TAURON Polska Energia S.A. (TPE) Earnings Call Transcript & Summary

Ladies and gentlemen, we have 11:00. It means that we are starting the Earnings Conference Call of TAURON Group for Q1 2025. I'd like to welcome you, ladies and gentlemen. The host of today's meeting will be Mr. Krzysztof Surma, the Vice President of the Management Board for Finance, CFO; Piotr Golebiowski, the Vice President of the Management Board for trading; and Mateusz Lewandowski, the Executive Director for Investments. Good morning. My name is Grzegorz Laguna. Since recently, I've become a Spokesman -- Press Spokesman of TAURON Group. Today's Q1 earnings call is taking place online. It will be a bit shorter than usually due to the fact that, as you know very well, we recently had a full year earnings conference call, during which the present board -- Management Board presented the full list of data and summed up to the expectation of investors. And today, in line with the expectation of investors and journalists, the conference call will be a bit shorter. But in the data, in the presentation, you will find all the details about our ratios of the company and via our website. During the conference call, you can ask questions. This Q&A session will be held after the presentation. But now I'd like to hand over the floor to Mr. President, Piotr Golebiowski.

Thank you very much. Welcome, ladies and gentlemen. We are exactly 5 months from announcing our strategy. The first quarter that the earnings for which we'll be presenting today is the starting, the initial quarter. It's a pleasure for me to communicate that our strategy is being implemented at a very satisfactory pace. Starting with the retail supply segment, we sold 180,000 of our product that is based on electricity generated from our renewables, renewable energy sources. We also commenced the decarbonization -- heat decarbonization project, namely departing from coal from the heat producing technologies. We also have an undertaking related to an increase of the CapEx in the distribution and renewables segments. Already this year, we will have 1 gigawatt -- more 1 gigawatt of capacity in renewables of TAURON. So everything is moving in the right direction. Ladies and gentlemen, this quarter was an exceptionally favorable for the conventional energy subsector. So the production of heat and electricity using the conventional source. It was extremely unfavorable for the renewables. In a moment, I will give you a few facts that will justify the situation. Since Mr. Surma will be -- President Surma will be speaking after me and will be presenting the earnings, I will limit myself now to present the environment, we've been operating in Q1 2025. And let me start generally about the market environment. Ladies and gentlemen, in Q1 2025, the consumption of electricity in Poland was flat versus the same period of last year, 44 more than terawatt hours, more than 24 of electricity consumption production, 45 terawatt hours, 700, mainly the growth of production was reported by the hard coal-fired power plants, 35.5 terawatt hours. That was the production, the output that was more than 8% more than in the same period of last year. Regarding the renewables, due to the small winds, not the production from wind farms went down. Our power plants, 25% we reported a decline year-over-year. It was, however, offset by the commissioning of our new investment projects, putting them into operation. So the Mierzyn, Warblewo and Gamów wind farm started with a total capital of 123 megawatts. And this meant that the decline in the production output was not so strong. Regarding the sources -- hydropower sources due to the low level of the hydrological situation, the low level of waters in the river. We also reported a decline of electricity by hydroelectric power plants. Also, some of our hydroelectric power plants are still shut down due to the flood last year. So that's why the production was low. It was also reflected in the financial results of this subsegment. Regarding the indices, starting with electricity, all the indices now are going up. Regarding the price on the spot market, we saw more than 3 megawatts per hour, so more than 36% up versus Q1 2024. This situation was caused by the lower production of wind power, wind -- energy, which led to a strong correlation in the production of electricity by the conventional sources and the gas-fired power plants and an increase of price. This also took place in Central Europe markets. Regarding the price of coal 2026, it reached to PLN 430 level. Generally speaking, throughout the first quarter of this year, the price was declining. However, it reached PLN 430 level, and this is a level that's very similar to the level reported last year. This is also, among others, an effect of the situation that despite the PSM 1 Index, the price of coal on the Polish market went down by PLN 6 per gigajoule. However, in parallel, the carbon credit prices went up. The increase of the carbon credit prices was a result of the fact that there was a domination of the production by the conventional power plants. That's why in the first half of this quarter, the price went to more -- of carbon credits went up to more than EUR 80 per tonne. Subsequently, as a result of the effect of a change of situation in the U.S., the funds started to reduce their positions due to the declining sentiment in the economy, which led to a decline in the carbon credit price average was about EUR 75 per tonne which was 22% higher versus the same period of last year. Regarding the CDS margin, the first degree margin, which is visualized by the difference between the electricity price and the variable cost of production, this level went up, among others, due to the increase of prices on the spot market and it was higher than the same period last year. Regarding the CDS on the futures market, this is at a similar level to the same period of last year. And regarding the issue of our assets, a few words on that. Regarding the distribution, we reported a 1% increase of electricity distributed up to 13.73 terawatt hours. Regarding the production of electricity from our assets, we produced 3.5 terawatt hours of electricity, including 14% coming from the renewables. In total, 0.48 terawatt hours and more than 3 terawatt hours coming from the conventional electricity, so 86% of the total output. Regarding the supply of electricity, the level of supply reached 7 terawatt hours, which translated into generally a situation where we had about -- by about 3.5 terawatt hours on the market and 3.5 terawatt hours in the simple balance we secured from our assets. Regarding what contributed to this 7 terawatt hours, 2.6 terawatt hours was consumed by the household segment, 0.5 terawatts SMEs, about 3 terawatt hours was consumed by the business customer segment. The balance is, the losses, the balancing difference. Ladies and gentlemen, regarding the prosumer segment, more than almost a 40% increase of production of electricity by the prosumers and feeding them into the grid, 36 gigawatt hours, self-consumption 38% how our units utilized. Regarding the generation line of business, our most efficient units were supposed to be contracted Nowe Jaworzno Grupa TAURON and Wydobycie due to the lack of availability of those units due to the 2 failures at Nowe Jaworzno Grupa TAURON, the fuel gas fan was failed, there was a malfunction for a portion of Q1. There was an outage at this unit. At Lagisza, we had a problem with untightening of boilers, so which meant that those products were brought back on the market and the 200 megawatt units took over some of the load. Also a lot of forced commissioning, forced operations, 400 hours, so more than 2x higher the level of those forced operations period. So nominally, the units that had the heating needs to satisfy. So one Lagisza unit and Jaworzno II , they were -- in addition to 200 megawatt units were put into operation. And this meant also that the results, the earnings of TAURON Wytwarzanie segment were very good. We were much higher than our expectations. Regarding the TAURON heat segment, the increase was due to the weather conditions. The temperature was lower than last year by more than 2.2 centigrades, increase of heat production by about 10%, which led to very good earnings. Regarding electricity production, all of the units nominally were contracted, including the biomass-fired unit. We were dealing also with a small failure of generation unit Bielsko Biala 2, also due to the untightening of boiler, partly this contract was taken over by the biomass-fired unit and partly was bought back on the market with electricity. Regarding the generation -- the renewables, the PV units are operating in a very stable manner. But what I already mentioned, the wind energy units due to the smaller winds, weaker winds, the output of this segment was generally lower than expected by 12%, a decline versus 2024. And now at this point, let me hand over the floor to my colleague. Krzysztof, please present the earnings.

Ladies and gentlemen, as Piotr mentioned, the financial results also confirm the fact that we are on the right track to implement our strategy. Let me remind you that we promised that we will achieve in first in 2030, more than PLN 9 billion of EBITDA; in 2035, more than PLN 13 billion. The results for Q1 show proof that we can achieve that we are able to achieve that. If we look at the detailed data, financial data regarding the revenue, they are roughly flat versus quarter-over-quarter. Let us remember that the compensation payments are still very important. If we stripped out the compensation payments from this revenue, we would face an increase of revenue quarter-over-quarter, mainly due to the sales of electricity -- by increased sales of electricity by TAURON Generation segment as well as increased revenue from electricity services. Regarding the EBITDA that I will elaborate more during the presentation further on, the amount of this EBITDA is at a record high level, more than PLN 2.3 billion for the quarter and this was more than 17% more than the analysts were expecting -- the market analysts. So it proves that we did quite well in this Q1. Regarding the net profit, this net profit was at a level of PLN 1.131 billion. It's worth emphasizing here that in this quarter we didn't have any negative currency that had a negative impact on the net profit, which quite frequently happened in the past. Regarding the CapEx level, it went up year-over-year by more than 27%. However, here in line with our strategy, the allocation of CapEx was 90% distribution and renewables. So fully in line with our strategy. Regarding the net debt to EBITDA ratio, it's at a safe level. It came in at 1.6. This ratio also gives us certain options and I will elaborate on that when I talk about the slide on the debt. Regarding operating data, Piotr mainly presented, but let me just summarize that [indiscernible] a stable level quarter-over-quarter sequentially. Regarding the renewables, as Piotr mentioned, weaker results on the hydro and weaker in the wind energy. It's worth reminding that we commissioned new capacity -- wind capacity, but it's offset for the weaker winds. It was not only for TAURON, but also all over Poland, Europe, all over Europe and the TAURON Generation segment benefited from that due to the fact that there was not much wind neither in Poland nor in Europe. TAURON Generation segment produced more. It's worth emphasizing, Poland versus the -- contrary to the previous year was a net exporter of electricity due to the fact that the winds were weak. So other countries had more requirements, more demand for electricity. Some of the electricity produced from coal went abroad. Regarding heat, as Piotr mentioned, better earnings, a great bigger output due to the fact that the quarter was colder than last year. And regarding supply, the weaker results year-over-year. Regarding volume, 2 aspects. The first thing, especially in the context of the big customers, we pay a lot of attention to the profile risk. And here, the contracts were changed, some customers did not accept the change, the amended terms and conditions. We're talking about the big customers. Regarding the smaller customers, here certain reallocation of the customers after the electricity prices have been unfrozen. But the goal of our Group will be to recover the volume, especially in the C tariff group. And definitely, a campaign will be conducted by a supply subsidiary in the near future. If we look at the comparable EBITDA year-over-year, it's also higher, about 20% up. Here, not many one-offs took place. Last year, we are dealing with a positive interpretation of tax office. We described it a number of times. It increased by slightly more than PLN 100 million the earnings for last year. Regarding the previous quarter, one-offs this quarter, 2 aspects noting. The first one is the damages due to the loss in the generation segment. This damage, this compensation was due to the outages that happened last year, after the discussions with the insurance companies, finally we managed to get the insurance payment. And the more important factor is an increase of EBITDA in the supply segment. And here, it is worth saying that the tariff in 2024 in July was reduced. However, we are experiencing a non-typical situation and the tariff was set for 1.5 years. So here, we're dealing with an uneven spread of distribution of costs and revenue. The revenue in the G tariff is evenly spread because the tariff in the second half of '24 and the same as in '25, at least until the end of Q3, this tariff will be in place. At the same time, we are dealing with 2 different contracting periods. But remember that we are basically contracting the G tariff for 1 year ahead of delivery. It means that the delivery for '24 was contracted in '23 and the electricity supply in '25 was basically contracted in '24. That's why the cost of electricity in '24 was different and the cost for '25 is different. And this one-off effect, we are saying that in the second half of 2024, the tariff did not fully cover our cost of electricity purchase and now we are compensating for it in 2025 because the tariff covers both the cost of electricity purchase for '25 and the costs that were not covered in '24. That's why we have this one-off effect in Q1. This effect will also be demonstrating in Q2 and Q3. If we now move on to the individual segments. Here, invariably, the Distribution segment is our key EBITDA contributor, more than 50%, similar as in Q1 2024. The Supply segment comes in a second spot. And here, let me pay attention to the one-off that I mentioned before. And the first spot was swapped here, Renewables was swapped to the Generation segment. As I mentioned, much weaker winds in Q1 when declining prices meant that the Generation segment in Q1 had generated better EBITDA than the Renewables segment. Now if we move on to the details of the breakdown of EBITDA in individual segments and which segments, as a matter of fact, contributed to the increase of EBITDA. We had 3 of them, Distribution, Generation and Supply. The 2 segments reduced EBITDA year-over-year, namely Renewables and Heat. And moving on to the individual factors in those segments. Regarding the Distribution, here, we're dealing with a higher margin on the distribution service. We also discussed -- presented that in the forecast of this year, but we presented during the presentation of the full year earnings. We are dealing with an increase of the regulatory asset base. We are dealing with an increase of weighted average cost of capital, WACC, that determined the increase of EBITDA. Here, we're showing this effect is PLN 120 million. In addition, we have a positive impact of the regulatory account. This year, the regulatory account is positive. Last year, it was negative. It's balanced. So here, a few words of my comments. Remember the account of the amount of this -- balance of this account is a result of a difference in the actual volume of electricity distributed and the one that was defined in the tariff. If the actual volume is lower than the volume included in the tariff, then a positive balance of account is being built up and it was settled in the year-end plus 2. And so this year, we are having settlements of this account for 2023. And the second segment in Q1 was the Generation segment. Here, some arguments I have already outlined why it happened. First of all, much better volume quarter-over-quarter. Secondly, in this quarter, we are dealing already with the new balancing market and the revenue from that market. Just remember that this market was implemented in June last year. So in Q1 last year, we didn't have at all these type of services. So let us say, historic regulatory system services that were replaced by the new balancing market and this led to the positive effect on EBITDA of the Generation segment. In addition, let us remember that the capacity contracts that we have concluded, they are also indexed by inflation rates. So we also had a positive contribution to EBITDA about a one-off regarding to the payout of insurance payments I already mentioned when I talked about the comparable EBITDA. In addition, as Piotr already mentioned, we are dealing with a decline of hard coal prices, which had a positive impact upon the margin achieved on heat. This tariff was practically -- or the price of heat sold was flat year-over-year, but the hard coal prices went down substantially, which led to a positive effect for the heat supply and it increased the earnings of the Generation segment. The third segment reported better earnings quarter-over-quarter sequentially, is the Supply segment. Here, the one-off and the G tariff I already mentioned. The second factor that is of similar nature and provides support for the segment is a lower cost of purchasing electricity on the unhedged position. This is, first of all, applicable to tariff A, B, C, where we are saying that we have a relatively fixed priced for the consumers. We didn't hedge it fully in the previous periods. And that's why we are benefiting from it, buying electricity that is a bit cheaper on the market. And what reduced on the earnings of this segment quarter-over-quarter was a one-off related to the participation regarding the VAT tax settlement. With respect to the segment, a negative impact upon the earnings quarter-over-quarter sequentially. First of all, the Renewables segment, as already was mentioned, weaker volume. First of all, in the hydro segment, winds weaker, fully made up by the new capacity commissioned and the declining price of electricity on the market. These were the factors that caused the weaker EBITDA in the Renewables segment and a slightly weaker earnings result of Heat segment. We had a few opposite -- moving in the opposite direction factors. The first one, the positive impact was the tariff for transmission, a positive impact year-on-year. In addition, the declining hard coal prices and the better volume of heat sales in this segment meant that we had better earnings year-over-year. However, the negative factors included the declining margin on electricity market and the weaker result generated by the TAMEH subsidiary where we are co-shareholder along with ArcelorMittal Group. If we move on now to the slide regarding the debt and financing. Here, also a good piece of information. The debt, economic -- gross economic debt went down. The net debt reported to the banks also declined. And regarding the individual aspects of that, here, I'd like to indicate a few factors at least. Regarding the carbon credits, CO2 emission allowances, here, we are not dealing with the decline, we have a slight increase. But it's worth mentioning that this is due to the shift in the dates of purchasing at least of a portion of carbon credits for the redemption obligation for 2024. Last year, some carbon credits we already purchased in March. This year, it was shifted to the early days -- early April. This automatically led to the high cash balance because we are preparing ourselves to buy those carbon credits. And therefore, we had to accumulate the cash on the accounts. So that's why you can see that the level of cash is much higher as of the end of the quarter this year versus the previous one. This is our preparation for the purchase of carbon credits. Subsequently, we are dealing with a factor that also had an impact upon the level of debt. On one hand, we were dealing with an increasing level of leases according to the IFRS 16, according to the loan agreements of banks, we are dealing with the lease according to the previous financial standards or typical financial lease. So here, according to the extended IFRS 16 definition, this includes the easement agreements, lease agreements. So in case of renewables, we are dealing with the lease of land of size. So according to the IFRS 16, the value of the lease amount, it goes up in the same situation if we add the indexing and the fees for operation of land and additional easement fees. This leads to an increase of lease balance, lease amount. We will be dealing with that in the subsequent quarters as well. And the second thing that I already mentioned in the previous conference, we are gradually departing from the subordinated debt, the hybrid bonds. Let us remember that the stable good level of leverage ratio, which allows us to depart from this beneficial for the ratio of financing, but was a bit more expensive than the senior level debt. We are departing from it and we will be observing that same thing in the subsequent quarters. In general, the improvement of this debt level is a result of the improvement of our operating profits. Let us remember that the EBITDA, the operating results we are calculating on the rolling basis. The ratio is calculated for the last 12 months. So we are talking about the EBITDA for the trailing 12 months. It's better versus the EBITDA for the previous 12 months calculated as of the end of Q1 2024. Regarding the availability itself of the financing, we have about PLN 4.8 billion of financing available. It clearly indicates we are ready, we are prepared to finance our CapEx project that we outlined in our strategy. We see no risk here. We're mentioning here that the distribution of the repayment dates, maturity dates for the debt is evenly spread. We don't have 1 year with a balloon large repayment, roughly less than PLN 3 billion over the next 5 years. It's evenly spread over each individual years. It's quite a safe level and it's fully possible to be refinanced. So much about the debt. Let me hand over the floor to Piotr and Mateusz, who will describe the CapEx and the individual investment projects.

In Q1 2025, the CapEx of the Group came in at PLN 1.072 billion that were higher by 27% versus the quarter of 2024. At that time, it was PLN 847 million, mainly due to the large increase of CapEx in the Distribution segment, the Renewables segment. I mentioned in my introductory statement that was part of the commencement of a rapid implementation of our strategy. Regarding the Renewables segment, the total CapEx in the Q1 2024 was PLN 191 million, more than twice as high as last year. We are conducting -- regarding the largest piece what this money is spent on, we are conducting 4 large wind farm construction and PV farm construction project, which -- this is what this high CapEx is spent on. Regarding additional data, regarding investment project, Director, Mateusz Lewandowski is at your service if you have any need to ask additional questions, please send them via e-mail. Regarding the Distribution segment, the CapEx level was in total, PLN 768 million. This is a 17% increase versus last year. This represents 70% of the total CapEx of the Group. This is mainly the outlays on connecting new consumers to the grid. PLN 384 million and PLN 290 million to replace and upgrade the grid assets. The other spending is the renewables upgrades and modernization of the Distribution segment, among others; the implementation of a program to replace the meters with the remote readout meters regarding the Generation and Heat segment. This is the modernization of the generating units. Regarding the Supply and other segments, mainly investments in the IT area. Regarding the improvement development of the customer service and the sales channels as well as the expansion of street lighting. That's all from me regarding this topic. Let me ask Mateusz to present the details regarding the investment projects underway.

Okay. Ladies and gentlemen, let me briefly present the current status of renewables projects underway, starting with the wind farms. And the most advanced project in this area, namely the Nowa Brzeznica wind farm with an installed capacity of 20 megawatts. At this point in time, it's close to 90% is the work progress. Regarding the scope of works completed, we completed the connection -- grid connection point, the power supply connection point, now we are launching the turbines. Also, we are cleaning the temporary structures. The commissioning date end of Q2 2025. The second wind project, the Sieradz wind farm close to 24 megawatts installed capacity. As of today, practically close to 60% of work progress achieved. We completed works related to the construction of power supply connection point. Completion works -- finishing works are underway. We are preparing for the installation of wind turbines. The installation should be completed in Q3 this year. Following the tests, we should be ready in Q4 to commission this wind farm. And the Miejska Górka wind farm, our last year's acquisition. Let me remind you, this is the second largest investment project of this type in Poland. As of today, the work progress is about 20%. Practically, we have completed the works related to the preparation of roadways, access roads, the sites in general. Also in parallel, the foundations are being laid. 23 out of 50 foundations have been completed. Also, the anchors were delivered -- supplied to the construction site. Due to the scale of this project, the works are conducted in parallel on a number of construction fronts. But in the overall aggregate summary, we can say that we are a bit ahead of the schedule and Q2 2027 is definitely still on the commissioning date. Moving on to the photovoltaic investment project. Let me start with Balkow PV farms, it's our largest in-house development based on the central inverters. As of now, 65% is the work progress level. We assembled the structure and the panels. The acceptances are underway of these works are underway. And in parallel, we are conducting works in the electrical branch. The commissioning date is Q4 2025. And the PV Postomino project, this is the project carried out under the cable pooling formula. 90 megawatts of total capacity is split into 2 stages, 80 and 10. In the first stage, we have completed the installation, the mounting of structure and panels and we have completed the acceptance of the stage. We are completing the works for Stage 2. We are finalizing the works on the electrical side. We foresee the commissioning also by the end of Q4 2025.

Thank you very much. Here, we would like to complete the presentation part of today's conference regarding the Q1 2025. Of course, we are moving on to the Q&A session, to the questions coming from the analysts and journalists. Let me read now the first question that was sent by Mr. Editor, [indiscernible] from Parkiet Daily. Question about the plans of the company regarding the units and capacity for the supplemental auctions, gas for 2026 and the main auctions, holdco. So please, I'd like to ask the host of today's meeting to answer this question.

Let's start with the issue related to the supplemental auction. And you know that we -- as part of the overall general certification, we registered 7 projects of our gas-fired units to take part in the auction for 2030. However, regarding the supplementary auction, the work progress of those project did not allow us to be able to take part in this supplementary auction. Regarding the supplementary auctions for 2026, the date of this auction 11th of September was announced relatively late, I would say, but we have to face it. We have to deal with that. We do not know yet when the certification for the auction will take place. We know that -- and we are analyzing all the time the auction strategy for our units, you know that. Regarding what's in play, these are the units that do not have the capacity market contracts beyond 2025. We are talking about all of Jaworzno units. We're talking about Lagisza. We're talking about Siersza. We're talking about the sum of the generating units of Lagisza because 2 units have capacity contract until the end of 2028. So time will tell. First of all, how the strategy that we developed will work in practice and we'll be looking at attentively and what will be happening in the coming months. Regarding the second part of this question, namely the question related -- I haven't read it. I haven't read it yet, sorry, excuse me. I have the idea of the Polish Committee of Electricity related to the electricity -- the power plants that were up to 300 [indiscernible] were to be excluded. The idea is very interesting to change your investment plans. This is an interesting idea, a chance to get additional support for the units. For instance, those picking units, gas-fired picking units that we plan to implement. I think roughly, I made a quick calculation, it may mean for us about PLN 20 million, PLN 30 million in savings regarding such a project as the electricity production using those units.

Another question. Are there any reasons for EBITDA in distribution in the subsequent quarters of this year should be similar to the result in Q1, which was very good, as we know?

I don't want to give you a precise answer, but the EBITDA will be the same in the subsequent quarters. First of all, we are not providing a precise forecast. Please let us remember also that it's usually that the Q1 is very good. But what I can confirm that definitely that those factors that we showed during today's presentation, a positive impact upon the result of this year in the Distribution segment in this quarter will also have a positive impact on the results in the subsequent quarters. So the increased regulatory asset base, the increased weighted average cost of capital as well as the settlement of the regulatory account, all these factors will have a positive impact on the next quarter, subsequent quarters of this year.

Next question. What increase of regulatory base can we expect in year 2026? Can it be PLN 1.8 billion increase as it happened in 2025 or could be a higher increase year-over-year?

Well, again, we are moving into the forecasting area, forecasting topics. However, the increase of regulatory base is dependent to a large extent to the CapEx program that we're implementing. We're not giving exact data here, but we can estimate a similar increase year-over-year.

Another question. Due to ENEA's announcement to the quicker return to the dividend payouts, are you forecasting a quicker return to dividend payouts in 2029? It seems like we're going to have a very good earnings this year. Is there any chance that for 2025, we will get a dividend payout to the shareholders?

Of course, this is the question that we could expect because we saw ENEA paid out or hasn't paid out yet, but recommended payout of a dividend for the current year. We, contrary to ENEA, we didn't recommend the payout of the dividend for this year, especially due to the fact that we want to supplement the reserve capital. After we have done that in the subsequent years, assuming the positive financial results, there will be no limitations, no constraints for the paid of a dividend. Regarding our strategy, the one that was announced December last year has clearly stated that the dividend will be paid out not later than for 2028, so in 2029, in fact. Of course, we are looking at the earnings. The financial results that we mentioned are very good as we communicated already. If the very good financial results are continued and maintained, it will open the discussion for -- about the possibility of a quicker payout of the dividend of sooner payout. Today, we just completed Q1, so we didn't take any decision that the dividend for '25 will be recommended or not. We'll be looking at the subsequent quarter. And of course, we'll be internally discussing this issue. But we understand the expectations of the investors because we had also the position of the main shareholder -- controlling shareholders. So definitely, this issue will be the subject of further discussions in the subsequent quarters.

Are there any reasons to assume in the Distribution segment in 2026 significant elements of earnings outside of WACC, weighted average cost of capital and the depreciation of the EBITDA level?

Ladies and gentlemen, you know very well that apart from the factors that you already mentioned, there are factors that are changing year-over-year. So this is the regulatory account that we are -- as we discussed this year, it's positive. Last year, it was negative. Next year, it's probably going to be negative as well. It depends upon the volumes achieved year-over-year. In addition, we have factors that are a bit less dependent upon us, namely the reconnection fees. This is also outside the settlement formula with the President of Energy Regulatory Office. And the second part is the liquidation, liquidating of the collisions. It's also an issue that is beyond our control. Of course, we can expect that over the next few months what the situation will be. But longer term, it's more difficult to evaluate. It's probably safe to assume that these issues will be comparable year-over-year. And we also have a factor of the passive energy, but it's also partly included in the tariff. It's dependent -- remember, we have the matter of the settlement of the price that's also delayed, so N plus 2. So I'm saying that cost of this passive energy is dependent upon the cost of electricity on the competitive market. Let's remember that the price of the competitive market is gradually declining. So this may also have an impact upon the results of the Distribution segment outside of obvious factors such as an increase of working days and increase of weighted average cost of capital or WACC.

I have a question, how probably is that you will not shut down any 200 megawatt units by 2028 due to the supplementary auctions with the PLN 9 billion budget? At what stage are the talks with the European Commission related to extending of the support for hard coal-fired units following 2028?

Excuse me, I didn't switch on the microphone.

Let's sum up again. What will be happening in the time frame between now today and the end of '28?

On the 11th of September, as I mentioned, there's an auction, a supplementary auction for '26. We are planning to have an individualized strategy -- bidding strategy for this auction. All of the units will be included in the strategy. We are talking about strategy. Of course, I'm noting one thing. It doesn't mean that if a unit is not taking part in the auction, it doesn't mean it's not going to be operated because we have full share of reserve operation for the units that have a capacity market agreements and also the units that are performing the backup role. Next year, I assume that at a similar point in time, there will be an auction held, supplementary auction for 2027 and so on sequentially in '27 for the year 2028. Therefore, the results of the auction, we are familiar with the initial parameters of the capacity gap and they indicate that each year will be getting more and more difficult. This year, this capacity gap is at such a level that seems to us that there's a big chance that the units taking part in the auction will have the capacity market, they will win the auction and the time of operation will be extended by 1 year. Regarding 2027, that capacity gap, in my opinion, seems a bigger challenge. We may be dealing with a situation where not all of the units will get the support from the capacity market. I'm not just talking about our TAURON units, but also about other units. Let me remind you that there's about 40 such units available on the Polish market. Therefore, there's a risk that a portion of the units operating in the Polish market will be liquidated because they will not be getting any more support mechanism, the second leg of support. As you know, that is the market and the margins earned on this market for the less efficient so-called 35 units are negative and are very much in the red. So therefore, I do not expect that any breakthrough change in the market will take place, but all of a sudden, those units might start earning money on the electricity production or sales of electricity. Regarding the final stage of the auction for 2027, this capacity gap also there is a lot to be desired. That's why probably another portion of units will not be eligible for support.

What will the world look like and the balance of the units that will continue to operate in the market will continue to operate beyond 2028.

I'm not able to answer that question. For a year or so, we are talking -- we are saying that this is a critical component for us. We are analyzing various concepts, including the concept of -- idea of liquidating the units that will -- decommissioning the units that will not be eligible for support.

The second part of the question, at what stage the discussions regarding extending beyond '28 support for cargo units talks with the European Union?

This side of the consultations with the European Commission is the domain of the public administration, state administration and they are conducting these talks. I am not able to give you our opinion and any information about at what stage they are at now. So let me just say that we are also hoping that these talks will lead to some beneficial solution regarding what may happen regarding the support mechanism beyond 2028. And we know that the challenges are even bigger regarding the expectation regarding the stability of the system, power system and the energy security.

Another question related to question # 7, what stage the consultation with the European Union related regarding the support for the coal reserve capacity reserve?

Let me add that the initial proposal regarding the coal reserve or the strategic reserve was compiled by the sector under the [indiscernible] of TGP as early as 2024 yet. However, the final shape of this market will be dependent upon the agreements reached with the European Commission. For us, what's important now is how the new solutions will be correlated with the supplementary auctions dedicated to the hard coal-fired units. It seems that this idea of a strategic reserve is interesting, an interesting one. However, I get an impression may be difficult to process, taking into account the fact what solutions have been applied so far and they were not the ones that have been notified and it seems that the more realistic, in my opinion, would be the idea to extend the derogations for the subsequent years. I'm talking about the derogations related to the emissions levels and the sources.

Another question from Editor [indiscernible] from WNP. First one, has TAURON contracted any capacity on the 15th of May for supplementary auction for the second half of 2025? If so, how much? Second question, which hard coal-fired units -- what total capacity is TAURON planning to submit for the fall reduction for 2026? And what will happen to the units that will not win those -- that auction will not be covered by the contract?

On May 15, the supplementary auction was held for the second half of 2025. We submitted 1 unit, we have 3. We contracted 188 megawatts. Initially, the contracted level of revenue is PLN 41 million. Let me remind you that the results of the auction have not been published yet. The auction was completed in round 1. So the auction price is between PLN 391,000 and PLN 411,000 per megawatt. It seems that I already answered the second part of the question. Let me reemphasize that the assumption is simple. The units that will not win the auction must take into account the fact that they will be gradually phased out because they do not meet the technical -- the economic conditions, excuse me, maintaining them longer.

Another question. When the decision can be taken regarding the construction of the first gas-fired units with the open system? So what's the planned capacity and the level of production during the year?

As I already communicated to you, we are preparing a portfolio of this type of investment project. We are treating this at this point in time as our certain option. Last year, we submitted the petition for the grid connection conditions for 2 sites, [indiscernible] including 1 gigawatt installed capacity for this type of technology. The potential investment decisions are closely related to the availability of the support mechanism for this technology. However, we cannot exclude that the first decision might appear after main auction for the capacity market this year, of course, assuming good effects of such an auction. Second part of the question, what is the planned capacity and level of production over a year time frame. Regarding the capacity of the portfolio itself here, perhaps we already outlined what level of portfolio we're talking about. Regarding the capacity of single individual units, so we are still at the stage of calibrating ourselves regarding the technology selection. We are considering various options still. So as of now, it's a bit premature to speak about the capacity of individual units. Regarding the level of production, from our point of view, the economics of the operation of such units as we look at it is, let's say, not so strongly correlated to the planned production output. However, the units of this type, from our point of view, are to represent the capacity reserve for the entire power system. And for that reason -- this is the reason why it should be compensated for probably those units will probably not be operated for more than 300 hours during the year.

The next question, what is the potential -- purchasing potential of renewables in megawatts this year?

Again, the situation varies depending upon the type of technology we are talking about. Regarding the PV farms market, this is not much different from what historically we communicated. So we have a lot of projects at this point in time available, widely available in market also the transaction prices are coming down, as we can see. But regarding the PV projects, we invariably try to place our bets on our own in-house development. At this point in time, close to 150 megawatts. This is the ready-to-build projects status regarding which where investment decisions will probably be taken in the near future starting from today. Regarding the projects, we also try to apply for the support mechanisms available for type of investments in order to improve the cost of capital calculations. And after these issues have been resolved, we'll be facing the investment -- final investment decision. Regarding the wind energy, regarding our in-house development, the first project will be available around 2027, '28 time frame. So what we are talking about now is realistically the acquisition market where the purchasing potential -- acquisition potential as of now -- as of today is moderate, I would say. So we are -- of course, we are trying to carefully review each project that's available. And each project will be subject to evaluation. Regarding the acquisition activities, it's difficult to plan the megawatts here. So I don't want to mention the specific number of megawatts that could be subject to decision investment this year.

What was the margin on the electricity buyback and revenue from balancing market in Q1?

We are talking about 2 segments, of course, here, about generation and heat. Regarding the margin on electricity buybacks was about PLN 90 million. However, regarding the revenue from the balancing market, it came in at PLN 70 million, so around PLN 70 million. What's worth mentioning here is the margin on buybacks quarter-over-quarter sequentially is weaker. However, regarding the revenue from the balancing market, as I mentioned, it's a new service. So let's remember that in the previous quarter, we had the regulatory system services also the comparison quarter-over-quarter, you would have to strip out the value of the amount of regulatory service -- system services that we are getting revenue in Q1 2024.

All utilities are announcing increase of volumes in the Supply segment and the margins are higher. So can we expect that more competitive fight in this market -- in the segment? What would be the risk for margins?

This is a difficult question, ladies and gentlemen. So let's start with the fact that I don't know whether margins are attractive. I will not confirm, not deny it. Definitely, we are expecting a very strong increase of competition. Let us remind you that our market here, well, the distribution area of TAURON is a very attractive piece of market. For small market companies that are operating in our territory, this is a challenge. And we are, of course, all the time in the process of various defensive actions. We have various trading strategies, commercial strategies that increase the attractiveness of our products that enable us to expand this market. During the strategy presentation, we said that we are planning to operate nationwide, highly profitable ones. Therefore, it's not the goal in itself to increase the market share. The goal is to increase the market share of good margin-generating products, good margin-generating contracts. A good example would be, situation in the B2B segment. Quarter-over-quarter, we lost several customers from the large business subsector. However, in that sector, the margin went up by more than PLN 100 million. So the low margin-generating contracts that are burdened with the high risk such nomination of such contract is not something that we will stop ourselves from doing.

So please refer to that twice as high WACC level in the distribution versus European competition. What is the opinion position regarding that of the European Commission?

I would start with the fact that for a long time, the weighted average cost of capital, WACC, in Distribution relatively low. And you could see that the level of investment in this segment was relatively low. So we didn't encourage the distributors for a long time to increase, expand the CapEx. Increased level of WACC, that's the bonus for investments is to encourage us to bring about a quicker transition. And so -- but the level of CapEx and the level of investment delays or backwardness could be made up in the future years. So this is very important regarding when you look at the increased WACC and the level of CapEx in the current period and the future period. It's difficult for me to say what the position of the European Commission is about it. So it's not up to European Commission to approve the WACC. And remember, what's also important, distribution is a natural monopoly of certain times. So -- and by the same token, as you can see from the financing getting from the national recovery plan, that's why the European Commission agreed to a much lower interest rates under this program than the ones that are in place for other loans for preferential on terms for the Renewables segment, for instance. So European Commission is looking differently at something that's happening locally in the given country and versus what's competing between all over Europe. So naturally, we are not competing directly with the grid that are operated in other European countries. The free cash flow level in the Q1 2025 in the Distribution segment can be maintained in the subsequent quarters. Of course, we are moving now into the details of the financial results of the subsequent quarters. Free cash flow depends on one hand on EBITDA. Secondly, on the CapEx in the distribution line of business. Here, as we mentioned that the CapEx as during the full year conference that an average will go up by about 20%. So it would be good to look at what is the trajectory in the Distribution segment. Last year, for instance, we announced the increase of EBITDA in this segment. I confirmed earlier that the factors that had a positive impact upon EBITDA in Q1 will have a positive impact on EBITDA in the subsequent quarters. So if you put together these 2 components, should have a positive impact on the free cash flow.

Another question. Please give us an update about the profitability of energy storage facilities? In what areas this is profitable? And what's the current CapEx in million PLN per megawatt or megawatt hour? When can higher spending come in this area? Are the auctions are necessary to get the net positive current value, put in net current value -- net present value?

Let's start selectively from the CapEx level. What we're observing now in the market is the levels of CapEx unit below PLN 800,000 per megawatt hour. So this decline versus the previous years is noticeable. Regarding the economics of this type of investment projects, regarding this part of the question related to its -- whether capacity auctions are necessary for obtaining -- achieving the positive NPV. This, to a large extent, depends upon the point of view of an investor regarding the volatility of the prices on the electricity market. So in this respect, the answer is not easy. So let me answer the following way. So this type of cash flow streams such as capacity auctions and additional support mechanisms are required due to the support for the allocation of capital into this type of investment project, which is characterized by a bit higher risk profile than other investment standard investment projects carried out by companies like us. This is one thing, one aspect. The second aspect is that such stable revenue streams also support this type of products. Looking at the observability of this absorption of this technology in the European market, you can see that in the first few years of the presence of a battery storage -- energy storage facilities, a major portion of revenue stream by this type of mechanisms such as the capacity market or the system services. Regarding our energy storage facility portfolio, you know that last year, we won a capacity market auction for 270 megawatts in storage. So successively, we'll be trying to implement the -- take investment decisions regarding the expansion of this portfolio. Of course, we take part also in the competitions for the available support mechanism of this type of technologies that are practically underway now. So therefore, only after this type of -- after such competitions have been resolved, we'll be successively approaching these decisions. But the first investments of a smaller scale, it seems that we are closer to the final decisions regarding such projects. Regarding the profitability, the second portion of this question, we can see that the profitability of this type of investments in the energy facility that we've installed stand-alone and colocation along with renewables and the PV, so it functions in both configurations. Let me add something because maybe that's the punch line for the profitability discussion. Our investments in large-scale storage facilities are not conditional upon the participation in the auctions and having the capacity contracts. This is -- these are extras that we can generate.

Another question. Why the change of the way the balancing costs are -- the way calculation was made which had a positive impact upon the earnings in Distribution and Supply.

Let me start with the fact that looking at the comparable quarter-over-quarter sequential earnings, that's why we are not showing it as a one-off. They were converted to make them comparable. I'm not sure the question is applicable to the current quarter compared to the previous quarter, the one that's presented during the presentation because the data has been standardized and the data has been adjusted in the context of earnings published for the previous years. Maybe this question is related to comparing what was presented or reported in Q1 last year and not what we show today. So to answer such question, what we are showing today in the presentation has a comparable result. So after we stripped out the estimation issues as we -- that's what we indicated during the full year earnings conference call. As we mentioned before, we stripped out the big impact of the settlement of the balancing difference as of the end of the year and its impact upon the Q1 of the subsequent year. Of course, historically, the impact came, first of all, from a big price difference. Let's remember that starting from 2020 to 2024, the leaps -- price leaps on the electricity market were very big. So the price for the balancing difference electricity was very different strongly between individual years. It had a very big impact upon the Distribution segment results. So we declared that we strip out this negative impact. We will strip out the settlement between December and January, at least from the accounting point of view. And having stripped it out, those results are comparable. And definitely, there is no major impact upon the earnings of Distribution or Supply segments in relation to Q1 relating -- regarding the results that we presented today.

The loss on the derivatives in minus PLN 250 million in Q1 2025, is it also visible with the reverse sign on the EBITDA level.

It's not a one-to-one relationship. That's what I would start with. What's the reason behind it? As a matter of fact, in the Generation segment and in the Heat segment, we are purchasing carbon credits. Those carbon credits are, of course, related to the electricity produced from coal. And once we sell electricity from those units, at the same time, we are securing the carbon credits and we are securing also hedging us against the FX risk. Regarding the carbon credits themselves, they are included in the operational part. And PLN strengthening versus the reserve for the given year is taken into account in the operational part. However, in the financial part, in the financial results, we can see the effect of that hedging. However, the effect of this hedging is related to the entire portfolio, both the portfolio related to the redemption for the previous year, but not in the operational reserve in the operational segment and the part that's related to the hedging of the carbon credits for the subsequent years that are not yet included in the operational part in the reserve. So that's why the difference between the cash flow or between the result in the financial part and the EBITDA part is not 1:1. That's the first part of my answer. Why is this happening like that? Because as of now, we don't have accounting of hedging included here, implemented here. So we don't have a direct ties, link between the hedged item, hedged position related to the FX rates with the hedging instrument, the forward instrument, which is included -- valuation of which is included in the financial part. We are working on that this year so that these items could be interrelated and potentially we could implement the accounting for the hedging instrument. So the full effect could be included in the operational part in the future.

What was the EBITDA in the trading segment in Q1 2025 broken down into individual consumers -- groups of consumers?

Well, we do not publish such detailed data. So I will not be giving you broken down per individual groups of consumers. We showed in the comparable part this one-off related to the G tariff and this segment. However, we are not publishing EBITDA per individual business segment.

What is the outlook for the regulatory accounting distribution in 2026?

As I mentioned before, this account is dependent upon the difference in volumes for this year and for 2026. It seems -- it looks like this account will be negative. So the settlement, as a matter of fact, will be negative.

What is the bonus for investment in WACC depending upon what bonus can be expected? What the premium can be in the future? You partly answered that. The premium -- the bonus for investment is depending upon the magnitude of your CapEx and what will the level be?

Of course, a very good question, but it comes up regularly during each conference. What is being promised as of today by the President of Energy Director Office, the minimum premium for investment is 1 percentage point. So we are saying about WACC until 2028, at least 7.5% -- around 7.5% and you can add to that at least 1 percentage point for reinvestments.

Based on what we have seen and we can observe, the level of premium for investment is going up as the level of your CapEx goes up. However, I cannot tell you whether there is a fixed formula saying that PLN 1 million means as much as much proportion of a percentage point of an increase. How much national recovery plan at a cost of 0.5% can be taken advantage of in this year and in subsequent year in millions of PLN.

Here, we have a small time difference time gap up to 1 month or 2 months in the context of spending incurred and the loans received -- funds received from the loan. First, we have to spend that we can ask for refinancing from the national recovery plan loans. As of now, I cannot give you specific numbers because as I said, it's a 1 or 2-month shift may lead to the fact that it may mean several hundred million difference. But we can assume it's going to be roughly PLN 1.5 billion this year. And not to give you subsequent years, but we promised that our best assumption would be to take the full advantage of funds that have been allocated. So PLN 11 billion over the 4-year time frame.

How much is the planned CapEx for 2025?

Here, we also didn't give the exact data, but during the annual conference, the full year conference, we gave an estimate that we expect our CapEx to be going up in the region of 20%, 20%-plus per annum. So I think this estimate is correct. The prices in the supplementary auctions in subsequent years could be higher than for the second half of 2025. I suppose that this picture will not be so optimistic anymore. This is a function of what is the capacity gap, how many units take part in the auction. This second half of '25 of this auction, practically all units were eligible. I said a few minutes ago, results have not been published. The initial 431,000, that's the maximum price, that's initial assessment. The capacity gap in 2026 is roughly 6.9 gigawatt, in '27, 6.5 gigawatt in 2028, roughly 4.5 gigawatt, which would mean that the auction will not be completed taking account of the number of units that we expect to take part will not be completed in the first round. So there could be 12 rounds max. So what's important, as I mentioned before, all of the units according to the given legislature taking part in the supplementary auctions have a price taker status. And the level of the price defined for each auction individually for the price taker sets the price at which the price taker can exit the auction, which means that if -- in a simple explanation, if the limit price defined by the given source is lower than the price takers' price, then theoretically, that unit can take part freely in this auction. However, the boundary -- limit price is higher, which would mean that when you take part in the auction, you're not able to exit it. It means directly that such unit, in fact, taking part in the auction would be burdened with a higher risk. So probably might not even take part in that auction.

Thank you very much, Mr. President, for this answer. This was the last question in our Q&A session. Thank you much for participating in our conference. First of all, to the host of our meeting, Mr. Krzysztof Surma, Vice President of the Management Board for Finance, CFO; Piotr Golebiowski, Vice President for Trading, Management Board; and Mateusz Lewandowski, the Executive Director for Investments. Thank you very much. Thank you very much, ladies and gentlemen, for taking part in our meeting, for asking all the questions. Invariably, we ask you to -- encourage you to ask questions via e-mail, and we always try to answer those questions. But of course, I'd like to invite you to our next conferences, not only the earnings conference call. Thank you very much for your attention. See you next time. [Statements in English on this transcript were spoken by an interpreter present on the live call.]