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

Good morning, ladies and gentlemen at the conference for the media, for investors and for analysts. Today's conference is going to be dedicated to the results of TAURON Group for 2021. The heads of today's meeting are Mr. Krzysztof Surma, CFO; and Mr. Jerzy Topolski, Vice President of the Management Board for Asset Management. My name is Lukasz Zimnoch, I'm spokesperson of TPE and I'm going to host this conference. The presentation is going to be carried out in Polish with simultaneous translation into English. You will also be able to listen to today's meeting in the mode of a teleconference. Feel free to ask questions on the form on the transmission side. Now Mr. Topolski, the floor is yours, the first presentation, and then there's going to be a presentation by Mr. Surma, and then there going to be a Q&A session.

Welcome, ladies and gentlemen, thank you for joining us. At the beginning, some financial operating data for 2021, then we'll talk a little bit about Q4. In 2021, as it seemed it was an unstable year from the macroeconomic perspective and the changes occurring in the times of pandemic. We know it was a prelude changes and economic uncertainty that we are observing in 2022. But even more we should take good care to observe the results and watch the results, analyze them for 2021. Some financial results and operating data, sales revenues for 2021 were over more than PLN 25 billion, which is an increase by 23%. EBITDA of the group at the level of 2020 EBITDA, PLN 4.152 billion, it's a drop by 2%. More details are going to be presented by Mr. Surma. Net result, net profit is PLN 338 million. CapEx PLN 2.932 billion, it's a drop by 27%. We will discuss it in detail shortly. And net debt-to-EBITDA ratio, it has been improved by 0.1. In 2021, it was 2.4; and in 2020, it was 2.5. As for operating data, TAURON Group provide electricity -- well, 7% more of electricity than in 2020. It was almost 54 terawatt-hours. Production from RES was 1.7 terawatt hours. It's a drop by 12% as compared to 2020. We discussed it at the results conference for 2020 on significant weather parameters, which were record high specifically wind, which we did not have in 2021, hence, a decrease. And in 2021, I must say that we did not have many investments to catch up for this loss. Electricity production by hard coal-fired units was almost to 14 terawatt hours, which was an increase by 31%. It was twice as high this increase as the average national increase, but we need to remember that it was affected by the new Jaworzno for 910 megawatts which started operating by the end of the year. And this year, it worked for -- until June. So for a much longer period before there was a failure in June. And last year, it was only for about 2 months, it was operating. This affected the dynamics in this respect. And the demand for electricity, specifically in the south of the country affected it as well. Heat generation is 12 PJ, it will affected highly by weather conditions, retail electricity supply in terawatt-hours was almost 33.5. It was 3% more than in 2020 and production of commercial coal, it was 5.15 million tonnes, which was 13% more than in 2020. So it's at the level of increased production, average increase in production nationwide. As for Q4, it's quite similar to overall results for 2021. Revenues from sales are almost PLN 7.8 billion, which is 38% more quarter-to-quarter. EBITDA PLN 444 million (sic) [ PLN 447 million ], which is 45% less than in Q4 2020. Net profit less negative is PLN 119 million, CapEx is PLN 969 million and net debt-to-EBITDA at PLN 2.4x. Electricity Distribution is an increase by 4% as compared to Q4 2020. It was 13.91 terawatt-hours, RES is 0.48. Electricity production by hard-coal-fired units, 3.73 terawatt-hours, it's an increase by 15%. Now comparable to national average, heat generation 3.99 PJ. It's a drop by 3%. The difference in temperatures, average temperatures, in this period, reduced the demand. Retail electricity supply almost 8.9%, which is an increase by 2% as compared to Q4 2020 and commercial coal production almost 1.5 million tonnes, which is an increase by 52%. Some most important events in 2021. In February, we started the construction of a wind farm, Piotrków, 30 megawatts. In March, we concluded an agreement for the sale of shares in PGE EJ for -- to the Treasury. And we launched a photovoltaic farm 6-megawatt capacity in Choszczno, it's a green investment. And at the end of 2022, at the end of the first quarter, we finalized the stage 2, which is 8 megawatts. So as of tomorrow, we have the capacity of -- installed capacity of the photovoltaic farm in Choszczno of 14 megawatts. In July, we made an agreement with the treasury and other energy companies concerning the cooperation with respect to the spinning off of the coal assets to NABE. Another item, another event in July was the decision to resign from the participation in the process to acquire selected assets of the CEZ group in Poland. We considered the purchase of CHP in [indiscernible]. In August, we made a letter -- we signed a letter of intent with PGNiG regarding potential transaction related to the sale of TAURON's equity interest in Elektrocieplownia Stalowa Wola. In September, it was the conclusion of a letter of intent with the Treasury concerning potential sale of shares of TAURON Wydobycie. In October, there were 2 events, very important events was affirmation of Fitch rating agency, BBB-, rating with a stable outlook and conclusion of a PLN 2.8 billion loan agreement with the European Investment Bank, which is unprecedented in this part of the energy sector. In December, we made an agreement with Erste Group Bank on a loan for PLN 0.5 billion. And we made -- we concluded an agreement to buy back a subsidiary from the Polish Development Fund, the shares of Nowe Jaworzno group subsidiary, which has been completed including payment. The other 2 events in December include decision to keep TAURON Cieplo as part of the TAURON Group and conclusion of a settlement agreement by Elektrocieplownia Stalowa Wola with Abener Energia. The macroeconomic situation and market situation in Q4 and throughout the whole year, shows important events related to the outcome or the recovery of the COVID pandemic crisis. GDP in Poland has changed and PMI have changed, were affected by the situation. And later quarters, Q3, Q4 were more stable. There was some moderate optimism regarding the markets and CO2 allowances had an impact on that as well. But obviously, we know there were some record high prices of about PLN 100 per tonne of CO2 allowances A few words about the structure of production of energy in Poland, which show some tendencies that I spoke about. So heat generated from hot-coal is 14.4%, more than last year, so almost 15% of increase. Lignite is 18.2%. We know that these units are used as the first line. So hence, this higher dynamics. As for gas-fired power generating plants, there was a drop, a decrease. We know it was affected by gas prices. The gas units were in a worse position in 2021 at the end of that year. And an increase of RES about 15%, very dynamic growth of micro installations and photovoltaic farms. Specifically, but also some wind farms as well. So this dynamics was quite huge and affected influence increase of this production all over the country. As for in financial data for 2021, it looks pretty good. We've used certain trends on the market. We took benefit we benefited from certain trends. So I'd like to point your attention to an increase of revenues by 23%, which is the result of good operating data, an increase of volume of sold energy, heat, increase of coal production and increase of distributed energy volume, plus an increase of price on the market. This significant increase of prices, combined with new revenues like revenues from the capacity market and transactions regarding CO2 allowances that I mentioned that all this contributed to an increase of revenues year-to-year. As for the results, we're back on the positive path after 2 years of negative result on a consolidated level, we have a positive result -- consolidated result despite the, fact that we have a significant write-off in the mining sector and conventional energy production, where the write-off was about PLN 1 billion, but we hope that these results are going to be positive in the coming years. As for EBITDA, it's comparable year-to-year, an increase by 7%. For comparison result, we eliminated one-off events involving mainly CO2 allowances transactions. But it's worth to mention a one-off event, which is a solution for our provision for equivalent of energy in 2020. And halt of units in Jaworzno and creation of a provision at the end of 2021, which I'm going to talk in detail further in this presentation. As for Q4 data, there's a slight drop of EBITDA for -- when we talk about this repeatable EBITDA. But as we speak about reported EBITDA, it was strongly affected by the established reserves, provisions, for the repurchase of power from Nowe Jaworzno unit. As for individual segments, again, our key segment is Distribution. More than 70% of generated EBITDA comes from that segment. We can observe some changes between the segments and shifts between sales and distribution. But I'm going to talk about it further in the presentation. As for Q4, here, again, we deal with a significant increase in distribution. This is the key segment here again. But there's a drop in the supply in the sales sector and production, generation of energy, which is due to a contract of cost-plus but also the halt of the stoppage of the Nowe Jaworzno unit. As for EBITDA in 2021, the reported EBITDA, it's stable year-to-year. We can see allocation between 2 segments: Sales, which is supply and generation which is the outcome of an agreement signed between TAURON Polska Energia and Nowe Jaworzno. This agreement is a cost-plus agreement, which covers all the costs of operation of Nowe Jaworzno units. And due to the fact that, unfortunately, there was a failure of that unit. And for the second half of the year, it was on hold. It was not operational. The cost of repurchase of energy from the market had to be covered as well. And hence, the allocation between supply and generation sectors, as the contract affects the result of TAURON Polska Energia, which is in the Supply segment. And the PFR agreement and investment of PFR has been completed. Transfer of shares was affected in December last year, but payment was affected in March this year. And since the company does not have an external investor, we dissolved the contract between TAURON Polska Energia and Nowe Jaworzno. So allocation was last done in 2021. And from 2022 onwards, we won't see it in the results. The results will be more intuitive. They will -- in the supply and generation sector, they will reflect the more actual situation. As for Q4, again, we see the result of the failure of and lack of operation of the Jaworzno unit. In the second half of the year, but you can see that the 3 segments have very good results. Those that drive the EBITDA, which is Distribution, which is RES. And also, it's worth to emphasize that we have a good result in the Mining sector, which in Q4 had positive EBITDA result for the first time last year. Now moving on to particular segments. It's worth to emphasize the stability of EBITDA year-on-year. In the Distribution segment. In this segment, what's very important in 2020, we had a one-off event involving a dissolution of a provision for the equivalent of energy. This release of the provision improved the result in 2020 by PLN 4 million plus. And even though we did not have this one-off event in 2021, the results are comparable. So if we remove this one-off event, the result is very, very good. Good results are due to several issues. First of all, significant increase of volume of distributed energy as has been discussed by Mr. Jerzy at the beginning of the presentation. And it's also due to reduction of cost -- of balance sheet costs, lower purchase prices, lower charges for the transmission grid operator. And so the results year-to-year are quite stable. But if we remove this one-off event, from the equation, the result is very, very good. It's worth to note that part of those results go to the regulatory account, and that will be settled in consecutive years, starting from 2023. So part of the volume, which is higher than what was established -- which was assumed by the President of the Energy Regulatory Authority goes to this regulatory account. So the results are very good. If we take all that into account. As for Q4, in Q4, there was no one-off event. So the provision and the release of the provision happened in Q1, but we can see how distribution contributed to the EBITDA of the whole group. These elements repeat themselves like an increase of volume. In Q4, it was not as dynamic as throughout the year. It was 7% throughout the year. In Q4, it was a little bit more than 4%, but let's remember that in 2020 Q4 was a kind of post-pandemic quarter. Well, obviously, we still were in the pandemic. But from the business point of view, there were no lockdowns and business return on its tracks as previous year. So the effect of Q4 2020 was not that much disturbed by one-off events in the form of lockdowns. So we need to emphasize this result, which is an increase of distributed energy volume as 4.5% as very good. As for key parameters for the Distribution segment specified by the President of Energy Regulatory Authority. They have been maintained. So there will be no negative effect due to not maintaining the terms because we have maintained them. And due to the investments we've been doing we have the growth of regulated assets value. As for Renewable Energy segment, we have 2 important things to note here is the volume of generated energy. As Jerzy said at the beginning, we had some drop in this area. It mainly concerned energy generated by wind farms. Here, the first quarter of 2021 was very poor in terms of weather conditions as compared to a comparable period. And obviously, it was supported by the energy market, the prices of energy, the prices of asset rights. So the segment was a huge beneficiary of these increases. As for Q4, in the RES segment, we can see it even better. I mean, the result of prices. As for production itself, there was some shift in Q4. We had better weather conditions year-to-year, meaning wind. As for hydropower plants, they had better generation at the beginning of the year. And in Q4, the production was lower as compared to Q4 previous year. And the Generation segment is one of the most difficult segments to understand because there are some disturbances regarding the cost-plus contract, but some important issues include the first year of capacity market operation, even if we take away our REM or [ REZ ] instruments, we still have PLN 336 million of pure profit from the capacity market. And also, we should point to good result on 200 units and cogeneration units in TAURON [ Cieplo ]. But also here, we deal with some negative impact of repurchase of energy of Nowe Jaworzno -- repurchase of energy from the market due to the failure of Jaworzno unit, which had a negative impact on the group's EBITDA, but we don't see it in the Generation segment, particularly due to the cost-plus agreement that was mentioned before. If we take away the effect of the cost-plus agreement from the distribution -- from the Generation segment, the result would be PLN 1.2 billion worse in that segment, but it would be better in the Sales sector by the same amount. But I'm going to discuss it in a moment. There's one more thing should be mentioned, which is CO2 allowances. It was discussed in detail after the results of Q1 2021. And this high positive impact of those transactions was affected by 2 factors, first of them being the transaction of transfer of CO2 emission allowances from the AIS market to the OTC market -- from the stock market to the OTC market. So involve -- like what is the deposit in markets change on the stock exchange market, it responded to it. So by eliminating this factor, we can predict cash flow more effectively. And the second factor was related to the stoppage and halt of the unit in Jaworzno [indiscernible]. Allowances were sold on the market and secured for production in 2022, 2023, 2024 which led to generation of a positive result in 2021. As for Q4, 2021. In the generation segment, we have similar factors here, good CDS for cogeneration and 200 capacity units. But on the other hand, we have this repurchase of energy for Nowe Jaworzno, which is not seen particularly in this segment, we will see it in the Supply segment in the Sales segment. But what we can see here is quite surprising since we don't see this repurchase, but we have the provision in this segment because the cost-plus agreement for the repurchase of energy from the new unit, it was dissolved at the end of the year. So the provision for the repurchase of energy is already allocated assigned to the Generation segment because from the new year, all the results regarding Nowe Jaworzno and as a standard of TAURON [ Cieplo ] and TAURON [ Wytwarzanie], it will be included in the Generation segment. So it's already shifted to the Generation segment. As for Sales or Supply segment, on the diagrams, it looks poor. The EBITDA of minus PLN 0.5 billion, it points to poor result. But like I said, it's the effect of cost-plus agreement, which burdens the Supply segment, which is more than PLN 1.2 billion. If we eliminate that, we could say that the result of Sales is stable or even increasing year-on-year. We have higher volume of energy sold and some effects that have a negative impact on that segment is an increase of the number of prosumers in the Supply segment because TAURON Sprzedaz [ must ] take off the energy of prosumers, but it has to cover the cost of distribution of energy in this area. And this has a negative impact on -- of this segment. As for Q4, similarly, to the results for the whole year. And [ what ] had the biggest impact on Q4 was the repurchase of energy for Nowe Jaworzno, which is reported in this segment. Like I said before, in 2021 if we eliminate this, then quarter-to-quarter results will be very similar with some reservations. We're pointing to some loss of profitability from the sales of gas due to a significant increase of prices in this area. And due to agreements, we could not translate all those price increases into the contracts with the clients. As for Mining segment, it was a very fluctuating variable year. The first half of the year, we had an increase of inventory -- most of the entities on the market did not know how to allocate the inventory of coal. There were stocks of coal in the heaps near the mines, but the trend was reversed in the second part of the year due to high prices of gas. There was a different balance of repurchase of energy in Poland. So as in the first half of the year, we imported energy to Poland, and it was reversed. We exported energy to foreign markets in the second part of the year. So the balance for the whole year was close to 0, but due to the fact that the exports were high in the second half, our units were much -- very much loaded, they consumed a lot of coal. And therefore, the coal inventory, the stock of coal was consumed, almost all of it. So the result of the Mining segment was affected by a significant increase of the sales of coal -- it's more than PLN 300 million of positive effect on EBITDA. Some one-off event that did not occur in 2021 was the issue of additional resources from the anti-Covid shield government scheme. Some costs were activated in the balance sheet as in the form of inventory. And since the inventory was sold in the second half of the year, it was translated into the results and it has a negative impact upon the generated EBITDA. As for Q4, it's worth to emphasize that EBITDA was positive in the Mining segment. And this positive EBITDA occurred was due to things, one of them being a significant increase in the sales of coal. And the second one was a gradual increase of coal prices. So it's worth to note this first positive EBITDA in this segment. As for Debt and Financing, there was a drop of net debt year-to-year by more or less PLN 0.5 billion, which translated into a lower debt ratio. As it has been mentioned already, we signed 3 important contracts this year. The most important of them was the one with EIB for PLN 2.8 billion, which is the biggest bilateral corporate agreement on the Polish market between EIB and enterprise. It has a long maturity of even up to 20 years. And obviously, it gives us a huge liquidity buffer. Another important contract was the one with Erste for investments of RES and Distribution segments and [indiscernible] contract, which is not being -- which is not used yet, but it's for a hybrid bonds. It has not been used, but it's available to us. As for plans for this year, we are dealing here with significant maturity. The program we've been talking about for a few quarters, which is PLN 6 billion, mature in December this year. We need to emphasize that it's used only slightly in a small part for now. But we're starting negotiations with financing institutions, and we're expecting to sign a refinancing agreement concerning this program in the first half of this year. But I also have to emphasize that regardless of whether we signed this refinancing agreement, TAURON has its liquidity secured for the whole 2022. And the financial gap that might occur here will be fully or is fully secured by the already signed loan agreements. An important piece of information that we don't mention too often, but at these growing interest rates, and it's worth to mention is that the level of security of hedging our portfolio is more than 80% of our exposure, is not at the risk of interest rate increases. It's due to the fact that we have fixed interest rates or we use some derivative instruments, swap contracts that change the valuable -- the fluctuating variable interest rate into a fixed rate and they base on a fixed rate. So we're not at this risk. And as for CapEx, I will give the floor to [ Krzysztof Surma ].

Thank you very much. As for CapEx, it's PLN 1.9 billion compared to -- Yes, once again, I changed the mic. So I have to repeat. Like I said, PLN 2.9 billion as compared to PLN 4 billion in the previous year. In this diagram, we see the main reason for it, which is the Jaworzno [indiscernible]. These Investments were quite high in -- due to this failure. In Distribution, we can see some increase of investment outlays to [ PLN 2.05 billion ] with [ PLN 1.9 billion ] in 2022. And mining sector. There's a slight drop from PLN 345 million to PLN 276 million. As you can see in the explanation part we dedicated some -- well, PLN 10 million on Grzegorz Shaft and the whole infrastructure. We will probably refer back to it during the Q&A session, and then some maintenance work allowing to mine coal at the level as expected by the group in 2021. As for other segments, there are no major changes, PLN 310 million in 2020 and PLN 282 million, that's performance in 2021. The main investment being broadband Internet as part of the POPC III and CUB program. IT investments, PLN 70 million. The broadband Internet is almost PLN 100 million. And lighting, maintenance and expansion is PLN 56 million and gas engines PLN 20 million. And please note Distribution, PLN 2.044 billion, it's -- for new connections. PLN 1.010 billion, that's for installing new grid connections. And Grid assets upgrades and replacement is PLN 877 million and dispatcher communication systems is PLN 38 million. So that's the response of TAURON distribution. For growing development of connection of new off-takers and also photovoltaic farms in the area of TAURON Distribution. And something that might be of interest to you, some perspectives for 2022. Obviously, we need to note here that the situation might be dynamic. Let's hope that we have this aggression of Russia to Ukrainian territory, which may affect the outcome of the group. But our best estimate regarding distribution is that we assume stable result year-to-year, slightly increasing volume, not -- maybe not as much as in the previous years, but also increasing. We have a positive trend regarding Distribution results. As for the weighted average cost of capital, we see an increase. We also have an increase of the value of regulated assets. I mentioned this already. It all should contribute to a positive result and supported by the increase of average distribution rate to the client year-on-year. But obviously, something that we cannot ignore is an increase of cost of external services and of remuneration of employees and a significant increase of cost for repurchase of energy to cover the balance differences. So altogether, it should give us a stable result in the Distribution segment. As for RES, we are expecting a double positive result for this segment. One of them being higher volume. And the other one -- well, specifically as production from wind farms, we are expecting a higher volume. As we said, the first quarter of 2021 was a poor quarter regarding wind. So we're expecting higher level of wind. As for prices, like we said at the beginning, Mr. Jerzy showed a diagram with prices. There's an increase of prices, an increase of asset rights. So we're expecting EBITDA to be better in the RES segment year-to-year. As for Generation and Supply segment, like I said before, if we take a look at the reported EBITDA in the Generation segment, it will be lower. But if we take away the cost-plus effect, this EBITDA year-to-year should be comparable. On the one hand, we'll be dealing with stable level of generation, which is obviously dependent on the operation of the Jaworzno unit, but we're assuming that it's going to be right on schedule and according to what we published in current reports, and we hope it's going to be launched and synchronized by the end of April. As for negative premises, we have obviously higher cost of coal. We're expecting that these final supplies are going to be at higher prices year-to-year and also not -- the costs are not fully covered by the district heating tariff, which is related to benchmark tariffs used in this area, which least a transfer of the cost of CO2 allowances or the cost of increase in coal prices. And in the -- we have this cost of external services and cost of employment would also increase also have impact on Generation segment. As for Supply, the positive impact will be the higher price. Well, in the Generation segment, we will benefit from higher prices. In the Supply segment, the reported EBITDA year-on-year, it's going to be significantly higher. If we take away the effect of cost-plus, this EBITDA should be quite stable. Though there might be some risks related to Russian aggression in Ukraine. Here, there are 2 factors that we deal with. One is the risk of loss of margin in the gas supply area, some contracts were signed with a guaranteed price. So an increase of price might have impact on loss of margin. And the other risk is the G tariff risk and the volume that was secured in the previous year for tariff G, it assumed a stable level of consumption year-on-year. We're obviously talking about statistics here. But if we have a bigger number of refugees in our sales area and the prices remain the same. This might also have a negative impact on the Supply segment. So these are the key risks in this segment. There's one more risk that I mentioned during my presentation, that is the risk of a growing number of prosumers, but it's -- since we have already established a reserve for it, its scale should not be visible throughout the year, not be very important, not be very significant. As for Mining, we're expecting a stable level of production year-on-year. We're expecting that prices of sales of coal will be higher this year. But on the other hand, we have this negative result that we see in other segments as well, which is an increase of the cost of external services and employment and also the cost of energy purchased. And the result of this segment might highly depend on subsidies that the company has already applied for. But if they're going to be granted, well, that's to be decided by the government in the coming months. They will have huge impact on the EBITDA of the Mining segment. As for the group's reported EBITDA year-on-year, we are expecting it to be stable. Obviously, with the reservation of some risk that we mentioned earlier. CapEx level will be increased year-on-year, but this increase will be mostly seen in the RES segment. This will be the green return announced by the group, we hope to have be welcomed by the market. And the increase of CapEx is to maintain this stable financial situation in the group and maintenance and observance of all the bank covenants. We're assuming safe level of covenants not to get close to 3.5%, which is the limit covenant determined in the financial agreements.

So this is all, and let's move on to Q&A session. Yes, we have many questions. Some of them are repeated. So I will try to compile them to answer as many as possible. The first question that we got from Andrzej Rembelski from the brokerage office of PKO BP. Do your -- have your coal mines received in 2022 any funds as support for the mining sector? At what stage are you with regards to the sales of coal mines to the treasury. How are you going to settle for losses of investments in 2022 regarding the extension of the disposal process and some more questions concerning coal. Maybe I will...

So yes, so the first question composed of 3 parts, actually. So maybe I will answer the first 2 parts and then we'll switch parts with Krzysztof. As I mentioned in the main part of the presentation, in TAURON Wydobycie there's -- well, there's an ordinance of subsidies on reduction of coal production according this ordinance, but we have not been granted these funds yet. But -- but TAURON Wydobycie has fulfilled all the requirements for us. So this operating plan has been completed and is approved by the [ Ministry ] of State Assets. So for now on, the funds have not been transferred to us [ yes ].

At what level are we -- at what stage are we with regards to disposal of coal mines to the Treasury?

Well, we've already signed a letter of intent and we've done all the [indiscernible] program works to prepare TAURON Wydobycie for sale for the disposal of assets. We've already had the company evaluated and the price, and we're waiting for some more arrangements with the Ministry of State Assets. And we need to remember that it all depends on negotiations with the European Commission on the support program because this is going to be public aid. So it has to be notified to the European Commission until it's done, this process of sale cannot be finalized. So we are ready, we are just limited to the moment of disposal of TAURON Wydobycie to the Treasury by these factors that I mentioned.

Question 2. When are you expecting to carve out production assets based on coal, how much of net debt do you identify as that related to those assets?

As for the first part of the question, it has been addressed by President Jerzy. But as for net debt, how much of it we identify with regards to mining assets. Well, we already mentioned it during the previous conferences. If we take into account the balance sheet position and historical loans for that segment. They are included, recognized. They are written-off actually to 0. So we don't identify any significant net debt items that might be as subject of transaction related to disposal of those assets.

Another question. These are still questions from Andrzej Rembelski. Do you contract energy in the production segment for 2023? And due to carving the expected carving out of assets, have you changed the strategy in this respect? What are the prices of coal from external suppliers that you assume for 2022, 2023?

Maybe I will answer this question. As for contracts, in the Mining segment, it's done on a standard basis. We have specific roles of contracting. We have an assumed commercial strategy. So I cannot answer fully. We have 2 extreme strategies. One is fully hedged contract, and the other one is a spot-based strategy. We're not publishing them fully because it's quite significant for the supply and demand in consecutive years. But we obviously have to take into account the positive CDS that occur in that period. And if according to [indiscernible] strategy, it is enough to secure this energy, we secure it if it's to have a positive outcome on the results of that segment in consecutive years.

Another question concerning Distribution, what's the level of weighted average cost of capital in the current macroeconomic situation that would be sufficient to speed up the investments in that segment?

I will perhaps try and answer that. We know that long term, which is 5-year regulatory model is not in the hands of Distribution, obviously. We know that geopolitical circumstances constitute a significant disturbance. I don't know if the President of the Energy Regulatory Authority is going to establish a model, maybe it's going to be a transitional model once again. But due to the macroeconomic situation and the indices that we see that we observe will not affect on the weighted average cost of capital or it might actually increase by 8 percentage points.

Will it be enough to speed up the investments?

Well, it will all depend on what is going to happen on the market of contractors regarding cost because I obviously understand speeding up investment, but it may be that the changes in prices and an increase of costs might be -- might consume the investments outlays. So for now, we cannot say because the variability of cost environment and availability of materials, subassemblies, that's strongly disturbed in today's reality.

Why -- another question? Why does RES reflect so strongly spot base prices of energy in 2021? Are your farm -- wind farms hedged in term contracts? And if so, with how much in advance?

Well, answering this question. Well, I probably -- by asking the second part of the question, you also knew the answer to the first part of the question. But yes, I'm answering, my answer is that, obviously, a contract in the RES segment are obviously hedged, secured. It all depends on exposure, higher or small exposure on the term contract market. Some of the sales are hedged some are open to the spot market. As for the decisions, they are made in advance, obviously, but those term contracts sales are a year, sometimes 2, 3 years ahead. So to conclude, yes, some of the contracts were concluded earlier. So not all of them are reflected in the increase of energy prices, but the level of hedging is -- in this segment, is based on statistics to the level in which we can be sure of production of energy from this segment. We cannot be fully sure because it all depends on the weather conditions. But it's also affected by the commercial strategy, but partly secured in the 3-year horizon.

And last question from Mr. Andrzej Rembelski. What's the exposure of the sales segment to the spot price fluctuation?

This question was actually addressed when talking about the perspectives for 2021. We secure contracts, we hedge contracts with the customers, back-to-back hedging. But in the area of tariff G, we use statistical methods. As for exposure of the segment to spot prices, it depends on the level of energy consumed, specifically in this area of tariff G. If those sales are much higher than what we expected, this might be due to the growing number of refugees coming to Poland specifically to the area of our sales and high prices of energy, this might have an important impact on the result of supply or sales segment.

Another question concerning coal. What's the plan of coal production in 2022? Is the company -- can the company increase the production in 2, 3 years? Or does it require this new Grzegorz Shaft? And what's the amount of ECO-PEA coal that can be produced and can it be increased in the context of embargo for Russian coal?

In the context of this situation, I will try to give you more details about mining segment. The whole segment of TAURON it's in the -- is covered by [ aid ] program where we assume some base levels that will have to decrease production. We know this [ aid ] scheme is -- this involves subsidies for the decrease of coal production in our country. But the plan for 2022 is similar to 2021, we're planning it to be 5.1 million tonnes, which also had to be arranged in the notification process with the European Commission because in 2022 it was to be the first year of decreased production. But due to the situation we have now, we returned to -- we revised this level and returned to the level of 2021. But as for the capacity to increase volume, we do have this capacity, but it has to be agreed upon and [ a range ]. We are talking and negotiating with the Polish government with the mining sector. And there are ongoing negotiations between the government and the European Commission. We need on changing this starting point due to the geopolitical situation. But we, as TAURON Wydobycie, can increase production. But obviously, well, it's not related only to Grzegorz Shaft because even if we want to finalize this investment. For this reason, if we are to commission it, if we sign a settlement agreement, it will only be commissioned in 2027, 2028. So the company and the horizon of 2, 3 years, the company may increase slightly its production with the assets we have now, it involves some investments to delve galleries to prepare production underground, but we also have to have an agreement and consent regarding the aid, the subsidies system. As for ECO-PEA, those cassettes of those 1,000 tonnes, we're maintaining this level that we have for now, there's no plan to increase the volume.

Another question. What are the risk factors that you see with regards to EBITDA of the Distribution segment?

I think we've already answered this question when we talked about projections and perspectives, forecasts, we see it stable. As for risks, they may materialize, but they will be strongly related to some danger related to Russian aggression on Ukraine. But as for those risks that we identify as of today, I would say that the volume of distributed energy that might have an impact on worse result in sales. In distribution, it will have a reverse impact. Maybe not on the sales scale as in the supply sector, but in the distribution, it should have a reverse impact. So we expect -- hence, we're expecting stable EBITDA.

Another question on Distribution. What's the state of the tariff model for Distribution?

Like I said before, the tariff model and the whole process of establishing the model of tariffs is quite advanced. As if it were a 5-year model that could allow us to project results for Distribution, but we need to bear in mind the situation of Russian aggression in Ukraine. It's a significant element disturbing the situation. The assumptions of all the operators are that we need to establish the term in the model to have it ready, but its parameters could be established for 2023. Taking into consideration this extraordinary situations that we have so that this model is a basis with some parameters to be decided in the future. I think this can be realistically negotiated with the President of their Energy Regulatory Authority.

Another question, which concerns partly the new model you've answered already. Well, do we know anything on the new return model from the distribution model? What are the perspectives from the segment with regards to pressure on energy grid? What's the CapEx plan and midterm plan and how much of it is going to be dedicated to refurbishment of the grid?

As for CapEx, it's at the similar level to performance of 2021, so it's more than PLN 2 billion. And when I showed you the performance for the last year, more than 50% of that, in general, it's being consumed by new connections, and we're not going to reverse this model. We're assuming that the trend related to RES and photovoltaic installations. It's not going to change. And hence, this consumption should have a similar share to new connections. And the other elements are related to refurbishment, modernization and they will be maintained at the same level. As for consecutive years, we are about to determine the model, the plan, we're expecting the President of the Energy Regulatory Authority to approve our plan. We'll see.

And then RES, what are plans of TAURON regarding capacity to be launched in 2022 and in 2 consecutive years.

As for the commissioning of RES unit, this year due to the investment process, they will occur. However, they will not be as spectacular as we might think. We're about to commission the wind farm in Piotrków to more photovoltaic projects One more wind farm in Majewo and photovoltaic in Choszczno. And we're about to start a [ photovoltaic ] farm construction in our postindustrial areas. But we're planning to increase CapEx in this year, when I -- well, I already mentioned it. This level of increase will be unprecedented in recent years. So in 2 years, we should speed up significantly with regards to the construction of consecutive wind capacities. In some press releases, an announcement. We already mentioned the start of construction of a 200 or 250-megawatt farm this year. So this will speed up significantly and it should result in more capacity available in the next 2 years because this is the length of an investment cycle in this area. This should increase our base with regards to RES in consecutive ears.

Another question from [ Darius Capella ] from WNP. The time of synchronization of 9, 10 unit in your Jaworzno plant scheduled for 29th of April this year. Is it going to be kept? Or are there going to be any delays?

Well, ladies and gentlemen, the work related to the repairment of the unit has been completed, all the defects of the boiler has been completed and finalized. And repaired for now, and we are at the level where the boiler is flooded with water is being flushed. These are prelaunch works. Next week, we'll start testing oil burners with a coal-based test. So when I look at this stage of works, I think that in our opinion, this date of 29th April is not at any risk.

Another question concerning Jaworzno was the result of 200 plus on the 200 units in Jaworzno or is TAURON expecting modernization of further coal-fired units?

Obviously, it concerns 200 units in [ Jaworzno III ], not Nowe Jaworzno, the results of 200-plus scheme are quite promising. The parameters we achieved with regards to the flexibility of the minimum power are quite promising. I will explain in a moment. The 200 unit has a minimum capacity of [ 139 ]. And under this program, we achieved about 90 megawatts. So without decreasing the parameters regarding the combustion and environment impact. We're not -- we don't know how it's going to be addressed yet, but it seems that this transitional period were in this situation, coal-fired units might work might be operational for a longer period in this transitional period. This might increase the energy security of the country due to the bigger flexibility in the context of growing and stable production from RES installations. But we, as TAURON are not planning the refurbishment of other units due to the process of disposal of all the assets to NABE and the government scheme of energy sector transformation. But we're mentioning it to the ministry that it's an important impact or contribution to the operation of the units and the NABE if obviously, prolonged. This period is prolonged for coal-fired units by the European Union. It's going to be quite a profitable investment. It's not high investment cost, and it's quite fast.

Another question by Mr. [ Capella]. How much does it cost you to repurchase the share of your Jaworzno from PFR?

The repurchase was a little bit more than PLN 1 billion, and it was covered by the contract from 2018 signed with PFR and the TAURON.

Another bunch of questions from Mr. [indiscernible], some are repeated. So due to increased demand for coal and ban on Russian coal, can TAURON increase its production? But we've already answered it. How much TAURON earn on the sale of allowances, CO2 allowances of Nowe Jaworzno?

Well, the first question should be, what year are we talking about? I presume that it was 2021 because in 2020 they were sold and transferred partly in Q1 2021. It was discussed after -- with the result of 2021 and during the presentation. But as for CO2 allowances for 2021, after the balance sheet date, after finalizing the year, closing the year, we took a decision on partly selling it on the market. And on repurchase and on securing transactions in TAURON with [indiscernible], I will not give you a precise answer on how much we earned on this transaction. But please bear in mind that these allowances were purchased earlier when the price on the market was about EUR 25, EUR 30. And we resold them in February and March this year. And so we generated some excess amount in this regard, but we will be able to tell you more about it after -- when we talk about the results of Q1 this year.

But how much is TAURON going to earn in Q1 this year for the allowances for the nonoperational unit, but you've answered it already. In view of the revision of the energy strategy of the country, is TAURON going to limit investments in gas and if not gas, how do you see the company's transformation regarding TAURON [ Cieplo ]?

You've probably noticed our [indiscernible] investment, we're continuing it. So for now, we're not reducing our thoughts on gas investments. We can see this energy strategy might perhaps change and this transition period might be prolonged for coal, but we need to remember that gas investments in TAURON are based exclusively on the units that generate heat mainly. So these are high capacity cogeneration units where the share of heat is quite high. These are not regulatory system blocks units. So our perspective is not being changed, but we will obviously revise it after the proceedings are completed after we've received the bids. And in the [ context ], our participation on the capacity auction that will be settled in December. This will give us the answer on how profitable these gas-related investments might be, how profitable they are going to be, income junction in combination with production of heat in cogeneration. Hence, today, we're not revising our strategy. So we just continue what we assumed and to be verified by the end of 2022. Once we know how it looks like in practice. As for TAURON Heat, TAURON [ Cieplo], we see that -- so the 3 major sources of energy, which is high-efficiency cogeneration, gas engines and heat pumps and also incineration of waste, RDF or other materials. This is what we focus on to allocate TAURON Heat idea to secure the heat supply for the inhabitants of [indiscernible].

And one last question from Mr. [indiscernible]. The strategy, I assume the revision energy law, is TAURON going to apply for the prolongation of capacity of operation for 2-megawatt units?

Well, NABE issue is very important. TAURON, first of all, focuses on carving out coal-based assets. And today, our effort is directed at all the activities to prepare us for the carving out of the assets, then we need to do the due diligence and then dispose of those assets to the Treasury. But obviously, there's a possibility to get some support from the capacity market for the refurbished 200-megawatt units, we will support it.

Another question. In the Generation segment, you're expecting stable results in 2022. How is it possible if in the subsegment heat, we should expect a significant decrease year-on-year? Why do the results of conventional production of TAURON, why should they improve significantly in 2022?

Well, let us remember that TAURON [ Cieplo], TAURON Heat is the area where we mainly use cogeneration units. So on the one hand, we deal here with very good results in the context of sales of energy and poorer results in the sales of heat, which is like not fully, which is due to not full coverage of increasing tariffs, CO2 prices. So these 2 factors will set off kind of for the results of heat. And also heat involves transmission. And if we take all of that into account, EBITDA in this area should not be significantly different year-on-year. Similarly to conventional areas. So we don't see any significant factors that should improve this result, but in the context of the fact that it's going to be stable heat-wise, the whole result should be stable year-on-year.

Another question. What was the result of the cost-plus agreement in Nowe Jaworzno in Q4 2021 and for the whole 2021?

It has been addressed during the conference already. For the whole year, the result was more than PLN 1.2 billion. As for Q4. it's a little bit more than PLN 500 million.

When taking the investment into account in [indiscernible], what's the scheduled date of completion?

Like I said, if the termination on the energy market on the capacity market is to bound in December, then we may take the decision. So by the end of the year, we can make the decision and the work of construction of such a unit is about 4, 5 years. So the first half of 2027, it's the earliest this investment could be commissioned.

Another question concerning Tauron Wydobycie, TAURON mining. So are you planning an increase of coal production, but we've already answered it. To what extent is the budget going to increase to finalize Grzegorz Shaft construction? When is it to be completed?

The budget on Grzegorz Shaft will depend on the settlement agreement that is being finalized now. We're assuming that in the next 2, 3 months, it will be concluded, and we'll be able to resume work on Grzegorz Shaft. It's a similar budget to what was assumed at the beginning with slight corrections. We know it was a little close to 50%. That is still to be spend, but it's still according to the original budget. If the budget increases based on the settlement agreement, several dozen million zlotys as compared to the projected original budget, and the termination should be -- the completion should be -- is bound in 2027.

Now without subsidies, does the EBITDA of Mining segment, should it be worse, better or stable year-on-year? What scale of subsidies is the company expecting to receive in 2022?

Here, the situation is quite dynamic, obviously. That's why we did not point to the direction of this change which is mainly due to the fact that we have very important significant changes of prices of coal on external markets. Prices of coal that are produced outside long-term contracts made with the group. They may have a significant impact on EBITDA of the Mining segment this year. So taking into account these huge dynamics of prices in this area, it's very difficult to say whether it will be stable or worse. I'm assuming it's going to be hard to achieve higher results. We've also mentioned some other factors important for this segment, like increase of prices, increase of service -- cost of services. Last year, we had energy contracted at different levels, the prices of services, external services were at different levels. So these differences in cost levels and employment costs, this will reduce EBITDA but the prices will have impact on increasing the EBITDA. So on that for now, the scale of subsidies, well, the subsidies depend fully on cash flow results of the company. So altogether, it's quite hard to determine. So this is a question that I cannot answer today. I think we will return to it once we've had the results of the first quarter then we'll be able to define the result and define the subsidies. Like I said, we've already applied for them, but we're expecting consecutive -- we're expecting decisions. It can be either subsidy in cash or it can be a subsidy in the form of securities. So it will also determine their value and their impact on the company.

And one last question, [indiscernible], Thomson Reuters. What's the advance of SMR reactors of the company? Where is the company going to take the first steps?

Well, the company has already taken the first steps, we're in the course of analysis. We've already started cooperation with some entities that have this technology at hand. We mainly talk about SMR low-temperature reactors. So it's easy to see what entities we focus on with -- as we know which companies have this technology available. And the results will be included in the updated strategy of TAURON Group, which should be published in 2022.

Thank you very much. Thank you for the conference, for the meeting. It seems we had more questions today than we have throughout the whole year. So there's more interest in the energy sector. I would like to invite you to our next meeting in May, once we've published the results for Q1 2022. We will announce the date of the conference in a traditional way. Thank you for the meeting. Have a nice day.

Thank you very much. Goodbye. [Statements in English on this transcript were spoken by an interpreter present on the live call.]