Management Reports • Nov 13, 2018
Management Reports
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Management Board's report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 3-month and 9-month period
ended September 30, 2018
| 1. | Description of activity of the Capital Group | 5 |
|---|---|---|
| 1.1. Description of organisation | 6 | |
| 2. | Implementation of key projects | 10 |
| 3. | Electricity market and regulatory and business environment | 13 |
| 3.1. Macroeconomic environment | 13 | |
| 3.2. Regulatory environment | 15 | |
| 3.3. Supply markets | 26 | |
| 4. | Results of PGE Capital Group | 28 |
| 4.1. Key financial results of the PGE Capital Group | 28 | |
| 4.2. Key operational figures of PGE Capital Group | 32 | |
| 4.3. Key financial results in the business segments | 34 | |
| 5. | Significant events of the reporting period and subsequent events | 47 |
| 5.1. Changes in the Management Board and Supervisory Board | 47 | |
| 5.2. Legal aspects | 48 | |
| 5.3. Information concerning proceedings in front of court, body appropriate for arbitration proceedings or in | ||
| front of public administration authorities | 48 | |
| 5.4. Information about granting guarantees by the Company or its subsidiary | 49 | |
| 5.5. Information on issue, redemption and repayment of debt securities and other securities | 50 | |
| 5.6. Activities related to nuclear energy | 50 | |
| 5.7. Rating | 51 | |
| 5.8. Tender offer to subscribe for the sale of 100% shares of Polenergia S.A. | 51 | |
| 5.9. Transactions with related entities | 51 | |
| 5.10. Publication of financial forecasts |
51 | |
| 5.11. Information about shares and other securities |
51 | |
| 6. | Statements of the Management Board | 52 |
| 7. | Approval of the Management Board's Report | 52 |
| Glossary | 53 |
| Management Board's report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 3-month and 9-month period ended September 30, 2018 | ||
|---|---|---|
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Capital Group of PGE Polska Grupa Energetyczna S.A. ("PGE Capital Group", the "Capital Group", "PGE Group", the "Group") is the largest vertically integrated producer of electricity and heat in Poland. With a mix of own fuel sources, generation assets and distribution network, PGE Group provides a safe and reliable supply of electricity to more than 5 million households, businesses and institutions.
The parent company of PGE Capital Group is PGE Polska Grupa Energetyczna S.A. (also "PGE S.A.", "PGE", the "Company", the "Issuer").
PGE Group currently organizes its activities in five business segments:
Conventional Generation
Core business of the segment includes extraction of lignite, production of electricity and heat from conventional sources as well as transmission and distribution of heat. The Conventional Generation segment includes PGE Energia Ciepła S.A. ("PGE EC"), which also tradesin electricity.
Renewables
Core business of the segment includes electricity generation from renewable sources and in pumped-storage power plants.
Supply
Core business of the segment includes trading of electricity across the country, wholesale trading of electricity on domestic and international market, provision of services to companies from the PGE Group related to commercial management of generation capacities of the Group and electricity produced, as well as trading of CO2 allowances and energy certificates and fuels.
Distribution
Core business of the segment includes supply of electricity to final off-takers though the grid and HV, MV and LV infrastructure.
Other Operations
Other operations include services, through the subsidiaries, to PGE Group, which includes organisation of capital raising projects and provision of IT, payroll & HR and transportation services. Its activities also include subsidiaries formed to prepare and implement a projectto build a nuclear power plant, to manage investment funds and to invest in start-ups.
Changes which occurred in the PGE Capital Group's structure in the period from January 1, 2018 until the publication date of this report, are presented in note 1.3 to condensed interim consolidated financial statements and described below.
| Entity | Date of registration | (1) Share capital | Comment | |
|---|---|---|---|---|
| National Court Register | (2) Increase | |||
| (NCR) | (3) Share capital | |||
| after increase | ||||
| Towarzystwo Funduszy |
April 3, 2018 | (1) | PLN 6250000 | On November 28, 2017 the Extraordinary General Meeting of the company adopted a resolution on an increase of the company's share |
| InwestycyjnychEnergia S.A. | (2) PLN 18000000 | capital. The increased capital was acquired by PGE S.A., in exchange for a cash contribution. PGE S.A. holds 100% of share capital. | ||
| (3) PLN 24250000 | ||||
| PGE Inwest 5 sp. z o.o., PGE Inwest 8 sp. z o.o., | PGE Inwest 5 sp. z o.o. – | (1) | PLN 20000 | On April 5, 2018 the Extraordinary Assemblies of Partners of the companies adopted resolutions on an increase of the company's share |
| PGE Inwest 9 sp. z o.o., PGE Inwest 10 sp. | June 5, 2018, | (2) | PLN 30000 | capital by PLN 30 000 in each case. The increased capital were acquired by PGE S.A. in exchange for cash contributions. PGE S.A. holds |
| zo.o., PGE Inwest 11 sp. z o.o., PGE Inwest | PGEInwest8 sp. z o.o. – | (3) | PLN 50000 | 100% of share capital of the companies. |
| 12sp. z o.o. and PGE Inwest 14 sp. z o.o. | May 22, 2018, | |||
| PGEInwest 9 sp. z o.o. – | ||||
| June 9, 2018, | ||||
| PGEInwest 10 sp. z o.o. – | ||||
| May 28, 2018, | ||||
| PGEInwest 11 sp. z o.o. – | ||||
| June 21, 2018, | ||||
| PGE Inwest 12 sp. z o.o. – | ||||
| May 21, 2018, | ||||
| PGE Inwest 14 sp. z o.o. – | ||||
| June 13, 2018 | ||||
| PGE Inwest 17 sp. z o.o., PGE Inwest 18 | PGE Inwest17 sp. z o.o. – | (1) | PLN 10000 | On April 5, 2018 the Extraordinary Assemblies of Partners of the companies adopted resolutions on an increase of the company's share |
| sp.zo.o. and PGE Inwest 19 sp. z o.o. | May 30, 2018, | (2) | PLN 30000 | capital by PLN 30 000 in each case. The increased capitals were acquired by PGE S.A. in exchange for cash contributions. PGE S.A. holds |
| PGEInwest 18 sp. z o.o. - | (3) | PLN 40000 | 100% of share capital of the companies. | |
| May 30, 2018, | ||||
| PGE Inwest 19 sp. z o.o. – | ||||
| June 29 2018 | ||||
| PGEEJ 1 sp. z o.o. | September 11, 2018 | (1) PLN 310858470 | The Extraordinary Assembly of Partners of the company of August 9, 2018 adopted resolution on the increase of the share | |
| (2) PLN 59999730 | capital of company. The increase of the share capital was acquired and paid in cash by all partners, i.e. PGE S.A., KGHM Polska | |||
| (3) PLN 370858200 | Miedź S.A., TAURON Polska Energia S.A. and ENEA S.A., proportionally to their stakes. PGE acquired 297 871 shares with a total |
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| nominal value of PLN41 999 811. PGE S.A. holds 70% in the share capital. |
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| PGE Ventures sp. z o.o. | October 24, 2018 | (1) PLN21400000 | On September 5, 2018 the Extraordinary Assembly of Partners of the company adopted resolution on the increase of the share capital of |
|
| (2) PLN 46500000 | company. The increased capital was acquired by PGE S.A. in exchange for cash contributions. PGE S.A. holds 100% of share capital of the |
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| (3) PLN 67900000 | company. | |||
| PGE Centrum sp. z o.o. | Not yet registered in the | (1) | PLN 8320000 | On September 26, 2018 the Extraordinary Assembly of Partners of the company adopted resolution on the increase of the share capital of |
| NCR | (2) | PLN 5300000 | company. The increased capital was acquired by PGE S.A. in exchange for cash contributions. PGE S.A. holds 100% of share capital of the |
|
| (3) PLN 13620000 | company. |
| Shares of the entity | Date of transaction/ registration in the National Court Register (NRC) |
Number of acquired shares |
Comment |
|---|---|---|---|
| ElectroMobility Poland S.A. ("ElectroMobility") – acquisition by PGE S.A. of the share capital increase shares of ElectroMobility |
January 3, 2018/ April 23, 2018 ElectroMobility's share capital increase registered |
2 500 shares |
On January 3, 2018 the Extraordinary General Meeting of ElectroMobility adopted resolution on a share capital increase by PLN 20 000 000 to PLN 30 000 000 by increasing the nominal value of existing shares. In exchange for a cash contribution, PGE S.A. took up increased nominal value of 2 500 shares, the total nominal value of which increased from PLN 2 500 000 to PLN 7 500 000. As a result of the share capital increase, PGE S.A.'s stake in ElectroMobility did not change (25% shareholding). |
| Polska Grupa Górnicza S.A. ("PGG") – acquisition by PGE Górnictwo i Energetyka Konwencjonalna S.A. ("PGE GiEK") of shares in the increased share capital of PGG |
January 31, 2018 April 6, 2018 PGG's share capital increase registered |
300 000 shares | On January 31, 2018 the Extraordinary Assembly of Partners of PGG adopted resolution in the increase of the share capital by PLN 300 000 000 to PLN 3 916 718 200, through issue of new inscribed shares. PGE GiEK S.A. took up 300 000 shares with a nominal value of PLN 30 000 000, representing 0.8% in the increased share capital of PGG. Currently PGE GiEK holds a total of 6 000 000 shares with a nominal value of PLN 600 000 000 representing 15.32% in the share capital of PGG. |
| PGE Energia Ciepła S.A. - acquisition of shares by PGE S.A. (reverse squeeze-out procedure and squeeze out procedure) |
March 7, 2018 and May 7, 2018 (reverse squeeze out) May 18, 2018 (squeeze out) |
342 728 shares |
On March 7, 2018 and May 7, 2018 PGE S.A. acquired respectively 3 285 and 2 970 shares of PGE Energia Ciepła S.A., through reverse art. 4181 squeeze-out procedure, pursuant to of the Polish Commercial Companies Code. On May 18, 2018 PGE S.A. acquired 336 473 shares of PGE Energia Ciepła S.A., through squeeze-out procedure, pursuant to art. 418 of the Polish Commercial Companies Code. As a result of the above transactions, currently PGE S.A. holds shares representing 100% in the share capital of PGE EC. |
| Zespół Elektrociepłowni Wrocławskich Kogeneracja S.A. ("Kogeneracja S.A.") - acquisition of shares by PGE EC (as a result of tender offer) |
March 14, 2018 | 1 202 172 shares |
PGE EC acquired 1202172 shares of Kogeneracja S.A. (acquisition was a consequence of the tender offer due to exceeding 33% of total votes, pursuant to art. 73 Act of July 29, 2005 on public offering, conditions governing the introduction of financial instruments to organised trading, and public companies). Currently PGE EC holds directly 3 845 041 shares of the company with a nominal value of PLN 19 225 205, representing 25.81% in the share capital of Kogeneracja S.A. In addition, PGE EC, through one-man subsidiary Investment III B.V., holds indirectly 4 807 132 shares with a nominal value of PLN 24035660, representing 32.26% in the share capital of Kogeneracja S.A. |
| Elektrownia Wiatrowa Baltica-1 sp.zo.o., Elektrownia Wiatrowa Baltica-2 sp.zo.o., Elektrownia Wiatrowa Baltica-3 sp.zo.o. – acquisition of shares by PGE S.A. (as a result of the share sale agreement) |
September 3,2018 | 31 600 shares 43 600 shares 31 600 shares |
On September 3, 2018 PGE Energia Odnawialna S.A. ("PGE EO") (the "Seller") and PGE S.A. (the "Buyer")signed the share sale agreement concerning 100% shares of companies: Elektrownia Wiatrowa Baltica-1 sp. z o.o., Elektrownia Wiatrowa Baltica-2 sp.z o.o. and Elektrownia Wiatrowa Baltica 3 sp. z o.o. On September 3, 2018 the payment was made and shares were transferred to PGE S.A. |
| ElectroMobility Poland S.A. – acquisition by PGE S.A. of increased value of the shares held in ElectroMobility |
October 4, 2018 Not yet registered in the NCR |
2 500 shares |
On October 4, 2018 the Extraordinary General Meeting of ElectroMobility adopted resolution on a share capital increase by PLN 40 000 000 to PLN 70 000 000 by increasing the nominal value of existing shares. In exchange for a cash contribution, PGE S.A. took up increased nominal value of 2 500 shares, the total nominal value of which increased from PLN 7 500 000 to PLN 17 500 000. As a result of the share capital increase, PGE S.A.'s stake in ElectroMobility will not change (25% shareholding). |
| Acquiring company /acquired company | Date of transaction/ registration in the National Court Register |
Comment |
|---|---|---|
| ELTUR -SERWIS sp. z o.o. -acquiring company TOP SERWIS sp. z o.o. -acquired company |
February 26, 2018 April 12, 2018 merger registered in the National Court Register |
On February 26, 2018 the Extraordinary Assembly of Partners of ELTUR - SERWIS sp. z o.o. (acquiring company) and TOP SERWIS sp.z o.o. (acquired company) adopted resolutions on merger of the companies in mode of art. 492 § 1 p. 1 of the Polish Commercial Companies Code (merger through acquisition), ), through transferring of all assets of the acquired company to the acquiring company in exchange for the shares, which the acquiring company allotted to PGE S.A. as a sole shareholder of the acquired company. The share capital of the acquiring company was increased by PLN 50 000, i.e. from PLN 34 824 500 to PLN34 874 500. |
| PGE Energia Odnawialna S.A. - acquiring company PGE Energia Natury PEW sp. z o.o. - acquired company |
March 27 and 29, 2018 May 2, 2018 merger registered in the National Court Register |
The Extraordinary General Meeting of PGE Energia Odnawialna S.A. (acquiring company) and the Extraordinary Assembly of Partners of PGE Energia Natury PEW sp.z o.o. (acquired company) on – respectively – March 29, 2018 and March 27, 2018 adopted resolutions on merger of the companies in mode of art. 492 § 1 p. 1 of the Polish Commercial Companies Code (merger through acquisition), through transferring of all assets of the acquired company to the acquiring company without issue of new shares in exchange for the shares in the share capital of the acquired company, pursuant to art. 516 of the Polish Commercial Companies Code and dissolution of the acquired company without its liquidation. PGE EnergiaOdnawialna S.A. was the sole shareholder of PGE Energia Natury PEW sp. z o.o. |
| PGE Energia Ciepła S.A.-acquiring company Investment III B.V. - acquired company |
July 9,2018 September 4,2018 merger registered in the National Court Register |
On July 9, 2018 an Extraordinary General Meeting of PGE Energia Ciepła S.A. (acquiring company) and an Extraordinary General Meeting of Investment III B.V., based in Amsterdam (the Netherlands) (acquired company) adopted resolutions on a cross-border merger pursuant to art. 492 § 1 point 1 in connection with art. 5161 of the Polish Commercial Companies Code (merger through acquisition), through the transfer onto the acquiring company of all of the acquired company's assets without issuing new shares of the acquiring company in exchange for the acquired company's shares, pursuant to art. 515 in connection with art. 5161 of the Polish Commercial Companies Code, and on dissolution of the acquired company without liquidation proceedings. PGE EC was the sole shareholder of Investment III B.V. |
| Spun off company /acquiringcompany | Date of transaction/ | Number of shares of | Comment |
|---|---|---|---|
| registration in the | the acquiring | ||
| National Court Register | company | ||
| PGE Górnictwo i Energetyka Konwencjonalna | October 18,2018 | 76 343 245 shares |
The Extraordinary General Meetings of PGE GiEK and PGE EC adopted resolutions on the division of PGE GiEK (divided |
| S.A. -Spun off company | company) through a carve out, pursuant to art. 529 § 1 point 4 of the Polish Commercial Companies Code, by way of transfer to | ||
| PGE Energia Ciepła S.A.-acquiringcompany | PGE EC (acquiring company) of selected PGE GiEK assets in the form of six PGE GiEK branches (Branches), i.e.: (1) Zespół |
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| Not yet registered | Elektrociepłowni Bydgoszcz, (2) Elektrociepłownia Gorzów, (3) Elektrociepłownia Zgierz, (4) Elektrociepłownia Lublin Wrotków, (5) Elektrociepłownia Kielce and (6) Elektrociepłownia Rzeszów. The Branches constitute an organised part of enterprise and are functionally related to the generation of electricity, generation of electricity and heat in cogeneration and distribution of heat and electricity. The transfer of the Branches to PGE EC was carried out by lowering PGE GiEK's share capital by PLN 406 847 180 and increasing PGE EC's share capital by PLN 763 432 450 through cancelling 40 684 718 shares of PGE GiEK, with nominal value of PLN 10 each, and issue of 76 343 245 new shares of PGE EC, with nominal value of PLN 10 each. As the sole shareholder of PGE GiEK, PGE S.A. acquired all new shares in PGE EC's increased share capital in exchange for the cancelled PGE GiEK shares. |
| Entity | Date of transaction | Comment |
|---|---|---|
| PGE KLASTER sp. z o.o. | March 29 and 30, 2018 | On March 29, 2018 the Extraordinary Assembly of Partners of PGE KLASTER sp. z o.o. adopted resolution on obligation of the sole shareholder i.e. PGE EO S.A., to supplementary payment to the shares, in the meaning of art. 177 of the Polish Commercial Companies Code, in total amount of PLN 2 000 000, i.e. PLN 2 000 for each share of PGE KLASTER sp. z o.o. entitled to PGE Energia Odnawialna S.A., |
| Elektrownia Wiatrowa Baltica-1 sp.zo.o., Elektrownia Wiatrowa Baltica-2 sp.zo.o., Elektrownia Wiatrowa Baltica-3 sp.zo.o. |
July 26,2018 | by March 30, 2018. In accordance with the above resolution, additional equity contributions were paid on March 30, 2018. On July 26, 2018 the Extraordinary General Meetings of Elektrownia Wiatrowa Baltica-1 sp. z o.o., Elektrownia Wiatrowa Baltica-2 sp. z o.o. and Elektrownia Wiatrowa Baltica-3 sp. z o.o. adopted resolutions to return contributions made by PGE EO pursuant to resolutions passed by the companies' Extraordinary General Meetings regarding contributions dated November 30, 2012. Pursuant to a decision of the General Meeting, contributions of PLN 6 983 600, PLN 6 976 000 and PLN 6 983 600 respectively were returned by July 30, 2018. |
| (return of equity contributions) |
| Key projects in Q3 2018 | ||||||
|---|---|---|---|---|---|---|
| Development investments |
Construction of new units in Opole power plant ● aim of the project: construction of two power units of 900 MW each ● budget: approx. PLN 11 billion (net, without costs of financing) ● capital expenditures incurred so far: approx. PLN 8.8 billion ● fuel: hard coal ● net efficiency: 45.5% ● contractor: syndicate of companies: Rafako, Polimex-Mostostal and Mostostal Warszawa with co-operation of GE as Project manager on behalf of the syndicate ● commissioning according to the amended agreement with the General Contractor: unit 5 – June 15, 2019, unit 6 – September 30, 2019. ● status: as far as unit 5 is concerned, a chemical treatment process for the boiler's pressure part was completed and work on the startup of particular installations is in progress, while the assembly of installations and ancillary equipment is underway at unit 6; overall project progress at the end of September 2018 was approx. 94%. |
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| Construction of new unit in Turów power plant ● aim of the project: construction of power unit with a capacity of 490 MW ● budget: approx. PLN 4 billion (net, without costs of financing) ● capital expenditures incurred so far: approx. PLN 1.9 billion ● fuel: lignite ● net efficiency: 43.1% ● contractor: syndicate of companies: MHPSE, Budimex and Tecnicas Reunidas ● commissioning: H1 2020 ● status: air and flue gas channels are being integrated in the boiler room. Assembly of turboset was completed at the machine room and assembly of steam pipelines was continued. Paint work on the internal surface of the cooling tower was initiated. Work on the construction of a lignite-feed installation and ancillary systems, i.e. flue gas desulphurisation system and slag and ash containers, is in progress. Assembly of DCS (Distributed control system) system cabinets at the control room building and cable laying wasstarted in the third quarter of 2018. |
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| Construction of a Thermal Processing Installation with Energy Recovery at Rzeszów CHP ● aim of the project: construction of a thermal processing installation with energy recovery at Rzeszów CHP with capacity of approx. 8 MWe in condensation (approx. 4.6 MWe + 16.5 MWt in co-generation) ● budget: approx. PLN 293 million (net, without costs of financing) ● capital expenditures incurred so far: approx. PLN 255 million ● fuel: municipal waste ● boiler's efficiency: 86% ● contractor: syndicate of TM.E. S.p.A. Termomeccanica Ecologia and Astaldi S.p.A. ● status: the investment was commissioned on October 26, 2018. |
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| Modernisation and replacement projects |
Comprehensive reconstruction and modernisation of units no. 1-3 at Turów power plant ● aim of the project: Adaptation to future BAT conclusions requirements regarding permissible emissions of SO2, NOx and particulate, increase of availability and efficiency, as well as expansion of each turboset's nominal capacity by approx. 15 MWe ● status: unit 2 was synchronised with the National Power System on June 16, 2018. The unit is currently in regulatory operation. Commissioning is planned for the fourth quarter of 2018. Unit 1 – disassembly of brick lining at the combustion chamber was finished, collection and discharge electrodes were assembled at the electrostatic precipitator, power was supplied to the DCS system, work was continuing on assembly of cyclones and discharge windows, RHI reheater, modernisation of HV, MV and LV modules and condenser, work on reclamation of generator was in progress. ● budget: PLN 0.8 billion (net, without costs of financing) ● fuel: lignite ● completion: 2020 |
Change in technology of furnace waste storage for units 1-12 – Bełchatów power plant and construction of installation to transport ash; production and transport of sludge from unit 14 in Bełchatów power plant
As regards deNOx - Trial operation of K4 boiler installation ended with a positive result. All assembly work intended to close the flue gas path from boiler K3 was completed and approval was granted to conduct cold start-up of K3 boiler installation. Finishing works on K3 and K4 installations were continued (including insulation, platforms, barriers, repairs of corrosion protection coating). Work on land management (yard and road construction) was commenced.
| Construction of flue gas denitrification system forsix OP-650 boilers at Rybnik power plant |
|---|
| ● project objective: construction of flue gas denitrification unit to ensure compliance with IED |
| Directive requirements |
| ● budget: PLN 259 million (net, without financing costs) |
| ● expendituresso far: PLN 216 million (net, without financing costs) |
| ● contractors: SCR – Consortium Strabag sp. z o.o. and Strabag Energy Technologies GmbH, SNCR – |
| Energotechnika – Energorozruch S.A., PM – Energotechnika – Energorozruch S.A. |
| ● completion: December 2018 |
| ● status: completion at approx. 95%. |
| Construction of flue gas denitrification units at CHP plantsin: Kraków, Gdańsk, Gdynia |
| ● project objective: construct flue gas denitrification unit to ensure compliance with IED Directive requirements |
| ● budget: PLN 545 million (net, without financing costs) |
| ● expendituresso far: PLN 488 million (net, without financing costs) |
| ● contractors: General Electric; Fortum-ZRE; Fortum Mehldau; SBB Energy; Fortum-Instal |
| ● completion: December 2018 |
| ● status: progress at approx. 95%. Gdańsk is completed, Gdynia – optimisation processes in |
| progress. Kraków – primary measures for K1 and K2 were completed, handover operation for |
| secondary measures is in progress. |
PGE Group's main operating area is Poland, and the domestic macroeconomic backdrop has a substantial impact on Group's results. At the same time, the condition of Poland's economy remains largely tied to the situation across the European Union and in global markets. The Group's financial results are affected by both the situation in specific segments of the economy and the financial markets, which affect the terms of PGE Group's debt financing.
As a rule of thumb, there is a historical correlation between rising electricity demand and economic growth in Poland. Considering PGE Group's position on the Polish power generation market, as well as its substantial share in the electricity sales and distribution market, changes in power and heat demand may have a significant impact on the Group's results.
In the third quarter of 2018, gross electricity consumption went up 2.3% compared to analogical period of 2017. The increase was lower than in the third quarter of 2017, when consumption went up 2.6% compared to analogical period of 2016.
Economic trends in the first half of 2018 remained positive in general, although GDP growth remains at lower level than expected at the beginning of the year. Estimates by mBank show that just in the third quarter of 2018 GDP grew by 4.6% y/y, comparing to 5.5% y/y in the third quarter of 2017.
Diagram: Seasonally adjusted GDP change vs. change in domestic gross electricity consumption.
Source: Central Statistical Office of Poland, PSE S.A., GDP Q3 2018 – estimate by mBank
The Purchasing Managers' Index (PMI) for industry reached an average of 51.6 points in the third quarter of 2018, compared to 52.8 points in the third quarter of 2017. This is still a level above 50 points, denoting managers' expectations of an improvement in the sector.
The September PMI reading for industry declined to 50.5 points, compared to 51.4 points in August 2018, signalling the slowest pace of improvement in economic conditions in the Polish industry sector since October 2016. Production and employment both grew at a slower pace, while companies reduced their purchasing activity.
The Polish industry sector's results reflect a down trend in the Eurozone, where the PMI for the third quarter of 2018 reached an average of 54.3 points, compared to 57.4 points in the same period of 2017.
Diagram: Manufacturing PMI in Poland and Eurozone (in points).
Source: Markit Economics
In the third quarter of 2018, industrial production increased by 5.4% y/y, compared to 6.4% in the same period of 2017. The change was caused by an increase in industrial processing production by 5.2% y/y and growth in the value of production in the entire energy sector by 6.9% y/y. The value of industrial production depends on the quantity of goods produced and the level of prices. The PPI in the first three quarters of 2018 reached 1.9% y/y. The CPI in the third quarter of 2018 reached 2.0% y/y.
Table: Key economic indicators for Poland.
| Key economic indicators (% change y/y) |
Q3 2018 | Q3 2017 |
|---|---|---|
| GDP1 | 4.6 | 5.5 |
| CPI2 | 2.0 | 1.9 |
| PPI3 | 1.9 | 3.3 |
| Sold industrial production4 | 5.4 | 6.4 |
| Sold production – manufacturing4 | 5.2 | 7.1 |
| 4 Sold production – energy |
6.9 | 8.8 |
| Dynamics of domestic electricity consumption5 | 2.3 | 2.6 |
| Gross domestic electricity consumption (TWh)5 | 41.5 | 40.6 |
| EUR/PLN6 | 4.31 | 4.26 |
Source: 1 for Q3 2018 – forecast bymBank, for Q3 2017 Central Statistical Office of Poland, 2National Bank of Poland, 3Central Statistical Office of Poland – data for three quarters, 4Central Statistical Office of Poland , 5PSE S.A., 6National Bank of Poland.
International International environment is determined by climate-energy package regulations, setting out greenhouse gas emission reduction targets by 2030 and the package "Clean energy for all Europeans," which aims to implement on the legal side the concept of energy union. The following regulations will have a significant impact on the Polish energy sector, including PGE Group, after 2020:
Directive of the European Parliament and of the Council no. 2018/410 amending Directive 2003/87/EC (to enhance cost-effective emission reductions and low- carbon investments) and decision (EU)
2015/1814, setting up in particular:
After formal adoption of the act in the first quarter of 2018, on March 19, 2018 the text of Directive was published in the EU Official Journal. Currently, the European Commission works on implementing acts that will set detailed rules for the Modernisation Fund and the Innovation Fund as well as on a delegated act concerning free allocation of allowances for industry and district heat producers. A potential decision by the European Commission on whether to issue guidelines for the application of art. 10c (derogations) will depend on the number of member states interested in using free-of-charge allocation of allowances for producers of electricity.
target. The European Commission will evaluate the projects, exercising in appropriate cases its right to issue non-binding recommendations, and will subsequently monitor their implementation. A line trajectory for the development of renewables over the next decade was forecast assuming that it will be necessary to achieve reference points, i.e. 18% of the required growth will be achieved in 2022, 43% in 2025 and 65% in 2027. If the voluntarily declared national contributions are not sufficient to achieve the EU target, a formula to calculate a fair national contribution, expressed as a percentage, will be used.
In the third quarter of 2018 the average energy price on the Day-Ahead Market1 reached PLN 252/MWh and was 55% higher than the average price (PLN 163/MWh) quoted in the same period last year. The increase in price was due to the situation on related markets: CO2 emission allowance prices in the third quarter of 2018 were over three times higher than in the same period last year. Moreover, an increase in coal prices was observed – the average level of the Polish Energy Industry Coal Index (PSCMI1) in the third quarter of 2018 reached PLN 11.26/GJ, i.e. 21% higher than in the comparative period (PLN 9.30/GJ). The growth in electricity prices also had to do with less favourable weather conditions and a 15% y/y decline in energy supply from wind assets in the National Power System.
Cumulatively in the first three quarters of 2018, the average price on the Day-Ahead Market reached PLN 216/MWh, i.e. 39% higher than the average price of PLN 155/MWh recorded in the same period of last year. The growth in prices on the Day-Ahead Market was due to cost pressure and the situation on related markets. The prices of CO2 emission allowances in the first three quarters of 2018 were nearly three times higher than in the same period last year. The average level of the PSCMI1 in the third quarter of 2018 was at PLN 10.85/GJ – higher by 19% than in the previous year i.e. PLN 9.11/GJ2 . Wind-based generation declined 13% y/y cumulatively.
Chart: Monthly prices and price volatility at the day ahead market in 2017–2018 (TGE)*
*Average monthly price of IRDN index calculated on the base of hourly quotations (fixing), weighted by the trading volume
The average price for BASE_Y-19 electricity delivery contracts reached PLN 258/MWh in the third quarter of 2018, whereas in the same period last year the BASE_Y-18 contract cost PLN 165/MWh on average (56% increase y/y). BASE_Y-19 trading volume in the third quarter of 2018 reached 40 TWh – this is 242% more than the trading volume for BASE_Y-18 recorded in the third quarter of 2017. Increased volume is related to draft amended Energy Law adopted by the Council of Ministers, that assumes obligation to sell 100% of energy generated by the power companies on power exchanges or regulated markets.
1 Statistic calculated on the basis of fixings data
2 Arithmetic average from quarterly readings
The average price for peak contracts (PEAK5_Y-19) in the third quarter of 2018 reached PLN 356/MWh, compared to PLN 210/MWh for the PEAK5_Y-18 contract in the same period last year (70% increase y/y). PEAK5_Y-19 trading volume in the third quarter of 2018 reached 2.7 TWh – up by 59% compared to the PEAK5_Y-18 trading volume in the third quarter of 2017.
Cumulatively in the first three quarters of 2018, the average price for base contracts (BASE_Y-19) reached PLN 226 /MWh and was 39% higher than the price for the BASE_Y-18 contract in the first three quarters of 2017 (PLN 163 /MWh). BASE_Y-19 trading volume in the three quarters of 2018 reached 87 TWh – three times more than the trading volume on the BASE_Y-18 contract in the first three quarters of 2017.
The average price for peak contracts (PEAK5_Y-19) in the first three quarters of 2018 was PLN 315 /MWh, which is 50% higher than the average price for the same contract (PEAK5_Y-18) in the three quarters of 2017. PEAK5_Y-19 trading volume in the first three quarters of 2018 reached 4.7 TWh, which is 40% higher than the trading volume on PEAK5_Y-18 in the three quarters of 2017.
165 258 210 356 100 150 200 250 300 350 400 450 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 2017 2018 PLN/MWh Base Y+1 Peak Y+1 Base Y+1 Q3 average Peak Y+1 Q3 average
Chart: Monthly prices and price volatility on the forward market in 2017–2018 (TGE)*.
* Monthly average index level for forward contracts for the next year (Y+1), baseload and peak, calculation based on daily quotations, weighted by the trading volume.
In the first three quarters of 2018, growth in wholesale electricity prices in neighbouring countries was in the range of PLN 79-91/MWh (i.e. 51-65% y/y) – from this perspective the price growth in Poland by PLN 89/MWh (i.e. by 55%) is in line with the regional trend. The common electricity price growth driver in the region was the situation on related commodity markets: growth in prices on the coal market and the CO2 emission allowance market. In the third quarter of 2018, the average electricity price in Poland was PLN 18-23/MWh higher than in Sweden, Germany and the Czech Republic. This had an impact on the cross-border trading balance.
Chart: Comparison of average electricity prices on Polish market and on selected European markets in the third quarter of 2018 (prices in PLN/MWh, average exchange rate EUR/PLN 4.30).
Source: TGE, EEX, EPEX, Nordpool, OTE a.s., PXE
Chart: Monthly imports, exports and cross-border exchange balance in 2017-2018 (in GWh).
Source: own work based on PSE S.A. data.
In the third quarter of 2018, Poland remained a net importer of electricity: trading balance reached 0.92 TWh (import 1.72 TWh, export 0.80 TWh). In the same period last year, Poland was also net importer, with a trading balance of 1.02 TWh (including import 1.58 TWh and export 0.56 TWh). The main net electricity import directions were Sweden (0.47 TWh) and Ukraine (0.32 TWh). Cumulatively in the first three quarters of 2018 Poland remained a net importer of electricity, with a balance of 4.68 TWh (import 6.24 TWh, export 1.56 TWh), compared to a balance of 2.26 TWh (export 4.82 TWh, export 2.56 TWh) in the same period last year. The key net import directions remained Sweden (balance of 2.04 TWh) and Ukraine (1.05 TWh).
Diagram: Geographical structure of commercial exchange in the three quarters of 2018 (GWh).
Source: own work based on PSE S.A. data.
The diversity of electricity prices for retail customers in the European Union depends not only on the level of the wholesale prices of electricity. The fiscalsystem, regulation mechanisms and supportschemesin particular countries all have significant impact on the final price of electricity. In Poland in the first half of 2018 3 , an additional burden for individual customers accounted for approx. 34% of the electricity price and in comparison to EU average of 31%. In Denmark and Germany the proportion of additional chargesin the price of electricity exceeded 50%.
3 Eurostat data are published in semi-annual intervals.
Chart: Comparison of average prices for individual customers in selected EU countries in the first half of 20184 (prices in PLN/MWh, average exchange rate EUR/PLN 4.22).
Source: own work based on Eurostat data.
Diagram: The share of additional charges in electricity prices for the individual customers in selected EU countries in the first half of 20184 (prices in PLN/MWh, calculated with average exchange rate EUR/PLN 4.22).
Source: own work based on Eurostat data.
4 Eurostat data are published in semi-annual intervals.
In the third quarter of 2018, the average price of green certificates (index OZEX_A) reached PLN 115/MWh and was 167% higher than in the same period of previous year. The price growth was driven by both supply (15% y/y decline in wind generation in the third quarter of 2018) and demand factors (regulation of the Minister of Energy that increased an obligation to redeem green certificates from 15.4% in 2017 to 17.5% in 2018 and to 18.5% in 2019). The average price of yellow certificates in the third quarter of 2018 reached PLN 109/MWh and was 6% lower than in the same period of previous year. The decline resulted from a higher supply of energy produced in gas-fired cogeneration sources (higher by 51% y/y in the third quarter of 2018). The obligation to redeem yellow certificates increased to 8% in 2018, compared to 7% in 2017.
Chart: Average quarterly prices of certificates.
Source: Own work based on TGE quotations. The yellow certificates prices presented on the chart are weighted average blended price – for products PMGM-16, PMGM-17, PMGM-18.
EUA (European Union Allowances) prices are one of the key factors determining wholesale energy prices and PGE Group's financial results. Installations emitting CO2 in the process of electricity or heat production bear the expenses for purchasing EUA allowances to cover the deficit (i.e. the difference between CO2 emissions at PGE Group's generating units and the freeof-charge allowances received under derogation in accordance with the National Investment Plan). Wherein, last allocations granted free of charge are planned for realisations of investment tasks for 2019, what means that the free allocations in accordance with the currently used method will end in 2020.
In the third quarter of 2018, the weighted average price of EUA DEC 18 reached EUR 19.70/t and was 220% higher than the average price for EUA DEC 17 (EUR 6.15/t) in the same period last year. Cumulatively in the first three quarters of 2018, the weighted average price for EUA DEC 18 reached EUR 15.15/t, up by 179% from the average price for EUA DEC 17 (EUR 5.43/t) in the same period last year. The increase in CO2 emission prices observed in the three quarters of 2018 is a result of market perception of the end of the EU ETS reform.
The amended text of the Directive 2003/87/WE ("EU ETS") including changes introduced to the MSR decision was published in the EU Official Journal in March 2018 (see p. 3.2 of this report).
Further discussion about enhancing the reduction ambitions within the European Union should be expected to take place at the COP24 in Katowice, during which the European Commission is expected to present in greater detail a preliminary version of the Road Map 2.0, together with specific proposals for the EU's new reduction ambitions until 2050. At the same time, work is on-going on delegated and implementing acts for the directive recently adopted. New legislative motions related to the revision of the EU ETS directive and the MSR decision should be expected once the new European Commission is appointed, which will take place in the second half of 2019.
The European Commission is currently analysing Poland's application to adopt the remedial measures referred to in art. 29a of the EU ETS directive concerning excessive price fluctuations. Adopting these measures is justified if, for more than six consecutive months, the allowance price is more than three times the average price of allowances during the two preceding years. Depending on the calculation method, this condition was already met at the beginning of October 2018 or may be met in December 2018.
Chart: Prices of CO2 emission rights.
Source own work based on ICE quotations.
The Regulation of the Council of Ministers, that sets the allocation of allowances for particular units of electricity producers in period 2013-2020, was adopted on April 8, 2014. Analogically, allocations of allowances for heat producers were set by the Regulation of the Council of Ministers of March 31, 2014.
PGE's installations accounts were credited with free allowances for heat for 2018 and energy for 2017, while free allowances for electricity for 2018 will be received by the Group by the end of April 2019, after verification of reports from investments submitted to the National Investment Plan.
At the same time, redemption of emission rights resulting from CO2 emissions in 2017 was completed in April 2018.
Table: Emission of CO2 from major Group installations and allocation of CO2 emission rights for 2018 (in Mg).
| Operator | CO2 emissions in Q3 2018* |
CO2 emissions in Q1-Q3 2018* |
Allocation of CO2 emission rights for 2018** |
|
|---|---|---|---|---|
| Bełchatów Power Plant | 9 944 910 | 29 130 507 | 6 211 022 | |
| Turów Power Plant | 1 754 765 | 5 045 522 | 2 500 954 | |
| Opole Power Plant | 2 011 871 | 5 658 101 | 1 437 267 | |
| ZEDO *** | 923 707 | 2 927 924 | 1 187 286 | |
| Bydgoszcz CHPs | 96 296 | 500 828 | 290 951 | |
| Lublin Wrotków CHP | 3 954 | 272 863 | 166 164 | |
| Gorzów CHP | 96 542 | 358 812 | 129 987 | |
| Rzeszów CHP | 19 836 | 186 292 | 78 433 | |
| Kielce CHP | 12 384 | 118 973 | 52 905 | |
| Zgierz CHP | 29 997 | 120 417 | 22 210 | |
| TOTAL PGE GiEK S.A. | 14 894 262 | 44 320 239 | 12 077 179 | |
| Rybnik power plant | 1 497 660 | 3 921 423 | 458 373 | |
| Wybrzeże CHPs**** | 208 838 | 1 318 387 | 583 062 | |
| Kraków CHP | 250 638 | 1 189 214 | 497 146 | |
| ZEW Kogeneracja* | 188 049 | 1 065 370 | 387 589 | |
| Zielona Góra CHP | 143 917 | 417 144 | 47 491 | |
| Toruń CHP | 20 396 | 160 323 | 52 056 | |
| TOTAL Acquired assets | 2 309 498 | 8 071 861 | 2 025 717 |
TOTAL Conventional Generation 17 203 760 52 392 100 14 102 896
* Estimates, emissions not verified - the data will be settled and certified by the authorised verifier of CO2 emission on the ground of yearly reports of volume of CO2 emissions
** Amount of granted CO2 emission rights will be confirmed in the Regulation of the Council of Ministers in the first quarter of 2019
*** Pomorzany CHP, Dolna Odra power plant, Szczecin CHP
**** Gdańsk CHP and Gdynia CHP
***** Wrocław CHP, Czechnica CHP, Zawidawie CHP
Table: Volume and cost of purchase of fuels from third party suppliers.
| Q1-Q3 2018 | Q1-Q3 2017 | |||
|---|---|---|---|---|
| Type of fuel | Volume (tons ths) |
Cost (PLN m) |
Volume (tons ths) |
Cost (PLN m) |
| Hard coal | 8 773 | 2 215 | 3 751 | 839 |
| Gas (cubic metres ths) | 789 289 | 538 | 445 421 | 303 |
| Biomass | 307 | 62 | 361 | 67 |
| Fuel oil* | 32 | 69 | 21 | 28 |
| TOTAL | 2 884 | 1 237 |
In the three quarters of 2018 the costs of purchasing primary fuels from providers outside the Group amounted to PLN 2 884 million and were higher by PLN 1 647 million than in the three quarters of 2017. The biggest impact on the change of fuel purchase costs in PGE Group came from the Acquired assets which are mainly hard coal-fired and gas-fired.
Hard coal
higher purchase volume by 134% (PLN +1 123 million)
The higher volume of hard coal purchased in the first half of 2018 is mainly related to the acquisition of EDF's assets and higher generation in hard coal-fired units of PGE GIEK.
higher average price by 13% (PLN +253 million)
Higher hard coal price in the three quarters of 2018 results from the higher prices on the mining market, both domestic and international, what translated directly into higher contractual prices.
Gas
higher purchase volume by 77% (PLN +234 million)
Increased volume of gas used resultsfrom acquisition of gas-fired EDF assets (see p. 4.2.1 of this report).
higher average price by 0.2% (PLN 1 million)
Fuel oil
higher average price by 62% (PLN +26 million)
Higher global prices of crude oil and refinery products attributed to the significant increase of average purchase price of fuel oil.
higher purchase volume by 52% (PLN +15 million)
Higher purchase volume in the three quarters of 2018 compared to the analogical period of the previous year results from impact of acquisition of assets from EDF. Higher number of generating units translated into higher number of trial run of units related to failures, planned overhauls and TSO's request to produce.
Biomass
lower purchase volume by 15% (PLN -10 million)
Lower volume of biomass purchase is a result of limited heat generation from biomass combustion in Szczecin CHP.
higher average price by 9% (PLN +5 million)
In the three quarters of 2018 approximately 60% of the electricity was produced from internally sourced lignite, whose extraction price is fully controlled by PGE Capital Group. In comparable period of 2017 the production from lignite accounted for 72% of total production.
PGE Group companies earn part of their income based on tariffs approved by the President of the Energy Regulatory Office:
Methodology of and assumptions for tariffs determination were published in the document "Tariffs for the DSO for the year 2018", which was prepared and published by the President of the Energy Regulatory Office.
On December 14, 2017, the President of ERO approved a tariff for PGE Dystrybucja S.A. for electricity distribution services over the period from January 1, 2018, to December 31, 2018.
On January 3, 2018, the President of ERO approved a change in PGE Dystrybucja S.A.'s tariff consisting of the introduction of so called an anti-smog tariff (G12as). This tariff was adjusted by the decision of the ERO President of January 16, 2018.
On February 27, 2018, in connection with the publication of the Act on Electromobility and Alternative Fuels, a change in the tariff was made in the part related to the connection to the grid of charging infrastructure for public road transport and publicly available charging stations – change is effective from March 14, 2018.
Distribution tariffs for 2018 approved by the President of the Energy Regulatory Office, contributed to changes in average tariff in particular tariff groups (calculated for revenues and volume in a given tariff year) in comparison to year 2017:
The change in rates for distribution services takes into account a decline in the RES fee to PLN 0/MWh in 2018 and maintaining the transition fee at the same level as in 2017. These fees are fully transferred to entities in charge of support instruments, thus they do not impact profit of the distribution companies.
Changes in average tariff in particular tariff groups (not including RES fees and transition fee) are as follows:
The quality regulation elements introduced in 2016 are being continued in 2018. It has been settled that the ratios directly impacting the regulated revenue will be following key performance indicators:
Non-compliance with the levels of ratios indicated by the ERO President may result in penalty of decreasing the regulated revenue through reduction of amount of return on capital in year t+2. In the initial period no rewards are anticipated for achieving better indicators than the required ones.
Impact of quality parameters realized in 2016 is included in tariff for 2018 and the realization of 2018 parameters will be included in tariff for 2020. In accordance with the assumptions adopted by the ERO, a penalty cannot exceed 2% of regulated revenue and value of 15% of return on capital in a given year. The 2018 tariff does not include a reduction in regulated revenue from quality regulation.
Pursuant to the Energy Law, energy companies holding concessions set tariffs for heat and propose their duration. Conduction of proceedings concerning heat tariffs approval lies within the competence of regional branches of the Energy Regulatory Office. PGE's average sales price for district heating increased by approx. 2% from the prices in effect in the three quarters of 2017.
| Key financial data | Unit | Q3 2018 |
Q3 2017 |
% change |
Q1-Q3 2018 |
Q1-Q3 2017 |
% change |
|---|---|---|---|---|---|---|---|
| Sales revenues* | PLN million | 6 091 | 6 073 | 0% | 18 962 | 16 693 | 14% |
| EBIT | PLN million | 532 | 1 883 | -72% | 2 363 | 3 815 | -38% |
| EBITDA | PLN million | 1 466 | 2 663 | -45% | 5 141 | 6 108 | -16% |
| Net profit for the reporting period | PLN million | 403 | 1 462 | -72% | 1 699 | 2 957 | -43% |
| LTC compensations | PLN million | 1 | 1 197 | -100% | -82 | 1 280 | - |
| LTC revenues | PLN million | 1 | 1 211 | -100% | -82 | 1 211 | - |
| LTC settlements adjustment (other operations) |
PLN million | 0 | -14 | - | 0 | 69 | - |
| Capital expenditures | PLN million | 1 515 | 1 598 | -5% | 3 759 | 4 193 | -10% |
| Net cash from operating activities | PLN million | -15 | 1 963 | - | 2 668 | 5 245 | -49% |
| Net cash from investing activities | PLN million | -1 434 | -1 379 | 4% | -4 339 | -1 970 | 120% |
| Net cash from financial activities | PLN million | 1 567 | -98 | - | 445 | -340 | - |
| EBITDA margin | % | 24% | 44% | 27% | 37% | ||
| Key financial data | Unit | As at September 30, 2018 |
2017** | As at December 31, | % change |
| 30, 2018 | 2017** | |||
|---|---|---|---|---|
| Working capital | PLN million | -694 | 524 | - |
| Net debt/LTM EBITDA*** | x | 1.44 | 0.99 |
* The Group has applied IFRS 15 since the standard's effective date i.e. since January 1, 2018, without restating the comparable data (changes introduced by IFRS 15 are described in note 4 to the interim condensed consolidated financial statements)
** Data restated
*** LTM EBITDA - Last Twelve Months EBITDA
Table: Impact of one-offs on EBITDA (in PLN million).
| One-offs | Q3 | Q3 | % | Q1-Q3 | Q1-Q3 | % |
|---|---|---|---|---|---|---|
| 2018 | 2017 | change | 2018 | 2017 | change | |
| LTC compensations | 1 | 1 197 | -100% | -82 | 1 280 | - |
Chart: Key changes of recurring EBITDA in PGE Capital Group (in PLN million).
EBITDA reported Q3 2018 1 466
Chart: Key changes of recurring EBITDA by segments (in PLN million). * PGE Energia Ciepła S.A., PGE Toruń S.A., PGE Gaz Toruń sp. z o.o., EC Zielona Góra S.A., Kogeneracja S.A., PGE Paliwa sp. z o.o., PGE Ekoserwis sp. z o.o., Torec sp. z o.o., Zower sp. z o.o., Energopomiar sp. z o.o.
| EBITDA Q3 2017 |
Conventional Generation |
Renewable Energy |
Supply | Distribution | Other Operations + consolidation adjustments |
EBITDA Q3 2018 |
|
|---|---|---|---|---|---|---|---|
| Change | -66 | 62 | -35 | 37 | 1 | ||
| EBITDA reported Q3 2017 | 2 663 | 1 789 | 70 | 192 | 585 | 27 | |
| One-offs Q3 2017 | 1 197 | 1 197 | 0 | 0 | 0 | 0 | |
| Recurring EBITDA Q3 2017 | 1 466 | 592 | 70 | 192 | 585 | 27 | |
| Recurring EBITDA Q3 2018 | 526 | 132 | 157 | 622 | 28 | 1 465 | |
| One-offs Q3 2018 | 1 | 0 | 0 | 0 | 0 | 1 | |
| EBITDA reported Q3 2018 | 527 | 132 | 157 | 622 | 28 | 1 466 |
* EBITDA of companies: PGE Energia Ciepła S.A., PGE Toruń S.A., PGE Gaz Toruń sp. z o.o., EC Zielona Góra S.A., Kogeneracja S.A., PGE Paliwa sp. z o.o., PGE Ekoserwis sp. z o.o., Torec sp. z o.o., Zower sp. z o.o., Energopomiar sp. z o.o.
Chart: Key changes in Assets (in PLN million).
Chart: Key changes in Equity and liabilities (in PLN million).
Chart: Net change in cash (in PLN million).
| Change | -2 577 | 68 | 115 | -272 | 18 | -2 297 | 862 | -111 | 29 | 4 | ||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net change in cash Q1-Q3 2017 | 2 935 | 5 245 | -4 338 | -218 | 272 | 0 | 2 283 | -106 | 0 | -230 | 27 | |
| Net change in cash Q1-Q3 2018 | 2 668 | -4 270 | -103 | 0 | 18 | -14 | 756 | -111 | -201 | 31 | -1 226 | |
Chart: Net debt (in PLN million).
Table: Key operational figures.
| Q3 | Q3 | % | Q1-Q3 | Q1-Q3 | % | ||
|---|---|---|---|---|---|---|---|
| Key figures | Unit | 2018 | 2017 | change | 2018 | 2017 | change |
| Lignite extraction | Tons m | 13.11 | 12.40 | 6% | 38.29 | 37.42 | 2% |
| Net electricity production | TWh | 16.17 | 13.58 | 19% | 49.09 | 41.46 | 18% |
| Heat sales | PJ | 3.35 | 1.33 | 152% | 32.39 | 11.94 | 171% |
| Sales to final customers* | TWh | 10.78 | 9.93 | 9% | 31.51 | 29.73 | 6% |
| Distribution of electricity** | TWh | 9.09 | 8.70 | 4% | 27.08 | 26.20 | 3% |
* After elimination ofsales within PGE Group
** With additional estimation
Table: Sales of electricity outside the PGE Capital Group (in TWh).
| Sales volume | Q3 | Q3 | % | Q1-Q3 | Q1-Q3 | % |
|---|---|---|---|---|---|---|
| 2018 | 2017 | change | 2018 | 2017 | change | |
| SALES IN TWh, including: | 18.80 | 15.28 | 23% | 56.60 | 47.31 | 20% |
| Sales to end-users* | 10.78 | 9.93 | 9% | 31.51 | 29.73 | 6% |
| Sales on the wholesale market, including: | 7.29 | 4.72 | 54% | 22.77 | 15.52 | 47% |
| Sales on the domestic wholesale market - power exchange |
6.18 | 2.87 | 115% | 19.61 | 9.71 | 102% |
| Other sales on the domestic wholesale market | 0.94 | 1.76 | -47% | 2.77 | 5.54 | -50% |
| Sales to foreign customers | 0.17 | 0.09 | 89% | 0.39 | 0.27 | 44% |
| Sales on the Balancing Market | 0.73 | 0.63 | 16% | 2.32 | 2.06 | 13% |
* After elimination of internal sales within PGE Group
The higher volume of sales to end customers in the third quarter of 2018 compared to the same period of 2017 resulted from recognition of sales generated by PGE Energia Ciepła S.A. Retail sales by Supply segment remained at a similar level (29.9 TWh). The higher sales volume on the wholesale market – power exchange results mainly from placing generation capacity of the newly acquired assets. Additionally, the volume growth was driven by favourable market conditions. Sales volume on the other wholesale markets declined due to lower sales in bilateral contracts, caused by larger requirements resulting from the so-called "power exchange obligation", which led to the transfer of sales into the regulated market and a change in regulations regarding allocating energy from renewable sources (limit on sales to obligated sellers).
Table: Purchases of electricity from outside of the PGE Capital Group (in TWh).
| Purchases volume | Q3 | Q3 | % change |
Q1-Q3 | Q1-Q3 | % change |
|---|---|---|---|---|---|---|
| 2018 | 2017 | 2018 | 2017 | |||
| PURCHASES IN TWh, including: | 3.43 | 2.67 | 28% | 10.55 | 9.04 | 17% |
| Purchases on the domestic wholesale market – power | 1.61 | 0.43 | 274% | 4.37 | 1.48 | 195% |
| exchange Purchases on the domestic wholesale market, other |
0.08 | 0.61 | -87% | 0.26 | 2.87 | -91% |
| Purchases from abroad | 0.14 | 0.08 | 75% | 0.41 | 0.12 | 242% |
| Purchases from Balancing Market | 1.60 | 1.55 | 3% | 5.51 | 4.57 | 21% |
The growth in volume of purchases from the power exchange results from the recognition of newly acquired assets in sales portfolio optimisation and the exercise of early buy-back options for energy previously sold at prices below the cost of manufacture as well as due to higher trading activities being tied to greater liquidity at the TGE exchange. The decline in purchases on the domestic wholesale market – other is mainly the result of the abolition of the obligation to purchase electricity from renewable energy sources of over 500 kWe. The higher purchase from the Balancing Market is a result of
newly acquired assets and higher volume of reductions forced by PSE S.A., largely due to imported electricity covering a larger share of domestic demand.
Table: Production of electricity (in TWh).
| Q3 | Q3 | % | Q1-Q3 | Q1-Q3 | % | |
|---|---|---|---|---|---|---|
| Generation volume | 2018 | 2017 | change | 2018 | 2017 | change |
| ELECTRICITY HENERATION IN TWh, including: | 16.17 | 13.58 | 19% | 49.09 | 41.46 | 18% |
| Lignite-fired power plants | 10.07 | 9.83 | 2% | 29.32 | 29.76 | -1% |
| including co-combustion of biomass | 0.00 | 0.00 | - | 0.00 | 0.00 | - |
| Coal-fired power plants | 4.59 | 3.02 | 52% | 12.52 | 7.83 | 60% |
| including co-combustion of biomass | 0.02 | 0.04 | -50% | 0.07 | 0.10 | -30% |
| Coal-fired CHP plants | 0.51 | 0.08 | 538% | 2.95 | 0.60 | 392% |
| including co-combustion of biomass | 0.00 | 0.00 | - | 0.01 | 0.00 | - |
| Gas-fired CHP plants | 0.63 | 0.23 | 174% | 2.87 | 1.69 | 70% |
| Biomass-fired CHP plants | 0.02 | 0.04 | -50% | 0.10 | 0.14 | -29% |
| Pumped-storage power plants | 0.07 | 0.08 | -13% | 0.27 | 0.26 | 4% |
| Hydroelectric plants | 0.07 | 0.07 | 0% | 0.32 | 0.33 | -3% |
| Wind power plants | 0.21 | 0.23 | -9% | 0.74 | 0.85 | -13% |
| Including Acquired assets*: | 2.30 | 7.54 |
* Rybnik power plant, EC Gdańsk, EC Gdynia, EC Kraków, EC Wrocław, EC Czechnica, EC Zawidawie, EC Zielona Góra, EC Toruń
The main impact on the level of electricity generation in the three quarters of 2018, compared to the three quarters of 2017, was higher generation at hard coal-fired power plants. This growth results from inclusion of Rybnik power plant in generation (3.91 TWh). Higher generation at Opole power plant resulted from repair-related downtime being lower by 1 115 hours (unit no. 3 remained in medium overhaul from March 3, 2017 till May 4, 2017) and larger use of the power plant's units by PSE S.A. Higher production at Opole power plant compensated for lower output at Dolna Odra power plant, due to lower use of units by PSE S.A.
The higher production at hard coal-based CHP plants results from recognition of production of Gdańsk CHP, Gdynia CHP, Wrocław CHP, Czechnica CHP and Kraków CHP (2.38 TWh).
The growth in production at gas-fired combined heat-and-power plants results from the recognition of production of Toruń CHP, Zielona Góra CHP and Zawidawie CHP (1.25 TWh).
Production in biomass CHP plants was at the lower level than in the three quarters of 2017.
Decreased production in lignite-based power plants in the three quarters of 2018 results from longer downtime of units in Turów power plant (by 4 274 h) in repairs and modernisations. Turów's unit no. 1 has been in modernization since May 1, 2018. Production at Bełchatów power plant remained at the similar level as in the three quarters of 2017.
Production at wind power plants was lower than in the three quarters of 2017 resulting mainly from worse windiness.
Production at hydro power plants was at slightly lower level compared to the three quarters of 2017.
Slightly higher production in pumped storage power plants results from the nature of these generation units, which in the three quarters of 2018, were used to a higher extent by PSE S.A.
In the three quarters of 2018 the heat sales in PGE Capital Group totalled 32.39 PJ and were higher by 20.45 PJ than in the three quarters of 2017. The above growth includes the sales of heat by the Acquired assets from Conventional Generation segment, which were not recognised in the three quarters of 2017 (21.09 PJ) and lower sales by branches of PGE GiEK S.A. (-0.64 PJ), what resulted largely from decreased demand for heat caused by the higher average outside temperatures.
Table: Breakdown of the Group's revenues by business segments.
| PLN million | Q3 2018 | Q3 2017 | % change |
|---|---|---|---|
| Conventional Generation | 3 781 | 3 748 | 1% |
| Renewables | 216 | 161 | 34% |
| Supply | 3 296 | 3 610 | -9% |
| Distribution | 1 432 | 1 552 | -8% |
| Other Operations | 174 | 86 | 102% |
| TOTAL | 8 899 | 9 157 | -3% |
| Consolidation adjustments | -2 808 | -3 084 | -9% |
| TOTAL AFTER ADJUSTMENTS | 6 091 | 6 073 | 0% |
Table: Key financial figures for each business segment (after intrasegmental eliminations).
| PLN million | EBITDA | EBIT | Capital expenditures |
Assets of the segment* |
|---|---|---|---|---|
| Q3 2018 | ||||
| Conventional Generation | 527 | -34 | 1 035 | 44 837 |
| Renewables | 132 | 68 | 16 | 3 171 |
| Supply | 157 | 150 | 4 | 5 217 |
| Distribution | 622 | 328 | 473 | 18 150 |
| Other Operations | 28 | 8 | 43 | 769 |
| TOTAL | 1 466 | 520 | 1 571 | 72 144 |
| Consolidation adjustments | 0 | 12 | -56 | -3 099 |
| TOTAL AFTER ADJUSTMENTS | 1 466 | 532 | 1 515 | 69 045 |
* see note 6.1 to the condensed interim consolidated financial statements
Table: Key financial figures for each business segment (after intrasegmental eliminations).
| PLN million | EBITDA | EBIT | Capital expenditures |
Assets of the segment* |
|---|---|---|---|---|
| Q3 2017 | ||||
| Conventional Generation | 1 789 | 1 378 | 1 135 | 37 278 |
| Renewables | 70 | 4 | 21 | 3 493 |
| Supply | 192 | 185 | 4 | 3 515 |
| Distribution | 585 | 297 | 431 | 17 564 |
| Other Operations | 20 | 3 | 32 | 626 |
| TOTAL | 2 656 | 1 867 | 1 623 | 62 476 |
| Consolidation adjustments | 7 | 16 | -25 | -2 726 |
| TOTAL AFTER ADJUSTMENTS | 2 663 | 1 883 | 1 598 | 59 750 |
* see note 6.1 to the condensed interim consolidated financial statements
Diagram: Main assets of the Conventional Generation segment.
Key figures for Conventional Generation.
| in PLN million | Q3 2018 |
Q3 2017 |
% change |
|---|---|---|---|
| Sales revenues | 3 781 | 3 748 | 1% |
| EBIT | -34 | 1 378 | - |
| EBITDA | 527 | 1 789 | -71% |
| Capital expenditures | 1 035 | 1 135 | -9% |
| EBITDA Q3 2017 |
Electricity in volume |
Electricity production production difference difference in price |
Result on energy trading |
Revenues from property rights |
Revenues from agreement with TSO |
Revenues from heat |
Costs of fuel |
CO 2 costs |
Personnel costs |
Cost of materials and repair services |
Other | Capitalized costs |
EBITDA Acquired assets* |
EBITDA Q3 2018 |
|
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Change | 54 | 227 | -86 | 52 | $-11$ | -9 | $-38$ | $-171$ | $-36$ | $-2$ | $-51$ | -6 | 11 | ||
| EBITDA reported Q3 2017 |
1789 | ||||||||||||||
| One-offs Q3 2017 | 1 1 9 7 | ||||||||||||||
| Recurring EBITDA Q3 2017 |
592 | 2 1 3 4 | 47 | $-35$ | 60 | 87 | 418 | 256 | 635 | 163 | 223 | $\mathsf{O}\xspace$ | |||
| Recurring EBITDA Q3 2018 |
2415 | $-39$ | 17 | 49 | 78 | 456 | 427 | 671 | 165 | 217 | 11 | 526 | |||
| One-offs Q3 2018 | |||||||||||||||
| EBITDA reported Q3 2018 |
527 | ||||||||||||||
* EBITDA of companies: PGE Energia Ciepła S.A., PGE Toruń S.A., PGE Gaz Toruń sp. z o.o., EC Zielona Góra S.A., Kogeneracja S.A.
Key factors affecting the results of Conventional Generation segment in the third quarter of 2018 compared to the results of the third quarter of 2017 included:
* Acquired assets: El. Rybnik, Ec. Gdańsk, Ec. Gdynia, Ec. Kraków, Ec. Wrocław, Ec. Czechnica, Ec. Zawidawie, Ec. Zielona Góra, Ec. Toruń
Table: Capital expenditures incurred in Conventional Generation segment.
| PLN million | Q3 2018 |
Q3 2017 |
% change |
|---|---|---|---|
| Investments in generating capacities, including: | 888 | 1 030 | -14% |
| Development |
456 | 731 | -38% |
| Modernisation and replacement |
432 | 299 | 44% |
| Purchase of finished capital goods | 9 | 7 | 29% |
| Vehicles | 4 | 1 | 300% |
| Other | 15 | 8 | 88% |
| Acquired assets* | 61 | - | - |
| TOTAL | 977 | 1 046 | -7% |
| Capitalized costs of overburden removal in mines | 58 | 89 | -35% |
| TOTAL with capitalized costs of overburden removal | 1 035 | 1 135 | -9% |
*PGE Energia Ciepła S.A., PGE Toruń S.A., PGE Gaz Toruń sp. z o.o., EC Zielona Góra S.A., Kogeneracja S.A.
Highest capital expenditures in the third quarter of 2018 were incurred for the following projects:
| | construction of units 5 and 6 in Opole power plant | PLN 262 million; |
|---|---|---|
| | construction of new unit in Turów power plant | PLN 134 million; |
| | modernisation of units 1-3 in Turów power plant | PLN 40 million; |
| | construction of a Thermal Processing Installation with Energy Recovery at Rzeszów CHP | PLN 39 million; |
| | investment program in Pomorzany CHP | PLN 19 million; |
| | construction of flue gas denitrification system for OP 230 boilers no. 3 and 4 at ZEC Bydgoszcz | PLN 14 million; |
| | shaping of reservoir no. 4 at KWB Bełchatów mine's internal heap | PLN 12 million; |
| | program of adaptation to BAT conclusions in Bełchatów power plant | PLN 10 million; |
| | expansion of flue gas desulphurisation system for OP 230 boilers no. 3 and 4 at ZEC Bydgoszcz | PLN 10 million; |
| | change in technology of furnace waste storage in Bełchatów power plant | PLN 9 million. |
Key developments in the third quarter of 2018 in the Conventional Generation segment:
The PGE Capital Group's operations in renewable energy are managed by the PGE Energia Odnawialna S.A. Assets in the segment include:
Diagram: Main assets of the Renewables segment.
Table: Key figures for Renewables.
| in PLN million | Q3 2018 | Q3 2017 | % change |
|---|---|---|---|
| Sales revenues | 216 | 161 | 34% |
| EBIT | 68 | 4 | 1600% |
| EBITDA | 132 | 70 | 89% |
| Capital expenditures | 16 | 21 | -24% |
Chart: Key changes of EBITDA in Renewables (in PLN million).
| EBITDA Q3 2017 |
Revenues from electricity - wind |
Revenues from property rights - wind |
Revenues from electricity - water |
Revenues from property rights - water |
Revenues from agreement with TSO* |
Costs | Other | EBITDA Q3 2018 |
|
|---|---|---|---|---|---|---|---|---|---|
| Change | 22 | 18 | |||||||
| EBITDA Q3 2017 |
70 | 38 | 22 | 13 | 64 | ||||
| EBITDA Q3 2018 |
43 | 44 | 18 | 67 | 63 | 132 |
Key factors affecting the results of Renewables in the third quarter of 2018 compared to the third quarter of 2017 were:
Table: Capital expenditures incurred in Renewables segment.
| PLN million | Q3 2018 |
Q3 2017 |
% change |
|---|---|---|---|
| Investments in generating capacities, including: | 14 | 19 | -26% |
| Development |
1 | 5 | -80% |
| Modernisation and replacement |
13 | 14 | -7% |
| Other | 2 | 2 | 0% |
| TOTAL | 16 | 21 | -24% |
Management Board's report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 3-month and 9-month period ended September 30, 2018
PGE Dystrybucja S.A. operates in the area of 122,433 sq. km and delivers electricity to approximately 5.4 million customers. Diagram: Area of PGE distribution grid.
Table: Key figures for Distribution.
| in PLN million | Q3 2018 |
Q3 2018* |
Q3 2017** |
% change | % change* |
|---|---|---|---|---|---|
| Sales revenues* | 1 432 | 1 587 | 1 552 | -8% | 2% |
| EBIT | 328 | 331 | 297 | 10% | 11% |
| EBITDA | 622 | 625 | 585 | 6% | 7% |
| Capital expenditures | 473 | 473 | 431 | 10% | 10% |
* Data restated – IFRS 15 not applied in 2018
** The Group has applied IFRS 15 since the standard's effective date i.e. since January 1, 2018, without restating the comparable data (changes introduced by IFRS 15 are described in note 4 to the interim condensed consolidated financial statements)
Chart: Key changes of EBITDA in Distribution (in PLN million).
| EBITDA Q3 2017 |
Volume of distributed electricity |
Change of distribution tariff* |
Other revenues of distribution tariff** |
Other operating revenues*** |
Network losses**** |
Property tax |
Personnel costs |
Repair and maintenance costs |
Other | EBITDA Q3 2018 |
|
|---|---|---|---|---|---|---|---|---|---|---|---|
| Change | 45 | -6 | -5 | 10 | -8 | ||||||
| EBITDA Q3 2017 |
585 | 982 | 45 | 37 | 85 | 92 | 256 | 32 | |||
| EBITDA Q3 2018 |
1021 | 49 | 32 | 75 | 96 | 264 | 29 | 622 |
Key factors affecting the results of Distribution in the third quarter of 2018 compared to the results of the third quarter of 2017 included:
Table: Capital expenditures incurred in Distribution segment.
| PLN million | Q3 2018 |
Q3 2017 |
% change |
|---|---|---|---|
| MV and LV power networks | 186 | 123 | 51% |
| 110/ MV and MV/MV | 27 | 34 | -21% |
| 110 kV power lines | 45 | 64 | -30% |
| Connection of new off-takers | 152 | 133 | 14% |
| Purchase of transformers and energy counters | 29 | 44 | -34% |
| IT, telemechanics and communication | 13 | 26 | -50% |
| Other | 21 | 7 | 200% |
| TOTAL | 473 | 431 | 10% |
Table: Key figures for Supply.
| w PLN million | Q3 2018 |
Q3 2018* |
Q3 2017** |
% change | %change |
|---|---|---|---|---|---|
| Sales revenues* | 3 296 | 4 289 | 3 610 | -9% | 19% |
| EBIT | 150 | 150 | 185 | -19% | -19% |
| EBITDA | 157 | 157 | 192 | -18% | -18% |
| Capital expenditures | 4 | 4 | 4 | 0% | 0% |
* Data restated – IFRS 15 not applied in 2018
** The Group has applied IFRS 15 since the standard's effective date i.e. since January 1, 2018, without restating the comparable data (changes introduced by IFRS 15 are described in note 4 to the interim condensed consolidated financial statements)
Chart: Key changes of EBITDA in Supply (in PLN million).
| EBITDA Q3 2017 |
Result on | Result on electricity margin electricity volume redemption costs |
Property right | Result on gas trading | Services for other segments in PGE Group |
Other | EBITDA Q3 2018 |
|
|---|---|---|---|---|---|---|---|---|
| Change | -45 | -6 | 23 | $-12$ | ||||
| EBITDA Q3 2017 |
192 | 355 | 183 | 137 | ||||
| EBITDA Q3 2018 |
319 | 187 | 160 | 157 |
Key factors affecting EBITDA of Supply segment in the third quarter of 2018 compared to the third quarter of 2017 included:
Table: Key figures for Other Operations.
| in PLN million | Q3 2018 |
Q3 2017 |
% change |
|---|---|---|---|
| Sales revenues | 174 | 86 | 102% |
| EBIT | 8 | 3 | 167% |
| EBITDA | 28 | 20 | 40% |
| Capital expenditures | 43 | 32 | 34% |
Increase in EBITDA of Other Operations segment by approx. PLN 8 million is mainly related to acquisition of EDF assets.
Capital expenditures in Other Operations in the third quarter of 2018 amounted to PLN 43 million compared to PLN 32 million in the third quarter of 2017.
Within the above amount, the highest capital expenditures in the three quarters of 2018 were incurred by the following companies:
As at September 30, 2018 and as at the publication date of this report, the Management Board worked in unchanged composition:
| Name and surname of the Management Board member |
Position |
|---|---|
| Henryk Baranowski | President of the Management Board |
| Wojciech Kowalczyk | Vice-President for Capital Investments |
| Marek Pastuszko | Vice-President for Corporate Affairs |
| Paweł Śliwa | Vice-President for Innovations |
| Ryszard Wasiłek | Vice-President for Operations |
| Emil Wojtowicz | Vice-President for Finance |
On July 19, 2018 the Ordinary General Meeting of the Company appointed eight members to the Supervisory Board of the 11th term as from July 20, 2018.
As at September 30, 2018 and as at the publication date of this report, the Supervisory Board worked in following composition:
| Name and surname of the Supervisory Board member |
Position |
|---|---|
| Anna Kowalik | Chairman of the Supervisory Board |
| Artur Składanek | Vice-Chairman of the Supervisory Board – independent |
| Grzegorz Kuczyński | Secretary of the Supervisory Board - independent |
| Artur Bartoszewicz | Supervisory Board Member - independent |
| Janina Goss | Supervisory Board Member - independent |
| Tomasz Hapunowicz | Supervisory Board Member - independent |
| Mieczysław Sawaryn | Supervisory Board Member - independent |
| Jerzy Sawicki | Supervisory Board Member - independent |
| Name and surname of the member of the Supervisory Board |
Audit Committee | Corporate Governance Committee |
Strategy and Development Committee |
Appointment and Remuneration Committee |
|---|---|---|---|---|
| Artur Bartoszewicz | Member from July 24, 2018 |
Member from July 24, 2018 |
||
| Janina Goss | Member from July 24, 2018 |
Member from July 24, 2018 |
||
| Tomasz Hapunowicz | Member from July 24, 2018 Chairman from July 24, 2018 |
Member from July 24, 2018 |
||
| Anna Kowalik | Member from July 24, 2018 |
Member from July 24, 2018 |
Member from July 24, 2018 |
|
| Grzegorz Kuczyński | Member from July 24, 2018 Chairman from 07.08.2018 |
Member from July 24, 2018 |
||
| Mieczysław Sawaryn | Member from July 24, 2018 |
Member from July 24, 2018 Chairman from July 24, 2018 |
||
| Jerzy Sawicki | Member from July 24, 2018 |
Member from July 24, 2018 |
Member from July 24, 2018 |
|
| Artur Składanek | Member from July 24, 2018 |
Member from July 24, 2018 Chairman from July 24, 2018 |
As at September 30, 2018 the standing committees of the Supervisory Board consisted of:
Information on claims for annulment of the resolutions of the General Meetings of PGE S.A are described in note 21.4 to the condensed interim consolidated financial statements.
Information on the issue of compensation regarding the conversion of shares are described in note 21.4 to the condensed interim consolidated financial statements.
Significant proceedings pending in front of courts, competent arbitration authority or public administration authority are described in note 21.4 to the condensed interim consolidated financial statements.
Table: Main guarantees granted by the PGE Group companies as at September 30, 2018.
| Issuer of guarantee |
Entity entitled to guaran tee (Beneficiary) |
Entity whose liabilities are subject to guaran tee (Debtor) |
Date of commitment due to the granted guarantee (dd-mm-yyyy) |
Validity of guarantee until (dd-mm-yyyy) |
Value of guaran tee (million) |
Currency | Value of loan subject to guar antee (million) |
Currency |
|---|---|---|---|---|---|---|---|---|
| PGE S.A. | Bondholders | PGE Sweden AB | 22.05.2014 | 31.12.2041 | 2 500.0 |
EUR | 638.0 | EUR |
| PGE S.A. | Nordic Investment Bank | PGE GiEK S.A. | 12.05.2017 | 31.12.2024 | 121.4 | EUR | 101.2 | EUR |
Information on issue, redemption and repayment of debt securities and other securities is described in p. 1.1 of the foregoing report and in note 1.3 to the condensed interim consolidated financial statements.
The programme to build Poland's first nuclear power plant (the "Programme") is focusing on conducting site characterisation and environmental surveys until an environmental impact assessment report and site report are prepared. Decisions with regard to the continuation of the Programme, in the above scope or otherwise, will be made based on decisions by the Minister of Energy concerning an updated Programme for Poland's Nuclear Power, a model for the procurement of nuclear power plant technology and investment financing model.
As a result of the sale of shares on April 15, 2015 to the Business Partners (TAURON Polska Energia S.A., ENEA S.A. and KGHM Polska Miedź S.A.) by PGE S.A., PGE S.A. holds 70% in the share capital of PGE EJ 1 sp. z o.o. ("PGE EJ 1", "EJ 1"), and each of the Business Partners holds 10% in the share capital of PGE EJ 1.
According to the Partners' Agreement, concluded on September 3, 2014, the Parties jointly undertook to finance operations under the initial phase of the Program (the "Development Stage"), proportionally to their shareholdings. It is assumed that PGE's financial commitment in the Development Stage will not exceed amount of approx. PLN 700 million. The funds for the Program are paid to PGE EJ1 in form of the increase of the share capital and loans. In the first quarter of 2018, PGE EJ 1 received a loan from its shareholders instead of a share capital increase. The share capital of PGE EJ 1 was increased in the third quarter of 2018.
Further action with regard to delivery of technology is dependent on the final arrangements with the Ministry of Energy related to formula of technology selection, working out economic, organisational and legal solutions, including the risk distribution and estimated costs of implementation of those solutions.
Site characterisation and environmental surveys, necessary to prepare an environmental impact assessment and a site characterisation report, were continued in the three quarters of 2018. The surveys are being carried out with the participation of ELBIS Sp. z o.o., a company from PGE Group. The aim of the surveys is gathering of data necessary to assess the area from the point of view of usefulness for foundation of nuclear power plant.
Works are being conducted at two sites: Lubiatowo-Kopalino and Żarnowiec, within Choczewo, Krokowa and Gniewino municipalities in the Pomeranian Voivodeship.
The works on schedule update have been carried out.
The main aim of activities in this area is to maintain a high level of community support at the planned nuclear plant sites and to deliver knowledge about nuclear power and about the Programme to the widest possible range of stakeholders.
In the three quarters of 2018, works were continued within the Site Municipality Development Support Programme intended to reinforce partner relations with the local communities and authorities of the municipalities by providing support to initiatives that are of significance to the residents and development of the region.
WorleyParsons initiated a lawsuit for payment of PLN 59 million for due remuneration, according to the claimant, and return of an amount unduly collected, according to the claimant, by PGE EJ 1 sp. z o.o. from a bank guarantee, and subsequently expanded its claim to PLN 104 million (i.e. by PLN 45 million). On March 31, 2018, the company filed a response to WorleyParsons' expanded claim. PGE Group does not accept the claim and regards its possible admission by the court as unlikely.
On November 7, 2018 rating agency Moody's published credit opinion for PGE S.A., in which it affirmed PGE's rating at investment level of Baa1 with stable outlook. In its latest credit opinion, the rating agency took into account PGE's strong position as the largest energy group in Poland, increasing share of revenues from regulated activities following the acquisition of district heating assets from EDF, as well as strong balance sheet and relatively low net debt/EBITDA ratio.
Information regarding the tender offer to subscribe for the sale of 100% shares of Polenergia S.A. is presented in note 24.1 to the condensed interim consolidated financial statements.
Information about transactions with related entities is presented in note 23 to the condensed interim consolidated financial statements.
PGE S.A. does not publish financial forecasts.
According to the best knowledge, on the ground of the letter from the Ministry of the State Treasury of April 27, 2016, the State Treasury holds 1 072 984 098 ordinary shares of the Company, representing 57.39% of the Company's share capital and entitling to 1 072 984 098 votes on the General Meeting of the Company, constituting 57.39% of total votes.
Table: Shareholders holding directly or indirectly by subsidiaries at least 5% of the total votes at the General Meeting of PGE S.A.
| Shareholder | Number of shares | Number of votes | % in total votes on General Meeting |
|---|---|---|---|
| State Treasury | 1 072 984 098 | 1 072 984 098 | 57.39% |
| Others | 796 776 731 | 796 776 731 | 42.61% |
| Total | 1 869 760 829 | 1 869 760 829 | 100.00% |
According to the best knowledge of the Management Board of the Company, members of management and supervisory authorities of the Company as of the date of submission of this report and as of the date of publishing of the consolidated report for the first half of 2018 did not hold shares of PGE S.A.
To the best knowledge of the Management Board of PGE S.A., the quarterly financial report including condensed interim consolidated financial statements of the Capital Group of PGE Polska Grupa Energetyczna S.A., quarterly financial information for PGE Polska Grupa Energetyczna S.A. and comparative data, was prepared in accordance with the governing accounting principles, presents a fair, true and reliable view of the material and financial situation of PGE Capital Group and its financial result.
The report of the Management Board on the activities of PGE Capital Group presents a true view of the development, achievements and situation of the Capital Group.
The foregoing Management Board's Report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. was approved for publication by the Management Board of the parent company on November 13, 2018.
Warsaw, November 13, 2018
Signatures of Members of the Management Board of PGE Polska Grupa Energetyczna S.A.
President of the Management Board Henryk Baranowski
Vice-President of the Management Board Wojciech Kowalczyk
Vice-President of the Management Board Marek Pastuszko
Vice-President of the Management Board Paweł Śliwa
Vice-President of the Management Board Ryszard Wasiłek
Vice-President of the Management Board Emil Wojtowicz Management Board's report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 3-month and 9-month period ended September 30, 2018
| AKPiA | Control, measurement and automation apparatus area |
|---|---|
| Ancillary control services (ACS) |
services provided to the transmission system operator, which are indispensable for the proper functioning of the National Power System and ensure the keeping of required reliability and quality standards. |
| Achievable capacity | the maximum sustained capacity of a generating unit or generator, maintained continuously by a thermal generator for at least 15 hours or by a hydroelectric generator for at least five hours, at standardized operating conditions, as confirmed by tests. |
| Balancing market | a technical platform for balancing electricity supply and demand on the market. The differences between the planned (announced supply schedules) and the actually delivered/off-taken volumes of electricity are settled here. The purpose of the balancing market is to balance transactions concluded between individual market participants and actual electricity demand. The participants of the balancing market can be the generators, customers for electricity understood as entities connected to a network located in the balancing market area (including off-takers and network customers), trading companies, electricity exchanges and the TSO as the balancing company. |
| Base, baseload | standard product on the electricity market: a constant hourly power supply per day in a given period, for example week, month, quarter or year. |
| BAT | Best Available Technology |
| Best Practices | Document "Best Practice for GPW Listed Companies 2016" adopted by the resolution of the GPW Supervisory Board of October 13, 2015 and effective from January 1, 2016. |
| Biomass | solid or liquid substances of plant or animal origin, subject to biodegradation, obtained from agricultural or forestry products, waste and remains or industries processing their products as well as certain other biodegradable waste in particular agricultural raw materials. |
| Black energy | popular name for energy generated as a result of combustion of black coal or lignite. |
| Circular economy | system that minimises the consumption of resources and the level of waste as well as emissions and energy losses by creating a closed loop of processes in which waste from one process is used as resources in other processes so as to maximally reduce the quantity of production waste |
| Co-combustion | the generation of electricity or heat based on a process of combined, simultaneous combustion in one device of biomass or biogas together with other fuels; part of the energy thus generated can be deemed to be energy generated with the use of renewable sources. |
| Co-generation | the simultaneous generation of heat and electricity or mechanical energy in the course of one and the same technological process. |
| Constrained generation |
the generation of electricity to ensure the quality and reliability of the national power system; this applies to generating units in which generation must continue due to the technical limitations of the operation of the power system and the necessity of ensuring its adequate reliability. |
| CVC fund | Corporate Venture Capital; in the CVC model, portfolio companies, aside from financial support, receive the opportunity to verify their ideas in a corporate setting |
| Distribution | transport of energy through distribution grid of high (110 kV), medium (15kV) and low (400V) voltage in order to supply the customers. |
| Distribution System Operator (DSO) |
a power company engaging in the distribution of gaseous fuels or electricity, responsible for traffic in the gas or electricity distribution systems, current and long-term security of operation of the system, the operation, maintenance, repairs and indispensable expansion of the distribution network, including connections to other gas or power systems. |
| Energy cluster | civil-law arrangement that may include natural persons, legal entities, scientific units, research institutes or local government units, concerning the generation, distribution or trade in energy and energy demand balancing, with this energy being from renewable sources or other sources or fuels, within a distribution grid with nominal voltage below 110 kV, within the operational area of the given cluster, not exceeding the area of one district (powiat) in the meaning of the act on district authorities) or 5 municipalities (gmina) in the meaning of the act on municipal authorities; an energy cluster is represented by a coordinator, which is a cooperative, association, foundation appointed for this purpose or any member of the energy cluster indicated in the civil-law arrangement |
| ERO | Energy Regulatory Office (pol. URE). |
| EUA | European Union Allowances: transferable CO2 emission allowances; one EUA allows an operator to release one tonne of CO2 |
| EU ETS | European Union Greenhouse Gas Emission Trading Scheme) EU emission trading scheme. Its operating rules are set out in the ETS Directive, amended by the Directive 2009/29/EC of the European Parliament and of the Council of April 23, 2009 (OJ EU L. of 2009, No. 140, p. 63—87). |
| Generating unit | a technically and commercially defined set of equipment belonging to a power company and used to generate electricity or heat and to transmit power. |
| GJ | Gigajoule, a unit of work/heat in the SI system, 1 GJ = 1000/3.6 kWh = approximately 278 kWh. |
|---|---|
| GPZ | main power supply point, a type of transformer station used for the processing or distribution of electricity or solely for the distribution of electricity. |
| Green certificate | popular name for energy generated from renewable energy sources. |
| GW | gigawatt, a unit of capacity in the SI system, 1 GW = 109 W. |
| GWe | one gigawatt of electric capacity. |
| GWt | one gigawatt of heat capacity. |
| HICP | Harmonised Index of Consumer Prices |
| High Voltage Network (HV) |
a network with a nominal voltage of 110 kV. |
| IED | Industrial Emissions Directive |
| IGCC | Integrated Gasification Combined Cycle. |
| Installed capacity | the formal value of active power recorded in the design documentation of a generating system as being the maximum achievable capacity of that system, confirmed by the acceptance protocols of that system (a historical value, it does not change over time. |
| IRiESP | the Transmission Network Operation and Maintenance Manual required to be prepared by a transmission system operator pursuant to the Energy Law; instructions prepared for power networks that specify in detail the terms and conditions of using these networks by system users as well as terms and conditions for traffic handling, operation and planning the development of these networks; sections on transmission system balancing and system limitation management, including information on comments received from system users and their consideration, are submitted to the ERO President for approval by way of a decision. |
| IRZ | Cold Intervention Reserve Service – service consisting of maintaining power units ready for energy production. Energy is produced on request of PSE S.A. |
| KSE | the National Power System, a set of equipment for the distribution, transmission and generation of electricity, forming a system to allow the supply of electricity in the territory of Poland. |
| KSP | the National Transmission System, a set of equipment for the transmission of electricity in the territory of Poland. |
| kV | kilo volt, an SI unit of electric potential difference, current and electromotive force; 1kV= 103 V. |
| kWh | kilowatt-hour, a unit of electric energy in the SI system defined as the volume of electricity used by the 1 kW equipment over one hour. 1 kWh = 3,600,000 J = 3.6 MJ. |
| Low Voltage Network (LV) |
a network with a nominal voltage not exceeding 1 kV. |
| LTC | long-term contracts on the purchase of capacity and electricity entered into between Polskie Sieci Elektroenergetyczne S.A. and electricity generators in the years 1994-2001. |
| Medium-voltage network (MV) |
an energy network with a nominal voltage higher than 1 kV but lower than 110 kV. |
| MEV | Minimum Energy Volumes. |
| MSR | Market Stability Reserve (relating to CO2 ) |
| MW | |
| a unit of capacity in the SI system, 1 MW = 106 W. | |
| Mwe | one megawatt of electric power. |
| MWt | one megawatt of heat power. |
| NAP | National emissions Allocation Plan, prepared separately for the national emission trading system and for the EU |
| NAP II | emission trading system by the National Administrator of the Emission Trading System. National CO2 emissions Allocation Plan for the years 2008-2012 prepared for the EU emission trading system adopted by the Ordinance of the Council of Ministers of July 1, 2008 (Dz. U. of 2008, No. 202, item 1248). |
| Nm3 | normal cubic meter; a unit of volume from outside the SI system signifying the quantity of dry gas in 1 m3 of space at a pressure of 101.325 Pa and a temperature of 0°C. |
| NOx | nitrogen oxides. |
| N:W ratio | Ration of volume of overburden removed in m3 to the mass of extracted coal in tons |
| OTF | Organized Trading Facilities |
| Operational Capacity Reserve (ORM) |
ORM constitutes of generation capacities of active Production Schedular Units (JGWa) in operation or layover, representing excess capacity over electricity demand available to the TSO under the Energy Sale Agreements and on the Balancing Market in unforced generation |
| Peak, peakload | a standard product on the electricity market; a constant power supply from Monday to Friday, each hour between 7:00 a.m. and 10:00 p.m. (15-hour standard for the Polish market) or between 8:00 a.m. and 8:00 p.m. (12-hour standard for the German market) in a given period, for example week, month, quarter or year. |
| Peak power pumped storage plants |
special type of hydro-power plant allowing for electricity storage. It uses the upper reservoir, to which water is pumped from the lower reservoir using electricity (usually excessive in system). The pumped storage facilities provide ancillary control services for the national power system. In periods of increased demand for electricity, water from the upper reservoir is released through the turbine. This way, electricity is produced. |
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| PJ | Petajoule, a unit of work/heat in the SI system, 1 PJ = approx. 278 GWh |
| Property rights | negotiable exchange-traded rights under green and co-generation certificates |
| Prosumer | end customer who purchases electricity under a comprehensive agreement and generates electricity only from renewable sources at a micro-installations for own purposes, unrelated to economic activities |
| PSCMI1 | Polish Energy Coal Market Index 1 - average level of prices of coal dust sold to industrial-scale power plants in Poland |
| RAB | Regulatory Asset Base. |
| Red certificate | a certificate confirming generation of electricity in co-generation with heat. |
| Red energy | popular name for electricity co-generated with heat. |
| Regulator | the President of ERO, fulfilling the tasks assigned to him in the energy law. The regulator is responsible for, among others, giving out licenses for energy companies, approval of energy tariffs, appointing Transmission System Operators and Distribution System Operators. |
| Renewable Energy Source (RES) |
a source of generation using wind power, solar radiation, geothermal energy, waves, sea currents and tides, flow of rivers and energy obtained from biomass, landfill biogas as well as biogas generated in sewage collection or treatment processes or the disintegration of stored plant or animal remains. |
| SAIDI | System Average Interruption Duration Index - index of average system interruption time (long, very long and disastrous), expressed in minutes per customer per year, which is the sum of the interruption duration multiplied by the number of consumers exposed to the effects of this interruption during the year, divided by the total number of off-takers. SAIDI does not include interruptions lasting less than three minutes and is determined separately for planned and unplanned interruptions. It applies to breakdowns in the low (LV), medium (MV) and high voltage (HV), wherein SAIDI in quality tariff does not include interruptions on low voltage. |
| SAIFI | System Average Interruption Frequency Index - index of average system amount of interruptions ( long, very long and disastrous ), determined as number of off-takers exposed to the effects of all such interruptions during the year divided by the total number of off-takers. SAIFI does not include interruptions lasting less than three minutes and is determined separately for planned and unplanned interruptions. It applies to breakdowns in the low (LV), medium (MV) and high voltage (HV), wherein SAIFI in quality tariff does not include interruptions on low voltage . |
| SCR | Selective catalytic reduction |
| SNCR | Selective non-catalytic reduction |
| Start-up | early-stage company established in order to build new products or services and characterised by a high level of uncertainty. The most common features of start-ups are: short operational history (up to 10 years), innovativeness, scalability, higher risk than in the case of traditional businesses but also potential higher returns on investment |
| Tariff | the list of prices and rates and terms of application of the same, devised by an energy enterprise and introduced as binding on the customers specified therein in the manner defined by an act of parliament. |
| Tariff group | a group of customers off-taking electricity or heat or using services related to electricity or heat supply to whom a single set of prices or charges and terms are applied. |
| TGE | Towarowa Giełda Energii S.A. (Polish Power Exchange), a commodity exchange on which trading can take place in electricity, liquid or gas fuels, extraction gas, emission allowances and property rights whose price depends directly or indirectly on electric energy, liquid or gas fuels and emission allowances, admitted to commodity exchange trading. |
| TPA, TPA rule | Third Party Access, the owner or operator of the network infrastructure to third parties in order to supply goods/services to third party customers. |
| Transmission | transport of electricity through high voltage (220 and 400 kV) transmission network from generators to distributors. |
| Transmission System Operator (TSO) |
a power company engaging in the transmission of gaseous fuels or electric energy, responsible for traffic in a gas or power transmission system, current and long-term security of operation of that system, the operation, maintenance, repair and indispensable expansion of the transmission system, including connections with other gas or power systems. In Poland, for the period from July 2, 2014 till December 31, 2030 Polskie Sieci Elektroenergetyczne S.A. was chosen as a TSO in the field of electricity transmission. |
| TWh | terawatt hour, a multiple unit for measuring of electricity unit in the system SI. 1 TWh is 109 kWh. |
| Ultra-high-voltage network (UHV) |
an energy network with a voltage equal to 220 kV or higher. |
Management Board's report on activities of the Capital Group of PGE Polska Grupa Energetyczna S.A. for the 3-month and 9-month period ended September 30, 2018
| V (volt) | electrical potential unit, electric voltage and electromotive force in the International System of Units (SI), 1 V= 1J/1C = (1 kg x m2 3 ) / (A x s ). |
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| W (watt) | a unit of power in the International Systems of Units (SI), 1 W = 1J/1s = 1 kg x m2 -3 x s |
| Yellow certificate | a certificate confirming generation of energy in gas-fired power plants and CCGT power plants. |
| Yellow energy | popular name for energy generated in gas-fired power plants and CCGT power plants. |
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