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Wednesday, 26 June 2024 | research report

CEE Power Utilities

Poland, Czech Republic

Like the legend of the phoenix WIG-Energia* 2,511.11

We resume coverage of Polish state-controlled power, with Enea (offering the 2024E EV/EBITDA 4.5x
biggest fundamental valuation gap) and PGE (the best play on coal unbundling) 2025E EV/EBITDA 4.9x
as our top picks. We also stand by our positive view on Polenergia, with its *Price as of June 25, 2024, 5:00 PM
attractive RES portfolio and plans for more optimal capital management.
The medium-term earnings momentum expected in the power sector is not too
WIG Energy vs. WIG
appealing (declining forward prices, reduced load factors), but the valuation
multiples of utilities remain very attractive, and their EBITDA potential is poised 3,200
WIGENE
to shift to more stable and regulated business lines. pts
WIG
Moreover, the capex plans of state utilities are becoming more value creative 2,900
than in the past, and they include optimization of legacy asset maintenance, re-
investment premiums in distribution, no politically driven investments and
M&As, and a more opportunistic approach to onshore renewables with Poland 2,600
about to announce a more constructive energy policy.
The new market paradigm inevitably involves the discontinuation of coal
energy generation, but we expect the government to offer transitional 2,300
compensation for negative clean dark spreads as of 2028 to keep coal plants on
standby as emergency backup. This expectation underlies our base case
scenario for power utility valuations. A potential coal assets carve-out 2,000
represents a bullish case with almost 100% upside on avg.
Power Market Paradigm Shift
The European energy mix transition is affecting power prices faster than previously
expected, with hourly spot prices falling deeper and deeper into the negative
Target Price Rating
territory. The number of hours with negative prices in the German-Austrian Name
electricity bidding zones increased from 148 in 2021 to 280 in 2023, and, this year, New Old New Old
they have more than doubled in a continuation of the uptrend. CEZ 948.40 893.60 hold hold
In Poland, excessive solar capacity development, combined with balancing market Enea 18.16 - buy suspended
reform, have added to the power price paradigm shift, boosting intraday spreads
and profile costs (a huge challenge for solar PV, but an opportunity for CCGTs and PGE 8.84 - buy suspended
energy storage). At the same time, we are witnessing a dramatic fall in coal power Polenergia 104.09 103.62 buy buy
plant load factors (only 20% expected in 2028 vs. 36% in 2023) which, together with
Tauron 4.27 - hold suspended
capacity closures, may result in a 60% slump in Polish steam coal demand.
Current Target
More stabilization may come only with structural changes in electricity demand (EV Name Upside
Price Price
charging, heat pumps, green H2) and the expected deployment of utility scale CEZ 933.50 948.40 1.6%
battery storage facilities. Meanwhile, in order to stabilize the system, the operator
Enea 9.42 18.16 92.9%
may be forced to implement ‘ancillary’ services to keep sufficient conventional
capacities on standby, offering compensation for negative CDS as of 2028 (our base PGE 6.91 8.84 28.0%
case scenario). Polenergia 64.80 104.09 60.6%
Coal Assets Carve-Out Back on Gov’t Agenda
Tauron 3.91 4.27 9.2%
The concept of a coal power plant carve-out seems to be back on the table, although
the whole endeavor is starting from scratch with no official schedule and
framework as of yet. We expect that, contrary to the original NABE project, this time
the prices offered by the state for the coal assets will be more aligned with their
profitability profiles and decommissioning schedules.
In our hypothetical calculations, we arrived at an implied EV of available capacity
offered in 2026-30 of PLN 1.8m per MW – a more reasonable proposition from the
government’s vantage point than the alternative, i.e., building new gas balancing
units with estimated capex of PLN 3.8m per MW. If we apply these estimates to the
DCF valuations of Enea, PGE and Tauron, we arrive at upside potential of 135%, 156%,
and 47%, respectively.
EV/EBITDA adj. DYield
2024E 2025E 2026E 2024E 2025E 2026E
CEZ 6.3 6.2 6.5 5.6% 5.5% 4.7%
Enea 1.4 1.2 1.2 0.0% 0.0% 0.0%
PGE 2.7 2.2 2.8 0.0% 0.0% 0.0%
Polenergia 8.1 11.7 18.6 0.0% 0.0% 0.0%
Tauron 3.8 3.3 3.3 0.0% 0.0% 0.0% Analyst:
Integrated Utilities 6.1 6.2 6.5 6.3% 6.2% 6.2%
Kamil Kliszcz
Network Utilities 9.3 8.8 8.7 5.0% 4.8% 5.0%
Head of Equity Research
Renewables Mix 10.3 10.4 10.2 4.6% 4.7% 4.9% Equity Analyst, Expert
+48 667 770 837
Renewables Wind 10.4 9.9 8.9 3.5% 3.8% 3.8%
[email protected]
Renewables Solar 13.2 10.8 10.2 0.0% 0.0% 0.4%

EV/EBITDA adj. DYield

2024E 2025E 2026E 2024E 2025E 2026E
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Contents

CEE Power Utilities .................................................................................................................................................................................................................................................................. 1

German Power Market ................................................................................................................................................................................................................................................... 3
Polish Power Market 10Y Outlook ........................................................................................................................................................................................................................... 4
Polish Coal Market ............................................................................................................................................................................................................................................................. 6
Base-Case Scenario for Polish Power Prices ................................................................................................................................................................................................... 6
Capacity Market ................................................................................................................................................................................................................................................................... 8
Capacity Investment – A Case Study .................................................................................................................................................................................................................... 9
Conventional Generation Outlook ....................................................................................................................................................................................................................... 14
2024-26 Earnings Prospects ......................................................................................................................................................................................................................................15
Coal Asset Carve-Out ..................................................................................................................................................................................................................................................... 16
Distribution Segment Outlook ............................................................................................................................................................................................................................... 18
Trading Segment Outlook ......................................................................................................................................................................................................................................... 19
Sector performance .........................................................................................................................................................................................................................................................21
mBank vs market consensus ...................................................................................................................................................................................................................................22
CEZ ...................................................................................................................................................................................................................................................................................................23
Enea ................................................................................................................................................................................................................................................................................................ 29
PGE...................................................................................................................................................................................................................................................................................................35
Polenergia ................................................................................................................................................................................................................................................................................... 41
Onshore Wind Segment............................................................................................................................................................................................................................................. 42
PV Segment ......................................................................................................................................................................................................................................................................... 43
Offshore Wind Project ..................................................................................................................................................................................................................................................44
Capex and Balance Sheet Outlook ..................................................................................................................................................................................................................... 45
Tauron .............................................................................................................................................................................................................................................................................................51

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German Power Market

Germany’s energy mix continues its transition, with the share Negative hourly prices are reflected in day-ahead spot
of renewables growing to more 50% in 2023 from less than prices, and this is weighing down the base forward market, as
40% in 2019. illustrated on the chart below.
Aside from capacity development (incl. nuclear closures), this The YTD average base spot price in Germany is €~70/MWh vs.
is due to an 11% year-over-year drop in total supply. The lower €99/MWh quoted in 2023, and we have already seen prints
production was driven by net imports change and further with daily prices as low as €10/MWh or less. We expect that
decline in demand (-3.7% year-over-year after falling 4.0% in this phenomenon may further intensify during the summer,
2022). especially on weekends.
The reduced power consumption is mainly the effect of a German BASE forward and spot prices (EUR/MWh)
slump in industrial production, but added to this is falling 600
demand from prosumers themselves (household demand is
already 6% below 2021 levels). The growing use of heat pumps 500
and electric cars has only has partly offset these trends.
400
German power production by source (TWh)
600
300
95 99
100 99
500 46
49 97 200
50 60
400 126 61
115 100
132 125
300 90 138
90
95 79 0
200 58 55
43 64 80
75 69 35
64 44
100 EEX spot price 1Y FWD
114 92 110 116 88
Source: Bloomberg, mBank
0

As a result, base clean dark spreads and clean spark spreads

have structurally fallen into the negative territory,
lignite nuclear coal gas wind PV others
destroying the profitability of conventional power plants. At the
Source: BDEW, Energiebilanzen same time, we have seen pressure on load factors with
European lignite/coal plant generation falling more than 20%
Germany’s average emissions decreased to 0.4t/MWh in 2023, YTD and natural gas plant output down 17%. Part of the supply
which affected market electricity prices via a weaker CO2 price has been taken over by hydroelectric power plants, benefitting
transmission channel. Moreover, higher solar production from extraordinarily favorable water conditions, however,
destroys pricing during the day, with hourly spot prices falling ultimately, the trend of coal/gas phase-out is inevitable.
deeper and deeper into the negative territory.
German forward price decomposition for gas/coal units
As shown in the following table, the number of hours with (EUR/MWh)
negative prices in the German-Austrian electricity bidding
zones increased from 148 in 2021 to 280 in 2023. This year, they 335
have more than doubled in a continuation of the uptrend. This 285
can be blamed on weather conditions and PV capacity
235
additions which have boosted solar generation by ca. 30% YTD,
along with a ca. 7% increase in wind generation. 185
135
Hours with negative power prices per month – EXAA hourly
prices (Austria/Germany bidding zones) 85

2021 2022 2023 2024 35

Jan 2 5 6 4 -15
coal gas coal gas coal gas
Feb 7 6 0 6
2025 2024 2023
Mar 27 1 25 21
CO2 fuel margin
Apr 20 4 14 67
May 53 9 45 82 Source: Bloomberg, mBank

Jun 11 1 39
Our EEX power price model for the benchmark German market
Jul 13 0 42 uses our forecasts as regards energy prices (ARA coal, TTF gas),
Aug 13 0 20 EUA prices, and the energy mix (average emissions). Our
Sep 0 0 13 calculations also include an adjustment implying CSS
margin at break even in the long term, which in our view is
Oct 1 0 10 needed to keep power supply security until full
Nov 0 0 9 implementation of necessary energy storage capacities. We
Dec 1 46 57 believe marginal power plants should not be structurally in the
Source: Bloomberg, mBank red, as this might drive early decommissioning and medium-
term system balancing issues, which would result in higher
market prices.

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We keep our coal/gas forward price curve unchanged (we In the long term, we expect power consumption in Poland to
assume TTF benchmark normalization from the current be correlated with the GDP trajectory, with an additional
€30/MWh to €20/MWh in the long term), but we have boost from the continued widespread of heat pumps,
updated our CO2 mid-term pricing after the recent market energy storage facilities, and electric cars. As a result, our
rebound. 2023-30 demand CAGR estimate amounts to 2.6% vs. the
pre-pandemic average of 1.3%.
As a result, we have raised our 5-year EEX power price
expectations by about 5%, leaving the long tail unchanged. The main assumptions underlying our forecasts can be
Our current estimates remain slightly above the market summarized as follows:
forward curve (+9% on average), probably due to the above-
mentioned CSS adjustment factor. ▪ The GDP growth forecasts are as presented by the mBank
macro team: 3.9% average until 2028 and 3.0% afterwards.
mBank EEX price assumptions vs. forward curve
(EUR/MWh) ▪ Heat pumps will increase from the current 0.6 million to
100 more than 3 million in 2033, with power consumption rising
from 2.2TWh to 12 TWh.
80
▪ Total number of EVs registered in Poland will grow from
57k in 2023 to 2 million in 2033, boosting power
60
consumption by ca. 4 TWh.
40 ▪ The current capacity of battery energy storage systems
(BESS) in Poland is estimated at 160 MW, but extra ~1.9GW
20 has been contracted in capacity auctions for 2027/28. We
BESS capacity will exceed 3 GW in ten years’ time.
0
▪ Residential energy storage systems at the end of 2023 had
a capacity of 110 MW, and based on further state support
mBank EEX forward curve mechanisms it should reach 1.5GW in ten years (a delay
Source: Bloomberg, EEX, mBank
from a 2030 timing assumed in the initial government
outlook).
Polish Power Market 10Y Outlook ▪ Assuming 4-hour per day workload for BESS and 2-hour per
day workload for residential units, we expect that power
Demand demand from energy storages may reach 5-6 TWh in ten
years.
In 2023, electricity use in Poland dropped 3.4% to 167 TWh,
reflecting slow economic growth (only +0.2%), unfavorable ▪ We do not include potential electrolysis/green hydrogen
weather conditions (heating degree days 4% below average), consumption as these represent opportunistic demand
and growing prosumer numbers (the average microscale rather than something that can be planned at this stage.
capacity was ~3GW or 34% higher year-over-year in 2023).
▪ We do not include any new pump-storage facilities as
It can be estimated that solar energy generated from rooftop already spotted projects (Młoty, Rożnów and Tolkmicko
panels amounted to ~3.5TWh in 2023, and in 2024 it may with total capacity of 2.8 GW) are at very early stages of
exceed 4 TWh (direct own consumption factor ca. 35%). This is development and may not come on line before the end of
equivalent to 2.5% of total electricity consumption registered in our 10-year forecast horizon.
2018-19, the last years before the “prosumer boom”. The
growing supply from solar is partly offset extra power Generation Capacity
demand from heat pumps (we estimate it at ~2.2 TWh in
2023). At the end of 2023, total capacity installed in the Polish
electricity grid amounted to 66 GW, rising from 60 GW a year
2024 started off relatively well in terms of demand, which grew earlier. The main contributors to this increase were PVs (+4.9
2.6% in the first four months of the year, albeit mainly thanks to GW) and onshore wind farms (1.2 GW).
favorable base effects and weather conditions in January. We
expect that the annual growth rate for the full year will be lower Renewable sources account for 45% installed capacity
at +2.1%, more correlated with expected GDP growth of +3.5%. (~30GW), but this includes a significant share (~40%) of micro
micro installations (~11GW). This is a result of the recent PV
Power consumption vs. GDP growth in Poland boom in Poland, driven by generous state support programs
which have since expired.
8.0%
In 2023, an extra 2 GW of prosumer PV installations were added
6.0%
(mostly commercial 10-50kW), but we expect the pace of new
4.0% capacity additions to slow down in the years ahead as falling
power prices put less pressure on industrials.
2.0%

0.0%

-2.0%

-4.0%

-6.0%

power consumption change GDP growth

Source: PSE, E- mBank estimate

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Installed capacity by technology – 10Y outlook (GW) Supply

100
Our Polish electricity generation forecasts use the demand
Tysiące

80 6 6 9 and capacity projections presented above, and forecasts

4 5 5 5
regarding net power imports. We assume that power
60 24 25 26 27 28 29 30 imports will gradually increase from ca. 4 TWh in 2023 to 21
20 21 23
17 TWh in 2033 (exceeding 2020’s record high of 13 TWh), driven
12
40 8 9 11 11 12 13 15 16 17 18 by attractive price parity and EU requirements to release more
19 20
4 4 6 6 8 9 interconnector capacity for trading.
9 9 9 10 10 10
8 8 8 10 10 10
20 8 8 7 6 5 4 Our supply forecasts consider coal-fired power plants as
23 23 22 22 20 19 17 16 15 15 15 15 marginal units covering the gap in the merit order. Otherwise,
0
we assume the following load factors for the different types of
power plants:

Hard coal Lignite Gas Onshore wind ▪ Lignite: A gradual decrease from the current 45% to 36% in
Solar Offshore wind other the long term (costs and lignite availability).
Source: mBank, PSE, ARE
▪ Gas: Flat at the current 40% (above coal plants in the merit
By 2033, we expect total installed capacity to increase to order in the long term due to CSS>CDS assumption).
approximately 96 GW after 42 GW is added in new projects
▪ Wind: Onshore at 29%, and offshore at 45%.
and 12 GW is shut down in existing assets.
▪ Photovoltaic: 12% in case of prosumer installations
The assumptions by technology are as follows:
adjusted for own consumption (~33%).
▪ Onshore wind: +10 GW thanks to the easing of the laws
▪ Storage: As described above, we assume a 4-hour-per-day
imposing minimum distance of onshore wind turbines
workload for BESS and 2 hours per day for residential units
from nearest housing (the “distance rule”). That should
with an 88% efficiency ratio (implied storage supply in 2033
unlock capacity growth potential, with peak construction
amounts to ~5 TWh.
expected to kick off in 2025-26.
▪ Hydro/other RES: Stable production at 2023 levels.
▪ Photovoltaic: +13 GW mostly utility scale projects within
cable pooling (~6.5-7.5 GW) and projects with already
Using these assumptions, the implied average coal power
secured connection to the grid and RES auction contracts
plant load factor would drop from last year’s 36% to about
(remaining ~2.5GW).
20% in 2028, and then stabilize slightly above 20% thanks to
▪ Offshore wind: +8.5GW, of which 5.9 GW with already capacity decommissioning and lignite plant closures. As a
approved CfDs in the first phase and the remaining 2.6 GW result, the total coal-fired generation volume will decrease
to be contracted in the 2025 auction. from 67 TWh in 2023 to only about 26 TWh in 2033. In the case
of lignite power plants, the drop is also quite severe (from 35
▪ We conservatively assume only “old” licenses issued before TWh to 14 TWh), due to the expected gradual
2023 will take part in Phase II, or the bidding phase of decommissioning of the Bełchatów power station.
offshore wind development. in 2025 (PGE’s ‘Baltica 1’ with 1
GW capacity, and Polenergia/Equinor’s ‘Bałtyk I’ with 1.6 Forecast of renewables share in power generation and
GW capacity), but we cannot rule out that some of the 10 coal/lignite load factors
licenses granted last year to Orlen and PGE (5.5GW/3.9GW) 70%
will also take part in the auction. 60%
▪ For now, it is difficult to assess the potential commissioning 50%
dates for the Phase II projects, especially as only a few
40%
phase 1 projects have just gone into construction.
30%
▪ Storage facilities: +4.7 GW by 2033 (both in residential and
utility scale units). This may look like a conservative 20%
approach given approved connections to the grid at >10 10%
GW, however, it is still uncertain how many projects will be
economically viable (more details below). 0%

▪ Gas: +4.0 GW in already announced projects that are under

development (Grudziądz, Ostrołęka, Adamów, Rybnik,
RES share in production coal load factor
Gdańsk, Siekierki). As a reminder, CCGT projects are being
lignite load factor
considered by Tauron (Łagisza, 0.5GW) and Enea Source: ARE, E – mBank estimates
(Kozienice, 1 GW).
When it comes to the shorter term, the competitive pressure
▪ Lignite: -4.5GW after gradual decommissioning of power
from renewables should be mitigated by an expected
plants owned by PGE (Bełchatów) and ZE PAK (Pątnów).
rebound in consumption. Hat said, looking at data from Q1’24
▪ Coal: -8 GW, as planned under the current (coal generation -8%, lignite -6%), a repeat of 2023 production
decommissioning plans of PGE (ZEDO, Rybnik), Enea volumes is unlikely, including due to growing imports.
(Kozienice), and Tauron (Jaworzno, Łaziska). According to a
recent TSO announcement, we can also expect additional
decommissioning of more than 2GW in non-centrally
dispatched units.
▪ Nuclear: The updated schedule of the Polish Nuclear
Program assumes the first nuclear power plant will be
commissioned in 2035 (beyond our forecast horizon). We
do not include any SMRs.

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Short-term outlook for power supply/demand balance in PL As far as current pricing, the price gap of Polish coal to the ARA
TWh 2021 2022 2023 2024E 2025E benchmark amounts to about 4 zł/GJ, and it is expected to
tighten further in 2025 as the standard logistic costs for
Hard coal 88.5 83.8 70.4 64.1 66.2
imports are exceeded.
Load factor 41% 41% 36% 33% 34%
Polish coal price benchmark vs. ARA pricing (PLN/GJ)
Lignite 46.0 47.3 34.8 34.0 30.9
60.0 20.0
Load factor 57% 60% 45% 44% 43%
Gas 15.6 11.7 16.5 19.4 19.4 50.0 10.0
PV 4.0 8.2 11.4 15.4 17.2
40.0 0.0
Wind 16.3 19.8 23.2 25.5 27.6
Load factor 27% 29% 30% 29% 29% 30.0 -10.0
Total 179.6 179.5 166.4 168.8 171.9
20.0 -20.0
year-over-year 13.7% 0.0% -7.3% 1.5% 1.8%
tCO2/MWh 0.79 0.76 0.67 0.62 0.60 10.0 -30.0

Consumption 174.4 173.5 167.5 171.0 175.3 0.0 -40.0

year-over-year 5.4% -0.5% -3.4% 2.1% 2.5%

Net Exports -0.8 1.7 -3.9 -5.0 -6.2

Source: ARE, mBank spread Polish index PLN/GJ ARA 1Y PLN/GJ
Source: ARP, Bloomberg, mBank

Polish Coal Market

The expected slump in coal fired power is going to reduce Base-Case Scenario for Polish Power Prices
steam coal demand in the Polish power sector by 60% in the Polish power prices, after skyrocketing in 2022 amid the
next 10 years. The loss of demand would be even more severe European energy crisis, logged a huge drop the following year,
were it not for the planned decommissioning of the Bełchatów this year they have stabilized below PLN 500/MWh.
power station in 2030-35, which could provide a temporary
boost to the remaining coal power plants. Apart from a downward trend in prices of natural gas, coal, and
emissions, the downturn in power prices was exacerbated by
The coal industry is in for a dramatic change – at the beginning changes in the merit order. Capacity use by old coal units
of the next decade, Polish power plants will need only 10-11 collapsed due to lower demand, higher net imports, and fast-
million tonnes of coal a year (compared to 30mmt in 2023), growing renewable capacity. While demand going forward is
of which 60% can be provided by the LW Bogdanka mine expected to reverse (we have already seen a rebound here),
(financial/logistical criteria). Such a scenario implies a much imports and RES growth will keep affecting Polish power prices
steeper curve of coal phase-out than assumed in the Polish in our view.
government’s 2023 outlook, which predicts coal demand will
amount to 21 mmt in 2030 and 13.8 mmt in 2035. Of course, we The factors behind the rise in net imports include EU
can imagine some deviations here depending on the timing of regulations (gradual rise of commercial availability of inter-
new capacity commissioning (incl. offshore wind) and the load connector capacity) and market arbitrage opportunities (YTD
factors of CCGTs, but the variations should not exceed PL/DE forward spread exceeds PLN 90/MWh).
+/-2 mmt.
It is worth noting that, since June 2022, Poland has had had
Coal based power production (TWh) vs. steam coal only three months of net power exports, and that 2024 YTD
consumption (mmt) in the Polish energy sector imports are up more than 12%.
90 40 The arbitrage window on the spot market is even more
80 35 appealing with the growing number of hours of negative
70 power pricing on the German market.
30
60 Polish 1Y BASE forward prices and weighted average
25
50 implied price hedged for year t+1 (PLN/MWh)
20
40 2,600
15
30
10 2,100
20
10 5
1,600
0 0
1,100

600
coal consumption coal plants generation (lhs)
Source: ARE, mBank 100
Jan-21

Nov-21

Jan-24
Mar-21

Jan-22
Mar-22

Jul-22
Sep-22
Nov-22

Mar-24
Jan-23
Mar-23

Sep-23
Nov-23
May-21
Jul-21
Sep-21

May-23
Jul-23

May-24
May-22

Local coal market oversupply, together with global market

price trends, resulted in a significant drop in domestic coal
deliveries in 2024 (-30% year over year). This pushes the Polish 1Y FWD yearly average
coal industry deeply into negative cash flows, but, in the Source: Bloomberg, mBank
medium term, the industry should survive thanks to state
support. In the long run, more severe restructuring will be
needed.

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As far as the booming renewable energy generation is Moreover, due to Poland’s latest balancing market reform (15-
concerned, its pricing impact pushes more expensive units out minute slots instead on 1-hour, more competition on the
of the merit order, and depresses hourly prices during balancing market and in ancillary services, more
generation peaks with energy oversupply. responsibilities on producers), spot price sensitivity to
oversupply and undersupply has increased.
Measures like PV production curtailment have intensified
recently, as illustrated in the following charts. During sunny The main objective of the reform was to move away from a
days with structural lower consumption (holidays, weekends), regulated/negotiated approach to market-driven pricing on
solar power supply has been driving hourly prices down, even the balancing market in order to better price hours with some
pushing them into the negative territory (in May, we had days tightness. As a result, in recent 2 weeks evening peak prices
with 5-7 hours of negative prices). As a result, BASE prices (24- on the spot market spiked above PLN 1,000/MWh and spreads
hour average) on such days are as much as PLN 150-200/MWh between offpeak/peak and solar production peak/BASE
lower than the monthly average. We can expect more such jumped.
“depressed” days during the summer, affecting not only spot
market sentiment but forward contracts as well, especially Base prices are also higher than before the reform (June 14-
taking into consideration the RES capacity rollout outlook. 25 average at PLN ~470/MWh vs 2 weeks preceding reform
kick-off at PLN ~450/MWh. We expect the situation to
Polish BASE spot prices (PLN/MWh) vs. RES generation normalize slightly in the coming weeks, but spreads are likely
curtailment (GWh) and… to remain elevated vs. pre-reform levels. Such an outcome is
40 700 positive for conventional units, energy storage facilities, and
Tysiące

wind farms, and negative for PVs and traders (balancing

35 600 exposure may be more costly).
30
500 Our power price forecasting model for Poland as usual uses
25 expected marginal coal power plant variable costs based on
400
expected coal prices (ARA quotes plus logistics premium, with
20
300 some additional adjustments in the short term) and our
15 predictions as to emissions prices (a gradual rise to €100/t until
200 2030).
10

5 100 This approach has led us to expect a downward trend in

power prices, with long-term levels below PLN 400/MWh. At
0 0 this level, the expected prices still imply positive profit margins
for CCGTs, but at the same time they spell negative CDS for
old coal power plants which are supposed to serve as
RES curtailment BASE spot marginal units in the Polish merit order in the coming years.

… number of hours with negative prices Therefore, in our opinion, Polish government/TSO will have to
8 set up a mechanism that will offer extra remuneration for
7 keeping such units “alive.” It will not be easy, but current talks
6 on capacity market extension until 2028 for more emission-
5 intensive units suggest that such support is doable in case of
4 emergency in the power system.
3
Accordingly, we add compensation for such “ancillary
2 services,” set to make up for negative CDS as of 2028, to our
1 EBITDA forecasts for the conventional power plants of Enea,
0 PGE, and Tauron.
After updating our projections for EUA prices, we have raised
our 2024-2028 power price forecasts for Poland by 7% on
Source: Bloomberg, PSE, mBank average.

TGE power price forecast and implied forward CDS/CSS margins (PLN/MWh)
2021 2022 2023* 2024E 2025E 2026E 2027E 2028E 2029E 2030E

PL steam coal (PLN/t) 248 425 704 500 400 336 336 285 234 234

ARA steam coal (PLN/t)** 316 862 468 306 303 303 253 202 202 202

premium/discount (+/-) -68 -437 236 194 97 32 83 83 32 32

PL power price (PLN/MWh) 233 385 1110 638 496 467 451 408 380 378

coal cost (PLN/MWh)*** 111 190 315 224 179 150 150 127 105 105

CO2 cost (PLN/MWh)*** 107 237 374 388 284 301 316 331 348 365

CDS (PLN/MWh)*** 15 -42 421 26 33 15 -15 -51 -72 -91

CSS (PLN/MWh) 111 -106 -124 168 158 123 101 90 95 86

coal power plants prod. (TWh) 86 81 68 61 63 56 43 29 24 26

load factor 41% 41% 36% 33% 34% 31% 26% 20% 19% 21%
*2023 margins were distorted by the price cap mechanism
**ARA prices adjusted for the calorific value
***coal unit spread calculated on 37% effectiveness ratio assumption
Source: Bloomberg, mBank

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Capacity Market Available capacity gap projection to PSE (MW)

12,000
The capacity market auction held in 2023 for delivery in 2028
10,000
closed at PLN 245,000/MW, significantly below the previous
auction, and it was dominated by energy storage projects (1.7 8,000
GW), DSRs (1 GW), and existing/modernized units (1.1 GW in
hydro plants, 1 GW biomass co-combustion, 0.9 GW gas units, 6,000
0.2 GW in biomass units).
4,000
Altogether, including foreign capacity on inter-connectors (1.1
GW), Poland’s TSO contracted 7.1 GW or 2028, however, nore 2,000
that no new conventional plant projects were able to win a
contract. 0

Capacity market auction pricing (PLNk/MW/year)

450
Source: PSE
400
Capacity market payments are an important revenue
350
stream for the power utilities, totaling PLN 5.3bn in 2023 and
300 PLN 6.1bn expected in 2024 (~7% of total revenues from
250 generation).
200 The increase in capacity revenues expected in 2024-25, aside
150 from more capacity contracted, is attributed to extraordinary
100
CPI indexation.

50 As a reminder, as of 2026 emission-intensive power plants

0
will be excluded from the state support mechanism (apart
from already-booked 5- and 15-years contracts), which will
affect Tauron’s top line the most (causing capacity market
revenues to fall from PLN 0.9bn to 0.4bn).
main auction supplementary auction
Source: PSE, mBank In case of PGE, a more significant drop is expected in 2029
(from current PLN 2.6bn to PLN 1.7bn).
The capacity auction for 2029 is not likely to be much Enea will also suffer from coal power plant exclusion in 2026
different as the initial capacity demand set by the TSO will be (revenues down from PLN 1bn to PLN 0.76bn), but this will be
comparable (5.4 GW vs 5.8GW assumed for 2028. The final partly offset by capacity contracts secured for biomass co-
volume approved by TSO was higher at 7.1GW due to the combustion units in Połaniec (1 GW in 2026-28 auctions).
operator’s “optimization” algorithm). At the same time, we can
expect slightly less competition as drafted maximum access At this stage, we do not include any additional revenues in
for inter-connectors is lower (by 0.7 GW) and the capacity the event of from extension of state support in our 2026-28
correction factor for energy storage units will probably be revenue forecasts.
reduced to 58% from 95%.
Capacity market revenues by company in PLN m
An interesting question is how Poland and PSE (the TSO) 3500
want to cover the expected gap in capacities in 2030s when
3000
the capacity market stops offering investment incentives for
new dispatchable units. According to the TSO’s latest 2500
estimates, the gap in available capacities in the Polish system
will exceed 6 GW in 2031, and it may double in the next 5 years 2000
(with LoLE increasing from 24 in 2025 to as much as 3,000 at 1500
the end of the 2030s).
1000
There are plans in Poland to develop new gas and nuclear
power stations, but the schedule is not fully determined yet. 500
Currently, the main focus is on extending the capacity market 0
for old coal units until 2028 in order to keep them operational
after 2025 (550g CO2/kWh emission factor limit). It seems that
Poland may reach an agreement with the European ENA PGE TPE
Commission on that, but under some conditions (capacity Source: companies, mBank estimates
demand audit, only 1-year contracts).
Poland may also try to keep a “coal power plant reserve” but
the potential here is also limited by emissions caps (max
350kg/kW/year=> available load factor at only 200h/year).

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Capacity Investment – A Case Study Reported capex on offshore wind projects vs. Polenergia
an Orlen’s wind farm projects
Offshore Wind Project Investors
Capacity Capex EUR/
MW EURm MW
There are currently 5.9 GW in offshore wind projects under St. Brieuc Iberdrola 496 2,400 4.84
development in Poland with already approved CfDs in the first
auction. On top of that, we also have 2.6GW in initial Baltic Eagle Iberdrola 476 1,300 2.73
development phases (the “Batłyk I” of Polenergia with Equinor, Vineyard Iberdrola 806 3,670 4.55
and PGE’s “Baltica 1”).
Windanker Iberdrola 309 800 2.59
In the table below, we present a potential commissioning
schedule based on publicly available information and East Anglia 3 Iberdrola 1,396 4,706 3.37
statements from the project owners. Gode Wind Orsted 253 1,200 4.74
The most advanced project is the “Baltic Power” Borkum Riff. Orsted 913 3,000 3.29
(Orlen/Northland), which should be finished by the end of 2026
(at least according to the official deadline). The project has Hornsea 3 Orsted 2,852 9,771 3.43
secured financing and most of the capex money. Dogger Bank A Equinor/SSE 1,200 3,765 3.14
Polenergia/Equionor’s first two farms (Bałtyks I and II) are also Seagreen Total/SSE 1,075 3,529 3.28
quite advanced in terms of capex contracting, and the
financing agreement should be closed this year. Sofia RWE 1,400 3,529 2.52

According to schedule, PGE/Orsted’s 1500 MW “Baltica 2” Noirmoutier Ocean Winds 496 2,500 5.04
project should be commissioned in 2027/28 as it has received Treport Ocean Winds 496 2,000 4.03
FID and most of the work is contracted, however, talks
regarding financing seem to be less advanced. average 3.66

Expected schedule of Polish offshore wind projects Bałtyk II/III Polenergia/Equinor 1,440 5,581 3.88
Expected
Project Investor Capacity MW Baltic Power Orlen/Northland 1,200 4,730 3.94
startup
Source: companies, mBank estimates
Baltic Power Orlen/Northland 1,200 2027

Bałtyk II/III Polenergia/Equinor 1,440 2027/28 As a reminder, Phase 1 offshore wind projects in Poland
benefit from a relatively attractive CfD mechanism with an
Baltica 2 PGE/Orsted 1,500 2027/28 initial price of PLN 319.6/MWh linked to CPI (as of 2021), which
B-Wind Ocean Winds 400 2027/28
implies pricing in 2027/28 close to PLN 500/MWh. Moreover,
this price can be converted to EUR, which enables investors to
Baltica 3 PGE/Orsted 1,255 2030 take advantage of low cost euro financing.
FEW Baltic-2 RWE 350 2030 According to our calculations, domestic Phase 1 wind projects
Bałtyk I Polenergia/Equinor 1,560 2030+
could prove highly profitable with IRR close to 8.7% at a
370b.p. spread to WACC (well above Orsted’s recently
Baltica 1 PGE 1,000 2030+ announced IRR target with 150-300b.p. premium to WACC).
Source: companies, mBank estimates That means that the NPV of a 1GW project could exceed
PLN 2bn.
Orlen has already signed financing agreement for “Baltica
Our assumptions for the above calculations are as follows:
Power,” and its capex guidance implies a total unit cost of
€4m/MW. Similar guidance has been provided by Polenergia, ▪ Unit capex at €4m/MW.
and it seems reasonable to compare these expenditures to the
average unit capex reported in offshore projects that are ▪ Unit fixed opex at €80k/MW (based on BVGA benchmarks
currently under construction (or were commissioned recently). and best in class estimates from Peak Wind). That may
seem a little too optimistic, but 1) prices are adjusted for CPI
The average capex per MW in the projects listed below as of 2021; and 2) opex, according to empirical analysis,
amounts €3.66m, however, most of these wind farms have should be decreasing with lifetime, whereas we keep it flat.
been developed on more mature offshore markets like the
UK, Denmark, and Germany, which leads us to expect that the ▪ On top of fixed opex, we add PLN 15/MWh profile costs.
first projects in Poland will end up at the upper end of the ▪ WACC at 5.0% (Beta 0.9; Eurobond RFR at 2.5%; credit
capex range. margin at 2.5%, LTV=75%; ERP at 6%).
It is worth noting that, in 2022-23, contrary to an earlier multi- ▪ Capacity factor at 46% and unit realized price in line with
year deflation trend, we noticed an upward trend in awarded CfDs index linked to inflation.
investment costs globally due to a general inflationary
environment combined with logistics/components ▪ Decommissioning capex after a 25-year-long lifecycle is
bottlenecks (inc. low availability of offshore construction assumed at €0.4m/MW.
vessels and service providers).
As far as projects that are to be realized under Phase 2 and
other of the Polish Wind Offshore Program, the main
parameters are still to be specified. The next auction is
scheduled for 2025, and its maximum is expected to be set
and published soon.
We expect that the level of state support for wind power may
be less favorable this time that was offered for Phase 1 projects,
however, the government seems determined to develop
offshore capacities and will try to attract investors.

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It is not clear yet what the size of project supply be in the 2025 Unit capex on Polish projects under construction is now close
auction. New licenses granted to Orlen and PGE last year will to PLN 10m or €2.3m/MW. This is significantly above the
probably not yet be fully ready to participate, at least not with German benchmark, which can be partly explained by that
all potential capacities (5.5GW and 3.9GW, respectively). market’s maturity (grid connection/ procedures/ supply
chains), regulatory constraints on the domestic market (the
Onshore Wind distance rule bans higher towers and more effective turbines),
Onshore wind capacity installed in Poland at the end of 2023 and, partly, by project acquisition costs.
amounted to 9.4 GW. Including projects under construction, As you can see in the table above, there are also fairly large
it may grow above 10 GW this year and reach 20 GW in the differences in capex between the individual projects, which can
next ten years, assuming the ‘distance rule’ is relaxed and be attributed to acquisition costs, grid connection length, a
other regulatory/administration obstacles ease (local rise in costs of construction services, and – again – the turbine
legislation as well as EU directives). technology applied (the bigger the turbine capacity, the lower
Our base case scenario is broadly in line with sector estimates. the cost per MW).
According to calculations by the Polish Onshore Wind Of course, one can expect some economies of scale depending
Association (PSEW), the easing of the distance rule to 500 on the size of a wind farm due to a dilution of the costs of
meters should release potential for up to 31 GW new onshore associated infrastructure (grid connection point, connection to
wind capacity (making 41.4 GW in total including existing the grid etc.).
farms), whereas a recent IEO report suggested that the
technical potential of new onshore wind farms in Poland The adjusted installed costs benchmark for Poland would be
amounts to ~17GW (o/w ~6GW economically viable on current currently closer to PLN 8m/MW.
terms).
Onshore wind profile cost development in 2023/24
Onshore wind capacity in Poland – mBank estimates (GW) 12
20 10
Tysiące

18
8
16
6
14
4
12
2
10 19.1 20.1
17.1 18.1 0
8 16.1
14.6
6 13.1 -2
11.1 11.6
4 8.2 9.4 10.6 -4
2 -6
0 -8

2023 2024
Source: ARE, mBank Source: mBank

As far as the size of investment is concerned, the global capex Average O&M pricing in Europe ranges between €30 and
benchmark (installed costs) provided by IRENA stays at 40/kW/year, but in Poland the fixed costs of a wind farm
€1.2m/MW (after falling from €1.7m/MW 10 years ago), seem higher. The implied cash operating cost per 1 MW of
however, it is diluted by the Chinese market (where turbine installed onshore wind capacity at Polenergia and Energa is
costs are only 25% of what they are in Europe). between PLN 180-250 or €40-60 /kW/year.
The benchmark for Germany (a better reference for CEE) is That said, these are the total costs of doing business for the
currently close to €1.8-1.9m per MW, which suggests an relevant divisions (incl. general operating costs, costs of new
increase vs. 2021 lows. project development, etc.), and the specific costs of wind farm
A decline in technology costs in the medium term is still the maintenance are probably somewhat lower and closer to €35-
base case (bigger turbine capacity and rotor diameter, higher 45/kW per year. Variable costs are mainly linked to profile
competition), however, lately there has been upward pressure prices (unit realized revenue vs daily base benchmark), which
on costs in Europe (producer issues, war in Ukraine, supply currently are quite low for wind installations due to high
chain disruptions, growing costs of raw materials). premiums during evening peak hours.
Current onshore wind LCOE in Germany is estimated at €50-
Reported capex on ongoing onshore wind projects in
60/MWh vs €70/MWh 5 years ago. These costs are sensitive to
Poland
the interest rates, and the recent rise in yields has not been too
Capex
favorable.
Project Investor MW PLN m PLN m /MW
In Poland, we estimate that LCOE may be close to PLN 370 or
Człuchów PAK 73 725 10.0
€85/MWh (at WACC of 6.8%). However, this estimate is based
Mierzyn Tauron 59 500 8.5 on an PLN 8m/MW capex benchmark, and for the capex
Potęgowo PAK 51 600 11.9 reported on the ongoing projects listed earlier LCOE would be
closer to PLN 450/MWh.
Przyrów PAK 42 342 8.1
Szybowice Orlen 37 408 10.9
Gamów Tauron 33 350 10.6
Warblewo Tauron 30 345 11.5
Nowa Brzeźnica Tauron 20 240 12.2
Kazimierz Biskupi PAK 18 150 8.6
Dobra PAK 8 75 9.6
Source: companies, mBank

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Onshore wind project IRR sensitivity to capex and prices Reported Capex of ongoing PV projects
price PLN/MWh Capex
11.3% 350 400 450 500 550 Project Investor MW PLN m PLN m/MW
CAPEX PLNm/MW

7.5 6.6% 9.7% 12.7% 15.8% 18.9% Przykona PAK 190 500 2.6
8.0 5.5% 8.4% 11.3% 14.1% 17.0% Postomino Tauron 90 275 3.1

8.5 4.6% 7.3% 10.0% 12.7% 15.4% Wielbark/Gryf Energa 75 250 3.3

9.0 3.7% 6.3% 8.8% 11.4% 13.9% Brudzew PAK 70 164 2.3
Mitra Energa 65 186 2.9
9.5 2.9% 5.4% 7.8% 10.2% 12.6%
Source: mBank Proszówek Tauron 55 200 3.6
Mysłowice Tauron 37 165 4.5
Solar Projects
Lewałd Wielki Onde 32 85 2.7
Installed solar capacity in Poland amounted to 17 GW at the Czernichowo Energa 4 12 2.9
end of last year. Including projects under construction, it Source: The companies, mBank
may reach ~20 GW this year and 30 GW in the next ten years.
We expect that utility scale projects will account for the Average O&M pricing is in the range of PLN 30-40k per MW
majority of this increase, followed by investment by annually, with negligible effects on NPV.
commercial prosumers. Apart from projects already underway, The more important component are profile costs, which
we expect a new wave of investments driven mainly by cable have been on the rise in recent years due to ‘overproduction’
pooling with existing onshore wind farms. during peak sunlight hours. According to our calculations, the
Solar module price index (USD/Wp) volume-weighted profile costs in 2023 were PLN -30/MWh, i.e.,
6% of baseload average. This year, this costs might be higher –
0.60
looking at YTD prints, we estimate them at PLN -55/MWh, i.e.,
0.50 15% of baseload average. That would imply a net revenue
after balancing costs of PLN 300/MWh on average.
0.40
Change in PV unit profile costs between 2023 and 2024
0.30 (PLN/MWh)
0.20 100

0.10 50

0.00 0

-50
Source: pvxchange
-100
As far the size of investment is concerned, the global capex
-150
benchmark (installed costs) provided by IRENA stood at
€0.8m/MW in 2022 (vs €2.2m/MW 10 years ago), however, it
-200
was diluted by Chinese market.
The benchmark for Germany (a better reference for CEE) was
2023 2024
close to €0.9m per MW. Supply chain disruptions in 2022
Source: mBank
affected the capex benchmark, however, today the costs are
falling quite rapidly due to solar module price deflation. The The current LCOE of a model solar farm in Poland can be
benchmark price for solar modules fell 50% in the last 12 estimated at PLN 320-330/MWh, which is close to last year’s
months, and modules account for ~45% of total installed costs. average auction bidding price of PLN 317/MWh (keep in mind,
Therefore, we can expect that the current capex benchmark however, that the auction price is CfD settled to the BASE
for PV utility scale projects in CEE is closer to €0.7m/MW. benchmark and should be adjusted for profile costs).
Unit capex reported for the Polish PV projects under IRR calculated based on current spot power prices
construction listed in the following table is currently close to (PLN ~360/MWh) is therefore fairly satisfactory (10%), and the
PLN 3.1m or €0.73m/MW, a similar level to the regional same is true for 1Y forward contract levels (PLN 480/MWh).
benchmarks.
However, securing financing for projects in a full merchant
As a reminder, these expenses include project acquisition costs model could prove challenging given current uncertainty in
which, depending on the status (connection to the grid, ready- Polish power market as regards prices and profile costs. In the
to-build, auction won contract), range between €0.10-0.18/MW. past, with forward pricing close to PLN 500/MWh, investors
Based on this, we can calculate that just construction costs were able to sign PPA contracts with end clients in the range
are currently closer to PLN 2.4m/MW (+/- 15% depending on of PLN 400-450/MWh, but such prices are much harder to
grid connection costs and project scale). achieve nowadays due to the rising awareness of the clients,
more intense competition, and downward-trending power
prices.
In case of PV projects currently underway (as listed in
earlier), with development margins paid to third parties and
total capex at PLN 3.1m/MW, the actual LCOE are significantly
higher than the theoretical benchmark at an estimated
PLN ~400/MWh.

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PV project IRR sensitivity to capex and prices It is also worth discussing the profitability of existing PV
Price (PLN/MWh) projects, which deteriorated significantly due to high profile
costs, and which lately has come under additional pressure
9.4% 350 400 450 500 550
from Poland’s balancing market reform. Keeping margins has
2.0 13.1% 16.5% 19.8% 23.1% 26.3% become a challenge, especially for projects with CfDs
(PLN m/MW)

2.2 11.1% 14.2% 17.3% 20.3% 23.3% contracted in auctions (CfD is settled vs BASE) and PPAs
CAPEX

without “pay as produced” formula.

2.4 9.4% 12.3% 15.2% 18.0% 20.7%
As illustrated by the chart above, projects wining auctions in
2.6 8.0% 10.7% 13.4% 16.0% 18.5%
2016-20 almost fully hedged their production (>1000MWh per
2.8 6.7% 9.3% 11.8% 14.2% 16.6% MW per year) at PLN 300-350/MWh. That means that, today,
Source: mBank their current net revenue may drop below PLN 100 per MWh.

Note that the calculations above are based on the assumption Solar PV plants may underdeliver on their supply
of undisturbed solar generation, shaped only by weather commitments. However, RES installations are required to
conditions (annualized load factor at 12%). Meanwhile, Poland deliver no less than 85% of power volumes declared at their
lately has been increasing the frequency of redispatch of PV winning auctions. Otherwise, they may be fined at 50% of the
generation (production curtailment). In just the weeks auction price times the volume shortfall. We can imagine that,
between March 1 and May 31, we saw close to 30 redispatch under certain circumstances, paying the fine will prove the
measures per day, resulting in generation reduction during more cost effective option.
peak sun hours as high as 3-4 GW (mainly on
On the downside, a failure by renewable power plants to deliver
weekends/holidays, but not only).
on their commitments, if it breaks through to the public,
Producers receive compensation for this in line with could ruin investor sentiment. The installations most exposed
European laws, however, we can imagine more challenges to that risk are those that secured CfDs at auctions through
arising in the future, including redispatching driven by 2020, i.e., ~3 GW.
negative prices. Monthly generation curtailment in April and
During later auctions, more production, especially in the initial
May amounted to 124 GWh and 222 GWh, respectively, which
years, was redirected to the market and PPAs, as they were
means that PV generation was cut by ~7-8% (the curtailment
much more attractive.
ratio for big PV systems was even higher as small units are not
subject to redispatching measures). M&As in Solar and Onshore Wind
Non-market redispatch of PV units by Polish TSO between Activity in the Polish renewable M&A market has been high,
March and May 2024 (production curtailment in GWh) resulting in numerous deals in existing assets and ready-to-
40
build projects, with domestic and global entities alike acting as
Tysiące

35 the buyers. The following table lists transactions finalized in the

30 last two years, including public pricing details.
25 For purely solar projects, acquisition prices in the last two
20 years have averaged PLN 3.9m/MWp. Recently, however, we
have seen pressure on solar valuations stemming from a
15 decline in the prices of PV modules combined with concerns
10 over profile costs. One recent example is Grenevia booking PV
5 asset impairment. The current M&A price benchmark for
existing PV assets is probably closer to PLN 3.5m/MW.
0
Downward price pressure is also felt when it comes to projects
at RTB stage, with the current market benchmark at
€150-180k or PLN 650-800k per MW compared to an earlier
Source: mBank, PSE market standard of more than €200k/MW.

If PV generation were to be “voluntarily" scaled down by Selected Renewables M&A transactions (PV, wind, hybrid)
20%, the LCOE per MWh of new-build solar PV projects on the Polish market in 2022-24*
wind price PLN/
would rise to PLN 380 (from the current model PLN 320-330), Buyer Seller PV MW
MW PLNm MW
or PLN 480 for “more expensive” projects with unit capex at Engie Columbus 103 499 4.9
PLN 3.1m/MW.
SINO-CEEF Alternus 89 234 2.6
KGHM Grenevia 50 210 4.2
Volumes declared by small PV projects at particular
Enea PV Genowefa 35 164 4.7
auctions (MWh per MW/year)*
Engie Onde 18 75 4.2
Enea Prow-Wind 12 35 2.9
Iberdrola GreenVolt 48 50 727 7.4
Energa Greenvolt 33 26 460 7.8
Ingka OX2 29 63 891 9.7
Energa Lewandpol 315 19 1,927 5.8
Energa Onde 37 407 10.9
Orlen EDP Res. 142 2,215 15.6
Orlen Octopus Res. 60 713 11.9
PGE Ser WindPark 25 338 13.6
PGE Collfield 84 756 9.0
Enea OX2 20 247 12.5
*Benchmark PV production in Poland is slightly above 1000 MWh/MW/year=> *listed projects pricing per MW may be distorted by particular deals specifics (e.g.,
declared volume at this level suggests ~100% PV project production hedged development pipeline included)
Source: IEO Source: market data, companies’ reports

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As far as pure wind projects are concerned, the implied unit In previous auctions, most investors limited their offers
price in the deals listed above amounted to PLN 12m/MW, anyway to 60-70% due to assumed capacity retention
with upward deviation in newer projects with cable pooling curve, but an imposed reduction may destroy the business
potential. Still, transactions like the Orlen/EDP one look like real case as capacity market revenues account for ~50% of BESS
outliers, especially taking into account the current capex revenues.
benchmark at PLN 8m/MW and the market benchmark for
RTB wind projects at €350k/MW (PLN 1.5m/MW). Given that, it is also important to note that, after 15(17) years
of revenues secured in the main auction, we assume no
The situation with wind farm projects is slightly different than more capacity revenues, and no regular payments (there
with PV due to an undersupply of new wind capacity and may be additional auctions for one year’s supply, but at
high bidder interest (limited pipelines due to uncertain lower pricing).
regulatory framework, a very attractive cable pooling
component). ▪ Ancillary services: it is expected that additional services
will be implemented on Polish market by the TSO,
Battery Storage Facilities including frequency management services, however, for
now their visibility is limited.
The current BESS (battery energy storage systems) capacity
in Poland is estimated at 160 MW, but in capacity auctions for Another important question for a BESS business case is about
2027/28 an extra ~1.9GW has been contracted – we expect this the size of potential arbitrage revenues based on the price
will exceed 3 GW in ten years’ time. For now, the business case spreads between particular hours during the day. The
for BESS projects is complicated and profitability may depend following table presents the implied spreads between
on regulatory framework development and, of course, on morning and evening peak hours and offpeak hours assuming
the deflation curve of capex per kWh. the battery has a 4-hour charging/discharging period. The
calculations show growing noon-evening spreads, which is
BNEF expects that the average battery price this year may
linked to Poland’s growing PV capacity – an opportunity that
drop to $133/kWh from last year‘s $139/kWh. Technical
BESS projects can definitely capture.
innovation and manufacturing improvements could drive this
benchmark lower to $113/kWh in 2025 and $80/kWh in 2030 Night/morning arbitrage seems to be less attractive, and it is
(CAGR -7.6%). not clear whether batteries in Poland may be able to capture
two charging/discharging cycles every day (on the other hand,
Goldman Sachs predictions suggest an even steeper curve,
more cycles affect the battery degradation curve).
with average annual falls of 11% until 2030. This may be driven
by potential battery manufacturing capacity oversupply with Yearly average spreads between peak/offpeak hours*
declared investment into factories exceeding 4x the expected 2024
PLN/MWh 2021 2022 2023
demand in 2025. YTD
hours 02:00-05:00 320 650 459 314
Current cots of battery energy storage in Poland can be
hours 08:00-11:00 422 786 521 362
estimated at $200/kWh and that is our base assumption for
the following IRR calculations. On top of this, we should include hours 12:00-15:00 420 680 474 309
design construction and grid connection costs, ending up with hours 18:00-21:00 468 1034 600 432
a total project capex of PLN ~1m/MWh.
Volume-weighted average lithium-ion battery pack and cell night/morning spread 77 89 31 26
price split 2013-23 (USD/kWh) noon/evening spread 20 293 90 97
800 *6% energy losses on charging/discharging process
Source: mBank
700
600 According to our calculations, a BESS project can be
500 profitable, with IRR close to 8%, but only assuming the fixed
distribution fees are cut.
400
Our model assumptions are as follows:
300
200 ▪ Unit capex at PLN 1m/MWh.
100 ▪ Unit opex at PLN 108k/MW (no distribution fixed fee).
0
▪ WACC at 7.6% (Beta 0.9; RFR at 5.5%; credit margin at 2.5%,
LTV=75%).
cell pack
▪ Arbitrage spreads at 2023-24 average level.
Source: BNEF
▪ Capacity correction factor within capacity market at 60%
As far as regulatory framework, the main obstacles/challenges and capacity market revenues at 2028 auction pricing
are as follows: (PLN ~245k/MW/year).
▪ Fixed distribution fee: Currently each storage facility, as a ▪ Property tax at 2% of the battery value.
standard commercial connecting point, is obliged to pay
fixed distribution fees at PLN 13k/MW per month, which is ▪ Annual battery degradation factor during life cycle
a huge burden on the OPEX side. The market speculates assumed at ~3% (from 100% in the first year to 50% after 25
that, in order to stimulate BESS investment, this fee should years).
be scrapped.
▪ Capacity correction factor: BESS projects so far have been
able to participate in main capacity market auctions up to
95% of nameplate capacity, but draft terms of the latest
2029 auction regulations published by the Climate Ministry
have a lower correction factor of just 57%.

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Price spreads between spot BASE and max/min hourly price Q1’24 EBITDA of Conventional Generation segments vs.
(PLN/MWh) Q1’23 results and mBank estimates (PLN m*)
1000 1Q'23 1Q'24 y/y 1Q'24E diff.
900 CEZ 23,068 26,980 +17% 19,291 +40%
800
ENA 490 930 +90% 992 -6%
700
600 PGE 909 -520 - 34 -
500 TPE 458 292 -36% 311 -6%
400 *CZK m for CEZ
300 Source: companies, mBank
200
100 A deep dive into the Q1’24 results of the conventional power
0 plants of Polish state owned utilities revealed a number of
interesting findings (summarized in the following table).
At Enea, the Q1’23 realized price was close to 2024Y the fwd
max-BASE BASE-min contract benchmark, the costs to buy emissions allowances
Source: Bloomberg, mBank were slightly above market averages (more hedging in 2023),
and coal prices were significantly below the domestic ARP
benchmark but in line with prices reported by Enea’s
Upside risks:
subsidiary and main coal supplier, LW Bogdanka.
▪ Potential additional revenue streams (e.g., frequency
market). Moreover, Enea managed to book extra margin on trading
(sales were 1.8 TWh higher than production) as the company
▪ Battery capex deflation/ technology upgrades/lower had hedged higher volumes and realized profits on power
degradation rates. repurchase instead of generation (we estimate the impact on
▪ Further intraday peak-offpeak spread expansions due to Q1’24 EBITDA at PLN +200m).
energy mix change (further excessive PV capacity
Allowing for standard seasonality, we expect the Q1’24 trends
development) and the regulatory changes on the
to continue into the subsequent quarters.
balancing market discussed earlier (see the price spread
chart above) In case of PGE, the Q1’24 realized price was below the 2024Y
▪ Savings on less space (taxes/leases) with vertical fwd contract benchmark, probably due to late hedging in 2023,
construction technology. which meant the company missed the time to capture higher
prices. Forward prices in H1’23 were PLN 755/MWh whereas the
Downside risks: H2’23 average was PLN ~595/MWh (at prices similar to
▪ No removal of distribution fees. ENA/TPE, PGE’s revenue would be PLN 0.8bn higher).
▪ No capacity market revenues after main contract The cost to buy a tonne of EUA was more or less in line with the
expiration. 2023 market average (despite lower power prices captured),
▪ New regulatory challenges (e.g., distance rule, stricter fire and coal prices were significantly above the ARP benchmark
regulations). as PGE utilized expensive stocks accumulated during 2023.
▪ Pump-storage facility expansion (planned by the previous In the remaining quarters of 2024, realized prices will likely
government) and squeezed arbitrage spreads in the longer remain at similar levels as in Q1, and CO2 costs might decline
term. somewhat (to more adequate levels relative to realized prices).
The cost of coal will decrease significantly (at the ARP
Conventional Generation Outlook benchmark, Q1’24 EBITDA would gain PLN 300m).
Conventional generation in CEE remains under pressure, It is good remember that, when comparing PGE’s conventional
with hard coal and lignite plant load factors falling 11% year- generation EBITDA to those of its peers, we should add
over-year on average in Q1’24. Moreover, the sector was generation/trading intersegment transfers at PLN 0.25bn
affected by clean dark spread compression, but this was partly quarterly (commission captured by trading segment for power
offset by the reduction of household price caps. portfolio management).
Among rated utilities, the strongest year-over-year EBITDA All in all, we expect subsequent quarters to be significantly
growth in Q1’24 was delivered by the conventional power stronger in terms of EBITDA than Q1’24. PSE data for the last
plants of CEZ (thanks to the Q1’23 comparable figure being few weeks suggests that PGE’s lignite plant load factor has
weighed down by extremely high price caps, combined with rebounded, which should also boost profitability.
flat production from lignite and positive contribution from
trading) and Enea (strong profits from hedging and trading At Tauron, we see a Q1’24 realized price close to the 2024Y fwd
activity, relatively cheap coal procured by LWB, lower biomass contract benchmark, but CO2 unit costs were below market
prices). average even adjusted for fx gains reported by company of PLN
122m (maybe some cheaper stocks played a role). We may
On the other hand, PGE’s EBITDA was a disappointment expect some normalization here in subsequent quarters.
after the quarterly results were affected by lower volumes,
weaker revenues from ancillary services, and opex pressure. When it comes to coal unit price, similarly to PGE, it was
affected by high inventories accumulated at high prices. This
should be diluted by cheaper purchases as of 2H’24 but
probably this process will take much more time than at PGE
(lower production than expected and relatively higher stocks
means that PLN 500/t may be reached at the end of the year at
the earliest).
As a result, EBITDA in subsequent quarters should be close to
the Q1’24 adjusted figure (PLN ~0.2bn).

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1Q’24 Conventional Generation financials of ENA, PGE, and ENEA

TPE
▪ We expect lower EBITDA in 2024 due mainly to CDS
Enea PGE Tauron contraction (net power price cap payments) as a decrease
Production TWh 5.0 10.7 2.7 in generation volumes is expected to be offset by extra
o/w coal 4.4 3.1 2.7 trading margin (we expect PLN +0.5bn).
Sales TWh 6.7 10.7 3.1 ▪ Next year, despite expected flat CDS, we assume further
implied trading vol 1.8 0.0 0.3 EBITDA decline due to a lack of the extra margin on
repurchases.
Price realized PLN/MWh 661 588 666
TGE weighted 1Y fwd 663 663 663 ▪ We anticipate a fall in production in 2026 based on planned
0.9GW capacity decommissioning. EBITDA will be
diff -0% -11% +0% additionally affected by lower CDS and falling capacity
CO2 emissions mt 4.2 11.8 2.6 market payments.
CO2 costs PLN m 1,853 4,707 957 ▪ As a reminder, Enea’s generation segment includes
t/MWh 0.85 1.10 0.95 renewable energy (wind, PV, hydro, biomass). According to
our estimates, wind/PV/hydro EBITDA contribution in
PLN/t 440 400 369
2024-26 will amount PLN ~0.19bn. As far as biomass is
2023 avg PLN/t 406 406 406 concerned, we assume gross margin contribution at
diff +8% -2% -9% PLN 0.4bn in this period (EBITDA from biomass is hard to
separate out as these assets are integrated with coal power
Coal costs PLN m 877 990 897
plants).
Coal volume mt 1.871 1.387 1.24
Enea generation segment EBITDA outlook
t/MWh 0.42 0.45 0.46
2022 2023 2024E 2025E 2026E
PLN/t 469 714 723
Production TWh 26.2 21.3 20.2 20.3 17.6
PSCMI benchmark '24 496 496 496
coal 24.3 19.1 17.8 17.8 15.2
diff -6% +44% +46%
renewables 1.9 2.3 2.4 2.4 2.4
Source: companies, mBank estimates
Price PLN/MWh 436 937 620 500 474
2024-26 Earnings Prospects Coal price PLN/t 502 747 461 369 315
Implied CDS PLN/MWh -2 177 72 70 50
CEZ
Capacity market revenues 893 948 1,013 1,053 758
▪ 2024 EBITDA is expected to be slightly lower year-over-year
EBITDA PLNm 310 3,605 2,530 1,967 1,245
(despite a strong, 13% rebound in Q1’24) due to a lower
commodity trading contribution (2023 was extraordinarily per MWh 12 169 125 97 71
high), opex inflation, and lower revenue from ancillary Source: Enea, mBank estimates
services.
PGE
▪ We expect slightly higher realized prices (after 2023 price
▪ We expect lower 2024 reported EBITDA, driven by model
caps impact), but this has been offset by expected nuclear
CDS deterioration (incl. expensive coal inventories impact)
production.
and lower revenues from ancillary services (PLN -1.3bn),
▪ Next year, based on reported hedging positions and partly offset by higher capacity payments (PLN +0.36bn).
current market prints, we assume slightly lower power Profitability has also been affected by opex inflation,
prices and comparable generation volumes. As a result, including employee benefits (PLN +0.46bn year-over-year).
EBITDA may drop to €~3bn.
▪ Next year, we expect CDS to recover with the normalization
▪ Similar underlying factors shape our estimates for 2026. of coal procurement costs, which, together with higher
capacity payments and CCGT full year contribution, is
CEZ generation segment EBITDA outlook expected to drive EBITDA higher.
2022 2023 2024E 2025E 2026E
▪ In 2026, we are anticipating a decline in EBITDA due to
Production TWh 54.3 51.5 49.2 49.3 49.1 lower production (planned 0.5GW capacity closures and
nuclear 31.0 30.4 29.7 30.8 32.2 continuous lignite load factor decrease) coupled with lower
lignite 10.8 9.2 7.6 6.4 4.5 CDS, partly offset by higher capacity market payments.
natural gas 2.5 2.0 2.0 2.0 2.0 ▪ As a reminder, PGE’s Generation EBITDA is structurally
renewables 3.3 3.6 3.7 3.9 4.1 affected by internal commissions paid to the Trading
segment for management services (PLN 0.9bn estimated
Price EUR/MWh 100 126 129 112 97
in 2024). The adjusted EBITDA estimate is shown in the
EBITDA EURm 4,213 3,777 3,520 3,056 2,679 following table.
per MWh 78 73 72 62 55
Source: CEZ, mBank estimates

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PGE conventional generation segment EBITDA outlook TAURON

2022 2023 2024E 2025E 2026E
▪ We expect lower EBITDA in 2024 driven by model CDS
Production TWh 55.9 44.8 44.3 44.7 43.1 deterioration (incl. negative impact of expensive coal on
lignite 39.6 29.8 27.6 26.3 25.1 inventories), lower production, and lower trading
coal 16.3 15.1 14.6 14.1 13.2 contribution. As far as one-offs are concerned, 2023 EBITDA
gas 0.0 0.0 2.1 4.2 4.8 was boosted to the tune of PLN +0.3bn (fx gains on EUAs
Price PLN/MWh 518 857 598 490 464
and Jaworzno compensation, offset by Tameh loss), and
this year we also expect fx gains on EUA revaluation
Coal price PLN/t 808 999 600 450 386
(PLN 0.3bn) included in implied CDS calculation.
Implied CDS PLN/MWh* 83 243 74 103 69
Capacity market rev. 2,142 2,203 2,557 2,724 2,875 ▪ Next year, we expect CDS rebound due to coal
EBITDA PLNm 2,065 1,472 -558 844 -385
procurement costs normalization, which is expected to
drive EBITDA higher.
per MWh 37 33 -13 19 -9
EBITDA PLNm adj.** 1,767 3,515 371 1,733 443 ▪ In 2026, we are anticipating weaker EBITDA due to lower
production (planned 1.1GW capacity decommissioning)
per MWh 32 78 8 39 10
and lower capacity payments (PLN -0.5bn year-over-year).
*unit gross margin incl. coal, lignite and gas units
**adjusted for one-offs and internal commission paid to Trading segment EBITDA will be additionally affected by lower CDS.
Source: PGE, mBank estimates
Tauron conventional generation segment EBITDA outlook
▪ When it comes to PGE’s renewables segment, we expect 2022 2023 2024E 2025E 2026E
flat EBITDA growth year-over-year in 2024 (slightly lower Production TWh 14.3 11.2 10.1 10.1 7.6
pump/storage production and lower prices, but no price coal 14.0 11.0 9.9 9.9 7.4
cap burden). Next year’s results will be affected by lower Price PLN/MWh 449 757 664 533 505
pricing, however, this can be mitigated by new capacity,
Coal price PLN/t 675 755 650 400 336
similarly to 2026 outlook.
Implied CDS PLN/MWh -26 52 23 68 41
PGE renewables segment EBITDA outlook Capacity market rev. 646 692 863 883 384
2022 2023 2024E 2025E 2026E EBITDA PLNm -779 1,377 840 1,014 335
Production TWh 2.9 3.4 3.2 3.4 3.7
per MWh -54 123 83 100 44
hydro 1.3 1.6 1.3 1.3 1.3 Source: Tauron, mBank estimates
wind 1.6 1.8 1.8 1.8 1.9
PV 0.0 0.0 0.1 0.3 0.4 Coal Asset Carve-Out
Capacity MW 2,433 2,485 2,690 2,870 3,050 After the failure of the coal asset carve-out plan under the
hydro 1,638 1,638 1,638 1,638 1,638 previous government, listening to statements from newly
wind 772 797 802 832 862 appointed ministers from the new cabinet, for a time, the
PV 22 49 249 399 549 market lost its faith in any positive scenario for the Polish power
Realized price PLN/MWh 977 666 536 507 491 utility sector.
EBITDA PLNm 1,795 1,114 1,139 1,169 1,214 Today, however, the concept of a coal power plant carve-out
per MWh 616 324 356 339 331 seems to be back on the table, although the whole
Source: PGE, mBank estimates endeavor is starting from scratch with no official schedule
and framework as of yet.
▪ As far as PGE’s district heating segment, we expect EBITDA
to decrease in 2024, mainly due to lower co-generation Companies have been lobbying for a coal spin-off and have
support mechanism payments (PLN -0.3bn year-over-year) requested that the process be completed in 2025 at the latest,
and lower gross margin after fuel/CO2 costs. citing the deteriorating earnings outlook of coal power plants
and financing needs to fund the clean energy transition.
▪ In 2025, we expected some improvement due to a
normalization in coal procurement costs (high and However, the government have not committed to anything
expensive inventories in 2023) and full positive impact form concrete so far, although a special inter-ministerial team has
Czechnica CCGT project. been setup. Its tasks include analyzing the
conditions/scenarios for the separation of coal assets,
▪ In 2026, however, we expect EBITDA to fall again to cooperation with companies, identifying potential legislative
PLN 1.4bn, mainly due to power/heat pricing. changes/EC notification needs, and preparing
recommendations in the final report.
PGE district heating segment EBITDA outlook For now, we have limited process visibility, but as a base case
2022 2023 2024E 2025E 2026E we can assume that the coal assets of Polish power stations will
Power production TWh 7.4 8.5 8.9 9.3 9.3 be bought sometime/somehow by a state entity or entities.
Heat production TJ 49.5 47.2 47.7 48.2 48.2
The old “NABE” plan (NABE was the abbreviation for a
Power price PLN/MWh 416 766 610 490 464 National Energy Security Agency-to-be which was supposed to
Heat price PLN/GJ 58.1 94.7 98.3 90.4 88.1 buy up the coal assets of domestic utilities, but which in the
Capacity mkt./other support PLN m 442 802 391 408 352 end failed to be established) is a good proxy for this, so we will
Coal price PLN/t 449 637 650 440 369 recap its financial framework as agreed between the previous
Natgas price PLN/MWh 172 206 145 135 135 government and the power generators.
EBITDA PLN m 33 1,952 1,572 1,826 1,501 The following table shows the main components of the
per MWh 4 229 176 196 161 government’s financing proposal, announced in July 2023. The
Source: PGE, mBank estimates main idea was to take over spun-off coal-powered power plants
(including debt) using a locked-box mechanism as of
September 2022 and payments spread over eight years. The
proposal did not specify the method of valuation.

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Looking only at EV/EBITDA 2021 multiples (2022 was not mBank’s coal asset valuation for Enea, PGE, and Tauron
representative due to the energy crisis), along with the book PLN m Enea PGE Tauron
value of coal assets, Tauron seemed to be the relative winner of
LT provisions 0 6,360 0
the NABE plan.
[email protected] 3,561 3,466 1,528
After including existing EUA liabilities in EV calculations (in
EBITDA'25 1,781 1,733 764
which case total money provided to the sector would amount
to PLN 40bn, incl. reclamation provisions at PGE), the EV/EBITDA 2.0 2.0 2.0
valuations per MW of installed capacity as of 2022 were closer capacity MW (2026-30) 3,899 10,531 1,892
to each other at PLN 1.6-1.8m/MW. However, our impression PLN m per MW 0.9 0.3 0.8
was that government’s proposal was not aligned with the
profitability profile of the coal assets, or their CO2 liabilities'25 3,458 10,803 1,836
decommissioning schedule, which meant Enea’s power % annual CO2 costs 68% 69% 68%
plants would have been undervalued. EV+CO2+recl. prov. 7,019 20,630 3,364
2023 coal assets carve-out proposal adj EV/MW 1.8 2.0 1.8
(PLN m) Enea PGE Tauron *book value of reclamation provisions as of Dec’23
Source: mBank
Equity 3,111 849 0
Net debt 2,380 5,400 5,674 Our EV calculations, although PLN 8.7bn lower than proposed
LT provisions 0 3,959 0 by the government in 2023 (despite PLN +2.4bn higher book
value of reclamation provision at PGE), may still seem quite
EV 5,491 10,208 5,674
high, especially taking into account regulatory and market
EBITDA'21 1,526 3,387 1,113 challenges for coal assets. Nevertheless, given that the
EV/EBITDA 3.6 3.0 5.1 government’s main reason for acquiring these assets is to
address power market security, we should compare this
capacity MW (as of Dec’22) 5,721 12,852 4,171
figure to the available alternatives by substituting gas units
PLNm per MW 1.0 0.8 1.4 for coal units.
Book Value 5,498 13,124 5,390 Looking at the estimated Capex of CCGTs at PLN 3.8m/MW, a
EV as a % of BV 100% 78% 105% cost of PLN 1.8m/MW for power plants that can support the
CO2 liabilities (Sep'22) 3,818 12,713 1,775 Polish power supply system for at least ten years does not seem
too high.
% annual CO2 costs 68% 69% 57%
EV+CO2 liabilities 9,309 22,921 7,449 Gas units under construction (Capex per MW, PLN m)
project (startup date) capex capacity PLN m/MW
adj EV/MW 1.6 1.8 1.8
Source: companies, mBank
Gryfino (2024) 4,300 1,366 3.1
Rybnik (2027) 4,000 882 4.5
We do not know what valuation methodology will be used this
time, and what criteria or parameters are going to be crucial for Ostrołęka (2026) 2,850 745 3.8
the government, however, the latest statements on this Grudziądz (2026) 2,000 563 3.6
suggest a stricter approach and lower state budget capacity. Adamów (2027) 2,300 600 3.8
The following table shows our valuation of the coal assets of avg. capex 3.8
rated utilities, with the following assumptions built in: Source: PGE, Orlen, ZEPAK, mBank

▪ Initial EV valuation with 2.0x EV/EBITDA ratio based on our In our base case, we do not include a coal carve-out in our
2025 EBITDA estimate for conventional generation target price calculations for ENA/PGE/TPE as the process is still
(adjusted for RES assets in Enea, district heating in Tauron in very early stages. We keep these assets in the financial
and inter-segment management fees in PGE). models until their planned decommissioning (in line with TSO
▪ Implied valuation per MW capacity installed is calculated system balancing needs), while assuming they will receive
on expected average installed capacity in 2026-30, in order additional (hypothetical) state support to offset future negative
to reflect assets maturity and their decommissioning clean dark spreads.
schedule Nevertheless, getting rid of these assets earlier would create
▪ Adjusted EV value of coal assets includes reclamation extra value for shareholders (long term risk mitigating, ESG
provisions and net CO2 liabilities estimated as of Dec’2025 profile improvement => re-rating).
(assumed similar provisions/total CO2 costs ratio for all
companies). In the following table, we present our rough calculations of
extra value per share under a coal carve-out scenario and at
▪ Implied adj EV/MW ratio is close to PLN 1.8m/MW with post-carve-out EV/EBITDA ratio of 4.0x. Of course, this is a
slight positive bias to younger and more profitable units. simplified approach (no differentiation between post-carve-
out multiples despite slightly different EBITDA profile), but the
main conclusion is that Enea and PGE are the best plays on a
potential carve-out re-rating story. We also presented here
our official target prices and target prices based on DCF
models assuming hypothetical coal assets carve-out as of 2025
(compensation in line with our above calculations adjusted for
Enea’s coal mine divestment impact). As far as post-carve-out
EBITDA structure, we see that Enea and Tauron would be
distribution oriented companies, whereas PGE more
diversified group with quite significant exposure to renewables
(especially taking into account its offshore assets to be
commissioned in 2027).

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Potential impact of coal assets carve-out In the Czech Republic, the regulatory framework remains
PLN m Enea PGE Tauron stable with WACC fixed at 6.5% since 2021 (after dropping from
7.95% in previous regulatory period due to RFR change).
Carve-out impact* 3,227 3,466 1,528
Regulatory parameters, including approved RAB growth (net
Net debt post carve-out -1,368 5,611 13,072 capex plus approved assets revaluation trajectory), are in effect
Mcap 4,987 15,495 6,852 until 2025.
@ share price 9.42 6.91 3.91 RAB return by company (EBIT/RAB)*
Implied EV 3,619 21,106 19,925 14.0%
EBITDA 2025 ex. coal 2,873 10,668 5,742
12.0%
o/w district heating/CCGT 0% 23% 4%
renewables 6% 11% 12% 10.0%

distribution 87% 57% 70% 8.0%

trading 9% 8% 11%
6.0%
Implied EV/EBITDA 1.3 2.0 3.5
Price @ EV/EBITDA 4.0x 24.28 16.52 5.65 4.0%

upside potential 158% 139% 44% 2.0%

mBank DCF TP (base case) 18.16 8.84 4.27
0.0%
upside potential 93% 28% 9%
mBank DCF TP (carve-out)* 22.09 17.67 5.75
upside potential 135% 156% 47% CEZ ENA PGE TPE
*with remuneration approach presented in the table “mBank’s coal asset valuation
*CEZ excl. planned GasNet acquisition
for Enea, PGE, and Tauron” with additional LWB adjustment for Enea
Source: mBank
Source: mBank

Given the above, we EBITDA from distribution to grow

Distribution Segment Outlook steadily in coming years at expected CAGR’23-26 of 9%, with
the highest pace of growth anticipated of Enea and PGE. In
In Poland, the regulatory framework for power distribution case of Tauron, keep in mind the elevated 2023 baseline due to
improved significantly in recent years as the regulator’s aim is extraordinary accounting gains on balancing costs.
to support network development in order to face energy
transition challenges. Distribution EBITDA forecasts (PLN m)
6,000
The main positive changes implemented so far include:
▪ WACC: Instead of applying current RFR (36M avg) to the 5,000
WACC formula, the regulator decided to replace this
variable in 2023 tariffs with a long term RFR forecast (4.4%). 4,000
This approach was extended into the 2023-28 regulatory
period with potential to further extension until 2030. It 3,000
implies a fixed WACC at 7.48%.
2,000
▪ CAPEX: The regulator has approved elevated Capex plans.
which drives RAB higher. Previously, this was not so
obvious as higher capital expenses affect household 1,000
electricity bills. The combined capex of ENA/PGE/TPE in
2022 amounted to PLN 6.1bn, and in 2023 this figure 0
jumped to ca. PLN 9bn. In the next five years, the total
annual capex will average PLN 10.6bn.
CEZ ENA PGE TPE
▪ Re-investing premium: In order to encourage operators to
increase capex, the regulator introduced a “re-investing Source: mBank
premium” component to then WACC formula depending
on the intensity of investment plans. EBITDA momentum at Enea and PGE is also supported by
high net capex approved by the regulator, which drives up the
In 2022-23, this factor was set at ~1ppt for all operators, but in value of the regulatory asset base.
the 2024 tariff it is more linked to capex/D&A. As a result, PGE
was granted the highest premium (>4 ppts), followed by ENA Tauron, due to its high leverage, is not able to commit to
(3.5 ppts) and TPE (3 ppts) and Orlen’s Energa (3 ppts). We delivering investment as high as its peers.
expect these high premiums may be temporary, and by 2030 In the long term, we assume gradual convergence to less
they will gradually disappear in line with falling net capex. capex-intensive models, although we do allow for the
possibility that guaranteed returns on grid investments will still
be appealing enough to encourage companies to keep high re-
investing rates.

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Net Capex-to-RAB ratio* ENEA:

16.0%
▪ Enea’s trading results have the least transparency due to
14.0% accounting specifics (generation related power/emissions
contract revaluation) which also makes it difficult to
12.0%
compare reported EBITDA margin to those of the peers.
10.0%
▪ Nevertheless, after six consecutive years with EBITDA
8.0% losses, in 2024 we expect a positive result of PLN >0.2bn
(PLN 80m reported in Q1’24), which should be repeated in
6.0% subsequent years. The year-over-year improvement will
4.0% come from higher retail margins and lower prosumer costs.

2.0% PGE:

0.0% ▪ As a reminder, PGE’s trading segment charges sister

generation companies “management commissions” which
artificially boost trading profits (in 2023, this was PLN 1.9bn
CEZ ENA PGE TPE on the revenues line). That should be taken into account
when comparing the EBITDA margins from trading with
*CEZ excl. planned GasNet acquisition those of PGE’s closest peers.
Source: mBank
▪ In 2024, we expect the management commissions to be
Trading Segment Outlook lower year-over-year (PLN 1.2bn due to lower power prices
which affect the size of commissions), but the reported
In 2023, profits from electricity trading remained segmental EBITDA may be significantly higher than in 2023
comparable year-over-year at most rated companies. (PLN 1.9bn in 2024). This improvement, apart from base
effects (huge negative impact from one-offs in 2023) will be
In Poland, 2023 marked another year in a row of regulator and driven by higher retail margins, a one-off positive
government-driven interventions and distortions settlement with the distribution segment at PLN 0.35bn
(compensations, provisions for onerous contracts, (balancing), and a reversal of a provision for onerous
government-mandated coal purchases, 1 month discount for contracts (PLN +0.2bn).
households) along with some inter-segment issues
(trading/distribution settlements). As a result, the ▪ In subsequent years, we expect EBITDA to decrease
comparability of 2023 financials is limited, and it is difficult to to PLN 1.6bn due to a lack of positive one-offs from
filter out recurring trading margins. settlements with distribution.

Meanwhile, at CEZ we had a positive one-off from an “old” TAURON:

litigation with railway company. ▪ We expect the 2024 trading EBITDA to jump from PLN
Forecast of realized and estimated EBITDA margins from 0.56bn to PLN 0.9bn, partly due to a positive one-off (PLN
power trading* 0.1bn provision reversal), and partly tanks to a recovery in
4.0%
retail margins, improvement in profits from natgas trading,
and a higher contribution from wholesale trading.
3.5%
▪ Our assumption for 2025-26 EBITDA, apart from 2024 one-
3.0%
off adjustment, includes slight margin compression to long
2.5% term average.
2.0% Aggregate trading volumes in 2024Y and 2025Y forward
1.5% BASE contracts on TGE (GWh) vs. weeks to maturity
1.0% 45,000 140%
40,000
0.5% 120%
35,000
0.0% 100%
30,000
-0.5%
25,000 80%

20,000 60%
CEZ ENA PGE TPE 15,000
40%
*in PGE margin adjusted for internal management commission from generation
10,000
Source: mBank 20%
5,000
0 0%
When it comes to estimates for following years, below we
present our main assumptions for particular companies:
CEZ: 2024 2025 2025/2024 ratio (rhs)

▪ In 2024, we expect 7% higher reported EBITDA year-over- Source: TGE, mBank

year as improving unit gross margins and growing ESCO

revenues should offset the 2023 one-off boost from Polish utilities still face a risk of having to set aside provisions
compensation from railways. in H2’24 to address new power price caps.

▪ In 2025, we assume that further unit margin normalization As a reminder, from July household power prices will remain
to 5Y average (due to power prices drop) will drive EBITDA frozen at PLN 500/MWh (raised from the previous cap of
higher again to CZK 8.5bn. PLN 412/MWh), but the compensations of power suppliers will
be calculated based on new tariffs, set for 18 months. The

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intention is that 2H’24 sales hedged at higher prices realized

be diluted by expected cheaper purchases in 2025 in order
to reduce the state budget burden.
As a result, power suppliers’ revenues in H2’24 will not
correspond to the procurement costs, and 2025 exposure is
still not fully hedged, as shown in the chart above (companies
have intensified purchases but are still far away from full
coverage).
Theoretically, in 2025 these losses should be reversed provided
market prices remain at the current levels, which are built into
the new 18-month tariffs (extraordinary margins in 2025). At
this stage, it is difficult to predict the final outcome, but, more
or less, the net impact (2024 vs. 2025) should be close to neutral.
Our base case assumption is that companies will be able to
dilute unit costs in the next 18 months and average out their
trading margin between H2’24 and 2025.

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Sector performance

Power utilities sector is lagging the market YTD PGE and Polenergia remain the laggers within CEE region
15% 10%
10% 5%
5% 0%

0% -5%

-5% -10%

-10% -15%

-15% -20%
-25%

Source: mBank, Bloomberg Source: mBank, Bloomberg

Renewables multiples de-rating seems to be over Integrated and network utilities EV/EBITDA multiple
(EV/EBITDA 12M FWD)… remains stable
18.0 10.0
16.0 9.0
14.0 8.0
7.0
12.0
6.0
10.0
5.0
8.0 4.0
6.0 3.0
4.0 2.0
2.0 1.0
0.0 0.0

Source: mBank, Bloomberg Source: mBank, Bloomberg

However share prices are still under pressure due to falling Last 5-year performance by subsectors vs power price
estimates changes
110 2024
2019 2020 2021 2022 2023
105 YTD
EEX power price 1Y FWD 9% 5% 294% 76% -54% 5%
100
95 Integrated utilities 9% 5% 2% -26% 5% -4%

90 Network utilities 19% -6% 23% -17% 8% 0%

85 Solar utilities 41% 113% -42% -28% -28% -10%
80 Wind utilities 42% 58% -12% 3% -21% -3%
75 WIG Energia -19% -6% 11% -15% 40% -10%
70 Source: mBank, Bloomberg

Integrated Network Wind Solar

Source: mBank, Bloomberg

Main sector sentiment factors performance (monthly average)

monthly avg Nov-23 Dec-23 Jan-24 Feb-24 Mar-24 Apr-24 May-24 Jun-24
EEX 1Y FWD power price EUR/MWh 113 94 85 74 79 87 95 94
EUA CO2 price EUR/t 76 72 68 58 60 66 73 71
gas TTF 1Y FWD price EUR/MWh 44 38 33 30 31 34 36 37
ARA coal 1Y FWD EUR/t 105 95 91 86 101 111 107 112
CDS margin EUR/MWh -8 -12 -15 -15 -18 -20 -17 -19
TGE 1Y FWD power price PLN/MWh 550 493 482 434 447 467 477 474
EU coal/lignite generation yoy -23% -31% -21% -33% -20% -24% -10% -7%
Source: mBank, Bloomberg

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mBank vs market consensus

Net profit EBITDA DYield
2024E 2025E 2026E 2024E 2025E 2026E 2024E 2025E 2026E
CEZ (CZK) CZK m CZK per share
mBank 34,306 29,525 44,149 119,294 118,963 109,554 52.0 51.0 43.9
cons. 32,901 34,665 35,295 121,470 111,700 95,523 46 47.5 49
differ. +4.3% -14.8% +25.1% -1.8% +6.5% +14.7% +13.0% +7.4% -10.4%
Enea (PLN) PLN m PLN per share
mBank 2,635 2,565 2,105 5,947 5,166 4,582 0.0 0.0 0.0
cons. 2,223 1,959 1,705 5,366 4,333 3,580 0 0 0
differ. +18.5% +30.9% +23.5% +10.8% +19.2% +28.0% - - -
PGE (PLN) PLN m PLN per share
mBank 2,675 4,010 2,900 9,460 11,755 10,921 0.0 0.0 0.0
cons. 2,778 2,984 2,827 9,237 10,040 10,271 0 0 0
differ. -3.7% +34.4% +2.6% +2.4% +17.1% +6.3% - - -
Polenergia (PLN) PLN m PLN per share
mBank 444 266 163 787 669 693 0.0 0.0 0.0
cons. 368 271 232 691 607 622 0 0 0
differ. +20.7% -1.7% -29.6% +13.9% +10.3% +11.4% - - -
Tauron (PLN) PLN m PLN per share
mBank 1,741 2,553 2,219 5,659 6,506 6,251 0.0 0.0 0.0
cons. 1,631 1,972 2,001 5,344 5,765 5,557 0 0 0
differ. +6.7% +29.5% +10.9% +5.9% +12.9% +12.5% - - -
Source: mBank, Bloomberg

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equal weights
Wednesday, 26each.
June 2024 | update

CEZ: hold (reiterated)

CEZ CP; CEZ.WA | Power Utilities, Czech Republic
Wednesday, 26 June 2024 | research report
Limited Upside Risk Current Price* CZK 933.50
Target Price CZK 948.40
CEZ shares have provide a YTD total return of -2%, similar to the dip on mCap CZK 502.2 bn
Wednesday, 26 June 2024 | research report
Stoxx Utilities (-2%), but it is good to keep in mind that, in 2023, the Czech Free Float CZK 150.6bn
power company outperformed sector. In addition to falling power prices,
ADTV (3M) CZK 137.9m
the main catalysts behind the decline include a disappointing FY2024
*Price as of June 25, 2024, 5:00 PM
guidance (lower volumes, curtailed profits from prop trading that might
Wednesday, 26 June 2024 | research report
not offset price caps) and the steeply priced GasNet acquisition (~9.5x Ownership
EV/EBITDA’24 and 1.5x EV/adjusted RAB after upward reconciliations Czech Government 69.8%
expected in 2025). CEZ’s leverage after the acquisition will increase
significantly from 1.2x to 1.8x net debt/EBITDA at the end of 2024, which Treasury shares 0.2%
may affect the dividend outlook. That said, in an unexpectedly positive Others 30.0%
turn of events, CEZ paid out the maximum 80% of 2023 net profit as
dividend this year.
We have raised our medium-term power price expectations to adjust for About CEZ
the latest rise in emissions prices, resulting in upward revisions to CEZ’s CEZ is the leading producer of electric power in the
medium-term earnings outlook and our target price, which increases to Czech Republic (50 TWh, 59% market share), as well
as being the largest distributor (with a 65% market
CZK 948.40 (+2%). Nevertheless, our hold recommendation remains intact.
share) and electricity supplier (38%). The company
CEZ’s expected 2024-26E DYield is lower than the benchmark offered by also operates power plants in Poland and develops
peer European integrated utilities (5.2% vs 6.4%), and the current P/E ESCO business in the region. Recently, CEZ
multiple does not look appealing due to windfall taxation. That said, a announced a natural gas distribution business
acquisition in Czechia expected to be finalized by the
potential removal of windfall tax in 2025 would only bring CEZ’s valuation
end of 2024.
closer to the peers rather than creating a buying opportunity (bringing our
DCF valuation higher by CZK 40/share). As we write this, there is no news CEZ vs. WIG
on the Czech Finance Ministry’s plans as regards windfall tax since 1600
February. CEZ
CZK WIG
A Strong Q1’24 Does Not Change Our Mid-Term Outlook 1350
Despite a significant EBITDA beat in Q1’24, we leave our FY2024 EBITDA
estimate intact at CZK 119bn as we continue to expect normalization in
generation (volumes, hedging revaluation, base effects) and trading 1100
(commodity sales).
Next year, based on reported hedging positions and current market prints, we
850
assume lower power prices in generation, only partly offset by further margin
expansion in trading and higher profits from distribution. As a result, EBITDA
ex. GasNet may drop 9% to CZK 108bn in 2025 (incl. GasNet we forecast flat y/y 600
growth). Similar underlying factors shape our estimates for 2026, with another
CZK 10bn y/y EBITDA drop expected.
GasNet Acquisition – Not Value Accretive In Our View
Target
CEZ signed the €846.5m deal to acquire a 55.21% stake in GasNet, the leading Price
Recommendation
Name
Czech gas distribution infrastructure operator, in March 2024. GasNet’s EBITDA New Old New Old
in 2023 was CZK 7.7bn after falling from CZK 9.2bn in 2022 and 10.2bn in 2021.
CEZ 948.40 893.60 hold hold
Normalized EBITDA was closer to CZK 10.4bn, but nevertheless the deal’s
Current Target
implied EV/EBITDA ratio looks demanding at ca. 9.5x (net debt adjusted for Name
Price Price
Upside
subordinated debt was CZK 63bn in 2023). EV/RAB after expected regulatory CEZ 933.50 948.40 1.6%
asset base reconciliation until 2025 does look fairly expensive as well at 1.5x.
Therefore, value creation by the GasNet acquisition will be challenging in our
Forecast Update 2024E 2025E 2026E
view, especially taking into account that as a formerly privately owned
company GasNet probably has limited opex optimization potential coupled EBITDA +0.2% +0.8% +1.4%

with high leverage. We assume GasNet’s revenues will be consolidated by CEZ Net profit -0.0% +0.3% +2.1%
from 2025, however, the deal has yet to be cleared by regulatory authorities). Power (EUR/MWh) +6.5% +5.4% +4.2%

(CZK m) 2022 2023 2024E 2025E 2026E EUR/CZK +0.0% +0.0% +0.0%

Revenue 288,485 340,585 337,263 320,327 302,494 CO2 (EUR/t) +27.3% +25.0% +20.4%

EBITDA 131,568 125,148 119,294 118,963 109,554

margin 45.6% 36.7% 35.4% 37.1% 36.2%
EBIT 101,927 84,512 82,568 74,482 64,598
Net profit 80,786 29,524 34,306 29,525 44,149
P/E 6.4 14.4 14.6 17.0 11.4
P/S 1.7 1.5 1.5 1.6 1.7 Analyst:
P/B 1.9 2.1 2.0 2.0 1.8
Kamil Kliszcz
EV/EBITDA 5.1 5.3 6.3 6.2 6.5 Head of Equity Research
DPS 47.6 143.9 52.0 51.0 43.9 Equity Analyst, Expert
+48 667 770 837
Dividend Yield 5.1% 15.4% 5.6% 5.5% 4.7% [email protected]
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Valuation
Valuation Summary
Using DCF Analysis and Relative Valuation, we set our twelve- Price Price
weight
month per-share price target for CEZ at CZK 948.40. (CZK) (PLN)
Relative Valuation 50% 921.45 159.41
DCF Analysis 50% 802.25 138.79
price 861.85 149.10
12M target price 948.40 164.07
Source: mBank

DCF Valuation
▪ Enterprise value is adjusted for book value of investments in
DCF model assumptions: associates and nuclear provisions.
▪ The DCF model uses free cash flow forecasts for the 2024- ▪ For the purpose of terminal value estimates, we adjust
2033 period. CAPEX to match D&A expenses.
▪ Cash flow is discounted as of the end of June 2024. Equity
▪ The terminal risk-free rate is 3.5% and beta is 1.0x. RFRs in the
value calculations factor in net debt as of 31 December 2023
forecast period are based on the 10Y Czech bond forward
incl. leases and expected payment for 55% GasNet acquisition
curve. Equity risk premium was set at 4.5%.
(equity+ debt at CZK 74bn). We consolidate this company in
our DCF model as of January 2025. Minority interests line ▪ We assume that FCF after FY2033 will grow at an annual rate
includes estimated book value of GasNet’s minorities at of 2.0% vs 1.5% assumed previously (in line with Polish state
CZK 17bn. owned utilities).

Key Assumptions
2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E 2032E 2033E
Power price (EUR/MWh) 129 112 97 91 76 68 70 71 73 73
CO2 (EUR/t) 70 75 79 83 87 91 95 100 100 100
Emission factor (t/MWh) 0.28 0.26 0.22 0.19 0.17 0.16 0.15 0.15 0.14 0.13
EUR/CZK fx rate 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0
Power generation TWh 49.2 49.3 49.1 48.0 47.2 46.7 46.3 46.1 46.0 45.6
Nuclear 29.7 30.8 32.2 32.2 32.2 32.2 32.2 32.2 32.2 32.2
Lignite 12.5 11.3 9.4 8.1 7.1 6.5 6.0 5.7 5.4 4.9
Renewables 3.7 3.9 4.1 4.3 4.5 4.6 4.8 4.9 5.0 5.1
RAB in Distribution (CZK bn) 154.1 232.7 239.9 244.6 249.4 254.1 259.4 264.7 269.8 274.8
Power network 154.1 165.6 173.8 182.1 190.3 198.1 206.0 213.5 220.6 227.2
Gas network - 67.1 66.1 62.5 59.0 56.0 53.4 51.1 49.2 47.6
Regulated WACC - power 6.5% 6.5% 6.5% 6.5% 6.5% 6.5% 6.5% 6.5% 6.5% 6.5%
Regulated WACC - gas - 6.4% 6.4% 6.4% 6.4% 6.4% 6.4% 6.4% 6.4% 0.0%
Trading volume TWh 24.1 24.2 24.3 24.5 24.6 24.7 24.8 25.0 25.1 25.2
ESCO revenues (CZK bn) 43.6 46.2 48.5 50.9 53.5 56.1 59.0 61.9 65.0 68.2
Source: mBank

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DCF model
(CZK m) 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E 2032E 2033E +
Revenue 337,263 320,327 302,494 295,242 278,253 271,180 275,732 280,725 286,111 289,043 289,043
change -1.0% -5.0% -5.6% -2.4% -5.8% -2.5% 1.7% 1.8% 1.9% 1.0% 0.0%
EBITDA 123,041 122,803 113,490 109,718 93,307 85,321 87,972 90,562 93,138 95,238 102,481
EBITDA margin 36.5% 38.3% 37.5% 37.2% 33.5% 31.5% 31.9% 32.3% 32.6% 32.9% 35.5%
D&A expenses 40,473 48,320 48,892 48,030 48,182 46,037 46,170 46,504 47,006 47,683 48,359
EBIT 82,568 74,482 64,598 61,688 45,125 39,285 41,803 44,058 46,132 47,555 54,122
EBIT margin 24.5% 23.3% 21.4% 20.9% 16.2% 14.5% 15.2% 15.7% 16.1% 16.5% 18.7%
tax on EBIT 42,705 35,751 12,244 11,737 8,164 6,848 7,356 7,817 8,245 8,520 11,366
NOPLAT 39,863 38,732 52,353 49,951 36,961 32,437 34,447 36,241 37,887 39,035 42,757

CAPEX -43,821 -48,179 -48,998 -49,013 -48,806 -48,797 -48,954 -48,785 -48,378 -48,359 -48,359
working capital 13,140 3,764 3,964 1,612 3,776 1,572 -1,012 -1,110 -1,197 -652 0
M&As 0 0 0 0 0 0 0 0 0 0 0

FCF 49,655 42,637 56,212 50,580 40,113 31,249 30,651 32,851 35,317 37,708 42,757
WACC 5.1% 5.3% 6.3% 6.2% 6.2% 6.4% 6.3% 6.8% 7.3% 7.2% 6.7%
discount factor 0.98 0.93 0.87 0.82 0.77 0.73 0.68 0.64 0.60 0.56 0.56
PV FCF 48,430 39,504 48,982 41,493 30,980 22,688 20,931 21,000 21,048 20,958

WACC 5.1% 5.3% 6.3% 6.2% 6.2% 6.4% 6.3% 6.8% 7.3% 7.2% 6.7%
Cost of debt 4.5% 4.5% 4.7% 4.5% 4.5% 4.7% 4.6% 5.1% 5.5% 5.4% 4.5%
risk-free rate 3.5% 3.5% 3.7% 3.5% 3.5% 3.7% 3.6% 4.1% 4.5% 4.4% 3.5%
Risk premium 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%
Effective tax rate 55.5% 53.2% 21.0% 21.0% 21.0% 21.0% 21.0% 21.0% 21.0% 21.0% 21.0%
Net debt / EV 47.5% 46.6% 41.8% 40.2% 40.9% 40.8% 39.8% 38.8% 37.6% 36.3% 30.0%

cost of equity 8.0% 8.0% 8.2% 8.0% 8.0% 8.2% 8.1% 8.6% 9.0% 8.9% 8.0%
risk premium 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5%
Beta 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0

FCF growth in the terminal period 2.0% Sensitivity Analysis

Terminal value 916,246 FCF growth in perpetuity
Present value of terminal value 509,261 1.0% 1.5% 2.0% 2.5% 3.0%
Present value of FCF in the forecast period 316,014 WACC +1,0 p.p. 559.52 617.52 685.76 767.21 866.11
Enterprise value 825,275 WACC +0,5 p.p. 617.52 685.76 767.21 866.11 988.75
Net debt adjusted 242,562 WACC 685.76 767.21 866.11 988.75 1,144.83
Minorities 18,923 WACC -0,5 p.p. 767.21 866.11 988.75 1,144.83 1,350.21
Equity investments 3,737 WACC -1,0 p.p. 866.11 988.75 1,144.83 1,350.21 1,632.62
Nuclear provisions 135,924
million shares outst 538.0
Equity value per share (CZK) 802.25
12M cost of equity 8.0%
Target price (CZK) 866.11
Target price (PLN) 149.84

EV/EBITDA (‘24) at target price 6.5

P/E(‘24) at target price 5.9
TV / EV 59.2%
Source: mBank

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Relative Valuation

We compared CEZ with three groups of comparable The weights assigned to the respective peer groups are based
companies (integrated utilities, network operators and on their expected contributions to CEZ’s 2024-2026E EBITDA.
renewables) using 2024-2026 projected price-to-earnings,
The forecast years are assigned equal weights each.
EV/EBITDA and Dyield ratios.

CEZ Relative Valuation

P/E EV/EBITDA Dyield
Price 2023 2024E 2025E 2026E 2023 2024E 2025E 2026E 2024-26
Distribution network/trading(25%)
E.ON 12.59 10.8 11.4 11.6 11.5 7.9 8.6 8.7 8.6 4.5%
ELIA GROUP 91.55 20.3 18.5 16.7 14.4 12.5 14.0 12.1 11.7 2.3%
EVN 29.90 12.9 12.0 13.0 12.8 9.1 8.5 8.5 8.1 3.0%
IREN 1.99 9.6 9.8 9.4 9.0 5.9 5.8 5.7 5.5 6.8%
NATIONAL GRID 896.80 13.9 12.8 12.8 12.1 12.9 12.6 11.4 11.3 5.6%
RED ELECTRICA 17.31 14.1 18.7 18.1 16.0 9.7 11.5 11.3 10.5 4.9%
REDES ENERGETICAS 2.33 11.4 13.4 13.1 12.3 8.3 8.3 8.0 7.8 6.7%
SSE 1827.00 12.1 11.6 10.9 10.4 10.6 10.0 9.0 8.8 3.5%
TERNA 7.41 17.1 15.1 15.6 14.5 12.0 10.9 11.3 11.1 5.1%
Median 12.9 12.8 13.0 12.3 9.7 10.0 9.0 8.8 4.9%
Integrated (66%)
EDP 3.64 12.1 12.1 12.8 12.6 7.1 7.5 7.7 7.4 5.6%
ENDESA 19.12 16.3 12.1 11.2 10.5 7.5 6.1 5.9 5.8 6.4%
ENEL 6.57 10.2 9.9 9.8 9.5 6.4 5.9 5.9 5.8 7.1%
ENGIE 13.66 6.1 7.4 8.3 8.9 4.4 5.7 6.2 6.5 8.6%
FORTUM 14.43 10.8 12.9 14.9 16.8 6.6 8.5 9.6 10.5 6.0%
Median 10.8 12.1 11.2 10.5 6.6 6.1 6.2 6.5 6.4%
Renewables (9%)
ABO WIND 53.80 18.2 17.4 16.2 14.0 10.7 10.6 9.9 8.7 1.2%
AVANGRID 35.25 17.0 15.7 14.6 14.3 11.8 12.1 12.9 - 5.0%
BORALEX 33.60 31.5 31.1 32.1 19.9 11.0 10.4 10.0 8.9 2.0%
EDP RENOVAVEIS 13.78 24.5 30.8 24.0 20.9 11.1 12.4 11.0 10.2 1.5%
EOLUS VIND 72.20 3.2 7.5 7.3 6.6 1.8 4.2 3.9 3.2 0.0%
IBERDROLA 12.43 16.6 15.4 14.9 14.2 9.8 9.3 9.4 9.2 4.8%
AB IGNITIS 18.48 5.6 6.2 6.4 6.7 5.5 6.6 7.2 7.6 7.4%
ORSTED 385.80 - 18.4 14.2 13.9 12.1 9.5 7.7 7.6 2.8%
PNE 14.10 - - - 193.2 46.1 35.8 27.0 20.3 0.4%
RWE 33.52 5.8 12.2 16.1 14.7 3.9 6.7 7.8 8.1 3.5%
XCEL ENERGY 53.62 15.9 15.0 14.0 13.0 10.8 10.5 10.1 9.6 4.3%
7C SOLARPARKEN 2.70 16.7 27.0 19.3 16.9 7.0 7.8 6.7 5.8 4.2%
AUDAX RENOVABLES 1.91 31.3 16.2 13.2 12.1 12.2 9.4 7.9 7.3 0.0%
CLEARWAY ENERGY 25.81 52.2 20.4 20.5 15.2 13.5 13.4 12.8 12.3 6.9%
ENCAVIS 16.85 27.7 30.4 26.1 25.9 14.9 15.9 14.6 13.3 0.0%
GRENERGY 33.80 17.2 18.7 9.9 10.5 13.9 14.9 10.8 10.2 0.2%
NEOEN 37.80 70.9 69.6 47.3 38.3 19.1 18.4 15.7 14.1 0.5%
RENOVA 1021.00 25.8 8.5 15.6 19.1 20.9 22.7 15.6 13.6 0.0%
SCATEC SOLAR 88.45 20.1 22.8 17.9 15.3 12.0 9.5 9.0 8.4 0.0%
SOLARIA ENERGIA 12.02 14.0 16.2 14.5 11.8 12.8 13.2 12.3 10.4 0.0%
SOLTEC 2.36 13.1 7.2 8.0 5.5 10.7 6.6 7.8 6.4 0.0%
ACCIONA ENERGIAS 20.08 13.2 19.0 17.5 17.1 8.4 9.6 8.9 8.6 2.1%
ERG 23.98 17.3 16.2 15.5 15.3 10.2 9.9 9.3 9.0 4.2%
INNERGEX 10.26 - - - 788.9 11.5 11.6 10.4 9.7 4.2%
NEXTERA 28.20 15.0 12.9 12.6 19.4 9.7 9.8 9.7 9.8 13.2%
NORTHLAND POWER 23.53 24.3 20.9 15.0 9.7 10.7 10.8 11.0 10.6 5.1%
BROOKFIELD RENEWABLE 25.59 - - - - 29.9 30.0 27.8 26.4 5.8%
HYDROELECTRICA 123.80 9.2 11.4 12.4 13.5 6.7 8.3 8.7 9.4 7.6%
MERIDIAN ENERGY 6.27 51.4 45.4 32.2 28.5 22.3 19.5 15.4 14.4 3.8%
VERBUND 75.85 10.8 16.0 17.3 22.2 6.9 9.6 10.4 12.6 2.9%
VOLTALIA 9.75 41.8 65.0 50.5 41.8 12.1 12.4 12.1 11.4 0.5%
Median 17.2 16.8 15.5 15.2 11.1 10.5 10.1 9.6 2.8%

Median weighted 12.0 12.7 12.1 11.4 7.9 7.7 7.4 7.5 5.9%
CEZ 933.50 17.0 14.6 17.0 11.4 5.3 6.3 6.2 6.5 5.2%
premium / discount 41.7% 15.3% 40.6% -0.6% -33.4% -18.5% -15.6% -12.4%

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Implied valuation
median 12.0 12.7 12.1 11.4 7.9 7.7 7.4 7.5 6%
multiple weight 46.7% 20.0% 33.3%
year weight 0.0% 33.3% 33.3% 33.3% 0.0% 33.3% 33.3% 33.3% 100.0%
equity value per share (CZK) 914.5
other assets per share (CZK) 6.9
equity value per share (CZK) 921.5
Source: mBank

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P&L CF statement
(CZK m) 2022 2023 2024E 2025E 2026E (CZK m) 2022 2023 2024E 2025E 2026E
revenues 288,485 340,585 337,263 320,327 302,494 operating CF 5,092 137,567 95,100 91,175 105,446
EBITDA 131,568 125,148 119,294 118,963 109,554 working capital -41,383 48,986 12,749 1,770 1,864
conv. generation 92,081 79,843 76,066 65,519 57,070 investing CF -36,712 -46,055 -128,365 -48,179 -48,998
mining 6,212 12,282 7,166 5,536 3,921 CAPEX -33,948 -44,792 -43,821 -48,179 -48,998
renewables 11,400 10,800 11,928 10,890 9,905 financing CF 42,651 -116,951 65,172 -45,145 -58,711
distribution 18,074 17,483 18,753 30,140 31,520 dividends paid -25,626 -77,435 -27,975 -27,445 -23,620
trading 4,408 6,345 6,986 8,483 8,744 CF statement 11,031 -25,439 31,907 -2,149 -2,263
others -607 -1,605 -1,605 -1,605 -1,605
CFO/EBITDA 3.9% 109.9% 79.7% 76.6% 96.2%
D&A 29,893 40,636 36,726 44,480 44,956 FCFF -28,856 92,775 51,279 42,996 56,448
EBIT 101,927 84,512 82,568 74,482 64,598 FCFF/EV -4.3% 14.0% 6.9% 5.8% 7.9%
financing activity -2,304 -5,496 -5,557 -7,264 -6,291 FCFE -32,926 85,466 45,722 35,732 50,156
FCFE/MCAP -6.6% 17.0% 9.1% 7.1% 10.0%
profit before tax 99,623 79,016 77,011 67,218 58,306 ROIC 23.6% 16.5% 14.9% 12.2% 10.7%
tax rate 19.0% 62.6% 55.5% 53.2% 21.0% ROCE 19.9% 14.2% 12.8% 10.8% 9.4%
net profit 80,786 29,524 34,306 29,525 44,149 DPS 47.63 143.93 52.00 51.01 43.90
adj. net profit 78,400 34,800 34,306 29,525 44,149 payment ratio 114.9% 98.8% 80.4% 80.0% 80.0%
DYield 5.1% 15.4% 5.6% 5.5% 4.7%
Balance sheet
(CZK m) 2022 2023 2024E 2025E 2026E Key ratios/KPIs
fixed assets 551,993 540,658 645,925 645,784 645,890 2022 2023 2024E 2025E 2026E
PP&E 423,126 435,904 541,069 541,317 541,907 P/E 6.4 14.4 14.6 17.0 11.4
intangible assets 24,423 27,801 27,118 26,037 24,956 EV/EBITDA 5.1 5.3 6.3 6.2 6.5
current assets 555,387 285,107 313,611 300,606 286,913 P/S 1.7 1.5 1.5 1.6 1.7
inventory 25,341 23,112 21,626 20,540 19,396 P/BV 1.9 2.1 2.0 2.0 1.8
trade receivables 167,346 84,759 83,932 79,718 75,280 P/CF 98.6 3.7 5.3 5.5 4.8
cash 36,609 10,892 42,799 40,650 38,387 P/FCFE -15.3 5.9 11.0 14.1 10.0

equity 258,886 244,052 250,383 252,463 272,992 Generation TWh 54.3 51.5 49.2 49.3 49.1
minorities 1,375 1,549 18,923 18,923 18,923 Nuclear 31.0 30.4 29.7 30.8 32.2
noncurrent liab. 339,745 346,505 424,341 418,030 397,355 Lignite/coal 17.5 15.4 13.8 12.6 10.7
loans 140,234 131,042 208,878 202,567 181,892 Natural gas 2.5 2.0 2.0 2.0 2.0
nuclear provisions 107,542 126,055 126,055 126,055 126,055 RES 3.3 3.6 3.7 3.9 4.1
current liabilities 507,374 233,659 265,889 256,974 243,532
loans 61,912 37,868 60,361 58,537 52,562 Emission factor 0.32 0.29 0.28 0.26 0.22
trade payables 84,713 59,869 70,305 66,775 63,057
Distribution RAB 134,000 142,000 154,074 232,721 239,908
WC cycles power 134,000 142,000 154,074 165,607 173,790
inventories 32 25 23 23 23 gas 0 0 0 67,114 66,118
receivables 212 91 91 91 91
payables 107 64 76 76 76 price (CZK) 933.50 933.50 933.50 933.50 933.50
shares outst. (m) 538 538 538 538 538
net debt 165,537 158,018 226,440 220,454 196,067 Mcap 502,213 502,213 502,213 502,213 502,213
net debt/EBITDA 1.26 1.26 1.90 1.85 1.79 EV 669,125 661,780 747,576 741,591 717,204
Source: mBank

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Wednesday, 26 June 2024 | research report

Enea:
Wednesday, buy (new)
26 June 2024 | research report
ENA PW; ENAE.WA | Power utilities, Poland

Biggest Valuation Gap Among State Peers Current Price* PLN 9.42
Target Price PLN 18.16
We resume coverage of Enea with a buy recommendation and a 12M target mCap PLN 5.0bn
price of PLN 18.16.
Free Float PLN 2.4bn
Our base case scenario for Enea does not factor in a coal assets carve-out, ADTV (3M) PLN 7.4m
but it does assume a compensation for negative clean-dark spreads *Price as of June 25, 2024, 5:00 PM
expected to be paid to conventional power plants as of 2028 in order to
keep them active. In such a scenario, Enea, with its relatively low-cost Ownership
conventional generation fleet, strongly outperforms local peers when it Polish Government 52.29%
comes to the fundamental valuation gap vs. current MCap (>90% upside).
NN Pension Fund 4.97%
Moreover, the EBITDA consensus for Enea is still underestimated despite a Allianz Pension Fund 4.96%
massive beat in Q1’24, plus, the company’s reported net debt as of end-
PZU Pension Fund 4.88%
2024 could surprise on the upside thanks to an expected cash release from
working capital, tax receivables, and normalization of net EUA provisions. Others 32.90%
Meanwhile, ENA stock is trading at extremely low 2024-26E EV/EBITDA of
1.3x vs. 3.4x Tauron and 2.6x PGE. About Enea
Enea is one of Poland's largest vertically integrated
When it comes to the potential unbundling of coal assets, we see Enea energy groups with a market share of 15% in net
among the biggest winners provided the price is aligned with the generation (coal power plants in Kozienice and
profitability profile of these assets and their decommissioning schedule. Połaniec as main production assets), 14% in power
Enea can supply Poland with 2026-30 average available capacity of 3.8GW, distribution and 12% in electricity supply. Enea also
backed by capacity market contracts (incl. biomass co-combustion). controls the listed coal miner, LW Bogdanka,
producing 7.5-9.0mmt of coal per year.
Moreover, it is integrated with Poland’s most competitive coal mines, LW
Bogdanka. Even if Enea were to sell its LWB stake at today’s market price
ENA vs. WIG
(implying negative 2025 EV as LWB has net cash of PLN 0.7bn), our 13
simplified post-carve-out DCF target price would amount to PLN 22.09, ENA
PLN
implying 135% upside potential from the current share price. WIG
11
Market Consensus Still Too Conservative
The analysts’ consensus for Enea’s FY2024 EBITDA was upgraded after the
massive beat of Q1’24, but it still shows upside potential of about 10% this year, 9
and 20% on average when it comes to 2025-26E. In our view, the market is
underestimating the following: 1) The relatively low variable costs of Enea’s coal
power plants, which mitigate the negative impact from systemic reductions, 7
2) The closing of the historical gap between WACC and the EBIT/RAB ratio in
distribution, 3) The return of recurring profitability in the trading segment, and
4)Reversal of inter-segmental losses on LWB’s coal margins. 5

Strongest Balance Sheet

Enea had net debt of PLN 5.8bn as of March’24, but note that there is PLN
~0.7bn more in cash to be released from power prices freezing compensations, Target
and a further PLN 1.2bn is frozen in short-term corporate tax receivables. Rating
Name Price
Moreover, Enea’s net CO2 liabilities vs. total CO2 costs ratio is the lowest among New Old New Old
peers (22% vs 28% PGE and 85% TPE). Last but not least, Enea’s FCF in Q2-Q4’24 Enea 18.16 - buy suspended
(simplified EBITDA-CAPEX formula) is likely to top PLN 1.2bn. As a result, net Current Target
Name Upside
debt reported at the end of the year will likely decrease to PLN 1.8bn (0.3x Price Price
EBITDA), and in 2025-26 it is poised to reverse to a net cash position. Enea 9.42 18.16 92.9%

If the coal assets carve-out moves ahead, Enea’s balance sheet will become
even stronger even with the unbundling of net cash generated by LWB. As a Forecast Update 2024E 2025E 2026E
company subject to revenue regulation (with distribution accounting for EBITDA +9.8% -2.0% -3.0%
almost 90% of EBITDA post carve-out), Enea would definitely regain its Net profit +20.0% -0.9% -1.0%
dividend paying capacity well before the local peers.
Power (PLN/MWh) +0.0% +8.5% +7.9%
(PLN m) 2022 2023 2024E 2025E 2026E Coal (PLN/t) +0.0% +0.0% +0.0%
Revenue 30,117.9 48,183.4 35,206.4 29,992.6 27,596.7 CO2 (EUR/t) +27.3% +25.0% +20.4%
EBITDA 2,220.0 6,297.8 5,946.5 5,165.8 4,581.7
margin 7.4% 13.1% 16.9% 17.2% 16.6%
EBIT 578.2 955.7 4,212.7 3,349.3 2,686.5
Net profit 45.3 -704.3 2,634.9 2,564.9 2,105.3
P/E 110.1 - 1.9 1.9 2.4
Analyst:
P/S 0.2 0.1 0.1 0.2 0.2
P/B 0.3 0.4 0.3 0.3 0.2 Kamil Kliszcz
EV/EBITDA 4.4 1.8 1.4 1.2 1.2 Head of Equity Research
Equity Analyst, Expert
DPS 0.0 0.0 0.0 0.0 0.0 +48 667 770 837
Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0% [email protected]

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Valuation
Valuation Summary
Using DCF Analysis, we set our twelve-month per-share price price
weight
target for Enea at PLN 18.16. Relative valuation is presented for (PLN)
informational purposes only, as we believe that DCF method Relative Valuation 35.03 35.03
better reflects Polish state owned utilities risk profile. DCF Analysis 16.20 16.20
price 16.20
12M target price 18.16
Source: mBank

DCF Valuation
▪ Terminal value is adjusted for coal assets as we believe that
DCF model assumptions: in the long term this business line will be discontinued.
▪ The DCF model uses free cash flow forecasts for the 2024- Moreover, during the forecast period as of January 2027 we
2033 period. applied an “adjustment” factor in the conventional
generation segment, assuming that, in order to temporarily
▪ Cash flow is discounted as of the end of June 2024. Equity
keep these assets in the power system, the government will
value calculations factor in net debt as of 31 December 2023
cover the potential negative CDS with an “emergency”
incl. leases. We include LWB minority interests at book value
compensation mechanism.
as of December 2023.
▪ The terminal risk-free rate is 4.5% and beta is 1.2x (similar for
▪ Enterprise value is adjusted for book value of investments in
associates, reclamation provisions, deferred tax net assets all Polish state owned utilities). RFRs in the forecast period
are based on the 10Y Polish government bond forward curve.
and discounted value of CO2 liabilities estimated as of
Equity risk premium was set at 6.0%.
December 2033.
▪ We assume that FCF after FY2033 will grow at an annual rate
▪ For the purpose of terminal value estimates, we adjust
CAPEX to match D&A expenses. of 2.0%.

DCF Model Assumptions

2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E 2032E 2033E
Power price 1Y fwd (PLN/MWh) 638 496 467 451 408 380 378 376 376 364
CO2 (EUR/t) 70 75 79 83 87 91 95 100 100 100
Emissions (t/MWh) 0.84 0.84 0.83 0.83 0.81 0.80 0.79 0.78 0.78 0.77
Coal (PLN/t) 500 400 336 336 285 234 234 234 234 234
Power generation TWh 20.2 20.3 17.6 15.1 10.5 9.7 10.3 10.3 10.6 10.5
coal 17.8 17.8 15.2 12.7 8.0 7.1 7.6 7.6 7.8 7.7
renewables 2.4 2.4 2.4 2.5 2.5 2.6 2.7 2.7 2.8 2.8
Coal production (mln t) 7.5 7.5 7.5 7.5 6.5 6.5 6.5 6.5 6.5 6.5
RAB in distribution (PLN bn) 11.1 12.3 13.6 14.9 16.1 17.3 18.5 19.5 20.5 21.4
regulated WACC 11.0% 11.0% 11.0% 10.0% 9.5% 8.5% 7.5% 7.5% 7.5% 7.5%
Trading volumes incl gas (TWh) 23.3 23.7 24.2 24.7 25.2 25.6 26.1 26.7 27.2 27.7
EBITDA margin 1.1% 1.4% 1.6% 1.7% 2.0% 2.1% 2.2% 2.3% 2.4% 2.5%
Source: mBank

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DCF Model
(PLN m) 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E 2032E 2033E +
Revenue 35,206 29,993 27,597 25,827 22,271 21,131 21,427 21,575 22,038 21,749 21,749
change -26.9% -14.8% -8.0% -6.4% -13.8% -5.1% 1.4% 0.7% 2.1% -1.3% 0.0%
EBITDA 5,946.5 5,165.8 4,581.7 4,204.7 4,061.2 3,838.9 3,860.0 3,964.8 4,155.4 4,336.0 3,956.9
EBITDA margin 16.9% 17.2% 16.6% 16.3% 18.2% 18.2% 18.0% 18.4% 18.9% 19.9% 18.2%
D&A expenses 1,733.9 1,816.5 1,895.3 1,927.1 2,001.7 1,906.1 1,933.3 1,963.2 1,994.5 2,024.1 2,277.5
EBIT 4,212.7 3,349.3 2,686.5 2,277.6 2,059.5 1,932.8 1,926.8 2,001.6 2,160.9 2,311.9 1,679.4
EBIT margin 12.0% 11.2% 9.7% 8.8% 9.2% 9.1% 9.0% 9.3% 9.8% 10.6% 7.7%
tax on EBIT 800.4 636.4 510.4 432.7 391.3 367.2 366.1 380.3 410.6 439.3 319.1
NOPLAT 3,412.3 2,713.0 2,176.0 1,844.9 1,668.2 1,565.5 1,560.7 1,621.3 1,750.3 1,872.6 1,360.3

CAPEX -3,286.7 -3,336.6 -3,381.3 -3,272.1 -3,170.0 -3,095.2 -3,028.6 -2,949.1 -2,849.0 -2,596.2 -2,277.5
working capital 850.5 682.7 313.7 231.8 465.6 149.3 -38.7 -19.4 -60.7 37.9 0.0

FCF 3,642.5 2,576.6 533.5 253.1 -238.6 395.1 709.7 727.7 1,035.8 1,265.6 1,360.3
WACC 11.3% 12.2% 12.8% 12.4% 10.6% 9.9% 10.5% 10.6% 10.9% 10.9% 9.5%
discount factor 0.95 0.84 0.75 0.67 0.60 0.55 0.50 0.45 0.40 0.36 0.36
PV FCF 3,453.3 2,176.9 399.7 168.7 -143.8 216.6 352.2 326.4 419.1 461.8

WACC 11.3% 12.2% 12.8% 12.4% 10.6% 9.9% 10.5% 10.6% 10.9% 10.9% 9.5%
Cost of debt 5.9% 5.8% 6.2% 6.2% 6.6% 5.9% 6.5% 6.7% 6.9% 6.9% 5.5%
risk-free rate 4.9% 4.8% 5.2% 5.2% 5.6% 4.9% 5.5% 5.7% 5.9% 5.9% 4.5%
Risk premium 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%
Effective tax rate 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0%
Net debt / EV 11.2% -3.1% -5.0% -0.8% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0%

cost of equity 12.1% 12.0% 12.4% 12.4% 12.8% 12.1% 12.7% 12.9% 13.1% 13.1% 11.7%
risk premium 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%
Beta 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2

FCF growth in the terminal period 2.0% Sensitivity Analysis

Terminal value 18,074.0 FCF growth in perpetuity
Present value of terminal value 6,595.3 0.0% 1.0% 2.0% 3.0% 4.0%
Present value of FCF in the forecast period 7,830.9 WACC +1,0 p.p. 14.18 15.23 16.52 18.16 20.30
Enterprise value 14,426.2 WACC +0,5 p.p. 14.68 15.84 17.29 19.15 21.63
Net debt 5,047.2 WACC 15.23 16.52 18.16 20.30 23.21
Minority interest 1,500.7 WACC -0,5 p.p. 15.84 17.29 19.15 21.63 25.10
Equity investments 216.1 WACC -1,0 p.p. 16.52 18.16 20.30 23.21 27.41
Other net assets/provisions 488.4
Equity value 8,583
million shares outst 529.7
Equity value per share (PLN) 16.20
12M cost of equity 12.1%
Target price (PLN) 18.16

EV/EBITDA (‘24) at target price 2.6

P/E(‘24) at target price 3.4
TV / EV 42.7%
Source: mBank

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Relative Valuation

We compared Enea with European integrated utilities and its

closest local peers using 2024-2026 projected price-to-
earnings, EV/EBITDA and Dyield ratios. Relative valuation is
presented for informational purposes only and is not included
in our final valuation.

Enea Relative Valuation

P/E EV/EBITDA Dyield
Price 2023 2024E 2025E 2026E 2023 2024E 2025E 2026E 2024-26
CEZ 933.50 17.0 14.6 17.0 11.4 5.3 6.3 6.2 6.5 5.2%
EDP 3.64 12.1 12.1 12.8 12.6 7.1 7.5 7.7 7.4 5.6%
ENDESA 19.12 16.3 12.1 11.2 10.5 7.5 6.1 5.9 5.8 6.4%
ENEL 6.57 10.2 9.9 9.8 9.5 6.4 5.9 5.9 5.8 7.1%
ENGIE 13.66 6.1 7.4 8.3 8.9 4.4 5.7 6.2 6.5 8.6%
FORTUM 14.43 10.8 12.9 14.9 16.8 6.6 8.5 9.6 10.5 6.0%
PGE 6.91 - 5.8 3.9 5.3 2.7 2.7 2.2 2.8 0.0%
TAURON 3.91 4.1 3.9 2.7 3.1 3.8 3.8 3.3 3.3 0.0%
Median 10.8 11.0 10.5 10.0 5.8 6.0 6.0 6.2 5.8%
ENEA 9.42 -7.1 1.9 1.9 2.4 1.8 1.4 1.2 1.2 0%
premium / discount - -82.8% -81.5% -76.3% -69.1% -76.3% -80.5% -80.0% -

Implied valuation
median 10.8 11.0 10.5 10.0 5.8 6.0 6.0 6.2
multiple weight 33.3% 33.3% 33.3%
year weight 0.0% 33.3% 33.3% 33.3% 0.0% 33.3% 33.3% 33.3% 100.0%

equity value per share (PLN) 35.03

Source: mBank

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Alternative DCF Valuation

(Coal Assets Carve-Out Scenario)

Below, we present an alternative DCF valuation of Enea in a FCF is adjusted for coal assets contribution, and working
hypothetical scenario where the company sells its coal assets capital changes are neutralized. We also factor out deferred tax
to the state. This is a simplified approach which assumes the net assets as they are mostly attributable to conventional
coal assets will be carved out as of January 2025 and which power plants. We do not apply any re-rating components (Beta
relies on remuneration methodology as described in the and ERP remain the same).
section of this report entitled Coal Asset Carve-Out.
A divestment of Enea’s stake in LW Bogdanka is priced into the
current market price. In this scenario, our target price would
amount to PLN 22.09 vs PLN 18.16 in the base case scenario.

DCF Model
(PLN m) 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E 2032E 2033E +
EBITDA 5,946.5 2,873.3 3,119.9 3,205.1 3,351.8 3,279.9 3,273.4 3,437.1 3,595.5 3,737.1 3,737.1
D&A expenses 1,733.9 948.9 1,045.5 1,113.1 1,202.8 1,180.3 1,229.1 1,277.8 1,325.8 1,372.5 2,252.5
EBIT 4,212.7 1,924.3 2,074.4 2,092.0 2,149.0 2,099.5 2,044.3 2,159.3 2,269.7 2,364.6 1,484.6
tax on EBIT 800.4 365.6 394.1 397.5 408.3 398.9 388.4 410.3 431.2 449.3 282.1
NOPLAT 3,412.3 1,558.7 1,680.3 1,694.5 1,740.7 1,700.6 1,655.9 1,749.1 1,838.4 1,915.4 1,202.6

CAPEX -3,286.7 -2,357.6 -2,411.5 -2,440.7 -2,449.2 -2,435.1 -2,412.1 -2,373.0 -2,319.3 -2,252.5 -2,252.5

FCF 3,642.5 851.1 -155.9 -111.5 -709.9 315.2 756.0 765.5 1,045.6 962.5 1,202.6
WACC 11.3% 12.2% 12.8% 12.4% 10.6% 9.9% 10.5% 10.6% 10.9% 10.9% 9.5%
discount factor 0.95 0.84 0.75 0.67 0.60 0.55 0.50 0.45 0.40 0.36 0.36
PV FCF 3,453.3 719.1 -116.8 -74.3 -427.7 172.8 375.2 343.4 423.1 351.2

FCF growth in the terminal period 2.0% Sensitivity Analysis

Terminal value 15,977.6 FCF growth in perpetuity
Present value of terminal value 5,830.3 0.0% 1.0% 2.0% 3.0% 4.0%
Present value of FCF in the forecast period 5,219.2 WACC +1,0 p.p. 18.58 19.50 20.65 22.09 23.98
Enterprise value 11,049.5 WACC +0,5 p.p. 19.02 20.04 21.33 22.97 25.16
Net debt 5,047.2 WACC 19.50 20.65 22.09 23.98 26.56
Minority interest 0.0 WACC -0,5 p.p. 20.04 21.33 22.97 25.16 28.23
Equity investments 216.1 WACC -1,0 p.p. 20.65 22.09 23.98 26.56 30.27
LWB stake divestment 662.3
Carve-out proceeds 3,561.3
Equity value 10,442
million shares outst 529.7
Equity value per share (PLN) 19.71
12M cost of equity 12.1%
Target price (PLN) 22.09
Source: mBank

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P&L CF statement
(PLN m) 2022 2023 2024E 2025E 2026E (PLN m) 2022 2023 2024E 2025E 2026E
revenues 30,118 48,183 35,206 29,993 27,597 operating CF 1,226 2,246 7,072 5,939 3,931
YoY change 41% 60% -27% -15% -8% working capital -2,318 -3,261 850 683 314
EBITDA adjusted 2,643 5,484 5,447 5,166 4,582 provisions incl. CO2 2,647 863 -48 -1,415 -470
EBITDA 2,220 6,298 5,947 5,166 4,582 investing CF -2,486 -2,856 -3,208 -3,284 -3,338
generation 310 3,605 2,530 1,967 1,245 CAPEX -2,587 -2,936 -3,287 -3,337 -3,381
trading -76 -30 237 251 265 financing CF -1,330 2,072 -4,678 -2,982 -743
distribution 1,329 1,822 2,264 2,490 2,730 interest payments -181 -292 -837 -197 -136
mining 611 1,326 971 512 393 dividends paid 0 0 0 0 0
others/adjustment 46 -426 -56 -54 -51 CF statement -2,590 1,462 -815 -327 -150

D&A 1,642 5,342 1,734 1,816 1,895 CFO/EBITDA 55.2% 35.7% 118.9% 115.0% 85.8%
EBIT 578 956 4,213 3,349 2,686 FCFF -1,361 -690 3,785 2,602 549
financing activity -303 -1,464 -749 -135 -83 FCFF/EV -14.0% -6.1% 44.4% 42.7% 9.7%
FCFE -1,542 -982 2,948 2,405 414
profit before tax 275 -508 3,464 3,214 2,604 FCFE/MCAP -30.9% -19.7% 59.1% 48.2% 8.3%
tax rate 56.8% 12.9% 19.0% 19.0% 19.0% ROIC 2.5% 3.9% 16.9% 13.5% 10.3%
minorities -74 -262 -171 -39 -4 ROCE 2.5% 4.0% 17.2% 13.3% 10.1%
net profit 45 -704 2,635 2,565 2,105 DYield 0.0% 0.0% 0.0% 0.0% 0.0%

Balance sheet Key ratios/KPIs

(PLN m) 2022 2023 2024E 2025E 2026E 2022 2023 2024E 2025E 2026E
fixed assets 23,162 21,637 23,190 24,710 26,196 P/E 110.1 - 1.9 1.9 2.4
PP&E 20,154 18,261 19,802 21,335 22,859 EV/EBITDA 4.4 1.8 1.4 1.2 1.2
intangible assets 1,179 1,178 1,189 1,177 1,139 P/S 0.2 0.1 0.1 0.2 0.2
others 1,828 2,198 2,198 2,198 2,198 P/BV 0.3 0.4 0.3 0.3 0.2
current assets 14,273 17,474 13,799 10,342 9,725
inventory 1,980 1,954 1,944 1,656 1,523 Generation/Mining
trade receivables 5,260 6,777 4,908 4,181 3,847 production TWh 26.2 21.3 20.2 20.3 17.6
CO2 allowances 4,093 3,731 3,731 1,616 1,616 coal 24.3 19.1 17.8 17.8 15.2
others 1,376.3 1,985.4 1,005.2 1,005.2 1,005.2 RES 1.9 2.3 2.4 2.4 2.4
cash 1,563.7 3,026.1 2,211.1 1,883.7 1,733.2
Coal capacity MWe 5,924 5,924 5,694 5,694 4,774
equity 14,875 13,939 16,564 19,120 21,215 RES capacity MWe 134 147 197 254 256
minorities 1,271 1,501 1,671 1,710 1,714 emission factor 0.88 0.85 0.84 0.84 0.83
noncurrent liab. 7,700 8,703 6,471 4,852 4,499 power price realized 436 937 620 500 474
loans/bonds 4,087 4,288 2,056 437 84 coal production mt 8.4 7.1 7.5 7.5 7.5
leases 625 659 659 659 659 coal price PLN/t 283 575 450 360 312
provisions 1,909 2,291 2,291 2,291 2,291 agg. EBITDA/MWh 35 231 173 122 93
tax liabilities 536 607 607 607 607
others 542 858 858 858 858 Distribution
current liabilities 13,589 14,968 12,283 9,370 8,493 RAB (PLN bn) 10.0 10.0 11.1 12.3 13.6
loans/bonds 750 3,090 1,481 315 60 EBIT/RAB 6.2% 10.8% 13.1% 12.9% 12.7%
leases 31 36 36 36 36 WACC 5.8% 8.5% 11.0% 11.0% 11.0%
trade payables 5,166 3,271 2,242 1,910 1,757
CO2 provisions 5,499 6,536 6,488 5,074 4,604 Trading
other provisions 577 762 762 762 762 volume TWh 22.8 22.2 22.6 23.1 23.5
others 1,565 1,273 1,273 1,273 1,273 EBITDA/MWh -3.3 -1.3 10.5 10.9 11.3

net debt 3,493 4,886 1,859 -598 -1,055 price (PLN) 9.42 9.42 9.42 9.42 9.42
net debt/EBITDA 1.6 0.8 0.3 -0.1 -0.2 shares outst. (m) 529.7 529.7 529.7 529.7 529.7
CO2 adj net debt 4,899 7,690 4,616 2,860 1,933 Mcap 4,987 4,987 4,987 4,987 4,987
adj ND/EBITDA 2.2 1.2 0.8 0.6 0.4 EV 9,752 11,374 8,518 6,099 5,646
Source: mBank
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Wednesday, 26 June 2024 | research report

PGE: buy (new)

Wednesday, 26 June 2024 | research report
PGE PW; PGE.WA | Power utilities, Poland

Best Play On Coal Carve-Out Current Price* PLN 6.91

Target Price PLN 8.84
We resume coverage of PGE with a buy recommendation and 12M target
price of PLN 8.84, implying 28% upside potential. mCap PLN 15.5 bn

Our base case scenario for PGE does not factor in a coal assets carve-out, Free Float PLN 6.1 bn
but it does assume a compensation for negative clean-dark spreads ADTV (3M) PLN 30.1m
expected to be paid to conventional power plants as of 2028 in order to *Price as of June 25, 2024, 5:00 PM
keep them active. In such a scenario, although less damaging to DCF
Ownership
valuation, PGE’s coal-based generation assets would still be destructive to
shareholder value. That being said, in our view the market may be Polish Government 60.86%
overestimating the negative NPV of these assets by extrapolating the NN Pension Fund 4.79%
relatively weak Q1’24 results (expensive coal stocks and ineffective Allianz Pension Fund 4.37%
hedging strategy) and ignoring the intersegmental management
PZU Pension Fund 3.02%
commissions paid to the trading segment.
Others 26.96%
We also want to highlight the fast-growing value of PGE’s regulated
distribution assets, expected to grow from PLN 20bn in 2023 to over 30bn About PGE
in 2028 due to huge investment rewarded by high ‘re-investing’ premiums. PGE is Poland's largest vertically integrated energy
One should also keep in mind PGE’s offshore project portfolio, of which 1.25 group with a market share of 37% in net generation
GW of capacity is already in advanced development phase (with estimate (lignite power plants in Bełchatów/Turów, coal power
NPV of PLN 3.6bn total and PLN 1.6 per share) and another 4.9GW are plants in Opole/Rybnik and several district heating
licenses eligible to be awarded CfDs at upcoming auctions. assets in biggest Polish cities), 26% in power
distribution and 26% in electricity supply. PGE also
When it comes to the potential unbundling of coal assets, we see PGE as owns a significant offshore wind portfolio with the
the biggest beneficiary of the unloading of a huge fixed-cost burden and first farms scheduled to be commenced in 2027/28.
large land reclamation charges (with current BV of PLN 6.5bn). PGE can
supply Poland with 2026-30 average available capacity of 10.8GW, backed PGE vs. WIG
by capacity market contracts (~7GW). Moreover, it is vertically integrated 11
PGE
with lignite mines – an important consideration from the point of view of PLN
WIG
system security. Our simplified post-carve-out DCF target price for PGE
10
comes out at PLN 17.67, implying 156% upside potential from the current
share price level (vs 135% Enea and 47% Tauron). At this point, it is worth
mentioning that, since the ‘carve-out rally’ began in July 2023, stocks in 8
Enea and Tauron have rallied more than 40% whereas for PGE the return
has been negative to the tune of -4%.
Value from Capital Projects 7
PGE is currently focusing its investment strategy on regulated distribution
assets (>60% of total capex and with the highest WACC re-investing premium),
5
CCGTs, equipped with long term capacity market contracts and earning higher
CSS with potential for high intraday spread arbitrage profits, and development
of renewables and battery energy storage systems (incl. offshore licenses).
According to our calculations, none of these projects should raise the market’s Target
Rating
concerns over potential value destruction. The CEO’s expressed skepticism Name Price
regarding the Pątnów nuclear project is a sign of the company’s new approach New Old New Old
to huge high-risk politically driven projects. PGE 8.84 - buy suspended
What remains a big question mark still is PGE’s medium-term strategy for Name
Current Target
Upside
Price Price
district heating as utilizing EU funds and support mechanisms may be crucial
PGE 6.91 8.84 28.0%
here for continuing to offer satisfactory returns for shareholders.
We would also be way of any M&A plans in renewables – PGE seems intent on
Forecast Update 2024E 2025E 2026E
sticking to its generation capacity KPIs (it will lose market share after coal plant
EBITDA +3.4% +0.7% -0.2%
de-commissioning/carve-out), which could cause it to make excessive bids, a
common practice among Polish state owned companies in recent years. Net profit +18.6% +6.9% +15.8%

Power (PLN/MWh) +0.0% +8.5% +7.9%

(PLN m) 2022 2023 2024E 2025E 2026E
Coal(PLN/t) +0.0% +0.0% +0.0%
Revenue 73,435.0 95,964.0 76,766.5 66,568.0 63,932.8
CO2 (EUR/t) +27.3% +25.0% +20.4%
EBITDA 8,661.0 10,024.0 9,460.1 11,754.9 10,921.5
margin 11.8% 10.4% 12.3% 17.7% 17.1%
EBIT 4,299.0 -3,431.0 4,090.9 5,821.6 4,605.1
Net profit 3,328.0 -5,012.0 2,675.3 4,010.4 2,899.7
P/E 4.7 - 5.8 3.9 5.3
Analyst:
P/S 0.2 0.2 0.2 0.2 0.2
P/B 0.3 0.3 0.3 0.3 0.3 Kamil Kliszcz
EV/EBITDA 1.5 2.7 2.7 2.2 2.8 Head of Equity Research
Equity Analyst, Expert
DPS 0.0 0.0 0.0 0.0 0.0 +48 667 770 837
Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0% [email protected]

35
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Valuation
Valuation Summary
Using DCF Analysis, we set our twelve-month per-share price weight price (PLN)
target for PGE at PLN 8.84. Relative valuation is presented for Relative Valuation 0% 12.89
information purposes only as we believe the DCF method
DCF Analysis 100% 7.89
better reflects the risk profile of Polish state owned utilities.
price 7.89
12M target price 8.84
Source: mBank

DCF Valuation

DCF model assumptions: ▪ Terminal value is adjusted for coal assets as we believe that,
in the long term this business line will be discontinued.
▪ The DCF model uses free cash flow forecasts for the 2024- Moreover, during the forecast period as of January 2027 we
2033 period. applied an “adjustment” factor in the conventional
▪ Cash flow is discounted as of the end of June 2024. Equity generation segment, assuming that, in order to temporarily
value calculations factor in net debt as of 31 December 2023 keep these assets in the power system, the government will
incl. leases. We include minority interests at book value as of cover the potential negative CDS with an “emergency”
December 2023. compensation mechanism.

▪ Enterprise value is adjusted for book value of investments in ▪ The terminal risk-free rate is 4.5% and beta is 1.2x (similar for
associates, reclamation provisions, deferred tax net assets all Polish state owned utilities). RFRs in the forecast period
and discounted value of CO2 liabilities estimated as of are based on the 10Y Polish government bond forward curve.
December 2033. Equity risk premium was set at 6.0%.

▪ For the purpose of terminal value estimates, we adjust ▪ We assume that FCF after FY2033 will grow at an annual rate
CAPEX to match D&A expenses, however on the top we add of 2.0%.
offshore project D&A (newly assets with 25-year lifetime).

DCF Model Assumptions

2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E 2032E 2033E
Power price 1Y fwd (PLN/MWh) 638 496 467 451 408 380 378 376 376 364
CO2 (EUR/t) 70 75 79 83 87 91 95 100 100 100
Emission factor (t/MWh) 1.05 1.01 1.00 0.96 0.96 0.96 0.94 0.92 0.90 0.87
ARP Coal (PLN/t) 500 400 336 336 285 234 234 234 234 234
Power generation TWh 56.4 57.4 56.1 55.5 55.4 54.1 53.1 52.8 51.0 48.3
lignite 27.6 26.3 25.1 24.6 24.2 23.7 22.0 19.2 16.5 13.3
coal 18.4 17.9 16.9 13.5 10.6 9.6 10.0 10.3 10.9 11.2
natural gas 6.7 9.2 9.9 12.9 12.9 12.9 12.9 12.9 12.9 12.9
renewables 3.7 4.0 4.2 4.4 7.7 7.9 8.1 10.4 10.6 10.8
RAB in distribution (PLN bn) 21.6 24.3 27.1 29.8 32.3 34.7 37.0 39.1 41.0 42.5
regulated WACC 11.7% 11.5% 11.5% 10.5% 9.5% 8.5% 7.5% 7.5% 7.5% 7.5%
RAB in railway distr. (PLN bn) 4.2 4.4 4.5 4.5 4.4 4.2 3.9 3.7 3.4 3.1
regulated WACC 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0%
Trading volumes incl gas (TWh) 32.7 32.9 33.2 33.5 33.7 34.0 34.3 34.6 34.8 35.1
adj. EBITDA margin 0.9% 1.3% 1.6% 1.7% 2.1% 2.3% 2.4% 2.5% 2.7% 2.9%
Source: mBank

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DCF model
PLN m 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E 2032E 2033E +
Revenue 76,766 66,568 63,933 62,205 58,178 55,497 55,383 55,528 55,439 53,521 53,521
change -20.0% -13.3% -4.0% -2.7% -6.5% -4.6% -0.2% 0.3% -0.2% -3.5% 0.0%
EBITDA 9,460 11,755 10,921 10,892 11,649 10,732 11,183 12,807 13,563 14,114 14,589
EBITDA margin 12.3% 17.7% 17.1% 17.5% 20.0% 19.3% 20.2% 23.1% 24.5% 26.4% 27.3%
D&A expenses 5,369 5,933 6,316 6,662 7,504 7,538 7,781 8,354 8,577 8,785 7,514
EBIT 4,091 5,822 4,605 4,230 4,146 3,194 3,401 4,452 4,986 5,329 7,075
EBIT margin 5.3% 8.7% 7.2% 6.8% 7.1% 5.8% 6.1% 8.0% 9.0% 10.0% 13.2%
tax on EBIT 777 1,106 875 804 788 607 646 846 947 1,013 1,344
NOPLAT 3,314 4,715 3,730 3,426 3,358 2,587 2,755 3,606 4,039 4,317 5,731

CAPEX -8,896 -10,845 -13,448 -11,865 -13,496 -10,703 -10,183 -10,893 -7,655 -7,259 -6,666
working capital 2,402 91 507 151 -4 398 189 -429 -265 -1,341 0

FCF 2,189 -106 -2,895 -1,626 -2,638 -180 542 638 4,695 4,502 6,578
WACC 10.7% 10.6% 10.7% 10.2% 10.6% 9.9% 10.5% 10.6% 10.9% 10.9% 9.5%
discount factor 0.95 0.86 0.78 0.70 0.64 0.58 0.52 0.47 0.43 0.39 0.39
PV FCF 2,080 -91 -2,247 -1,145 -1,680 -104 285 303 2,009 1,737

WACC 10.7% 10.6% 10.7% 10.2% 10.6% 9.9% 10.5% 10.6% 10.9% 10.9% 9.5%
Cost of debt 5.9% 5.8% 6.2% 6.2% 6.6% 5.9% 6.5% 6.7% 6.9% 6.9% 5.5%
risk-free rate 4.9% 4.8% 5.2% 5.2% 5.6% 4.9% 5.5% 5.7% 5.9% 5.9% 4.5%
Risk premium 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%
Effective tax rate 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0%
Net debt / EV 18.3% 18.3% 23.8% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0%

cost of equity 12.1% 12.0% 12.4% 12.4% 12.8% 12.1% 12.7% 12.9% 13.1% 13.1% 11.7%
risk premium 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%
Beta 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2

FCF growth in the terminal period 2.0% Sensitivity Analysis

Terminal value 87,400 FCF growth in perpetuity
Present value of terminal value 33,723 0.0% 1.0% 2.0% 3.0% 5.0%
Present value of FCF in the forecast period 1,145 WACC +1,0 p.p. 4.04 5.30 6.86 8.84 11.42
Enterprise value 34,868 WACC +0,5 p.p. 4.64 6.04 7.79 10.04 13.03
Net debt 10,702 WACC 5.30 6.86 8.84 11.42 14.93
Minority interest 981 WACC -0,5 p.p. 6.04 7.79 10.04 13.03 17.22
Other net assets 4,259 WACC -1,0 p.p. 6.86 8.84 11.42 14.93 20.00
Reclamation/CO2 provisions 9,751
million shares outst 2243.7
Equity value per share (PLN) 7.89
12M cost of equity 12.1%
Target price (PLN) 8.84

EV/EBITDA (‘24) at target price 3.9

P/E(‘24) at target price 7.4
TV / EV 91.1%
Source: mBank

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Relative Valuation

We compared PGE with European integrated utilities and its

closest local peers using 2024-2026 projected price-to-
earnings, EV/EBITDA and Dyield ratios. Relative valuation is
presented for informational purposes only and is not included
in the final valuation.

PGE Relative Valuation

P/E EV/EBITDA Dyield
Price 2023 2024E 2025E 2026E 2023 2024E 2025E 2026E 2024-26
CEZ 933.50 17.0 14.6 17.0 11.4 5.3 6.3 6.2 6.5 5.2%
EDP 3.64 12.1 12.1 12.8 12.6 7.1 7.5 7.7 7.4 5.6%
ENDESA 19.12 16.3 12.1 11.2 10.5 7.5 6.1 5.9 5.8 6.4%
ENEL 6.57 10.2 9.9 9.8 9.5 6.4 5.9 5.9 5.8 7.1%
ENGIE 13.66 6.1 7.4 8.3 8.9 4.4 5.7 6.2 6.5 8.6%
FORTUM 14.43 10.8 12.9 14.9 16.8 6.6 8.5 9.6 10.5 6.0%
ENEA 9.42 -7.1 1.9 1.9 2.4 1.8 1.4 1.2 1.2 0.0%
TAURON 3.91 4.1 3.9 2.7 3.1 3.8 3.8 3.3 3.3 0.0%
Median 10.5 11.0 10.5 10.0 5.8 6.0 6.0 6.2 5.8%
PGE 6.91 -3.1 5.8 3.9 5.3 2.7 2.7 2.2 2.8 0%
premium / discount - -47.3% -63.2% -46.6% -53.6% -55.2% -62.8% -55.1% -

Implied valuation
median 10.5 11.0 10.5 10.0 5.8 6.0 6.0 6.2
multiple weight 33.3% 33.3% 33.3%
year weight 0.0% 33.3% 33.3% 33.3% 0.0% 33.3% 33.3% 33.3% 100.0%

equity value per share (PLN) 12.89

Source: mBank

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Alternative DCF Valuation

(coal assets carve-out scenario)

Below we present an alternative DCF valuation in a In such a scenario, our target price would amount to PLN 17.67
hypothetical coal assets carve-out scenario. It is just a vs PLN 8.84 in the base case scenario.
simplified approach, assuming coal assets carve-out as of
January 2025 with remuneration methodology described in
the section Coal Asset Carve-Out.
FCF are adjusted for coal assets contribution, and working
capital changes are neutralized. We also factor out deferred tax
net assets as they are mostly attributable to conventional
assets. We do not apply any re-rating components (Beta factor
and ERP remain the same).

DCF Model
(PLN m) 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E 2032E 2033E +
EBITDA 9,460.1 10,668.5 11,036.5 11,821.0 13,357.4 12,880.3 12,794.7 14,017.5 14,395.0 14,690.6 14,690.6
D&A expenses 5,369.2 3,800.2 4,159.1 4,398.7 5,225.4 5,317.3 5,544.6 6,104.3 6,318.3 6,525.0 7,713.7
EBIT 4,090.9 6,868.2 6,877.4 7,422.4 8,132.0 7,563.0 7,250.1 7,913.2 8,076.7 8,165.6 6,976.9
tax on EBIT 777.3 1,305.0 1,306.7 1,410.2 1,545.1 1,437.0 1,377.5 1,503.5 1,534.6 1,551.5 1,325.6
NOPLAT 3,313.6 5,563.3 5,570.7 6,012.1 6,586.9 6,126.1 5,872.6 6,409.7 6,542.1 6,614.1 5,651.3

CAPEX -8,896.1 -8,452.0 -11,134.8 -10,591.5 -12,761.6 -10,008.8 -9,555.6 -10,333.0 -7,162.5 -6,866.3 -6,866.3

FCF 2,188.5 911.5 -1,405.0 -180.7 -949.3 1,434.5 1,861.6 2,181.0 5,697.9 6,272.9 6,498.7
WACC 10.7% 10.6% 10.7% 10.2% 10.6% 9.9% 10.5% 10.6% 10.9% 10.9% 9.5%
discount factor 0.95 0.86 0.78 0.70 0.64 0.58 0.52 0.47 0.43 0.39 0.39
PV FCF 2,079.7 782.8 -1,090.5 -127.3 -604.8 831.5 976.9 1,034.4 2,437.8 2,420.3

FCF growth in the terminal period 2.0% Sensitivity Analysis

Terminal value 86,344.4 FCF growth in perpetuity
Present value of terminal value 33,315.4 0.0% 1.0% 2.0% 3.0% 5.0%
Present value of FCF in the forecast period 8,740.9 WACC +1,0 p.p. 12.93 14.18 15.72 17.67 20.22
Enterprise value 42,056.3 WACC +0,5 p.p. 13.52 14.91 16.64 18.86 21.82
Net debt 10,702.0 WACC 14.18 15.72 17.67 20.22 23.70
Minority interest 981.0 WACC -0,5 p.p. 14.91 16.64 18.86 21.82 25.95
Other net assets 1,540.0 WACC -1,0 p.p. 15.72 17.67 20.22 23.70 28.70
Carve-out proceeds 3,466.3
Equity value 35,380
million shares outst 2,243.7
Equity value per share (PLN) 15.77
12M cost of equity 12.1%
Target price (PLN) 17.67
Source: mBank

39
P&L CF statement
PLN m 2022 2023 2024E 2025E 2026E PLN m 2022 2023 2024E 2025E 2026E
revenues 73,435 95,964 76,766 66,568 63,933 operating CF 11,609 3,269 11,217 10,883 10,733
adj. EBITDA 7,105 12,783 9,252 11,755 10,921 working capital 7,991 3,684 2,402 -5,468 507
Conv. generation 618 2,086 -558 844 -385 investing CF -7,296 -11,451 -8,174 -10,257 -12,927
District heating 33 2,061 1,572 1,826 1,501 CAPEX -6,661 -9,733 -8,896 -10,845 -13,448
Renewables 1,796 1,108 1,139 1,169 1,214 financing CF 841 2,328 -3,043 -626 2,195
Distribution 2,836 3,930 4,150 4,915 5,562 dividends paid 0 0 0 0 0
Railway energy 0 1,243 1,103 1,120 1,128 CF statement 5,154 -5,854 0 0 0
Trading 1,957 1,984 1,734 1,765 1,782
Others -135 371 113 116 119 CFO/EBITDA 163.4% 25.6% 121.2% 92.6% 98.3%
FCFF 4,948 -6,464 2,321 37 -2,716
D&A 4,362 13,455 5,369 5,933 6,316 FCFF/EV 37.0% -23.8% 9.1% 0.1% -9.0%
EBIT 4,299 -3,431 4,091 5,822 4,605 FCFE 4,759 -7,090 1,625 -715 -3,658
financing activity -624 -696 -752 -942 -1,138 FCFE/MCAP 30.7% -45.8% 10.5% -4.6% -23.6%
ROIC 6.7% -5.1% 5.6% 7.6% 5.5%
profit before tax 4,110 -4,055 3,395 5,070 3,663 ROCE 6.2% -4.8% 5.7% 7.7% 5.7%
tax rate 17.5% -20.9% 19.0% 19.0% 19.0% DPS 0.00 0.00 0.00 0.00 0.00
net profit 3,328 -5,012 2,675 4,010 2,900 payment ratio 0.0% 0.0% 0.0% 0.0% 0.0%
DYield 0.0% 0.0% 0.0% 0.0% 0.0%
Balance sheet
PLN m 2022 2023 2024E 2025E 2026E Multiples
fixed assets 71,732 78,340 81,867 86,779 93,911 2022 2023 2024E 2025E 2026E
PP&E 64,388 68,508 72,002 76,943 84,165 P/E 4.7 - 5.8 3.9 5.3
intangible assets 2,037 3,804 3,837 3,807 3,718 EV/EBITDA 1.5 2.7 2.7 2.2 2.8
current assets 34,046 35,103 30,693 23,892 23,541 P/S 0.2 0.2 0.2 0.2 0.2
inventory 4,918 3,773 3,018 2,617 2,514 P/BV 0.3 0.3 0.3 0.3 0.3
trade receivables 9,083 10,516 6,861 6,019 5,772 P/CF 1.3 4.7 1.4 1.4 1.4
CO2 allowances 4754 10517 10517 4958.5 4958.5 P/FCFE 3.3 -2.2 9.5 -21.7 -4.2
cash 11,887 6,033 6,033 6,033 6,033
Generation TWh 66.2 56.8 56.4 57.4 56.1
equity 53,538 46,874 49,549 53,560 56,459 Lignite 39.6 29.8 27.6 26.3 25.1
minorities 845 981 1,055 1,151 1,219 Coal 20.6 18.8 18.4 17.9 16.9
noncurrent liab. 16,099 23,378 22,370 22,813 25,083 Natural gas 2.8 4.2 6.7 9.2 9.9
loans/bonds 6,799 10,384 9,376 9,819 12,089 RES 3.3 4.0 3.7 4.0 4.2
provisions 6,363 9,746 9,746 9,746 9,746
current liabilities 35,296 42,210 39,585 33,146 34,691 Emission factor 1.06 1.00 0.97 0.93 0.92
loans/bonds 2,137 6,351 5,734 6,006 7,394
trade payables 3,104 4,715 3,772 3,271 3,141 Distribution RAB 19,620 23,365 25,791 28,744 31,602
CO2 provisions 20,318 21,211 21,971 15,762 16,048 power 19,620 19,806 21,570 24,333 27,097
railway network 0 3,559 4,221 4,411 4,504
WC cycles
inventories 24 14 14 14 14 Regulated WACC
receivables 45 40 33 33 33 power 5.8% 8.5% 11.7% 11.5% 11.5%
payables 15 18 18 18 18 railway network - 5.8% 9.0% 9.0% 9.0%

net debt -2,951 10,702 9,077 9,792 13,450 price (PLN) 6.91 6.91 6.91 6.91 6.91
ND/EBITDA -0.3 1.1 1.0 0.8 1.2 shares outst. (m) 2,244 2,244 2,244 2,244 2,244
ND incl. CO2 12,499 21,376 20,512 20,575 24,519 Mcap 15,495 15,495 15,495 15,495 15,495
adj. ND/EBITDA 1.44 2.13 2.17 1.75 2.25 EV 13,389 27,178 25,628 26,439 30,164
Source: mBank

40
Wednesday, 26 June 2024 | update

Polenergia: buy (reiterated)

PEP PW; PEP.WA | Renewables, Poland
Wednesday, 26 June 2024 | research report
Capital Management Optimization On the Way Current Price* PLN 64.80
Target Price PLN 104.09
Polenergia shares continue to underperform the WIG index, with the YTD mCap PLN 5.0bn
gap at ca. 25 ppts, mirroring negative trends on European RES peers (wind Free Float PLN 1.3bn
companies -4% YTD, solar companies -10% YTD) and volatile power prices.
ADTV (3M) PLN 0.2m
The announcement in February of plans to raise capital (up to PLN 3.4bn) *Price as of June 25, 2024, 5:00 PM
put an extra damper on performance, but since then a new CEO has taken
over, with a different approach. CEO Zań is committed to optimizing Ownership
capital management by maximizing debt financing and via back ended Mansa Investments 42.84%
equity in offshore project finance. In our view, when combined with a BIF IV Europe Holdings 32.04%
review of certain capital projects, this should allow Polenergia to avoid a
Allianz Pension Fund 7.83%
capital increase, which we take as our baseline scenario (the baseline also
assumes slower onshore wind development and excludes Baltic NN Pension Fund 5.92%
I/Romanian wind). When it comes to debt financing, we see huge potential Generali Pension Fund 4.45%
in leveraging existing wind and solar farms (financing collateral up to Others 6.92%
PLN 5-6bn vs. current gross debt at PL 1.7bn).
We continue to see value both in Polenergia’s onshore assets (1,300 MW About Polenergia
wind and ~500 MW PV projects incl. cable pooling), and its offshore wind Polenergia is an independent, vertically integrated
energy group with a focus on clean energy. The
project (>PLN 1bn EBITDA from 2028, PLN 25/share NPV).
company operates 493 MW of onshore wind capacity
After minor updates, we keep our buy rating for PEP unchanged with a and 81 MW of solar capacity, and it is currently
new 12M target price of PLN 104.09. PEP stock is trading at a 37% discount developing three offshore wind projects jointly with
to peers on 2024-26E P/E and EV/EBITDA adjusted for offshore linked debt. Equinor (3GW total capacity, first installations set to
commence in 2027/28) Polenergia’s onshore wind
Is a Capital Increase Really Necessary? and solar pipeline totals 1.8 GW.
A potential share overhang as large as PLN 3.4bn has been a drag on PEP’s Polenergia is also an energy distributor with
performance, but the new Management Board seem more keen to focus on regulatory assets worth PLN 140m, and it owns gas-
equity management. fired CHPs and is involved in energy trading.

While it would be impossible to develop Polenergia’s ambitious pipeline (1.8 PEP vs. WIG
GW in Polish PV and onshore wind, 3GW offshore JVs, 0.6 GW Romanian 130
PEP
onshore wind, green hydrogen project) without an equity injection, we would PLN WIG
expect a short-term prioritizing of the projects (offshore wind, cable pooling
110
PVs) that should mitigate capital needs. According to our model, the FCF from
existing assets can cover equity contributions to offshore until 2028, and
0.6 GW of operational capacity can provide collateral for up to PLN 5-6bn debt 90
financing. A more ambitious schedule would require an equity raise, but, on
the other hand, the additional projects would boost our valuation of PEP.
70
Offshore Projects – Huge Value Potential
Polenergia’s offshore wind project, the “Baltics” II and III (720MW attributable
to Polenergia) is currently in late development phase and the FID is expected 50
in early 2025 after financing is secured in late 2024.
As a reminder, the project was awarded a 25-year CfD at the max price
(PLN 319.4/MWh), with CPI indexation and an option to settle the CfD in euro
Target Price Rating
(attractive financing terms). According to our estimates, this implies a realized Name
power price in 2028 of PLN ~500/MWh. After applying benchmark O&M costs New Old New Old
and balancing costs at PLN 15/MWh, we arrive at a 2028 EBITDA contribution Polenergia 104.09 103.62 buy buy
of PLN ~1bn. This implies an NPV of ca. PLN 2.0bn total and PLN 25 per share.
Name Current Price Target Price Upside
There is upside risk from the Baltic I license (total 1560 MW capacity that can
Polenergia 64.80 104.09 60.6%
be submitted for auction in 2025), which is not included in our current model
as its development may require a capital increase.
Forecast Update 2024E 2025E 2026E
(PLN m) 2022 2023 2024E 2025E 2026E EBITDA +5.3% +0.1% +3.1%
Revenue 7,089.2 5,615.4 4,391.0 4,214.3 4,220.7 Net profit +7.5% -1.8% +49.2%
EBITDA 354.0 547.5 786.9 669.5 693.0 Power (PLN/MWh) +0.0% +8.5% +7.9%
margin 5.0% 9.8% 17.9% 15.9% 16.4% Green cert.(PLN/MWh) +0.0% +0.0% +0.0%
EBIT 237.6 381.2 606.2 473.2 485.6 CO2 (EUR/t) +27.3% +25.0% +20.4%
Net profit 159.9 263.6 444.1 266.4 163.3
P/E 27.1 19.0 11.3 18.8 30.6
P/S 0.6 0.9 1.1 1.2 1.2 Analyst:
P/B 1.4 1.3 1.1 1.1 1.0 Kamil Kliszcz
EV/EBITDA 14.5 9.7 8.1 11.7 18.6 Head of Equity Research
Equity Analyst, Expert
DPS 0.0 0.0 0.0 0.0 0.0
+48 667 770 837
Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0% [email protected]

41
Onshore Wind Segment Capacity forecast (MW) and EBITDA estimates (PLN m) for
Polenergia’s Onshore Wind business
Polenergia reported PLN 222m EBITDA in the onshore wind 800 733 800
segment in Q1’24, a big jump from PLN 164m a year earlier. The 649 671
700 622 629 700
improvement is mainly attributable to higher realized power
prices (+43% y/y after balancing costs) and 8% bigger 600 600
468
production (more favorable wind conditions and full utilization 500 500
of newly launched capacities). 343
400 400
On the other hand, the company suffered a PLN 13m drop in 300 300
revenues from green certificates due to lower prices (which
fell 28% y/y, but nevertheless remained well above market 200 200
averages due to hedging at PLN 133/MWh vs PLN 52/MWh). 100 100
Operating costs also increased y/y, but remained broadly in line
0 0
with capacity development.

Quarterly unit EBITDA of Polenergia vs realized power

Capacity installed (rhs) EBITDA
price (PLN/MWh) and unit opex
Source: Polenergia, mBank
500
140
450 We expect that the Onshore Wind segment will generate
120 EBITDA higher than PLN 0.7bn in 2024 as Polenergia should
400 continue to benefit from higher prices post 1Q.
100
350
Our forecast assumes wind conditions consistent with
80 averages throughout the year as, after a strong Q1, the
300
60 conditions in Q2 have been rather disappointing (see the
250
following table).
200 40
In subsequent years, we assume average annual capacity
150 20 additions at 50 MW (Polenergia currently reports 48 MW in
advanced development phase and 1.3 GW in early stage
100 0
pipeline). The higher production, however, is offset by more
conservative pricing assumptions, and, as a result, we expect
the segmental EBITDA of Onshore Wind to shift to a lower
OPEX PLNk/MW (rhs) realized price EBITDA/MWh range of PLN 0.62-0.67bn in 2025-28.
Source: Polenergia, mBank
Power prices in our base scenario are expected to decrease
As show in the chart above, Polenergia’s unit EBITDA are well below PLN 400 in 2028, so, if Polenergia has succeeded in
correlated with realized power prices, which is not a surprise. securing higher prices in PPAs (closer to PLN 500/MWh), that
However, the historical positive spread seems to have would mean revenue upside as big as over PLN 200m annually.
disappeared recently, which is linked to a lower share of assets Average wind speed in Poland (m/s, monthly data)
receiving green certificate support due to new projects (m/s) 2019 2020 2021 2022 2023 2024 mth. avg.
coming onstream (as a reminder, the green certificates
January 4.2 3.7 3.3 5.1 3.7 4.5 4.1
mechanism will be discontinued by the end of 2029).
February 3.8 4.7 3.6 5.1 4.4 4.4 4.3
When it comes to realized prices, they are a combination of March 4.3 3.9 3.5 3.2 3.9 3.7 3.8
different factors: part of the sales volume is hedged in PPAs, 4.2 3.4 3.8 3.8 3.4 3.7 3.7
April
part are sold at fixed prices at RES auctions (net profile costs),
May 3.5 3.6 4.0 3.4 3.5 3.3 3.5
and part are sold at market prices. Polenergia does not
disclose the actual breakdown its realized prices, but from June 3.5 3.2 2.9 3.1 3.0 2.8 3.1
what we know it focuses on increasing the share of commercial July 3.4 2.8 2.9 3.5 3.0 3.1
PPAs in the sales mix. August 2.8 2.9 3.0 2.8 2.8 2.8
September 3.3 2.7 3.2 3.1 2.5 2.9
Realized power price vs quarterly spot price and 1Y forward
price (PLN/MWh) October 2.8 3.2 3.6 2.9 3.4 3.2
November 3.9 3.1 3.9 3.0 3.9 3.6
1,200
December 3.6 4.0 3.9 3.6 4.6 3.9
1,000 annual avg. 3.6 3.4 3.4 3.5 3.5 3.7
Source: Bloomberg, mBank
800

600

400

200

realized price BASE 1Y fwd price BASE spot price

Source: Polenergia, mBank

42
Quarterly load factors reported by Polenergia As far as pricing is concerned, all projects included in our
50% forecasts won long-term CfDs in RES auctions, however, in
45% the initial years, only a small part of production was declared
40% for the mechanism of support as volumes are sold under PPAs
35% and market hedging. That is why our assumption for the
30% average realized price after profile costs in 2025-28 is close to
25% PLN 330/MWh.
20% As a result, we expect segmental EBITDA to grow from PLN
15% 21m this year to PLN 66m in the next four years.
10%
5% Distribution Network
0%
The Regulatory Asset Value of Polenergia’s power distribution
network included in the current tariff amounts to PLN 139m
2021 2022 2023 2024 (another PLN 42m has already been invested and should be
added to the regulatory asset base soon).
Source: Bloomberg, mBank
Last year’s EBITDA contribution at PLN 21m is not a good proxy
Our estimates do not yet include the recently acquired for 2024 estimates as it was affected by regulatory delays that
Romanian onshore project. led to implied losses on the electricity sales in Q1’23.
As a reminder, the project’s potential capacity amounts to 685
Distribution segment’s EBITDA composition (PLN m)
MW, but it is in early stage of development (secured land rights 20.0
and grid connection). Polenergia has paid €6.8m (PLN 29m) so
far for these assets, but assuming full-scale implementation 15.0
the total acquisition costs (100% share in all SPVs) in a 4-year
horizon may reach €76.6m (€0.1/MW) ex. devex and capex 10.0
outflows.
5.0
The current investment schedule assumes that the
development phase will be completed by the end of 2025, and
0.0
that the wind farms will come onstream in late 2028.
The reason why we opt not to include this Romanian project -5.0
in our valuation model for Polenergia is that it would require a
capital increase with total capex estimated at PLN ~5bn, of -10.0
which equity share might reach PLN 1.2bn.

PV Segment sales margin distribution margin opex

Source: Polenergia
In 2023, the EBITDA contribution of the PV segment was
relatively low at PLN 10m with installed capacity of 36 MW. This year, we see a reverse effect in 1H (with regulated power
However, business is growing in scale quite fast, and after the prices well above market prices. This should be updated in the
recent Strzelino project commissioning (45MW), we expect new tariff expected as of July), and as a result, we expect
2024 EBITDA to double to PLN 21m. FY2024 EBITDA from Distribution to exceed PLN 40m.
Further, Polenergia says construction has kicked off in the The 2025 EBITDA figure should become normalized at ca.
Szprotawa project (67MW), and another 95MW is in advanced PLN 30m, and in subsequent years profits should be linked
development phase. On top of that, the company has a mostly to expected RAB evolution.
pipeline of 0.5GW early stage projects, taking advantage of
cable pooling opportunities with existing wind farm assets.
Trading Segment
Our base case scenario is that Polenergia will grow its PV
The trading segment is the most volatile and the least
capacity to 240 MW by 2028. Theoretically, the early-stage
transparent area of Polenergia’s business as it is involved in
pipeline suggests upside potential to this figure, but financing
multiple kinds of activity from own fleet management to RES
is the main challenge here (as a reminder, we do not assume
aggregation, end customer electricity sales, and sales of
an equity raise in our model).
rooftop solar panels and heat pumps.
Capacity forecast (MW) and EBITDA estimates (PLN m) Last year, the segment’s results (EBITDA at PLN 85m after a
Polenergia’s PV business PLN 5m loss generated in 2022) were boosted by extraordinary
70 66 300 profits from own fleet management (lower profile costs in
56 onshore wind, CCGT hedging optimization), and in 2024 we
60 250 expect a significant deterioration to ca. PLN 30m, including
45
50 because of challenges in the rooftop PV/heat pump business
200
40
(which suffered a loss in Q1’24).
29 150
30 21 As a reminder, starting this year, Polenergia has changed its
100 accounting policy as regards own fleet balancing costs which
20 13
10 have been allocated directly to onshore wind/PV segments.
10 50

0 0

Capacity installed (rhs) EBITDA

Source: Polenergia, mBank

43
Trading segment’s EBITDA composition (PLN m) For now, we do not include Baltic I in our model as it may
80 require a capital raise, which is not assumed in our valuation.
60 According to our calculations, using the assumptions below,
40
Polenergia’s 720MW offshore project may generate an NPV
of PLN ~2.0bn, i.e., PLN ~25 per share.
20
▪ Unit capex at €4m/MW (benchmark level, slightly above
0 the company’s own guidance of €3.9m/MW).
-20 ▪ EURPLN=4.30.
-40 ▪ We do not include devex of PLN 0.6bn already spent by the
end of 2023.
-60
▪ Fixed opex at €80k/MW (based on BVGA benchmarks and
best in class estimates from Peak Wind). This seem
opex others (rooftop PV/heat pumps) optimistic, but 1) it is CPI indexed as of 2021; 2) opex,
end clients sales own fleet mgmt according to empirical analysis, should decrease with
trading/RES agg.
lifetime, whereas we keep it flat.
Source: Polenergia
▪ On top of fixed opex, we add PLN 15/MWh profile costs.
Offshore Wind Project ▪ Power price in line with CfD secured at PLN 319.6/MWh
adjusted for CPI as of 2021.
Polenergia, as part of a 50:50 JV with Equinor, has been
developing the “Baltic II and III” offshore wind farm project with ▪ WACC at 5.8% (Beta 1.0x; Eurobond RFR at 2.5%; credit
planned capacity of 1440 MW and full operability assumed in margin at 3.5%, LTV=75%; ERP at 6%).
2028. Another project, the Baltic I (1,560 MW), is in early ▪ Capacity factor at 46% and unit realized price in line with
development stage, and it is being prepared to take part in the awarded CfDs index linked to inflation.
2025 auction.
▪ Decommissioning capex after a 25 year lifecycle is assumed
The Baltic II/III project is currently in late development at €0.4m/MW.
phase and the decision to invest is expected in early 2025, after
financing is secured, hopefully by the end of this year. The following table presents a sensitivity analysis of NPV per
share depending on capex per MW and Eurobond RFR.
Polenergia has already signed contracts with providers of
most of the components and services, including turbines,
Sensitivity analysis of the NPV per share of Polenergia’s
cables, and foundations, and it has booked the marine
offshore Baltic II/III project
operations.
EUR risk free rate
As a reminder, the project was awarded a 25-year CfD at the
2534.6% 2.00% 2.25% 2.50% 2.75% 3.00%
max price (PLN 319.4/MWh), with CPI indexation (starting from
2021) and option to settle the CfD in euro (allowing the 3.6 41.8 38.2 34.7 31.4 28.3
company to achieve attractive financing terms).
(EUR m/MW

3.8 37.1 33.6 30.2 26.9 23.8

CAPEX

According to our estimates, this implies a realized power price 4.0 32.2 28.7 25.3 22.2 19.1
in 2028 (full operation) of PLN ~500/MWh. Applying
benchmark O&M costs and balancing costs at PLN 15/MWh, we 4.2 27.3 23.8 20.5 17.4 14.4
arrive at a 2028 EBITDA contribution of PLN ~1bn from Baltic 4.4 22.1 18.7 15.5 12.4 9.5
I and II (Polenergia’s share). Source: mBank

Polenergia offshore project timeline

Source: Polenergia

44
Capex and Balance Sheet Outlook While we do not factor in any expenses on the on Baltic I
offshore project, and while devex financing may need extra
Last year, capex amounted to PLN 0.7bn, and it consisted equity, the incorporation of this project would add extra value
mainly of expenses on onshore wind and PV projects and cash to our valuation model.
injections into offshore SPVs. We also see huge potential in leveraging existing wind/PV
According to the management, this year capital investment farms, as Polenergia current portfolio amounts to ~0.6GW with
may reach PLN 1.7bn, of which most will be allocated to market value of PLN 5-6bn. Meanwhile, gross debt at the end
offshore. of 2023 amounted to only PLN 1.7bn. We expect that, after
covering these assets with stable revenues (PPAs on top of
In subsequent years, we expect a further increase in spending auctioned CfDs), the company may use them as financing
on offshore wind farms, peaking in 2026-27 at PLN 5bn collateral to much greater extent.
annually.
When it comes to the offshore project, it is worth noting that
Together with planned onshore wind/PV development its achievable LTV is 80%, and the equity requirement yet to
(>0.4GW), total capital expenditures in 2024-28 could exceed cover (aside from the already spent PLN 1.14bn) should not
PLN 14bn (we do not account for any capex on Baltic I, exceed PLN 1.5bn. Applying the back ended equity option in
Romanian assets, or green hydrogen projects). the project finance agreement would help to additionally
reduce capital needs in the short term.
Capex breakdown by segment (PLN m)
6,000 Polenergia’s net debt at the end of 2023 amounted to
PLN 0.3bn (thanks to a PLN 750m capital raise), but in Q1’24 it
5,000
increased to PLN 0.69bn due to capital spend.
4,000
We expect that, in subsequent years, total net debt (incl.
3,000 offshore project financing) will increase to PLN 13bn by the
end of 2027, but it will be purely driven by the offshore project.
2,000
According to our estimates, aggregate simplified cash flow
1,000 from businesses other than offshore will amount to
PLN 1.2bn, which corresponds to the capital needs to make the
0
equity contribution to the Baltic II/III project.
Net debt decomposition into offshore linked debt and
onshore/PV offshore others others (PLN m)
14,000
Source: Polenergia, mBank
12,000

In February 2024, Polenergia’s former Management Board 10,000

requested a capital raise by up to PLN 3.4bn (the request was 8,000
approved by shareholders) in order to secure equity
contributions to projects planned in the next three years. 6,000
4,000
However, the new CEO, who took over in March 2024, said he
was committed to optimize capital management by 2,000
maximizing debt financing, and via back ended equity in 0
offshore project finance and optimizing financial costs.
-2,000
In our view, when combined with a review of certain planned
investment (Romanian wind farms, hydrogen, eMobility), this
should allow Polenergia to avoid a capital increase, which "offshore" component other
we take as our baseline scenario. Source: Polenergia, mBank

45
Valuation
Valuation Summary
Using DCF Analysis and Relative Valuation, we set our twelve- weight price (PLN)
month per-share price target for Polenergia at PLN 104.09. Relative Valuation 50% 88.76
DCF Analysis 50% 98.98
price 93.87
12M target price 104.09
Source: mBank

DCF Valuation
DCF model assumptions: ▪ For the purpose of terminal value estimates, we adjust
CAPEX to match D&A expenses.
▪ The DCF model uses free cash flow forecasts for the 2024-
2033 period. ▪ The terminal risk-free rate is 4.5% and beta is 1.0x. RFRs in the
▪ Cash flow is discounted as of the end of June 2024. Equity forecast period are based on the 10Y Polish gov bonds
forward curve. Equity risk premium was set at 6.0%.
value calculations factor in net debt as of 31 December 2023
incl. leases. ▪ We assume that FCF after FY2033 will grow at an annual rate
of 3.5%.
▪ Enterprise value is adjusted for current (discounted) value of
offshore wind farms decommissioning costs.

Key assumptions
2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E 2032E 2033E
Power price 1Y fwd (PLN/MWh 638 496 467 451 408 380 378 376 376 364
Green certificate (PLN/MWh) 60 60 60 60 60 60 - - - -
Power generation TWh 1.7 1.8 2.0 2.1 5.2 5.3 5.5 5.6 5.8 5.9
Onshore wind 1.5 1.6 1.8 1.9 2.1 2.3 2.4 2.6 2.7 2.9
Offshore wind 0.0 0.0 0.0 0.0 2.9 2.9 2.9 2.9 2.9 2.9
PV 0.1 0.1 0.2 0.2 0.2 0.3 0.3 0.3 0.4 0.4
RAB in distribution (PLN m) 158 175 190 205 219 231 243 254 265 275
Source: mBank

46
DCF Model
PLN m 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E 2032E 2033E +
Revenue 4,391 4,214 4,221 4,135 5,546 5,629 5,729 5,870 6,013 6,150 6,150
change -21.8% -4.0% 0.2% -2.0% 34.1% 1.5% 1.8% 2.5% 2.4% 2.3% 0.0%
EBITDA 787 669 693 728 1,775 1,821 1,883 1,975 2,070 2,160 2,160
EBITDA margin 17.9% 15.9% 16.4% 17.6% 32.0% 32.4% 32.9% 33.6% 34.4% 35.1% 35.1%
D&A expenses 181 196 207 221 762 775 789 802 815 829 416
EBIT 606 473 486 507 1,013 1,046 1,094 1,173 1,255 1,331 1,744
EBIT margin 13.8% 11.2% 11.5% 12.3% 18.3% 18.6% 19.1% 20.0% 20.9% 21.6% 28.4%
tax on EBIT 115 90 92 96 192 199 208 223 238 253 331
NOPLAT 491 383 393 411 820 847 886 950 1,016 1,078 1,412

CAPEX -1,719 -1,924 -5,414 -5,227 -414 -414 -414 -416 -420 -415 -416
working capital 57 8 0 4 -66 -4 -5 -7 -7 -6 0

FCF -990 -1,336 -4,813 -4,591 1,103 1,205 1,256 1,329 1,405 1,486 1,412
WACC 9.4% 8.5% 7.4% 6.7% 7.2% 6.8% 7.5% 7.9% 8.4% 8.8% 8.7%
discount factor 0.94 0.87 0.81 0.76 0.71 0.66 0.62 0.57 0.53 0.48 0.48
PV FCF -933 -1,159 -3,890 -3,477 779 797 773 758 738 717

WACC 9.4% 8.5% 7.4% 6.7% 7.2% 6.8% 7.5% 7.9% 8.4% 8.8% 8.7%
Cost of debt 5.9% 5.8% 6.2% 6.2% 6.6% 5.9% 6.5% 6.7% 6.9% 6.9% 5.5%
risk-free rate 4.9% 4.8% 5.2% 5.2% 5.6% 4.9% 5.5% 5.7% 5.9% 5.9% 4.5%
Risk premium 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%
Effective tax rate 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0%
Net debt / EV 23.5% 37.4% 61.7% 72.5% 70.1% 67.3% 63.9% 59.8% 55.0% 49.2% 30.0%

cost of equity 10.9% 10.8% 11.2% 11.2% 11.6% 10.9% 11.5% 11.7% 11.9% 11.9% 10.5%
risk premium 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%
Beta 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0

FCF growth in the terminal period 3.5% Sensitivity Analysis

Terminal value 27,231 FCF growth in perpetuity
Present value of terminal value 13,151 1.5% 2.5% 3.5% 4.5% 5.5%
Present value of FCF in the forecast period -4,896 WACC +1,0 p.p. 41.33 57.98 80.01 110.53 155.64
Enterprise value 8,255 WACC +0,5 p.p. 48.74 67.80 93.56 130.31 187.00
Net debt 326 WACC 57.20 79.23 109.75 154.86 228.28
Minority interest 0 WACC -0,5 p.p. 66.93 92.69 129.44 186.13 285.02
other net assets/provisions -286 WACC -1,0 p.p. 78.26 108.78 153.89 227.31 367.88
Equity value 7,643
million shares outst 77.2
Equity value per share (PLN) 98.98
12M cost of equity 10.9%
Target price (PLN) 109.75

EV/EBITDA (‘24) at target price 11.5

P/E(‘24) at target price 19.1
TV / EV 144.7%
Source: mBank

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Relative Valuation
We compared Polenergia with four groups of comparable The weights assigned to the respective peer groups are based
companies (wind companies, solar developers, integrated on their expected contributions to Polenergia’s 2024-2026E
utilities, network operators) using 2024-2026 projected price- EBITDA. The forecast years are assigned equal weights each.
to-earnings and EV/EBITDA ratios.

Polenergia Relative Valuation

P/E EV/EBITDA
Price 2023 2024E 2025E 2026E 2023 2024E 2025E 2026E
WIND PEERS87%
ABO WIND 53.80 18.2 17.4 16.2 14.0 10.7 10.6 9.9 8.7
AVANGRID 35.25 17.0 15.7 14.6 14.3 11.8 12.1 12.9 -
BORALEX 33.60 31.5 31.1 32.1 19.9 11.0 10.4 10.0 8.9
EDP RENOVAVEIS 13.78 24.5 30.8 24.0 20.9 11.1 12.4 11.0 10.2
EOLUS VIND 72.20 3.2 7.5 7.3 6.6 1.8 4.2 3.9 3.2
IBERDROLA 12.43 16.6 15.4 14.9 14.2 9.8 9.3 9.4 9.2
AB IGNITIS 18.48 5.6 6.2 6.4 6.7 5.5 6.6 7.2 7.6
ORSTED 385.80 - 18.4 14.2 13.9 12.1 9.5 7.7 7.6
PNE 14.10 - - - 193.2 46.1 35.8 27.0 20.3
RWE 33.52 5.8 12.2 16.1 14.7 3.9 6.7 7.8 8.1
TERNA ENERGY 19.37 37.3 32.8 31.2 23.9 17.4 16.0 16.4 14.5
XCEL ENERGY 53.62 15.9 15.0 14.0 13.0 10.8 10.5 10.1 9.6
Median 16.8 15.7 14.9 14.3 10.9 10.4 9.9 8.9

SOLAR PEERS4%
7C SOLARPARKEN 2.70 16.7 27.0 19.3 16.9 7.0 7.8 6.7 5.8
AUDAX RENOVABLES 1.91 31.3 16.2 13.2 12.1 12.2 9.4 7.9 7.3
CLEARWAY ENERGY 25.81 52.2 20.4 20.5 15.2 13.5 13.4 12.8 12.3
ENCAVIS 16.85 27.7 30.4 26.1 25.9 14.9 15.9 14.6 13.3
NEOEN 37.80 70.9 69.6 47.3 38.3 19.1 18.4 15.7 14.1
RENOVA 1021.00 25.8 8.5 15.6 19.1 20.9 22.7 15.6 13.6
SCATEC SOLAR 88.45 20.1 22.8 17.9 15.3 12.0 9.5 9.0 8.4
SOLARIA ENERGIA 12.02 14.0 16.2 14.5 11.8 12.8 13.2 12.3 10.4
Median 26.8 21.6 18.6 16.1 13.2 13.3 12.6 11.3

NETWORK&TRADING9%
E.ON 12.59 10.8 11.4 11.6 11.5 7.9 8.6 8.7 8.6
ELIA GROUP 91.55 20.3 18.5 16.7 14.4 12.5 14.0 12.1 11.7
EVN 29.90 12.9 12.0 13.0 12.8 9.1 8.5 8.5 8.1
IREN 1.99 9.6 9.8 9.4 9.0 5.9 5.8 5.7 5.5
NATIONAL GRID 896.80 13.9 12.8 12.8 12.1 12.9 12.6 11.4 11.3
RED ELECTRICA 17.31 14.1 18.7 18.1 16.0 9.7 11.5 11.3 10.5
REDES ENERGETICAS 2.33 11.4 13.4 13.1 12.3 8.3 8.3 8.0 7.8
SSE 1827.00 12.1 11.6 10.9 10.4 10.6 10.0 9.0 8.8
TERNA 7.41 17.1 15.1 15.6 14.5 12.0 10.9 11.3 11.1
Median 12.9 12.8 13.0 12.3 9.7 10.0 9.0 8.8

INTEGRATED1%
CEZ 933.50 13.3 16.1 13.2 14.2 5.3 - - -
EDP 3.64 12.1 12.1 12.8 12.6 7.1 7.5 7.7 7.4
ENDESA 19.12 16.3 12.1 11.2 10.5 7.5 6.1 5.9 5.8
ENEL 6.57 10.2 9.9 9.8 9.5 6.4 5.9 5.9 5.8
ENGIE 13.66 6.1 7.4 8.3 8.9 4.4 5.7 6.2 6.5
FORTUM 14.43 10.8 12.9 14.9 16.8 6.6 8.5 9.6 10.5
Mediana 11.5 12.1 12.0 11.6 6.5 6.1 6.2 6.5

Median mix 16.9 15.7 14.9 14.2 10.9 10.5 9.9 8.9
Polenergia 64.80 19.0 11.3 18.8 30.6 9.7 8.1 11.7 18.6
premium / discount 12.4% -28.1% 26.4% 116.4% -10.7% -22.9% 17.7% 107.7%

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Implied valuation
median 16.9 15.7 14.9 14.2 10.9 10.5 9.9 8.9
multiple weight 50.0% 50.0%
year weight 0.0% 33.3% 33.3% 33.3% 0.0% 33.3% 33.3% 33.3%
equity value per share (PLN) 88.76
Source: mBank

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P&L CF statement
PLN m 2022 2023 2024E 2025E 2026E PLN m 2022 2023 2024E 2025E 2026E
revenues 7,089 5,615 4,391 4,214 4,221 operating CF 246 616 740 615 654
EBITDA 354 548 787 669 693 working capital -266 39 57 8 0
onshore 343 468 733 622 629 investing CF -779 -748 -1,719 -1,924 -5,414
PV 13 10 21 29 45 CAPEX -781 -744 -1,719 -1,924 -5,414
offshore 0 0 0 0 0 financing CF 1,015 674 979 1,308 4,759
CCGT plant 7 3 4 4 4 dividends paid 0 0 0 0 0
distribution 27 21 42 30 32 CF statement 481 542 0 0 0
trading -5 85 29 30 31
others -29 -39 -42 -45 -48 CFO/EBITDA 69.3% 112.4% 94.0% 91.9% 94.4%
FCFF -536 -128 -979 -1,308 -4,759
D&A 116 166 181 196 207 FCFF/EV -10.4% -2.4% -15.4% -16.7% -37.0%
EBIT 238 381 606 473 486 FCFE -587 -206 -1,037 -1,453 -5,043
financing activity -37 -51 -58 -144 -284 FCFE/MCAP -13.6% -4.1% -20.7% -29.0% -100.8%
ROIC 5.5% 7.5% 9.7% 5.8% 3.9%
profit before tax 200 330 548 329 202 ROCE 5.7% 7.1% 9.4% 6.0% 4.4%
tax rate 20.1% 20.2% 19.0% 19.0% 19.0% DPS 0.00 0.00 0.00 0.00 0.00
net profit 160 264 444 266 163 payment ratio 0.0% 0.0% 0.0% 0.0% 0.0%
DYield 0.0% 0.0% 0.0% 0.0% 0.0%
Balance sheet
PLN m 2022 2023 2024E 2025E 2026E Key ratios/KPIs
fixed assets 3,946 4,411 5,949 7,676 12,883 2022 2023 2024E 2025E 2026E
PP&E 3,030 3,273 4,812 6,539 11,745 P/E 27.1 19.0 11.3 18.8 30.6
intangible assets 12 10 10 10 10 EV/EBITDA 14.5 9.7 8.1 11.7 18.6
current assets 2,301 2,301 2,220 2,209 2,209 P/S 0.6 0.9 1.1 1.2 1.2
inventory 112 90 71 68 68 P/BV 1.4 1.3 1.1 1.1 1.0
trade receivables 361 280 219 210 210 P/CF 17.6 8.1 6.8 8.1 7.6
derivatives 838 206 206 206 206 P/FCFE -7.4 -24.3 -4.8 -3.4 -1.0
cash 869 1,411 1,411 1,411 1,411
Generation TWh 1.1 1.6 1.8 1.9 2.1
equity 3,083 3,998 4,442 4,708 4,872 Onshore wind 1.0 1.4 1.5 1.6 1.8
minorities 0 0 0 0 0 PV 0.0 0.0 0.1 0.1 0.2
noncurrent liab. 1,785 1,810 2,704 3,957 8,304 CCGT 0.1 0.2 0.2 0.2 0.2
loans/bonds 1,453 1,498 2,392 3,645 7,992
provisions 23 118 118 118 118 RES capacity 401 528 610 722 807
current liabilities 1,380 904 1,024 1,221 1,916 onshore wind 365 492 529 574 624
loans/bonds 240 239 382 582 1,278 PV 36 36 81 148 183
trade payables 172 109 85 82 82
others 968 557 557 557 557 CAPEX 1,719 1,924 5,414 5,227 414
onshore 615 191 279 300 300
WC cycles PV 25 124 152 85 75
inventories 6 6 6 6 6 offshore 111 390 1,250 1,500 5,000
receivables 19 18 18 18 18 distribution 25 29 29 29 29
payables 9 7 7 7 7 Distribution RAB 118 139 158 175 190

net debt 824 326 1,364 2,816 7,860 price (PLN) 64.80 64.80 64.80 64.80 64.80
ND/EBITDA 2.3 0.6 1.7 4.2 11.3 shares outst. (m) 66.8 77.2 77.2 77.2 77.2
offshore assets 394 814 2,064 3,564 8,564 Mcap 4,329 5,004 5,004 5,004 5,004
adjusted net debt 430 -488 -700 -747 -704 EV 5,153 5,330 6,367 7,820 12,863
Source: mBank

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Wednesday, 26 June 2024 | research report

Tauron: hold (new)

TPE PW; TPE.WA | Power utilities, Poland

Valuation Far Above Peers Current Price* PLN 3.91

Target Price PLN 4.27
We resume coverage of Tauron with a hold recommendation and a 12M mCap PLN 6.9bn
target price of PLN 4.27, implying 9% upside from the current share price.
Free Float PLN 4.1bn
TPE is trading at 3.4x 2024-26E EV/EBITDA, and, although our earnings
ADTV (3M) PLN 15.1m
expectations exceed the market’s by more than 10% we see much ‘upfront’
*Price as of June 25, 2024, 5:00 PM
optimism built into Tauron’s valuation compared to the closest peers.
Tauron offers significant upside potential in the best-case scenario of coal Ownership
assets carve-out, but the upside in Enea and PGE is more than double that. Polish Government 30.06%
Our base case scenario for Tauron factors in a compensation for negative KGHM 10.00%
clean-dark spreads expected to be paid to conventional power plants as of
Helikon Investments 7.29%
2028 in order to keep them active. The expectation of such extra revenue
can be seen as an optimistic approach vs. the existing market setup. When NN Pension Fund 5.63%
it comes to the potential unbundling of coal assets, Tauron can supply PZU Pension Fund 4.79%
Poland government with 2026-30 average available capacity of 1.9GW (incl. Allianz Pension Fund 3.86%
the malfunction-prone 0.9GW Jaworzno unit), which we estimate at PLN
Others 38.37%
1.5bn (using the similar valuation approach as for the other rated power
companies). Our simplified post-carve-out DCF target price for Tauron
About Tauron
comes out at to PLN 5.75, implying 47% upside potential from the current
Tauron is one of Poland's largest vertically integrated
share price level (vs. 135% Enea and 156% PGE). energy groups with a market share of 7% in net
Keep in mind that Tauron has the biggest leverage of all rated utilities at generation (coal power plants in Jaworzno and
the moment, which may affect its post-coal development (the regulated Łagisza are the main assets), 36% in power
distribution and 23% in electricity supply.
distribution assets are already growing at a slower than average pace) and
delay the potential reinstatement of dividend payments.
TPE vs. WIG
Balance Sheet Outlook 6
TPE
Tauron reported having net debt of PLN 15.6bn as of March’24. This figure PLN
WIG
should be adjusted for PLN 1.2bn in receivable net compensations and security
5
deposits, and, on the other hand, Tauron has set aside relatively high EUA
provisions (its net CO2 liabilities to total CO2 costs ratio is the highest among
peers at 85% vs 22% Enea and 28% PGE). Nevertheless, leverage remains very
4
high (with the expected adj. ND /EBITDA ratio at end-2024 close to 3.0x), and
the potential payment for unbundled coal assets will not make much of a
difference. Hence, we see no room for dividends from Tauron in the near future, 3
unlike in the case of the closest peers, esp. Enea.
2025E EBITDA Rebound Above PLN 6bn
2
We expect Tauron’s EBITDA to decrease to PLN 5.6bn in 2024, driven by tighter
clean-dark spreads (depressed by expensive coal inventories, partly offset by
FX gains on EUA revaluation), lower generation volumes, and negative
balancing adjustments in distribution. Next year, however, we are anticipating
Target
a rebound in CDS after a normalization in coal costs coupled with higher Rating
Name Price
profits from distribution (RAB growth and no extra balancing costs), resulting New Old New Old
in EBITDA rising past PLN 6.5bn. Tauron 4.27 - hold suspended
We Remain Cautious on Tauron’s Renewables Energy Projects Name
Current Target
Upside
Price Price
Two-thirds of Tauron’s Capex is dedicated to distribution infrastructure, but the
Tauron 3.91 4.27 9.2%
company is also actively investing in onshore wind (with total wind capacity
set to top 580 MW in 2026 vs. 417 MW at end-2023) and solar power plants (with
total capacity at over 300 MW in 2026 vs. 19 MW at end-2023). Looking at the Forecast Update 2024E 2025E 2026E
Capex breakdown between projects (over PLN 10m/MW to be invested in wind, EBITDA +6.8% +1.5% -1.5%
over 3.5m/MW to be spent on solar), for them to create value for shareholders Net profit +20.0% +3.6% -2.5%
might prove difficult.
Power (PLN/MWh) +0.0% +8.5% +7.9%
(PLN m) 2022 2023 2024E 2025E 2026E
Coal(PLN/t) +0.0% +0.0% +0.0%
Revenue 37,825.0 50,715.0 42,720.7 37,780.0 35,630.7
CO2 (EUR/t) +27.3% +25.0% +20.4%
EBITDA 3,215.0 6,145.0 5,658.7 6,506.0 6,251.2
margin 8.5% 12.1% 13.2% 17.2% 17.5%
EBIT 1,119.0 3,394.0 3,251.5 3,850.6 3,364.0
Net profit -134.0 1,673.0 1,740.7 2,553.4 2,219.5
P/E - 4.1 3.9 2.7 3.1
Analyst:
P/S 0.2 0.1 0.2 0.2 0.2
P/B 0.4 0.4 0.3 0.3 0.3 Kamil Kliszcz
EV/EBITDA 6.7 3.8 3.8 3.3 3.3 Head of Equity Research
DPS 0.0 0.0 0.0 0.0 0.0 Equity Analyst, Expert
+48 667 770 837
Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0% [email protected]

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Valuation
Valuation Summary
Using DCF Analysis, we set our twelve-month per-share price weight price (PLN)
target for Tauron at PLN 4.27. Relative valuation is presented Relative Valuation 0% 8.72
for informational purposes only, as we believe the DCF method
DCF Analysis 100% 3.81
better reflects the risk profile of Polish state owned utilities.
price 3.81
12M target price 4.27
Source: mBank

DCF Valuation
DCF model assumptions: ▪ Terminal value is adjusted for coal assets as we believe that
in the long term this business line will be discontinued.
▪ The DCF model uses free cash flow forecasts for the 2024-
2033 period. Moreover, during the forecast period as of January 2027 we
applied an “adjustment” factor in the conventional
▪ Cash flow is discounted as of the end of June 2024. Equity generation segment, assuming that, in order to temporarily
value calculations factor in net debt as of 31 December 2023 keep these assets in the power system, the government will
incl. leases. We include minority interests at book value as of cover the potential negative CDS with an “emergency”
December 2023. compensation mechanism.
▪ Enterprise value is adjusted for book value of investments in ▪ The terminal risk-free rate is 4.5% and beta is 1.2x (similar for
associates, reclamation provisions, deferred tax net assets all Polish state owned utilities). RFRs in the forecast period
and discounted value of CO2 liabilities estimated as of are based on the 10Y Polish government bond forward curve.
December 2033. Equity risk premium was set at 6.0%.
▪ For the purpose of terminal value estimates, we adjust ▪ We assume that FCF after FY2033 will grow at an annual rate
CAPEX to match D&A expenses. of 2.0%.

DCF Model Assumptions

2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E 2032E 2033E
Power price 1Y fwd (PLN/MWh) 638 496 467 451 408 380 378 376 376 364
CO2 (EUR/t) 70 75 79 83 87 91 95 100 100 100
Emission factor (t/MWh) 0.78 0.76 0.72 0.68 0.61 0.61 0.62 0.62 0.63 0.64
ARP Coal (PLN/t) 500 400 336 336 285 234 234 234 234 234
Power generation TWh 11.7 12.0 9.8 6.9 4.9 4.7 5.0 5.1 5.4 5.5
coal 9.9 9.9 7.4 4.5 2.5 2.3 2.6 2.7 3.0 3.1
renewables 1.8 2.1 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4
RAB in distribution (PLN bn) 21.9 23.3 24.7 26.0 27.1 28.2 29.4 30.6 31.7 32.9
regulated WACC 10.5% 10.5% 10.5% 9.5% 9.5% 8.5% 7.5% 7.5% 7.5% 7.5%
Trading volumes incl gas (TWh) 31.2 31.7 32.2 32.6 33.1 33.6 34.1 34.6 35.2 35.7
adj. EBITDA margin 2.2% 2.1% 2.2% 2.4% 2.6% 2.7% 2.7% 2.7% 2.7% 2.8%
Source: mBank

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DCF Model
PLN m 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E 2032E 2033E +
Revenue 42,721 37,780 35,631 33,379 31,356 30,581 30,996 31,585 32,373 32,628 32,628
change -15.8% -11.6% -5.7% -6.3% -6.1% -2.5% 1.4% 1.9% 2.5% 0.8% 0.0%
EBITDA 5,659 6,506 6,251 6,205 6,810 6,502 6,435 6,678 6,923 7,169 6,958
EBITDA margin 13.2% 17.2% 17.5% 18.6% 21.7% 21.3% 20.8% 21.1% 21.4% 22.0% 21.3%
D&A expenses 2,407 2,655 2,887 2,988 3,143 3,149 3,272 3,411 3,566 3,732 4,199
EBIT 3,251 3,851 3,364 3,217 3,667 3,353 3,163 3,266 3,357 3,436 2,759
EBIT margin 7.6% 10.2% 9.4% 9.6% 11.7% 11.0% 10.2% 10.3% 10.4% 10.5% 8.5%
tax on EBIT 618 732 639 611 697 637 601 621 638 653 524
NOPLAT 2,634 3,119 2,725 2,605 2,970 2,716 2,562 2,646 2,719 2,783 2,235

CAPEX -4,547 -4,664 -3,933 -3,670 -3,719 -3,855 -3,998 -4,141 -4,283 -4,422 -4,199
working capital 2,130 -312 -309 -500 -356 62 108 46 82 20 0

FCF 2,624 799 1,371 1,424 2,038 2,072 1,944 1,961 2,084 2,114 2,235
WACC 9.1% 9.3% 10.0% 10.2% 10.6% 9.9% 10.5% 10.6% 10.9% 10.9% 9.5%
discount factor 0.96 0.88 0.80 0.72 0.65 0.59 0.54 0.49 0.44 0.40 0.40
PV FCF 2,511 700 1,092 1,029 1,332 1,233 1,047 954 915 837

WACC 9.1% 9.3% 10.0% 10.2% 10.6% 9.9% 10.5% 10.6% 10.9% 10.9% 9.5%
Cost of debt 5.9% 5.8% 6.2% 6.2% 6.6% 5.9% 6.5% 6.7% 6.9% 6.9% 5.5%
risk-free rate 4.9% 4.8% 5.2% 5.2% 5.6% 4.9% 5.5% 5.7% 5.9% 5.9% 4.5%
Risk premium 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%
Effective tax rate 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0%
Net debt / EV 40.1% 36.8% 33.1% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0%

cost of equity 12.1% 12.0% 12.4% 12.4% 12.8% 12.1% 12.7% 12.9% 13.1% 13.1% 11.7%
risk premium 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%
Beta 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2

FCF growth in the terminal period 2.0% Sensitivity Analysis

Terminal value 29,693 FCF growth in perpetuity
Present value of terminal value 11,755 0.0% 1.0% 2.0% 3.0% 5.0%
Present value of FCF in the forecast period 11,650 WACC +1,0 p.p. 2.13 2.69 3.39 4.27 5.42
Enterprise value 23,405 WACC +0,5 p.p. 2.39 3.02 3.80 4.80 6.14
Net debt 16,331 WACC 2.69 3.39 4.27 5.42 6.99
Minority interest 38 WACC -0,5 p.p. 3.02 3.80 4.80 6.14 8.01
Other net assets 73 WACC -1,0 p.p. 3.39 4.27 5.42 6.99 9.25
Reclamation/CO2 provisions 434
million shares outst 1752.5
Equity value per share (PLN) 3.81
12M cost of equity 12.1%
Target price (PLN) 4.27

EV/EBITDA (‘24) at target price 4.3

P/E(‘24) at target price 4.3
TV / EV 48.6%

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Relative Valuation

We compared Tauron with European integrated utilities and

its closest local peers using 2024-2026 projected price-to-
earnings, EV/EBITDA and Dyield ratios. Relative valuation is
presented for informational purposes only and is not included
in the final valuation.

Tauron Relative Valuation

P/E EV/EBITDA Dyield
Price 2023 2024E 2025E 2026E 2023 2024E 2025E 2026E 2024-26
CEZ 933.50 17.0 14.6 17.0 11.4 5.3 6.3 6.2 6.5 5.2%
EDP 3.64 12.1 12.1 12.8 12.6 7.1 7.5 7.7 7.4 5.6%
ENDESA 19.12 16.3 12.1 11.2 10.5 7.5 6.1 5.9 5.8 6.4%
ENEL 6.57 10.2 9.9 9.8 9.5 6.4 5.9 5.9 5.8 7.1%
ENGIE 13.66 6.1 7.4 8.3 8.9 4.4 5.7 6.2 6.5 8.6%
FORTUM 14.43 10.8 12.9 14.9 16.8 6.6 8.5 9.6 10.5 6.0%
ENEA 9.42 - 1.9 1.9 2.4 1.8 1.4 1.2 1.2 0.0%
PGE 6.91 - 5.8 3.9 5.3 2.7 2.7 2.2 2.8 0.0%
Median 11.5 11.0 10.5 10.0 5.8 6.0 6.0 6.2 5.8%
Tauron 3.91 4.1 3.9 2.7 3.1 3.8 3.8 3.3 3.3 0%
premium / discount -64.3% -64.2% -74.4% -69.1% -35.3% -37.2% -46.0% -47.0% -

Implied valuation
median 11.5 11.0 10.5 10.0 5.8 6.0 6.0 6.2
multiple weight 33.3% 33.3% 33.3%
year weight 0.0% 33.3% 33.3% 33.3% 0.0% 33.3% 33.3% 33.3% 100.0%

equity value per share (PLN) 8.72

Source: mBank

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Alternative DCF Valuation

(coal assets carve-out scenario)

Below we present an alternative DCF valuation in a In such a scenario, our target price would amount to PLN 5.75
hypothetical coal assets carve-out scenario. It is just a vs PLN 4.27 in the base case scenario.
simplified approach, assuming coal assets carve-out as of
January 2025 with remuneration methodology described in
the section Coal Asset Carve-Out.
FCF are adjusted for coal assets contribution, and working
capital changes are neutralized. We also factor out deferred tax
net assets as they are mostly attributable to conventional
assets. We do not apply any re-rating components (Beta factor
and ERP remain the same).

DCF Model
(PLN m) 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E 2032E 2033E +
EBITDA 5,658.7 5,491.9 5,916.1 5,950.6 6,389.8 6,227.2 6,183.8 6,436.0 6,703.2 6,958.0 6,958.0
D&A expenses 2,407.3 2,128.4 2,358.1 2,479.7 2,646.8 2,699.8 2,839.4 2,991.0 3,154.7 3,327.4 4,198.9
EBIT 3,251.5 3,363.5 3,558.1 3,470.9 3,743.0 3,527.4 3,344.4 3,445.1 3,548.5 3,630.6 2,759.1
tax on EBIT 617.8 639.1 676.0 659.5 711.2 670.2 635.4 654.6 674.2 689.8 524.2
NOPLAT 2,633.7 2,724.5 2,882.0 2,811.4 3,031.8 2,857.2 2,708.9 2,790.5 2,874.3 2,940.8 2,234.9

CAPEX -4,547.0 -4,095.6 -3,507.0 -3,357.4 -3,496.6 -3,631.7 -3,775.3 -3,918.6 -4,060.3 -4,198.9 -4,198.9

FCF 2,623.6 757.2 1,733.1 1,933.7 2,182.0 1,925.3 1,773.1 1,862.8 1,968.7 2,069.3 2,234.9
WACC 9.1% 9.3% 10.0% 10.2% 10.6% 9.9% 10.5% 10.6% 10.9% 10.9% 9.5%
discount factor 0.96 0.88 0.80 0.72 0.65 0.59 0.54 0.49 0.44 0.40 0.40
PV FCF 2,511.2 663.1 1,380.2 1,397.9 1,426.3 1,145.1 954.7 906.5 864.2 819.2

FCF growth in the terminal period 2.0% Sensitivity Analysis

Terminal value 29,693.4 FCF growth in perpetuity
Present value of terminal value 11,755.4 0.0% 1.0% 2.0% 3.0% 5.0%
Present value of FCF in the forecast period 12,068.5 WACC +1,0 p.p. 3.60 4.17 4.86 5.75 6.90
Enterprise value 23,823.9 WACC +0,5 p.p. 3.87 4.50 5.28 6.28 7.62
Net debt 16,331.0 WACC 4.17 4.86 5.75 6.90 8.47
Minority interest 38.0 WACC -0,5 p.p. 4.50 5.28 6.28 7.62 9.48
Other net assets 0.0 WACC -1,0 p.p. 4.86 5.75 6.90 8.47 10.73
Carve-out proceeds 1,528.2
Equity value 8,983
million shares outst 1,752.5
Equity value per share (PLN) 5.13
12M cost of equity 12.1%
Target price (PLN) 5.75

Source: mBank

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 Informacje Służbowe podmiotu z Grupy mBank - objęte ochroną | mBank Groups entity Business information - protected

P&L CF statement
PLN m 2022 2023 2024E 2025E 2026E PLN m 2022 2023 2024E 2025E 2026E
revenues 37,825 50,715 42,721 37,780 35,631 operating CF 2,775 4,616 7,380 5,596 5,422
EBITDA 3,215 6,145 5,659 6,506 6,251 working capital -572 -1,100 2,130 -312 -309
adj. EBITDA 4,613 5,507 5,952 6,506 6,251 investing CF -3,976 -4,794 -4,469 -4,600 -3,869
Conv. generation -182 1,092 840 1,014 335 CAPEX -3,879 -4,841 -4,547 -4,664 -3,933
Mining 801 0 0 0 0 financing CF 1,518 286 -2,912 -995 -1,553
Renewables 476 431 678 706 710 dividends paid 0 0 0 0 0
Distribution 2,939 3,175 3,545 4,047 4,458 CF statement 317 108 0 0 0
Trading 594 568 780 634 643
Others -15 241 108 105 105 CFO/EBITDA 60.2% 83.8% 124.0% 86.0% 86.7%
FCFF -1,104 -225 2,833 932 1,489
D&A 2,897 2,751 2,407 2,655 2,887 FCFF/EV -5.1% -1.0% 13.2% 4.4% 7.3%
EBIT 1,119 3,394 3,251 3,851 3,364 FCFE -1,730 -1,027 1,652 170 802
financing activity -986 -1,092 -1,102 -698 -624 FCFE/MCAP -25.2% -15.0% 24.1% 2.5% 11.7%
ROIC 3.0% 8.4% 7.7% 8.8% 7.3%
profit before tax 133 2,302 2,149 3,152 2,740 ROCE 3.4% 9.6% 9.1% 10.4% 8.6%
tax rate - 27.1% 19.0% 19.0% 19.0% DPS 0.00 0.00 0.00 0.00 0.00
net profit -134 1,673 1,741 2,553 2,219 payment ratio 0.0% 0.0% 0.0% 0.0% 0.0%
DYield 0.0% 0.0% 0.0% 0.0% 0.0%
Balance sheet
PLN m 2022 2023 2024E 2025E 2026E Key ratios/KPIs
fixed assets 35,053 37,353 39,493 41,501 42,547 2022 2023 2024E 2025E 2026E
PP&E 29,731 31,872 33,998 36,019 37,110 P/E - 4.1 3.9 2.7 3.1
intangible assets 2,803 3,062 3,075 3,063 3,017 EV/EBITDA 6.7 3.8 3.8 3.3 3.3
current assets 10,267 12,445 8,884 8,370 8,080 P/S 0.2 0.1 0.2 0.2 0.2
inventory 1,118 1,483 1,249 1,105 1,042 P/BV 0.4 0.4 0.3 0.3 0.3
trade receivables 3,819 5,341 4,499 3,979 3,752 P/CF 2.5 1.5 0.9 1.2 1.3
CO2 allowances 597 702 702 852 852 P/FCFE -4.0 -6.7 4.1 40.3 8.5
cash 1,678 1,084 1,084 1,084 1,084
Generation TWh 15.6 12.7 11.7 12.0 9.8
equity 16,581 17,915 19,656 22,209 24,429 Coal 14.0 11.0 9.9 9.9 7.4
minorities 33 38 38 38 38 RES 1.6 1.7 1.8 2.1 2.4
noncurrent liab. 18,511 17,576 16,143 15,950 15,233 o/w wind 0.9 1.0 1.0 1.3 1.4
loans/bonds 15,959 14,544 13,111 12,918 12,201 hydro 0.3 0.4 0.4 0.4 0.4
provisions 1,851 2,071 2,071 2,071 2,071 PV 0.0 0.0 0.1 0.1 0.3
current liabilities 10,195 14,269 12,540 11,674 10,927 biomass 0.3 0.2 0.2 0.2 0.2
loans/bonds 528 2,871 2,573 2,533 2,384
trade payables 2,953 2,643 2,226 1,969 1,857 Emission factor 0.83 0.79 0.78 0.76 0.72
CO2 provisions 3,128 3,439 3,257 2,688 2,202
Distribution RAB 20,500 21,400 21,900 23,318 24,748
WC cycles regulated WACC 5.8% 8.5% 10.5% 10.5% 10.5%
inventories 11 11 11 11 11
receivables 37 38 38 38 38 Retail sales TWh 31.1 30.8 31.2 31.7 32.2
payables 28 19 19 19 19 EBITDA/MWh 19.1 18.5 25.0 20.0 20.0

net debt 14,809 16,331 14,600 14,367 13,501 price (PLN) 3.91 3.91 3.91 3.91 3.91
ND/EBITDA 3.7 2.7 2.6 2.2 2.2 shares outst. (m) 1,753 1,753 1,753 1,753 1,753
ND incl. CO2 17,340 19,068 17,155 16,202 14,851 Mcap 6,852 6,852 6,852 6,852 6,852
adj. ND/EBITDA 5.4 3.1 3.0 2.5 2.4 EV 21,694 23,221 21,491 21,257 20,392
Source: mBank

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List of abbreviations and ratios used by mBank:

EV (Enterprise Value) – Equity Value + Net Debt; EBIT – Earnings Before Interest and Taxes; EBITDA – EBIT + Depreciation & Amortisation; Net Debt – Borrowings + Debt Securities + Interest-Bearing Loans - Cash
and Cash Equivalents; P/E (Price/Earnings) – Price Per Share Divided by Earnings Per Share; P/CE (Price to Cash Earnings) – Price Per Share Divided by Earnings + Depreciation & Amortisation; P/B (Price to Book
Value) – Price Per Share Divided by Book Value Per Share; P/CF (Price to Cash Flow) – Price Divided by Cash Flow from Operations; ROE (Return on Equity) – Earnings Divided by Shareholders' Equity; ROCE
(Return on Capital Employed) – EBIT x (Average Assets - Current Liabilities); ROIC (Return on Invested Capital) – EBIT x (1-Tax Rate) / (Average Equity + Minority Interest + Net Debt); FCFF (Free Cash Flow to Firm)
– Cash Flow from Operations - CAPEX - Lease Payments; FCFE (Free Cash Flow to Equity) – Free Cash Flow to Firm - Net Interest Expense (incl. Debt + Leases)
EBITDA margin – EBITDA/Sales

OVERWEIGHT (OW) – a rating which indicates that we expect a stock to outperform the broad market
NEUTRAL (N) – a rating which indicates that we expect the stock to perform in line with the broad market
UNDERWEIGHT (UW) – a rating which indicates that we expect the stock to underperform the broad market

Recommendations of Biuro maklerskie mBanku:

A recommendation is valid for a period of 12 months, unless a subsequent recommendation is issued in this period. Expected returns from individual recommendations are as follows:
BUY – we expect that the rate of return from an investment will be at least 10%
HOLD – we expect that the rate of return from an investment will range from 0% to +10%
SELL – we expect that an investment will bear a loss
The foregoing principle maybe waived where circumstances warrant, including but not limited to periods of increased share price volatility experienced by the company that is the subject of a recommendation
immediately preceding the time the recommendation is issued.
Recommendations are updated at least once every twelve months.

mBank S.A. with its registered office in Warsaw at Prosta 18 renders brokerage services via a dedicated organisational unit, the Brokerage Bureau, which uses the Polish name Biuro maklerskie mBanku.

mBank S.A. as part of the Exchange's Analytical Coverage Support Programme (“Programme”, https://www.gpw.pl/eacsp) prepares analytical reports for Sygnity. These documents are prepared at the request of
Giełda Papierów Wartościowych w Warszawie S.A. (‘WSE’), which is entitled to copyrights to these materials. mBank S.A. receives remuneration from the WSE for the preparation of the reports. All documents
prepared for the Programme are available at: https://www.mdm.pl/ui-pub/site/market_and_analysis/analysis_and_recommendations/analytical_coverage_support_programme

This document has been created and published by Biuro maklerskie mBanku. This report expresses the knowledge as well as opinions of the authors on day the report was prepared. The opinions and estimates
contained herein constitute our best judgment at this date and time, and are subject to change without notice. This report was prepared with due care and attention, observing principles of methodological
correctness and objectivity, on the basis of sources available to the public, which Biuro maklerskie mBanku considers reliable, including information published by issuers, shares of which are subject to
recommendations. However, Biuro maklerskie mBanku, in no case, guarantees the accuracy and completeness of the report, in particular should sources on the basis of which the report was prepared prove to
be inaccurate, incomplete or not fully consistent with the facts. mBank S.A. bears no responsibility for investment decisions taken on the basis of this report or for any damages incurred as a result of investment
decisions taken on the basis of this report.

This document does not constitute an offer or invitation to subscribe for or purchase any financial instruments and neither this document nor anything contained herein shall form the basis of any contract or
commitment whatsoever. It is being furnished to you solely for your information and may not be reproduced or redistributed to any other person This document does not constitute investment, legal, accounting
or other advice, and mBank is not liable for damages resulting from or related to the use of data provided in the documents. This document may not be copied, duplicated and/or be directly or indirectly distributed
in the United States, Canada, Australia or Japan, nor transferred to citizens or residents of a state where its distribution may be legally restricted, which does not limit the possibility of publishing materials prepared
for the Programme on Sygnity, mBank or WSE websites. Persons who disseminate this document should be aware of the need to comply with such restrictions.

Recommendations are based on essential data from the entire history of a company being the subject of a recommendation, with particular emphasis on the period since the previous recommendation.

Investing in shares is connected with a number of risks including, but not limited to, the macroeconomic situation of the country, changes in legal regulations as well as changes on commodity markets. Full
elimination of these risks is virtually impossible.

It is possible that mBank S.A. in its brokerage activity renders, will render or in the past has rendered services for companies and other entities mentioned in this report.

mBank S.A. does not rule out offering brokerage services to an issuer of securities being the subject of a recommendation.

Biuro Maklerskie mBanku S.A. ("BM") has put in place internal regulations governing the active management of conflicts of interest, which establish internal organizational and administrative frameworks and
information barrier protocols to prevent and avoid conflicts of interest in connection with recommendations. Different types of brokerage activities are separated from each other within BM's internal
organizational structure, including the equity research department, which is separated from other brokerage activities. Information barriers, called "Chinese walls," have been created to restrict the exchange of
information between different organizational units and employees of BM.

Information concerning a conflict of interest arising in connection with issuing a recommendation (should such a conflict exist) is located below.

The present report was not transferred to the issuer prior to its publication.

Enea SA, PGE Polska Grupa Energetyczna, Polenergia SA, Tauron Polska Energia SA are clients of mBank.
CEZ AS, Enea SA, PGE Polska Grupa Energetyczna, Polenergia SA, Tauron Polska Energia SA are counterparties to mBank.

The production of this recommendation was completed on June 26, 2024, 7:26 AM.
This recommendation was first disseminated on June 26, 2024, 8:36 AM.

mBank S.A., its shareholders and employees may hold long or short positions in the issuer's shares or other financial instruments related to the issuer's shares.

Copying or publishing this report, in full or in part, or disseminating in any way information contained in this report requires the prior written consent of mBank S.A.

Recommendations are addressed to all Clients of Biuro maklerskie mBanku.

All investment recommendations and strategies issued by mBank S.A. over the last 12 months are available at: https://mdm.pl/bm/analizy

The activity of mBank S.A. is subject to the supervision of the Polish Financial Supervision Commission.

Individuals who did not participate in the preparation of recommendations, but had or could have had access to recommendations prior to their publication, are employees of Biuro maklerskie mBanku authorised
to access the premises in which recommendations are prepared and/or individuals having to access to recommendations based on their corporate roles, other than the analysts mentioned as the authors of this
recommendations.

This publication constitutes investment research in the meaning of Art. 36.1 of Commission Delegated Regulation (EU) 2017/565.

The compensation of the research analysts responsible for preparing investment research is determined independently of and without regard to the compensation of or revenue generated by any other employee
of the Bank, including but not limited to any employee whose business interests may reasonably be considered to conflict with the interests of the persons to whom the investment research prepared by the
Research Department of Biuro maklerskie mBanku is disseminated. With that being said, since one of the factors taken into consideration when determining the compensation of research analysts is the degree
of fulfillment of annual financial targets by customer service functions, there is a risk that the adequacy of compensation offered to persons preparing investment research will be questioned by a competent
oversight body.

For U.S. persons only: This research report is a product of mBank SA which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report
is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are
not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company,
public appearances and trading securities held by a research analyst account.
This report is intended for distribution by mBank SA only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof
by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and
return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor.
In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, mBank
SA has entered into an agreement with a U.S. registered broker-dealer, Cabrera Capital Markets. ("Cabrera"). Transactions in securities discussed in this research report should be effected through Cabrera or
another U.S. registered broker dealer.

Strong and weak points of valuation methods used in recommendations:

DCF – acknowledged as the most methodologically correct method of valuation; it consists in discounting financial flows generated by a company; its weak point is the significant susceptibility to a change of
forecast assumptions in the model.
Relative – based on a comparison of valuation multipliers of companies from a given sector; simple in construction, reflects the current state of the market better than DCF; weak points include substantial
variability (fluctuations together with market indices) as well as difficulty in the selection of the group of comparable companies.
Economic profits – discounting of future economic profits; the weak point is high sensitivity to changes in the assumptions made in the valuation model.
Discounted Dividends (DDM) – discounting of future dividends; the weak point is high sensitivity to changes in the assumptions as to future dividends made in the valuation model.
NAV - valuation based on equity value, one of the most frequently used method in case of developing companies; the weak point of the method is that it does not factor in future changes in revenue/profits of a
company.
 Informacje Służbowe podmiotu z Grupy mBank - objęte ochroną | mBank Groups entity Business information - protected

mBank issued the following recommendations in the 12 months prior to this publication:

CEZ (Kamil Kliszcz)

Rating hold hold sell sell sell
Rating date 2024-05-06 2024-02-01 2023-12-01 2023-10-02 2023-07-03
Target price (CZK) 893.60 959.93 959.93 884.00 853.62
Price on rating day 851.00 870.50 988.00 980.00 900.00

Enea (Kamil Kliszcz)

Rating suspended suspended suspended suspended
Rating date 2024-05-06 2023-12-01 2023-10-02 2023-07-03
Target price (PLN) - - - -
Price on rating day 8.63 8.59 7.30 6.40

PGE (Kamil Kliszcz)

Rating suspended suspended suspended suspended
Rating date 2024-05-06 2023-12-01 2023-10-02 2023-07-03
Target price (PLN) - - - -
Price on rating day 6.18 8.41 7.50 7.26

Polenergia (Kamil Kliszcz)

Rating buy buy buy buy
Rating date 2024-05-06 2023-12-01 2023-10-02 2023-07-03
Target price (PLN) 103.62 111.78 102.17 104.34
Price on rating day 66.80 72.90 73.00 82.90

Tauron (Kamil Kliszcz)

Rating suspended suspended suspended suspended
Rating date 2024-05-06 2023-12-01 2023-10-02 2023-07-03
Target price (PLN) - - - -
Price on rating day 2.93 4.12 3.59 2.75

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mBank S.A.
Prosta 18
00-850 Warszawa
http://www.mbank.pl/

Research Department
Kamil Kliszcz Michał Konarski Paweł Szpigiel
director +48 515 025 640 +48 509 603 258
+48 667 770 837 [email protected] [email protected]
[email protected] banks, financials media, IT, telco, e-commerce
energy, power generation

Piotr Poniatowski Mikołaj Lemańczyk, CFA Janusz Pięta

+48 509 603 046 +48 501 663 511 +48 506 065 659
[email protected] [email protected] [email protected]
gaming banks, financials, property developers retail, e-commerce

Mateusz Krupa, CFA Beata Szparaga-Waśniewska, CFA Jakub Sargsyan

+48 571 608 973 +48 510 929 021 +48 519 419 895
[email protected] [email protected] [email protected]
strategy biotechnology, healthcare industrials, mining

Sales and Trading

Traders

Piotr Gawron Paweł Cylkowski Piotr Brożyna

director +48 503 684 130 | +48 22 697 47 31 +48 512 756 702 | +48 22 697 48 47
+48 698 832 853 | +48 22 697 48 95 [email protected] [email protected]
[email protected]

Andrzej Kowalczyk Andrzej Sychowski Łukasz Płaska

+48 789 868 634 | +48 22 697 47 44 +48 605 848 003 | +48 22 697 48 46 +48 784 449 962 | +48 22 697 47 90
[email protected] [email protected] [email protected]

Karol Kułaj
+48 509 602 984 | +48 22 697 49 85
[email protected]

Sales, Foreign Markets

Marzena Łempicka-Wilim
deputy director
+48 696 427 249 | +48 22 697 48 82
[email protected]

Private Client Sales

Maciej Sokołowski Jarosław Banasiak
director deputy director
[email protected] [email protected]