Buy Hold Sell Under Review / Suspended POLENERGIA Poland, … · Innergex Renewable Energy CANADA 11.18 CAD 826 78.2 43.3 15.5 17.1 17.1 11.4 Greenko Group INDIA 109.75 GBp 235 15.9

DISCLAIMER: Disclosure statements provided on the last page of this report are an integral part of this document.

POLENERGIA Poland, Renewable energy

Reuters: POLENERGIAP.WA Bloomberg: POLENERGIA PW 08 April 2015

Locking in renewable-driven growth

Reinstating as BUY. 12M Target Price at PLN 41.30

Recommendation

Portfolio weighting

BUY

-

Price (PLN, 1 April 2015) 31.00

Target price (PLN, 12M) 41.30

Market cap. (PLN m) 1,422

Free float (%) 18.4

Number of shares (m) 45.44

Average daily turnover 3M (shares) 39.1k

EURPLN 4.05

USDPLN 3.76

PEP

TP

WIG Relative

10

15

20

25

30

35

40

45

50

Mar-

12

Ju

n-1

2

Sep

-12

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Sep

-13

De

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Mar-

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-14

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Mar-

15

Buy Hold Sell Under Review / Suspended

The chart measures performance against the WIG index. On 1/04/2015, the WIG index closed at 54,033.

Rec. Date Price Performance

on issue date

12 month target

absolute relative (p.p)

Restr. 8-19-2014 29.5 n.a. 4.9% 1.4

Buy 4-28-2014 28.2 37.0 4.8% 3.6

Main shareholders % of votes

Kulczyk Investments SA 65.6

China CEE Investment Co-operation Fund 16.0

OFE Aviva BZ WBK 6.7

Generali OFE 6.5

Company description

POLENERGIA, an independent vertically integrated utility player, specializes in renewable energy production. By Dec2015 it will enjoy 245MW operational on-shore wind farms, with another 730MW in pipeline, of which 336MW will participate in the 1

st auction in 2016.

Research team:

Paweł Puchalski, CFA

+48 22 586 80 95 [email protected]

The marriage between the renewable-oriented PEP assets and the far more

operationally dispersed Kulczyk Investment assets have given rise to the

vertically integrated POLENERGIA group. The Group holds the second-largest

portfolio of on-shore wind projects across the WSE-listed utility names and, with

the new Renewables Act in force, (1) its victories in the renewable auctions and

(2) alternative projects (off-shore wind and others) offer an upside to the stock.

POLENERGIA’s almost-certain wind capacity expansion by 99MW in 2015 should

give rise to its 2014-16E unparalleled 60% EBITDA expansion, a very unique

feature across the sector. EU policies and the CO2 certificate price are the key

upsides, while any delay in wind farm construction or uncertainty over the

auctions (delays & outcomes) stand for the key risk factors. We see

POLENERGIA likely turning into a dividend story potentially by 2017 and the

presence of strategic investors (entering at PLN33 a share) provides solid share

price support, in our view. All valuation methodologies offer a double-digit share

price upside and with the weighted valuation at PLN41.3 a share (a 33%

upside), we re-initiate our coverage of the stock with a Buy recommendation.

Last year’s marriage of PEP’s renewable-skewed assets with the far more operationally dispersed,

vertically integrated utility assets of Polenergia Holding (Trading, Distribution, Conventional generation,

alternative projects) created a truly vertically integrated POLENERGIA group. Its shareholding structure

underwent a well-engineered twist, with the introduction of an external strategic investor (CEE Equity

Partners, a 16% stake), entering the company at PLN33 a share, providing the company’s share price

with a solid floor, in our view.

On-shore wind continues to be POLENERGIA’s key value driver, with the company’s wind fleet growing to

245MW by Dec2015, also offering a hypothetical 730MW in wind pipeline upside. We see the joint impact

of the wind’s booming EBITDA and the stable regulated EBITDA of conventional generation and

distribution, boosting the group’s EBITDA by 15% in 2015E y/y and by 40% in 2016E. It should be noted

that these upsides are based on certain projects only – if we see no unexpected delays in the 99MW on-

shore wind capacity, POLENERGIA’s EBITDA will expand by 60% in two years’ time. Later on, the

group’s results may improve even further as success in the 2016 auction could trigger a 100% boost to

POLENERGIA’s EBITDA by 2018/19E. It is EBITDA profile that differentiates POLENERGIA from any

other WSE-listed utility since it is the only utility offering decent EBITDA expansion.

The price of CO2 certificates is the key upside to the company’s valuation – POLENERGIA is a black

price-taker and a steady rise in the CO2 certificate price would unlock a substantial TP upside. The price

of the green certificates, with the oversupply glut seen vanishing by 2018E, should generally work the

same way. Finally, the company’s alternative projects and the likelihood of on-shore repowering may

unlock their intrinsic value. On the side of risks, delay in the kick-off of the 99MW under construction stand

for the key risk factor. Moreover, the auctioning system represents another risk factor, with delays of the

auctions or POLENERGIA’s inability to win them possibly exposing the group’s SoTP valuation to the risk.

The NPV sum of POLENERGIA’s projects yields an equity value of PLN 1,914mn, or PLN 42.2 per share.

The comparative approaches, both failing to capture the company’s true upside, in our view, imply a share

price ranging from PLN35.5 to PLN43.1. The weighted approach to POLENERGIA’s valuation results in

POLENERGIA’s blended average Target Price of PLN41.3 per share. As this price offers a 33% upside to

the company’s market price, we re-initiate the company’s coverage with a BUY recommendation.

POLENERGIA: Financial summary* PLN in millions, unless otherwise stated

2013 2014 2015E 2016E 2017E 2018E 2019E

Sales 1,118.0 2,659.1 2,422.0 2,723.2 2,810.1 3,203.5 3,271.0

EBITDA 137.5 169.0 193.6 271.0 277.7 607.7 538.0

EBIT 64.7 82.9 108.2 150.8 157.5 398.6 329.0

Net profit 38 49.6 63.9 96.9 84.4 256.1 190.0

EPS (PLN) 1.8 1.09 1.41 2.1 1.9 5.6 4.2

P/E (x) 17.2 28.4 22.0 14.5 16.7 5.5 7.4

EV/EBITDA (x) 5.6 9.0 9.2 6.9 9.6 5.7 6.4

Source: Company data, BZWBK Brokerage research. * 2013-14 data pro-forma.

POLENERGIA 08 April 2015

2

Valuation

Comparable valuation

Fig. 1. POLENERGIA: Comparable valuation

Mkt Cap P/E EV/EBITDA

Company Country Price Currency (EURm) 2015E 2016E 2017E 2015E 2016E 2017E

POLENERGIA** POLAND 31.0 PLN 339 22.0 14.5 16.7 9.2 6.9 9.6

Diversified

Innergex Renewable Energy CANADA 11.18 CAD 826 78.2 43.3 15.5 17.1 17.1 11.4

Greenko Group INDIA 109.75 GBp 235 15.9 7.4 n.a. 11.5 7.6 n.a.

Alerion Cleanpower ITALY 2.95 EUR 128 26.8 24.6 22.7 8.9 8.5 8.0

China Datang Corp Renewable Power CHINA 1.19 HKD 1,040 22.1 14.0 9.5 9.8 9.2 8.1

Greentech Energy Systems DENMARK 8.20 DKK 117 16.4 14.6 13.1 6.7 11.1 9.4

Terna Energy GREECE 2.36 EUR 258 13.6 8.6 4.8 6.4 5.6 3.4

Energy Developments AUSTRALIA 7.19 AUD 872 20.3 16.2 16.0 8.0 7.2 7.1

Median 20.3 14.6 14.3 8.9 8.5 8.1

Wind

China Longyuan Power Group Corp CHINA 8.43 HKD 8,142 15.3 13.2 11.2 9.6 8.8 8.4

Concord New Energy Group HONG KONG 0.54 HKD 581 9.0 8.3 7.2 12.6 11.0 n.a.

EDP Renovaveis SPAIN 6.40 EUR 5,582 38.1 30.2 24.7 9.3 8.4 7.8

Enel Green Power ITALY 1.74 EUR 8,695 18.7 16.9 14.9 8.8 8.2 7.5

Gamesa Corp Tecnologica SPAIN 11.88 EUR 3,316 20.7 17.6 15.0 8.1 7.0 6.0

Median 19.7 15.1 14.9 9.4 8.3 7.7

Hydro&Nuclear

Verbund AUSTRIA 15.72 EUR 5,461 29.5 24.6 21.0 12.0 11.3 10.2

A2A ITALY 0.96 EUR 3,017 14.6 14.8 14.8 6.6 6.4 6.4

Median 22.0 19.7 17.9 9.3 8.8 8.3

Waste-to-energy/Biomass

Covanta Holding USA 21.82 USD 2,712 55.4 42.1 32.1 10.9 10.4 9.7

Median 55.4 42.1 32.1 10.9 10.4 9.7

Total Median 20.5 15.5 14.9 9.4 8.4 8.0

Source: Company data, Bloomberg, BZWBK Brokerage research. Prices as of April 01, 2015.

We believe that comparing POLENERGIA with Europe’s diversified large cap energy

companies is pointless when it comes to its valuation. This is why we have compared it

with a more applicable group – companies dealing with renewables. However, since

there are also significant differences within this sector, for the purpose of our

POLENERGIA comparative valuation, we have chosen two sub-sectors: ‘wind’ and

‘diversified’. Both are well represented by the listed companies (peer groups of five and

seven companies, respectively).

Fig. 2. POLENERGIA: Equity valuation implied by comparable valuation In PLN per share

P/E EV/EBITDA

2015E 2016E 2017E 2015E 2016E 2017E

Diversified 28.6 31.3 26.5 29.9 42.4 41.2

Wind energy 27.8 32.2 27.5 32.2 41.4 38.8

Source: BZWBK Brokerage research

Different stages of wind farms development have a strong impact on the EBITDA, but

their impact on the reported bottom line is incomparably stronger (e.g. if the company

has operated wind farms for a long time, its debts are repaid, its interests paid are

low,its bottom line is high and P/E ratio disproportionately low). We, therefore, believe

that the P/E ratios are less important to EV/EBITDA in case of the renewable assets and

this is why we applied 25% / 75% weights to the P/E and EV/EBITDA ratios. Based on


3

the aforementioned weights and ratios, POLENERGIA’s FY2014 report and on our

2015-2017 estimates for the company, we have arrived at POLENERGIA’s equity value

amounting to very similar level of PLN35.4 per share (comparable with the wind

segment) and PLN35.6 per share (comparable with the diversified segment). Overall,

the per share valuations range from PLN28.8 to PLN37.8, and the equal-weighted

approach yields a final comparative valuation of PLN35.5.

Fig. 3. POLENERGIA: Comparable valuation - summary In PLN per share

P/E EV/EBITDA

2011E-13E 2011E-13E

Diversified 28.8 37.8

Wind energy 29.1 37.5

Average 29.0 37.6

Weight 25% 75%

Total weighted valuation 35.5


Comparable valuation – alternative approach

Every company’s on-shore wind farm projects may be split into projects that are

operational, under construction or in the pipeline. Below we present an abbreviated

approach to POLENERGIA’s valuation on the basis of today’s Enterprise Value of ENEL

Green Power and EDP Renovaveis, two European giants offering comparability to the

Polish renewable players.

Fig. 4. POLENERGIA: Valuation of company’s on-shore windfarms, part 1 In MW, unless otherwise stated

Capacity-based approach

[all data in MW]

Production-based approach

[all data in GWh]

EDPR

Enel

Full pipeline

Enel Highly

confident pipeline

EDPR

Enel

Full pipeline

Enel Highly

confident pipeline

Projects operating 9,037 9,626 9,626 19,763 31,798 31,798

Weight 100% 100% 100% 100% 100% 100%

Projects under construction 543 2,025 2,025 1,192 4,207 4,207

Weight 95% 95% 95% 95% 95% 95%

Project in pipeline 985 26,000 8,500 2,163 20,733 63,419

Weight 10% 10% 10% 10% 10% 10%

Total projects, weighted 9,651 14,150 12,400 21,112 37,868 42,136

Company's EV (PLN mn) 40,157 69,465 69,465 40,157 69,465 69,465

EV per 1MW / 1GWh 4.16 4.91 5.60 1.90 1.83 1.65


Above we have presented a breakdown of the two companies’ wind projects, with own

weights applied to the three different statuses of their wind farm projects (100% for

those operating, 95% for those that are under construction, 10% for the wind pipeline).

The weighted sum, calculated either in MW (capacity) or GWh (production), is then

contrasted against these companies’ current Enterprise Value. This offers a market


4

valuation of EV per MW or EV per GWh assigned to the wind farm-focused company by

investors.

Fig. 5. POLENERGIA: Breakdown of on-shore wind projects (operating; under construction; pipeline)

EDPR ENEL Green Power POLENERGIA

86%

5% 9%

Projects operating Projects under construction

Project in pipeline

48%

10%

42%


Project in pipeline

15%

10%

75%


Project in pipeline


The next step was pretty straightforward – we applied precisely the same approach to

POLENERGIA’s on-shore wind farms. The company’s current capacities or production

(see Fig. 6) show that the current Enterprise Value of POLENERGIA sits in a narrow

range of PLN1.46-1.53bn vs. our NPV-based valuation of PLN1.78bn. However, it

should be kept in mind that 48-86% of the EDPR / ENEL wind projects is operational

(see Fig. 5) compared to the meagre 16% of operational projects of POLENERGIA –

any weight below 100% applied to non-operational projects substantially penalises the

valuation of any company with a huge pipeline.

Fig. 6. POLENERGIA: Valuation of company’s on-shore windfarms, part 2 In PLN per share

Capacity-based approach

[all data in MW]

Production-based approach

[all data in GWh]

POLENERGIA

Today

POLENERGIA

50% winning chance in

2016 auction; 10% winning

chance in next auctions

POLENERGIA

In mid-2016, with 50% projects

victorious in 2016 auction

POLENERGIA

Today

POLENERGIA

50% winning chance in

2016 auction; 10% winning

chance in next auctions

POLENERGIA

In mid-2016, with 50% projects

victorious in 2016 auction

Projects operating 147 147 246 361 361 646

Weight 100% 100% 100% 100% 100% 100%

Projects under construction 99 99 162 285 285 449

Weight 95% 95% 95% 95% 95% 95%

Project in pipeline 730 730 562 1,918 1,918 1,477

Weight 10% 28% 10% 10% 28% 10%

Total projects, weighted 314 448 462 823 1,177 1,220

Assumed EV per unit* (PLNmn) 4.88 4.88 4.88 1.78 1.78 1.78

Implied windfarms’ EV (PLNmn) 1,533 2,189 2,254 1,462 2,089 2,166

Source: BZWBK Brokerage research. * average of respective EV per MW or EV per GWh ratios for ‘EDPR’ and ‘ENEL – Highly

confident pipeline’.

Moreover, we believe POLENERGIA’s chances of winning the 2016 auction are quite

decent, thanks to its 3336MW in ready-to-build projects and also the low interest of


5

other Polish utilities. We, therefore, also present two different scenarios. In the first

scenario, we assume POLENERGIA has a 50% chance of winning the 2016 auction

(50% out of 336MW) and that the applied standard 10% weight of all the remaining

projects would result in pipeline’s wind farms’ “weighted” weight growing to 28%. The

other scenario moves us one year ahead, to the day after the 50% of the 336MW ready-

to-build POLENERGIA had won the 2016 auction.

Both these scenarios suggest that the Enterprise Value of POLENERGIA’s on-shore

wind segment is substantially above PLN2.0bn. While we see the latter as a reasonable

upside to POLENERGIA’s valuation, we decided to present an alternative valuation of

POLNERGIA based on its (1) current comparable valuation and (2) a 50% chance of

winning the 2016 auction.

Fig. 7. POLENERGIA: Equity valuation based on ENEL / EDPR wind parks

Today

50% winning chance in 2016

auction

Average POLENERGIA windfarms valuation [PLNmn] average of EV/MW and EV/GWh approach 1,498 2,139

Value of all other projects, including Net Debt [PLNmn] see SoTP valuation, excluding on-shore windfarms 137 137

Total valuation [PLNmn] 1,635 2,276

Total valuation per share [PLN] 36.0 50.1

Implied average per share valuation [PLN] 43.1


DCF valuation

Fig. 8. POLENERGIA: WACC calculation

Wind projects Other projects

Risk free rate (10-year Polish T-bond yield) 2.3% 2.3%

Unlevered beta 1.00 1.00

Levered beta 2.89 1.81

Equity risk premium 4.5% 4.5%

Cost of equity 15.3% 10.4%

Risk free rate (10-year Polish T-bond yield) 2.3% 2.3%

Debt risk premium 1.0% 1.0%

Tax rate 19% 19%

After tax cost of debt 2.67% 2.67%

%D 70% 50%

%E 30% 50%

WACC 6.46% 6.56%


The common DCF approach implies there is Terminal Value in the company, which is

not the case for POLENERGIA’s wind farm fleet that has a defined economic life of 25

years (also see our detailed discussion of this assumption in the Sensitivity section and

on page 32). Projects in the wind and conventional generation segments, responsible

for the bulk of the company’s valuation, have a precisely defined lifetime. We, have,


6

therefore, decided to value every single one of POLENERGIA’s segments using the

NPV approach, which actually is a calculation of FCF over the entire segment’s life.

Below we summarise our assumptions behind the NPV calculations of each of

POLENERGIA’s segments under consideration (detailed calculations are presented on

pages 22-30):

1) On-shore wind farms – running and under construction: WACC at 6.46%; black

electricity price at PLN156/MWh in 2015E and PLN189/MWh in 2021E, growing at

1.3% thereafter; CO2 certificates flat at EUR9/t as of 2016; green certificates at

PLN155 in 2015, growing to PLN230 as of 2019; remaining debt-financed CAPEX

at PLN140mn in 2015; projects’ life of 25 years for each project; 147MW operating

by 2025, additional 99MW (currently under construction) contributing as of

Jan2016;

2) On-shore wind farms – auctioning system: WACC at 8.46% (+2pp premium);

electricity price in 2016 auction at PLN400/MWh, auction electricity price erosion

5% p.a.; load factor 30.5% in 2016, growing by 0.5pp p.a.; black electricity price at

PLN156/MWh in 2015E and PLN189/MWh in 2021E, growing at 1.3% thereafter;

CO2 certificates flat at EUR9/t as of 2016; CAPEX at EUR1.7/MW, 30% financed

with equity; projects’ life of 25 years for each project; POLENERGIA winning

556MW projects (out of its 730MW pipeline), of which we assume the company will

build and operate 345MW and dispose of 211MW; costs of 730MW development

included;

3) Conventional energy: WACC at 6.56%; includes valuation of three projects (Nowa

Sarzyna, Mercury, Zakrzow), with the former responsible for 90% of the segment’s

valuation; assumption that all projects are operational by 2020E; assumed yellow

certificates received by 2020, priced at PLN110/MWh in 2015 (inflation-indexed

afterwards); stranded costs & gas compensation to keep Nowa Sarzyna EBIT

positive terminally; no CAPEX needs;

4) Pellet production lines: WACC at 8.56% (+2pp premium); three facilities running

until 2029-2030E, total annual pellet production at 123kt; avg. EBITDA margin at

9.4%; avg. annual CAPEX at PLN1.3mn;

5) Distribution: WACC at 8.56% (+2pp premium); valuation consisting of PLN60mn

RAB (2014) and PLN28mn value of provided electricity sales; annual CAPEX at

PLN4.1mn;

6) Trading: WACC at 7.56% (+1pp premium); sales of black electricity and certificates

of origin at 3.0% margin (own production), 0.5% margin (other electricity) and 0.1%

margin (trading portfolio);

7) Alternative projects: includes a 50% book value of three projects: (1) gas network,

(2) 1,200MW off-shore wind and (3) greenfield lignite-fired generation unit;

8) Headquarters & Others: WACC at 8.56% (+2pp premium); valuation of negative

Headquarters costs, which we see at PLN8mn in 2016E, halved in 2021E and

vanishing (lack of any new projects) as of 2027E;

9) Net Debt: value of POLENERGIA’s Net Debt, as reported in the company’s FY2014

consolidated statement.


7

Fig. 9. POLENERGIA: SoTP valuation (sum of NPV valuations by segments)

Project Valuation Valuation Share in

valuation*

PLNmn PLN per share

On-shore wind: working and under construction 1,526 33.6 65% On-shore wind: pipeline in auctioning system 250 5.5 11%

Conventional energy 239 5.3 10%

Biomass production 39 0.9 2%

Distribution 88 1.9 4%

Trading 66 1.4 3%

Alternative projects 129 2.8 6%

Headquarters & Others -53 -1.2 -

Net Debt -370 -8.2 -

Total 1914 42.2 100%

Source: BZWBK Brokerage research. * under assumption of proportionate allocation of

Headquarter & Net Debt negative values across segments.

We estimate POLENERGIA’s total valuation, based on the sum of its separate

projects’ NPVs, at PLN1,914mn. This equals the fully-diluted PLN42.5 per share.

POLENERGIA – valuation summary

We have previously presented what we believe stands for a thorough valuation

screening of the company, including the application of three different valuation

approaches. Each one of these offers a decent upside to POLENERGIA’s current share

price, ranging from 15% to 39%. Investors should keep in mind, however, that the ‘pure

comparable’ approach is based on just a few wind farms that contribute to the

company’s EBITDA & bottom lines, but which, overall, fails to capture the company’s

upside, which is likely to get unlocked in two-three years’ time.

Fig. 10. POLENERGIA: Valuation summary

Method Target Price Upside Weight

SoTP – sum of segments’ NPV 42.2 36.0% 70%

Pure comparable 35.5 14.5% 15%

'Alternative' comparable 43.1 39.0% 15%

Blended average Target Price 41.3 33.2%

Source: BZWBK Brokerage research.

We believe that it is SoTP that reflects the company’s intrinsic value most accurately, so

we gave this method a 70% weight. Applying an equal, 15% weight in the two

comparable approaches puts POLENERGIA’s blended average Target Price at

PLN41.3 per share. As this price offers a 33% upside to the company’s market

price, we re-initiate the company’s coverage with a BUY recommendation.


8

Sensitivity analysis – part one

The company operates in a very complex environment and its share price can be

substantially affected by (1) changes in the EU’s environmental policies, (2) actions of

the mighty local Treasury-controlled competitors, or (3) decisions (or their absence) of

the local regulator, just to name a few.

However, as we are unable to test for the unknown, we decided to familiarise investors

with POLENERGIA’s business by presenting its key valuation drivers. Our valuation

relies on several valuation methods, but, here, we will be testing the company for

changes in the SoTP valuation outcome by changing just one, single factor at a time

(ceteris paribus). Below we list a number of factors that affect the company’s valuation,

from the most to the least significant..

Fig. 11. POLENERGIA: SoTP valuation sensitivity analysis

Factor Worst-case scenario Core assumption Best-case scenario

Price of CO2 certificates Down to nil as of 2016 Flat EUR9/t Up EUR3/t p.a. to

EUR81/t in 2040

SoTP-implied Target Price [PLN] 37.8 42.2 59.3

Deviation from core scenario -10.9% 0.0% 39.8%

Renewable electricity price in 2016 auction PLN300/MWh PLN400/MWh PLN450/MWh



Polish green certificate price

Flat at PLN130/certificate as of

2015

Flat at PLN230/certificate as of

2019

Jumping to PLN300/certificate in

2020



Wind farms’ economic life 20 years 25 years 27 years



Change in load factor for all running wind farms -1.0% 0.0% 1.0%



Annual growth in Polish electricity price 0.00% 1.30% 2.50%



Source: Company data, BZWBK Brokerage research

It is clear that the price of CO2 certificates is the key game-changer for POLENERGIA –

an end to the EU’s climate-changing dreams (and elimination of the CO2 certificate

price) would cut POLENERGIA’s valuation by 11%, while application of these policies in

their rigid version (de-carbonisation goal) would boost the company’s valuation by

almost 40%. The renewable electricity price at auctions as of 2016 has the capacity to

change POLENERGIA’s valuation substantially, while, quite counter-intuitively, upside

from a high green certificate price seems limited. Finally, the assumption of a much


9

shorter economic life of a wind farm (20 years instead of 25) could trim POLENERGIA’s

valuation by 16%, with almost no upside available.

Above all, it should be noted that there is not a single ‘worst-case scenario’ that could

trim POLENERGIA’s valuation below its current share price. The risks are there, but,

unless a number of these factors hit the company simultaneously, the current share

price should be perceived as a buying opportunity.

Fig. 12. POLENERGIA: Sensitivity analysis – impact of change in CO2 certificate price

In PLN

37.8 39.5

42.2

47.9

59.3

30

35

40

45

50

55

60

65

Down to nil as of2016

Down to flatEUR3.5/t in 2016

Flat EUR9/t Up EUR1/t p.a. toEUR33/t in 2040

Up EUR3/t p.a. toEUR81/t in 2040


Fig. 13. POLENERGIA: impact of change in load factor Fig. 14. POLENERGIA: impact of price in 2016 auction

In PLN In PLN

39.0

40.6

42.2

43.7

45.3

3.5

3.6

3.7

3.8

3.9

4.0

4.1

4.2

4.3

4.4

4.5

4.6

-1.00% -0.50% 0.00% 0.50% 1.00%

34.7

39.3

42.2

45.5

50.1

30

35

40

45

50

55

PLN

300

/MW

h

PLN

380

/MW

h

PLN

400

/MW

h

PLN

420

/MW

h

PLN

450

/MW

h

Source: BZWBK Brokerage research Source: BZWBK Brokerage research

VERTE


10

Fig. 15. POLENERGIA: impact of growth in electricity price Fig. 16. POLENERGIA: impact of green certificate price In PLN In PLN

40.1

41.1

42.4

43.2

44.3

38

39

40

41

42

43

44

45

0.00% 0.65% 1.30% 1.90% 2.50%

34.4

38.9

42.2

44.746.0

30

32

34

36

38

40

42

44

46

48

50

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13

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20

15

Fla

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ate

in 2

020

Source: BZWBK Brokerage research Source: BZWBK Brokerage research

Fig. 17. POLENERGIA: Sensitivity analysis – impact of change in wind farm’ economic life*

In PLN

35.7

38.9

42.2 42.4 42.5

30

32

34

36

38

40

42

44

20 years 22 years 25 years 26 years 27 years

Source: BZWBK Brokerage research. * substantially skewed to the left, as wind projects cannot operate longer than for 26-27 years withough serious concessions at load factor.


11

Changes to POLENERGIA’s wind CAPEX and OPEX

Regardless of our assumptions on the company’s wind pipeline, its real CAPEX to be

spent remains uncertain. POLENERGIA’s CAPEX in the wind segment is a derivative of

the turbine unit costs (currently assumed at EUR 1.7m/MW for all the projects) and the

EURPLN exchange rate (our assumption is 4.15x for the entire pipeline). Should either

factor change, any single project could require both capital investments and equity

inflows that are different from our assumptions.

Fig. 18. POLENERGIA: Valuation sensitivity to changes in windfarms’ CAPEX and OPEX*

CAPEX [PLNmn / MW] 5.65 6.45 7.06 7.77 8.47

SoTP valuation [PLN per share] 48.2 44.7 42.2 39.1 36.1

Annual OPEX [PLNmn / MW] -20% -10% 0% +10% +30%


Source: BZWBK Brokerage research. * ceteris paribus (all other constant).

While demand for new turbines will diminish to some 600MW a year (our own

assumption of the annual auction size), the EU-originated focus on renewable capacity

should keep demand for turbines (greenfield or re-powering) unchanged in the coming

years. For this reason, we see little scope for any substantial changes to the turbine

price at EUR1.7mn per MW (technology update to be visible at improving load factors

and productivity). The changes in CAPEX presented above should be rather viewed as

POLENERGIA’s exposure to any changes in the future EURPLN exchange rate.

With respect to OPEX, we do not expect any changes in the long term. However, we

present the calculations above to show the hypothetical impact of a surprising change to

taxes / other regulations, which could alter the long-term value of operating costs paid

by the company.


12

Sensitivity analysis – part two

Changes to RFR, WACC and capital structure

Our WACC calculation is based on a 90-day average interest rate of the Polish 10YR

Treasury bill, currently at 2.3%. Moreover, we assume that POLENERGIA will have to

finance 30% of the wind farm CAPEX with own equity.

Fig. 19. POLENERGIA: Valuation sensitivity to changes in RFR & capital structure*

Level of RFR 1.5% 2.0% 2.3% 3.0% 4.5%


Equity / Debt ratio in windfarms 20 / 80 25 / 75 30 / 70 40 / 60 50 / 50


Source: BZWBK Brokerage research. * ceteris paribus (all other constant).

Changes to the RFR affect all of the company’s projects and all of POLENERGIA’s

NetFCF. This is why we see the RFR as a very potent driver of the company’s valuation

(more of a risk factor though, with the downside substantially outweighing any upside).

The very limited impact of the changes on the capital structure in the total valuation

stems from the fact that we apply the new capital structure to the 345MW of the 2016-

2019 wind projects only, which we calculated to have an 11% share in the total

valuation.


13

POLENERGIA profile

Last year’s marriage of PEP’s renewable-focused assets (on-shore wind farm portfolio

and biomass production) with the far more operationally dispersed vertically integrated

utility assets of Polenergia Holding (Trading, Distribution, Conventional generation,

alternative projects) created the vertically integrated POLENERGIA group.

Fig. 20. POLENERGIA: Assets of the Group & shareholding structure

Source: company data.

The new activities (electricity & gas sales in Trading and Distribution, electricity

distribution in Distribution, gas-fired electricity & heat production in Nowa Sarzyna’s

Conventional generation) have substantially widened the scope of POLENERGIA’s

business. Assets that the Polenergia Holding had acquired also include alternative

projects in off-shore wind (the most advanced off-shore project in Poland), a thermal

coal-fired power unit (potentially located on the Polish coast) or the Germany-Poland

gas connector.

Fig. 21. POLENERGIA: Diversification of group’s operations [operational projects in green, alternative projects in red]

Generation Transmission and Distribution Sales & Trading

Renewable Generation

Electricity generation in on-shore wind farms – operational; development activity

Electricity generation in off-shore wind farms

Electricity generation from biomass

Distribution of electricity (regulated)

Distribution of gas (regulated)

Transmission of natural gas (pipeline Bernau – Szczecin)

Wholesale trade and sale of electricity to final customers

Certificates trading (certificates of origin of renewable energy)

Gas trading

Gas Generation

Electricity and heat generation (CHP Nowa Sarzyna)

Electricity and heat generation (Zakrzów and Mercury power plants)

Coal Generation

Electricity generation based on coal (Power station Północ)

Source: company data.


14

Capacity expansion

POLENERGIA’s current on-shore wind farm portfolio consists of 147MW in running units

and 98MW in units under construction (to be completed by Dec2015). On top of that, the

company has three conventional generation units with total capacity of 124MW. The

renewable auctioning scheme brings the company’s 730MW wind pipeline within close

reach, although we believe the company has capacity to build only 345MW and will

likely need to dispose some projects in the future (see pages 25-27 for more detail).

Still, capacity-wise, additional upside is hidden in the alternative projects, with 1,200MW

in off-shore wind farms and 1,600MW in the thermal coal-fired greenfield (the company

treat these as an option). Again, it should be noted that POLENERGIA has absolutely

no ability to provide equity for all of these and selling stakes in these projects would be

necessary in our view. Considering this, Fig. 22 should be viewed as a purely

hypothetical capacity calculation.

Fig. 22. POLENERGIA: Potential capacity growth (MWe) – official approach

Source: company data

.

Shareholding structure

The company’s shareholding structure was reshuffled substantially last year (see Fig.

20) as (1) the acquisition of Polenergia Holding assets and (2) the PLN240mn cash

inflow from CEE Equity Partners required two share issues, totalling 24.1mn in new

shares, sold for PLN33.03 each. However, at the expense of the free float reduced to

the current 18.4% (including AVIVA and Generali Pension Funds holding 6.7% and

6.5%, respectively), the company not only has received a pool of EBITDA-supportive

assets and prospective projects, but it now predominantly enjoys a 16% cornerstone

investor. In our view, the presence of the latter and the entry price at PLN33 a share

both offer very solid long-term support to the company’s share price.


15

Focus on on-shore wind

Regardless of the substantial changes to the company’s business mix, we believe the

on-shore wind farms (operating, under construction and pipeline) to be the key value

driver. Therefore, below we present a quick update on this segment’s current status and

prospects.

Fig. 23. POLENERGIA: On-shore wind farms development status in 2010-end…

F – 42 MW

LMP, ED

E – 38 MW

LMP, ED

D – 102 MW

LMP, ED

Wind farm projects at advanced stages of development

Extension of Modlikowice/Łukaszów wind farms

Milestone reached:

LMP – Local master plan

ED – Environmental decision

GCT – Grid connection terms

BP – Building permit

C – 28 MW

LMP, GCT

G – 50 MW

LMPA+B: 90-105 MW

LMP, ED, GCT

(105 MW)

Fig. 24. POLENERGIA: …and the construction phase and readiness to the first auction in 2016

Source: Company data

The company has substantially expanded its on-shore wind farm portfolio to tomorrow’s

certain 245MW in the running projects. Moreover, POLENERGIA seems very well-

prepared for next year’s renewable auction, with 336MW out of the 730MW pipeline at

the ‘ready-to-build’ status by 1Q2016. We expect the company to win 15-year support

Projects under construction

Projects with Building Permit

Wind farm at an advanced development stage

Milestones reached:

MPZ - Local Development Plan

DŚ - Environmental Decision

WPS - Terms of connections to the Network

PB - Building Permit


16

for a total of 556MW in the coming 2016-2019 auctions, of which 211MW would be sold

to facilitate (1) construction of the others or (2) distribution to shareholders.

Fig. 25. POLENERGIA: On-shore capacity operated [MW] Fig. 26. POLENERGIA: On-shore EBITDA generation*[PLNmn]

0

100

200

300

400

500

600

700

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

20

25

PUCK MOD & LUK GAW & RAJ 2015

2016 2017 2018 2019

0

100

200

300

400

500

600

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

20

25

Puck MOD & LUK GAW & RAJ 2015

2016 2017 2018 2019

Source: Company data, BZWBK Brokerage research for all graphs. * EBITDA on assumed projects’ one-off disposals not included.

POLENERGIA – positioning on the Polish renewable market

Fig. 27. POLENERGIA: Comparison of onshore and offshore wind fleets across the Polish power sector

PGE Tauron ENEA Energa POLENERGIA

POLENERGIA’s

Rank

Wind capacity ready by

Dec2015 530 MW 183 MW 56 MW 185 MW 245 MW No.2

On-shore wind pipeline ~1,000 MW 20 MW 100 MW** ~1,000 MW 730 MW No.3*** [No.1]

Wind capacity ready for 2016

auction [own assumptions]* 200-300 MW 0 MW 0 MW 0 MW 336 MW No.1

Off-shore wind pipeline 1,000 MW 0 MW 0 MW 0 MW 1,200 MW No.1

Source: Companies’ data, BZWBK Brokerage research. * based on public companies’ suggestions; ** ENEA intends to acquire

developed wind projects; *** we doubt in either PGE or Energa capable of developing 1,000MW

The table above highlights one of the weaknesses of the Polish power segment – low

exposure to renewables. In contrast, POLENERGIA’s long-term focus on renewables

lets its operational & pipelined wind fleets expand into one of the largest renewable

players on the Polish utility market, trailing just behind PGE and by far outpacing both

ENEA and Energa (the hydro dam of the latter will lose renewable support in Jan16).


17

Financial results and forecasts

Price assumptions Fig. 28. POLENERGIA: Black electricity / green certificate / CO2 certificate price assumptions In PLN, unless otherwise stated

2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E

Black price ex. CO2 price 122 168 167 141 156 166 174 181 183 185 187 189 191

Electricity black price 180 200 185 164 183 200 207 215 217 219 221 222 224

CO2 certificates

Price (EUR) 15.6 8.5 4.7 6.0 7.0 9.0 9.0 9.0 9.0 9.0 9.0 9.0 9.0

Price (PLN) 64.4 35.4 19.7 25.0 29.2 37.5 37.5 37.5 37.5 37.5 37.5 37.5 37.5

CO2 impact* 58 32 18 23 26 34 34 34 34 34 34 34 34

Green Certificate 240 247 140 187 155 165 180 190 230 230 230 230 230

Black + Green**

Source: Companies, regulator, BZWBK Brokerage research. * Adjusted for 0.9x pollution factor for Poland. ** price recognized by POLENERGIA windfarms

Above we present our price assumptions (electricity, green certificates, CO2 certificates)

that are valid for our entire model of POLENERGIA. We believe that the impact of the

CO2 certificates will smoothly be passed onto the final customer, so we adjust the ‘real’

black electricity price for this burden.

We assume that today’s substantial green certificate oversupply will dry up by 2018-19E

due to ceased support for hydro and biomass co-burning (impact of the recently

approved Renewables Act, valid as of Jan2016). We, therefore, assume there will be a

gradual recovery of the green certificate prices to PLN230 in 2019E. We expect them to

remain flat afterwards. We also note that our assumption settles substantially below the

price set by the RA – we assume that the green certificates prices will remain close to

75% of this official price.

Price of the CO2 certificates at EUR9/t represents one of the key assumptions in our

model. We believe that the CO2 price should grow to EUR9/t next year. We expect it to

remain flat at this level afterwards. A break-up of the certification system in Europe or

factual implementation of the de-carbonisation system could have very strong

implications for POLENERGIA’s share price – we discuss the company’s share price

sensitivity on page 8, but we are unable to build any reasonable model for the CO2

pricing behaviour.


18

Insight into POLENERGIA’s financials

Prior to the transformation of PEP into POLENERGIA, wind stood for the key revenue

and EBITDA contributor, while analysis of this one segment alone used to deliver the

correct answers for the consolidated figures. The addition of the brand new segments

under the POLENERGIA brand, with the revenue-boosting Trade, EBITDA-strong

Conventional generation and stable Distribution, has brought the vertically integrated

POLENERGIA closer to the other utilities in respect of good value chain, but also

analysis of one sector can no longer offer a proper P&L approximation at any level.

Fig. 29. POLENERGIA: Margin breakdown*

80.0% 81.9%

75.7% 77.2% 78.1%

83.1%80.7% 81.4% 80.2% 80.0% 79.5% 79.3% 79.1%

24.5% 24.0% 23.6% 23.5% 22.7% 23.6% 22.0%

0.8% 0.3% 0.2% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4%

12.3%

6.4% 8.0% 10.0% 9.9%

19.0%16.5% 17.9% 17.7% 17.6% 17.4% 17.3% 17.3%

21.3%24.7%

27.1%

33.0% 33.4%

49.5%45.7%

52.5%

59.8% 59.5% 58.8% 58.6% 58.4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

Wind

Conventional generation*

Trading

POLENERGIA

POLENERGIA ex. Trading

Source: Company data, BZWBK Brokerage research. *we assume termination of Conventional

generation contribution in 2020E, the future of Nowa Sarzyna beyond 2020 relies on State support.

In our view, analysis of POLENERGIA via its revenues is pointless since the trading

segment’s modest changes may (and probably will) turn the observable trends upside

down year after year. We believe that the EBITDA margin is not a good tool as

POLENERGIA’s business may be broken down into four businesses with totally different

characteristics: (1) very high-margin operation of wind farms, (2) compensation-

supported conventional generation lasting till 2020E, (3) regulated distribution and (4)

trading with its very high revenues and very tiny margins.

Fig. 30. POLENERGIA segments: EBITDA contribution [PLNmn] Fig. 31. POLENERGIA: EBITDA breakdown by segments

0

100

200

300

400

500

600

700

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

20

25

Wind - operating Wind - auctions

Conventional generation Trading

Others

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

20

25

Wind - operating Wind - auctions

Conventional generation Trading

Others

Source: Company data, BZWBK Brokerage research for all graphs.


19

Quite counter intuitively, the well-known renewable-oriented PEP has turned into a

much more conventional generation-oriented POLENERGIA, if judged by the 2013-17E

EBITDA contribution and breakdown (pro-forma for 2013-14). It should also be noted

that POLENERGIA’s 245MW on-shore wind farms will be contributing for 12 months of

the calendar year only as of 2016, while the stable contribution of Nowa Sarzyna’s

stranded costs-supported will keep supplementing the ‘renewable look’ of the company

at least until 2020. Investors should also bear in mind our belief in one-off disposals of

sizeable developed projects (that won auctions) in the years 2018E and 2020E,

boosting the respective ‘wind-auction’ segment’s contribution beyond proportion (one-

offs at PLN95mn in 2018E and PLN35mn in 2020E).

Fig. 32. POLENERGIA: Net Debt and Net Debt to EBITDA

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

0

500

1,000

1,500

2,000

2,5002013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

Net Debt [lhs] Net Debt / EBITDA [rhs]


The assumption of POLENERGIA more than doubling its running wind portfolio to

2021E 590MW in the running on-shore wind farms requires heavy investment outlays,

especially in the construction of 252MW in projects that can be expected to win the 2016

auction. The two necessary equity injections in wind farms, close to PLN0.9bn each in

the years 2016-17E, should boost POLENERGIA’s net debt beyond PLN2bn in 2017E.

Still, while the company’s Net Debt to EBITDA will peak at 7.3x that year, the certain

contribution of these new wind farms will depress this ratio instantly to below 3.0x after

2021E, a very reasonable level for renewable or regulates businesses.

Fig. 33. POLENERGIA: Dividend payout assumptions Fig. 34. POLENERGIA: Dividend Yield

0% 0% 0% 0%

50% 50% 50% 50%

100%100%100%100%100%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

20

25

0.0%0.0%0.0%0.0%

3.4%3.0%

9.1%

6.7%

14.6%

13.6%14.5%14.8%

15.7%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

20

25



20

And speaking of high gearing, one must remember that the company’s policy assumes

dividend payments as of 2017. Without any clear guidance on the matter, however, we

expect POLENERGIA to settle its dividend pay-out at 50% until the CAPEX-intensive

wind farm investments are over, before increasing the dividend pay-out ratio to 100% as

of 2021E. We do not expect any high DY in 2017-18E, but for 2018 we have assumed

(1) doubling of the company’s running on-shore wind farm capacities and (2) a one-off

PLN95mn gain on some projects’ disposal possibly triggering a DY above 9% in 2019E

before a rise in the dividend pay-out to 100% would settle POLENERGIA’s DY close to

the 15% threshold. Actually, exclusively on the basis of the company’s current projects,

we expect the company to become a stable payer of a 7% dividend yield.

Fig. 35. POLENERGIA: Cash Flow analysis [PLNmn] Fig. 36. POLENERGIA: Cash Flows to EV

-79

-803 -787

-6

-110

367

257223 219 220 221

-1200

-1000

-800

-600

-400

-200

0

200

400

600

-1200

-1000

-800

-600

-400

-200

0

200

400

600

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

20

25

Operating Cash Flow

CAPEX

Dividends

Net Cash*

6.9% 5.9% 5.3%

10.7%9.9%

14.6%16.0%15.5%

17.1%19.2%

21.9%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

20

25

Operating CF / EV Net Cash* / EV

Source: Company data, BZWBK Brokerage research for all graphs. * Net Cash understood as Operating Cash Flow minus CAPEX minus Dividends.

POLENERGIA’s ambitious wind-related plans will not make the company a cash cow

before 2018E. Although its operating FCF remains healthy, its secured long-term

contracts, significant potential CAPEX requirements and early dividend pay-outs will

probably not allow the company to report a positive annual Net Cash before 2020E.

However, we see a strong contribution from the wind farms letting POLENERGIA deliver

some +PLN200mn in Net Cash per annum. Actually, in our view, the assumed CAPEX-

intensive victory in the 2016 auction could guarantee high cash generation, making

today an ideal entry point into the stock.


21

Drivers of 2015-18E earnings

Fig. 37. POLENERGIA: Drivers of changes in the company’s reported 2014-18E EBITDA* In PLNmn

169

27 0 0 2

194

770 2 2

271

12 0 6 0

278

10

312

8 0

608

0

100

200

300

400

500

600

700

EB

ITD

A 2

014

Win

d-o

pe

ratio

nal

Win

d-a

uction

Co

nventioa

lge

nera

tion

Oth

er

EB

ITD

A 2

015

E

Win

d-o

pe

ratio

nal

Win

d-a

uction

Co

nventioa

lge

nera

tion

Oth

er

EB

ITD

A 2

016

E

Win

d-o

pe

ratio

nal

Win

d-a

uction

Co

nventioa

lge

nera

tion

Oth

er

EB

ITD

A 2

017

E

Win

d-o

pe

ratio

nal

Win

d-a

uction

Co

nventioa

lge

nera

tion

Oth

er

EB

ITD

A 2

018

E

Source: company, BZWBK Brokerage research. * 2014 EBITDA pro-forma.

Wind - operational: The decent improvement in 2015E is driven by the 12M

contribution from the Gaw&Raj projects – growth would be healthier if not for Tauron’s

cancellation of its bilateral electricity purchase agreements, trimming the 2015E EBITDA

by PLN7mn y/y (ceteris paribus). In 2016E, we see the 12M impact of the 98MW wind

farms under construction, not to mention the small upside resulting from growth in the

[black + green] electricity price. The upsides in 2017E and 2018E stem exclusively from

the supportive electricity & green certificate price changes.

Wind - auctioning: POLENERGIA needs to win an auction and build wind farm(s), so

we see no contribution from this sub-segment until 2017E. However, the 252MW

capacity running at the assumed 30.0% load factor and priced at PLN400/MWh will

produce PLN219mn in EBITDA, more than doubling the total wind contribution y/y. On

top of that, we also expect POLENERGIA to sell 155MW of its developed wind projects

(after securing contracts in the 2017 auction for these as to provide financing for the

wind farms under construction) – this one-off should boost the 2018E EBITDA by

PLN93mn.

Conventional generation: We expect little changes to the segment’s EBITDA

contribution in the forecasting period. Stranded costs and gas compensation (annual

recovery), boosted by revenues from the yellow certificates, should keep this segment’s

EBITDA within the PLN80-88mn range.

Other (Trade; Distribution; Biomass; Headquarters): We expect a flat EBITDA

contribution of biomass until 2018E. In 2015E, we expect margin erosion driven EBITDA

reduction in Trading, which should be compensated with an upside to the RAB-boosted

Distribution. In 2016E, the tide should turn, leading to a recovery in Trading that would

offset the WACC-driven erosion to Distribution, not to mention some optimisation of the

Headquarters’ costs. We expect no major changes in either of the segment’s EBITDA

contribution in 2017E or 2018E.

Fig. 38. POLENERGIA: Financial summary* PLN in millions, unless otherwise stated

2013 2014 2015E change 2016E change 2017E change 2018E change

Sales 1,118 2,659 2,422 -8.9% 2,723 12.4% 2,810 3.2% 3,203 14.0%

EBITDA 138 169 194 14.6% 271 40.0% 278 2.5% 608 118.8%

EBITDA margin (%) 12.3% 6.4% 8.0% 1.6 10.0% 2.0 9.9% -0.1 19.0% 9.1

EBIT 64.7 82.9 108.2 30.4% 151 39.4% 157 4.4% 399 153.1%

EBIT margin (%) 6% 3% 4% 1.3 6% 1.1 6% 0.1 12% 6.8

Net profit 38 50 64 28.9% 97 51.6% 84 -12.9% 256 203.6%

On-shore wind capacity 80 147 147 0.0% 245 66.7% 245 0.0% 497 102.9%

Source: Company data, BZWBK Brokerage research. * 2013-14 financial data pro-forma.


22

POLENERGIA mechanics by project

Wind mechanics in POLENERGIA

PEP, the legal predecessor of POLENERGIA, had secured a substantial pipeline of on-

shore wind farms. But their construction programme was significantly delayed by the

lack of the Renewables Law for almost three years. Today, POLENERGIA is reaping

benefits of PEP’s expertise.

Fig. 39. POLENERGIA: Summary of the company’s on-shore wind outlook [BZWBK Brokerage estimates]

Project Capacity Load factor Annual

production* Operating costs Production

kick-off NPV

MW

GWh PLNmn / MW PLNmn

Puck 22 21.6% 42 0.180 2006 80

Modlikowice 24

24.6% 125 0.235 2012 283 Łukaszów 34

Gawłowice 41.4

33.5% 196 0.235 2014 500 Rajgród 25.3

2015 98.6 30.0% 259 0.200 Dec2015 663

TOTAL OPERATIONAL 245 28.9% 621 0.216 1,526

2016** 252 30.5% 673.3 0.200 2018E 204

2017** 153 31.0% 416.1 0.200 2019E 80

2018** 93 31.5% 257.3 0.200 2020E 32

2019** 58 32.0% 162.3 0.200 2021E 9

Source: Company data, BZWBK Brokerage research. * own estimates, ** hypothetical capacity, to be discussed in detail on

pages 25-27.

Fig. 40. POLENERGIA: On-shore wind projects – actual and assumed load factors

21.6%

24.6%

33.5%

30.0%30.5%

31.0%31.5%

32.0%

20%

22%

24%

26%

28%

30%

32%

34%

PUCK MOD & LUK GAW & RAJ 2015 2016 2017 2018 2019



23

Below we present our abridged assumptions for all the wind farms that we expect

POLENERGIA to be operating in the coming years, including those that are already

operational (Puck; Mod&Luk; Gaw&Raj), under construction (‘2015’ projects) or those

that we assume POLENEGIA will win in the subsequent years’ auctions (projects ‘2016’

and ‘2018’, to be discussed in detail on pages 25-27).

Fig. 41. POLENERGIA: On-shore capacity operated [MW] Fig. 42. POLENERGIA: On-shore capacity production [MWh]

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As POLENERGIA’s wind fleet of tomorrow is split between the certain (245MW) and

uncertain auctioning projects (own assumption sits at 345MW), with each enjoying quite

the different characteristics, we have decided to discuss these separately on the

subsequent pages.


24

On-shore running / under construction projects

POLENERGIA has so far accumulated five running wind farm projects in Poland with

147MW capacity and another 98MW in projects under construction (own assumption of

these becoming operational in late Dec2015, providing no support to the 2015’s P&L

account). These projects are very safe, with banks allowing the company to repay its

debt over 15 years and the electricity & green certificates purchased by the Trading

segment of POLENERGIA.

Fig. 45. POLENERGIA: Certain on-shore capacity [MW] Fig. 46. POLENERGIA: Certain on-shore production [MWh]

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Most importantly, after the last substantial outlay in 2014, these projects will continue to

contribute a stable EBITDA and growing NetFCF until 2040. With all the projects

receiving only the black electricity price as of 2031, the total EBITDA of the

aforementioned 245MW will shrink to PLN75mn, though the debt-free NetFCF should

continue supporting POLENERGIA at PLN71mn p.a. until the last project reaches the

end of its operational life in 2041.

These are our key assumptions on the projects under consideration:

- All projects receive the black electricity price (market price) and the green certificate

price (market price);


25

- All projects receive green certificates for 15 years from the very kick-off (these

expire in 2023 in Puck, in 2027 in Mod&Luk, in 2029 in Gaw&Raj, in 2031 in

projects under construction);

- All CAPEX payments have already been made by the company for the running

projects, both the debt and equity parts; the 98MW in projects under construction

require PLN138mn in debt-financed CAPEX;

- All projects’ average long-term capacity-weighted load factor is at 28.9%, incl.

Puck’s 21.6% and the high 33.5% in the Gaw&Raj projects;

- Average capacity-weighted operating costs are at PLN218/kW;

- Bank loans to be repaid 15 years after the start of operation, which boosts the

operator’s profits in the late years.

On-shore wind under auctioning system

In reality these projects do not differ much from the running projects, other than the fact

that we need to apply some additional modelling tools to them. For starters, we present

our views on the auctions’ mechanism since it is the probability of winning every auction

that drives our assumptions for POLENERGIA’s total capacity of the ‘auctioning wind

farm system.’

On-shore wind segment – auctioning system

The official guidance for Poland’s on-shore wind farms settles the final capacity at some

7,000-8,000MW. We assume that the Polish regulator will announce auctions for a total

of 2.4GW, spread equally between four annual auctions. Assuming a lower supply of

new projects in the 2016/17E auctions, the company with the biggest lot of ready-to-

build projects will have the biggest chance of winning the first or the second auction –

and we believe this is precisely where POLENERGIA has an advantage.

While 730MW is a set of numerous unique projects, we decided to work on the total

capacities rather than on the separate projects. Therefore, our calculated capacities for

any single year (see below) may not be equal to the capacities of the existing projects.

Fig. 49. POLENERGIA: Calculation of auction winning probability – part one

Auction Demand in

auction New ones

Failed in previous

years Total Winning projects

Losing projects

Share of winning projects

year MW MW MW MW MW MW %

Numer 2 3 4 5 6 7 8

Calculations = 7 = 3 + 4 = 2 = 5 - 6 = 6 / 5

2016 600 800 0 800 600 200 75%

2017 600 1,050 200 1,250 600 650 48%

2018 600 1,175 650 1,825 600 1,225 33%

2019 600 1,175 1,225 2,400 600 1,800 25%

TOTAL 2,400 4,200



26

Fig. 50. POLENERGIA: Calculation of auction winning probability – part two

2016 auction

2017 auction

2018 auction

2019 auction Total Probability

2016 projects 75% 12% 4% 2% 93%

2017 projects

48% 17% 9% 74%

2018 projects

33% 17% 50%

2019 projects

25% 25%


Fig. 51. POLENERGIA: Calculation of auction winning probability – part three In MW

POLENERGIA projects* 2016 auction 2017 auction 2018 auction 2019 auction

2016 336 252 40 14 7

2017 235 - 113 40 21

2018 118 - - 39 20

2019 41 - - - 10

Total wins by POLENERGIA 252 153 93 58

Source: BZWBK Brokerage research. * 336MW ready-to-build for 2016, own assumptions for

2017-19 auctions.

With a 93% compound probability of projects winning in the first auction, we expect

POLENERGIA to win contracts for 314MW out of 336MW total capacity prepared for the

2016 auction. With the same approach applied to the other auctions, probabilities and

POLENERGIA’s wind farm lots, we expect POLENERGIA’s 730MW on-shore wind

pipeline to let it win 15-year contracts for 556MW.

Auctioning wind portfolio – from ideal to reality

We expect POLENERGIA to secure 15-year contracts for 556MW in on-shore wind

capacity in the 2016-2019 auctions. However, the construction of this wind portfolio

would put the 2017-21E CAPEX at PLN3.9bn and, most importantly, and require an

equity inflow of PLN1.2bn. POLENERGIA cannot afford this CAPEX – construction of a

556MW on-shore wind farm would leave the company’s cash at PLN0.6bn in the

negative territory since the company cannot take on any more debt.

Therefore, we believe that a return to plans of selling wind farms, a vital part of PEP’s

past operations, is the only reasonable scenario.


27

Disposal of developed projects

The company has so far sold six developed wind projects in 2007-2011. The average

net profit of these transactions stood at PLN475/kW and EUR125/kW. However, the EV

of these sales provides far more substantial information – the average transaction was

initiated at the Economic Value of EUR158/kW.

Fig. 52. POLENERGIA: Wind projects disposals PLN in millions, unless otherwise stated

Suwalki Tychowo Suwalki / Tychowo Jarogniew Jarogniew Wartkowo Pagow Klukowo

Aug2007 Aug2008 Mar2009 Jan2009 Oct2009 Jun2010 Dec2010 Dec2011

Power [MW] 41 35 76 20 20 30 51 105

Stake sold 70% 70% 30% 70% 30% 100% 100% 100%

Effective power sold [MW] 28.7 24.5 22.8 14.0 6.0 30.0 51.0 105.0

Net profit [PLNmn] 12.6 9.0 9.7 8.9 3.7 10.1 25.6 42.0 Net profit / eff. power [PLNmn/MW] 0.439 0.367 0.425 0.636 0.617 0.337 0.502 0.400

EURPLN exchange rate 3.5 3.2 4.0 4.6 4.3 4.1 4.0 4.5

Net profit [EURmn / MW] 0.125 0.115 0.106 0.138 0.143 0.082 0.126 0.089

EV [EURmn] 7 6 9 5 4 4 10 19

EV per kW [EUR] 176 185 130 238 187 148 200 185

Source: Company data, BZWBK Brokerage research.

Conservatively we applied an average MW disposal price of EUR145/kW and have

played with the optimal proportions of own construction vs. disposals. While the positive

consolidated cash position may stem from different combinations, we assume the

company will build whatever it wins in the 2016 and 2018 auctions and, at the same

time, dispose of all the pre-construction projects with the 15-year contracts.

Fig. 53. POLENERGIA: Auctioning scheme – allocation between construction and disposals

2016 2017 2018 2019

Year-end cash position PLNmn 34 74 22 204

Projects won in auctions MW 252 153 93 58

Projects for construction MW 252 0 93 0

Projects for disposal MW 0 153 0 58

Proceeds from disposal PLNmn 0 93 0 35


Conventional generation segment

This segment consists of three installations: the gas-fired Nowa Sarzyna unit and two

minor conventional generation projects ‘Zakrzow’ (CHP plant) and ‘Mercury’ (coke gas).

All these three units have either (1) official contracts for electricity delivery (Zakrzow /

Mercury) or (2) stranded costs and gas compensations in Nowa Sarzyna signed until

2020E. This is why we expect their positive contribution to cease in 2020.

This segment represents a very potent EBITDA contributor in the early years, but it

should be kept in mind that Nowa Sarzyna’s profitability is driven solely by quasi one-

offs – the company recovers its stranded costs and gas compensations. On top of that,


28

Nowa Sarzyna recognises yellow certificates and, today, the Polish regulator keeps

investors puzzled over the yellow certificates’ fate beyond 2018.

Fig. 54. POLENERGIA: KPI for Conventional generation segment In PLNmn

2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Nowa Sarzyna

Revenues 338.6 345.0 349.4 342.3 329.4 350.5 360.2 139.4 0.0

EBITDA 82.1 82.2 81.8 80.0 74.1 82.4 78.6 -0.2 0.0

EBIT 41.4 41.4 65.8 64.0 58.1 66.4 62.6 -7.2 0.0

Zakrzow

Revenues 9.8 9.8 10.1 10.1 10.4 10.4 10.7 8.3 0.0

EBITDA 2.8 2.7 2.8 2.8 2.9 2.9 3.0 3.1 0.0

EBIT 1.8 1.8 1.9 1.8 2.0 1.9 2.0 2.1 0.0

Mercury

Revenues 10.5 10.7 10.9 11.1 11.4 11.6 11.8 12.0 0.0

EBITDA 2.9 2.8 2.8 2.8 2.7 2.7 2.6 2.6 0.0

EBIT 1.5 1.4 1.4 1.4 1.3 1.3 1.2 1.2 0.0

Total segment

Revenues 358.8 365.5 370.3 363.5 351.1 372.5 382.7 159.8 0.0

EBITDA 87.8 87.7 87.4 85.6 79.8 88.0 84.3 5.5 0.0

EBIT 44.7 44.6 69.0 67.2 61.4 69.6 65.9 -3.9 0.0

Total Net FCF n.a. n.a. 53.3 34.0 48.2 28.4 26.6 57.1 61.1* Source: Company data, BZWBK Brokerage research. * change at Working Capital.

Distribution segment

POLENERGIA’s distribution segment consists of the core distribution and retail sales

segments. Within the distribution segment alone, we apply the plain RAB x WACC =

EBIT formula, assuming that depreciation equals CAPEX p.a. With RAB expanding to

PLN74mn as of 2015E, the bulk of the segment’s total valuation (PLN88mn) is

explained by the regulated business. The retail sales segment explains the missing

PLN14mn valuation input – it is important to keep in mind that POLENERGIA is not

forced to sell electricity and, from the rational point of view, it would be selling it below

cost (under conditions of a potential price war on the market) – this stands for a decent

value-protector, in our view.

Fig. 55. POLENERGIA: KPI for Distribution Segment In PLNmn

2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E

PURE DISTRIBUTION

Regulatory Asset Base 49.1 60.1 74.2 74.2 74.2 74.2 74.2 74.2 74.2

Recognition Ratio 72% 86% 100% 100% 100% 100% 100% 100% 100%

Adjusted RAB 35.4 51.7 74.2 74.2 74.2 74.2 74.2 74.2 74.2

WACC 8.9% 7.3% 7.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2%

EBIT 3.1 3.8 5.3 4.6 4.6 4.6 4.6 4.6 4.6

PURE RETAIL SALES

Supply volumes [GWh] 287.5 250.0 250.0 258.8 267.8 277.2 286.9 296.9 307.3

Margin on sales 3.3% 7.6% 5.0% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5%

EBIT 3.1 7.3 5.3 2.8 2.9 3.0 3.1 3.1 3.1

Total segment

EBITDA 9.6 15.0 15.0 11.7 11.8 11.9 12.0 12.0 12.0

EBIT 6.2 11.1 10.7 7.4 7.5 7.6 7.7 7.7 7.7

CAPEX 7.4 7.9 5.1 4.1 4.1 4.1 4.1 4.1 4.1

Net FCF 3.0 6.1 4.5 2.5 2.6 2.7 2.7 2.7 2.7


.


29

Trade segment

All the electricity and green certificates produced by POLENERGIA’s installations are

sold to the company’s trade segment, which sells them to the market at a margin. Aside

from selling black electricity (relatively high margin on own electricity, marginal margin

on the external one) and green certificates (relatively high margin, assumption of trading

only with own certificates), the company also holds a trading portfolio (minimal margin),

where it may recoup some market price inefficiencies.

Fig. 56. POLENERGIA: KPI for Trade Segment In PLNmn

2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Total segment

Revenues 492 2,002 1,722 1,922 2,001 2,085 2,109 2,152 2,170

EBITDA 4.0 6.9 4.3 6.8 7.1 7.6 7.8 8.5 8.6

EBIT 4.0 6.9 4.3 6.8 7.1 7.6 7.8 8.5 8.6

CAPEX 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net FCF 5.1 21.8 8.5 1.9 4.4 4.6 5.9 6.2 6.6


Pellet production segment

POLENERGIA has three biomass production units that have a total capacity of 135kt

biomass per annum. The units’ operational life allows them to run until 2031 and we

expect this segment to cease operations then. This segment’s performance has

improved following the recent restructuring and strong erosion in the straw (fuel) price.

Considering the lack of decent support for biomass co-burning (at 0.5 green certificate

as of 2016), we do not expect the segment to flourish unless the black electricity price

turns biomass co-burning profitable again).

Fig. 57. POLENERGIA: KPI for Distribution Segment In PLNmn

2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Pellet production [kt] 118 123 123 123 123 123 123 123 123

EBITDA margin 1.0% 8.9% 10.3% 9.5% 8.8% 8.0% 8.3% 8.5% 8.8%

Total segment

Revenues 59.6 67.0 52.1 52.9 54.2 55.5 56.9 58.4 59.8

EBITDA 0.6 6.0 5.4 5.0 4.8 4.5 4.7 5.0 5.2

EBIT -3.2 2.2 1.7 1.3 1.0 0.7 1.0 1.3 1.5

CAPEX 0.0 0.0 1.5 0.0 0.0 1.5 0.0 1.5 2.9

Net FCF 1.2 4.3 2.5 3.9 3.9 2.3 4.2 3.0 1.9


Headquarters and adjustments

Management of the POLENERGIA group and other adjustments are presented in this

section. After some negative one-offs in the preceding years, we expect the company’s

negative EBITDA settling at PLN11mn in 2015E, while optimisation should trim losses in

the segment to some PLN8mn as of 2016E (inflation-indexed). In our valuation we also

assume there will be no new projects once the 2019 auction is completed (no projects,

no development). We are almost certain that brand new projects and development will

be there, but as not to penalise the company’s valuation, we assume the management’s

costs will be halved as of 2021E.

It must also be kept in mind that POLENERGIA needs to spend cash on the

development of its projects. We expect the development of the remaining 367MW


30

(730MW in the pipeline minus 336MW with ‘ready-to-build’ status) to require some

PLN76mn in 2015-17E, while the potential projects in off-shore wind and gas

connectors should necessitate a PLN81mn cash outflow in 2015-16E.

Fig. 58. POLENERGIA: KPI for Headquarters and adjustments In PLNmn

2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E

EBITDA -16.3 -12.6 -11.0 -8.0 -8.1 -8.2 -8.4 -8.5 -4.3

Development [Working Capital]:

On-shore wind -22.6 -26.3 -26.3

Off-shore wind -12.0 -12.0

Hans -28.5 -28.5



31

POLENERGIA’s risk-reward profile

Please see below for a list of factors that affect POLENERGIA’s financial performance

and its market perception.

Failure to complete 98MW windfarms by Dec2015

Across this research we assume that POLENERGIA’s 98MW in projects under

construction will receive green certificates. But to get them, all the company’s projects

must start producing electricity by the end of 2015. If POLENERGIA fails to deliver on

any of these projects timely, just to mention the force majeure, there will be a real risk

that the company’s valuation will get reduced at least by a fraction of PLN663mn (NPV

valuation of 99MW built in 2015).

The 2016 auction: potentially very positive for POLENERGIA’s valuation…

Since we are advocates of the ‘alternative comparative’ valuation approach (see pages

3-5), winning of the 2016 auction would be very supportive to POLENERGIA’s valuation

(not to mention that it would have a positive impact on the EBITDA thanks to the new

wind farms). Under the assumption that POLENERGIA can secure the 15-year contracts

in the 2016 auction for 168MW, or 50% of its ready-for-action 336MW portfolio, we

estimate the value of one company’s share at PLN50.1. It would settle POLENERGIA’s

(1) ‘alternative comparable’ valuation higher - at PLN7 a share and (2) weighted

company valuation higher - at PLN1.4 a share (20% weight), also offering (3) a 65%

upside to the current share price.

Fig. 59. POLENERGIA: Equity valuation based on ENEL / EDPR wind parks

Today

50% winning chance in 2016

auction

Average POLENERGIA windfarms valuation [PLNmn] average of EV/MW and EV/GWh approach 1,498 2,139

Value of all other projects, including Net Debt [PLNmn] see SoTP valuation, excluding on-shore windfarms 137 137

Total valuation [PLNmn] 1,635 2,276

Total valuation per share [PLN] 36.0 50.1

Implied average per share valuation [PLN] 43.1

Upside: Total valuation less Implied average valuation [PLN] 7.0


…but a delay could spoil the mood

On the other hand, we believe that any news of a possible delayof the 2016 auction (for

any imaginable reason) would have a negative impact on POLENERGIA’s share piece.

First, POLENERGIA may lose its advantage of having 336MW ready for the first

auction. With the other players possibly building up their ready-to-build pipelines,

POLENERGIA’s chances of winning the auction could weaken to the detriment of its


32

entire construction pipeline and the company’s valuation (wind farms under auctioning

scheme add PLN5.6 a share).

Sensitivity analysis

Below we present an abridged version of Fig. 11 presented in full on page 8.

Fig. 60. POLENERGIA: SoTP valuation sensitivity analysis

Factor Worst-case scenario Core assumption Best-case scenario

Price of CO2 certificates Down to nil as of 2016 Flat EUR9/t Up EUR3/t p.a. to EUR81/t in 2040

Deviation to TP from core scenario -10.9% 0.0% 39.8%

Renewable electricity price in 2016 auction PLN300/MWh PLN400/MWh PLN450/MWh


Polish green certificate price Flat at PLN130/certificate

as of 2015 Flat at PLN230/certificate

as of 2019 Jumping to

PLN300/certificate in 2020


Wind farms’ economic life 20 years 25 years 27 years


Change in load factor for all running wind farms -1.0% 0.0% 1.0%


Annual growth in Polish electricity price 0.00% 1.30% 2.50%



It is clear that the price of CO2 certificates is the key game-changer for POLENERGIA –

an end to the EU’s climate-changing dreams (and elimination of the CO2 certificate

price) would cut POLENERGIA’s valuation by 11%, while application of these policies in

their rigid version (de-carbonization goal) would boost the company’s valuation by

almost 40%. The renewable electricity price at auctions as of 2016 has the capacity to

change POLENERGIA’s valuation substantially, while, quite counter-intuitively, upside

from a high green certificate price seems limited. Finally, the assumption of a much

shorter economic life of a wind farm (20 years instead of 25) could trim POLENERGIA’s

valuation by 16%, with almost no upside available.

Wind projects – economic life of 25 years, or continued activity (re-powering)?

Discussions on POLENERGIA’s operating wind farms address its NPVs as if these had

been built, run for 25 years and then shut down. We believe this is not the right

assumption – in Western Europe, re-powering (replacement of old renewable units with

new ones) has become natural for the renewable players. In any case, with unchanged

wind conditions and continued high demand for carbon dioxide-free renewable power, it

would be unwise to cease activity after just one lifecycle of a project.

The assumption of Terminal Value in wind farms – new wind farms built to replace those

that get switched off – adds 25% to the NPV of every company’s wind project. This

means that the assumption of continued operations (re-powering) would boost

POLENERGIA’s valuation by PLN441mn, or PLN9.7 per share (23% upside).


33

Off-shore windfarms – valuation(s)

POLENERGIA’s off-shore wind pipeline consists of 1,200MW, scheduled potentially for

an operational kick-off in 2022E (600MW) and 2026E (600MW). In our SoTP, we have

conservatively applied a 50% valuation presented by POLENERGIA during the merger

with PEP – this valuation was based on a valuation offered by CEE Equity and includes

the negative impact of the 2015-16E PLN24mn outlays necessary for project

development.

Fig. 61. POLENERGIA: Off-shore – details; NPV calculation; financial forecasts

Baltyk III Baltyk II

Capacity 600MW 600MW

Operations’ kick-off 2022 2026

Load factor 49.0% 49.0%

Annual production 2,58TWh 2,58TWh

CAPEX PLN10.2bn PLN11.05bn

Operating costs PLN0.44 / MW PLN0.47 / MW

NPV PLN415mn PLN8mn

NPV per share PLN9.1 PLN0.2

Forecasts 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E … 2047E 2048E 2049E

Electricity price [PLN/MWh] . 600 600 600 600 600 600 600 600 … 294 298 301

Production [GWh] 0 0 2575 2575 2575 2575 5151 5151 … 5151 5151 5151

Revenues [PLNmn] 0 0 1,545 1,545 1,545 1,545 3,134 3,134 … 1,517 1,535 1,552

EBITDA [PLNmn] 0 0 1,283 1,278 1,272 1,267 2,566 2,555 … 656 656 657

CAPEX [PLNmn] 5,112 5,167 4 4 5,541 5,526 5,112 0 … 0 0 0

Net FCF [PLNmn] -1,538 -1,593 128 363 -1,289 -1,259 507 760 … 666 666 667


Fig. 62. POLENERGIA: Off-shore windfarm – comparative valuation

Price achieved by PNE Wind in transaction completed in Aug2012 EUR0.26/MW

Value of Baltyk projects based on past transaction PLN1,295mn

Value of Baltyk projects adjusted for project’s advancement [45%]* PLN583mn

Two-year average price of CO2 in Aug2012 EUR10.78

Two-year average price of CO2 in Mar2015 EUR6.38

CO2 adjustor [price in Mar15 divided by price in Aug12] 59%

Implied Value of Baltyk project, after adjustments PLN345mn

Source: BZWBK Brokerage research. * POLENERGIA estimate.

If POLENERGIA manages to secure a flat PLN600/MWh price in an auction for its off-

shore wind projects (the current Renewable Law leaves the window open for offshore to

participate in auctions at a later stage) and chooses to run these, we believe it would

result in its off-shore wind farms valuation of PLN422mn. The disposal of these (in the

pre-construction phase) could result in a cash inflow of PLN345mn. Both these

approaches suggest a substantial upside to our SoTP valuation, respectively at

PLN350mn (PLN7.7 a share, 18% upside) and PLN272mn (PLN6.0 a share, 15%

upside).


34

Nowa Sarzyna – the gas-fired system saviour, or even baseload operator?

Our NPV of the Nowa Sarzyna gas-fired CHP unit is based exclusively on its 2015-

2020E cash flows because we expect it to stop operating afterwards. However, the

company’s intention is to convert the Nowa Sarzyna boiler into a gas off-peaker

intervention facility, used to compensate for changes in Poland’s wind-originated

electricity production as of 2021. Since the facility was built in 2000, we believe that only

minor CAPEX would be needed to let Nowa Sarzyna operate safely until 2030-35E. In

this context, we see Nowa Sarzyna offering a PLN126mn discounted upside to the

NPV, or PLN2.8 a share (a 6.8% upside to the blended POLENERGIA’s valuation).

Fig. 63. POLENERGIA: Polish generation units’ variable costs [ fuel + CO2 burden] curve; CO2 certificate price at EUR40/t

116 124 122 13095 81 80 92 91 95

160196 195

126

68118

168

59

134

68

185

151 193 202168

210

0

50

100

150

200

250

300

350

910

new

CH

P

500

830

gas-f

ired

360

old

CH

P

500

200

360

200

120

120

PL

N/ M

Wh

hard coal new hard coal lignite gas CO2

Source: Companies, BZWBK Brokerage research. Individual units’ capacity in different

technologies is shown in MW on the X axis.

Still, there’s more upside in the Nowa Sarzyna installation, in our view. Assuming that

the CO2 certificate cost will rise strongly right after 2020, the curve of the Polish

generation units’ variable costs should turn upside down. This scenario would

discourage production in lignite-fired units and, at the same time, promote gas sources,

all due to the drastic growth in the CO2 dues. With this in mind, the scenario of Nowa

Sarzyna starting to operate in the base load cannot be ruled out, offering a yet non-

measurable but certain upside to POLENERGIA’s valuation.

High gearing

We expect the company’s net debt-to-EBITDA ratio will grow from the 2014 year-end’s

2.2x to its peak at 7.3x in 2017E (new debt for new wind projects, with the EBITDA

contribution visible only in 2019E), to fall below 3.0x as of 2021E. We can, therefore, be

pleased with the company’s long-term agreements on electricity sales, debt repayment

guarantees, guaranteed 15-year cash flows or, finally, its P/E and EV/EBITDA ratios that

are both expected in the low single digits as of 2018E. However, we are also fairly

certain that the issue of POLENERGIA’s reported 2017E very high indebtedness of

PLN2.0bn and its implied Net Debt to EBITDA peaking at 2017E’s 7.3x will be brought

to light one day in early 2017, which could stand for a short-term risk to the company’s

share price (regardless of ratio falling below 3.0x threshold already in 2021E).


35

New share issue

POLENERGIA’s development programme remains uncertain when it comes to the

timeliness of its wind projects, not to mention the uncertainty regarding its hypothetical

new ventures (gas connector, thermal coal-fired generation unit, off-shore wind farms).

Hence, we believe that if any of these development projects accelerated, the company

could find it reasonable to apply for additional financing via a new share issue.

However, we currently believe this to be a hypothetical issue – there have been too

many delays in the development processes to make any strong statements. We are also

confident that no announcements can be made before mid-2016 since the expected

positive news flow on wind farm auctions (most are won by POLENERGIA) and the

management’s decision to go ahead with any of the new projects could result in extra

demand for equity.

Please also keep in mind that our model assumes there will be disposals of some wind

projects in the pre-construction phase (after these win an auction). If the electricity price

at the auction(s) proves to be exceptionally good (2016E auction price at PLN450/MWh,

causing the post-construction NPV to be much higher that the disposal price of the pre-

construction one), POLENERGIA would require some PLN320mn in extra financing in

2018. Assuming that the new shares are sold at PLN35 each (with the EBITDA at

PLN550mn, 245MW operational wind farms and 336MW under construction), the

company would require 9m shares in the new issue. Still, the current management has

proven that it is rational in its decisions and we believe the share issue would only be

considered an option under substantially better operating conditions, conditions that

would offer a decent upside for the shareholders.

Renewable electricity pricing vs. IRR in auctions…

Although the Renewables Act had been recently adopted, the reference price (electricity

price to be received by a wind farm over a 15-year period, inflation indexed) represents

an extremely substantial risk factor to the positive NPV of any future wind farm. Based

on our model of POLENERGIA’s average wind farm, we decided to test the projects’

IRR levels implied by the different total renewable electricity prices at the future

renewable auctions. While we believe that POLENERGIA enjoys a competitive edge

over any local competitor (reflected in the company’s load factors settling above market

averages and /or relatively quick development process), the above-mentioned test

should represent an ideal starting point for discussion.

Fig. 64. POLENERGIA: On-shore wind IRR in various renewable electricity price levels*

Total price in 1st auction [PLN/MWh]: 350 380 400 420 450

Auction in year:

2016 8.7% 11.0% 12.5% 14.0% 16.3%

2017 7.5% 9.7% 11.2% 12.8% 15.0%

2018 6.6% 8.8% 10.3% 11.8% 13.9%

2019 5.5% 7.7% 9.1% 10.6% 12.7%

Source: BZWBK Brokerage research. * we assume total auction price erodes 5% p.a., as to match

an assumed steady improvement in windfarm’s load factor / productivity.


36

…LCOE remains very supportive of on-shore wind…

Fig. 65. POLENERGIA: Renewable technologies’ LCOE* comparison

In EUR/MWh

0 50 100 150 200 250

Wind -Onshore

Wind -Offshore

PV - ThinFilm

Nuclear

Large Hydro

Biomass -Incineration Dec2014

Dec2012

Dec2009

Source: Bloomberg, BZWBK Brokerage research. * Levelised Cost of Electricity.

As of 2016, the regulator will be organising unified auctions for all technologies except

those that produce over 4kh p.a. (load factor above 45% - dedicated biomass, off-shore

wind farms and nuclear technologies). As we can see in Fig. 65, on-shore wind enjoys

the lowest Levelised Cost of Electricity, so that a single auction for all technologies

implies that on-shore wind technology and on-shore wind projects should be the

winners of these auctions. This is a clear positive for POLENERGIA via its sizeable on-

shore wind farm pipeline.

…but who will win the renewable auctions?

In theory, the Renewables Act suggests that prices at the auctions should allow for the

projects’ IRR at 12%. If that were to be an unbroken rule, application of the inflation-

indexed renewable electricity price at PLN400/MWh in the 2016 auction would let

POLENERGIA flourish. However, several years ago, in conditions of a much higher

RFR, CEZ decided to invest in a 600MW Romanian wind farm at an IRR reportedly as

low as 7-8%. Below we present three factors that may easily pose a threat to

POLENERGIA’s winning auctions as of 2016:

Falling RFR. We have recently observed a steady and substantial RFR erosion,

which justifies acceptance of a much lower IRR on its own merit. If any player

accepts its IRR much below the 12% threshold, it could offer a lower price than

POLENERGIA;

Expansionism into the European power market. The European electricity market

represents an interesting battlefield for external players, just to mention the

neighbouring CEZ’s multiple but unfavourable attempts to enter the Polish market.

POLENERGIA’s new cornerstone shareholder provides the perfect example of

Chinese expansionism and open auctions for thousands of MWs in wind (price

represents the sole criterion) offers a unique opportunity for new players to enter

this market, all just at the well-calculated cost of the ‘lost NPV’;


37

At-all-cost defence of the local giants. The local WSE-listed utility names clearly

lag POLENERGIA in wind development. However, protectionism or misunderstood

will to keep the Polish power market under control may trigger irrationally low price

offerings at auctions.

Risks to alternative projects (off-shore windfarms, gas connector, thermal coal generation unit)

There are only two entities with a pipeline of off-shore wind farms in Poland – PGE and

POLENERGIA. Several years ago PGE had trimmed its strategic target in off-shore

exposure from a 3,400MW capacity to 1,000MW and we are not aware of PGE actively

working on this project. In an environment of intense market competition, this would

represent an all-but-positive piece of news, with POLENERGIA’s chances of winning

(and valuation of its off-shore pipeline) on the rise.

This would even be more the case of POLENERGIA’s Poland-Germany gas connector

project. We would be far more certain about its future, if it were not a clear trouble-

maker to the Treasury-controlled PGNiG, a quasi-monopolist in the local gas sector.

Finally, a thermal coal-fired conventional generation greenfield, built and operated by an

independent player, could pose a threat to the profitability of the state-controlled

companies, whose generation units are generally old and obsolete.

Unfortunately, the Polish market is also highly regulated, with the Treasury and the

regulator having a long history of protecting their own interests. We believe that all the

POLENERGIA projects are sound, but in light of the aforementioned factors, there is a

real risk that the company might have to share profits from these projects at best or

abandon these in the worst-case scenario.

More stringent CO2 and renewable goals

The Polish generation segment is predominantly fuelled with thermal coal and lignite

(90% of the total production), and this is unlikely to change in the coming decades.

Introduction of more stringent CO2 & renewable goals would be very positive news for

the company (see Figs. 11 & 12 for the scale of the supportive impact of growth of the

CO2 / green certificate prices on POLENERGIA’s valuation).

However, we need to distinguish between the news-driven upside to the valuation and

the real impact on POLENERGIA’s figures. The transfer of the CO2 dues is beyond any

regulatory body’s control in Poland – these affect directly the black electricity price,

which means that these would be visible instantly at POLENERGIA’s P&L account. In

our view, it is sadly a very different case with respect to the renewable goals adopted by

either the EU or Poland. Today, Poland produces little energy from renewable sources.

Its renewable target is set at 19% in renewable electricity of its fuel mix by 2020 and

27% by 2030 and it remains very clear that the Renewables Act without a clear

message on electricity price in an auctions, yet fails to offer the thrilling incentive to the

renewable segment. Still, we can observe no real movement toward scrapping of the

existing renewable production-demand gap and we see the risk that the 2021-2030

period might be seen as yet another “transition period” rather than “action period”.


38

CEE’s risks to regulated assets

The stable and predictable cash flows of the regulated assets attract many categories of

investors due to their relatively low risk and POLENERGIA, in its current shape

(segments of distribution, stranded cost-neutralised gas-fired conventional generation

and its predominantly on-shore wind core business), can be seen as a regulated

business. While it is pretty certain that the risk to the regulated segment has elsewhere

risen (see last year’s radical and abrupt changes in Spain, for example), we have to

admit that the risk in the CEE region remains much higher.

Fig. 66. POLENERGIA: Examples of regulatory uncertainty in the CEE region

POLAND Surprising extraction tax levied on copper / silver

Erased some 50% of KGHM’s valuation

Failure to approve the Renewables Act for three years in a row

Negative for the renewables players

Lack of information on the 2016 auction reference price

Negative for the renewables players

Red / yellow certificates vanishing for two years

CCGT units lost material support, most electricity-producing gas-fired units were switched off

CZECH REPUBLIC

Extra tax on solar installations

Erased the high positive NPV of the photovoltaic installations

Debate about a potential corporate tax increase

Negative for the net FCF of all enterprises in the country, including utilities

ROMANIA

Major reduction in the renewable electricity subsidies

Materially reduced the NPV of renewable installations

ALBANIA

Nationalisation of the privatised distribution grid

Heavy losses for the buyer (CEZ), although it has recovered some of these a few months ago.


We have listed above changes to regulations in Central and Eastern Europe that

damaged local companies’ valuations. Unfortunately, many of these took place in

Poland and a number of these had a direct impact on the utility segment. We, therefore,

conclude that the risk of investing in regulated assets in CEE remains higher than in any

other European region.


39

APPENDIX I

Impact of the Renewable Act

Fig. 67. POLENERGIA: Strong state support reflected in the new renewable act

Projects in Operation and in Construction: Green Certificates

New Projects: Auction/Feed-in Tariff

Projects in operation and development or construction: Green certificates system is optional for

all projects commissioned before the new renewable regulations become effective (which is before 1st January 2016) . Long Term Support Maintained: 15 years from date of

operation, continuation of Green Certificates System High level of Substitution Fee: frozen at c.

PLN300/MWh (after indexation in 2014) Provisions for re-balancing of Green Certificate supply & demand which will lead to stabilization of green certificate prices on the level of Substitution Fee:

Supply: significant limitation of qualification for certificates which will eliminate c.50% of supply through elimination of support for hydro plants above 5 MW capacity, and reduction of support for biomass co-firing to 0.5 per MWh if share of biomass in fuel mix (calorific value) is below 20%;

Demand: renewable obligation target for sales to final customers set at 14% in 2015, 15% in 2016 and 20% in 2017 and will be determined annually based on the projected amount of electricity to be generated from RES therefore allowing to balance demand and supply of green certificates. The option to pay the Substitution Fee will be removed in the event of certificate prices falling in average below 75% of the fee value in the period of 3 month preceding the obligation fulfilment date. An unfavourable tax treatment of costs resulting from Substitution Fee will be introduced, resulting in an increasing demand for Green Certificates, potentially increasing its prices to the level close to the substitution Fee. Market forecasts used by the Management in the long-term assume that new RES regulations will keep green certificate prices on the level of Substitution Fee (c. PLN 300/MWh).

Bilateral Contracts permitted: New regulations allow to

sell certificates under long term contracts Option to move to the Auction/Feed-in Tariff system: all projects under the green certificates system

will have the opportunity to move to the feed in tariff through an auction system (besides the co-combustion installations, if the share of biomass energy in the fuel mix of the installation is less than 20%).

Long Term Support Maintained: support for 15 years

from date of operation through Feed-in Tariff in Reverse Auction system giving fixed price contracts for 15 years Simple Reverse Auction Mechanics:

Target amount of energy produced in five 3-year settlement periods will be auctioned;

Ministry of Economy will determine every year the Reference Price for each technology taking into account average CAPEX and OPEX for standardized project;

only offers with proposed price equal or lower than the Reference Price for given technology will be taken into account;

all technologies will be able to participate in the auction mechanism;

pool of offers with lowest prices that meets the volume under given auction will be granted contracts based on the winning offer price for 15 years with price indexed annually (CPI).

Bilateral Contracts permitted: producer will be able to

sell the electricity to anyone, either in the market for example in billateral contracts (including energy groups) or to Seller which will be obliged to buy it. Differences between the price achieved through auction and the market prices (determined based on TGE quotations) will be settled by a Governmental Agency (contract for difference mechanism) Envisaged offshore auctions:

― Dedicated auctions for technologies producing more than 4000 MWh per annum (effectively excluding all technologies except offshore and dedicated biomass);

― Ability to participate in the auctions at environmental decision stage without the requirement of a building permit will decrease development risk;

― Construction period extended to 72 months (allowing for construction of offshore farms)

Source: company data, the Renewable Law

Recently the Polish Parliament approved the long-awaited Renewable Act. It nullifies

support to large hydro, cuts co-generation support by 0.5x. On the negative note, the

cut-off for installations to receive green certificates was set on Jan 2016.


40

APPENDIX II Polish draft energy policy for 2050

On August 18, 2014, the Economy Ministry released a draft of the Polish energy policy

up to 2050 for consultation purposes. The document contains many angles, countless

assumptions and conclusions. We have prepared an excerpt focusing on what we

believe to be its key conclusions.

Fig. 68. Official forecast of capacity breakdown Fig. 69. Official forecast of electricity production In MW In TWh

0

10 000

20 000

30 000

40 000

50 000

60 000

70 000

80 000

90 000

20

10

20

15

E

20

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20

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20

30

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20

35

E

20

40

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20

45

E

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50

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Total lignite Total thermal coal

Total gas nuclear power stations

Total hydro Total renewables (ex.hydro)

other

0

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100

150

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250

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20

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coal lignite

natural gas renewable energy sources

nuclear energy other

Source: Ministry of Economy, Aug 2014. Source: Ministry of Economy, Aug 2014.

Key takeaways from the draft:

Polish electricity production should expand up to 2030 at a 1.6% CAGR to

reach 207TWh, then grow by another 11% to peak at 230TWh in 2040;

Changes in the capacity mix: lignite vanishes as a significant fuel from 2030,

thermal coal capacity remains flat at 20-21GW until 2050, gas turns into

Poland’s number two fuel in 2035, renewables expand to 39GW (21GW in wind

& 15GW in photovoltaic in 2050); there are no additions in large hydro

capacity;

International pressure to reduce greenhouse gases is set to be maintained via

the EU’s ETS system and a gradual increase in the CO2 certificate prices;

Current targets for renewable energy for 2020 will remain in force until 2050; a

stricter approach is not built into the draft; growth in renewable capacity will

be the result of competitive advantages offered by the renewable

technologies, NOT of support from the state;

Focus on growth in energy efficiency;

Expected growth in the European energy markets and a Europe-wide grid

network improvement, allowing for diversification of fuel types;

No changes in taxation on fuels based on their different pollution factors;


41

The Polish nuclear unit’s construction programme will be continued as

scheduled, with the option of a potential expansion beyond 6GW if the unit

proves operationally sound;

Assumption of local gas usage at current levels until 2050 implies that the

shale gas upside is at nil;

Lack of import constraints for oil, gas, thermal coal and uranium, implying that

key raw energy sources are available for import on a large scale.

Own conclusions: The long-term forecasts should be viewed as guidance rather than a

precise outlook. Still, we believe that the document contains several very interesting

themes.

1) End of the shale gas story? There has been speculation about substantial

shale deposits in Poland for several years now. However, the Polish energy

policy draft assumes that the long-term extraction of shale gas will be at the

current (low) levels.

Comment: The ministry seems to be admitting that shale gas in Poland is

practically non-existent.

2) Absence of new support mechanisms for renewable energy sources. The

Economy Ministry expects renewable sources to turn competitive versus the

conventional ones on their own and assumes there will be no additional

government support for them.

Comment: In our opinion, the ministry’s official suggestion that there will be

no future support stems from the assumption that the CO2 certificate price will

grow to EUR45/t. At that price, renewable projects would require no subsidies.

3) No changes to future fuel taxation. After the surprise introduction of an

extraction tax on copper and silver, we saw a risk that the regulator would

apply an extra tax on the low-cost lignite fuelled fleets of PGE and ZE PAK.

4) Approval of large-scale thermal coal imports? In our opinion, both

‘diversification in fuels’ and ‘availability of raw energy source imports’ could

end the dependency of thermal coal-fired generation units on the local thermal

coal producers. We are sure that this is not going to happen for several years,

but the door seems to have been opened.

5) No new large hydro capacity. The draft shows the large hydro-generation

capacity remaining flat between 2010-50.

Fig. 70. Polish utilities: Official forecasts of domestic primary energy demand In Mtoe

2010 2015 2020 2025 2030 2035 2040 2045 2050

Coal 43.0 36.9 35.5 32.8 31.3 30.1 29.9 27.1 24.4

Lignite 11.6 14.3 13.0 11.9 9.1 2.5 2.6 2.2 2.1

Crude oil 26.5 25.4 27.2 27.5 26.9 25.1 23.4 22.3 21.5

Natural gas 12.8 14.1 15.2 15.3 15.2 16.1 16.1 15.8 15.5

Renewable energy sources 7.3 9.2 12 12.6 14.0 14.6 14.1 13.8 13.7

Nuclear energy 0.0 0.0 0.0 2.8 5.6 10.8 10.9 10.6 10.3

Other 0.6 0.3 0.4 0.4 0.4 0.4 0.4 0.4 0.4

TOTAL 101.8 100.2 103.2 103.3 102.5 99.5 97.3 92.2 87.9

Source: Economy Ministry draft Polish Energy Policy for 2050, published mid-August 2014.


42

Fig. 71. Polish utilities: Official forecast of power production, by fuel type

In TWh

2010 2015 2020 2025 2030 2035 2040 2045 2050

Coal 87.9 72.5 76.9 75.9 79.0 84.4 88.8 82.3 74.5

Lignite 48.6 58.4 53.8 49.6 38.1 11.1 11.3 10.7 10.3

Natural gas 6.8 5.8 11.8 11.9 13.0 18.4 17.5 23.3 20.4

Renewable energy sources 11.6 20.6 34.0 36.9 51.9 61.1 65.1 67.5 73.2

Nuclear energy 0.0 0.0 0.0 11.8 23.3 45.1 45.4 44.2 43.2

Other 2.6 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4

TOTAL 157.7 158.8 177.9 187.5 206.8 221.4 229.7 229.5 222.9


Fig. 72. Polish utilities: Official forecast of Polish capacity, broken down by technology and old/new units

In MWe

2010 2015 2020 2025 2030 2035 2040 2045 2050

Lignite – existing plants 8,750 8,350 7,557 7,557 6,617 1,332 1,332 1,332 1,332

Lignite – new power plants 0 0 450 450 450 450 450 450 450

Coal – existing plants 15,911 15,911 12,388 12,388 9,413 2,611 766 766 766

Coal – new power plants 0 0 3,000 3,000 4,500 12,500 12,500 12,500 12,500

Coal – existing CHPs* 5,282 5,274 4,565 4,365 3,409 1,666 1,266 362 362

Coal – new CHPs* 0 0 923 1,360 3,029 5,402 5,760 7,197 6,783

Natural gas units 0 0 0 0 0 3,000 6,500 6,500 6,500

Natural gas – CHPs* 906 1,464 2,988 3,007 3,301 3,395 2,663 3,994 2,952

Nuclear units 0 0 0 1,500 3,000 6,000 6,000 6,000 6,000

Large hydro power plants 1,696 1,696 1,696 1,696 1,696 1,696 1,696 1,696 1,696

Small hydro power plants 650 670 700 725 750 775 800 800 800

Pure biomass units 325 530 530 530 530 530 205 0 0

Biogas units 102 140 360 800 1,400 1,500 1,600 1,700 1,800

Wind turbines on land 1,800 3,050 7,050 9,800 13,500 18,000 19,000 20,000 21,000

Photovoltaic 1 25 175 600 2,426 4,213 7,149 10,723 15,830

Other 582 582 472 372 272 172 72 72 72

TOTAL 36,005 37,692 42,854 48,151 54,293 63,242 67,759 74,092 78,843

Source: Economy Ministry draft Polish Energy Policy for 2050, published mid-August 2014. * CHP – Combined Heat & Power unit.

Fig. 73. Polish utilities: Official forecast of CO2, NOx, SO2, dust emissions

In mt

2010 2020 2030 2040 2050 2010-50 change

CO2 402 390 350 299 239 -41%

NOx 867 590 411 364 315 -64%

SO2 974 724 552 485 410 -58%

Dust 417 369 296 246 198 -53%


Fig. 74. Polish utilities: Official CO2 certificate price forecast

In EUR/t

2010 2015 2020 2030 2040 2050

CO2 14.5 7.5 12.5 25.0 35.0 45.0



43

Financial statements and forecasts

Fig. 75. POLENERGIA: P&L, per share ratios, market ratios, 2013-19E PLN million, unless otherwise stated

2013 2014E 2015E 2016E 2017E 2018E 2019E

Consolidated Revenues, o/w: 1,118 2,659 2,422 2,723 2,810 3,203 3,271

Trading 492 2,002 1,722 1,922 2,001 2,085 2,109

Wind 65 81 122 220 234 514 543

Conventional generation 359 366 370 364 351 373 383

Others 202 211 207 218 225 232 236

Consolidated COGS, o/w: 980 2,490 2,228 2,452 2,532 2,596 2,733

Trading 488 1,995 1,718 1,915 1,994 2,078 2,102

Wind 13 15 30 50 51 9 105


Others 208 203 198 209 216 224 228

Depreciation 73 86 85 120 120 209 209

Gross profit 138 169 194 271 278 608 538

Consolidated EBITDA, o/w: 138 169 194 271 278 608 538

Trading 4 7 4 7 7 8 8

Wind 52 66 93 170 182 504 438


Others -6 8 9 9 8 8 8

Consolidated EBIT, o/w: 65 83 108 151 157 399 329

Trading 4 7 4 7 7 8 8

Wind 29 41 44 86 99 331 265


Others -13 -9 -9 -9 -10 -10 -10

Financial income 29 18 8 5 1 1 1

Financial expense -48 -43 -37 -36 -55 -84 -96

Others 0 0 0 0 0 0 0

Profit before tax 46 57 79 120 104 316 234

Income tax 8 8 15 23 20 60 44

Net profit 38 50 64 97 84 256 190

EPS 1.80 1.09 1.41 2.13 1.86 5.63 4.17

CEPS 5.22 2.99 3.29 4.78 4.50 10.24 8.77

BVPS 24.17 29.35 30.76 32.89 33.68 38.39 39.74

DPS 0.00 0.00 0.00 0.00 1.07 0.93 2.82

P/E 17.2 28.4 22.0 14.5 16.7 5.5 7.4

P/CE 5.9 10.4 9.4 6.5 6.9 3.0 3.5

EV/EBITDA 5.6 10.5 9.6 9.8 12.4 5.7 6.6

EV/sales 0.7 0.7 0.8 1.0 1.2 1.1 1.1

Div. yield 0.0% 0.0% 0.0% 0.0% 3.4% 3.0% 9.1%



44

Fig. 76. POLENERGIA: Balance sheet forecasts, 2013-19E PLN in millions, unless otherwise stated

2013 2014E 2015E 2016E 2017E 2018E 2019E

Current assets 390 764 631 355 275 373 370

cash and equivalents 208 417 398 107 34 74 22

accounts receivable 24 109 101 106 99 129 179

inventories 120 41 49 59 59 86 86

other assets 39 197 83 83 83 83 83

Fixed assets 559 1,968 2,091 2,931 3,730 3,855 3,979

PPE 553 1,707 1,839 2,689 3,499 3,634 3,768

intangibles 2 242 232 222 212 202 192

long-term receivables 4 20 20 20 20 20 20

Total assets 949 2,732 2,722 3,285 4,004 4,228 4,349

Current liabilities 78 533 399 353 523 486 488

bank debt 47 92 92 92 292 292 292

accounts payable 15 128 119 98 83 70 72

short-term provisions 17 313 187 162 147 124 125

Long-term liabilities 356 865 925 1,438 1,951 1,997 2,055

bank debt 276 695 756 1,268 1,781 1,828 1,885

other long-term liabilities 80 170 170 170 170 170 170

Equity 515 1,334 1,398 1,495 1,531 1,745 1,806

share capital 43 91 91 91 91 91 91

retained earnings 434 1,194 1,243 1,307 1,355 1,398 1,526

net income 38 50 64 97 84 256 190

Total liabilities and equity 949 2,732 2,722 3,285 4,004 4,228 4,349

Net debt 114 370 450 1,253 2,039 2,045 2,155

Source: Company data, BZWBK Brokerage research. Fig. 77. POLENERGIA: Cash flow statement forecasts, 2013-19E PLN in millions, unless otherwise stated

2013 2014E 2015E 2016E 2017E 2018E 2019E

Cash flow from operations 469.9 128.6 156.9 181.3 371.1 351.3

Net profit 49.6 63.9 96.9 84.4 256.1 189.6

Provisions 86.1 85.5 120.3 120.3 209.2 209.2

Depreciation and amortisation 0.0 0.0 0.0 0.0 0.0 0.0

Changes in WC, o/w 106.9 -9.1 -35.4 -8.0 -70.9 -48.3

inventories 78.8 -7.8 -10.2 0.5 -27.6 -0.1

receivables -85.5 7.8 -4.4 6.7 -30.3 -49.4

payables 113.7 -9.2 -20.8 -15.1 -13.0 1.2

Other, net 227.3 -11.6 -24.9 -15.3 -23.2 0.8

Cash flow from investment -1,495.3 -207.9 -960.1 -919.6 -334.7 -333.2

Additions to PPE and intangibles -1,239.8 -218.0 -970.2 -929.7 -344.8 -343.3

Change in long-term investments -239.7 10.1 10.1 10.1 10.1 10.1

Other, net -15.8 0.0 0.0 0.0 0.0 0.0

Cash flow from financing 1,234.0 60.5 512.3 665.1 4.0 -70.8

Change in long-term borrowing 419.7 60.5 512.3 513.5 46.2 57.2

Change in short-term borrowing 45.3 0.0 0.0 200.0 0.0 0.0

Change in equity and profit distribution 769.1 0.0 0.0 0.0 0.0 0.0

Dividends paid 0.0 0.0 0.0 -48.4 -42.2 -128.0

Other, net 0.0 0.0 0.0 0.0 0.0 0.0

Net change in cash and equivalents 208.7 -18.8 -290.9 -73.2 40.5 -52.7

Beginning cash and equivalents 208.1 416.8 398.1 107.1 34.0 74.4

Ending cash and equivalents 208.1 416.8 398.1 107.1 34.0 74.4 21.7



45

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46

LIMITATION OF LIABILITY

This material was produced by Dom Maklerski BZ WBK which is a separate organizational unit of Bank Zachodni WBK S.A conducting brokerage activity (DM BZ WBK). DM BZ WBK is subject to the regulations of the Act on Trading in Financial Instruments dated July 29th 2005 (Journal of Laws of 2014, item 94 - consolidated text, further amended), Act on Public Offering, Conditions Governing the Introduction of Financial Instruments to Organised Trading, and Public Companies dated July 29th 2005 (Journal of Laws of 2013 item 1382 - consolidated text, further amended), Act on Capital Market Supervision dated July 29th 2005 (Journal of Laws of 2005, No.183 item 1537 further amended). It is addressed to qualified investors and professional clients as defined under the above indicated regulations and to Clients of DM BZ WBK entitled to gain recommendations based on the brokerage services agreements. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of Bank Zachodni WBK S.A. (BZ WBK) or entities belonging to BZ WBK Group. DM BZ WBK is an author of this document. All copyrights belong to BZ WBK.This document may not be reproduced or published, in part or in whole, without a prior written consent of BZ WBK. DM BZ WBK may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. DM BZ WBK will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for particular investor and it is recommended to consult an independent investment advisor in case of doubts about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to investor’s individual circumstances, or otherwise constitutes a personal recommendation to particular investor. Whenever the document refers to "the Issuer" shall mean the company / companies which is / are the subject of the recommendations referred to in this document. In the case where recommendation refers to several companies, the name “Issuer” will apply to all of them. Affiliates of DM BZ WBK may, from time to time, to the extent permitted by law, participate or invest in financing transactions with Issuer, perform services for or solicit business from such Issuer and/or have a position or effect transactions in the financial instruments issued by the Issuer (“financial instruments”). DM BZ WBK may, to the extent permitted by applicable Polish law, UK law and other applicable law or regulation, effect transactions in the Financial instruments before this material is published to recipients. This document is valid at the time of its preparation and may change. DM BZ WBK may have issued, and may in the future issue, other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. Those reports reflect the different assumptions, views and analytical methods of the analysts who prepared them and DM BZ WBK is under no obligation to ensure that such other reports are brought to the attention of any recipient of this report. DM BZ WBK informs that success in past recommendations is not a guarantee of success in future ones. Points of view expressed in the reports reflect Analyst personal opinion on the analysed company and its securities. With the exception of remuneration from the DM BZ WBK ,Analysts do not receive any other form of compensation for recommendations made. The sources of the data include WSE, PAP, Reuters, Bloomberg, EPFR, GUS /Central Statistical Office/, NBP /National Bank of Poland/, DM BZ WBK , Akcje.net, financial periodicals and business and finance websites. Information and opinions contained herein have been compiled or gathered, with due care and diligence, by DM BZ WBK from sources believed to be reliable, however DM BZ WBK cannot ensure their accuracy or completeness. Investor shall be responsible for conducting his own investigation and analysis of the information contained or referred to in this document and of evaluating the merits and risks involved in the Financial instruments forming the subject matter of this document. The information and opinions contained herein are subject to change without any notice. Dom Maklerski BZ WBK is not responsible for any losses incurred by Investors which were result of investment decisions based on recommendations issued by DM BZ WBK, if they were prepared with due care and diligence. This document does not constitute an offer or invitation to subscribe for or purchase or carry out transactions in any financial instruments and shall not be considered as an offer to sell or to buy any securities. This document is furnished and presented to you solely for your information and shall not be reproduced or redistributed to any other person. This document nor any copy hereof shall not be distributed directly or indirectly in the United States, Canada, Australia or Japan or to any citizen or resident of the United States, Canada, Australia or Japan where its distribution may be restricted by law. Its distribution may be restricted by law in other countries. Persons who distribute this document shall make themselves aware of and adhere to any such restrictions. This document may be distributed in united states and in the united kingdom to persons which have professional knowledge about investing in accordance with relevant regulations. Opinions in this document must not be relied upon as having been authorised or approved by issuer the opinions expressed herein are solely those of DM BZ WBK. DM BZ WBK informs that investing assets in financial instruments implies the risk of losing part or all the invested assets. DM BZ WBK indicates that the price of the financial instruments is influenced by lots of different factors, which are or cannot be dependent from issuer and its business results. These are factors such as changing economical, law, political or tax condition. More information on financial instruments and risk connected with them can be found on www.dmbzwbk.pl, section disclaimers and risk. The decision to purchase any of the financial instruments should be made only on the basis of the prospectus, offering circular or other documents and materials which are published on general release on the basis of polish law.

Overweight/Underweight/Neutral – means that, according to the authors of this document, the stock price may perform better/worse/neutrally than the WIG20 index in a given month. When particular stocks are marked with Overweight/Underweight/Neutral - such information should not be construed as investment recommendation concerning a given financial instrument. The recommendation system of BZ WBK Brokerage S.A. is based on determination of target prices and their relations to current prices of financial instruments; in addition, when recommendations are addressed to a wide range of recipients, two methods of valuation are required. Overweight/Underweight/Neutral information contained herein does not meet any of the aforementioned requirements. Furthermore, depending on the situation, it can be grounds for taking different (including opposing) investment action in the case of particular investors. Mid-caps – if a stock is included into a mid-cap portfolio it means that, according to the authors of this document, a particular stock price may outperform the WIG20 index during one month. Stocks are added to or deleted from the list on the basis of the requirement to rotate the stocks included in the list. Any change in weight of stocks already included in the portfolio should not be construed as investment recommendation. Such changes are aimed exclusively at making the total weight of all stocks equal 100%. DM BZ WBK confirms that the adjustment for dividend paid, adjustment for preemptive rights, share split or merger, or any other purely technical adjustments to the share price will result in corresponding changes in the stocks’ target prices - such situations must be considered within purely technical context and should not be considered as changes to recommendations in the meaning of the law. Explanations of special terminology used in the recommendation: EBIT – earnings before interest and tax EBITDA – earnings before interest, taxes, depreciation, and amortization P/E – price-earnings ratio EV – enterprise value (market capitalisation plus net debt) PEG - P/E to growth ratio EPS - earnings per share CPI – consumer price index WACC - weighted average cost of capital CAGR – cumulative average annual growth P/CE – price to cash earnings (net profit plus depreciation and amortisation) ratio NOPAT – net operational profit after taxation FCF - free cash flows BV – book value ROE – return on equity P/BV – price-book value Recommendation definitions: Buy - indicates a stock's total return to exceed more than 15% over the next twelve months. Hold - indicates a stock's total return to be in range of 0%-15% over the next twelve months. Sell - indicates a stock's total return to be less than 0% over the next twelve months. In the opinion of DM BZ WBK., this document has been prepared with all due diligence and excludes any conflict of interests which could influence its content. DM BZ WBK is not obliged to take any actions which could cause financial instruments that are the subject of the valuation contained in this document to be valued by the market in accordance with the valuation contained in this document. Brokerage activity conducted by DM BZ WBK, which is a separate organizational unit of Bank Zachodni WBK S.A., is subject to the supervision of the Financial Supervision Commission.

http://www.dmbzwbk.pl/


47

The date on the first page of this report is the date of preparation and publication of the document. ANY PERSON WHO ACCEPTS THIS DOCUMENT AGREES TO BE BOUND BY THE FOREGOING DISCLAIMER AND LIMITATIONS. Dom Maklerski BZ WBK is a separate organizational unit of Bank Zachodni WBK S.A. with its registered office in Wrocław, ul. Rynek 9/11, 50-950 Wrocław, registered by the District Court in Wrocław - Fabryczna, VI Commercial Division of the National Court Register under the number 0000008723. Share capital – PLN 992 345 340 fully paid up. Taxpayer Identification Number (NIP) 896-000-56-73. ---------------------------------------------------------------------------------------------------------------------------------------- DISCLOSURES This report contains recommendations referring to company/companies: Polenergia S.A. („Issuer”). DM BZ WBK emphasizes that this document is going to be updated at least once a year. This document has not been disclosed to issuer.

In preparing this document DM BZ WBK applied at least two of the following valuation methods: 1) discounted cash flows (DCF), 2) comparative, 3) mid-cycle, 4) dividend discount model (DDM), 5) residual income, 6) warranted equity method (WEV), 7) SOTP valuation, 8) liquidation value.

The discounted cash flows (DCF) valuation method is based on expected future discounted cash flows. One advantage of the DCF valuation method is that it takes into

account all cash streams reaching Issuer and the cost of money over time. Some disadvantages of the DCF valuation method are that a large number of parameters and assumptions need to be estimated; and the valuation is sensitive to changes in those parameters. The comparative valuation method is based on the economic rule of "one price". Some advantages of the comparative valuation method are that the analyst need only estimate a small number of parameters; the valuation is based on current market conditions; the relatively large accessibility of indicators for companies being compared; and that there is an extensive knowledge of the comparative method among investors. Some disadvantages of valuation by the comparative method are the considerable sensitivity of the results of the valuation on the choice of companies to the comparative group; the method can lead to a simplification of the picture of the company which in turn can lead to omitting certain important factors (e.g. growth dynamics, extra-operational assets, corporate governance, the repeatability of results, differences in applied accounting standards); and the uncertainty of the effectiveness of a market valuation of companies being compared. The mid-cycle valuation is based on long-term averages for the two-year forward consensus P/E and EV/EBITDA multiples for the members of the peer group. The methodology is aimed calculating a fair, through the cycle value of cyclical stocks. Among its shortfalls is that at peaks and/or troughs of the cycle, the implied fair value may deviate substantially from the market’s value of an analysed stock as well as the methods’ reliance on the quality of external data (we use Bloomberg consensus here). Simplicity and average through-cycle value allowing to capture over as well as under-valuation of a given stock are the main advantages of this methodology. The dividend discount model (DDM) valuation is based on the net present value of the future dividends that are expected to be paid out by the company. Some advantages of the DDM valuation method are that it takes into account real cash flows to equity-owners and that the methodology is used in respect to companies with long dividend payout history. Main disadvantage of the DDM valuation method is that dividend payouts are based on a large number of parameters and assumptions, including dividend payout ratio. Residual income method is conceptually close to the discounted cash flows method (DCF) for non-financial stocks, the difference being that it is based on expected residual income (returns over COE) rather than expected future cash flows. One advantage of this valuation method is that it captures the excess of profit potentially available to shareholders and the cost of money over time. Main disadvantage of the valuation method is that a large number of parameters and assumptions need to be estimated; and the valuation is sensitive to changes in those parameters. The warranted equity method (WEV) is based on the formula P/BV = (two year forward ROE less sustainable growth rate)/(Cost of equity less sustainable growth rate) which allows estimating a fair value (FV) of a given stock in two years time. Subsequently the FV is discounted back to today. The main advantage of the WEV method is that it is a transparent one and based on relatively short term forecasts, hence substantially reducing the margin of forecasting error. The main disadvantage in our view is that the model is based on the principle that stock price should converge towards its fair value implied by company’s ROE and COE. SOTP valuation - different assets of a company are being valued according to different valuation methods, and the sum of these valuations represents the final valuation of the company. SOTP valuation advantages / disadvantages are identical to advantages and disadvantages of the specific valuation methods used. Liquidation value method – liquidation value is the estimated amount of money that an asset or company could be quickly sold for, such as if it were to go out of business. Then, the estimated assets value is adjusted for liabilities and liquidation expenses. One advantage of this valuation method is its simplicity. This method does not account for intangible assets as goodwill, which is the main disadvantage. Over the last three months Dom Maklerski BZ WBK issued 42 Buy recommendations, 16 Hold recommendations and 9 Sell recommendations.

% of Companies

Rating Covered with This Rating Provided with Investment Banking in Past 12M

Buy 61,54 7,14

Hold 25,27 8,70

Sell 12,09 27,27

Under Review 1,10 0,00

Definition of each rating was provided in the above section Limitation of liability. The Stock performance charts in this report include line graphs of the securities’ daily closing prices for one year period. Information relating to a longer period (max 3 years) is available upon request. The Issuer may hold shares of BZ WBK S.A. Among those, who prepared this document, as well as among those who didn’t prepare it but had or might have had access to it, there are such individuals who hold shares issued by the Issuer or financial instruments whose value is connected with their value. Members of the Issuer’s authorities or their relatives may be members of the management board or supervisory board of BZ WBK S.A. Persons engaged in preparing the report or their relatives may be the members of the Issuer’s authorities and may hold management position in this entity or may be party to any agreement with the Issuer, which would be concluded on different basis than agreements between Issuer and consumers. BZ WBK Group, its affiliates, representatives or employees may occasionally undertake transactions or may be interested in acquiring securities of companies directly or indirectly related to those being analysed During the last 12 months DM BZ WBK has been a party to agreements relating to the offering of financial instruments issued by Issuer and connected with the price of financial instruments issued by Issuer. DM BZ WBK acts as market maker, on principles specified in the Regulations of the Warsaw Stock Exchange, for the shares of Issuer. DM BZ WBK acts as issuer’s market maker, on principles specified in the Regulations of the Warsaw Stock Exchange, for the shares of Issuer. DM BZ WBK is not a party to the agreement with the Issuer related to issuing recommendations. During the last 12 months DM BZ WBK has received remuneration for providing services for the Issuer. These services covered acting as issuer’s market maker, managing the deposit of financial instruments. During the last 12 months BZ WBK S.A. has received remuneration for providing services of investment banking from Issuer. Bank Zachodni WBK S.A. is indirectly connected with Issuer. BZ WBK S.A. does not rule out that in the period of preparing this document any Affiliate of BZ WBK S.A. might purchase shares of the Issuer or any financial instruments being the subject of this document which may cause reaching at least 5% of the share capital. BZ WBK Group may hold, in the period of preparing this document, shares of the Issuer, in the amount reaching at least 1% of the share capital. Subject to the above, the Issuer is not bound by any contractual relationship with BZ WBK, which might influence the objectivity of the recommendations contained in this document. BZ WBK S.A. does not, directly hold financial instruments issued by the Issuer or financial instruments whose value depends on the value of financial instruments issued by the (except on the basis of being market maker and issuer’s market maker). However, it cannot be ruled out that, in the period of the next twelve months or the period in which this document is in force, BZ WBK S.A. will submit an offer to provide services for the Issuer or will purchase or dispose of financial instruments issued by the Issuer or whose value depends on the value of financial instruments issued by the Issuer. Except for broker agreements with clients under which DM BZ WBK sells and buys the shares of the Issuer at the order of its clients, DM BZ WBK is not party to any agreement which would depend on the valuation of the financial instruments discussed in this document. Remuneration received by the persons who prepare this document may be dependent, in an indirect way, from financial results gained from investment banking transactions, related to financial instruments issued by the Issuer, made by DM BZ WBK or its Affiliates.

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