TAURON Polska Energia : Current Report No. 34/2016

02.09.2016 17:55

Management Board of TAURON Polska Energia S.A. ('Company', 'Tauron') informs that on 2 September 2016 the Company's Management Board adopted and the Supervisory Board issued a positive opinion on the document entitled 'TAURON Group's 2016-2025 Strategy' ('Strategy'). Strategy is the response to the challenges stemming from the current and forecast situation on the market and in the power sector. In the process of preparing the Strategy a thorough analysis was conducted of the macroeconomic, market and regulatory environment as well as of the forecasts on the directions of the sector's growth, including translating them into opportunities and risks facing TAURON Polska Energia S.A. Group ('Group') over the next ten years. The Group's ability to finance the current and planned investment projects was reviewed in detail with a view that their completion could be achieved using funds generated from operations and debt financing. The above analyses and market trends were the basis for verifying market and macroeconomic assumptions as well as the CAPEX plan.
Strategy presents the optimal expansion path that will ensure financial stability and growth, while at the same time providing support for ensuring stability of the power system. The long term growth will be driven by solutions based on customer relationships. The adopted mission and vision reflect new management philosophy and are in line with the customer-oriented growth concept.
In accordance with the adopted Strategy the Group's mission was defined in the following way: 'With passion and commitment we are delivering modern solutions that provide energy in the constantly changing world'. The Group's vision is: 'We are a company that best meets customer needs in the Polish energy industry.'
Strategy sets the priorities that will transform the Group into an innovative, aligned to the market and customer needs, growing energy company providing a return on invested capital for its shareholders.
Key assumptions of TAURON Group's 2016-2025 Strategy
Strategy includes an action plan split into three coherent and complementary priorities for the Group.
1. Ensuring the Group's financial stability to be achieved through the following actions:
• Efficiency Improvement Program, adopted in March 2016 and assuming achieving PLN 1.3bn in savings in 2016-2018. The above savings include actions resulting in the cumulative EBITDA increase by approximately PLN 1bn and involving CAPEX reduction by approximately PLN 0.3bn in 2016-2018
• Strategic Initiatives, including CAPEX reduction in 2017-2020, will bring a financial effect of PLN 1.9bn. It will be achieved as a result of actions leading to the cumulative EBITDA increase by approximately PLN 1.2bn and the CAPEX reduction by approximately PLN 0.7bn. These are additional financial outcomes, beside the effects generated by the Efficiency Improvement Program
• Stopping the investment in the CCGT unit at Łagisza Power Plant, resulting in not incurring PLN 1.5bn in CAPEX. It will be possible to resume the project in case the regulatory and market environment turns favorable.
2. Building a strong capital group. Strategy defines a new approach to the value chain where key tasks are set for each line of business. Strategy does not assume balanced growth along each link of the value chain. Sales and development of new products and services are to constitute a strong base for the Group's growth. The Group is planning to rapidly develop its offering for the customers in this segment which will allow for retaining the existing base of customers that purchase TAURON products and increasing profitability. Electricity distribution as well as heat generation and distribution segments are to constitute a stable base of the Group's regulated businesses. Mining and conventional generation segments have tasks related first of all to efficiency improvement. The following three pillars of the strong capital group were defined:
• Customer relationships based on integrated high quality service with the use of modern sales and customer service channels as well as developing a product and service offering
• Stable base of regulated assets based on the upgraded electricity distribution and heat segments as well as readiness to grow renewable energy sources in case the regulatory environment turns favorable
• Efficient conventional assets, i.e. mining and conventional generation segments, which as a result of improving cost efficiency and productivity will be competitive on the market or, in case of generation assets, they will be shifted to the regulated segment of the power system.
3. Transforming the Group into a modern and innovative organization, by deploying changes supporting the implementation of the strategy:
• Expanding research and development as well as innovative activities for which expenditures equal to 0.4% of the consolidated revenue a year are envisaged
• Developing innovative projects based on the Corporate Venture Capital (CVC) type fund dedicated for this purpose
• Implementing a new, process-oriented operational model. Five priority process streams have been identified around which TAURON Group's operations will be concentrated, i.e. Strategy, Finance, Asset Management and Development, Customer and Corporate Management and Support. Such approach will allow for placing a greater emphasis on cross-sectional issues that will determine the Group's competitive advantages in the future.
The implementation of the Strategy will allow for increasing EBITDA from PLN 3.5bn in 2015 to more than PLN 4bn in 2020 and to more than PLN 5bn in 2025. Estimated, recurring effect of implementing the Efficiency Improvement Program in the form of an impact on the Group's EBITDA will be approximately PLN 0.4bn starting from 2018, while the effect of implementing the Strategic Initiatives in the form of an impact on the Group's EBITDA will be approximately PLN 0.3bn beyond 2020.
2016-2025 CAPEX
As part of rationalizing CAPEX the expenditures planned for 2016-2020 were reduced from PLN 20.2bn to approx. PLN 18bn. It is assumed that the commenced and well advanced investment projects will be continued. The detailed analysis revealed that 75 percent of the CAPEX plan until 2020 are tasks that are either a continuation or are related to keeping the commitments made. Such tasks include the investment in the 910 MW unit at Jaworzno III Power Plant as well as the contracted or resulting from regulatory requirements tasks in the distribution segment. Resigning or delaying these tasks would have a negative impact on the Group's value or is impossible due to legal or safety reasons.
In the mining segment investments at Janina coal mine and the construction of Grzegorz shaft at Sobieski coal mine will be continued and the planned investments at Nowe Brzeszcze Grupa TAURON coal mine will be carried out. CAPEX in this line of business is approximately PLN 1.3bn until 2020.
In the generation segment investments in the construction of the 910 MW unit at Jaworzno III Power Plant and the CCGT unit at Stalowa Wola Combined Heat and Power Plant as well as the investments in the heating networks will be continued. TAURON assumes that the construction of the 910 MW unit at Jaworzno III Power Plant will be carried out under a new financing formula envisaging spinning off of an organized part of the enterprise and selling its shares to third party partners, provided they do not acquire a controlling stake. A change of the way the unit's construction is financed would reduce the net debt/EBITDA ratio, and thus significantly lower the risk of breaching the threshold value of this covenant (3.5x) defined in the financing agreements.
It should be emphasized that the Strategy assumes maintaining financial stability and not breaching the net debt/EBITDA covenant of 3.5x, without taking into account selling to third party partners a minority stake in the project for construction of the 910 MW unit. This means that the planned change of this project's financing formula constitutes an additional element that would stabilize TAURON Group's financial position.
Generation segment's capital expenditures amount to PLN 6.7bn until 2020.
More than 50 percent of the entire CAPEX, i.e. PLN 9.5bn by 2020, are investments in the distribution that include connecting new customers and generation sources as well as upgrading and replacing grid assets.
With respect to innovative as well as research and development activities the Strategy assumes expenditures equal to 0.4% of the consolidated revenue a year.
The overall objective in terms of CAPEX is to align the investment portfolio to the market needs.
In particular the actions to be undertaken will be aimed at:
• optimizing the asset structure in all lines of business and achieving compliance with the environmental requirements
• carrying out only those investment projects that guarantee the expected return on capital and are not burdened with material market risks
• using off-balance sheet forms of financing, in particular by engaging third party partners
• reviewing investment projects in the conventional generation segment, provided mechanisms that guarantee revenue are introduced (e.g. capacity market or another form of regulation)
• investing in projects in sectors that are related to the power industry (in particular, services) in order to complement the value chain that TAURON is operating in, and also developing a high margin services offering.
Assumed directions of investments beyond 2020 include first of all the regulated segments of the power sector (i.e., among others, electricity distribution, heat generation and distribution, participation in the nuclear power generation and regulated conventional generation) and the new power industry (i.e. e-mobility, distributed heat and electricity generation, power generation by prosumers, Smart Home, Smart City solutions and energy related services). The Company assumes that in 2020-2025 its estimated investment potential will be more than PLN 6bn.
TAURON's dividend policy
In the long term TAURON is planning to pay out a dividend of minimum 40 percent of the consolidated net profit. The Company's intention is to provide a dividend yield that would be competitive versus the yield offered by long term debt instruments issued on the Polish market by investment grade rated companies. The final recommendation on the dividend will be affected by additional factors, including in particular:
- Group's liquidity position
- market situation
- implementation of the investment policy
- cost and ability to obtain financing
- legal requirements and provisions of the financing agreements, in particular related to not breaching the defined value of the leverage ratio
- ensuring investment grade rating.

At the same the Company notes that the forecasts that the Strategy is based upon indicate that 2020 will be the first year when the dividend payout will be possible.

Strategy will allow for transforming the Group into a modern entity with a stable financial position and a rich product and service offering meeting the expectations of the customers around whom the Group will be building its value.
More detailed information on the Strategy is provided in the presentation attached to this report.

Article 17 paragraph 1 MAR - inside information