33.3 The impact of the COVID-19 pandemic on the activities of the PGE Capital Group

PGE CG identifies on an ongoing basis risk factors that affect the Group’s results in connection with the COVID-19 pandemic. In 2020, the impact of the pandemic on financial results was limited. Nevertheless, further impact of the pandemic may be evident in the subsequent periods, especially if a decision on national quarantine is taken. Further possible impacts and their magnitude are difficult to estimate. The duration of the epidemic, its possible further intensification and spread, as well as its impact on economic growth in Poland will be important. At the same time, the precision of estimates remains difficult to achieve in view of a number of other factors affecting the electricity market, including the level of demand for electricity.

In 2020, the outbreak of the pandemic caused a slowdown in the global economy and in Poland. This is reflected, among other things, in the revision of market forecasts for GDP, industrial production and investment.

In connection with the reduced intensity of economic activities, the PGE Group identifies the risk of a periodically lower level of domestic electricity consumption, which may result in a decrease in revenue and margins from generation, distribution and sales of energy in the Conventional Power Generation, Distribution and Trade segments, as well as in the Heat Generation segment.

The decrease in electricity demand affects the utilisation of the power generation units. In 2020, the negative impact of COVID-19 was related to potential reductions on the part of the Transmission System Operator, resulting in lower power generation based on lignite, which is characterised by a relatively stable cost structure. Some power generation units of the PGE Group are in the so-called spinning reserve and secure possible shortages of supplies from renewable sources, imports or resulting from failures of other system power plants in Poland. The majority of production for 2020 had been contracted in previous years, therefore, in this period the negative impact of lower volumes on the Conventional Power Generation segment was to a large extent limited. On the other hand, the PGE Group expects an impact on volumes and contracting prices for subsequent periods, but at this stage it is not possible to estimate this impact.

For the Trade segment, the decrease in demand volume became apparent primarily in Q2 2020, and the negative impact was related to lower sales to end customers and higher electricity balancing costs. Also in the Distribution segment, the lower volume of supplies to end customers directly translated into lower revenue from this segment. However, taking into account the entire value creation chain, the impact of the above factors at the Group level was not significant in 2020.

As at December 31, 2020, the impact due to the expected increase in payment congestion, especially in the case of receivables from small and medium-sized enterprises, was not material. As described in note 26.3. 1 to the consolidated financial statements, the Group made additional write-downs on receivables in the amount of PLN 16 million. However, depending on further developments of the epidemiological and economic situation, the risk of deteriorated liquidity of the PGE Group and increase of write-downs for overdue receivables still exists and is monitored on an ongoing basis. Currently the Group does not expect the phenomenon to become more material and does not identify any threat to its liquidity.

The PGE Group possesses strategic plants providing for the maintenance of uninterrupted production and distribution of electricity and heat in Poland. The COVID-19 pandemic affected the organisation of work, particularly in the case of the power generation units of the PGE Group. In many cases, this entailed additional costs, such as the purchase of personal protective equipment for employees. After the outbreak of the pandemic, the Group introduced work rules aimed at reducing as much as possible the risk of employees falling ill. As one of the largest employers in Poland, with over 40,000 employees, the PGE Group undertakes a number of actions related to the organisation of the Company and the organisation of work aimed at ensuring the continuity of operations, protecting the health and lives of employees, including the implementation of remote and rotating work, building awareness, in particular, of the basic principles of protection against coronavirus, prevention and quarantine. PGE established a Crisis Team that collects information from all companies in the Group, monitors the situation in individual companies on an ongoing basis and takes appropriate measures.

The production divisions also have implemented operating plans that are on an ongoing basis with respect to increased absenteeism, and as strategic utilities from the point of view of maintaining uninterrupted generation and supply of electricity and heat, they are in constant contact with local services responsible for monitoring the situation at all locations where the PGE Group operates power generation units.

In the area of retail customer services, the PGE Group focused primarily on expanding remote service channels.

As a result of the introduction of appropriate countermeasures at an early stage of the pandemic, the PGE Capital Group was able to maintain uninterrupted generation and distribution of electricity and heat.

The PGE Capital Group is monitoring the further impact of the COVID-19 pandemic on its financial health and is preparing for various scenarios. The pandemic accelerated the introduction of measures related to preparing the entire organisation for changes necessary to meet the challenges posed to power companies related in consequence of decarbonisation plans. This will require specific financial outlays. All potential scenarios for savings in both capital expenditures and operating costs are analysed in order to focus on the most important development projects related to the core business of the PGE Group.