6. Information on the business segments

An operating segment is a component of the Group:

• that engages in economic activities in connection with which it may earn revenue and incur expenses,
• whose operating results are regularly reviewed by the Group’s chief operating decision making body and which uses such results in deciding on the allocation of resources to the segment and in assessing the segment’s performance,
• for which separate financial information is available.

Due to the types of production processes as well as the system of regulations in force within the PGE Capital Group, the following sectoral segments are distinguished:

• Conventional Power Generation,
• Heat Generation,
• Renewable Power Generation,
• Trade,
• Distribution,
• Other activities, which include the activities of subsidiaries other than the activities of the aforementioned segments, but not material enough to establish separate segments.

Segment revenue is revenue generated from either sales to external customers or transactions with other segments within the Group, which are reported in the Group’s statement of profit or loss and are directly attributable to a given segment along with the appropriate portion of revenue that can be reasonably attributed to that segment. Segment costs comprise the cost of sales to external customers and the cost of transactions with other segments within the Group that result from the operating activities of the segment and are directly attributable to the segment along with the appropriate portion of the entity’s expenses that can be reasonably attributed to that segment. Segment result is the difference between segment revenue and segment cost.

Segment assets are operating assets that are employed by a segment in its operating activities and that are either directly attributable to the segment or can be reasonably attributed to the segment. Segment liabilities are operating liabilities that result from the operating activities of a segment and that are either directly attributable to the segment or can be reasonably attributed to the segment. Segment assets and liabilities do not include income tax settlements.

The companies of the PGE Capital Group conduct their activities on the basis of relevant concessions, including in particular concessions for the generation, trading and distribution of electricity, generation, transmission and distribution of heat, granted by the President of the Energy Regulatory Office, as well as concessions for the mining of lignite from deposits granted by the Minister of the Environment. Concessions are generally granted for periods from 10 to 50 years. The key concessions in the PGE Capital Group expire in the years 2020-2038.

The concessions for lignite mining, electricity and heat generation as well as electricity and heat distribution have corresponding assets allocated to them, as shown in the detailed information on the operating segments. In connection with the electricity and heat concessions, the PGE Group incurs annual fees dependent on revenue.  In the case of the activities related to the mining of lignite, the Company incurs extraction fees dependent on applicable rates and mining volumes, as well as mining usage fees. In 2020, the PGE Group’s costs related to concessions amounted to approximately PLN 17 million (PLN 17 million in 2019), while the mining fee and the mining usage fee amounted to PLN 113 million in 2020 and PLN 118 million in 2019.

The PGE Capital Group presents information on its operating segments for the current and comparative reporting periods in accordance with IFRS 8 Operating Segments. The division of the reporting system of the PGE Capital Group is based on its sectoral segments:

• Conventional Power Generation comprises lignite exploration and extraction, electricity generation from conventional sources, as well as related ancillary activities.
• Heat Generation comprises the generation of electricity in cogeneration sources as well the transmission and distribution of heat.
• Renewable Power Generation includes electricity generation in pumped storage hydro power plants and from renewable sources.
• Trade comprises the sale and purchase of electricity and gas on the wholesale market, trade in emission allowances and property rights resulting from certificates of origin, the purchase and supply of fuels, the sale of electricity and the provision of services to end customers.
• Distribution comprises the management of local distribution networks and the transmission of electricity through these networks.
• Other activities include the provision of services by subsidiaries for the benefit of the Capital Group, e.g. arranging financing, providing IT, accounting, HR and transport services. In addition, the segment of other activities includes the activities of subsidiaries whose main activity is the preparation and implementation of the nuclear power plant construction project as well as investments in start-ups.

The PGE Capital Group is organised and managed by segments based on the type of products and services offered. Each segment constitutes a strategic business unit offering different products and serving different markets. The allocation of particular entities to operating segments is presented in note 1.3 to these consolidated financial statements. As a matter of principle, the PGE Capital Group settles transactions between segments as if they concerned unrelated entities – on an arm’s length basis. Analysing the results of particular operating segments, the management of the PGE Capital Group pays attention first of all to achieved EBITDA.

Beginning in 2019, the PGE Capital Group established a new segment of Heat Generation. In the previous periods the assets and results of this segment had been recognised and analysed within the Conventional Power Generation segment.

The new presentation layout is intended to improve transparency and strengthen oversight of the implementation of the Strategy for Heat Generation, which is one of the Group’s key growth areas.

The main factors influencing demand for electricity and heat include atmospheric factors such as air temperature, wind power, precipitation, socio-economic factors such as the number of energy consumers, prices of energy carriers, economic development and GDP, as well as technological factors such as technological progress and product manufacturing technologies. Each of these factors influences the technical and economic conditions for generation and distribution of energy carriers, and thus affects the results achieved by the companies of the PGE Capital Group.

The level of electricity sales throughout the year is variable and depends primarily on the atmospheric factors such as air temperature and the length of day. Increased demand for electricity is particularly visible during the winter period, while lower demand is observed in the summer. Moreover, seasonal changes are visible among selected groups of end users. Seasonality effects are more significant for households than the industrial sector.

In the Renewable Power Generation segment, electricity is generated from environmental resources such as water, wind and sun. Meteorological conditions are an important factor affecting electricity production in this segment.

Sales of heat depend in particular on air temperature and are higher in the winter and lower in the summer.