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Integrated report 2020

Sustainable Finance

Contents

The balance that we follow in our activities also guides us in the financial sphere. Our priority is to maintain a stable level of debt while implementing an ambitious transformation plan.

Assumptions for financing the investment program

  • Implementation of investments together with partners
  • Maximizing the utilisation of domestic and EU aid funds for the energy transition
  • Using the potential of green debt financing
  • Limited leverage increase while maintaining the rating
  • Investments in the project finance formula
PGE-EBITDA-ENG-01 PGE-EBITDA-ENG-01

Treasury rules

PGE Group’s existing financing model takes into account the use of funds from its core activities, debt financing in the form of commercial bank credit facilities and bond programmes, credit facilities from Bank Gospodarstwa Krajowego (“BGK”), credit facilities from multilateral institutions such as the European Investment Bank (“EIB”) or the European Bank for Reconstruction and Development (“EBRD”) as well as in the form of preferential financing. In order to effectively manage liquidity, within the Group we have introduced a cash-pooling system, with participation of 34 Group companies.

External financing

PGE-financing-model-ENG-01 PGE-financing-model-ENG-01

An ambitious investment programme of approx. PLN 75 billion scheduled for 2021-2030 will require long-term planning and securing external financing.

Currently, the most important available external financing sources for PGE Group are as follows:

  • Domestic bond programme of PLN 5 billion.
  • Euro Medium Term Note (EMTN) bond programme of up to EUR 2 billion.
  • 2 credit facilities from BGK as part of the „Inwestycje polskie” (“Polish investments”) programme, amounting to PLN 1.5 billion in total.
  • Syndicated loan – term facility of PLN 3.6 billion.
  • PLN 1.99 billion credit facilities from the EIB – PLN 1.5 billion will be used for projects related to distribution network modernisation and expansion, while PLN 0.49 billion for financing and re-financing of the construction of cogeneration units.
  • Green facility loan of PLN 272.5 million from EIB  for financing of “green projects”.
  • PLN 500 million credit facility from the EBRD to support implementation of a long-term programme for distribution network development and modernisation.
  • Syndicated revolving loan of PLN 4.1 billion intended for financing of the ongoing operations, financing of the investment and capital expenses and refinancing of the financial liabilities.
  • Current-account overdraft facilities

PGE Group’s financing policy features diverse maturities for specific financial instruments, which along with the diversification of financing sources, helps the Group to optimise its financing costs. The Group aspires to implement a responsible financial policy, which entails maintaining its net debt to EBITDA ratios at a level that makes it possible to retain investment-grade ratings.

Effective use of available funding sources

The ongoing transformation of the Polish energy sector, including PGE, will be an extremely capital-intensive undertaking. The PGE Group’s capital expenditures by 2030 will reach even PLN 75 billion. Therefore, skilful use of financing sources will be very important in this process – funds available for Poland from funds under the Cohesion Policy, the Recovery and Resilience Facility, the Just Transition Fund, React EU or the Modernization Fund may exceed EUR 45 billion, and the funds available directly from the European Commission (guarantees from Invest EU, Innovation Fund, Horizon Europe, CEF) is another EUR 120 billion.

In the case of the power sector, financing can be obtained in areas such as:

Renewable energy sources
District and individual heating
Energy and heating infrastructure
Energetic efficiency
Employees training

The PGE Group intends to use the available sources of financing from the assistance funds available to Poland in the field of energy transformation. PGE’s ambition is that the share of obtained financing should cover at least 25%. the Group’s investment needs.

In addition, we will consider other external sources of financing that may support PGE’s transformation towards achieving climate neutrality in 2050 – such as „green” bonds or ESG financing.

Limiting exposure to market changes and a stable return on investments based on dedicated support mechanisms, as well as the use of off-balance sheet financing will have a positive impact on the company’s risk profile and will support building shareholder value.

Custom Size – 1 Custom Size – 1

To put it simply, cash deficits at some companies are covered with cash excesses from other companies within the group. This mechanism is based on aggregating the companies’ cash in a single account, which is managed by the pool leader – in our case this is PGE S.A., and another 33 other companies from the Group participate in the cash pooling process, which is provided by two banks: PKO BP S.A. and Bank Pekao S.A. Cash pooling allows us to optimise cash flows and effectively manage liquidity. By using intra-group financial surpluses, it reduces the need for external financing and lowers bank service costs. Depending on swings in financial liquidity, cash pooling may reduce the Group’s external debt by even several hundred million zlotys.

Debt Structure

PGE Group finances its expenditures mainly with funds from on-going operations, i.e. revenue from sales, with a relatively stable structure. We are currently implementing a capital-intensive investment programme, which also requires external financing. Our aim is to build and maintain a diverse debt structure allowing us to flexibly manage financing costs.

Our debt structure is presented below, by type of financing, maturity, currency and type of interest as well as changes in gross and net debt in successive periods.

Debt and available financing by type of financing (guaranteed funds) as at 31 December 2020, in PLN million

PGE Group’s debt maturities as at 31 December 2020, in PLN million

(including hedging transactions) as at 31 December 2020

(including hedging transactions) as at 31 December 2020

Gross debt and net debt (PLN million)

Rating

In 2020 and 2021, two rating agencies: Moody’s and Fitch, affirmed PGE S.A.’s long-term rating at investment level.

As an entity using various types of external financing, including debt securities, PGE uses the services of rating agencies, which assign credit ratings to borrowers. In order to assess creditworthiness, rating agencies have adopted multi-step grading scales that are based on letter designations (triple letters traditionally, with AAA or Aaa being the highest rating).

PGE S.A. has ratings assigned by two rating agencies: Fitch Ratings Ltd. (”Fitch”) and Moody’s Investors Service Limited (”Moody’s”).

Description Moody’s Fitch Ratings
PGE’s long-term rating Baa1 BBB+
Rating outlook stable stable
Rating date September 2, 2009 September 2, 2009
Last rating confirmation date June 30, 2021 July 7, 2020
Poland’s long-term rating A2 A-
Rating outlook stable stable

In 2020 and 2021 both rating agencies: Moody’s and Fitch affirmed long-term rating of PGE S.A. at investment grade respectively at Baa1 and BBB+, both with stable outlook. Both agencies underline affirmation results from strong market position of PGE in the Polish electricity sector.

According to Fitch positive rating reflects the strong business position of PGE, which is the largest power group in Poland and one of the largest power generators in Central Europe.  PGE’s financial position is supported by the lowest level of debt among Polish energy groups, which should increase in the coming years due to increased capital expenditures during the transformation of generation sources and lower margins in the Conventional Generation segment. PGE’s funds from operations (FFO) net leverage will increase to around 2.5x in 2020-2024 still leaving some leverage headroom in relation to maximum 3.0 under the current rating. Financial results stability is supported by EBITDA largely based (up to 90%) on regulated and quasi-regulated activities (distribution, renewables, district heating and capacity market).

In its latest release from June 2021 Moody’s notices  that affirmation of the rating takes into account PGE’s current strong financial profile, which gives the company flexibility in the implementation of a extensive investment program and allows it to counter potential changes on the Polish electricity market.

According to Moody’s, additional support for PGE’s position is to be the government’s plan to transform the power sector. Separating coal assets from the Group’s structure will strengthen its profile, and PGE will be able to implement a corporate strategy focusing on increasing the already high share of regulated revenues from distribution and heating activities and increasing production from renewable sources to the level of approximately 7 650 MW.

Ratings assigned by both agencies confirm PGE’s long-term credibility on the credit market.

The following list presents a comparison of PGE’s ratings with ratings assigned to other Polish companies (as at August, 2021).

Company Rating Fitch Rating Moody’s Rating S&P
PGE BBB+ stable Baa1 stable n/a
Enea BBB stable n/a n/a
Energa BBB- Rating watch, positive Baa2 stable (national rating assigned on the basis of publicly available data about the Company) n/a
Tauron BBB- stable n/a n/a
PGNiG BBB stable Baa2 stable n/a
PKN Orlen BBB-Rating watch, positive Baa2 positive n/a
Polska A- stable A2 stable A- stable
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Tax policy

PGE Group is a responsible taxpayer at both national and local level. We are an important partner for local communities and authorities. Taxes that we pay to the municipalities in which we operate often account for a significant part of their budget.

From the point of view of PGE Group companies – as business entities – the most important is taxation of incomes (corporate income tax), taxation of turnover (value added tax, excise tax) followed by taxation of assets (real estate tax and vehicle tax).

The amount of income tax paid by PGE Group companies in 2020 was PLN 555 million, at an effective tax rate of 53%.

From September 18, 2014, PGE S.A. and 30 PGE Group companies are members of a tax capital group entitled PGK PGE 2015. The tax group agreement was executed for 25 years and is effective from January 1, 2015. PGE S.A. represents the tax group.

The act on corporate income tax treats tax groups as separate payers of corporate income tax (CIT). This means that companies within PGK PGE 2015 are not treated as separate entities for corporate income tax purposes, with PGK PGE 2015 being treated as one whole entity instead. PGK PGE 2015’s tax base will constitute the group’s aggregate income, calculated as the excess of the income of the companies that make up the group over their losses. PGK PGE 2015 is a separate taxpayer only for the purposes of corporate income tax. This should not be construed as a separate legal entity. It also does not apply to other taxes, especially each of the companies within PGK PGE 2015 continues to be a separate payer of VAT, civil law transaction tax and payer of personal income taxes.

Pursuant to the agreements, when a given company within a tax group shows a tax profit, it provides the relevant amount of income tax to PGE S.A., which as representative settles with the tax office. When a company that is a member of PGK PGE 2015 incurs a tax loss, the related tax benefit is attributable to the representing company, i.e. PGE S.A. This also means that in the case of tax settlement corrections for companies incurring a tax loss, such corrections have a direct impact on the separate financial results of PGE S.A.

Flows between companies belonging to PGK PGE 2015 are settled during the year, within deadlines preceding the payment of advances for income tax. Final settlement between tax group member companies occurs after the representing company files the annual return.

VAT split payment mechanism

The Group uses funds received from counterparties in VAT accounts to pay its liabilities that contain VAT. The amount of funds held in these VAT accounts at a given date depends mainly on the number of the Group’s counterparties that decide to use this mechanism and on the relation between the payment dates of receivables and payables. As at 31 December 2020, the balance of cash on the VAT accounts was PLN 1 042 million.

Insurance policy

As a power consortium, we possess a series of high-value assets and our activities feature a very broad spectrum of operations. As a company that is aware of the risk of accidents, natural disasters, as well as failures, destruction or theft, we try to address these risks. For this purpose, we established an insurance management procedure within the Group. Its introduction served to create a coherent insurance management system in the Group, which takes place in a manner organised by the PGE’s Corporate Centre, i.e. PGE Polska Grupa Energetyczna S.A. Thanks to these activities, we possess a standardised, uniform rules, forms and procedures related to obtaining protection and settlement of damages, we also reinforced the PGE Group’s position in the insurance market.

The crucial insurance areas in the PGE Group include insurances of the most important assets in terms of risk related to natural disasters and failures as well as the resulting loss of revenue. Furthermore, we insure the Group’s civil liability on the executed activity and possessed property.

From 2016, PGE is part of the PZUW Mutual Insurance Company (TUW PZUW). TUW is an alternative to classic insurance companies that act as joint-stock companies and their purpose is to achieve profit. TUWs are associations of persons or entities that have the same objective and interest, identifying not through capital relations (like a joint-stock company), but through affiliation and common purpose – instead of profit, the main objective of a TUW is to satisfy the needs of its members in terms of insurance coverage. By joining the TUW PZUW as a member, we guaranteed an alternative method of transferring risk based on the reciprocity rule as part of our own PGE CG Reciprocity Association (hereinafter referred to as the Association) and the ability to build lasting relations with the insurance and reinsurance markets. This form of risk transfer is based on a cost transparency, which allows for optimising the insurance programme, costs of a possible insurance and reinsurance brokerage, and in consequence – the premiums paid. The system of premium settlement as part of the Association allows for achieving returns or lowering the premium at a low ratio of damages. Any surcharges are only projected in the case of the Association’s negative result and can amount to max. 50% of the assigned premium. The Association does not take part in covering the TUW PZUW losses or in covering the losses of other functioning associations. According to Article 103 of the Act of 11 September 2015 on insurance and reinsurance activity, the regulations on public procurements do not apply to insurance agreements concluded with a mutual insurance company by entities constituting members of the given company, which mainly allows to negotiate the price and makes the agreement conclusion process much more flexible and shorter.

The current agreements concluded as part of the TUW include, among others, the complex insurance of:

energy units (PGE GiEK – Bełchatów Power Plant, Turów Power Plant, Opole Power Plant, Dolna Odra Power Plants branches)
heat and power plants that were transferred from PGE GiEK to PGE EC (Bydgoszcz, Kielce, Rzeszów, Lublin, Zgierz and Gorzów)
insurance of the property of the Bełchatów and Turów Brown Coal Mines (PGE GiEK)
insurance of hydroelectric power plants and wind farms (PGE Energia Odnawialna)
civil liability insurance for the entire PGE Capital Group

The insurer of the PGE EC’s property (excluding the heat and power plants transferred from PGE GiEK) is PZU S.A.

It is however necessary to note that the membership in the TUW PZUW does not mean that we do not use other insurance methods – depending on the needs and estimated costs, we co-operate in a broad scope with insurance and reinsurance companies and use the services of insurance and reinsurance brokers.

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