Annual report 2020

On the basis of the Act of 29 June 2007 on the rules of covering producers’ costs in connection with early termination of long-term contracts for the sale of power and electricity (Dz. U. [Journal of Laws] of 2007, No. 130, item 905) (the “KDT Act”), the subsidiary EC Zielona Góra S.A. is entitled to receive cash flows to cover stranded costs (the so-called KDT compensations).

In accordance with the KDT Act, EC Zielona Góra S.A. receives compensations (quarterly advances) to cover stranded costs. After each year, the annual adjustment is performed. Upon expiry of the period for which KDT was concluded (KDT settlement period), the final adjustment is performed.

The amount of revenue, costs, and settlements recognized in a given year in relation to KDT compensation is an estimate of the Management Board. The estimate is determined on the basis of the Company’s interpretation of the provisions of the KDT Act and the expected amounts of annual adjustments and the final adjustment set out by way of decisions issued by the President of the Energy Regulatory Office. Changes in the interpretation of the provisions of the KDT Act or assumptions may materially affect the estimates and result in significant changes in the company’s assets, financial position and results of operation.

The amounts of the anticipated annual adjustments and the final adjustment are determined based on the model developed to calculate KDT compensations. The key parameters used in the model which affect the revenue, costs and settlements recognized in the financial statements are electricity selling prices and the interest rate used for discounting the long-term liability. For the purposes of the calculation model, the price paths based on best available knowledge were adopted (based on the report prepared by the third party, i.e. Agencja Rynku Energii S.A.).

In accordance with Article 18.1 of the KDT Act, the legislator defines the discount rate for the j-th period as the update rate equal to the yield on five-year treasury bonds issued as at the nearest day preceding 30 June of a given “j” year, according to data published by the minister competent for public finance and the Central Statistical Office, increased by the difference between the rediscount credit rate and the deposit rate of the National Bank of Poland valid as at 30 June of a given “j” year. The effective discount rate shall be understood as the average rate constant over the entire forecast period. As of 31 December 2020, the effective discount rate for the entire program is 4,03%.

Following the update of the assumptions adopted in the KDT compensation calculation model, it was estimated that the final adjustment would be lower than the sum of KDT compensations paid during the entire period. In connection with the expectations as to the sales revenue in 2021–2024, i.e. over the remaining KDT settlement period, EC Zielona Góra S.A. will not have to return all amounts received under KDT compensations. The retained amounts will represent a grant to increase the revenue. As at 31 December 2020, the estimated amount of compensation not subject to the final adjustment amounts to PLN 51 460 thousand.

In connection with the Group’s recognition of the maximum level of Stranded Costs over the entire period of the program (according to the estimates as at 31 December 2020, updated based on actual financial results for 2020), the Group recognizes as the KDT costs the amount corresponding to the amount of financial costs during the reporting period and the change in estimates. The decisive factors influencing the change in estimates are as follows:

• update of the forecasts for 2021–2024, including the Company's current financial plan for 2021–2022,
• inclusion of the BPG turbine overhaul expected to increase the turbine’s power generation efficiency (higher margin for power generation results in a decrease in Stranded Costs due),
• update of data based on actual performance in 2020.

As at 31 December 2020, in accordance with the accounting principles, the part of the program results 1 January 2019 to the current reporting period was recognized.
In the period from 1 January to 31 December 2020, the revenue from KDT compensations amounted to PLN 29 824 thousand (KDT compensation costs for the period from 1 January to 31 December 2019: PLN 7,237 thousand).

In the period from 1 January to 31 December 2020, the financial costs from KDT compensations amounted to PLN 3 934 thousand (in the period from 1 January to 31 December 2019: PLN 4,301 thousand).

The value of the liabilities due to KDT compensations as at 31 December 2020 amounted to PLN 416 551 thousand, of which a long-term liability: PLN 394 941 thousand and short-term liability: PLN 21 610 thousand (as at 31 December 2019: PLN 466,629 thousand).

Table. Expenses by nature

Table. Employee benefits costs

Table. Other operating costs

Table. Effective tax rate