Annual report 2019

On the basis of the Act of 29 June 2007 on the principles for covering costs arising for producers in connection with early termination of long-term contracts for the sale of power and electricity (Journal of Laws of 2007, item 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 for stranded costs in the form of quarterly advances. An annual adjustment is performed after each year end, and the final adjustment is performed after expiry of the period for which the KDT contract was concluded (KDT settlement period). The revenue, costs, receivables and payables 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, which are set out in decisions issued by the President of the Energy Regulatory Office. 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, receivables and payables 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 which are based on best available knowledge (a report prepared by an third party – Agencja Rynku Energii S.A.) were adopted. Changes in the adopted interpretation of the provisions of the KDT Act or assumptions may materially affect the estimates and, consequently, may result in significant changes to the company’s financial position and its results of operations.

As a result of updating the assumptions adopted in the model for calculation of the KDT compensations due, it has been estimated that the final adjustment will be lower than the sum of KDT compensations paid during the entire period. In connection with the expectations as to the sales revenue in 2020-2024, i.e. over the remaining KDT settlement period, EC Zielona Góra S.A. will not have to return all the amounts received as KDT compensations, and the retained amounts will represent a subsidy to increase the revenue earned. As at 31 December 2019, the estimated amount of compensation which will not be subject to the final adjustment amounts to PLN 25 570 thousand. As at 31 December 2019 the effective discount rate applied in the whole program was 4,93%. In connection with the Group’s recognition of the maximum level of Stranded Costs throughout the duration of the scheme (according to the estimates as at 31 December 2019), the Group recognizes in the costs of premature termination of long-term contracts the amount corresponding to the amount of financial costs during the reporting period and the change in estimates. A decisive factor influencing the change in estimates was: updating model data based on received forecasts and financing plan for 2020-2021 and actual performance in the fourth quarter 2019. As at 31 December 2019, in accordance with the accounting principles, the part of the KDT's results attributable to the current reporting period was recognised. The cost of KDT compensation for the period from 1 January to 31 December 2019 amounted to PLN 7 237 thousand (from 1 January to 31 December 2018: PLN 119 825 thousand). The financial cost of KDT compensation for the period from 1 January to 31 December 2019 amounted to PLN 4 301 thousand from 1 January to 31 December 2018: PLN 3 445 thousand). The value of the liabilities due to KDT compensations as at 31 December 2019 amounted to PLN 466 629 thousand, including a long-term liability: PLN 430 204 thousand and short-term liability: PLN 36 425 thousand (as at 31 December 2018: PLN 455 280 thousand).