Financial results by operating segments

Financial results by operating segments

Distribution Business Line

Throughout 2018, the Distribution Business Line generated almost 91% of the EBITDA for the Energa Group (vs. 80% in 2017).
The sales revenue of the Distribution Business Line in 2018 was PLN 4,028 m vs. PLN 4,300 m in 2017. This was mainly the effect of:

  • change in the presentation of the costs of the transitional charge.
  • higher volume of distributed electricity (by 2%).
    The net profit in 2018 was PLN 647 m vs. PLN 685 m, and the change is mainly attributable to EBIT.
    The capital expenditure of the Distribution Business Line was PLN 1,368 m, which means an increase by PLN 117 m year on year.

EBITDA remained at a similar level year on year, amounting to PLN 1,704 m. A significant impact on the operating result at the level of PLN 944 million was::

  • in the distri-bution margin (taking into account grid losses of PLN 109 m), which was mainly due to the higher volumes in the high-margin groups G and B.
  • higher OPEX, mainly due to the change in actuarial reserves (as compared to the low base in 2017, when material actuarial provisions were reversed), and additionally by employment growth due to measures taken to address the skills gap.
  • increased cost of right of way and debt provisions due to the full application of IFRS 9.
  • higher balance of other operating activities mostly as a result of the absence of any material accidental losses, which did occur in 2017.

Generation Business Line

The EBITDA of the Generation Business Line in 2018 was PLN 329 m, accounting for 18% of the total Group EBITDA (also 18% in 2017). The Line’s EBITDA in 2018 was driven by:

  • revenue from the sale of electricity and green property rights,
  • cost of purchase of emission allow-ances,
  • cost of consumption of key fuels for production.
    Revenue from the sale of electricity depends mainly on the level of selling prices for electricity charged by the Ostrołęka and wind farms. The increase in revenue from the sale of green property rights was driven by high market prices. The cost of purchase of CO2 emission allowances depended on the market prices of emission allowances and a smaller pool of free production allowances granted for 2018. How-ever, it is appropriate to note that this cost is largely offset by electricity prices. The cost of consumption of key fuels for production was determined by the unit prices for the coal purchased by the Group.
    Apart from the factors affecting the gross results of the Business Line presented above, one has to note that:
    • impairment charges on wind farms totalling PLN 117 m were reversed in Q2 2018. The reversal was dictated by developments in the legislative environment, namely signing of the Act of 7 June 2018 Amending the Renewable Energy Sources Act and Certain Other Acts by the President of the Republic of Poland;
    • impairment charges on wind farms and photovoltaic farms totalling PLN 145 m were reversed in Q4 2018. The reversal was dictated by developments in the market environment, in particular an in-crease in electricity and green certificate prices.
    Capital expenditures of the Line in 2018 increased by PLN 151 m and were mainly related to repair work at the Ostrołęka power plant and optimisation of the biomass unit in Elbląg.

Sales Business Line

The revenue of the Sales Business Line in 2018 amounted to PLN 5,529 m, and it grew by PLN 213 m (or 4%) relative to 2017. As usual, the most important revenue item of the Business Line is revenue from the sale of electricity, which went up by 4% (or PLN 216 m) yoy in 2018. This is an effect of an increase in the average selling price of energy by 5%, with a similar sales volume.
In 2018, EBITDA in the Sales Business Line was PLN -85 m, as compared to PLN 85 m in EBITDA in 2017. Non-recurring events which occurred both in 2017 and 2018 significantly contributed to the change in EBITDA.
One-off events had the most significant impact on the Business Line results in 2018. In connection with the implementation of the Act amending the Act on Excise Tax and Some Other Acts of 28 December 2018, a provision was established for contracts giving rise to charges at Energa Obrót SA in the amount of PLN 136 m (one-off non-cash event).

In connection with the cases seeking recognition of long-term contracts for purchase of green certificates as invalid, the Sales Business Line in the year 2018 was charged with the amount of PLN 26 m arising from the resolutions of some of those cases in arbitration proceedings (another one-off event). Further-more, settlements ending disputes were concluded in 2018 with three counterparties. The aggregate power generating capacity of the facilities with whom settlements have previously been concluded ac-counts for over 31% of the aggregate installed capacity of all sued wind farms. As a result of the decision to recognise the said contracts as invalid, in 2018 the Business Line proceeded to the purchase of green certificates at market prices in the overwhelming majority (in addition to the disputes resolved during that period).

The following factors also had an impact on the change of EBITDA level of the Business Line:

  • at the end of 2017, the provisions for impairment losses on disputed receivables in the amount of PLN 44 m were released as a result of an analysis of the wording of IFRS 9 introducing changes in the approach to the creation of provisions for impairment losses on disputed receivables, the previously established provisions were partially released. No similar event took place in the year 2018.
  • the margin on the sale of electricity, went up by PLN 88 m yoy, driven mainly by considerably reduced legal and contractual obligations in connection with the limitation of the scope of the Offtaker of Last Resort function starting from 1 January 2018 and the discontinuation of performance of long-term pur-chase contracts for green certificates starting from September 2017. However, the growth of the margin was limited as a result of a sudden and unexpected increase in electricity prices on the futures, SPOT and balancing markets observed last year. This translated into unexpectedly high costs of closing out of contract positions.
  • the revenue from the sale of services by the commercial operator, which were mostly provided to wind farm operators. The decline in this revenue by PLN 46 m is attributable to a substantially reduced scope of the function of Offtaker of Last Resort and thus the considerably lower volume of obligatory energy purchases from farms located in the terri-tory of the Energa Group. However, it should be noted that the decline in revenue from the sale of commercial operator services is outweighed by the benefits of a reduced cost of electricity resulting from the restriction of this function.