Key risks identified at the level of Energa SA and Group companies for each of the four Energa Group Risk Model areas are presented below, together with a description of key risk mitigation measures.
Risks involved in the implementation of the Group Strategy for 2016-2025. Key risks in this area are associated with the use of revenue decoupling regulations in heat tariffs, implementation of a new customer-centric business model and development of new business areas, to name just some. Materialisation of risks may lead to lower EBITDA, loss of part of the market / competitive advantage, lack of return on investments or deterioration of image.
Control mechanisms used:
Risks involved in investments carried out within the Energa Group, including without limitation those relating to the new unit in Ostrołęka, the biomass unit in Elbląg, and the flue gas desulphurisation plants in Elbląg and Ostrołęka. Materialisation of risks may lead to non-achievement of the expected return on investments, loss of revenue, the need to repay subsidies or deterioration of image.
Risks involved in trading in electricity, fuels and property rights, including in the context of price volatility, forward market and SPOT market fluctuations, meeting customer demand or regulatory and legal requirements. Materialisation of risks may lead to difficulties in the achievement of strategic objectives, financial loses, changes to risk exposures, customer attrition, increased costs of operation.
The risk concerns legislative changes affecting the functioning of the Energa Group’s individual Business Lines. Materialisation of risks may lead to the modification of investment plans or rise in operating expenses. The risk additionally offers an opportunity to adopt new legal solutions which could facilitate raising of additional funds or provide a support system for the Group’s assets.
The risk is associated, for instance, with legal, financial, organisational or image-related ramifications of the Energa Group’s failure to align with new legal provisions, or a misinterpretation of new legal provisions.
Risks associated with conducting the operations in accordance with the provisions of environmental law, good practice and environmental standards (ISO 14001, ISO 50001) mitigating the risks and ensuring sustainability; providing information and assurance to stakeholders with respect to compliance with the national environmental regulations and the requirements of the EMAS Regulation. Materialisation of risks may lead to withdrawal of the ISO 14001 certificate. Non-compliance with environmental regulations may lead to increased costs due to the need to address potential environmental incidents, imposition of financial sanctions and closures of defective plant components.
The risk concerns situations and actions related to fraud, including potential conflicts of interest, corruption or misappropriation on the part of the employees of the Energa Group companies. The risk involves the potential threat of fraud and corrupt practices in operating processes. Materialisation of risks may lead to financial losses and may entail procedures conducted by law enforcement authorities against employees or bodies of the Group companies. The risk may have an adverse effect on the Energa Group’s image and reputation, undermining employees’ trust in supervisors, colleagues and the organisation as a whole.
The risks are associated with court and administrative proceedings carried out by or against the Group companies. Materialisation of risks may give rise to an obligation to pay damages and sanctions, or to grant customer discounts arising from the provisions of law.
Risk associated with unauthorised access to facilities, including power equipment. The risk additionally involves the safety and security of employees and third parties present on the premises of the Group’s companies, as well as incidents related to terrorism and sabotage. Potential consequences of the risk may involve a threat to security of grid operation, loss/destruction of property or interruption of operational continuity.
Risks associated with the disruption of critical distribution activities, i.e. continuity of the distribution service meeting the required performance security criteria of the distribution system. Materialisation of risks may put human life and property in danger and lead to unavailability of critical process resources (sites, systems, employees).
Risk involving the availability (malfunctions and loss of performance), integrity and confidentiality of ICT systems, including interfaces/integrations. Materialisation of the risk may lead to increased maintenance costs of IT systems and the need to incur additional capital expenditures in this area. The risk may significantly hinder or even prevent the Group companies from performing their basic functions.
The risk is associated with observance of quality standards in customer service and compliance with contractual provisions. Materialisation of risks may affect revenue, result in financial sanctions, damages and obligatory discounts, as well as civil law suits and deterioration of image due to poor customer experience.
Risks associated with infringements of the Energa Operator SA Compliance Programme. If the risk materialises, complaints might be filed by system users to the Energy Regulatory Office and the Office of Competition and Consumer Protection. The effects of the risk involve an increased workload
in the preparation and conduct of investigations before the President of the URE or potential financial sanctions.
Risks associated with the need to satisfy the requirements of the production process and legal requirements with respect to holding sufficient coal stocks or sufficient quality and quantity of biomass. Materialisation of risks may lead to a reduced output, and as a result lower sales, increased operating expenses, fines and sanctions, or repayment of EU subsidies.
This risk involves a lower sales volume and breaching the conditions of integrated permits by Energa Kogeneracja due to the failure to conclude a long-term heat supply contract with Elbląg.
Risk associated with the ability to meet payment obligations in the short and long term. Materialisation of the risk may hinder the achievement of strategic objectives and organisational development, undermine creditworthiness, increase the cost of debt servicing and lead to a loss of reputation.
Risk associated with incorrect calculation of selling prices and approval by the President of the URE of tariff rates at a level which does not guarantee the viability of sales. If the risk materialises, this may result in losing the market share (margin, volume, revenue), customer attrition, and if no tariff is approved – inability to bill customers for actual sales.
Implementing the provisions of the Energa Group’s financial policy, group companies enter into various kinds of financial agreements that generate financial and market risks. The most important ones are interest rate risk, foreign exchange risk, credit risk, as well as liquidity risk. The above risk categories determine the financial performance of individual companies, as well as the Energa Group as a whole.
The Energa Group finances its operating or investing activity with debt liabilities bearing interest at a floating or fixed interest rate. Interest rates are also involved when surplus cash is invested in floating or fixed interest rate assets.
The floating interest rate risk resulting from existing debt liabilities applies to WIBOR-based rates only. With respect to liabilities denominated in EUR, the Energa Group has a financial liability arising from issues of fixed-coupon eurobonds, as well as issues of hybrid eurobonds, also based on a fixed coupon.
According to the interest rate risk policy, the risk of fluctuation of interest rates is mitigated by maintaining a portion of debt with a fixed interest rate. In line with these assumptions, IRS floating interest rate hedging transactions are executed.
In connection with the implementation of hedge accounting, the Energa Group additionally identifies an interest rate risk relating to its CCIRS and IRS hedging transactions, which however has no effect on the Group’s financial result. Moreover, the level of interest rates has a direct effect on the WACC quoted by the President of the URE to calculate the return on RAB, which is included in the tariffs of Energa Operator SA. Low interest rates result in a lower return on RAB and an increase in actuarial provisions.
In the financial area, the foreign exchange risk is associated mainly with incurring and servicing Energa Group’s debt liabilities in foreign currencies under the EMTN eurobond programme, as well as issue of hybrid bonds. Additionally, some Energa Group companies have a foreign currency surplus resulting from their operating activity or investing activity. The Energa Group monitors the foreign exchange risk and manages it mainly through CCIRS hedge transactions and hedge accounting.
Credit risk is associated with the counterparty’s potential permanent or temporary insolvency with regard to financial assets such as cash and cash equivalents and available-for-sale financial assets. The risk arises due to the contractual counterparty’s inability to make the payment and the maximum exposure to this risk equals the carrying amount of the instruments acquired.
Within the scope covered by the analysis, in order to minimise the credit risk, ratings of financial institu-tions cooperating with the Energa Group are regularly monitored
Liquidity risk involves the likelihood of becoming unable to pay current liabilities on time or losing the potential benefits of over-liquidity.
The Energa Group companies monitor the liquidity risk using a regular liquidity planning tool. The tool takes into account the due/maturity dates of investment liabilities, financial assets and financial liabilities, as well as the projected cash flows from operating activities. The Group aims to maintain a balance between continuity and flexibility of financing by using many different sources of financing, such as working capital and investment loans, local bonds and eurobonds. Since the Group’s debt operations are centralised within Energa SA, this company monitors the fulfilment of covenants on an ongoing basis and their long-term projections, enabling the determination of the Energa Group’s debt capacity, determining its ability to invest and impacting its capability of meeting its obligations in the long term.
The efficiency of use of the Group’s surplus cash for financing of daily operations of individual Group companies is maximised by zero-balancing cash pooling, which was implemented in January 2016.
In order to mitigate the liquidity risk, the Group companies can also use the short-term bond issuance mechanism, and in the existing bond programmes, the issuer – a Group company – offers the bonds to other Group companies only. This procedure is coordinated by Energa SA, which makes it possible to optimise the entire process in terms of its organisation.
Additionally, Energa SA concluded loan agreements with several financial institutions, which are a po-tential immediate liquidity reserve in case of any liquidity needs.