The impact of the COVID-19 pandemic on the operations of TAURON Capital Group in 2020

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In 2020, an increase in the number of COVID-19 infection cases was observed in Poland. Therefore, a number of restrictions aimed at preventing the spread of the SARS-CoV-2 virus causing the COVID-19 infections were introduced in the country. This situation led to the disruptions in the economic and administrative system in Poland and worldwide. As a result, the epidemic significantly curbed the economic activity, affecting the operations of the manufacturing plants and the small and medium sized enterprise segment companies. As a consequence, in the medium and long term it should be expected that the epidemic will continue to affect the condition of the national, the European, as well as the global economy, making a negative impact on the economic growth in Poland in 2021 and in the subsequent years.

The COVID-19 related situation had a material impact upon the level of demand for electricity in the Polish Power System (KSE) and, as a consequence, on TAURON Capital Group’s electricity distribution and supply volumes. In the second half of 2020, the impact of the COVID-19 pandemic on the domestic demand was milder than in the first half of 2020. The steepest decline in electricity consumption in Poland took place in the second quarter of 2020, clocking in at as much as 8.5%, while the annual consumption of electricity in the country decreased by approx. 2.3%, as compared to the corresponding period of 2019.

The changes in the demand for electricity resulted in a drop of the revenues, mainly in the electricity distribution and supply lines of business. TAURON Capital Group estimates that in the Distribution Segment the negative impact of the pandemic on EBITDA stood at PLN 47,876,000, which was due to the loss of a part of the sales volume to the consumers other than the households. With respect to the Supply Segment, the estimated negative impact of the pandemic on EBITDA came in at PLN 77,179,000, which was due to the loss of margin related to the decline in electricity supply and the need to balance the buy position.

The pandemic situation observed also led to a fall of the production volume in the conventional generation line of business and, consequently, to a drop of the demand for hard coal and an increase in its inventory levels. Because of such developments the negotiations with the coal suppliers were undertaken in order to renegotiate the coal purchase contract terms related to the pricing and quantities.

In order to curtail the negative impact of the pandemic on TAURON Capital Group, at TAURON Wydobycie subsidiary an agreement was signed between the Management Board of the company and the social partners (workforce) limiting the working time and reducing the compensation of the Management Board and the employees of the company by 20% for the period of three months, starting from May 1, 2020. On the other hand, at TAURON Wytwarzanie subsidiary an agreement signed between the Management Board of the company and the social partners (workforce) reduced the working time and the compensation of the Management Board and the employees of the company by 10% in the same period of time. The above agreements made it possible to cut down the costs and obtain funds under the solutions provided under the anti-crisis shield due to the reduced working time of the employees.

Disruptions in the economic activity in Poland brought about financial difficulties for the customers and contractors (counterparties, business partners) of TAURON Capital Group. The situation was mitigated by the regulatory actions taken with respect to the introduction of the successive anti-crisis shields, which were aimed at maintaining liquidity and protecting jobs at Polish businesses.

In the period from March to December 2020, the changes in the balance of the overdue accounts receivable were observed in the first weeks of the pandemic’s spread. Later in the year, the balance of the overdue accounts remained basically constant, with an increased migration of the balance of the accounts receivable to the successive overdue by time frames observed.

In order to limit potential credit losses, the extended credit risk management criteria are applied, the monitoring of the accounts receivables has been enhanced and the debt collection activities have been intensified.

The impact of the COVID-19 pandemic on the write down (charge) related to the accounts receivable in 2020 clocked in at 19,628,000. The COVID-19 pandemic also resulted in the need to book additional impairment charges related to the expected losses on the credit related financial instruments and to change the fair value of the loans granted. This led to a rise in the operating expenses of the Company by PLN 5,020,000 and in the financial costs by the amount of PLN 50,526,000.

In terms of the market environment, increased volatility of the prices of the commodity related instruments was observed, in particular with respect to electricity and the CO2 emission allowances, which translated into an increase in the required margins and, consequently, the level of funds allocated for that purpose. In order to improve its liquidity position, the Company concluded agreements on the guarantee limits allowing it to provide to IRGiT (Warsaw Commodity Exchange Clearing House) the required collateral in a non-cash form instead of cash. The Company also took advantage of the anti-crisis shield package by filing a declaration of voluntary submission to debt recovery with IRGiT (Warsaw Commodity Exchange Clearing House), thus reducing the level of the margins to be deposited, both in the form of cash, as well as the bank guarantees set up (this solution, in accordance with the Act, expired on September 30, 2020).

In order to further reduce the liquidity risk, the Company aligned the delivery dates for the concluded futures contracts for the CO2 emission allowances with the dates of their redemption and decided to conclude new contracts only on the OTC market. A system of capping (curtailing) the expenses of TAURON Capital Group was also introduced.

With respect to the financial instruments, a weakening of the Polish zloty and a decline of the interest rates was observed, including an emergency lowering of the NBP’s reference (prime) interest rate. The change in the FX rates affects the costs of purchasing the CO2 emission allowances, as well as the valuation of the Company’s debt denominated in the foreign currencies. On the other hand, the changes in interest rates may affect the costs resulting from the financing agreements concluded based on a floating (variable) interest rate.

As a result of the outbreak of the COVID-19 pandemic, also certain difficulties in the implementation of the strategic investment projects carried out by TAURON Capital Group have taken place. In case of the 910 MW power generating unit construction project in Jaworzno and the EC Stalowa Wola unit construction project, such disruptions occurred in the initial period of the pandemic as a result of the introduction of strict access control to the infrastructure and the additional security procedures. With regard to the construction of the 910 MW unit, the COVID-19 pandemic was one of the reasons for the amendment of the agreement with the Rafako S.A. and Mostostal Warszawa S.A. Consortium, as well as the contractor’s claims related to the additional works, which is also presented in note 59 to the Consolidated financial statements of TAURON Capital Group. In order to minimize the consequences of the disruptions to the projects that have occurred, all of the contractors implementing the investment projects have been cooperating, closely and on an ongoing basis, with TAURON Capital Group’s subsidiaries responsible for the investment projects who are monitoring the status of the projects and reacting adequately to the situation, using the tools available.

The situation related to the COVID-19 pandemic has also had an impact upon the operational activities of the lines of business due to the increased employee absenteeism and an increase in the operating costs resulting from the need to meet the epidemiological conditions. In this regard, TAURON Capital Group has taken a number of preventive measures with respect to the organizational and material (tangible) solutions aimed at protecting the employees of TAURON Capital Group’s individual subsidiaries and maintaining the continuity of the critical infrastructure operations.

In order to coordinate the efforts related to ensuring safety related to the risk (threat) of falling ill with COVID-19, the dedicated Crisis Teams have been established at the level of both the parent company as well as the individual Subsidiaries.

TAURON Capital Group is estimating that the negative impact of the above risk factors on the full year 2020 EBITDA clocked in at approx. PLN 144,683,000.

TAURON Capital Group, being aware of the threats related to the epidemiological situation, was undertaking in 2020 and continues to undertake active measures aimed at minimizing the impact of the current and the expected economic situation, as well as providing protection against the extreme events. It should be emphasized, however, that that the situation related to the COVID-19 pandemic is highly volatile and the future effects and the scale of the pandemic are currently difficult to precisely estimate. The duration of the pandemic, its severity and scope, as well as the impact on the economic growth in Poland in the short, medium and long term will be important. The Management Board of the Company, being aware of the threats stemming from the pandemic, is monitoring the impact on an ongoing basis and will be taking all possible steps in order to mitigate any negative effects of the COVID-19 pandemic on TAURON Capital Group.