Commissioning of the 910 MW power unit
As a result of damage to one of the boiler components which occurred during the last testing phase of the 910 MW power unit (“the Unit”) in Jaworzno, the Consortium of RAFAKO S.A. – MOSTOSTAL WARSZAWA S.A., (the “Consortium”) being the contractor of the Unit, the designer of the boiler and the entity responsible for the commissioning of the boiler indicated that it was necessary to postpone the date of commissioning of the Unit. On 6 March 2020, the subsidiary Nowe Jaworzno Grupa TAURON Sp. z o.o. received information from the contractor, according to which the estimated commissioning of the Unit was to take place by the end of July 2020. On 4 May 2020, the subsidiary Nowe Jaworzno Grupa TAURON Sp. z o.o. and the contractor signed an agreement related to the execution of the contract for the construction of the Unit. In the signed agreement, the parties agreed on the causes of the damage to one of the boiler components referred to above. According to the conclusions presented by the emergency commission consisting of representatives of the parties, the failure resulted from an unfavourable combination of phenomena during the start-up of the Unit. In addition, the emergency committee agreed on a method of repairing the damaged boiler components that will avoid similar failures in the future.
The agreement also established a schedule of activities including procedures to prevent the risk of recurrence of failures and procedures for tuning and start-up work on the Unit. The agreement was followed by an addendum to the main contract between the parties, in which the Contractor undertook to commission the Unit by 15 November 2020. This deadline took into account the additional time needed to remedy the failure referred to above.
On 13 November 2020, the Unit was commissioned. On the day of commissioning of the 910 MW Unit, Nowe Jaworzno Grupa TAURON Sp. z o.o., E003B7 Sp. z o.o. (a company 100% controlled by RAFAKO S.A. in restructuring) and the Consortium (acting with the consent of the supervisor of the arrangement in simplified restructuring proceedings) signed a settlement agreement which is the result of mediation conducted before the Court of Arbitration at the Polish Prosecutor General’s Office and which regulates in particular the following issues:
- Nowe Jaworzno Grupa TAURON Sp. z o.o. and the Consortium waived their mutual equivalent claims which had occurred by the date of signing the Settlement Agreement, except for, inter alia, Nowe Jaworzno Grupa TAURON Sp. z o.o.’s claims under warranty or guarantee and recourse claims against the Consortium for payment of further subcontractors’ claims and the Consortium’s claims for work performed in accordance with the contract,
- The Consortium will perform additional services for Nowe Jaworzno Grupa TAURON Sp. z o.o., including optimising the operation of the Unit, which will result, inter alia, in reducing the technical minimum of the Unit from 40% to 37%.
In addition, the technical guarantee for the high-pressure part of the boiler will be extended by six months (to 36 months), for which Nowe Jaworzno Group TAURON Sp. z o.o. will receive additional security provided by the guarantors.
The Settlement became effective after the balance sheet date, on 6 January 2021, following the fulfilment of all conditions precedent, key among which were the commissioning of the Unit by 15 November 2020, the submission by the Consortium of an agreement in the form of a Promissory Note with financial institutions on how to raise the funds necessary to complete the project and the approval of the Settlement by a court of law.
In connection with the conclusion of the settlement, on 13 November 2020, Nowe Jaworzno Grupa TAURON Sp. z o.o. and the Consortium concluded an annex to the agreement for the construction of the Unit, which regulates in detail the arrangements between the parties set out in the Settlement Agreement with respect to additional services provided by the Consortium, including, inter alia, dates of their performance and related dates of payments.
Impact of the COVID-19 pandemic on the operations of the Group
The development of COVID-19 cases has been observed in Poland during the year ending 31 December 2020. As a result, numerous restrictions have been put in place in the country to contain the spread of the SARS-CoV-2 virus that causes COVID-19 disease. This situation has caused disturbances in the economic and administrative system in Poland and worldwide. As a result, the pandemic has significantly reduced economic activity, affecting the work of industrial plants and companies in the small and medium-sized enterprise segment. Consequently, in the medium and long term, it is expected that the pandemic will continue to affect national, European as well as global economic conditions, having a negative impact on economic growth in Poland in 2021 and beyond. Material issues relating to the impact of the pandemic on the TAURON Group are set out below.
- The situation related to the COVID-19 pandemic in 2020 significantly affected the level of demand for electricity in the National Power System and, consequently, the volumes of electricity distribution and sales in the TAURON Group. In the second half of 2020, the impact of the COVID-19 pandemic on domestic demand was milder than it was in the first half of 2020. The biggest drop in electricity consumption in Poland took place in the second quarter of 2020,amounting to as much as 8.5%, while the country’s annual electricity consumption fell by around 2.3% compared tothe same period in 2019. Changes in electricity demand resulted in a decrease in revenues mainly in the area of electricity distribution and sales. The Group estimates that, in terms of the Distribution segment, the adverse impact of the pandemic on EBITDA amounted to PLN 47,876 thousand, which is due to the loss of some sales volume to non-household customers. With regard to the Sales segment, the estimated negative impact of the pandemic on EBITDA amounted to PLN 77 179 thousand, due to the loss of margin associated with the decrease in electricity sales and the need to balance the purchase position. In addition, the pandemic situation has led to a reduction in production in the area of conventional generation and, consequently, to a fall in demand for hard coal and an increase in coal stocks. In view of this situation, renegotiations were undertaken with coal suppliers on price and quantity conditions for its purchase. In order to mitigate the negative impact of the pandemic on TAURON Group in TAURON Wydobycie S.A., an agreement was signed between the Management Board of the company and the social side, limiting working hours and reducing the remuneration of the company’s Management Board and employees by 20% in the period of three months starting from 1 May 2020. In turn, at TAURON Wytwarzanie S.A., an agreement signed between the company’s Management Board and the social side limited working hours and reduced the remuneration of the company’s Management Board and employees by 10% in the corresponding period. These agreements made it possible to reduce costs and obtain funds under the solutions contained in the anti-crisis shield for reduced working hours of employees.
- Disturbances in economic activity in Poland caused financial difficulties for customers and contractors of the TAURON Group. The situation was mitigated by regulatory measures in the introduction of successive anti-crisis shields, which were aimed at maintaining liquidity and protecting jobs at Polish entrepreneurs. In the period from March to December 2020, changes in the level of overdue receivables were observed in the first weeks of the development of the pandemic. In the remainder of the year, past due receivables were broadly stable, with increased migration of the balance of receivables into subsequent past due periods observed. In order to limit potential credit losses, extended credit risk management criteria are applied, monitoring of receivables has been intensified and debt collection activities have been stepped up. The COVID-19 pandemic has further affected the need for additional allowances for expected credit losses of financial instruments and the remeasurement to fair value of loans granted. This increased the Company’s operating expenses by PLN 19,628 thousand and financial expenses by PLN 14,497 thousand.
- In terms of the market environment, increased volatility was observed in the prices of commodity instruments, in particular electricity and CO2 emission allowances, which translated into an increase in the required security deposits and, consequently, the level of cash committed for this purpose. In order to improve its liquidity position, the Company has entered into guarantee limit agreements allowing it to provide the required collateral to the IRGiT in non-cash form. The Company has also taken advantage of the anti-crisis shield solution by filing a declaration of submission to enforcement with the IRGiT, thereby reducing the level of deposits made both in cash and in established bank guarantees (this solution, in accordance with the Act, expired on 30 September 2020). In order to further reduce the liquidity risk, the Company matched the delivery dates of the concluded forward contracts for CO2 emission allowances with their redemption dates and decided to conclude new contracts exclusively on the OTC market. A capping system for TAURON expenditure has also been introduced.
- In terms of financial instruments, a depreciation of the zloty and a fall in interest rates were observed, including an intervention reduction in the NBP reference interest rate. Changes in exchange rates affect the costs incurred to purchase CO2 emission allowances, as well as the valuation of the Company’s debt denominated in foreign currencies. On the other hand, changes in interest rates may affect the costs resulting from the concluded financing agreements based on a variable interest rate.
- As a result of the COVID-19 pandemic, there were also some difficulties in the implementation of TAURON Group’s strategic investment projects. In the case of the investment in the construction of the 910 MW unit at Jaworzno and the construction of the unit at EC Stalowa Wola, these occurred in the early stages of the pandemic as a result of the introduction of strict controls on access to infrastructure and additional security procedures. With regard to the construction of the 910 MW unit, COVID-19 was one of the reasons for amending the contract with the Consortium of Rafako S.A. and Mostostal Warszawa S.A. (the change in the commissioning date of the 910 MW power unit is described above in this note). In order to mitigate the consequences of project disruptions, all contractors implementing the projects cooperate closely and on an ongoing basis with TAURON Group companies responsible for the investments, which monitor the situation in the projects and respond appropriately to the situation using available tools.
- The pandemic situation also affected the operations of individual business areas through increased employee absenteeism and increased operating costs resulting from the need to meet epidemiological conditions. In this regard, the TAURON Group has taken a number of preventive measures in organisational and material terms aimed at protecting employees of individual TAURON Group companies and maintaining the continuity of critical infrastructure operations. Dedicated Crisis Teams have been established at the level of the Parent Company as well as individual Subsidiaries in order to coordinate the security work related to the threat of COVID19.
In conclusion, the TAURON Group, being aware of the risks related to the epidemiological situation, undertook in 2020 and continues to undertake active measures to mitigate the impact of the current and expected economic situation as well as to protect against extreme events. However, it should be stressed that the COVID-19 pandemic situation is highly volatile and the future impact and scale of the pandemic are difficult to estimate precisely at present. The duration of the pandemic, its severity and spread, and its impact on Polish economic growth in the short, medium and long term will be important. The Company’s Management Board, being aware of the threats resulting from the pandemic, monitors the impact on an ongoing basis and will take all possible steps to mitigate any negative effects of the COVID-19 pandemic on the TAURON Group.