The key risks identified at the Energa SA and entities of the Group level are presented below. They are divided into four areas of the Energa Group Risk Model together with a description of the most important mitigating risk measures.
Risk related to activities conducted by the Group affecting its image. Should this risk materialize, it could cause deterioration of business relations, of the competitive position of Group entities, decline of the Group’s value (brand) and consequently to the loss of customers, investors or business partners.
Control mechanisms used:
Internal regulations pertaining to communication and marketing and sponsorship activity
Cooperation with a PR agency and creative agency
Vision and plan of communication and promotion actions
Current cooperation and maintaining good relations with the stakeholders
Monitoring of the environment for the brand presence and ongoing response to changes regarding the image
The risk pertains to the declining satisfaction of customers with the services provided by Group entities, failure to meet customer service quality standards and lower revenues on sales and distribution activity.
Control mechanisms used:
Ongoing control of the customer service standards, recommendation of changes in the risk areas
Monitoring the timeliness of responding in the complaint process and trends as regards customer loss
Mystery shopping research
Unification and standardization of service depending on the contact channel.
The risk is associated with selecting incorrect investment directions. The risk concerns failure to achieve an appropriate level of investment profitability, problems associated with the financing of investments, failure to achieve the assumed operational parameters and delays in investment project implementation. Risk materialization may lead to, among others, the weakening of the Group’s competitive position, the undermining of the economic ratios, necessity to write off the loss value of failed investments or lack of investment returns. In the case of in-vestments subsidized from EU funds, risk materialization may also entail the necessity to refund the subsidies received.
Control mechanisms used:
Long-Term Plan of Strategic Investments (clear guidelines regarding the Group’s investment policy)
Ongoing contacts with financial institutions
Reporting on the project performance status on a regular basis, including risk analysis
Ongoing monitoring of performance of investment projects
The risk is associated with lack of or misguided approach to development of particular companies comprising the Energa SA Group. The effects of the risk may involve, among other things, financial losses and losses to image, reduction of production capacities or loss of part of the market.
Control mechanisms used:
Strategy and strategy performance control
Feasibility analyses
Analysis of the external environment and internal conditions supporting flexible response and adaptation to changing environment (scenario-based analysis)
The risk pertains to ongoing monitoring and control of fulfillment of the investment conditions by Polska Grupa Górnicza. The effects of the risk may lead to deterioration of the financial performance of Energa Kogeneracja Sp. z o.o. (which is the direct investor) or prevent return from invested capital.
Control mechanisms used:
Task force for the purposes of ongoing monitoring and enforcement of in-vestment terms in the PGG project
Participation of an Energa Kogeneracja representative in the Monitoring Committee at the PGG Supervisory Board
The risk concerns legislative changes affecting the functioning of the Energa SA Group’s individual Business Lines. If the risk materializes, the performance of the investment plans may be suspended or operating expenses may rise. The risk is also an opportunity to adopt the new legal solutions which could facilitate raising additional funds or ensure a support system for the Group’s assets.
Control mechanisms used:
Monitoring changes in the law
Participation in the legislative process
Participation of the Group’s representatives in the work of industry associations
The risk involves, among other things, legal, financial, organizational or image-related effects of the Energa SA Group’s failure to comply with new laws or their incorrect interpretation.
Control mechanisms used:
Monitoring changes in the law
Task forces on ensuring compliance of the Group’s operations with the changing laws (among others, GDPR)
Compliance management in the Energa SA Group
Risk associated with conducting the operations in accordance with provisions of the environmental law, best environmental practices mitigating the risks and ensuring compliance with the sustainable development principles; providing information and assurances to stakeholders about compliance with the national environmental regulations and the requirements of the EMAS Regulation. If the risk materializes, the ISO 14001 certificate may be withdrawn and the ISO 50001 certificate may not be obtained. Failure to comply with environmental regulations may lead to an in-crease in the costs associated with removal of potential incidents affecting the environment, imposition of financial penalties and shutdown of elements of defective installations.
Control mechanisms used:
Internal regulations
Monitoring changes in the law on an ongoing basis
Analyses and measurements of emissions
Controls and audits
EMAS System implemented in the Group’s main companies
The risk concerns situations and actions related to abuse, including conflict of interest, corruption and fraud, which can be committed by employees of the Energa SA Group companies. The risk involves potential threat of abuse and corrupt practices in the operational processes. If the risk materializes, this may lead to emergence of financial losses and may involve the law enforcement authorities conducting procedures against employees or bodies of the Group companies. The risk may have an adverse effect on the Energa SA Group’s image and reputation, and it may contribute to deterioration of the employees’ trust in their supervisors, colleagues and the organization as a whole.
Control mechanisms used:
Internal regulations related to abuse
Training for employees (related to, among others, corruption prevention)
The organization’s three lines of defense (internal control system, risk management system, internal audit)
External controls
Explanatory actions
The risk is associated with court and administrative procedures conducted by or against the Group companies as well as criminal procedures conducted against employees in connection with the performance of their professional duties. If the risk materializes, this may result in an obligation to pay damages and penalties, and also giving bonuses to customers resulting from failure to comply with the electricity quality standards prescribed by law.
Control mechanisms used:
Collaboration with law firms
The system for monitoring important matters
Internal regulations
Risk associated with unauthorized access to facilities, including power equipment. The risk also applies to security of employees and third parties present on the premises of the Group’s companies, as well as incidents related to terror-ism and sabotage. Potential consequences of the risk may involve threat to security of the grid’s operation, loss/destruction of property or interruption of operational continuity.
Control mechanisms used:
Security Plans, including Critical Infrastructure Security Plans
Internal regulations related to security
Operational Continuity Plans in the Group Companies
Property insurance, third party liability insurance and insurance for lost revenues
Physical and technical security systems in the Group’s facilities
Security incidents monitoring in the Group
Employee training
Risk associated with ensuring the availability (incorrect operation and decrease in capacity), integrity and confidentiality of ICT systems, including their interconnection/integration. If the risk materializes, this may lead to increased maintenance costs of the IT systems and the need to incur additional capital expenditures in this respect. The risk may significantly hinder and even prevent the Group companies from performing their basic tasks.
Control mechanisms used:
Procedures for creating IT system backups
Internal regulations related to ICT security
Service Level Agreements (SLA) and Service Agreements signed with the IT service and hardware suppliers
Eliminating the possibility of entering incorrect data in the system (system validations and the authorizations system)
Training to improve specialist qualifications of the IT area employees
IT Audits
Risk associated with lack of client database centralized in a single IT system and the customer service being conducted in contravention with the accepted standards. If the risk materializes, this may erode the revenues and result in the need to pay fines, damages and give dis-counts; it may also result in filing of civil law lawsuits and deterioration of image.
Control mechanisms used:
Outsourcing of the handling of some of the notifications
Customer satisfaction surveys
Monitoring KPIs designated in the notifications handling process
Processes and Rules for managing the points of contact of the processes among the Energa SA Group companies
IT systems
Risk is associated with the violation of the Compliance Program in place in Energa-Operator SA. If the risk materializes, this may result in complaints being filed by the system users to the Energy Regulatory Office and the Office of Competition and Consumer Protection. The effects of the risk involve increased workload related to the preparation and conducting of explanatory proceedings before the ERO President or the imposition of possible fines.
Control mechanisms used:
The provisions of the Compliance Program allowing for the pursuit of damages on general principles from the employee who breached his/her duties, which resulted in a fine being imposed by the ERO President
Provisions of the agreements related to subcontractors’ and service providers’ conformity with the Compliance Program
Training conducted on regular basis
Risk associated with ineffective tax settlements, including within the Tax Group. If the risk materializes, this may result in fines and interest being imposed, the need to make additional payments to make up for the incorrectly accrued tax, or it may lead to loss of benefits attributable to the Tax Group and absence of VAT deductions.
Control mechanisms used:
Internal regulations related to transfer prices and tax management
Collaboration with tax consultants (permanent and incidental)
Filing petitions with the Ministry of Finance to hand down individual tax rulings
Employee training
Monitoring changes to tax laws
Verification of agreements from tax standpoint before signing
Procedures protecting from criminal tax liability
The risk associated with incorrect calculation of sales prices and the ERO President’ s approval of the tariff rates at the level not guaranteeing profitability of sales. If the risk materializes, this may result in losing the market share (margin, volume, revenue), loss of clients and if the tariff is not approved – inability to bill customers for the sales.
Control mechanisms used:
Market analyses, conducted on an ongoing basis, from the standpoint of changes taking place on the market and changes to the legal and regulatory environment
Ongoing surveys of the planned financial result and other selected ratios, and ongoing analysis of the impact of the adopted price calculation rules on that result/ratios
Ongoing analyses of the offering mechanisms (including the Conjugate Model) and correctness of operation of IT trade systems and databases
Close collaboration to acquire the information necessary to shaping the pricing policy
Audits and controls
Offering monitoring system
The risk is related to business decisions made on the basis of the following:
budgeting and monitoring the performance of the companies’ budgets, reports and management information for the companies’ governing bodies and for the Group;
feasibility analyses of the investment projects;
impairment tests;
long-term modeling.
If the risk materializes, this may result in making incorrect decisions on the execution or abandoning of investment tasks, the need to make impairment losses and lost revenues or additional costs.
Control mechanisms used:
Macroeconomic guidelines and assumptions for the price paths for financial models
Best practices
Analytical skills of the team
IT tools
Management control matrices
Realizując postanowienia Polityki finansowej Grupy Energa podmioty wchodzące w jej skład wstępują w różnego rodzaju umowy finansowe, które generują ryzyka finansowe i rynkowe. Do najważniejszych możemy zaliczyć ryzyko stopy procentowej, ryzyko walutowe, ryzyko kredytowe, a także ryzyko utraty płynności. Powyższe kategorie czynników ryzyka determinują wyniki finansowe poszczególnych spółek, jak również Grupy Energa.
The Energa SA Group companies finance their operating or investing activity with debt liabilities bearing interest at a floating or fixed interest rate. Interest rates are also associated with investment of surplus cash in floating or fixed interest rate assets.
The floating interest rate risk resulting from concluded debt liabilities applies to WIBOR-based rates only. In respect to liabilities denominated in EUR, the Energa SA Group has contracted financial debt under issued fixed-coupon Eurobonds.
According to the interest rate risk policy, risk of variation in interest rates is mitigated by maintaining a portion of debt with fixed interest rate. Under these assumptions, IRS floating interest rate hedging transactions are executed.
In connection with implementation of hedge accounting, the Energa SA Group also identifies interest rate risk related to the concluded 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 stated by the ERO President 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 FX risk is associated mainly with incurring and servicing Energa SA Group’s debt liabilities in foreign currencies under the EMTN Eurobond Issue Program as well as in connection with the issue of hybrid bonds. Additionally, selected Energa SA Group companies had foreign currency surpluses resulting from their operating activity or investing activity. The Energa SA Group monitors the foreign exchange risk and manages it primarily through contracted CCIRS hedge transactions and implemented hedge accounting.
Credit risk is associated with the counterparty’s potential permanent or temporary insolvency with re-gard to financial assets such as cash and cash equivalents and financial assets available for sale. The risk arises due to the contractual counterparty’s inability to make the payment and the maximum ex-posure to this risk equals the carrying amount of acquired instruments.
In this respect, the ratings of financial institutions with which the Energa SA Group cooperates are monitored on a regular basis to minimize credit risk.
Risk of loss of financial liquidity – associated with the possibility of losing the ability to pay liabilities on time or losing possible benefits resulting from over-liquidity.
Energa SA Group companies monitor the liquidity risk using a regular liquidity planning tool. The tool takes into account the payment due/maturity dates both for investment liabilities and financial assets and liabilities and projected cash flows from operating activity. The Group aims at maintaining the balance between continuity and flexibility of financing through use of various sources of financing, such as working capital and investment loans, local bonds and Eurobonds. Since the Group’s debt is centralized in Energa SA, this company monitors the fulfillment of covenants on an ongoing basis and their forecasts in the long term, which allows it to determine the Energa SA Group’s debt capacity, its capability to conduct capital expenditures and affects its capacity to pay liabilities on a timely basis in the longer term.
In order to mitigate the liquidity risk, the Group companies may use the mechanism of issuing short-term bonds, and, as part of the established bonds issue programs, the purchase offers are made by the issuer – a Group company – only to other companies. The procedure is coordinated by Energa SA, which makes it possible to optimize the entire process in terms of its organization.
The effectiveness is maximized through the zero-balancing cash pooling, implemented in January 2016, which involves utilization of Group’s cash surpluses to finance the current operations of individual Group companies.
Energa SA also concluded loan agreements with several financial institutions, which represent an immediate liquidity reserve in case of any liquidity needs.