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ESG Report of the
ENEA Capital Group for 2020

  • 33. Provisions

33. Provisions

Accounting rules

Provisions are created when the Group has a present obligation (legal or customarily expected) resulting from past events, and there is a likelihood that performing this obligation will result in an outflow of economic benefits and if the amount of this obligation can be reliably estimated.
Provisions for liabilities are measured at justified, reliably estimated values. Specific provisions are established for losses related to court cases against the Group. The amount of the provision constitutes the most accurate estimate of funds necessary to satisfy the claim as at the balance sheet date. The cost to create provisions is recognised in other operating costs.
Using a previously created provision for certain or highly likely future obligations is recognised when these obligations arise as a decrease of the provision.
In the event of a decrease or cessation of risk justifying the creation of a provision, an unused provision increases finance income or other operating revenue.
The Group also creates provisions for onerous contracts if the costs to comply with an obligation arising from a contract exceed the benefits (that are expected to be) received from that contract.
The Group also creates provisions for pre-trial claims submitted by the owners of properties on which its distribution grids with equipment are located and for other claims related to the Group’s grid assets on properties for which the Group has no legal title. Estimating the amount of compensation includes potential payments of compensation for non-contractual use of land and for rent, and is prepared by technical personnel.
Provision for energy origin certificates and energy efficiency certificates
The Group creates provisions for redemption of energy origin certificates and energy efficiency certificates or payment of substitute fees.
The basis for determining provisions for redemption of energy origin certificates for each instrument is the quantity of energy origin certificates constituting the difference between the quantity of certificates required for redemption in accordance with the Energy Law and the quantity of certificates redeemed as at the reporting date.
The basis for determining provisions for redemption of energy efficiency certificates is the quantity of certificates expressed in tonnes of oil equivalent constituting the difference between the quantity of certificates required for redemption under the Energy Law and the quantity of certificates redeemed as at the reporting date.
Provisions are measured as follows:
1) first, based on the purchase price for the energy efficiency certificates held but not redeemed at the balance sheet date,
2) second, based on the purchase price resulting from the Group’s sale agreements as regards the part of the certificates that the Group intends to receive first,
3) third, based on the weighted average price in session transactions executed on the property rights market managed by Towarowa Giełda Energii S.A. in the course of the month with the reporting date that is used to determine the amount of provision,
4) in the case of a lack of such transactions or a market shortage preventing the Group from purchasing a sufficient quantity of rights required to perform its obligation, the missing quantity of the provision is valued based on the unit substitute fee for the given financial year.
The provision for origin certificates will be performed in Q1-Q2 2021
Provision for mine liquidation
A provision for future costs associated with mine closure is recognised in compliance with the requirements stemming from the Geological and Mining Law, pursuant to which a mining enterprise is required to close mines after production ends, in an amount of the expected costs associated with:
  • securing or liquidating mining excavations and mine facilities and equipment;
  • securing any unused parts of the deposit;
  • securing any neighbouring deposits;
  • securing excavations adjacent to the mining facility;
  • providing the necessary means to protect the environment and rehabilitate land and manage post-mining areas.
The amount of provision is recognised in the present value of expenditures that – it is expected – will be necessary to comply with the obligation. An interest rate before tax is then used, which reflects the present market assessment of the value of money in time and risk associated specifically with the liability. Increase in the provision associated with the passage of time is recognised as interest costs. Changes in the amount of this provision related to updated estimates (inflation rate, expected nominal value of expenditures on liquidation) in reference to the provision for mine closure are recognised as adjustment of the value of non-current assets subject to the closure obligation

Significant judgements and estimates

Provision for non-contractual use of property
Valuation includes estimating the potential payments of compensation for non-contractual use of land and for rent. The provision for non-contractual use of land is estimated using the stages and weights approach, i.e. the likelihood of losing the dispute and the necessity to satisfy the claim. The size of awarded compensation for non-contractual use of land might be significant for the Group given the number of properties in question however the Group is unable to estimate the maximum compensation amount. The Group, in connection with establishing transmission corridors, has estimated and taken into account in the provision also compensation for non-contractual use of land on which its grid assets (power lines) are situated such as were not subject to any claims as of the reporting date. There is a high uncertainty around when this provision will be used.
Provision for other claims
This item includes provisions for claims that are unrelated to the non-contractual use of land. It is not possible to estimate the deadline for outflow of economic benefits on account of the rest of the provisions.
Provision for landfill site reclamation
After filling or closing a slag and ash landfill site, the Group is required to rehabilitate the land. Given the fact that the Group has large unfilled landfill sites, the rehabilitation obligation is expected to arise in 2060. Future estimated costs of landfill rehabilitation were discounted to present value using a 1.5% discount rate (2.15% as at 31 December 2019).
Provision for CO2 emission allowance purchases
Judgements concern assumptions related to the allocation of free CO2 emission allowances due for the Group for 2020
Provision for mine liquidation costs
The Group creates a provision for the costs of mine closure that it is required to incur by law. The key assumptions used in determining the mine closure costs include mine life-cycle, expected inflation and long-term discount rates. Any changes to these assumptions have an impact on the provision’s book value. Mine closure costs are calculated by an independent advisory firm using historic data concerning mine closure costs in the hard coal sector in Poland. It is difficult to determine when this provision will be performed.
Provision for claims concerning terminated agreements for the purchase of property rights
Recognising this provision requires the most accurate estimate of potential compensation for terminating contracts for the purchase of property rights (note 43.7). It is difficult to determine when this provision will be performed.

 

Change in provisions for liabilities and other charges

For the financial year ended 31 December 2020:
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Provision for non-contractual use of land Provision for other claims Provision for landfill site reclamation Provision for energy origin certificates Provision for CO2 emission allowance purchases
Mine liquidation
Other
Total
As at 1 January 2020 210 087 230 706 91 280 197 555 1 233 325 162 972 364 528 2 490 453
Reversal of discount and change of discount rate (7 199) – 186 – – 3 504 − (3 509)
Increase in existing provisions
 41 380 44 912 25 649 136 556 1 933 376 34 987 321 343 2 538 203
Use of provisions
 (3 615) (10 930) – (158 524) (1 271 545) – (129 984) (1 574 598)
Reversal of unused provision
 (820) (2 467) (217) (158) – – (276) (3 938)
As at 31 December 2020 239 833 262 221 116 898 175 429 1 895 156 201 463 555 611 3 446 611
Long-term
 849 990
Short-term 2 596 621

 

For the financial year ended 31 December 2019:
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Provision for non-contractual use of land Provision for other claims Provision for landfill site reclamation Provision for energy origin certificates Provision for CO2 emission allowance purchases
Mine liquidation
Other
Total
As at 1 January 2019 182 738 166 663 66 119 306 918 557 713 112 566 570 992 1 963 709
Reversal of discount and change of discount rate 10 249 – 2 665 – – 3 625 – 16 539
Increase in existing provisions
 17 626 68 787 25 849 181 356 1 241 691 46 781 91 587 1 673 677
Use of provisions
 (295) (1 133) – (289 750) (558 177) – (146 238) (995 593)
Reversal of unused provision
 (231) (3 611) (3 353) (969) (7 902) – (151 813) (167 879)
As at 31 December 2019 210 087 230 706 91 280 197 555 1 233 325 162 972 364 528 2 490 453
Long-term
 774 065
Short-term 1 716 388

 

A description of material claims and conditional liabilities is presented in note 43.

Provision for CO2 emission allowance purchases
The provision for CO2 emission allowance purchases as at 31 December 2020 amounted to PLN 1 895 156 thousand (as at 31 December 2019: PLN 1 233 325 thousand). This provision will be used in 2021.
Provision for other claims
In 2020, ENEA S.A. created a PLN 16 432 thousand provision for potential claims related to the termination by ENEA S.A. of agreements to purchase energy origin certificates for renewables, and the value of this provision as at 31 December 2020 was PLN 139 464 thousand (this provision is shown in the table above in the column „Provision for other submitted claims” and detailed information on this provision are presented in note 43.7).
Other provisions mainly concern:
  • potential liabilities related to grid assets resulting from differences in the interpretation of regulations PLN 178 172 thousand (as at 31 December 2019: PLN 170 985 thousand); it is difficult to determine when this provision will be performed, however in these financial statements it is assumed that it will not happen within 12 months,
  • costs to use forest land managed by State Forests PLN 64 421 thousand (as at 31 December 2019: PLN 96 278 thousand); it is difficult to determine when this provision will be performed, however in these financial statements it is assumed that it will not happen within 12 months,
  • future investment liabilities toward Elektrownia Ostrołęka Sp. z o.o. and ENERGA S.A. PLN 220 200 thousand (PLN 0 thousand as at 31 December 2019), detailed information on this provision is available in note 18,
  • onerous contracts PLN 50 821 thousand (as at 31 December 2019: PLN 68 565 thousand); this provision will be performed in 2020 (note 43.1),
Rules for settlements with prosumers are laid down in the Act of 20 February 2015 on renewable energy sources (Polish Journal of Laws of 2015, item 478, as amended, consolidated text from 2020). In the current net metering system, as part of settlement for the energy introduced by the prosumer to the grid, the Company covers the prosumer’s variable distribution fees (the prosumer is exempted from these), which in effect generates negative financial results for the Company. At 31 December 2020, the Company had 47 000 contracts with prosumers. Taking the above into account and acting in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, the Company recognised a provision for onerous contracts as at 31 December 2020, amounting to PLN 50 821 thousand. Information on the use of the onerous contracts provision concerning customers in tariff G groups is presented in note 43.1

 

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