38.1. Credit risk

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Exposure to credit risk	Risk management
Credit risk is risk associated with the Group incurring financial losses as a result of a client or counterparty that is a party to a financial instrument failing to meet its contractual obligations.	The Management Board implements a Credit risk management policy at ENEA Group, pursuant to which exposure to credit risk is monitored on an on-going basis and activities intended to minimise it are undertaken. The key tool for managing credit risk is analysis of the credit-worthiness of the Group’s most important customers, pursuant to which contractual terms with the counterparties are appropriately structured (payment terms, potential collateral, etc.).
Credit risk is associated with a potential inability to collect receivables from customers.
Key factors having impact on the Group’s credit risk:
a large number of clients, which has an impact on the operational complexity of the risk mitigation process (assessment of counterparties' credit-worthiness) and the high cost of controlling the in-flow and recovery of receivables,
legal conditions for doing business, which specify rules for shutting down electricity supplies as a result of non-payment or the obligation to connect entities to ENEA Operator’s relevant distribution area, as well as the reserve seller or ex-officio seller functions.

The following table shows a structure of balance-sheet items depicting the Group’s exposure to credit risk:

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	Maximum exposure to credit risk* as at
	31 December 2020	31 December 2019
Financial assets measured at fair value (without shares and equity instruments through other comprehensive income)	69 910	12 482
Debt financial assets at amortised cost	61	52 225
Other short-term investments	–	477
Assets arising from contracts with customers	322 446	330 447
Trade and other receivables	1 648 562	1 561 518
Finance lease and sublease receivables	1 488	1 269
Cash and cash equivalents	1 941 554	3 761 947
Funds in the Mine Decommissioning Fund	141 591	133 998
Credit risk	4 125 612	5 854 363

* These values correspond to book values.

In line with internal regulations, the issue of receivables being concentrated in relation to the Group’s end customers is also subject to monitoring. The size of the Group’s sales portfolio means that despite the fact that there are entities within the portfolio with relatively large consumption, the share of a single entity does not exceed 5% of the entire portfolio’s

volume, therefore the level of concentration is not seen as significant. In light of the above, the Group does not use additional collateral relating solely to concentration. The use of collateral is dependent each time on the counterparty’s financial standing.

Failure to perform an obligation is understood as the occurrence of at least one of the following events or circumstances:

debtor is more than 90 days late on a significant payment;
the Group considers is as unlikely that the debtor will pay off its debt entirely (without taking into account amounts received from collateral or similar actions).

Events that indicate a low likelihood of the obligation being performed include: submission of bankruptcy application by the debtor, instigation of arrangement proceedings for the debtor – as well as other events not directly resulting from legal actions, such as lack of cash or negative forecasts regarding the debtor’s payment situation. Meeting one of the aforementioned criteria provides grounds for identifying impairment on a given financial asset due to credit risk.

Despite the COVID-19 crisis in 2020, the Group did not record any major divergences in overdue receivables, which is why its situation in terms of credit risk is stable.

Impairment of trade and other receivables:

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	As at
	31 December 2020	31 December 2019
Impairment as of 1 January	157 844	162 104
Created	18 633	9 135
Reversed	(26 424)	(3 494)
Used	(10 458)	(9 901)
Impairment as of 31 December	139 595	157 844

Impairment losses are mainly recognised on trade receivables. Impairment of other receivables is negligible.

As at 31 December 2020, the Company carried out an additional analysis of the COVID-19 pandemic’s potential impact on receivables impairment. An individual approach was applied to a list of ENEA S.A.’s largest debtors, using assumptions for a model described in the Group’s existing Methodology for determining expected credit losses for non-current debt assets and similar items. As regards the model’s quantitative module – available reporting data from the debtors was used, while the qualitative module incorporated the existing (and predicted) situation in the national economy as well as the counterparty’s market and financial position. Based on this overall evaluation, a rating was assigned and subsequently transposed onto the Probability of Default parameter (in accordance with the aforementioned Methodology). As regards the Loss Given Default parameter, a value equal to 10% was conservatively adopted (in reality far exceeding the actual levels of receivables losses recorded by the Company/Group). The above analysis generated an additional expected credit loss at a negligible level from the viewpoint of reporting.

For current trade receivables, expected credit losses are calculated based on historic data in a way that is described in Rules for creating and recording impairment losses on trade receivables and other financial items at ENEA Group companies. In the year-closing procedure, receivables impairment is determined on the basis of date from the present year, i.e. 2020. Based on this data, impairment indicators are determined and used to estimate the amount of receivables impairment at the end of 2020. Therefore, the specified expected credit losses take into account objective indications of impairment resulting from the pandemic situation and regulations.

Age structure of assets arising from contracts with customers and trade and other receivables constituting financial instruments:

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	As at 31 December 2020
	Nominal value	Impairment	Book value
Trade and other receivables
Current	1 498 136	(8 817)	1 489 319
Overdue	290 021	(130 778)	159 243
0-30 days	100 033	(262)	99 771
31-90 days	15 417	(1 359)	14 058
91-180 days	9 215	(2 676)	6 539
over 180 days	165 356	(126 481)	38 875
Total	1 788 157	(139 595)	1 648 562
Assets arising from contracts with customers	322 657	(211)	322 446

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	As at 31 December 2019
	Nominal value	Impairment	Book value
Trade and other receivables
Current	1 418 337	(8 783)	1 409 554
Overdue	301 025	(149 061)	151 964
0-30 days	99 035	(413)	98 622
31-90 days	13 354	(1 422)	11 932
91-180 days	6 932	(2 130)	4 802
over 180 days	181 704	(145 096)	36 608
Total	1 719 362	(157 844)	1 561 518
Assets arising from contracts with customers	330 675	(228)	330 447

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Electricity sales and distribution services – retail clients	There is a substantial volume of overdue receivables in this segment. Although these do not constitute a significant threat to the Group’s finances, activities aimed at reducing this are undertaken. Activities intended to streamline the debt recovery process are successively being undertaken and consist of new and updated instructions and rules for debt recovery as well as cooperation with specialised entities. Introducing harmonised debt collection rules, including soft debt recovery, makes it possible to shorten the cash recovery time and avoid long-term and often ineffective hard debt recovery, i.e. court enforcement. Cases that exceed a debt recovery limit are referred for court and enforcement proceedings;
Electricity sales and distribution services – business, key and strategic clients	The amounts of overdue receivables in this segment are much lower than in the case of individual customers. Given the above and due to a much smaller number of clients in these segments, debt collection rules are largely based on soft collection. Soft recovery activities are undertaken immediately after the payment deadline passes
Other	The amounts of overdue receivables are negligible.

In the debt collection and recovery process, the Group works with specialised external entities that support it in hard debt collection activities. The Group monitors on an on-going basis the level of over-due receivables, recognises impairment losses and in justified cases raises legal claims

As regards receivables from financial institutions, including cash deposited in bank accounts and deposits, as well as currency risk and interest risk hedging transactions, the safety for such transactions is governed by „ENEA Group’s liquidity and liquidity risk management policy” and „ENEA Group’s currency risk and interest risk management policy.” ENEA only cooperates with partners meeting strict credit-worthiness criteria and having an established position on the banking market.

In accordance with the aforementioned policies and „ENEA Group’s credit risk management policy,” if a transaction partner has a rating issued by a reputable agency, the Group does not estimate an internal rating for this entity. In selecting banking counterparties, the Group analyses external credit ratings, which override all other criteria for evaluating the security of investments and settlements, and these values must be at investment grade.

List of selected long-term ratings assigned to banks that currently work with ENEA S.A.:

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Bank	Agency	Rating
PKO BP	Moody’s	A2
Pekao	Fitch	BBB+
mBank	S&P	BBB+
Santander Polska	Fitch	BBB+
BGK	Fitch	A-

As regards financial investments, in order to limit concentration risk, diversification rules for invested cash are applied. In accordance with the aforementioned „ENEA Group’s liquidity and liquidity risk management policy,” a maximum permissible level of fund allocation to one transaction partner is set. Moreover, allocating excess cash of companies within the cash pooling structure is generally carried out by the parent company, which serves as Pool Leader in the cash pooling mechanism. Companies require ENEA S.A.’s approval to investment free cash on their own.

As regards managing current excess cash and as regards currency risk and interest risk hedging instruments, the Group works with six financial institutions on a day-to-day basis.

The Group diversifies credit risk concerning cash. As at 31 December 2020, cash was allocated as follows at the three banks with the largest balances: bank A 86.43%, bank B 8.54%, bank C 5.03%.

ENEA S.A.’s Risk Management Department carries out evaluations of significant long-term receivables and debt securities (including intra-group bonds and loans) as well as financial guarantees and liabilities concerning loans, and monitors significant credit risk and determines impairment for expected credit losses in accordance with the Company’s Methodology for determining expected credit losses for non-current debt assets and similar items. In pursuing this objective, the Department’s personnel perform individual assessments of each counterparties or specific instruments, using external credit ratings and, in the absence thereof, using a system of internal credit ratings based on Altman’s model for emerging markets and elements of qualitative-forecasting assessment.

The Group identifies a deterioration in credit risk if:

counterparty is more than 30 days late on a significant payment;
a downgrade by at least two notches is observed as of the balance sheet date – for non-investment-grade ratings, identified in accordance with the aforementioned Methodology in the range from BB+ to B- (in comparison with the initial rating for this instrument), or
a downgrade by at least one notch is observed as of the balance sheet date – for speculative-grade ratings, identified in accordance with the aforementioned Methodology in the range from CCC to D (in comparison with the initial rating for this instrument), or
downgrade from non-investment grade to speculative grade.

Items assigned to investment grade for which no arrears on significant payments occurred for longer than 30 days are treated as items with low credit risk (the counterparty has high short-term ability to meet its obligations as regards contractual cash flows, and adverse changes in economic and business conditions in the long term might – but do not have to – impair its ability to satisfy these obligations).

The following table shows asset categories for which expected credit losses are calculated, by rating:

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	As at
	31 December 2020 12-month ECL	31 December 2019 12-month ECL
Cash and cash equivalents	1 941 554	3 761 947
from AAA to BBB- (investment grade)	1 941 554	3 761 947
Funds in the Mine Decommissioning Fund	141 591	133 998
from AAA to BBB- (investment grade)	141 591	133 998
Loans granted	210 145	118 223
from AAA to BBB- (investment grade)	–	8 244
from CCC to D (speculative grade)	210 145	109 979
Other short-term investments	–	477
from AAA to BBB- (investment grade)	–	477
Total gross value	2 293 290	4 014 645
Loans granted	(210 084)	(65 998)
Total impairment for expected credit losses	(210 084)	(65 998)
Cash and cash equivalents	1 941 554	3 761 947
Funds in the Mine Decommissioning Fund	141 591	133 998
Loans granted	61	52 225
Other short-term investments	–	477
Total balance sheet value	2 083 206	3 948 647

Credit risk associated with trade receivables

Credit risk associated with trade receivables by market segment

Credit risk associated with cash and derivative instruments

Credit risk associated with other financial assets

38.1. Credit risk

Credit risk associated with trade receivables

Credit risk associated with trade receivables by market segment

Credit risk associated with cash and derivative instruments

Credit risk associated with other financial assets

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