Tools
PGE’s existing financing model takes into account the use of funds from its core activities, debt financing in the form of commercial bank credit facilities and bond programmes, credit facilities from Bank Gospodarstwa Krajowego (“BGK”), credit facilities from multilateral institutions such as the European Investment Bank (“EIB”) or the European Bank for Reconstruction and Development (“EBRD”) as well as in the form of preferential financing. In order to effectively manage liquidity, within the Group we have introduced a cash-pooling system, with participation of 31 Group companies.
An ambitious investment programme of approx. PLN 34 billion scheduled for 2016-2020 requires long-term planning and external financing.
PGE Group’s financing policy features diverse maturities for specific financial instruments, which along with the diversification of financing sources, helps the Group to optimise its financing costs. The Group aspires to implement a responsible financial policy, which entails maintaining its net debt to EBITDA ratios at a level that makes it possible to retain investment-grade ratings.
In May 2019, PGE issued bonds as part of the Domestic Bonds Programme. The issue, settled upon on 21 May, was successful – PGE issued bonds with a total value of PLN 1.4 billion. The subscription twice exceeded the offered supply. The bonds were issued in two series: PLN 1 billion with a 10-year maturity and PLN 400 million with a 7-year maturity. This was the first public issue of bonds with a 10-year investment horizon by an industrial enterprise in Poland. We were also granted favourable conditions: the interest rate on both bond series will be based on the variable rate of a 6-month WIBOR rate increased by a margin of 140 and 120 basis points respectively.
The issue featured participation of several dozen institutions with varying profiles including, among others, pension and investment funds, insurance companies and banks. The bond issue was awarded by the Fitch agency a national-scale unsecured debt rating of AA(pol), which means that the issue presents a very low risk in comparison to other issues made in Poland.
In December 2019 PGE entered into a credit agreement with the EIB for up to PLN 272.5m, with the purpose of financing the construction of new onshore wind farms on the Baltic coast in Poland. The three wind farms called Starza, Rybice and Karnice II (combined into the Klaster project ) with a combined installed capacity of up to 97 MW. The EIB will provide PGE with a dedicated credit line for a period of up to 17 years and for an amount that represents around 50% of the project cost. The funds acquired under the credit agreement will be allocated for the financing of projects which are 100% eligible under EIB’s climate action objective (i.e. the three wind farms). At the time of its execution, the agreement between PGE and the EIB was the first energy project approved after the adoption of the Bank’s new energy lending policy.
To put it simply, cash deficits at some companies are covered with cash excesses from other companies within the group. This mechanism is based on aggregating the companies’ cash in a single account, which is managed by the pool leader – in our case this is PGE S.A., and another 30 companies from the Group participate in the cash pooling process, which is provided by two banks: PKO BP S.A. and Bank Pekao S.A. Cash pooling allows us to optimise cash flows and effectively manage liquidity. By using intra-group financial surpluses, it reduces the need for external financing and lowers bank service costs. Depending on swings in financial liquidity, cash pooling may reduce the Group’s external debt by even several hundred million zlotys.
Cash pooling is a finance management method that was created for companies operating within a group that has an extensive organisational structure.
PGE Group finances its expenditures mainly with funds from on-going operations, i.e. revenue from sales, with a relatively stable structure. We are currently implementing a capital-intensive investment programme, which also requires external financing. Our aim is to build and maintain a diverse debt structure allowing us to flexibly manage financing costs.
Our debt structure is presented below, by type of financing, maturity, currency and type of interest as well as changes in gross and net debt in successive periods.
Debt and available financing by type of financing (guaranteed funds) as at 31 December 2019, in PLN million
PGE Group’s debt maturities as at 31 December 2019, in PLN million
As an entity using various types of external financing, including debt securities, PGE uses the services of rating agencies, which assign credit ratings to borrowers. In order to assess creditworthiness, rating agencies have adopted multi-step grading scales that are based on letter designations (triple letters traditionally, with AAA or Aaa being the highest rating).
PGE S.A. has ratings assigned by two rating agencies: Fitch Ratings Ltd. („Fitch”) and Moody’s Investors Service Limited („Moody’s”).
In 2019 and 2020, two rating agencies: Moody’s and Fitch, maintained PGE S.A.’s long-term rating at investment level
| Description | Moody’s | Fitch Ratings |
|---|---|---|
| PGE’s long-term rating | Baa1 | BBB+ |
| Rating outlook | Stable | Stable |
| Rating date | September 2, 2009 | September 2, 2009 |
| Last rating confirmation date | December 16, 2019 | July 7, 2020 |
| Poland’s long-term rating | A2 | A- |
| Rating outlook | Stable | Stable |
In 2019 and 2020 both rating agencies: Moody’s and Fitch affirmed long-term rating of PGE S.A. at investment grade respectively at Baa1 and BBB+, both with stable outlook. Both agencies underline affirmation results from strong market position of PGE in the Polish electricity sector.
According to Fitch, the positive assessment is a reflection of strong business profile as the largest electricity generator in Poland and one of the largest in central Europe. PGE’s financial profile is supported by the lowest leverage ratios among Polish power utilities, expected to increase in next year due to transition capex and downward pressure on conventional-generation margins. PGE’s funds from operations (FFO) net leverage will increase to around 2.5x in 2020-2024 still leaving some leverage headroom in relation to maximum 3.0 under the current rating. Financial results stability is supported by EBITDA largely based (up to 90%) on regulated and quasi-regulated activities (distribution, renewables, district heating and capacity market)
Moody’s in its latest release dated December 2019 emphasises strong, leading market position of the PGE Group in Poland, growing share of revenues from regulated activities related to distribution grid and district heating, as well as moderate level of debt. The rating takes into account significant share of coal-based generation in the Group’s portfolio, exposure to volatility of electricity prices on the power exchange in view of significant level of fixed costs of operations and large capital expenditures that involve funds from operations.
Ratings assigned by both agencies confirm PGE’s long-term credibility on the credit market..
The following list presents a comparison of PGE’s ratings with ratings assigned to other Polish companies (as at July 24, 2020).
PGE’s rating vs other Polish utilities.
| Company | Rating Fitch | Rating Moody’s | Rating S&P |
|---|---|---|---|
| PGE | BBB+ stable | Baa1 stable | n/a |
| Enea | BBB stable | n/a | n/a |
| Energa | BBB- stable | n/a | n/a |
| Tauron | BBB- stable | n/a | n/a |
| PGNiG | BBB stable | Baa2 stable | n/a |
| PKN Orlen | BBB- stable | Baa2 positive | n/a |
| Polska | A- stable | A2 stable | A- stable |
PGE Group is a responsible taxpayer at both national and local level. We are an important partner for local communities and authorities. Taxes that we pay to the municipalities in which we operate often account for a significant part of their budget. (more: Local communities).
From the point of view of PGE Group companies – as business entities – the most important is taxation of incomes (corporate income tax), taxation of turnover (value added tax, excise tax) followed by taxation of assets (real estate tax and vehicle tax).
The amount of income tax paid by PGE Group companies in 2019 was PLN 555 million, at an effective tax rate of 16%.
Tax capital group
From September 18, 2014, PGE S.A. and 30 PGE Group companies are members of a tax capital group entitled PGK PGE 2015. The tax group agreement was executed for 25 years and is effective from January 1, 2015. PGE S.A. represents the tax group.
The act on corporate income tax treats tax groups as separate payers of corporate income tax (CIT). This means that companies within PGK PGE 2015 are not treated as separate entities for corporate income tax purposes, with PGK PGE 2015 being treated as one whole entity instead. PGK PGE 2015’s tax base will constitute the group’s aggregate income, calculated as the excess of the income of the companies that make up the group over their losses. PGK PGE 2015 is a separate taxpayer only for the purposes of corporate income tax. This should not be construed as a separate legal entity. It also does not apply to other taxes, especially each of the companies within PGK PGE 2015 continues to be a separate payer of VAT, civil law transaction tax and payer of personal income taxes.
Pursuant to the agreements, when a given company within a tax group shows a tax profit, it provides the relevant amount of income tax to PGE S.A., which as representative settles with the tax office. When a company that is a member of PGK PGE 2015 incurs a tax loss, the related tax benefit is attributable to the representing company, i.e. PGE S.A. This also means that in the case of tax settlement corrections for companies incurring a tax loss, such corrections have a direct impact on the separate financial results of PGE S.A.
Flows between companies belonging to PGK PGE 2015 are settled during the year, within deadlines preceding the payment of advances for income tax. Final settlement between tax group member companies occurs after the representing company files the annual return.
As a power consortium, we possess a series of high-value assets and our activities feature a very broad spectrum of operations. As a company that is aware of the risk of accidents, natural disasters, as well as failures, destruction or theft, we try to address these risks. For this purpose, we established an insurance management procedure within the Group. Its introduction served to create a coherent insurance management system in the Group, which takes place in a manner organised by the PGE’s Corporate Centre, i.e. PGE Polska Grupa Energetyczna S.A. Thanks to these activities, we possess a standardised, uniform rules, forms and procedures related to obtaining protection and settlement of damages, we also reinforced the PGE Group’s position in the insurance market.
The crucial insurance areas in the PGE Group include insurances of the most important assets in terms of risk related to natural disasters and failures as well as the resulting loss of revenue. Furthermore, we insure the Group’s civil liability on the executed activity and possessed property.
From 2016, PGE is part of the PZUW Mutual Insurance Company (TUW PZUW). TUW is an alternative to classic insurance companies that act as joint-stock companies and their purpose is to achieve profit. TUWs are associations of persons or entities that have the same objective and interest, identifying not through capital relations (like a joint-stock company), but through affiliation and common purpose – instead of profit, the main objective of a TUW is to satisfy the needs of its members in terms of insurance coverage. By joining the TUW PZUW as a member, we guaranteed an alternative method of transferring risk based on the reciprocity rule as part of our own PGE CG Reciprocity Association (hereinafter referred to as the Association) and the ability to build lasting relations with the insurance and reinsurance markets. This form of risk transfer is based on a cost transparency, which allows for optimising the insurance programme, costs of a possible insurance and reinsurance brokerage, and in consequence – the premiums paid. The system of premium settlement as part of the Association allows for achieving returns or lowering the premium at a low ratio of damages. Any surcharges are only projected in the case of the Association’s negative result and can amount to max. 50% of the assigned premium. The Association does not take part in covering the TUW PZUW losses or in covering the losses of other functioning associations. According to Article 103 of the Act of 11 September 2015 on insurance and reinsurance activity, the regulations on public procurements do not apply to insurance agreements concluded with a mutual insurance company by entities constituting members of the given company, which mainly allows to negotiate the price and makes the agreement conclusion process much more flexible and shorter.
The current agreements concluded as part of the TUW include, among others, the complex insurance of energy units (PGE GiEK – Bełchatów Power Plant, Turów Power Plant, Opole Power Plant, Dolna Odra Power Plants branches), heat and power plants that were transferred from PGE GiEK to PGE EC (Bydgoszcz, Kielce, Rzeszów, Lublin, Zgierz and Gorzów), insurance of the property of the Bełchatów and Turów Brown Coal Mines (PGE GiEK), insurance of hydroelectric power plants and wind farms (PGE Energia Odnawialna), civil liability insurance for the entire PGE Capital Group. The insurer of the PGE EC’s property (excluding the heat and power plants transferred from PGE GiEK) is PZU S.A.
It is however necessary to note that the membership in the TUW PZUW does not mean that we do not use other insurance methods – depending on the needs and estimated costs, we co-operate in a broad scope with insurance and reinsurance companies and use the services of insurance and reinsurance brokers.
In 2019, the key event was the renewal of the insurance cover for our conventional power plants. Insurances were placed in a market characterized by an increase in insurance premiums and at the same time subject to increasing decarbonisation pressure. In 2019, all major insurance companies from the continental European Union countries announced their policies to abandon the so-called carbon risks. In order to enable the participation of the markets, so far not interested in insuring PGE directly, we engaged independent risk engineers to conduct insurance surveys. In addition, the risk was presented to approx. 30 markets in form of the roadshow. Ultimately, all renewals of insurance cover were successful. Thanks to the diversification of the reinsurers’ portfolio, it was possible to obtain competitive prices, especially compared to other energy companies.
