Financial results – additional information

Financial results forecasts

The Management Board of Enea SA did not publish any financial forecasts for 2016.

Principles of preparation of annual consolidated financial statements and basis for publication

This Report of the Management Board on the operations of Enea Capital Group for the financial year of 2016 was prepared in accordance with § 92 item 1(4) and § 92 item 3 in conjunction with § 91 item 5-6 and § 83 item 7 of the Regulation of the Minister of Finance of 19 February 2009 on current and periodic information published by issuers of securities and conditions of recognising as equivalent information required by legal regulations of a state not being a member state (J. L. No. 33, item 259 as amended).

Consolidated financial statements of the Capital Group and non-consolidated financial statements of Enea SA included in the consolidated report of Enea SA for the financial year of 2016 were prepared in accordance with International Accounting Standards and International Financial Reporting Standards (IAS/IFRS) approved by the European Union.

The consolidated financial statements of the Capital Group and non-consolidated financial statements of Enea SA were prepared on a going concern basis by the Issuer and its Capital Group in the foreseeable future. The Company's Board states, as at the execution of the consolidated and non-consolidated report, no facts or circumstances that could indicate any threats to the possibility of continuing the activity during the period of 12 months after the balance sheet date as a result of a wilful or mandatory negligence or substantial limitation of the existing activities.

Financial data presented in the statements, if not stated otherwise, was presented in thousands of PLN.

Used financial instruments

Enea SA has been implementing the strategy of hedging the interest rate risk whose key purpose is hedging cash flows resulting from concluded financing agreements. The adopted strategy foresees the threats of impacting the financial result, changes in cash flows resulting from the risk of interest rate versatility on the market in a given time horizon. In 2016, within the concluded agreements on transactions on the financial market the interest rate risk was hedged for the total amount of PLN 1.440.000 thou. Interest rate risk hedging was made based on the Interest Rate Swap (IRS) instruments.

In 2016 Enea Centrum sp. z o.o. did not conclude any transactions hedging currency risk.

In the reporting period Enea Trading sp. z o.o. concluded transactions hedging currency risk (forward transactions of EUR acquisition) in order to hedge the payments resulting from the purchase of CO2 emission allowances within futures contracts. The volume of active forward contracts for purchases of EUR as at 31 December 2016 amounted to EUR 23,063 thou.

In the reporting period Enea Wytwarzanie sp. z o.o. held active NDF forward contracts for the purchase of biomass in the amount of EUR 521 thou.

Financial resources management

In January 2014 Enea Capital Group Companies and banks PKO BP SA and Pekao SA concluded agreements for the comprehensive banking service. The concluded agreements provide Enea Capital Group Companies with comprehensive bank servicing within the range of available banking products, availability of overdraft facilities and will enable joint management of cash using Cash Pooling. The objective of concluding these agreements was e.g. provision of an efficient management of Group Companies’ cash and cost optimisation within the costs incurred on bank services. A Cash Pooling service allows for the consolidation of bank accounts, as a result of which the account balances of Companies belonging to Enea Tax Capital Group (Enea TCG) are balanced by covering transitory financial deficits with surpluses of cash of other Companies incorporated under Enea TCG.

The current Companies' liquidity management is concentrated on planning the cash flows and monitoring the current concentration of cash resources on bank accounts. Enea SA as a Pool Leader deposits the remaining financial surplus in current assets as bank deposits. In order to standardise the liquidity and liquidity risk management process Enea TCG Companies are subject to intergroup regulations, i.e. policy and procedure of liquidity and liquidity risk management. At the same time,

in order to limit the risk resulting from lack of cash for the needs of settling of liabilities in a timely fashion Enea Capital Group Companies have an access to intraday limits as part of Cash Pooling services. In lack of the sufficient balance of cash within Cash Pooling there is a possibility of utilising overdraft facilities.

The entity authorised to audit financial statements

KPMG Audyt spółka z ograniczoną odpowiedzialnością sp. k. was selected to perform the financial audit mentioned in the table below. The contract with the above mentioned entity was concluded on 6 May 2015. The information on the net remuneration due to the entity performing the financial revision for Enea SA in 2015-2016 is presented in the table below:

Data in PLN ‘000 20152016
Remuneration for auditing and reviewing the non‐consolidated and consolidated financial statements of Enea SA 139 147
Remuneration for other services 41 35
TOTAL 180 182

The remuneration for the other services comprises the remuneration for auditing the regulatory report for 2015 pursuant to Article 44 of the Energy Law and remuneration for the conduct of agreed procedures in respect of bank covenants for 2015.

Detailed information on the selection of KPMG Audyt spółka z ograniczoną odpowiedzialnością sp. k. and description of rendered services was published in the current report No. 38/2014 of 18 December 2014.

Anticipated financial position

In 2016 LW Bogdanka CG generated very good financial results as compared to the sector. The full compensation for the drop in coal prices with a higher volume of its sales was not achieved during the previous year. Therefore, keeping the unit costs on a relevant level and optimisation of investment expenditures will be a priority. The area of mining’s performance should be affected also by the observable price stabilisation on the coal market, and also good cooperation of the area of Generation and Mining as regards the use of coal available within Enea CG.

Area of Generation which in 2016 accounted for 26% EBITDA of Enea CG, is still under the influence of the demanding situation on the energy market. The production concentrated on bituminous coal involves the exposure to risk related to carbon dioxide emission costs. Extensive repairs of generating units planned in 2017 are significant for the results generated by the area of Generation, and they will force relatively long periods of electricity generation suspension on the renovated unit in Kozienice Power Plant. A smaller production by the so far held generating resources will be however compensated by effecting synergies and coherent production management in relation to the acquisition of Połaniec Power Plant’s assets.

In consequence, in Enea CG’s assessment, it should contribute to the generation of better results in the area of Generation.

A large share of the regulated area of Distribution in Enea CG's EBITDA (in 2016 Distribution accounted for 47% of the Group's EBITDA) affects the predictability of cash flows and stabilises them over time. However, two facts are of some importance for this area: a drop in the average weighted average cost of capital adopted by the Energy Regulatory Office (ERO) for tariff calculation (WACC) by 1.522 p.p. (from 7.197% in 2015 to 5.675% in 2016) and introduction of the so called quality tariff as of 2016 by ERO. The introduced mechanism of clearing accounts with distributors of electricity based on SAIDI and SAIFI indices realised in a given year, may significantly affect reduction of EBITDA in the area of Distribution. Reduction of WACC in 2016 decreased EBITDA in the area by ca. PLN 58 mln.

In the area of Trade the operations focus on increasing sales of electricity and gas - due to an attractive product range new Customers are obtained, and the volume of sold energy and gas increases. An increasing competition on the market putting pressure on the realised prices, higher costs of ecological duties and a significant reduction in market prices of proprietary interests have a negative impact on the area’s financial results. An increased volume of electricity generated within Enea CG will undoubtedly positively affect the performance of this area.

Despite difficult market and regulatory conditions, due to the consistently realised operating costs optimisation, Enea CG generates financial results on an anticipated level. In the face of a more and more demanding situation on the energy market the Management Board will undertake subsequent activities in order to maintain a positive result of operations.

The Group's financial standing is safe, supported with a significant volume of cash, which as at the end of 2016, including current financial assets kept to maturity and financial assets evaluated at fair value through result, amounted to over PLN 2.3 bln. The amount included the cash on the Companies’ accounts, bank deposits, and also cash and cash equivalents managed by an external company. Due to the consistently maintained cost discipline and optimum allocation of held resources the Group is guaranteed a favourable financing of the investments.

Enea Group implements a vast CAPEX programme (capital expenditures) covering mainly the area of generation and the distribution network, and also acquisitions constituting market opportunities (as the recent acquisition of LW Bogdanka or the acquisition of Połaniec Power Plant finalised in March 2017).

The implementation of the investment programme will positively affect the financial results of Enea CG.

Significant events occurring after the balance sheet date

Annexing agreements for Comprehensive Bank Services

On 25 January 2017 Enea CG companies signed annexes to the Agreements currently in force for the comprehensive bank services concluded with PKO BP and Pekao SA. The annexed agreements provide Enea CG Companies with comprehensive bank services under uniform terms. Managing the accounts of Companies included in Cash Pooling allows for the generation of added values both in the area of managing financial surpluses and mutual balancing of financial shortages. Therefore, it translates into a growth in the cash management efficiency in the Group and cost optimisation within financing. Due to the execution of a deadline amending annex the accounts dedicated to receiving payments from Customers will not change. The term of the annexed agreements expires on 31 December 2019.

Investment loan from the European Investment Bank (Agreement C) and Enea Operator’s Bond Issue Programme

In January 2017 Enea SA made the third disbursement of the loan within Agreement C granted by the European Investment Bank in the amount of PLN 250,000 thou. The currency of the disbursed loan is Polish Zloty. The interest rate is floating based on WIBOR rate for 6-month deposits increased with the Bank’s margin. The tranche will be paid in equal instalments, and the final repayment will be made in December 2031.

At the same time, in January 2017 Enea SA took up the 3rd series of bonds in the amount of PLN 250,000 thou. of the bonds issued by Enea Operator sp. z o.o. based on the Bond Issue Programme of 7 July 2015. The interest rate of bonds is floating and a margin is added. The bonds will be redeemed in equal instalments, and the final redemption date is in December 2031.

The programme agreement on the bond issue programme of LW Bogdanka SA

In March 2017 LW Bogdanka SA signed an annex to the Programme Agreement of 30 June 2014, as a part of which the Programme’s Term for Tranche 1 was shortened from 31 December 2019 to 30 March 2017. In the light of the above all the bonds issued within Tranche 1 in the total amount of PLN 300,000 will be redeemed on 30 March 2017.