26.3.1 Trade receivables. Other loans and financial receivables

Financial receivables

Financial receivables, including trade receivables, are measured at fair value at inception and subsequently at amortised cost using the effective interest rate including allowance for expected credit losses.

The Group uses simplified methods for the measurement of receivables measured at amortised cost if this does not distort the information contained in the statement of financial position, in particular if the period until repayment of the receivables is not long.

The Group does not monitor changes in the level of credit risk over the life of the instrument. The expected credit loss is estimated to the maturity of the instrument.

The Companies apply the following policies for estimating and recognising impairment losses on financial receivables:

• for receivables from significant customers that are subject to credit risk assessment procedures, the Companies estimate the expected credit losses based on a model to assess this risk based on the ratings assigned to each counterparty; the ratings are assigned a probability of failure that is adjusted for the impact of macroeconomic factors;
• for receivables from bulk customers or those not covered by the credit risk assessment process, the Companies estimate expected credit losses based on an analysis of the probability of incurring credit losses in each age bracket;
• in justified cases the Companies may estimate the value of the impairment loss individually.

Impairment losses on receivables are recognised as other operating costs or finance costs. Non-current receivables are measured at present (discounted) value.

Ratios used to estimate expected losses calculated according to the following provision matrix:

The impairment loss applies to receivables subject to matrix and individual impairment loss (100%). The Group has no significant items of receivables, past due for more than 90 days, which were not subject to a 100% write-down at the reporting date, except for the disputed receivable with Enea S.A. described in detail in note 28.3 to these financial statements.

Indicators used to estimate expected loss values calculated according to the model for key customers:

Trade receivables typically have a 14-21-day payment deadline. In 2021, PGE Group waited an average of 28 days for repayment of receivables. Trade receivables relate mainly to receivables for energy sold and distribution services. According to PGE Group’s management, there are no additional risks of non-repayment of receivables above the level determined by the impairment loss.

PGE Group mitigates and controls credit risk related to commercial transactions in accordance with harmonised credit risk management rules implemented at all key PGE Group companies. For commercial transactions that, due to their high value, may generate significant losses as a result of counterparty default, a counterparty assessment taking into account financial analysis, counterparty credit history and other factors is carried out before entering into the transaction. Based on the assessment, an internal rating is recognised or PGE Group uses a rating determined by an independent reputable agency. A limit for the contractor is set based on the rating. Entering into contracts that would increase exposure above the limit, requires in principle the collateral in line with PGE Group’s rules pertaining to credit risk management. The level of used limit is regularly monitored and reported and if it is substantially exceeded, units responsible for counterparty risk are required to undertake measures to eliminate them. PGE Group regularly monitors payments of receivables and uses system of early debt recovery, taking into consideration deadlines arising from the energy law and high level of repayment of receivables with short term of expire. It also works with business intelligence agencies and debt collection companies.

No significant extensions in the payment of receivables or problems with liquidity resulting from the COVID-19 pandemic were observed as of the reporting date. Moreover, the Group has updated the models used to estimate expected credit losses. For the purposes of estimating the expected credit losses, counterparties were split into two groups: strategic counterparties, which have been internally assigned ratings based on a scoring model, and other counterparties, for which expected credit losses are estimated based on a provisions matrix. For the first group of counterparties, the basis for calculating expected credit losses has been changed – from December 31, 2020, losses are calculated based on quotations of Credit Default Swap (CDS) instruments, while for the second group of counterparties, the percentage ratios in the different intervals of the provision matrix have been updated to a level corresponding to the current collectability of receivables. As a result of these two changes, the level of provisions for expected credit losses as at December 31, 2021 is PLN 12 million higher than if the provisions had been made under the previous rules.

Credit risk relating to trade receivables by geographical region is presented in the table below:

Ageing of receivables and impairment

Certain financial assets were covered by impairment losses as of December 31, 2021. The change in allowances accounts for these classes of financial instruments is presented in the table below:

Impairment of trade receivables concerns the Supply segment. The total amount of trade receivables impairment at these companies as at December 31, 2021, was PLN 147 million (PLN 156 million in 2020).

There are no significant receivables in the Group that would be substantially past due and not covered by an impairment allowance, except for disputed claims from ENEA S.A. described in detail in note 28.3 to these financial statements.

Analysis of ageing structure of trade receivables and other loans and receivables taking into account impairment allowances is presented below:

As at December 31, 2021, more than 51% of overdue trade receivables and other loans and receivables that were not covered by impairment losses concerned sale of energy to end-users.