38.1. Credit risk

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

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 2021, the Group did not record any major divergences in overdue receivables, which is why its situation in terms of credit risk is stable.

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.

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

As at 31 December 2021, the Group 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. 2021. Based on this data, impairment indicators are determined and used to estimate the amount of receivables impairment at the end of 2021. Therefore, the specified expected credit losses take into account objective indications of impairment resulting from the pandemic situation and the associated regulations

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.:

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 2021, cash was allocated as follows at the three banks with the largest balances: bank A 49.61%, bank B 35.36%, bank C 15.03%.

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 ENEA Group’s Methodology for determining expected credit losses for non-current debt assets and similar items. In pursuing this objective, individual assessment of each counterparty or specific instruments is carried out, 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: