63. Other material information

On 3 February 2022, the Act of 17 December 2021 amending the Act on the functioning of the hard coal mining industry (the “Act”) entered into force, establishing a system of public aid for hard coal mining. The Act stipulates the value of subsidies in the amount of over PLN 28.8 billion for the years 2022-2031, while values of subsidies for subsequent years have not been specified. The Act clarifies, among others, the rules for granting public aid in the form of subsidies to reduce the production capacity of coal mines, stipulates the suspension of the repayment and ultimate redemption of a part of the mining companies’ liabilities towards the Social Insurance Institution (ZUS) and defines the possibility of increasing their capital by issuing treasury securities. On 4 February 2022, the Regulation of the Minister of State Assets on capacity reduction subsidies for mining companies entered into force, setting out the detailed conditions of the support system regarding capacity reduction subsidies. The support system adopted in the Act constitutes state aid and is subject to notification to the European Commission. As at the date of approval of consolidated financial statements for publication, the aid scheme has not been notified.

On 8 April 2022, TAURON Wydobycie S.A. received information on the acceptance by the Minister of State Assets of the application for granting public aid in the form of subsidies to TAURON Wydobycie S.A. to reduce its production capacity for 2022.

On 20 December 2022, TAURON Wydobycie S.A. concluded the following agreements:

• with the Minister of State Assets – the agreement to increase the share capital of the company,
• with the State Treasury – represented by the Minister of State Assets – an agreement to take up shares in the increased share capital of TAURON Wydobycie S.A.

The above agreements were concluded in the framework of the public support approved by the Minister of State Assets for TAURON Wydobycie S.A. in the form of subsidies for production capacity reduction. The subsidy to the reduction of the production capacity of the company occurred in the form of an increase in the share capital of TAURON Wydobycie S.A. in exchange for a non-cash contribution made by the State Treasury in the form of treasury securities – treasury bonds worth PLN 178 million. TAURON Wydobycie S.A. sold the treasury bonds received at a price of PLN 178 million.

On 31 December 2022, the Group lost control over TAURON Wydobycie S.A. as a result of the sale of 100% of the company shares to the State Treasury, as described in more detail in Note 3 of consolidated financial statements.

In April 2021, the government programme of the transformation of the Polish electricity sector (the “NABE Programme”) was initiated by the Ministry of State Assets (“MAP”). The Programme aims to separate coal assets from state-owned energy companies under the terms and conditions set out by the MAP in the document entitled “The transformation of the electricity sector in Poland. Separation of coal generation assets from the companies with the State Treasury shareholding”. On 1 March 2022, the Council of Ministers passed the resolution adopting the aforementioned document.

The NABE Programme stipulates the acquisition of all assets related to the generation of energy in coal and lignite-fired power plants, including service companies providing services to them by the State Treasury from PGE Polska Grupa Energetyczna S.A., ENEA S.A., TAURON Polska Energia S.A. and Energa S.A. The State Treasury will integrate the acquired assets into a single entity. The acquisition will be preceded by an internal reorganisation of the energy corporations.

In connection with the NABE Programme, in the period of the year ended 31 December 2022, work was carried out in the Group in order to perform the reorganisation changes necessary for the execution of the transaction, aimed at integrating the assets to be separated into a single entity, i.e. TAURON Wytwarzanie S.A. company in TAURON Group. In particular, as part of the work performed:

• on 18 May 2022, a resolution was adopted to divide the TAURON Wytwarzanie S.A. company by separating and transferring the separated assets to the newly established company, TAURON Inwestycje Sp. z o.o. in organisation. Assets other than those related to the production of electricity from coal assets, such as the photovoltaic farm and shares in the joint venture Elektrociepłownia Stalowa Wola S.A., which are not planned to be transferred under the NABE Programme, were transferred to TAURON Inwestycje Sp. z o.o. The value of the separated net assets amounted to PLN 75 million. The transaction did not have any impact on the consolidated financial statements. The demerger of TAURON Wytwarzanie S.A. and the incorporation of TAURON Inwestycje Sp. z o.o. were registered on 1 July 2022,
• on 31 May 2022, the Company transferred the ownership of 100% of shares in the share capital of Bioeko Grupa TAURON Sp. z o.o. and 95.61% of shares in the share capital of TAURON Serwis Sp. z o.o. to TAURON Wytwarzanie S.A., with a total market value of PLN 58 million, under the datio in solutum agreement concluded,
• on 29 July 2022, an agreement was concluded for the sale of 100% of the shares in Nowe Jaworzno Grupa TAURON sp. z o.o. held by the Company to TAURON Wytwarzanie S.A. for the price of PLN 4 815 million,
• on 3 October 2022 the merger of companies TAURON Wytwarzanie S.A. (the acquiring company) with Nowe Jaworzno Grupa TAURON sp. z o.o. (the acquired company) through the transfer of the entire assets of Nowe Jaworzno Grupa TAURON Sp. z o.o. to TAURON Wytwarzanie S.A. was registered.

The above transactions had no impact on the consolidated financial statements.

As at 31 December 2022, the Group believes that the criteria of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations have not been met in the scope of classification of the Group’s assets and liabilities of the manufacturing and service companies included in the NABE Programme as a disposable group classified as held for sale.

2022 was the time of the continuing conditions of the COVID-19 pandemic (5th wave), which initially (in the first quarter of 2022) saw persistently high levels of SARS-CoV-2 virus infections, which gradually decreased later throughout the year. Some restrictions still applied in the country with the aim to contain the spread of the pandemic which were gradually eased as the number of recorded cases of infection decreased. In 2022, this situation triggered certain turbulences in the economic and administrative system in Poland and worldwide. The restrictions are currently considerably less severe, nevertheless, in the medium and long term, it should be expected – taking into account the probability of emergence of new waves of increased infections – that the COVID-19 pandemic may still affect, although to a lesser extent than before, the national, European and global economic situation, exerting a negative impact on macroeconomic factors. Material issues relating to the impact of the pandemic on TAURON Group are set out below:

• despite the restrictions initially in force, no material impact of the COVID-19 pandemic on the level of demand for electricity among TAURON Group customers was observed in 2022,
• in 2022, no significant changes and sustained trends were observed in the level of overdue receivables and volatility in prices of electricity and related products resulting from the COVID-19 pandemic,
• no significant changes in the level of prices in the markets of electricity and related products resulting from the COVID-19 pandemic were observed,
• the situation related to the COVID-19 pandemic in 2022 (especially in the first quarter of 2022) affected the operating activities of the individual Business Areas of TAURON Group through increased employee absenteeism, which, however, did not have a significant impact on operational continuity.

TAURON Group, being aware of the risks associated with the epidemiological situation, continued and adapted its activities adequately to the level of risks and the development of the epidemiological situation in the analysed period. In connection with the foregoing, the Management Board of the Company continues to monitor the pandemic situation and takes any feasible steps to mitigate the negative impact of the pandemic on TAURON Group.

In February 2022, the aggression of the Russian Federation started in territory of Ukraine. In the TAURON Group’s assessment, the key consequences of the aggression and the resulting risks that affected TAURON Group in 2022 are as follows:

• crisis in the energy fuels market resulting from the reduction in trade exchange with the Russian Federation, causing supply disruptions in fossil fuels and consequently affecting spikes in the volatility and price levels of raw materials quoted on commodity markets (including oil, gas and coal). This situation (mainly in the second half of the year) had an impact on increasing the variable costs of generation with limited possibilities to transfer the cost to increased revenues from sales and electricity production,
• a reduction in the supply of coal in terms of agreements concluded with external suppliers, logistical disruptions in the transport of coal, as well as regulatory changes that affected the level of compliance with statutory required hard coal stocks,
• high level of volatility of electricity prices in all market segments both in Poland and in the European markets, resulting in continuing high level of market risk. In commercial terms, a high volatility in the cost of securing (including profiling and trade balancing) the end-customers’ demand in the Sales Area was also recorded,
• continuing high volatility in the prices of electricity and related products, causing an increase in trading margins resulting from contracts concluded on the exchange market for electricity,
• the rise of inflation in Poland, as a result of which the Monetary Policy Council cyclically introduced increases in the NBP reference rate. The volatility of interest rates affected the cost of servicing financing in TAURON Group and it will also affect the return of capital employed in the Distribution Area in 2023. As a result of the economic turbulence, an increased volatility of exchange rates and a depreciation of the zloty were also recorded, which mainly affected the cost of purchasing CO₂ emission allowances and an increase in the cost of purchasing hard coal from foreign directions, as well as the valuation of debt denominated in EUR,
• observed gradual downturn of the economic situation in Poland, and consequently a decrease in the volume of energy sales and distribution (observed in particular in the third and fourth quarter of 2022), which affected the value of revenues of the Distribution Area and the Sales Area,
• escalation of wage claims and potential social unrest in TAURON Group as a result of rising inflation in Poland,
• implementation of significant national regulations aimed at limiting electricity demand, introducing mechanisms to limit increases in electricity prices for end users, introducing margin restrictions for electricity generators and trading companies, as well as changes to the rules of operation of the wholesale electricity market (abolition of the exchange obligation, changes to the rules of price setting in the balancing market). The introduction of the above regulations affected the TAURON Group’s trading activities in 2022 and will also affect the results of the Sales Area, the conventional Generation Area, the RES Area, the Heat Area and the Distribution Area in 2023.

In the subsequent periods, at least some of the above-mentioned risk factors are expected to continue and their impact on the TAURON Group’s liquidity and results will depend on the impact of the aggression of the Russian Federation on the developments in the market, economic and geopolitical environment. It should be indicated that the situation associated with the aggression of the troops of the Russian Federation against Ukraine and its impact on the market and regulatory environment is highly volatile and its future consequences are difficult to estimate precisely. They will depend, in particular, on the scale and duration of the aggression, further developments including the potential escalation of hostilities as well as the impact on the condition of the economy in Poland and worldwide. The impact of the risks identified may also depend on further regulatory action at the European Union level and at the national level in terms of implementing intervention measures as well as shaping the future energy market.

In addition to the continuation of the risk factors identified above, the possibility of the following risks occurring in the subsequent periods should be taken into consideration:

• economic turbulences which may trigger financial difficulties for some customers and counterparties of TAURON Group and, at the same time, an increase in credit risk,
• continued high volatility of raw material prices and prices of electricity and related products, persistent high inflation, as well as possible disruptions to the supply chains of goods and services, which may affect the timing and profitability of ongoing and planned investment processes,
• changes in the EU energy balance and, as a consequence, a potential increased level of operation of TAURON Group’s generating units, which may result in a decrease in their availability and risks resulting from capacity obligations imposed on some of them,
• threats in the scope of security and cyber security, including potential restrictions in the access to IT/ OT infrastructure, the internet and GSM networks as well as physical security of critical infrastructure elements, the disruption of which may cause disturbances in the scope of functioning of operational processes and business continuity. At the national level, alert degrees were maintained, indicating an increased risk associated with the possibility of occurrence of terrorist events.

In other areas, as of the date of drawing up this information, TAURON Group has not identified any direct effects of the aggression on its own operating and business activities, while the continuity of business processes was not at risk. TAURON Group had no assets located in Ukraine, Russia or Belarus. No significant changes were recorded in balances of overdue receivables. In 2022, no significant risks were identified with regard to the implementation of long-term development directions and TAURON Group Strategy. Current and potential challenges identified in investment and restructuring processes related to the volatility of commodity prices, disruption in supply chains for goods and services as well as inflation were analysed in detail based on updated knowledge and forecasts before any liabilities had been incurred and significant funding had been raised.

Recognising the scale of the risks associated with the current situation, TAURON Group continuously monitored the impact of the war in Ukraine and undertook measures to mitigate the potential effects of risk materialisation as well as to maintain the continuity of critical infrastructure operations. In connection with the existing situation in companies of TAURON Group, dedicated Crisis Teams have been established to monitor the impact of the current situation on business processes and to take action in the event of identification of a threat of their interruption or disruption.

On 20 April 2022, the Company concluded a letter of intent with KGHM Polska Miedź S.A., in which the parties consider strategic cooperation related to research and development and future investment projects in the scope of construction of generation sources in the Small and Micro Modular Reactor (SMR) technology, i.e. nuclear power reactors with the capacity of 5 to 300 MWe. The purpose of the cooperation between the parties to the Letter of Intent is to identify the possibility, nature and details of potential joint involvement in the implementation of investment projects in the scope of SMR. The subject of the cooperation will cover, among others, the analysis of available technologies and the possibility of installing a generating installation in the vicinity of the receiving infrastructure and the possibility of using the existing infrastructure of existing power units as well as identification of the possibility of acquiring an optimal technology, investing in another way or establishing other forms of cooperation with third parties already implementing or planning to implement investment projects in the field of SMR.

The letter of intent is an expression of the parties’ intention to cooperate, while the provisions of the letter of intent are not binding on the parties. The letter of intent shall remain in force until the date on which one of the parties expresses its willingness to renounce further cooperation.