26.3 Credit risk

Credit risk is related to a potential credit event that may take the form of a counterparty’s insolvency, only partial repayment of receivables, a material delay in repayment of receivables or other deviation from contractual terms (including, in particular, failure to deliver and receive agreed goods in accordance with the contract and possible non-payment of damages and contractual penalties).

PGE Group companies are exposed to credit risk arising in the following areas:

• core business of the companies – sources of credit risk include, inter alia, transactions for purchase and sale of electricity and heat, transactions for purchase and sale of rights to electricity certificates of origin and CO2 emission allowances, transactions for purchase and sale of fuels, etc. This includes the possibility that counterparties and customers of PGE Group may fail to make payments when due or to fulfil their delivery obligations to a PGE Group company if the fair value of the transaction is positive from the Group’s point of view;
• investment activities of entities – the credit risk results from transactions resulting from investment projects which depend on the financial situation of the Group’s suppliers;
• investing free cash of entities – the credit risk results from investing free cash of the PGE Group entities in securities bearing credit risk, i.e. financial instruments other than those issued by the State Treasury.

To monitor credit risk in operating activities, the most commercially significant PGE Group companies use the internal rating approach using rating models implemented with the assistance of an external provider.

There are significant concentrations of credit risk within PGE Group related to trade receivables. The three most significant customers accounted for approx. 14% of the trade receivables balance.

Maximum credit risk exposure resulting from PGE Group’s financial assets is equal to the carrying value of these items.