28.2 Other significant issues related to contingent liabilities

As described in note 21.4 of these financial statements the PGE Group recognises provision for disputes under court proceedings, concerning non-contractual use of properties for distribution activities. In addition, PGE Group is a party to disputes at an earlier stage of proceedings, and it cannot be ruled out that the volume and value of similar disputes will increase in the future.

In accordance with fuel purchase agreements (mainly coal and gas), PGE Group is required to collect a minimum volume of fuel and to not exceed the maximum gas uptake levels in specific periods. Failure to collect the minimum volumes of fuel or to exceed the maximum volumes specified in the contracts may result in the payment of the corresponding charges (in the case of one of the gas fuel purchase contracts, volumes not collected but paid for may be collected during the following three contractual years).

According to PGE Group, the terms of fuel delivery to its generating assets as described above do not diverge from the terms of delivery to other power stations in Poland.

According to the applicable legislation, an energy enterprise producing electricity or heat is required to maintain fuel stocks in an amount sufficient to ensure continuity of supply of electricity or heat to consumers. In October 2021, the minimum hard coal stockpile was breached at all PGE GiEK S.A. generating units operating on hard coal (Opole Power Plant, Dolna Odra Power Plant, Rybnik Power Plant). By the end of 2021, hard coal stock levels were below the minimum volumes set for the month. The President of the Energy Regulatory Office positively considered the Branches’ applications submitted in November 2021 and issued three separate administrative decisions extending the deadline for rebuilding hard coal stocks in the aforementioned Branches until February 28, 2022.

By the end of February 2022 at the Dolna Odra Power Plant and the Rybnik Power Plant, the coal stock had been rebuilt and exceeded the minimum level indicated in the regulations, while at the Opole Power Plant the required coal stock was not rebuilt until April 2022. Periods of reduction in hard coal stocks below the regulatory level also occurred in the following months of 2022 at all the generating units mentioned above. In particular, the maintenance of the minimum required level of hard coal stocks was significantly impacted by the change in regulations that came into force on 28 November 2022, which caused the required minimum levels of hard coal stocks at PGE GiEK S.A. to almost double. As a result, breaches of the minimum hard coal stock levels appeared in all the above-mentioned Branches at the end of November 2022. In December 2022, all of the above branches applied to extend the deadline for rebuilding coal stocks to March 31, 2023. The URE President granted the application of Elektrownia Opole Branch and issued an administrative decision extending the deadline for the restoration of hard coal stocks at this Branch until March 31, 2023, while the other Branches had not received a response to their applications by the date of these financial statements. In February 2023, the regulatory required level of hard coal stocks was rebuilt in all of the above branches.

The situation of failing to meet minimum levels of hard coal stocks and the problems of rebuilding these stocks were significantly influenced by a number of factors beyond the Group’s control, most notably:

• unforeseen coal supply constraints, the main reasons for which were problems on the part of the rail carriers and the lack of a sufficient supply of coal from the country’s largest suppliers,
• lack of full performance of contractual obligations by some hard coal suppliers,
• an accumulating backlog of rail yard shipments and, on the mines’ side, untimely coal loading,
• no consent from the TSO for all requested reductions in electricity production,
• high (higher than planned) demand on the TSO’s part for electricity from PGE GiEK S.A.’s generating units,
• restrictions on the transport of coal to the aforementioned generating units due to repair and modernisation works on railway lines.

Pursuant to art. 56 sec. 1 point 2) of the Energy Law, a fine will be imposed on anyone who fails to comply with the obligation to maintain the fuel stocks, (…), or does not replenish them in time, (…). It should be noted that the mere fact of violating a prohibition or order provided for in the Energy Law results in the imposition of a penalty by the President of the Energy Regulatory Office. As the Opole Power Plant failed to rebuild the required coal reserves by February 28, 2022, the risk of the President of the Energy Regulatory Office imposing a penalty on PGE GiEK S.A. is high. Pursuant to art. 56 sec. 3 of the Energy Law, the penalty may not be lower than PLN 10 thousand and higher than 15% of the penalised enterprise’s revenue generated in the previous tax year, and if the cash penalty is related to a concession activity, then the penalty may not be lower than PLN 10 thousand or higher than 15% of the penalised enterprise’s revenue generated from the concession activity in the previous tax year.

Taking into account the above mentioned reasons, independent from the Group, for not complying and not building the required minimum coal stocks within the designated timeframe, as well as the fact that PGE GiEK S.A. did not have any previous penalties on this account, which should be a premise for appropriate mitigation of the penalty, the Group estimates that the value of the potential penalty calculated should not be significant for the Group, therefore no provisions on this account were recognised in these financial statements.

As described in note 33.3 of this report, the disbursement of funds obtained from the capital increase contrary to the provisions of the investment agreement may result in fines or even in the need to return the funds received.