7.1 Revenue from sales

Revenue is recognised so as to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

Revenue is recognised when the performance obligation is met, i.e. goods (product) are provided to the customer. The transfer of the goods occurs when the customer gains control of the goods.

The Group recognises revenue from a contract with a client only if all of the following criteria are met:

• the parties have executed a contract (in written or verbal form or in accordance with customary trade practices) and are obligated to perform their duties;
• the Group is able to identify the rights of each of the parties with regard to the goods or services that are to be transferred;
• the Group is able to identify terms of payment for the goods or services that are to be transferred;
• the contract has commercial substances;
• it is probable that the entity will receive the consideration to which it is entitled to in exchange for the goods or services when these are delivered to the customer.

Upon contract execution, the Group analyses the goods or services covered by the contract with the client and identifies as a performance obligation all commitments to provide the customer with:

• goods or services (or packages of goods or services) that are distinguishable; or
• groups of separate goods or services that are essentially the same and in the transfer to the client is the same.

The Group recognises revenue when the performance obligation concerning the goods and services is met (or is in the process of being met). The transfer of the asset occurs when the client obtains control over the asset, i.e. gains the ability to directly manage the asset and obtain largely all other benefits from it.

The Group transfers control over goods or services over time and thus satisfies the performance obligation and recognises revenue over time if one of the following conditions is met:

• the customer receives and derives benefits from the Group’s consideration as the Group provides the consideration;
• as a result of the Group’s consideration a new or improved asset is created (e.g. production in progress) and control over this asset – as it is created or improved – is exercised by the customer; or
• as a result of the Group’s consideration no new asset is created for alternative use by the Group and the Group has an enforceable title to pay for the consideration provided thus far.

For each performance obligation over time, the Group recognises revenue over time, measuring the degree of performance of this obligation. The purpose of the measurement is to determine the progress in meeting the entity’s obligation to transfer control of the goods or services promised to the customer (i.e. the extent to which the performance obligation is met).

When a performance obligation is met (or is in the process of being met), the Group recognises as revenue an amount equal to the transaction price that was allocated to that performance obligation. The transaction price takes into account part or all of the amount of estimated variable consideration only to the extent that it is highly probable that a significant portion of the amount of previously recognised accumulated revenue will not be reversed when uncertainty about the amount of variable consideration ceases. Revenue is recognised after deducting value added tax (VAT), excise duty and other sales taxes as well as discounts.

To determine the transaction price, the entity considers the terms of the contract and its usual commercial practices. The transaction price is the amount of consideration that the Group expects to receive in exchange for transferring the promised goods or services to the customer, excluding amounts collected on behalf of third parties.

Agreements for the sale of electricity concluded on the wholesale market shall be notified to the Transmission System Operator (TSO) in the form of the quantity of electricity declared each hour that the Group, as supplier, is obliged to deliver or cause to be delivered and the customer to receive. The settlement price as well as volumes of electricity in particular hours result from previously signed over- the-counter (OTC) contracts or in case of sales on TGE markets from electronically recorded transactions. Revenue from the sale of electricity is recognised on the delivery date.

The actual delivery of electricity is carried out through the Balancing Market, where the TSO ensures the reliability of data in terms of the delivered amount of energy, and quantitative deviations from the previously submitted operational schedules (the so-called Energy Sale Contracts) are settled using prices resulting from the Balancing Market mechanism. Balancing market settlements are carried out with the TSO in 10-day cycles, while wholesale settlements on POLPX are conducted with clearinghouse IRGiT, which is the guarantor for settlements of transactions executed on POLPX, and they are performed daily, in accordance with the IRGiT settlement rules. In the case of OTC contracts, settlements are carried out in accordance with the provisions of these contracts, i.e. in 10-day or monthly cycles.

Revenues are priced according to currently applicable heat prices and tariff rates, subject to approval by URE President. Heat prices relate to the heat capacity ordered, the heat energy sold and the heat carrier in terms of heat generation, while the variable and fixed charge rates relate to heat distribution and transmission. Revenue invoiced for the sale of heat is the product of the tariff rates described above and the sales volumes.

The sales of heat in quantitative terms are derived from readings of measurement and billing systems. Readings are taken on designated working days in each calendar month, including a date close to the end of the month. Accordingly, for financial reporting purposes, re-estimates of sales volumes are made for the period between the last reading date of the month and the end of that month.

Revenue from the sale of heat is recognised when the heat is delivered in accordance with the readings obtained, including re-assessment.

Revenue from the sale of electricity distribution services is derived from sales documented by invoices, adjusted by the re-estimation made of uninvoiced sales of electricity distribution services during the period. The re-assessment of sales is made at least at the end of each quarter.

Revenue from the distribution service is recognised at the time the service is performed, based on readings of measurement and billing systems, taking into account the re-estimation of consumption.

Sales revenue does not include the value of fees collected on behalf of third parties for which the Group acts as payer, i.e. the transitional charge, the RES charge, the co-generation charge and the capacity fee.

The balance of the regulatory account is determined in accordance with the rules set out in the Decree of the Minister of Climate and Environment of November 13, 2020 amending the Ordinance on detailed rules for the formation and calculation of tariffs and settlements in electricity trading.

The balance of the regulatory account is the difference between the sum of the projected revenue assumed in the tariff for a given year, which is the basis for calculating the DSO’s own charge rates, and the sum of the revenue actually generated in a given year, which does not depend on the Group and is primarily the result of deviations in the charge carriers, such as e.g. the volume of electricity deliveries or the level of contracted power, on the basis of which the charge rates are calculated.

The balance of the regulatory account for year n is taken into account by the URE President when calculating the tariff and influences the regulated revenue in year n+2 (possibly also in subsequent years).

The Group generates revenue from the sale of electricity and natural gas to final customers and on the wholesale market. Revenue from the sale of electricity is recognised on the basis of the month of sale indicated on the invoices.

Due to the continuous nature of energy supply, for the purposes of correct accounting, the Group adjusts sales revenue (invoiced sales) by the amount of energy supplied but not invoiced in the period. A re-assessment of electricity sales is made at the end of each month.

The re-assessment calculation is made separately for each energy consumption point and separately for individual price components and types of tariff charges. The estimation of the electricity volume is calculated on the basis of the average daily energy consumption for the point of consumption in question, determined on the following basis:

• data from energy sales invoiced in the last billing period,
• forecast daily energy consumption.

The re-assessment of electricity volume for a newly acquired energy consumption point (with no history of electricity consumption in the billing system) is determined on the basis of the volume declared by the customer.

In the case of electricity points billed using forecast-based invoices, the re-assessment makes the sales realistic by recalculating the charges for the forecasted amount of energy according to the current rates applicable in the forecast period.

Receivables from re-assessed sales as at December 31, 2021 are presented in note 25.1.1 to these financial statements.

Pursuant to the Act, Capacity Providers may offer the Operator (PSE S.A.) a capacity obligation for a specified delivery period in capacity auctions. The capacity obligation is the obligation of the Capacity Supplier to remain available during the supply period to supply specified electrical capacity to the system by a capacity market unit and to supply specified electrical capacity to the system during periods of emergency. As a result of the Main Auction for 2022, held on November 15, 2018, PGE Group contracted more than 12 GW of capacity obligations.

Operating lease income is recognised in profit or loss on a straight-line basis over the lease term, unless another systematic basis is more representative of the time pattern in which use benefit derived from the leased asset is diminished.

The undiscounted lease payments to be received annually in future periods are presented in the table below.

The following table presents a reconciliation between revenue disclosed by category and information on revenue that the Group discloses for each reporting period.

The total amount of revenue from sales includes PLN 66 million due to sales transactions for which the value was not finally determined at the end of the reporting period. PGE Group makes revenue estimates, the most significant of which relate to:

• compensation revenue estimates in the Supply segment,
• Re-estimation of revenues] from the sale of electricity, gaseous fuel, distribution services in the Supply and Distribution segments,
• Re-estimation of revenues] from the sale of electricity, gaseous fuel, distribution services in the District Heating segment,

Lease payments recognised as income in 2022 amounted to PLN 86 million (PLN 84 million in 2021). The Group did not earn operating lease income relating to variable lease payments that do not depend on an index or rate.

The following table presents revenue from contracts with customers by category to reflect the manner in which economic factors influence the type, amount, payment deadline and uncertainty of revenue and cash flows.

The following table presents a reconciliation between revenue disclosed by category and information on revenue that the Group discloses for each reporting period.

The total amount of revenue from sales includes PLN – 40 million due to sales transactions for which the value was not finally determined at the end of the reporting period. PGE Group makes estimates of revenue, of which the most significant one concerns estimation of revenue from sale of electricity, gas fuel, distribution services in segments Supply and Distribution as well as estimation of revenue from support of high-efficiency co-generation in the District Heating segment.

The following table presents revenue from contracts with customers by category to reflect the manner in which economic factors influence the type, amount, payment deadline and uncertainty of revenue and cash flows.