Note 12.1 Related party transactions

The accounting policies and important estimates and assumptions presented in Note 10 are applicable to transactions entered into with related parties.

In 2018, dividends from subsidiaries amounted to PLN 239 million (in the comparable period: PLN 4 million).

Pursuant to IAS 24, the Company is obliged to disclose unsettled balances, including payables towards the Polish Government and entities controlled or jointly controlled by the Polish Government, or over which the Polish Government has significant influence.

 As at 31 December 2018, the  balances of payables due to agreements necessary to conduct principal operating activities of the Company in the amount of PLN 200 million (as at 31 December 2017: PLN 202 million) were comprised of

• setting mining usufruct  – fixed fees and mining usufructs for exploration and evaluation of mineral resources – in the total amount of PLN 170 million (as at 31 December 2017: PLN 171 million),
• setting mining usufruct – variable part (recognised in costs) in the amount of PLN 30 million (as at 31 December 2017: PLN 31 million).

In the current and comparable periods, no other individual transactions were identified which would be considered as significant in terms of unusual scope and amount.

The remaining transactions, which were collectively significant, between the Company and the Polish Government and with entities controlled or jointly controlled by the Polish Government, or over which the government has significant influence, were within the scope of normal, daily economic operations, carried out at arm’s length. These transactions concerned the following:

• the purchase of goods to meet the needs of current operating activities. In the period from 1 January to 31 December 2018, the turnover from these transactions amounted to PLN 910 million (from 1 January to 31 December 2017:
  PLN 732 million), and, as at 31 December 2018, the unsettled balance of liabilities from these transactions amounted to PLN 131 million (as at 31 December 2017: PLN 118 million),
• sales to Polish State Treasury Companies. In the period from 1 January to 31 December 2018, the turnover from these sales amounted to PLN 41 million (from 1 January to 31 December 2017: PLN 71 million), and, as at 31 December 2018, the unsettled balance of receivables from these transactions amounted to PLN 6 million (as at 31 December 2017: PLN 5 million).

Note 12.2 Dividends paid

In accordance with Resolution No. 10/2018 of the Ordinary General Meeting of KGHM Polska Miedź S.A. dated 6 July 2018 regarding appropriation of the profit for financial year 2017, the entirety of the profit was transferred to the Company’s reserve capital.

In accordance with Resolution No. 7/2017 of the Ordinary General Meeting of KGHM Polska Miedź S.A. dated 21 June 2017 regarding the payout of a dividend from prior years’ profits and setting the dividend date as well as the dividend payment dates, the amount of PLN 200 million was allocated as a dividend, representing PLN 1.00 per share.
The dividend date (the date on which the right to dividend is set) was set on 14 July 2017. Moreover, it was decided that the dividend will be paid in two instalments: on 17 August 2017 – the amount of PLN 100 million (representing PLN 0.50 per share) and on 16 November 2017 – the amount of PLN 100 million (representing PLN 0.50 per share). All shares of the Company are ordinary shares.

Note 12.3 Other assets

Note 12.4 Other liabilities

Note 12.5 Assets and liabilities not recognised in the statement of financial position

The value of contingent assets and liabilities and other liabilities not recognised in the statement of financial position were determined based on estimates.

Note 12.6 Capital commitments related to property, plant and equipment and intangible assets

Capital commitments incurred in the reporting period, but not recognised in the statement of financial position, were as follows (as at 31 December of a given year):

Note 12.7 The right of perpetual usufruct of land

The Company obtained the right of perpetual usufruct of land mostly free of charge on the basis of laws in force. The land subject to perpetual usufruct is industrial area related to the core business activities, which also includes protective zones in which environmental quality standards have been exceeded as a result of the activities carried out.
Due to the nature of the use of the above-mentioned land, as at 31 December 2018 the Company had not determined fair values for these perpetual usufruct rights.
The table below contains information on future payments due to the right of perpetual usufruct of land.

The Company’s liabilities due to the right of perpetual usufruct of land, which were not recognised in the statement of financial position, were estimated on the basis of annual payment rates resulting from recent administrative decisions and the useful life of the land subject to this right.

Note 12.8 Employment structure

Note 12.9 Other adjustments in the statement of cash flows

Note 12.10 Remuneration of key managers

Note 12.11 Remuneration of the entity entitled to audit the financial statements and of entities related to it
(in PLN thousands)

Note 12.12 Disclosure of information on the Company’s activities regulated by the Act on Energy

Note 12.12.1 Introduction

KGHM Polska Miedź S.A. meets the definition of an “energy enterprise” under the Act on Energy.

Pursuant to article 44 of the Act on Energy, the Company is required to prepare, on the basis of the Company’s accounting records, information about its regulated activities. The scope of information concerning regulated activities, pursuant to article 44 of the aforementioned Act, constitute the Company’s business activities in:

• distribution of electricity;
• distribution of gaseous fuels; and
• trade in gaseous fuels.

Note 12.12.2 Description of regulated activities

KGHM Polska Miedź S.A. conducts the following types of energy-related activities:

• Distribution of electricity – an activity which consists of distributing the electricity, used to meet the needs of clients conducting business activities;
• Trade in gaseous fuels – an activity which consists of trading in nitrogen-enriched natural gas and is conducted to meet the needs of clients engaged in business activities; and
• Distribution of gaseous fuels – an activity which consists of distributing nitrogen-enriched natural gas by utilising the distribution grids located in the Legnica and Głogów municipalities in order to meet the needs of clients conducting business activities.

Note 12.12.3 Basic principles of regulatory accounting

Regulatory accounting is a specific type of accounting, if compared to the accounting carried out in accordance with the Accounting Act of 29 September 1994, conducted by an entrepreneur for its regulated activities including energy activities.

In addition to the accounting policies which were described in the financial statements and were the basis for the keeping of the accounting records and for preparation of the Company’s financial statements, KGHM Polska Miedź S.A. applies the following accounting policies for the purposes of regulatory accounting:

Causality principle

The allocation of particular revenue and costs is made in accordance with a given assets’ intended purpose and utilisation of assets to meet the needs of a specified type of activity or service, with the causality principle governing the recognition of items of revenue and costs in specified types of activity and with the principle of consistency between recognition by types of activity of items of revenue and costs, which stems from the fact that these items reflect different aspects of the same events.

Objectivity and non-discrimination principle

The allocation of assets, liabilities, equity, revenue and costs is done objectively and is not aimed at making profits or incurring losses.

Continuation and comparability principle

The methods and principles used in preparing the report on regulatory accounting are applied in a continuous manner. This report was prepared using the same principles for the current and comparable periods.

Transparency and consistency principle

The methods applied in preparing the report on regulatory accounting are transparent and consistent with the methods and principles applied in other calculations performed for regulatory purposes and with the methods and principles applied in preparing the financial statements.

Materiality principle (feasibility principle)

The Company permits certain simplifications in measurement, recognition and allocation of items of assets, liabilities, equity, revenue and costs as long as it does not significantly distort the true picture of the financial position and assets presented in the financial statements on regulated activities.

Note 12.12.4 Detailed principles of regulatory policy – methods and principles governing the allocation of assets, liabilities, equity, costs and revenues

The Company prepares financial information on its regulated activities by overlapping the regulated activities’ structure with the Company’s organisational structure. The Company applies, in a continuous manner, various methods for the allocation of revenue, costs, assets and liabilities to specific types of regulated activities. The following methods were used:

- specific (direct) identification method –  applied if a direct identification of value is possible, for example the level of revenue from certain activities, 

- direct allocation method (e.g. the purchase cost of production fuel) – this method is applied if there is a direct cause-and-effect relationship between the consumed resource and the corresponding cost,

- indirect allocation method on the basis of a predetermined allocation key, this method is used among others, to allocate cost in a situation where no direct cause-and-effect relationship between the utilised resource and the cost item exists and there is a need to use a cost driver (an allocation key) which enables linkage of items with their respective cost. The most commonly used allocation keys are:

• revenue key                    – value of revenue is the allocation key;
• production key              – production units are the allocation key;
• power key                       – the installed power of machines and equipment is used for the allocation of indirect costs;
• cost key                           – the value of costs is the allocation key;
• mixed keys, which combine elements of several different keys; and
• other keys appropriate for a specific case.

Assets

In the statement of financial position of KGHM Polska Miedź S.A. for the current and comparable periods, the following items of assets of regulated activities were recognised:

    Non-current assets:

        1.Fixed assets;
        2.Fixed assets under construction;

   Current assets:

       1. Trade receivables.

Other items of assets in the Company’s statement of financial position were allocated to other activities due to the lack of a link between these items and regulated activities, or because the share of these items in regulated activities is immaterial.

Fixed assets

The identification and allocation of specific items of fixed assets to regulated activities takes place when these items of fixed assets are brought into use. Based on the key consumption for energy carriers, being the quantitative share in sales of the energy carrier in the total volume of the purchased energy carrier less losses, the percentage in the carrying amount of fixed assets used in the energy activities is established.

Fixed assets under construction

The allocation of fixed assets under construction to regulated activities is achieved by the detailed identification of expenditures on fixed assets under construction which are related to regulated activities, based on the analysis of accounting records. The remaining expenditures on fixed assets under construction are recognised in other activities of the Company.

The Company recognises the full amount of deferred tax assets due to other deductible temporary differences under other activities, due to their immaterial share in regulated activities.

Trade receivables

Allocation of receivables in specific types of regulated activities is done on the basis of detailed identification of revenues from specific types of regulated activities, by analysing the accounting records with respect to unsettled sales invoices. The remaining amount of trade receivables is recognised in other activities. The Company recognises the full amount of other receivables (i.e. apart from trade receivables) in other activities due to their immaterial share in regulated activities.

Equity and liabilities

In the statement of financial position, the following items were recognised in equity and liabilities for the current and comparable periods with respect to regulated activities:

    Equity

   Liabilities

      I. Non-current liabilities:

         1. Deferred tax liabilities;

         2. Future employee benefits liabilities.

      II. Current liabilities:

         1. Future employee benefits liabilities.

The full amount of other items of liabilities are recognised by the Company in other activities, due to their immaterial share in regulated activities.

Equity

The Company allocates equity to regulated activities as an item offsetting the assets and liabilities.

Deferred tax liabilities

With respect to regulated activities, deferred tax liabilities were identified arising from taxable temporary differences between the depreciation  of property, plant and equipment and intangible assets for tax purposes and their carrying amount.

The allocation of deferred tax liabilities due to the depreciation of property, plant and equipment and the amortisation of intangible assets, with respect to regulated activities, is performed through the use of indicators set for property, plant and equipment and intangible assets.  The Company allocates all deferred tax liabilities arising from other taxable temporary differences to other operating activities.

Non-current and current liabilities due to future employee benefits

Liabilities due to future employee benefits are allocated to individual types of regulated activities using a revenue key through the indirect allocation method.

Revenues from sales

Following an analysis of revenues in terms of their allocation to individual types of regulated activities, the Company identified groups of operations which met the following conditions:

• revenues from the sale of electricity – distribution;
• revenues from the sale of nitrogen-enriched natural gas – distribution; and
• revenues from the sale of nitrogen-enriched natural gas – trade.

 Revenues from sales are allocated to individual types of regulated activities using the individual identification method.

Operating costs

Following an analysis of costs in terms of their allocation to individual types of regulated activities, the following types of operating costs were identified:

• costs of electricity distribution services and the distribution of natural gas;
• the value of the sold merchandise related to trade in natural gas; and
• administrative expenses associated with electricity sold.

 Costs of sales, selling costs and administrative expenses are allocated to separate types of regulated activities based on the Company's account of the actual costs.

Income tax

The amount of income tax presented in the statement of profit or loss for individual types of regulated activities is set as a multiple of the financial result and the effective tax rate. The amount of current income tax decreases or increases deferred income tax, which is calculated from the difference between the carrying amount and the taxable amount of the respective assets of regulated activities.

Note 12.13 Subsequent events after the reporting period

Extension of the deadline for repayment of a bank loan

On 1 February 2019, the Company extended the period of availability of the USD 100 million credit line in Bank Gospodarstwa Krajowego to 2 February 2020. Interest on the credit is based on LIBOR plus a margin.

Signing of financing agreements

On 13 February 2019, the Company signed an overdraft credit agreement for the amount of PLN 100 million with Bank Pekao S.A. in Warsaw. Interest on the credit is based on WIBOR plus a margin. The credit’s period of availability expires on 13 February 2020.

On 27 February 2019, the Company signed an unsecured, working capital facility agreement with Bank Gospodarstwa Krajowego with a financing period of up to 84 months, as a revolving credit line in the amount of USD 450 million for a period of 60 months, with the option to transform it into a non-revolving credit after 60 months. Interest on the credit is based on LIBOR plus a margin.

Redemption of Investment Certificates of KGHM I FIZAN Fund and KGHM V FIZAN Fund

In January 2019, as a result of liquidation of KGHM I FIZAN and KGHM V FIZAN, 100% of Investment Certificates of these Funds, held by KGHM Polska Miedź S.A.,  were redeemed. As a result of this, the Company received PLN 391 million.

Payment for the second issuance, B Series, of Investment Certificates of KGHM VI FIZAN and KGHM VII FIZAN

In January 2019, there was a payment for the second issuance of Investment Certificates, B series, of the following Funds:

- KGHM VI FIZAN in the amount of PLN 60 million,
- KGHM VII FIZAN in the amount of PLN 73 million.

Acquisition of Investment Certificates of KGHM VI FIZAN FUND and KGHM VII FIZAN FUND

In January 2019, the Company acquired Investment Certificates, C series, of the following Funds:

- KGHM VI FIZAN in the amount of PLN 46 million,
- KGHM VII FIZAN in the amount of PLN 212 million.