4. Revenue from compensations of stranded costs in subsidiary EC Zielona Góra S.A.

The subsidiary, EC Zielona Góra S.A., recognize stranded costs compensations based on Annex 4 to the Act dated 29 June 2007 on covering the costs incurred by producers in connection with the early termination of long-term contracts for sales of power and electricity.

According to the LTC Act, EC Zielona Góra S.A. receives compensations for stranded costs in a form of quarterly advances. At each year-end, an annual adjustment is made, while, after the whole period of the original LTC contract, a final adjustment will be made.

Revenues, costs and liabilities from stranded costs is estimated by Management Board. This estimate is determined based on the interpretation of the company in respect of the provisions of the Act on LTC and the expected amount of annual adjustments and the final adjustment, the amount of which is determined by the decisions of the President of the Energy Regulatory Office.

The expected by the company amounts of annual adjustments and the final adjustment are determined by previous years’ calculations of model LTC compensation. Crucial factors model calculations that affect recognized in the financial statements of revenues, expenses and settlement are the sale price of electricity and the interest rate used to discount long-term commitment.

The changes in the assumptions (including long-term forecasts) may significantly impact on the estimates which consequently, may lead to significant changes in the financial and material situation and financial results of the company.

As a result of an update of the underlying assumptions in model of LTC refunds, it was calculated that the approximate amount, which will determined at the end of the period of LTC settlement, will be lower than the sum of LTC to be paid out during the whole period. The Company will not have to pay back all proceeds received as LTC refunds, and refunds will be recognized as grant (in years 2019-2024). As at 31 December 2018 the estimated amount of compensation that will not be subject to final adjustment is PLN 37 108 thousand.

The effective discount rate for 2018 applied in the model was 3.64%.

In connection with the Group’s recognition of the maximum level of Stranded Costs throughout the duration of the scheme (according to the estimates as at 31 December 2018), the Group recognizes in the costs of premature termination of long-term contracts the amount corresponding to the amount of financial costs during the reporting period and the change in estimates. A decisive factor influencing the change in estimates was the increase in electricity prices in the forecast period 2018-2024 by approx. 25% while keeping gas prices at a comparable level.

As at 31 December 2018, in accordance with the accounting principles, the part of the LTC's results attributable to the current reporting period was recognised.

The cost of LTC compensation for the period from 1 January to 31 December 2018 amounted to PLN 119 825 thousand. The financial cost of LTC compensation for the period from 1 January to 31 December 2018 amounted to PLN 3 455 thousand. The value of the liabilities due to LTC compensations as at 31 December 2018 amounted to 455 280 PLN thousand (as at 31 December 2017: PLN 330 446 thousand).