Financial liquidity management in energy sector in Poland

Liquidity comprises one of the most important indicators of an enterprise’s financial situation and proper operation. Dynamic liquidity understood as an ability to generate cash flow constitutes an interesting issue in the area of managing finances related with taking managerial decisions in the following areas: operational, investment and financial. The aim of the article is to identify cash flow in a managerial perspective for the purposes of taking decisions with regard to developing liquidity and indicating determinants thereof in the energy sector, in Poland. Formulas of setting cash flows for the owner (FCFE) and for all funding parties (FCFF) have been shown and their calculation has been presented with an example of selected energy enterprises listed on the Stock Exchange in Warsaw.


Introduction
Liquidity support comprises grounds for supporting continuity of all economic processes. The issue related with liquidity is up-to-date for each economic entity irrespective of the type of conducted activity. Ensuring enterprise's liquidity in the short and long term undoubtedly comprises one of the most important aims of each company.
Liquidity guarantee is conditioned by indicating factors developing it as well as the direction and impact force thereof. They determine decisions related with releasing and obtaining cash by influencing operational, investment and financial areas.
In the article, the liquidity aspect has been presented with a particular consideration of dynamics thereof related with maximising cash flows. The methodology of assessing cash flows based on a managerial approach supporting the decision process has been presented herein. Basing on the set criteria, a calculation has been conducted on an example of selected energy enterprises. For the purposes of the publication, cash flows identified as flow from assets of a given economic activity were assessed in compliance with the FCFF (Free Cash Flow to Firm) methodology. Simultaneously, this concept presents meeting owner's cash needs FCFE (Free Cash Flow to Equity) as well as funding activity of external entities FCFD (Free Cash Flow to Debt).
2. The enterprise's ability to generate cash flows -dynamic liquidity Liquidity is a complex economic category conditioning enterprise's operation and survival. Furthermore, the imperative of having liquidity determining the need of keeping it by the enterprise, can be deemed as an organisation's financial security indicator. Meeting the aforementioned imperative constitutes a condition for continuing activity in operational, investment and financial areas. Interest in the issue of liquidity increases the need to perform many liquidity management functions in an effective and rational manner. Liquidity analysis is based on the information included in traditional financial statements of the units. The aforementioned information determines considering the liquidity in static understanding based on covering short-term liabilities with short-term assets (Sierpińska, Jachna, 2007). Static liquidity analysis is based on the enterprise's balance sheet presenting information on the value of property and financing sources thereof as on the day of drawing it up. The subject literature and economic practice assess static liquidity with three main indicators: current liquidity, accelerated liquidity and cash ratio. Practice indicates that static liquidity measure based on the resources' volume has a limited character and is used by external entities to assess economic activity with regard to its ability to regulate short-term debt. Application of the presented approach for managerial purposes is greatly limited and insufficient from the owner's point of view.
The essence of liquidity in the dynamic understanding comprises presenting the course of financial processes with the use of cash flows and mutual synchronisation thereof in order to preserve cash balance. Identified flows allow determining cash sources in the following areas: operational, investment and financial as well as directions of use thereof with regard to preserving liquidity. By indicating cash sources, dynamic measures determine enterprise's ability to create money. Additionally, measures based on cash flows allow studying mechanisms influencing changes of held cash resources and reflect the unit's financial situation in a more reliable manner. Simultaneously, the aforementioned approach realises the image of an enterprise based on memorial context related with financial results' analysis. An increase in cash from operational activity expresses "solidarity" of the company better than the profit amount itself. As a rule, all significant financial decisions should be based on the cash flow account's results (Brealey, R. and Myers, S.C. (2010)).
Analysis of cash flows and the ability to maximise allows assessing actual cash flow and can contribute to the definition of the liquidity determinant depending on an enterprise as well as its operations' characteristics.

Cash flows in managerial understanding
Dynamic liquidity understood as the ability to earn cash is based on cash flows. Full information on flows in a given period is usually obtained from the statement which indicates the enterprise's ability to generate inflows and directions of outflows in three areas of activity: operational, investment and financial. The ability to generate positive cash flows stabilizes the enterprise's liquidity and strengthens its ability to pay.
In strategic understanding, the ability to generate cash flows in ex ante understanding provides grounds for generating the enterprise's economic value. The relation between the enterprise's value and its cash flows is reflected in income methods that enable discounting future benefits measured with flows with the use of a relevant rate reflecting the cost of capitals funding the activity.
Cash flows themselves are influenced by many variables the assessment and cognition of which are necessary for the purposes of proper liquidity management. Three most important liquidity factors are related with operational effectiveness, investment in fixed and current assets and financial effectiveness related with the structure of developing capitals. The said factors analysed with regard to the nature and characteristics of the activity can lead to systemising problems of developing liquidity in given industries, in which enterprises operate.
Knowledge on cash generation determinants can be obtained from formulas and methodologies of stipulating cash flows; they are systematised in the literature in accordance with various criteria. In managerial understanding, two types of flows are most often encountered in practice (Pratt S.P., Niculita A.V(2008)):  FCFF (free cash flow to firm) -cash flows due to all funding parties,  FCFE (free cash flow to equity) -cash flows due to owners. The model based on flows due to all parties funding the enterprise's activity (FCFF) enables setting a total value for the company (capital + debt) both, for owners and creditors. Whereas, FCFE allows calculating flows for owners from the equity possible to be obtained and being at their disposal after considering expenses, capital expenditure and liabilities. In order to provide for a more specific analysis of flows and separating particular funding parties, it is possible to divide FCFF into two groups (Damodaran, A. (2006)):  FCFE (free cash flow to equity) -cash flows for owners,  FCFD (free cash flow to debt) -cash flows for banks. The introduction of a new category allowing stipulating cash flows for creditors (FCFD) enables assessing interests on loans, increased with a payment of capital instalments, which are necessary to be paid by the company. Mutual FCFE, FCFD and FCFF relation as well as relations with particular balance sheet items have been presented in figure no. 1.
The FCFF methodology is understood as flows from assets and shows a potential to generate cash from operational and investment areas. Operational activity is expressed with operating profitability measured with EBIT after taxation as well as effectiveness of management in the area of developing the demand for net working capital. Whereas, investment activity is expressed with investment in fixed assets determining spending cash and not constituting period's costs. The investment activity results in the level of amortisation treated as unspent costs, yet, reflected in developing accounting profits.
Whereas, FCFE methodology takes into consideration effectiveness measured with net profitability and financial activity related with effectiveness of using foreign capital of interest nature.
[1]     throughout analysed years has been significantly decreasing, noting gradually lower values, which can result from the fact of significant investments both in fixed assets as well as in net working capital.
The biggest negative FCFF flows in analysed period were noted by PGE Polska Grupa Energetyczna S.A., which as the largest energy entity in the market has not been generating positive flows from assets in recent years. On the other hand, a loss of cash from operational and investment activity is compensated by obtaining capitals from the outside, which shows that external entities are willing to fund the activity of the biggest energy producer in the Polish market.
In the case of FCFE analysis (Figure no. 4), positive flows in recent years were noted by ENEA S.A. As has already been underlined, FCFF flows were negative, whereas, external funding obtained by ENEA S.A. Group allowed to generate positive flows for the owner. In the recent year, i.e. 2016 the biggest engagement of foreign capital was noted in PGE SA. Funding obtained from the outside was necessary, among others, for tangible investments in the manufacturing area and equity investments in the mining area. Despite obtaining significant inflows in the financial area, PGE S.A. did not reach positive cash flows for the owner FCFE.   Negative cash flows FCFE and FCFF in 2015 and 2016 were determined by high expenditures incurred on investments (an increase in fixed assets) and by an increase in the demand for net working capital. Investments in fixed assets caused freezing of available resources and a decrease in cash flows. However, while considering the issue of incurred expenditures in the long-term, investments are necessary to maintain current cash flows and generate them in the future for further development of the company.
In the years 2015 and 2016, ENERGA S.A. was paying indebtedness due to external funds which contributed to positive cash flows for FCFD capital providers.  It results mainly from CAPEX value (PLN -14,802,000 thousand) and an increase in the demand for net working capital (PLN -2,689,000 thousand). In

Conclusion
A traditional liquidity measure in the current situation is insufficient so as to generate a satisfactory level of information for the purposes of effective finance management. It seems that an evolution is recommended in the direction of a larger than ever use of dynamic methodologies based on cash flows.
Maintaining dynamic liquidity understood as sustaining financial balance between cash flows from assets and cash flows from liabilities, i.e. for equity providers and foreign capital providers, gains particular importance in the case of managing finances of enterprises.
Conducted studies were aimed at stipulating enterprises' ability to generate cash flows from assets and liabilities and the ability to maintain financial balance between them. The analysis used managerial flows based on FCFF, FCFF and FCD methodologies.
Conducted studies on liquidity and factors developing it in the energy industry allowed specifying that main liquidity determinants in dynamic understanding included: operational profitability, CAPEX investment expenditures, demand for net working capital and effectiveness of foreign capital management determining the amount of paid interests and capital instalments.
The analysis of energy enterprises conducted in the years 2014 -2016 indicated in most cases negative FCFF cash flows, which were determined with investments of tangible and equity investment. Simultaneously, the industry strongly supported maintaining financial balance by obtaining external funding of interest nature. In the majority of companies financial decisions allowed obtaining positive flows for owners, cumulated for the period and measured in accordance with FCFE methodology.
Presented considerations indicated the essence of effective liquidity management and maximisation of cash flows in the enterprise, in various areas of its activity.