The impairment tests were performed as at November 30, 2019 with respect to cash-generating units by determining their recoverable amount. Determination of fair value for very large groups of assets for which there is no active market and a small number of comparable transactions is very difficult in practice. In the case of CHP plants for which a value on the local market should be determined, there are no observable fair values. Therefore, the recoverable amount of the analysed assets was determined based on value in use estimated using the discounted net cash flow method, based on financial projections prepared for the period from December 2019 to 2030. According to the Group, financial projections longer than five years are justified due to significant and long-term effects of projected changes in the regulatory environment. With longer projections, the recoverable amount can be determined in a more reliable manner. For generating units with expected periods of economic useful lives beyond 2030, a residual value was determined for the remaining service time. The energy market, and in particular the heating market, is a regulated market in Poland and as such is subject to many regulations and cannot be freely shaped solely on the basis of business decisions. The objectives of the Energy Law include, among others, taking effective regulatory actions aimed at ensuring energy security. This means that the regulatory environment aims at stable operation of heat suppliers in a given area in order to meet the long-term needs of consumers. According to the provisions of the Energy Law, the President of the ERO may even, in extreme cases, order an energy company to carry out activities covered by a concession (for a period not longer than 2 years) if the public interest so requires. If such activities cause a loss to the energy company, the losses should be covered by the State Treasury.
Therefore, the Company does not assume the end of life of assets due to the regulatory environment, which limits the possibility of discontinuation of operations. Moreover, in the heating sector, we can observe an extended service life of equipment (boilers, turbine sets), which is operated much longer than it would result from the original assumptions. In view of the above, the impairment tests assume the continuation of operations (in the form of residual value) while maintaining expenditures at the replacement level on current assets in the long term, due to, among other things, the public interest in the form of heat supplies. The life cycle approach is in line with the PGE Group’s asset maintenance strategy.
Detailed assumptions regarding the segment
Presented below are the key assumptions having impact on estimates of the value in use of the tested CGUs:
Some important regulatory assumptions made for impairment tests are beyond the control of PGE Group and their materialization in the future is uncertain. This concerns in particular issues related to the shape of the Polish capacity market after July 1, 2025 or allocation of free CO2 emission allowances after 2020. In these areas, the Group relies on current assumptions about developments in regulations, which are subject to risk. Future changes to these regulations, compared to PGE’s current expectations, may have an impact on the assessment of the recoverable amount of generation assets in the District Heating segment.
Nevertheless, the Group believes that such assumptions are justified in view of the expected changes in the regulatory environment. These assumptions, which have been reflected in cash flows, form, in the Group’s opinion, a realistic scenario and will remain valid in the period they have been made for. However, it cannot be ruled out that the final shape and term of validity of these arrangements may differ significantly from those assumed.
Impairment tests for the District Heating segment were performed in respect of generation assets owned by PGE EC S.A. and its subsidiaries, excluding Elektrownia Rybnik presented in the Conventional Generation segment. As a result of the acquisition of EDF assets in 2017, goodwill was allocated to the acquired district heating assets.
As at November 30, 2019, the value of tested property, plant and equipment and intangible assets of PGE EC S.A. amounted to PLN 5,959 million. Based on the impairment test, the Group estimated the excess of the value in use of the tested assets over their carrying amount, and therefore found no need to recognize or reverse impairment losses on these assets. The Group also found that it was not necessary to reverse the impairment losses recognised in previous reporting periods with respect to selected CGUs.
Sensitivity analysis
In accordance with IAS 36, the Group performed a sensitivity analysis for generation units in the District Heating segment.
The estimated effect of the change of key assumptions on the value in use of assets as at November 30, 2019 for the District Heating segment is presented below.
Parameter | Change | Effect on value in use in PLN billion | |
---|---|---|---|
Increase | Decrease | ||
Change in electricity prices in the entire projection period | 1% | 0.5 | – |
-1% | – | 0.5 |
A 1% decrease in electricity price would decrease the value in use by PLN 0.5 billion.
Parameter | Change | Effect on value in use in PLN billion |
|
---|---|---|---|
Increase | Decrease | ||
Change in WACC | + 0.5 p.p. | – | 1.6 |
– 0.5 p.p | 2.0 | 0 |
A 0.5 p.p. increase WACC would decrease the value in use by PLN 1.6 billion.
A lack of support for high-efficiency would decrease the value in use by PLN 2.3 billion.