9. Property, plant and equipment

ACCOUNTING POLICIES

Property, plant and equipment

Property, plant and equipment are assets:

• held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and
• expected to be used during more than one period.

After initial recognition, an item of property, plant and equipment is measured at carrying amount, i.e. initial value (or deemed cost for items of property, plant and equipment used before the transition to IFRSs) less any accumulated depreciation and any impairment losses. Initial value of an item of property, plant and equipment comprises its cost, which includes all costs directly related to its acquisition and bringing it to working condition for its intended use. The cost comprises estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having it used for purposes other than to produce inventories. As at the date of acquiring or manufacturing of an item of property, plant and equipment, the Group identifies and distinguishes all components being a part of a respective asset that are significant as compared to the acquisition price, cost of manufacture or deemed cost, and depreciates them separately. The Group also recognises the costs of major overhauls, periodic inspections that meet the definition of component as components of property, plant and equipment.

The depreciable amount is the cost of an item of property, plan and equipment less its residual value. Depreciation commences when the asset is available for use. Depreciation of property, plant and equipment is based on a schedule plan reflecting the future useful life of the item of property, plant and equipment. The depreciation method used reflects the pattern in which the asset’s future economic benefits are expected to be consumed by the Group. Major overhauls and periodic inspections recognised as a component of property, plant and equipment are depreciated starting from the month following the completion of the inspection/overhaul until the month in which the next inspection/overhaul commences.

The following useful lives are adopted for particular groups of property, plant and equipment:

Depreciation methods, depreciation rates and residual values of property, plant and equipment are verified on an annual basis. Changes identified during verification are accounted for as a change in an accounting estimate and adjustments, if any, to depreciation charges are recognised in the year in which the verification took place and in subsequent periods.

Property, plant and equipment under construction include assets in the course of construction or assembly, and are measured at cost less any impairment losses. Property, plant and equipment under construction are not depreciated until their construction is completed and they are available for use.

Borrowing costs

Borrowing costs are interest and other costs incurred by the Group in connection with the borrowing of funds. Borrowing costs which may be directly attributed to an acquisition, construction or production of a qualifying asset are capitalised as part of the cost of such an asset, Other borrowing costs are recognised as costs for the period. Exchange differences arising from foreign currency borrowings are capitalised by the Group to the extent that they are regarded as an adjustment to interest costs.

Impairment of non-financial non-current assets

As at each reporting date, the Group assesses whether there is any indication of impairment of its non-financial non-current assets. If such indication exists, or in case an annual impairment testing is required, the Group makes an estimate of the recoverable amount of that asset or the asset’s cash-generating unit.

The recoverable amount of an asset or cash-generating unit is the higher of the asset’s or cash-generating unit’s fair value less costs to sell and its value in use. The recoverable amount is determined for individual assets, unless a given asset does not generate separate cash flows largely independent from those generated by other assets or asset groups. If the carrying amount of an asset is higher than its recoverable amount, the value of the asset is impaired and an impairment loss is recognised up to the established recoverable amount. In assessing value in use, the projected cash flows are discounted to their present value using a pre-tax discount rate which reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses of continuing operations are recognised in the expense categories consistent with the function of the impaired asset.

Stripping costs

If the conditions of the IFRIC 20 interpretation are met, mines also recognize as an item of property, plant and equipment so-called deferred stripping cost, i.e. stripping costs incurred during the production phase. The value of the assets arising due to stripping costs in the production phase is determined based on the model that takes into account, inter alia, the estimated value of the overall N-W ratio (the proportion of overburden to lignite) and annual real rate of N-W. This ratio is calculated as the ratio of the remaining quantity of overburden to the remaining coal reserves to be extracted from the date of application of IFRIC 20 interpretation to the end of coal extraction from the given deposit. This ratio is calculated at the end of each year based on the best knowledge of the technical experts employed in the mine and may be subject to change in case of acquisition of new information on the size of the deposit and the way it is located underground.

An asset arising due to stripping costs is systematically depreciated using the natural method of depreciation based on the amount of coal extracted from the given deposit.

Measurement of assets arising from capitalisation of stripping costs in the production phase of surface mine

The value of the assets arising due to stripping costs in the production phase is determined based on the model that takes into account, inter alia, the estimated value of the overall N-W ratio.

Costs of post-mining rehabilitation of surface mines

Surface mines operating in the Group capitalise in the value of the corresponding component of tangible assets estimated costs of rehabilitation of post-exploitation mining properties in the proportion of the volume of the excavation resulting from stripping of overburden at the reporting date to the planned volume of excavation resulting from stripping of overburden at the end of exploitation period.

Capitalised costs of rehabilitation are systematically depreciated using the natural method of depreciation based on the amount of lignite extracted from a particular field.

Property, plant and equipment subject to operating leases

The Group classifies each of its leases as either an operating lease or a finance lease. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of an underlying asset to the lessee. All other types of lease are treated as operating leases.

Assets subject to operating leases are presented in the statement of financial position according to the nature of the asset.

The entity, as a lessor disaggregates each class of property, plant and equipment into assets subject to operating leases and assets not subject to operating leases.

Change in property, plant and equipment by group

Other changes in the gross carrying amount of property, plant and equipment in the comparative period comprise mainly changes in assumptions and capitalisation of the cost of rehabilitation provisions.

Significant additions and disposals of property, plant and equipment

The largest expenditure was incurred by the Conventional Generation segment (PLN 4,016 million) and the Distribution segment (PLN 2,207 million). The key expenditure items included: construction of units 5 and 6 at the Opole power plant (PLN 910 million) and construction of a unit at the Turów power plant (PLN 527 million).

Borrowing costs

During the year ended December 31, 2019, PGE Group capitalised borrowing costs of approximately PLN 136 million (PLN 147 million in the comparative period) in property, plant and equipment. The average capitalisation rate of borrowing costs for the year ended December 31, 2019 was 49% (64% in the comparative period).

Capitalisation of stripping costs

In the current period, in accordance with the requirements of IFRIC 20, the Group capitalized expenditures regarding stripping costs in the production phase of PLN 440 million. At the same time, the Group recognised depreciation of capitalised stripping costs of PLN 144 million, and impairment losses of PLN 883 million. Capitalised stripping costs are presented as „other property, plant and equipment”.

Capitalisation of changes in measurement of rehabilitation provision

In the property, plant and equipment, PGE Group recognises changes in rehabilitation provision assigned to stripping of overburden, provision for rehabilitation of post-construction grounds of wind farms and provision for liquidation of property, plant and equipment. As at December 31, 2019, the net carrying amount of the capitalised portion of rehabilitation provisions (after impairment and depreciation) amounted to PLN 1,146 million (including PLN 1,031 million of the provision for rehabilitation of post-exploitation mining properties). In comparative period, the net carrying amount of the capitalised portion of rehabilitation provisions amounted to PLN 1,138 million (including PLN 1,041 million of the provision for rehabilitation of post-exploitation mining properties). Capitalised rehabilitation provision is presented in: “land” and “other property, plant and equipment”.

Depreciation periods of property, plant and equipment

Depreciation rates and charges are determined based on the anticipated economic useful lives of property, plant and equipment, as well as their estimated residual values. Capitalised costs of major overhauls are depreciated throughout the period until the beginning of the next major overhaul.

Estimated economic useful lives of assets are subject to verification at least once a financial year. Depreciation periods applied are disclosed in notes 9, 11 and 12.

The verification of the economic useful lives of property, plant and equipment and intangible assets conducted in 2019 resulted in a decrease in the depreciation costs for 2019 by a total of PLN 82 million.

Property, plant and equipment subject to operating leases

The table below presents changes in property, plant and equipment subject to operating leases by class of the underlying asset.

Changes in property, plant and equipment subject to operating leases

The amounts presented in the table above are mainly related to the contract for the provision of regulatory system services by the pumped-storage power plants of the Group.

The provision of regulatory system services consists in the disposal and use of generation units by the transmission system operator for the purpose of interventional balancing of active and passive capacity in the National Power System (PPS) in order to ensure ongoing security of PPS operation. The Group assessed that the contract for provision of regulatory system services concluded with Polskie Sieci Elektroenergetyczne S.A. contains a lease. The Group, as the lessor, has separated the property, plant and equipment covered by this contract.