Impairment of non-financial assets

The Group’s assets that are subject to depreciation are analysed in terms of impairment whenever indications of impairment are identified.

An impairment loss is recognised in the amount by which the asset’s balance sheet value exceeds its recoverable value. The recoverable value is determined as the higher of the following two amounts: fair value less cost to sell or usable value (i.e. estimated present value of future cash flows that are expected to be obtained from further use of the asset or cash generating unit). For impairment analysis purposes, assets are grouped at the lowest level where it is possible to identify separate cash flows (cash generating units). Cash generating units are never larger than operating segments.

All impairment losses are recognised in profit or loss. Impairment losses may be reversed in subsequent periods (except for goodwill) if events occur that justify a lack of or change in impairment.

Recoverable value of tangible and intangible assets

Cash generating units are tested for impairment using a variety of assumptions, some of which are beyond the Group’s control. Significant changes in these estimates have an impact on impairment test results and, in consequence, on the Group’s financial position and financial results, described further below.

As at 30 September 2020, in connection with information and analyses concerning changes in the market prices of CO2 emission allowances, electricity, energy origin certificates and forecasts for macroeconomic indicators, ENEA Group carried out impairment tests for property, plant and equipment in areas involved in the generation of electricity, among others. Based on these tests, the necessity to recognise the following events was identified.

Based on the analysis, impairment losses were recognised on non-financial non-current assets at CGU Elektrownie Systemowe Kozienice amounting to PLN 2 881 174 thousand. This impairment loss reduced the Group’s net financial result by PLN 2 333 751 thousand. As at 30 June 2020, impairment losses on non-financial non-current assets at CGU Elektrownie Kozienice amounted to PLN 522 822 thousand. This impairment loss reduced the Group’s financial result by a total of PLN 423 486 thousand. The Group decided not to reverse the impairment losses on non-financial non-current assets that had been recognised in previous years

Presented below are the results of these impairment tests:

 

The recoverable value of each CGU was estimated on the basis of useful value using the discounted cash flows approach based on financial projections.

The following forecast periods were used for testing the CGUs:

• CGU Elektrownie Systemowe Kozienice – until 2043
• CGU Wind:
  • wind farm Darżyno until 2039,
  • wind farm Bardy until 2043,
  • wind farm Baczyna until 2043,
• CGU Hydro – until 2043,
• CGU Biogas – until 2024,
• CGU Elektrownie Systemowe Połaniec – until 2034,
• CGU Zielony Blok – until 2043,
• CGU Białystok – until 2043.

Presented below are the key assumptions used in impairment tests:

• assets were tested in seven CGUs (CGU Elektrownie Systemowe Kozienice, CGU Wind, CGU Hydro, CGU Biogas, CGU Elektrownie Systemowe Połaniec, CGU Zielony Blok, CGU Białystok),
• the main price paths, based on forecasts prepared by ENEA Trading (a company operating as ENEA Group’s competence centre for wholesale trade of electricity, emission allowances and fuels), taking into account the specific nature of products and knowledge about existing contracts:
  • wholesale „base” prices for electricity: for 2021-2043: prices are expected to see the largest growth, from 230.1 PLN/MWh in 2021 to PLN 286.3 in 2033, followed by conservative annual growth by an average of 0.4% in the period 2034-2043 [fixed prices 2020],
  • prices of energy origin certificates (renewables): the support system for renewables until 2031 was taken into account, and specific renewable-source plants will use support within a 15-year period; until 2023, prices are expected to grow by an average of approx. 7% in reference to 2021. After 2023, prices are forecast to remain in a downtrend at the average rate of approx. 3% annually until 2028, while in the final years they are expected to dynamically decline until the support system ends [fixed prices 2020],
  • prices of CO2 emission allowances: the forecast sees gradual growth in the price of CO2 emission allowances by an average of 5.5%, from 21.42 EUR/t in 2021 until 2028. From 2028 to 2037, further growth in price is expected, at approx. 3%. From 2038, growth is expected to reach approx. 1% [fixed prices 2020],
  • coal prices: coal prices are expected to remain stable at approx. 11 PLN/GJ [fixed prices 2020],
  • biomass prices: biomass prices are expected to grow until 2027, from the average level of 20 PLN/GJ in 2021, at approx. 2%. After 2027, prices are expected to decline at approx. 4% until 2031. In 2032, prices are expected to grow by 3%, followed by slow growth until 2043 at approx. 1% [fixed prices 2020],
  • heating prices: an average annual growth of approx. 1% is expected until 2043, from the average price level of 71.9 PLN/GJ in 2021 [fixed prices 2020],
  • natural gas: prices are expected to grow until 2030, at an average annual rate of approx. 3%, from 80.5 PLN/MWh in 2021, follows by stabilisation until 2043 [fixed prices 2020].
• quantity of CO2 emission allowances received for free for years 2020-2025 in accordance with derogation application (pursuant to art. 10c sec. 5 of Directive 2003/87/EC of the European Parliament and of the Council),
• revenue related to maintaining generation capacities from 2021 pursuant to the Act on the Capacity Market, adopted in December 2017, based on auctions won in 2018, 2019 and 2020,
• inflation, taking into account the inflation target, at a maximum level of 2.5%,
• nominal discount rate – 4.41% [discount rate before tax is 5.12%]. The Group used a premium for specific risk for the following CGUs:
  1. CGUs Wind, Water and Green Block: 2%. Discount rate reflecting specific risk premium was 4.92% [discount rate reflecting specific risk premium before tax is 5.63%]
  2. CGU Elektrownie Systemowe Kozienice and Elektrownie Systemowe Połaniec: 4%. Discount rate reflecting specific risk premium was 5.44% [discount rate reflecting specific risk premium before tax is 6.15%]
  3. CGU Białystok: 2.5%. Discount rate reflecting specific risk premium was 5.05% [discount rate reflecting specific risk premium before tax is 5.76%]
• growth rate in residual period – 0%

The sensitivity analysis shows that significant factors having impact on the estimated recoverable values of CGUs include: discount rates, inflation, electricity prices and CO2 emission allowance prices. Future financial results and thus the recoverable amounts of CGUs will also be driven by the prices of energy origin certificates, coal, heat and biomass prices.

The following table shows the value impact of selected factors on the total recoverable value (output value) of CGUs:

 

 

 

 

The Group performed a periodic assessment of asset impairment indications in the Mining segment (LWB) in accordance with IAS 36 Impairment of Assets. Due to the COVID-19 pandemic, which forces companies to operate in volatile, entirely unusual and unprecedented conditions, analysing these indications must be done especially carefully. Performing this evaluation for the purposes of the consolidated financial statements for 2020, the Group, based on an analysis of the current economic and market situation, believes that LWB’s current market capitalisation remains below the balance sheet value of its net assets. It should be noted that this indication was already present at the end of the previous financial year and was the main reason for an impairment test performed as at 31 December 2019. Despite the fact that the full-scale pandemic took place in 2020, this does not constitute the main indication of possible impairment of non-current assets, rather merely an additional indication confirming the need to perform an impairment test.

During 2020 (in comparison with the end of the previous financial year) the share price and thus also market capitalisation continued to decline, although not as substantially. According to the Group, this situation mainly stems from factors that are beyond its control such as political factors and the EU’s climate policy, and partly also low share liquidity and low free-float, as well as the economic slowdown brought on by the coronavirus pandemic. In connection with the above, despite the fact that the company’s non-current assets were tested for impairment at the end of 2019 and at the end of June 2020, the Group is required to perform an impairment test for the Mining segment also at the end of 2020.

Due to the inability to determine fair values for a very large group of assets for which there is no active market and no comparable transactions, the recoverable values of these assets were determined by estimating their useful values using the discounted cash flow approach based on the Group’s financial projections for 2021-2051.

Presented in the table below are the results of this impairment test:

 

The key assumptions used in estimating the value in use of the tested assets are presented below:

• given the links between the various divisions and the mine’s organisational scheme, all of LWB’s assets were considered as one CGU;
• the average volume of coal production and sales in 2021-2030 was set at 9.2 million tonnes. Given a conservative approach to the assumptions (also taking into account the provisions of “Poland’s energy policy 2040,” for test purposes it was assumed that in subsequent years coal sales will decline as the economy moves away from coal used for energy-generation purposes. However, due to the low unit cost of production of coal, market share is expected to remain at the level specified in the Strategy;
• forecast period from 2021 to 2051 – was estimated on the basis of the company’s extractable coal resources as at the balance sheet date (i.e. resources that are currently available using infrastructure existing as of the balance sheet date, which mainly concerns shafts. From 2035, the average annual output decreases as a result of deposits in the „Bogdanka” field being depleted and the assumption that only currently existing infrastructure is used);
• coal price: for the period 2021-2043, prices from studies prepared for the entire Group were used: the average coal sales price was estimated at 11.35 PLN/GJ, assuming a side-trend in the range +/-5%; from 2044, a constant price was used at the 2043 level,
• the entire model is inflation-free;
• real wage growth is assumed for the entire forecast period at a level that reflects the Group’s best possible estimate as at the test date;
• he discount rate is the weighted average cost of capital (WACC) of 6.00% throughout the entire forecast period, estimated based on the latest economic data (using a risk-free rate of 1.71% and a beta coefficient of 1.07);
• an average annual level of investment expenditures in the entire forecast period of PLN 291 014 thousand, including on average PLN 421 729 thousand in 2021-2035

The sensitivity analysis shows that significant factors having impact on the estimated recoverable values of CGUs include: discount rate, prices of coal for energy-generation purposes and the level of sales. Results of the analysis of the model’s sensitivity (change in recoverable value) on changes in key assumptions are presented below.

 

 

 

Furthermore, being aware of the significant impact of the effect of scale and optimal use of resources on LWB’s financial and operating results, and taking into account the trend to move away from hard coal, the Group also analysed changes in recoverable values in the model in the case of a reduction in the output of coal for sales purposes during the entire forecast period by 5% (vs. the existing recoverable resources, for example if it should become necessary to shut down a mine earlier). The results of the analysis of changes in recoverable values are presented in the following table. However, it should be noted that if demand is reduced or other factors that can have an adverse impact on the overall level of output materialise, the Group is automatically taking appropriate optimisation activities in order to ensure the most effective use of resources and maximise economic benefits at a given level of production