14. Impairment in value of non-financial assets
SELECTED ACCOUNTING PRINCIPLES
Goodwill is tested for impairment every year and each time when indications of impairment have been identified. Other non-financial non-current assets are tested for impairment if indications exist that they may have been impaired.
Within the impairment tests the Group estimates the recoverable amount of an asset or the cash-generating unit (“CGU”) to which the specific asset belongs. In order to conduct an impairment test, goodwill acquired under a business combination or acquisition of entities is assigned to individual cash-generating unit groups upon recognition. Information concerning identification of the CGU to which goodwill is allocated is presented in Note 26.
The recoverable value of an asset or CGU corresponds to the higher of the fair value less costs of sales or the value in use. If the carrying amount of an asset/CGU is higher than its recoverable amount, impairment occurs and the value of the asset is reduced to the recoverable amount determined.
Impairment losses are allocated to goodwill in the first place and the remaining amount is allocated to individual assets forming the CGU based on the share of the carrying amount of each asset in the carrying amount of the CGU, whereas as a result of such allocation the carrying amount of the asset may not be lower than the highest of three amounts: the fair value less disposal costs, the value in use and zero.
If the indications of impairment driving the recognition of an impairment loss in a preceding period are no longer present, the impairment loss is reversed or reduced. Impairment losses on goodwill are not subject to reversal.
PROFESSIONAL JUDGEMENT AND ESTIMATES
As at every balance sheet date the Group assesses whether objective indication of impairment occurs in relation to non-financial non-current assets. The analysis of indications covers both internal and external factors.
While performing an impairment test, the Group estimates the recoverable amount.
Estimation of the value in use of cash generating units is based on their future cash flows discounted to the current value with a discount rate. The value in use calculation is based on a series of assumptions as discussed below in more detail.
Key assumptions in the scope of tests performed as at 31 December 2022:
In the year ended 31 December 2022, the Group recognized as part of the result on continuing operations impairment losses related to non-financial fixed assets as a result of impairment tests of assets performed as at 31 December 2022.
The recoverable value of this group of assets corresponds to their useful value. The impairment losses charged mainly own cost of sales.
The impairment loss recognized as a result of the tests performed in the year ended 31 December 2022 is related to the following cash generating units:
| CGU | Company | Discount rate (after tax) assumed in tests as at: | Recoverable amount | Impairment loss recognized | |
|---|---|---|---|---|---|
| 31 December 2022 | 31 December 2021 | As at 31 December 2022 | Year ended 31 December 2022 | ||
| CGU Generation-Coal | TAURON Wytwarzanie S.A. | 12.24% | 8.96% | 5 762 | − |
| CGU Generation-Biomass | (161) | (35) | |||
| CGU ZW Katowice | TAURON Ciepło Sp. z o.o. | 12.24% | 8.96% | 645 | − |
| CGU ZW Bielsko-Biała | 210 | − | |||
| CGU ZW Tychy | 382 | − | |||
| CGU ZW Local Heating Plant Area | (3) | (16) | |||
| CGU Transmission | 8.60% | 6.89% | 869 | − | |
| CGU ECI Generation | Energetyka Cieszyńska Sp. z o.o. |
12.24% | n.d. | (12) | (24) |
| CGU ECI Transmission | 8.60% | n.d. | 27 | − | |
| Total | (75) | ||||
The need to write down the assets of the CGU Generation-Biomass results from the inability to generate positive cash flows in the long term. The increase in the price of biomass as a result of reduction in the supply of fossil fuel on the market has resulted in a decrease in market margins in the medium to long term.
On the other hand, the write-down of the assets of the CGU ZW Area of Local Heat Plants, the CGU ECI Generation and the goodwill of Energetyka Cieszyńska Sp. z o.o. results from the lower return on capital in the heat tariff calculated using the justified costs method in accordance with the Regulation of the Minister of Climate and Environment on detailed rules for shaping and calculating tariffs and settlements on account of heat supply in relation to the cost of capital assumed in the discount rate.
As at 31 December 2022, impairment tests were performed on property, plant and equipment ad goodwill, taking into account the following indications:
- the Group’s capitalisation remaining below the net asset carrying amount in the long term;
- significant price increases in global energy commodities, electricity and the price of CO2emission allowances, resulting from the energy crisis caused, inter alia, by the outbreak of war in Ukraine;
- increases in coal fuel prices resulting from a short-term excess of demand over supply due to the introduction of an embargo on the carriage and transport of coal and coke from Russia and Belarus;
- high volatility of energy prices on the forward market (including low liquidity) and persistently high prices on the spot market;
- the introduction from 28 October 2022 of a mechanism for limiting offers in the electricity balancing market in accordance with the Regulation of the Minister of Climate and Environment of 27 September 2022 amending the Regulation on detailed conditions for the operation of the electricity system;
- publication of the “RePowerEU” package to accelerate Europe’s independence from Russian fossil fuels by 2030, temporarily reduce energy consumption and diversify raw material supply sources;
- work on reforming the EU ETS market to adapt the scheme to the new higher CO2 emission reduction targets;
- dynamic development of RES, in particular the prosumer and micro-photovoltaic subsectors;
- price and wage pressure resulting from rising inflation levels;
- a 4.12% increase in the risk-free rate compared to the tests carried out as at 31 December 2021.
The tests conducted as at 31 December 2022 required estimating the value in use of cash generating units, based on their future cash flows discounted subsequently to the present value using a discount rate.
Within the Generation segment, the Group has identified the following cash-generating units (“CGUs”):
- TAURON Wytwarzanie S.A., where the business of generating electricity from conventional sources (hard coal) was separated as a cash-generating centre: CGU Generation-Coal. Within other areas of activity of TAURON Wytwarzanie S.A., the following cash generating unit was identified: CGU Generation-Biomass. The key premises justifying the inclusion of coal-fired generating units within CGU Generation-Coal included: the publication of provisions regarding the new Capacity Market mechanism in 2018, launching a new product – the capacity obligation; the strategy of joining the Capacity Market consisting in the portfolio approach, where maximising the total revenue from the Capacity Market is significant, as well as capacity allocation to suppliers, determining the level of capacity constituting reserve sources for the remaining capacity contracted at the capacity market and high dependence of cash proceeds among generators;
- TAURON Ciepło Sp. z o.o., where the heat transmission and distribution business of CGU Transmission was separated. In addition, within the heat and electricity generation business, tests were carried out for individual generation plants: CGU ZW Katowice, CGU ZW Tychy, CGU ZW Bielsko-Biała EC1, CGU ZW Bielsko-Biała EC2, CGU ZW Area of District Heating Plants;
- Two CGUs were separated in Energetyka Cieszyńska Sp. z o.o. as part of its heat generation and transmission business: CGU ECI Generation and CGU ECI Transmission;
The impairment tests for the CGUs indicated above were carried out on the basis of estimated cash flows covering the entire period of their operation, except for the CGU Transmission and CGU ECI Transmission, for which the tests were carried out based on the current value of the estimated cash flows from the CGU operations based on detailed projections up till 2032, as well as an estimated residual value.
The assumptions concerning the life of the generation units adopted for the impairment tests carried out as at 31 December 2022, including in particular:
- operation of generation units within the CGU Generation-Coal was assumed until 2060, including: four units in Jaworzno III Branch until 2025, units in Łaziska and Siersza Branches until 2025, a biomass unit in Jaworzno II Branch until 2027, two units in Jaworzno III Branch until 2028, two units in Jaworzno II Branch until 2030, a unit in Łagisza Branch until 2035, a unit in Nowe Jaworzno Branch until 2060;
- the operation of TAURON Ciepło Sp. z o.o. and Energetyka Cieszyńska Sp. z o.o. generation units was assumed until 2049.
The macroeconomic and sector-oriented assumptions underlying the projections are updated as frequently as any indications for their modification are observed on the market. The projections also take into account changes in the regulatory environment known as at the date of the test.
| Category | Description |
|---|---|
| Coal | The projected price of hard coal for 2023 has been raised by 111% compared to the result for 2022. This is due to the observed upward trends in the domestic cost of mining and the current situation on global coal markets, in particular the European market at ARA ports.
It was assumed that, in the long term, coal prices were expected to fall as a result of the acceleration of the decarbonisation policy driven by the European Union, aimed at achieving climate neutrality for Europe by 2050. After 2026, coal prices in Poland assume a constant value, due to decreasing coal demand and supply, which will be caused by decreasing electricity generation from conventional sources and the need to take into account global trends in domestic coal price paths (coal mine closures are assumed in accordance with the social agreement defining the timing of mine closures). |
| Electricity | During the calculation of the price paths, different scenarios were analysed in terms of commodities price prediction and the power balance of the National Power System (“KSE”). The adopted forecast of wholesale electricity prices for the period 2023-2040 has been updated and adjusted in the first three years (2023-2025) to current levels recorded in the market, taking into consideration the contracting level. In 2023, a significant increase in energy prices of approximately 62.2% as compared to 2022 has been assumed, which results, among others, from a significant increase in coal and gas prices and the structure of electricity generation in Poland. In 2024, the price will fall by approximately 9.4% compared to 2023. The forecast of wholesale electricity prices is affected by the current and predicted balancing situation in the KSE, forecasts of fuel prices and the costs of purchasing CO2 emission allowances. No significant impact on electricity demand has been assumed due to global warming and the average increase in demand has been assumed taking into account projected economic development rates. The observed change in the structure of electricity generation and the increase in the share of renewable energy sources reduces the level of electricity prices and margins achieved when selling electricity from coal-fired sources – this effect is partially compensated by assuming the impact of the Scarcity Pricing mechanism on wholesale electricity prices after 2025. The projected difficult balance situation in Europe is caused by the progressive shutdown of conventional sources.
The electricity retail price path has been adopted based on the wholesale price of black energy, taking into account the costs of excise duty, the obligation to redeem energy certificates of origin as well as the expected level of margin resulting from historical values. Electricity price regulations have been adopted on the basis of the Act of 27 October 2022 on extraordinary measures to limit the level of electricity prices and support certain consumers in 2023 and the Regulation of the Council of Ministers of 8 November 2022 on the manner of calculating the price cap. The regulations had a negative impact on the cash flow estimates in 2023 for the Generation segment and the Renewables segment. For the Sales segment, the above regulations had a neutral impact due to the assumed compensation. |
| CO2 | CO2 emission limits for heat generation have been adopted in line with the regulation of the Council of Ministers and adjusted by the level of operations, i.e. generation of heat.
The CO2 emission allowance price growth path has been adopted throughout the forecasting horizon. In the contracting for 2023, a 29.9% higher price of CO2 emission allowances was assumed compared to the average price in contracting for 2022. In 2024, compared to 2023, the price of CO2 emission allowances is higher by 4.1%. This is the effect of the combined impact of the uncertain economic situation and the additional supply of allowances on the market from the sale of additional allowances to finance the RePowerEU package. Up till 2030, a price increase to the level of approx. EUR 105/Mg in fixed prices (approx. EUR 120/Mg in current prices) has been assumed due to the assumption of an increase in the Linear Reduction Factor (LRF) to the level of 4.2% proposed by the European Commission (from the current 2.2%). A further increase in the price of CO2 emission allowances is assumed in the years 2031-2040, compared to 2030, which stems from the assumed increase in the decarbonisation rate of the economy and the target of achieving climate neutrality of Europe in 2050. The price of CO2 projected for 2040 amounts to approx. EUR 100/Mg (approx. EUR 140/Mg in current prices). |
| Certificates of energy origin | The price path for certificates of energy origin and the obligatory redemption in the subsequent years have been adopted based on the provisions of the RES Act and the system balance forecast. |
| Capacity market | It is assumed that payments for capacity will be maintained until 2025 for existing coal-fired units which do not meet the EPS 550 criterion (for which the unit emission performance exceeds 550 kg/MWh). For units which concluded long-term contracts by 31 December 2019 and do not meet the EPS 550 criterion, maintaining of payments until the end of the contract effectiveness period has been assumed. |
| RES | With regard to the RES Area, existing support systems (certificate of origin scheme, auction scheme, FIT/FIP feed-in tariff system, guarantee of origin scheme) are taken into account, of which the certificate of origin scheme is the most significant. Within this system, for green energy, limited support periods were included, in line with the provisions of the RES Act defining new mechanisms for granting the support for electricity generated from this type of sources. The support period was limited to 15 years counted from the moment of first injection to the grid of electricity eligible to receive the energy origin certificate. |
| Natural gas | The projected price of natural gas for 2023 has been raised by 81.1% compared to the result for 2022. The main reason for the projected increase is the likely emergence of an unstable supply-side situation during the period of filling gas storage facilities in Europe, as a result of a significant decline in volumes of natural gas supplied from Russia. The forecast also takes into account the risk of rising demand for natural gas in Asian countries and consequently LNG prices, which have a significant impact on the pricing of futures contracts in Western European gas hubs. In addition, the growing uncertainty associated with increasing weather risks and a significant increase in the prices of other related products (oil, coal and CO2 emission allowances) add an element of uncertainty associated with gas prices. The factors provided are already reflected in prices of the futures contracts listed for 2023-2024. In the subsequent years, it was assumed that new gas supply directions for the world’s gas hubs would gradually become structured, resulting in successively lower prices of this commodity in Europe. |
| WACC | The weighted average cost of capital (WACC) during the projection period for individual CGUs has been adopted in the range of 6.67%-12.24% in nominal terms after tax, taking into account the risk-free rate corresponding to the yield on 10-year Treasury bonds (at a level of 5.9%) and the risk premium for operations relevant for the power industry (6.75%). The growth rate used for extrapolation of projected cash flows going beyond the detailed planning period has been adopted at a level of 2.5% and corresponds to the estimated long-term inflation rate.
The WACC level as at 31 December 2022 as compared to the level as at 31 December 2021 increased in individual segments, mainly due to an increase in the risk-free rate and the debt cost. |
| Remuneration | An increase in wages was assumed, based on signed wage agreements with the social side and an increase in the minimum wage with effect for the following years of the financial forecast. |
| Regulated revenue | Regulated revenue of distribution companies has been assumed, ensuring the coverage of justified costs and a reasonable level of return on capital . The return on capital depends on the Regulatory Asset Value. In the years 2023-2032, an average increase in electricity supply by 1% year-on-year has been assumed. The WACC adopted for the calculation of regulated income in 2023 is 8.478% (gross), in the 2024-2032 period and in the residual period 7.478% (gross). The growth rate used to extrapolate cash flow projections beyond the detailed planning period was assumed at 2.5% and corresponds to the assumed long-term inflation rate. |
| 910 MW Unit | The CGU tests assumed the most likely operating scenario for the 910 MW unit in the Nowe Jaworzno Branch. In 2023, the unit is assumed to operate at a lower net capacity of 650 MW due to ongoing PSE testing. Full availability and optimum parameter values were assumed to be achieved from 2024. |
| Nowe Jaworzno | The target net capacity of 820 MW was assumed. The planned production level assumes a unit failure rate of 6%, which is a standard for this class of generating units. The electricity repurchase taken into account, on the one hand, relates to the emergency shutdown periods of the unit and, on the other hand, results from the adopted shutdown periods planned in connection with maintenance works. The plans also comprise a reduction volume associated with a lower PSE electricity demand during off peak hours.
Component overhauls comprising medium and major overhauls are foreseen for the 910 MW unit, alternating in two-year cycles. The aim of component overhauls is to ensure safe and technically and economically compliant operation. In addition, a number of modernisation tasks are planned to improve the current availability rates with the planned lifetime of the unit. As part of the ongoing maintenance of the 910 MW unit assets, the Group has maintenance agreements in place to cover the key technological systems of the generating unit, and funds for this work have been secured within the overhaul costs. |
| Changes in working capital CGU Generation -Coal | The projected working capital in the CGU Generation-Coal is derived from the assumed level of production, the price assumptions adopted and the distribution of revenue and cost payments. A significant component of working capital comprises assets and liabilities associated with the CO2 settlement obligation.
In the first years of the plan, the effects of concluded CO2 supply contracts in terms of volume, price and payment term were taken into account. For the subsequent non-contracting years, assumptions compliant with the CO2 purchasing strategy were used, whereby the settlement and purchase of CO2 allowances takes place in the year following the year of emission. This results in the absence of a recognised CO2 allowance asset at the end of each year from 2026 onwards, which has reduced the level of projected working capital in subsequent years. The tests of the CGU Generation-Coal assume the simultaneous settlement of CO2 advances in the years 2023-2025. |
| Sales volume and production capacity | The volume of sales to end customers was assumed taking into account the GDP growth, the competitive situation in the market, the significant increase in financial costs (trade credit costs) incurred by sales companies. This has caused a decrease in the volume in 2023. From 2024, a gradual recovery of the lost volume is planned.
The economic useful lives of fixed assets and the maintenance of production capacity as a result of replacement investments were taken into account. |
In addition to tangible fixed assets, the CGUs tested comprised intangible assets and rights to use assets.
Sensitivity analysis
The sensitivity analysis as at 31 December 2022 to changes in the most significant assumptions is presented for the cash-generating units for which write-downs had been recognized as at 31 December 2022, i.e. the CGU Generation-Biomass, the CGU District Heating Area, and the CGU Energetyka Cieszyńska – Generation. The negative direction of changes in the assumptions used for the sensitivity analysis does not affect the increase in the write-down, due to the fact that the tangible fixed assets assigned to the indicated CGUs had been written down to zero.
| Parameter | Change in | Decrease in net write-down |
|---|---|---|
| Change in heat prices over the forecast period | 5% | 33 |
| -5% | − | |
| Change in prices of CO2 emission allowances over the forecast period | 5% | − |
| -5% | 9 | |
| Change in coal prices over the forecast period | 5% | − |
| -5% | 4 |
Impairment of the carrying amount of goodwill
The test was performed for the net assets increased by goodwill in each operating segment. The recoverable amount in each company was determined based on the value in use.
An impairment of goodwill in Energetyka Cieszyńska Sp. z o.o. in the amount of PLN 18 million was identified as part of the test performed as at 31 December 2022.