Annual report 2019

As at 31 December 2019, an impairment test was carried out for property, plant and equipment, taking into account the following premises:

• changes in global energy prices and greenhouse gas emission allowances,
• changes in raw material prices,
• results of completed capacity market auctions with delivery in 2021, 2022, 2023 and 2024,
• coming into force of the December 14 2018 act on promoting electricity from high efficiency cogeneration.

The testing methodology complies with International Accounting Standard 36 Impairment of Assets. The tests consisted of comparing the carrying amounts of the cash generating units (CGUs) to which goodwill was allocated with its recoverable value. Determining fair value for very large groups of assets, for which there is no active market and only few comparable transactions, is very difficult in practice. In a power and heating plant, for which the value on the local market has to be determined, there are no observable fair values.

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.

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 Group's asset maintenance strategy.

In the conducted tests the useful value was adopted as recoverable value in the tests. In accordance with the standard useful value is the current, estimated value of future cash flows expected to be received on further use of a cash generating unit – the DCF method. The adopted model assumes calculating the value of KOGENERACJA S.A. based on the discounted cash flow (DCF) method in the years 2020 - 2030 adjusted for the forecast for 12/2019 and the residual value determined by the Gordon model. In the Company’s opinion, adopting financial projections longer than the five-year ones recommended by IAS 36, is justified due to the material and long-term impact of the estimated changes in the regulatory environment.

The key assumptions influencing the recoverable amount of tested CGUs were as follows:

• forecasts of electricity prices for the years 2019-2030, assuming an increase in the average electricity market price by 42% in the period 2019-2030,
• CO₂ emission rights prices forecasts for the years 2018-2030, assuming an increase in price by 225% in the period 2018-2030,
• hard coal prices forecasts for the years 2019-2030, assuming an increase in price by 21%,
• accounting for revenues from the Capacity Market in the period 2021–2027,
• maintaining production capacity as a result of capital expenditure on replacement projects;
• adopting the weighted average cost of capital after tax (WACC) over the period of the projection at a level of 7.29%.

The results of the sensitivity analysis showed that mainly the changes in assumptions relating to weighted average cost of capital had the largest impact on the useful value of the measured assets.

The analysis of sensitivity to changes in a reasonable range of the main parameters (+/-0,5 p.p.) did not indicate the need to recognise the impairment loss.