In the first half of 2016 the PGE Group identified impairment indications that could significantly influence the value of the power generating assets and goodwill of Renewables segment.
In the fourth quarter of 2016, the Group verified the indications once again and found it essential to revise impairment allowances in the area of wind energy.
In the PGE Group’s opinion the most important factors influencing the recoverable amount of assets are:
Changes in the market environment
The delayed entry into force of the new support system for the production of electricity from renewable energy sources causes that new units are involved in the current system of support. Although, since the beginning of 2016, the support for large hydropower and biomass co-firing with coal technologies was limited, the delayed entry into force of the provisions of section 4 of the Act on Renewable Energy Sources dated February 20, 2015 contributed to even higher increase of a large surplus of green certificates. Additionally, expected changes of the support system contributed to the intensification of construction works, the consequence of which was a large number of wind power plants that were put into use in 2015 and in 2016. As a result, there have been further declines of prices of energy origin rights and worsening future forecasts.
Changes in the legal environment
On May 20, 2016 act on investments in wind farms was passed. Among other things, it amends the definition of construction in the construction law. Changed definition of construction causes that the tax base of real estate tax will be expanded to wind farms.
Consequently, the PGE Group forecasts a decrease in future cash flows and recognizes the risk of impairment of power generating assets of Renewables segment in the area of wind farms.
The impairment tests of cash-generating units (“CGU”) were carried out as at June 30,2016 and then as at December 31, 2016 in order to determine their recoverable amount. The recoverable amount was determined based on estimated value in use of the tested assets calculated using the discounted cash flow method on the basis of financial projections for assumed economic useful life of the particular CGU. According to the PGE Group, adoption of the financial projections longer than five years is reasonable due to the fact that property, plant and equipment used by the Group have significantly longer economic useful lives and due to the significant and long-term impact of projected changes in the regulatory environment.
The impairment allowances of projects concerning wind farms were significantly influenced by the following:
- the Act of May 20, 2016 on investments in wind farms defined the conditions of construction and localization of wind farms located near existing and planned residential buildings. The provisions of the Act concern installations on land exceeding the power of kW 40. The most important changes which were introduced under the power of the Act include:
- minimum distance between the wind power plant and residential building or mixed-function building is equal to or greater than ten times the heights of the power plant, measured from the ground level to the highest element of the building, including technical elements, escpecially a rotor with blades;
- permission to build a wind power plant issued before the Act becomes effective remain valid if the occupancy permit is issued within three years from the date of effectiveness of the Act.
a draft of the Government Order of November, 2016 concerning the maximum quantity and value of electricity obtained from the renewable energy sources that can be sold through auction in 2017. According to the Act of February 20, 2015 on renewable energy sources, the Council of Ministers determines the amount of energy which can be bought through auction in the following year. The decrease in total value of investment projects results from their oversupply in contrast to little demand for renewable energy resulting from the draft of the Government Order.
Due to the minor probability of realization of the projects, the PGE Group decided to raise impairment allowance covering all investment projects related to wind farms located on land, except for Karnice II Project. The amount of the impairment allowance was determined in the same way as for available-for-sale assets, i.e. through comparison of the carrying value to the fair value less costs of disposal.
The key assumptions influencing the recoverable amount of the CGUs tested were as follows:
recognition as a single CGU of:
- pumped-storage power plants
- other hydropower plants
- particular wind farms
- the production of electricity and energy origin rights based on historical data and expert estimates made for investment needs and taking into consideration the availability of particular units,
- forecasts of electricity prices for the years 2017-2038 assuming an increasing trend of wholesale market price by 2031 and decrease in prices in the following years (in fixed prices),
- price forecast for renewable energy origin rights assuming first growth and then, since 2019, decrease of prices (with an exception that for the production covered by binding contracts prices resulting from these contracts were assumed),
- increase of property tax,
- maintenance of production capacities at the current level, as a result of replacement investments,
- adoption of weighted average cost of capital after tax (WACC) at the level of 7.56%.
Forecasted electricity and energy origin rights prices are derived from the study prepared by an independent expert. The forecast of energy prices defined as the most likely was considered, with an exception that for the part covered by binding contracts, prices resulting from these contracts during their validity were assumed.
Impairment of the power generating assets of Renewables energy segment
The tests conducted indicate impairment of some of the wind farms, majority of investment projects and goodwill allocated to this CGU.
|As at December 31,2016||Assets value before impairment||Impairment loss||Value after impairment|
|Power generating assets of Renewables segment|
|Pumped-storage power plants||808||-||808|
|Other hydropower plants||322||-||322|
|Wind investment projects||224||(218)||6|
|Marine investment projects||61||-||61|
|Unallocated assets and non-core||82||(1)||81|
|Property, plant and equipment and intangible assets under construction (excluding wind projects)||19||-||19|
The results of the sensitivity analysis show that changes in estimates regarding weighted average cost of capital as well as sales prices of electricity and energy origin rights have the most significant impact on the recoverable amount of the measured assets. The table below presents the estimated impact of changes in key assumptions on changes in impairment loss of Renewables segment’s assets as at December 31, 2016 (data in PLN million).
|Parameter||Change||Impact on impairment loss|
|Increase in impairment loss||Decrease in impairment loss|
|Change in electricity prices throughout the forecast period||+1%||-||16.6|
|Change in WACC||+ 0.5 p.p.||61.6||-|
|- 0.5 p.p.||-||52.2|
|Change in energy origin rights prices throughout the forecast period||+ 1%||-||8.8|