2.4 Equity-accounted investees

Joint arrangements

Joint arrangements include:

• Joint operations (see Note 8.5.),
• Joint ventures.

As a partner in a joint venture, in the consolidated financial statements the Group recognises its interest in the joint venture as an investment and accounts for that investment with the equity method.

According to the equity method, investments are initially recognised at cost, and subsequently adjusted for the Group’s share in changes of their net assets which occurred in the period from the date joint control was assumed to the reporting date, less impairment. When the Group’s share of losses of a jointly controlled entity exceeds the Group’s interest in that entity, the Group discontinues recognising its share of further losses. Unrealised gains and losses on transactions between the Group and a jointly controlled entity are eliminated on consolidation proportionately to the Group’s interest in the jointly controlled entity. The equity method is also applied in the PGNiG Group’s consolidated financial statements to recognise interests in associates over which the PGNiG Group has significant influence.

Significant influence

If an entity holds, directly or indirectly (e.g. through subsidiaries), 20% or  more of the voting power of the investee, it is presumed that the entity has significant influence, unless it can be clearly demonstrated that this is not the case. Conversely, if the entity holds, directly or indirectly (e.g. through subsidiaries), less than 20 per cent of the voting power of the investee, it is presumed that the entity does not have significant influence, unless such influence can be clearly demonstrated. A substantial or majority ownership by another investor does not necessarily preclude an entity from having significant influence.

Impairment of investment in joint venture SGT EUROPOL GAZ S.A.

As at the end of each reporting period, the Parent tests its investment in SGT EUROPOL GAZ S.A. (a jointly controlled entity accounted for with the equity method) for impairment and measures the investment’s value in use using the discounted cash flow (DCF) method. The valuation was based on the Inter-Governmental Protocol of October 29th 2010, which specified the company’s expected net profit.

The company’s value estimated with the DCF method as at December 31st 2020 was PLN 840m.

The calculations were based on the assumption that in each year in 2011−2021 net profit earned by SGT EUROPOL GAZ S.A. (EUROPOL GAZ) will be PLN 21m. The discounted cash flows include all cash flows generated by EUROPOL GAZ, including cash flows related to the servicing of interest-bearing borrowings (interest expense and principal repayments) and other risks known to the issuer. The cash flows were discounted using a discount rate of 5.35% (in real terms).

As at the end of 2020, the value of the Parent’s interest in EUROPOL GAZ determined using the equity method was PLN 1,788m. Therefore, a PLN 31m impairment loss was recognised in the current reporting period to align the equity method valuation of the interest with the DCF valuation of the interest.

The impairment test result is sensitive to the adopted assumptions regarding future cash flows (which depend on whether the provisions of the Inter-Governmental Protocol with respect to net profit to be earned in each of the years are implemented by the company) and discount rate. Changes in those assumptions following from updates of the company’s financial forecasts and changes in the discount rate due to general or company-specific factors, may have a material effect on the company’s future value.

Impairment of investment in Polska Grupa Górnicza S.A., a joint venture

The PGNiG Group’s joint control of Polska Grupa Górnicza S.A. (PGG), a joint venture, is exercised through the equity interest held by PGNiG TERMIKA S.A. (a subsidiary of PGNIG S.A.) in PGG. During 2020, the equity interest in PGG was tested for impairment; the main considerations were:

• the key assumptions of Poland’s energy policy,
• lower expected future cash flows due to lower coal production forecasts,
• employment at the company continued above the planned level,
• impact of the Covid-19 pandemic on the company’s results.

As a result of the test, the value in use of the Group’s equity interest in PGG as at the end of 2020 was determined at PLN 0, which means that the impact of the test on the 2020 financial result of the PGNIG Group will be negative at PLN -260m (in 2019, the impairment impact on the PGNiG Group’s financial result was PLN -143m). The value of the holding in PGG was determined with the discounted cash flow method. For more information on the recognised impairment loss, see Note 2.4.1.

The result of the impairment test is sensitive to the assumptions made with respect to future cash flows (planned coal production levels, correlated with Poland’s energy policy objectives, employment levels and related labour costs) and discount rates. Changes in those assumptions following from updates of the company’s financial forecasts and changes in the discount rate due to general or company-specific factors, may have a material effect on the company’s future value.