The observed in the II half of 2014 decline in crude oil prices on the global markets affects the result of the Upstream segment within the ORLEN Group operations in Canada. As a result, an impairment tests were carried out as at 31 December 2014, in accordance with IAS 36 – impairment of assets, an impairment allowances of evaluation and extraction of mineral resources assets in the Canadian TriOil, belonging to the ORLEN Upstream Group of PLN (311) million was recognized.
As at 31 December 2014 the fair value of evaluation and extraction of mineral resources assets in Canada was determined based on the projected crude oil prices and reserves evaluation developed by an independent company in accordance with professional standards for the Canadian market.
Projected net cash flows used for the estimation of fair value of the assets were discounted to their present value using a discount rate that reflects the current market value of money and the specific risks to the assets on the Canadian market, which amounted to 9%.
Sensitivity analysis of the ORLEN Upstream Group assets value in use within an impairment test performed as at 31 December 2014
|in PLN million||EBITDA|
|- 0.5 p.p.||increase in allowance (19)||decrease in allowance 32||decrease in allowance 84|
|0.0 p.p.||increase in allowance (50)||-||decrease in allowance 50|
|+ 0.5 p.p.||increase in allowance (80)||increase in allowance (31)||decrease in allowance 18|
As at 31 December 2014 the ORLEN Group did not identify any new impairment indicators of other assets within the ORLEN Group.
The Group’s results for the 12 months of 2014 include the impairment allowances recognized as a result of the impairment tests carried out as at 30 June 2014 in accordance with IAS 36 – impairment of assets.
As at 30 June 2014, an impairment indicators were identified in the ORLEN Group and resulted from the deterioration of the macroeconomic situation and the lack of prospects for its improvement, particularly in the refinery area. Limited fuel consumption due to lasting economic crisis, excess of global capacity increasing products’ supply and growing pressure on margins resulting from shale gas revolution in America and economic changes in Russia have led to an update of assumptions of Group’s Strategy and Mid-term Plan for years 2014-2017.
During development of assumptions to impairment tests, in accordance with IAS 36 – impairment of assets, the legitimacy and the possibility of estimation of the fair value and value in use of individual assets of the ORLEN Group was considered. The measurement of fair value less cost of disposal is not possible because there is no basis for making a reliable estimate of the price, at which an orderly transaction to sell the asset owned by the Group would be executed.
As a result, it was assumed that the best estimate of the recoverable amount of particular Group’s assets is its value in use, according to IAS 36.20.
As at 30 June 2014, the analysis were conducted based on the Mid-term Plan for 2014-2017 and after the period of financial projections a constant growth rate of cash flows was adopted estimated separately for each relevant geographic markets at the level of long-term inflation.
While determining the value in use, future cash flows are discounted to their present value with a discount rate before tax that represents current market valuation of time value of money as well as the common risk allocated to the relevant asset.
The discount rate is calculated as the weighted average cost of capital of equity and debt. The source for macroeconomic indicators necessary to determine the discount rate were based on publications of prof. Aswath Damodaran (source: http://pages.stern.nyu.edu), the official listing of treasury bonds and rating agencies available as at 30 June 2014.
The discount rate structure used in the impairment tests of assets by cash-generating unit of ORLEN Group as at 30 June 2014
|Cost of equity||13.10%||11.41%||11.61%||11.85%||10.72%||9.10%||9.28%||13.99%||12.24%||10.20%||7.40%|
|Cost of debt after tax||4.25%||4.25%||4.25%||4.25%||2.58%||2.58%||2.58%||4.92%||4.92%||2.89%||1.65%|
|Nominal discount rate||10.13%||10.46%||8.47%||9.62%||7.99%||8.23%||6.43%||10.94%||9.12%||5.75%||4.95%|
|Long-term rate of inflation||2.22%||2.22%||2.22%||2.22%||1.96%||1.96%||1.96%||2.20%||2.20%||2.08%||1.40%|
Cost of equity is determined by the profitability of the government bonds that are considered to be risk-free, with the level of market and operating segment risk premium (beta).
Cost of debt includes the average level of credit margins and expected market value of money for each country. The analysis in periods were separately determined for each cash-generating unit on the basis of the expected useful life.
Useful life used for analysis by main cash generating units as at 30 June 2014
|Usefull life in years||Minimum||Median||Maximum|
As at 30 June 2014 impairment testing for each CGU was performed.
As a result of the impairment tests performed an impairment allowances of assets of PLN (5,002) million were recognized and mainly related to selected CGU Refining assets of the ORLEN Group. Additinal information is presented in note 9.2.
After analysis of ability to generate future tax profits the Group recognized deferred tax asset from a part of the above impairment allowances in the Unipetrol Group of PLN 135 million.
Future financial performance is based on a number of assumptions, a part of which concern macroeconomic factors, including: commodity prices, product quotations on global markets, foreign exchange rates or interest rates, remain beyond the control of the Group. Changes in these assumptions can affect impairment tests results of non-current assets and as a result may lead to changes in the financial standing and financial results of the Group.
Sensitivity analysis of ORLEN Group’s assets value in use within an impairment test performed as at 30 June 2014
The major elements that influence the amount of the value in use of assets within the individual cash-generating unit are: operating profit before depreciation and amortisation (i.e. EBITDA ratio) and the discount rate.
The sensitivity of changes of the above factors on the impairment allowances are presented below
|in PLN million||EBITDA|
|- 0.5 p.p.||increase in allowance (148)||decrease in allowance 64||decrease in allowance 310|
|0.0 p.p.||increase in allowance (667)||-||decrease in allowance 239|
|+ 0.5 p.p.||increase in allowance (1256)*||increase in allowance (478)||decrease in allowance 158|
*change reflects not only an increase of impairment allowances recognized in half year of 2014 but also additional impairment allowance of assests mainly of CGU Rafininery of PKN ORLEN and CGU Petrochemistry of Unipetrol Group, which would occur after the change of assumptions.
Impact of impairment allowances of non-current assets on consolidated statement of profit or loss and other comprehensive income for the period ended 31 December 2014
|Buildings and constructions||(738)||107||(631)|
|Machinery and equipment||(4,211)||13||(4,198)|
|Vehicles and other||(84)||1||(83)|
|Construction in progress||(106)||5||(101)|
|Assets related to development and extraction of mineral resources||(309)||-||(309)|
|Exploration and evaluation of mineral resources assets||(13)||-||(13)|
|Patents, trade marks and licenses||(19)||4||(15)|
|9.1 ,9.2, 12.2, 14.1, 14.3||(5,492)||132||(5,360)|
In 2013 net impairment allowances of PLN (185) million were recognized mainly in the Upstream segment and related to Orlen International Exploration & Production Company BV
Based on an analysis of the KAMBR project stating the lack of hydrocarbon saturation an impairment allowance of PLN (89) million including PLN (3) million on goodwill was recognized.
Moreover, impairment allowances of property, plant and equipment of PLN (54) million and energy rights of PLN (42) million were recognized, due to changes in legal regulations and lack of opportunities to use them in the future.