14.4.3. Recognition and Reversal of impairment allowances of property, plant and equipment, intangible assets, goodwill and rights-of-use assets as at 31 December 2021

Assets of the Energy segment

The cash flows for the Energa Group’s assets were estimated based on the underlying macroeconomic assumptions used by the ORLEN Group, verified based on the forward curves for CO₂ and natural gas prices and the concluded contracts.

As at 31 December 2021, ENERGA Group recognized a impairment allowance in the amount of PLN (77) million of which PLN (67) million resulted from tests. Other net impairment allowance of PLN (10) million relate mainly to discontinuation of investments.

The total value of recognized impairment allowance amounted to PLN (92) million. Asset impairment tests have shown the need to make an impairment allowance in the amount of PLN (55) million for ENERGA Elektrownie Ostrołęka: CGU Ostrołęka B. Discount rates ranging from 5.61% to 7.73% were used for the valuation of assets. The value of the assets after the impairment allowance for CGU Ostrołęka B (excluding land and perpetual usufruct rights) is 0. Asset impairment tests have shown the need to make a impairment allowance in the amount of PLN (14) million for ENERGA KOGENERACJA: CGU Żychlin (impairment allowance realized in the second quarter of 2021). A discount rate of 4.16% was used for the valuation of assets. Additionally as at 31 December 2021, ENERGA OZE: CGU Magazyn Energii recognized impairment allowance in the amount of PLN (10) million with a discount rate of 6.30%. Other impairment allowance in the amount of PLN (13) million related mainly to abandonment of investments, liquidation of tangible fixed assets and others.

The total value of reversals of impairment allowances was PLN 15 million and mainly related to: ENERGA KOGENERACJA: CGU Żychlin PLN 12 million due to revaluation and ENERGA Elektrownie Ostrołęka: CGU Ostrołęka B of PLN 3 million due to the revaluation of the provision for reclamation. The value in use of CGU Żychlin is PLN 33 million and was calculated at a discount rate of 6.23%.

Sensitivity analysis of value in use of the ENERGA KOGENERACJA: CGU Żychlin as part of the tests carried out as at 31 December 2021

CGU Ostrołęka B and ENERGA OZE: CGU Magazyn Energii are not sensitive for changes of the discount rate and EBITDA.

As at 31 December 2020, the ORLEN Group has not identified any impairment of assets in the Energy segment. The analyzes used the appropriate discount rates presented (note 14.4.1).

Assets of the Refinery segment

The ORLEN Group conducted tests for impairment at the end of 31 December 2021 base on the above assumptions. The test resulted in the reversal of impairment losses on assets of the Group ORLEN Południe in the amount of PLN 70 million and in ORLEN Lietuva in the amount of PLN 6 million.

Impairment tests for the production assets of the ORLEN Południe Refining segment carried out at a discount rate of 8.09% for CGU Other showed the possibility of reversal of impairment allowance in the amount of PLN 51 million and determined the value in use at PLN 879 million, for CGU Bio, showed the possibility of reversing the write-offs in the amount of PLN 19 million and set the value in use at the level of PLN 960 million.

Impairment tests for the production assets of the ORLEN Lietuva refining segment, carried out at a discount rate of 6.14%, showed a surplus of value in use over the carrying amount of the tested assets including allocated goodwill on the acquisition of UAB Mockavos terminalas in the amount of USD 1.6 million, which corresponds to PLN million. Value in use was set at PLN 3,120 million.

As at 31 December 2021, impairment tests were also performed on the production assets of the ORLEN Unipetrol Group’s refining segment with a discount rate of 7.41%. The analysis did not show any impairment of assets and determined the value in use at PLN 3,919 million.

In 2021, as a result of the asset impairment tests, it was not necessary to write down ORLEN Oil assets. As at 31 December 2021, the value in use amounted to PLN 326 million and was calculated at the discount rate of 8.09%, which corresponds to the rate for the refining segment, taking into account organizational changes resulting from the Company’s Strategy.

Additionally, for the PKN ORLEN Refinery segment, the result of the estimation of the recoverable amount for 4 fuel terminals determined using the fair value method less costs to sell, the Company made impairment losses on property, plant and equipment in the amount of PLN (51) million.

As at 31 December 2020, the relevant impairment tests for the production assets of the Refining segment showed the need to recognize impairment losses in the amount of USD (22) million for the production assets of the ORLEN Lietuva Refining segment, which corresponded to PLN (81) million. The discount rate for the assets of Orlen Lietuva was 6.22%.

As at 31 December 2020, the ORLEN Unipetrol Group recognized a write-down on PARAMO’s assets related to the approval of the business strategy and the decision to close the production plant in Kolin in the amount of CZK (387) million, which corresponded to PLN (66) million. The discount rate for the refining assets of the ORLEN Unipetrol Group was 5.64%.

As at 31 December 2020, ORLEN Oil reversed the impairment loss for the amount of PLN 30 million, using a discount rate of 3.82%, adequate for distribution units.

Value in use of the CGU of the Refining segment in the ORLEN Group as at 31 December 2021 and as at 31 December 2020 for which the value of assets was updated

Sensitivity analysis for impairment of value in use ORLEN Południe CGU Other under tests carried out as at 31 December 2021

Sensitivity analysis of the impairment of value in use of ORLEN Południe CGU Bio as part of the tests carried out as at 31 December 2021

Sensitivity analysis of impairment in value in the Refinery segment of the ORLEN Lietuva Group as part of the tests carried out as at 31 December 2021

Sensitivity analysis for impairment of the value in use of the ORLEN Lietuva Group Refinery segment as part of the tests carried out as at 31 December 2020

Sensitivity analysis of the value in use of the ORLEN Unipetrol Group Refinery segment as part of the tests carried out as at 31 December 2020

The levels of the impairment allowances and reversals on the assets of ORLEN Oil and PARAMO estimated as a result of the valuation are not sensitive to the change of the discount rate +/- 1p.p. adopted for the sensitivity analysis. and EBITDA +/- 5%.

Assets of the Petrochemical segment

The ORLEN Group conducted impairment tests at the end of 31 December 2021 based on the above assumptions. The tests carried out with the discount rate at the level of 7.65% resulted in the reversal of impairment allowance for Anwil S.A. CGU Tworzywa in the amount of PLN 29 million. Value in use was set at PLN 1,127 million.

Sensitivity analysis of the value in use of assets in the petrochemical segment of CGU Anwil Tworzywa as part of the tests carried out as at 31 December 2021

Assets of the Upstream segment

Each exploration project and production area within the Upstream segment is treated as a separate CGU.

As at 31 December 2021, as a result of asset impairment tests, the ORLEN Upstream Group reversed net impairment losses on non-current assets in the amount of PLN 918 million.

The reversal of impairment losses results from the revaluation of cash flows for the ORLEN Upstream Group assets located in Poland and Canada based on Provision Reports prepared by independent companies.

In Canada, supportive economic conditions helped maintain favourable natural gas prices throughout the year. Increased local demand and a surge in gas exports to the US provided a favourable pricing environment for hydrocarbon producers in Canada. Benchmark AECO gas prices in Alberta reached as high as CAD 5.0/mcf in the second half of the year, the highest level since 2014. The average annual price of AECO gas was CAD 3.61/mcf in 2021, compared with CAD 2.22/mcf a year earlier, up 63% year on year.

Oil demand gradually increased in 2021 as the economy recovered. The US EIA estimates crude demand growth at 5.1 mboe/d throughout 2021, after the pandemic-driven decline of 8.5 mboe/d in 2020. With the OPEC+ alliance pursuing a policy of slow lifting of crude oil production caps, the demand-side imbalance persisted and the upward trend in crude prices continued practically throughout the year. The average price of Brent crude in 2021 was USD 71/bbl, compared with USD 42/bbl a year earlier, up 69% year on year. The average annual price of CLS (Canadian Light Sweet) crude was CAD 80/bbl, compared with CAD 45/bbl a year earlier, up 78% year on year. The average price differential of CLS to the US WTI benchmark was CAD -5/bbl (CAD -7/bbl in 2020).

The ORLEN Group’s strategy assumes continuation of upstream operations through cautious and balanced development of the portfolio of upstream assets, with a particular focus on gas fields. Investment works in 2021 were carried out based on the assumptions of the ORLEN Group’s Strategy until 2030, which took into account, inter alia, maximizing the value of assets and extraction, prioritizing selected exploration and appraisal projects and launching production in areas under development. Taking advantage of the recovery in the hydrocarbon prices market and favorable medium-term forecasts for crude oil and natural gas, the Company decided to accelerate and increase the material scope of the drilling program in 2021, which despite a decrease in the level of verified resources by 15% in Poland and 1% in Canada translates into a significant increase in the value of investments in ORLEN Upstream.

As a result of the tests carried out in 2021, ORLEN Upstream Polska recognized the possibility of reversing the impairment losses on net assets in the amount of PLN 164 million.

As a result of the tests and the withdrawal from some exploration projects in 2021, the ORLEN Upstream Polska Group recognized impairment losses in the amount of PLN (120) million, of which impairment allowance of development and extraction assets amounted to PLN (81) million for the Miocen project, PLN (2) million for the Płotki project, while for the exploration and evaluation assets for the Sieraków project, the impairment allowance was PLN (24) million, and for the Edge project, PLN (13) million. In the same period, there were also reversals of impairment allowance in the amount of PLN 284 million for development and production assets for the Płotki project PLN 16 million and a reversal of PLN 268 million for the exploration assets and mineral resource assessment for the Płotki project in the amount of PLN 126 and for the project Edge in the amount of PLN 142 million. The valuations used a discount rate of 8.19%. The recoverable amount for Polish upstream assets was determined using the value in use method due to the lack of an active market.

As a result of the tests carried out in 2021, the ORLEN Upstream Canada Group recognized the possibility of reversing the impairment losses on net assets in the amount of PLN 754 million.

The total value of reversals amounted to PLN 761 million and mainly related to the assets of CGU Kakwa and CGU Ferrier. The total value of recognized impairment losses amounted to PLN (7) million and related to CGU Peace River Oil. The recoverable amount of the Canadian upstream assets was determined using the fair value less costs to sell method. The valuations used discount rates ranging from 11% to 16.4%. The valuation was based on Level 3 of the valuation hierarchy.

The total impact of the recognized reversals of net impairment allowance on the non-current assets of the ORLEN Upstream Group in 2021 amounted to PLN 918 million.

As at 31 December 2020, as a result of testing and withdrawing from certain exploration projects in 2020, the ORLEN Upstream Polska Group recognized a impairment loss of PLN (553) million. In the same period, impairment allowance in the amount of PLN 216 million were reversed. In the valuations at the end of 2020, a discount rate of 7.10% was used. The recoverable amount for Polish upstream assets was determined using the value in use method due to the lack of an active market.

As a result of the tests, in 2020 the ORLEN Upstream Canada Group recognized a net asset impairment loss in the amount of PLN (1,085) million. The total value of recognized impairment losses amounted to PLN (1,134) million. The total value of reversals of impairment allowance was PLN 49 million. The valuations at the end of 2020 used discount rates ranging from 11% to 16.4%. The recoverable amount of the Canadian upstream assets were determined using the fair value less costs to sell method. The valuation was based on Level 3 of the valuation hierarchy.

The total impact of the recognized net impairment losses on the non-current assets of the ORLEN Upstream Group in 2020 amounted to PLN (1,422) million

The recoverable amount of the Upstream segment assets in the Upstream Group as at 31 December 2021 and as at 31 December 2020

Sensitivity analysis of the value in use of assets in the upstream segment of ORLEN Upstream Polska as part of the tests carried out as at 31 December 2021 and as at 31 December 2020

2021

2020

Sensitivity analysis of the fair value less costs to sell assets of the ORLEN Upstream Canada upstream segment as part of tests carried out as at 31 December 2021 and as at 31 December 2020

2021

2020

Assets of the Retail segment

In 2021, the ORLEN Group made impairment losses on the net assets of the Retail segment in the amount of PLN (47) million as a result of testing for impairment at individual service stations. This applies mainly to the assets of PKN ORLEN PLN (7) million (discount rates used during 2021 from 5.18% to 7.07%), the ORLEN Unipetrol Group PLN (28) million (discount rates used during 2021 from 5.36% to 6.36%) and the ORLEN Deutschland Group PLN (10) million (discount rates used during 2021 from 3.18% to 3.45%), other PLN (2) million.

In 2020, the ORLEN Group, as a result of carrying out impairment tests at individual fuel stations, made impairment losses on the net value of the Retail segment assets in the amount of PLN (39) million. Impairment losses recognized in 2020 mainly related to assets of PKN ORLEN PLN (13) million (discount rates used during 2020 from 5.14% to 5.92%), ORLEN Unipetrol Group PLN (8) million (discount rates used during the year 2020 from 3.84% to 5.74%) and the ORLEN Deutschland Group PLN (17) million (discount rates used during 2020 from 1.98% to 3.64%).

Goodwill impairment tests

The Group allocated goodwill arising from the settlement of business combinations described in note 7.3 to the CGU which is the entity on the acquisition of which goodwill arose, except for the goodwill of UAB Mockavos terminalas, which was assigned to CGU ORLEN Lietuva.

The basis for the evaluation of the recoverable amount for individual CGUs to which goodwill was assigned was their value in use. The test was performed based on discounted cash flow models for individual CGUs. The macroeconomic assumptions and discount rates adopted in the tests are consistent with the assumptions for the individual segments to which the tested CGUs are assigned, as indicated in note 14.4.1 and 14.4.2.

In order to estimate the value in use, the following additional key assumptions were made with regard to the following CGUs to which goodwill was assigned:

RUCH Group

Cash flows for the valuation of RUCH’s goodwill take into account the restructuring processes of the RUCH Group’s key segments: retail, press, courier services, including verification of logistic costs, and the development of the retail network with new formats of points of sale, while optimizing the press business. RUCH’s value in use, calculated at the 7.07% discount rate, amounts to PLN 471 million.

Livingstone and the Nowotna Farma Wiatrowa

The cash flows for the valuation of Livingstone and Nowotna Farma Wiatrowa include the price conditions included in the signed RES electricity sales contracts (PPA) and the contracts for the sale of property rights resulting from certificates of origin (CPA). Moreover, the flows for Nowotna Farma Wiatrowa take into account revenues from future contracts that the Company will conclude in accordance with the price assumptions applicable in the ORLEN Group for the Energy segment. The value in use of Livingstone and Nowotna Farma Wiatrowa, calculated at the 6.3% discount rate, is PLN 141 million and PLN 985 million, respectively.

ORLEN Transport

Cash flows in the impairment test of ORLEN Transport take into account assumptions regarding the development of the ORLEN Group’s transport fleet, as reflected in the ORLEN 2030 Strategy, including a higher level of efficiency of fixed costs in the target structure of operations. The value in use of ORLEN Transport, calculated at the 7.18% discount rate, amounts to PLN 175 million.

UAB Mockavos terminalas

The goodwill of UAB Mockavos terminalas was assigned to CGU ORLEN Lietuva. The assumptions made for the ORLEN Lietuva test are described in note 14.4.2.

In the ORLEN Group’s opinion, even in the case of reasonably possible change in key assumtions adopted for the measurement of value in use as part of the conducted tests for goodwill, the carrying amount of cash-generating units together with the assigned goodwill would not significantly exceed their recoverable amount.

As a result of the conducted analyses, no impairment was found in relation to the goodwill as at 31 December 2021.

Summary of the results of the impairment analysis

The total impact of the recognized net imparirment allowances on the non-current assets of the ORLEN Group in 2021 amounted to PLN 811 million.

The total effect of the recognized net impairment allowances on the non-current assets of the ORLEN Group in 2020 amounted to PLN (1,591) million.

The reversal and recognition of impairment losses on property, plant and equipment, intangible assets, goodwill and right-of-use assets were recognised in other operating income (note 13.9) and in other operating expenses (note13.10) ), respectively.