9. Property, plant and equipment

Property, plant and equipment are assets:

• held for use in the production or supply of goods or services, for rental to other entities based on a rental agreement, or for administrative purposes and
• expected to be used for more than one year.

Property, plant and equipment is measured at net carrying amount, i.e. initial value (or deemed cost for items of property, plant and equipment used before the transition to IFRS) less any accumulated depreciation and any impairment losses. Initial value comprises purchase price including all costs directly attributable to the purchase and bringing the asset into use. The cost comprises estimate of the costs of dismantling and removing the property, plant and equipment and restoring the site on which these assets located, the obligation for which an entity incurs either when the assets are acquired or as a consequence of having them used for purposes other than to produce inventories. As at the date of acquiring or manufacturing an item of property, plant and equipment, the Group identifies and distinguishes all components being a part of a respective asset that are material relative to the acquisition price, cost of manufacture or deemed cost, and depreciates them separately. The Group also recognises the costs of major overhauls, periodic inspections that meet the definition of component as components of property, plant and equipment.

The depreciable amount is the cost of an asset less its residual value. Depreciation commences when the asset is available for use. Depreciation is based on a depreciation plan reflecting the future useful life of the asset. The depreciation method used reflects the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. Major inspection and overhauls recognised as a component of property, plant and equipment are depreciated starting from the next month after finishing the inspection/overhaul until the beginning of the next major inspection/overhaul.

Depreciation methods, depreciation rates and residual values of property, plant and equipment are verified at least each financial year. Changes identified during verification are accounted for as a change in an accounting estimate, and possible adjustments to depreciation amounts are recognised in the year in which the verification took place and in subsequent periods.

Investments relating to property, plant and equipment under construction or in assembly are recognised at cost of acquisition or cost of manufacturing less impairment losses. Property, plant and equipment under construction is not depreciated until the construction is completed and the items are available for use.

Borrowing costs are interest and other costs that the Group incurs in connection with the borrowing of funds. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset. Other borrowing costs are recognised as an expense. Exchange differences arising from foreign currency borrowings are capitalised by the Group to the extent that they are regarded as an adjustment to interest costs.

The Group assesses at each reporting date whether there is any indication that a component of non- financial assets may be impaired. If any such indication exists, or if there is a need to perform an annual impairment testing, the Group estimates the recoverable amount of the asset or cash-generating unit.

The recoverable amount or an asset or cash generating unit is defined as the higher of an asset’s or cash-generating unit’s fair value less costs to sell and its value in use. Recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. If the carrying amount is higher than the recoverable amount, an impairment loss is recorded. When estimating the value in use of an asset, future cash flows are discounted to the present value using a discount rate before tax, which represents the current market estimate of time value of money and risk relevant to the asset. Impairment losses on assets used in continuing operations are recognised in those expense categories that correspond to the function of the asset that is impaired.

When the conditions of IFRIC Interpretation 20 are met, mines also recognise as a component of property, plant and equipment the so-called stripping asset, i.e. the stripping costs incurred at the production stage. The value of the stripping activity asset at the production stage is determined on the basis of a model taking into account, inter alia, the estimated value of the overall ratio of the amount of overburden to coal and the actual annual overburden to coal ratio. This ratio is calculated as the ratio of the remaining quantity of overburden to be removed to the remaining coal resources to be extracted from the date of application of the interpretation of IFRIC 20 until the end of coal extraction from a given deposit component. This ratio is determined based on the best knowledge of the mine’s technical services at the end of each financial year and may change if new information is obtained as mining progresses regarding the size of the deposit in operation and the manner in which it is deposited.

The overburden stripping asset is systematically depreciated using the natural method based on the amount of coal extracted from the deposit component.

The value of the overburden stripping asset at the production stage is determined on the basis of a model taking into account, among other things, the estimated value of the overall overburden to coal ratio.

Open-pit mines operating in the Group capitalise in the value of the corresponding component of tangible assets estimated costs of rehabilitation of post-mining properties in the proportion of the volume of the excavation resulting from stripping of overburden at the reporting date to the planned volume of excavation resulting from stripping of overburden at the end of exploitation period.

Capitalised costs of rehabilitation are systematically depreciated using the natural method of depreciation based on the amount of lignite extracted from a particular field.

The Group classifies each of its leases as either a financial lease or an operating lease. Leases are classified as financial leases if substantially all the risks and rewards of ownership of the underlying asset are transferred to the lessee. All other leases are treated as operating leases.

Assets under operating leases are presented in the statement of financial position according to the nature of the assets.

An entity, as lessor, divides each class of property, plant and equipment into assets subject to operating leases and assets not subject to operating leases.

The largest expenditures were incurred in the Distribution segment (PLN 2,576 million), Other Activity segment (PLN 2,202 million), District Heating segment (PLN 1,140 million). The main items of expenditure were the connection of new customers to the distribution network (PLN 1,097 million) and the Cable Program (PLN 503 million). Expenditure in the Other Activity segment was primarily incurred on the construction of gas and steam units at PGE Gryfino 2050 (PLN 2,110 million). In the District Heating segment, the largest expenditure was incurred on the construction of the new CHP plant EC Czechnica (PLN 393 million).

The largest expenditures were incurred in the Conventional Generation segment (PLN 1,759 million) and the Distribution segment (PLN 1,358 million). The key expenditures included: construction of unit 7 at Elektrownia Turów (PLN 587 million). Expenditures on connecting new customers to the distribution grid incurred by the Distribution segment reached PLN 626 million.

In the current period, the Group purchased shares in companies that own wind farms. The purchase is described in note 1.4 of these consolidated financial statements. As a result of this transaction, the net value of property, plant and equipment and right-of-use assets increased by PLN 1,134 million.

In the current period, the Group sold its stake in PGE EJ1 sp. z o.o. As a result of this transaction, the net value of property, plant and equipment, intangible assets and right-of-use assets decreased by PLN 415 million.

During the year ended December 31, 2021 PGE Group recognised in the value of property, plant and equipment borrowings costs of approx. PLN 40 million (PLN 87 million in the comparative period). The average capitalisation rate of borrowing costs in the year ended December 31, 2022 was 18% (22% in the comparative period).

In the current period, in accordance with the requirements of IFRIC 20, no stripping costs in the production phase were capitalised. In the current reporting period, amortisation of capitalised expenses of PLN 154 million (147 million in the comparative period) was charged to expenses. Capitalised stripping costs are presented as „other property, plant and equipment”.

PGE Group recognises in property, plant and equipment changes in value of the rehabilitation provision assigned to stripping of overburden, provision for rehabilitation of post-construction grounds of wind farms and provision for liquidation of property, plant and equipment. As at December 31, 2031 the net value of the capitalised rehabilitation provision (after depreciation and impairment) was PLN 239 million (including PLN 113 million of the provision for rehabilitation of post-mining properties). In comparative period the net value of capitalised land rehabilitation provision amounted to PLN 827 million (including PLN 730 million of the provision for rehabilitation of post-exploitation mining properties).

Depreciation rates are calculated on the basis of the estimated economic useful life of an item of property, plant and equipment and its residual value. Capitalised costs of major inspections and overhauls are depreciated throughout the period until the beginning of the next major inspection or overhaul.

Estimated economic useful lives of assets are subject to verification at least once a year. The applicable depreciation periods are presented in notes 9, 11 and 12.

The review of the economic useful lives of property, plant and equipment carried out in 2022 resulted in a reduction in depreciation and amortisation expense 2022 in the total amount of approximately PLN 58 million.

The following table presents changes in property, plant and equipment under operating leases, divided by class of underlying asset.