ORLEN ORLEN Group 2017
Integrated Report

Explanatory notes to the statement of financial position

GRI INDICATORS:
Capitals:

9.2. Explanatory notes to the statement of financial position

9.2.1. Property, plant and equipment

SELECTED ACCOUNTING PRINCIPLES


Property, plant and equipment
Property, plant and equipment shall be measured initially at acquisition or production cost and shall be presented in the statement of financial position in its net carrying amount, including grants. Property, plant and equipment are stated in the statement of financial position at the net book value which is the amount at which an asset is initially recognized (cost) less accumulated depreciation and any accumulated impairment losses, as well as received grants for assets.

The costs of significant repairs and regular maintenance programs are recognized as property, plant and equipment.
Fixed assets are depreciated with straight-line method and in justified cases units of production method of depreciation (catalysts, assets arising from development and extraction of mineral resources).
Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item is depreciated separately over the period reflecting its useful lives.
The following standard useful lives are used for property, plant and equipment:

  • Buildings and constructions 10-40 years.
  • Machinery and equipment 4-35 years.
  • Vehicles and other 2-20 years.

The method of depreciation, residual value and useful life of an asset are reviewed at least at the end of each year. When it is necessary adjustments of depreciation are carried out in subsequent periods (prospectively).

Grants
Grants are recognized if there is reasonable assurance that the grants will be received and the entity will comply with the conditions attaching to them.
Grants related to assets are recognized as a decrease of a carrying amount of an asset and as a result a decrease of depreciation and amortisation charges over its useful life.

Exploration and extraction of mineral resources
Within the framework of exploration and extraction of mineral resources, the following classification of stage was made:

  1. Stage of exploration and assessment of mineral resources include:
  • Acquisition of rights to explore and extract, exploration and recognition of resources are recognized according to the successful efforts method.
  • Expenditures for exploratory.
  • Other expenditures which are directly attributable to the phase of exploration and recognition.

The Group shall review annually expenditures incurred in the stage of exploration and recognition of mineral resources in order to confirm the intention of further work. The analyzes are carried out at the level of projects, including works with a defined exploratory and/or prospective purpose, which are conducted in the assigned area. If the work is unsuccessful, resulting in a lack of intention to continue the work, the cost previously recognized as an asset are recognized as cost of a current period. Expenditure incurred in the exploration and recognition of resources are recognized as assets related to development and extraction of mineral resources within property, plant and equipment at the moment of the conclusion of their technical feasibility and economic viability of mining.

  1. Stage of site planning and of extraction of mineral resources

Expenditure incurred for mineral resource sites planning and extraction of resources are capitalized and amortised by unit of production method calculated proportionally to the amount of extraction of hydrocarbons based on unit of installation. The Group calculates the depreciation of all assets related to sites planning and extraction of mineral resources based on so called proved plus probable reserves. In case of significant change in estimated mineral resources, at the reporting date potential impairment allowances are recognized or reversed. In case of performance of exploratory drillings on already extracted resource, the Group analyses, if costs incurred enable rising new boreholes. If not, the expenditures are recognized in costs of the current period.

PROFESSIONAL JUDGEMENTS


Expenditures for exploration and evaluation of mineral resources
Application of the Group’s accounting policy for expenditures for exploration and evaluation of mineral resources requires an assessment, whether future economic benefits
resulting from future extraction or sale are possible or if indications allowing to estimate the resources does not yet exist. When estimating the resources, the Group
assesses future events and circumstances, including the assessment whether the extraction will be economically feasible.


ESTIMATES


Useful lives of property, plant and equipment
The Group verifies useful lives of property, plant and equipment once at year end. The impact of verification of useful lives in 2017 resulted in a decrease of depreciation costs by PLN 38 million compared to depreciation costs that were recognized based on useful lives applied in 2016.

Exploration and evaluation of mineral resources
The Group estimates resources based on interpretation of available geological data and verifies then on a the current basis, based on effects of further drills, trial exploitation, actual extraction and economic factors such as: hydrocarbons’ prices, contractual terms or investment plans. At the end of each reporting period the Group analyses cost of removal of wells and supporting infrastructure.

Remediation of land – water environment
The Group estimates the level of provisions related to non-current assets, which to a significant probability are needed for land – water environment remediation of the territory of petrol stations, fuel depots and areas of production plants. Detailed information in note 9.2.10.1.


  Land Buildings and constructions Machinery and equipment Vehicles and other Construction in progress Exploration and evaluation of mineral resource assets Assets related to development and extraction of mineral resources Total
Net carrying amount at 01/01/2017
Gross carrying amount 1,164 20,837 37,950 2,110 4,707 986 5,307 73,061
Accumulated depreciation (12) (8,805) (19,582) (1,283) - (27) (1,036) (30,745)
Impairment allowances (37) (2,531) (10,338) (145) (146) (495) (778) (14,470)
Grants - (52) (117) (5) (1) - - (175)
  1,115 9,449 7,913 677 4,560 464 3,493 27,671
Increases/(decreases), net
Investment expenditures - 106 66 55 3,460 107 653 4,447
Depreciation (1) (649) (1,188) (180) - (12) (321) (2,351)
Borrowing costs - 29 83 1 (66) 2 - 49
Acquisition of subsidiary - 10 1 3 - - - 14
Net impairment allowances, incl.: * - 160 441 25 25 (43) (96) 512

recognition

- 63 7 1 6 - - 77

reversal

- (73) (16) (6) (6) (44) (96) (241)
Reclassifications 20 968 2,048 211 (3,765) (22) 48 (492)
Grants - 1 4 1 - - - 6
Foreign exchange differences, incl.: (18) (29) (99) (25) (31) (4) (293) (499)

foreign exchange differences of impairment allowances

(1) 132 1,338 13 11 - 82 1,575

Other

1 (18) (193) (42) (27) (5) (2) (286)
  1,117 10,027 9,076 726 4,156 487 3,482 29,071
Net carrying amount at 31/12/2017
Gross carrying amount 1,166 21,838 37,489 2,152 4,267 1,049 5,666 73,627
Accumulated depreciation (11) (9,521) (19,741) (1,315) - (24) (1,392) (32,004)
Impairment allowances (38) (2,239) (8,559) (107) (110) (538) (792) (12,383)
Grants - (51) (113) (4) (1) - - (169)
  1,117 10,027 9,076 726 4,156 487 3,482 29,071
Net carrying amount at 01/01/2016
Gross carrying amount 1,128 20,546 36,947 2,018 2,819 762 4,293 68,513
Accumulated depreciation (12) (8,500) (19,593) (1,186) - (3) (420) (29,714)
Impairment allowances (33) (2,564) (10,045) (165) (154) (423) (705) (14,089)
Grants - (51) (116) (6) (1) - - (174)
  1,083 9,431 7,193 661 2,664 336 3,168 24,536
increases/(decreases), net
Investment expenditures - 74 130 59 3,736 175 340 4,514
Depreciation (1) (595) (967) (172) - (24) (288) (2,047)
Borrowing costs - - 1 1 56 9 - 67
Acquisition of subsidiary 40 194 233 34 18 - - 519
Net impairment allowances, incl.: * - 101 249 25 14 (72) - 317

recognition

- 162 200 1 3 - - 366

reversal

- (81) (41) (7) (5) (72) - (206)

Reclassifications

13 431 1,348 120 (1,935) - 29 6

Grants

- (1) (1) 1 - - - (1)
Sale of subsidiary (40) (194) (233) (34) (18) - - (519)
Foreign exchange differences, incl.: 23 77 142 17 39 5 245 548

foreign exchange differences of impairment allowances

(4) (68) (542) (5) (6) - (73) (698)
Other (3) (69) (182) (35) (14) 35 (1) (269)
Net carrying amount at 31/12/2016 1,115 9,449 7,913 677 4,560 464 3,493 27,671

* In 2017 and in 2016 the increases/(decreases) net of impairment allowances include recognition, reversal, usage and reclassifications.
Description of the reasons for changes in major impairment allowances is presented in the note 9.2.5.

In 2017 and 2016 the capitalization rate used to calculate borrowing costs amounted to 1.05% and 1.14%, respectively.
The gross carrying amount of all fully depreciated property, plant and equipment still in use as at 31 December 2017 and as at 31 December 2016 amounted to PLN 5,044 million and PLN 5,086 million, respectively.

9.2.2. Intangible assets

SELECTED ACCOUNTING PRINCIPLES


Intangible assets
An intangible asset shall be measured initially at acquisition or production cost and shall be presented in the statement of financial position in its net carrying amount, including grants.
Intangible assets with the finite useful life are amortised using straight-line method. Amortization shall begin when the asset is available for use.
Standard useful lives of intangible assets are from 2 to 10 for software and from 2 to 15 years for concessions, licenses, patents and similar.
The amortization method and useful life of intangible asset item are verified at least at the end of each year.

Goodwill
Goodwill acquired in a business combination shall, from the acquisition date, be allocated to each of the acquirer's cash-generating units (CGU), that is expected to benefit from the synergies of the combination.
After combination the acquirer shall measure goodwill in the amount recognized at the acquisition date less any accumulated impairment allowances.
A cash-generating unit to which goodwill has been allocated shall be tested for impairment annually, and whenever there is an indication that the unit may be impaired.

Rights
The main item of rights is CO2 emission rights, not amortised, tested for impairment.
Granted emission allowances are presented as intangible assets in correspondence with deferred income at fair value as at the date of registration. Purchased allowances are presented at purchase price.
For the estimated CO2 emission during the reporting period, a provision is created (taxes and charges).
Grants are recognized on a systematic basis in each reporting period to ensure proportionality with the relevant costs of the created reserve.
Outgoing of allowances is recognized using FIFO method (First In, First Out).
Rights also include energy certificates.


ESTIMATES


Useful lives of intangible assets
The Group verifies useful lives of intangible assets once at year end with effect from the beginning of next year. Should the economic useful lives of intangible assets from 2016 be applied in 2017, the depreciation expense would not change significantly.


Change in internally generated intangible assets
As at 31 December 2017 and as at 31 December 2016 internally generated intangible assets amounted to PLN 82 million and PLN 108 million, respectively.

Change in other intangible assets

  Patents, trade marks and licenses Goodwill Rights Other Total
Net carrying amount at 01/01/2017
Gross carrying amount 1,521 384 886 101 2,892
Accumulated amortisation (1,055) (19) - (59) (1,133)
Impairment allowances (107) (315) (59) (6) (487)
Grants (3) - - - (3)
  356 50 827 36 1,269
Increases/(decreases), net
Investment expenditures 9 1 - 72 82
Amortisation (73) - - 3 (70)
Borrowing costs - - - 1 1
Net impairment allowances, incl.: * (1) - 1 2 2

reversal

(1) - - - (1)
Foreign exchange differences, incl.: (3) (2) - - (5)

foreign exchange differences of impairment allowances

4 9 - (1) 12
Other ** 95 - (140) (44) (89)
  383 49 688 70 1,190
Net carrying amount at 31/12/2017
Gross carrying amount 1,602 374 746 113 2,835
Accumulated amortisation (1,112) (19) - (38) (1,169)
Impairment allowances (104) (306) (58) (5) (473)
Grants (3) - - - (3)
  383 49 688 70 1,190
  Patents, trade marks and licenses Goodwill Rights Other Total
Net carrying amount at 01/01/2016
Gross carrying amount 1,395 374 840 132 2,741
Accumulated amortisation (944) (18) (1) (65) (1,028)
Impairment allowances (98) (315) (59) (7) (479)
Grants (3) - - - (3)
  350 41 780 60 1,231
Increases/(decreases), net
Investment expenditures 45 8 - - 53
Amortisation (69) - - 2 (67)
Net impairment allowances, incl.: * (6) - - - (6)

reversal

(2) - - (1) (3)
Foreign exchange differences, incl.: 5 1 - 1 7

foreign exchange differences of impairment allowances

(3) - - 1 (2)
Other** 31 - 47 (27) 51
Net carrying amount at 31/12/2016 356 50 827 36 1 269

* In 2017 and in 2016 increases/(decreases) net of impairment allowances include recognition, reversal, usage and reclassifications.
** Other net increases/(decreases) of property rights consist mainly granted free of charge for 2017 and 2016 and settlement of rights for 2016 and 2015.
Description of the reasons for changes in major impairment allowances is presented in the note 9.2.5.

 

The gross carrying amount of all fully amortised intangible assets still in use as at 31 December 2017 and as at 31 December 2016 amounted to PLN 540 million and PLN 586 million, respectively.

9.2.2.1. Rights

Change in owned CO2 emission rights for 2017

  Quantity (in thous. tonnes) Value
01/01/2017 34,521 816
Granted free of charge 7,783 181
Emission settlement for 2016 (12,916) (322)
Purchase/(Sale), net 89 1
Impairment allowances - 1
  29,477 677
CO₂ emission in 2017 14,334 377

The market value of owned EUA rights exceeds their total carrying amount, therefore the Group does not identify impairment indicators.
As at 31 December 2017 the market value of one EUA amounted to PLN 33.95 (representing EUR 8.14 at exchange rate as at 31 December 2017) (source: www.theice.com).

The rights to colourful energy (energy certificates) recognized in the line rights as at 31 December 2017 and as at 31 December 2016 amounted PLN 11 million. In 2017 the Group recognized granted free of charge rights to energy certificates in the amount of PLN 82 million.

Additionally, as at 31 December 2017 and as at 31 December 2016 the Group recognized CO2 emission rights in the amount PLN 10 million and PLN 11 million, respectively and rights to colourful energy in the amount PLN 60 million and PLN 3 million, respectively (note 9.2.6.2) in the line trade and other receivables.

9.2.3. Assets by operating segments and by geographical allocation

9.2.3.1. Assets by operating segments

  31/12/2017 31/12/2016
Downstream Segment 42,159 38,770
Retail Segment 6,511 6,139
Upstream Segment 3,839 3,840
Segment assets 52,509 48,749
Corporate Functions 8,206 6,943
Adjustments (51) (133)
  60,664 55,559

Operating segments include all assets except for financial assets, tax assets and cash. Assets used jointly by the operating segments are allocated based on revenues generated by individual operating segments.

9.2.3.2. Assets by geographical allocation

  31/12/2017 31/12/2016 % share
      2017 2016
Poland 20,055 19,631 65.6% 67.1%
Germany 922 966 3.0% 3.3%
Czech Republic 5,966 5,216 19.5% 17.8%
Lithuania, Latvia, Estonia 831 708 2.7% 2.4%
Canada 2,788 2,731 9.2% 9.4%

 

30,562

29,252

100.0%

100.0%

Non-current assets by geographical allocation include property, plant and equipment (note 9.2.1), intangible assets (note 9.2.2), investment property and perpetual usufruct of land (note 9.2.9).

9.2.4. Investments accounted for under equity method


PROFESSIONAL JUDGEMENTS


Based on its own judgment, taking into account its rights, obligations, considering the structure, legal form and the terms of the agreement agreed by the parties, the Group assessed that BOP, PPPT and Pieridae Production constitute a joint contractual arrangement whereby PKN ORLEN exercises joint control over them.
The agreements give all shareholders a joint control over the companies, decisions related to significant operations require the unanimous approval of all shareholders, and the legal form of separate entities does not give shareholders the right to their assets and obligations to repay liabilities. In relation to above, the Group classified BOP, PPPT and Pieridae Production as joint ventures that are accounted for under equity method in the consolidated financial statements.


  Place of business Principal activity Valuation method
Joint ventures
Basell ORLEN Polyolefins Sp. z o.o. (BOP) Płock/Poland production, distribution and sales of poliolefins equity method
Płocki Park Przemysłowo-Technologiczny (PPPT) Płock/Poland construction and renting real estate equity method
Pieridae Production GP Ltd (ORLEN Upstream Group) Calgary/Canada exploration and extraction of minerals, storage, transport and logistics equity method
Joint operations
Butadien Kralupy a.s. (Unipetrol Group) Kralupy nad Vltavou/Czech Republic manufacturing of butadien share in assets and liabilities

The ORLEN Group in accordance with IFRS 11 classified Butadien Kralupy a.s. in as joint operations. Based on Article association of Butadien Kralupy a.s, the Group has the right to proportionate share of the income and bears a proportionate share in the costs of joint operations. As a result, the Group recognizes its share (51%) in assets, liabilities, revenues and costs.

ORLEN Upstream Group has participated in the following joint operations:

  • Consortium (Blue Gas – Polish Shale Gas program) founded by ORLEN Upstream, Polskie Górnictwo Naftowe i Gazownictwo (PGNIG), LOTOS Petrobaltic and University of Science and Technology (Akademia Górniczo-Hutnicza), Institue of Oil and Gas (Instytut Nafty i Gazu), Gdansk University of Technology, Warsaw University of Technology. The program aims to manufacture and commercialize the technology and gain knowledge for the extraction of shale gas in Poland. In the past year ended a 5-year period of activity of the consortium. The cooperation was summarized in all 6 projects in which ORLEN Upstream was involved. The total contribution of ORLEN Upstream in the implementation of the above projects amounted to PLN 24 million. Applications were collected that provides grounds for applying for patent rights for developed solutions.
  • Exploration – extraction projects carried out together with PGNiG (the search areas „Sieraków” – 49% share of ORLEN Upstream, “Bieszczady” – 49% share of ORLEN Upstream and through subsidiary FX Energy Poland the search areas “Płotki” – 49% share of FX Energy Poland). The agreements provide the conduct of joint operations and activities in the field of exploration, prospection and extraction of crude oil and natural gas.

ORLEN Upstream Group has the right to proportionate share of the income and bears a proportionate share in the costs of joint operations.

Investments accounted for under equity method

  31/12/2017 31/12/2016
Joint ventures, incl.: 709 756

Basell ORLEN Polyolefins Sp. z o.o.

677 677
Associates 6 7
  715 763

Share in profit from investments accounted for under equity method

  2017 2016
Joint ventures, incl.: 248 297

Basell ORLEN Polyolefins Sp. z o.o.

248 298
  248 297

Condensed financial information of Bassel ORLEN Polyolefines Sp. z o.o.

  31/12/2017 31/12/2016
Non-current assets 845 856
Current assets 1,242 1,152

cash

329 440
Other current assets 913 712
Total assets 2,087 2,008
Total equity 1,375 1,395
Non-current liabilities 50 50
Current liabilities, incl.: 662 563

trade and other liabilities

646 548
Total liabilities 712 613
Total equity and liabilities 2,087 2,008
Net debt (329) (440)
Net assets 1,375 1,395
Group’s share in joint ventures (50%) 688 698
Consolidation adjustments (11) (21)
Joint ventures investments accounted for under equity method 677 677

Condensed financial information of Bassel ORLEN Polyolefines Sp. z o.o. continued

  2017 2016
Sales revenues 3,526 3,218
Cost of sales, incl.: (2,809) (2,365)

depreciation and amortisation

(86) (97)
Gross profit on sales 717 853
Distribution expenses (94) (90)
Administrative expenses (23) (25)
Other operating income and expenses, net - (1)
Profit from operations 600 737
Net finance income and costs (12) 7
Profit before tax 588 744
Tax expense (113) (142)
Net profit 475 602
Total net comprehensive income 475 602
Net cash from operating activities 427 745
Net cash (used) in investing activities (41) (74)
Net cash (used) in financing activities (497) (625)
Dividends received from joint ventures 248 311
Net profit 475 602
Group’s share in joint ventures (50%) 238 301
Consolidation adjustments 10 (3)
Group’s share in result of joint ventures accounted for under equity method 248 298

In 2017 and 2016, there were no significant restrictions in associates and joint ventures resulting from loans agreements, regulatory requirements and other contractual agreements that would restrict access to assets and settlement of liabilities of the Group.

9.2.5. Impairment of property, plant and equipment and intangible assets

SELECTED ACCOUNTING PRINCIPLES


Impairment of property, plant and equipment and intangible assets
At the end of the reporting period, the Group assesses whether there are indicators that an asset or cash-generating unit (CGU) may be impaired or any indicators that the previously recognized impairment should be reversed.
Assets that do not generate the independent cash flows are grouped on the lowest level on which cash flows, independent from cash flows from other assets, are generated (CGU). If such case occurs, the recoverable amount is determined on the CGU level, to which the asset belongs.
Recognition and reversal of impairment allowances of property, plant and equipment and intangible assets is recognized in other operating activity.


ESTIMATES AND JUDGMENTS


Impairment of property, plant and equipment and intangible assets
The Management Board assesses whether there is any indicator for impairment of an assets or cash generating unit. As part of the analysis of indications, both external factors - including primarily the macroeconomic environment as well as internal environment are analyzed - including strategic decisions, financial projections and operational plans. If there is any indicator for impairment, the estimation of recoverable amount of an asset is made.


Net impairment allowances of property, plant and equipment and intangible assets in 2017

  NOTE 2017 2016
ORLEN Upstream   (140) (73)
Unipetrol Group   (12) 300
ORLEN Asfalt   (8) -
ORLEN Oil Group   - (55)
other   (5) (15)
  9.2.1
9.2.2
(165) 157

As at 31 December 2017, the Group identified in accordance with IAS 36 “Impairment allowances of assets” impairment indicators of exploration assets in FX Energy Poland in Upstream Group, mainly due to the observed decrease in hydrocarbon prices. As a result of an independent valuation of the assets, an impairment allowances of exploration assets of FX Energy Poland of PLN (97) million was recognized. The value in use of exploration assets was estimated at the discount rate of 8.69% and amounted to PLN 501 million.

Additionally, in the 3rd quarter of 2017, as a result of the decision to partially narrow the exploration area of ORLEN Upstream Group in Poland, an impairment of exploration and recognition of mineral resources assets of FX Energy Poland of PLN (43) million was recognized. The total influence of impairment allowances on exploration assets in FX Energy Poland on the financial result in 2017 on the Upstream segment amounted to PLN (140) million.

Other impairment allowances recognized in 2017 concerned mainly the impairment of assets in the Unipetrol Group in the amount of PLN (12) million for impairment of the Retail segment and ORLEN Asfalt in the amount of PLN (8) million in the Downstream segment.

Sensitivity analysis of the FX Energy Poland exploration assets value in use within an impairment test performed as at 31 December 2017

  in PLN million HYDROCARBONS PRICES
  change -5% 0% 5%
  - 0,5 p.p. increase in allowance decrease in allowance decrease in allowance
DISCOUNT RATE   (25) 10 35
  0,0 p.p. increase in allowance - decrease in allowance
    (42)   24
  + 0,5 p.p. increase in allowance decrease in allowance decrease in allowance
    (59) (18) 14

The Group did not identify any impairment indicators of other assets in the ORLEN Group.
In relation to other assets of the ORLEN Group, the valuations made as at 31 December 2016 remain valid.

Net impairment allowances of property, plant and equipment and intangible assets in 2016
Assumptions of the ORLEN Group Strategy for 2017-2021 adopted in December 2016 ("Strategy") include among others, economic growth in key markets activity of the ORLEN Group, the increase of crude oil prices resulting from the need to replace natural decreases in extractions by productions from more expensive sources and restrictions on investment in recent years, the stabilization of downstream margin and a further increase in regulatory pressure, especially in the field of low carbon economy and environmental protection. Macroeconomic assumptions were developed on the basis of commercially available sources of knowledge of industry analytical agencies, forecasts of bank analysts, expert knowledge of the ORLEN Group.
Due to the lack of a reliable estimate of the price, at which would have taken place potential transaction to sale the assets of the Group as the recoverable value of its individual assets is its value in use, according to IAS 36.20.
The impairment tests were performed on the basis of assets of the ORLEN Group as at 31 December 2016 and net cash flows projected in the approved within the Strategy the Mid-term Plan, discounted to their present value using the discount rates which reflect the current market value of money and the specific risks to the valued assets.
Discount rates were calculated as the weighted average cost of engaged equity and debt. Sources of macroeconomic indicators necessary to determine the discount rate were published by prof. Aswath Damodaran (source: http://pages.stern.nyu.edu), government bonds quotation and government agencies available as at 31 December 2016.

The discount rate structure used in the impairment tests of assets by cash-generating unit of ORLEN Group as at 31 December 2016

  Poland   Czech Republic Lithuania Canada Germany
  Refining Petrochemical Retail Upstream Refining Petrochemical Retail Refining Retail Upstream Retail
Cost of equity 15.40% 14.70% 17.65% 15.13% 11.88% 11.21% 14.07% 15.26% 17.83% 8.91% 11.10%
Cost of debt after tax 2.37% 2.37% 2.37% 2.37% 1.56% 1.56% 1.56% 4.27% 4.27% 1.70% 0.88%
Capital structure 0.60 0.29 1.12 1.24 0.60 0.29 1.12 0.60 1.12 0.47 1.12
Nominal discount rate 10.50% 11.93% 9.57% 8.06% 8.00% 9.04% 7.45% 11.13% 10.65% 6.60% 5.69%
Long-term rate of inflation 1.38% 1.38% 1.38% 1.38% 1.98% 1.98% 1.98% 1.84% 1.84% 1.78% 1.50%

As a result in the 4th quarter of 2016 were recognized mainly effects of reversal of impairment allowance of refinery assets of Unipetrol Group in the amount of PLN 315 million and assets of ORLEN Oil in the amount of PLN (55) million.

As a part of above tests discount rates of 8% were applied for the Unipetrol Group refining assets and 9.57% for the ORLEN Oil assets The value in use of the refining assets of the Unipetrol Group and ORLEN Oil assets were CZK 10 billion and PLN 121 million respectively. The total influence of impairment allowances on assets as at 31 December 2016 on the Downstream segment amounted to PLN 230 million.

At the same time, ORLEN Upstream Sp. z o.o. evaluated the validity of continuing exploration work on the concession areas located in the Mazowieckie, Lubelskie, Łódzkie and Małopolskie province and decided to continue further exploration work on these concessions only in selected, the most promising areas of conventional research. As a result in the 4th quarter of 2016 an impairment allowance mainly of exploration assets in ORLEN Upstream Group in Poland in the Upstream segment of PLN (72) million was recognized. The total influence of impairment allowances on assets as at 31 December 2016 within the Upstream segment amounted to PLN (73) million.

The total influence of impairment allowances on net assets as at 31 December 2016 amounted to PLN 157 million.

Sensitivity analysis of the Unipetrol Group refining assets value in use within an impairment test performed as at 31 December 2016

  in PLN million EBITDA  
  change -5% 0% 5% increase of reversal
  - 0,5 p.p. decrease of reversal increase of reversal increase of reversal
    (81) 112 305
DISCOUNT RATE  

0,0 p.p.

 

decrease of reversal -
    (185) - 185
  + 0,5 p.p. decrease of reversal decrease of reversal increase of reversal
    (279) (102) 75

Sensitivity analysis of the ORLEN Oil assets value in use within an impairment test performed as at 31 December 2016

  in PLN million EBITDA
  change -5% 0% 5%
  - 0,5 p.p. increase of reversal decrease of reversal decrease of reversal
    (1) 8 15
DISCOUNT RATE 0,0 p.p. increase of reversal - decrease of reversal
    (8) - 8
  + 0,5 p.p. increase of reversal increase of reversal decrease of reversal
    (14) (7) 1

9.2.6. Net working capital


Net working capital
The Group defined net working capital as: inventories and trade and other receivables decreased by trade and other liabilities


  NOTE Inventories Trade and other receivables Trade and other liabilities Net working capital
31/12/2016   11,182 8,553 13,591 6,144
31/12/2017   12,440 9,518 14,469 7,489
Change in working capital in the statement of financial position   (1,258) (965) 878 (1,345)
Adjustments   (187) (614) 179 (622)
Change in rights and advances for non-financial non-current assets 9.2.6.2 - (269) - (269)
Change in investment liabilities 9.2.6.3
9.2.9
- - (34) (34)
Change in financial liabilities from finance lease

9.2.6.3
9.2.9

- - (28) (28)
Liability for withholding tax 9.1.7.3 - - (57) (57)
Change in compensations’ receivables 9.2.6.2 - (222) - (222)
Foreign exchange differences   (218) (135) 288 (65)
Reclassification   12 - - 12
Other   19 12 10 41
Change in working capital in the statement of cash flows   (1,445) (1,579) 1,057 (1,967)


9.2.6.1. Inventories

SELECTED ACCOUNTING PRINCIPLES


Inventories
Inventories, including mandatory reserves comprise products, semi-finished products and work in progress, merchandise and materials.
Finished goods, semi-finished products and work in progress are measured initially at production cost. Production costs include costs of materials and costs of conversion for the production period of finished goods, semi-finished products as well as work in progress and systematic allocation of fixed and variable production overheads estimated for its normal level.
Finished goods, semi-finished products and work in progress shall be measured at the end of the reporting period at the lower of cost or net realizable value. Outgoings of finished goods, semi-finished products and work in progress are determined based on the weighted average cost of production.
Merchandise and materials are measured initially at acquisition cost, while as at the end of the reporting period merchandise and raw materials are measured at the lower of cost or net realizable value. Outgoings of merchandise and raw materials are determined based on the weighted average acquisition cost.
The initial value of inventories is adjusted for their profits or losses from settlement of cash flow hedging instruments.
Impairment tests for specific items of inventories are carried out at the end of each month. Write-down to net realizable value concerns inventories that are damaged or obsolete and the selling price have fallen. Raw materials held for use in the production are not written down below acquisition or production cost if the products in which they will be incorporated are expected to be sold at or above cost.
However, when a decline in the price of materials indicates that the cost of the products exceeds net realizable value, the materials are written down to net realizable value.
Recognition and reversal of impairment allowances of inventories is recognized in cost of sales.


ESTIMATES


Net realizable values from sale of inventories
The inventory allowances required estimation of the net realizable value based on the most recent sales prices at the moment of estimations.


  31/12/2017 31/12/2016
Raw materials 6,911 6,367
Semi - finished goods and work in progress 1,289 1,154
Finished goods 3,566 3,139
Merchandise 674 522
Inventories, net 12,440 11,182
Impairment allowances of inventories to net realisable value 134 158
Inventories, gross 12,574 11,340

The main item of inventories, which is realized more than 12 months after the end of the reporting period are mandatory reserves. As at 31 December 2017 and as at 31 December 2016 the value of mandatory reserves presented in consolidated financial statements amounted to PLN 4,262 million and PLN 4,109 million, respectively.

Change in impairment allowances of inventories to net realizable value

  2017 2016
At the beginning of the period 158 288
Recognition 119 153
Reversal (54) (98)
Usage (77) (191)
Foreign exchange differences (12) 6
  134 158

In 2017 and 2016 the recognition and reversal of net impairment allowances of inventories to net realizable value related mainly to the downstream segment and amounted to PLN (65) million and PLN (42) million, respectively.

9.2.6.2. Trade and other receivables

SELECTED ACCOUNTING PRINCIPLES


Receivables
Receivables, including trade receivables, are recognized initially at a fair value and subsequently, at amortised cost using the effective interest method less impairment allowances.
The Group applies simplified methods of valuation of receivables measured at amortized cost if it does not distort information included in the statement of financial position, in particular when the period until the repayment date is not long.


ESTIMATES


Impairment of trade and other receivables
The Management Board assesses whether there is a risk of collectability of receivables taking into account the adopted internal procedures as individual assessment of each customer with regard to credit risk.
Impairment allowances of receivables are based on the individual contractors analysis taking into account the value of held collaterals, and based on the possible compensation of debts.
Recognition and reversal of impairment allowances of receivables are recognized in other operating activity in relation to principal amount and in financial activities in relation to interest for delayed payments.

  NOTE 31/12/2017 31/12/2016
Trade receivables   8,476 7,161
Other, incl.:   161 281

compensation from insurers in Unipetrol Group

  - 222
Financial assets   8,637 7,442
Excise tax and fuel charge   120 123
Other taxation, duties, social security and other benefits   216 181
Advances for non-current non-financial assets   178 503
Rights   70 14
Advances for deliveries   70 31
Prepayments   227 259
Non-financial assets   881 1,111
Receivables, net   9,518 8,553
Receivables impairment allowance 9.2.6.2.2 448 479
Receivables, gross   9,966 9,032

Division of financial assets denominated in foreign currencies is presented in note 9.3.5.2. Division of receivables from related parties is presented in note 9.4.6.2.
The Group expects that the trade and other receivables by contractors will be realized no later than twelve months after the end of the reporting period.

9.2.6.2.1. The ageing analysis of receivables

Based on the analysis of balances of not past due receivables the customers were divided into two groups:

  • Group I – customers with very good or good history of cooperation in the current year.
  • Group II – other customers.

The division of not past due receivables

  31/12/2017 31/12/2016
Group I 7,488 6,205
Group II 603 895
  8,091 7,100

As at 31 December 2017 and as at 31 December 2016 the division of not past due receivables includes beside trade and other receivables also non-current receivables presented in other non-current financial assets in the amount of PLN 9 million and PLN 32 million, respectively (note 9.2.9).

The division of past due receivables, but not impaired as at the end of the reporting period

  31/12/2017 31/12/2016
up to 1 month 504 304
above 1 to 12 months 25 36
above 1 year 25 34
  554 374

The Group assess that the risk of unsettled receivables by customer in the field of undue receivables and due receivables not covered by write-down is remote due to effective management of trade credit and debt recovery.
The Group among others sets limits for particular customers, establishes hedge and has the possibility to compensate of debts.

9.2.6.2.2. Change in impairment allowances of trade and other receivables

  NOTE 2017 2016
At the beginning of the period   479 477
Recognition 9.1.5
9.1.6.2
36 27
Reversal 9.1.4
9.1.6.1
(44) (15)
Usage   (20) (20)
Foreign exchange differences   (4) 10
    448 479


9.2.6.3. Trade and other liabilities

SELECTED ACCOUNTING PRINCIPLES


Liabilities
Liabilities, including trade liabilities, are initially measured at fair value and subsequently, at amortised cost using the effective interest rate method. The Group applies simplified methods of valuation of liabilities measured at amortized cost if it does not distort information included in the statement of financial position, in particular when the period until settlement of the liability is not long.


  31/12/2017 31/12/2016
Trade liabilities 7,901 7,549
Investment liabilities 1,435 1,398
Finance lease 32 29
Other 287 113
Financial liabilities 9,655 9,089
Payroll liabilities 284 260
Excise tax and fuel charge 2,830 2,585
Value added tax 1,377 1,333
Other taxation, duties, social security and other benefits 190 161
Holiday pay accruals 76 71
Other 57 92
Non-financial liabilities 4,814 4,502
  14,469 13,591

Division of financial liabilities denominated in foreign currencies is presented in note 9.3.5.2. Division of liabilities from related parties is presented in note 9.4.6.2.
As at 31 December 2017 and as at 31 December 2016 in the Group were no material overdue liabilities.
The Group expects that the payment of trade liabilities to contractors will take place no later than twelve months after the end of the reporting period.

9.2.7. Net debt and equity management

SELECTED ACCOUNTING PRINCIPLES


Net debt
The Group defined net debt as: non-current and current loans, borrowings and bonds lower by cash and cash equivalents.
Cash comprises cash on hand and in a bank accounts. Cash equivalents are short-term, highly liquid investments (of initial maturity up to three months), that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. Valuation and outflows of cash and cash equivalents in foreign currencies are based on FIFO (First In First Out) method.
The Group to assess the level of debt used ratios: net financial gearing (net debt / equity (calculated as at the end of the period) x 100%) and net debt / EBITDA before net impairment allowances.


Changes in net debt and liabilities from financing activities

  Loans and borrowings Bonds Cash and cash equivalents Net debt Financial lease Change in liabilities from financing activities
  (A) (B) (C) (A+B-C) (D) (A+B+D)
01/01/2017 940 7,495 5,072 3 363 170 8,605
Cash changes

net proceeds/(outflows)

(882) (300) 1,293 (2,475) (28) (1,210)

interest paid

(33) (193) - (226) (8) (234)
Non-cash changes

foreign exchange differences in statement of profit or loss

(9) (318) (121) (206) - (327)

valuation of debt

(38) 273 - 235 9 244

settlement of loans hedging instruments

63 - - 63 - 63

acquisition of subsidiary

7 - - 7 1 8

new finance lease agreements

- - - - 54 54
31/12/2017 48 6,957 6,244 761 198 7,203
Net financial gearing           2.2%
Net debt / EBITDA before net impairment allowances           0,07

 

  Loans and borrowings Bonds Cash and cash equivalents Net debt Financial lease Change in liabilities from financing activities
  (A) (B) (C) (A+B-C) (D) (A+B+D)
01/01/2016 5,003 4,155 2,348 6,810 166 9,324
Cash changes

net proceeds/(outflows)

(4,357) 3,258 2,685 (3,784) (28) (1,127)

interest paid

(92) (122) - (214) (9) (223)
Non-cash changes

foreign exchange differences in statement of profit or loss

178 100 39 239 - 278

valuation of debt

174 104 - 278 11 289

settlement of loans hedging instruments

34 - - 34 - 34

new finance lease agreements

- - - - 30 30
31/12/2016 940 7,495 5,072 3,363 170 8,605
Net financial gearing           11.5%
Net debt / EBITDA before net impairment allowances           0.35


9.2.7.1. Loans, borrowings and bonds

  Non-current Current Total
  31/12/2017 31/12/2016 31/12/2017 31/12/2016 31/12/2017 31/12/2016
Loans - 653 48 286 48 939
Borrowings - - - 1 - 1
Bonds 6,688 6,793 269 702 6,957 7,495
  6,688 7,446 317 989 7,005 8,435

The ORLEN Group bases its financing on fixed and floating interest rates. Depending on the currency of financing these are relevant interbank rates increased by margin. The margin reflects risk of the Group and in case of some long-term contracts depends on net debt/EBITDA ratio.
On 10 March 2017 PKN ORLEN early repaid the long-term credit in the amount of PLN 763 million with interest due, under the agreement the maturity falling in 2025. The credit agreement allowed the early repayment at the request of the borrower.


9.2.7.1.1. Loans

- by currency (translated into PLN)/ by interest rate

  31/12/2017 31/12/2016
PLN – WIBOR 6 758
EUR – EURIBOR - 71
CAD – LIBOR CAD 42 110
  48 939

As at 31 December 2017 unused credit lines (note 9.3.5.4) increased by trade and other receivables (note 9.2.6.2) and cash and cash equivalents exceeded trade and other liabilities (note 9.2.6.3) by PLN 10,471 million.
The Group hedges partially cash flows related to interest payments regarding external financing in EUR and USD, by using interest rate swaps (IRS).
In the period covered by the foregoing consolidated financial statements as well as after the reporting date there were no cases of violations of loans or interests repayment.
In case of operating loans agreements, the ORLEN Group entities have obligation to maintain selected financial ratios within specified ranges. In 2017 these ratios assessed by the creditor banks were at a safe level. The value of covenant as at 31 December 2017 included in the loan agreement of PKN ORLEN (net debt / EBITDA before net impairment allowances) amounted to 0.07.


9.2.7.1.2. Bonds

- by currency (translated into PLN)

  31/12/2017 31/12/2016
PLN 1,716 2,017
EUR 5,241 5,478
  6,957 7,495

- by interest rate

  Nominal value Subscription date Maturity date Base rate Margin Rating
  PLN EUR          
Bond issue program 2017-2022

A Series

200 - 19.09.2017 19.09.2021 6M WIBOR 1,00% A - (pol)

B Series

200 - 08.12.2017 08.12.2022 6M WIBOR 1,00% A - (pol)
Bond issue program 2013-2014              

E Series

200 - 02.04.2014 02.04.2018 6M WIBOR 1,30% A - (pol)

F Series

100 - 09.04.2014 09.04.2020 Fixed interest rate 5% A - (pol)
Retail bonds 700 -          
Corporate bonds 1,000 - 27.02.2012 27.02.2019 6M WIBOR 1,60% -
Eurobonds 2,131* 500 30.06.2014 30.06.2021 Fixed interest rate 2.5% BBB-, Baa2
Eurobonds 3,318** 750 07.06.2016 07.06.2023 Fixed interest rate 2.5% BBB-, Baa2
Eurobonds 5,449 1,250          
  7,149 1,250          

*translated into PLN using the exchange rate as at 31 December 2014
** translated into PLN using the exchange rate as at 31 December 2016

The difference between the nominal value and carrying amount of bonds results from measurement of bonds according to amortized cost using the effective interest method.

In the 2nd quarter of 2017 PKN ORLEN redeemed of retail bonds A and B series in the total amount of PLN 400 million issued under public bond issue program conducted in 2013-2014. Then PKN ORLEN in the 4th quarter of 2017 redeemed of retail bonds C and D series in the total amount of PLN 300 million issued under the first public bond issue program conducted in 2013-2014.
Under the second public bond issue program PKN ORLEN in the 4th quarter of 2017 issued retail bonds series A and B in the total amount of PLN 400 million.


9.2.7.2. Equity management policy

Equity management is performed in order to protect the Group’s financial security in the process of continue its operations while maximizing returns for
shareholders, in particular by:

  • Providing access to liquidity for the Group entities and development of effective liquidity distribution structures within the Group.
  • Diversification of sources of external financing and maintaining their long maturity, taking into account banking and non-bank sources.

Above actions are performed based on the constant monitoring of:

  • Net financial gearing of the Group - as at 31 December 2017 and as at 31 December 2016 amounted to 2.2% and 11.5% respectively.
  • Net debt to EBITDA ratio before net impairment allowances.
  • PKN ORLEN rating.

Dividend per ordinary shares – depends on financial position of the Group, including maintaining financial ratios at a secure level. In 2017 and 2016 the dividend in the amount of PLN 3 per share and of PLN 2 per share, was paid, respectively.

9.2.8. Equity

SELECTED ACCOUNTING PRINCIPLES


Share capital
Equity paid by shareholders and stated at nominal value in accordance with the Parent Company’s of association and the entry in the Commercial Register. Share capital as at 31 December 1996, in accordance with IAS 29, § 24 and 25, was revalued based on monthly price indices of consumer goods and services.

Share premium
Equity created by the surplus of the issuance value in excess of the nominal value of shares decreased by issuance costs. Capital from issue of shares above their nominal value as at 31 December 1996, in accordance with IAS 29, § 24 and 25, was revalued based on monthly price indices of consumer goods and services.

Hedging reserve
Equity including valuation and settlement of hedging instruments that meet the criteria of cash flow hedge accounting.

Exchange differences on translating foreign operations
Result mainly from translation of the financial statements of the foreign companies into PLN under consolidation procedures.

Retained earnings
include:

  • Reserve capital created and used in accordance with the Commercial Companies Code.
  • Actuarial gains and losses from post-employment benefits.
  • The current reporting period profit/loss.
  • Other capitals created and used according to the rules prescribed by law.
     


9.2.8.1. Share capital

  31/12/2017 31/12/2016
Share capital 535 535
Share capital revaluation adjustment 523 523
  1,058 1,058

In accordance with the Polish Commercial Register, the share capital of Polski Koncern Naftowy ORLEN S.A. as at 31 December 2017 and as at 31 December 2016 was divided into 427,709,061 ordinary shares with nominal value of PLN 1.25 each.

Number of shares issued
A Series B Series C Series D Series Total
336,000,000 6,971,496 77,205,641 7,531,924 427,709,061

In Poland, each new issue of shares is labelled as a new series of shares. All of the above series have the exact same rights.

Shareholders’ structure

  Number of shares / voting rights Nominal value of shares (in PLN) Share in share capital
State Treasury 117,710,196 147,137,745 27.52%
Nationale-Nederlanden OFE* 30,000,000 37,500,000 7.01%
Aviva OFE* 28,300,000 35,375,000 6.62%
Other 251,698,865 314,623,581 58.85%
  427,709,061 534,636,326 100.00%

 *Shareholders holding directly or indirectly via related parties, at least 5% of total votes at the Extraordinary Shareholders Meeting of PKN ORLEN S.A. held on 2 February 2018.


9.2.8.2. Share premium

  31/12/2017 31/12/2016
Nominal share premium 1,058 1,058
Share premium revaluation adjustment 169 169
  1,227 1,227


9.2.8.3. Hedging reserve

  2017 2016
At the beginning of the period (355) (80)

gross value

(440) (99)

deferred tax

85 19
Items of other comprehensive income 929 (396)

settlement of hedging instruments,gross, incl.:

(107) 129

sales revenues

37 (67)

cost of sales

(54) 105

foreign exchange differences

(185) 47

inventories

78 31

Ineffective part from settlement

17 -

settlement of instruments - no hedged item

(48) 61

valuation of hedging instruments, gross

1,084 (586)
Deferred tax from hedging instruments valuation and settlement (175) 75
Items of other comprehensive income attributable to non-controlling interest (68) 46
  331 (355)

gross value

409 (440)

deferred tax

(78) 85


9.2.8.4. Retained earnings

  31/12/2017 31/12/2016
Reserve capital 21,735 17,756
Other capital 884 884
Actuarial gains and losses (32) (19)
Net profit for the period attributable to equity owners of the parent 6,655 5,261
  29,242 23,882


9.2.8.5. Equity attributable to non-controlling interest

  31/12/2017 31/12/2016
Unipetrol Group 3,000 2,511
Other 14 11
  3,014 2,522

 

  31/12/2017 31/12/2016
At the beginning of the period 2,522 2,071
Share in profit net, incl.: 518 479

Unipetrol Group

518 481
Share in items of other comprehensive income 61 33

hedging reserve, net

68 (46)

exchange differences on translating foreign operations

(7) 79
Change in the structure of non-controlling interest 2 (1)
Paid and declared dividends (89) (60)
  3,014 2,522

Condensed financial information relating to UNIPETROL GROUP

  31/12/2017 31/12/2016
Non-current assets 6,104 5,259
Current assets 6,259 5,965

cash

401 480

other current assets

5,858 5,485
Total assets 12,363 11,224
Total equity 8,121 6,799
Non-current liabilities 393 328
Current liabilities, incl.: 3,849 4,097

trade and other liabilities

3,383 3,762

loans and borrowings

3 3
Total liabilities 4,242 4,425
Total equity and liabilities 12,363 11,224
Net debt (398) (477)

 

  2017 2016
Sales revenues 19,811 14,179
Cost of sales, incl.: (17,832) (13,438)

depreciation and amortisation

(459) (316)
Gross profit on sales 1,979 741
Distribution expenses (432) (401)
Administrative expenses (261) (237)
Net other operating income and expenses, incl.: 663 1,512

reversal / recognition of impairment allowances of property, plant and equipment and intangible assets

(12) 300

penalties, damages and compensations

659 1,194
Profit from operations 1,949 1,615
Net finance income and costs (229) 21
Profit before tax 1,720 1,636
Tax expense (317) (337)
Net profit 1,403 1,299
Items of other comprehensive income 160 92
Total net comprehensive income 1,563 1,391

In 2017 and 2016, there were no significant restrictions in entities with significant non-controlling interest resulting from credit agreements, regulatory requirements and other contractual arrangements that restrict access to assets and settlement of liabilities of the Group.


9.2.8.6. Proposal for distribution of the Parent Company’s profit for 2017

The Management Board of PKN ORLEN, after considering the liquidity situation and achievement of strategic financial objectives, proposes to distribute the net profit of PKN ORLEN for the year 2017 in the amount of PLN 6,101,792,575.09 as follows: PLN 1,283,127,183 will be allocated as a dividend payment (PLN 3 per 1 share) and the remaining amount of PLN 4,818,665,392.09 as reserve capital. The Management Board of PKN ORLEN recommends 20 July 2018 as the dividend date and 3 August 2018 as the dividend payment date. This recommendation of the Management Board will be presented to the General Shareholders’ Meeting of PKN ORLEN, which will make a conclusive decision in this matter.


9.2.8.7. Distribution of the Parent Company’s profit for 2016

The Ordinary General Meeting of Shareholders of PKN ORLEN S.A. on 30 June 2017 distributed the net profit of PKN ORLEN for the year 2016 in the amount of PLN 5,364,455,552.64 as follows: the amount of PLN 1,283,127,183 was allocated as a dividend payment (PLN 3 per 1 share) and the remaining amount of net profit of PLN 4,081,328,369.64 as reserve capital.

9.2.9. Derivatives and other assets and liabilities

Derivatives and other assets

  Non-current Current Total
  31/12/2017 31/12/2016 31/12/2017 31/12/2016 31/12/2017 31/12/2016
Cash flow hedging instruments 303 66 311 92 614 158

currency forwards

303 12 225 32 528 44

commodity swaps

- 54 86 60 86 114
Derivatives not designated as hedge accounting - - 123 5 123 5

currency forwards

- - 89 5 89 5

commodity swaps

- - 33 - 33 -

currency interest rate swaps

- - 1 - 1 -
Derivatives 303 66 434 97 737 163
Other financial assets 93 73 133 152 226 225

receivables on settled derivatives

- - 126 149 126 149

financial assets available for sale

84 40 - - 84 40

other

9 33 7 3 16 36
Other non-financial assets 237 204 - - 237 204

investment property

104 97 - - 104 97

perpetual usufruct of land

115 107 - - 115 107

other

18 - - - 18 -
Other assets 330 277 133 152 463 429

Derivatives and other liabilities

  Długoterminowe Krótkoterminowe Razem
  31/12/2017 31/12/2016 31/12/2017 31/12/2016 31/12/2017 31/12/2016
Cash flow hedging instruments - 190 141 376 141 566

currency forwards

- 42 7 117 7 159

commodity swaps

- 28 134 228 134 256

currency interest rate swaps

- 120 - 31 - 151
Derivatives not designated as hedge accounting 75 90 172 25 247 115

currency forwards

- - 100 4 100 4

commodity swaps

- - 72 21 72 21

interest rate swaps

56 90 - - 56 90

currency interest rate swaps

19 - - - 19 -
Embedded derivatives - - - 2 - 2

currency swaps

- - - 2 - 2
Derivatives 75 280 313 403 388 683
Other financial liabilities 302 280 125 169 427 449

liabilities on settled derivatives

- - 125 169 125 169

investment liabilities

108 111 - - 108 111

finance lease

166 141 - - 166 141

other

28 28 - - 28 28
Other non-financial liabilities 9 9 195 145 204 154

deferred income

9 9 195 145 204 154
Other liabilities 311 289 320 314 631 603

9.2.10. Provisions

SELECTED ACCOUNTING PRINCIPLES


Provisions
The amount recognized as a provision is the best estimate of the expenditure required to settle the present obligation at the end of the reporting period.

Environmental provision
The Group creates provisions for future liabilities due to reclamation of contaminated land or water or elimination of harmful substances if there is such a legal or constructive obligation. Environmental provision for reclamation is periodically reviewed on the basis of the degree of contamination. Changes of provision increase or decrease in the current period the value of asset causing the obligation of reclamation. In case of decrease of provision is higher than carrying amount of the asset, the amount of that excess is recognized in profit or loss.

Jubilee bonuses and post-employment benefits
Under the remuneration plans employees of the Group are entitled to jubilee bonuses, paid to employees after an elapse of a defined number of years in service as well as retirement and pension benefits, paid once at retirement or pension. The amount of above benefits and jubilee bonuses depends on the number of years in service and an employee’s remuneration. The jubilee bonuses are other long-term employee benefits, whereas retirement and pension benefits are classified as post-employment defined benefit plans.
Provisions are determined by an independent actuary and revalued if there are any indications impacting their value, taking into account the staff turnover and planned change in wages.
Actuarial gains and losses from post-employment benefits are recognized in components of other comprehensive income and from other employment benefits are recognized in profit or loss.

CO2 emissions, energy certificates
The Group recognizes the estimated CO2 emissions costs during the reporting period in operating activity costs (taxes and charges). Provision is recognized based on the value of allowances taking into account the principle of FIFO. In case of a shortage of allowances, the provision is created based on the purchase price of allowance concluded in forward contracts or market quotations of allowances at the reporting date.
Energy certificates are property rights to energy and energy efficiency certificates. The Group recognizes provisions for the estimated volume of energy rights and energy efficiency certificates for depreciation in the reporting period, which is recognized as a reduction of revenues from sales of energy or as operating costs in case of purchase of electricity for own needs.
The obligation to submit energy certificates for depreciation or to pay a substitute fee or obtain a statement together with an energy efficiency audit is regulated on the basis of separate regulations.

Other provisions
Other provisions include mainly provisions for going on legal proceedings and are recognized after consideration of available information, including the opinions of independent experts. The Group recognizes provisions if at the end of the reporting period the Group is an obligation arising from past events that can be reliably estimated and it is probable that fulfilment of this obligation will cause an outflow of resources embodying economic benefits.


ESTIMATES


Recognition of provisions requires estimates of the probable outflow of resources embodying economic benefits and defining the best estimate of the expenditure required to settle the present obligation at the end of the reporting period. Provisions are recognized when the probability of outflow of resources embodying economic benefits is higher than 50%.

Provisions

  Non-current Current Total
  31/12/2017 31/12/2016 31/12/2017 31/12/2016 31/12/2017 31/12/2016
Environmental 626 570 67 38 693 608
Jubilee bonuses and post-employment benefits 238 212 39 33 277 245
CO₂ emissions, energy certificates - - 376 365 376 365
Other 38 46 191 230 229 276
  902 828 673 666 1,575 1,494

Changes in provisions

  Environmental provision Jubilee bonuses and post-employment benefits provision CO₂ emissions, energy certificates Other Total
01/01/2017 608 245 365 276 1 494
Recognition 134 49 378 19 580
Reversal (9) - (15) (48) (72)
Usage (36) (16) (343) (18) (413)
Foreign exchange differences (4) (1) (9) - (14)
  693 277 376 229 1 575
01/01/2016 489 253 466 251 1 459
Recognition 154 10 354 118 636
Reversal (4) - (63) (140) (207)
Usage (44) (20) (397) (61) (522)
Acquisition of subsidiary (8) - - - (8)
Foreign exchange differences 21 2 5 108 136
  608 245 365 276 1 494

 

  2017 2016
Change in provisions presented in the statement of financial position 81 35
Usage of prior year provision for CO₂ emissions, energy certificates from previous year 336 392
Capitalization of environmental provision (99) (56)
Actuarial gains and losses (15) (10)
Foreign exchange differences 42 (28)
Other - (3)
Change in provisions in the statement of cash flowskursowe 345 330


9.2.10.1. Environmental provision

The Group has legal obligation to clean contaminated land – water environment in the area of production plant in Płock, fuel stations, fuel terminals and warehouses.
The Management Board estimated the provision for environmental risk related to the removal of pollution based on an analyses provided by independent expert taking into account the expected costs of remediation. Depending on the type of pollution generating facility, the provision is estimated by taking into account the frequency of remediation, the scale of environmental pollution and the achieved ecological effects. The decommissioning of most facilities will take place many years in the future and the precise requirements that will have to be met when the removal event occurs are uncertain. The level of uncertainty is subject to potential change in regulations concerning, among others environmental and social expectations.
At the same time, technological progress is an important factor that will determine future decommissioning costs. The Group believes that the impact of any reasonably foreseeable change to these provisions on the Group's operating results, financial position or liquidity will not be material.

In the Czech Republic, the Government is responsible for liabilities arising from contamination of land-water environment before date of entity’s privatization. In case of new contamination that arose after this date the Group is responsible for those liabilities.

In 2016, Unipetrol Group recognized provision for the estimated costs of plant for the production of chlorine using the mercury electrolysis liquidation in Spolana a.s in the amount of approximately PLN 21 million. In November 2017, the process of liquidation of the plant began. The plan assumes the completion of recultivation works and the use of the specific reserve by the end of 2018. As at 31 December 2017 the balance of provision for liquidation and contaminations clean up costs in the plant amounted to PLN 26 million translated using the exchange rate as at 31 December 2017 (representing CZK 160 million).
Moreover, at the stage of development and extraction of hydrocarbon deposits, the Group recognizes provisions for the cost of removal of drillings and supporting infrastructure. The line environmental provision mainly concerns entities operating in Poland and Canada.
In Poland provision was discounted based mainly on the risk-free rate set on the level of yields on 10-year treasury bonds and adjusted by the 5-year inflation rate. As at 31 December 2017 and as at 31 December 2016 the rate amounted to 0.86% and 2.33%, respectively. The companies of the Upstream segment in Canada to update the environmental provision applied the discount rate as at 31 December 2017 and 31 December 2016 at 2.20% and 2.40%, respectively.


9.2.10.2. Provision for jubilee bonuses and post-employment benefits

Change in employee benefits obligations

  NOTE Jubilee bonuses provision Post-employment benefits Total
    31/12/2017 31/12/2016 31/12/2017 31/12/2016 31/12/2017 31/12/2016
At the beginning of the period   137 150 108 103 245 253
Current service costs   7 6 5 3 12 9
Interest expenses   4 5 4 3 8 8
Actuarial gains and losses arising from changes in assumptions:   14 (16) 15 10 29 (6)

demographic

  7 (19) 4 3 11 (16)

financial

  6 (4) 5 (2) 11 (6)

other

  1 7 6 9 7 16
Past employment costs   - (4) (1) 5 (1) 1
Payments under programme   (17) (15) (3) (4) (20) (19)
Other   - 11 4 (12) 4 (1)
  9.2.10 145 137 132 108 277 245

The carrying amount of employee benefits liabilities is identical to their present value as at 31 December 2017 and 31 December 2016.

Employee benefits liabilities divided into active and retired employees

  Active employees Retired employees Total
  31/12/2017 31/12/2016 31/12/2017 31/12/2016 31/12/2017 31/12/2016
Poland 205 189 38 32 243 221
Czech Republic 17 17 - - 17 17
Lithuania, Latvia, Estonia 17 7 - - 17 7
  239 213 38 32 277 245

 

  Jubilee bonuses provision Post-employment benefits Total
  31/12/2017 31/12/2016 31/12/2017 31/12/2016 31/12/2017 31/12/2016
Employee benefits liabilities divided into geographical structure
Poland 140 132 104 89 244 221
Czech Republic 5 5 12 12 17 17
Lithuania, Latvia, Estonia - - 16 7 16 7
  145 137 132 108 277 245
Maturity of employee benefits analysis
up to 1 year 19 16 20 17 39 33
above 1 to 5 years 54 51 19 13 73 64
above 5 years 72 70 93 78 165 148
  145 137 132 108 277 245

The weighted average duration of liabilities for post-employment benefits in 2017 and in 2016 amounted to: Poland 8 and 9 years, the Czech Republic 8 and 10 and Lithuania, Latvia, Estonia 12 and 10 years, respectively.

In 2017 the amount of provision for employee benefits changed as the result of update of assumptions, mainly in relation to discount rate, projected inflation and expected remuneration increase ratio. Should the 2016 assumptions be used, the provision for the employee benefits would be lower by PLN (22) million.

Sensitivity analysis to changes in actuarial assumptions
As at 31 December 2017, the Group used the following actuarial assumptions that had an impact on the level of actuarial provisions for the Polish entities: discount rate 3.2%, expected inflation 2.3% in 2018, 2.7% in 2019 and 2.5% in subsequent years the remuneration increase rate: 4% in 2018 and 2.5% in subsequent years. In the Group's foreign entities the main impact had value of discount rate: from 0.8% to 1.5%.
The Group analysed the impact of the financial and demographic assumptions and calculated that the changes of ratios: remuneration ratio by +/- 0.5 p.p., the discount rate by +/- 0.5 p.p. and the rate of turnover by +/- 0.5 p.p. in Poland, Czech, Lithuania, Latvia and Estonia are no higher than PLN 8 million. Therefore, the Group does not present any detailed information.
The Group carries out the employee benefit payments from current resources. As at 31 December 2017 there were no funded plans and the Group paid no contributions to fund liabilities.


9.2.10.3. Provision for CO2 emissions, energy certificates


Provision for CO2 emissions and energy certificates comprises mainly recognition of the provisions for estimated in the reporting period, the cost of CO2
emissions. As at 31 December 2017 and as at 31 December 2016 the value of the provision amounted to PLN 364 million and PLN 353 million, respectively.


9.2.10.4. Other provisions


As at 31 December 2017 and as at 31 December 2016 other provisions comprise mainly provisions for the risk of unfavourable decisions of pending administrative or court proceedings of PLN 164 million and PLN 192 million, respectively.


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