9. Property, plant and equipment

SIGNIFICANT ACCOUNTING PRINCIPLES
Property, plant and equipment Property, plant and equipment comprise the following assets: maintained for the purpose of their utilisation in production processes or in the delivery of goods or the provision of services, for the purpose of making them available for use to other entities under rental agreements, or for administrative purposes, and expected to be used for periods longer than one year. Property, plant and equipment are measured at the net value, i.e. the initial value (or at the cost assumed for non-current assets used before the date of transition to IFRSs) less depreciation and impairment write-downs. The initial value of property, plant and equipment includes their purchase price plus all costs related directly to their purchase and adjustment to the condition making them available for use. Such costs include also the expected costs of the decommissioning of property, plant and equipment, their disposal, and the restoration of a particular location of a given asset to its original condition. The obligation to incur such costs occurs at the time of the installation of an asset or its usage for purposes other than the manufacture of inventories. As at the time of purchasing or manufacturing a component of property, plant and equipment, the Group identifies and distinguishes all their constituents significant in view of the purchase price or manufacturing cost of the whole asset and depreciates each such constituent separately. The Group also recognises the costs of general overhauls and periodic maintenance inspections as an element of a component of property, plant and equipment. The basis for calculating depreciation charges is a purchase price/manufacturing cost of a component of property, plant and equipment less its residual value. Depreciation starts when an asset is available for use. Depreciation of assets takes place on the basis of a depreciation plan specifying the expected economic lifetime of a component of property, plant and equipment. The applied depreciation method reflects the process of the Group’s consuming the economic benefits related to a given asset. General overhauls and periodic maintenance inspections constituting components of property, plant and equipment are depreciated for the period from the month following the end of an overhaul/inspection to the month in which the next overhaul/inspection starts. The methods of depreciation, rates of depreciation and residual values of tangible fixed assets are reviewed annually. All changes resulting from conducted reviews are recognised as changes in estimates and possible adjustments of depreciation charges are made in the year in which a review is made and in the subsequent periods. Property, plant and equipment under construction are assets in the course of being constructed or assembled; they are recognised at their acquisition prices or manufacturing costs less possible impairment write-downs. Property, plant and equipment under construction are not depreciated until construction is completed and the item of property, plant and equipment is brought into use. Borrowing costs Borrowing costs include interest and other costs incurred by the Group in connection with the borrowing of financial resources. Borrowing costs which can be allocated directly to the purchase, construction or generation of a given asset are activated as a part of the purchase price or the manufacturing cost of such an asset. Other borrowing costs are recognised as costs of the period. In the case of foreign exchange differences occurring in connection with loans and credits in foreign currencies, the Group capitalises them up to the amount in which they are regarded as an adjustment of interest costs. Impairment of non-financial non-current assets As at every reporting date, the Group estimates whether there are any circumstances indicating the possibility of impairment of any non-financial non-current assets. If the Group determines that there are such circumstances or if it becomes necessary to conduct an annual test checking whether particular assets have been impaired, the Group estimates the recoverable value of a given asset or a cash generating unit to which a given asset belongs. The recoverable value of an asset or a cash generating unit corresponds to its fair value less the costs of selling such an asset or a relevant cash generating unit or its value in use, whichever is higher. The recoverable value is determined for particular assets unless a given asset does not generate cash flows which are mostly independent of cash flows generated by other assets or groups of assets. If the book value of an asset is higher than its recoverable value, impairment occurs and the asset needs to be written down to the established recoverable value. In the estimation of value in use, forecast cash flows are discounted to their current value based on the discount rate before taking into consideration the consequences of taxation, which reflect the current market estimate of the time value of money and risks typical for a given asset. Impairment write-downs of assets used in the continued activities are recognised in the categories of costs corresponding to the function of an asset in the case of which impairment has been identified. Stripping costs If the conditions specified in the interpretation of IFRIC 20 are met, the mines recognise also so-called stripping assets, i.e. the costs of overburden removal incurred during the production stage, as a component of property, plant and equipment. The value of the stripping asset at the production stage is determined based on a model that takes into account, among other things, the estimated value of the overall N-W ratio (the ratio of the amount of overburden to lignite) and the actual annual N-W ratio. This ratio is calculated as the ratio of the remaining quantity of overburden to the remaining lignite resources to be removed from the date of application of IFRIC 20 until the end of lignite extraction from a given deposit component. The ratio is determined on the basis of the mine technical teams’ best knowledge as at the end of every financial year; it may change if new information concerning the size of a particular deposit and its deposition is acquired in parallel to progress in the mining operations. The stripping asset is depreciated systematically by means of the natural method based on the volume of lignite extracted from a given part of the deposit. Measurement of the stripping asset at the production stage The value of the asset related to stripping operations at the stage of production is established on the basis of a model including, among other things, the estimated value of the general N:W ratio. Final workings rehabilitation costs in the opencast lignite mines The opencast lignite mines operating in the PGE Group recognise in the value of property, plant and equipment the estimated rehabilitation costs of the final workings attributable to excavated overburden in the proportion corresponding to the ratio of the volume of the open pit attributable to overburden as at the reporting date to the planned volume of the open pit attributable to overburden as at the end of the mining period. The asset related to land rehabilitation costs is depreciated systematically by means of the natural method based on the volume of lignite extracted from a given open pit. Property, plant and equipment subject to operating leases The Group classifies each of its leases as either an operating lease or a finance lease. A lease is classified as a finance lease if substantially all risks and rewards relating to ownership of the underlying asset are transferred to the lessee. All other leases are treated as operating leases. Assets leased under operating leases are presented in the statement of financial position according to the nature of the assets. The entity, as a lessor, divides each class of property, plant and equipment into assets subject to operating leases and assets not subject to operating leases.

SIGNIFICANT ACCOUNTING PRINCIPLES

Property, plant and equipment
Property, plant and equipment comprise the following assets:

maintained for the purpose of their utilisation in production processes or in the delivery of goods or the provision of services, for the purpose of making them available for use to other entities under rental agreements, or for administrative purposes, and
expected to be used for periods longer than one year.

Property, plant and equipment are measured at the net value, i.e. the initial value (or at the cost assumed for non-current assets used before the date of transition to IFRSs) less depreciation and impairment write-downs. The initial value of property, plant and equipment includes their purchase price plus all costs related directly to their purchase and adjustment to the condition making them available for use. Such costs include also the expected costs of the decommissioning of property, plant and equipment, their disposal, and the restoration of a particular location of a given asset to its original condition. The obligation to incur such costs occurs at the time of the installation of an asset or its usage for purposes other than the manufacture of inventories. As at the time of purchasing or manufacturing a component of property, plant and equipment, the Group identifies and distinguishes all their constituents significant in view of the purchase price or manufacturing cost of the whole asset and depreciates each such constituent separately. The Group also recognises the costs of general overhauls and periodic maintenance inspections as an element of a component of property, plant and equipment.
The basis for calculating depreciation charges is a purchase price/manufacturing cost of a component of property, plant and equipment less its residual value. Depreciation starts when an asset is available for use. Depreciation of assets takes place on the basis of a depreciation plan specifying the expected economic lifetime of a component of property, plant and equipment. The applied depreciation method reflects the process of the Group’s consuming the economic benefits related to a given asset. General overhauls and periodic maintenance inspections constituting components of property, plant and equipment are depreciated for the period from the month following the end of an overhaul/inspection to the month in which the next overhaul/inspection starts.
The methods of depreciation, rates of depreciation and residual values of tangible fixed assets are reviewed annually. All changes resulting from conducted reviews are recognised as changes in estimates and possible adjustments of depreciation charges are made in the year in which a review is made and in the subsequent periods.
Property, plant and equipment under construction are assets in the course of being constructed or assembled; they are recognised at their acquisition prices or manufacturing costs less possible impairment write-downs. Property, plant and equipment under construction are not depreciated until construction is completed and the item of property, plant and equipment is brought into use.
Borrowing costs
Borrowing costs include interest and other costs incurred by the Group in connection with the borrowing of financial resources. Borrowing costs which can be allocated directly to the purchase, construction or generation of a given asset are activated as a part of the purchase price or the manufacturing cost of such an asset. Other borrowing costs are recognised as costs of the period. In the case of foreign exchange differences occurring in connection with loans and credits in foreign currencies, the Group capitalises them up to the amount in which they are regarded as an adjustment of interest costs.
Impairment of non-financial non-current assets
As at every reporting date, the Group estimates whether there are any circumstances indicating the possibility of impairment of any non-financial non-current assets. If the Group determines that there are such circumstances or if it becomes necessary to conduct an annual test checking whether particular assets have been impaired, the Group estimates the recoverable value of a given asset or a cash generating unit to which a given asset belongs.
The recoverable value of an asset or a cash generating unit corresponds to its fair value less the costs of selling such an asset or a relevant cash generating unit or its value in use, whichever is higher. The recoverable value is determined for particular assets unless a given asset does not generate cash flows which are mostly independent of cash flows generated by other assets or groups of assets. If the book value of an asset is higher than its recoverable value, impairment occurs and the asset needs to be written down to the established recoverable value. In the estimation of value in use, forecast cash flows are discounted to their current value based on the discount rate before taking into consideration the consequences of taxation, which reflect the current market estimate of the time value of money and risks typical for a given asset. Impairment write-downs of assets used in the continued activities are recognised in the categories of costs corresponding to the function of an asset in the case of which impairment has been identified.
Stripping costs
If the conditions specified in the interpretation of IFRIC 20 are met, the mines recognise also so-called stripping assets, i.e. the costs of overburden removal incurred during the production stage, as a component of property, plant and equipment. The value of the stripping asset at the production stage is determined based on a model that takes into account, among other things, the estimated value of the overall N-W ratio (the ratio of the amount of overburden to lignite) and the actual annual N-W ratio. This ratio is calculated as the ratio of the remaining quantity of overburden to the remaining lignite resources to be removed from the date of application of IFRIC 20 until the end of lignite extraction from a given deposit component. The ratio is determined on the basis of the mine technical teams’ best knowledge as at the end of every financial year; it may change if new information concerning the size of a particular deposit and its deposition is acquired in parallel to progress in the mining operations.
The stripping asset is depreciated systematically by means of the natural method based on the volume of lignite extracted from a given part of the deposit.
Measurement of the stripping asset at the production stage
The value of the asset related to stripping operations at the stage of production is established on the basis of a model including, among other things, the estimated value of the general N:W ratio.
Final workings rehabilitation costs in the opencast lignite mines
The opencast lignite mines operating in the PGE Group recognise in the value of property, plant and equipment the estimated rehabilitation costs of the final workings attributable to excavated overburden in the proportion corresponding to the ratio of the volume of the open pit attributable to overburden as at the reporting date to the planned volume of the open pit attributable to overburden as at the end of the mining period.
The asset related to land rehabilitation costs is depreciated systematically by means of the natural method based on the volume of lignite extracted from a given open pit.
Property, plant and equipment subject to operating leases
The Group classifies each of its leases as either an operating lease or a finance lease. A lease is classified as a finance lease if substantially all risks and rewards relating to ownership of the underlying asset are transferred to the lessee. All other leases are treated as operating leases.
Assets leased under operating leases are presented in the statement of financial position according to the nature of the assets.
The entity, as a lessor, divides each class of property, plant and equipment into assets subject to operating leases and assets not subject to operating leases.

Economic lifetimes adopted for particular groups of property, plant and equipment

Asset group	Average remaining depreciation period in years	Most frequently used depreciation periods in years
Buildings, premises and civil engineering structures	17	20 – 60
Machinery and technical equipment	11	2 – 40
Means of transport	6	4 – 15
Other property, plant and equipment	2	3 – 10

	As at 31 December 2023	As at 31 December 2022
Land	236	200
Buildings and structures	29,320	26,506
Technical equipment	27,161	29,138
Means of transport	583	333
Other property, plant and equipment	393	1,541
PPA under construction	10,815	6,670
NET VALUE OF PROPERTY, PLANT AND EQUIPMENT	68,508	64,388

Change in property, plant and equipment by generic group

	Land	Buildings and structures	Technical equipment	Means of transport	Other property, plant and equipment	PPA under construction	Total
GROSS BOOK VALUE
AS AT 1 JANUARY 2023	235	49,624	66,303	964	8,533	6,851	132,510
Capital expenditure	–	–	1	–	6	9,913	9,920
Settlement of PPE under construction	11	3,610	3,184	128	68	(7,001)	–
Liquidation, sale	(2)	(168)	(440)	(14)	(9)	(5)	(638)
Change in composition of CG	33	2,515	1,935	224	8	1,323	6,038
Effect of changes in assumptions for rehabilitation provision	–	52	26	–	1,282	–	1,360
Donations and transfers free of charge	–	97	5	(1)	–	–	101
Other	(3)	24	(98)	(2)	5	(44)	(118)
AS AT 31 DECEMBER 2023	274	55,754	70,916	1,299	9,893	11,037	149,173
AMORTISATION AND WRITE-DOWNS
AS AT 1 JANUARY 2023	35	23,118	37,165	631	6,992	181	68,122
Amortyzacja i wartość netto likwidacji ujętych w kosztach rodzajowych	3	1,726	2,474	98	253	6	4,560
Odpisy aktualizujące	–	1,775	4,600	1	2,258	42	8,676
Liquidation, sale	–	(163)	(429)	(13)	(8)	–	(613)
Other	–	(22)	(55)	(1)	5	(7)	(80)
AS AT 31 DECEMBER 2023	38	26,434	43,755	716	9.500	222	80,665
NET VALUE AS AT 31 DECEMBER 2023	236	29,320	27,161	583	393	10,815	68,508

	Land	Buildings and structures	Technical equipment	Means of transport	Other PPE	PPE under construction	Total
GROSS BOOK VALUE
AS AT 1 JANUARY 2022	234	48,018	64,066	940	9,104	3,478	125,840
Capital expenditure	–	–	1	1	–	6,911	6,913
Settlement of PPE under construction	8	1,576	1,916	48	25	(3,573)	–
Liquidation, sale	(3)	(306)	(381)	(20)	(9)	–	(719)
Change in composition of CG	(4)	195	693	(5)	(8)	38	909
Effect of changes in assumptions for rehabilitation provision	1	18	16	–	(579)	–	(544)
Donations and transfers free of charge	–	126	6	–	–	–	132
Other	(1)	(3)	(14)	–	–	(3)	(21)
AS AT 31 DECEMBER 2022	235	4,624	66,303	964	8,533	6,851	132,510
AMORTISATION AND WRITE-DOWNS
AS AT 1 JANUARY 2022	35	21,958	35,164	589	6,790	179	64,715
Depreciation and net value of liquidation included in costs by nature	2	1,567	2,294	63	221	3	4,150
Write-downs	–	(12)	99	–	1	5	93
Liquidation, sale	–	(301)	(372)	(16)	(8)	–	(697)
Change in composition of CG	(2)	(87)	(16)	(2)	(10)	–	(117)
Other	–	(7)	(4)	(3)	(2)	(6)	(22)
AS AT 31 DECEMBER 2022	35	23,118	37,165	631	6,992	181	68,122
NET VALUE AS AT 31 DECEMBER2022	200	26,506	29,138	333	1,541	6,670	64,388

Significant increases in property, plant and equipment

The largest capital expenditure was incurred by the Distribution segment (PLN 4,224 million), the Heat Generation segment (PLN 1,523 million), the Renewable Power Generation segment (PLN 1,478 million) and the Conventional Power Generation segment (PLN 1,053 million).

The main expenditure items in the Distribution segment were connections of new customers to the distribution network (PLN 1,593 million) and the cabling programme (PLN 881 million). In the Conventional Power Generation segment, the main items of expenditure were incurred at the Bełchatów Power Plant for the overhaul of unit 7 (PLN 43 million) and unit 14 (PLN 365 million), at the Turów Power Plant for the adjustment of the power plant to the conclusions (PLN 49 million) and at the Opole Power Plant for the mid-term overhaul of unit 4 (PLN 41 million). In the Heat Generation segment, the largest expenditure items were incurred on the construction of the new Czechnica CHP plant (PLN 538 million), the construction of a source at the Bydgoszcz CHP plant (PLN 69 million) and the construction of the second technological line at the thermal waste processing with energy recovery () installation at the Rzeszów CHP plant (PLN 161 million). In the Railway Power Engineering segment, the largest expenditure items were incurred on the modernisation of power supply systems (PLN 998 million). In the Other Activities segment, expenditure was mainly incurred on the construction of two CCGT units at PGE Gryfino 2050 (PLN 364 million) and the construction of a CCGT unit at Rybnik 2050 (PLN 97 million).

In the comparative period, the largest capital expenditure items were incurred by the Distribution segment (PLN 2,576 million), the Other Activities segment (PLN 2,202 million) and the Heat Generation segment (PLN 1,140 million). The main expenditure items included connections of new customers to the distribution network (PLN 1,097 million) and the cabling programme (PLN 503 million). Expenditure in the Other Activities segment was incurred primarily on the construction of CCGT units in PGE Gryfino 2050 sp. z o.o. In the Heat Generation segment, the largest part of expenditure was incurred on the construction of the new Czechnica CHP plant (PLN 393 million).

As is described in note 1.4 to these consolidated financial statements:

On 3 April 2023, the Group acquired shares in PKPE Holding. The transaction increased the net value of property, plant and equipment by PLN 5,699 million.
On 20 September 2023, PGE Energia Odnawialna S.A. purchased shares in LongWing Polska sp. z o.o. The transaction increased the net value of property, plant and equipment by PLN 331 million.

In the comparative period, the Group purchased shares in companies owning wind farms. As a result of this transaction, the net value of property, plant and equipment increased by PLN 1,116 million.

Significant decreases in property, plant and equipment

As presented in note 3.1 to these financial statements, in 2023, as a result of the impairment tests carried out for the item write-downs, the Group recognised impairment write-downs on property, plant and equipment.

Borrowing costs

During the year ended 31 December 2023, the PGE Group recognised borrowing costs in property, plant and equipment in the amount of approximately PLN 222 million (PLN 71 million in the comparative period). The average capitalisation rate of borrowing costs in the year ended 31 December 2023 amounted to 31% (18% in the comparative period).

Capitalised deposit preparation costs

In the current period, in accordance with the requirements of IFRIC 20, expenditure incurred for the removal of overburden during the production stage was capitalised at PLN 39 million. At the same time in the current reporting period, the Group recognised depreciation of capitalised stripping costs of PLN 155 million, and an impairment write-down of PLN 1,045 million. Capitalised stripping costs are presented under “Other property, plant and equipment”.

Capitalisation of changes in the measurement of the provision

Under property, plant and equipment, PGE Group recognises changes in the provision allocated to overburden, the provision for of wind farm sites and the provision for liquidation of property, plant and equipment. On 31 December 2023, the net value of the capitalised portion of the provisions (net of the impairment write-down and depreciation) amounted to PLN 341 million (including the provision for final workings of PLN 131 million). In the comparative period, the net value of the capitalised part of the provisions was PLN 239 million (including the provision for final workings of PLN 113 million).

Depreciation periods for property, plant and equipment

The rates of depreciation charges are established on the basis of the expected economic lifetime of a particular component of property, plant and equipment as well as estimates concerning its residual value. Capitalised overhauls are depreciated over a period remaining until the next planned overhaul.

Economic useful life periods are verified at least once during the course of a financial year.

Carried out in 2023, the verification of economic useful life periods for property, plant and equipment resulted in a decrease in depreciation costs for 2023 by the combined amount of approximately PLN 56 million.

Property, plant and equipment subject to operating leases
The table below shows changes in property, plant and equipment under operating leases by class of an underlying asset.

	Land	Buildings and structures	Technical equipment	Other PPE	Total
GROSS BOOK VALUE
AS AT 1 JANUARY 2023	25	72	8	1	106
Sales
Liquidation		(2)			(2)
Other	(2)	(5)		1	(6)
AS AT 31 DECEMBER 2023	23	65	8	2	98
AMORTISATION AND WRITE-DOWNS
AS AT 1 JANUARY 2023	2	39	7	1	49
Depreciation and net value of liquidation included in costs by nature		2			2
Sales
Liquidation		(2)			(2)
Other
AS AT 31 DECEMBER 2023	2	39	7	1	49
NET VALUE AS AT 31 DECEMBER 2023	21	26	1	1	49

	Land	Buildings and structures	Technical equipment	Other PPE	Total
GROSS BOOK VALUE
AS AT 1 JANUARY 2022	26	70	8	1	105
Sales	–	(2)	–	–	(2)
Other	(1)	4	–	–	3
AS AT 31 DECEMBER 2022	25	72	8	1	106
AMORTISATION AND WRITE-DOWNS
AS AT 1 JANUARY 2022	3	39	7	–	49
Depreciation and net value of liquidation included in costs by nature	–	2	–	–	2
Sales	–	(2)	–	–	(2)
Other	(1)	–	–	1	–
AS AT 31 DECEMBER 2022	2	39	7	1	49
NET VALUE AS AT 31 December 2022	23	33	1	–	57

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9. Property, plant and equipment

Economic lifetimes adopted for particular groups of property, plant and equipment

Change in property, plant and equipment by generic group