10.1.1.1.1 Impairment testing of service station network

In 2021, LOTOS Paliwa Sp. z o.o. recognised an impairment loss on service station assets totalling PLN 3.6m, as presented in Note 9.4., due to the insufficient level of return of the employed assets (2020: PLN 8.8m, see Note 9.5.).

The recoverable amount of property, plant and equipment related to the service station network was determined based on the value in use of each station, calculated with the discounted cash flow method. Future cash flows were calculated on the basis of cash flow projections over the useful life of individual stations, prepared based on the provisional budget for 2022 and the plan of cash inflows and outflows for subsequent years derived from the development strategy. The development paths for each station were individually assessed by the Business Unit with operational responsibility for the stations. LOTOS Paliwa Sp. z o.o.’s net weighted average cost of capital (WACC) based on the company’s financing structure was assumed at 6.96% (2020: 5.65%).

Calculation of the value in use of cash-generating units is most sensitive to the following variables:

• Gross margin, which depends on average values of unit margins for the budget period. In the first year of the budget period, the unit fuel margin has stayed close to the 2021 level, taking into account micro-markets of the relevant service stations.
• The assessment of 2021 was performed without taking into account the results of the fourth quarter of the year, due to their incidental and disruptive In terms of the realised unit margin, the fourth quarter 2021 results were significantly different from the typical results achieved in previous periods. The market situation, heavily affected by the decision of the largest competitor (which also has the greatest influence on prices at fuel stations in Poland) to refrain from increasing retail prices, prevented the Company from achieving the projected margins.
• The level of the unit fuel margin is planned so that it covers operating costs and their potential increase during the budget year. The level of the unit margin in subsequent years reflects macroeconomic inflation indices applied in the The unit margin on non-fuel sales assumed for the budget period is on average 1% higher than in the year preceding the budget period. A gradual return to pre-COVID-19 levels is assumed. The unit non-fuel margin is expected to rise in subsequent years reflecting a change in the product mix, with a growing share of high-margin products, mainly food and beverage, in total sales.
• Discount rate which reflects the expected rate of return on assets at a specific risk level, after taking into account the marginal tax rate of 19% (the rate is calculated in accordance with the WACC and CAPM methodologies using such inputs as the median of 10- year treasury bond prices, market risk premium (MRP), country risk premium (CRP), and the market structure of financing).
• Volumes based on the dynamics of fuel consumption growth in the retail segment and on business analysis taking into account the nature of micro-markets at the analysed locations.
• Market share in the budget period (the market share was assumed to be maintained).
• The growth rate used to estimate cash flows outside the budget period (2.5%).