Intangible assets

The movements in intangible assets in 2020 were as follows:

Goodwill

The goodwill relates to the acquisition of DNWG in 2017. Stedin Group completed the fair value measurement of the identifiable assets and liabilities in the first half of 2018. The finalised goodwill was allocated, on the basis of the synergy benefits, to the cash-generating units Stedin Netbeheer (€30 million) and DNWG (€47 million).

Impairment test

For the purpose of the annual impairment testing, goodwill arising from the DNWG acquisition was allocated to two cash-generating units (CGUs), Stedin and DNWG, which were determined at the operating segments level.

The book values of the goodwill as at 31 December 2020 were as follows:

Stedin Group carried out an impairment test on goodwill for each CGU as at 30 June 2020. This involves a comparison between the recoverable amount of the CGU and its book value. The fair value is determined based on the recoverable amount. Due to the lack of observable market data, the valuation method is a level 3 fair value within the fair value hierarchy. The recoverable amount functions, where appropriate, as an approximation of the realisable value. In principle, the recoverable amount is based on pre-tax cash flow projections, discounted using a pre-tax weighted average cost of capital (pre-tax WACC).

The estimated projected cash flows for the 2020-2034 period are derived from the Financial Strategic Plan (FSP) of Stedin Group as approved by the Board of Management and the Supervisory Board, among other things. The budgets for the CGUs Stedin and DNWG are distinctly included in the FSP, covering the 2020-2025 period. The 2026-2034 period is derived from the extrapolation of the FSP projections. The projected investments are based on the Strategic Investment Plan (SIP). The SIP covers a 15-year projection period (2020-2034). Therefore, 2034 is regarded as a natural starting point for the residual value period.

The following items are the most important factors and assumptions used in the goodwill impairment test:

• the estimated fair value of the regulated assets (the so-called normalised regulated asset value or NRAV);
• the market shares of Stedin and DNWG respectively;
• the relative profitability of Stedin and DNWG respectively; the return on investment on the regulated assets (actual pre-tax WACC), as set by the Netherlands Authority for Consumers and Markets (ACM);
• the long-term inflation forecasts and the long-term growth rate;
• the weighted average cost of capital (WACC).

Regarding the aforementioned items, we note the following:

• Stedin Group applies fair value as the valuation principle for its regulated network components. The fair value is derived from the NRAV. As a logical consequence of this accounting policy, the variance between the realisable value and the book value of the regulated assets for both CGUs (Stedin and DNWG) is limited. Accordingly, by definition, there is an increased risk of goodwill impairment.
  
• The market shares of the CGUs Stedin and DNWG are based on the relative market shares of Stedin and DNWG in the combined output (samengestelde output, SO) of the sector as a whole. This is based on 2015 data as published by the ACM. It is assumed that both the Stedin and DNWG market shares will remain constant in the future.
  
• The profitability of Stedin and DNWG partly depends on the instrument of 'yardstick competition'. The allowed revenue which the ACM grants to the individual Dutch grid managers for their regulated activities depends on the sector-average costs and the market share of each grid manager. Stedin's market share is approximately 24% for electricity distribution and 26% for gas distribution. DNWG’s market share is approximately 3% for electricity distribution and 2% for gas distribution. The system of 'yardstick competition' means that the revenues and future cash flows of Stedin and DNWG are affected by both their own performance and that of other grid managers. The allowable income is revisited by the ACM at the beginning of each five-year regulation period; this will be done again in 2021. The underlying data are also published once every five years. As a result, grid managers cannot reliably estimate overperformance or underperformance compared to other regional grid managers during a regulatory period, nor the potential impact on their future cash flows. The next recalibration will take place in 2021.
  
• In view of the deviations between the individual performance of Stedin and DNWG compared to the benchmark, a convergence assumption of seven years was used in the determination of the realisable value of both CGUs. In this convergence assumption, the operational expenses and the level of investment of Stedin and DNWG in the year are assumed, with effect from the year 2027, to be equivalent to those of their market share.
  
• The capital costs as defined by the ACM constitute an important cost component for determining the sector-average costs. The capital costs include depreciation charges based on regulatory accounting principles as well as a return on the NRAV on the basis of the actual pre-tax WACC. The ACM determines the WACC based on relevant market parameters and corporate finance theories. The WACC assumptions utilised by Stedin Group management for its projections are derived from the proposed WACC communicated by the ACM for the next regulation period. For the subsequent regulation periods as of 2027 onwards, Stedin Group management made its own estimate for the regulated and non-regulated WACCs. These WACCs are primarily derived from i) market observations with regard to the relevant parameters such as interest rates, risk profiles, market fees and capital ratios and ii) the approach utilised by the ACM to define the WACC. The WACCs were used for two objectives, namely for the return on the NRAV and for the discount rate. The post-tax WACC of Stedin and DNWG is a weighted average for the regulated (1.7%-3.8%) and non-regulated activities (8.5%).
  
• The long-term growth rate that was used to determine the terminal values of the two CGUs is conservatively estimated at 0%. For the projection period until 2034, a growth rate has been used that is equal to the expected inflation (1.5%). This has been chosen to remain consistent with the SIP period, which ends in 2034.

For both Stedin and DNWG, the buffer between the net book value and the net realisable value is relatively small due to the fact that the fair value is used as the valuation principle for regulated assets. On the basis of the above assumptions, no impairment is indicated.

Based on the impairment test carried out on 30 June 2020 as well as additional analysis, there was no indication as at 31 December 2020 that the goodwill associated with both CGUs is impaired.

The outcome of the impairment test depends on changes in certain key estimates and assumptions. The most important ones are:

• the investment levels;
• the convergence assumption;
• the discount rate;
• the long-term growth rate.

Stedin Group performed a sensitivity analysis of changes in the key assumptions and estimates that were used to determine the realisable value for both CGUs. Stedin Group is of the opinion that any reasonably possible change in the key assumptions on which the realisable values are based will not lead to a decrease of the realisable value below the book value. The sensitivities to changes in key assumptions on which the realisable values of Stedin and DNWG are based are described below:

• If 1% of the regulated investments is not earned back via future tariffs (for example due to inefficiencies), this results in a decrease in the realisable value of Stedin by €31 million and of DNWG by €4 million.

• A one-year delay in the convergence assumption results in an increase in the realisable value of Stedin by €6 million and a decrease in the realisable value of DNWG by €3 million.

• An increase in the (regulated) discount rate of 0.1% results in a decrease in the realisable value of Stedin by €4 million and of DNWG by €3 million.

• A decrease of the long-term growth rate by 0.2% results in a decrease in the realisable value of Stedin by €4 million and of DNWG by €4 million.

None of the above sensitivities result in a material negative buffer or an impairment indication.