Intangible assets

14 Intangible assets

Goodwill

The goodwill relates to the acquisition of DNWG in 2017 and was initially allocated, based on the synergy benefits, to cash-generating units (CGUs) Stedin Netbeheer for €30 million and to DNWG for €47 million. As a result of the merger of Stedin Netbeheer B.V. and Enduris B.V., the goodwill of €77 million as at 1 January 2022 will be allocated in full to the cash-generating unit Stedin Netbeheer.

Impairment test

As at 30 June 2022, Stedin Group carried out the annual goodwill impairment test for CGU Stedin Netbeheer. This involves a comparison between the fair value of the CGU and its net carrying amount. The fair value is determined based on the net realisable value. Due to the lack of observable market data, the valuation method is a level 3 analysis within the fair value hierarchy. The net realisable value functions as an approximation of the recoverable amount. In principle, the net realisable value is based on post-tax cash flow projections, discounted applying a post-tax weighted average cost of capital (post-tax WACC).

The estimated projected cash flows for the 2022-2046 period are mainly derived from the Financial Strategic Plan (FSP) of Stedin Group as approved by the Board of Management and the Supervisory Board. The budgets for the CGU are distinctly included in the Stedin Group FSP, covering the 2022-2027 period. The 2028-2046 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 (2022-2036). The investments after 2036 are derived from an extrapolation of the SIP projections. A projection period up to and including 2046 has been chosen because this fits in well with the estimated duration of the energy transition, also following the Climate Agreement and the national targets set therein for 2030 and 2050. The residual value period starts after 2046.

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 normalised standardised asset value, NSAV);

• the market share of Stedin Netbeheer;

• the relative profitability of Stedin Netbeheer; the return on investment (nominal/actual pre-tax WACC) for the regulated assets as determined by the Netherlands Authority for Consumers and Markets (ACM);

• the inflation forecasts and the long-term growth rate; and

• 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 NSAV. A consequence of this valuation principle is that the buffer between the realisable value and the net carrying amount of the CGU Stedin Netbeheer is more limited over time than if Stedin Group were to value its regulated network components at historical cost.
  

• The profitability of Stedin partly depends on the instrument of ‘benchmark comparison’. The system of ‘benchmark competition’ means that the revenues and future cash flows of Stedin Netbeheer 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. The underlying data on which the recalibration is based are also published once every five years. As a result, grid managers cannot entirely reliably estimate overperformance or underperformance compared with other regional grid managers during a regulatory period, nor the potential impact on their future cash flows. The recalibration was performed in 2021. Stedin Netbeheer’s market share was adjusted in 2021 on the basis of this. Stedin Netbeheer’s market share is approximately 25% for electricity transmission and 28% for gas distribution. For the future it is assumed that the market share will develop based on the expected developments in volumes in the sector.
  

• In view of the existing deviations between the individual performance of Stedin Netbeheer compared with the benchmark (on the basis of which performance versus other regional grid managers is determined), a convergence assumption of approximately 20 years was used in determining the net realisable value of the CGU. This convergence assumption assumes that Stedin Netbeheer’s operational expenses and capital costs around the year 2042 are equal to its market share of the sector’s total operational expenses and total capital costs. In the period up to convergence, Stedin Group prepared an estimate of its relative position in the benchmark.
  

• From 2022, ACM applies a declining balance method of depreciation for the compensation system for depreciation of the gas network. This is included in the projections. The capital costs as defined by the ACM constitute an important cost component for determining the sector-average costs. The capital costs include the depreciation charges determined on the basis of regulatory accounting principles as well as a return on the standardised asset value based on the pre-tax return on investment (the nominal and hybrid actual pre-tax WACC for gas and electricity respectively). The ACM determines this pre-tax WACC based on relevant market parameters and corporate finance theories. From 2022, ACM will apply subsequent costing to the difference between its estimated risk-free interest rate and the actual risk-free interest rate, and the grid manager may incorporate this difference in its tariffs. In our projections, we follow the intended pre-tax WACCs communicated by ACM for the current regulatory period (2022 - 2026). For the regulation periods from 2027 onwards, management has made its own estimate for the (regulated) WACCs.
  

• The post-tax WACCs (discount rate) (3.0% - 3.6%) are determined separately for each year of the projection period and are primarily derived from market observations on relevant parameters such as interest rates, risk profiles, market fees and capital ratios.
  

• The long-term growth rate that is used to determine the terminal values of the CGU is conservatively estimated at 0%. For the projection period until 2046, a growth rate has been used that is equal to the expected inflation, i.e. 2.0%.

The buffer between the net carrying amount and the net realisable value is positive.

Based on the impairment test carried out on 30 June 2022, and the additional analyses performed for the period between 30 June 2022 and 31 December 2022, there is no impairment indication as at 31 December 2022 related to goodwill.