ENGIE SA – Annual report – 31 December 2020
NOTE 19 PROVISIONS
General principles related to the recognition of a provision
The Group recognizes a provision where it has a present obligation (legal or constructive) towards a third party arising from past events and where it is probable that an outflow of resources will be necessary to settle the obligation with no expected consideration in return.
A provision for restructuring costs is recognized when the general criteria for setting up a provision are met, i.e. when the Group has a detailed formal plan relating to the restructuring and has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it.
Provisions with a maturity of over 12 months are discounted when the effect of discounting is material. The Group’s main long-term provisions are provisions for the back-end of the nuclear fuel cycle, provisions for dismantling facilities and provisions for site restoration costs. The discount rates used reflect current market assessments of the time value of money and the risks specific to the liability concerned. Expenses with respect to unwinding the discount on the provision are recognized as other financial income and expenses.
Estimates of provisions
Factors having a significant influence on the amount of provisions, and particularly, but not solely, those relating to the back-end of the nuclear fuel cycle, to the dismantling of nuclear facilities and of gas infrastructures in France, include:
- cost estimates (notably the retained scenario for managing radioactive nuclear fuel consumed) (see Note 19.2);
- the timing of expenditure (notably, for nuclear power generation activities, the timetable for reprocessing radioactive nuclear fuel consumed and for dismantling facilities as well as the timetable for the end of gas operations regarding the main gas infrastructure businesses in France) (see Notes 19.2 and 19.3); and
- the discount rate applied to cash flows.
These factors are based on information and estimates deemed by the Group to be the most appropriate as of today. Modifications to certain factors could lead to a significant adjustment in these provisions.
(1) Of which €6,207 million in provisions for dismantling nuclear facilities, managed by Synatom, compared to €6,060 million at December 31, 2019.
The impact of unwinding discount adjustments in respect of post-employment and other long-term benefits relates to the interest expense on the benefit obligation, net of the interest income on plan assets.
The “Other” line mainly comprises actuarial gains and losses arising on post-employment benefit obligations in 2020, which are recorded in “Other comprehensive income” as well as provisions recorded against a dismantling or site rehabilitation asset.
Additions, utilizations, reversals and the impact of unwinding discount adjustments are presented as follows in the consolidated income statement:
The different types of provisions and the calculation principles applied are described below.
19.1 Post-employment benefits and other long-term benefits
See Note 20 “Post-employment benefits and other long-term benefits”.
19.2 Obligations relating to nuclear power generation activities
In the context of its nuclear power generation activities, the Group assumes obligations relating to the management of the back-end nuclear fuel cycle and the dismantling of nuclear facilities.
19.2.1 Legal framework
The Belgian law of April 11, 2003 granted Group subsidiary Synatom responsibility for managing provisions set aside to cover the costs of dismantling nuclear power plants and managing spent nuclear fuel in those plants. The tasks of the Commission for Nuclear Provisions (CNP) set up pursuant to the above-mentioned law is to oversee the process of computing and managing these provisions.
To enable the Commission for Nuclear Provisions to carry out its work in accordance with the above-mentioned law, Synatom is required to submit a report every three years describing the core inputs used to measure these provisions. If any changes are observed from one triennial report to another that could materially impact the financial inputs used, i.e., the industrial scenario, estimated costs and timing, the Commission may revise its opinion, and the Group makes the necessary adjustments, if any, in the income statement.
Synatom submitted its triennial report to the Commission on September 12, 2019 and the Commission issued its opinion on December 12, 2019, which was taken into account in preparing the financial statements for the year ended December 31, 2019. The provisions recognized by the Group were determined taking into account the prevailing contractual and legal framework, which sets the operating life of the Tihange 1 reactor and the Doel 1 and 2 reactors at 50 years, and the other reactors at 40 years. These provisions have not changed significantly since that date, besides the impact of recurring factors such as the passage of time (unwinding) and utilizations of and additions to provisions for fuel spent during the year.
The provisions include in their assumptions all existing or planned environmental regulatory requirements on a European, national and regional level. If new legislation were to be introduced in the future, the cost estimates used as a basis for the calculations could vary. The Group does not believe that it is aware of any developments that could materially impact the amount of the provisions with the exception of the ongoing studies conducted by ONDRAF to define a technical solution for the storage of category A, low- or medium- activity and short-lived waste.
The estimated provision amounts include margins for contingencies and other risks that may arise in connection with dismantling and radioactive spent fuel management procedures. The contingency margins relating to the disposal of waste are determined by ONDRAF and built into its fees. The Group also estimates appropriate margins for each cost category.
The Group considers that, to the best of its knowledge, the provisions approved by the Commission take into account all currently available information to manage the contingencies and other risks associated with processes such as dismantling nuclear facilities and managing radioactive spent fuel.
19.2.2 Provisions for the back-end of the nuclear fuel cycle
Allocations to provisions for the back-end of the nuclear fuel cycle are computed based on the average unit cost of the quantities expected to be used up to the end of the operating life of the plants, applied to quantities used at the closing date. An annual allocation is also recognized with respect to unwinding the discount on the provisions.
When spent nuclear fuel is removed from a reactor and temporarily stored on-site, it requires conditioning and potentially reprocessing to separate the most active radionuclides, before being consigned to long-term storage.
ONDRAF proposed on February 9, 2018 that geological storage be adopted as the national policy for managing high-level and/or long-lived radioactive waste. The proposal is subject to the approval of the Belgian government after obtaining the opinion of the Federal Agency for Nuclear Control (Agence Fédérale de Contrôle Nucléaire – AFCN).
In addition, ENGIE considers that the “mixed” scenario adopted by the Commission for Nuclear Provisions continues to apply, whereby the fuel containing the most active radionuclides is reprocessed, and the rest disposed of directly without reprocessing.
The provisions booked by the Group for nuclear fuel processing and storage cover all of the costs linked to the “mixed” scenario, including on-site storage, transportation, reprocessing, conditioning, storage and geological disposal. They are calculated based on the following principles and inputs:
- storage costs primarily comprise the costs of building and operating additional dry storage facilities and operating existing facilities, along with the costs of purchasing containers;
- part of the radioactive spent fuel is transferred for reprocessing. The resulting plutonium and uranium is sold to a third party;
- radioactive spent fuel that has not been reprocessed is to be conditioned, which requires conditioning facilities to be built according to ONDRAF’s approved criteria. ONDRAF’s recommendations as regards the cost of these facilities have been fully taken into account;
- the reprocessing residues and conditioned spent fuel are transferred to ONDRAF;
- the cost of burying fuel in deep geological repositories is estimated using the royalty rate established by ONDRAF based on a total disposal facility cost of €10.7 billion2017. The estimated cost of the AFCN’s preliminary recommendation as regards an additional well has also been included based on ONDRAF’s recommendations.
- the long-term obligation is calculated using estimated internal costs and external costs assessed based on offers received from third parties;
- the baseline scenario includes ONDRAF’s latest scenario, with geological storage starting in around 2070 and ending in around 2135;
- the discount rate used is 3.25%. It takes into account (i) an analysis of trends in long-term benchmark rates and their historical and forecast averages, as well as (ii) the long life of the liabilities based on ONDRAF’s scenario;
- an inflation rate assumption of 2.0% (actual rate of 1.25%).
The costs effectively incurred in the future may differ from the estimates in terms of their nature and timing of payment. In its opinion to the Commission for Nuclear Provisions, ONDRAF pointed out the uncertainty over some costs, which in principle are covered by the contingency margins, but for which the Commission set up a work and further analysis program as of 2020. The provisions may be subsequently adjusted in line with changes in the above-mentioned inputs and related cost estimates. Belgium’s current legal framework does not permit partial reprocessing and has not yet confirmed the adoption of geological storage as the policy for managing medium and high level nuclear waste.
As regards the partial reprocessing scenario, following a resolution adopted by the House of Representatives in 1993, reprocessing contracts that had not already begun were suspended and then terminated in 1998. The scenario adopted is based on the assumption that the Belgian government will allow Synatom to reprocess spent fuel and that an agreement will be reached between Belgium and France designating Orano (formerly Areva) as responsible for these reprocessing operations. A scenario assuming the direct disposal of waste without reprocessing would lead to a decrease in the provision compared to the provision resulting from the “mixed” scenario currently used and approved by the Commission for Nuclear Provisions.
The Belgian government has not yet taken a decision as to whether the waste should be buried in a deep geological repository or stored over the long term. On November 27, 2019, the European Commission sent a reasoned opinion to Belgium under the breach procedure provided for in Article 258 of the Treaty on the Functioning of the European Union, on the grounds that Belgium had not adopted a national program for managing radioactive waste in compliance with various requirements set out in the directive on spent fuel and radioactive waste (Council Directive 2011/70/Euratom). Therefore, at this stage, there is only one national program for the safe storage of spent fuel pending reprocessing or long-term storage. The scenario adopted by the Commission for Nuclear Provisions is based on the assumption that the waste will be buried in a deep geological repository at a site yet to be identified and classified in Belgium.
Provisions for the back-end of the nuclear fuel cycle remain sensitive to assumptions regarding costs, the timing of operations and expenditure, as well as to discount rates:
- a 10% increase in ONDRAF’s fees above the royalty rate for the removal of high-level and/or long-lived waste would lead to an increase in provisions of approximately €175 million based on unchanged contingency margins;
- a five-year advance in ONDRAF’s expenditure on temporary storage, conditioning and long-term storage for high-level and/or long-lived radioactive waste would lead to an increase in provisions of approximately €170 million. A five-year delay in the payment schedule for these various expenses would lead to a decrease of less than that amount;
- a change of 10 basis points in the discount rate used could lead to an adjustment of approximately €260 million in provisions for the back-end of the nuclear fuel cycle. A fall in discount rates would lead to an increase in outstanding provisions, while a rise in discount rates would reduce the provision amount.
These sensitivities are calculated on a purely financial basis and should therefore be interpreted with appropriate caution in view of the variety of other inputs – some of which may be interdependent – included in the evaluation.
19.2.3 Provisions for dismantling nuclear facilities
A provision is recognized when the Group has a present legal or constructive obligation to dismantle facilities or to restore a site. The present value of the obligation at the time of commissioning represents the initial amount of the provision for dismantling with, as the counterpart, an asset for the same amount, which is included in the carrying amount of the facilities concerned. This asset is depreciated over the operating life of the facilities and is included in the scope of assets subject to impairment tests. Adjustments to the provision due to subsequent changes in (i) the expected outflow of resources, (ii) the timing of dismantling expenses or (iii) the discount rate, are deducted from or, subject to specific conditions, added to the cost of the corresponding asset. The impacts of unwinding the discount are recognized in expenses for the period.
A provision is also recorded for nuclear units for which the Group holds a capacity right up to its share of the expected decommissioning costs to be borne by the Group.
Nuclear power plants have to be dismantled at the end of their operating life. Provisions are set aside in the Group’s financial statements to cover all costs relating to (i) the shutdown phase, which involves removing radioactive spent fuel from the site and (ii) the dismantling phase, which consists of decommissioning and cleaning up the site.
The dismantling strategy is based on the facilities being dismantled (i) immediately after the reactor is shut down, (ii) on a mass basis rather than on a site-by-site basis, and (iii) completely, the land being subsequently returned to greenfield status.
Provisions for dismantling nuclear facilities are calculated based on the following principles and inputs:
- costs payable over the long term are calculated by reference to the estimated costs for each nuclear facility, based on a study conducted by independent experts under the assumption that the facilities will be dismantled on a mass basis;
- fees for handling Class A – low or medium activity and short-lived – and B – low or medium activity and long-lived dismantling waste are determined using the royalty rate established by ONDRAF and include the margins recommended by ONDRAF for waste reclassification risk given the uncertainty over the definition of the criteria for classification in those classes;
- for the various phases, margins for usual contingencies, reviewed by ONDRAF and the Commission for Nuclear Provisions, are included;
- an inflation rate of 2.0% is applied until the dismantling obligations expire in order to determine the value of the future obligation;
- a discount rate of 2.5% (including inflation of 2.0%) is applied to determine the present value (NPV) of the obligation. It is different from the rate used to calculate the provision for processing spent nuclear fuel due to the major differences in horizon of the two liabilities after taking into account ONDRAF’s new scenario;
- the operating life is 50 years for Tihange 1 and Doel 1 and 2, and 40 years for the other facilities;
- the start of the technical shutdown procedures depends on the facility concerned and on the timing of operations for the nuclear reactor as a whole. The shutdown procedures are immediately followed by dismantling operations.
The costs effectively incurred in the future may differ from the estimates in terms of their nature and timing of payment. In its opinion to the Commission for Nuclear Provisions, ONDRAF pointed out the uncertainty over some costs, which in principle are covered by the contingency margins, but for which the Commission set up a work and further analysis program in 2020. The provisions may be subsequently adjusted in line with changes in the above-mentioned inputs. However, these inputs and assumptions are based on information and estimates which the Group deems reasonable to date and which have been approved by the Commission for Nuclear Provisions.
The scenario adopted is based on a dismantling program and on timetables that have to be approved by the nuclear safety authorities.
Based on currently applied inputs for estimating costs and the timing of payments, a change of 10 basis points in the discount rate used could lead to an adjustment of approximately €62 million in dismantling provisions. A fall in discount rates would lead to an increase in outstanding provisions, while a rise in discount rates would reduce the provision amount.
This sensitivity is calculated on a purely financial basis and should therefore be interpreted with appropriate caution in view of the variety of other inputs – some of which may be interdependent – included in the evaluation.
19.3 Dismantling of non-nuclear plant and equipment and site rehabilitation
19.3.1 Dismantling obligations arising on non-nuclear plant and equipment
Certain plant and equipment, including conventional power stations, transmission and distribution pipelines, storage facilities and LNG terminals, have to be dismantled at the end of their operational lives. This obligation is the result of prevailing environmental regulations in the countries concerned, contractual agreements, or an implicit Group commitment.
Based on estimates of proven and probable gas reserves through 2260 using current production levels, dismantling provisions for gas infrastructures in France have a present value near zero.
19.3.2 Hazelwood Power Station & Mine (Australia)
The Group and its partner Mitsui announced in November 2016 their decision to close the coal-fired Hazelwood Power Station, and cease coal extraction operations from the adjoining mine from late March 2017. The Group holds a 72% interest in the former 1,600 MW power station and adjoining mine, which was previously fully consolidated and has been consolidated as a joint operation since September 2018.
At December 31, 2020, the Group’s share (72%) of the provision covering the obligation to dismantle and rehabilitate the mine amounted to €277 million.
Dismantling and site rehabilitation work commenced in 2017 and focused on: managing site contamination; planning site-wide environmental clean-up; the demolition and dismantling of all of the site’s industrial facilities, including the former power station; and ongoing aquifer pumping and designated earthworks within the mine to ensure mine floor and batter stability with a view to long-term rehabilitation into a pit lake.
Several policies and laws that have a direct or indirect impact on mine rehabilitation and on the agencies that administer them have recently been reformed. Consequently, the ultimate regulatory obligations are likely to be revised during the life of the project and could therefore have an impact on provisions.
The average discount rate used to determine the amount of the provisions is 4.03%.
The amount of the provision recognized is based on the Group’s best current estimate of the demolition and rehabilitation costs that Hazelwood is expected to incur. However, the amount of this provision may be adjusted in the future to take into account any changes in the key inputs.
19.4 Other contingencies
This caption essentially includes provisions for commercial litigation, tax claims and disputes (except income tax, pursuant to IFRIC 23) as well as provisions for onerous contracts relating to storage and transport capacity reservation contracts.