ENGIE SA – Annual report – 31 December 2018
NOTE 20 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
Parameters 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 and to the dismantling of nuclear facilities, as well as those relating to the dismantling of gas infrastructures in France, include:
• cost estimates (notably the retained scenario for managing radioactive nuclear fuel consumed) (see Note 20.2);
• 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 20.2 and 20.3);
• and the discount rate applied to cash flows.
These parameters are based on information and estimates deemed by the Group to be the most appropriate as of today.
Modifications to certain parameters could lead to a significant adjustment in these provisions.
(1) Comparative data at December 31, 2017 have been restated due to the application of IFRS 9 and IFRS 15 (see Note 2 “Restatement of 2017 comparative data”).
(2) Of which €5,337 million in provisions for dismantling nuclear facilities, compared to €5,159 million at December 31, 2017.
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” column mainly comprises actuarial gains and losses arising on post-employment benefit obligations in 2018 which are recorded in “Other comprehensive income” as well as provisions recorded against a dismantling or site rehabilitation asset.
Additions, reversals and the impact of unwinding discounting adjustments are presented as follows in the consolidated income statement:
The different types of provisions and the calculation principles applied are described below.
20.1 Post-employment benefits and other long-term benefits
See Note 21 “Post-employment benefits and other long-term benefits” for a description of the main pension plans and other post-employment and long-term benefits.
20.2 Nuclear power generation activities
In the context of its nuclear power generation activities, the Group assumes obligations relating to the back-end of the nuclear fuel cycle and the dismantling of nuclear facilities.
20.2.1 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 radioactive fissile material from such plants. The tasks of the Commission for Nuclear Provisions set up pursuant to the above-mentioned law is to oversee the process of computing and managing these provisions. The Commission also issues opinions on the maximum percentage of funds that Synatom can lend to operators of nuclear plants and on the types of assets in which Synatom may invest its outstanding funds (see Note 17.1.4 “Financial assets set aside to cover the future costs of dismantling nuclear facilities and managing radioactive fissile material”).
To enable the Commission for Nuclear Provisions to carry out its work in accordance with the law, Synatom is required to submit a report every three years describing the core inputs used to measure these provisions.
Synatom submitted its triennial report to the Commission for Nuclear Provisions on September 12, 2016. The Commission issued its opinion on December 12, 2016 based on the prior opinion given by ONDRAF, the Belgian agency for radioactive waste and enriched fissile material.
If any changes are observed from one triennial report to another that could materially impact the financial inputs used, the industrial scenario, estimated costs or their timing, the Commission for Nuclear Provisions may decide to revise its opinion.
The provisions related to nuclear power generation activities are measured 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.
The provisions take into account 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. However, the Group is not aware of any planned legislation on this matter which could materially impact the amount of the provisions, other than the matters described in Note 20.2.2 below.
The estimated provision amounts also include margins for contingencies and other risks in order to take into account the degree of control of techniques related to dismantling and radioactive spent fuel management, being understood that contingency margins for the disposal of waste are determined by ONDRAF and included in its fees. Thus, the Group considers that the provisions approved by the Commission for Nuclear Provisions 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.
Based on the information disclosed in Notes 20.2.2 and 20.2.3 below, core inputs for measuring provisions including management scenarios, implementation program and timetable, detailed technical analyses (physical and radiological inventories), estimation methods and timing of expenditures, as well as discount rates, are those approved by the Commission for Nuclear Provisions in 2016.
Consequently, changes in provisions in the Group’s financial statements in 2018 therefore mainly relate to recurring items linked to the passage of time (the unwinding of discounting adjustments) and provisions for fuel spent during the year.
20.2.2 Provisions for the back-end of the nuclear fuel cycle
Allocations to the 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 remains radioactive and requires processing. There are two scenarios for managing radioactive spent fuel:
• either based essentially on reprocessing;
• or based essentially on conditioning without reprocessing.
ENGIE considers that the “mixed” scenario adopted by the Commission for Nuclear Provisions in 2016 continues to apply, whereby around one-quarter of total fuel is reprocessed, and the rest disposed of directly without reprocessing.
Furthermore, 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).
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 removal. They are calculated based on the following 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;
• the reprocessing residues and conditioned radioactive spent fuel are transferred to ONDRAF;
• the cost of burying fuel in deep geological repositories is estimated by ONDRAF;
• the long-term obligation is calculated using estimated internal costs and external costs assessed based on offers received from third parties;
• the discount rate used is 3.5% and was calculated based on an inflation rate of 2.0% (actual rate of 1.5%). It is based on an analysis of trends in and average, past and prospective benchmark long-term rates.
The costs effectively incurred in the future may, however, differ from the estimates in terms of their nature and timing of payment. The provisions may be subsequently adjusted in line with changes in the above-mentioned inputs and related cost estimates. In particular:
• As regards the partial reprocessing scenario, Belgium’s current legal framework does not prescribe methods for managing nuclear waste. The reprocessing of radioactive spent fuel was suspended following a resolution adopted by the House of Representatives in 1993. 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. The Commission’s 2016 opinion recommends that the necessary steps be officially initiated to ensure that this partial reprocessing scenario is implemented.
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 medium- and high-level radioactive waste should be buried in a deep geological repository or stored over the long term. In accordance with the European Directive, in 2015 the government submitted its proposed national program for the management of spent fuel and radioactive waste to the European Commission. This program was approved by ministerial order in 2016, based on the assumption that the waste would be buried in a deep clay layer at Boom. This assumption was accepted by the Commission for Nuclear Provisions in 2016 although to date, there is no accredited site in Belgium where the waste may be buried. However, the Commission for Nuclear Provisions asked for a scenario to be developed that includes the creation of a storage facility concept that the authorities would be likely to authorize.
In these conditions, in 2018 ONDRAF’s Board of Directors adopted a new reference scenario for the geological storage of this waste, based on a new architecture and a potentially greater burial depth, on condition that a suitable site could be identified in Belgium. On that basis and in accordance with the procedures set out in the Royal Decree of March 30, 1981 “determining the tasks and setting the operational procedures of the public agency for the management of radioactive waste and fissile material”, ONDRAF set the new fees to be charged for the management and storage of high-level and/or long-lived waste. These fees were approved by ONDRAF’s Board of Directors on September 28, 2018 and notified to the Commission for Nuclear Provisions and Synatom. However, they have yet to be integrated in the agreements to be entered into by ONDRAF and the nuclear waste producers, including Electrabel and Synatom.
The new technical arrangements will result in the following:
– Estimated costs of €8.0 billion based on 2017 economic conditions, meaning a twofold increase in the cost of geological storage of waste compared with the cost assumptions used in the 2016 proposal submitted to the Commission for Nuclear Provisions. This amount includes technical optimizations for €2.7 billion, based on 2017 economic conditions, to be confirmed by a special working group by 2020.
– Significant delays in the payment schedule for the various expenses related to the conditioning and storage of nuclear waste. These delays could be as long as 35 years for some expense categories, such as facilities for conditioning radioactive spent fuel and for the removal of conditioned fuel, thus reducing the net present value of the expenses and, therefore, the impact of the increase in burial costs on the measurement of nuclear provisions.
ONDRAF has asked the Commission for Nuclear Provisions to ensure that provisions are sufficient to cover the expenses for the back end of the nuclear fuel cycle, should the optimizations subject to expert appraisal fail to materialize.
Given the expected trend in assumptions for geological waste storage costs, reprocessed volumes, unit reprocessing costs and the timetable for operations, the Group believes, based on information available to date, that the impact of the new technical scenario on the provisions for the back-end cycle should not significantly alter the net present value of its commitments as estimated today.
The amount of provisions for radioactive spent fuel at December 31, 2018 therefore remained based on the industrial scenarios and cash flow projections approved by the Commission for Nuclear Provisions in December 2016 at the time of the last triennial report.
The new estimate, taking into account the new fees and timetable, will be included in Synatom’s proposal to be submitted to the Commission for Nuclear Provisions no later than at the time of the next triennial report in 2019.
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. Based on the new scenario notified by ONDRAF:
• a 10% increase in ONDRAF fees for the removal of high-level and/or long lived waste would lead to an increase in provisions of approximately €140 million at unchanged contingency margins;
• a five-year advance in ONDRAF’s program for high-level and/or long-lived radioactive waste conditioning and removal would lead to an increase in provisions of approximately €90 million. A five-year delay in the payment schedule for these various expenses would lead to a decrease of a similar amount;
• a change of ten basis points in the discount rate used could lead to an adjustment of approximately €190 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.
20.2.3 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 engagement at the time of commissioning represents the initial amount of the provision for dismantling with, as 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. 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.
Nuclear power plants have to be dismantled at the end of their operating life. Provisions are set aside in the Group’s accounts 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 “serial” 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 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 “in series”;
• 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 3.5% (including inflation of 2.0%) is applied to determine the net present value (NPV) of the obligation. This rate is the same as that used for the back-end of the nuclear fuel cycle;
• 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. The provisions may be subsequently adjusted in line with changes in the above-mentioned inputs. The assumptions used have a significant impact on the related implementation costs. 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.
Provisions are also recognized for the Group’s share of the expected dismantling costs for the nuclear facilities in which it has drawing rights.
Based on currently applied inputs for estimating costs and the timing of payments, a change of ten basis points in the discount rate used could lead to an adjustment of approximately €60 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.
20.3 Dismantling of non-nuclear plant and equipment and site rehabilitation
20.3.1 Dismantling obligations arising on other 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.
20.3.2 Hazelwood Power Station & Mine (Australia)
Following the Group and its partner Mitsui’s announcement in November 2016 of their decision to close the coal-fired Hazelwood Power Station, the adjoining mine was shut down in late March 2017. The Group holds a 72% interest in the 1,600 MW power station, which was previously fully consolidated and has been consolidated on joint operation since September 2018.
At end-2018, the Group’s share (72%) of the provision covering the obligation to dismantle and rehabilitate the mine amounted to €310 million.
Dismantling and site rehabilitation work was initiated in 2017 and includes site rehabilitation, with the purpose of ensuring long-term land and wall stability, the demolition and dismantling of all of the site’s industrial facilities, the monitoring of environmental incidents and any related remediation plans, as well as long-term site monitoring.
Several laws that have a direct or indirect impact on mine rehabilitation and on the agencies that administer the laws are currently being reformed. Consequently, the ultimate regulatory obligations could 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 4.22%.
The amount of the provision recognized is based on the Group’s best current estimate of the dismantling 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.
20.4 Litigation and tax risks
This caption includes essentially provisions for commercial litigation, and tax claims and disputes.
20.5 Other contingencies
This caption includes notably provisions for onerous contracts relating to storage and transport capacity reservation contracts recognized in 2017 (see Note 10.5).