ENGIE SA – Annual report – 31 December 2017
NOTE 18 PROVISIONS
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 2017 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.
18.1 Post-employment benefits and other long-term benefits
See Note 19 “Post-employment benefits and other long-term benefits”.
18.2 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.
18.2.1 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 15.1.5 “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 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.
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 opinion given by ONDRAF, the Belgian agency for radioactive waste and enriched fissile material.
For 2017, 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, correspond to those which have been approved by the Commission for Nuclear Provisions and the Group has made sure that these assumptions remain reasonable. Changes in provisions in 2017 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.
The provisions recognized by the Group were 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 set aside 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.
The estimated provision amounts include margins for contingencies and other risks that may arise in connection with dismantling and radioactive spent fuel management procedures. These margins are estimated by the Group for each cost category. The contingency margins relating to the disposal of waste are determined by ONDRAF and built into its tariffs.
The Group considers that the provisions approved by the Commission take into account all currently available information to manage the contingencies and other risks associated with the processes of dismantling nuclear facilities and managing radioactive spent fuel.
18.2.2 Provisions for nuclear fuel processing and storage
When spent nuclear fuel is removed from a reactor, it remains radioactive and requires processing. There are two different procedures for managing radioactive spent fuel: reprocessing or conditioning without reprocessing. The Belgian government has not yet decided which scenario will be made compulsory in Belgium.
The Commission for Nuclear Provisions has adopted a “mixed” scenario in which around one-quarter of total fuel 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 this “mixed” scenario, including on-site storage, transportation, reprocessing by an accredited facility, conditioning, storage and removal. They are calculated based on the following principles and inputs:
- storage costs primarily comprise the costs of building and operating additional dry storage facilities, along with the costs of purchasing containers;
- part of the spent fuel is transferred for reprocessing. The resulting plutonium and uranium is sold to a third party;
- 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 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 or fee proposals from independent organizations;
- 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;
- allocations to the provision are computed based on the average unit cost of the quantities used up to the end of the operating life of the plant;
- an annual allocation is also recognized with respect to unwinding the discount on the provision.
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 and related cost estimates. However, these components are based on information and estimates which the Group deems reasonable to date and which have been approved by the Commission for Nuclear Provisions.
Belgium’s current legal framework does not prescribe methods for managing nuclear waste. The reprocessing of 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 uranium and that an agreement will be reached between Belgium and France designating 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 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 drew up its national program for the management of spent fuel and radioactive waste. The program remains subject to approval by a ministerial order. 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 the Boom clay facility, as recommended in ONDRAF’s waste management program. To date, there is no accredited site in Belgium where the waste may be buried. The Commission’s 2016 opinion requires developing a scenario that includes the creation of a storage facility concept that the authorities are likely to deem as fit for authorization.
The Group does not expect that demonstrating the feasibility of these facilities will challenge the industrial scenario that is being adopted since it has been reviewed and validated by both national and international experts who, to date, have not raised any objections as to the technical implementation of the proposed solution of burying waste in a deep geological repository.
In these conditions, on February 9, 2018, ONDRAF proposed that geological storage be adopted as the national policy for managing this waste over the long term. Once the Government has ratified the proposal after obtaining the opinion of the Belgian Federal Agency for Nuclear Control (FANC), ONDRAF will launch a decision-making process with all the stakeholders, which will be included in the analysis of the Commission for Nuclear Provisions
18.2.3 Provisions for dismantling nuclear facilities
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 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) “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 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 “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 present value (NPV) of the obligation. This rate is the same as that used to calculate the provision for processing spent nuclear fuel;
- 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 present value of the obligation when the facilities are commissioned represents the initial amount of the provision. The matching entry is an asset recognized for the same amount within the corresponding property, plant and equipment category. This asset is depreciated over the remaining operating life of the facilities;
- an annual allocation to the provision, reflecting the interest cost on the provision carried in the books at the end of the previous year, is calculated at the discount rate used to estimate the present value of the obligation.
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.
18.2.4 Sensitivity to discount rates
The remaining balance at end-2017 of provisions for the back-end of the nuclear fuel cycle came to €5.9 billion. The obligation, expressed in current euros and estimated at the share of spent fuel to date amounted to approximately €11.7 billion.
Provisions for dismantling nuclear facilities in Belgium amounted to €5.2 billion at end-2017. The obligation, expressed in current euros, totaled approximately €7.5 billion.
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 around €150 million in dismantling and nuclear fuel processing and storage 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.
Changes arising as a result of the review of the dismantling provision would not have an immediate impact on income, since the matching entry under certain conditions would consist in adjusting the corresponding assets accordingly.
Sensitivity to discount rates as presented above in accordance with the applicable standards, is an automatic calculation 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. The frequency with which these provisions are reviewed by the Commission for Nuclear Provisions in accordance with applicable regulations ensures that the overall obligation is measured accurately.
18.3 Dismantling of non-nuclear plant and equipment and site rehabilitation
18.3.1 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.
18.3.2 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 is fully consolidated.
At end-2017, the provision covering the obligation to dismantle and rehabilitate the mine amounted to €446 million (including €282 million of mine rehabilitation and €164 million of power station dismantling costs).
Dismantling and site rehabilitation work was initiated in 2017 and includes mine 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.
The applicable laws and regulations are currently undergoing reform by the State of Victoria. The final regulations adopted could change the nature of the work to be carried out, the timing and, consequently, the provisions recorded to cover the related costs.
The average discount rates used to determine the amount of the provision were 4.26% and 4.14% for mine restoration work and power station dismantling work, respectively.
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.
18.4 Contingencies and tax risks
This caption includes essentially provisions for commercial contingencies, and claims and tax disputes.
18.5 Other contingencies
This caption includes notably provisions for onerous contracts relating to storage and transport capacity reservation contracts (see Note 8.5).