IFRS 8 para 22(aa), judgements made in aggregating operating segments into reportable segments

ENGIE SA – Annual report – 31 December 2016

Industry: utilities

NOTE 6 SEGMENT INFORMATION (extract)

6.1 Operating segments and reportable segments

6.1.1 ENGIE’s new organizational structure and determination of operating segments

Since January 1, 2016, the Group is organized into 24 Business Units (BUs) primarily based on a region-centered approach within a single country or group of countries.

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Each Business Unit corresponds to an “operating segment” whose operational and financial performance are regularly reviewed by the Group’s Executive Committee, which is the Group’s “chief operating decision maker” within the meaning of IFRS 8.

The Executive Committee monitors the performance of each Business Unit in terms of:

  • revenues;
  • EBITDA;
  • current operating income after share in net income of entities accounted for using the equity method;
  • industrial capital employed.

Net financial income and income taxes are monitored at the Group level.

Until December 31, 2015, the Group was organized into the following five operating segments: Energy International, Energy Europe, Global Gas & LNG, Infrastructures and Energy Services.

6.1.2 Definition of reportable segments

In accordance with IFRS 8, ENGIE has grouped its operating segments into ten reportable segments to present the Group’s segment information:

  • three reportable segments corresponding to operating segments: North America, Benelux and Exploration & Production (E&P);
  • six reportable segments corresponding to groups of operating segments, broken down as follows:

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  • a tenth reportable segment called “Other” that comprises operating segments that cannot be grouped together (Tractebel, GTT, Generation Europe, Solairedirect) due to the specificity of their businesses and markets or due to their particular risk profile, as well as the Group’s holding and corporate activities.

In order to determine how to group together the operating segments, as set out above, the Group exercised its judgment to decide whether two or more operating segments could be grouped together in the same reportable segment. The following key factors were examined to assess the similarity of the operating segments’ economic characteristics:

  • regulatory environment;
  • economic environment in which the concerned activities operate (market maturity, growth prospects, political risks, etc.);
  • risk profiles of the activities;
  • how the activities fit into the Group’s strategy and new business model.

The Group decided to organize the operating segments within the six reportable segments set out in the diagram above, for the following reasons:

  • the Latin America and Brazil operating segments were grouped together within the Latin America reportable segment as these segments share relatively similar growth prospects and a substantial proportion of their revenue is generated by electricity sales under long-term agreements;
  • the Asia-Pacific, China, Africa and Middle East, Southern and Central Asia and Turkey operating segments were grouped together within the Africa/Asia reportable segment as all these regions have high power generation requirements and consequently represent significant growth prospects for the Group in the energy and energy services businesses. A substantial proportion of their revenue is also generated by electricity sales under long-term agreements;
  • the France BtoB, France BtoC, France Networks and France Renewable Energy operating segments group all the French downstream energy businesses (energy services and gas and electricity sales and distribution to BtoB, BtoT and BtoC customers) and the increasingly decentralized renewable energy production. These are complementary businesses that are supported by a well-developed local network and primarily aim to develop a combined offering for local customers: energy services, decentralized production resources and combined gas and electricity supply contracts;
  • the United Kingdom and North, South and Eastern Europe operating segments were grouped together within the Europe excluding France & Benelux reportable segment as both BUs have a similar business mix (energy services, production and sales of renewable energy), operate in mature energy markets and are undergoing a transformation as part of the energy transition;
  • the GRDF, GRTgaz, Storengy and Elengy operating segments, which comprise the gas infrastructure businesses in Europe (distribution, transport, storage and LNG terminals), were grouped together within the Infrastructures Europe reportable segment as they are all regulated (or pending regulation) businesses with similar risk profiles and margins;
  • the Global Energy Management and Global LNG operating segments were grouped together within the GEM & LNG reportable segment as they are both responsible for managing and optimizing the Group’s gas supply contracts.

6.1.3 Description of reportable segments

  • North America: includes power generation, energy services and natural gas and electricity sales activities in the United States, Canada and Puerto Rico.
  • Latin America: groups together the activities of (i) the Brazil BU and (ii) the Latin America BU (Argentina, Chile, Mexico and Peru). The subsidiaries concerned are involved in the centralized power generation and gas chain businesses, and energy services.
  • Africa/Asia: groups together the activities of the following BUs: (i) Asia-Pacific (Australia, New Zealand, Thailand, Singapore, Indonesia and Laos), (ii) China, (iii) Africa (Morocco, South Africa) and (iv) the Middle East, South and Central Asia and Turkey (including India and Pakistan). In all of these regions, the Group is active in electricity generation and sales, gas distribution and sales, energy services and seawater desalination in the Arabian peninsula.
  • Benelux: includes the Group’s activities in Belgium, the Netherlands and Luxembourg: (i) power generation using its nuclear power plants and renewable power generation facilities, (ii) natural gas and electricity sales and (iii) energy services.
  • France: groups together the activities of the following BUs: (i) France BtoB: energy sales and services for buildings and industry, cities and regions and major infrastructures, (ii) France BtoC: sales of energy and related services to individual and professional customers, (iii) France Renewable Energy: development, construction, financing, operation and maintenance of all renewable power generation assets in France (excluding Solairedirect) and (iv) France Networks, which designs, finances, builds and operates decentralized energy production and distribution facilities (heating and cooling networks).
  • Europe excluding France & Benelux: groups together the activities of the following BUs: (i) United Kingdom (management of renewable power generation assets and the portfolio of distribution assets, supply of energy services and solutions, etc.) and (ii) North, South and Eastern Europe (sales of natural gas and electricity and related energy services and solutions, operation of renewable power generation assets, management of distribution networks).
  • Infrastructures Europe: groups together the GRDF, GRTgaz, Elengy and Storengy BUs, which operate natural gas transportation, storage and distribution networks and facilities, and LNG terminals, mainly in France and Germany. They also sell access rights to these infrastructures to third parties.
  • GEM & LNG: includes the activities of the Global Energy Management (GEM) and Global LNG BUs. The aim of the GEM BU is to manage and optimize the Group’s portfolios of physical and contractual assets (excluding gas infrastructures), particularly on the European market, on behalf of the BUs that hold power generation assets. It is also responsible for sales of energy to major pan-European and national industrial clients, and leverages its expertise in the energy-related financial markets to provide solutions to third parties. The Global LNG BU manages a long-term supply contract portfolio and interests in LNG infrastructures and operates an LNG fleet.
  • E&P: groups together the Group’s activities relating to the exploration, development and operation of oil and gas fields.
  • Other: includes the activities of the following BUs: (i) Generation Europe, comprising the Group’s thermal power generation activities in Europe, (ii) Tractebel (engineering companies specializing in energy, hydraulics and infrastructures), (iii) GTT (specialized in the design of cryogenic membrane confinement systems for sea transportation and storage of LNG, both on land and at sea), as well as the Group’s holding and corporate activities which include the entities centralizing the Group’s financing requirements, Solairedirect’s activities and the contribution of the associate SUEZ. 

The main commercial relationships between the reportable segments are as follows:

  • relationships between the “Infrastructures Europe” reportable segment and the users of these infrastructures, i.e. the “GEM & LNG” and “France” reportable segments: services relating to the use of the Group’s gas infrastructures in France are billed based on regulated fees applicable to all network users, except for storage infrastructure. The prices for reservation and use of storage facilities are established by storage operators based on a “negotiated access” system;
  • relationships between the “GEM & LNG” reportable segment and the “France”, “Benelux” and “Europe excluding France & Benelux” reportable segments: the “GEM & LNG” reportable segment manages the Group’s natural gas supply contracts and sells gas at market prices to commercial companies within the “France”, “Benelux” and “Europe excluding France & Benelux” reportable segments. As regards electricity, GEM manages and optimizes the power stations and sales portfolios on behalf of entities that hold power generation assets and deducts a percentage of the energy margin in return for providing these services. The revenue and margins related to power generation activities (minus the percentage deducted by GEM) are reported by the segments that hold power generation assets (“France”, “Benelux”, “Europe excluding France & Benelux” and “Generation Europe” within the “Other” reportable segment);
  • relationships between the “Generation Europe” segment, which is part of the “Other” reportable segment, and the commercial entities in the “France”, “Benelux” and “Europe excluding France & Benelux” reportable segments: a portion of the power generated by the thermal assets within the “Generation Europe” BU is sold to commercial entities from these segments at market prices.

Due to the variety of its businesses and their geographical location, the Group serves a very diverse range of situations and customer types (industry, local authorities and individual customers). Accordingly, no external customer represents individually 10% or more of the Group’s consolidated revenues.

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