Liquidity and valuation of assets in unrestricted funds from provisions set up for nuclear decommissioning, dismantling and disposal

Brief study on behalf of the Alliance 90/The Greens parliamentary group in the German Bundestag
At the end of 2014, nuclear groups E.ON, RWE, EnBW and Vattenfall had set aside provisions totalling nearly €38 billion for the decommissioning and dismantling of nuclear installations and for the long-term storage (also known as waste management or disposal) of radioactive material from power reactors in Germany.
Unlike other European countries, Germany allows these groups to freely use the cash flow from the financial equivalent of the set-aside provisions, that is, a portion of corporate revenue, which is offset by a corresponding expense matching allocations to provisions and subsequent interest payments. No information is available on how nuclear power plant operators or their parent groups have invested the unrestricted funds from the nuclear provisions. A direct link cannot be drawn between individual liability items and individual asset items on a group’s balance sheet. Just because provisions are set up does not necessarily mean that the funds are being invested to finance dismantling and disposal. Groups can employ any type of financing whatsoever to provide future funding for dismantling and disposal activities.
Using E.ON and RWE as examples, we investigated a selection of financing options. The options that E.ON and RWE have for using debt to finance activities related to nuclear dismantling and disposal are becoming more limited in light of their declining credit ratings and relatively high debt-to-equity ratios. As regards financing from cash flow, one needs to consider that operating margins have fallen sharply in recent years and have been negative at times, while revenue and EBITDA have also fallen year-over-year in most of E.ON’s and RWE’s business divisions. There is no guarantee that the cash flow generated during the next few years will be adequate to finance higher provisions or pay for activities related to nuclear dismantling and the long-term storage of radioactive material.
For financing through asset restructuring, one needs to take a closer look at the groups’ assets, especially tangible assets, shareholdings, financial assets and – to the extent that they are not required to cover current liabilities – liquid assets. Funding available in the short-term is not enough to cover net nuclear provisions. The value of E.ON’s and RWE’s plant and machinery assets and shareholdings declined significantly from 2013 to 2014. There is a risk that this trend will continue.
With regard to the question of the groups’ using current financial resources to cover all their obligations in the nuclear sector, one must also bear in mind that the groups must use their assets and cash flow not only for their nuclear provisions, but also to cover other obligations. Therefore, it is necessary to compare the groups’ financial resources with all of their assumed obligations. For both E.ON and RWE, we conclude that the financial resources currently at their disposal are, in the best case, nearly sufficient to cover all of their long-term obligations.
In addition, there are risks that the tangible assets currently at their disposal will continue to decline in value in the coming years. The margins of fossil-fuel power plants are not expected to improve in the forseeable future. In the renewable energy sector, compensation rates are shrinking while competition is growing. The energy services business still makes no substantial contribution to group results. There is a risk that the groups’ international activities will not improve any more than they have done in recent years. Also, financial market volatility may make it even more difficult for groups to finance investment, on top of being saddled by rising debt-to-equity ratios and falling credit ratings.
This poses the danger that as years pass, the groups’ remaining assets will be less and less adequate for covering long-term obligations in the nuclear sector and other obligations. With this in mind, we propose that assets from these groups be transferred to a publicly administered fund in the coming years and kept there as liquidable assets to be used for making future payments required for dismantling and waste management activities. In addition, transfers to the external fund should not free operators from their dismantling and disposal responsibilities. On the contrary, these responsibilities need to be enshrined in an additional payment liability if fund assets are insufficient. In order to diversify risks associated with managing the fund and enable operator transfers, regulations should allow not only the transfer of securities and cash but also the transfer of ownership of tangible assets and shareholdings in the grid segment and potentially in the retail energy segment. Assets should be transferred within five years. Extending the transfer period entails greater risks of further erosion of the groups’ financial resources. The groups’ risk of insolvency can neither be completely ruled out with a five-year transfer period nor with a longer transfer period, but neither can it be ignored if the current provision policy is maintained and no external fund is established.

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