DEPRECIATION AND AMORTIZATION

Transcription

1 Page 1 f DEPRECIATION AND AMORTIZATION 1.0 PURPOSE This evidence describes OPG s depreciatin and amrtizatin plicy and presents the depreciatin and amrtizatin expense fr the nuclear facilities..0 OVERVIEW OPG is seeking apprval f test perid revenue requirements that include depreciatin and amrtizatin expense f $6.9M in 017, $78.7M in 018, $8.0M in 019, $5.9M in 00 and $8.1M in 01 fr the nuclear facilities, as shwn in Ex. F-1-1 Table. Exhibit F-1-1 Table als presents the depreciatin and amrtizatin expense fr the histrical and bridge years fr the nuclear facilities. Sectin.0 describes OPG s depreciatin and amrtizatin expense, summarizes OPG s depreciatin and amrtizatin plicy and review prcess, and utlines nuclear statin life changes effective December 1, 015 based n the recmmendatins f OPG s Depreciatin Review Cmmittee ( DRC ). Sectin.0 discusses the trend in depreciatin and amrtizatin expense ver the perid 01 t 01. The depreciatin expense fr the Bruce assets is presented in Ex. G DEPRECIATION AND AMORTIZATION EXPENSE OPG cntinues t determine depreciatin and amrtizatin expense in the same manner as presented in EB Allcatin f depreciatin expense is nt required t attribute depreciatin and amrtizatin expense t the regulated facilities. Apprximately 99 per cent f OPG s in-service fixed and intangible assets are assciated with specific generatin facilities r plant grups. The remaining in-service fixed and intangible assets, such as infrmatin technlgy assets, cntinue t be either directly assciated with a business unit r t be held centrally fr use by

2 Page f bth regulated and unregulated generatin business units. Fr the use f assets held centrally, generating business units (bth regulated and unregulated) cntinue t be charged an asset service fee fr the use f these assets. This charge cntinues t be reprted as an OM&A cst. The asset service fees are described in Ex. F Depreciatin and Amrtizatin Plicy and Review Prcess OPG s depreciatin and amrtizatin plicy and treatment f asset retirements is unchanged frm that presented in EB Depreciatin and amrtizatin rates fr the varius classes f OPG s in-service fixed and intangible assets cntinue t be based n their estimated service lives. The service life f an asset class is limited by the service life f the statin(s) t which it relates. An average endf-life ( EOL ) date is established fr depreciatin purpses fr all units at a particular statin, which is typically based n estimated EOL dates fr each perating unit f the statin. The determinatin f the statin EOL dates fr depreciatin purpses invlves an assessment f the cnditin and expected remaining life f certain key cmpnents (referred t as lifelimiting cmpnents), in cnjunctin with an estimate f the expected peratin f the statin, which includes ecnmic viability cnsideratins. Fr the nuclear statins, the life-limiting cmpnents are: fuel channels, steam generatrs, feeder pipes and reactr cmpnents. The net bk value f the prescribed nuclear facilities and the Bruce assets cntinues t include asset retirement csts ( ARC ) relating t OPG s nuclear decmmissining and nuclear waste management liabilities (asset retirement bligatin r ARO ). Accrdingly, the depreciatin and amrtizatin expense als includes the depreciatin f ARC. The depreciatin f ARC frms part f the revenue requirement impact fr the recvery f the ARO as discussed and presented in Ex. C-1-1. The EOL dates fr depreciatin purpses fr the prescribed nuclear facilities and the Bruce statins are prvided belw. As OPG anticipated in EB and as further discussed in sectin., effective December 1, 015, OPG changed the statin EOL dates f Bruce

3 Page f 8 1 A, Bruce B, Pickering Units 5-8, and Darlingtn. These changes impact the depreciatin and amrtizatin expense. Effective January 1, 01 1 Effective December 1, Darlingtn December 1, 051 December 1, 05 Pickering Units 1 & December 1, 00 December 1, 00 Pickering Units 5-8 April 0, 00 December 1, 00 Bruce A (Units 1-) December 1, 08 December 1, 05 Bruce B (Units 5-8) December 1, 019 December 1, 061 In EB-01-01, the OEB accepted the results f the independent assessment f OPG s asset service life estimates and nuclear statin EOL dates (the EB Depreciatin Study ) perfrmed by Gannett Fleming Canada ULC ( Gannett Fleming ), predicated n OPG s cntinued applicatin f the average life grup methd. OPG cntinues t apply the average life grup methd fr the purpses f calculating depreciatin expense. With the exceptin f the changes in nuclear statin EOL dates nted abve, there have been n changes in the asset service lives fr OPG s regulated business cmpared t thse recmmended by Gannett Fleming in the EB Depreciatin Study. As part f its due diligence prcess, OPG cntinues t cnvene an internal DRC t examine the service lives f fixed and intangible assets and therefre the calculatin f depreciatin and amrtizatin expense. The DRC is cmprised f business unit representatives as well as staff frm the Finance and Regulatry Affairs functins. The DRC cnsiders available engineering, technical, peratinal and financial assessments/infrmatin as part f its regular review f the service lives f generating statins (including the Bruce statins) and a selectin f asset classes with the general bjective f reviewing all significant asset classes fr the regulated assets ver a five-year cycle. Peridic independent reviews f the service 1 These EOL dates are as presented in EB Ex. F-1-1 and reflected in the apprved revenue requirement in that prceeding. EB Decisin with Reasns, p. 98

4 Page f live estimates f significant asset classes fr the regulated assets are als perfrmed ver a five-year perid, as recmmended by Gannett Fleming. The DRC s scpe and recmmendatins cntinue t be submitted fr apprval t OPG s senir executives, including the Chief Financial Officer and the business unit leader f the Nuclear peratins. Apprved DRC recmmendatins are used t calculate the depreciatin and amrtizatin expense that is reflected in OPG s financial statements and business plan. As part f the EB Depreciatin Study, OPG s DRC review prcess was fund by Gannett Fleming t be prcedurally sund and meeting generally accepted regulatry bjectives regarding depreciatin. Since EB-01-01, the DRC was cnvened twice in 01 and in 015. The 01 DRC review did nt recmmend any changes t asset classes r statin services lives. In 015, the DRC recmmended, and the Apprvals Cmmittee apprved, changes t the nuclear statin EOL dates effective December 1, 015, as discussed in sectin.. The 015 DRC recmmendatins fr the regulated business are fund in Attachment 1. Effective January 1, 016, the revenue requirement impact n the prescribed facilities f the differences in depreciatin and amrtizatin expense arising frm the December 1, 015 nuclear statin EOL date changes are being recrded in the Impact Resulting frm Changes in Statin End-f-Life Dates (December 1, 015) Deferral Accunt established in EB , until the effective date f new nuclear payment amunts incrprating the impacts f the revised EOL dates. Any changes in the depreciatin expense fr the Bruce facilities are subject t the Bruce Lease Net Revenues Variance Accunt. OPG s deferral and variance accunts are discussed in Ex. H As the EB Depreciatin Study, which was based n December 1, 01 asset net bk values, was cnducted less than five years ag, OPG has nt cmmissined a new independent review f the service life estimates fr the prescribed assets. EB Ex. F-1-1, Attachment 1, p I-7 EB Ex. F-1-1, Attachment 1, pp. I- and I-

5 Page 5 f Changes in Nuclear Statin End-Of-Life Dates As OPG anticipated in EB , OPG changed nuclear statin EOL dates fr depreciatin and amrtizatin purpses effective December 1, 015 as described belw. The previus and current nuclear statin EOL dates can be fund in the table prvided in sectin.1. Bruce Nuclear Statins On December, 015, the Prvince f Ontari annunced that it will prceed with the refurbishment f the six nt-yet-refurbished units perated by Bruce Pwer (i.e., Bruce A Units and and Bruce B Units 5 t 8) and that the previus refurbishment implementatin agreement between the Independent Electricity System Operatr and Bruce Pwer had been crrespndingly updated. The resulting Amended and Restated Bruce Pwer Refurbishment Implementatin Agreement ( ARBPRIA ) was made public in December 015 fllwing the Prvince s annuncement. 5 The ARBRIPA sets ut the target refurbishment schedule fr the six nt-yet-refurbished Bruce units and the crrespnding estimated pst-refurbishment EOL dates fr each f the eight perating Bruce units. The Prvince s annuncement and the executin f the ARBPRIA prvided OPG with the necessary evidence t align the Bruce EOL dates fr accunting purpses with the ARBPRIA, effective December 1, 015. As a result, fr OPG s accunting purpses, the average EOL date f the Bruce A statin was extended frm December 1, 08 t December 1, 05 and the average EOL date f the Bruce B statin was extended frm December 1, 019 t December 1, 061. The estimated annual impact n depreciatin and amrtizatin expense fr the Bruce assets frm the abve revisin in statin EOL dates is a reductin f apprximately $59 millin starting in This cmprises apprximately $57 millin related t the existing ARC balance and apprximately $ millin related t the nn-arc asset balances Excluding the depreciatin impact f the December 1, 015 ARC adjustment discussed in Ex. C-1-1

6 Page 6 f Pickering Nuclear Statin In 015, OPG achieved high cnfidence that all fur f Pickering Units 5 t 8 are expected t be technically fit t perate until at least the end f 00. This cnfidence was achieved thrugh wrk n the Fuel Channel Life Extensin Prject and executin f inspectin and technical wrk prgrams. As a result, OPG adpted an average EOL date, fr accunting purpses, f December 1, 00 fr these units, effective December 1, 015. This represents an extensin frm the previus average EOL date f April 0, 00, which assumed that sme f the units wuld be shut dwn prir t the end f 00. The estimated annual impact n depreciatin and amrtizatin expense fr the prescribed assets frm the abve revisin in the statin EOL date is a reductin f apprximately $8 millin starting in This cmprises apprximately $ millin related t the existing ARC balance and apprximately $ millin related t the nn-arc asset balances. As discussed in Ex. F--, OPG is undertaking a set f initiatives t extend Pickering peratin beynd 00, which will require the CNSC s apprval. The December 1, 00 accunting EOL date fr the Pickering units is expected t be reassessed in the future when further technical wrk cnfirms that the units wuld be fit t perate beynd 00. OPG will seek the OEB s apprval f an accunting rder related t any future changes t the Pickering EOL date based n the same requirements that underpinned OPG s EB applicatin. Darlingtn Nuclear Statin In January 016, the Prvince annunced that Ontari is mving frward with OPG s refurbishment f the fur-unit Darlingtn Generating Statin, with the refurbishment f the last unit scheduled t be cmpleted by 06. The Prvince s annuncement fllwed the apprval f the prject budget and schedule by OPG s Bard f Directrs in Nvember Ibid.

7 Page 7 f Based n the refurbishment schedule and an assumed pst-refurbishment perating life fr the units, OPG extended the average statin EOL date fr Darlingtn t December 1, 05, frm the previus date f December 1, 051, effective December 1, 015. The DRP is discussed in Ex. D--1 and related exhibits. The estimated annual impact n depreciatin and amrtizatin expense fr the prescribed assets frm the abve revisin in the statin EOL date is a reductin f apprximately $1 millin starting in This reductin in expense predminantly relates t the ARC balance..0 DEPRECIATION AND AMORTIZATION EXPENSE TRENDS The depreciatin and amrtizatin expense fr the prescribed nuclear facilities increases mderately frm 01 t 019, with year-ver-year increases largely due t the impact f inservice additins at the Pickering and Darlingtn statins and fr the Darlingtn Refurbishment Prject, which are discussed in Ex. D-1- and Ex. D--1. The prjected increase in depreciatin and amrtizatin expense in 016, cmpared t 015, is a net f a reductin in prescribed facilities ARC depreciatin as a result f the changes in statin EOL dates discussed in sectin. as well as the related year-end 015 adjustments in the ARO and ARC balances. The year-end 015 ARO and ARC adjustments and related revenue requirement impacts are discussed in Ex. C-1-1, sectin 5.0. Nuclear depreciatin and amrtizatin expense is frecast t increase ntably in 00 when rate base increases in 00 as a result f Darlingtn Unit s return t service in February 00. Nuclear depreciatin and amrtizatin expense declines significantly in 01, cmpared t 00, as the assumed Pickering EOL date f December 1, 00 is reached. 9 8 Ibid. 9 In line with the current EOL date, mst f the frecast Pickering capital additins in 01 are assumed, in OPG s business plan and this Applicatin, t be fully depreciated in 01

8 1 Filed: Page 8 f 8 Attachment 1: ATTACHMENTS 015 Depreciatin Review Cmmittee Recmmendatins fr Regulated Business

9 -1-1 Attachment 1 Page 1 f DEPRECIATION REVIEW COMMITTEE RECOMMENDATIONS FOR REGULATED BUSINESS DECEMBER 015

10 MEMORANDUM December Attachment 1 Page f Depreciatin Review Cmmittee Recmmendatins Regulated Business PURPOSE AND SUMMARY This memrandum is intended t btain apprval f recmmendatins resulting frm the 015 Depreciatin Review Cmmittee ( DRC ) review f the average asset service lives fr OPG s prescribed nuclear facilities and Bruce nuclear generating statins. The 015 DRC review recmmends the fllwing changes t OPG s nuclear statin service lives fr depreciatin purpses, effective December 1, 015: Pickering Units 5-8: extend end-f-life (EOL) date frm April 0, 00 t December 1, 00 Darlingtn: extend EOL date frm December 1, 051 t December 1, 05 Bruce A (units 1-): extend EOL date frm December 1, 08 t December 1, 05 Bruce B (unit 5-8): extend EOL date frm December 1, 019 t December 1, 061 The Pickering Units 1 and EOL date is recmmended t remain unchanged at December 1, 00. BACKGROUND The DRC is cnvened annually t review the service lives fr depreciatin purpses f OPG s majr facilities and a selectin f asset classes in thse facilities with the general bjective f reviewing all significant asset classes ver a five year perid. Excluding asset retirement csts, the DRC reviews in 01 and 01 are estimated t have cvered ver half f the in-service net bk value f the asset classes in OPG s regulated business. In Nvember 01, the Ontari Energy Bard ( OEB ) issued its decisin n OPG s applicatin fr 01/15 regulated rates, in which it apprved OPG s frecast depreciatin expense fr the regulated and Bruce assets as filed, based n asset service lives then in effect. The OEB als accepted the results f independent depreciatin studies filed by OPG as part f the rate applicatin. The latest f these studies was based n in-service balances f OPG s prescribed assets as at December 1, 01 as well as the Niagara Tunnel. In its decisin, the OEB als accepted OPG s cntinued use f the average life grup methd. SCOPE OF 015 DRC REVIEW The fcus f the wrk f the 015 DRC was t review the service lives fr OPG s nuclear statins based n the mst recent infrmatin available including refurbishment plans and schedules, majr cmpnents service lives, develpments related t the Bruce statins and ther relevant infrmatin available. SUMMARY OF RECOMMENDATIONS The DRC is recmmending changes t the statin service life assumptins fr depreciatin purpses fr each f OPG s nuclear statins based n the evidence discussed belw fr each statin. 1 f

11 MEMORANDUM December Attachment 1 Page f Depreciatin Review Cmmittee Recmmendatins Regulated Business Prescribed Nuclear Generating Statins Pickering Statin The DRC is recmmending an extensin f the Pickering Units 5-8 average EOL date frm April 0, 00 t December 1, 00. The DRC is nt recmmending changes t the average EOL date fr Pickering Units 1 and f December 1, 00. In 01, the DRC received cnfirmatin f high cnfidence that Pickering Units 5-8 culd be perated until at least 7,000 effective full pwer hurs ( EFPH ) based primarily n the results f the Fuel Channel Life Management prject. Pickering Units 5 and 6 in particular were expected t shut dwn befre the end f 00. The resulting average EOL date fr all fur Pickering Units 5-8 was established as April 0, 00, effective December 1, 01. As nted in the 01 DRC recmmendatins, OPG launched the Fuel Channel Life Extensin ( FLCE ) prject with the aim f achieving high cnfidence in perating Pickering Units 5-8 t at least 61,000 EFPH, which wuld allw all fur f the units t perate until at least the end f 00. In the furth quarter f 015, the DRC received technical cnfirmatin f high cnfidence that all fur Pickering Units 5-8 are nw expected t be technically fit t safely perate until at least December 1, 00 based n the results f the FCLE prject. This determinatin frms the basis fr the DRC s recmmendatin t extend the average statin EOL date fr Pickering Units 5-8 t December 1, 00, effective December 1, 015. The estimated annual impact n depreciatin expense f the abve service life change, befre the impact f anticipated year-end 015 adjustments t the asset retirement bligatin ( ARO ) estimate and asset retirement csts ( ARC ) is a reductin f apprximately $8M. Of this amunt, apprximately $M relates t the existing ARC balances and apprximately $M t nn-arc assets. 1 Darlingtn Statin The DRC recmmends extending the Darlingtn statin s EOL date frm December 1, 051 t December 1, 05. Darlingtn s current EOL date f December 1, 051 was established effective January 1, 010 fllwing the decisin t prceed with the definitin phase f the Darlingtn refurbishment. This reflected a preliminary refurbishment utage schedule, which included an assumptin f ver-lapped refurbishment utages fr the first tw units being refurbished. In Nvember 015, OPG s Bard f Directrs apprved the budget and schedule fr the fur-unit Darlingtn refurbishment. The apprved schedule includes substantial un-lapping f the refurbishment utages fr the first tw units. Based n the apprved refurbishment utage schedule and target returnt-service dates fr each unit and cntinuing t assume a 0-year pst-refurbishment perating life, the DRC recmmends extending the Darlingtn EOL date t December 1, 05, effective December 1, 015. The estimated annual impact n depreciatin expense f the abve service life change, befre the impact f anticipated year-end 015 ARO / ARC adjustments, is a reductin f apprximately $1M related t the 1 The ARO / ARC change at year-end 015 is expected t have a material impact n depreciatin expense. These impacts will be finalized nce all inputs int the calculatin f the ARO / ARC change are determined early in 016. f

12 MEMORANDUM December Attachment 1 Page f Depreciatin Review Cmmittee Recmmendatins Regulated Business existing ARC balance. There is a minimal impact n nn-arc asset depreciatin expense f less than $1M per year. Bruce Nuclear Generating Statins The DRC is recmmending an extensin t the EOL date fr the Bruce A statin (Units 1-) t December 1, 05 frm December 1, 08 and an extensin t the EOL date fr the Bruce B statin (Units 5-8) t December 1, 061 frm December 1, 019. In December 015, the Prvince f Ontari (the Prvince ) publicly annunced that it will prceed with the refurbishment f the six yet-t-be refurbished units (i.e. Bruce Units -8) perated by Bruce Pwer and that the previus refurbishment implementatin agreement between the Independent Electricity System Operatr ( IESO ) and Bruce Pwer has been crrespndingly updated. The resulting Amended and Restated Bruce Pwer Refurbishment Implementatin Agreement ( ARBPRIA ) made public in December 015 frmally utlines specific refurbishment plans with respect t Bruce Units -8 and creates a psitive bligatin n Bruce Pwer t refurbish these units. The ARBPRIA includes a target refurbishment schedule fr Units -8, as well as the fllwing crrespnding EOL dates estimated fr each f the eight Bruce units: Bruce A Bruce B Unit 1: December 1, 0 Unit 5: December 1, 06 Unit : December 1, 0 Unit 6: December 1, 058 Unit : December 1, 061 Unit 7: December 1, 06 Unit : December 1, 06 Unit 8: December 1, 06 The Prvince s public annuncement and the infrmatin cntained in the ARBPRIA prvide the evidence fr the DRC s recmmendatin t revise the Bruce A and Bruce B statin EOL dates t December 1, 05 and December 1, 061, respectively, effective December 1, 015. The recmmended new dates reflect the estimated EOL dates specified in the ARBPRIA. The estimated annual impact n depreciatin expense f the abve service life changes, befre the impact f anticipated year-end 015 ARO / ARC adjustments, is a reductin f apprximately $58M. Of this amunt, apprximately $57M relates t the existing ARC balances and apprximately $1M t nn- ARC assets. See ftnte 1 See ftnte 1 f

13 MEMORANDUM December Attachment 1 Page 5 f Depreciatin Review Cmmittee Recmmendatins Regulated Business DRC MEMBERS AND APPROVALS COMMITTEE The DRC includes representatives frm the perating business units as well as representatives having experience in finance and accunting, investment planning, and rate regulatin. The Apprvals Cmmittee is respnsible fr apprving the DRC recmmendatins and is cmprised f: Glenn Jager, President, OPG Nuclear and Chief Nuclear Officer Mike Martelli, Senir Vice President, Hydr Thermal Operatins Carl Crzzli, Senir Vice President and Interim Chief Financial Officer Bruce Bland, Senir Vice President, Cmmercial Operatins and Envirnment The DRC is cmprised f the fllwing members: Charanjit Singh (DRC Chair), Vice President, Shared Financial Services Jhn Mauti, Vice President, Chief Cntrller and Accunting Officer Carla Carmichael, Vice President, Nuclear Finance Lubna Ladak, Vice President, HTO Finance Mari Mazza, Vice President, Strategic Operatins, Hydr Thermal Operatins Alex Kgan, Vice President, Business Planning and Reprting Randy Pugh, Directr, Ontari Regulatry Affairs Stephen Rgers, Directr, Asset Planning and Integratin, Nuclear Finance Alec Cheng, Directr, External Reprting and Accunting Plicy Dave Bell, Senir Manager, Accunting and Reprting Dwight Zerkee, Senir Manager, Investment Management, Nuclear Finance f

14 Numbers may nt add due t runding. Filed: Table 1 Table 1 Depreciatin and Amrtizatin - Regulated Hydrelectric ($M) Intentinally left blank (See Ex. A1--1)

15 Numbers may nt add due t runding. Filed: Table Table Depreciatin and Amrtizatin - Nuclear ($M) Line N. Cst Item Actual 1 Actual Actual Budget Plan Plan Plan Plan Plan (a) (b) (c) (d) (e) (f) (g) (h) (i) 1 Darlingtn NGS Darlingtn Refurbishment Prject Pickering NGS Nuclear Supprt Divisins Asset Retirement Csts Other (0.0) (.5) Ttal Ntes: 1 01 Actual frm EB Ex. L Staff-00, Att. 1, Table 8, cl. (d). Includes lsses n retirements, gains n dispsal and ther related charges.