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The Group recognizes provisions, in particular for:
The provision for future costs associated with decommissioning of a mine is established, inter alia, on the basis of the obligations following from the Geological and Mining Law imposing on mining enterprises an obligation to decommission mines upon completion of operation, in the amount of anticipated costs associated with:
The provision amounts are presented in the present value of the expenditures which are expected to be required to fulfill the obligation. The interest rate before tax is then used, which reflects the current assessment of the market regarding the value of money over time and the risk associated specifically with the given liability. The initial estimation of the mine closure provision increases the value of property, plant and equipment. Increase of the provisions associated with elapse of time is recognized as interest expenses. Changes in the amount of the provisions associated with updating the estimates pertaining to them (discount rate, inflation rate, expected nominal value of liquidation expenditures) are recognized as an adjustment correction of the value of non-current assets subject to the liquidation obligation.
The Group recognizes provisions for mining damage only for reported mining losses caused by the activity of the mines owned by the Group, in the amount resulting from documented claims for the same title or at the amount of expenditures to protect the area against the effects of mining activity. Since there is no reliable estimation methodology, the provision for mining damage does not include those damages that will arise in the future. The Group discloses these liabilities as contingent liabilities.
The provision for removing mining damage is calculated based on a reliable estimation of cost of repairing the facilities, structures and compensation being the effect of the mining operations or protective measures taken by the Group against the effects of mining operations on the areas covered by the concessions. The starting point for recognition of the provision are the impacts of mining operations, resulting from execution of mine operation plans, identified on the surface. The provision is presented as the present value of expenditures required to fulfill this obligation.
The provision for environment reclamation, property tax, legal claims, warranty repairs et al. is recognized when the Group has the legal or customary obligation resulting from past events and it is probable that fulfillment of the obligation will cause the necessity to pay out funds, and its size has been reliably estimated. Provisions are not created for future operating losses.
The balance of provisions is verified as at each final day of the reporting period and is adjusted to reflect the current, most appropriate estimate. The estimates and assumptions adopted to calculate the provisions are disclosed in the subsequent part of the Note.
| Property tax | Mining damage | Decommissioning of a mine | Environmental fee and environmental protection | Potential litigation related to the free coal allowance for old-age and disability pensioners | Other provisions | TOTAL | |
|---|---|---|---|---|---|---|---|
| AS AT 1 JANUARY 2018 | |||||||
| Long-term | – | 223.0 | 445.4 | 36.8 | 653.5 | 4.3 | 1,363.0 |
| Short-term | 29.8 | 54.7 | – | 2.4 | – | 73.0 | 159.9 |
| TOTAL | 29.8 | 277.7 | 445.4 | 39.2 | 653.5 | 77.3 | 1,522.9 |
| Recognition of additional provisions | 4.0 | 175.3 | 110.7 | 50.0 | – | 21.1 | 361.1 |
| Provision recognized – interest expense | – | – | 13.8 | 1.1 | – | 1.6 | 16.5 |
| Reversal of unused provisions | (3.9) | (15.0) | (21.1) | (18.8) | (653.5) | (31.0) | (743.3) |
| Provisions used | (9.8) | (75.8) | (1.8) | (2.6) | – | (6.1) | (96.1) |
| BALANCE AS AT 31 DECEMBER 2018 | 20.1 | 362.2 | 547.0 | 68.9 | – | 62.9 | 1,061.1 |
| Long-term | – | 217.5 | 547.0 | 19.9 | – | 3.6 | 788.0 |
| Short-term | 20.1 | 144.7 | – | 49.0 | – | 59.3 | 273.1 |
| Note | Property tax | Mining damage | Decommissioning of a mine | Environmental fee and environmental protection | Potential litigation related to the free coal allowance for old-age and disability pensioners | Other provisions | Total | |
|---|---|---|---|---|---|---|---|---|
| BALANCE AS AT 1 JANUARY 2017 | ||||||||
| Long-term | – | 199.2 | 615.3 | 37.1 | 1,902.7 | 0.8 | 2,755.1 | |
| Short-term | 62.8 | 66.9 | – | 3.0 | – | 100.9 | 233.6 | |
| TOTAL | 62.8 | 266.1 | 615.3 | 40.1 | 1,902.7 | 101.7 | 2,988.7 | |
| Recognition of additional provisions | 15.9 | 77.1 | – | 0.5 | – | 33.5 | 127.0 | |
| Provision recognized – interest expense | – | – | 17.8 | 1.1 | – | – | 18.9 | |
| Reversal of unused provisions | (24.7) | (5.9) | (82.5) | (0.3) | (1,249.2) | (35.8) | (1,398.4) | |
| Reversal of the provision in connection with the transfer of KWK Krupiński to SRK | 4.5 | – | (4.9) | (97.1) | – | – | (14.2) | (116.2) |
| Provisions used | (24.2) | (54.7) | (8.1) | (2.2) | – | (7.9) | (97.1) | |
| BALANCE AS AT 31 DECEMBER 2017 | 29.8 | 277.7 | 445.4 | 39.2 | 653.5 | 77.3 | 1,522.9 | |
| Long-term | – | 223.0 | 445.4 | 36.8 | 653.5 | 4.3 | 1,363.0 | |
| Short-term | 29.8 | 54.7 | – | 2.4 | – | 73.0 | 159.9 |
The main assumptions made when determining the cost of mine closure include the assumptions with regards to the life of a mine, anticipated inflation and long-term discounting rates and the expected nominal cost of decommissioning the respective mines, which are determined by the Company. Any changes to these assumptions affect the carrying amount of the provision.
Based on the concessions held for the mining of black coal and methane as a concomitant mineral, the size of the documented resource base of the mines according to an official evaluation of the resources and forecasts of the mining capacity of the mines, the following periods for conducting production activities by particular mining facilities within the organizational structure of JSW are anticipated:
| Mines | According to the status | |
|---|---|---|
| as at 31 December 2018 | as at 31 December 2017 | |
| Zakład Górniczy KWK „Borynia-Zofiówka-Jastrzębie” | ||
| – Ruch „Borynia” | to 31.12.2042 | to 31.12.2042 |
| – Ruch „Zofiówka” | to 31.12.2051 | to 31.12.2051 |
| – Ruch „Jastrzębie” | to 31.12.2025 | to 31.12.2025 |
| Zakład Górniczy KWK „Budryk” | to 31.12.2077 | to 31.12.2077 |
| Zakład Górniczy KWK „Pniówek” | to 31.12.2051 | to 31.12.2051 |
| Zakład Górniczy KWK „Knurów-Szczygłowice” | ||
| – Ruch „Knurów” | to 31.12.2072 | to 31.12.2072 |
| – Ruch „Szczygłowice” | to 31.12.2078 | to 31.12.2078 |
The above forecasts of mine lives have been prepared under an assumption that the coal resources in active JSW mines have been fully exhausted, regardless of business performance. This assumption includes the implementation of future investments related to the construction of new mining levels or opening and developing of new deposits.
If, due to market conditions, it is financially impossible to carry out the capital expenditures needed to fully develop the documented resources, the lives of mines may be reduced or extraction of some resources may prove to be unprofitable.
| 2018 | 2017 | |
|---|---|---|
| Inflation rate | 2.3% | 2.3% |
| Nominal discount rate | 3.1% | 3.3% |
If the discount rates used were 0.5% points lower than the JSW Management Board’s estimates then the carrying amount of the provision for mine closure costs would be PLN 113.3 million more and if the discount rates used were 0.5% points higher then the carrying amount of the provision would be PLN 90.3 million less.
Coal resources are the estimated volumes of coal which may be extracted legally and in an economically-justified manner from the mining areas where the Parent Company operates. JSW estimates the size of the resources based on information prepared by properly qualified persons pertaining to the geological data about the size, depth and shape of the resources. Interpretation of this information requires complex judgments to be applied. Estimation of coal resources that are suitable for extraction is based on factors such as coal prices, future investment requirements, cost of production and assumptions and judgments regarding the deposit’s geological parameters. Any changes in coal resource estimations may affect the anticipated life of mines and thus, indirectly, also the carrying amount of property, plant and equipment, provisions for mine closure costs, deferred tax assets and depreciation expenses.
JSW’s mines have a total of approx. 6.739 billion tons of resources of coal, including approx. 1.056 billion tons of recoverable coal reserves (based on mine resource appraisal reports as at 31 December 2018).
Recoverable coal reserves in respective mines:
| Mines | 31.12.2018 | 31.12.2017 |
|---|---|---|
| m tons | ||
| Zakład Górniczy KWK Borynia-Zofiówka-Jastrzębie: | 301.2 | 218.8 |
| – Ruch Borynia | 88.3 | 33.0 |
| – Ruch Zofiówka | 199.6 | 172.0 |
| – Ruch Jastrzębie* | 13.3 | 13.8 |
| Zakład Górniczy KWK Budryk | 251.6 | 247.9 |
| Zakład Górniczy KWK Pniówek | 181.5 | 185.9 |
| Zakład Górniczy KWK Knurów-Szczygłowice: | 321.6 | 324.2 |
| – Ruch Knurów | 153.5 | 155.3 |
| -Ruch Szczygłowice | 168.1 | 168.9 |
As at the end of the reporting period, JSW revaluated the provision by applying the discount rate used in the restatement model for employee benefit liabilities (Note 7.11), ) which is close to the long-term bond yield and by applying the forecast inflation rate and restated expected closure costs of the individual mines. The revaluation of the mine closure provision as at 31 December 2018 entailed an increase in the provision by PLN 87.9 million, which was recognized in property, plant and equipment, in line with IFRIC 1 (Note 7.1).
Due to the need to remove mining damage resulting from the operations of mines, the Parent Company has established a provision for mining damage. The value of work necessary to remove mining damage as at 31 December 2018 was PLN 362.2 million and was calculated as the estimated cost of repairs of facilities and structures and of compensations resulting from the consequences of mining operations.
The starting point for recognition of the provision are the impacts of mining operations, resulting from execution of mine operation plans, identified on the surface. The provision is presented as the present value of expenditures required to fulfill this obligation and estimated based on the knowledge of the mine’s technical function.
The Group expects that PLN 144.7 million of the mining damage provision will be used in 2019. The remaining amount of this provision will be used in the period from 2020 to 2026. The JSW mines classify the tasks based on their knowledge of the dates of repair of the individual damage (individual evaluation of tasks) or the agreed compensation payment dates. The tasks included in the non-current provision are systemically reclassified to the current part based on the accepted technical and economic plan in the 4th quarter of a year, i.e. when particular entities in the Group acquire knowledge about the dates (in subsequent quarters of the following year) when the mining damages, for which the provision has been established, will be removed.
As at 31 December 2018, the Parent Company recognized a provision for environmental protection associated with biological reclamation of land in the total amount of PLN 48.6 million. Based on the administrative decisions received, current zoning plans and the applicable act on the protection of arable land, JSW is legally obligated to reclaim the storage yards after it discontinues its industrial activity.
The Group’s coking plants recognize a provision for the costs of remediation of contaminated sites in accordance with the law regulating the issues of soil, earth and groundwater pollution. The owner of the land where contamination of the earth’s surface occurs is obliged to carry out remediation steps. As a result of the conducted tests, the existence of pollution with risk-causing substances was found in the areas of the Jadwiga, Przyjaźń and Radlin coking plant and in the areas of the former coking plants Dębieńsko and Makoszowy.
Pursuant to Article 217d of the Environmental Protection Law, installations holding an integrated permit have the option to postpone remediation until the end of the installation’s operation if the operator demonstrates that it does not pose a significant threat to human health or the condition of the environment. The provision applies to installations currently in operation. Since no installations are in operation in the areas of the closed coking plants, JSW KOKS will have to carry out remediation and will not be able to postpone the process. At present, work is underway to prepare reports on the contamination status of the soil, earth and groundwater in these areas.The provisions were estimated by taking into account primarily the costs of works related to the construction of sheet piling and reactive barriers, as well as the use of soil mixing and soil washing processes. The calculation also includes the necessary preparatory, documentation and acceptance works. Based on market data, an average cost estimate was prepared for the above-mentioned works per 1 hectare. The projected remediation costs of the hydrocarbons installations area in the former Makoszowy Coking Plant were estimated at PLN 9.0 million and of the hydrocarbons installations area in the Dębieńsko Coking Plant at PLN 10.9 million (the total value of the provision as at 31 December 2018 is PLN 19.9 million).
After a positive ruling of the Constitutional Tribunal and the judgments of the Voivodship Court of Administration and the Supreme Court of Administration, JSW estimates the risk of further administrative proceedings in courts, as a result of which the property, plant and equipment components located in mine workings may be taxed and revalues the provisions for potential disputes with townships. Starting in December 2014, the Parent Company started declaring underground infrastructure for tax purposes and it submitted corrections to JSW’s tax returns for previous years and submitted corrections to tax returns for the taxation of roof supports, using provisions recognized for this purpose. As at 31 December 2018, the provision for property tax on elements of capitalized mine workings recognized in the books is PLN 1.5 million (PLN 10.6 million as at 31 December 2017).
An assessment or risk conducted by the Group’s coke plants, associated with the classification of fixed assets for property tax purposes, based on the updated risk calculation and assessment in this respect resulted in reducing the provision amount to PLN 18.6 million as at 31 December 2018 (PLN 19.2 million as at 31 December 2017).
In Q4 2018, the JSW Management Board made a decision to reverse the provision for potential litigation related to the free coal allowance for old-age and disability pensioners in the amount of PLN 653.5 million.
This amount of this provision served as JSW’s security against possible claims of persons not entitled to compensation benefits pursuant to the Act and eligible persons who decided not to file applications for compensation benefits (Act on compensation benefits by virtue of the loss of the right to receive free coal of 12 October 2017), upholding their hitherto position that depriving them of the free coal allowance (determined according to the original rules) is completely illegal, as well as future pensioners (present employees) because of there being no regulations in the act governing their right to the free coal allowance or compensation benefits. The amount of this provision was estimated by an independent actuarial firm using actuarial methods.
The decision to reverse the provision in 2018 was preceded by a systematic analysis of pending court cases and judgments in this respect, in accordance with the “Procedure for verification of claims on account of the free coal allowance right or refusal to pay compensation benefit” (“Procedure”) that had been put in place. The analysis covered the following groups of persons raising claims against JSW:
The decision to release the entire amount of the provision was made in connection with the fact that JSW had obtained final positive decisions that exceeded the threshold assumed in the Procedure resulting in the ratio of such positive decisions to all claims filed for the free coal allowance right for old-age and disability pensioners or refusal to pay compensation, and after the analysis of justifications for the court judgments. The fact of exceeding this threshold indicates that a line of court decisions has formed that are positive for JSW, which justifies the reversal of the provision.
The reversal has a positive effect on the Group’s operating result in the amount of PLN 653.5 million in Q4 2018 (as at 31 December 2017 the provision amounted to PLN 653.5 million).
Other provisions include mainly: