29 November 2016 - EY

1 10th European IFRS Power and Utilities roundtable Brussels29 November 2016 Figure 1: Disruption is forcing power and utilities to re-evaluate existing business modelsUtility disruption driversInfrastructureinvestmentIncreased distributed generation attractivenessReduced demand growthHigher energyefficiencyChangingenergy mixand distributed generationEmpoweredcustomersDigitization Market andpolicy reformsRegulatoryframeworksNewcompetitor sTalent anddiversitySector intransformationTraditional utility outlookIncreasing distributed generation grid parityChanging energy sourcesDecreasing customer trustChanging behaviors and regulatory pressureIncreasing cost to serve remaining customersDecreasing commodity revenueIncreasing unit price of electricitySource: EYIn brief: International Financial Reporting Standards (IFRS) for power and utility companiesHow power and utility companies can navigate a rapidly evolving business and accounting environmentAt EY, we view power and utilities as a sector undergoing fundamental transformation.

2 Utilities are being forced to adapt the ways in which they do business, in response to ongoing evolution in the sector. And as utilities business models change, their internal accounting and external financial reporting models must change, | 10th European IFRS Power and Utilities Roundtable BrusselsUtility disruption driversInfrastructureinvestmentIncreased distributed generation attractivenessReduced demand growthHigher energyefficiencyChangingenergy mixand distributed generationEmpoweredcustomersDigitization Market andpolicy reformsRegulatoryframeworksNewcompetitor sTalent anddiversitySector intransformationTraditional utility outlookIncreasing distributed generation grid parityChanging energy sourcesDecreasing customer trustChanging behaviors and regulatory pressureIncreasing cost to serve remaining customersDecreasing commodity revenueIncreasing unit price of electricityMeeting at the 10th European IFRS Power and Utilities Roundtable in November 2016 , senior finance executives from leading power and utilities businesses considered issues and emerging trends in the sector.

3 As well as the latest financial reporting by EY in Brussels, the event brought together keynote speakers from the International Accounting Standards Board (IASB) and the European Financial Reporting Advisory Group (EFRAG), who presented insights on critical developments in International Financial Reporting Standards (IFRS). We also welcomed the secretaries-general of both the World Energy Council (WEC) and Eurelectric, who shared their perspectives on the rapid reshaping of the are pleased to present the headline insights to come out of the 10th ChossonEY Global Assurance Power & Utilities LeaderDennis DeutmeyerEY Global IFRS Power & Utilities Leader10th European IFRS Power and Utilities Roundtable Brussels |2 Pace of change: In the three years since the World Energy Congress (WEC) in Daegu, Korea, the pace of change for utilities has quickened. Friction points that emerged at the 2016 Congress in Istanbul included the mismatch between decentralization of energy and its depoliticization; the specter of peak demand and the increased risk of stranded resources; and a growing belief in technological leapfrogging in the developing world.

4 Drivers of future change: Three drivers for further change in coming years include the need to accelerate decarbonization; the need for greater innovation, with margins moving from resources to customers; and the likelihood of more extreme weather events. Energy trilemma: The scenarios underpinning WEC s latest Grand Transition report focus on the need for a strategic approach to balancing the energy trilemma and for entrepreneurship to address the challenges that the trilemma presents. Utilities will need to embrace the transformation of traditional business models if they are to energy realities: navigating the triple transitionChristoph Frei Secretary-General, WECP anel discussion, moderated by EY s Charles-Emmanuel Chosson, with Andrew Watchman (EFRAG), Jane Pike (IASB), Olaf Boelsems (EY Germany), Sophie Ganter (EY France) and Miriam Deloose (ENGIE) sharing their thoughts on IFRS 9. Miriam offered insights about specific implementation issues that she encountered in her role as project manager for IFRS 9 adoption at takeaways: IFRS 9 adoption needs buy-in from the main corporate departments that are impacted.

5 To be successful, it cannot be left solely to the IFRS implementation team. Start work on disclosures for IFRS 9 early they are likely to be more onerous than expected. IFRS 9, financial instruments for utilities: analysis of issues relating to the former IAS 39 and insights on the scope, impact and reactions to the new IFRS 9 standard. Structure of the classification and measurement model; approach to impairment testing and the application of hedge accounting: insights on how the requirements of the new IFRS standard are being implemented in the utilities 9: financial instrumentsOlaf Boelsems Partner, EY Germany2 IASB activities: work plan, 2017 2021; emissions trading; rate regulationJane Pike Technical Principal, IASB The IASB s current work plan focuses on four themes identified in feedback to its 2015 Agenda Consultation: Complete standard-setting projects: IFRS standards must continue to be principles-based. Finalizing the revised Conceptual Framework is a priority, with several key standard-setting projects expected to reach completion in 2017.

6 Promote better communication in financial reporting: The disclosure initiative is aimed at addressing disclosure overload. The use of alternative performance measures is likely to merit further investigation. Continued development of implementation support: Post-issue support needs to be enhanced, clarifying principles, rather than introducing complexity and rules. Focus on fewer research projects: Though research remains important for effective standard-setting, the project pipeline has been streamlined. Emissions trading: Now renamed Pollutant pricing mechanisms, it has been moved to the research pipeline due to dependencies on the revised Conceptual Framework. Specific issues relate to asset type, day-one liabilities and the threshold for recognizing a liability. Rate-regulated activities: Concerns relating to scope and potential interaction with other standards have been raised by the Accounting Standards Advisory Forum. In response, a new model is proposed that would recognize regulatory balances for identifiable timing differences between performance of the entity and performance of the customer | 10th European IFRS Power and Utilities Roundtable Brussels Brexit: On Brexit s implications for the sector, the stark message is that both sides are likely to lose out.

7 Implementing Brexit is likely to take longer than two years. The European Commission s Winter Package: Greater consistency is needed in policy-setting between the energy efficiency and decarbonization agendas. It does not necessarily make sense to mandate energy saving in an energy system with a growing proportion of renewable generation. Eurelectric aims to promote decarbonization of electricity production in the most efficient way, while encouraging the longer-term replacement of other fossil-fuel use with electricity. Diminishing use of incremental variable cost pricing: In a world where electricity already attracts negative pricing on occasion, the relevance of incremental variable cost pricing is diminishing. Instead, the true value of electricity now relates to availability. There are clear parallels with the telecommunications sector, where access to capacity, rather than usage of capacity, has become the more important factor. The prosumer dilemma: Self-generation means a greater share of the costs of running the system is borne by other for the power and utilities sector and the winter packageHans ten Berge Secretary-General, Eurelectric5 IFRS 15: the new revenue recognition standardAngela Covic Executive Director, EY United Kingdom IFRS 15 will be mandatory in 2018: Transition efforts will be a key focus in 2017, as will disclosures about the impact of IFRS 15 in 2017 financial statements.

8 A statement by European Securities and Markets Authority (ESMA) on implementation considerations indicates that ESMA expects the effect of IFRS 15 will be known or reasonably estimable by the time most issuers prepare their 2017 interim financial statements. The 2016 clarifications to IFRS 15; the clarifications, together with the recent discussions by the Transition Resources Group for revenue recognition, will be helpful as entities consider the impact of IFRS 15. However, significant judgement will likely still be needed. Entities should also ensure they are prepared for the disclosures required by the new standard. EFRAG s mission: what EFRAG s mission means in practice and explanation of the endorsement status relating to recent accounting standards. IFRS 16 and impact analysis: EFRAG s approach to impact analysis for IFRS 16 and how the standard is likely to change reported debt and EBITDA levels across different and the power and utilities sectorAndrew Watchman Chairman, EFRAG De finition of a lease for the purposes of IFRS 16: how the application is driven by commercial considerations about the right to control the use of individual assets.

9 Accounting for lease payments: applying an appropriate discount rate, along with transition requirements for the standard. Practical IFRS 16 implementation considerations: how to define a lease in practice and measure lease liabilities; the importance of understanding how the standard may affect customer behavior and its likely impact on KPIs and covenants; the need to keep stakeholders fully informed on changes expected in companies financial 16 leases: the journey so farVictor Chan Partner, EY United Kingdom10th European IFRS Power and Utilities Roundtable Brussels |45| 10th European IFRS Power and Utilities Roundtable BrusselsCharles-Emmanuel Chosson EY Global Assurance Leader Power & Utilities Office: +44 207 951 7869 Deutmeyer EY Global IFRS Leader Power & Utilities Mobile: +1 917-699-5463 Pans Global Assurance Power & Utilities resident Mobile: +34 915 725 737 Coneybeare Sector Analyst Power & Utilities Office: +44 20 7951 5628 Mobile: +44 7824 895801 of presentations from this event can be found on the EY Power & Utilities website more information on any of the roundtable subjects, please speak to your usual EY contact or get in touch with EY s Power & Utilities team, using the details below.

10 610th European IFRS Power and Utilities Roundtable Brussels |EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit EY s Global Power & Utilities SectorIn a world of uncertainty, changing regulatory frameworks and environmental challenges, utility companies need to maintain a secure and reliable supply, while anticipating change and reacting to it quickly.