bold spirit - ArcelorMittal South Africa

168
ArcelorMittal South Africa
Annual Report 2010
22. PROVISIONS continued
Asset retirement obligation and environmental remediation obligation provisions
Environmental obligations consist of asset retirement obligations and environmental remediation obligations.
Environmental remediation obligations represent the present value of the cost of remedial action to clean-up and
secure a site. These actions are primarily attributable to historical, that is legacy, waste disposal activities. Legal
obligations exist to remediate these facilities.
Estimating the future cash flows associated with these obligations and the related asset components is complex.
In particular, judgement is required in distinguishing between asset retirement obligations and environmental
remediation obligations.
Existing laws and guidelines are not always clear as to the required end-state situation. The provisions are also
affected by changing technologies, environmental, safety, business and legal considerations.
Management assess long-term operational plans, technological and legislative developments, guidelines issued by
the authorities, advice from external environmental experts, and computations provided by quantity surveyors in
order to derive an estimated future cash flow profile to serve as basis for the computation of the obligations and
related assets.
The asset retirement obligations represent management’s best estimate of the present value of costs that will
be required to retire plant and equipment. The majority of the obligation relates to ancillary plant and equipment
that will be retired as part of the clean-up and closure of those facilities to be remediated via the environmental
remediation obligation. The net carrying amount of the asset retirement obligation asset component, included in
note 13, amounts to R46 million (December 2009: R26 million) for the group and R37 million (December 2009:
R20 million) for the company.
The term of the obligation assessment varies according to the site. The maximum term is 20 years.
Average discount rates
December
2010
%
December
2009
%
Asset retirement obligation 8.7 11.6
Environmental remediation obligation 9.0 11.7
Onerous contracts 8.4 10.5
The average escalation factor applied to the current cash flow estimates is 5.7% (2009: average rate of 6.1%).
Onerous contract provision
Included in the provision is an onerous operating lease contract embedded in a long-term, take-or-pay gas supply
contract with Afrox. The unavoidability of the cost arose upon the 1997 decommissioning of steel-making facilities
at Pretoria Works. Net cash outflow for the year amounted to R57 million (December 2009: R46 million). The
unexpired term of the contract is nine years.
Also included is a long-term contract containing a take-or-pay clause for burnt dolomite and coal fines sourced from
PPC. The take-or-pay obligation arose historically due to lower off-take on account of efficiency improvements and
method changes. The carrying amount at 31 December 2010 equalled R12 million (December 2009: R20 million).
Net cash outflow for the year amounted to R10 million (December 2009: R8 million). The unexpired term of the
contract is two years.
Post-retirement medical aid benefits
The group and company recognise a liability relating to future medical aid for certain early retirees. The obligation
represents a present value amount, which is actuarially valued on an annual basis. Any surplus or deficit arising from
the valuation is recognised in the income statement.