Published on December 6, 2007
Estimating Environmental Asset Retirement Obligations : Estimating Environmental Asset Retirement Obligations An Interpretation of the Interpretation or Peering Through the Fog at the Intersection of Environmental & Accounting Regulation AGA Environmental Matters Committee Teleconference December 20, 2005 The Regulatory Framework: The Regulatory Framework S-K 101, 103, 303 Statement of Financial Accounting Standards (SFAS), number 5 Statement of Position (SOP) 96-1, “Environmental Remediation Liabilities” ASTM Standards: E 2137-01 (Standard Guide for Estimating Monetary Costs and Liabilities for Environmental Matters), and E 2173-01 (Standard Guide for Disclosure of Environmental Liabilities). SFAS No. 143, “Accounting for Asset Retirement Obligations FASB Interpretation No. 47, “An Interpretation of FASB Statement No. 143 Why FIN 47?: Why FIN 47? Diverse accounting practices evolve in ambiguous climate. Accounting scandals create demand for greater clarity and enforcement of rules. Interpretation clarifies that an entity is required to recognize a liability for the fair value of a conditional ARO when incurred if the fair value can be reasonably estimated. Interpretation clarifies when an entity would have sufficient information to reasonably estimate the fair value. Key Concepts in FAS 143: Key Concepts in FAS 143 FAS 143 applies to legal obligations associated with the retirement of a long-lived asset that result from the acquisition, construction, or development and (or) operation of the asset. Retirement is defined as the other than temporary removal of a long-lived asset from service. The term encompasses sale, abandonment, or disposal in some other manner. A legal obligation can result from: (a) a government action, such as a law, statute, or ordinance, (b) an agreement between entities, such as written or oral contract, or (c) a promise conveyed to a third party. Focus is on “Special Requirements” Key Concepts in FAS 143: Key Concepts in FAS 143 FASB believes that when an existing law, regulation, or contract requires an entity to perform the retirement activity, an unambiguous requirement to perform the retirement activity exists, even if that activity can be deferred indefinitely. At some point, deferral is no longer possible, because no tangible asset will last forever (except land). Therefore the obligation to perform the ARO is unconditional even though uncertainty about the timing exists. Uncertainty surrounding the timing and method of settlement must be factored into the measurement of the liability rather than the recognition of the liability. Obligating Event Exclusions: Exclusions Statement does not encompass temporary idling of an asset. Activities necessary to prepare an asset for an alternative use are not associated with the retirement of the asset and are not within the scope of the statement. Obligations associated with maintenance, rather than retirement, are excluded from the scope of FAS 143 (i.e., the cost of a replacement part that is a component of a long-lived asset is not within the scope of the statement, however, any legal obligation that requires special disposal of the replaced part is within the scope). Environmental remediation liabilities that result from the improper operation of a long-lived asset do not fall with the scope of statement. FIN 47 in a Nutshell: FIN 47 in a Nutshell An ARO would be reasonably estimable if: It’s evident that the fv of the obligation is embodied in the acquisition price of the asset, An active market exists for the transfer of the obligation, Sufficient information exists to apply an expected present value technique. An entity would have sufficient information to apply an expected present value technique and therefore an ARO would be reasonably estimable if the information is available to reasonably estimate The settlement or the range of potential settlement dates, The method of settlement or potential methods of settlement, The probabilities associated with the potential settlement dates and potential methods of settlement. FIN 47 in a Nutshell: FIN 47 in a Nutshell Information for estimating the potential settlement dates, potential methods of settlement, and their associated probabilities can be derived from: Entity’s past practice, Industry practice, Management’s intent, or The asset’s estimated economic life. If sufficient information is not available to estimate the FV at the time the liability is incurred, Statement 143 requires a liability to be recognized in the period in which the information becomes available. If the liability’s fv cannot be reasonably estimated, that fact and the reasons shall be disclosed. NiSource ARO Identification and Measurement Strategy: NiSource ARO Identification and Measurement Strategy Form an internal team Tap external specialists as necessary for required expertise Coordinate with industry peers to achieve consistency in application Tentatively Identified AROs: Tentatively Identified AROs Gas Transmission Companies Asbestos PCBs Underground Storage Tanks Aboveground Storage Tanks Well Abandonment Natural Gas Filter Units Tentatively Identified AROs: Tentatively Identified AROs Gas Distribution Companies Asbestos PCBs Mercury Regulators Underground Storage Tanks Aboveground Storage Tanks Well Abandonment Natural Gas Filter Units Tentatively Identified AROs: Tentatively Identified AROs Electric Distribution Asbestos Batteries PCB Transformers Non-PCB Transformers SF6 Containing Breakers Underground Storage Tanks Lead Paint Treated Wood Poles Tentatively Identified AROs: Tentatively Identified AROs Electric Generation Asbestos Cathode Ray Tubes Circuit Boards Used Oil Lighting and Batteries Mercury Bearing Equipment Transformers and Capacitors Regulated Underground Storage Tanks Aboveground Storage Tanks Landfill, Ash ponds, SWMU Nuclear Gages Solid Waste Management Unit Assessment/Closure Assessment Considerations: Assessment Considerations Need clear understanding of legal requirements (Federal, State, and Local) and their applicability to the organization and the asset. Need to identify specific performance requirements that may impose multiple cost elements such as: Assessment Removal Disposal Need to distinguish between legal requirements applicable to the “long-lived” asset from those applicable only to a disposable commodity. Regulatory Analysis: Regulatory Analysis Asbestos Federal and State regulatory requirements: Regulations (40 CFR 61.145) require thorough inspection of building prior to demolition or renovation. Regulations require removal of RACM from a facility being demolished or renovated. Regulations do not require removal of Category I or II ACM that is in good condition. Regulations (40 CFR 61.150) establish disposal requirements. Regulatory Analysis: Regulatory Analysis Underground Storage Tanks Federal and State regulatory requirements: When an UST system is temporarily closed for more than 12 months, tank must be permanently closed if it doesn’t meet new UST standards. To permanently close a tank, regulations (40 CFR 280.71) state that owners and operators must empty and clean the tanks by removing all liquids and accumulated sludges. Regulations require that “all tanks taken out of service permanently must also be removed from the ground or filled with an inert solid material.” Regulations (40 CFR 280.72) require an assessment to determine if a release has occurred. DOT “pipeline facility” exclusion applied to many USTs Regulatory Analysis: Regulatory Analysis Aboveground Storage Tanks Federal and State regulatory requirements: No federal regulations comparable to those for UST governing closure of ASTs. Does tank cleaning prior to scrapping constitute a legal or contractual requirement? Certain states, such as Pennsylvania have regulations with specific closure requirements. DOT “pipeline facility” exclusion applied to many ASTs Regulatory Analysis: Regulatory Analysis PCBs PCB contaminated transformers 40 CFR 761.2 establishes testing requirements (for all transformers). 40 CFR 761.60 establishes disposal requirements. Natural gas pipeline Containing PCB > 50 ppm Containing PCB > 500 ppm Characterization? PCB remediation sites Regulatory Analysis: Regulatory Analysis Wood Utility Poles Letter from IDEM stating that extensive testing has conclusively demonstrated that poles are not a hazardous waste and utility can rely on this as generator knowledge. Filter Units, Batteries, CRTs, lighting, used oil, etc Are they long-lived assets? Do hazardous waste regulations apply? When recycled or reused are “special requirements” established? Materiality issues Mercury Regulators (not material) Other RCRA Issues (FAS 5 vs FAS 143) Closure of ash management areas. Solid Waste Management Units (SWMU) Regulatory Analysis: Regulatory Analysis Well Abandonment Most States have regulations that require that a well be sealed and plugged with an impervious grouting material when permanently abandoned. Wells installed for environmental purposes are typically incorporated into FAS 5 costs. Freon 40 CFR 82.156 requires that all persons disposing of an appliance must evacuate the refrigerant in the entire unit to a recovery or recycling machine certified. Work must be performed by a certified individual. Halon includes disposal requirements AROs to be Recorded: AROs to be Recorded Asbestos Regulated underground storage tanks PCBs Batteries in the generating stations Ash management areas and SWMUs Nuclear gages Halon and Freon Regulated ASTs and Mercury regulators were not considered material Measuring the Liability: Measuring the Liability The objective of the initial measurement of the liability for an ARO is the fair value. Quoted market prices are the best representation of fair value. The measurement objective is to determine the amount a third party would demand to assume the obligation including such things as overhead, profit margin, and market-risk premium. Aggregation techniques may be necessary for AROs that are components of a larger group of assets (e.g., several wells that comprise a field) Implementation Challenges and Reporting Requirements: Implementation Challenges and Reporting Requirements Kevin Blissmer, Manager, Financial Reporting Some Key Challenges Implementing FIN-47: Some Key Challenges Implementing FIN-47 Pressure to place a life on an asset when management may not truly know what the economic life of that asset is. “No physical asset lasts forever” vs. “sufficient information to reasonably estimate fair value” Auditors seem to favor recording a liability and having uncertainty in the estimate. What AROs can we still hold as having an indefinite life Hydros? Plug and abandonment costs for wells? Some Key Challenges Implementing FIN-47: Some Key Challenges Implementing FIN-47 What constitutes a “special” or materially incremental costs upon retirement. Cutting and capping obligation/cost for your gas lines but can abandon the pipe in place.. How to treat interim retirements created by right-of-way (ROW) agreements, government agencies, etc… Does a ROW or franchise right itself create a contingent ARO, only affect the timing of retirement, or a combination of both. What ARO costs are included or excluded in rates and regulatory assets or liabilities. Reporting Requirements: Reporting Requirements Recognition in the financial statements of a liability and corresponding entries for your AROs. Pro-forma disclosure in the footnotes of the ARO liability for your prior beginning and ending balance sheet dates presented. Additional disclosures required by Opinion No. 20 as instructed previously in SFAS 143. Requires adoption on or before 12-31-05 for calendar year enterprises.