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Article # 0065

Considerations in Calculating Asset Retirement Obligations

by

R.L. Langley, P.E.


Introduction


Prior to 2001, there was a lack of overall guidance for requirements regarding accounting for long term environmental obligations for operating assets at retirement. This would include any required site remediation due to contamination, dismantling costs, land restoration, etc. In an effort to further and lend consistency to such reporting, the Financial Accounting Standards Board (FASB) published the Accounting for Asset Retirement Obligations (AROs) Standard 143 in June, 2001. To further refine the consistency in application of FASB 143, FASB issued further guidance per Interpretation No. 47 in March, 2005.


Although a non-governmental, private body established in 1973, FASB is a U.S. based organization with a mission “…to establish and improve standards of financial accounting and reporting…..”. It wields significant influence as its published standards are recognized by the Securities and Exchange Commission (SEC) and the American Institute of Certified Public Accountants. One of its most widely known publications is the Generally Accepted Accounting Principles (GAAP). Many companies adhere to FASB standards in corporate financial reporting, as well as GAAP in their accounting procedures.


ARO corporate reporting is normally a Financial Department accountability, but because of the potential complexity and diversity of considerations that comprise the numbers, usually the technical/engineering personnel of a company’s Environmental, Safety & Health (ES&H) or Engineering/Technical Services departments may be involved or even tasked with developing a process to obtain and report information to the Finance Department regularly.

Scope

This writing assumes that the company has already decided FASB 143 based reporting is required, and it’s not within the scope of this paper to define how financial groups use or report the generated information (that’s a whole different subject left to the CPAs). The purpose of this summary paper is to identify and provide guidance on key components that go into an onging work process for calculating ARO for midstream type oil and gas systems—including pipelines, compressor stations, processing plants, and storage/distribution facilities.


What is ARO?

An Asset Retirement Obligation is any legally required liability associated with the eventual retirement of a fixed asset. The legal requirement can be from any state, local or federal regulation, from site lease/landowner agreements, or “promissory estoppel.” Promissory estoppel is a legal doctrine that allows a party to enforce the terms of, say perhaps a verbal agreement that would not otherwise be binding.

“Retirement” is the sale, abandonment or disposal of a long-lived asset, but doesn’t apply to temporary idling or removals. Also, the legal obligations are from acquisition, construction/development, or normal operation. (More about this later.)


The Challenge


For a company with significant physical assets scattered across the continent, the challenges are the identifying following:


Meeting the Challenge


Assessing the resources available to begin such a task is important. Actual costs from past remediation/dismantling work can be a key. Accurate cost factors can be developed from these experiences (or recent contractor quotes) and used in the ARO process. Generic unit costs can be developed from these actual jobs and incorporated in the model to apply across the system. Deploying technical/engineering types to develop the process to ongoing obtain accurate information, review it, and then feed into the company’s financial reporting processes seems to work well.

Also, another primary necessary resource will be the lease/landowner agreement records from the Land/Right-of-Way department. This will show the contractual requirements (in addition to the regulatory requirements) necessary for any given site upon asset retirement, if leased. If the site is company owned, then it will revert to the federal, state and local regulations, as well as company policy.

.

Regulatory and Legal Requirements


Legal requirements include, but not limited to following:



ARO Cost Components


A spreadsheet for each site that lists budgetary estimates following three major areas, as applicable, is helpful*:


Remediation


Asbestos Abatement


Dismantling


The total of these three subcategories (Remediation, Asbestos Abatement, and Dismantling) should give a good handle on the total ARO costs.


For tax and accounting reasons each cost component should be separated into its Labor and Material/Equipment components.


*Unit cost factors developed from previous dismantling/demolition jobs and/or contractor quotes can be used to determine the amounts of each component for each site


Documentation for Sites


The aforementioned Costing can be folded into the documentation spreadsheets for each site, which can contain the following elements for ongoing upkeep.



Items of Interest


There are several nuances of FASB 143 that require in depth understanding and application translation by the Financial types to the Environmental/Engineering personnel developing the ARO reporting process. For example, FASB covers “normal” operations, and therefore a massive spill (which may result in considerable soil contamination) caused by abnormal circumstances or misoperation may not be considered part of the ARO (remediation) cost. There can be a fine line between what’s “normal” operations vs. abnormal, and developing sound, well thought out guidelines that are applied consistently are important.


Each location is almost like a unique fingerprint. For example, in a remote area of West Texas, one might be able to use the quicker, cheaper controlled explosive method of demolition for large compressor foundations. However, in a heavily populated area of Louisiana, that might not be acceptable because of adverse public reaction. Therefore, it has to be costed accordingly.


Some work the ARO accounting as a “net” number—i.e. cost of demolition vs. returns via scrap sales. This requires ongoing keeping up with the cyclic scrap metal pricing and knowing the approximate steel weights of the components of the asset. Similarly, some companies recycle concrete, so netting may be used there also.


At some sites, although there may be no “legal” requirement to perform certain activities, it may be a good idea to do so. For example, the author is familiar with one situation where there was no legal requirement to do anything to a cooling tower basin, but because of the potential for a landowner’s cattle to become entrapped in the abandoned basin, the company shouldered the responsibility to demolish the basin and bring the land to grade. This also brings up the human “attractive nuisance” issue, which should be covered with the Legal Department. In other words, in the process of retiring an asset, there may be no legal requirements to, say, remove a rail car rack. However, since it’s near a housing addition and perhaps an “attractive nuisance” for youth to climb and play on the elevated platforms, the assessment may call for removing it in the process of demolition to diminish the site’s risk. (This would likely be classified as a “non-ARO” expense.)


Even if a lease agreement requirement is that all equipment and foundations be removed, there needs to be a determination as to what depth do foundations need removed? Can they be removed to “plow depth” vs. complete removal (which can be several feet) or what? There can be a big difference in cost here. Also, what’s the disposition on abandoned underground pipelines?


In the process the author is familiar with, because physical assets changed so quickly, the ES&H Director managed the process by sending out requests for information quarterly in spreadsheet format (by entity pipelines, compressor stations, plants and terminal/distribution systems) asking users to input demolition/dismantling and remediation details. This information was then taken to update what ARO was reported to the Financial Dept. Then that group would “do their thing” with the numbers for Corporate reporting.


Conclusion

Although usually a corporate Financial reporting accountability, Engineering/Technical resources are often tapped to develop the evergreen work process by which the numbers are developed that Finance receives on an ongoing basis. This is because much of the underpinning work often involves detailed costing out of demolition, dismantling and site remediation activities, which can become highly specialized and technical, based on the circumstances. Also, it’s important to have an ARO work process in the hands of those that keeps up with the latest federal, state and local requirements. Normally, because of ongoing permit requirements and compliance to regulations, the ES&H group is the normal choice because that division, by necessity, should have a handle on what’s going at each location. Therefore, overseeing the ARO data gathering and reporting to Financial fits hand in glove with the corporate environmental function.

RLL

9/18/14


Acknowledgement: Much of what is described in this paper was developed by J.D. Morris, P.E. when working as Environmental Engineer for Dynegy Corp’s Midstream Operations. Although developed several years ago (soon after issuance of FASB 143), that work lives on, and is still used in the successor company’s ARO work process—a tribute to the quality of his effort.

Biography:

Robert (Bob) Langley, P.E. holds a B.S. Degree in Chemical Engineering from the University of Oklahoma. For over 30 years he worked for Fortune 500 midstream (natural gas processing) companies as Process Engineer, Plant Engineer, Plant Supervisor, Plant Manager, Supply and Distribution Manager, Supply Chain Manager and Environmental, Safety & Health Manager. As a consulting engineer, Mr. Langley assisted Targa Resources LLC in the administration of the ARO process described here during the 2006-2009 timeframe.


Article # 0065         TEST QUESTIONS:

1.  Prior to 2001, there was a lack of overall guidance for financial reporting requirements for:

  1. Cash Flow

  2. IRS Taxable Income

  3. Asset Retirement Obligations (ARO)

  4. All of the above

2.   The published standard that describes ARO is known as:

  1. IRS 1040

  2. Title V Clean Air Act

  3. OSHA 1910

  4. FASB 143

3.   The Financial Accounting Standards Board (FASB) is a governmental agency.

  1. True

  2. False

4.   The ___________Department is normally accountable for high level ARO corporate reporting.

  1. Financial

  2. Engineering/Technical Services

  3. Drafting

  4. Accounting

5.   It’s important to have Environmental Compliance /Engineering type functions tied into developing the ARO work process.

  1. True

  2. False

6.   ARO is primarily concerned with reporting retirement activities due to…..

  1. Legal Requirements

  2. Pending legislation

  3. Utility Company Rate Filings

  4. All of the above

7.   ARO is concerned with reporting activities due to the following regulatory and other requirements…..

  1. Federal

  2. Local

  3. Lease Agreements

  4. All of the above

8.   The main areas of regulatory activity to retire a midstream asset may be…….

  1. Soil Remediation

  2. Asbestos Abatement

  3. Dismantling/demolition

  4. All of the above

9.   Since most compressor sites are in remote locations, it really doesn’t matter what condition they’re left in.

  1. True

  2. False

10.   Besides applicable regulations, the following must be obtained if the site is leased……

  1. Topographic maps

  2. Pipeline maps

  3. Landowner/Lease Agreement

  4. Mineral Rights

 

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