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Ryan RisseManager, Plant AccountingAmeren Corporation

Advanced ARO IssuesEEI Property Accounting & Valuation Committee MeetingMay 15, 2016

Kellee QuickAccounting Analyst, Projects and Fixed Asset AccountingAvista Corporation

Joel SechlerConsultant Regulated Capital Consultants

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AGENDA

• Company Backgrounds

• ARO Fundamentals

• ARO Layering Concepts

• ARO Settlement Considerations

• Ameren Specific Processes and Examples

• Avista Specific Processes and Examples

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• Electric generation, transmission and delivery and gas delivery business

• Serves 1.2 million electric and 127,000 gas customers

• 10,300 MW of total generation capability– 5,400 MW baseload coal– 1,200 MW baseload nuclear– 800 MW renewables– 2,600 MW gas peaking– Regulated by Missouri Public

Service Commission

AMEREN OVERVIEW

• Market Cap of $12B• Fully rate-regulated electric and gas utility

– 2.4 million electric and 900,000 gas customers– 10,300 megawatts (MW) of regulated electric

generation capability– 7,400 circuit miles of U.S. Federal Energy Regulatory

Commission (FERC) regulated electric transmission

Ameren Missouri Ameren Illinois

• Electric and gas delivery and electric transmission business

• Serves 1.2 million electric and 807,000 gas customers

• Regulated by Illinois Commerce Commission

Transmission

• Ameren Transmission Company of Illinois invests in regional multi-value projects

• Regulated by FERC

Ameren Corporation

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AVISTA OVERVIEW

• Rate Regulated Electric & Gas Utility– Primary market covers more than 30,000 square miles serving electric

and natural gas customers in eastern Washington and northern Idaho, and natural gas customers in southern and eastern Oregon

– 340,000 electric and 300,000 gas customers in a service area of 1,600,000

– Eight hydroelectric generating plants on two rivers providing 1,022 megawatts of generation capability

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AVISTA OVERVIEW

• Seven thermal generating plants providing 822 megawatts of generation capability

• 19,000 miles of distribution lines• 7,700 miles of natural gas distribution mains• 500 miles of 500kV transmission line• 676 miles of 230kV transmission line• 1,553 miles of 115kV transmission line

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AVISTA OVERVIEW

• Utility Power Supply Mix– Total Hydro 48%

(includes long term contracts)– Natural Gas 35%– Coal 9%– Biomass 2%– Wind Contract 6%

Alaska Energy Resources Company, an Avista subsidiary provides retail electric service in Juneau, Alaska

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WHAT IS AN ASSET RETIREMENT OBLIGATION (ARO)

• An Asset Retirement Obligation (ARO) – “is a legal obligation associated with the retirement of a tangible long-lived asset in which the timing or method of settlement may be conditional on a future event, the occurrence of which may not be within the control of the entity burdened by the obligation.”

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DEFINITIONS

• ARO – Asset Retirement Obligation• Accretion Expense – Increase of liability of the life of the ARO• ARC – Asset Retirement Cost (i.e. increased carrying cost of the

asset over its useful life)• Settlements – Costs incurred to remediate the ARO. Applied as

debit to the liability• Layer – Present valued cash flows related to an the estimate

revisions

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GAAP GUIDANCE

• -FAS 143 “Accounting for Asset Retirement Obligations” – June2001– Estimate in today’s dollars.– Adjusted for Risk Premium.– Future Valued out to Retirement Date at Inflation rate.– Present Valued back using credit adjusted risk free rate (CARFR).– Liability is Accreted * credit adjusted risk free rate.– Asset is straight-line depreciated to end of life.– Gain / Loss on liability settlement.– Estimate Revision need to be “layered”– Reasonable Estimate

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EXPENSE RECOGNITION PATTERN

• ARC depreciation is level over the life of the ARO:

• ARO Liability is compounded and grows exponentially through accretion:

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ADDITIONAL GAAP GUIDANCE

• FIN 47 – Conditional ARO’s– Issued in March 2005– “The obligation to perform the asset retirement activity is unconditional,

even though uncertainty exists as about the timing…”

• Both FAS143 and FIN 47 are now classified as ASC 410.

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FERC CHART OF ACCOUNTS

• General Ledger– Balance Sheet

• 101: ARC Asset• 108: Accumulated Depreciation

ARC Asset• 230: ARO Liability

– Income Statement• 411: Accretion Expense• 403: Depreciation Expense• 421: Gain/Loss on Settlement

– Regulatory• 182: Regulatory Asset• 254: Regulatory Liability

• Plant ARC Sub Accounts– 317 – Steam Production ARC– 326 – Nuclear Production ARC– 337 – Hydraulic Production ARC– 347 – Other Production ARC– 359.1 – Transmission ARC– 374 – Distribution ARC– 386 – Regional Transmission ARC– 399.1 – General Plant ARC

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SUBSEQUENT MEASUREMENT

• Allocation of Retirement Costs– “Systematic and Rational Allocation Method”– Passage of time (Accretion Expense)– Change in Estimate (Cost or Time)

• ARO Layer Concepts– Change in Estimated Cost Results in a New Layer– Upward Revision – Current Credit Adjust Risk Free Rate– Downward Revision – Historical Rate or Weighted Average Rate

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UPWARD REVISION EXAMPLE

• First layer with an estimated cost of $100,000 (assuming 2026 Final Settlement Date)

• Additional Cost of $50,000 incurred due to new regulations two years later:

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DOWNWARD REVISION EXAMPLE

• Now assume the initial cost estimate decreased by $25,000 because oil and commodity prices dropped one year later:

• Complexities:– Weighted Average CARFR for downward revisions can be used is

specific layer can’t be identified– Downward Revisions resulting in negative ARCs– Settlement against multiple layered ARO’s

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ARO SETTLEMENT CONSIDERATIONS

• ARO Settlement Costs– Remediation costs incurred against the ARO– Debit to decrease the liability

• Common Pain Points:– Communication with Operations– Distinguishing Settlements by ARO– Applying settlements to multiple layers– “Re-layering” ARO’s with prior settlements– Current vs Long Term Liability Classification

• How Are You Dealing with These Issues?

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AGENDA – AMEREN Processes

• ARO’s we have recorded• How ARO estimates are calculated• How ARO liability is calculated• GAAP reporting• Rate treatment• Accounting entries• Example• Controls

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ARO’S WE HAVE RECORDED

• Ameren has ARO’s recorded for the following:– Nuclear decommissioning– Asbestos abatement– PCB transformer disposal– River structure removal– CCR facility closure (ash ponds)– CCR facility post-closure costs

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HOW ARO ESTIMATES ARE CALCULATED

• Nuclear decommissioning– 3rd party estimate– Updated every 3 years

• Asbestos abatement– 3rd party estimate– Reviewed annually for reasonableness

• PCB transformer disposal– Updated annually based on actual disposal costs

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HOW ARO ESTIMATES ARE CALCULATED (CONTINUED)

• River structure removal– 3rd party estimate– Reviewed annually for reasonableness

• CCR facility closure (ash ponds)– Fixed amount per acre based on actual cost to close a CCR

facility in 2012– 3rd party estimates for each pond will be completed in 2016– Reviewed quarterly for reasonableness

• CCR facility post-closure costs– Based on actual post-closure costs– Fixed amount per year for 30 years (escalated for inflation)

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HOW ARO LIABILITY IS CALCULATED

• Ameren uses the PowerPlant ARO module

• Inputs:– ARO estimates (current dollars)– Inflation rate (2.3% based on CPI of other factors)– ARO settlement date– Discount rate (credit-adjusted risk free interest rate)

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HOW ARO LIABILITY IS CALCULATED(CONTINUED)• Example

– ARO Estimate: $1,000,000 (2016 dollars)*– Settlement date: 2040– CARFR: 5%– Inflation rate: 2.3%

* $ amount to settle ARO liability today

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GAAP REPORTING

• Reported on balance sheet as a liability for “Asset Retirement Obligations”

• ARO liability has an off-setting regulatory asset (regulated operations only)

• Footnotes describe ARO liabilities and provides a rollforward schedule

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RATE TREATMENT

• ARO’s are for GAAP reporting purposes only

• Actual costs to settle ARO’s are recovered through cost-of-removals included in depreciation rates*

• Ameren ignores ARO’s for rate-making purposes– ARO liability is excluded from long-term liabilities– The current portion of the ARO liability is excluded from

the working capital calculation– ARO asset is excluded from PPE

* Except nuclear decommissioning which is recovered through trust fund deposits included in customer rates.

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ACCOUNTING ENTRIES*

1. Record the initial fair value of an ARO:DR: (3XX) Various Property and Plant – ARO [Asset account]CR: (230) Asset Retirement Obligation [Liability account]

2. Record monthly depreciation of ARO Property and Plant asset:DR: (182) Regulatory Asset [Asset account]CR: (3XX) Accumulated Depreciation of ARO Asset [Contra-asset]

3. Record monthly accretion of ARO liability:DR: (182) Regulatory Asset [Asset account]CR: (230) Asset Retirement Obligation [Liability account]

* Assumes no trust fund established (i.e., nuclear decommissioning)

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ACCOUNTING ENTRIES (CONTINUED)

4. Record COR* associated with the settlement of an ARO:DR: (3XX) Accumulated Depreciation of Plant [Contra - asset]CR: (131) Cash/Accounts payable [Asset account]

5. Record settlement of the ARO:DR: (230) ARO Liability [Liability account]CR: (182) Regulated Asset [Asset account]

6. Record ARO asset retirement:DR: Accumulated Depreciation of ARO Asset [Contra-asset]CR: Various Property and Plant – ARO accounts [Asset account]

* Cost of Removal

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ACCOUNTING ENTRIES* EXAMPLE

* Assumes no trust fund established (i.e., nuclear decommissioning)** $ amount to settle ARO liability today*** Present value of 2040 ARO settlement costs (see slide 23)

2016 ARO Estimate: $1,000,000 **2016 ARO Liability: $ 535,000 ***Asset retirement date: 2035ARO Settlement Date: 2040Discount Rate (CARFR): 5%

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ACCOUNTING ENTRIES EXAMPLE (CONTINUED)

1. Record the initial fair value of ARO:DR: (3XX) Various Property – ARO $535,000CR: (230) Asset Retirement Obligation $535,000

2. Record depreciation of ARO asset (2016 – 2035 total):DR: (182) Regulatory Asset $535,000CR: (3XX) A/D of ARO Asset $535,000

3. Record monthly accretion of ARO liability (2016 – 2040 total):DR: (182) Regulatory Asset $1,191,000CR: (230) Asset Retirement Obligation $1,191,000

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ACCOUNTING ENTRIES EXAMPLE (CONTINUED)

3XX 182 230 1312016 535,000$ -$ (535,000)$ 2016 - 2035 Depreciation (535,000)$ 535,000$ 2016 - 2040 Accretion 1,191,000$ (1,191,000)$ 2040 Balance Before Settlement -$ 1,726,000$ (1,726,000)$

Account

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ACCOUNTING ENTRIES* EXAMPLE

* Assumes no trust fund established (i.e., nuclear decommissioning)** $ amount to settle ARO liability today*** Present value of 2040 ARO settlement costs (see slide 8)

2016 ARO Estimate: $1,000,000 **2016 ARO Liability: $ 535,000 ***Asset retirement date: 2035ARO Settlement Date: 2040Discount Rate (CARFR): 5%

Actual ARO Settlement Cost: $2,000,000

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ACCOUNTING ENTRIES EXAMPLE (CONTINUED)

4. Record COR* associated with the settlement of an ARO:DR: (3XX) Various Property – COR $2,000,000CR: (131) Cash/Accounts payable $2,000,000

5. Record settlement of the ARO:DR: (230) ARO Liability $1,726,000CR: (182) Regulated Asset $1,726,000

6. Record ARO asset retirement:DR: A/D of ARO Asset $535,000CR: Various Property – ARO accounts $535,000

* Cost of removal. Assumes no trust fund established (i.e., nuclear decommissioning)

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ACCOUNTING ENTRIES EXAMPLE (CONTINUED)

3XX 182 230 1312016 535,000$ -$ (535,000)$ 2016 - 2035 Depreciation (535,000)$ 535,000$ 2016 - 2040 Accretion 1,191,000$ (1,191,000)$ 2040 Balance Before Settlement -$ 1,726,000$ (1,726,000)$

Settlement (cost-of-removal) 2,000,000$ (2,000,000)$ Net ARO Liability and Reg Asset (1,726,000)$ 1,726,000$ 2040 Balance After Settlement 2,000,000$ -$ -$ (2,000,000)$

Account

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CONTROLS

Control Type Owner Frequency SOXPlant Accounting performs an annual review to identify the status of current AROs and determine if any new legal obligations exist.

Detective Plant Accounting Annual Yes

Inputs (fair value assumptions, cost estimates, scenarios) and all changes to inputs are reviewed for compliance with ASC 410-20 requirements. If an adjusting entry is necessary, the Assistant Corporate Controller reviews the entry.

Detective Plant Accounting Annual/As Needed

Yes

The ARO accretion and depreciation expense entry is reviewed by the Supervisor of Production and General Plant.

Detective Plant Accounting Monthly No

The Supervisor of Production and General Plant performs a recalculation to ensure system calculation of ARO entry is accurate by completing a run-out schedule for all AROs.

Detective Plant Accounting Annual/As Needed

Yes

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AVISTA ARO EXAMPLES

• Avista has five AROs– PCB transformer removal. Began with 1,900 PCB contaminated

transformers and have been systematically removing them. Estimated project completion date is 2018.

– Kettle Falls ash landfill

• Closure and post closure monitoring– Coyote Springs combustion turbine

• Site restoration at conclusion of the ground lease

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– Colstrip Units 2 & 3 coal fired thermal generation

• process ponds ash reclamation• Removal of two 10,000 gallon underground

storage tanks• Removal/remediation of areas under the coal piles

– Colstrip Units 2 & 3 Coal Combustion Residuals (CCR)

• Holding pond cap and compliant liner system for paste disposal

• Dry waste disposal system

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– Wastewater treatment system for groundwater capture– Closure and post closure monitoring

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• Avista uses 3rd party estimates to determine the ARO liability• Calculated on spreadsheets, although we are in the process of

implementing the PowerPlan ARO module• We calculate our AROs using the CPI inflation rate, one discount

rate, and the expected settlement date• The total asset retirement cost (ARC) for four of the AROs is

$1,066,665. Colstrip CCR is $12,537,179

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• Because the ARO for the Colstrip CCR that was recorded last year was significantly higher than all of the other AROs combined, we used a different discount rate for each of the future years’ cash flows

• The ARO estimate will be re-evaluated with the implementation of the PowerPlan ARO module as multiple discount rates create an expectation of exactness that creates a sense of false precision

• With the PowerPlan ARO module implementation we will be evaluating our controls

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• Current Controls around Avista’s process– Yearly meeting to discuss known changes– Monthly reconciliation for depreciation expense and quarterly for

accretion expense by tying to the amortization spreadsheets– Quarterly journal entry to capture accretion expense– The spreadsheet cells are spot-checked for accuracy and management

signs off on the calculation– ARO balances and activity are disclosed in our 10k