Meltdown - or Not? for Utilities

The accounting treatment for nuclear decommissioning costs may be changing. Taking a nuclear power plant out of service is a bit like trying to close a very large Pandora's box. From a financial reporting perspective, the FASB project on accounting for the retirement of long-lived assets will have a significant impact on how the electric utility industry accounts for this often rigorous process. The 53 utilities that currently have nuclear plants will have to spend almost $33 billion to decommission them. Because of the lack of guidance on accounting for these costs, most utility company financial statements do not fully reflect decommissioning liabilities. Under FASB's proposed standard, however, utilities would have to recognize those liabilities at the time of initial plant operation. This would put a liability on the balance sheet that has been off-balance-sheet for the majority of utilities. The impact of this change would make key ratios, such as debt to equity, look much worse. FASB believes its proposal better reflects the economics of operating a nuclear power plant than does current accounting practice. FASB issued the original ED, Accounting for Certain Liabilities Related to Closure or Removal of Long-Lived Assets, in February 1996. The board is revising the ED--retitled Accounting for Obligations Associated With the Retirement of Long Lived Assets--which is expected to be issued later this year. Because FASB is proposing a standard that would change how utilities account for nuclear decommissioning costs, it is imperative that CPAs at utilities with nuclear plants examine the standard's implications for their companies. Now is the time to provide FASB with input on the accounting changes--before the standard becomes final. A UNIQUE ENVIRONMENT Although the proposed standard would affect any industry that incurs costs to retire and dispose of long-lived assets, the focus of this article is on how such new rules would affect utilities. Imminent deregulation makes the business environment in which utilities operate unique. CPAs and other financial managers need to understand how utilities ac count for nuclear decommissioning costs on their financial statements and what changes the ED is likely to bring. It also is useful for utilities to understand how their peers account for these obligations, because differences in current accounting practices mean the impact of any new standard will vary widely. There are several reasons why the ED's potential impact on utilities will be different from its effect on other industries. The utility industry itself is in a state of flux. Deregulation of energy providers will bring retail competition to many states in the early part of this decade. Furthermore, most nuclear plants are jointly owned by more than one utility. Given the joint and several nature of most environmental liabilities (whereby any owner of an asset may be responsible for the entire liability associated with that asset), it is unclear whether proportion of plant ownership will determine responsibility for the decommissioning liability. Industry deregulation also may affect the ability of utilities to continue to recover decommissioning costs from ratepayers. CURRENT PRACTICE VS. ED REQUIREMENTS To understand how utilities account for nuclear decommissioning costs, we examined the annual reports and form 10-Ks of the 53 investor-owned utilities with nuclear facilities. We matched financial statement disclosures with data related to nuclear decommissioning costs provided by Goldman, Sachs & Co. While the information comes from 1994 annual reports, few if any utilities have made major changes in their accounting methods since that time as they awaited a new FASB standard. The amount and quality of the disclosures utilities provided varied widely. Utilities most frequently accounted for nuclear decommissioning costs (the method approximately 57% of utilities used) by recording the costs as a part of depreciation expense with a corresponding entry to accumulated depreciation. …