August 6, 2019
Many assume that actual ARO will always be higher than LLR, but that isn’t always the case.
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Welcome to the third in our series of articles highlighting why the AER’S LLR deemed liability values may not provide an accurate assessment of true end of life liability costs, or Asset Retirement Obligations (ARO). Many assume that actual ARO will always be higher than LLR, but that isn’t always the case. This week, we’ll demonstrate how facility over-licensing can result in over-estimation of liability costs when relying on LLR deemed liabilities to evaluate the end of life liabilities of an asset. To get a high-level sense of the overall potential impact of relying on LLR deemed liability values instead of a fully representative ARO calculation, download our case study entitled “LLR vs ARO: The Cost of Uncertainty”.
The licensing requirements of Directive 056 create incentives to license facilities to their maximum size potential, even if the actual facility ends up being smaller than the license (sometimes significantly so). Essentially, it is more trouble to go back and amend a license in order to increase license capacity than it is to simply license at 100-per cent capacity during the original application process. As a result, over-licensing has become common practice.
But when it comes to assigning end of life liability values, the AER’s LLR formula assigns deemed liability values according to how facilities are licensed. If a facility is licensed to a large size, but built to a smaller size, the deemed liability values may exceed the actual retirement cost of the facility, making any ARO calculation based on LLR deemed values inaccurate and much higher than necessary. As a result, over-licensed facilities can put an unrealistic liability burden on a company’s balance sheet, which can affect its LLR rating for regulatory purposes and hinder access to bank credit.
By way of example, consider a facility Instead of using LLR deemed liabilities to evaluate end of life costs, companies may want to consider using a dedicated ARO software system such as XI’s ARO Manager. While ARO Manager still draws on potentially over-licensed facility data from the AER, the system allows users to make changes to that data in order to reflect real-world capacity. As users adjust facility capacity data, any changes are saved, auditable, and carried forward for future analysis, tracking, and management. The updated ARO analysis work can also be shared across the organization, as well as with external auditors and banks.