Judgment Case 3: Asset Retirement Obligations

PDC Coal, Inc. received a mining permit to strip mine 1,000 acres of land in West Virginia on January 5^th of a current year. Prior to receiving the permit, PDC submitted a legally binding plan that included a timetable for the full reclamation process. PDC anticipates operating the mine for 5 to 7 years. Once it has closed the mine, PDC will restore the ground to its original contour. It will then reclaim the ground cover and provide reforestation. PDC will also engage in activities designed to minimize the air and water pollution created by the strip mining process. Finally, PDC has committed to a process for restoring the pre-existing wildlife to the area.

PDC makes the following estimates regarding the ultimate cost of the asset retirement obligation.

1. Labor costs related to the reclamation of the soil, ground cover, and reforestation are currently $20 per hour. However, PDC is certain that the costs will increase between 5 and 15% in the next 5 to 7 years. PDC believes it most likely that the percentage increase will be somewhere in the middle of this range but there is some possibility that the increase will be only 5% or as much as 15%.

2. PDC estimates that it will take between 8 and 10 hours per acre related to the soil, ground cover, and tree reclamation. It does not have any better estimates.

3.PDC estimates allocated equipment and overhead costs as 75% of labor costs.

4. PDC estimate that grass seed will cost $600 acre and the seedlings will cost $500 per acre.

5. PDC estimates that it will take between $400,000 and $600,000 to reclaim the damages done by the air and water pollution created by the strip mining process. It does not have any better estimates.

6. PDC has not previously made any attempts to restore the wildlife to an area that has been strip mined its best guess is that the costs will range from $150,000 to $500,000.

7. No signification inflation is anticipated during this time period.

8. All of the reclamation work will be done within one year of when the strip mine is closed.

The risk-free rate on January 5^th is 2%. If a contractor were going to lock in a price today to provide the reclamation services, it would typically charge a 3% premium.

What amount do you think PDC should recognize related to its asset retirement obligation? Support your answer with computations and explanations. You may find ASC 410-20 Asset Retirement and Environ mental Obligations Asset Retirement Obligations helpful.