How does Petro Stopping Center account for changes in expected future decommissioning costs?
Petro_Stopping_Center Franchise · 2025 FDDAnswer from 2025 FDD Document
e determined by discounting the expected future cash flows at a pre-tax risk-free rate that reflects current market assessments of the time value of money. Where discounting is used, the increase in the provision due to the passage of time is recognized within finance costs. Provisions are discounted using a nominal discount rate of 4.5% (2023 4%).
Provisions are split between amounts expected to be settled within 12 months of the balance sheet date (current) and amounts expected to be settled later (non-current).
Contingent liabilities are possible obligations whose existence will only be confirmed by future events not wholly within the control of the Company, or present obligations where it is not probable that an outflow of resources will be required or the amount of the obligation cannot be measured with sufficient reliability. Contingent liabilities are not recognized in the consolidated financial statements but are disclosed, if material, unless the possibility of an outflow of economic resources is considered remote.
Decommissioning
Liabilities for decommissioning costs are recognized when the Company has an obligation to plug and abandon a well, dismantle and remove a facility or an item of plant and to restore the site on which it is located, and when a reliable estimate of that liability can be made. Where an obligation exists for a new facility or item of plant, such as oil and natural gas production or transportation facilities, this liability will be recognized on construction or installation. Similarly, where an obligation exists for a well, this liability is recognized when it is drilled. An obligation for decommissioning may also crystallize during the period of operation of a well, facility or item of plant through a change in legislation or through a decision to terminate operations; an obligation may also arise in cases where an asset has been sold but the subsequent owner is no longer able to fulfil its decommissioning obligations, for example due to bankruptcy. The amount recognized is the present value of the estimated future expenditure determined in accordance with local conditions and requirements. The provision for the costs of decommissioning wells, production facilities and pipelines at the end of their economic lives is estimated using existing technology, at future prices, depending on the expected timing of the activity, and discounted using a nominal discount rate.
An amount equivalent to the decommissioning provision is recognized as part of the corresponding intangible asset (in the case of an exploration or appraisal well) or property, plant and equipment. The decommissioning portion of the property, plant and equipment is subsequently depreciated at the same rate as the rest of the asset. Other than the unwinding of discount on or utilization of the provision, any change in the present value of the estimated expenditure is reflected as an adjustment to the provision and the corresponding asset where that asset is generating or is expected to generate future economic benefits.
Environmental expenditures and liabilities
Environmental expenditures that are required in order for the Company to obtain future economic benefits from its assets are capitalized as part of those assets. Expenditures that relate to an existing condition caused by past operations that do not contribute to future earnings are expensed.
Liabilities for environmental costs are recognized when a clean-up is probable and the associated costs can be reliably estimated.
Source: Item 23 — RECEIPTS **RECEIPTS (FDD pages 87–131)
What This Means (2025 FDD)
According to Petro Stopping Center's 2025 Franchise Disclosure Document, the company recognizes liabilities for decommissioning costs when it has an obligation to plug and abandon a well, dismantle and remove a facility or an item of plant, and to restore the site on which it is located, provided that a reliable estimate of that liability can be made. For new facilities or wells, this liability is recognized upon construction or drilling. An obligation may also arise during operation due to legislative changes or a decision to terminate operations, or if a subsequent asset owner cannot fulfill decommissioning obligations. The recognized amount is the present value of the estimated future expenditure, determined according to local conditions and requirements. This provision is estimated using existing technology at future prices, depending on the expected timing of the activity, and is discounted using a nominal discount rate.
An amount equivalent to the decommissioning provision is recognized as part of the corresponding intangible asset or property, plant, and equipment. The decommissioning portion of the property, plant, and equipment is subsequently depreciated at the same rate as the rest of the asset. Changes in the present value of the estimated expenditure, other than the unwinding of discount or utilization of the provision, are adjusted against both the provision and the corresponding asset if that asset is generating or is expected to generate future economic benefits.
Petro Stopping Center reviews its refineries periodically for changes in circumstances, including those related to the energy transition, that might necessitate recognizing a decommissioning provision. Decommissioning cost estimates are based on the known regulatory and external environment, and these estimates may change in the future due to the transition to a lower carbon economy. For refineries, decommissioning provisions are generally not recognized because the associated obligations have indeterminate settlement dates, typically driven by the cessation of manufacturing. Management continuously reviews facts and circumstances to assess if decommissioning provisions need to be recognized, particularly where cessation of manufacturing decisions have been made. As of December 31, 2024, decommissioning provisions relating to refineries were not material.