As the deluge of first-quarter 2003 results began, some exploration and production companies changed the way they account for future plugging and abandonment costs they will incur for old wells that are no longer economic, according to a review. It's another in a series of accounting changes mandated by the Financial Accounting Standards Board (FASB) that make comparing year-to-year numbers more difficult. This ruling, Statement of Financial Accounting Standards No. 143 or SFAS 143, "accounting for asset-retirement obligations," requires E&P companies to recognize as liabilities the present value of costs associated with the P&A of wells, decommissioning and removal of offshore facilities and platforms, and site restoration. Now these costs have to be reported as stand-alone liabilities. The capitalized costs will depreciate over time and changes in their value will be accreted and expensed. As an offset to the liability, companies must increase the capitalized cost associated with the underlying assets, thus "grossing up" the balance sheet, says Shannon Nome, an E&P analyst with JP Morgan Securities. "The effect will be more pronounced for those companies with fast-declining properties (i.e. offshore)," says Nome. "For E&P companies, such costs are now more 'back-end loaded.'" The ruling means that a slight increase in DD&A rates will result. In addition, Nome says, this may motivate companies to sell more of their mature properties, as the ruling increases the retirement obligation costs towards the end of a property's useful life-just when production is falling and maintenance costs are climbing. XTO Energy Inc., one of the first E&P companies to report, said it gained $1.8 million after tax, for SFAS 143. -Leslie Haines
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