Accounting For Nuclear Power Provisions At RWE Case Solution

1. Use the excel file (sheet ”AQ1”) for your calculations of the following hypothetical example. Given the projected D&D costs reported in Exhibit 6,an estimated inflation rate of 3.6% per annum and a discount rate at 4.6%, what is the present value of D&D obligations for a newly-constructed nuclear power plant in 2013? Assume the plant was intended to be operational for 50 years before the start of the D&D process. Given your answer, prepare journal entries to record D&D cost transactions at the completion of plant construction and at the end of its first year of operation.

The following is the journal entry required:

Plant 129,414,190

Cash 129,414,190 

2. Use data from Exhibit 5 to prepare the journal entries for RWE in 2015 to record changes in the D&D provision. How would the entries differ if the unplanned increases / decreases in Exhibit 5 are related to plants that are still operating, versus plants that have closed?

The following are the journal entries required:

Depreciation 1,320,553

Accumulated Dep 1,320,553

Interest expense 5.45

D&D Provision 5.45 

3. Use the data in the Excel file (sheet “AQ3”) to estimate the value of RWE’s remaining D&D commitments for all its plants at the end of 2013. Is RWE’s D&D provision in 2013 sufficient to cover the projected D&D costs? How would a decline / increase in the forecasted interest rate affect the provision (assuming that inflation does not change)? What is the appropriate spread to use for D&D provisions? Why?

D&D's provision is sufficient to cover future D7D costs. A decline in interest rates would cause the present value of D7D provisions to rise, resulting in higher dismantling provisions. This would further increase the expenses associated with the plant as the present value costs are directly associated with the total dismantling costs.