FERC Accounting vs. GAAP

1. FERC Accountingvs.GAAP Presented by: Jim Callihan, Partner Accounting & Assurance Services Lattimore Black Morgan & Cain, PC

2. FASB – Objectives of Financial Reporting Provide information: • That is useful to making rational investment, credit, and similar decisions • To help investors, creditors, and others assess the amounts, timing, and uncertainty of prospective cash inflows related to the enterprise • About the economic resources of an enterprise, the claims to those resources, and the effects of transactions, events, and circumstances that change its resources and claims

3. GASB – Objectives of Final Reporting Provide information: • That enables users to assess governmental unit’s accountability (revenues sufficient for services, compliance with legally-adopted budget, etc.) • That assists users in evaluating operating results (sources and uses of funds, financing activities) • That is useful in assessing the level of services that can be provided by the entity and its ability to meet obligations as they come due

4. GASB 62 – Incorporation of FASB Standards

5. Objectives of FERC Reporting Financial statements included in FERC Form 1 or 1F: • Comparability of reported amounts across all jurisdictional entities (USOA) • Provide information useful in FERC’s role in ensuring the justness and reasonableness of cost-based rates

6. Sources of FERC Accounting Guidance • Generally incorporates FASB-based GAAP, with certain exceptions • Uniform System of Accounts – adopted in 1936 • Accounting Rulemakings – official rules and regulations (FERC “Orders”) • Accounting Guidance – interpretations of a general nature of existing FERC rules and can be looked up by docket number • Accounting Releases – provide interpretations of a more specific and technical nature of existing FERC rules

7. Annual FERC Financial and Operating Reports • Form 1, Major Electric Utility. Major is defined as having: (1) one million Megawatt hours or more; (2) 100 megawatt hours of annual sales for resale; (3) 500 megawatt hours of annual power exchange delivered; or (4) 500 megawatt hours of annual wheeling for others (deliveries plus losses). • Form 1-F, Non-Major Electric Utilities. Non-major is defined as having total annual sales of 10,000 megawatt-hours or more and not classified as Major.

8. Common Differences in Presentation • Subsidiary companies • Current, non-current portion of debt • Certain power purchase and sale transactions with an RTO • Accumulated cost of removal • Deferred taxes, uncertain tax positions • Above vs. below the line operating statement items

9. Common Differences in Underlying Accounting • Capitalized interest • Investments • Loss on extinguishment of debt • Pension costs • OPEB costs • Internal use software development costs

10. Difference in Presentation of Subsidiary Companies • Subsidiaries are reported on a consolidated basis under GAAP • Investments in subsidiaries are reported in a single line item in a manner similar to equity method accounting for FERC reports

11. Difference in Debt Presentation • GAAP requires presentation of assets and liabilities, including debt as current or non-current based on realization period or maturities (12 months or less) • FERC reports do not provide for bifurcation of debt amounts between current and non-current

12. Difference in Presentation of Power Purchases & Sales With RTO • GAAP presentation of such transactions based primarily on contractual right of offset, various units of account • For FERC report, such transactions are netted based on hourly volumes; separate netting for real time and day ahead market transactions

13. Difference in Presentation of Accumulated Cost of Removal

14. Difference in Presentation of Deferred Taxes • GAAP requires that: (i) current deferred tax assets and liabilities are netted to a single current deferred tax asset or liability; (ii) long term deferred tax assets and liabilities are similarly presented as net long term asses or liability • For FERC reporting, deferred income tax assets are presented gross in one account, and deferred income tax liabilities are presented gross in another account

15. Difference in Presentation of Uncertain Tax Positions

16. Above the Line vs. Below the Line • GAAP focus is on operating vs. non-operating revenues and expenses • FERC focus is on: (i) nonutility revenues and expenses, and (ii) allowable vs. disallowed costs (from a cost-based rate-setting perspective) • Therefore: (i) non-utility revenues and expenses are classified in “below the line” FERC accounts; (ii) income taxes associated with non-utility activities also presented below the line; (iii) operating costs that are not considered “just and reasonable” (e.g. penalties and fines) are presented below the line

17. Differences in Accounting For Capitalized Interest • In a non-regulated environment, capitalized interest for GAAP reporting is based in interest costs incurred that theoretically could have been avoided during the period if construction expenditures had not been made • Regulated enterprises may be directed by FERC or other regulators to include an equity component in the “interest” that is capitalized • Also, FERC may require capitalizing interest earlier than would occur under GAAP guidance • A specific GAAP rule conforms GAAP capitalized interest with amount of regulatory allowance for funds used during construction----provided that active construction is going on (vs. pre-construction or phase-in AFUDC)

18. Differences in Accounting for Investments • FASB accounting is based on classification of securities---held to maturity vs. trading vs. available for sale. HTM reported at amortized cost…Trading and AFS at fair value, with changes in FV reported differently • Under FERC and GASB guidance, all investments are reported at fair value and changes in FV are included in results of operations

19. Differences in Accounting For Debt Extinguishment • Under FASB, a gain or loss on extinguishment is recognized immediately • Under GASB, gains/losses on extinguishments are recognized immediately. Gains and losses are amortized over the remaining life of the original debt or the life of the new issue • The FERC allows such gains or losses to be amortized

20. Differences in Pension Accounting • FERC accounting follows FASB guidance with specific accounts identified to use within the USOA • GASB accounting generally consistent with FASB, except more latitude is given in terms of frequency (bi-annual vs. annual) and date of actuarial valuations (consistent interim date permitted vs. as of balance sheet date) • Differences may or may not be material

21. Differences in Accounting For OPEB • FERC accounting follows FASB guidance with specific accounts identified to use within the USOA • GASB accounting generally consistent with FASB, except more latitude is given in terms of frequency (every 1, 2, or sometimes 3 years), date of actuarial valuation (interim vs. as of date), and transition upon adoption of new standard (retrospective vs. prospective application) • Differences may or may not be material

22. Differences in Internal Use Computer Software Costs • GAAP provides for capitalizing costs of development during the applications phase of the project • FERC requires that such costs are expensed as incurred

23. Questions/Comments

24. Contact Info • Jim Callihan • Partner, Accounting & Assurance Practice Lattimore Black Morgan & Cain, PCjcallihan@lbmc.com • 423.755.0716