Power and Utilities Accounting, Financial Reporting, and ...

Power and Utilities Accounting, Financial Reporting, and Tax Update

January 2016

Contents

Forewordiii

Section 1 -- Industry Developments

1

Section 2 -- SEC Update

42

Section 3 -- Industry Accounting Hot Topics

54

Section 4 -- Energy Contracts, Derivative Instruments, and Hedging Activities 83

Section 5 -- Accounting Standards Codification Update

89

Section 6 -- Implications of the New Revenue Model

124

Section 7 -- Overview of the New Leases Model

138

Section 8 -- FERC Enforcement Activities

147

Section 9 -- Income Tax Update

156

Section 10 -- Renewable Energy

164

Appendixes179

Appendix A -- Abbreviations

180

Appendix B -- Titles of Standards and Other Literature

183

Appendix C -- Deloitte Specialists and Acknowledgments

187

Appendix D -- Other Resources and Upcoming Events

189

As used in this document, "Deloitte" means Deloitte LLP and its subsidiaries. Please see us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

Foreword

January 2016 We are pleased to present our 14th annual Accounting, Financial Reporting, and Tax Update for the power and utilities (P&U) industry. Our industry continues to face changing markets, new legislation, environmental initiatives, regulatory pressures and proposed revisions to the historical compact, and emerging businesses and exponential technologies. This publication discusses accounting, tax, and regulatory matters that P&U entities will need to consider as a result of these changes, including updates to SEC, FASB, and tax guidance, and focuses on specialized industry accounting topics that frequently affect P&U companies, including rate-regulated entities. New to this year's publication are sections that concentrate on accounting and reporting considerations related to (1) the new leases standard, (2) alternative revenue programs, and (3) asset retirement obligations. To highlight an industry sector growth area, we have also included a section on accounting and reporting concerns specific to renewable energy. Certain sections of this publication are designed to help you understand and address potential challenges in accounting and reporting related to topics on which the FASB has recently issued (1) proposed guidance or (2) final standards that are not yet effective or available for adoption. Our publication discusses such proposed and codified standards and highlights nuances that could affect our industry. We hope you find this update a useful resource, and we welcome your feedback. As always, we encourage you to contact your Deloitte team or any of the Deloitte specialists in Appendix C for additional information and assistance.

William P. Graf U.S. Audit Sector Leader, Power & Utilities Deloitte & Touche LLP

Forewordiii

Section 1 Industry Developments

Section 1 -- Industry Developments: Foreword1

This section covers some of the developments in the P&U industry that are not addressed in the rest of this publication.

Role of M&A in the P&U Sector

M&A activity in the energy sector continued to heat up in 2015, with many micro- and macroeconomic factors coming together to create an opportunistic environment. The micro- and macroeconomic factors are being driven by market volatility throughout the sector, which is attributable to declining oil prices, sustained low natural gas prices, and potentially rising interest rates. Compounding the market volatility is the movement away from traditional fossil-fuel-fired generation toward cleaner sources and changing energy market dynamics. All of these factors have led to shifting opportunities for energy investments by both public and private entities.

Industry observers predict a flood of generation assets coming up for sale in the PJM Interconnection LLC (PJM) market as declining equity valuations drive publicly traded independent power producers to consider asset sales. However, such a phenomenon is not limited to this market. New types of investors have been moving into the renewable energy space as a result of fundraising problems that have greatly slowed the once rapid pace of deal making in the yieldco sector. Many industry observers also expect the occurrence of more electric/natural gas mergers similar to the following examples of transactions completed and announced in 2015:

? Completed: o June 2015 (announced June 2014) -- Wisconsin Energy Corp. and Integrys Energy Group Inc. (17 percent premium). o October 2015 (announced August 2015) -- NextEra Energy Partners LP and NET Midstream. o December 2015 -- Iberdrola S.A. and UIL Holdings Corp. (19 percent premium).

? Announced: o August 2015 -- Southern Co. and AGL Resources Inc. (36 percent premium). o September 2015 -- Emera Inc. and TECO Energy Inc. (48 percent premium). o October 2015 -- Duke Energy Corp. and Piedmont Natural Gas Co. Inc. (40 percent premium).

The current driver of this convergence theme is companies looking to supplement and broaden investment opportunities while remaining in businesses they know and diversifying commodity exposure. Many electric utilities are seeking to grow rate base and earnings while minimizing risk from merchant generation and are willing to have higher debt ratios at the holding company. As a result of this convergence theme, a trend has emerged with an increase in premiums paid, as shown above.

M&A Activity

M&A continued to play an active role in the P&U sector in 2015. Acquiring companies have sought to increase their financial security, reduce their risk profiles and costs, strengthen their balance sheets, diversify their state regulatory risk, and enhance their abilities to employ large capital investment programs. Some companies with regulated operations have sought to grow their rate bases and provide more stable, predictable earnings. Further, over the past few years, companies in the merchant power sector have been expanding their operations through M&A.

Section 1 -- Industry Developments: Role of M&A in the P&U Sector2

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