Financial and Accounting Impacts of Environmental Regulation

Financial and Accounting Impacts of Environmental Regulation

Financial and Accounting Impacts of Environmental Regulation

Financial and Accounting Impacts of Environmental Regulation

© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 1 Agenda  Overview  Environmental Acts, Agencies and Regulations  Potential Results/Costs of Compliance  Financial and Business Impacts  Accounting Implications

© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 2 Overview  Numerous of regulations – Numerous federal, regional, and state laws and regulations. – Compliance can conflict with other strategic initiatives – Significant impacts on the utility industry – Number of regulations increasing over recent years  Business and Financial impacts – More reporting, more compliance, and more costs – Need to increase rates to recover costs incurred to comply – Strategic business decisions need to be evaluated

© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 3 Environmental Acts, Agencies, Regulations  EPA (Environmental Protection Agency)  CAA (Clear Air Act)  CSAPR (Cross State Air Pollution Rule)  CAIR (Clean Air Interstate Rule)  MATS (Mercury & Air Toxics Standards)  New Source Review (Best Available Technology)  NRC (Nuclear Regulatory Commission)  Each State has own Environmental Agencies  RPS (Renewable Portfolio Standards) – Varies by State  Fly Ash and Coal Ash removal (state and Federal)  RGGI (Regional Greenhouse Gas Initiative) – Group of states in New England  Other RTO rules and regulations Examples of Federal Agencies and Rules Examples of State/Regional Agencies and Rules

© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 4  Shutdown of existing coal power plants – Many plants will not meet EPA requirements  Install or update environment control equipment to reduce emissions – Costs to install equipment are significant  Build new power plants to replace retiring units or convert (coal to gas) – Significant costs to finance construction  Require additional infrastructure – Transmission lines – Pipelines and gas storage  Procure emissions to meet emissions standards – Could significantly increase costs of power Potential Results/Costs of Compliance

© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 5  Costs to extend nuclear plant licenses – Legal challenges and costs  Replace older cast iron gas pipes mains and pipes – Timely and expensive process  Construct renewable energy facilities - Costs/Risks to finance and Construct  Procure renewable energy or renewable energy credits (REC’s)  Install additional equipment around water discharge  Alter equipment and materials used to dispose of ash  Purchase Carbon Credits (if a Carbon exchange materialized) Potential Results/Costs of Compliance (Cont’d)

© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 6 Impacts on the Business  Financing of compliance costs: – Raise Debt/Equity – Impact to overall business strategy (i.e. get out or sell assets or line of business) – Impact to credit ratings, stock price, ability to pay dividends – Underfunding other areas of business  Construction Risk – Deadlines to meet compliance – Costs overruns of project – Newer technology/uncertainty of costs

© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 7 Impacts on the Business (cont’d)  Human Capital Costs – Additional employees/costs to comply – Incremental outside advisory/legal costs – Access to knowledge surrounding the regulations  Public Image – Managing the process with stakeholders – Media reports – Costs/fines for non-compliance

© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 8 Accounting Implications and Considerations  Impairment Considerations  Regulatory Accounting Considerations  Environmental Related Accounting and Asset Retirements  Emission Allowances  Renewable Energy and Renewable Energy Credits  Additional Disclosures

© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 9 Impairment Considerations  Older facilities (coal or older oil/gas) – Shorten depreciable lives – Shutdown without significant environmental upgrades – Changing market conditions coupled with regulation could change the values and cash flows associated with those facilities – States could require shutdown replaced with green energy and RPS standards

© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 10 Impairment Considerations  ASC 360/FAS 144, Impairment Considerations – Two step process – if an “impairment indicator” exists - compare the carrying value of the long lived asset or asset group to the undiscounted cash flows to be generated from the long lived asset including upon its disposition – If carrying value exceeds the sum of the undiscounted cash flows then the amount of the impairment loss is computed as the amount by which the fair value of the asset exceeds the carrying value  Potential impacts – Increased monitoring and triggering events – Significant time and efforts to complete impairment assessments/evaluations – Involvement of outside advisors to assist with evaluation – Significant judgment and assumptions in the evaluation

© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 11 Regulatory Accounting Considerations  Interaction with rate setting body over recovery of costs – Demonstrate prudency of compliance costs for inclusion in rate based – Incremental maintenance costs of new environmental equipment – How use of renewable energy by customers impacts rates  Significant capital additions will increase level of deferred income taxes  Plants are shutdown and abandoned – Accounting under ASC 980/FAS 90 considerations – Recovery of Stranded Costs

© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 12 Environmental – Remediation  Remediation activities under ASC 410 (formerly SOP 96-1) – If it is probable of an unfavorable outcome related to an environmental event (i.e. a liability has been incurred), an accrual of the amount (the minimum amount of a range) that can be reasonably estimated is recorded  Potential Impacts – Regulations could result in additional sites or facilities requiring remediation – Additional reserves and costs could result to meet the regulations – Expertise (outside and/or inside) maybe needed to evaluate – Subjective area that requires a lot of judgment

© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 13 Environmental –Asset Retirement Obligations (ARO’)  ARO’s accounted for under ASC410 (formerly FAS 143 & FN 47) – Requires an enterprise to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with retirement of a long lived asset – Enterprise would record a corresponding asset (ARO asset) when initially establishing the ARO liability and depreciate the asset and accrete the liability – Adjustments need to be assessed for changes in estimates of the amounts and/or timing of cash flows needed to retire asset  Potential Impacts – May incorporate additional ARO’s to be evaluated – Timeframe or manner in which ARO’s are satisfied could be altered – Require addition monitoring of the laws to identify potential changes – New ARO estimates or revised estimates over cost and timing may need to be completed – Could result in additional liabilities and expenses

© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 14 Environmental - Emission Allowances  Federal, regional, and State authorities have programs in place to reduce power plant emissions – SOX and NOX programs to reduce Sulfur and Nitrogen emissions – Typically granted by jurisdiction – If short on allowances based on amount emitted, need to procure additional allowances or pay fines  Accounting for Emission Credits – Inventory vs. Intangible presentation of allowances purchased – Need to consider intent – Recognition of earnings from sales of emissions (gross vs. net) – Derivative considerations for future purchases and sales

© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 15 Renewable Energy and Renewable Energy Credits (REC’s)  Renewable Portfolio Standards (RPS) – Requirements by state mandating minimal amounts of renewable energy that utilities must generate or procure – If utility is short on producing required levels, procurement of REC’s is available to satisfy requirements – REC’s are allocated to generators of renewable electricity by jurisdiction  Tax Incentives to promote Renewable Energy Construction – Production Tax Credit (PTC), Investment Tax Credits (ITC), Grants – Accounting for ITC (flow through vs. normalize) – Accounting for grants

© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 16 Renewable Energy and Renewable Energy Credits (REC’s)  Buy and Selling of Purchase or Renewable Power and REC’s (PPA’s) – Agreements to sell power and associated REC’s to same counterparty or can be sold separate – REC’s can be sold at one all in price vs. a price for power and REC – Accounting considerations over the renewable PPA’s – Lease or VIE’s – Timing of Revenue Recognition over REC recognition  Accounting for REC’s – Income Statement presentation of REC sales – Recognition of earnings from sales of emissions (gross vs. net) – Derivative considerations

© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 17 Disclosures  Many of the new regulations and incremental accounting considerations create additional disclosures such as: – Descriptions of environmental reserves and exposures – ARO’s and changes in those estimate – Expanded accounting policies over REC’s, emissions, etc – Estimates regarding impairment considerations – Discussions of liquidity – Discussion of new or expanded regulations

Thank you Steve Rathjen Audit Partner, KPMG LLP srathjen@kpmg.com

© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.