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NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS Jan A. Umbaugh Jan A. Umbaugh Deloitte & Touche LLP Deloitte & Touche LLP October 8, 2007 October 8, 2007

NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS Jan A. Umbaugh Deloitte & Touche LLP October 8, 2007

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Page 1: NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS Jan A. Umbaugh Deloitte & Touche LLP October 8, 2007

NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS

Jan A. Umbaugh Jan A. Umbaugh Deloitte & Touche LLPDeloitte & Touche LLPOctober 8, 2007October 8, 2007

Page 2: NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS Jan A. Umbaugh Deloitte & Touche LLP October 8, 2007

Purchase Accounting Issues

• Goodwill and other identifiable intangibles• Property, plant & equipment• Emission allowances• Long-term debt• Unrecognized pension and OPEB• Hedging and normal contracts• Cost savings from synergies• Rate stabilization plans/frozen rates• Push down accounting• Business Combinations Exposure Draft

Page 3: NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS Jan A. Umbaugh Deloitte & Touche LLP October 8, 2007

Goodwill and Other Identifiable Intangibles

• Why historical cost for FAS 71 entities• What is basis for regulated entity goodwill• Aren’t there other identifiable intangibles• Why isn’t regulated goodwill amortized

Page 4: NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS Jan A. Umbaugh Deloitte & Touche LLP October 8, 2007

Property, Plant & Equipment

• Justify original cost/carryover basis for FAS 71 entity• Should accumulated depreciation be zeroed out• PP&E valuation approaches

– Replacement cost new, depreciated• Is this the maximum value

– Income/discounted cash flow approach– Market/comparable sales approach

Page 5: NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS Jan A. Umbaugh Deloitte & Touche LLP October 8, 2007

Emission Allowances

• Assigning value separate from PP&E• What allowances to value• Valuation approaches

– Discounted cash flows– Available market

• Subsequent impairment testing

Page 6: NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS Jan A. Umbaugh Deloitte & Touche LLP October 8, 2007

Long-term Debt

• Substantiating carryover basis for FAS 71 entity– FV disclosures already made in footnotes

• Treatment of debt of partial FAS 71 entity

Page 7: NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS Jan A. Umbaugh Deloitte & Touche LLP October 8, 2007

Unrecognized Pension and OPEB

• FAS 87 and 106 require recognition of unrecognized amounts in purchase accounting (pre-FAS 158)

• Should regulatory asset/liability be recognized• Must assumptions be harmonized

– Discount rate– Expected return on assets– Market related value (current recognition preferred)

Page 8: NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS Jan A. Umbaugh Deloitte & Touche LLP October 8, 2007

Hedging and Normal Contracts

• Recognizing favorable/unfavorable contracts• Exception under FAS 71?• Flushing Accumulated OCI• Acquiree/acquirer contracts – EITF 04-1

– Comparable values?– What if one MTM and other accrual?– What if one MTM and other FAS 71?

Page 9: NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS Jan A. Umbaugh Deloitte & Touche LLP October 8, 2007

Cost Savings from Synergies

• Not recognized under GAAP• If retained, is this a favorable contract• If rate decrease, is this an unfavorable contract

Page 10: NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS Jan A. Umbaugh Deloitte & Touche LLP October 8, 2007

Rate Stabilization Plans/Frozen Rates

• Are these favorable/unfavorable contracts?• Is unregulated “market” appropriate comparison?• What is “comparable” market?

Page 11: NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS Jan A. Umbaugh Deloitte & Touche LLP October 8, 2007

Push Down Accounting

• SEC generally requires if 100% acquisition• Not restrictions on form of ownership• First Mortgage Bonds generally restrict push down• Non-mortgage debt restrictions may not be sufficient

to prevent push down• Can regulatory restrictions prevent GAAP pushdown

Page 12: NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS Jan A. Umbaugh Deloitte & Touche LLP October 8, 2007

Business Combinations Exposure Draft• FASB was to issue final Q3 2007 (now 10/07?)• Defines business, changes EITF98-3/FIN46• Recognize value acquired, not cost• Expense acquisition costs• Contingent consideration estimated at acquisition;

subsequent changes in income• Negative goodwill to income (not other assets)• Preacquisition contingencies valued at acquisition and later

changes to income• Changes EITF 95-3; most restructuring liabilities expensed

after acquisition• Full fair value of partial/step acquisitions

Page 13: NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS Jan A. Umbaugh Deloitte & Touche LLP October 8, 2007

Consolidations and Minority Interests

• Minority interest in equity; not liability or mezzanine• OCI would be allocated to minority interest• Losses in excess of minority carrying value would be

assigned to minority (not controlling entity)• After controlled, all transactions are equity

transactions (no longer step acquisitions)• Upon loss of control, remeasure at FV and

recognize gain/loss in income

Page 14: NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS Jan A. Umbaugh Deloitte & Touche LLP October 8, 2007

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