Stay informed 2015 SEC comment letter and financial reporting trends

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Stay informed
2015 SEC comment
letter and financial
reporting trends
Power & Utilities
Current developments
in SEC reporting
December 2015
To our clients and friends:
We are pleased to offer you our annual publication on SEC comment letter trends specific to companies
in the power and utilities sector. We have prepared this publication to assist management teams as they
identify and understand the SEC staff’s current focus areas for the industry. We have highlighted the
areas where power and utilities registrants received the most comments from the SEC staff and have
provided relevant examples of recent comment letters to aid preparers in ensuring their disclosures are
robust and consistent with the relevant accounting and reporting guidance. This publication includes an
update and discussion around the SEC’s disclosure effectiveness project and an overview of the SEC
comment letter process and related best practices. The document also includes our views on key
considerations in the preparation of the Form 10-K, and benchmarks and data from our survey of
financial reporting trends in the power and utilities industry.
Our goal in preparing this publication is to provide controllers and financial reporting specialists with
relevant information for the upcoming financial reporting season. We hope you find the insights and
examples in this report to be both informative and useful as you navigate your year-end reporting
process.
Please do not hesitate to reach out to your PwC engagement team, the PwC contacts listed on the last
page of this document, or me to discuss this information in more detail.
Best wishes,
Robert Keehan
US Power and Utilities Assurance Leader
PwC, 400 Campus Drive, Florham Park, NJ 07932
T: (973) 236 5733, www.pwc.com
Contents
SEC developments ........................................................................................................................................................ 1
Overview .......................................................................................................................................................................2
Disclosure effectiveness ................................................................................................................................................3
Overview of the comment letter process ....................................................................................................................... 5
Top 10 power and utility comment letter topics ............................................................................................................. 8
Internal controls ...........................................................................................................................................................9
Management’s discussion and analysis ...................................................................................................................... 11
Pension and other postretirement benefits ................................................................................................................ 16
Impairments ............................................................................................................................................................... 18
Acquisition accounting .............................................................................................................................................. 20
Regulatory ..................................................................................................................................................................22
Financial statement presentation and disclosure .......................................................................................................23
Compensation and incentive plans ............................................................................................................................ 26
Dividends and restricted net assets ............................................................................................................................ 27
Segment reporting ..................................................................................................................................................... 29
About PwC power and utilities practice ......................................................................................................................32
PwC
PwC’s Power and Utilities Industry Group has developed this publication to assist
management teams in understanding some of the SEC staff’s current focus areas, as well
as other financial reporting hot topics.
SEC developments
Accounting and financial reporting are at the heart of the
SEC’s core mission. Accurate, reliable, and transparent
financial information provides investors the tools they
need to make informed decisions and build the trust and
confidence that promote capital formation. So it comes
as no surprise that 2015 was another year of heavy
interest for the SEC in the accounting and financial
reporting arena.
One area the SEC staff was keenly focused on in 2015 was
implementation of the new revenue accounting standards.
Whether by facilitating the identification and resolution
of broad-based practice issues or encouraging companies
to take a fresh look at their revenue-related internal
controls, the SEC staff is working to promote a successful
implementation and consistent application in the US and
around the world. Revenue is one of the most important
financial measures used by investors across industries
and geographies, and the SEC wants to make sure the
transition to the new standard is a smooth one.
Once the new revenue standards have been implemented,
the accounting in that area will be largely converged. Still,
there was much discussion throughout 2015 about
whether International Financial Reporting Standards
should play a broader role for domestic US public filings.
The SEC staff heard from a wide array of stakeholders in
2015. Through those discussions they heard there is
continued support for the objective of a single set of highquality, global accounting standards. However, they also
heard there is little or no support for the SEC to require
all companies to prepare their financial statements using
IFRS or even to provide US companies an option to do so
(although there is ongoing consideration of whether US
companies should have the option of providing
supplemental IFRS information). So what does all of this
mean? It's not clear what the next steps are, but Jim
Schnurr, the SEC's Chief Accountant, recently remarked
that for now, it appears the most likely path for advancing
the objective of high-quality, global accounting standards
is for the FASB and the IASB to continue to work together
to converge their standards.
During 2015, we also saw a continuation of the SEC’s
agency-wide emphasis on internal controls as the SEC
staff continued to ask questions when a filing disclosed
immaterial accounting errors—especially when there have
been multiple errors. The staff is probing beyond what
happened at the transaction level and is seeking to
understand the root cause of the deficiency—looking
beyond the individual control activities and asking
whether there are broader issues involved. For instance, if
a particular error related to a new line of business,
revenue stream, or geography, they may ask how the
company evaluated whether the deficiency relates to its
risk assessment, monitoring, or control environment.
The SEC staff is also looking closely at how the company
evaluated the severity of the deficiency—focusing both
on the magnitude of the actual error and on the volume
of activity that reasonably could have been exposed to
the deficiency. The SEC recognizes that a company’s
internal controls form the foundation of accurate
financial reporting, and this is undoubtedly an area
of long-term interest.
But the SEC’s interest in financial reporting and internal
controls is not limited to the Commission’s accountants.
The Enforcement Division has expressed great interest
in these areas as well. Enforcement actions and
investigations in the financial reporting area have
increased substantially over prior years. “Corporate
disclosure and financials” is at or near the top of the list
of most frequent whistleblowers allegations, and internal
controls have figured prominently in several recent
enforcement cases, including some where there were no
underlying fraud charges. Additionally, following on from
its “accounting quality model,” the Division of Economic
and Risk Analysis devoted substantial effort over the past
year to build out its data-driven Corporate Issuer Risk
Assessment tool (known as CIRA), which provides staff
across the agency (including the Enforcement Division’s
Financial Reporting and Audit Task Force) with more
than 100 custom metrics designed to identify situations
or activities that warrant further inquiry.
2015 was a busy year at the SEC, and with the pending
confirmation of two new Commissioners, the
implementation of securities-based crowdfunding, and
further progress on the disclosure effectiveness, clawback,
and pay versus performance initiatives on the horizon,
2016 promises more of the same, but the continued focus
on accounting, financial reporting, and internal control
are sure to remain high on the priority list. We hope you
find the analysis that follows helpful as you navigate this
year's financial reporting season.
John A. May
SEC Services Leader
1
Overview
This document provides our views on relevant
considerations in the preparation of the Form 10-K,
information summarized from SEC staff comment
letters issued to electric, natural gas, water, and cogeneration registrants, and certain information derived
from our annual survey of financial reporting trends in
the power and utilities industry. We perform this survey
annually to develop benchmarking information for
certain reporting areas of interest to power and utilities
2
registrants. We reviewed registrants in the power
and utilities industry with market capitalization
greater than $1 billion as of December 31, 2014,
including benchmarking of Management’s
Discussion and Analysis of Financial Condition
and Results of Operations (MD&A), the financial
statements, and certain disclosures in the filing
closest to December 31, 2014. Our survey included
sixty nine registrants this year.
Stay informed | 2015 SEC comment letter and financial reporting trends - Power & Utilities | PwC
Disclosure effectiveness
The SEC staff is in the midst of a broad, ongoing
project to evaluate the requirements of Regulation
S-K and certain provisions of Regulation S-X for all
registrants. This effort evolved out of a JOBS Act
requirement for the SEC staff to evaluate ways to
modernize and simplify the registration process and
reduce the costs and other burdens associated with
Regulation S-K requirements for issuers that are
emerging growth companies.
SEC Chair Mary Jo White has emphasized that
disclosure effectiveness continues to be an area of focus
for the SEC staff. Additionally, Keith Higgins, Director
of the Division of Corporation Finance has noted in
recent speeches that the purpose of the project is to
eliminate duplicative disclosures while continuing to
provide material information. As Keith further noted,
“better disclosure” is the objective of the project and
reducing the volume of disclosure is not – although
hopefully this effort might ultimately reduce costs
and burdens on public reporting companies. ”
While the SEC staff has been clear that current
disclosure requirements are not broken, there
appears to be widespread support for identifying
targeted recommendations to minimize duplicative
and overlapping requirements, eliminating disclosures
that are not useful, and reducing the costs and burdens
of financial reporting to preparers. As Figure 1 on the
next page shows, the average number of pages in a
10-K in the sector has increased by nearly fifty pages in
the last ten years, but at the same time, companies are
filing quicker than ever before.
disclosure system while continuing to provide material
information. The SEC staff has been clear that reducing
disclosure is not the objective of this important project,
but they have indicated that they believe the initiative
can reduce costs and burdens on companies. While the
disclosure effectiveness project may identify and
eliminate duplication or overlaps in disclosure
requirements, it may also identify gaps in information
that investors would find useful, in which case it may
lead to additional disclosure requirements.
On September 25, 2015, the SEC published its first
request for comment from the disclosure effectiveness
initiative. The request for comment focuses on the
portions of Regulation S-X that address financial
information of entities other than the registrant
(e.g., acquired businesses, equity method investees,
guarantors). The application of these rules can be
complex and many consider it to be disproportionately
burdensome to smaller registrants since they are more
likely to trigger the quantitative thresholds in these
rules. The project may serve as an opportunity to
further scale disclosure requirements for the various
classes of registrants. The SEC is soliciting input on how
this financial information is used by investors and what
changes would facilitate the disclosure of the most
useful information. The comment period closed on
November 30, 2015, although companies who still wish
to comment should do so. PwC’s response is available
on http://www.sec.gov/comments/s7-20-15/s7201531.pdf.
Through the disclosure effectiveness initiative, the SEC
is looking for ways to update and modernize its
3
Disclosure effectiveness
In advance of formal rule making, registrants can still
take action to make disclosures more effective and
streamlined by:



Reducing repetition – Registrants should think
before repeating something. For example,
MD&A should not simply repeat information,
such as critical accounting policies, provided
elsewhere. Greater use of hyperlinks and cross
referencing where applicable and appropriate
can also decrease unnecessary duplication.
Eliminating outdated information –
Disclosures should evolve over time.
Companies and their representatives should
regularly evaluate their disclosure to determine
whether they are material to investors.
Avoiding boilerplate language – Disclosures
should be tailored for the entity. For example,
risk factors should be less generic and explain
how these items would affect the company if
they came to pass.
Figure 1: Average number of pages in Form 10-K
200
171
180
160
140
128
120
100
80
60
40
20
0
10 years ago
Figure 2: Average days to file
56
2012
4
Today
55
2013
54
2014
Stay informed | 2015 SEC comment letter and financial reporting trends - Power & Utilities | PwC
Overview of the comment letter process
The SEC’s Division of Corporation Finance (CorpFin)
has a long history of reviewing selected filings made
under the Securities Act of 1933 (Securities Act) and the
Securities Exchange Act of 1934 (Exchange Act). An
important goal of these reviews is to monitor and
improve compliance with applicable disclosure and
accounting requirements, consistent with the SEC’s
mission of investor protection.
Under Section 408 of the Sarbanes-Oxley Act, the SEC
must review a public company’s filings at least once
every three years. In practice, these reviews often occur
more frequently, especially for larger public companies.
The SEC does not publicly disclose the criteria it uses to
select companies and filings for review, however the
following factors outlined in the Sarbanes-Oxley Act are
intended to guide the staff:

Material restatements of financial results

Issuers that experience significant volatility in
their stock price compared others

Companies with the largest market
capitalizations

Emerging companies with disparities in price to
earnings ratios

Businesses whose operations significantly affect
any material sector of the economy

Any other factors that the SEC may
consider relevant
Once a filing is selected, the SEC staff may conduct a
full cover-to-cover review, limit its scope to financial
statements and related disclosures (e.g., MD&A), or
perform a more targeted review focusing on one or
more specific items. Although reviewers concentrate on
critical disclosures that appear to conflict with SEC
rules or the applicable accounting standards, they may
also comment on disclosures they believe are deficient
or lack clarity. The disclosures are judged from the
perspective of potential investors and the questions
they would pose.
The SEC staff may request for additional supplemental
information so they can better understand a reporting
entity’s accounting or disclosure, additional disclosures
or revisions related to previous filings or the inclusion
of additional or revised disclosures in future filings.
Responses are due within 10 business days of the
receipt of a comment letter, but extensions may be
requested. Depending on the complexity of an issue,
there may be several rounds of correspondence with the
SEC staff before the issues identified in the review are
resolved. Figure 3 highlights how many rounds of
comment letters were required to resolve the comments
received by power and utilities registrants (based on
letters posted to EDGAR between November 1, 2014
and October 31, 2015). As noted in the figure, 80% of
comment letters were resolved with one response from
the respective registrant.
Figure 3: Number of rounds per comment letter
1%
19%
One
80%
Two
Three or more
5
Overview of the comment letter process
Responding to SEC comment
letters
The SEC staff’s comments are based primarily on a
company’s disclosure and other public information,
such as information on the company’s website, in press
releases, discussed on analysts calls, etc. (nonpublic
information, such as whistleblower tips and PCAOB
inspection reports, can also be a source of comments).
In their comments, the SEC staff may request that a
company provide additional supplemental information
so the staff can better understand the company’s
disclosure, or may ask that the company provide
additional or different disclosure in a future filing or
change the accounting and/or revise the disclosure by
filing an amendment. When responding to the SEC
staff, keep these best practices in mind:
6

Own the process — Companies should leverage
the knowledge and experience of their auditors
and SEC counsel, but it’s important to maintain
ownership. There should be a clear owner and
project manager coordinating input from
various sources and developing responses.

Don’t rush — Companies should evaluate how
long they believe it will take to respond.
Although the letter from the SEC staff will
request a response in 10 business days, it is
acceptable for management (usually through
counsel’s call to the SEC staff) to request more
time if 10 days is not sufficient. A thoughtful
and complete response is better than a quick
reply.

Think about future filings — Companies should
discuss letters received shortly before it is
planning to file a registration statement with its
auditors and counsel to determine if there are
any implications on the content and timing of
the registration statement. Questions about
timing can also be discussed with the SEC staff
as well as the possibility of an expedited review
of the company’s response.

Ask the SEC staff — Companies can call the
SEC staff if they do not understand the
comment. The objective should not be for the
company to explain their position, but to gain
clarification when a comment or aspects of the
comment is unclear.

Remember that comments become public —
Comments become part of the public domain
once submitted and resolved. Comments and
the related responses are posted to the SEC’s
website no earlier than 20 days after the review
is completed or the registration statement is
declared effective. Even those comment letters
related to Emerging Growth Companies that
have filed confidentially eventually are made
public. CorpFin will redact any information
subject to a Rule 83 confidential treatment
request without evaluating the substance of that
request.

Don’t rely solely on precedent — The use of
previous comments and responses of other
companies may be helpful in responding but
should not be the primary basis of the response.
Each comment is based on specific facts and
circumstances and may involve different levels
Stay informed | 2015 SEC comment letter and financial reporting trends - Power & Utilities | PwC
Overview of the comment letter process
of materiality. Accordingly, the reason the staff
accepted a response for one company may not
be applicable in another situation. Make sure
the response is appropriate based on the
company’s specific facts and applicable
accounting literature.


Address the intent of the question — Consider,
if possible, the objective of the SEC staff
comment. Sometimes providing a complete
answer that addresses the intent of the question
can reduce the need for the staff to follow up,
enabling the Company to close out the
comment letter quickly and effectively.
Provide planned disclosures — Many
comments will request additional disclosure in
future filings. To ensure there is a meeting of
the minds, provide the SEC staff with a draft of
the applicable disclosure, even if the data used
is from a prior period. This will allow the SEC
staff to assess whether the narrative sufficiently
addresses their comment and may prevent
future comments on the same disclosure.
The company or its representatives should feel free
to involve the SEC’s Office of the Chief Accountant
(OCA) (distinct from CorpFin’s Office of Chief
Accountant) at any stage in this process. Generally,
OCA addresses questions concerning the application
of GAAP while CorpFin resolves matters concerning
the age, form, and content of financial statements
required to be included in a filing.
Closing a filing review
When a company has resolved all SEC staff comments
on an Exchange Act registration statement, a periodic
or current report, or a preliminary proxy statement,
CorpFin provides the company with a letter to
confirm that its review of the filing is complete.
When a company has resolved all SEC staff comments
on a Securities Act registration statement, the
company may request that the SEC declare the
registration statement effective so that it can proceed
with the transaction.
A more detailed discussion of the filing review
process used by CorpFin can be found on the SEC’s
website as http://www.sec.gov/divisions/corpfin/
cffilingreview.htm.
7
Top 10 power and utility comment letter topics
To help reporting entities gain insight into the SEC
staff’s current areas of interest, we have identified the
top 10 topics addressed in comment letters received
from the SEC staff in 2014 and 2015 (see Figure 4)
Figure 4: Top 10 areas of comment for power and
utilities companies
8
2015
rank
2014
rank
Nature of comments
1
2
Management discussion and
analysis
2
1
Financial statement presentation
and disclosure
3
7
Business combinations
4
4
Regulatory accounting
5
9
Dividends and restricted net
assets
6
n/a
Internal controls
7
3
Impairment
8
8
Compensation and incentive
plans
9
3
Pension and other postretirement
benefits
10
10
Segment reporting
Most of the top 10 comment areas are consistent with
our findings in all industries and are not necessarily
unique to this sector. However, the focus of comments
in these areas often contains industry-specific aspects.
The topics most frequently identified this year are
largely consistent with those issued in prior years, with
the highest volume of comments related to registrants’
discussion of results of operations and liquidity and
capital resources in MD&A.
Business combinations has risen significantly in the top
10 ranking, which is largely due to the current market
activity in the sector.
Segment reporting continues to be an area
of focus, with the staff evaluating both the
identification and reporting of segments, but also
the entity-wide disclosures required under ASC 280,
Segment Reporting.
The increase in comments on internal controls and
assessment of errors is a notable trend. The SEC staff
has focused heavily in this area, particularly in the
controls assessment made by management when
errors are detected.
Additionally, given the changes in the power markets
and lower gas prices, the SEC staff continues to focus on
foreshadowing disclosure leading up to impairments.
This publication has been prepared to assist power and
utility reporting entities in their preparation of 2015
year-end financial reporting, and to identify where
additional disclosures may be warranted. In each area
discussed herein, we have included representative SEC
staff comments as well as our views on other relevant
considerations for the preparation of Form 10-K.
Stay informed | 2015 SEC comment letter and financial reporting trends - Power & Utilities | PwC
Internal controls
The SEC staff continues to focus on internal control
over financial reporting (ICFR) and we have seen an
increasing volume of comments in this area since 2014.
Registrants should continue to carefully evaluate the
ICFR and disclosure controls and procedures (DC&P)
implications that may be implied by their responses to
the SEC staff, even when the SEC staff has not raised a
question regarding internal control. Registrants should
also continue to assess the sufficiency of their
disclosures and certifications.
Recent SEC staff comments reflect their concern that
not all material weaknesses are being properly
identified, evaluated, and disclosed. Specifically, they
continue to question why a revision did not result in the
reporting of a material weakness. Over the past year,
several SEC staff members have emphasized the fact
that there are a low number of material weaknesses
reported in the absence of a restatement or other known
material error, implying that it is possible the
“could factor” or the potential exposure is not being
correctly evaluated.
The SEC staff has also questioned registrants when
there is no explicit conclusion about the effectiveness of
DC&P or when management has concluded ICFR is
ineffective while DC&P is effective. Although separately
assessed, it is important to remember there is
substantial overlap between the processes considered
DC&P and those considered part of IFCR. Nearly all of
ICFR falls within the scope of DC&P, whereas there are
aspects of DC&P that extend beyond what is considered
part of ICFR. As such, it is rare that a material
weakness in ICFR would not also result in DC&P being
considered ineffective.
Item 308 of Regulation S-K requires registrants to
disclose any change in the company’s ICFR that has
materially affected, or is reasonably likely to materially
affect, the registrant’s ICFR each quarter. Changes
requiring disclosure include changes in internal control
made in the process of remediating previously
identified material weaknesses, as a result of the
integration of significant acquisitions, or due to the
implementation of new information technology
systems. The SEC staff often looks to information
contained in companies’ current reports, on their
websites, and in other sources to identify potential
changes in ICFR. SEC staff comments in this area have
focused on the timeliness and completeness of the
disclosures in periodic filings.
“We also routinely engage management in
discussions regarding the root causes of identified
control deficiencies, which is important because of
the potential pervasive impact of certain control
issues that may not be immediately obvious.
Appropriate disclosure of a material weakness is
important because it can aid investors in assessing
the potential impact to the financial statements of
the material weakness.”
– James Schnurr, SEC Chief Accountant
Additionally, Companies sometimes assess control
deficiencies with a focus on the Control Activities
component of COSO. It is important to evaluate the
implications of control deficiencies on all COSO
components. The SEC staff has asked for additional
information about the company’s consideration of
specific components within the COSO framework.
Figure 5 highlights the number of companies in 2014
that adopted the 2013 COSO Framework.
Figure 5: 2013 COSO Framework
12%
88%
Yes
No
9
Internal Controls
Sample comments received
1.
Please address the following: (a) Tell us when and how the error was identified. If it was identified through
your processes or internal controls, explain why the error was not identified in an earlier period given that it
dates back to 200X. (b)Tell us whether you evaluated if there were any deficiencies in your monitoring or
risk assessment controls and processes as a result of the error and, if so, how you evaluated the severity of
those deficiencies. (c) Tell us if you made changes or improvements in your internal controls over financial
reporting (ICFR) due to the error disclosed.
2. Please provide us a robust chronology of the circumstances that caused and led to the discovery of the errors,
and please elaborate on any internal control deficiencies that allowed the misapplication of certain
accounting provisions to prevail over time and explain whether these amounted to a material weakness.
3. You indicate that the errors were discovered during the Company’s year-end financial statement close
process. Tell us how the Company was able to implement the remediation actions necessary in order for both
Company management and the independent accountant to conclude that both the disclosure controls and
procedures and internal control over financial reporting were both effective.
4. Please tell us how management considered the restatement of the financial statements in determining that
the disclosure controls and procedures over financial reporting were effective.
10
Stay informed | 2015 SEC comment letter and financial reporting trends - Power & Utilities | PwC
Management’s discussion and analysis
Management’s discussion and analysis (MD&A)
continued to garner its share of SEC staff comments.
Consistent with previous years, our analysis found that
the majority of MD&A comments related to improving
the quality of disclosures to meet the overall objectives
of MD&A, rather than meeting the specific technical
requirements of Regulation S-K.
The requirements themselves are set forth in Item 303
of Regulation S-K, which identifies five MD&A
disclosure categories:

Liquidity

Capital resources

Results of operations

Off-balance-sheet arrangements

Contractual obligations
Financial Reporting Release (FRR) 36, Management’s
Discussion and Analysis of Financial Condition and
Results of Operations, and FRR 72, Interpretation:
Commission Guidance regarding MD&A of Financial
Condition and Results of Operations, provide
additional guidance.
Following the release of its December 2013 Report on
Review of Disclosure Requirements in Regulation S-K
mandated by the JOBS Act, the SEC announced that
the Division of Corporation Finance would develop
recommendations to improve and streamline
disclosure requirements. This project may reduce the
costs and burdens placed on companies and eliminate
duplicative MD&A disclosures. However, it may also
identify opportunities to increase the transparency of
information, which may lead to new requirements.
The focus of the SEC staff and their view on the
importance of MD&A is captured in the
following comment.
Sample comment:
“The Management’s Discussion and Analysis
section is one of the most critical aspects of your
disclosure. As such, we request that you revise this
section to provide a detailed executive overview to
discuss the events, trends, and uncertainties that
management views as most critical to your future
revenues, financial position, liquidity, plan of
operations, and results of operations, to the extent
known and foreseeable. To assist you in this
regard, please refer to the Commission Guidance
Regarding Management’s Discussion and Analysis
of Financial Condition and Results of Operations,
Release No. 33-8350 (December 19, 2003) at
http://www.sec.gov/rules/interp/33- 8350.htm.”
The comment letter process this year has continued to
reinforce the well-established MD&A objectives that
disclosures be:

Transparent and provide relevant information

Tailored to the company’s facts
and circumstances

Consistent with the financial statements and
other public communications

Comprehensive in addressing the many
business risks that exist in today’s economic
environment
Results of operations, as well as liquidity and capital
resources, are the areas within MD&A that received the
most attention among power and utility registrants. In
the following section, we provide analysis and relevant
examples of comments issued by the SEC staff in these
and other areas of MD&A.
11
Management’s discussion and analysis
Results of operations
SEC staff comments continue to remind registrants that
the results of operations section should provide readers
with a clear understanding of the significant
components of revenues and expenses and events that
have resulted in or are likely to cause a material change
in the relationship between costs and revenues.
In addition, they encourage the discussion of key
operating metrics used by management, coupled with
an analysis of the relationship between such metrics
and GAAP results.
The SEC staff has frequently issued comments
specifying that MD&A should not simply repeat
information provided elsewhere in the filing; rather, it
should explain the underlying drivers behind changes in
the financial position, results of operations and cash
flows of registrants. Increasingly, registrants are being
challenged to quantify the impacts that such factors
have had, especially when an account has been
impacted by multiple factors.

Disclosing known trends: The SEC staff has
asked registrants to disclose known trends
affecting the business, in particular, disclosure
of events that have occurred and how those
events were a positive or negative indicator of
future performance. For example:
-
Impact of one-time events such as storms
and/or hurricanes
Current commodity prices
Impact of acquisitions
Expenditures on capital growth or
maintenance activities
Significant changes to, additions or losses
of contracts

Drivers behind fluctuations: Many
comments relate to improving registrants’
disclosures of significant fluctuations between
periods, including pricing and volume. The SEC
staff has asked for more detailed descriptions
related to the specific factors driving such
fluctuations and for registrants to quantify each
factor separately, even when they net to an
insignificant change overall.

Consistency of information: The SEC staff
often reviews public information for
consistency with the information included in a
registrant’s periodic filings. When management
discusses events or trends on earnings calls,
social media channels, or the company’s
website, the SEC staff may question why such
events are not also addressed in MD&A.

Segment discussion: SEC staff comments
also encourage the use of a segment analysis if
such analysis would provide readers with a
more in-depth understanding of the
consolidated results. The segment analysis may
be integrated with the discussion of the
consolidated results to avoid unnecessary
duplication.
Sample comments received by power and utilities registrants
1.
We note that throughout your analysis of results for 20x0, you refer to increases resulting from your
acquisition of Company X. For the ease of your readers, please quantify the impact of this acquisition on
each line item in your statements of operations, where material and practicable, within your MD&A analysis
of results of operations. We believe it improves investor understanding of the relative magnitude of each
underlying factor that drove changes in your results of operations if the impact of each significant underlying
factor is quantified in a single location within your filing.
2. As part of our prior review of Form 10-K for the year ended December 31, 20x0 we wrote you the following
comment: “We note several instances in your discussions of segment results where you disclose an increase
or decrease in operating expenses and general and administrative expenses without describing the
underlying reasons for the increase or decrease. Please disclose the underlying causes for the changes in
future filings. Also, we note that you identify more than one factor underlying increases or decreases in gross
margins and costs and expenses without quantifying the impact of the factors. In future filings please
quantify to the extent practical the impact of each factor identified
12
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Management’s discussion and analysis
Liquidity and capital resources
Discussion of liquidity and capital resources should
provide a clear picture of a company’s ability to
generate cash and meet known, or reasonably likely,
cash requirements. The SEC staff expects the discussion
to address material cash requirements, and the sources
and uses of cash. The discussion should also address
material trends and uncertainties in a company’s ability
to use its capital resources to satisfy its obligations
both in the long and short term. General observations
regarding SEC staff comments in this area include
the following:


Disclosure of events impacting liquidity:
The SEC staff has asked registrants to discuss
known trends, events, or uncertainties that are
reasonably likely to impact future liquidity.
Such events could include entry into material
commitments, loss of customers or contracts,
treasury stock repurchase programs, or plans
for significant capital expenditures. Given the
significant cash flow often needed by power and
utilities registrants due to their extensive
capital requirements, reporting entities often
refinance existing debt or obtain new debt,
particularly when rates are favorable. Any such
plans should be discussed in the MD&A.
Cash flow analysis: One of the common staff
comments as it relates to the liquidity analysis
is when registrants simply repeat information
found on the face of the statement of cash
flows,
particularly as it relates to changes in operating
cashflows. Organizations should disclose the
underlying factors driving changes in operating
assets and liabilities and the related cash flows.

Debt agreements and related covenants:
The SEC staff has requested expanded
disclosure of the material terms of debt
agreements, including compliance with
financial covenants. In situations where there
has been, or is projected to be, a violation of
covenant compliance, registrants should
provide a detailed description of the covenants,
and the target and actual covenant measures
for the most recent reporting period.
Registrants should also discuss the sensitivity
of those measurements, if applicable.
Companies should also clearly detail any other
items that could potentially impact the
availability of credit, including limitations on
the ability to draw on existing credit lines,
borrowing base redeterminations, and/or other
borrowing issues. Disclosures should include,
where possible, any significant assumptions or
drivers that may impact a company’s future
liquidity.

Negative working capital: Liquidity
disclosures should also identify how reporting
entities plan to address negative working
capital, particularly if the negative working
capital is driven by the level of current debt at
the balance sheet date.
Figure 6 Percentage of registrants surveyed with negative working capital
100%
80%
60%
40%
20%
0%
Total
100%
59%
Diversified
48%
58%
2014
Electric
Gas
73%
59%
100%
73%
52%
52%
2013
Water
Sample comments received by power and utilities registrants
1.
Please tell us what consideration you gave to describing internal and external sources of liquidity, discussing
any material unused sources of liquid assets and discussing the significant factors contributing to changes in
operating, investing and financing cash flows.
2. We read on page 15 that two of the major rating agencies lowered your credit ratings. In light of this and
recent market conditions, please consider disclosing your credit ratings and discussing how changes to your
13
Management’s discussion and analysis
credit ratings results in changes to your liquidity, access to capital markets and cost of capital. Refer to Item
303(A)(1) of Regulation S -K.
Critical accounting policies
The SEC staff has issued guidance regarding the
nature and extent of disclosures of important
accounting policies, including FRR 60, Cautionary
Advice Regarding Disclosure about Critical
Accounting Policies. Through comment letters,
the SEC staff continued to stress the need for more
robust and transparent MD&A discussion of critical
accounting policies, preparer judgments, and risks
and uncertainties.
In recent years, the SEC staff has also offered several
recommendations to improve critical accounting policy
disclosures, including being mindful to avoid merely
repeating accounting policy discussions contained in
financial statement footnote disclosures, ensuring all
relevant policies have been disclosed, providing
quantitative as well as qualitative analysis, and
providing sensitivity analysis when appropriate.
Figure 7 highlights the ten most common critical accounting policies disclosed by power and utilities
reporting units.
Figure 7: Critical accounting policies disclosed
10%
10%
Accounts receivable allowance
15%
16%
Fair value measurement
31%
29%
Asset retirement obligations/nuclear
decommissioning
45%
45%
Contingencies
52%
48%
Derivatives
59%
61%
Revenue recognition/unbilled
63%
64%
Income taxes
65%
64%
Impairment
89%
88%
Regulation
93%
91%
Pensions
0%
10%
2013
14
20%
30%
40%
50%
60%
70%
80%
90%
100%
2014
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Management’s discussion and analysis
Non-GAAP measures
accounting standard, registrants not meeting the
criteria for discontinued operations may seek to
utilize non-GAAP measures to present adjusted
results excluding disposed of business.
Companies often supplement their GAAP financial
reporting with non-GAAP information that is intended
to provide additional insight into the financial
performance of the business. A non-GAAP financial
measure is a numerical measure that adjusts the most
directly comparable measure determined in accordance
with GAAP. Such measures provide supplemental
information regarding a company’s historical or future
financial position, performance, cash flows, or liquidity.
Non-GAAP financial measures included in SEC filings
are subject to the requirements of Regulation G and
Item 10 of Regulation S-K. When non-GAAP financial
information is presented in periodic SEC reports,
companies should also include:
A company has flexibility in which non-GAAP financial
measures it chooses to report, if any, and how it
calculates such metrics, subject to certain prohibitions.
Therefore, a limitation inherent in non-GAAP financial
measures is that they are subjective and may not be
comparable to similarly titled non-GAAP financial
measures used by other companies, including peers.
This has also been a consistent area commented on by
the investor community as they seek to have consistent
non-GAAP measures across an industry to allow more
meaningful comparatives and benchmarking. In
connection with the new discontinued operations

The reasons why management believes the non
GAAP measures are relevant to investors

Additional purposes, if any, for which
management uses the non-GAAP
financial measure

A presentation with equal or greater
prominence of the most directly comparable
financial measure presented in accordance with
GAAP

A reconciliation to the comparable
GAAP measure
Figure 8: Most commonly utilized non-GAAP measures
4%
Revenue net of purchased power
4%
8%
Adjusted operating income
10%
10%
9%
EPS by segment
23%
20%
Adjusted earnings/EPS
6%
6%
EBITDA/EBIT or adjusted EBITDA/EBIT
39%
Gross margin/Adjusted gross margin
38%
0%
5%
2013
10%
15%
20%
25%
30%
35%
40%
45%
2014
15
Pension and other postretirement benefits
There has been an increase in comment letters related to pension and postretirement benefit accounting and
disclosure. The SEC staff comments have focused on a variety of areas, including the adoption of updated mortality
tables, the application of settlement accounting, and the type of pension plans.
Mortality assumptions
Settlement accounting
In October 2014, the Society of Actuaries’ (SOA)
published updated mortality tables and an updated
improvement scale, which both reflect improved
longevity. At the 2014 AICPA National Conference
on current SEC and PCAOB developments, the SEC
staff indicated that it does not believe it would be
appropriate for a registrant to disregard the SOA’s
new mortality data in determining their best estimate
of mortality. Additionally, the SEC staff indicated
that management should consider the guidance in
ASC 715-20 and disclose the impact of mortality to
the extent it results in a significant change in the
benefit obligation. In recent comment letters, the
SEC staff has questioned registrants’ adoption of the
RP-2014 mortality tables, and disclosure of the impact
on pension and postretirement plan liabilities.
A settlement is an event that relieves the employer of
the primary responsibility for the obligation to some or
all participants, eliminates significant risks related to
the obligation and the assets used to settle it, and is
irrevocable. In these situations, the reporting entity
should disclose a description of the nature of the event
and the quantitative effect on the periods presented.
The SEC staff comments have focused on why certain
events (e.g., lump-sum payments to employees) were
not accounted for as settlement accounting.
Figure 9 shows that approximately 76% of power and
utilities reporting entities surveyed adopted the RP2014 mortality tables.
Figure 9: Adoption of the new mortality tables
20%
4%
76%
Adopted RP-2014 mortality tables
Did not adopt RP-2014 mortality tables
Not disclosed
16
Type of defined benefit plans and
other postretirement plans
In recent comment letters, the SEC staff has also
questioned if defined benefit plans and other
postretirement plans are considered multiemployer
plans or multiple–employer plans.
A key characteristic of multiple-employer plans is that
they may involve features that allow participating
employers to select different benefit formulas, with each
employer’s contributions to the plan based on their
respective benefit formula and beneficiaries. A
multiemployer plan is a postretirement benefit plan in
which two or more employers contribute to a fund. This
fund is then used to provide benefits to plan
participants who were employed by the participating
employers. A common characteristic of this type of plan
is that the contributions of one employer can be utilized
to provide benefits to another employer’s employees.
When an entity participates in a pension plan
sponsored by an affiliated entity (e.g., parent company),
the accounting in standalone financial statements of
that entity should generally follow the “multiemployer”
guidance in ASC 715-80. Given the prevalence of
multiple registrants in the power and utilities industry,
operating subsidiaries that are SEC registrants should
evaluate if the multiemployer guidance will apply
to them.
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Pension and other postretirement benefits
Recent developments
In developing the interest cost and service cost
components of net benefit cost for a defined benefit
retirement plan under US GAAP, one key assumption
is the discount rate. Most companies currently use a
traditional, single weighted-average discount rate
approach to calculate interest cost and service
cost. We understand that many companies and their
actuaries have been considering various alternative
approaches to determining the discount rates used to
compute these cost components. In evaluating a
specific fact pattern, the SEC staff recently indicated
it would not object to a registrant changing to an
alternative disaggregated spot rate approach, and
treating such a change as a change in estimate that
would be applied prospectively from the next
measurement date. Under the spot rate approach,
each period’s future projected benefit payments and
the associated spot rates based on the yield curve for
that period are utilized to measure the interest cost
and service cost components.
The SEC staff reached this conclusion in the context
of a company that utilizes a full yield curve to
calculate the projected benefit obligation and
discount rate. However, a number of entities measure
the benefit obligation using other approaches, such as
a bond match approach, which utilizes a hypothetical
portfolio of bonds constructed to match the plan’s
projected benefit payments. Because this approach
does not incorporate a full set of individual discount
rates in the calculation of the benefit obligation,
questions have arisen as to whether such a company
could adopt a yield curve approach to measuring the
projected benefit obligation, in order to apply the
spot rate approach to determine interest and
service cost.
The SEC staff recently indicated that the focus of
assessing a potential change in approach should be
on the measurement of the benefit obligation and
determination of the best discount rate, rather than
on the calculation of components of net benefit costs.
A company must also consider its prior basis and
reasons for selecting the bond match approach and
whether those are still relevant, and what economic
facts and circumstances have changed to warrant a
change in approach. The SEC staff also noted that the
materiality of a change from a bond match approach
to a yield curve approach should not be used as a
basis for selecting a model. The same considerations
apply even if the change would result in little or no
difference in the plan’s benefit obligation at the
current time. These views would appear to make it
very challenging for a company that currently utilizes
a bond match approach to shift to a spot rate
approach to calculate interest and service cost.
Sample comments received by power and utilities registrants
1.
We understand that the Society of Actuaries developed an update set of mortality assumptions presented in
its RP-2014 Mortality Tables Report issued in October 2014. We also understand that the RP-2014 mortality
tables represent the most current and complete benchmarks of U.S. private pension plan mortality
experience. Please tell us what consideration you gave to changing the mortality table used to calculate the
present value of pension and postretirement plan liabilities. If you did not adopt the new mortality
assumptions, please tell us the mortality table used to calculate the present value of pension and
postretirement plan liabilities and why you believe the mortality rate assumptions reflects the best estimate
of expected mortality rates for your participant population. If you adopted the RP-2014 mortality tables,
please tell us the impact on pension and postretirement plan liabilities.
2. We note the decrease in your net pension liability and your disclosure, "Additionally, during 20X4, for a
limited period of time, we permitted former participants with a vested benefit in the plan, to take a lump
sum distribution of their benefit. Our actuary has considered these changes in the calculations below." We
also have read your disclosure, "Additionally, employees hired prior to January 1, 201X will be given the
option to convert to the cash balance formula, or remain with the average annual basic earnings formula
which will now allow for a lump sum distribution, with a decision to be made by December 31, 201X." Please
quantify for us the amount of lump sum distributions made under these arrangements and clarify if you
account for them as settlements under ASC 715.
3. Please tell us whether the defined benefit plans and other postretirement plans are multiemployer plans as
defined in ASC 715-80-20 or multiple-employer plans as defined in ASC 715-30-20, and describe the
characteristics if the plans that support your determination.
17
Impairments
The changes in power markets, evolving power
plant technologies, and the persistent increase in
environmental requirements have resulted in the
need for robust impairment evaluations of goodwill
and other long lived assets for power and utilities
companies. As such, the SEC staff continues to
issue comment letters related to registrants’
disclosures related to goodwill and other
long-lived asset impairments.
Goodwill and indefinite – lived
intangible assets
SEC staff comments have requested details surrounding
a company’s quantitative impairment tests and the
related assumptions. For reporting units whose fair
values are not substantially in excess of their carrying
amounts (“at risk” reporting units), the SEC staff has
asked registrants to disclose additional quantitative and
qualitative information consistent with the guidance
outlined in the Division of Corporation Finance
Financial Reporting Manual Section 9510.3.
Some registrants also received comments from the SEC
staff when no impairment charge was recorded during
the annual assessment, but other publicly available data
indicated the presence of a negative trend that could
impact the impairment assessment.
Long-lived assets
The themes of the SEC staff comments related to longlived assets were consistent with those for goodwill and
other indefinite-lived intangible assets. Additional
information about the level of uncertainty and
sensitivity of key assumptions related to “at risk” assets
or asset groups has been a point of focus by the SEC
staff. In some instances, the SEC staff requested details
of the impairment analysis and challenged registrants’
conclusions relative to how registrants considered
economic challenges, operating losses at a specific
segment, or the impairment of similar assets as a
potential trigger event.
When an impairment charge is recognized, registrants
should consider disclosing the events that gave rise to
the impairment, such as changes in the underlying
business or environment, the amount of the
impairment loss, and the method of determining the
fair value of the reporting unit. Such disclosures should
answer the question of why the charge was recorded in
the current period as opposed to an earlier period.
Figure 10 highlights the types of impairment charges
recorded in 2012-2014 for power and utilities reporting
entities surveyed.
Figure 10: Types of impairments
25%
18%
20%
6%
Long Lived Assets
2012
18
2013
8%
9%
4%
Other Investments
(OTTI)
7% 6%
Equity method
investments
8%
7%
4%
3%
Goodwill/Intangibles
4%
1% 1% 1%
Emission Allowances
3%
Others
2014
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Impairments
Sample comments received by power and utilities registrants
1.
We note your goodwill impairment charge of $X million recorded in the fourth quarter of 201X as a result of
your annual goodwill impairment test. Please tell us whether you performed an interim goodwill test as a
result of a triggering event described in ASC 350 -20-35-3C. If an interim impairment test was performed,
please tell us the triggering event that caused the evaluation, the results of the impairment test and the
percentage that fair value exceeded carrying value for each of your reporting units. If no interim impairment
test was completed, please confirm that there were no triggering events described in ASC 350-20-35-3C and
explain in detail why each factor did not trigger an interim impairment test. Please be specific when
explaining the factor in ASC 350-20-35-3C(d). Refer to 350-20-35-30.
2. We note your disclosure on page X that the adverse effects of lower wholesale electricity prices in ERCOT
driven by the sustained decline in natural gas prices since mid-2008 and the maturation of natural gas
hedges in 201X challenged the profitability and operating cash flows of X’s competitive businesses. We also
note your disclosure on page X that four steam generation units representing 1,655 MW of capacity are
currently idled. Please explain to us the economic circumstances that caused them to be idled and whether
there are any plans to resume generation. In this regard, tell us whether you evaluated any of your
generation plants, and specifically idled natural gas fueled generation plants, for impairment during 201X.
Please summarize the results of any evaluations performed, including why no impairment was necessary. If
you did not evaluate them for impairment, please tell us how you considered the factors above in your
decision.
3. Please disclose whether any of your reporting units are at risk of failing step 1 of the impairment test. If any
of your reporting units are at risk of failing step one of the impairment test, please disclose: (a)The
percentage by which fair value exceeded carrying value as of the date of the most recent test; (b)The amount
of goodwill allocated to the reporting unit; (c)A description of the methods and key assumptions used and
how the key assumptions were determined; (d) A discussion of the degree of uncertainty associated with the
key assumptions, including specifics to the extent possible; and (e) A description of potential events and/or
changes in circumstances that could reasonably be expected to negatively affect the key assumptions.
4. We note various disclosures throughout the document regarding the challenges you have faced in your gas
storage business due to less expensive and more stable gas prices in recent periods as well as your disclosure
that the market outlook for gas storage in 201X remains challenging, especially at your California facility
where certain multi-year contracts are expiring. We also note the losses incurred in your natural gas
operations during the second quarter of fiscal year 201X due to having re-contracted certain expiring storage
capacity for the 201X gas storage year at lower prices due to the current market environment. In light of the
preceding, please expand your disclosures here and in Form 10-Q, as applicable, to discuss if any
impairment testing of your gas storage facilities/assets has been conducted during the fiscal year ended
December 31, 201X or in the six months ended June 30, 201X, and if so, the results of the testing indicating
the factors considered and assumptions made in concluding no adjustments to the assets were necessary.
For example, you should disclose the timing and extent of any assumed recovery of the gas storage market as
well as your consideration of the currently low and stable forward gas price curves. We believe disclosures
should be sufficient to allow readers to ascertain the likelihood of material impairment charges in the
upcoming periods; thus, please also disclose the sensitivity of the impairment tests to changes in
assumptions.
19
Acquisition accounting
Mergers and acquisitions activity has escalated
in recent years in the power and utility sector and
as a result, the SEC staff continues to comment
on various aspects of acquisition accounting and
disclosure. Acquisition-related accounting and
disclosure requirements can be complex, and
will vary based on the structure of the transaction
and the nature of the assets acquired and liabilities
assumed. ASC 805, Business Combinations, requires
extensive disclosures to enable users to evaluate the
nature and financial effects of a business combination.
Companies should carefully consider the applicable
disclosure requirements, both in the period of the
acquisition and in subsequent periods.
A business combination that involves a regulated utility
has certain unique issues as a result of the impact of
regulation, including measuring the fair value of assets
and liabilities arising from, or subject to, regulation
and determining when regulatory offset of fair value
adjustments is appropriate. SEC staff comments in this
area have focused on general acquisition accounting
matters and the regulatory accounting considerations
related to the transaction, including:

Purchase price allocations, including questions
about how fair value was determined and the
key assumptions used

The reasons for significant adjustments to the
initial purchase price allocation and why such
information was not available at an earlier date

Additional information about the qualitative
factors that resulted in significant goodwill

How goodwill was allocated to reporting units
and the interplay with the company’s operating
segments disclosures

How the company evaluated whether the
transaction was the purchase of assets or
a business

Requirements to provide the audited financial
statements of the acquired entity pursuant to
S-X Rule 3-05
Of the power and utilities reporting
entities in our survey, 29% disclosed
some level of acquisition related
activity.
20
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Acquisition accounting
The SEC staff has also questioned the omission of pro forma financial information required by ASC 805-10-50-2.
Sample comments received by power and utilities registrants
1.
Please tell us the qualitative factors that make up the goodwill you recognized during the periods presented,
and how you complied with the disclosure requirements of ASC 805-30-50-1(a)
2. Please explain to us why the pro forma results of operations do not include the (X) transactions. Reference is
made to ASC 805-10-50-3.
3. Tell us and disclose in future filings, the valuation technique(s) and significant inputs used to measure the
fair value of the (X) non-controlling interest of $121 million. Refer to paragraph ASC 805-20-50-1e.2.
4. Please tell us how you determined that it was not necessary to provide audited financial statements of (X) in
accordance with Rule 3-05 of Regulation S-X. Please provide us with your calculations pursuant to
Rule 3-05(b)(2) and Rule 1-02(w) of Regulation S-X.
In addition to comments directed at the disclosures in Form 10-K and Form 10-Q, the SEC staff has also
commented on compliance with the requirements to present proforma financial information related to significant
business combinations in accordance with Article 11 of Regulation S-X in Form 8-K and certain registration
statements. The Article 11 proformas are in addition to the proforma information required by ASC 805. The
calculation and presentation of proformas under Article 11 and ASC 805 will differ in many respects.
21
Regulatory
Regulated utilities continue to focus on fair and
timely cost recovery and return on their investments.
Effective disclosures around regulation provide
readers with a comprehensive understanding of the
current regulatory environments, rate structures, and
recovery mechanisms that result in the recognition of
regulatory assets and liabilities.
Regulatory accounting and related disclosures
continues to be an area of SEC staff scrutiny due to
continually evolving regulatory constructs and the
accounting judgment required. Key focus areas
have included:

Support for deferral of regulatory assets
The SEC staff continues to request
clarification of the nature of costs incurred
and the related regulatory treatment,
including whether rate plans provide for
specific recovery of costs, and if not, the basis
for management’s assertion that the amounts
are probable of recovery.

More information around rate plans
The SEC staff has asked questions to better
understand specific elements of rate plans if
the disclosure provided is not clear.

Regulatory lag
Staff is also focusing on the impact
of regulatory lag on results from operations.
They are asking companies to better explain
how the timing of recovery of regulatory
items could impact future results.

Enhanced disclosure
The SEC continues to question whether the
appropriate disclosure of the remaining
recovery period for assets not earning a
return has been provided in accordance
with ASC 980-340-50.
Sample comments received by power and utilities registrants
1.
Please clarify both the impact and consequences of the "significant" regulatory lag experienced by your utility
subsidiaries, including, if applicable, quantification of the impact of such lag on your business and revenue.
Please also explain the "alternative ratemaking mechanisms" your utility subsidiaries are currently pursuing,
as well as clearly disclose the current impact on your business and revenue of any actions by your utility
subsidiaries to minimize regulatory lag.
2. Explain to us how you reached the conclusion that the deferred coal and corporate headquarters
consolidation costs were probable of recovery. Tell us whether you have a rate order or otherwise explain to
us what evidence you considered in reaching the conclusion that such regulatory assets are probable of
recovery.
3. We note your disclosure that any impairment loss would be recorded as a regulatory asset until regulatory
review regarding recoverability through the rate-making process is complete, at which time you will
recognize a loss if it is determined to be unrecoverable or retain as a regulatory asset and recover through
rates. Please explain this policy to us in more detail; providing an illustrative example of how regulated rates
that cover your costs would result in an impairment would improve our understanding of this matter. Please
also explain to us how this policy is consistent with regulatory accounting under ASC 980. Please also tell us
if you have ever incurred a long-lived impairment loss and whether you recorded it as a regulatory asset or in
the income statement, including the amounts and periods in which it was recorded.
22
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Financial statement presentation
and disclosure
This section discusses SEC staff comments on
financial statement presentation and disclosure.
The SEC staff has continued to focus on compliance
with US GAAP and SEC rules and has issued
comments when financial statement presentation or
disclosures do not comply with these rules. SEC staff
focus areas include:

Income Statement Presentation
In recent comment letters, the SEC staff has
requested that companies quantify certain
categories of revenue. They have also asked
about management’s consideration of
separately disclosing revenues and cost of
revenue pursuant to rules 5-03(b)(1) and
(b)(2). SEC Rule S-X 5-03(1), which require
separate presentation in the income statement
revenues relating to tangible products,
operating revenues of public utilities, income
from rentals, revenue from services and other
revenues if they exceed 10% of total revenue.
The cost and expenses related to each revenue
category must also be reflected separately in
the income statement.
Additionally, for public utilities using a
uniform system of accounts or a form of
annual report prescribed by a federal or
state authority, these rules require disclosure
of operating revenue and expenses in the
income statement consistent with such reports.
Figure 11 highlights the percentage of power
and utilities entities surveyed with multiple
revenue streams that disclose the categories
of revenue on the face of the income statement.
Figure 11: Revenue presentation by category
41%
59%
Yes

No
Statement of cash flows
Cash flow errors continue to be a leading cause
of restatement and revisions. The SEC staff has
recently commented that while the total
number of restatements over the past five years
has been relatively consistent, restatements
due to error in the statement of cash flows
continue to increase year over year. As a result,
the SEC staff has continued to question the
classification of certain amounts in the
statement of cash flows and how those
amounts reconcile to other disclosures in the
Form 10-K and Form 10-Q. Common
comments relate to the presentation of
significant and/or unusual and non-recurring
transactions, and the disclosure of noncash
investing and financing activities. Given the
capital intensive nature of power and utilities
companies, there has been focus on ensuring
amounts reflected in accounts payable related
to capital asset purchases that have not yet
been paid for, are not reflected as capital
expenditures on the cash flow statement.
23
Financial statement presentation and disclosure

Accounting policies
A company’s accounting policies are critical to
facilitate a user’s ability to understand and
compare operating results with other reporting
entities. In accordance with ASC 235, Notes to
Financial Statements, companies are required
to describe all significant accounting policies in
the financial statements, including principles
and methods specific to the industry in which
the entity operates, even if such principles and
methods are predominately followed in that
industry. For example, the SEC staff comment
letters have focused on the clarifying the
company’s accounting principles in areas such
as accounting for emission allowances,
renewable energy credits, and capitalization
of project development costs, each of
which is generally unique to power and
utility companies.
These accounting policy disclosures are in
addition to the required SAB 74 disclosures.
SAB 74 requires disclosing the impact recently
issued accounting standard will have on the
financial statements of the registrant when
adopted in future periods.

Earnings Per Share
The SEC staff has questioned if certain
securities that entitle the recipients to
dividends qualify as participating securities
and if the registrants considered the two-class
method in computing EPS in accordance with
ASC 260. A participating security is a security
that may participate in undistributed earnings
with common stock, whether the participation
is conditioned upon the occurrence of a
specified event or not. ASC 260 requires
securities meeting the definition of a
participating security, irrespective of whether
the securities are convertible, non-convertible,
or potential common stock securities, be
included in the computation of basic EPS using
the two–class method.
Sample comments received by power and utilities registrants
1.
Please quantify, on an absolute dollar basis, the revenue generated from sales of products, sales of services
and other sales within your non-regulated businesses. Additionally, please tell us what consideration you
gave to separately disclosing revenues and cost of revenues for products, services and other pursuant to
Rules 5-03(b)(1) and (2) of Regulation S-X for your non-regulated businesses.
2. We note that you record REC’s as inventory at cost and that you either purchase them or acquire them in the
course of generation. Please address the following comments pertaining to your RECs: • Quantify for us the
impact of REC’s on your consolidated financial statements for each year presented. • Clarify for us how you
differentiate the sales of REC’s reflected in revenues on a gross basis from the sales of REC’s for “trading
purposes” reflected on a net basis. In other words, explain to us how you distinguish a “trading” REC from a
“non-trading” REC.
3. We note that you record the sale of emission allowances on a net basis within operating revenues. Please
provide us with a comprehensive discussion of your emission allowance accounting policy, including how
you record them when earned and/or acquired. If you both purchase emissions allowances and receive them
free of charge, please tell us how you determine the cost netted within revenues. Also, quantify for us the
amount of emission allowance revenue recorded within the periods presented in your filing.
4. Please tell us where in the statement of cash flow you classify borrowed and equity funds used during
construction and disclose the amount, if material.
5. We note that non- performance-based restricted awards under the Restricted Stock Plan entitle the
recipients to dividends. Please tell us if these awards qualify as participating securities as defined in ASC
260-10-20. If so, please tell us what consideration you gave to presenting earnings per share under the twoclass method. Please refer to ASC 260-10-45-60B.
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Financial statement presentation and disclosure
Combined periodic reporting
To add to the complexity of financial reporting, many
power and utilities entities have multiple registrants,
as noted in Figure 13. Multiple registrants are more
prevalent in the power and utilities industry as it is
common for operating subsidiaries to issue SEC
registered debt, thereby making these subsidiaries
SEC registrants. As permitted by SEC rules, more
than 80% of those reporting entities with multiple
registrants included in one filing provide combined
financial statements, as noted in Figure 12.
Registrants should be mindful to ensure all required
disclosures are provided for each respective
registrant included in the filing.
Figure 12: Financial statement notes
19%
81%
Separate
Combined
Figure 13: Multiple registrants
Number of registrants
5 or more Registrants
10%
4 Registrants
1%
3 Registrants
9%
2 Registrants
25%
0%
10%
20%
30%
2 Registrants
3 Registrants
4 Registrants
5 or more Registrants
25
Compensation and incentive plans
In July 2015, the SEC voted three to two to finalize the
rule that would require public companies to calculate
and disclose its CEO compensation as a multiple of or
ratio to the median employee’s pay, which would be
incremental to the executive compensation disclosures
already required by Regulation S-K. The rule has been
designed to provide flexibility by permitting reporting
entities to use statistical sampling to identify the
median employee and certain other computational
flexibility. In addition to this final rule, the SEC has also
issued two proposals relating to the clawback provision
and pay vs. performance. The proposed disclosures
around pay vs. performance would provide additional
details around executive compensation. The proposed
clawback provision would provide a mechanism to
recover executive compensation if an error was
discovered. The amount of pay which would be clawed
back would be computed as the amount which would
have been received absent the error less the amount
actually received. There could be significant
complexity in this calculation, especially when
executive compensation includes elements of
market measures, including total shareholder
return (TSR) and share price.
SEC staff comments related to executive compensation
and stock compensation disclosures have focused on:

Disclosure of how the awards are recorded in
the financial statements (i.e., as liability awards
or equity awards)

Consideration of disclosing the terms of the
modification made to stock option awards

Disclosure of the aggregate intrinsic values for
your performance units and restricted stock
awards which are expected to vest

Factors related to changes in executive
compensation plans
In addition, the SEC staff has also focused on the
completeness of the stock based compensation
disclosures. The presentation and disclosure
guidance for stock based compensation is addressed
in ASC 718-10-50. Reporting entities should carefully
consider all of the disclosure guidance related to stock
based compensation.
In addition to executive compensation disclosures
required by Regulation S-K, reporting entities are
required to include share-based payment disclosures in
the footnotes to the financial statements as required by
US GAAP.
Sample comments received by power and utilities registrants
1.
We note your disclosure regarding performance shares and restricted stock. Please revise to ensure all of
the requirements of ASC 718-10-50 are met, such as the fair value measurement disclosures required by
ASC 718-10-50-1(c) and 718-10-50-2(f), or tell us why you believe you have met the disclosure requirements.
2. Please tell us your basis for applying a 25% discount to the fair value of your common stock to estimate
the fair value of restricted shares issued to directors, and why the 25% discount is considered reasonable
under the circumstances. In doing so, please tell us your consideration of ASC 718-10-55-5 which states
that, “if shares are traded in an active market, post-vesting restrictions may have little, if any, effect on
the amount at which the shares being valued would be exchanged.” In addition, please tell us whether
restricted shareholders are entitled to dividends, and if not, how the lack of dividend rights is considered in
your valuation of restricted shares.
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Dividends and restricted net assets
Registrants are required by SEC rules to file certain
supplementary financial statement schedules unless
(1) the information is already disclosed in the financial
statement footnotes or (2) the schedules are not
applicable or not specifically required by the form
being filed. The condensed financial information of
a registrant (Schedule I) is one of the most common
financial statement schedules applicable to power
and utilities registrants.
The SEC staff continues to focus on ensuring that
reporting entities have appropriately considered the
requirement to file Schedule I or disclose restrictions on
the ability to access subsidiary net assets. In the current
year, the SEC staff has placed increased focus on debt
covenants that may impose restrictions on a registrant’s
ability to access subsidiary assets, including debt
compliance ratios (e.g., a current ratio or debt-to-equity
ratio required to be maintained by a subsidiary).
Schedule I is required when a registrant’s
proportionate share of restricted net assets (i.e., net
assets of consolidated subsidiaries which may not be
transferred to the parent in the form of loans, advances,
or cash dividends without the consent of a third party)
exceeds 25 percent of total consolidated net assets.
Additionally, footnote disclosure of the restrictions or
limitations may also be required if at the end of the
most recently completed fiscal year, the registrant’s
proportionate share of restricted net assets of
consolidated subsidiaries exceeds 25 percent of the
total consolidated net assets. Figure 14 highlights the
percentage of power and utilities reporting entities in
our survey that included Schedule I in their Form 10-K.
Registrants that do not present Schedule I still need to
consider if footnote disclosure of the restrictions is
required. This is because different calculations are used
to assess the requirements. Footnote disclosure is
required when restricted net assets of consolidated and
unconsolidated subsidiaries as well as the parent’s
equity in undistributed earnings of 50% or less owned
affiliates exceeds 25 percent of consolidated net assets.
As noted in Figure 15, 72 percent of reporting entities in
our survey disclose net asset restrictions. Management’s
discussion of liquidity in MD&A should also include the
nature and extent of the restrictions and the impact
they have had or are expected to have on the ability of
the parent company to meet its cash obligations.
Figure 14: Parent-only financial statements
Figure 15: Net asset restrictions
55%
45%
49%
54%
51%
46%
28%
72%
2012
2013
Yes
2014
Yes
No
No
27
Dividends and restricted net assets
In preparing Schedule I, registrants should ensure that
the form:


Includes appropriate disclosures. Additional
disclosures that may be necessary include
disclosures of the basis of accounting for the
parent company’s majority-owned subsidiaries
and cash dividends paid to the parent for each
of the last three fiscal years,
Properly classifies items in the statement of
cash flows, including loans between the parent
and subsidiaries and equity-investee income
and dividends,

Presents periods consistent with those
presented by the parent,

Presents comprehensive income in a single
continuous statement or in two separate but
consecutive statements,

Demonstrates form and content consistent with
interim financial statement requirements (i.e.,
in accordance with Article 10 of Regulation
S-X), and

Ensures total equity and net income per
Schedule I equals consolidated net income and
equity attributable to the company.
Sample comments received by power and utilities registrants
1.
We note the significant number of debt agreements maintained by your wholly-owned subsidiaries along
with your disclosure that you are required to comply with certain covenants in connection with the various
long term loan agreements. Please tell us whether there are any subsidiary restrictions for paying cash
dividends. Additionally, please tell us the amount of restricted net assets as defined in Rule 4-08(e)(3) of
Regulation S-X as of the end of most recently completed year and how you compute the amount. In addition,
if the restricted net assets exceed 25 percent of your consolidated net assets, please provide the disclosures
required by paragraphs 3(i) and (ii) of Rule 4- 08(e) of Regulation S-X and Schedule I prescribed by Rule 1204 of Regulation S-X as required by Rule 5-04 of Regulation S-X.
2. We note the dividends you receive from your subsidiaries are subject to various restrictions. Please tell us
whether any other restrictions exist, such as regulatory agency, government, etc., and what consideration
you gave to providing condensed financial information of the registrant as set forth in Rules 4-08 and 12-04
of Regulation S-X. Include in your response the amount and percentage of your net assets that are restricted
as of December 31, 20x1.
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Segment reporting
The SEC staff continue to highlight the importance of
accurate segment footnotes within public filings.
Historically an area of focus among the SEC staff,
segment reporting gained further prominence as a
result of observations made by an SEC staff member at
the 2014 AICPA National Conference on Current SEC
and PCAOB Developments. Specifically, the staff
announced its plans to refresh its approach to reviewing
segment disclosures. Wesley Bricker, the SEC Deputy
Chief Accountant also made remarks publically in
November 2015 noting that segments continue to be a
focus area for the SEC, especially reviewing entities who
present only one reportable segment.
In addition to the areas of focus indicated in last year’s
comment letters, registrants should be prepared for the
possibility of new trends emerging in the near future
based on the staff’s reconsideration of segment
disclosures. Future comment letters might challenge:

The identification of the Chief Operating Decision
Maker (“CODM”)

Relying too heavily on the CODM reporting
package to identify operating segments (i.e.,
registrants should also consider the basis on
which budgets and forecasts are prepared, the
basis on which executive compensation is
determined, and the overall
organizational/management structure).

Companies who only show one reportable
segment (including a review of operational
content and materials used by the business)
Currently, the most frequent SEC staff comments
related to segments relate to the proper identification of
operating segments and the aggregation of operating
segments into reportable segments. The SEC staff
routinely requests documentation supporting the
registrant’s identification of operating segments.
Registrants are often asked to provide copies of the
CODM reporting package to allow the SEC staff to
consider whether the information is consistent with the
registrant’s identification of its segments. However, the
CODM package should not be the only information
considered when identifying operating segments.
Registrants should understand the staff continues to
review publicly available information, such as
earnings calls, press releases, investor presentations,
and registrant websites, to ensure a company’s
description and organization is aligned across all
public information.
Segment disclosures are often described as the
unit of valuation by an analyst and arguably
one of the most important disclosures in the
financial statements.
Dan Murdock, 2014 AICPA conference
We have also seen a trend in recent comment letters
relating to the entity-wide disclosures required under
ASC 280-10-50-40 as the SEC staff believes these are
often overlooked in company filings. This guidance
requires certain entity-wide disclosures, which include
information about a reporting entity’s products and
services, geographic areas, and major customers. In
some cases, these requirements may already be met
through other disclosures in the standard. ASC 280
requires these entity-wide disclosures even if this
information is not reviewed by the CODM, and even if
the reporting entity operates in only one segment. As
the staff continues to highlight the importance of these
disclosures, registrants may receive comments if they
have omitted the disclosure of revenue by product or
service, by groups of similar products or services, or by
geography. These questions are usually based on the
way management describes the registrant’s business or
discusses the results of operations in MD&A. The SEC
staff will frequently challenge registrants that assert
that providing such disclosures is impracticable,
especially in filings in which the description of the
company’s business outside of the financial statements
(e.g., within MD&A) includes quantification and
discussion of different revenue categories. Finally, it is
worth noting that the entity-wide disclosure of revenue
by product may differ from how revenue is presented in
segments organized by product.
29
Segment reporting
The SEC staff routinely issues comments related to a
registrant’s conclusion that its operating segments
satisfy the “economic similarities” criterion for
purposes of aggregation. Information such as analyst
presentations and public filings are often used by the
staff when considering the appropriateness of
aggregation. Comment letters frequently request
additional information from registrants, such as
historical/projected gross and operating margins, to
support the assertion that aggregated operating
segments exhibit similar long-term financial
performance. In addition, demonstrating similar longterm performance is not in and of itself sufficient to
support the appropriateness of aggregation. All of the
qualitative criteria outlined in ASC 280 should be
considered, including (1) the nature of a registrant’s
products and services and (2) the type or class of
customer for those services. Registrants are reminded
that the aggregation criteria are meant to set a high
hurdle to overcome.
Registrants that have an acquisition or make changes to
the structure of the company should consider whether
there is an impact on their segments. When changes in
reportable segments occur, ASC 280-10-50-34 requires
that the comparable periods be recast, unless it is
impracticable to do so.
The FASB and SEC have both suggested that the
segment reporting standard may warrant updating
given changes in technology and how information can
be accessed and used. Until and unless changes are
made, registrants should assess their segments based
on the existing standard, and continually reassess their
segment conclusions, especially when there is a
change in the registrant’s business and management
reporting structure.
Sample comments received by power and utilities registrants
1.
We note that the regulated utilities generate revenues from the sale of electricity, distribution of gas and
electricity, transmission of electricity and riders to recover costs incurred for regulatory programs and
uncollectible accounts, among other sources. We also note that Generation generates revenues from gas and
oil exploration and production activities, retail and wholesale electricity and gas sales, distributed
generation, heating, cooling and cogeneration facilities, home improvements, sales of appliances and
servicing of heating, air conditioning, plumbing, electrical and indoor quality systems. Please provide us with
a summary of revenues from external customers for each product and service for each registrant. In addition,
please tell us why you did not provide the disclosures in ASC 280-10-50-40
2. Please tell us what consideration you gave to disclosing the factors used to identify reportable segments,
including the basis of organization. Please refer to ASC 280-10-50-21a.
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Segment reporting
See Figure 16 and Figure 17 which summarize the number of segments and the basis for segment determination for
power and utilities reporting entities
Figure 16: Number of segments
4%
3%
7 or more segments
7%
6 segments
6%
11%
5 segments
4 segments
10%
13%
12%
28%
3 segments
30%
21%
20%
2 segments
17%
18%
1 segment
0%
2014
5%
10%
15%
20%
25%
30%
35%
2013
Figure 17: Basis of segments
4%
Regulated by jurisdiction
3%
4%
6%
Regulated by entity
8%
10%
Geography
20%
22%
T&D/Generation
34%
Gas/Electric
35%
45%
Regulated
49%
75%
Non-regulated and other
72%
0%
2013
10%
20%
30%
40%
50%
60%
70%
80%
2014
31
About PwC Power & Utilities practice
Drawing on the talents of more than 4,000 people
worldwide assigned full time to the power and utilities
sector, PwC provides a full range of accounting and
business advisory services to leading power and utility
reporting entities. Our professionals specialize in
accounting and auditing, rate regulation, financial risk
management, revenue assurance, taxation, transaction
services, environmental regulation, Sarbanes-Oxley
compliance, and other areas.
PwC US helps organizations and individuals create the
value they’re looking for. We’re a member of the PwC
network of firms in 157 countries with more than
208,000 people.
Gain customized access to our insights by downloading
our thought leadership app: PwC’s 365™ Advancing
business thinking every day.
For more information about the Power and Utilities
Industry Group or PwC, please contact:
Casey Herman
US Power and Utilities Leader
[email protected]
(312) 298 4462
Robert Keehan
US Power and Utilities Assurance Leader
[email protected]
(973) 236 5733
Acknowledgements
This publication represents the efforts and ideas of
many individuals within PwC, including members of the
US Power and Utilities sector and the National
Professional Services Group. The following PwC
personnel contributed to the contents or served as
technical reviewers of this publication:
David Humphreys
US Power and Utilities Accounting Technical Leader
[email protected]
(617) 530-7332
Jason Crouch
National Professional Services Partner
[email protected]
(973) 236 7877
Sean Riley
National Professional Services Partner
[email protected]
(973) 236 7764
Vidiya TR
National Professional Services Senior Manager
[email protected]
(973) 236 7853
Kate Sturgess
National Professional Services Senior Manager
[email protected]
(973) 236 5519
Visit our website at:
www.pwc.com/us/utilities
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