SUBJECT:
CPS Energy's Debt Issuance Costs in relation to Governmental Accounting Standard Number 65
SUMMARY:
This is a request for concurrence to continue the practice of capitalizing CPS Energy's debt issuance costs and then amortizing them over the life of the corresponding debt. This request also includes concurrence of CPS Energy's newly recommended practice to rename and treat these unamortized existing and future costs as regulatory assets. There will be no incremental rate increase requirement in conjunction with this action.
BACKGROUND INFORMATION:
In March 2012, the Governmental Accounting Standards Board (GASB) issued Statement No. 65 ("GASB 65"), Items Previously Reported as Assets and Liabilities, providing new guidance for accounting and reporting of certain financial elements that were previously considered assets and/or liabilities, including, particular to this action, debt issuance costs. This statement became applicable to CPS Energy at the beginning of its current fiscal year (ending January 31, 2014). GASB 65 requires that debt issuance costs be recognized as an expense in the period incurred. This treatment would be a significant change from CPS' current practice of amortizing debt issuance costs over the life of the related debt. CPS Energy's existing rates include recovery of debt service amounts, a portion of which is debt issuance costs.
As an example of current accounting treatment of debt issuance costs and the change required by GASB 65, in July 2013, CPS issued $375 million of debt. Related to that issuance, $2.6 million in debt issuance costs were incurred. The current accounting treatment of those issuance costs would be amortization over the life of the debt issued (average 31 years), resulting in an expense of approximately $84 thousand per year. The treatment required by GASB 65 would result in the full $2.6 million being charged to expense as incurred in the current fiscal year. The total of unamortized debt issuance costs on CPS Energy's books at January 31, 2013, was $29 million.
The City establishes rates for CPS Energy that are designed to recover the costs of providing services. The City has covenanted in bond resolutions that CPS will charge rates sufficient to cover costs and maintain certain debt service coverage ratios.
As a result, CPS qualifies for the application of regulatory accounting as provided in GASB Statement No. 62 ("GASB 62"), paragraphs 476-500. GASB 62 allows regulated entities to defer costs and create regulatory assets, provided that it is probable that future revenue in an amount at least equal to the capitalized cost will result from inclusion of that cost in allowable costs for rate-making purposes.
Including the recent rate request review process that concluded in November of 2013, CPS Energy has historically and consistently included these costs in rate cases and amortized the amount over the corresponding life of the debt.
To create a regulatory asset, a regulated entity must have the approval of its regulator. Based on the applicability of GASB 65, beginning in CPS' current fiscal year, CPS considers it preferable and appropriate to record existing and future debt issuance costs as regulatory assets, pursuant to GASB 62. Debt issuance costs previously incurred and remaining unamortized at the beginning of the current fiscal year totaling approximately $29 million, as well as debt issuance costs to be incurred in future periods will thus not be expensed currently, but continue to be amortized over the life of the related debt. The effect of this accounting treatment on rates is as follows:
• There will be no incremental rate increase requirement in conjunction with this action.
• Costs associated with the issuance of debt are already included in the financing strategy that is shared with CPS' Board and the City of San Antonio City Council on a periodic basis. This action is not recommended as a consequence of additional costs incurred/to be incurred by CPS Energy.
• Establishing a regulatory asset and using regulatory accounting for debt issuance costs allows for the continuation of the existing practice of recognizing expense for these issuance costs over the life of the debt and the assets financed with the debt, maintaining for the community affordability and an equitable match of cost to benefit on a year-by-year basis.
The continuation of the CPS Energy current practice of capitalizing debt costs is also consistent with practices used by other regulated utilities.
ISSUE:
GASB 65 requires that debt issuance costs be recognized as expense in the period incurred. Establishing a regulatory asset and using regulatory accounting for debt issuance costs allows for the continuation of the existing practice of recognizing expense for these issuance costs over the life of the debt. This is a request for concurrence to continue the practice of capitalizing CPS Energy's debt issuance costs and then amortizing them over the life of the corresponding debt. This request also includes concurrence of CPS Energy's newly recommended practice to rename and treat these unamortized existing and future costs as regulatory assets. There will be no incremental rate increase requirement in conjunction with this action.
ALTERNATIVES:
The City Council could choose not to approve the proposed Ordinance authorizing the continuation of the CPS Energy current practice of capitalizing debt costs. However, this treatment would be a significant change from the Company's current practice of amortizing debt issuance costs over the life of the related debt.
FISCAL IMPACT:
This item will have no fiscal impact to the City.