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 una...
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