FERC Proposes Quarterly Financial Reports and Seeks Further Comment on Cash Management Issues

On June 26, the Federal Energy Regulatory Commission (FERC) issued a notice of proposed rulemaking to establish quarterly financial reporting requirements for electric utilities, natural gas companies, and oil pipeline companies currently filing annual reports with the agency. Although much of the data sought in the proposed quarterly reports is now reported to FERC on an annual basis, FERC would require for the first time a narrative discussion by management explaining the company’s financial statements and assessing the probable impact of current and future events on the operations of the company. According to FERC, the proposed rule “will allow the Commission, as well as customers, investors, and others, to identify and evaluate financial trends and emerging issues facing the energy industry.”

On the same date, FERC issued an interim rule establishing documentation requirements for cash management programs. FERC is seeking comment on proposals to require Commission-regulated entities to file agreements related to their cash management programs with the Commission, and to require these entities to notify the Commission when their proprietary capital ratios drop below 30 percent.

Proposed Quarterly Reporting Requirements

The proposed quarterly reporting requirements would apply to entities that are subject to FERC’s Uniform System of Accounts and are required to file FERC annual report Forms 1 or 1-F (electric utilities), 2 or 2-A (natural gas companies), or 6 (oil pipelines). Note that independent and affiliated power marketers and power producers typically have waivers from these annual reporting requirements, as do gas marketers. However, FERC is considering (in another proceeding) whether to continue these waivers. On a quarterly basis, covered entities would be required to file:

• Financial Statements – These would include comparative balance sheet, statement of income and retained earnings, statement of cash flows, and statement of other comprehensive income and hedging activities. These statements must compare the current quarter with the same quarter of the prior year.
• Management’s Discussion and Analysis of Financial Condition and Results of Operation (MD&A) – The MD&A would include a “description of events where there is a known trend or uncertainty that is reasonably likely to have a material effect on a jurisdictional company’s operations.” The MD&A would be similar in content to an MD&A filed with the Securities and Exchange Commission (SEC) for consolidated operations, but would be for only the jurisdictional entity.
• Corporate Officer’s Certification Statement – In this statement, the principal executive officer, principal financial officer, and persons performing similar functions certify that “each officer has reviewed the quarterly report form and the quarterly report does not contain any untrue statement of material fact, is not misleading, and fairly represents the financial condition of the company.” Each officer would also be required to certify that they are responsible for establishing and maintaining disclosure controls and procedures to ensure that they are informed of all material information.

The proposed rule would not require that quarterly reports be reviewed by a certified public accountant (CPA). If, however, a company chooses to have its quarterly report reviewed by a CPA, then that company would be required to submit the CPA review letter along with the quarterly report to the Commission.

Quarterly reports would initially be due 45 days after the close of the quarter. After a transition period, however, they would be due 35 days after the end of the quarter.

The proposed rule would also revise the annual reporting requirements by directing companies to include information required for quarterly reports, as described above, for the fourth quarter. A new schedule would be added to Forms 1 and 1-F to collect information on ancillary services purchased and sold during the year. Annual reports would be due on March 1, after a transition period.  

Interim Rule on Cash Management

FERC’s cash management rulemaking, initiated in August 2002, was triggered by revelations about interaffiliate cash management arrangements among Enron’s regulated and unregulated affiliates.

The interim rule on cash management applies to all FERC-regulated entities, including utility subsidiaries of registered holding companies regulated by the SEC, but does not apply to those entities that have been granted waivers of FERC’s accounting and annual reporting requirements. It requires covered entities to maintain documentation of all deposits into and borrowings from cash management programs, including documentation of daily balances and security for repayment of deposits or in support of borrowings. It also requires documentation of the organization and operation of the cash management program, including documentation of the duties and responsibilities of program administrators and participants.

Moreover, FERC is seeking comment on whether to require (1) the filing of cash management agreements with FERC; and (2) notice to FERC if the entity’s proprietary capital ratio falls below 30 percent or rises above 30 percent.