Message-ID: <3302560.1075842429009.JavaMail.evans@thyme> Date: Thu, 11 May 2000 02:59:00 -0700 (PDT) From: drew.fossum@enron.com To: susan.scott@enron.com Subject: Re: TW Proposal for Fuel Retention in Dollars (not in-kind) -- Draft Accounting Memo Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: Drew Fossum X-To: Susan Scott X-cc: X-bcc: X-Folder: \Drew_Fossum_Dec2000_June2001_1\Notes Folders\All documents X-Origin: FOSSUM-D X-FileName: dfossum.nsf What a tangled mess. please call and splain what's going on here. Thanks. DF ---------------------- Forwarded by Drew Fossum/ET&S/Enron on 05/11/2000 09:57 AM --------------------------- From: Bob Chandler 05/10/2000 10:33 AM To: Susan Scott/ET&S/Enron@ENRON cc: Rod Hayslett/FGT/Enron@Enron, Dan Fancler/ET&S/Enron@Enron, Drew Fossum/ET&S/Enron@ENRON, Mary Kay Miller/ET&S/Enron@ENRON Subject: Re: TW Proposal for Fuel Retention in Dollars (not in-kind) -- Draft Accounting Memo Please note that if TW eventually decides to file for a tariff change to allow cash in lieu of in-kind fuel retention that Rod would like to see our proposed accounting methodology included in the filing. ---------------------- Forwarded by Bob Chandler/ET&S/Enron on 05/10/2000 10:26 AM --------------------------- Rod Hayslett 05/10/2000 10:25 AM To: Bob Chandler/ET&S/Enron@ENRON cc: Subject: Re: TW Proposal for Fuel Retention in Dollars (not in-kind) -- Draft Accounting Memo If FERC is going to tell us the accounting or specifically approve our proposed accounting then I have no issues. I do not want to have a tariff change with our interpretation of accounting requirements for it, without that specific approval. So I guess we need to specifically ask for approval of the accounting. From: Bob Chandler 05/10/2000 09:32 AM To: Rod Hayslett/FGT/Enron@Enron cc: Subject: Re: TW Proposal for Fuel Retention in Dollars (not in-kind) -- Draft Accounting Memo See responses below. Rod Hayslett 05/10/2000 06:38 AM To: Bob Chandler/ET&S/Enron@ENRON cc: Subject: Re: TW Proposal for Fuel Retention in Dollars (not in-kind) -- Draft Accounting Memo Some simple questions? As I indicated this morning, it's not that I "want" to classify these credits as revenues in order to achieve any commercial, regulatory, overhead allocation or tax objectives, but if all other factors are considered equal believe that revenue treatment is the most appropriate decision from both GAAP and FERC USofA standpoints. FERC USofA In the "Shipper Supplied Gas" section of Order 581 the Commission concluded that "it is not appropriate to mandate revenue recognition for gas provided by shippers for compressor fuel and other pipeline system use and used to provide transportation services. Instead, each pipeline will have the discretion to determine whether it will recognize revenue for these transactions in its accounting records...Pipelines electing to recognize shipper provided gas as revenue must also recognize an equal amount of purchased gas expense. Pipelines would credit the appropriate transportation revenue account (Accounts 489.1 through 489.4) and record an equal amount in Account 805, Other Gas Purchases." We have chosen not to recognize revenue, but we do want to track our transactions, so we debit and credit different subaccounts of acct 805. The over-retained volumes on TW are debited to acct 805 and credited to acct 495 Other Revenues (also in accordance with Order 581. However, for internal reporting we map the 495 credit to cost of transport (expense). Sounds reasonable to me. Will you be able to continue that in SAP? Yes. We'll be using statistical orders in lieu of subaccounts. While the Commission agreed that pipelines would not be required to recognize shipper provided gas on its books, it did require those who chose to do so to record it as transportation revenue, not as a credit to fuel or gas purchase expense. GAAP Revenues. Statement of Financial Accounting Concepts No. 6 defines revenues as inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or purchasing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations. In the TW proposal the cash inflows are the result of a fuel charge factor in the transportation tariff. TW's ongoing major or central operation is the rendering of natural gas transportation services to shippers pursuant to its tariff. Therefore the credits resulting from the assessment of the fuel charge constitute transportation revenues. I don't think there is a limitation with respect to cash received in lieu of gas. When gas is retained we can debit and credit 805 and it's a wash. When we receive cash we have to charge a balance sheet account (Cash) and credit an income statement account. We can't opt out of recording an earnings creating transaction. What is the argument that this cash does not just take the place of Gas you would have received and should track the normal accounting for gas? The cash alone cannot take the place of a retained volume; the cash together with a gas purchase is the volumetric equivalent of a volume retained. Under this proposal we would charge gas purchase expense when the cash is used to buy gas that would replace the volumes not retained in kind. I am concerned that what you are proposing may not work as well after the next rate case (since I don't believe it likely we will be allowed to continue to collect the windfall) and we may be setting ourselves up for restatements. But I guess it really won't matter, because whatever we do FERC will have specifically ordered us to account for it that way, isn't that right? There is nothing about our current or proposed accounting that would have to be changed as the result of a future rate case that changes the volumetric retention factors. However, if a tracker is imposed, then we would have additional entries to make, similar to those we now make on NNG. In any event, the imbalance cashout approach described below would result in the recording of fuel retention entries (debit and credit account 805) exactly the same as we now record for volumes retained. It would merely result in the additional entry to resolve the imbalance by debiting cash and crediting the imbalance receivable from the shipper. Expenses. Statement of Financial Accounting Concepts No. 5 speaks to the recognition of expenses and losses: "Further guidance for recognition of expenses and losses is intended to recognize consumption (using up) of economic benefits...during a period. Expenses...are generally recognized when an entity's economic benefits are used up in delivering or producing goods, rendering service, or other activities that constitute its ongoing major or central operations..." In the TW proposal natural gas volumes are consumed in the operation of compressor engines to render natural gas transportation service to shippers...the ongoing major or central operation of the company. Receiving cash from shippers in accordance with the Tariff's fuel charge does not reduce the consumption of natural gas volumes in rendering transportation service, Instead it provides economic assets (cash) to the company to pay for the gas volumes that have to be acquired to run the compressors. Therefore the proceeds from the fuel charge represent transportation revenues for the company, not a fuel or gas purchase expense reduction. I recently received a memo from Susan Scott (Legal) indicating that in approving tariff changes to allow shippers to pay cash for fuel use rather than to provide in-kind volumes, FERC looks at the situation as being analogous to cashing out an imbalance, where the imbalance was created by the shipper not delivering the fuel retention volumes. If we followed FERC's lead here we would record the fuel retention entries with a debit and credit to Account 805, then credit the cash receipt from the shipper as a reduction of its imbalance. Any gain or loss on the cash-out would be credited to Acct 495 (gain) or charged to Acct 813 (loss), just like any other gain or loss on resolution of an imbalance. I think the cashout approach will probably meet the objective of not bloating reported margins...at least if the tariff language is consistent with this concept. If you prefer this cashout approach to my original proposal to record fee revenue, then I will go ahead and re-draft the accounting memo along those lines. Any final determination of the appropriate accounting, though, would have to be made after the language in the tariff revision is finalized. However, if the cashout approach is your preference, then I expect that we could work with Rates to make sure that the tariff language doesn't conflict with the cashout approach. Shall I re-draft and recirculate the memo using the cashout approach? Rod Hayslett 05/08/2000 06:32 AM To: Bob Chandler/ET&S/Enron@ENRON cc: Subject: Re: TW Proposal for Fuel Retention in Dollars (not in-kind) -- Draft Accounting Memo I guess I'd like to understand the reason for wanting to call them revenue? From: Bob Chandler 05/05/2000 06:04 PM To: Rod Hayslett/FGT/Enron@Enron cc: Subject: Re: TW Proposal for Fuel Retention in Dollars (not in-kind) -- Draft Accounting Memo I don't disagree that there are frequently numerous ways to account for things--and some ways are better than others for tax, regulatory, financing and other purposes. From an historical perspective before Order 636 we didn't seem to have any difficulty recording the proceeds from the PGA tracker portion of the tariff as transportation revenue. Under the proposed circumstances, we are charging a fee based on average fuel retention percentages that are set somewhat higher than actual consumption and there is no requirement for a true-up. In this circumstance, even though we may call it a fuel reimbursement factor, it seems to be more characteristic of revenue than expense credit. That having been said, if it's deemed to be advantageous to the company to account for these cash proceeds as an expense credit, I could support crediting the proceeds to a/c 805 similar to our accounting for volumetric fuel retention. If that's the path you'd like us to follow, I'll amend the draft memo accordingly. Please confirm. Rod Hayslett 05/05/2000 06:58 AM To: Bob Chandler/ET&S/Enron@ENRON cc: Dan Fancler/ET&S/Enron@ENRON Subject: Re: TW Proposal for Fuel Retention in Dollars (not in-kind) -- Draft Accounting Memo My first blush problems are 2. 1) This is really reimbursement for an item that is designated an expense - compressor fuel and so I don't know why you want to show it as revenue. 2) Having a stat order will not help the income statement presentation of revenues, a lower percentage of costs being recovered from demand charges, a major factor if we decide to make TW really stand on its own. What is the reason for wanting to bloat the revenue in the income statement? Explain the logic for showing a revenue item for the contra of an item that has been determined to be an expense. From: Bob Chandler 05/04/2000 04:16 PM To: Rod Hayslett/FGT/Enron@Enron cc: Dan Fancler/ET&S/Enron@ENRON Subject: Re: TW Proposal for Fuel Retention in Dollars (not in-kind) -- Draft Accounting Memo If we go with the transport revenue approach, we would for sure set up a separate SAP statistical order to accumulate the fuel reimbursement fee separately from the other revenue components. If you think this approach is distortive from a reporting trend perspective, we could classify these revenues as "other gas revenues" on our GAAP statements--similar to the way we've classified excess fuel retention revenue in TW's 1999 GAAP statements. Rod Hayslett 05/04/2000 02:41 PM To: Bob Chandler/ET&S/Enron@ENRON cc: Dan Fancler/ET&S/Enron@ENRON Subject: Re: TW Proposal for Fuel Retention in Dollars (not in-kind) -- Draft Accounting Memo I would think at a minimum we would like to have some kind of a tracking account (nojn-FERC) for accounting purposes to be able to tell the earnigs impact of the transactions. I have a problem with recording the revenue in a plain transportation revenue account since it will skew the percentage of transport revenues collected from demand charges which is an important piece for the financial world. Ultimately I guess FERC will tell us how to account for it. From: Bob Chandler 05/04/2000 12:55 PM To: Mary Kay Miller/ET&S/Enron@ENRON, Steven Harris/ET&S/Enron@ENRON, Lorraine Lindberg/ET&S/Enron@ENRON, Susan Scott/ET&S/Enron@ENRON, Glen Hass/ET&S/Enron@ENRON cc: Steve Klimesh/ET&S/Enron@ENRON, Dan Fancler/ET&S/Enron@Enron, Rod Hayslett/FGT/Enron@Enron, Jerry Thomas Moore/Corp/Enron@ENRON Subject: TW Proposal for Fuel Retention in Dollars (not in-kind) -- Draft Accounting Memo From what we have so far been able to learn about the referenced proposal, and after discussions with Dan Fancler, I prepared the attached draft of an accounting memorandum for your consideration. Please advise if you have additional facts or ideas to be considered. By copy of this memo I'm asking Jerry Moore for excise tax advice as to whether TW would risk incurring excise tax if we record gas sales to the shippers and then retain the volumes for fuel.