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15.2 Accounting for joint plant
Publication date: 30 Apr 2023
us Utilities guide
In the power and utilities industry, it is established practice that joint plant is accounted for using proportionate consolidation. SAB Topic 10.C, Jointly Owned Electric Utility Plants, codified in ASC 980-360-S99-1, discusses the accounting for typical utility joint plant arrangements and requires certain related disclosures (see UP 15.5). In general, utilities have followed proportionate consolidation for joint plant based on historical industry practice and reference to SAB Topic 10.C, as well as consideration of the guidance on undivided interests in ASC 970-810-45-1 and in an AICPA Issues Paper, Joint Venture Accounting. General information on proportionate consolidation is included in CG 8.4.
In evaluating whether proportionate consolidation accounting is appropriate for a new joint plant arrangement, reporting entities should consider the description of joint plant arrangements in SAB Topic 10.C as well as the guidance on accounting for undivided interests in ASC 970-810-45-1. Figure UP 15-1 highlights the key considerations in evaluating the criteria to apply proportionate consolidation to undivided interests in joint plant. Reference is given to the section in this chapter where the specific criterion is discussed further.
Figure UP 15-1
Evaluating the application of proportionate consolidation to joint plant arrangements
Evaluating the application of proportionate consolidation to joint plant arrangements
ASC 970-810-45-1 criteria |
Key considerations |
Ownership is in the form of undivided interests in the underlying assets (UP 15.2.1)
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Each owner is be able to independently approve decisions on financing, development, sale, or operations of its undivided interest without approval by other owners (UP 15.2.2)
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Each investor is only entitled to its pro rata share of income and responsible to pay only its pro rata share of expenses from the joint operations (UP 15.2.3)
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Each investor is severally liable only for debts or liabilities that it incurs in connection with its undivided interest (UP 15.2.4)
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15.2.1 Ownership of the plant by undivided interests
The first criterion requires that the investors in the plant or other utility assets own undivided interests in the underlying assets.
Each owner should have title to its undivided interest in the property as tenant in common with the other owners. An undivided interest is an ownership arrangement in which two or more parties jointly own property, and title is held individually to the extent of each party’s interest. To meet this criterion, ownership through undivided interests should be specified in the operating agreement and other related legal agreements.
If the plant or other utility assets are held in a separate legal entity (e.g., limited liability company, limited partnership, or other special purpose entity), the owners typically do not have undivided interests in the underlying assets, but rather hold debt or equity interests in a legal entity. In such cases, the arrangement would not qualify for application of proportionate consolidation accounting. See UP 9 for information on accounting for investments in power plant entities.
15.2.2 Approvals by owners
The second criterion addresses how decisions are made regarding the financing, development, sale, or operations of the property.
The approval of two or more of the owners is not required for decisions regarding the financing, development, sale, or operations of real estate owned.
In assessing whether proportionate consolidation is appropriate, SAB Topic 10.C provides additional context regarding the financing and operations of typical joint plant projects.
Excerpt from SAB Topic 10.C (codified in ASC 980-360-S99-1)
During the construction period a participating utility finances its own share of a utility plant using its financial resources and not the combined resources of the group... When a joint-owned plant becomes operational, one of the participant utilities acts as operator and bills the other participants for their proportionate share of the direct expenses incurred.
Within this context, factors typically considered in evaluating whether proportionate consolidation is appropriate for a joint plant arrangement include:
● Financing
Each party should be responsible for providing its own financing.
● Development
The individual owners should be able to act independently to decide whether to expand the facility or to make other similar development decisions. Once a decision to build has been made, however, joint agreement on key construction decisions is consistent with the typical joint plant model as discussed under “Operations.”
● Operations
The components of a power plant cannot be physically separated and operated independently. Power plants with multiple units also have common facilities, which are integral to the overall operation. Due to the physical nature of joint plant, it is necessary for the parties to agree on operational matters, such as significant budget decisions, maintenance, and contracting. As a result, joint plant arrangements generally establish a management committee comprised of the owners (or owner representatives) that has oversight of the plant and is responsible for key development and operating decisions.
SAB Topic 10.C acknowledges the common industry practice of having a single participant operate the facility which would not preclude an entity from meeting the requirements in ASC 970-810-45-1(b).
● Sale
Autonomy in making sale decisions about an individual ownership interest is another important factor. Joint plant arrangements may include provisions to protect the rights of other owners, such as a right of first offer or a limitation on sale of partial interests. These types of provisions should be assessed to determine whether individual owners can act independently to sell their interests. Restrictions on the ability of an owner to sell or encumber its interest may result in this criterion not being met.
Application of the proportionate consolidation guidance for joint plant arrangements as described is common practice in the utility and power industry and should not be analogized to other scenarios.
15.2.3 Pro rata share of income and expenses
The criteria in ASC 970-810-45-1(c) and ASC 970-810-45-1(d) pertain to how income and expenses are allocated to the different owners.
Excerpt from ASC 970-810-45-1
c. Each investor is entitled to only its pro rata share of income.
d. Each investor is responsible to pay only its pro rata share of expenses.
To meet these criteria, each investor can only be entitled to its share of income generated from the output of the plant and responsible for its share of expenses. These amounts are typically based on the relative shares and/or the dispatch decisions of the parties.
15.2.4 Indebtedness
To meet the criterion in ASC 970-810-45-1(e), each investor must be severally liable only for debt or liabilities that it incurs in connection with its proportionate interest in the plant.
Each investor is severally liable only for indebtedness it incurs in connection with its interest in the property.
An arrangement that makes owners pay for a proportionate share of costs in the event the other owners fail to pay would not meet this criterion.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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