Dodd-Frank Reporting, Derivative Accounting & Valuation Considerations for Wind Farm Owners

By Shane Randolph and Matt Smith

With a lack of traditional utility power purchase agreements available to meet demand, wind project sponsors have turned to corporate power purchase agreements (PPAs) and other hedging alternatives to secure predictable cash flows. Depending on the structure, these agreements can lead to derivative accounting, trigger Dodd-Frank reporting requirements, or both. The following discusses what each of these agreements represent and the associated derivative accounting and Dodd-Frank implications.

What is a PPA?

A PPA generally refers to a contract between two parties where one party (seller) agrees to sell electricity and renewable energy credits (RECs) to another party (buyer or offtaker) at a specified price. In this case, the seller is often the developer or project owner. The buyer is generally a utility or commercial and industrial (C&I) organization. With a physical PPA, the seller operates the wind farm and delivers the electricity generated from the wind farm to the buyer at the contractually specified delivery point.

  • Accounting Considerations: These contracts may or may not meet the definition of a derivative depending on whether the agreement includes volumetric guarantees or contains default provisions that indicate a minimum volume. If the contract meets the definition of a derivative it may still be able to escape derivative accounting via the normal purchases normal sales (NPNS) scope exception since the contract results in physical delivery.
  • Dodd-Frank Reporting Considerations: A physical PPA is not subject to Dodd-Frank reporting requirements as the contract results in physical delivery of electricity.

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About the Authors:

As a Managing Director at Opportune, Shane Randolph assists companies and financial institutions throughout North America, South America, Europe, and Asia-Pacific in their understanding of what is possible as they deal with the challenges of implementing risk management programs and highly technical accounting pronouncements. Shane oversees the risk management, derivatives, stock based compensation, and complex securities service offerings of Opportune. He assists clients with the entire risk management life cycle including strategy, execution, compliance, valuation, and hedge accounting. He has undergraduate and graduate degrees in accounting from Oklahoma State University. He is also a member of the American Institute of Certified Public Accountants.

Matt Smith is a Director in Opportune’s derivative valuation and hedge accounting practice. Matt assists companies with their derivative valuation, hedge accounting, documentation and disclosure requirements. His background includes extensive experience in technical accounting research, SEC financial reporting, derivative valuation, and hedge accounting. He gained this experience from his various positions in the commodity space as a technical consultant and from his experience as an audit manager with EY. Matt has an undergraduate degree in accounting from Oral Roberts University. He is also a member of the American Institute of Certified Public Accountants.

Opportune LLP is a proud sponsor of the 15th Annual REFF Wall Street Renewable Energy Finance Forum.  

Shane Randolph

Managing DirectorOpportune LLP

Matt Smith

DirectorOpportune LLP

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