PIEDMONT MUNICIPAL POWER AGENCY

Transcription

1 Financial Statements and Schedules (With Report of Independent Auditor Thereon)

2 Table of Contents Page Report of Independent Auditor 1-2 Management s Discussion and Analysis 3-10 Financial Statements Statements of Net Position Statements of Revenues, Expenses, and Changes in Net Position 13 Statements of Cash Flows Supplementary Information Schedule of Revenues and Expenses - Actual and Budget - Per the Bond Resolution 52 and Other Agreements Schedule of Revenues and Expenses - Per the Bond Resolution and Other Agreements 53

3 Report of Independent Auditor To the Board of Directors Piedmont Municipal Power Agency Greer, South Carolina Report on the Financial Statements We have audited the accompanying financial statements of Piedmont Municipal Power Agency ( PMPA ) (a South Carolina corporation), which comprise the statements of net position as of, and the related statements of revenues, expenses, and changes in net position and cash flows for the years then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform our audits to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PMPA as of, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. 1

4 Other Matters Management s Discussion and Analysis Accounting principles generally accepted in the United States of America require that the management s discussion and analysis on pages 3 through 10 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Supplementary Information Our audits were conducted for the purpose of forming an opinion on the financial statements as a whole. Schedules 1 and 2 are presented for purposes of additional analysis and are not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audits of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole. Greenville, South Carolina March 12,

5 Management s Discussion and Analysis Overview of the Financial Statements This section of Piedmont Municipal Power Agency s ( PMPA ) annual financial statements presents our analysis of PMPA s financial performance during the fiscal years ended December 31, 2018 and Please read this discussion and analysis in conjunction with the financial statements that follow this section. Financial Highlights PMPA s total assets as of December 31, 2018 decreased by $6.4 million over the prior year. This decrease is due to decreases in other noncurrent assets, a result of decreases in net costs recoverable from future Participant billings. Additionally, there is a decrease in restricted assets, which decreased due to the defeasance of bonds during Deferred outflows, which include costs on advanced refundings and redemption losses, decreased by $8.9 million at December 31, 2018 when compared to the prior year. PMPA s total assets as of December 31, 2017 decreased by $7.6 million over the prior year. This decrease is due to decreases in other noncurrent assets, a result of decreases in net costs recoverable from future Participant billings. This is offset by increases in current unrestricted assets, primarily due to an increase in marketable debt securities purchased during Deferred outflows, which include costs on advanced refundings and redemption losses, decreased by $8.8 million at December 31, 2017 when compared to the prior year. Total liabilities at December 31, 2018 decreased by $44.8 million when compared to December 31, Bond related liabilities decreased $77.5 million; of this amount, $17.4 million represented a decrease in current debt service requirements. Reserves for decommissioning increased by $20.0 million due to $4.9 million in annual accretion and a $15.1 million increase in the decommission liability. Accrued interest payable increased by $11.3 million. The change in deferred inflows was due to a $1.6 million decrease in the Fair Value ( FV ) liability of derivative instruments at December 31, Total liabilities at December 31, 2017 decreased by $44.7 million when compared to December 31, Bond related liabilities decreased $59.7 million; of this amount, $1.5 million represented a decrease in current debt service requirements. Reserves for decommissioning increased by $4.7 million due to annual accretion, and accrued interest payable increased by $10.1 million. The change in deferred inflows was due to a $2.7 million increase in the FV liability of derivative instruments at December 31,

6 Management s Discussion and Analysis Overview of the Financial Activities The following is an overview of the financial activities of PMPA for the years ended December 31, 2018 and PMPA s financial statements, which include the statements of net position, the statements of revenues, expenses, and changes in net position, and the statements of cash flows, are presented to display information about the reporting entity as a whole in accordance with GASB Statement No. 34, as amended. The statements are prepared using the economic resources measurement focus and the accrual basis of accounting. (Intentionally Left Blank) 4 (continued)

7 Management s Discussion and Analysis Financial Information The following summarizes the activities of PMPA for the years ended December 31, 2018, 2017, and 2016: (In thousands) Revenues: Sales of electricity to Participants $ 214,770 $ 232,803 $ 236,690 Sales of electricity to other utilities and other operating revenues 22,648 23,288 23,174 Total Operating Revenues 237, , ,864 Interest income 5,460 3,319 2,346 Net increase/(decrease) in fair value of investments and derivative instruments 1,489 (3,673) 225 Total Revenues 244, , ,435 Expenses: Operation, maintenance, and nuclear fuel amortization 43,308 46,167 51,193 Purchased power, transmission, and power delivery 61,718 58,974 61,582 Administrative, general, and payment in lieu of property taxes 23,860 25,209 24,603 Depreciation 8,310 8,232 11,840 Interest and amortization expense 52,688 55,324 56,345 Other 10,424 11,728 9,656 Total Expenses 200, , ,219 Revenues over expenses before deferred items 44,059 50,103 47,216 Change in net expenses recoverable from future Participant billings (13,045) (24,510) (25,300) Change in net position 31,014 25,593 21,916 Net position beginning 106,447 80,854 58,938 Net position ending $ 137,461 $ 106,447 $ 80,854 5 (continued)

8 Management s Discussion and Analysis Results of Operations Revenues Sales of electricity to Participants, PMPA s primary source of revenue, decreased in 2018 by 7.7% or approximately $18 million. A $21.3 million rate credit was the primary source of the revenue decrease, offset by a 4.5% increase in energy sales. PMPA s primary source of revenue decreased in 2017 by 1.6% or approximately $3.9 million. Surplus energy sales to other utilities decreased 2.7% in 2018 due to a decrease in surplus energy available for sale. Surplus energy sales to other utilities increased 0.5% in 2017 due to an increase in surplus energy available for sale. The majority of PMPA s surplus energy was contractually sold to Santee Cooper as part of a supplemental purchased power agreement. Expenses Purchased power (including transmission and power delivery) expenses increased by 4.7% (or approximately $2.7 million) in 2018 due to an increase in both the quantity and price of energy purchased compared to PMPA s purchased power expense decreased 4.2% (or approximately $2.6 million) in Fuel amortization expense decreased by $3.0 million in 2018 due to an decrease in production at Catawba as a result of a dual refueling outage in Fuel amortization expense increased by $1.9 million in 2017 due to an increase in production at Catawba. PMPA entered into a floating-to-fixed rate, step-coupon swap ( swap ) as part of the 2004 debt restructuring that helped to produce level debt service without issuing more capital appreciation debt and increased the benefits of the restructuring through January 1, Under this swap, PMPA will pay a below-market rate of interest for the first 20 years and an above-market rate for the last ten years resulting in approximate market rates over the entire term of the swap. This swap was designed to minimize the amount of capital appreciation bonds PMPA needed to issue as part of the 2004 restructuring. By paying an artificially low rate for the first 20 years, should the swap terminate during this period, it is likely that PMPA would owe a payment to the swap counterparty. In 2018, a $1.6 million decrease in FV of the step-coupon swap liability was added to a $0.1 million increase in the FV of PMPA s other investments. In 2017, a $2.7 million increase in FV of the swap liability was added to a $0.9 million increase in the FV of PMPA s other investments. 6 (continued)

9 Management s Discussion and Analysis Assets, liabilities, and net position are summarized as follows: (In thousands) Assets: Capital assets $ 381,643 $ 359,146 $ 359,847 Current unrestricted assets 170, , ,859 Current restricted assets 217, , ,726 Other noncurrent assets 480, , ,851 Total Assets $ 1,250,211 $ 1,256,651 $ 1,264,283 Deferred Outflows: $ 44,003 $ 52,935 $ 61,685 Liabilities: Long-term liabilities $ 919,984 $ 959,973 $ 1,013,399 Current liabilities 188, , ,915 Total Liabilities $ 1,108,801 $ 1,153,604 $ 1,198,314 Deferred Inflows: $ 47,952 $ 49,535 $ 46,800 Net Position: Net investment in capital assets $ (426,802) $ (520,203) $ (572,071) Other restricted assets 20,675 29,676 37,736 Unrestricted 543, , ,189 Total Net Position $ 137,461 $ 106,447 $ 80,854 Changes in PMPA s current unrestricted assets during 2018 are a reflection of the $9.3 million increase to PMPA s working capital, when PMPA budgeted to decrease working capital by $8.6 million. Also, there was a decrease to Participant accounts receivable and an increase in materials and supplies. The decrease in current liabilities includes a decrease in bond principal payable on January 1, 2019 and an increase in bond interest payable on January 1, Changes in PMPA s current unrestricted assets during 2017 are a reflection of the $24.2 million increase to PMPA s working capital, when PMPA budgeted to increase working capital by $11.0 million. Also, there was a decrease to Participant accounts receivable and an increase in materials and supplies. The increase in current liabilities includes a decrease in bond principal payable on January 1, 2018 and an increase in bond interest payable on January 1, Restricted assets decreased in 2018 as a result of the defeasance of bonds in 2018 as well as funds being withdrawn from construction accounts for capital additions at Catawba. Restricted assets decreased in 2017 as a result of funds being withdrawn from construction accounts for capital additions at Catawba. The 2018 decrease in noncurrent assets was due, primarily, to a decrease in net costs recoverable from future Participant billings resulting from a decrease in expenses included in Participant billings for debt principal payments and amortization of costs on advanced refundings of PMPA debt. 7 (continued)

10 Management s Discussion and Analysis The 2017 decrease in noncurrent assets was due, primarily, to a decrease in net costs recoverable from future Participant billings resulting from an increase in interest and depreciation expenses included in Participant billings for debt principal payments and amortization of costs on advanced refundings of PMPA debt. As bonds matured on January 1, 2018, long-term repayment obligations that were funded in the prior year were retired, resulting in a decrease in debt outstanding of $77.5 million. As bonds matured on January 1, 2017, long-term repayment obligations that were funded in the prior year were retired, resulting in a decrease in debt outstanding of $59.7 million. Capital Assets PMPA s capital assets include structures and improvements, reactor plant equipment, turbo generator units, other equipment, and nuclear fuel. Such amounts are detailed as follows: (In thousands) Structures and improvements $ 167,407 $ 163,579 $ 162,301 Reactor plant equipment 279, , ,468 Turbo generator units 73,924 73,277 71,307 Other equipment 97,276 94,194 84,162 Nuclear fuel 83,472 76,268 73,047 Other 59,131 48,246 58,339 Construction work-in-progress 10,473 9,876 8,162 Total 771, , ,786 Less accumulated depreciation (389,443) (384,224) (370,939) Total, net $ 381,643 $ 359,146 $ 359,847 8 (continued)

11 Management s Discussion and Analysis PMPA s investment in capital assets at December 31, 2018 totaled $381.6 million (net of accumulated depreciation), a $22.5 million increase from Major capital transactions during 2018 included the following: Increase in Catawba plant and decommissioning obligation of $10.7 million offset by $0.5 million in retirements and related accumulated depreciation. Net increase in nuclear fuel of $7.2 million ($17.8 million was added to fuel, and $10.6 million of fully amortized fuel was written off). Depreciation and amortization expense of $22.4 million. Increase in construction work-in-progress of $0.6 million representing capital additions at Catawba ($12.0 million of additions offset by $11.4 million that was moved to plant accounts and written off). PMPA s investment in capital assets at December 31, 2017 totaled $359.1 million (net of accumulated depreciation), a $0.7 million decrease from Major capital transactions during 2017 included the following: Decrease in Catawba plant and decommissioning obligation of $10.6 million offset by $0.5 million in retirements and related accumulated depreciation. Net increase in nuclear fuel of $3.2 million ($12.5 million was added to fuel and $9.3 million of fully amortized fuel was written off). Depreciation and amortization expense of $25.3 million. Increase in construction work-in-progress of $1.7 million representing capital additions at Catawba ($12.1 million of additions offset by $10.4 million that was moved to plant accounts and written off). Debt Management PMPA s total debt decreased $77.5 and $62.7 million in 2018 and 2017, respectively. 9 (continued)

12 Management s Discussion and Analysis Economic Factors and Next Year s Rates Because the retail customers of PMPA Participants are mostly residential and small commercial accounts, PMPA would be much less affected by economic downturns than a utility with larger commercial and industrial retail customers. The 2019 budget does not include an increase in PMPA s wholesale rates to the Participants. Request for Information This financial report is provided as an overview of PMPA s finances. Questions concerning any of the information in this report or requests for additional information should be directed to the Office of the Finance Director, Piedmont Municipal Power Agency, 121 Village Drive, Greer, South Carolina

13 Statements of Net Position Assets Capital Assets (Note 5): Utility plant assets being depreciated $ 760,077 $ 732,958 Accumulated depreciation and amortization (389,443) (384,224) Total utility plant assets being depreciated, net 370, ,734 Utility plant assets not being depreciated 11,009 10,412 Total Capital Assets, net 381, ,146 Current Assets (Note 8): Cash Marketable debt securities 133, ,846 Accrued interest receivable 2 3 Participant accounts receivable 16,335 18,316 Other accounts receivable Materials and supplies 19,646 19,360 Total Current Unrestricted Assets 170, ,369 Restricted Assets (Note 7): Restricted for debt service 117, ,833 Restricted for decommissioning 79,439 73,315 Restricted for other 20,675 29,676 Total Current Restricted Assets 217, ,824 Total Current Assets 388, ,193 Noncurrent Assets: Net costs recoverable from future Participant billings (Note 9) 480, ,111 Other Total Other Assets 480, ,312 Total Assets $ 1,250,211 $ 1,256,651 Deferred Outflows: Redemption loss $ 13,934 $ 16,294 Losses on advance refunding of debt, net 30,069 36,641 Total Deferred Outflows $ 44,003 $ 52,935 See accompanying notes to financial statements. 11

14 Statements of Net Position (Continued) Liabilities Long-Term Liabilities (Notes 10 and 11): Bonds payable, net $ 802,764 $ 862,815 Reserve for decommissioning (Note 12) 116,435 96,418 Accrued expense OPEB Total Long-Term Liabilities 919, ,973 Current Liabilities: Accounts payable and accrued liabilities 10,682 9,340 Current Liabilities Payable from Restricted Assets: Accrued interest payable 142, ,116 Current installments of bonds payable 35,750 53,175 Total Current Liabilities Payable from Restricted Assets 178, ,291 Total Current Liabilities 188, ,631 Total Liabilities $ 1,108,801 $ 1,153,604 Deferred Inflows: Derivative financial instruments $ 47,952 $ 49,535 Net Position Net investment in capital assets $ (426,802) $ (520,203) Restricted for other 20,675 29,676 Unrestricted 543, ,974 Total Net Position $ 137,461 $ 106,447 See accompanying notes to financial statements. 12

15 Statements of Revenues, Expenses and Changes in Net Position Years Ended Operating Revenues: Sales of electricity to Participants $ 214,770 $ 232,803 Sales of electricity to other utilities 21,029 21,605 Other 1,619 1,683 Total Operating Revenues 237, ,091 Operating Expenses: Operation and maintenance 29,219 29,092 Nuclear fuel amortization 14,089 17,075 Purchased power 53,458 51,582 Transmission 7,599 6,835 Power delivery Administrative and general 16,309 18,075 Depreciation 8,310 8,232 Decommissioning 4,909 4,672 Payments in lieu of property taxes 7,551 7,134 Total Operating Expenses 142, ,254 Net Operating Income 95, ,837 Other Income (Expense): Interest income 5,460 3,319 Net change in fair market value of investments and derivative instruments 1,489 (3,673) Interest expense (48,855) (51,222) Amortization expense (3,833) (4,102) Other (5,515) (7,056) Total Other Expense, Net (51,254) (62,734) Revenues over expenses before change in net expenses recoverable from future Participant billings 44,059 50,103 Net decrease in net expenses recoverable from future Participant billings (13,045) (24,510) Revenue over expenses 31,014 25,593 Net position, beginning of year 106,447 80,854 Net position, end of year $ 137,461 $ 106,447 See accompanying notes to financial statements. 13

16 Statements of Cash Flows Years Ended Cash flows from operating activities: Receipts from customers $ 239,354 $ 256,154 Payments for operations and maintenance (29,505) (29,700) Payments for purchased power, transmission, and power delivery (69,269) (66,108) Payments for administration and general (14,922) (17,846) Net cash from operating activities 125, ,500 Cash flows from investing activities: Purchase of investment securities (410,515) (550,352) Proceeds from sales and maturities of investments 424, ,679 Interest received on investments 5,149 3,220 Interest received on Duke working capital Net interest paid on derivative instruments (952) (1,297) Net cash from investing activities 18,655 (15,651) Cash flows from capital and related financing activities: Payment of bond principal (74,120) (116,650) Proceeds from bond issuance - 60,682 Interest payment on bonds (34,208) (37,826) Debt issuance costs (30) (931) Expenditures for electric plant in service (12,013) (12,086) Expenditures for nuclear fuel (17,843) (12,549) Payment to Duke for other charges (7,064) (6,753) Other 868 (416) Net cash from capital and related financing activities (144,410) (126,529) Net change in cash (97) 320 Cash, beginning of year Cash, end of year $ 318 $ 415 Noncash investing and financing activities: Gain on sale of investment $ 125 $ 8 Amortization expense on discounts and premiums $ 3,179 $ 3,511 Amortization of net redemption loss $ (8,784) $ (8,592) Net change in fair value of investments $ 1,489 $ (3,673) See accompanying notes to financial statements 14

17 Statements of Cash Flows (Continued) Years Ended Reconciliation of operating income to net cash provided by operating activities: Operating income $ 95,313 $ 112,837 Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation 8,310 8,232 Fuel amortization 14,089 17,075 Accretion of reserve for decommissioning 4,909 4,672 (Increase) decrease in: Participant accounts receivable 1, Other accounts receivable (45) 7 Materials and supplies (286) (608) Increase (decrease) in: Accounts payable and accrued liabilities 1, Accrued expense OPEB Net cash from operating activities $ 125,658 $ 142,500 See accompanying notes to financial statements. 15

18 (1) Description of the Entity, Industry Restructuring Developments, and Related Uncertainties (a) Description of the Entity Piedmont Municipal Power Agency ( PMPA ) was incorporated in 1979 under the South Carolina Joint Municipal Electric Power and Energy Act (the Act ). The Act, adopted April 1978, enabled the formation, by South Carolina municipalities and municipal commissions of public works, of a joint agency to plan, finance, develop, own, and operate electric generation and transmission facilities. Ten municipal utility systems ( Participants ) comprise PMPA s membership. The Participants, located in northwestern South Carolina, are the cities of Abbeville, Clinton, Easley, Gaffney, Greer, Laurens, Newberry, Rock Hill, Union, and Westminster. PMPA is not a component unit of any other governmental entity. PMPA has a 25% undivided ownership interest in Unit 2 of the Catawba Nuclear Station ( Catawba ). Pursuant to the Operating and Fuel Agreement between PMPA and Duke Energy Carolinas, LLC ( Duke ), Duke operates both Units 1 and 2 at Catawba. PMPA s power output entitlements (approximately 282 MW) come from both Catawba Units. PMPA pays 12.5% of the costs and receives 12.5% of the power output associated with each of these 1,129 MW units. The operating licenses for Catawba Unit 1 and Unit 2 expire on December 5, Additionally, the terms of the McGuire Reliability Exchange Agreement ( MREA ) allow transfers of energy between PMPA s entitlements from the Catawba Units and Duke s two nuclear units at the McGuire Nuclear Station ( McGuire ). The result spreads PMPA s entitlements across four similar nuclear units. The operating license for McGuire Unit 1 expires on June 12, 2041 and the operating license for McGuire Unit 2 expires on March 3, (b) Industry Restructuring Developments and Related Uncertainties There is no deregulation debate underway in the South Carolina General Assembly. The well-publicized problems with deregulation in other parts of the country have caused the legislators and regulators in South Carolina to continue a regulated retail electricity market. 16

19 (2) Summary of Significant Accounting Policies (a) Basis of Accounting The financial statements have been prepared in accordance with the provisions of the Governmental Accounting Standards Board ( GASB ) Statement No. 34, Basic Financial Statements and Management s Discussion and Analysis for State and Local Governments as amended by GASB Statement No. 37, Basic Financial Statements and Management s Discussion and Analysis for State and Local Governments: Omnibus, GASB Statement No. 38, Certain Financial Statement Disclosures and GASB Statement No. 61, The Financial Reporting Entity Omnibus An Amendment of GASB Statement No. 14 and No. 34. Statement No. 34 requires, as supplementary information, Management s Discussion and Analysis, which includes an analytical overview of PMPA s financial activities. PMPA s accounting records are maintained on the accrual basis in conformity with accounting principles generally accepted in the United States of America ( U.S. GAAP ) and substantially in conformity with the Federal Energy Regulatory Commission s Uniform System of Accounts. PMPA follows the accounting practices set forth in U.S. GAAP, Accounting for the Effects of Certain Types of Regulation, as amended. This standard allows PMPA to capitalize or defer certain costs or revenues based on PMPA s ongoing assessment that it is probable that such items will be recovered through future revenues based on the rate-making authority of PMPA s board of directors. The criteria require consideration of anticipated changes in levels of demand or competition during the recovery period for any capitalized cost. PMPA s General Bond Resolution requires that its rate structure be designed to produce revenues sufficient to pay operating, debt service, and other specified costs. PMPA s board of directors, which is comprised of representatives of the Participants, is responsible for reviewing and approving the rate structure. The application of a given rate structure to a given period s electricity sales may produce revenues not intended to pay that period s costs, and conversely, that period s costs may not be intended to be recovered in period revenues. The affected revenues and/or costs are, in such cases, deferred for future recognition. The ultimate recognition of deferred items is correlated with specific future events, primarily payment of debt principal. 17

20 (2) Summary of Significant Accounting Policies Continued (b) Losses on Advanced Refundings of Debt and Redemption Losses Losses on advanced refundings of debt at of $44,003 and $52,935, respectively, (net of accumulated amortization of $325,254 and $315,816, respectively) have been deferred in accordance with U.S. GAAP and are being amortized over the term of the debt issued on refunding using the effective interest method. The remaining costs on advanced refundings will be amortized over the next 16 years (2018 through 2033) based on the shorter of the original debt maturity dates or the maturity dates of the new debt. (c) (d) (e) (f) Discounts on Bonds Payable The discounts on bonds payable at of $1,032 and $1,213, respectively, (net of accumulated amortization of $2,999 and $2,948, respectively) are being amortized on the bonds outstanding method, which approximates the effective interest method. Premiums on Bonds Payable The premiums on bonds payable at of $15,521 and $19,058, respectively, (net of accumulated amortization of $25,607 and $27,116, respectively) are being amortized on a method which approximates the effective interest method. Income Taxes PMPA is recognized as a public utility for federal income tax purposes. As such, gross income of PMPA is excluded from federal income taxes under Internal Revenue Code Section 115. Cash Flows For purposes of the statements of cash flows, PMPA considers deposits with banks and held by Duke to be cash. 18

21 (2) Summary of Significant Accounting Policies Continued (g) Marketable Debt Securities As authorized by the General Bond Resolution, investment securities at December 31, 2018 and 2017 consist only of direct obligations of the United States government and obligations of United States government agencies. These investments are uninsured and unregistered and are held by PMPA s trustee in PMPA s name. Marketable debt securities are recorded at fair value based on market prices. Unrealized holding gains and losses on marketable debt securities are included in income. Interest income is recognized when earned. (h) Capital Assets Electric plant in service, including unclassified assets, is stated at cost and is depreciated on a straight-line basis at rates calculated to depreciate the composite assets over their respective estimated useful lives. Depreciation begins when assets are placed into service. PMPA s annual provision for depreciation expressed as a percentage of the average balance of depreciable utility plant was 1.1% and 1.6% for 2018 and 2017, respectively. PMPA's capital assets are currently being depreciated according to the following table: Years Years Structures and improvements 40 Station equipment 40 Reactor plant equipment 40 Transmission equipment 40 Turbo generator units 40 Other Accessory electric equipment 40 Unclassified 40 Miscellaneous plant equipment 40 Nuclear fuel 4-5 (i) (j) Materials and Supplies Materials and supplies inventories are stated at the lower of cost or market value using the average cost method. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 19

22 (2) Summary of Significant Accounting Policies Continued (k) Net Position Equity is classified into net positions and is displayed in three components: Net Investment in Capital Assets Consists of capital assets including restricted capital assets, net of accumulated depreciation and reduced by the outstanding balances of any bonds, notes, or other borrowings that are attributable to the acquisition, construction, or improvement of those assets. Restricted Consists of net assets with constraints placed on the use either by (1) external groups such as creditors, grantors, contributors, or laws or regulations of other governments or (2) law through constitutional provision or enabling legislation. Unrestricted All other net assets that do not meet the definition of restricted or net investment in capital assets. (l) Revenue Recognition PMPA recognizes revenue on sales when the electricity is delivered to the Participants. (m) Operating and Non-Operating Expenses PMPA s funds distinguish operating revenues and expenses from non-operating items. Operating revenues and expenses generally result from providing services in addition to producing and delivering goods in connection with the principal ongoing operations. The principal operating revenues of PMPA s funds are charges to Participants for sales and services. Operating expenses for PMPA s funds include the costs of sales and services, general and administrative services, and depreciation of capital assets. All revenues and expenses not meeting this definition are reported as non-operating revenues and expenses. (n) Derivative Financial Instrument The derivative is recognized on the statements of net position at its fair value. PMPA has not designated its derivative as a hedge. Changes in the fair value of the derivative instrument are reported in current period revenues and expenses and in the changes to the net increase or decrease in net expenses recoverable from future Participant billings. 20

23 (2) Summary of Significant Accounting Policies Continued (o) Recent Pronouncements Recently Adopted Pronouncements The GASB issued Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions. This Statement replaces the requirements of GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions. Among other things, GASB Statement No. 75 requires governments to report a liability on the face of the financial statements for the OPEB that they provide and requires governments in all types of OPEB plans to present more extensive note disclosures and required supplementary information about their OPEB liabilities. The requirements of this Statement are effective for periods beginning after June 15, 2017, although early adoption is permitted. The adoption of this Statement had no material effect on PMPA s financial statements. The GASB issued Statement No. 85, Omnibus This Statement addresses practice issues that have been identified during implementation and application of certain GASB statements. The requirements of this Statement are effective for periods beginning after June 15, The adoption of this Statement had no material effect on PMPA s financial statements. The GASB issued Statement No. 86, Certain Debt Extinguishment Issues. This Statement establishes standards of accounting and financial reporting for in-substance defeasance transactions in which cash and other monetary assets acquired with only existing resources; that is, resources other than the proceeds of refunding debt are placed in an irrevocable trust for the purpose of extinguishing debt. This Statement also amends accounting and financial reporting requirements for prepaid insurance associated with debt that is extinguished regardless of how the cash and other monetary assets were acquired. This Statement also establishes an additional disclosure requirement related to debt that is defeased in substance, regardless of how the cash and other monetary assets were acquired. The requirements of this Statement are effective for periods beginning after June 15, 2017, although early adoption is permitted. The adoption of this Statement had no material effect on PMPA s financial statements. 21

24 (2) Summary of Significant Accounting Policies Continued (o) Recent Pronouncements - Continued Recently Issued Pronouncements The GASB issued Statement No. 83, Certain Asset Retirement Obligations. This Statement addresses accounting and financial reporting for certain asset retirement obligations ( AROs ). Among other things, GASB Statement No. 83 establishes criteria for determining the timing and pattern of recognition of a liability and a corresponding deferred outflow of resources for AROs. The requirements of this Statement are effective for periods beginning after June 15, 2018, although early adoption is permitted. This Statement is not expected to have a material impact on PMPA. The GASB issued Statement No. 87, Leases. This Statement establishes a single model for lease accounting based on the foundational principle that leases are financings of the right to use the underlying asset. As a result, recognition of certain lease assets and liabilities for leases that previously were classified as operating leases and recognized as inflows of resources (revenues) or outflows of resources (expenses) based on the payment provisions of the contract. Under this Statement, a lessee is required to recognize a lease liability and an intangible right-to-use asset, and a lessor is required to recognize a lease receivable and a deferred inflow of resources. The requirements of this Statement are effective for periods beginning after December 15, 2019, although early adoption is permitted. This Statement is not expected to have a material impact on PMPA. The GASB issued Statement No. 88, Certain Disclosures Related to Debt, Including Direct Borrowings and Direct Placements. This Statement defines debt for purposes of disclosure in notes to financial statements as a liability that arises from a contractual obligation to pay cash (or other assets that may be used in lieu of cash) in one or more payments to settle an amount that is fixed at the date the contractual obligation is established. It requires that additional essential information related to debt be disclosed in notes to financial statements, including unused lines of credit; assets pledged as collateral for debt; and terms specified in debt agreements related to significant events of default with finance related consequences, significant termination events with finance related consequences, and significant subjective acceleration clauses. For notes to financial statements related to debt, this Statement also requires that existing and additional information be provided for direct borrowings and direct placements of debt separately from other debt. The requirements of this Statement are effective for periods beginning after June 15, This Statement is not expected to have a material impact on PMPA. 22

25 (2) Summary of Significant Accounting Policies Continued (o) Recent Pronouncements - Continued The GASB issued Statement No. 89, Accounting for Interest Cost Incurred before the End of a Construction Period. This Statement simplifies accounting for interest cost incurred before the end of construction and requires those costs to be expensed in the period incurred. As a result, interest cost incurred before the end of a construction period will not be included in the historical cost of the capital asset. The requirements of this Statement are effective for periods beginning after December 15, This Statement is not expected to have a material impact on PMPA. The GASB issued Statement No. 90, Majority Equity Interests An Amendment of GASB Statements No. 14 and No. 61. This Statement establishes that ownership of a majority equity interest in a legally separate organization results in the government being financially accountable for the legally separate organization and, therefore, the government should report that organization as a component unit. This Statement also requires that a component unit in which a government has 100% equity interest account for its assets, deferred outflows and resources, liabilities, and deferred outflows of resources at acquisition value at the date the government acquired a 100% equity interest in the component unit. The requirements of this Statement are effective for periods beginning after December 15, This Statement is not expected to have a material impact on PMPA. (3) Power Sales Agreements (a) Catawba Project Power Sales Agreements PMPA and each Participant are parties to Catawba Project Power Sales Agreements ( Catawba Sales Agreements ). These Power Sales Agreements obligate PMPA to provide each Participant a share of the undivided 25% interest in Unit 2 of Catawba power output and, in turn, each Participant must pay its share of the Catawba costs. Participants make their payments on a take-or-pay basis whether or not Catawba is operable or operating. Such payments are not subject to reduction or offset and are not conditioned upon performance by PMPA or any given Participant. The Catawba Sales Agreements are in effect until the earlier of August 1, 2035 or the completion of payments on the bonds and satisfaction of obligations under the Project agreements. 23

26 (3) Power Sales Agreements Continued (a) Catawba Project Power Sales Agreements Continued The Participants shares of PMPA s Catawba output are as follows: City of Abbeville 2.68% City of Clinton 7.84 City of Easley City of Gaffney City of Greer 9.34 City of Laurens 6.49 City of Newberry City of Rock Hill City of Union City of Westminster % (b) Supplemental Power Sales Agreements PMPA and each Participant are also parties to Supplemental Power Sales Agreements ( Supplemental Agreements ) under which each Participant has agreed to pay, in exchange for All Requirements Bulk Power Supply, its share of All Requirements Bulk Power Supply costs. The Supplemental Agreements terminate December 20, 2034; however, a Participant may terminate its Supplemental Agreement with ten years advance notice. On December 31, 2018, the Participants of Greer, Rock Hill, and Westminster provided their ten years written notice to terminate their Supplemental Power Sales Agreement with PMPA. The effective date of termination will be December 31,

27 (4) Project and Other Agreements Project Agreements between PMPA and Duke consist of the Purchase, Construction, and Ownership Agreement ( Sales Agreement ), the Operating and Fuel Agreement (the Operating Agreement ), the Joint Ownership Support Agreement, (the JOSA ), and the MREA. (a) Sales Agreement The Sales Agreement generally provides for (i) the purchase of Catawba by PMPA; (ii) PMPA s contract with Duke to act as engineer contractor for PMPA for completion of construction, initial fueling, and placing Catawba into commercial operation; (iii) PMPA s payment to Duke for construction completed to date of closing on Catawba and for construction thereafter; and (iv) PMPA s payment to Duke of certain profits and fees. (b) Operating Agreement The Operating Agreement generally provides that PMPA employs Duke, as operator of Catawba, to be responsible for the (i) operation, maintenance, and fueling of Catawba; (ii) making of renewals, replacements, and capital additions to Catawba; and (iii) ultimate decommissioning of Catawba at the end of its useful life. (c) (d) JOSA The JOSA generally provides for certain joint ownership rights and obligations, including the Catawba Reliability Exchange. This agreement became effective January 1, MREA The MREA generally provides for the continued exchange of energy from PMPA s entitlements to the Catawba units for energy from units at Duke s McGuire Nuclear Station. This agreement became effective January 1, 2006, and can be terminated by either party by giving a three-year written notice. 25

28 (4) Project and Other Agreements Continued Other Agreements (a) (b) (c) Requirements Service Agreement On December 13, 2010, PMPA entered into a Power Sales Agreement with the South Carolina Public Service Authority ( Santee Cooper ). This agreement became effective on January 1, The contract requires that PMPA purchase power from Santee Cooper, approximately 200 MW, to meet all of its load demand beyond the amounts served by Catawba, the Participants share of electricity from SEPA ( Southeastern Power Administration ) hydroelectric facilities, and load requirements met by individual generating resources owned by certain Participants. Transmission Services PMPA entered into a service agreement with Duke to begin taking transmission service under Duke s Open Access Transmission Tariff ( OATT ) on January 1, Power Purchase Agreement On December 28, 2010, PMPA entered into a Power Purchase Agreement with Duke. This agreement generally provides for PMPA to purchase capacity and energy from Duke in order to obtain backstand services for PMPA s entitlement to capacity and energy from the Catawba and McGuire Nuclear Stations. This agreement became effective on January 1, On December 31, 2018, PMPA provided the two years written notice to terminate their Power Purchase Agreement with Duke. The effective date of termination will be December 31, (Intentionally Left Blank) 26

29 (5) Capital Assets The following is a summary of capital asset activity for as of : December 31, 2018 Beginning Ending Balance Increase Decrease Balance Utility plant being depreciated: Structures and improvements $ 163,579 $ 3,828 $ - $ 167,407 Reactor plant equipment 277,930 6,363 (4,890) 279,403 Turbo generator units 73,277 1,007 (360) 73,924 Accessory electric equipment 58,099 1,416 (739) 58,776 Miscellaneous plant equipment 24, (276) 24,806 Station equipment 5,570 1,921-7,491 Transmission equipment 6, ,203 Other 3,231 15,292 (23) 18,500 Unclassified 44,479 8,778 (13,162) 40,095 Nuclear fuel 76,268 17,844 (10,640) 83,472 Total utility plant assets being depreciated 732,958 57,209 (30,090) 760,077 Less accumulated depreciation and amortization (384,224) (22,399) 17,180 (389,443) Total utility plant assets being depreciated, net 348,734 34,810 (12,910) 370,634 Utility plant assets not being depreciated: Land Construction work-in-progress 9,876 12,013 (11,416) 10,473 Total utility plant assets not being depreciated 10,412 12,013 (11,416) 11,009 Total capital assets, net $ 359,146 $ 46,823 $ (24,326) $ 381,643 27

30 (5) Capital Assets Continued December 31, 2017 Beginning Ending Balance Increase Decrease Balance Utility plant being depreciated: Structures and improvements $ 162,301 $ 6,023 $ (4,745) $ 163,579 Reactor plant equipment 273,468 7,752 (3,290) 277,930 Turbo generator units 71,307 2,301 (331) 73,277 Accessory electric equipment 54,161 3,938-58,099 Miscellaneous plant equipment 20,501 3,858 (7) 24,352 Station equipment 5, ,570 Transmission equipment 4,092 2,081-6,173 Other 2, (190) 3,231 Unclassified 55,124 8,208 (18,853) 44,479 Nuclear fuel 73,047 12,549 (9,328) 76,268 Total utility plant assets being depreciated 722,278 47,424 (36,744) 732,958 Less accumulated depreciation and amortization (370,939) (25,307) 12,022 (384,224) Total utility plant assets being depreciated, net 351,339 22,117 (24,722) 348,734 Utility plant assets not being depreciated: Land Construction work-in-progress 8,162 12,086 (10,372) 9,876 Total utility plant assets not being depreciated 8,508 12,276 (10,372) 10,412 Total capital assets, net $ 359,847 $ 34,393 $ (35,094) $ 359,146 Unclassified assets are in service and being depreciated but are not yet classified to specific plant accounts. 28

31 (5) Capital Assets Continued Nuclear fuel represents costs associated with acquiring and processing reload fuel assemblies as well as the cost of nuclear fuel in the reactor. Nuclear fuel is amortized based on burn rates using a unit of production basis. PMPA regularly removes fully amortized nuclear fuel costs when fuel batches are replaced during core refueling operations. Fully amortized fuel costs of $10,640 and $9,328 were removed during 2018 and 2017, respectively. A summary of accumulated depreciation and amortization at is as follows: Accumulated depreciation of electric plant in service $ 343,098 $ 341,328 Accumulated amortization of nuclear fuel 46,345 42,896 $ 389,443 $ 384,224 The depreciation charge for the year on PMPA s generation plant has been determined based on revised estimated useful lives for these assets. The remaining estimated useful lives were revised to recognize a 19-year extension of the operating license for Catawba Unit 1 and a 17-year extension of the operating license for Catawba Unit 2 through 2043 which Duke received during (6) Cash, Cash Equivalents, and Investments At December 31, 2018, the carrying value of deposits included in cash and cash equivalents was $318. Bank deposits were covered by federal depository insurance up to $250, as described in Note 8. As of December 31, 2018, PMPA had the following investments (all are listed at fair value): Investment Type Time Segmented Distribution Under 1 Year 1-2 Years 2-3 Years 3-4 Years >4 Years Total Cash/money market $ 189,160 $ - $ - $ - $ - $ 189,160 Government agency 14,422-2, ,614 Government treasury 25,661 41,651 29,707 27,055 20, ,300 Mortgage backed securities Total Fair Value $ 229,243 $ 41,651 $ 32,123 $ 27,234 $ 20,678 $ 350,929 29