Public Utility District No. 1 of Cowlitz County

Transcription

1 Financial Statements Audit Report Public Utility District No. 1 of Cowlitz County For the period January 1, 2015 through December 31, 2015 Published June 6, 2016 Report No

2 Washington State Auditor s Office June 6, 2016 Board of Commissioners Public Utility District No. 1 of Cowlitz County Longview, Washington Report on Financial Statements Please find attached our report on Public Utility District No. 1 of Cowlitz County s financial statements. We are issuing this report in order to provide information on the District s financial condition. Sincerely, TROY KELLEY STATE AUDITOR OLYMPIA, WA Insurance Building, P.O. Box Olympia, Washington (360) TDD Relay (800)

3 TABLE OF CONTENTS Independent Auditor s Report On Internal Control Over Financial Reporting And On Compliance And Other Matters Based On An Audit Of Financial Statements Performed In Accordance With Government Auditing Standards... 4 Independent Auditor s Report On Financial Statements... 6 Financial Section... 9 About The State Auditor s Office Page 3

4 INDEPENDENT AUDITOR S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS Public Utility District No. 1 of Cowlitz County January 1, 2015 through December 31, 2015 Board of Commissioners Public Utility District No. 1 of Cowlitz County Longview, Washington We have audited, in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States, the financial statements of each major fund of Public Utility District No. 1 of Cowlitz County, Washington, as of and for the year ended December 31, 2015, and the related notes to the financial statements, which collectively comprise the District s basic financial statements, and have issued our report thereon dated May 31, As discussed in Note 1 to the financial statements, during the year ended December 31, 2015, the District implemented Governmental Accounting Standards Board Statement No. 68, Accounting and Financial Reporting for Pensions an amendment of GASB Statement No. 27 and Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date - an amendment of GASB Statement No. 68. INTERNAL CONTROL OVER FINANCIAL REPORTING In planning and performing our audit of the financial statements, we considered the District s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the District s internal control. Accordingly, we do not express an opinion on the effectiveness of the District s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the District's financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, Page 4

5 or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. COMPLIANCE AND OTHER MATTERS As part of obtaining reasonable assurance about whether the District s financial statements are free from material misstatement, we performed tests of the District s compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. PURPOSE OF THIS REPORT The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the District s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the District s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. However, this report is a matter of public record and its distribution is not limited. It also serves to disseminate information to the public as a reporting tool to help citizens assess government operations. TROY KELLEY STATE AUDITOR OLYMPIA, WA May 31, 2016 Page 5

6 INDEPENDENT AUDITOR S REPORT ON FINANCIAL STATEMENTS Public Utility District No. 1 of Cowlitz County January 1, 2015 through December 31, 2015 Board of Commissioners Public Utility District No. 1 of Cowlitz County Longview, Washington REPORT ON THE FINANCIAL STATEMENTS We have audited the accompanying financial statements of each major fund of Public Utility District No. 1 of Cowlitz County, Washington, as of and for the year ended December 31, 2015, and the related notes to the financial statements, which collectively comprise the District s basic financial statements as listed on page 9. 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 opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit 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 District s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, Page 6

7 but not for the purpose of expressing an opinion on the effectiveness of the District 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 opinions. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of each major fund of Public Utility District No. 1 of Cowlitz County, as of December 31, 2015, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Matters of Emphasis As discussed in Note 1 to the financial statements, in 2015, the District adopted new accounting guidance, Governmental Accounting Standards Board Statement No. 68, Accounting and Financial Reporting for Pensions an amendment of GASB Statement No. 27 and Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date - an amendment of GASB Statement No. 68. Our opinion is not modified with respect to this matter. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management s discussion and analysis on pages 10 through 12 and pension plan information on page 46 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. Page 7

8 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. OTHER REPORTING REQUIRED BY GOVERNMENT AUDITING STANDARDS In accordance with Government Auditing Standards, we have also issued our report dated May 31, 2016 on our consideration of the District s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the District s internal control over financial reporting and compliance. TROY KELLEY STATE AUDITOR OLYMPIA, WA May 31, 2016 Page 8

9 FINANCIAL SECTION Public Utility District No. 1 of Cowlitz County January 1, 2015 through December 31, 2015 REQUIRED SUPPLEMENTARY INFORMATION Management s Discussion and Analysis 2015 BASIC FINANCIAL STATEMENTS Statement of Net Position 2015 Statement of Revenues, Expenses and Changes in Net Position 2015 Statement of Cash Flows 2015 Notes to Financial Statements 2015 REQUIRED SUPPLEMENTARY INFORMATION Schedule of Proportionate Share of the Net Pension Liability and Contributions 2015 Page 9

10 MANAGEMENT DISCUSSION AND ANALYSIS For the Year Ended December 31, 2015 This discussion and analysis is designed to provide an overview of the financial activities of Public Utility District No. 1 of Cowlitz County, Washington (the District) for the year ended December 31, 2015 with comparable information for This supplementary information is to be read in conjunction with the District s financial statements. The District is a municipal corporation incorporated in 1936 to serve the citizens of Cowlitz County, Washington. The District is governed by a three-member board of locally elected commissioners, independent of county government. The District manages and operates two systems: Electric and Production (Swift No. 2 Hydroelectric). Financial Policies and Controls The District s financial management system consists of financial policies, financial management strategies and its internal control structure, including annual budgets and external audits of its financial statements. These policies set standards for rate sufficiency, rate stability, reserve funds, capital investment and debt management that guide the development of budgets, rates and debt issuance. Taken as a whole, the financial policies are intended to provide financial performance indicators, including debt service coverage and reserve requirements. The District s Board has the exclusive right to determine rates and charges for services provided. Planning is guided by forecasts of balance sheet, operating and capital items. These tools are used to identify the impacts of anticipated initiatives and to develop strategies to meet the Board s financial objectives. ELECTRIC SYSTEM The Electric System provides electric service throughout Cowlitz County which encompasses 1,144 square miles and approximately 48,500 customers. The District is among the largest PUDs in the state of Washington with total 2015 and 2014 retail power sales of 4,922,273 MWHs and 5,076,899 MWHs, respectively. Approximately 70% of the District s power and 50% of revenues are sold to two industrial customers. Extreme weather and economic conditions are the primary influences on electricity sales. The Electric System power supply is provided through contracts with BPA and Grant County PUD, as well as the purchase of the output from the District s Swift No. 2 Hydroelectric Production System on the Lewis River and the power associated with a 2 MW share of Energy Northwest s Nine Canyon Wind Project. The District also receives and sells energy from interests in two wind projects; 46% of the MW White Creek Project (contractual interest) and 30% of the 98.9 MW Harvest Wind Project (tenant in common). Both projects are located in Klickitat County, WA. Approximately 90% of the District s power supply is purchased from BPA. Since the majority of the District s power supply comes from hydroelectric generation, financial performance of the Electric System is largely influenced by the availability of water for generation and by prices obtainable for excess generation in the wholesale markets. Wholesale sales activity can complement sales to retail customers and provides a stabilizing portfolio effect in years when wholesale sales are at or higher than budget. Conversely, when wholesale sales are below budget, this activity will not provide the expected support for retail rates and may cause upward rate pressures. The District also uses forward physical power contracts and financial instruments that set a floor to protect the District from commodity price risk. When the amount of water available for generation is at or greater than budget and prices are sufficient, funds can be added to reserves for future uses or used to supplement revenues required for current year operations. Overall the Electric System s net position decreased approximately $7.8 million or 4.6% for The decrease largely results from a $12.9 million charge related to implementation of a new pension accounting standard. The Electric System continued investing in plant infrastructure and cash reserves continue to improve. Page 10

11 Selected Financial Data Electric System Current Assets $ 118,334,164 $ 108,916,909 Net Utility Plant 172,593, ,152,727 Other Assets and Deferred Outflows 122,197, ,407,004 Total Assets and Deferred Outflows 413,124, ,476,640 Current Liabilities 40,089,465 41,000,998 Long-Term Debt 165,167, ,858,382 Other Liabilities and Deferred Inflows 47,534,809 47,425,684 Total Liabilities and Deferred Inflows 252,791, ,285,064 Net investment in capital assets 31,216,091 29,163,896 Restricted 1,147,983 1,195,345 Unrestricted 127,969, ,832,335 Total Net Position 160,333, ,191,576 Operating Revenues 253,466, ,397,828 Operating Expenses 242,798, ,241,413 Net Operating Revenues 10,668,460 11,156,415 Other Income (Expense) (5,526,786) (5,925,811) Change in Net Position 5,141,674 5,230,604 Change in Accounting Principle (12,932,678) Results of operations are primarily impacted by changes in rates, retail load, power supply costs, particularly generation levels and wholesale prices, conservation activities and rate stabilization decisions. In September 2015 retail rates were increased 7.5%. In September 2013 and 2014 residential rates were increased 5% and 4.6% with either no change or decreases ranging from 2% to 15% and 3.5% to 8% among the commercial and industrial classes, respectively. Capital Asset and Long-Term Debt Activity As of year-end, the Electric System had $303 million invested in electric system plant in service, an increase of 3.8%. Additions are primarily related to an enhanced construction program in an effort to improve the reliability of the Electric System for all customers, Advanced Automated Metering project, ERP computer system and substation upgrades. Capital construction is funded by a combination of rates, aidto-construction paid by customers and long-term revenue bonds. Total Electric System utility plant in service as of December 31, 2015 and 2014 consisted of the following: Intangible $ 239,963 $ 239,963 Land and Land Rights 3,276,904 3,082,142 Transmission & Distribution 245,493, ,389,683 General Plant 54,306,344 52,370,855 Total Plant In Service $ 303,316,270 $ 292,082,643 At December 31, 2015 the Electric System had outstanding revenue bonds totaling $153 million compared to $163 million at December 31, In 2015 the District completed two Electric System bond refunding transactions resulting in a net present value savings of approximately $6.2 million. Page 11

12 PRODUCTION SYSTEM The Production System operates the 66.8 MW Swift No. 2 Hydroelectric Project on the Lewis River. All of the output is sold to the District s Electric System at cost. The 50-year FERC license expires in June Overall the Production System s net position decreased approximately $236,000 or.2% for Selected Financial Data Production System Current Assets $ 30,316,857 $ 27,985,758 Net Utility Plant 116,416, ,568,067 Other Assets and Deferred Outflows 21,769,301 21,654,803 Total Assets and Deferred Outflows 168,502, ,208,628 Current Liabilities 2,158,941 2,102,940 Long-Term Debt 63,941,689 64,403,872 Other Liabilities and Deferred Inflows 8,124,973 8,188,627 Total Liabilities and Deferred Inflows 74,225,603 74,695,439 Net investment in capital assets 54,302,911 54,302,911 Restricted - - Unrestricted 39,974,397 40,210,278 Total Net Position 94,277,308 94,513,189 Operating Revenues 7,601,976 7,411,680 Operating Expenses 5,756,793 6,101,966 Net Operating Revenues 1,845,183 1,309,714 Other Income (Expense) (2,081,064) (2,916,382) Change in Net Position (235,881) (1,606,668) Operating revenues are set to cover operating and capital costs, debt service and to fund reserves over time. Fluctuations in operations from year to year are largely impacted by non-recurring or infrequent projects. Capital Asset and Long-Term Debt Activity No substantial capital activity in 2015 or 2014 and no new debt. Total Production System plant in service as of December 31, 2015 and 2014 consisted of the following: Intangible $ 3,113,155 $ 5,109,470 Land and Land Rights 1,224,229 1,224,229 Production Plant 143,934, ,047,698 Transmission Plant 6,799,262 4,624,838 Total Plant In Service $ 155,071,468 $ 155,006,235 At December 31, 2015 the Production System had outstanding revenue bonds totaling $60 million compared to $61 million at December 31, In 2015 and 2014 the District completed Production System bond refunding transactions resulting in net present value savings of approximately $1 million and $3.5 million, respectively. Page 12

13 PUBLIC UTILITY DISTRICT NO. 1 OF COWLITZ COUNTY, WASHINGTON STATEMENT OF NET POSITION DECEMBER 31, 2015 Electric Production Total CURRENT ASSETS Cash and cash equivalents $ 90,861,287 $ 29,317,824 $ 120,179,111 Customer accounts receivable and unbilled revenues 20,455,722-20,455,722 Other accounts receivable 2,489,332-2,489,332 Allowance for uncollectible accounts (872,015) - (872,015) Accounts receivable from assoc. companies 6,932-6,932 Current portion of advances to others 116, , ,672 Materials and supplies 4,438,616-4,438,616 Prepayments 430, , ,796 Interest receivable 406, ,855 Total current assets 118,334,164 30,316, ,651,021 RESTRICTED ASSETS Cash and cash equivalents 14,274,774 10,234,349 24,509,123 Investments 5,960,000-5,960,000 Total restricted assets 20,234,774 10,234,349 30,469,123 UTILITY PLANT Plant in service 303,316, ,071, ,387,738 Construction in progress 4,093,065 51,033 4,144,098 Total utility plant 307,409, ,122, ,531,836 Less accumulated depreciation and amortization 134,816,017 38,705, ,521,765 Net utility plant 172,593, ,416, ,010,071 OTHER PROPERTY AND INVESTMENTS White Creek Wind Project Energy Purchase Agreement 50,670,628-50,670,628 Investment in associated organizations 42,695,247-42,695,247 Note receivable 393, ,058 Advances to other funds - 10,009,112 10,009,112 Other charges 3,023, ,369 3,725,759 Total other property and investments 96,782,323 10,711, ,493,804 DEFERRED OUTFLOWS OF RESOURCES 5,180, ,471 6,003,664 TOTAL ASSETS AND DEFERRED OUTFLOWS OF RESOURCES $ 413,124,772 $ 168,502,911 $ 581,627,683 The accompanying notes are an integral part of these financial statements. Page 13

14 PUBLIC UTILITY DISTRICT NO. 1 OF COWLITZ COUNTY, WASHINGTON STATEMENT OF NET POSITION DECEMBER 31, 2015 Electric Production Total CURRENT LIABILITIES Current portion of long-term debt $ 9,727,035 $ 1,105,000 $ 10,832,035 Accounts payable 19,568,282 64,515 19,632,797 Accounts payable to assoc. companies - 6,932 6,932 Accrued wages and benefits 1,786,319-1,786,319 Customer deposits 1,743,906-1,743,906 Taxes payable 5,176,294 44,546 5,220,840 Interest payable 2,077, ,948 3,015,436 Other current liabilities 10,141-10,141 Total current liabilities 40,089,465 2,158,941 42,248,406 LONG-TERM LIABILITIES Bonds payable 144,345,000 59,390, ,735,000 Premium on bonds payable 10,226,464 4,551,689 14,778,153 Advances from other funds 10,009,112-10,009,112 Loan payable 586, ,672 Total long-term liabilities 165,167,248 63,941, ,108,937 OTHER LIABILITIES AND CREDITS Net pension liability 12,282,040-12,282,040 Lewis River Cost-Share Agreement - 7,433,402 7,433,402 Compensation and retirement reserves 329, ,544 Other credits 889, ,917 Post-retirement benefit obligation 1,221,529-1,221,529 Total other liabilities and credits 14,723,030 7,433,402 22,156,432 TOTAL LIABILITIES 219,979,743 73,534, ,513,775 COMMITMENTS AND CONTINGENCIES DEFERRED INFLOWS OF RESOURCES 32,811, ,571 33,503,350 NET POSITION Net investment in capital assets 31,216,091 54,302,911 85,519,002 Restricted 1,147,983-1,147,983 Unrestricted 127,969,176 39,974, ,943,573 TOTAL NET POSITION 160,333,250 94,277, ,610,558 TOTAL LIABILITIES, DEFERRED INFLOWS OF RESOURCES AND NET POSITION $ 413,124,772 $ 168,502,911 $ 581,627,683 The accompanying notes are an integral part of these financial statements. Page 14

15 PUBLIC UTILITY DISTRICT NO. 1 OF COWLITZ COUNTY, WASHINGTON STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET POSITION FOR THE YEAR ENDED DECEMBER 31, 2015 Electric Production Total OPERATING REVENUES Retail sales $ 248,215,014 $ 7,601,976 $ 255,816,990 Wholesale sales 3,352,741-3,352,741 Other operating revenues 1,899,085-1,899,085 Total operating revenues 253,466,840 7,601, ,068,816 OPERATING EXPENSES Power costs 195,200, ,200,626 Operations expense 20,494,327 1,667,205 22,161,532 Maintenance expense 5,751, ,176 6,674,737 Depreciation and amortization 11,091,596 3,121,043 14,212,639 Taxes 10,260,270 45,369 10,305,639 Total operating expenses 242,798,380 5,756, ,555,173 OPERATING INCOME 10,668,460 1,845,183 12,513,643 OTHER INCOME (EXPENSE) Interest and dividend income 264, , ,237 Interest on long-term debt (8,158,894) (2,449,327) (10,608,221) Amortization of regulatory asset (116,601) (33,312) (149,913) Debt issuance costs (629,569) (134,088) (763,657) Income from Harvest Wind Project 504, ,888 Miscellaneous nonoperating income (expense) 24, ,924 Total other income (expense) (8,110,678) (2,081,064) (10,191,742) CHANGE IN NET POSITION BEFORE CONTRIBUTIONS AND SUBSIDY 2,557,782 (235,881) 2,321,901 Contributions in aid of construction 1,657,883-1,657,883 BAB subsidy 926, ,009 CHANGE IN NET POSITION 5,141,674 (235,881) 4,905,793 TOTAL NET POSITION, beginning of year 168,124,254 94,513, ,637,443 ACCUMULATED ADJUSTMENT FOR CHANGE IN ACCOUNTING PRINCIPLE (12,932,678) - (12,932,678) TOTAL NET POSITION, as restated 155,191,576 94,513, ,704,765 TOTAL NET POSITION, end of year $ 160,333,250 $ 94,277,308 $ 254,610,558 The accompanying notes are an integral part of these financial statements. Page 15

16 PUBLIC UTILITY DISTRICT NO. 1 OF COWLITZ COUNTY, WASHINGTON STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2015 Electric Production Total CASH FLOWS FROM OPERATING ACTIVITIES Cash received from customers $ 250,880,644 $ 7,601,976 $ 258,482,620 Cash payments to suppliers (203,772,198) (2,495,487) (206,267,685) Cash payments to employees (12,803,622) - (12,803,622) Cash payments for taxes (9,986,010) (8,823) (9,994,833) Net cash from operating activities 24,318,814 5,097,666 29,416,480 CASH FLOWS FROM NON-CAPITAL FINANCING ACTIVITIES Inter-System Advances (657,786) 657,786 - Net cash from non-capital financing activities (657,786) 657,786 - CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Construction and acquisition of utility plant, net (12,532,187) 30,271 (12,501,916) Net proceeds from issuance of long-term debt 2,825, ,184 3,008,708 Principal paid on long-term debt (8,390,000) (1,080,000) (9,470,000) Debt issuance costs (629,569) (134,088) (763,657) Interest paid on long-term debt and notes (9,483,473) (2,918,923) (12,402,396) Harvest Wind Project, net 2,509,577-2,509,577 Contributions in aid of construction 1,657,883-1,657,883 BAB subsidy 926, ,009 Materials and supplies 115, ,350 Other charges, net 313, ,797 Miscellaneous nonoperating 24, ,924 Net cash from capital and related financing activities (22,662,265) (3,919,456) (26,581,721) CASH FLOWS FROM INVESTING ACTIVITIES Net Beacon Hill 241, ,273 Interest and dividends on investments 244, , ,933 Investment in associated organizations 251, ,006 Net cash from investing activities 736, ,563 1,272,212 NET CHANGE IN CASH 1,735,412 2,371,559 4,106,971 CASH AND CASH EQUVALENTS, beginning 103,400,649 37,180, ,581,263 CASH AND CASH EQUVALENTS, end of year $ 105,136,061 $ 39,552,173 $ 144,688,234 The accompanying notes are an integral part of these financial statements. Page 16

17 PUBLIC UTILITY DISTRICT NO. 1 OF COWLITZ COUNTY, WASHINGTON STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2015 Reconciliation of operating income to net cash from operating activities: Electric Production Total Operating income $ 10,668,460 $ 1,845,183 $ 12,513,643 Adjustments to reconcile operating income to net cash from operating activities: Depreciation and amortization 11,091,596 3,121,043 14,212,639 Amortization of energy purchase agreement 4,317,725-4,317,725 Changes in assets and liabilities: Customer accounts receivable and unbilled (4,068,017) - (4,068,017) Other accounts receivable 1,882,490-1,882,490 Accounts receivable from assoc. companies (962) - (962) Prepayments (98,320) 58,335 (39,985) Other current assets 36,049-36,049 BPA transmission credit receivable 1,016,890-1,016,890 Option premiums 24,580-24,580 Accounts payable (62,117) 35,597 (26,520) Accounts payable to assoc. companies Accrued wages and benefits (529,402) - (529,402) Net pension liability and related (188,695) - (188,695) Customer deposits (399,707) - (399,707) Taxes payable 274,260 36, ,806 Other current liabilities (72,009) - (72,009) Deferred compensation and retirement (41,115) - (41,115) Other credits (31,401) - (31,401) Post-retirement benefit obligation 498, ,509 $ 24,318,814 $ 5,097,666 $ 29,416,480 The accompanying notes are an integral part of these financial statements. Page 17

18 PUBLIC UTILITY DISTRICT NO. 1 OF COWLITZ COUNTY, WASHINGTON NOTES TO THE COMBINED FINANCIAL STATEMENTS For the Year Ended December 31, 2015 These notes are an integral part of the accompanying financial statements. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Reporting Entity Public Utility District No. 1 of Cowlitz County, Washington (the District) was founded on November 3, 1936 and is a municipal corporation of the State of Washington. The District is governed by an elected three-member board of commissioners that have the responsibility to set rates and charges for services provided. The District s reporting entity is comprised of the combined Electric System and Production System (66.8 MW Lewis River Swift Plant No. 2 Hydroelectric System). Inter-company balances and transactions have not been eliminated from the combined amounts reported. The District has no component units. The District s wholesale activity is generated from the sale of the output from interests in two wind projects; 46% of the MW White Creek Project (contractual interest) and 30% of the 98.9 MW Harvest Wind Project (tenant in common). Both projects are located in Klickitat County, WA. B. Basis of Accounting and Presentation The District s accounting policies are in accordance with accounting principles generally accepted in the United States of America. The District applies accounting and reporting standards of the Governmental Accounting Standards Board (GASB), exclusively. The financial statements use a flow of economic resources measurement focus to determine financial position and the change in financial position. The accounting principles used are similar to those applicable to businesses in the private sector and, thus, are maintained on the accrual basis of accounting. Revenues are recognized when earned and expenses are recognized when incurred. Accounting records are maintained in accordance with methods prescribed by the State Auditor under the authority of Chapter RCW and the Uniform System of Accounts prescribed by the Federal Energy Regulatory Commission (FERC). C. Change in Accounting Principle In 2015, the District implemented GASB Statement No. 68, Accounting and Financial Reporting for Pensions and GASB Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date - an amendment of GASB Statement No. 68. The primary objective of GASB Statement No. 68 is to improve accounting and financial reporting by state and local governments for pensions. GASB Statement No. 68 establishes standards for measuring and recognizing liabilities, deferred outflows of resources, deferred inflows of resources and expense. For defined benefit pensions, this statement identifies the methods and assumptions that should be used to project benefit payments, discount projected benefit payments to their actuarial present value and attribute that present value to periods of employee service. In addition, prior to implementing GASB Statement No. 68, employers participating in a cost-sharing plan recognized annual pension expense essentially equal to their contractually required contribution to the plan. Upon the adoption of GASB Statement No. 68, employers participating in cost-sharing plans recognize their proportionate share of the collective pension amounts for all benefits provided through the plan based on an allocation methodology. GASB Statement No. 71 amends GASB Statement No. 68 regarding the deferred outflows of resources for governments whose current year pension contributions are reported subsequent to the measurement date. The collective financial impact resulting from the implementation of GASB Statements No. 68 and 71 is the restatement of 2015 beginning net position by $12.9 million (See Note 10). Page 18

19 D. New Accounting Standards GASB has issued the following Statements for which the District is evaluating the impact on its combined financial statements: Statement No. 72, Fair Value Measurement and Application, effective for financial statement periods beginning after June 15, 2015 Statement No. 73, Accounting and Financial Reporting for Pensions and Related Assets that are Not Within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68, effective for financial statements for fiscal years beginning after June 15, 2016 Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other than Pension Plans, effective for financial statements for fiscal years beginning after June 15, 2016 Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions, effective for financial statements for fiscal years beginning after June 15, 2017 Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments, effective for financial statements for fiscal years beginning after June 15, 2015 E. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. F. Cash Equivalents The District considers all highly liquid investments (including restricted assets) with a maturity of three months or less to be cash equivalents. Balances in the Local Government Investment Pool (LGIP) are considered cash equivalents as they can be converted to cash within one day. G. Investments The District records investments at fair value based on quoted market rates, with changes in unrealized gains and losses reported as investment income (See Note 2). H. Accounts Receivable and Allowance for Uncollectible Accounts Accounts receivable are recorded when invoices are issued and are written-off when they are determined to be uncollectible. The allowance for uncollectible accounts includes amounts estimated through an evaluation of specific accounts, based on the best available information, of customers that may be unable to meet their financial obligations, and a reserve based on historical experience. Actual losses between twelve and fifteen months old are then charged against the provision for uncollectible accounts quarterly. I. Other Accounts Receivable Other accounts receivable consists of certain wholesale transactions, conservation reimbursements, aid to construction billings and other miscellaneous customer and non-customer items that may require invoicing that would not normally be entered into the customer service billing system. Page 19

20 J. Interfund Balances and Transactions The District s Electric System makes payments for goods, services and taxes on behalf of the Production System. This is reflected in the statement of net position as accounts receivable from associated companies. Alternatively, the amounts due by the Production System to the Electric System are reflected in the statement of net position as accounts payable to associated companies. These accounts include only short-term obligations which are paid monthly and are not interfund loans. A description of loans and long-term advances between funds is contained in Note 7. K. Materials and Supplies Materials and supplies consist of items for plant maintenance and construction and are stated at average cost. L. Restricted Assets In accordance with bond resolutions and certain related agreements, separate restricted funds are required to be established. Cash and investments held in these funds are restricted for specific uses, including construction, debt service and other special reserve requirements. M. Utility Plant and Depreciation Utility plant is stated at original cost or, if donated, fair value (See Note 3). Cost includes labor, materials and related indirect costs. Additions, renewals and betterments with a minimum cost of $1,000 per item are capitalized. Repairs and minor replacements are charged to operating expenses. When an asset is removed from service and retired, unless it s a major retirement or a general plant asset, the cost of property plus removal cost less salvage is charged to accumulated depreciation. No material utility plant impairments were noted for the year ended December 31, Contributions by developers and customers are recorded at contract price or cost as contributions in aid-of-construction and recorded in the statement of revenues, expenses and changes in net position. Depreciation is computed on the straight-line method over estimated useful lives as follows: Distribution Plant - 20 to 33 years; Transmission Plant - 33 years; General Plant - 4 to 50 years; Production Plant - 10 to 50 years; FERC License - 50 years. N. White Creek Wind Project Energy Purchase Agreement In November 2007 the White Creek Wind Project began energy production and the District paid $85,572,237 under the Amended and Restated White Creek Wind Project Energy Purchase Agreement to receive a 46% share of the energy for 20 years. With certain exceptions, the Agreement stipulates a minimum Annual Energy Quantity (225,917 MWh). The payment was made with unrestricted funds ($70,354,497) and a loan from the Production System to the Electric System ($15,217,740 See Note 7). The prepayment is being amortized on a straight-line basis over the life of the contract. In addition, the District is responsible for its share of annual operating costs. O. BPA Transmission Credit Receivable In October 2007 the White Creek Wind Project assigned 46% of its Bonneville Power Administration (BPA) transmission credit to the District. For the term of the agreement beginning January 1, 2008 and ending the sooner of the exhaustion of the assigned credit or January 1, 2021, the District will receive amounts for use of the facilities from BPA. During 2015 the District received $1,016,890 under this agreement. Page 20

21 P. Regulatory Assets The District has deferred costs to be charged to future periods matching the time periods when the expenses are included in rates. Q. Unamortized Bond Premiums Bond premiums are amortized to interest expense using the effective interest method over the term of the bonds. R. Debt Refundings For current and advance refundings resulting in defeasance of debt, the difference between the reacquisition price and the net carrying amount of the old debt (gain or loss) is deferred and amortized as a component of interest expense over the remaining life of the old debt or the new debt, whichever is shorter. These amounts are reported as deferred inflows or outflows of resources on the statement of net position. S. Fair Value of Financial Instruments The carrying amounts of current assets, including restricted cash and investments, and current liabilities approximate fair value due to the short-term maturity of those instruments. The fair value of the District s investments and debt are estimated based on the quoted market prices for the same or similar issues. T. Derivative Instruments The District enters into derivative energy transactions to hedge its known or expected positions within its approved Risk Management policy. Decisions are made to enter into forward transactions to protect its financial position, specifically to deal with expected long and short positions as determined by projected load and resource balance positions, with the objective of providing stable rates and meeting budget. Subject to certain exceptions GASB requires that every derivative instrument be recorded on the statement of net position as an asset or liability measured at its fair value, and that changes in the derivative s fair value be recognized currently in earnings unless such derivatives meet specific hedge accounting criteria to be determined as effective. Effective hedges qualify for hedge accounting and such changes in fair values are deferred. These are recorded on the statement of net position as deferred inflows/outflows of resources as accumulated increase/decrease in fair value of hedging derivatives. It is the District s policy to document and apply as appropriate the normal purchase and normal sales exception under GASB. The District has reviewed its various contractual arrangements to determine applicability of these standards. Purchases and sales of forward electricity and option contracts that require physical delivery and which are expected to be used or sold by the reporting entity in the normal course of business are generally considered normal purchases and normal sales. These transactions are excluded under GASB and therefore are not required to be recorded at fair value in the financial statements. Certain put and call options and financial swaps for electricity are considered to be derivatives under GASB, but do not generally meet the normal purchases and normal sales criteria. Page 21

22 As of December 31, 2015, the District had the following derivative instruments outstanding. Options are amortized to power costs over the exercise period of the option. Fair value of derivative assets are recorded under other charges and fair value of derivative liabilities are recorded under other credits on the statement of net position. Options and Swaps Hedging Derivatives 2015 Notional value $ 4,027,487 Volumes (MWH) 182,366 Fair value - asset $ 1,236,631 Fair value - liability $ 33,839 Reference rates Mid-C index Dates entered into 9/13-12/15 Dates of maturity 1/16-6/17 Cash paid $ 97,020 The fair values used for the mark-to-market amounts are based on the futures price curve for the Mid-Columbia Intercontinental Exchange. The District has developed a credit policy that establishes guidelines for setting credit limits and monitoring credit exposure on a continuous basis. The policy addresses frequency of counterparty credit evaluations, credit limits per specific counterparty and counterparty credit concentration limits. Commodity transactions, both physical and financial, are entered into only with counterparties approved by the District s Risk Management Committee for creditworthiness. The District has entered into master enabling agreements with various counterparties, such as International Swaps and Derivatives Association Agreements (ISDA) for financial transactions. All of the enabling agreements have provisions addressing credit exposure and provide for various remedies to assure financial performance, including the ability to call on additional collateral as conditions warrant, generally as determined by the exposed party. The District also uses netting provisions in the agreements to diffuse a portion of the risk. The District proactively works to eliminate or minimize basis risk on energy transactions by entering into derivative transactions that settle pursuant to an index derived from market transactions at the point physical delivery is expected to take place. There are no derivative transactions outstanding that carry basis risk as of December 31, As of December 31, 2015, no termination events have occurred, and there are no outstanding transactions with material termination risk. There is no rollover, interest rate or market access risk for these derivative products at December 31, U. Compensated Absences The District accrues personal leave benefits as the obligation is incurred. Personal leave is limited to sixty days for union employees and one hundred fifty days for staff at the end of any calendar year. V. Rate Stabilization Fund The District s Board of Commissioners deferred amounts as allowed for under regulatory accounting and bond covenants. Such amounts will be amortized to revenue or a reduction in power costs consistent with ratemaking decisions. For the year ended December 31, 2015, no amounts were deferred. Page 22

23 W. Compensation and Retirement Reserves Personal leave accruals may be transferred, according to the District s Banked Personal Leave Plan, into the Banked Personal Leave Fund. Employee amounts in the Banked Personal Leave Fund are no longer tied to the employee s wage rate, but accrue interest according to the earnings of the Banked Personal Leave Fund investments. At December 31, 2015 the value of the accrued liability was $282,031. Effective August 1, 1984, the District established a Retirement Reserve Fund in response to the Washington State Legislature s SHB 843 which was signed into law on March 15, SHB 843 reduced the maximum days of accrued vacation applied to retirement payable by the State to 30 days, with the balance of the maximum accrued vacation and floating holidays applied to retirement payable by the employer under the average compensation formula for Plan 1 employees. The District has elected to fund the financial liability for Plan 1 employees for those days in excess of the 30 days funded by the State. When the District pays the lump sum due for days in excess of 30, the District has no future liability for that retiree s payments. As of December 31, 2015 the amount in the Retirement Reserve Fund was $47,513. X. Net Position Net position consists of: Net investment in capital assets This component of net position consists of capital assets, net of accumulated depreciation, less outstanding balances of any bonds and other borrowings that are attributable to the acquisition, construction, or improvement of those assets. Restricted This component consists of net assets on which constraints are placed as to their use. Constraints include those imposed by creditors (such as through debt covenants), contributors, or laws or regulation of other governments or constraints imposed by law through constitutional provisions or through enabling legislation. Unrestricted This component of net position consists of net assets that do not meet the definition of restricted or net investment in capital assets, including the White Creek Wind Project Energy Purchase Agreement and joint venture in the Harvest Wind Project (net of inter-system advances). Y. Operating Revenues and Expenses Operating revenues and expenses result from providing services in connection with the District s principal ongoing operations. Operating revenues are recognized when billed and expenses are recognized when incurred. In addition, the District recognizes unbilled revenue, revenues from services provided, but not yet billed. The principal operating revenues of the District are charges to customers for electric service. Operating expenses for the District include the cost of power, operations, maintenance, administrative expenses, depreciation on capital assets and taxes. All revenues and expenses not meeting this definition are reported as non-operating revenues and expenses. Approximately 50% of Electric System retail sales were from two industrial customers. The credit practices of the District require an evaluation of each new customer s credit worthiness on a case-by-case basis. Based on policy, a deposit may be obtained from the customer. Except for the two large industrial customers, concentrations of credit risk with respect to receivables for retail customers are limited due to the number of customers comprising the District s customer base. Credit losses have been within management s expectations. Similar to its evaluation of residential, commercial and industrial customers credit reviews, the District evaluates its wholesale power customers by reviewing credit ratings and financial credit worthiness of existing and new customers. Page 23

24 Z. Significant Risks and Uncertainties The District is subject to certain business risks that could have a material impact on future operations and financial performance. These risks include, but are not limited to, weather and natural disaster related disruptions; collective bargaining labor disputes (current contract expires March 31, 2018); fish and other Endangered Species Act issues; Environmental Protection Agency regulations; federal and state government regulations or orders; deregulation of the electric industry; and market risks inherent in buying and selling of power, a commodity with inelastic demand characteristics and minimal storage capability. The District maintains insurance coverage for property, casualty and liability claims and is selfinsured for employee health benefits up to certain stop-loss limits. Health benefit claims paid for the year ended December 31, 2015 totaled approximately $3 million. The District participates in a State of Washington plan for workers compensation and is self-insured for unemployment benefits. Page 24