Public Utility District No. 1 of Kittitas County

Transcription

1 Financial Statements Audit Report Public Utility District No. 1 of Kittitas County For the period January 1, 2014 through December 31, 2015 Published December 19, 2016 Report No

2 Washington State Auditor s Office December 19, 2016 Board of Commissioners Public Utility District No. 1 of Kittitas County Ellensburg, Washington Report on Financial Statements Please find attached our report on Public Utility District No. 1 of Kittitas 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 Summary Schedule Of Prior Audit Findings... 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... 6 Independent Auditor s Report On Financial Statements... 8 Financial Section About The State Auditor s Office Page 3

4 SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS Public Utility District No. 1 of Kittitas County January 1, 2014 through December 31, 2015 This schedule presents the status of findings reported in prior audit periods. The status listed below is the representation of Public Utility District No. 1 of Kittitas County. The State Auditor s Office has reviewed the status as presented by the District. Audit Period: 01/01/ /31/2013 Report Ref. No: Finding Ref. No: Finding Caption: The District s controls over financial statement preparation are inadequate to ensure accurate and complete financial reporting. Background: It is the responsibility of District management to design and follow internal controls that provide reasonable assurance regarding the reliability of financial reporting. We identified the following internal controls that, when taken together, represent a material weakness: Staff responsible for financial statement preparation prior to 2013 did not have the technical knowledge needed to ensure the statements were prepared in accordance with GAAP. Specifically, District staff was not aware of accounting principles related to recording capital contributions. Staff did not perform adequate research to ensure proper accounting treatment was made for contributions in aid of construction. We identified the following material errors during our audit: The District reported private party down payments for new or extended service lines as a reduction of utility plant costs instead of revenue. This practice is not consistent with GAAP revenue recognition requirements. In 2013, under the direction of a new Finance Manager, the District identified the error and recorded a 2012 prior period adjustment to beginning net position and utility plan in service of $3,673,871. This adjustment represents 25 percent of 2012 beginning net position. Status of Corrective Action: (check one) Fully Partially Not Corrected Corrected Corrected Finding is considered no longer valid Corrective Action Taken: The District s controls over financial statement preparation are adequate to ensure accurate and complete financial reporting. Page 4

5 The District hired a CPA in 2012, a CPA consulting firm with utility accounting expertise in 2013 and another CPA in In addition, the District has sent all staff members to training for work orders, inventory, accounts payable and utility accounting during the last 4 years. Staff members worked closely with the Finance Manager to develop an Accounting Procedures Manual. The review and approval processes taught staff members the link and interconnection each of them have on financial reporting and educated them on the definition of internal controls. This manual is used as a reference guide and training tool by management. The District used GFOA s guidance and an internal controls report, prepared by dm-t, to prioritize and write policies with the goal of guiding and training staff members and Commissioners. Beginning in 2014, the District approved policies including Asset Management, Budget, Debt Management, Financial reporting and Internal Controls, and in 2015 approved the Warehouse and Material Yard policy. These policies and the Accounting Procedures Manual have been key components of a cultural change of understanding GAAP reporting requirements. The internal audit process with annual reporting began in Initial reporting was to the Board. In 2016 an Audit Committee was formed to accept the internal report and formulate a process for reporting, accessing risk and documenting the progress. The committee is comprised of one Commissioner, General Manager and the Finance Manager. Page 5

6 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 Kittitas County January 1, 2014 through December 31, 2015 Board of Commissioners Public Utility District No. 1 of Kittitas County Ellensburg, 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 Public Utility District No. 1 of Kittitas County, Washington, as of and for the years ended December 31, 2015 and 2014, and the related notes to the financial statements, which collectively comprise the District s basic financial statements, and have issued our report thereon December 13, As discussed in Note 2 to the financial statements, during the year ended December 31, 2014, the District implemented Governmental Accounting Standards Board Statement No. 68, Accounting and Financial Reporting for Pensions an amendment of GASB Statement No. 27. INTERNAL CONTROL OVER FINANCIAL REPORTING In planning and performing our audits 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 opinion 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, or a combination of Page 6

7 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 December 13, 2016 Page 7

8 INDEPENDENT AUDITOR S REPORT ON FINANCIAL STATEMENTS Public Utility District No. 1 of Kittitas County January 1, 2014 through December 31, 2015 Board of Commissioners Public Utility District No. 1 of Kittitas County Ellensburg, Washington REPORT ON THE FINANCIAL STATEMENTS We have audited the accompanying financial statements of Public Utility District No. 1 of Kittitas County, Washington, as of and for the years ended December 31, 2015 and 2014, and the related notes to the financial statements, which collectively comprise the District s basic financial statements as listed on page 11. 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 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, but not for the purpose of Page 8

9 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 opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Public Utility District No. 1 of Kittitas County, as of December 31, 2015 and 2014, and the changes in financial position and cash flows thereof for the years then ended in accordance with accounting principles generally accepted in the United States of America. Matters of Emphasis As discussed in Note 2 to the financial statements, in 2014, 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. 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 12 through 20 and pension plan information on pages 48 through 52 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. Page 9

10 OTHER REPORTING REQUIRED BY GOVERNMENT AUDITING STANDARDS In accordance with Government Auditing Standards, we have also issued our report December 13, 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 December 13, 2016 Page 10

11 FINANCIAL SECTION Public Utility District No. 1 of Kittitas County January 1, 2014 through December 31, 2015 REQUIRED SUPPLEMENTARY INFORMATION Management s Discussion and Analysis 2015 and 2014 BASIC FINANCIAL STATEMENTS Statement of Net Position 2015 and 2014 Statement of Revenues, Expenses and Changes in Net Position 2015 and 2014 Statement of Cash Flows 2015 and 2014 Notes to Financial Statements 2015 and 2014 REQUIRED SUPPLEMENTARY INFORMATION Schedule of Employer s Share of Net Pension Liability Pension Plans PERS 1 and PERS 2/ and 2014 Schedule of Contributions Pension Plans PERS 1 and PERS 2/ and 2014 Notes to PERS Plan Schedules 2015 Page 11

12 Management s Discussion and Analysis Public Utility District No. 1 of Kittitas County, Washington December 31, 2015 and 2014 The following is a discussion and analysis of the financial activities of Public Utility District No. 1 of Kittitas County (the District) for the years ended December 31, 2015 and It is designed to be used in conjunction with the financial statements, notes and other supplementary information. FINANCIAL HIGHLIGHTS Credit ratings are as follows: Moody s - A1 Standards & Poor s A Fitch N/A During 2015, the District adopted a two year Strategic Plan covering years to support the Mission and Vision Statements. Commissioners and staff identified eight objectives to use in evaluating the District overall performance. The plan focuses on safety, reliability, customer service, asset management, reasonable cost-based rates, financial sustainability, workforce development and governance. Increased staffing levels allow for additional customer programs, reliable information, regulatory compliance and fiscally responsible decisions. The District continues to outsource legal, engineering studies, pole testing, locates, meter audits, IT, conservation, printing and statement processing. The District improved the website offering enhanced payment options and convenient time sensitive methods for delivery and receipt of information. The website can be accessed at Public meetings held during 2015 resulted in approval and implementation of a new Irrigation rate structure effective February All rates increased 3.1% November 1, 2015 to compensate for the bi-annual BPA rate increase. The District experienced natural disasters over the last three years. Reserves initially funded the damages. Some costs were recaptured through reimbursements from FEMA and a legal settlement. As of the financial statement date the District has remaining obligations to retain a portion of the FEMA funds. The District promotes conservation efforts through BPA sponsored programs. Fiscal year allowable reimbursements were reached and the District requested additional funding for Customers participated in home energy programs, lighting projects and received energy saving products. During 2013, the District started a Helping Hands program for elderly low-income customers, funded by District employees and customers. Donations doubled in 2014 and increased by 23% in Distributed generation customers increased in 2015 and reached the maximum allowable level for participation in the Washington State Renewable Energy System Cost Recovery Incentive Payment Program whose reimbursement is capped at $100,000. The District placed a moratorium on new Net metering customers to avoid reducing the incentive payment for existing participants and allow a full review and determination of the impacts on other customers. The Districts Line Extension policy reflects a philosophy that Growth Pays for Growth. The decrease in subsidization was designed to limit or delay future rate increases for power sales Page 12

13 Management s Discussion and Analysis and borrowed funds. Contributions in Aid to Construction have been close to $300,000 for the last three years. Growth is forecast at less than 1% for the next five years. Current market conditions allowed the District to take advantage of bank financing with lower interest rates and issuance costs other than with a traditional Bond sale. The District refunded 2005 Bonds at 2.31% for 15 years, saving the District $1,055,803 over the term of the debt. The District reduced debt issuance costs and front loaded interest expense by not borrowing additional monies. The plan is to utilize available cash reserves and short term bond anticipation notes until 2019 when 2009 Bonds are callable. The District has a 10-year Work Plan totaling $17,618,536 of which $4,739,429 is expected to occur in the next three years. Future expenditures include facility improvements, vehicle replacement, system improvements and redundancy. Capital projects completed during 2015 include: Smithson Feeder S2 Upgrades In 2015, a contractor was hired to upgrade 2.1 miles of small conductor single phase overhead line with large conductor three phase overhead, replace aging or deteriorated poles and upgrade structures to current standards. The pole changes were completed but only 1.8 miles of the re-conductor was finished due to weather conditions. This project balances the load on the distribution system across all three phases and lowers the system losses. It is part of a larger system plan to provide redundancy to the Teanaway substation customers from the Smithson substation when the entire feeder tie is complete. Lauderdale Junction This project is part of a larger vision to Network the PUD substations and feeders. The long term goal is to connect the Smithson Substation feeder S2 to the Teanaway Substation feeder T1. This area is considered a view corridor and is challenging for the District to obtain land owner support for overhead transmission lines. The Lauderdale Junction project establishes one mile of an underground express transmission feeder, empty distribution conduit system for future load growth and a Right of Way between the Smithson and Teanaway substation feeders, completing the phase which was stalled in 2008 following community resistance. LED light replacement This District efforts to modernize the operations of the utility continued with this project. The new lights save energy, annual maintenance costs, and come Bluetooth enabled, allowing the District personnel to easily disconnect remotely. In addition, the lights are Dark Sky compliant, providing downward light so there is less light pollution. The complete retirement of plant assets and installation of assets with a different service life created a Loss on Disposal of Property. Engineering studies The District updated the 20 year system study to encompass expansion of the wind farms, additional hay press loads and emerging Cannabis industry in Kittitas County. The study modeled the District s transmission and distribution systems using engineering analysis software to evaluate unbalanced load flow at Year 1 (2015) and Year 20 (2015). Deficiencies identified resulted in recommended projects placed in sequence according to planning quartiles, which give the District management flexibility within the annual capital budget to shuffle the projects within the planning quartile to meet the annual needs. Conductor and Pole Replacement Projects Located in various places in the District system these projects included replacement of aging poles and line. The upgrades improve the reliability, access and capacity of the lines. In addition, they reduce the line losses by improving load balance. Here is a list of the project areas; Gilbert Road Conductor and poles Manastash Road Conductor Reecer Creek Road Poles Vantage Underground cable replacement Bynum Road Poles Brick Mill Road Poles Other single pole locations identified in pole testing survey Page 13

14 Management s Discussion and Analysis OVERVIEW OF THE FINANCIAL STATEMENTS The financial statements of the District are a broad overview of finances and report the activities of the District. The sale of electrical energy and construction of the infrastructure for delivery of the same are the major functions. The District reports finances similar to private sector business enterprises using the accrual basis of accounting in accordance with the accounting principles generally accepted in the United States of America. Under this basis of accounting, revenues are recognized in the period they are earned and expenses are recognized in the period they are incurred, regardless of the timing of related cash flows. The Statement of Net Position includes all of the District s assets, liabilities and net assets. It provides information about the nature and amounts of investments in assets and the obligations of the District. The Statement of Revenues, Expenses and Change in Net Position provide the operating results, nonoperating revenues and expenses, as well as capital contributions. The Statement of Cash Flows provides information about the District s cash receipts and cash disbursements during the year. This statement reports net changes in cash resulting from operations, investing and financing activities. The Notes to the Financial Statements provide additional information that is essential to a full understanding of the information provided in the three statements described above. FINANCIAL ANALYSIS OF THE DISTRICT AS A WHOLE The District continues to experience positive financial health. Overtime this can be measured by increases in Net Position. The equity goal of 50% was attained for the first time in the history of the District in 2014 despite exceeding the budget and natural disasters funded by cash reserves. Non-financial factors should be considered including expected growth, local economic conditions, legislation and reporting standards. GASB 68, Accounting and Financial Reporting for Pensions reduced Net Position by $589,300 for the cumulative effect. Unrestricted cash remains at $5m despite the restricted cash requirements of financing covenants. These results are reported on the Statements of Net Position with the annual activity reported on the Statements of Revenues, Expenses and Changes in Net Position. Page 14

15 Management s Discussion and Analysis The following analysis provides a three-year comparison of key financial information: CONDENSED COMPARATIVE FINANCIAL INFORMATION Page 15

16 Management s Discussion and Analysis ASSETS Restricted cash includes the Construction Funds from Bond issuances, trust account and reserve requirements. Restricted cash increased in 2015 with additional debt reserve requirements, trust account and decreased for funding of capital projects. Restricted cash used for capital projects in 2015 was $.3m. Accounts Receivable increased by 21% in 2015 due to weather and change in approach for billing line extensions and customer system damages. Consistent collection processes are returning positive results. Inventory reduced 22% due to purchasing restrictions, standardization and less capital projects pending. Overall Current Assets have increased in 2015 due to the increase in cash and Accounts Receivable. Net Utility Plant investments were offset by depreciation and retirement in Customer Line Extensions increased Net Utility Plant by $294,256. The aging infrastructure requires aggressive replacement schedules in addition to the increase of new services to maintain the integrity of the infrastructure. Investments in associated organizations increases each year for the equity membership in Federated Insurance. LIABILITIES Accounts payable & accrued expenses increased in 2015 for accrued employee benefits. Principal payments on Bond indebtedness fluctuates annually based on repayment schedules. Current ratio is 3.7% and 3.63% for 2015 and 2014, respectively. Page 16

17 Management s Discussion and Analysis LONG-TERM DEBT Long-term debt decreased following annual scheduled payments of bond principal with a $60,419 increase due to closing costs for the 2005 Bonds refunding in December of NET POSITION Net Investment in Capital Assets and Restricted Net Position fluctuate with the issuance of Bonds, Bond payments and Capital Projects capitalized. The Change in Net Position has increased each year until 2015 with the implementation of GASB 68. Unrestricted Net Position can be used to finance the day-to-day operations of the District and is increased and decreased by earnings. In 2015, the District s decision to refund the 2005 required an increase in the Bond Reserve account which transfer funds to the restricted classification. Page 17

18 Management s Discussion and Analysis STATEMENT OF REVENUES AND EXPENSES Sales of Electricity increased in Irrigation revenues were lower than expected in 2014 and a shortened season due to water restrictions resulted in 2015 being lower than The District s meters are fully automated with heightened data collection capabilities. The accuracy of meter reads allows matching revenues to cost of power. The District increased rates in November 2015 and is again lower than the National average and higher than the state average. The District does not have Generation facilities which allow power production at a lower cost. Net metering customers increased to maximum capacity for the District. New services for the District were 55, 36, 31 for 2013, 2014, and 2015, respectively. The total number of connected services has not increased at the same rate. Other Electric revenue increased in 2015 for FEMA reimbursements and litigation settlement for costs related to natural disasters of previous years. Operating costs remained consistent for 2014 and Power Costs are a direct reflection of Bonneville Power Administration rate structure and increases. The District is a Distribution system only and purchases more than 80% of power costs from BPA. The District demonstrates a willingness and ability to adjust rates in response to the BPA increases. Page 18

19 Management s Discussion and Analysis Operations, Maintenance and Administration expenses constitutes 50% of other Operating expenses. Operations and Maintenance decreased by 15% by not hiring outside Dock Crews and using in house line crew on capital projects. Wages and benefits are the second largest expense for the District. Wages increased as budgeted while a change in medical provider maintained benefit costs. New positions were added to Operations in July 2014, December 2015 and one to Administration January Historical practices for PTO accrual have increase wage expense through buyout provisions offered. Page 19

20 Management s Discussion and Analysis Staffing positions have been modified during the last three years. Limited staff fulfilling multiple positions increases the volatility probability of variances between expense accounts. Non-operating Revenues (expenses) includes interest income, interest expense and miscellaneous other items. Interest expense constitutes the majority of the expense. Interest income is conservative due to market rates and District investment policy. Conservation income and expense was separated and reported as other Non-operating income and expense in Net income before capital contributions increased by $.6m primarily due to the unknown revenue available for prior natural disasters recorded as Other Electric Revenue and a reduction in Operations and Maintenance expense. CONTACTING THE DISTRICT S FINANCIAL MANAGEMENT This report is designed to provide the District s customers, bondholders, creditors and other interested parties with a general overview of the District s finances. If you have questions about this report or need additional information, contact the District at Kittitas County PUD #1, 1400 Vantage Highway, Ellensburg, Washington, Page 20

21 Statements of Net Position December 31, 2015 and 2014 ASSETS AND DEFERRED OUTFLOWS OF RESOURCES Current Assets - Unrestricted: Cash and cash equivalents (Note 3) $ 5,276,259 $ 4,864,182 Accounts receivable, net (Note 4) 1,274,268 1,023,199 Materials and supplies inventory 372, ,146 Prepayments and other current assets 24,306 28,821 6,947,525 6,394,348 Current Assets - Restricted: Restricted cash and cash equivalents (Notes 3 and 5) 1,973,801 1,882,557 Total current assets 8,921,326 8,276,905 Net Utility Plant (Note 6): Utility plant in service 38,380,137 37,458,976 Construction in progress 198, ,860 Accumulated depreciation (12,533,439) (11,698,489) Total net utility plant 26,045,260 26,061,347 Other Assets: Regulatory assets 38,542 43,762 Investments in associated organizations (Note 7) 54,538 96,963 Total other assets 93, ,725 Total assets 35,059,666 34,478,977 Deferred Outflows of Resources: Losses on reacquired debt (Note 8) 97, ,954 Deferred outflows related to the net pension liability (Note 10) 171,212 55,637 LIABILITIES, DEFERRED INFLOWS OF RESOURCES AND NET POSITION Total deferred outflows of resources 269, ,591 Total assets and deferred outflows of resources $ 35,328,841 $ 34,656,568 Current Liabilities: Accounts payable and accrued expenses $ 1,068,021 $ 1,012,656 Consumer deposits 82,195 66,434 Compensated absences 159, ,903 Unearned revenue 145, ,669 Long-term debt, due within one year (Note 9) 895, ,000 Premium on bond issuance, to be amortized within one year (Note 9) 7,007 7,007 Total current liabilities 2,357,889 2,296,669 Noncurrent Liabilities: Long-term debt, due after one year (Note 9) 12,244,499 13,080,000 Premium on bond issuance, to be amortized after one year (Note 9) 115, ,131 Net pension liability (Note 10) 1,065, ,447 Total noncurrent liabilities 13,424,860 13,925,578 Total liabilities 15,782,749 16,222,247 Deferred Inflows of Resources: Deferred inflows related to the net pension liability (Note 10) 161, ,240 Commitments and contingencies (Notes 10 and 11) Total deferred inflows of resources 161, ,240 Total liabilities and deferred inflows of resources 15,944,522 16,547,487 Net Position: Net investment in capital assets 12,880,502 12,119,163 Restricted 1,973,801 1,882,557 Unrestricted 4,530,016 4,107,361 Total net position 19,384,319 18,109,081 Total liabilities, deferred inflows of resources and net position $ 35,328,841 $ 34,656,568 The accompanying notes are an integral part of the financial statements. Page 21

22 Statements of Revenues, Expenses and Changes in Net Position Years Ended December 31, 2015 and Operating Revenues: Sales of electricity $ 8,683,513 $ 8,589,754 Other operating revenues 290, ,781 Total operating revenues 8,974,285 8,699,535 Operating Expenses: Cost of power 3,550,497 3,580,022 Distribution expense - operations 517, ,263 Distribution expense - maintenance 566, ,142 Consumer accounts expense 442, ,037 Administrative and general expense 1,070, ,863 Depreciation expense 1,079,008 1,038,462 Tax expense 468, ,309 Other deductions 155,493 32,704 Total operating expenses 7,851,403 7,756,802 Operating income 1,122, ,733 Other Income and Expense: Investment income 23,596 18,963 Interest expense (577,364) (563,911) Loss on disposal of assets (85,754) (137) Other nonoperating income (Note 11) 497,622 12,860 Total other income and expense, net (141,900) (532,225) Income before capital contributions 980, ,508 Capital contributions 294, ,829 Changes in net position 1,275, ,337 Net position, beginning of year 18,109,081 18,465,531 Cumulative effect of change in accounting principle (Note 12) - (1,040,787) Net position, beginning of year, as adjusted 18,109,081 17,424,744 Net position, end of year $ 19,384,319 $ 18,109,081 The accompanying notes are an integral part of the financial statements. Page 22

23 Statements of Cash Flows Years Ended December 31, 2015 and Cash Flows from Operating Activities: Receipts from customers $ 8,692,464 $ 8,767,374 Payments to suppliers (4,848,267) (5,157,738) Payments to or on behalf of employees (1,597,812) (1,689,775) Net cash provided by operating activities 2,246,385 1,919,861 Cash Flows from Capital and Related Financing Activities: Additions to utility plant (1,160,419) (2,214,968) Proceeds from issuance of long-term debt 6,350,419 - Principal payments on long-term debt (7,145,000) (905,000) Interest payments on long-term debt (560,209) (546,927) Contributions in aid of construction 294, ,829 Cash from nonoperating sources 411,868 12,723 Net change in investments in associated organizations 42,425 (8,652) Net cash used by capital and related financing activities (1,766,660) (3,388,995) Cash Flows from Investing Activities: Interest and dividends received 23,596 18,963 Net cash provided by investing activities 23,596 18,963 Net increase (decrease) in cash and cash equivalents 503,321 (1,450,171) Cash and cash equivalents, beginning of year 6,746,739 8,196,910 Cash and cash equivalents, end of year $ 7,250,060 $ 6,746,739 Reconciliation of Cash and Cash Equivalents to the Statements of Financial Position: Cash and cash equivalents $ 5,276,259 $ 4,864,182 Restricted cash and cash equivalents 1,973,801 1,882,557 Cash and cash equivalents, end of year $ 7,250,060 $ 6,746,739 Reconciliation of Operating Income to Net Cash Provided by Operating Activities: Operating income $ 1,122,882 $ 942,733 Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation expense 1,176,506 1,140,630 Changes in: Accounts receivable, net (251,069) 25,471 Materials and supplies inventory 105,454 7,136 Prepayments and other current assets 4,515 (4,245) Regulatory assets 5,220 (43,093) Accounts payable and accrued expenses 55,365 (169,852) Consumer deposits 15,761 8,888 Compensated absences (4,313) 14,038 Unearned revenue (46,513) 45,892 Net pension liability and related deferred outflows (inflows) 62,577 (47,737) Net cash provided by operating activities $ 2,246,385 $ 1,919,861 Supplemental Disclosure of Non-cash Activities: Amortization of losses on reacquired debt $ 23,991 $ 23,991 Amortization of premium on bond issuance (6,836) (7,007) The accompanying notes are an integral part of the financial statements. Page 23

24 Notes to Financial Statements December 31, 2015 and Organization Public Utility District No. 1 of Kittitas County, Washington (the District) is a municipal corporation of the State of Washington established in 1936 to function as a public utility for the purpose of engaging in the generation, transmission, distribution and sale of electric energy. The District serves Kittitas and Yakima counties, including approximately 4,300 residents and businesses, with 735 miles of line. The District's administrative office is located in the City of Ellensburg. The District is governed by an elected three-member Board of Commissioners (Commissioners), which is responsible for the legislative and fiscal control of the District. The Commissioners responsibilities are to appoint the General Manager; approve the District's budgets; adopt regulations; and set policies and guiding financial and operating principles for the operations included in these financial statements. The District has no component units. 2. Summary of Significant Accounting Policies Basis of Accounting The District follows the Federal Energy Regulatory Commission s (FERC) Uniform System of Accounts prescribed for Class A and Class B Electric Utilities. The accompanying financial statements of the District conform to accounting principles generally accepted in the United States of America (GAAP) applicable to a municipal utility. As a result, the District s application of accounting principles generally accepted in the United States of America differs in certain respects from such application by non-regulated enterprises. The differences relate primarily to the time at which various items enter into the determination of operating income in order to follow the principle of matching costs and revenues. The Governmental Accounting Standards Board (GASB) is the accepted standard-setting body for establishing governmental accounting and financial reporting principles. The District has adopted and applied all applicable GASB pronouncements, including GASB Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements. GASB Statement No. 67, Financial Reporting for Pension Plans an amendment of GASB Statement No. 25, GASB Statement No. 69, Government Combinations and Disposal of Government Operations and GASB Statement No. 70, Accounting and Reporting for Nonexchange Financial Guarantees were all effective for the District beginning in fiscal year Implementation of these statements did not have a material impact on the District s financial results. Page 24

25 Notes to Financial Statements, Continued December 31, 2015 and Summary of Significant Accounting Policies, Continued Basis of Accounting, Continued In June 2012, GASB issued Statement No. 68, Accounting and Financial Reporting for Pensions An Amendment of GASB Statement No. 27. The primary objective of Statement No. 68 is to improve accounting and financial reporting for pensions by state and local governments. This statement establishes standards for measuring and recognizing liabilities, deferred outflows and deferred inflows of resources and expenses. For defined benefit pension plans, 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. Note disclosure and required supplementary information about pensions are also addressed. This statement, as well as GASB Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date, was effective for the District beginning in fiscal year The District s 2014 Statement of Net Position and Statement of Revenues, Expenses and Changes in Net Position were restated for the impacts of the required retroactive implementation of GASB Statement No. 68 (see Note 12). Prior to implementation of this statement, employers participating in a cost-sharing pension plan recognized annual pension expense substantially equal to their contractually required contributions to the plan. Upon the adoption of GASB Statement No. 68, employers must recognize their proportionate share of the plans collective net pension liability, pension expense and deferred inflows of resources and deferred outflows of resources. Implementation of Statement No. 68 had no impact on the District s cash flows. During 2015, GASB issued Statement No. 72, Fair Value Measurement and Application, Statement No. 73, Accounting and Financial Reporting for Pensions and Related Assets that are not within the Scope of GASB 68, Statement No. 74, Financial Reporting for Postemployment Benefit Plans other than Pension Plans, Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits other than Pensions, Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments, Statement No. 77, Tax Abatement Disclosures, Statement No. 78, Pensions Provided through Certain Multi-Employer Defined Benefit Pension Plans and Statement No. 79, Certain External Investment Pools and Pool Participants. These statements are all effective for fiscal years beginning after The District s management is currently evaluating the financial statement impact of adopting these statements. Page 25

26 Notes to Financial Statements, Continued December 31, 2015 and Summary of Significant Accounting Policies, Continued Cash and Cash Equivalents The District considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. Accounts Receivable Accounts receivable primarily consist of amounts due from providing electricity to the District s customers and are stated at the amount that management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through an allowance for doubtful accounts. Additions to the allowance for doubtful accounts are based on management s judgment, considering historical write-offs, reviews of specific past-due accounts, collections and current credit conditions. Generally, the District considers accounts receivable past due after 30 days. Balances which remain outstanding after management has used reasonable collection efforts are written off through a charge to the allowance for doubtful accounts and a credit to the applicable accounts receivable. Payments received on accounts receivable subsequent to being written off are recorded as a bad debt recovery. Changes in the allowance for doubtful accounts have not been material to the financial statements. Materials and Supplies Inventory Materials and supplies inventory, which consists primarily of items for construction and maintenance of electric plant, is recorded at the lower of weighted average cost or market. Useable materials from plant retirements are returned to inventory at current weighted average cost. Restricted Assets Restricted assets consist of assets that are restricted for specific uses, including debt service and other special reserve requirements in accordance with bond resolutions and related agreements. Net Utility Plant Utility plant is recorded at cost, which includes contracted work, direct labor and materials, and allocable overhead. Major additions and betterments with a cost of $5,000 or more are capitalized. Costs of routine repairs and maintenance that do not improve or extend the useful lives of the related assets, and the replacement and renewal of items determined to be less than units of plant, are charged to maintenance as incurred. Overhead costs, including indirect labor, payroll burden, transportation charges and stores expense, are charged to construction and retirements monthly on a prorated basis. Page 26

27 Notes to Financial Statements, Continued December 31, 2015 and Summary of Significant Accounting Policies, Continued Net Utility Plant, Continued Depreciation is calculated on the straight-line basis over the estimated useful lives of the assets, ranging from 3 to 38 years. Composite rates are used for asset groups of utility plant, therefore no gain or loss is recorded upon retirement or disposal of utility plant unless it represents a material amount. At the time of retirement or sale of depreciable assets, the original cost is removed from utility plant and the cost plus the cost of removal, less net salvage or insurance recovery, is removed from accumulated depreciation and the remaining amount, if material, is recorded as a gain or loss. When general plant assets are retired, sold or otherwise disposed of in the ordinary course of business, their net book value is removed from utility plant and the resulting gain or loss, if any, is recognized. Deferred Charges and Deferred Credits The Commissioners have the authority to establish the level of rates charged for all District services. As a regulated entity, the District s financial statements are prepared in accordance with ASC Topic 980, Regulated Operations, which requires that the effects of the rate-making process be recorded in the financial statements. Accordingly, certain expenses and credits, normally reflected in the Statement of Revenues, Expenses and Changes in Net Position, are recognized when included in rates and recovered from, or refunded to, customers. The District records various regulatory assets and credits to reflect rate-making actions of the Commissioners. Investments in Associated Organizations Investments in associated organizations are recorded at the face value of the related patronage certificates. Other amounts included in investments are generally carried at cost, which approximates fair value. Deferred Financing Costs Costs associated with the issuance of bonds are expensed in the year incurred. Original issue and reacquired bond premiums and discounts related to bonds are amortized over the terms of the respective bonds. Valuation of Long-Lived Assets Management of the District periodically reviews the net carrying value of its assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable. These reviews consider the net realizable value of each asset to determine whether an impairment in value has occurred, and whether there is a need for any asset impairment writedown. Impaired assets are reported at the lower of cost or fair value. At December 31, 2015 and 2014, no assets were considered to be impaired. Page 27

28 Notes to Financial Statements, Continued December 31, 2015 and Summary of Significant Accounting Policies, Continued Compensated Absences The District provides its employees with personal time off (PTO) in lieu of vacation and sick leave. PTO is recorded as an expense and a liability as the benefits accrue. The District's PTO policy includes an annual buy-out provision and a requirement that PTO time accrued may not exceed 900 hours for union employees and 520 hours for nonunion employees. PTO may be deferred and taken in subsequent years, however each employee must schedule and use at least five days of PTO in each calendar year during their first five years of employment and at least 10 days of PTO annually thereafter. All accumulated PTO is payable upon resignation, retirement or death. Revenue and Cost Recognition During 2014, the District completed procedures to obtain meter readings for all meters as of the end of each month. Substantially all of the District s customers meters were read as of December 31, Accordingly, management believes that any unbilled revenue would not be material to the financial statements, and therefore has not provided an accrual for unbilled accounts receivable. Expenses are recorded when the liabilities for goods or services received are incurred. Clearing Accounts Overhead costs, including indirect labor, payroll burden, insurance, depreciation, transportation charges and stores expense, are charged to clearing accounts on a monthly basis. The amounts charged to the clearing accounts are cleared each month of substantially all actual expenses. Transportation and equipment charges are allocated directly to construction work orders to the extent that usage relates to construction in progress. Remaining transportation and equipment expense, along with all other amounts charged to the clearing accounts, are allocated based on equipment usage, labor charges or material issuances, depending on the nature of the charge. Taxes The State of Washington assesses Excise and Privilege taxes on the District. Credit Risk Financial instruments which potentially subject the District to concentration of credit risk consist principally of cash and cash equivalents and accounts receivable. The District maintains its cash in bank deposit accounts at high quality financial institutions. At times, deposit account balances may exceed federally insured limits. The District has not experienced any losses from such accounts and the District s management believes it is not exposed to any significant credit risk on cash and cash equivalents. Page 28