REPORT OF INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS WITH SUPPLEMENTARY INFORMATION FOR TILLAMOOK PEOPLE S UTILITY DISTRICT

Transcription

1 REPORT OF INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS WITH SUPPLEMENTARY INFORMATION FOR TILLAMOOK PEOPLE S UTILITY DISTRICT December 31, 2017 and 2016

2 Table of Contents Board of Directors, Administrative Staff, and Registered Agent 1 Report of Independent Auditors 2 4 Management s Discussion and Analysis 5 8 PAGE Financial Statements Statements of net position 9 10 Statements of revenues, expenses, and changes in net position 11 Statements of cash flows Notes to financial statements Required Supplementary Information Schedule of funding progress for retiree health plan 33 Schedule of proportionate share of the net pension liability 34 Schedule of contributions 35 Supplementary Information Schedule of changes in electric plant in service 36 Schedule of bonds and certificates debt service transactions 37 Schedule of future bonds and certificates debt service requirements 38 Schedule of operating expenses Schedule of five year comparisons of financial ratios Report of Independent Auditors 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 Report of Independent Auditors on Compliance and Internal Control Over Financial Reporting Based on an Audit of Financial Statements Performed in Accordance with Oregon Audit Standards 46 47

3 Board of Directors, Administrative Staff, and Registered Agent BOARD OF DIRECTORS Name Address Position Barbara A. Trout Old Pacific Highway President Rockaway Beach, Oregon Doug Olson PO Box 1000 Vice President Pacific City, Oregon Edwin L. Jenkins 6996 Bewley Creek Road Treasurer Tillamook, Oregon Ken Phillips 4855 Sunset Drive Secretary Tillamook, Oregon Harry E. Hewitt 1816 Ninth Street Director Tillamook, Oregon ADMINISTRATIVE STAFF Name Todd Simmons KC Fagen Jim Martin Marty Holm Barbara Johnson John Luquette Wade Scott Terri Filosi Position General Manager Engineering Manager Finance Manager Customer Services Manager Public Relations Manager Information Technology Manager Operations Manager Human Resources Director REGISTERED AGENT Todd Simmons 1115 Pacific Avenue Tillamook, Oregon 1

4 Report of Independent Auditors The Board of Directors Tillamook People s Utility District Report on the Financial Statements We have audited the accompanying financial statements of Tillamook People's Utility District (the District), which comprise the statements of net position as of December 31, 2017 and 2016, and the related statements of revenues, expenses, and changes in net position, and cash flows for the years then ended, and the related notes to the financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America 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 audits to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 2

5 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Tillamook People's Utility District as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that management's discussion and analysis, schedule of proportionate share of the net pension liability, schedule of contributions, and the schedule of funding progress for retiree health plan be presented to supplement the financial statements. Such information, although not a part of the financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the 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 financial statements, and other knowledge we obtained during our audits of the financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Supplementary Information Our audit was conducted for the purpose of forming an opinion on the financial statements that collectively comprise the District s financial statements. The supplementary information, listed in the table of contents is presented for purposes of additional analysis and is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. Such information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the supplementary information is fairly stated in all material respects in relation to the financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated April 12, 2018 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 the 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. 3

6 Other Reporting Required by Oregon Auditing Standards In accordance with the Minimum Standards for Audits of Oregon Municipal Corporations, we have issued our report dated April 12, 2018, on our consideration of the District s compliance with certain provisions of laws and regulations, including the provisions of Oregon Revised Statutes as specified in Oregon Administrative Rules. The purpose of that report is to describe the scope of our testing of compliance and the results of that testing and not to provide an opinion on compliance. Julie Desimone, Partner for Moss Adams LLP Portland, Oregon April 12,

7 Management s Discussion and Analysis The Management's Discussion and Analysis section of the District's Annual Financial Report presents an analysis of the financial position and activities of Tillamook People's Utility District for the years ended December 31, 2017 and This report has been prepared by management and is a required component of an annual financial report prepared in accordance with generally accepted accounting principles. The discussion is designed to assist readers in understanding the accompanying financial statements through an objective and easily readable analysis of the District's financial activities based on currently known facts and conditions. Financial Highlights Comparison of 2017, 2016 and 2015 revenues & expenses: Change Change from 2016 from to to 2016 Revenues: Sales of electricity $ 38,563,885 $ 36,654,854 $ 1,909,031 $ 34,382,271 $ 2,272,583 Other operating revenues 488, ,218 (104) 449,874 38,344 Interest and other income 210, ,571 75,075 94,844 40,727 Total revenues 39,262,645 37,278,643 1,984,002 34,926,989 2,351,654 Expenses: Cost of power 19,670,874 18,344,814 1,326,060 17,192,295 1,152,519 Distribution expense: Operation 4,036,872 3,943,324 93,548 3,810, ,993 Maintenance 3,209,216 3,027, ,329 3,419,660 (391,773) Customer accounts 1,025,454 1,021,695 3,759 1,024,628 (2,933) Customer service and info 773, ,469 51, ,608 (29,139) Sales 102, ,185 (4,945) 123,074 (15,889) Administrative and general 3,417,212 3,173, ,827 3,077,676 95,709 Depreciation 3,035,194 2,991,773 43,421 2,861, ,403 Taxes 859, ,821 17, ,520 (1,699) Interest on long-term debt 781, ,465 (30,531) 840,868 (28,403) Other charges 15,551 15,566 (15) 15,566 - Total expenses 36,928,427 35,003,384 1,925,043 33,961,596 1,041,788 Change in net position $ 2,334,218 $ 2,275,259 $ 58,959 $ 965,393 $ 1,309,866 Revenues Our revenues from sales of electricity increased $1,909,031 in 2017, which is a change of 5.2%. This was mostly due to the cold winter weather in 2017 as compared to milder weather in Also contributing to the increase was our normal customer and load growth rate of about 0.5%. The increase in 2016 of $2,272,583 or 6.6% was mainly attributed to our October 1, 2015 retail rate increase of 5.0%. Other operating revenues increased $38,344 from 2015 to 2016, largely due to the increase in the rental income of $29,000 from the District s pole contact billings. Interest and other income saw an increase of $75,075 in 2017, and $40,727 in 2016 due to the rise in the rate of earnings on investments over the last few years. 5

8 Management s Discussion and Analysis Power Supply The District s cost of power increased $1,326,060, or 7.2% in As explained above, the cold winter weather in 2017 was the main reason for this increase in power cost. One other contributing factor in the increase was BPA s wholesale power rate increase of 5% which was effective October 1, In 2016, the District s cost of power increased $1,152,519 or 6.7%, which is up from The increase was a result of a combination of a rise in load growth, as well as a 6% BPA wholesale power rate increase that went into effect October 1, Expenses The increase of Distribution Expense Maintenance in 2017 of $181,329 and the decrease in 2016 of $391,773 were both due to the December 2015 storm event. This storm was significant enough to create substantial damage to our facilities and therefore was declared a disaster by the State of Oregon. With this formal proclamation the District qualified for FEMA reimbursement. The higher labor costs related to this storm event were reflected in the District s records in December of 2015, while a reimbursement of $253,000 was received and credited against Distribution Expense Maintenance in The increase in Administrative and General in 2017 of $243,827 or 7.7% was due in part to a one-time investment in upgrading our Industrial Billing Software. The increase of $95,709 or 3.1% in 2016 was a more normal increase. Depreciation Expense increased by only $43,421 or 1.5% in 2017 as a result of significant retirements of meters in The increase in 2016 of $130,403 or 4.6% is a more typical increase for depreciation. 6

9 Management s Discussion and Analysis Statement of Net Position: 2017 Percent 2016 Percent 2015 Percent ASSETS Total electric plant $ 101,327,964 $ 99,395,712 $ 97,163,288 Accumulated provision for depreciation (33,057,622) (32,248,890) (30,427,053) Net electric plant 68,270, % 67,146, % 66,736, % Notes receivable 160, % 167, % 194, % Investments 2,601, % 2,577, % 2,561, % Current assets 18,143, % 18,905, % 18,496, % Other noncurrent assets 22,121, % 19,488, % 17,592, % Deferred outflows of resources 3,915, % 6,771, % 1,074, % Total assets and deferred outflows of resources $ 115,212, % $ 115,057, % $ 106,655, % LIABILITIES AND NET POSITION Net position Net investment in capital assets $ 40,791, % $ 37,915, % $ 35,957, % Restricted 3,357, % 3,562, % 3,387, % Designated 4,000, % 3,400, % 3,400, % Unrestricted 8,502, % 9,439, % 9,298, % Long-term debt 25,733, % 27,569, % 29,368, % Current liabilities 6,987, % 7,022, % 6,496, % Other noncurrent liabilities 12,471, % 13,870, % 6,250, % Deferred inflows of resources 13,368, % 12,276, % 12,497, % Total liabilities, net position and deferred inflows of resources $ 115,212, % $ 115,057, % $ 106,655, % The statement of net position shows a consistent increase in total electric plant of approximately $1.93 million in 2017, and about $2.23 million in However, accumulated provision for depreciation was less consistent with an increase of only $808,732 in 2017 as compared to a more normal increase of $1.8 million in The 2017 increase was lowered by a number of significant retirements of special equipment, specifically meters, and the Nestucca substation transformer. The sum of total electric plant less the accumulated provision for depreciation resulted in increases to net electric plant of approximately $1.1 million in 2017 and $410,000 in The major changes to other noncurrent assets, along with deferred outflows of resources are driven by the change in the regulatory deferral of GASB 68 pension expense. Regulatory Asset pension debit is a significant part of other noncurrent assets and has risen from $6.5 million in 2015, to $7.9 million in 2016, and $9.2 million in In addition, within deferred outflows of resources, the pension part of this line item has increased from $810,000 in 2015, up to $6.5 million in 2016, then down to $3.7 million in On the liability side, the GASB 68 pension adjustments, which are included in other noncurrent liabilities, make the biggest impact to total liabilities. Net position started at $5.8 million in 2015, increasing sharply to $13.6 million in 2016, then dropping to $12.2 million in Deferred inflows of resources started at $1.5 million in 2015, decreased to $900,000 in 2016, then dropped to $700,000 million in

10 Management s Discussion and Analysis Capital Assets The District's investment in net electric plant as of December 31, 2017 amounted to $68,270,342, net of accumulated depreciation representing 59.3% of total assets. The District's investment in net electric plant as of December 31, 2016 and 2015 amounted to $67,146,822 and $66,735,818, net of accumulated depreciation representing 58.5% and 62.6% of total assets, respectively. Investment in electric plant includes land, structures, improvements, station equipment, poles, conductor, meters and transformers. Long Term Debt As of December 31, 2017, the District had $25,733,490 in outstanding debt, which is net of current maturities. Of this amount, $4,485,000 is from the 2008 bond sale, and $3,515,000 is from the 2010 bond sale. In addition, $80,791 is unamortized premium on long term debt, and $17,652,699 reflects revenue certificates of indebtedness, which were issued in lieu of bonds, and represents loans from the Rural Utilities Service. As of December 31, 2016 and 2015, the District had debt outstanding of $27,569,950 and $29,368,157, respectively, net of current maturities. Of this amount for 2016, $4,720,000 is from the 2008 bond sale, $3,990,000 is from the 2010 bond sale, $87,490 is unamortized premium on long term debt, and $18,772,460 consists of revenue certificates of indebtedness. In 2015, $4,945,000 is from the 2008 bond sale, $4,450,000 is from the 2010 bond sale, and $19,861,887 consists of revenue certificates of indebtedness. Next Year s Budget Our 2018 budget forecasts an increase in Sales of Electricity by 3% effective April 1, 2018, but the actual increase is now currently forecasted to be later in the year, more likely October 1, Power Supply expense was budgeted to increase 4% annually based on the BPA 5% increase that went into effect October As the result of a relatively cold 2017, 2018 (weather normalized) was budgeted to be only $417,000, or 2.1% higher in Sales of Electricity, and $552,000, or 1.4% higher in Power Supply expense than the actual audited numbers from Major construction projects in our 2018 budget includes the Tillamook Oceanside Transmission Line, which is budgeted at $1.6 million, improvements to the Beaver Substation budgeted at $1.56 million, and improvements to the Nestucca substation budgeted at $740,000. Most projects will be performed by District employees, with the exception of transmission and substation projects. Additions to long term debt, in the form of a $3 million RUS Loan advance, was also budgeted for in The 2018 budget also includes a $2.3 million capital project, which consists of a remodel for our headquarters lobby and customer services area, as well as a warehouse expansion including new office space for our Operations Department, Warehouse staff, and Metering Department. 8

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12 Statements of Net Position ASSETS AND DEFERRED OUTFLOWS OF RESOURCES December 31, ELECTRIC PLANT: In service at cost 99,487,370 $ 97,746,181 Construction work in progress 1,840,594 1,649,531 Total electric plant 101,327,964 99,395,712 Less accumulated provision for depreciation (33,057,622) (32,248,890) Net electric plant 68,270,342 67,146,822 CURRENT ASSETS Cash and cash equivalents: Cash and cash equivalents 6,776,965 7,797,598 Principal redemption fund restricted 756, ,861 Special deposits related to bond interest restricted 155, ,278 Rate stabilization fund designated 4,000,000 3,400,000 Accounts receivable (net of allowance for doubtful accounts of $239,861 and $231,154, respectively) 3,131,077 3,141,425 Unbilled revenue 1,635,765 1,966,215 Materials and supplies 1,263,233 1,290,076 Prepayments 423, ,203 Total current assets 18,143,713 18,905,656 OTHER NONCURRENT ASSETS Regulatory asset contributions in aid of construction 12,651,273 11,421,122 Regulatory asset pension debit 9,180,229 7,942,665 Restricted investments - bond reserve fund 2,601,062 2,577,967 Notes receivable 160, ,326 Other 290, ,136 Total other noncurrent assets 24,882,908 22,234,216 DEFERRED OUTFLOWS OF RESOURCES Deferred outflows of resources pension 3,694,757 6,528,205 Unamortized loss on bond refunding 220, ,895 Total deferred outflows of resources 3,915,402 6,771,100 Total assets and deferred outflows of resources $ 115,212,365 $ 115,057,794 9 See accompanying notes.

13 Statements of Net Position NET POSITION, LIABILITIES AND DEFERRED INFLOWS OF RESOURCES December 31, NET POSITION Net investment in capital assets $ 40,791,314 $ 37,915,106 Designated for rate stabilization fund 4,000,000 3,400,000 Restricted for bond debt service 3,357,995 3,562,723 Unrestricted 8,502,660 9,439,922 Total net position 56,651,969 54,317,751 CURRENT LIABILITIES Current maturities of long-term debt 1,966,183 1,904,661 Accounts payable 2,597,543 2,733,922 Customer deposits 347, ,187 Accrued interest 155, ,278 Accrued vacation pay 784, ,126 Other accruals 1,136,250 1,065,660 Total current liabilities 6,987,337 7,022,834 LONG-TERM DEBT Revenue bonds, less current maturities 8,000,000 8,710,000 RUS revenue certificates of indebtedness, less current maturities 17,652,699 18,772,460 Unamortized revenue bond premium 80,791 87,490 Total long-term debt 25,733,490 27,569,950 OTHER NONCURRENT LIABILITIES Net pension liability 12,157,906 13,615,194 Other noncurrent liabilities 313, ,267 Total noncurrent liabilities 12,471,216 13,870,461 DEFERRED INFLOWS OF RESOURCES Deferred inflows of resources pension 717, ,676 Regulatory liability contributions in aid of construction 12,651,273 11,421,122 Total deferred inflows of resources 13,368,353 12,276,798 Total net position, liabilities and deferred inflows of resources $ 115,212,365 $ 115,057,794 See accompanying notes. 10

14 Statements of Revenues, Expenses, and Changes in Net Position Years Ended December 31, OPERATING REVENUES Sales of electricity: Residential: Urban and rural $ 16,549,473 $ 15,448,633 Secondary 6,301,660 5,696,422 Commercial: Small 6,886,036 6,411,704 Large 8,367,529 8,623,117 Area lighting 343, ,194 Public lighting 115, ,784 Other operating revenues 488, ,218 Total operating revenues 39,051,999 37,143,072 OPERATING EXPENSES Cost of power 19,670,874 18,344,814 Distribution expense: Operation 4,036,872 3,943,324 Maintenance 3,209,216 3,027,887 Customer accounts expense 1,025,454 1,021,695 Customer service and informational expense 773, ,469 Sales expense 102, ,185 Administrative and general expense 3,417,212 3,173,385 Depreciation 3,035,194 2,991,773 Taxes 859, ,821 Total operating expenses 36,130,942 34,175,353 NET OPERATING REVENUES 2,921,057 2,967,719 NONOPERATING REVENUES (EXPENSES) Interest income 198, ,028 Interest on long-term debt (781,934) (812,465) Other income 11,938 8,543 Amortization of debt premium and loss (15,551) (15,566) Total nonoperating expenses (586,839) (692,460) CHANGE IN NET POSITION 2,334,218 2,275,259 NET POSITION, BEGINNING OF YEAR 54,317,751 52,042,492 NET POSITION, END OF YEAR $ 56,651,969 $ 54,317, See accompanying notes.

15 Statements of Cash Flows Years Ended December 31, CASH FLOWS FROM OPERATING ACTIVITIES Cash received from customers $ 39,381,104 $ 36,823,192 Cash payments for purchased power (19,765,514) (18,185,702) Cash payments to suppliers for goods and services (7,319,230) (6,831,144) Cash payments to employees for services (6,071,746) (6,112,256) Net cash provided by operating activities 6,224,614 5,694,090 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Principal payments on bonds and certificates of indebtedness (1,768,239) (1,562,661) Interest payments on long-term debt (785,367) (718,886) Construction and acquisition of plant (6,089,959) (4,680,156) Contributions in aid of construction 1,836,057 1,070,032 Net cash provided by (used in) capital and financing activities (6,807,508) (5,891,671) CASH FLOWS FROM INVESTING ACTIVITIES Net decrease (increase) in: Notes receivable 7,287 27,393 Investments reserve fund (23,095) (16,632) Interest and other income received 198, ,028 Net cash provided by investing activities 182, ,789 NET DECREASE IN CASH AND CASH EQUIVALENTS (399,994) (59,792) CASH AND CASH EQUIVALENTS, beginning of year 12,089,737 12,149,529 CASH AND CASH EQUIVALENTS, end of year $ 11,689,743 $ 12,089,737 See accompanying notes. 12

16 Statements of Cash Flows Years Ended December 31, Reconciliation of net operating revenues to net cash provided by operating activities: Net operating revenues $ 2,921,057 $ 2,967,719 Adjustments to reconcile net operating revenues to net cash provided by operating activities: Depreciation 3,035,194 2,991,773 Decrease (increase) in: Accounts receivable 10,348 (206,630) Unbilled revenue 330,450 (131,044) Materials and supplies 26,843 (130,756) Prepayments (5,692) (672) Increase (decrease) in: Accounts payable (136,379) 343,741 Customer deposits (11,693) 17,794 Accrued vacation pay (16,104) (23,822) Other accruals 70,590 (134,013) Total adjustments 3,303,557 2,726,371 Net cash provided by operating activities $ 6,224,614 $ 5,694,090 RECONCILIATION OF CASH AND CASH EQUIVALENTS Cash and cash equivalents, current $ 6,776,965 $ 7,797,598 Principal redemption fund, current 756, ,861 Special deposits related to bond interest 155, ,278 Rate stabilization fund designated 4,000,000 3,400,000 $ 11,689,743 $ 12,089, See accompanying notes.

17 Notes to Financial Statements Note 1 Organization and Summary of Significant Accounting Policies Organization Tillamook People's Utility District (the District) is a municipal corporation organized under Oregon Revised Statutes Chapter 261. The District is a power distribution utility serving patrons in almost all of Tillamook County and small portions of Yamhill and Clatsop counties. The District's Board of Directors has the authority to set rates and charges for services furnished. Substantially all revenues are derived from the sale of electric power to residential and commercial customers. Reporting entity The financial statements of the District include all financial activities for which the Board of Directors is financially accountable. The District has no component units. Income tax status The District is a people's utility district organized under Oregon Revised Statutes Chapter 261. As a political subdivision of the State of Oregon, the District is exempt from taxation under the provisions of Section 115 of the Internal Revenue Code. Basis of accounting The District is considered an enterprise and operates as a proprietary fund. The financial statements of the District have been prepared using the economic resources measurement focus and on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (GAAP) as applied to governmental units. The Governmental Accounting Standards Board (GASB) is the standard-setting body for governmental accounting and financial reporting. 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. Revenue recognition Operating revenues generally result from providing electric sales and services. The District utilizes cycle billing and records revenue billed to its customers when the cycle s reads are uploaded into the billing system. Meters are read daily and customer accounts are cycle billed monthly. The District also records unbilled revenue, revenues from electric power delivered but not yet billed. All revenues not meeting this definition are reported as non-operating revenues. Concentration of credit risk Financial instruments that are exposed to concentrations of credit risk consist primarily of cash (see Note 3) and receivables. Credit is extended to customers generally without collateral requirements, however, deposits are obtained from certain customers and formal shut-off procedures are in place. Electric plant Electric plant is recorded at original cost (see Note 2). The cost of additions, renewals and replacements of property with an estimated useful life greater than one year is added to plant, and repairs and maintenance of property is charged to expense. Property units renewed or replaced are removed from the plant at their estimated cost. The cost of plant retired, plus removal cost, less salvage value, is charged to accumulated depreciation. 14

18 Notes to Financial Statements Note 1 Organization and Summary of Significant Accounting Policies (continued) Provision has been made for depreciation of electric plant on annual straight-line composite rates as follows: Transmission plant 2.75% Distribution plant 1.8% 10.0% General plant 3.0% 14.4% Cash equivalents and restricted cash The District considers short-term investments with original maturities of three months or less and demand deposits to be cash equivalents (see Note 3). Restrictions on cash relate to interest and principal set aside for payment of long- term debt. Accounts receivable Accounts receivable are recorded when invoices are issued and are written off when they are determined to be uncollectible. The allowance for doubtful accounts is estimated based on the District s historical losses, review of specific problem accounts, the existing economic conditions, and the financial stability of its customers. Generally, the District considers accounts receivable past due after 30 days. Materials and supplies Materials and supplies consist primarily of items for construction and maintenance of the utility plant and are stated at average cost. Compensated absences Compensated absences consist of accrued vacation and sick time for District employees. Amounts are determined as outlined in the District personnel policy manual. Investments Investments are carried at fair value. Restricted investments consist of the bond reserve fund. Regulatory asset and regulatory liability The District has established a regulatory asset and a regulatory liability for the following items: Contributions in aid of construction Contributions in aid of construction represent customer reimbursements received to cover the cost of certain plant additions. The regulatory liability is established to amortize the contributions at a rate equal to the District s average depreciation rate of 3.3%. In accordance with established Rural Utility Service (RUS) accounting requirements, customer reimbursements are netted against the cost of plant additions. The regulatory asset is established to recognize the impact of GASB No. 33, Accounting and Financial Reporting for Nonexchange Transactions, and amortize it over the useful life of the asset. Pension debits Pension debits represent a portion of the change in net pension items and pension expense, as defined under GASB Statement No. 68. Regulatory accounting is used to recognize pension expense in accordance with the required employer contribution rates set by the Oregon Public Employees Retirement System. Deferred outflows of resources Deferred outflows of resources consist of the following components: 15

19 Notes to Financial Statements Note 1 Organization and Summary of Significant Accounting Policies (continued) Unamortized loss on bond refunding For current and advance refunding resulting in defeasance of debt, the difference between the reacquisition price and the net carrying amount of the old refunded debt (gain or loss) is deferred and amortized as a component of interest expense over the remaining life of the old refunded debt or the new refunded debt, whichever is shorter. These amounts are reported as a deferred outflow of resources on the statements of net position. Pension Deferred outflows of resources related to pension represents deferrals of changes in net pension liability, as defined under GASB Statement No. 68. Deferred inflows Deferred inflows consist of the following components: Contributions in aid of construction Refer to footnote on the previous page. Pension credits Deferred inflows of resources related to pension represents deferrals of changes in net pension liability, as defined under GASB Statement No. 68. Net position Consists of the following components: Net investment in capital assets This component of net position consists of capital assets, net of accumulated depreciation and outstanding balances of any bonds or debt obligations that are attributable to the acquisition, construction, or improvement of those assets. Restricted This component represents net position 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. Designated This component represents net position on which constraints are placed as to their use. Constraints include those imposed internally by the Board of Directors. Unrestricted This component of net position consists of net position that does not meet the definition of restricted or net investment in capital assets. 16

20 Notes to Financial Statements Note 2 Electric Plant Electric plant activity for the year ended December 31, 2017 was as follows: Balance Balance 1/1/2017 Additions Retirements 12/31/2017 Electric plant not being depreciated Land $ 1,107,553 $ - $ - $ 1,107,553 Intangible plant Construction in progress 1,649,531 2,999,320 2,808,257 1,840,594 Total electric plant not being depreciated 2,757,640 2,999,320 2,808,257 2,948,703 Electric plant being depreciated Transmission and distribution 83,384,570 3,789,238 2,245,416 84,928,392 General 13,253, , ,416 13,450,869 Total electric plant being depreciated 96,638,072 4,242,021 2,500,832 98,379,261 Less accumulated depreciation 32,248,890 3,035,194 2,226,462 33,057,622 Total electric plant being depreciated, net 64,389,182 1,206, ,370 65,321,639 Net electric plant $ 67,146,822 $ 4,206,147 $ 3,082,627 $ 68,270,342 17

21 Notes to Financial Statements Note 2 Electric Plant (continued) Electric plant activity for the year ended December 31, 2016 was as follows: Balance Balance 1/1/2016 Additions Retirements 12/31/2016 Electric plant not being depreciated: Land $ 1,098,335 $ 9,218 $ - $ 1,107,553 Intangible plant Construction in progress 1,027,883 2,463,868 1,842,220 1,649,531 Total electric plant not being depreciated 2,126,774 2,469,663 1,842,220 2,754,217 Electric plant being depreciated Transmission and distribution 82,025,883 2,056, ,213 83,384,570 General 13,010, , ,164 13,253,502 Total electric plant being depreciated 95,036,514 2,572, ,377 96,641,495 Less accumulated depreciation 30,427,053 2,991,773 1,169,936 32,248,890 Total electric plant being depreciated, net 64,609,461 (419,415) (202,559) 64,392,605 Net electric plant $ 66,736,235 $ 2,050,248 $ 1,639,661 $ 67,146,822 Note 3 Cash and Investments Cash and investments are comprised of the following as of December 31, 2017 and 2016: Working funds $ 2,050 $ 2,050 Deposits with financial institutions 1,059,207 1,024,345 Deposits with Oregon Local Government Investment Pool 10,628,486 11,063,342 Restricted Investments - bond reserve fund 2,601,062 2,577,967 Total cash and investments $ 14,290,805 $ 14,667,704 18

22 Notes to Financial Statements Note 3 Cash and Investments (continued) Deposits Deposits with financial institutions include bank demand and time certificate deposits. The Oregon State Treasurer is responsible for monitoring public funds held by bank depositories in excess of FDIC insured amounts, and for assuring that public funds on deposit are collateralized to the extent required by Oregon Revised Statutes (ORS) Chapter 295. ORS Chapter 295 requires depository banks to place and maintain on deposit with a third-party custodian bank securities having a value of 10%, 25% or 110% of public funds on deposit depending primarily on the capitalization level of the depository bank. The Oregon Local Government Investment Pool is an external investment pool which is part of the Oregon Short-Term Fund (OSTF). Investment policies are governed by the Oregon Revised Statues and the Oregon Investment Council (Council). The State Treasurer is the investment officer for the Council. Investments are further governed by portfolio guidelines issued by the OSTF Board. The Governor appoints the members of the Council and OSTF Board. The fair value of the District s position in the pool is the same as the value of the pool shares. The OSTF does not receive credit quality ratings from nationally recognized statistical rating organizations. Financial statements for the OSTF may be obtained from the Oregon State Treasurer s website. Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. The Oregon Short-Term Fund manages this risk by limiting the maturity of the investments held by the fund. Custodial credit risk for deposits is the risk that in the event of a bank failure, the District s deposits may not be returned. The District follows State law with respect to custodial credit risk and has not adopted a separate policy. The District created a rate stabilization fund as permitted by the District's bond resolution and is funding it from unrestricted cash and deposits. The resolution allows the District to use amounts in this fund for its debt service coverage calculation as defined in the District's bond resolution. Investments State statutes authorize the District to invest in general obligations of the U.S. Government and its agencies, certain bonded obligations of Oregon municipalities, bank repurchase agreements, bankers' acceptances, and the Oregon Local Government Investment Pool, among others. The District has no investment policy that would further limit its investment choices. 19

23 Notes to Financial Statements Note 3 Cash and Investments (continued) The composition of the District's investments as of December 31, 2017 and 2016 is shown below: Fair Value Percent Fair Value Percent Investment in U.S. Treasury obligations $ 2,601, % $ 2,577, % Total restricted investments $ 2,601, % $ 2,577, % As of December 31, 2017, all of the investments mature in less than one year. Custodial credit risk for investments is the risk that, in the event of the failure of the counterparty, the District will not be able to recover the value of its investments or collateral securities that are in the possession of an outside party. The securities underlying the District s investment in the U.S. Treasury obligations are held by the District s counterparty, not in the District s name. Cash and investments as of December 31, 2017 and 2016, are presented on the statement of net position as follows: Restricted Investments bond reserve fund $ 2,601,062 $ 2,577,967 Cash and cash equivalents 6,776,965 7,797,598 Principal redemption fund 756, ,861 Special deposits related to bond interest 155, ,278 Rate stabilization fund designated 4,000,000 3,400,000 Total cash and investments $ 14,290,805 $ 14,667,704 20

24 Notes to Financial Statements Note 4 Fair Value Measurement The District categorizes its fair value measurements within the fair value hierarchy established by generally accepted accounting principles. The hierarchy is based on the valuation inputs used to measure the fair value of the asset. Level 1 inputs are quoted prices in active markets for identical assets; Level 2 inputs are significant other observable inputs; Level 3 inputs are significant unobservable inputs. The District determines disclosures related to these investments only need to be disaggregated by major type because investing is not a core part of the District s mission. The District has the following recurring fair value measurements: As of December 31, 2017: Fair Value Measurements Using: Quoted Prices in Significant Other Significant Active Markets for Observable Unobservable Identical Assets Inputs Inputs 2017 (Level 1) (Level 2) (Level 3) Investments by fair value level Debt securities US treasury securities $ 2,601,062 $ 2,601,062 $ - $ - Total restricted investments $ 2,601,062 $ 2,601,062 $ - $ - As of December 31, 2016: Fair Value Measurements Using: Quoted Prices in Significant Other Significant Active Markets for Observable Unobservable Identical Assets Inputs Inputs 2016 (Level 1) (Level 2) (Level 3) Investments by fair value level Debt securities US treasury securities $ 2,577,967 $ 2,577,967 $ - $ - Total restricted investments $ 2,577,967 $ 2,577,967 $ - $ - Debt securities classified in Level 1 of the fair value hierarchy are valued using prices quoted in active markets for those securities. 21

25 Notes to Financial Statements Note 5 Long-Term Debt Bonds and certificates Authority to issue revenue bonds is granted to the District under the provisions of Chapter 261, Oregon Revised Statutes. Revenue certificates of indebtedness have been issued in lieu of bonds for loans obtained from the Rural Utilities Service. Long-term debt covenants specify that District revenues are pledged for the retirement of long-term debt. The proceeds of all bonds and certificates were used for construction and acquisition of capital assets. At December 31, 2017 and 2016, long-term debt payable consists of the following: Electric system revenue bonds: Series 2008 $ 4,720,000 $ 4,945,000 Series 2010, refunding bonds 3,990,000 4,450,000 Total electric system revenue bonds 8,710,000 9,395,000 RUS revenue certificates of indebtedness: 2.58% 3.05% certificates 11,991,284 12,528,979 5% certificates 385, ,000 Variable rate certificates 6,532,598 6,963,142 Total RUS revenue certificates of indebtedness 18,908,882 19,992,121 Total bonds and certificates payable 27,618,882 29,387,121 Less: Current maturities (1,966,183) (1,904,661) Add: Unamortized revenue bond premium 80,791 87,490 Long-term debt $ 25,733,490 $ 27,569,950 The Electric System Revenue Bonds, Series 2008, are due annually through December 1, 2032, with interest at 4% to 4.25% per annum payable semi-annually on June 1 and December 1. The Electric System Revenue Refunding Bonds, Series 2010, are due annually through December 1, 2027, with interest at 2% to 4% per annum payable semi-annually on June 1 and December 1. The RUS revenue certificates of indebtedness are due semi-annually or annually through December 31, 2034, with interest at 2.58%, 3.05% or 5% per annum or a variable rate with a maximum rate of 7% per annum payable semi-annually or quarterly on January 1 and July 1 or on March 31, June 30, September 30 and December

26 Notes to Financial Statements Note 5 Long-Term Debt (continued) Principal and interest activity during the years 2017 and 2016 was as follows: Principal Outstanding Matured Outstanding 1/1/2017 Issued and Paid 12/31/2017 Revenue bonds $ 9,395,000 $ - $ 685,000 $ 8,710,000 Certificates of indebtedness 19,992,121-1,083,239 18,908,882 Total $ 29,387,121 $ - $ 1,768,239 $ 27,618,882 Principal Outstanding Matured Outstanding 1/1/2016 Issued and Paid 12/31/2016 Revenue bonds $ 10,060,000 $ - $ 665,000 $ 9,395,000 Certificates of indebtedness 20,889, ,661 19,992,121 Total $ 30,949,782 $ - $ 1,562,661 $ 29,387,121 Scheduled future maturities of principal and interest are as follows: Certificates Revenue Bonds of Indebtedness Totals Year Principal Interest Principal Interest Principal Interest 2018 $ 710,000 $ 336,918 $ 1,256,183 $ 376,287 $ 1,966,183 $ 713, , ,095 1,072, ,110 1,807, , , ,101 1,103, ,405 1,858, , , ,164 1,137, ,983 1,922, , , ,231 1,170, ,049 1,980, , ,015, ,332 6,132,682 1,093,077 9,147,682 1,820, ,900, ,736 5,344, ,483 7,244, , ,691,228 48,089 1,691,228 48,089 Totals $ 8,710,000 $ 2,393,577 $ 18,908,882 $ 3,318,483 $ 27,618,882 $ 5,712,060 Scheduled interest maturities for RUS variable rate loans are based on the maximum rate of seven percent per annum, except for the 23rd Series. The 23rd Series are equal payment loans and scheduled principal and interest maturities are based on an estimated variable rate provided by RUS. 23

27 Notes to Financial Statements Note 6 Retirement Plan Plan description All qualified employees are eligible to participate in one of the Utility s two pension plans administered by Public Employees Retirement System (PERS). The Oregon Public Employees Retirement Fund (Tier 1/Tier 2) is a cost-sharing multiple-employer defined benefit pension plan for qualifying employees hired before August 29, The Oregon Public Service Retirement Plan (OPSRP) is a hybrid successor plan to Tier 1/Tier 2 consisting of two programs: a defined benefit pension plan and a defined contribution program (the Individual Account Program or IAP). The OPSRP pension plan is effective for all new employees hired on or after August 29, The plan provides a life pension funded by employer contributions. Benefits are calculated by a formula for members who attain normal retirement age. The formula takes into account final average salary, years of service and type of service (general or police/fire). Beginning January 1, 2004, all PERS member contributions go into the IAP portion of OPSRP. Tier 1/Tier 2 members retain their existing Tier 1/Tier 2 accounts, but member contributions are deposited into the member s IAP account. Benefit provisions under the Plans are established by State statute. PERS issues publicly available reports that include a full description of the pension plans regarding benefit provisions, assumptions and membership information that can be found on the PERS website. Benefits provided (Tier 1/Tier 2) The Tier 1/Tier 2 pension plan provides retirement, disability benefits, annual cost-of-living adjustments, and death benefits to plan members, who must be public employees and beneficiaries. The plan was closed to new members on or after August 29, The retirement allowance is payable monthly for life and may be selected from 13 retirement benefit options. These options include survivorship benefits and lump-sum refunds. The basic benefit is based on years of service and final average salary. A percentage (1.67 percent for general service employees) is multiplied by the number of years of service and the final average salary. Benefits may also be calculated under either a formula plus annuity (for members who were contributing before August 21, 1981) or a money match computation if a greater benefit results. A member is considered vested and will be eligible at minimum retirement age for a service retirement allowance if he or she has had a contribution in each of five calendar years or has reached at least 50 years of age before ceasing employment with a participating employer. General service employees may retire after reaching age 55. Tier 1 general service employee benefits are reduced if retirement occurs prior to age 58 with fewer than 30 years of service. Tier 2 members are eligible for full benefits at age 60. Upon the death of a non-retired member, the beneficiary receives a lump-sum refund of the member s account balance (accumulated contributions and interest). In addition, the beneficiary will receive a lumpsum payment from employer funds equal to the account balance, provided one or more of the following conditions are met: The member was employed by a PERS employer at the time of death The member died within 1200 days after terminated of PERS-covered employment The member died as a result of injury sustained while employed in a PERS-covered job The member was on an official leave of absence from a PERS-covered job at the time of death. 24

28 Notes to Financial Statements Note 6 Retirement Plan (continued) A member with 10 or more years of creditable service who becomes disabled from other than dutyconnected causes may receive a non-duty disability benefit. A disability resulting from a job-incurred injury or illness qualifies a member for disability benefits regardless of the length of PERS-covered service. Upon qualifying for either a non-duty or duty disability, service time is computed to age 58 when determining the monthly benefit. Under ORS monthly benefits are adjusted annually through cost-of-living changes. Under current law, the cap on the cost of living adjustments will vary based on 1.25 percent on the first $60,000 of annual benefit and 0.15 percent on annual benefits over $60,000. Benefits provided (OPSRP) The OPSRP pension plan provides retirement, disability benefits, annual cost-of-living adjustments, and death benefits to plan members, who must be public employees and beneficiaries. The plan is open to new members hired on or after August 29, This portion of OPSRP provides a life pension funded by employer contributions. Benefits are calculated with the following formula for members who attain normal retirement age: 1.5 percent is multiplied by the number of years of service and the final average salary. Normal retirement age for general service members is age 65, or age 58 with 30 years of retirement credit. A member of the OPSRP plan becomes vested on the earliest of the following dates: the date the member completes 600 hours of service in each of five calendar years, the date the member reaches normal retirement age, or, if the pension program is terminated, the date on which termination becomes effective. Upon the death of a non-retired member, the spouse or other person who is constitutionally required to be treated in the same manner as the spouse receives for life 50 percent of the pension that would otherwise have been paid to the deceased member. A member who has accrued 10 or more years of retirement credits before the member becomes disabled or a member who becomes disabled due to a job-related injury shall receive a disability benefit of 45 percent of the member s salary determined as of the last full month of employment before the disability occurred. Under ORS 238A.210 monthly benefits are adjusted annually through cost-of-living changes. Under current law, the cap on the COLA will vary based on 1.25 percent on the first $60,000 of annual benefit and 0.15 percent on annual benefits above $60,000. Contributions PERS funding policy provides for monthly employer contributions at actuarially determined rates. These contributions, expressed as a percentage of covered payroll, are intended to accumulate sufficient assets to pay benefits when due. Employer contribution rates during the period were based on the December 31, 2013 actuarial valuation. The rates, based on a percentage of payroll, first became effective July 1, The state of Oregon and certain schools, community colleges and political subdivisions have made lump sum payments to establish side accounts, and their rates have been reduced. Employer contributions were $1,188,489 and $999,520, excluding amounts to fund employer specific liabilities, for the years ended December 31, 2017 and 2016, respectively. 25