Financial Statements (With Independent Auditors Report Thereon)
Table of Contents Independent Auditors Report 1 Management s Discussion and Analysis, (Unaudited) 3 Basic Financial Statements: Statements of Trust Net Assets, 6 Statements of Changes in Trust Net Assets, Years ended 7 Notes to Financial Statements 8 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 11 Page
KPMG LLP 1601 Market Street Philadelphia, PA 19103-2499 Independent Auditors Report The Trustees Philadelphia Gas Works OPEB Trust: Report on the Financial Statements We have audited the accompanying basic financial statements of the Philadelphia Gas Works OPEB Trust (the Trust) as of and for the years ended, and the related notes to the financial statements, which collectively comprise the Trust s basic financial statements as listed in the table of contents. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these basic financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of basic financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these basic 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 Accounting 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 basic financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the basic financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the basic 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 basic 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 basic 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 basic financial statements referred to above present fairly, in all material respects, the trust net assets of the Philadelphia Gas Works OPEB Trust as of, and the changes in trust net assets for the years then ended, in accordance with U.S. generally accepted accounting principles. KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative ( KPMG International ), a Swiss entity.
Emphasis of Matter As discussed in note 1 and 3 to the basic financial statements, these basic financial statements present only the trust net assets and changes in trust net assets of the Philadelphia Gas Works OPEB Trust and do not purport to, and do not, present fairly the net assets and changes in net assets of the Philadelphia Gas Works OPEB Plan in accordance with accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter. Other Matter Required Supplementary Information United States generally accepted accounting principles require that management s discussion and analysis on pages 3 5 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 audits 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. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated May 10, 2016 on our consideration of the Trust 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 Trust s internal control over financial reporting and compliance. Philadelphia, Pennsylvania May 10, 2016 2
Required Supplemental Information (Unaudited) Management s Discussion and Analysis The Trustees of the Philadelphia Gas Works OPEB Trust (the Trust or the PGW OPEB Trust) present this narrative overview and analysis of the financial activities of the Trust for the years ended. This information should be considered in conjunction with the information in the financial statements, including the notes to financial statements which follow this section. The Trust s financial statements are prepared using the accrual basis of accounting and are in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), as established for governmental entities by the Governmental Accounting Standards Board (GASB). Philadelphia Gas Works OPEB Trust Philadelphia Gas Works (PGW) is accounted for as a component unit of the City of Philadelphia and provides natural gas service to approximately 501,000 customers. PGW sponsors a single employer defined-benefit healthcare plan (the Plan) that provides healthcare insurance and life insurance benefits to its employees and their beneficiaries after active employment ends (postemployment). Creation of the Trust was significantly influenced by GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, which required major changes to the reporting of employer obligations for other postemployment benefits. This statement required that employers financial statements show more clearly the accumulated liability for such benefits that are already earned by employees. In May 2010, the Pennsylvania Public Utility Commission (PUC) approved a surcharge proposed by PGW to fund its OPEB liability resulting in charges to customer bills of $16.0 million annually, and required PGW to use that $16.0 million and an additional $2.5 million of its resources to contribute $18.5 million to the Trust in each of the years 2011 through 2015. The Trust was established on July 13, 2010 to receive these and other contributions from PGW. In July 2015, the PUC approved the continuance of the OPEB surcharge beyond August 31, 2015. The Trust is managed by five Trustees, consisting of the City of Philadelphia Director of Finance; the Chief Finance Officer of PGW; the Chief Administrative Officer of PGW; the Chair of the Finance Committee of the Philadelphia Facilities Management Corporation Board (PFMC), which serves as the Board of Directors for PGW; and the President of the Union representing the majority of PGW s bargaining unit employees. Financial statements of the Trust show the amounts received (additions) from PGW as employer of the plan participants. The Trust exists to accumulate assets for the Plan and the Trust does not independently have the capacity to raise funds. Responsibility for determining and funding the benefits rests with PGW management. Financial Highlights Investments and net assets (fund balance) of the Trust increased by $15.8 million during 2015 to a total of $110.4 million, a 16.7% increase over the $94.6 million in investments and net assets held by the Trust at the end of 2014. The $15.8 million was comprised of the PGW contribution of $18.5 million, along with the reinvestment of interest and dividends, offset by market losses, net of all administrative expenses. The fund balance increased by $20.8 million during 2014 to a total of $94.6 million, a 28.2% increase over the $73.8 million in investments and net assets held by the Trust at the end of 2013. The $20.8 million was 3 (Continued)
Required Supplemental Information (Unaudited) Management s Discussion and Analysis comprised of the PGW contribution of $18.5 million, along with the reinvestment of interest and dividends and realized and unrealized gains net of administrative expenses. The return on the Trust s net assets was $5.1 million less in 2015 compared to 2014 and $6.5 million less in 2014 compared to 2013. Investment losses in 2015 were $2.6 million compared with investment income of $2.5 million in 2014 and $8.8 million in 2013. Benefits of the Plan are paid directly by PGW. Deductions were limited to administrative expenses and were $0.1 million, $0.2 million, and $0.1 million for 2015, 2014, and 2013, respectively. During 2015, the Trustees of the PGW OPEB Trust voted to end the financial management agreement with Segall Bryant & Hamill. Assets managed by Segall Bryant & Hamill were liquidated and invested in existing mutual funds. Overview of the Financial Report The Trust is classified as a fiduciary fund since the assets are held for the exclusive benefit of PGW retirees and future retirees. Financial reports are prepared using the economic resources measurement focus and the accrual basis of accounting. Plan liabilities do not include actuarial accrued liabilities for benefits that are not due and payable at the reporting date. The basic statements included in the financial report are described below. Statements of Trust Net Assets. These statements present information on the assets, liabilities, and net assets of the Trust at a point in time (the end of the fiscal year). Over time, the changes in net assets may serve as a useful indicator of the accumulated assets. Net assets are classified as net assets held in trust for other postemployment benefits. Statements of Changes in Trust Net Assets. These statements present information on the additions and deductions to the Trust during the year being reported. Additions include employer contributions to the Trust, net investment income, and any other additions that are available. Deductions include expenses associated with administering the Trust and net investment losses. Notes to Financial Statements. The notes provide additional information that is essential to a full understanding of the data provided in the financial statements. Financial Analysis and Discussion Statements of Trust Net Assets As of December 31, 2015, 2014, and 2013, the statements showed the following summary amounts: 2015 2014 2013 Total assets $ 110,454,189 94,668,060 73,845,499 Total liabilities (11,091) (37,134) (23,266) Net assets held in trust for other postemployment benefits $ 110,443,098 94,630,926 73,822,233 4 (Continued)
Required Supplemental Information (Unaudited) Management s Discussion and Analysis Assets consist entirely of cash and investments, and net assets held in trust for other postemployment benefits as of December 31, 2015 of $110.4 million would cover the annual expense incurred by the Plan for healthcare and life insurance related to retirees for approximately four years. Statements of Changes in Trust Net Assets The Trust showed the following changes in net assets during the year in summary amounts: 2015 2014 2013 Additions $ 15,876,943 20,982,332 27,311,134 Deductions (64,771) (173,639) (51,762) Net increase in net assets $ 15,812,172 20,808,693 27,259,372 Additions in 2015, 2014, and 2013 included the employer contributions of $18.5 million each year, as well as net realized and unrealized gains and losses during the year, which represented a net loss of $5.0 million in 2015, a net gain of $1.0 million in 2014, and a net gain of $7.6 million in 2013. Interest and dividend income was $2.3 million in 2015, $1.5 million in 2014, and $1.2 million in 2013. Investment management expenses of $0.1 million in 2015, $0.2 million in 2014, and $0.1 million in 2013 were incurred during the year and are included in deductions above. Requests for Information This financial report is designed to provide an overview of the PGW OPEB Trust. Questions concerning any of the information provided or requests for additional information should be addressed to Administrator PGW OPEB Trust, 800 W. Montgomery Avenue, Philadelphia, PA 19122 Room 3-24. 5
Statements of Trust Net Assets 2015 2014 Assets: Cash and cash equivalents $ 15,359 4,111 Accrued interest income 31 35,947 Investments: Domestic equity: DFA US Small Cap Fund 11,438,752 4,872,146 Assets managed by Segall Bryant and Hamill U.S. Equities 17,920,753 Vanguard Total Stock Market Index Fund 35,432,617 16,317,106 Total domestic equity 46,871,369 39,110,005 International equity: Harbor International Mutual Fund 16,587,441 16,542,165 Harding Loevner Institutional Emerging Markets Fund 5,279,782 6,101,949 Causeway Emerging Markets Fund 3,686,912 1,328,791 Total international equity 25,554,135 23,972,905 Fixed income: Vanguard Total Bond Market Fund 12,421,485 11,610,360 Baird Core Bond Fund 23,002,196 18,005,751 Total fixed income 35,423,681 29,616,111 Commodities: PIMCO Commodity Real Return Fund 2,589,614 1,928,981 Total investments 110,438,799 94,628,002 Total assets 110,454,189 94,668,060 Liabilities: Accrued administrative expenses 11,091 37,134 Net assets held in trust for other postemployment benefits $ 110,443,098 94,630,926 See accompanying notes to financial statements. 6
Statements of Changes in Trust Net Assets Years ended 2015 2014 Net assets held in trust beginning of year $ 94,630,926 73,822,233 Additions: Contributions: Philadelphia Gas Works 18,500,000 18,500,000 Investment income (expense): Net realized gains 1,747,126 3,861,097 Interest and dividend income 2,339,166 1,487,228 Net unrealized losses (6,709,349) (2,865,993) Total investment income (2,623,057) 2,482,332 Total additions 15,876,943 20,982,332 Deductions: Investment management expenses 64,771 173,639 Net increase 15,812,172 20,808,693 Net assets held in trust end of year $ 110,443,098 94,630,926 See accompanying notes to financial statements. 7
Notes to Financial Statements (1) Summary of Significant Accounting Policies (a) Reporting Entity The Philadelphia Gas Works (PGW) OPEB Trust (Trust or PGW OPEB Trust) accumulates assets for the PGW OPEB Plan. The Trust was established in July of 2010. The Trust is managed by five Trustees, consisting of the City of Philadelphia Director of Finance; the Chief Finance Officer of PGW; the Chief Administrative Officer of PGW; the Chair of the Finance Committee of the Philadelphia Facilities Management Corporation Board (PFMC), which serves as the Board of Directors of PGW; and the President of the Union representing the majority of PGW s bargaining unit employees. The Trust is classified as a fiduciary fund because the assets are held for the exclusive benefit of PGW retirees and future retirees. (b) (c) Basis of Accounting The Trust s financial statements are prepared using the accrual basis of accounting and are in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), as established for governmental entities by the Governmental Accounting Standards Board (GASB). Deposits and Investments Cash and cash equivalents include cash on hand and funds in money market investments. Investments are reported at their fair value based on quoted market prices. Interest income is recorded on a cash basis and dividends are recorded when received. All distributions from mutual funds are classified as interest and dividend income. All mutual funds earnings are automatically reinvested. Purchases and sales of securities are recorded on a trade-date basis. The Trust is invested in an asset allocation strategy chosen by the Trustees. At December 31, 2015 and 2014, the asset allocation strategy was as follows: 2015 2014 Target Actual Target Actual Domestic equity 40% 43% 40% 42% International equity 25 23 25 25 Fixed income 30 32 30 31 Commodities 5 2 5 2 (d) Contributions Contributions to the Trust are the amounts received (additions) from PGW as employer of the plan participants. The Trust exists to accumulate assets for the Plan, and the Trust does not independently have the capacity to raise funds. Responsibility for determining and funding the benefits rests with PGW management. 8 (Continued)
Notes to Financial Statements (e) (f) (g) Deductions Currently, the OPEB Trust is not making distributions to the Plan. The cost of consulting, custody services, audits, and similar costs incurred exclusively for the Trust are paid from resources of the Trust. Risks and Uncertainties The Trust invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market, and credit risks. Due to the level of risk inherent in investment securities, it is possible that changes in the values of investment securities will occur in the near term and those such changes could affect the amounts reported in the Statements of Trust Net Assets. Management Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. (2) Deposits and Investments Cash and cash equivalents at both, at fair value, totaled less than $0.1 million. At, investments totaling $110.4 million and $94.6 million, respectively, were in various mutual funds and equities, which were recorded at fair value based on quoted market prices. On the Statements of Trust Net Assets investments are presented by asset class. The Trust s investments are subject to various risks. Among these risks are custodial credit risk, credit risk, interest rate risk, and investment concentration risk. Each one of these risks is discussed in more detail below. (a) Custodial Credit Risk Custodial credit risk is the risk that in the event of a bank failure, the Trust s deposits may not be returned to the Trust. The Trust held less than $0.1 million in cash and cash equivalents at both, covered by federal deposit insurance. Custodial credit risk for investments is the risk that, in the event of a failure to a counterparty to a transaction, the value of the investment or collateral securities that are in the possession of an outside party may not be recovered. Investments are exposed to custodial credit risk if the securities are uninsured, are not held in the name of the Trust, or are held by either the counterparty or the counterparty s trust department or agent but not in the Trust s name. The Trust s investments are not exposed to custodial credit risk as they are held by the Trust s custodian in the name of the Trust. (b) Credit Risk Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligations. The credit risk of a debt instrument is measured by nationally recognized statistical rating agencies such as Moody s. 9 (Continued)
Notes to Financial Statements The Trust s credit risk as it relates to fixed income investments is mitigated by the fact the Trust does not directly invest in fixed income investments. (c) (d) Interest Rate Risk Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of fixed income investments. The Trust s investment policy does not specifically address limitations on the maturities of investments, and the Trust does not directly invest in fixed income investments. Investment Concentration Risk Investment concentration risk is the risk that the investment portfolio is disproportionately exposed to market changes in specific sectors or securities. As of, the Trust held the following investments in assets in excess of 5% of the fair value of the Trust s net assets: DFA US Small Cap Fund, Harbor International Mutual Fund, Vanguard Total Stock Market Index Fund, Vanguard Total Bond Market Fund, and Baird Core Bond Fund. Also, as of December 31, 2014, Harding Loevner Institutional Emerging Markets Fund was in excess of 5% of the fair value of the Trust s net assets. (3) Information about the OPEB Plan The PGW OPEB Plan is managed by PGW management. These financial statements do not reflect the obligations, funding requirements, or payments of benefits related to the Plan as these obligations rest with PGW management. Total expenses incurred by PGW for retiree benefits in its fiscal year ended August 31, 2015 were $48.8 million, consisting of $28.6 million of healthcare expenses, $1.7 million of life insurance expenses, and the $18.5 million contribution to the Trust. Total expenses incurred by PGW for retiree benefits in its fiscal year ended August 31, 2014 were $44.4 million, consisting of $24.3 million of healthcare expenses, $1.6 million of life insurance expenses, and the $18.5 million contribution to the Trust. (4) Subsequent Events In February 2016, there was a unanimous vote of the Trustees to amend the stated agreement of the Trust to replace the Chief Administrative Officer of PGW as Trustee with the Vice President of Human Resources of PGW. 10
KPMG LLP 1601 Market Street Philadelphia, PA 19103-2499 Independent Auditors 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 The Trustees Philadelphia Gas Works OPEB Trust: We have audited, in accordance with the 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 statement of trust net assets and statement of changes in trust net assets of the Philadelphia Gas Works OPEB Trust (the Trust) as of and for the year ended December 31, 2015, and the related notes to the financial statements, which collectively comprise the Trust s basic financial statements, and have issued our report thereon dated May 10, 2016. Internal Control over Financial Reporting In planning and performing our audit of the financial statements, we considered the Trust 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 Trust s internal control. Accordingly, we do not express an opinion on the effectiveness of the Trust 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 combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity 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 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 audits 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 Trust s financial statements are free from material misstatement, we performed tests of its 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 statements amounts. However, providing an opinion on compliance with those provisions was not an objective of our audits, 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. 11 KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative ( KPMG International ), a Swiss entity.
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 Trust 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 Trust s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Philadelphia, Pennsylvania May 10, 2016 12