ML023100355
| ML023100355 | |
| Person / Time | |
|---|---|
| Site: | Palo Verde  |
| Issue date: | 10/30/2002 |
| From: | Bauer S Arizona Public Service Co |
| To: | Document Control Desk, Office of Nuclear Reactor Regulation |
| References | |
| 102-04859-SAB/TNW/CJJ | |
| Download: ML023100355 (36) | |
Text
Energy Services Department of Water and Power City of Los Angeles Report and Financial Statements June 30, 2001
Report of Independent Accountants To the Board of Water and Power Commissioners Department of Water and Power City of Los Angeles In our opinion, the accompanying balance sheets and the related statements of income, changes in equity and cash flows present fairly, in all material respects, the financial position of the Power System (Energy Services) of the Department of Water and Power of the City of Los Angeles at June 30, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2001 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Departments management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the financial statements, on July 1, 2000 the Department changed its method of accounting for contributions in aid of construction and for transfers to the reserve fund of the City of Los Angeles, and has restated all prior years presented. In addition, on July 1, 2000 the Department adopted Statement of Financial Accounting Standards No. 133 and changed its method of accounting for derivative instruments.
September 24, 2001
Los Angeles Department of Water and Power Energy Services Balance Sheets, as restated (Amounts in thousands)
June 30, 2001 2000 Assets Utility Plant Generation $ 2,449,908 $ 2,434,930 Transmission 794,023 788,701 Distribution 3,553,306 3,469,367 General 832,586 814,281 7,629,823 7,507,279 Accumulated depreciation 3,634,060 3,358,196 3,995,763 4,149,083 Construction work in progress 362,789 80,224 Nuclear fuel, at amortized cost 14,003 12,274 4,372,555 4,241,581 Restricted and other investments 987,100 1,385,349 Current Assets Cash and cash equivalents 392,586 439,923 Cash collateral received from securities lending transactions 139,156 228,414 Customer and other accounts receivable, net of
$11,000 allowance for losses 254,549 296,196 Current portion of long-term notes receivable 35,610 -
Accrued unbilled revenue 124,477 130,600 Materials and fuel 104,980 91,222 Prepayments and other current assets 62,532 43,598 1,113,890 1,229,953 Long-term California wholesale energy receivable 183,243 -
Long-term notes receivable 1,280,037 1,118,617 Net pension asset 112,262 100,166
$ 8,049,087 $ 8,075,666 Capitalization and Liabilities Equity Retained income reinvested in the business $ 3,379,184 $ 3,058,823 Accumulated other comprehensive loss (5,218) -
3,373,966 3,058,823 Long-term debt 3,326,292 3,390,214 Advance refunding bonds 244,474 557,954 6,944,732 7,006,991 Current Liabilities Debt due within one year 120,290 136,165 Accounts payable and accrued expenses 189,175 149,418 Accrued interest 46,995 56,223 Accrued employee expenses 47,370 43,671 Due to Water Services 7,340 1,344 Obligations under securities lending transactions 139,156 228,414 550,326 615,235 Deferred credits 350,894 279,172 Accrued postretirement liability 203,135 174,268 Commitments and contingencies (Note 13) - -
$ 8,049,087 $ 8,075,666 The accompanying notes are an integral part of these financial statements.
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Los Angeles Department of Water and Power Energy Services Statements of Income, as restated (Amounts in thousands)
Year Ended June 30, 2001 2000 1999 Operating Revenues Residential $ 655,847 $ 641,196 $ 633,633 Commercial and industrial 1,423,730 1,404,912 1,333,868 Sales for resale 956,185 297,845 184,667 Other 47,301 52,184 51,196 3,083,063 2,396,137 2,203,364 Operating Expenses Fuel for generation 876,187 326,008 213,030 Purchased power 893,864 707,333 797,743 Maintenance and other operating expenses 557,246 532,581 509,800 Depreciation and amortization 280,010 279,853 268,418 2,607,307 1,845,775 1,788,991 Operating Income 475,756 550,362 414,373 Other Income and Expense Investment income 180,553 100,213 46,197 Loss on asset impairment and abandoned projects (43,519) - -
Loss on terminated power contract - (77,462) -
Other, net 693 2,846 11,401 137,727 25,597 57,598 Debt Expenses Interest on debt 185,378 175,711 162,644 Allowance for funds used during construction (1,123) (1,830) (2,761) 184,255 173,881 159,883 Contributions in aid of construction and grants 16,730 14,465 18,138 Income before transfers to the City and cumulative effect 445,958 416,543 330,226 Transfers to the reserve fund of the City of Los Angeles 119,800 112,000 108,146 Income before cumulative effect of change in accounting 326,158 304,543 222,080 Cumulative effect of change in accounting for energy purchases and sales (5,797) - -
Net income $ 320,361 $ 304,543 $ 222,080 The accompanying notes are an integral part of these financial statements.
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Los Angeles Department of Water and Power Energy Services Statements of Changes in Equity, as restated (Amounts in thousands)
Retained Income Accumulated Other Reinvested in the Comprehensive Business Loss Total Balances at June 30, 1998 $ 2,532,200 $ - $ 2,532,200 Net income 222,080 - 222,080 Balances at June 30, 1999 2,754,280 - 2,754,280 Net income 304,543 - 304,543 Balances at June 30, 2000 3,058,823 - 3,058,823 Comprehensive income:
Net income 320,361 320,361 Other comprehensive income:
- Cumulative effect of adoption - (42,366) (42,366)
- Reclassifications included in net income - 42,366 42,366
- Unrealized losses on energy purchases and sales - (5,218) (5,218)
Total comprehensive income 315,143 Balance at June 30, 2001 $ 3,379,184 $ (5,218) $ 3,373,966 The accompanying notes are an integral part of these financial statements.
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Los Angeles Department of Water and Power Energy Services Statements of Cash Flows (Amounts in thousands)
Year Ended June 30, 2001 2000 1999 Cash Flows from Operating Activities:
Operating income $ 475,756 $ 550,362 $ 414,373 Adjustments to reconcile operating income to net cash provided by operating activities Depreciation and amortization 280,010 279,853 268,418 Provision for losses on customer and other accounts receivable 11,872 10,778 16,763 Loss on asset impairment and abandoned projects (43,519) - -
Loss on terminated power contract - (77,462) -
Cumulative effect of change in accounting (5,797) - -
Changes in assets and liabilities:
Customer and other accounts receivable (161,120) (75,697) (47,379)
Accrued unbilled revenue 6,123 (33,693) 5,769 Net pension asset (12,096) 7,504 (24,758)
Accounts payable and accrued expenses 34,539 27,590 (44,791)
Deferred credits 71,722 68,342 85,972 Accrued postretirement liability 28,867 25,748 25,259 Other (22,304) (8,110) (15,540) 664,053 775,215 684,086 Cash Flows from Noncapital Financing Activities:
Payments to the reserve fund of the City of Los Angeles (119,800) (112,000) (108,146)
Issuance of noncapital revenue bonds, net - 564,876 -
Interest paid on noncapital revenue bonds (18,132) (7,405) -
(137,932) 445,471 (108,146)
Cash Flows from Capital and Related Financing Activities:
Additions to plant and equipment, net (409,861) (163,960) (156,828)
Contributions in aid of construction and grants 16,730 14,465 18,138 Purchases of escrow investments (176,843) (49,651) -
Proceeds from escrow investment maturities 528,770 330,182 117,019 Principal payments and maturities on long-term debt, net (1,672,236) (505,196) (154,416)
Issuance of bonds and revenue certificates, net 1,275,939 387,777 178,585 Debt interest payments (193,189) (199,710) (207,630)
(630,690) (186,093) (205,132)
Cash Flows from Investing Activities:
Purchases of investment securities (1,214,808) (221,211) (1,855,227)
Proceeds from maturities of investment securities 1,298,544 342,897 1,436,115 Purchase of long-term notes receivable, net (186,435) (1,114,520) -
Investment income 159,931 109,975 80,236 57,232 (882,859) (338,876)
Cash and Cash Equivalents:
Net (decrease) increase (47,337) 151,734 31,932 Beginning of year 439,923 288,189 256,257
$ 392,586 $ 439,923 $ 288,189 The accompanying notes are an integral part of these financial statements.
Page 5
Los Angeles Department of Water and Power Energy Services Notes to Financial Statements NOTE 1: Summary of Significant Accounting Policies The Department of Water and Power of the City of Los Angeles (the Department) exists as a separate proprietary agency of the City of Los Angeles (the City) under and by virtue of the City Charter enacted in 1925 and as revised effective July 2000. The Departments Power System (Energy Services) is responsible for the generation, transmission and distribution of electric power for sale in the City.
Method of accounting The accounting records of Energy Services are maintained in accordance with accounting principles generally accepted in the United States of America. As a government-owned utility, the Department applies all statements issued by the Governmental Accounting Standards Board (GASB) and all statements and interpretations issued by the Financial Accounting Standards Board (FASB), which are not in conflict with statements issued by the GASB.
The Departments rates are determined by the Board of Water and Power Commissioners (the Board) and are subject to review and approval by the City Council. As a regulated enterprise, the Departments financial statements are prepared in accordance with Statement of Financial Accounting Standards (SFAS) No. 71, Accounting for the Effects of Certain Types of Regulation, which requires that the effects of the ratemaking process be recorded in the financial statements. Such effects primarily concern the time at which various items enter into the determination of net income in order to follow the principle of matching costs and revenues. Accordingly, Energy Services records various regulatory assets and liabilities to reflect the regulators actions. Management believes that Energy Services meets the criteria for continued application of SFAS No. 71, but will continue to evaluate its applicability based on changes in the regulatory and competitive environment (see Note 3).
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.
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Los Angeles Department of Water and Power Energy Services Notes to Financial Statements (continued)
NOTE 1: (continued)
Utility plant The costs of additions to utility plant and replacements of retired units of property are capitalized. Costs include labor, materials, an allowance for funds used during construction (AFUDC), and allocated indirect charges such as engineering, supervision, transportation and construction equipment, retirement plan contributions, health care costs, and certain administrative and general expenses. The costs of maintenance, repairs and minor replacements are charged to the appropriate operations and maintenance expense accounts.
The original cost of property retired, net of removal and salvage costs, is charged to accumulated depreciation.
Depreciation and amortization Depreciation expense is computed using the straight-line method based on service lives for all projects completed after July 1, 1973, and for all office and shop structures, related furniture and equipment, and transportation and construction equipment. Depreciation for facilities completed prior to July 1, 1973 is computed using the 5% sinking fund method based on estimated service lives. Estimated service lives range from 5 to 75 years. Depreciation expense as a percentage of average depreciable utility plant in service was 3.9%, 3.9% and 3.8% for fiscal years 2001, 2000 and 1999, respectively. Amortization expense for computer software is computed using the straight-line method over 5 years.
Nuclear decommissioning The Department owns a 5.7% direct ownership interest in the Palo Verde Nuclear Generating Station (PVNGS). In addition, through its participation in the Southern California Public Power Authority (SCPPA), the Department is party to a contract for an additional 3.95% of the output of PVNGS. Nuclear decommissioning costs associated with the Departments output entitlement are included in purchased power expense (see Note 5). The Department recognizes an increase in accumulated depreciation equivalent to its contributions and investment earnings from the nuclear decommissioning trust funds.
Decommissioning of PVNGS is expected to commence subsequent to the year 2024. The total cost to decommission the Departments direct ownership interest in PVNGS is estimated to be
$101 million in 1998 dollars. This estimate is based on an updated site specific study prepared by an independent consultant in 1998. Prior to December 1999, the Department contributed to external trusts established in accordance with the PVNGS participation agreement and Nuclear Regulatory Commission requirements. In fiscal year 1999, the Department contributed $11 million to these trusts in order to fund its direct share of estimated decommissioning costs. The contributions were charged to depreciation expense.
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Los Angeles Department of Water and Power Energy Services Notes to Financial Statements (continued)
NOTE 1: (continued)
During fiscal year 2000, the Department suspended contributing additional amounts to the trust funds, as management believes that contributions to date, combined with reinvested earnings, will be sufficient to fully fund the Departments share of decommissioning costs.
The Department will continue to reinvest its investment income. The Department reinvested
$8 and $6 million in fiscal years 2001 and 2000, respectively, and recognized an offsetting expense. As of June 30, 2001, decommissioning funds totaled $80 million.
Nuclear fuel Nuclear fuel is amortized and charged to fuel for generation on the basis of actual thermal energy produced relative to total thermal energy expected to be produced over the life of the fuel. Under the provisions of the Nuclear Waste Policy Act of 1982, the federal government assesses each utility with nuclear operations, including the Department, $1 per megawatt hour of nuclear generation. The Department includes this charge as a current year expense. See Note 13 for discussion of spent nuclear fuel disposal.
Cash and cash equivalents As provided for by the California Government Code, the Departments cash is deposited with the City Treasurer in the Citys general investment pool for the purpose of maximizing interest earnings through pooled investment activities. Cash and cash equivalents in the Citys general investment pool are reported at fair value and changes in unrealized gains and losses are recorded in the Statement of Income. Interest earned on such pooled investments is allocated to the participating funds based on each funds average daily cash balance during the allocation period. The City Treasurer invests available funds of the City and its independent operating departments on a combined basis. At June 30, 2001 and 2000, cash and cash equivalents includes $61 and $35 million of internally-designated balances relating to bond redemption and interest funds and a self-insurance fund, respectively. In addition, at June 30, 2001 and 2000, the cash and cash equivalents balance includes $113 and $253 million, respectively, of funds restricted by bond indenture for use in construction. The Department considers all unrestricted investments with an original maturity of three months or less to be cash equivalents.
Restricted and other investments Restricted and other investments include primarily commercial paper, United States Government and governmental agency securities, and corporate bonds. Investments are reported at fair value and changes in unrealized gains and losses are recorded in the Statement of Income. Gains and losses realized on the sale of investments are generally determined using the specific identification method. The stated fair value of investments is generally based on published market prices or quotations from major investment dealers.
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Los Angeles Department of Water and Power Energy Services Notes to Financial Statements (continued)
NOTE 1: (continued)
Debt expenses Debt premium, discount and issue expenses are deferred and amortized to expense over the lives of the related debt issues. Gains and losses on refundings related to bonds redeemed by proceeds from the issuance of new bonds are amortized over the shorter of the life of the new bonds or the remaining term of the bonds refunded.
Revenues Energy Services rates are established by a rate ordinance, which is approved by the City Council. Energy Services sells energy to other City departments at rates provided in the ordinance. Energy Services recognizes energy costs in the period incurred and accrues for estimated energy sold but not yet billed. The Departments current rates include amounts designated for the pre-collection of out-of-market future purchase power costs. These amounts are included in deferred credits. At the discretion of the Department, these amounts will be recognized as revenue when the related purchase power expense is incurred. At June 30, 2001 and 2000, deferred credits include $327 and $256 million, respectively, related to pre-collected purchased power costs.
Non-operating revenues Contributions in aid of construction and other grants received by the Department for constructing utility plant and other activities are recognized as non-operating revenues when all applicable eligibility requirements, including time requirements, are met.
Allowance for funds used during construction Allowance for funds used during construction represents the cost of borrowed funds used for the construction of utility plant. Capitalized AFUDC is included as part of the cost of utility plant and as a reduction of debt expenses. The average AFUDC rate was 5.4%, 5.4% and 6.0%
for fiscal years 2001, 2000 and 1999, respectively.
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Los Angeles Department of Water and Power Energy Services Notes to Financial Statements (continued)
NOTE 1: (continued)
Recent Accounting Pronouncements During 1999, the GASB issued Statement No. 34, Basic Financial Statements - MD&A for Local and State Governments. Under the new Statement, certain modifications to the Departments financial statements will be required including name and presentation changes.
In addition, this Statement establishes new required disclosures, including basic financial statements, managements discussion and analysis and other required supplementary information. The Department has adopted the new Statement effective July 1, 2001.
In August 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement Obligations. This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement will be effective for financial statements issued for fiscal years beginning after June 15, 2002. The Department has not yet determined the financial statement impact of adopting the new Statement.
Reclassification Certain financial statement items for prior years have been reclassified to conform to the current year presentation. The reclassifications did not impact net income, total assets or net equity.
NOTE 2: Accounting Changes GASB Statement No. 33 On July 1, 2000, the Department adopted GASB Statement No. 33 (GASBS 33), Accounting and Financial Reporting for Nonexchange Transactions. This statement establishes accounting and financial reporting standards over the recording of nonexchange transactions involving cash and financial and capital resources. As a result of the adoption of GASBS 33, contributions in aid of construction and the voluntary transfer to the City of Los Angeles are included as non-operating revenues and expenses, respectively, in the Statement of Income.
Prior to the adoption of GASBS 33, contributions in aid of construction and the voluntary transfer were reported as equity transactions.
The Department restated prior year financial statements to retroactively apply GASBS 33. The adoption of GASBS 33 as of July 1, 1998 resulted in the combination of two equity accounts, contributions in aid of construction and retained income reinvested in the business. The cumulative effect of adoption of GASBS 33 resulted in a $263 million increase to retained income reinvested in the business effective July 1, 1998.
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Los Angeles Department of Water and Power Energy Services Notes to Financial Statements (continued)
NOTE 2: (continued)
The adoption of GASBS 33 resulted in a restatement of prior year net income as follows (amounts in millions):
Year Ended June 30, 2000 1999 Net income, as previously reported $ 402 $ 312
- Contributions in aid of construction 15 18
- Transfers to the reserve fund of the City of Los Angeles (112) (108)
Net income, as restated 305 222 Retained income reinvested in the business Beginning of year, as restated 2,754 2,532 End of year, as restated $ 3,059 $ 2,754 FASB Statement No. 133 In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires companies to record derivatives on the balance sheet as assets and liabilities, and measure those instruments at fair value. This Statement, as amended, became effective for Energy Services financial statements at the beginning of fiscal year 2001.
The Department is party to contracts that qualify as derivative instruments under the Statement when it buys and sells electricity and fuel that is scheduled for delivery in future periods.
Certain of these contracts qualify as an exception provided under the Statement for activities that are considered normal purchases and normal sales. These contracts are reflected in the income statement at the time of contract settlement.
For certain contracts which qualify as derivatives but do not qualify as a normal purchase or sale, the Department has designated the contract as a cash flow hedge of a future transaction.
A contract that is treated as a cash flow hedge is recorded at fair value in the balance sheet; however, the offsetting entry is recorded as other comprehensive income, an equity account within the balance sheet. When the contract settles, the amount recorded as other comprehensive income is reclassified as a gain or loss to the income statement.
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Los Angeles Department of Water and Power Energy Services Notes to Financial Statements (continued)
NOTE 2: (continued)
On July 1, 2000, Energy Services adopted SFAS No. 133 and recorded the cumulative effect of the change in accounting principle by recording its short-term energy purchases and sales at fair value in the financial statements. This resulted in a cumulative effect of $6 million to net income for trading activities and $42 million to other comprehensive income for cash flow hedges.
As of June 30, 2001, the Department recorded the following amounts related to derivative instruments (in millions):
Balance Sheet:
Contract commitments (included in current assets and $ 1 current liabilities)
Accumulated other comprehensive loss $ 5 Income Statement:
Unrealized gain on derivative instruments (included in $ (6) sales for resale)
The Department will release all of the balance included in accumulated other comprehensive loss during fiscal year 2002 as the associated contracts are settled.
In June 2001, the FASB cleared Implementation Issue No. C15 (C15). C15 expands the normal purchase and normal sales exception to include electricity contracts entered into by a utility company when certain criteria are met. Energy Services implemented C15 as of July 1, 2001 and expects that a majority of its short-term purchases and sales will qualify as normal purchases and normal sales under the interpretation. C15 will be implemented on a prospective basis. Contracts reported as derivatives as of June 30, 2001 that qualify as normal purchases and sales under C15, will continue to be reported on the balance sheet at their fair values as of June 30, 2001. At the time the contracts are settled, the recorded fair value and any associated amounts included in accumulated other comprehensive income (loss) will be reversed with an offsetting entry to the income statement.
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Los Angeles Department of Water and Power Energy Services Notes to Financial Statements (continued)
NOTE 3: Regulatory Matters Effective April 1, 1998, customers of Californias investor-owned utilities (IOU) became eligible for direct access. The introduction of direct access resulted in significant structural changes to the electric power industry, including plant divestitures and management of IOU transmission assets through the California Independent System Operator (CISO). In 2001, legislation was enacted to suspend direct access to retail customers in California.
As a government-owned utility, the Department was not compelled to participate in direct access or to divest its generation assets. Management continues to evaluate the Departments alternatives in response to deregulation, including potential rate decreases, the introduction of direct access and participation in the CISO. In addition, management has implemented debt and cost reduction programs and restructured certain purchase power commitments in response to the changes in the electric utility market. Furthermore, in August 2000, the City Council approved a $1.7 billion, ten-year plan to upgrade the Departments local power plants and to implement a program that includes demand side management, alternative energy sources and distributed generation.
No definitive plan for allowing direct access to customers in the Departments service area has been adopted; however, if the Department implements direct access in the future, it is likely that its generation business will no longer qualify for accounting under SFAS No. 71. SFAS No. 71 requires that the effects of the ratemaking process be recorded in the financial statements. Based on current and projected market prices, management does not believe that market issues or the introduction of direct access will negatively impact the Departments financial position.
Federal Energy Regulatory Commission Price Mitigation Plan In June 2001, the Federal Energy Regulatory Commission (FERC) issued a price mitigation plan on spot market sales in the Western System Coordinating Council (WSCC). The plan imposes price limits on the sale of electricity in WSCC based on a calculation that estimates the cost of production of the least efficient gas-fired generation plant in California and a fixed factor to account for other variable costs. The calculation is based on factors existing at the then most current California Stage 1 Emergency. Sellers and other marketers have the opportunity to justify prices above the limit to the FERC. Energy Services purchases and sales of electricity occur entirely within the WSCC. Management has not determined the effect, if any, that the price mitigation plan will have on future purchases and sales of electricity.
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Los Angeles Department of Water and Power Energy Services Notes to Financial Statements (continued)
NOTE 3: (continued)
California Receivables During fiscal year 2001, the Department made sales to two California agencies that were formed by Assembly Bill 1890 to facilitate the purchase and sale of energy and ancillary services in the State of California. These agencies, the CISO and the California Power Exchange (CPX), have not made payments on amounts outstanding to counterparties for energy consumed in fiscal year 2001, including Energy Services, since April of 2001. Two utilities with significant amounts due to these agencies, Southern California Edison Company and Pacific Gas & Electric, have stated in public disclosure documents that they may not be able to pay for all the power they consumed in 2001. In addition, Pacific Gas & Electric has filed for protection under Chapter 11 of the Federal Bankruptcy Statute.
A total of $183 million is due Energy Services from the CISO and CPX. In addition, during fiscal years 2000 and 2001 the FERC has questioned whether amounts charged for energy sold to the CISO and the CPX represent unlawful profits that should be subject to refund. The FERC has considered various options for determination of a refund amount but has not issued definitive guidance on what represents unlawful profits for sales during the period. If the FERC issues an order requiring a refund under defined conditions, the Department may be liable to refund a portion of amounts recorded as sales. However, it has not been established that the FERC has any jurisdiction over municipal utilities, including the Department.
Energy Services has not recorded a reserve for potential losses on its California receivables as management believes that it is entitled to all amounts due from sales to counterparties in California, including those named above. In addition, management does not believe that Energy Services exposure to losses with respect to these receivable balances is currently estimable. If final settlement of these receivables results in an amount less than the recorded balance, the Department will be required to record a loss in the Statement of Income.
Public benefits In accordance with Assembly Bill 1890, a percentage of the Departments retail revenue is designated for use for qualifying public benefits programs. Qualifying programs include cost-effective demand side management services to promote energy-efficiency and energy conservation, new investment in renewable energy resources and technologies, development and demonstration programs to advance science and technology, and services provided for low-income electricity customers. During fiscal years 2001, 2000 and 1999, the Department spent $64, $61, and $45 million, respectively, on public benefits programs including investments in electric buses and vehicles, photovoltaic power and other alternative energy sources, and support for low-income customers. The Department defers public benefits collections from customers in excess of costs incurred under qualifying programs. As of June 30, 2001 and 2000, the deferred credits balance includes public benefits deferrals of $3 and
$10 million, respectively.
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Los Angeles Department of Water and Power Energy Services Notes to Financial Statements (continued)
NOTE 4: Jointly-Owned Utility Plant Energy Services has direct interests in several electric generating stations and transmission systems, which are jointly-owned with other utilities. As of June 30, 2001, utility plant includes the following amounts related to Energy Services ownership interest in each jointly-owned utility plant (amounts in millions, except as indicated):
Plant in Service Ownership Share of Capacity Accumulated Interest (MW) Cost Depreciation Palo Verde Nuclear Generating Station 5.7% 217 $ 512 $ 206 Navajo Generating Station 21.2% 477 207 167 Mohave Generating Station 20.0% 316 124 72 Pacific Intertie DC Transmission Line 40.0% 1240 183 47 Other transmission systems Various 76 36
$ 1,102 $ 528 Energy Services will incur certain minimum operating costs related to the jointly-owned facilities, regardless of the amount or its ability to take delivery of its share of energy generated. Energy Services proportionate share of the operating costs of the joint plants is included in the corresponding categories of operating expenses.
On September 18, 2001, the Board approved the sale of 50% of the Departments 20%
ownership interest in the Mohave Generating Station (Mohave) to the Salt River Project Agricultural Improvement and Power District (SRP). SRP took the place of the original purchaser, AES Corporation (AES), under the terms of the Mohave Project Plant Site Conveyance and Co-Tenancy Agreement. SRP will pay approximately $95 million for the 10% interest. The sale is expected to result in an accounting gain of approximately $73 million. This transaction is pending approval by the Los Angeles City Council.
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Los Angeles Department of Water and Power Energy Services Notes to Financial Statements (continued)
NOTE 5: Purchase Power Commitments The Department has entered into a number of energy and transmission service contracts, which involve substantial commitments as follows (amounts in millions, except as indicated):
Department's Interest in Agency's Share Outstanding Agency Agency Share Interest Capacity MW Principal Intermountain Power Project IPA 100.0% 66.8% 1,068 $ 1,895 Palo Verde Nuclear Generating Station SCPPA 5.9% 67.0% 151 $ 572 Mead-Adelanto Project SCPPA 67.9% 35.7% 291 $ 83 Mead-Phoenix Project SCPPA 17.8% - 22.4% 24.8% 148 $ 18 Southern Transmission System SCPPA 100.0% 59.5% 1,142 $ 636 IPA: The Intermountain Power Agency is an agency of the State of Utah established to own, acquire, construct, operate, maintain, and repair the Intermountain Power Project (IPP). Energy Services serves as the Project Manager and Operating Agent of IPP.
SCPPA: The Southern California Public Power Authority, a California Joint Powers Agency.
Note: SCPPAs interest in the Mead-Phoenix Project includes three components.
The above agreements require Energy Services to make certain minimum payments, which are based mainly upon debt service requirements. In addition to average annual fixed charges of approximately $314 million during each of the next five years, the Department is required to pay for operating and maintenance costs related to actual deliveries of energy under these agreements (averaging approximately $219 million annually during each of the next five years). The Department made total payments under these agreements of approximately $532,
$550, and $610 million in fiscal years 2001, 2000 and 1999, respectively. These agreements are scheduled to expire from 2027 to 2030.
Long-term notes receivable Under the terms of its purchase power agreement with IPA, the Department is charged for its output entitlements based on its share of IPAs costs, including debt service. During fiscal year 2000, the Department restructured a portion of this obligation by transferring $1.12 billion to IPA in exchange for long-term notes receivable. The funds transferred were obtained from the debt reduction trust funds and through the issuance of new variable rate debentures (see Notes 6 and 8). IPA used the proceeds from these transactions to defease and to tender for bonds with par values of approximately $615 and $611 million, respectively. The net discount of
$114 million is being amortized using the effective interest method over the lives of the bonds through 2023.
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Los Angeles Department of Water and Power Energy Services Notes to Financial Statements (continued)
NOTE 5: (continued)
On September 7, 2000, the Department transferred $187 million to IPA in exchange for additional long-term notes receivable. IPA used the proceeds to defease bonds with a face value of $198 million. The net discount of $9 million is being amortized using the effective interest method over the life of the bonds through 2017.
The Departments future payments to IPA will be partially offset by interest payments and principal maturities from the subordinated notes receivable.
Termination of power contract During fiscal year 2000, the Department terminated a power contract with the Montana Power Company under which the Department was required to take approximately 750,000 megawatt hours annually through 2010. The Department recorded a net loss of approximately $77 million on this transaction in fiscal year 2000.
Energy entitlement The Department has a contract through 2017 with the U.S. Department of Energy for the purchase of available energy generated at the Hoover Power Plant. The Departments share of capacity at Hoover is approximately 500 megawatts. The cost of power purchased under this contract was $11, $11, and $12 million in fiscal years 2001, 2000 and 1999, respectively.
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Los Angeles Department of Water and Power Energy Services Notes to Financial Statements (continued)
NOTE 6: Restricted and Other Investments A summary of Energy Services restricted and other investments is as follows (amounts in millions):
June 30, 2001 2000 Escrow investments $ 283 $ 612 Debt reduction trust funds 446 679 Nuclear decommissioning trust funds 80 73 Other investments 178 21
$ 987 $ 1,385 Postretirement health care benefit trust fund $ 60 $ 54 All restricted and other investments are held in trust accounts to be used for a designated purpose as follows:
Escrow investments Escrow investments are held to call specified revenue bonds at scheduled maturity dates.
Debt reduction trust funds The debt reduction trust funds were established during fiscal year 1997 to provide for the payment of principal and interest on long-term debt obligations and purchased power obligations arising from the Departments participation in the Intermountain Power Project and the Southern California Public Power Authority (SCPPA) (see Note 5). The Department has transferred funds from purchased power pre-collections into these trust funds. Funds from operations may also be transferred by management as funds become available.
Nuclear decommissioning trust funds Nuclear decommissioning trust funds will be used to pay the Departments share of decommissioning the Palo Verde Nuclear Generating Station at the end of its useful life (see Note 1).
Postretirement health care benefit trust fund The postretirement health care benefit trust fund was established to provide for the payment of the Departments postretirement health benefits. The trust fund is recorded net of the accrued postretirement liability (see Note 10).
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Los Angeles Department of Water and Power Energy Services Notes to Financial Statements (continued)
NOTE 6: (continued)
Other investments Other investments consist of funds held by SCPPA on behalf of the Department. Certain of these investments are currently being used by the Department to provide for the payment of principal and interest on long-term debt obligations and purchased power obligations arising from the Departments participation in SCPPA. However, there are no restrictions imposed on the Department regarding the use of these investments.
Restricted and other investments held by the Department are categorized separately below to give an indication of the level of custodial credit risk assumed by the Department at June 30, 2001. Specifically, identifiable investments are classified as to credit risk by three categories and summarized below as follows: Category 1 includes investments that are insured or registered or for which securities are held by the Department or its agent in the Departments name; Category 2 includes uninsured and unregistered investments for which the securities are held by the counterpartys trust department or agent in the Departments name; and Category 3 includes uninsured and unregistered investments for which the securities are held by the counterparty or by its trust department or agent, but not in the Departments name. At June 30, 2001, Energy Services restricted and other investments are categorized as follows (amounts in millions):
Category Type of Investments 1 2 3 Total Investments - Categorized U.S. Government Securities $ 651 $ - $ - $ 651 Bonds 135 - - 135 Bankers Acceptances 22 - - 22 Commercial Paper 75 - - 75 Repurchase Agreements - 67 - 67 Negotiable Certificates of Deposits 100 - - 100 Total Categorized Restricted Investments $ 983 $ 67 $ - 1,050 Investments - Not Categorized Investments Held by Broker-Dealers:
U.S. Government Securities 64 Total $ 1,114 Repurchase agreements relate to the Departments securities lending program (see Note 7).
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Los Angeles Department of Water and Power Energy Services Notes to Financial Statements (continued)
NOTE 7: Securities Lending Transactions In December 1999, the Department initiated a securities lending program managed by its custodial bank. The bank lends up to 20% of the investments held in the debt reduction trust funds, decommissioning trust funds, and plan assets held in the postretirement benefits trust fund for securities, cash collateral or letters of credit equal to 102% of the market value of the loaned securities and interest, if any. The Department can sell collateral securities only in the event of borrower default.
A summary of Energy Services securities lending transactions as of June 30, 2001 and 2000 is as follows (amounts in millions):
June 30, 2001 June 30, 2000 Fair value Fair value of of underlying Collateral underlying Collateral Securities lent for cash collateral securities value securities value US Government and agency securities $ 65 $ 67 $ 3 $ 3 Corporate fixed income securities - - 137 142
$ 65 $ 67 $ 140 $ 145 The lending agent provides indemnification for borrower default. There were no violations of legal or contractual provisions and no borrower or lending agent default losses during fiscal years 2001 and 2000.
General Investment Pool Program The Department also participates in the Citys securities lending program through the pooled investment fund. The Citys program has substantially the same terms as the Departments direct securities lending program. The Department recognizes its proportionate share of the cash collateral received for securities loaned and the related obligation for the general investment pool. As of June 30, 2001 and 2000, Energy Services attributed share of cash collateral and the related obligation from the Citys program was $72 and $83 million, respectively.
Management believes that participation in these securities lending programs results in no credit risk exposure to the Department because the amounts owed to the borrowers exceed the amounts the borrowers owe to the Department and the Pool.
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Los Angeles Department of Water and Power Energy Services Notes to Financial Statements (continued)
NOTE 8: Long-term Debt and Advance Refunding Bonds Long-term debt outstanding as of June 30, 2001 consists of revenue bonds and refunding revenue bonds due serially in varying annual amounts as follows (amounts in millions):
Fiscal Year Effective of Last Date of Interest Scheduled Principal Bond Issues Issue Rate Maturity Outstanding Third Issue of 1991 10/01/91 6.684% 2032 $ 124 Refunding Issue of 1992 02/01/92 6.398% 2028 107 Issue of 1992 04/01/92 6.687% 2032 121 Refunding Issue of 1993 04/15/93 5.824% 2031 515 Second Refunding Issue of 1993 11/15/93 5.424% 2032 526 Issue of 2000 03/02/00 5.878% 2030 87 Second Issue of 2000 03/02/00 Variable 2010 621 Issue of 2001, Series A1 03/20/01 4.869% 2025 1,141 Issue of 2001, Series A3 04/01/01 5.043% 2025 116 Total principal amount 3,358 Revenue certificates 389 Unamortized debt-related costs (including net loss on refundings) (56)
Debt due within one year (including current portion of revenue certificates) (120)
$ 3,571 Revenue bonds generally are callable ten years after issuance. The Department has agreed to certain covenants with respect to bonded indebtedness. Significant covenants include the requirement that Energy Services net income, as defined, will be sufficient to pay certain amounts of future annual bond interest and of future annual aggregate bond interest and principal maturities. Revenue bonds and refunding bonds are collateralized by the future revenues of Energy Services.
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Los Angeles Department of Water and Power Energy Services Notes to Financial Statements (continued)
NOTE 8: (continued)
New issuances Fiscal Year 2001 In March 2001, the Department issued $1.3 billion of Energy Services fixed rate bonds. The net proceeds from these issuances were used to defease bonds with par amounts of $1.2 billion. The defeasance is expected to reduce total debt payments over the life of the new issues by $67 million and is expected to result in present value savings of approximately $49 million. This transaction resulted in a net loss for accounting purposes of $44 million, which was deferred and will be amortized over the shorter of the life of the bonds retired or the life of the new bonds.
In June 2001, the Department issued $621 million of Energy Services variable rate bonds for the purpose of defeasing the Second Issue of 2000 bonds in August 2001. The net proceeds from the issuance were deposited into a trust and were used to secure the new bonds until August 2001 at which time the Second Issue of 2000 bonds were defeased.
Fiscal Year 2000 In March 2000, the Department issued $337 and $621 million of fixed and variable rate bonds, respectively. The net proceeds from these issuances were used as follows (amounts in millions):
Deposits to construction funds $ 248 Defeasance of selected revenue bonds 86 Purchase of long-term notes receivable 565 Tender for selected revenue bonds 54
$ 953 A portion of the proceeds was used to tender for and to defease bonds with par amounts of $58 and $92 million, respectively. Based on an assumed cost of 4.0% for the variable rate bonds, the tender and defeasance are expected to reduce total debt payments over the life of the new issues by $99 million and are expected to result in present value savings of approximately $6 million. The actual savings will vary depending on future interest rates. An increase in the average rate of the variable bonds to 4.5% would change total net debt service savings to $97 million and the present value savings to $4 million. These transactions resulted in a net gain for accounting purposes of $7 million, which was deferred and will be amortized over the shorter of the life of the bonds retired or the life of the new bonds.
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Los Angeles Department of Water and Power Energy Services Notes to Financial Statements (continued)
NOTE 8: (continued)
Cash defeasance In February 2000, the Department transferred $51 million from the debt reduction trust funds to trusts established for the purpose of making future debt service payments on specific revenue bonds with a par value of $54 million. As a result of the completion of certain defeasances upon the new issuances in fiscal year 2001 discussed above, the Department further defeased bonds with par amounts of $50 million. This transaction resulted in a net loss for accounting purposes of $1 million, which has been recognized in fiscal 2001 as part of debt expenses. The final maturity of the remaining $4 million in revenue bonds not defeased, is 2006.
Escrow Investments In July 2000, the Department deposited $32 million into a trust established for the purpose of making future debt service payments on specified revenue bonds with a par value of $35 million. The final maturity of the related revenue bonds is 2031.
Forward purchase agreement On March 6, 2001, the Department entered into a forward delivery contract with a group of underwriters under which the Department will sell and deliver $109 million principal amount of fixed rate bonds on November 6, 2001. The net proceeds of the issuance will be used to defease bonds with a par value of $107 million.
Variable rate bonds The variable rate bonds currently bear interest at a weekly rate (ranging from 2.50% to 2.65%
as of June 30, 2001). The Department can elect to change the interest rate period of the bonds, with certain limitations. The bondholders have the right to tender the bonds to the tender agent on any business day with seven days prior notice. The Department has entered into Standby Agreements with a syndicate of commercial banks in an initial amount of $621 million to provide liquidity for these bonds. The initial Standby Agreements expire on February 27, 2002. Bonds purchased under the agreements will bear interest that is payable quarterly at the greater of the Federal Funds Rate plus .50% or the banks announced base rate, as defined.
The unpaid principal of bonds purchased is payable in ten equal semi-annual installments, commencing after the termination of the agreement. At its discretion, the Department has the ability to convert the outstanding bonds to fixed rate obligations, which cannot be tendered by the bondholders. The Department has the ability to refinance the outstanding variable rate bonds upon tender and, therefore has included the balance outstanding in long-term debt as of June 30, 2001.
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Los Angeles Department of Water and Power Energy Services Notes to Financial Statements (continued)
NOTE 8: (continued)
Advance refunding bonds In prior years, Energy Services established irrevocable escrow trusts with proceeds from the issuance of refunding bonds. During fiscal year 2001, bonds with a par value of $308 million were refunded using proceeds from the balance in the restricted escrow investments. Escrow investments of $246 million (stated at fair value as of June 30, 2001) will be used to refund bonds presently included in long-term debt at scheduled redemption dates as follows (amounts in millions):
Principal Redemption Amount to be Bond Issues Date Redeemed Third Issue of 1991 10/01/01 $ 122 Issue of 1992 04/01/02 118
$ 240 The related advance refunding bonds will be reclassified to long-term debt from advance refunding bonds at the time that the bonds to be refunded are called. Interest expense from refunding bonds and interest income earned on related escrow investments are included in investment income.
Scheduled principal maturities Scheduled annual principal maturities during the five years following June 30, 2001 are $40,
$34, $152, $165 and $158 million, respectively, and $3.2 billion thereafter. These scheduled maturities exclude the impact of mandatory redemptions with escrow investments.
Revenue certificates As of June 30, 2001, the Department has outstanding commercial paper of $389 million bearing interest at an average rate of 2.74%. The commercial paper matures not more than 162 days from the date of issuance. The Department intends and has the ability to refinance $309 million of the outstanding revenue certificates upon their maturity and, therefore, has included this portion of the balance outstanding in long-term debt at June 30, 2001. The commercial paper is an unsecured obligation of the Department.
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Los Angeles Department of Water and Power Energy Services Notes to Financial Statements (continued)
NOTE 8: (continued)
Effective September 1, 1999, the Department entered into a letter of credit and reimbursement agreement (the Agreement) with a commercial banking syndicate in the amount of $400 million to provide liquidity and credit support for the Departments commercial paper program. The Agreement secures the payment when due of the principal and interest on commercial paper issued on or subsequent to September 1, 1999. Drawings on the Agreement will represent advances to the Department and will bear interest that is payable monthly at the Federal Funds Rate plus 0.5% or an adjusted rate based on the London Interbank Offered Rate (LIBOR), as defined. The unpaid principal of each advance is payable in ten equal semi-annual installments, commencing on the date six months after the advance. The Agreement terminates on August 31, 2002, unless extended.
Fair value The fair value of long-term debt and refunding bonds is $3.3 and $3.7 billion at June 30, 2001 and 2000, respectively. Management has estimated fair value based on the present value of interest and principal payments on the long-term debt and refunding bonds, discounted using current interest rates obtainable by the Department for debt of similar quality and maturities.
The carrying amount of revenue certificates of $389 million at June 30, 2001 and 2000 approximates fair value due to the short maturities of these instruments.
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Los Angeles Department of Water and Power Energy Services Notes to Financial Statements (continued)
NOTE 9: Retirement, Disability and Death Benefit Insurance Plan The Department has a funded contributory retirement, disability and death benefit insurance plan covering substantially all of its employees. The Water and Power Employees Retirement, Disability and Death Benefit Insurance Plan (the Plan) operates as a single-employer benefit plan to provide pension benefits to eligible Department employees and to provide disability and death benefits from the respective insurance funds. Plan benefits are generally based on years of service, age at retirement and the employees highest 12 consecutive months of salary before retirement. Active participants who joined the Plan on or after June 1, 1984 are required to contribute 6% of their annual covered payroll. Participants who joined the Plan prior to June 1, 1984 contribute an amount based upon an entry-age percentage rate. The Department contributes $1.10 for each $1.00 contributed by participants plus an actuarially determined annual required contribution as determined by the Plans independent actuary. The contributions are allocated between Energy Services and Water Services based on the current year labor costs.
The Retirement Board of Administration (the Retirement Board) is the administrator of the Plan. The Plan is subject to provisions of the Charter of the City of Los Angeles and the regulations and instructions of the Board of Water and Power Commissioners (the Board of Commissioners). The Plan is an independent pension trust fund of the Department.
Plan amendments must be approved by both the Retirement Board and the Board of Commissioners. During March 1998, two amendments were made to the Plan. The amendments change the retirement age required to receive unreduced benefits with thirty years of service from 55 to 50 years of age for employees retiring before October 1, 2002, and provide participants with the option of purchasing other governmental service for purposes of enhancing benefits and eligibility for retirement. These amendments are considered in the actuarial determination of annual required contributions.
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Los Angeles Department of Water and Power Energy Services Notes to Financial Statements (continued)
NOTE 9: (continued)
Energy Services allocated share of annual pension cost (APC) and net pension obligation (NPO) consists of the following (amounts in millions):
Year Ended June 30, 2001 2000 Annual required contribution $ - $ -
Interest on net pension asset (8) (8)
Adjustment to annual required contribution 12 34 APC (including $1 and $5 million of amounts capitalized in fiscal 2001 and 2000, respectively) 4 26 Department contributions (16) (16)
Shared operating expenses (see Note 11) - (2)
Change in NPO (12) 8 NPO (asset) at beginning of year (100) (108)
NPO (asset) at end of year $ (112) $ (100)
Annual required contributions are determined through actuarial valuations using the entry age normal actuarial cost method. The actuarial value of assets in excess of the Departments actuarial accrued liability (AAL) was being amortized by level contribution offsets over the period ending June 30, 2003. As a result of an April 2000 amendment to the Plan, the amortization period was changed to rolling fifteen-year periods effective July 1, 2000.
In accordance with actuarial valuations, the Departments required contribution rates are as follows:
Acturial Valuation Date Surplus Contribution June 30 Normal Cost Amortization Rate 2000 10.59% -14.52% 0.00%
1999 10.57% -26.72% 0.00%
1998 9.64% -13.39% 0.00%
The significant actuarial assumptions include an investment rate of return of 8%, projected inflation-adjusted salary increases of 5.5%, and postretirement benefit increases of 3%. The actuarial value of assets is determined using techniques that smooth the effects of short-term volatility in the market value of investments over a four-year period. Plan assets consist primarily of corporate and government bonds, common stocks, mortgage-backed securities and short-term investments.
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Los Angeles Department of Water and Power Energy Services Notes to Financial Statements (continued)
NOTE 9: (continued)
Trend information for the current and two preceding fiscal years for Energy Services are as follows (amounts in millions):
Year ended Percentage of June 30, NPO APC Contributed APC 2001 $ (112) 413% $ 4 2000 $ (100) 71% $ 26 1999 $ (108) 285% $ 15 The following schedule provides information about the Departments overall progress made in accumulating sufficient assets to pay benefits when due, prior to allocations to Water Services and Energy Services (amounts in millions):
Overfunding Actuarial Actuarial Actuarial as a % of Valuation Date Value of Assets Over Covered Covered June 30, Assets AAL AAL Funded Ratio Payroll Payroll 2000 $ 5,606 $ 5,083 $ 523 110% $ 370 142%
1999 $ 5,254 $ 4,911 $ 343 107% $ 355 97%
1998 $ 4,514 $ 4,340 $ 174 104% $ 431 40%
The Departments measurement, recognition and disclosure of pension information are in accordance with GASB Statement No. 27, Accounting for Pensions by State and Local Governmental Employers.
Disability and death benefits Energy Services allocated share of disability and death benefit plan costs and administrative expenses totaled $7, $9, and $9 million for each of the fiscal years 2001, 2000, and 1999, respectively.
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Los Angeles Department of Water and Power Energy Services Notes to Financial Statements (continued)
NOTE 10: Health Care Costs The Department provides certain health care benefits to active and retired employees and their dependents. The total number of active and retired Department participants entitled to receive benefits was approximately 15,500 at June 30, 2001. The allocated cost to Energy Services of providing such benefits amounted to $89, $78, and $73 million for fiscal years 2001, 2000 and 1999, respectively. Of these costs, $20, $15, and $15 million were capitalized and the remainder was charged to expense for fiscal years 2001, 2000 and 1999, respectively.
Postretirement benefits The Department accounts for postretirement benefits in accordance with SFAS No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions, which requires that the cost of postretirement benefits be recognized as expense over employees service periods.
Energy Services allocated share of postretirement benefit costs is summarized as follows (amounts in millions):
Year Ended June 30, 2001 2000 1999 Service cost $ 8 $ 8 $ 6 Interest cost 32 30 23 Expected return on plan assets (3) (3) (3)
Amortization of transition obligation 10 12 12 Amortization of prior service costs 5 5 2 Special termination benefits - - 7
$ 52 $ 52 $ 47 Page 29
Los Angeles Department of Water and Power Energy Services Notes to Financial Statements (continued)
NOTE 10: (continued)
The funded status and the accrued benefit cost related to postretirement benefits for the Department, prior to allocations to Water Services and Energy Services, are summarized as follows (amounts in millions):
June 30, 2001 2000 Change in benefit obligation:
Benefit obligation at beginning of year $ 636 $ 513 Service cost 13 10 Interest cost 48 39 Actuarial losses 139 58 Plan amendment - 46 Benefits paid (33) (30)
Benefit obligation at end of year 803 636 Change in fair value of plan assets:
Fair value of plan assets at beginning of year 71 69 Actual return on plan assets 7 2 Fair value of plan assets at end of year 78 71 Funded status (725) (565)
Unrecognized net loss 201 63 Unrecognized transition obligation 183 197 Unrecognized prior service cost 55 62 Accrued benefit cost $ (286) $ (243)
Energy Services' allocated share of accrued benefit cost $ (203) $ (174)
Weighted average actuarial assumptions used in determining postretirement benefit costs are as follows:
June 30, 2001 2000 1999 Discount rate 7.25% 7.75% 7.25%
Expected return on plan assets 6.50% 7.00% 7.00%
Plan assets consist primarily of commercial paper, United States Government and governmental agency securities, and corporate bonds. No funding policy has been established for the future benefits to be provided under this plan.
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Los Angeles Department of Water and Power Energy Services Notes to Financial Statements (continued)
NOTE 10: (continued)
For measurement purposes, a 10.0% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2001; the rate was assumed to decrease gradually to 5.50% in 2011 and remain at that level thereafter. For the dental plan, an 8.5% annual rate of increase in the per capita cost was assumed for 2001, the rate was assumed to decrease gradually to 5.50% in 2008 and remain at that level thereafter. The effect of a 1% change in these assumed health care cost trend rates would increase or decrease the Departments total benefit obligation by approximately $104 or $88 million, respectively. In addition, such a 1%
change would increase or decrease the aggregate service and interest cost components of net periodic benefit cost by approximately $11 or $9 million, respectively.
During fiscal year 2000, the Department began contributing toward dental coverage for retirees enrolled in a Department-sponsored plan. This amendment resulted in a $46 million increase in the Departments accumulated postretirement benefit obligation at June 30, 2000.
Energy Services allocated $35 million share of this increase is being amortized through 2008, the remaining average service period. This change also resulted in an $11 and $8 million increase in postretirement benefit costs for fiscal years 2001 and 2000, respectively, of which
$7 and $6 million, respectively, was allocated to Energy Services.
NOTE 11: Shared Operating Expenses Energy Services shares certain administrative functions with the Departments Water Services.
Generally, the costs of these functions are allocated on the basis of the benefits provided.
Operating expenses shared with Water Services were $455, $466, and $430 million for fiscal years 2001, 2000 and 1999, respectively, of which $301, $316 and $284 million were allocated to Energy Services.
NOTE 12: Loss on Asset Impairment and Abandoned Project During fiscal year 2001, management approved the sale of one of its administrative facilities and Energy Services reported its portion of the loss on asset impairment of $28 million. The completion of the sale is expected to occur within 12 to 24 months for a total purchase price of
$50 million, which is below the total asset carrying value. In addition, management formally abandoned one of its customer information system projects and Energy Services reported its portion of the loss on abandonment of $15 million.
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Los Angeles Department of Water and Power Energy Services Notes to Financial Statements (continued)
NOTE 13: Commitments and Contingencies Transfers to the reserve fund of the City of Los Angeles Under the provisions of the City Charter, Energy Services transfers funds at its discretion to the reserve fund of the City. Pursuant to covenants contained in the bond indentures, the transfers may not be in excess of net income of the prior fiscal year. Such payments are not in lieu of taxes and are recorded as a reduction of income in accordance with GASBS 33 (See Note 2).
The Department made payments of $120, $112 and $108 million in fiscal years 2001, 2000 and 1999, respectively, from Energy Services to the reserve fund of the City. The Department expects to make a transfer declaration from Energy Services of approximately $154 million during fiscal year 2002.
Palo Verde Nuclear Generating Station (PVNGS)
As a joint project participant in PVNGS, the Department has certain commitments with respect to nuclear spent fuel and waste disposal. Under the Nuclear Policy Act, the Department of Energy (DOE) was to develop the facilities necessary for the storage and disposal of spent fuel and to have the first such facility in operation by 1998; however, the DOE has announced that such a repository cannot be completed before 2010. There is ongoing litigation with respect to the DOEs ability to accept spent nuclear fuel; however, no permanent resolution has been reached.
Arizona Public Service (APS), PVNGS operating agent, has capacity in existing fuel storage pools at PVNGS which, with certain modifications, could accommodate all fuel expected to be discharged from normal operation of PVNGS through 2002. In addition, APS believes it could augment that wet storage with new facilities for on-site storage of spent fuel for an indeterminate period of operation beyond 2002, subject to obtaining required government approvals. The Department currently estimates that it will incur $23 million (in 1998 dollars) over the life of PVNGS for its direct share of the costs related to the on-site interim storage of spent nuclear fuel. During fiscal 1999, the Department expensed approximately $7 million for its direct share of on-site interim nuclear fuel storage costs related to nuclear fuel burned prior to fiscal 1999. In addition, the Department began accruing for current nuclear fuel storage costs as a component of fuel expense as the fuel is burned. The Departments share of spent nuclear fuel costs related to its indirect interest in PVNGS is included in purchased power expense. APS currently believes that spent fuel storage or disposal methods will be available for use by PVNGS to allow its continued operation beyond 2002.
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Los Angeles Department of Water and Power Energy Services Notes to Financial Statements (continued)
NOTE 13: (continued)
The Price-Anderson Act (the Act) requires that all utilities with nuclear generating facilities share in payment for claims resulting from a nuclear incident. The Act limits liability from third-party claims to $9 billion per incident. Participants in PVNGS currently insure potential claims and liability through commercial insurance with a $200 million limit; the remainder of the potential liability is covered by the industry-wide retrospective assessment program provided under the Act. This program limits assessments to $79 million for each licensee for each nuclear incident occurring at any nuclear reactor in the United States; payments under the program are limited to $10 million per incident, per year. Based on the Departments 5.7%
direct interest and its 3.95% indirect investment interest through SCPPA, the Department would be responsible for a maximum assessment of $8 million per incident, limited to payments of $1 million per incident annually.
Environmental matters Numerous environmental laws and regulations affect Energy Services facilities and operations. The Department monitors its compliance with laws and regulations and reviews its remediation obligations on an ongoing basis.
The Department is subject to the Regional Clean Air Incentives Market (RECLAIM) emission reduction program adopted by the South Coast Air Quality Management District (SCAQMD).
In accordance with this program, an emissions cap is established for each company that controls emissions. Companies that exceed the required limit may buy emissions credits from other companies that have emissions below the maximum threshold. The Department has established a program of installing emission controls and purchasing RECLAIM trading credits to meet the emissions requirements.
Based on the Departments significant increase in sales for resale during the spring and the early summer of 2000, the Department anticipated a potential shortfall in nitrogen oxide emission (NOx) credits to provide for both its native load and the demands of the California grid during the remaining months of calendar year 2000. As a result, during August 2000, the Department entered into a Settlement Agreement (Agreement) with the SCAQMD. The Agreement released the Department from any and all claims or penalties arising from the incidents which gave rise to the RECLAIM violations at its local facilities through December 31, 2000. The Agreement also provides for a civil penalty of not less than $14 million. The civil penalty must be spent within a three-year period on supplemental environmental projects agreed to by the SCAQMD and the Department.
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Los Angeles Department of Water and Power Energy Services Notes to Financial Statements (continued)
NOTE 13: (continued)
Although the Department did not have a shortfall of RECLAIM trading credits at the end of calendar year 2000, the Department has continued its partnership with SCAQMD in the Departments funding of environmental projects. The Department and SCAQMD have agreed to projects in the areas of micro-turbine development and commercialization, natural gas fueling station infrastructure, tree plantings at schools, advanced fuel cell demonstration, and hybrid-electric midsize school buses.
In May 2001, SCAQMD adopted amendments to RECLAIM with the intent of lowering and stabilizing RECLAIM trading credit prices. One key element of the amendments is that existing power plants are bifurcated from the rest of the RECLAIM market and are required to install Best Available Retrofit Control Technology (BARCT) through compliance plans. The Department submitted its compliance plans for SCAQMD approval in August 2001 that demonstrate that the Department has sufficient RECLAIM trading credits to meet its needs for the next five years; operates its generating units using environmental dispatch; and has installed BARCT or better on all sources of NOx emissions, or will do so by January 2003.
Litigation A number of claims and suits are pending against the Department for alleged damages to persons and property and for other alleged liabilities arising out of its operations. In the opinion of management, any ultimate liability, which may arise from these actions, are not expected to materially impact Energy Services financial position, results of operations or cash flows as of June 30, 2001.
Risk management Energy Services is subject to certain business risks common to the utility industry. The majority of these risks are mitigated by external insurance coverage obtained by Energy Services. For other significant business risks, however, Energy Services has elected to self-insure. Management believes that exposure to loss arising out of self-insured business risks will not materially impact Energy Services financial position, results of operations or cash flows as of June 30, 2001.
Credit risk Financial instruments, which potentially expose the Department to concentrations of credit risk, consist primarily of retail and wholesale receivables. The Departments retail customer base is concentrated among commercial, industrial, residential and governmental customers located within the City. Although the Department is directly affected by the Citys economy, management does not believe significant credit risk exists at June 30, 2001, except as provided in the allowance for losses. The Department manages its credit exposure by requiring credit enhancements from certain customers and through procedures designed to identify and monitor credit risk.
Page 34
Los Angeles Department of Water and Power Energy Services Notes to Financial Statements (continued)
NOTE 13: (continued)
Energy Services also enters into forward purchase and sale commitments for the physical delivery of energy with utility companies and energy marketers. Energy Services is exposed to credit risk related to nonperformance by its wholesale counterparties under the terms of these contractual agreements. In order to limit the risk of counterparty default, the Department has implemented a Wholesale Marketing Counterparty Evaluation Policy (the Policy). The Policy includes provisions to limit risk including: the assignment of internal credit ratings to all Department counterparties based on counterparty and/or debt ratings; the requirement for credit enhancements (including irrevocable letters of credit, escrow trust accounts and parent company guarantees) for counterparties that do not meet an acceptable level of risk; and the use of standardized agreements which allow for the netting of positive and negative exposures associated with a single counterparty. As discussed in Note 3, during fiscal year 2001, Energy Services experienced nonperformance and material counterparty default with the CISO and the CPX. Energy Services does not anticipate nonperformance by any other of its counterparties and has no reserves related to nonperformance at June 30, 2001 and 2000, respectively. Apart from the events discussed in Note 3, Energy Services did not experience any material counterparty default during fiscal years 2001, 2000 or 1999.
Page 35