ML051890146
| ML051890146 | |
| Person / Time | |
|---|---|
| Site: | Rancho Seco |
| Issue date: | 06/29/2005 |
| From: | Bradley Jones Sacramento Municipal Utility District (SMUD) |
| To: | Document Control Desk, NRC/FSME |
| References | |
| NQA 05-023 | |
| Download: ML051890146 (69) | |
Text
PI SMUD SACRAMENTO MUNICIPAL UTILITY DISTRICT 0 6201 S Street, P.O. Box 15830, Sacramento CA 95852-1830, (916) 452-3211 AN ELECTRIC SYSTEM SERVING THE HEART OF CALIFORNIA NQA 05-023 June 29, 2005 U.S. Nuclear Regulatory Commission Document Control Desk Washington, DC 20555 Docket No. 50-312 Rancho Seco Nuclear Generating Station License No. DPR-54 ANNUAL FINANCIAL REPORT Attention: John Hickman In accordance with 10 CFR 50.71(b), we are submitting the 2004 annual financial report for the Sacramento Municipal Utility District. If you, or members of your staff, have questions requiring additional information or clarification, Please contact Bob Jones at (916) 732-4843.
Sincerel SuperV g Quality Engineer Cc: NRC, Region VI BASSO (D
I
-__________I_________I SACRAMENTO MUNICIPAL UT LITY DISTRICT [ 2004 General Manager's message 3 Energizing Sacramento 5 Earning the public' confidence 16 Putting customers first 7 Reliability: count on it 8 Gearing up for the future 10 Aprehistoric discovery 12 Financial stability 14 Strategic Directives IS Supporting the business community 10 Brightening Stockton Boulevard 17 A dynamic work force 18 Cleaner ways to energize a community SMUD: A beacon of solar power 20 SMUD 2004 hnancials 22 M I 567,176 Since Dec. 31, 1946, SMUD has provided electrical Total service within Sacramento County. As of Dec. 31, 2004, SMUD delivered electric power to 1.4 million Customers people in a 900-square-mile territory that includes California's capital city, Sacramento County and a Served small portion of Placer County. As a municipal (at year-end) utility, SMUD is governed by a seven-member Board of Directors elected by the voters for staggered four-year terms. The Board of Directors determines Tota I policy for the District and appoints the General Manager, who isresponsible for the District's operations.
Operating Revenue: SMUD SERVICE AREA AND BOARD MEMBER WARDS
$1.069 billion SACRAM1!
PEAK DEMAND:
2,672 megawatts on Aug. 11, 2004 (all time peak demand:
2,809 megawatts on July 22, 2003) 4 WGIo Grey.
Employees 2,149 (full-time)
1 N I
.(eneral Managers message J1 At SMUD, the charge in 2004 was as simple as it was challenging: To continue building a more secure energy future for our customers. From installing solar roofs on zero-energy homes to building 'a new combined cycle power plant to hedging our natural gas contracts, we're always looking for better ways to meet our customers' electrical energy' needs. They expect as much, and we took a number of significant steps in 2004 toward fulfilling that trust.
The federal Western Area Power Administration selected SMUD to host its control area operations in the Sierra Nevada region. We now have dependable access to our contract share of generating resources over a 230-kilovolt transmission system without the uncertainty of the state ISO. This will benefit our customers for many years to come. Despite rising natural gas prices and a below-average hydroelectric year~,we maintained our strong financial footing. Our bond ratings are firm. And in one of the country's fastest-growing regions, SMUD provides a building block for economic development by supplying reliable and affordable power.
To further our commitment to renewable resources, we're expanding our wind farm near Rio Vista. Construction continued on the Cosumnes Power Plant, a 500-megawatt facility scheduled to open in 2006. While the new plant will be fueled by natural gas, we hedged the risk by purchasing natural gas reserves and locking in costs through long-term contracts. Nonetheless, the escalating cost of natural gas prompted me to recommend to our Board of Directors just our second rate increase in 15 years. The average rate increase of 6 percent will keep us on track to achieve our 20 percent equity target by 2007. Our rates remain significantly lower than those of California investor-owned utilities.
A desire for local control, along with SMUD's lower-rates and history of providing reliable power, led the jurisdictions of Davis, West Sacramento, Woodland and Yolo County to approach SMUD about possibly annexing a oortion of their county. The Board of Directors continues to assess the feasibility of the proposed annexation.
~ .Other accomplishments are listed more fully in this report, but I'd like to mention a few in passing. SMUD moved closer to the full implementation of a new electronic outage management system that will provide more timely
-and accurate information to customers. In 2004, SMUD was the top-rated utility in California in overall customer
~'satisfaction in a survey conducted by J.D. Power and Associates. Better yet, we're meeting these needs without increasing our'ove'rall labor costs per customer. The Board of Directo rs finalized a set of strategic dire ctives that will set SMUD's course for the upcoming decade. Like other utilities, we're experiencing considerable employee turnover brought on by an aging work force. A variety of apprenticeship and experience transfer programs is helping us meet this challenge.
SMUD is a consumer-owned utility. Each and every one of our customers has a direct stake in the way we conduct business. Please take a few minutes to read about some of the ways in which we energized Sacramento in 2004.
SACRAMENTO MUNICIPAL UTILITY DISTRICT l 2004 A
ANNUAL REPORT l 2004 Energizing Sacramento 1 1.
Introduction For the better part of six decades, SMUD has energized the Sacramento region with affordable, reliable electricity. Today, more than ever, SMUD's residential and commercial customers understand and appreciate the benefits provided by a locally owned and locally operated utility.
In 2004, SMUD 'was the top-rated electric utility in the state in terms of overall customer satisfaction. It marked the fourth time in five years that SMUD was I..
the top-ranked California utility in the J.D. Power and Associates survey of residential and commercial customers.
But given uncertainties in the energy industry, it's imperative to look ahead. SMUD demonstrated in 2004 that it's taking the right steps to continue serving one of the
- fastest-growing regions in the country.
Construction of the 500-megawatt Cosumnes Power Plant should be completed before the summer peak season of 2006, increasing SMUD-owned generating capacity by -more than 40 percent. In an ongoing effort to diversify its resource portfolio, SMUD also moved forward in 2004 with plans to expand its wind project0 jnear the city of Rio Vista in adjacent Solano County.
~' SMUD's Board of Directors finalized several strategic directives this past year that.
provide a roadmap for the nation's sixth-largest customer-owned utility. One of*
the key directives approved by the Board is to build customer equity in the electric system. The adopted target is to achieve 20 percent customer equity by the end of 2007. SMUD spent several years following the 1989 closure of the Rancho Seco nuclear plant paying off debt related to that project. Now,Ito sustain its valued WA ci credit rating, SMUD is committed to increasing equity in its system, allowing the utility to continue financing capital projects at a reasonable cost.
I4-SACRAMENTO MUNICIPAL UTILITY DISTRICT l 2004
.Earning te confidence spubics - /
QI// ~~~
~0 e ;,0 X;~~~~~ 0; ;J'C - a
- 2. .~~~~~~~~~~~ ' '-.'-,-
. i Public power in general, and SMUD specifically, received a big vote of confidence .- N A when the Western Area Power Administration (WAPA) selected SMUD to host .L
--A sub-control area operations for the Sierra Nevada region beginning Jan. 1, 2005.
This gives SMUD greater flexibility and control over providing customers with .i affordable electricity. Plus, SMUD has improved access to contract rights for the I
Central Valley Project generating resources over a transmission system that's not A subject to California Independent System Operator (Cal ISO) services and tariffs.
I I SMUD's control area now includes Western's 230-kilovolt California transmission _ A system. The agreement allows for direct transactions between SMUD and Western II and its direct-connect customers, such as Roseville and Redding, without i
triggering the need for services from the ISO. Ir I
With long-term contracts with PG&E expiring on Dec. 31, 2004, WAPA selected SMUD on the basis of five criteria - flexibility, durability, certainty, operating i
'_I transparency and cost-effectiveness. By hosting sub-control areas for the Sierra i Nevada region, SMUD should save significant fees that otherwise would have been II I
paid to the ISO. t i4 Western's Sierra Nevada region markets and transmits federal hydropower from . .1I the Central Valley Project to publicly owned nonprofit utilities in northern and central California. The Central Valley Project's hydro resources account for about 11 10 percent of SMUD's total energy supply.
holy 2..ip I.
I -I VVI
ANNUAL REPORT I 2004 Plutting customers first-.-;-;- - -: i.:
I n ,, '~fE -;' '0'-' ' '--0 I:-S=-f:-:.C;:'-X:..: -- ~fC- u --
iy al o i I *1. " I : m 1' : : '_ ,
__ I- 7, -. -J) le-.ingCustomer satisfaction SMUD. For a locally. owne d utility is a top priority at serving customer-owners is the primary reason for existence.-:
SMUD passed the test in 2004, ranking first in California among residential and commercial customers in a survey by J.D. Power and Associates. II -
N Yf I-
_l
. 'Y"- -j I I ml In the J.D. Power commercial customer survey, SMUD ranked first in the state Blenvenidos a smud.org en espafol.
and second in the western United States. EastspighnsonhasIa prlmeras quoofroomon anoun Mioms Y sevftn alInhlds.
dlloronto rnmebane par un SitMa mob anonPotlol cadsve mayor.
Customer perspectives on utility service are changing. Aside from receiving Aunque bodava no hshantrddo todas de5u&org, espermon In pigines quoMseen OtMlnELatin drigidasa los dbntes resddls quehabaiespaoLl quebncan hfomadn reliable power at competitive rates, customers expect to receive a level of service bahds SMUD.
Sob. elnnrydo *Wddcde SMUD Leh tamonpar quonon youde y quloroneow- Ionpogrnm y erdokos a denatrn onto cononsconoota-on
.r nato de sobrob l that meets or exceeds the standards set by other businesses. anfrnnaddno eI.apglnms bdidoalos quologusbrb ner en espvi Fuede pone en contcto can waotmen
--SMUD established an overall customer satisfaction target of 95 percent on actual IC-ddsoprwulWntal transactions with customers. Surveys indicate that SMUD customers are satisfied
-or very satisfied with new connects and transfers, energy audits, tree trimming, Site mnap power quality, and design/construction services. . Contdea
. Ace de SMUD
-Upgrades to the SAP software system improved customer contacts and call center . SaciaennntoreonECrdijiCa
.. SUC..
- SnunaL I Lon
,-i" operations, resulting in reduced wait times for customers.
- Customers are also taking advantage of expanded services available online at www.smud.org. More than 30,000 customers used SMUD's electronic "E-bill" service to view and pay their bills online.
SACRAMENTO MUNICIPAL UTILITY DISTRICT l 2004
--IReiabliy:coun
'R-Ii-biht .u .ht.Xoni- -:
4
.- .;.: 9 . , t -: ; --- ::
I.,
r.7_.
3, A SMUD is proud of its record in providing reliable, high-quality power at competitive rates, but outages do occur. Successful utilities such as SMUD work to reduce the chance of outages and respond quickly when they do occur.
Maintaining SMUD's system requires year-round work. That work continued to bear fruit in 2004. In years past, trees were the leading cause of outages. That's no longer the case. Thanks to the vegetation-management program, tree-related outages have gone down significantly. SMUD trimmed 66,871 trees and removed 5,782 trees in 2004, reducing the risk of branches falling on power lines.
More than 1,300 utility poles were replaced throughout SMUD's 900-square-mile Meeting the needs service territory in 2004. SMUD also exceeded its goal in 2004 of replacing 100,000 of a growing feet of underground cable while staying within budget.
community Additionally, SMUD used silicone injection to rehabilitate another 100,000 feet of The construction boom continued underground cable. The rehabilitation process involves injecting a silicone fluid throughout the Sacramento region. I - I into cable strands. The fluid gradually seeps into the cable insulation layer and fills - ,I SMUD designed 10,224 lots in 2004, _i any voids in the insulation. This process can prolong the life of the cable by more close to the previous high of 11,388, than 20 years and is considerably less expensive than replacing the cable.
set in 2003.
Commercial development also remained strong. SMUD reduced Keeping customers in the loop its backlog of projects and SMUD moved closer to electronic outage management in November when a the average time it takes to do new system was implemented in the 21kV and 4kV system that serves downtown preliminary design work. The lead Sacramento. The outage management system is part of SMUD's broader Service time for providing a commitment Delivery Information Technology (SDIT) project.
is now 12 weeks, down from 20 weeks in late 2003. When it's fully implemented throughout SMUD's service territory, outage management is expected to provide more timely and accurate information to SMUD made numerous customers. It should also streamline the management of repair crews and resources.
improvements in how new services work is handled and When a customer calls to report an outage, the outage-management system will hired six additional designers combine information from customer calls and from systems monitoring SMUD in 2004. substations to analyze within a matter of seconds where the problem originates.
construction isexpected to remain A milestone in the SDIT project was the conversion of all of SMUD's paper strong inthe next two to three maps to digital format using a Geographic Information System. GIS now years. New development recently contains more than 1.8 million features - poles, transformers, conductors, opened inthe Sunrise/Douglas area substations and customer locations.
south of Highway 50 and Laguna SMUD now has computer terminals installed in 73 vehicles as part of the mobile Ridge in Elk Grove.
data dispatch system. This allows troubleshooters, line supervisors and service crews to enter outage information from the field.
'-I
- 1.. I - . -; k- - I. : ,. I I I . 7 :I
-: ; 0 Dd ;:
- - t C 7
- ;i 4, w : : i=
II ; , . c : ;, ,
LOX - ANNOAL REPORT 0 10:2004
- 1
- - - . I . -' ., ' , :
- ,. C, £, 9 . :
- 1- , z
- 'I:: - ,: ' i V- : ,.X I;
U AL. , ,
ZZ-F
- . .
- r. , r wtv- 11- I I I I ;
N, cŽtbj I i':
"I I-Ii I'V -- :~
ENS,'.
'A':
H H1.
-N.
E r bli o' T, ti£ 4
SACRAMENTO MUNICIPAL UTILITY DISTRICT 1 2004
,3, ti Geari~ng-up, for te~ future "WOO 0%0%--
t 4,0 TOM r Cosumnfes Powert Plant p peline, compilete~d,`2-TheCosumn~es Power Plant willsupply the rapidly growing Sacramet
-regionwith a generating capacity of 5006 m~egiawatsL enough power to meet the annual needs of 450,000 households. Construction on the $380',,
iinpancontinued throughout.2004.The plant isdue'tob c mpe d intme forthe peak summer season of 2006. '
Thenatural gas-ired planti~sbeing builton SMUDs Ran'cho Seco pro'pe'rt'y'----
in Southeastern Sacramnento6 County. Construction of the 26 mile extension of SMUD's ntral gas pipeline from El Grv oteCsmnes Power Plant
--was completed In-2004.The $18.5million pipeline project came inon time and within budget.
Powerifrom the Cosumrnes Power Plant will dramatically lower SMUD'
- .--,,dependence on imported power. And while the risingcosts ofna-tu-r-algas In'.-,L,,'
"2004 caused concern throughout the energy industry the Cosumnes Power,.:,--
Plant iscost-effective compared to existing contracts and marketpucae Since the plant will be located Within SMUD's service area, itwill reduce
-SMUD'sreliance on imported energy and the service charges attached to-~~~l"--
the delivery of imports.
In ddiioth Coumes Power Plant Is mnore efficient than- ma-ny oif te exi1sting contract resources available, reducing risk from tevltl
-marketplace.~
To meet long term energy needls,S MUhasteoption to construct additional natural gas generation at R nh Seo w ihteB ad wIl consider as part of SM0 o gtr e o r e pa I0
4.ANNUAL REPORT 2004 V -
I j .:
F
SACRAMENTO MUNICIPAL UTILITY DISTRICT l 2004
.>--i~pehistoriC discov r rJ y'--k:-
-- 0 -S .i ~~~~~e,-
to X'-"-',;.
.a' Construction of the gas pipeline made headlines around the state, but not because of any glitches or setbacks. A few feet beneath the surface of a sun-baked cornfield along the pipeline route, a pair of well-trained eyes unlocked a window to the prehistoric past.
A paleontologist working with SMUD during construction of the pipeline noticed white fragments in the heavy clay soil. The tiny fragments turned out to be the fossil remains of a Columbian mammoth that roamed the Sacramento Valley 130,000 to 450,000 years ago.
-Excavation was halted immediately. Trenching was moved around the discovery site, allowing the project to continue without significant delay.
The discovery illustrates the attentiveness SMUD pays to environmental, cultural and archeological concerns on its projects. Paleontologists, archeologists and biologists accompanied construction crews along the 26-mile pipeline route. Biological monitors were on the lookout for giant
- garter snakes, fairy shrimp, California tiger salamanders, raptors and nesting birds such as the Swainson's hawk.
- Earlier in the pipeline project, the routing was changed to avoid the sites of possible Native American villages and burial areas.
- Similar safeguards are being taken on the northern end of SMUD's 900-square-mile service territory. The Elkhorn-Natomas neighborhood distribution project encompasses an area with numerous endangered or threatened species that need to be protected. In planning the Solano Wind Project near Rio Vista, SMUD enlisted experts to study the potential of raptors colliding with the wind turbines.
As these examples point out, addressing these wide-ranging concerns-environmental, cultural and archeological - is a responsibility SMUD takes seriously.
And sometimes, it yields a prehistoric treasure or two.
ANNUAL REPORT 2004 Paleontologists, archeologists
--and bilologsts ac'companied
-,construction crews along the f-026-mile pipelineroute.
-SACRAMENTO MUNICIPAL UTILITY DISTRICTj .2;l04
- if Financial stability
!OS ;_11W i - -
Taking the long view The largest portion of SMUD's annual budget is energy supply, which includes purchased power,: fuel and transmission costs. This component is the most SMUD hedges natura gas costs to minimize the impact o volatile natural
- susceptible to market forces. :
9gasprices. Hedging' meanstheutility signs fixed price contracts to`guard against fluctuations In the gas markets. For instance SMUD plans to meet -Just as consumers are seeing higher costs for gasoline, SMUD is feeling the effect
-' about 35 percent of its natural gas requirements with contracts that exceed :.of higher energy costs. A steep increase in natural gas prices increased SMUD's
<,,-fiveyearsinlength- -power generation costs and put pressure on~wholesale prices for purchased power.
o Also, SMUDs purchaseofnaturalgasreservesshoud meet abo 5 XAs a result, SMUD's general manager recommended in late 2004 an average
<-.percentbof its long-term natural gas needs. -rate increase of 6 percent. The Beard of Directors voted in March 2005 on the recommendation to raise rates for just the second time in 15 years. The vote
- followed several weeks of community meetings, workshops and public hearings, all
- designed to receive input from SMUD's customer-owtiers. Without a rate increase, higher energy costs would have led to a 2005 reduction in cash flow of more than
.$60 million. In addition, SMUD would have fallen short of achieving its 20 percent
- equity goal by the end of 2007. -
FL." -...
The equity goal is an essential element in SMUD's effort to mriainain its solid
-credit rating. Lower ratings would trigger higher interest costs for borrowing and would hamper SMUD's ability to purchase energy through multi-year fixed price contracts and finance new power generation, transmission and distribution facilities.
In May, Moody's Investors Service boosted the District's credit rating a notch.
Moody's raised SMUD's rating from A2 to Al in connection with the spring sale
'of $129 million in bonds. Moody's also upgraded the credit rating on SMUD's outstanding bonds to Al.
SACRAMENTO MUNICIPAL UTILITY DISTRICT 12004 Supportn h 1-*110 O'Sop-,
I *I;t, business community;-
7,i
ANNUAL REPORT 2004 rihenn Stockt on Bolear I
- SACRAMENTO MUNICIPAL UTILITY DISTRICT I.2004 Adnamic wor frce L As the baby boom generation ages, SMUD and other utilities- will need to replace a large percentage of employees. SMUD has increased its recruitment and training
- efforts for line workers and other skilled positions where experience is crucial. 'With about half of its work force nearing the traditionial retirement age, SMUD has a work IAa Aaa I Establishing new apprenticeship programs in various disciplines;
,=` ;"F-.%z * .Having employees shadow people who are about to retire; and w>4 : !,z'z
. v.- ,k I -
Bringing back retired employees for training purposes.
z Given these needs, SMUD has an opportunity to strengthen employee diversity and to hire employees with an appropriate mix of knowledge, skills and abilities to apply new technology.
In 2004, SMUD started or expanded apprentice programs-for all of its skilled trades and developed technical curriculum for designers and engineers. These programs, which typically take four to five years to complete, will ensure that SMUD has qualified staff in key positions to offset expected attrition.
The Board of Directors' strategic directive on employee relations, coupled with SMUD's diversity commitment statement, will help SMUD prepare for the future.
Given the expected employee turno~ver in the next five tosvnyaastteyo
-. help retain and recruit a high-quality, diverse workforce will benefit one of the, most racially and ethnically diverse communities in the country.
~ANNUAL REPORT Ci2004 F
[ Cleaner wdys toenergize 9.-.>
1..
a community . -
I;-
SMUD has set a goal of supplying 20 percent of its energy from renewables by 201 1, a more aggressive goal than the state target -of20 percent by 2017.
In addition to soliciting bids from suppliers of conventional renewables such as wind, small hydroelectric and landfill gas, SMUD is looking at emerging sources of renewable energy. This includes photovoltaic, biomass gasification, solid, waste and solar thermal with and without gas. Emerging renewables are more expensive initially but should lead to lower cost energy in the future, once the technologies mature.
Expanding SMUD's renewable portfolio will improve environmental quality and diversify its energy supply, alleviating risks associated with other energy sources.
I.
SACRAMENTO MUNICIPAL UTILITY DISTRICT l 2004 SMUJD:b A-iconhof so ar-powert;-- :-... -
. . . .t
- ~~F7,f ,.C;.ff.. ;...
- hf , i.d.
-Decomissioning of the closed Twenty years ago, SMUD demonstrated long-range vision, tapping into an energy
,_nuclear plant at Rancho Seco source 93 million miles away.
reached another milestone with SMUD's installation in 1984 of what became known as PV1 at Rancho Seco was a the removal of two 73 foot-long historic moment in the annals of solar energy. PV1 was the world's first commercial teamrgenerators. SMUD'sRancho-central-station photovoltaic power plant built and operated by a utility.
Seco decommissionirng team cut the generators in halfand sealedin Twenty years later, SMUD remains a leader in the field of solar energy. The
.- radioactive contamination before'. 2004 dedication of PV6 - the sixth array of solar panels on the site of the maneuvering the two 570-ton - decommissioned Rancho Seco nuclear power plant - brings the combined solar steam generators out of the reactor - generating capacity at the site to 3.2 megawatts. Those 5,000 solar panels generate building and onto railcars for U enough power to meet the average needs of more than 2,200 homes.
---Shipmenttoadisposal site.--
While large-scale solar facilities such as PV1 and PV6 provide clean and renewable
.Since 1997, SMUD has been - - energy to its energy mix, SMUD is now emphasizing custom-er-owned solar on
- dismantling the plant and removing Sacramento-area buildings, homes and parking structures. SMUD's PV Partners
-radioactivity from the site. SMUD .program offers customers the opportunity to buy their own rooftop panels at Is about three-quarters of the way reduced prices.
through decommissioning, which',
Two Sacramento-area homebuilders are constructing SMUD Zero Energy Homes
',,should be complete in 2008.
- homes that combine innovative construction and roof-integrated solar electric Creative thinking on managing systems. Additionally, SMUD provides financial incentives to local businesses that
-costs and diligence on safety install photovoltaic systems of 30 kilowatts or larger.
helps the decommissioning.-
SMUD is one of the leading utilities in the United States in terms of solar power, project stay In line with SMUD's with more than 9.3 megawatts of installed solar panels at Rancho Seco and on area Strategic Directives to keep .
buildings, homes and parking structures.
rates competitive, protect ihe environment and work safely. :' The benefits of solar power are far-reaching. Since solartechnology doesn't use fossil fuels, the offset in power-plant emissions is equivalent to about 10,000 cars being removed from local roads.
ANNUAL REPORT l 2004 i
I
SACRAMENTO MUNICIPAL UTILITY OISTRICT 2004 H. ~ t,.
Ji -----
4 -4
)i ~jri
SACRAMENTO MUNICIPAL UTILITY DISTRICT l 2004 SACRAMENTO MUNICIPAL UTILITY DISTRICT FINANCIAL REPORT TABLE OF CONTENTS Report of Independent Auditors. ........ . . . . . . 24 Management's Discussion and Analysis . ....... ... . 25 Financial Statements. . . . . . . . . . . . . . . . . . . . . 34 Notes to Financial Statements Note 1. Organization . 38 Note 2. Summary of Significant Accounting Policies . . . 38 Note 3. Restatement .44 Note 4. Utility Plant . . . ..... ...... ..... . 45 Note 5. Investment in Joint Powers Agency .46 Note 6. Component Units .46 Note 7. Cash, Cash Equivalents, and Investments . . . . 47 Note 8. Regulatory Deferrals ........ . . ..... 48 Note 9. Derivative Financial Instruments .51 Note 10. Long-term Debt .52 Note 11. Commercial Paper Notes .55 Note 12. Fair Value of Financial Instruments . . 55 Note 13. Rancho Seco Decommissioning Liability . . . . 56 Note 14. Pension Plans .58 Note 15. Other Post-employment Benefits .59 Note 16. Insurance Programs and Claims .60 Note 17. Commitments .61 Note 18. Claims and Contingencies .62 Note 19. Supplemental Cash Flow Information .66
I I SACRAMENTO MUNICIFAL UTILITY DISTRICT l 2004
_I.
REPORT OF INDEPENDENT AUDITORS PricewaterhouseCoopers LLP 400 Capitol Mall, Suite 600 Sacramento CA 95814-4602 To the Board of Directors of Sacramento Municipal Utility District:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of revenues, expenses and changes in net assets and of cash flows present fairly, in all material respects, the financial position of Sacramento Municipal Utility District (the "District") and its subsidiaries at December 31, 2004 and December 31, 2003, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the District's 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.
Those standards 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. WXe believe that our audits provide a reasonable basis for our opinion.
As described in Note 2 to the consolidated financial statements, in 2003 the District adopted Statement of Financial Accounting Standards No. 143, AccountingforAsset Retirement Obligations, which changed the District's recognition and measurement of its decommissioning liabilities.
As described in Note 3 to the consolidated financial statements, the District restated its December 31,2003 consolidated balance sheet to record the fair value of derivative financial instruments related to five power purchase agreements, to record related regulatory assets and liabilities and to present all derivatives assets and liabilities at gross on the consolidated balance sheet.
The management's discussion and analysis included on pages 25 through :33 is not a required part of the basic consolidated financial statements but is supplementary information required by the Governmental Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the supplementary information. However, we did not audit the information and express no opinion on it.
rdc H40MS UV March 10, 2005
SACRAMENTO MUNICIPAL UTILITY DISTRICT l 2004 4
SACRAMENTO MUNICIPAL UTILITY DISTRICT MANAGEMENT'S DISCUSSION AND ANALYSIS The following discussion and analysis of the Sacramento Municipal Utility District and its component units (District) financial performance provides an overview of the District's financial activities for the years ended December 31, 2004 and 2003. This discussion and analysis should be read in conjunction with the District's financial statements and accompanying notes, which follow this section.
BACKGROUND The District was formed by a vote of the electors in 1923, under provisions of the State of California Municipal Utility District Act, and began electric operations in 1947. The District is governed by an elected Board of Directors and has the rights and powers to fix rates and charges for commodities or services furnished, to incur indebtedness and issue bonds or other obligations, and, under certain circumstances, to levy and collect ad valorem property taxes. The District is responsible for the acquisition, generation, transmission, and distribution of electric power to its service area, which includes most of Sacramento County and a small adjoining portion of Placer County.
Setting of Rates The District's Board of Directors (Board) has autonomous authority to establish the rates charged for all District services. Changes in such rates require formal action, after public hearing, by the Board.
On May 3, 2001, in response to market disruptions and the high costs of purchased power and natural gas (energy crisis) the Board unanimously approved the District's first rate increase in more than ten years. The rate action included a 16 percent average rate increase along with two temporary surcharges of three percent each, one to cover reduced hydroelectric production, resulting in increased power costs in 2001 and one intended to replenish the Rate Stabilization Fund. The first surcharge expired May 2,2002 and the other expired May 2, 2004. The District is currently in the midst of a rate proceeding that will be completed early in 2005. The General Manager is recommending a rate increase that will result in an average system rate increase of approximately six percent and would be effective in rates beginning April 1, 2005.
Financial Reporting The District's accounting records are maintained in accordance with generally accepted accounting principles for proprietary funds as prescribed by the Governmental Accounting Standards Board (GASB) and, where not in conflict with GASB pronouncements, accounting principles prescribed by the Financial Accounting Standards Board (FASB). The District's accounting records generally follow the Uniform System of Accounts for Public Licensees prescribed by the Federal Energy Regulatory Commission (FERC), except as it relates to the accounting for contributions of utility property in aid of construction.
In 2004, the District identified five power purchase agreements, in effect at December 31, 2003, that are derivative financial instruments which were improperly identified as a normal purchases and, as such, were not included at fair value in the December 31, 2003 consolidated balance sheet, as required by FAS 133
~Accountingfor DerivativeInstruments and HedgingActivities. In addition, the District was netting the fair value of contracts by commodity group and presenting the fair values net on the consolidated balance sheet when the right of set off did not exist as defined in FIN 39 'Offsetting ofAmounts Related to Certain Contracts. The restatement of the December 31,2003 consolidated balance sheet corrects the treatment of these contracts to reflect them as derivative financial instruments at that are recorded at their fair values and presents the fair values of derivative assets and liabilities gross on the balance sheet when it is appropriate to do so.
The adjustment for these corrections resulted in an increase of, which totaled $35.7 million for derivative instrument assets and $170.5 million for derivative financial instrument liabilities at December 31, 2003.
The District's Board defers the recognition of derivative financial instruments for rate-making purposes, and accordingly, regulatory assets and regulatory credits were restated by $87.5 and $47.3 million, respectively, at December 31,2003. The restatement does not impact the 2003 statement of revenues, expenses and changes in net assets.
SACRAMENTO MUNICIFAL UTILITY DISTRICT l 2004 In accordance with Financial Accounting Standards (SFAS) No. 71, MAccountingfor the Effects of Certain Types of Regulation',the Board has taken various regulatory actions for ratemaking pu'rposes that result in the deferral of expense or revenue recognition. As of December 31, 2004, the District hiad total regulatory costs for future recovery of $498 million, which is a net increase of $26 million from 2003. The increase is due primarily to the change in value of derivative financial instruments, an increase in the deferred decommissioning liability and the deferral of costs associated with the recognition of a liability to th'e U.S. Bureau of Reclamation (Bureau),
partially offset by collection in rates of the deferred nuclear plant costs and reductions in deferred costs associated with wholesale receivables tentatively settled in 2004. The District also had regulatory credits of
$382 million as of December 31, 2004, which is a net increase of $49 million over 2003. The increase is primarily due to the deferral of gains from contribution in aid of construction, the change in value of derivative financial instruments, and a settlement with El Paso Natural Gas, partially offset by the recognition of revenue from the Rate Stabilization Fund. The regulatory costs and regulatory credits will be recognized in the consolidated statement of revenues, expenses and changes in net assets in future periods as determined by the Board for ratemaking purposes.
For the last several years, the Board had a strategic directive to build up the Rate Stabilization Fund as a reserve against the need for future rate increases. As a result, the District would defer any net income or recoup any net loss through the use of the Rate Stabilization Fund as part of its rate policy. In 2004, the Board ceased this practice in connection with adoption of a strategic directive to increase customer equity to a targeted level of 20 percent by 2007.
Using This Financial Report This financial annual report consists of management's discussion and analysis and the consolidated financial statements, including notes to the consolidated financial statements. The financial annual report reflects the activities of the District primarily funded through the sale of energy, transmission, and distribution services to its customer-owners.
Consolidated Balance Sheets, Statements of Revenues, Expenses and Changes in Net Assets, and Statements of Cash Flows The consolidated financial statements provide both short-term and long-term information about the District's financial status. The consolidated Balance Sheets include all of the District's assets and liabilities, using the accrual method of accounting, as well as an indication about which assets can be utilized for general purposes, and which assets are restricted as a result of bond covenants, Board action and other commitments.
The consolidated Balance Sheets provide information about the nature and amount of resources and obligations at a specific point in time. The consolidated Statements of Revenues, Expenses and Changes in Net Assets report all of the District's revenues and expenses during the periods indicated. The consolidated Statements of Cash Flows report the cash provided and used by operating activities, as well as other cash sources such as investment income and debt financing, and other cash uses such as payments for bond principal and capital additions and betterments.
SACRAMENTO MUNICIPAL UTILITY DISTRICT l 2004 FINANCIAL HIGHLIGHTS Summary of Consolidated Financial Position and Change in Net Assets (millions)
December 31, Assets 2004 2003 2002 As Restated Electric Utility Plant - net .. ... . . ..... ...... ... .$ 2,494 $ 2,239 $ 1,919 Restricted and Designated Assets 238 271 228 Current Assets 642 750 762 Noncurrent Assets and Deferred Charges 527 501 417
$ 3,901 $ 3,761 S 3,326 Liabilities and Net Assets Long-Term Debt - net . . . . . . . . . . . . . . . . . . . . . .$ 2,407 $ 2,359 $ 2,058 Current Liabilities and Deferred Credits . ............ 473 488 513 Noncurrent Liabilities and Deferred Credits .. . ...... . . 719 696 535 Net Assets ........ .. . . ............. .. . . 302 218 220
$ 3,901 $ 3,761 S 3,326 ASSETS Utility Plant - Net 2004 Compared to 2003 The District has invested approximately $2.5 billion in utility plant assets and construction work in progress net of accumulated depreciation at December 31,2004. Net utility plant makes up about 64 percent of the District's assets, approximately 4 percent greater than the previous year. During 2004, the District capitalized approximately $528 million of additions to utility plant, including additions to construction work in progress in the District's consolidated financial statements. The primary increase was due to the 2004 costs of approximately $161 million for the 500 MWV, gas-fired Cosumnes Power Plant project (Project). The Project is currently planned to cost approximately $390 million and to be completed by April 2006.
The District has been negotiating with the Project's general contractor, Fru-Con Construction Corporation, to resolve disputes over cost and delays. Unable to resolve the disputes to the satisfaction of the District, the contract was terminated on February 11, 2005. See Note 17 for additional details.
2003 Compared to 2002 The District has invested approximately $2.2 billion in utility plant assets and construction work in progress net of accumulated depreciation at December 31, 2003. Net utility plant makes up about 60 percent of the District's assets, approximately 2 percent greater than the previous year. During 2003, the District capitalized approximately $371 million of additions to utility plant, including additions to construction work in progress in the District's consolidated financial statements. The primary increase was due to the purchase of the Rosa gas field natural gas reserves for $136 million, which is included in Other in the chart below. A second major increase was in generation plant, which includes the 2003 additional costs of approximately $118 million for the 500 MWV, gas-fired Cosumnes Power Plant project (Project).
-p SACRAMENTO MUNICIPAL UTILITY DISTRICT l 2004 The following charts show the breakdown of net utility plant by major plant category - Generation, Transmission, Distribution, and Other:
34% 5% 25 % 21 %
36% 39%
5% 36% 5% %33 %33 6%
December 31,2004 December 31, 2003 December 31, 2002 Distribution Transmission Generation Other Restricted Assets 2004 Compared to 2003 The District's level of restricted assets (noncurrent) decreased by $36 million during 2004 reflecting a reduction of Revenue bond, debt service, and construction reserves, a reduction in the Rate Stabilization Fund, and a lower decommissioning trust fund balance as the District continues to decommission the Rancho Seco nuclear power plant.
2003 Compared to 2002 The District's level of restricted assets (noncurrent) increased by $43 million during 2003 reflecting a $56 million deposit into the Rate Stabilization Fund, higher decommissioning trust fund balance as the District continues to fund the decommissioning of the Rancho Seco nuclear power plant through rates, and higher securities lending, partially offset by a higher current portion of restricted assets.
Current Assets 2004 Compared to 2003 (As Restated)
Current assets decreased by $108 million in 2004 as a result of a lower level of unrestricted cash and investments reflecting significant expenditures for construction, a lower level of regulatory costs to be recovered in one year, reflecting the completion of recovering certain regulatory charges through rates, and a lower level of prepayments. These decreases were partially offset by higher receivables for wholesale energy sales.
2003 (As Restated) Compared to 2002 Current assets decreased by $12 million in 2003 as a result of a lower level of unrestricted cash and investments and a lower level of regulatory costs to be recovered in one year, reflecting the completion of recovering certain regulatory charges through rates. These decreases were partially offset by a higher current portion of restricted assets, higher receivables for wholesale and customer energy sales, and higher prepayments due to a credit from the energy contract with Western Area Power Administration.
Noncurrent Assets and Deferred Charges 2004 Compared to 2003 (As Restated)
Total noncurrent assets and deferred charges increased by $26 million. This increase reflects an increase in the amount of regulatory assets to be recovered in future periods as a result of a proposed settlement with the U.S. Bureau of Reclamation (Bureau), changes in the valuation of derivative financial instruments, which are deferred for rate-making purposes, and an increase in other noncurrent assets due to a credit from a settlement with El Paso Natural Gas.
Gl
SACRAMENTO MUNICIPAL UTILITY DISTRICT 2004 I
2003 (As Restated) Compared to 2002 Total noncurrent assets and deferred charges increased by $84 million. This increase reflects changes in the valuation of derivative financial instruments, which are deferred for rate-making purposes, and higher unamortized debt issuance costs. The increases were partially offset by a reduction in the amount of regulatory assets to be recovered in future periods and the completion of recovering certain stranded costs in 2003. The long-term amount of conservation loans is also lower reflecting the continued normal collections and a low amount of new lending activity.
LIABILITIES-Long-term Debt 2004 Compared to 2003 The District completed one debt issuance for a total of $131 million, which was used to refund $101 million of Commercial Paper Notes and $17 million of previously issued revenue bonds through legal defeasance.
During 2004, the District called approximately $4 million of Central Valley Financing Authority (CVFA) bonds, a component unit of the District, reducing future debt service. In January 2005, the District called an additional $4 million of CVFA bonds.
2003 Compared to 2002 Long-term debt increased by over $300 million in 2003. The District completed four debt issuances for a total of $924 million. The 2003 Series R Electric Revenue Bonds were issued for $481 million and were used to refund
$115 million of Commercial Paper Notes and $134 million of previously issued revenue bonds through legal defeasance. The 2003 Series S Electric Revenue Refunding Bonds were issued for $331 million and were used to refund $360 million of previously issued revenue bonds through a legal defeasance. The 2003 Subordinated Electric Revenue Bonds (2003 Series H and 2003 Series I) were issued for $112 million and were used to refund
$106 million of previously issued revenue bonds.
The following table shows the District's future debt service requirements through 2009 as of December 31, 2004:
Debt Service Requirements 250 200 3 150 50 2005 2006 2007 2008 2009 Interest Principal As of December 31, 2004, the District had an underlying rating of "A' from both Standard & Poor's and Fitch, and a higher rating of "Al" from Moody's. Most of the District's bonds are insured and are therefore rated "AAA" by the rating agencies.
29
I I.
SACRAMENTO MUNICIPAL UTILITY DISTRICT l 2004 Current Liabilities and Deferred Credits 2004 Compared to 2003 (As Restated)
Current liabilities and deferred credits decreased by approximately $15 million during 2004. As described in Long-Term Debt above, the District refunded $101 million of commercial paper notes through long-term senior debt after issuing $50 million during 2004. Additionally, accounts payable and accrued interest both decreased in 2004. The decreases were partially offset by an increase in the current portion of long-term debt, purchased power payable, and customer deposits and other. In January 2005, the District issued $50 million of commercial paper.
2003 (As Restated) Compared to 2002 Current liabilities and deferred credits decreased by approximately $25 million during 2003. As described in Long-term Debt above, the District refunded $115 million of commercial paper notes through long-term senior debt. The current portion of long-term debt also decreased by $6 million. The decreases were partially offset by increases in accounts payable, accrued decommissioning, accrued interest, and higher securities lending.
Noncurrent Liabilities and Deferred Credits 2004 Compared to 2003 (As Restated)
Noncurrent liabilities and deferred credits have increased by $23 million as a result of the increase in valuation of derivative financial instruments, which are deferred for rate-making purposes, an increase in regulatory credits and the recognition of a liability to the Bureau related to the tentative settlement of a billing dispute.
2003 (As Restated) Compared to 2002 Noncurrent liabilities and deferred credits have increased by $161 million as a result of the increase in the rate stabilization fund of $56 million and increases in other regulatory credits, and changes in the valuation of derivative financial instruments, which are deferred for rate-making purposes. The increases were partially offset by reductions in the accrued decommissioning and changes in the valuation of derivative financial instruments.
Summary of Revenues, Expenses and Changes in Net Assets (millions)
December31, 2004 2003 2002 Operating revenues .................... . $ 1,069 $ 1,033 $ 1,012 Operating expenses .. (901) _ (943) (930)
Operating income .168 90 82 Interest and other income .. 25 30 40 Interest charges .. (109) (120) (122)
Increase in net assets . . . . . . . . . . . . . . . . . . . . . . .$ 84 $ $
SACRAMENTO MUNICIPAL UTILITY DISTR CT 2 004 CHANGES IN NET ASSETS Operating Revenues 2004 Compared to 2003 Operating revenues were $1,069 million in 2004, an increase from 2003 of $36 million after transferring approximately $12 million from the Rate Stabilization Fund in 2004 versus a $56 million transfer to the Rate Stabilization Fund in 2003. Sales to customers were $962 million in 2004, an increase of $9 million over 2003 sales. The District sold 3.2 percent more energy to its retail customers, which grew from 553,337 customers in 2003 to 567,176 customers in 2004, at average revenue per kilowatt hours that decreased by 2.1 percent, reflecting the end of a temporary rate surcharge in May 2004.
Wholesale revenues are comprised of both surplus energy and gas sales. In 2004, surplus gas sales were
$62 million as compared to $65 million in 2003. The decrease was due to a lower amount sold (9 percent) although at higher average prices (4 percent) as compared to 2003. Surplus energy sales in 2004 were
$39 million lower than in 2003. The decrease is due to lower volume (45 percent) and lower average prices (31 percent) than in 2003.
2003 Compared to 2002 Operating revenues were $1,033 million in 2003, an increase from 2002 of $21 million even after transferring approximately $56 million to the Rate Stabilization Fund versus a $2 million transfer in 2002. Sales to customers were $953 million in 2003, an increase of $39 million over 2002 sales. The District sold 4.3 percent more energy to its retail customers, which grew from 541,296 customers in 2002 to 553,337 customers in 2003, at average rates that remained the same as the previous year. Although average rates for the year remained stable, the three percent hydro surcharge was removed from rates in May 2003.
Wholesale revenues are comprised of both surplus energy and gas sales. In 2003, surplus gas sales exceeded surplus energy sales for the first time as a result of the investment in the Rosa gas field. The District had over
$65 million of surplus gas sales in 2003 as compared to $29 million in 2002. The increase was due to both higher amounts sold (27 percent) and higher average prices (75 percent) as compared to 2002. Surplus energy sales in 2003 were $4 million lower than in 2002. The decrease is due to lower volume (28 percent) partially offset by higher average prices than in 2002.
The following charts show the percentage of megawatt hour (MWh) sales and sales revenue in 2004, 2003 and 2002 by surplus energy sales (surplus), commercial and industrial (C&I), and residential (Res) customers:
MWh Sales Sales Revenues 100% 100%
80% 80%
60% 60%
40% 40%
20% 20%
0% 0%
2004 2003 2002 2004 2003 2002
- Surplus Surplus
- Commercial and Industrial Commercial and Industrial
= Residential M Residential
-I SACRAM:NTO MUNICIPAL UT LITY D STRICT 2004 Operating Expenses 2004 Compared to 2003 Operating expenses were $901 million in 2004 as compared to $943 million in 2003. The District spent $15 million less for purchased power in 2004 than in 2003. Approximately 2.4 percent less energy was purchased in 2004 at average prices that were 1.4 percent lower than in 2003. In 2004, fuel costs, a component of production costs, were approximately $88 million, or $12 million higher than 2003. More fuel was used in 2004 (974 thousand decatherms) at average prices that were 10 percent higher than in 2003.
The District also had lower expenses for administrative and general due to lower property insurance premiums, lower A&G salaries, and lower expenditures for public good activities for research and development of photovoltaic generation and distributed technology.
Maintenance increased due to repairs at hydro facilities and preventative maintenance projects. Depreciation expense increased due to additions to plant in service, primarily for distribution plant.
Regulatory deferrals collected in rates significantly decreased due to the complete recovery through rates for deferred nuclear plant costs and other regulatory assets during 2003.
In 2004, power supply costs made up approximately 63 percent of total operating expenses as compared to 61 percent for 2003.
2003 Compared to 2002 Operating expenses were $943 million in 2003 as compared to $930 million in 2002. The District spent
$25 million more for purchased power in 2003 than in 2002. Approximately two percent less energy was purchased in 2003 at average prices that were nine percent higher than in 2002. In 2003, fuel costs, a component of production costs, were approximately $93 million in 2003, or $56 million lower than 2002.
Less fuel was used in 2003 (1.4 million decatherms) at average prices that were 33 percent lower than in 2002.
The District also had higher expenses for administrative and general due to higher property insurance, Service Delivery Information Technology project data conversion costs and renewable technology expenses not included in public good expense. Maintenance and depreciation expenses were also higher, all of which were partially offset by lower expenses for public good and decommissioning.
In both 2003 and 2002, power supply costs made up approximately 61 percent and 62 percent of total operating expenses, respectively.
The following charts compare the relative cost of purchased power, production expenses, and depletion of the Rosa gas field (power supply costs) to all other operating expenses in 2004, 2003 and 2002:
37% 39% 38%
2004 Operating Expenses 2003 Operating Expenses 2002 Operating Expenses
_ Power Supply _ Other
SACRAMENTO MUNICIPAL UTILITY DISTRICT 1 2004 Interest and Other Income 2004 Compared to 2003 Interest and other income was lower by $5 million in 2004 as compared to 2003. Interest income was lower due to lower cash balances and lower interest rates in 2004 as compared to 2003. Other income was lower in 2004 primarily as a result of lower unrealized holding gains on investments.
2003 Compared to 2002 Interest and other income was lower by $10 million in 2003 as compared to 2002. This was primarily a result of lower interest rates in 2003 as compared to 2002.
Interest Charges 2004 Compared to 2003 Interest charges in 2004 were $11 million lower than in 2003, which is due primarily to higher allowance for funds used during construction as a result of the progress on the Cosumnes Power Plant project and due to lower amortization of debt issuance costs and discounts.
2003 Compared to 2002 Interest charges in 2003 were $2 million lower than in 2002, which is due primarily to higher allowance for funds used during construction as a result of the progress on the Cosumnes Power Plant project.
33
SACRAMENTO MUNICIPAL UTILITY DISTRICT I 2004
-4 SACRAMENTO MUNICIPAL UTILITY DISTRICT CONSOLIDATED BALANCE SHEETS
___ DECEMBER31, 2004 2003 (As Restated)
(thousands of dollars)
ASSETS Electric Utility Plant Plant in service ........................... .$ 2,945,909 $ 2,806,386 Less accumulated depreciation and depletion . ....... . (1,065,631) (992,803)
Plant in service - net .............. . 1,880,278 1,813,583 Construction work in progress ............ . 613,507 425,490 Total electric utility plant - net . .....
. . ........ 2,493,785 2,239,073 Restricted and Designated Assets Revenue bond, debt service and construction reserves .. .... . 179,793 203,253 Nuclear decommissioning trust fund ..... . . . ....... . 87,968 91,346 Rate stabilization fund. ....................... . 75,000 87,317 Securities lending collateral . . ... ..... . ... .... .. . 66,427 65,486 Other funds ...... ..... ... .... .. ..... ... . . 6,072 3,625 Less current portion . . . . . . . . . . . . . . . . . . . . . . .. (177,168) (180,258)
Total restricted and designated assets ..... .. ..... . 238,092 270,769 Current Assets Cash, cash equivalents and investments Unrestricted ........ . . . .. . . ........... . 123,322 226,965 Restricted and designated ...... . . . . . ........ . 177,168 180,258 Receivables - net:
Retail customers ....... . . . . .. . . ......... . 12:3,722 125,616 Wholesale ............................ . 50,475 42,844 Conservation loans due within one year, accrued interest and other . . . . .. ... .. .... .. 16,508 19,776 Regulatory costs to be recovered within one year ... . . .. . 72,836 76,790 Derivative financial instruments maturing within one year ... . 32,309 24,731 Materials and supplies ....... . . . . . . . ......... . 33,631 29,848 Prepayments ........ .. .. . .. .. .......... . 11,837 23,302 Total current assets ...... . . . . . . . ......... . 641,808 750,130 Noncurrent Assets and Deferred Charges Regulatory costs for future recovery . .. ... ....
. .. .. . 289,373 301,310 Derivative financial instruments ...... . . . ........ . 150,971 120,998 Unamortized debt issuance costs ..... . . . .. ...... . 30,323 31,066 Conservation loans ....... .. . . . . . . ....... . . 33,730 31,276 Preliminary project studies and other . . . . ..... . ... .. 22,857 16,118 Total noncurrent assets and deferred charges . . . .. . . .. 527,254 500,768 Total Assets ...... $ 3,900,939 $ 3,760,740 The accompanying notes are an integral part of these financial statements.
SACRAMENTO MUNICIPAL UTILITY DISTRICT l 2004 SACRAMENTO MUNICIPAL UTILITY DISTRICT CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2004 2003 (As Restated)
(thousands of dollars)
LIABILITIES Long-term Debt - net. S 2,406,325 $ 2,358,710 Current Liabilities and Deferred Credits Commercial paper notes ...................... 51,000 Accounts payable .......................... 74,285 84,066 Purchased power payable ............ ......... . 76,610 72,850 Long-term debt due within one year ... . . ..... ...... 67,165 44,245 Accrued decommissioning ..................... 41,500 39,081 Accrued interest .......................... 39,141 44,576 Accrued salaries and compensated absences ... . . ..... .. 25,178 27,184 Derivative financial instruments maturing within one year ......... . ..... ... . . 48,317 30,304 Regulatory credits to be recognized within one year. 7,495 5,044 Securities lending collateral ..................... 66,427 65,486 Customer deposits and other .................... 27,355 23,749 Total current liabilities and deferred credits .......... 473,473 487,585 Noncurrent Liabilities and Deferred Credits Accrued decommissioning ..................... 283,758 283,866 Derivative financial instruments .................. 155,523 147,722 Regulatory credits ......................... 238,497 233,763 Due to affiliated entity. ...................... 14,863 16,960 Due to U.S. Bureau of Reclamation .. . . ...... ..... .. 12,485 Self insurance, deferred credits and other .......... . . . 13,699 13,679 Total noncurrent liabilities and deferred credits. 718,825 695,990 Total Liabilities ......................... 3,598,623 3,542,285 NET ASSETS Invested in capital assets, net of related debt . . .. ... . .... 152,809 (72,985)
Restricted . . . . . . 44,068 50,871 Unrestricted . . . . . . . . . . . . . . . . . . . . . . . . . 105,439 240,569 Total Net Assets . ........... .... .. .... . . 302,316 218,455 COMMITMENTS AND CONTINGENCIES (Notes 17 And 18)
Total Liabilities and Net Assets . . . ...... ..... ... S 3,900,939 S 3,760,740 The accompanying notes are an integral part of these financial statements.
SACRAMENTO MUNICIPAL UTILITY DISTRICT l 2004 SACRAMENTO MUNICIPAL UTILITY DISTRICT CONSOLIDATED STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS Year Ended December 31.
2004 _ 2003 (thousands of dollars)
Operating Revenues Residential . . $ 442,704 $ 444,713 Commercial and industrial . 514,670 503,668 Street lighting and other . . . . . . . . . . . . . . . . . . . . . . 13,158 12,894 Wholesale ...... . .... .. ..... ... ... . .. 85,878 127,661 Rate stabilization fund transfers .................. 12.317 (56,069)
Total operating revenues . 1,068,727 1,032,867 Operating Expenses Operations:
Purchased power. 373,362 387,985 Production . . . . . . . . . . . . . . . 189,502 178,745 Transmission and distribution . 32,553 32,965 Administrative, general and customer . 93,609 97,998 Public good . ..... .......... ... . .. .... .. .. 22,933 25,421 Maintenance. 54,834 46,353 Depreciation . . . . . . . . . . . . . . . . . . . . . . . . 98,614 92,578 Depletion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,265 4,941 Decommissioning. 29,166 29,708 Regulatory deferrals collected in rates ... . . ... ..... .. 1,140 46,303 Total operating expenses . ............ .. . ... . . ... 900,978 942,997 Operating Income .......................... 167,749 89,870 Nonoperating Revenues and Expenses Other revenues:
Interest income .......................... 17,550 19,664 Other income - net ....................... 7,422 10,164 Total other revenues ...................... 24,972 29,828 Interest charges:
Interest on debt .......................... 124,230 127,326 Allowance for funds used during construction ... . .... .. (15,370) (7,628)
Total interest charges ... . .... . .... . . ... ... 108,860 119,698 Increase in Net Assets ........................ 83,861 Net assets - Beginning of year. 218,455 219,652 Cumulative effect of change in accounting principle. __ (1,197)
Net assets - Beginning of year as adjusted. 218,455 218,455 Increase in Net Assets During the Year. 83,861 Net Assets - End of Year . $ 302,316 $ 218,455 36 The accompanying notes are an integral part of these financial statements.
SACRAMENTO MUNICIPAL UTILITY DISTRICT l 2004
+
SACRAMENTO MUNICIPAL UTILITY DISTRICT CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December31, 2004 2003 (thousands of dollars)
Cash Flows from Operating Activities Receipts from retail customers ......... ....... . . . . . . . . 965,211 $ 949,397 Receipts from surplus power sales ....... 32,942 66,548 Receipts from surplus gas sales ......... 61,874 60,640 Receipts from federal and state grants ..... 3,727 6,212 Receipts from steam sales ........... . . . . . . . . .. 7,931 7,369 Issuance/repayment of conservation loans, net. 2,102 15,989 Payments to employees - payroll and other . . (176,518) (159,199)
Payments for wholesale power . . . . . . . . (354,050) (390,867)
Payments for gas purchases ........... (149,712) (143,213)
Payments to vendors .............. . . . . . . . . .. (63,005) (81,969)
Payments for decommissioning ........ (32,249) (26,320)
Payments for Rosa gas imbalance . ... . . . . -0.- (3,703)
Other payments - net ............. (6,047) (4,190)
Net cash provided by operating activities . . . . . . . . . . . . 292,206 296,694 Cash Flows from Investing Activities Sales and maturities of securities . 164,596 251,152 Purchases of securities . . . . . . . . . . (257,582) (251,201)
Interest and dividends received .. ..... ...... ..... . 13,937 15,019 Securities lending collateral - net ................. 954 35,256 Net cash provided by (used in) investing activities ........ (78,095) 50,226 Cash Flows from Capital and Related Financing Activities Construction expenditures ..................... (348,414) (380,657)
Contributions in aid of construction . . . . . . . . . . . 13,252 15,014 Net proceeds from bond issues ................... 131,188 993,595 Repayment and defeasance of debt . . . . . . . . . . . . . . . . (65,627) (715,189)
Issuance/repayment of commercial paper - net ... . . . .... (51,000) (115,300)
Interest on debt ........................... (124,038) (107,745)
Net cash used in capital and related financing activities. (444,639) (310,282)
Net increase (decrease) in cash and cash equivalents ......... (230,528) 36,638 Cash and cash equivalents at the beginning of the year.. 551,926 515,288 Cash and cash equivalents at the end of the year. .. . 321,398 551,926 Cash and cash equivalents at the end of the year consist of:
Unrestricted . . . . . . . . . . . . . . . . . . . . . . . 123,322 226,965 Restricted and designated - current portion ........... 177,168 180,258 Restricted and designated - noncurrent portion ......... 20,908 144,703
$ 321,398 $ 551,926 The accompanying notes are an integral part of these financial statements. 37
SACRAMENTO MUNICIPAL UTILITY DISTRICT l 2004 SACRAMENTO MUNICIPAL UTILITY DISTRICT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. ORGANIZATION The Sacramento Municipal Utility District (District) was formed and operates under the State of California Municipal Utility District Act (Act). The Act confers upon the District the rights and powers to fix rates and charges for commodities or services furnished, to incur indebtedness and issue bonds or other obligations and, under certain circumstances, to levy and collect ad valorem property taxes.
As a public utility, the District is not subject to regulation or oversight by the California Public Utilities Commission. The District is responsible for the acquisition, generation, transmission, and distribution of electric power to its service area, which includes most of Sacramento County and a small adjoining portion of Placer County. The Board of Directors (Board) determines the District's rates. The District is exempt from payment of federal and state income taxes and real and personal property taxes.
NOTE 2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES Method of Accounting The District's accounting records are maintained in accordance with generally accepted accounting principles for proprietary funds as prescribed by the Governmental Accounting Standards Board (GASB) and, where not in conflict with GASB pronouncements, accounting principles prescribed by the Financial Accounting Standards Board (FASB). The District's accounting records generally follow the Uniform System of Accounts for Public Utilities and Licensees prescribed by the Federal Energy Regulatory Commission (FERC), except as it relates to the accounting for contributions of utility property in aid of-construction (CIAC). The District's consolidated financial statements are reported using the economic resources measurement focus and the accrual basis of accounting.
Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of the related cash flows. Electric revenues and costs that are directly related to generation, purchase, transmission, and distribution of electricity are reported as operating revenues and expenses. All other revenues and expenses are reported as non-operating revenues and expenses.
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 disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The Financial Reporting Entity These consolidated financial statements include the District and its component units. Although the component units are legally separate from the District, they are blended into and reported as part of the District because of the extent of their operational and financial relationships with the District. All significant inter-component transactions have been eliminated in consolidation.
Component Units The component units include the Central Valley Financing Authority (CVFA), the Sacramento Cogeneration Authority (SCA), and the Sacramento Power Authority (SPA). The primary purpose of the component units is to own and operate electric utility plants that supply power to the District. The District's Board comprises the Commissions that govern these entities.
Plant In Service The cost of additions to Plant in Service and replacement property units is capitalized. Repair and maintenance costs are charged to expense when incurred. When the District retires portions of its Electric Utility Plant, retirements are recorded against Accumulated Depreciation and the retired portion of Electric Utility Plant is removed from Plant in Service. The costs of removal and the related salvage value, if any, are charged or credited as appropriate to Accumulated Depreciation. The District generally computes depreciation on Plant in Service on a straight-line, service-life basis. The consolidated average annual composite depreciation rates for 2004 and 2003 were 3.59 percent and 3.56 percent. Depreciation is calculated using the following estimated lives:
Generation . . . . . . . . . . 5 to 74 years Transmission and Distribution . . . . 5 to 50 years General . . . . . . . . . . . 2 to 45 years 38
SACRAMENTO MUNICIPAL UTILITY DISTRICT l 2004 Investments In Joint PowerAgency (JPA)
The District's investment in the Transmission Agency of Northern California (TANC) is accounted for under the equity method of accounting and is reported as a component of Plant in Service. The District's share of the TANC debt service costs and operations and maintenance expense, inclusive of depreciation, are included in Transmission and Distribution expense in the consolidated statements of revenues, expenses and changes in net assets.
Investments In Gas Properties In March 2003, the District acquired an approximate 23 percent non-operating ownership interest in the Rosa Unit gas properties in New Mexico for $136.6 million. The District transports the gas extracted from the Rosa Unit for use in its natural gas fired cogeneration power plants (see Note 5). The District uses the successful efforts method of accounting for its investment in gas producing properties.
Costs to acquire mineral interests in gas properties, to drill and equip exploratory wells that find proved reserves, and to drill and equip development wells are capitalized as a component of Plant in Service on the consolidated balance sheets. Costs to drill exploratory wells that do not find proved reserves, geological and geophysical costs, and costs of carrying and retaining unproved properties are expensed.
Capitalized costs of producing gas properties, after considering estimated residual salvage values, are depleted by the unit-of-production method based on the estimated future production of the proved developed producing wells.
Restricted Assets Cash, cash equivalents and investments, which are restricted under terms of certain agreements for payments to third parties or Board actions limiting the use of such funds are included as restricted assets.
Restricted Bond Funds The District's Indenture Agreements and Bond Resolutions require the maintenance of minimum levels of reserves for debt service and certain construction costs intended by the related debt offerings.
Nuclear Decommissioning Trust Fund The District makes annual contributions to its Nuclear Decommissioning Trust Fund (Trust Fund) to cover the cost of its primary decommissioning activities associated with the Rancho Seco facility. Primary decommissioning excludes activities associated with the spent fuel storage facility after 2008 and most non-radiological decommissioning tasks. The District annually evaluates its contribution rate to ensure the Trust Fund will fully fund primary decommissioning by the end of 2008, the same year inwhich active decommissioning is planned to be complete (see Note 13.) The annual contribution rate is determined in advance of each year, during the budget process, based on calculation of the planned expenditure rate over the remaining number of years estimated to complete the primary decommissioning activities. Changes in the estimate of the decommissioning liability serve to increase the contribution rate in future years (not in the year the estimate is updated, if changed).
Interest earnings on the Trust Fund assets are recorded as Interest Income and are accumulated in the Trust Fund. Such interest is also included in Decommissioning Expense in the year earned.
Accrued Decommissioning Effective January 1,2003, the District implemented Statement of Financial Accounting Standards (SEAS) No. 143, "AccountingforAsset Retiremnent Obligations (ARO)', which significantly changed the methodology for estimating the District's decommissioning liability.
The District accrues decommissioning costs related to Utility Plant when an obligation to decommission facilities is legally required.
Adjustments are made to such liabilities based on estimates by District staff in accordance with SFAS No. 143. For active plants, such costs are included in the Utility Plant's cost and included as a component of Depreciation expense over the Utility Plant's life. For Rancho Seco decommissioning changes there is no effect on net assets (see Note 13) because of the regulatory accounting applied to Rancho Seco decommissioning costs. Expenditures for decommissioning activities are recorded as reductions to Accrued Decommissioning liability.
Changes in decommissioning liability estimates, arising from inflation, annual accretion and other changes to the cost assumptions are recorded directly to Accrued Decommissioning with a corresponding adjustment to the related regulatory deferral. The current portion of the accrued decommissioning liability represents the District's estimate of actual expenditures in the next year, generally as set forth in the annual budget.
At December 31, 2004 and 2003, the District's Accrued Decommissioning balance in the consolidated balance sheets relating to Rancho Seco was $320.5 million and $316.6 million, respectively (See Note 13). Other electricity generation and gas production facilities Accrued Decommissioning balance in the consolidated balance sheets totaled $4.8 million and $4.3 million as of December 31, 2004 and 2003, respectively.
39
. I SACRAMENTO MUNICIPAL UTILITY DISTRICT l 2004
-- I Securities Lending Transactions The District lends its securities to broker-dealers and other entities for collateral with a simultaneous agreement to return the collateral for the same securities in the future. District policy requires cash collateral of 102 percent of the market value of the loaned securities. Both the investments purchased, with the collateral received, and the related liability to repay the collateral are included in the consolidated balance sheets.
Cash Equivalents Cash equivalents include all debt instruments purchased with an original maturity of three months or less and all investments in the Local Agency Investment Fund (LAIF) and money market mutual funds. The debt instruments and money market mutual funds are reported at amortized cost and the LAW is reported at the value of its pool shares.
Investments The District's investments are reported at fair value. Realized and unrealized gains and losses are induded in Interest and Other Income in the consolidated statements of revenues, expenses and changes in net assets. Premiums and discounts on zero coupon bonds are amortized using the effective interest method. Premium and discounts on other securities are amortized using the straight-line method, which approximates the effective interest method.
Unbilled Operating Revenues The District records an estimate for unbilled revenues earned from the dates its retail customers were last billed to the end of the month.
At December 31,2004 and 2003, unbilled revenues were $59.9 million and $53.8 million, respectively.
Purchased Power Expenses A portion of the District's power needs are provided through power purchase agreements. Expenses from such agreements, along with associated transmission costs paid to other utilities, are charged to Purchased Power expense, on the consolidated statements of revenues, expenses and changes in net assets, in the period the power is received. The costs, or credits, associated with energy swap agreements (gas and electricity) or other arrangements that affect the net cost of Purchased Power, are recognized in the period in which the underlying power delivery occurs. Contract termination payments and adjustments to prior billings are included in Purchased Power expense once the payments or adjustments can be reasonably estimated.
Advanced Capacity Payments Some long-term agreements to purchase energy from other providers call for up-front payment. Such costs are generally recorded as an asset and amortized over the length of the contract. One advance capacity contract, with a fair value of $103.7 million at December 31, 2004, is accounted for as a derivative financial instrument (see Note 9).
Credit and Market Risk The District enters into forward purchase and sales commitments for physical delivery of gas and electricity with utilities and power marketers. The District isexposed 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 District has a wholesale counterparty evaluation policy, which includes the assignment of internal credit ratings to the District's counterparties based on counterparty and/or debt ratings, the requirement for credit enhancements for counterparties that do not meet an acceptable risk level, and the use of standardized agreements that allow for the netting of positive and negative exposures associated with a single counterparty. The District is also subject to similar requirements for many of its gas and electricity purchase agreements.
Accounts Receivable and Allowance for Doubtful Accounts Accounts Receivable are recorded at the invoiced amount and do not bear interest except for accounts related to energy loans. The District recognizes an estimate of uncollectible accounts for its receivables related to electric service, wholesale activities and conservation loans based upon its historical experience with collections, and current energy market conditions. For large wholesale receivable balances, the District determines its bad debt reserves based on the specific credit issues for each account. The District records bad debts for its estimated uncollectible accounts related to electric service and wholesale activities as a reduction to the related operating revenues in the consolidated statements of revenues, expenses and changes in net assets. The District records bad debts for its estimated uncollectible accounts related to energy loans in Administrative, General and Customer expense in the consolidated statements of revenues, expenses and changes in net assets.
SACRAMENTO MUNICIPAL UTILITY DISTRICT l 2004 The summarized activity of the changes in the allowance for doubtful accounts during 2001 and 2003 is presented below (thousands of dollars):
Balance at Write-offs Balance beginning and at end of Year Additions Recoveries of Year California ISO/PX:
December 31,2004 .$ 40,193 $ 457 $ 16,722 $ 23,928 December 31,2003 .39,619 574 40,193 Wholesale power and other:
December 31,2004 .$ 3,674 $ 564 $ 343 $ 3,895 December 31,2003 .358 3,587 271 3,674 Retail Customers:
December 31, 2004 .$ 2,533 $ 6,410 $ 6,060 $ 2,883 December 31,2003 ... . ....... . . 2,406 5,056 4,929 2,533 Energy Efficiency Loans:
December 31, 2004 .$ 1,248 S 1,164 $ 1,158 $ 1,254 December 31, 2003 . .1,786 674 1,212 1,248 Through December 31, 2003 the District's allowance for doubtful accounts for its receivables related to wholesale power sales for transactions executed through the California Independent System Operator (ISO) and Power Exchange (PX) were reserved at 100%
of the outstanding balances due to collectibility issues and disputes over amounts billed from October 2000 through June 2001. In 2004, the District negotiated a reduced settlement of $5.5 million with the California ISO relating to $16.7 million of disputed amounts.
District management believes collection of this amount is reasonably assured and, as a result, there is no allowance for this amount at December 31,2004. Write-offs and recoveries of $16.7 million in 2004 in the above table reflect the $5.5 million settlement (recovery) and the associated $11.2 million write-off.
Regulatory Deferrals The Board has the authority to establish the level of rates charged for all District services. As a regulated entity, the District's financial statements are prepared in accordance with SEAS No. 71, 'Accountingfor the Effects of Certain Types of Regulation, which requires that the effects of the rate-making process be recorded in the financial statements. Accordingly, certain expenses and credits, normally reflected in Net Increase (Decrease) in Net Assets as incurred, are recognized when included in rates and recovered from, or refunded to, customers and the District records various regulatory assets and credits to reflect rate-making actions of the Board.
Materials and Supplies Materials and supplies are stated at average cost, which approximates the first-in, first-out method.
Unamortized Debt Issuance Costs The costs incurred in connection with the issuance of debt obligations, principally underwriter's fees and legal costs, are recorded as Unamortized Debt Issuance Costs in the consolidated balance sheets and are amortized over the terms of the related obligations using the bonds outstanding method.
Compensated Absences The District accrues vacation leave and compensatory time when the employees earn the rights to the benefits. The District does not record sick leave or other leave as a liability until it is taken by the employee, since there are no cash payments for sick leave or other leave made when employees terminate or retire. At December 31, 2004 and 2003, the total estimated liability for vacation and other compensated absences was $20.1 million and $19.3 million, respectively.
Public Good Public Good expenses consist of non-capital expenditures for energy efficiency programs, renewable energy resources and technologies research.
GainslLosses on Bond Refundings Gains and losses resulting from bond refundings are included as a component of Long-term Debt on the consolidated balance sheets and amortized as a component of Interest on Debt in the consolidated statements of revenues, expenses and changes in net assets, over the shorter of the life of the refunded debt or the new debt using the bonds outstanding method.
. I SACRAMENTO MUNICIPAL UTILITY DISTRICT l 2004 Gains/Losses on Bond Defeasances Gains and losses resulting from bond defeasances that were not financed with the issuance of new debt are included as a component of Interest on Debt in the consolidated statements of revenues, expenses and changes in net assets.
Allowance for Funds Used During Construction The District capitalizes, as an additional cost of Construction Work In Progress (CWIP), an Allowance for Funds Used During Construction (AFUDC), which represents the cost of borrowed funds used for such purposes. The amount capitalized is determined by a formula prescribed by FERC. The AFUDC rates for 2004 and 2003 were 4.1 percent and 3.6 percent of eligible CWIR respectively.
Derivative Financial Instruments (As Restated)
The District records derivative financial instruments (interest rate swap and gas price swap agreements, certain wholesale sales agreements, certain electricity purchase agreements and option agreements) at fair value on its consolidated balance sheets. The District generally does not enter into agreements for trading purposes. However, the District does not elect hedge accounting. Fair market value is estimated by comparing contract prices to forward market prices quoted by third party market participants and/or provided in relevant industry publications. The Board defers recognition of the unrealized gains or losses from such instruments for rate-making purposes. The District is exposed to risk of nonperformance if the counterparties default or if the swap agreements are terminated. The District reports derivative financial instruments with remaining maturities of one year or less and the next twelve months portion of long-term contracts as current on the consolidated balance sheets.
Interest Rate Swap Agreements The District enters into interest rate swap agreements to modify the effective interest rates on outstanding debt. Interest expense is reported net of the swap payments received or paid as a component of Interest on Debt in the consolidated statements of revenues, expenses and changes in net assets.
Gas and Electricity Price Swap and Option Agreements The District uses forward contracts to hedge the impact of market volatility on gas commodity prices for its gas fueled power plants and for energy prices on purchased power for the District's retail load. Net cash payments or receipts incurred under the price swap and option agreements are reported as a component of Production for fuel related contracts and Purchased Power for electricity contracts in the consolidated statements of revenues, expenses and changes innet assets over the periods of the agreements.
Precipitation Hedge Agreements The District enters into non-exchange traded precipation hedge agreements to hedge the increased cost of power caused by low precipitation years (Precipitation Agreements). The District records the intrinsic value of the Precipitation Agreements on the consolidated balance sheets. Settlement of the Precipitation Agreements is not performed until the end of the period covered (water year ended September 30). The intrinsic value of a Precipitation Agreement is the difference between the expected results from a monthly allocation of the cumulative rainfall amounts, in a normal rainfall year, and the actual rainfall during the same period.
Insurance Programs The District records liabilities for unpaid claims at their present value when they are probable of occurrence and the amount can be reasonably estimated. The District records a liability for unpaid claims associated with general, auto, workers' compensation, and short-term and long-term disability, based upon estimates derived by the District's claims administrator or District staff. The liability comprises the present value of the claims outstanding, and includes an amount for claim-events incurred but not reported based upon the District's experience.
SACRAMENTO MUNICIPAL UTILITY DISTRICT I 2004 Net Assets The District classifies its net assets into three components as follows:
- Invested in capital assets, net of related debt - This component of net assets consists of capital assets, net of accumulated depreciation reduced by the outstanding debt balances, net of unamortized debt expenses.
- Restricted - This component consists of net assets with constraints placed on their use, either externally or internally.
Constraints include those imposed by Debt Indentures (excluding amounts considered in net capital, above), grants or laws and regulations of other governments, or by law through constitutional provisions or enabling legislation or by the Board.
- Unrestricted-This component of net assets consists of net assets that do not meet the definition of "invested in capital, net of related debt' or 'restricted' Contributions In Aid of Construction The District records CIAC from customer contributions, primarily relating to expansions to the District's distribution facilitates, as Nonoperating Revenues in the consolidated statements of revenues, expenses and changes in net assets. Contributions of capital are valued at estimated market cost. For rate-making purposes, the District's Board does not recognize such revenues when received; rather CIAC is included in revenues as such costs are amortized over the estimated useful lives of the related distribution facilities.
Grants The District receives grant proceeds from federal and state assisted programs for its advanced and renewable technologies, electric vehicle, and energy efficiency programs. The District also periodically receives grant proceeds from federally assisted programs as partial reimbursements for costs it has incurred as a result of storm damages. When applicable, these programs may be subject to financial and compliance audits pursuant to regulatory requirements. The District considers the possibility of any material disallowances to be remote.
During 2004 and 2003, the District recognized grant proceeds of S2.5 million and $6.5 million, respectively, as a component of Interest and Other Income, in the consolidated statements of revenues, expenses and changes in net assets.
Recent Accounting Pronouncements In March 2003, GASB issued Statement of Governmental Accounting Standards (SGAS) No. 40, 'Depositand Investment Risk Disclosures,'which updates the custodial credit risk disclosure requirements of SGAS No. 3 and establishes additional disclosure requirements addressing other common risks of deposits and investments. This Statement is effective for the District beginning in 2005. The District iscurrently assessing the financial statement impact of adopting the new Statement.
In June 2004, GASB issued SGAS No. 45, 'Accounting andFinancialReportingby Employersfor Postemployment Benefits other than Pensions(OPEB): which establishes standards of accounting and financial reporting for OPEB expense and related OPEB liabilities or assets. OPEB arises from an exchange of salaries and benefits for employee services rendered. It refers to postemployment benefits other than pension benefits such as postemployment healthcare benefits. This Statement is effective for the District beginning in 2007.
The District's estimate of its OPEB obligation is approximately $321.1 million as of December 31, 2004.
Reclassificatlons Certain amounts in the 2003 consolidated financial statements have been reclassified in order to conform with the 2004 presentation.
43
-i SACRAMENTO MUNICIPAL UTILITY DISTRICT l 2004 NOTE 3. RESTATEMENT In 2004, the District identified five power purchase agreements, in effect at December 31, 2003, that are derivative financial instruments which were improperly identified as a normal purchases and, as such, were not included at fair value in the December 31, 2003 consolidated balance sheet, as required by FAS 133 'AccountingforDerivative Instrumentsand HedgingActivities. In addition, the District was netting the fair value of contracts by commodity group and presenting the fair values net on the consolidated balance sheet when the right of set off did not exist as defined in FIN 39 'Offsetting ofnAmounts Related to Certain Contracts'. The restatement of the December 31,2003 consolidated balance sheet corrects the treatment of these contracts to reflect them as derivative financial instruments at that are recorded at their fair values and presents the fair values of derivative assets and liabilities gross on the balance sheet when it is appropriate to do so. The adjustment for these corrections resulted in an increase of, which totaled $35.7 million for derivative instrument assets and $170.5 million for derivative financial instrument liabilities at December 31, 2003. The Districts Board defers the recognition of derivative financial instruments for rate-making purposes, and accordingly, regulatory assets and regulatory credits were restated by $87.5 and $47.3 million, respectively, at December 31,2003. The restatement does not impact the 2003 statement of revenues, expenses and changes in net assets.
Balances presented in the 2003 consolidated balance sheet are restated as follows:
2003 2003 As Previously As Reported Restated (thousands of dollars)
Assets:
Regulatory costs for future recovery - current . ....... ... . $ 71,329 $ 76,790 Derivative financial instruments - current . .3,448 24,731 Total current assets .. . . . . ....... .. . 723,386 750,130 Regulatory costs for future recovery - noncurrent . . . . . . . . . . 219,200 301,310 Derivative financial instruments - noncurrent . 106,597 120,998 Total noncurrent assets and deferred charges . .404,257 500,768 Total assets .................. . 3,637,485 3,760,740 Liabilities:
Derivative financial instruments - current .............. 580 30,304 Regulatory credits - current . . . . . . . . . . . . . . . . . . . . 7,912 5,044 Total current liabilities and deferred credits............. 460,729 487,585 Derivative financial instruments - noncurrent .......... 6,949 147,722 Regulatory credits - noncurrent .. .. ..... ... .... .. . 278,137 233,763 Total current liabilities and deferred credits............. 599,591 695,990 Total liabilities . ......................... 3,419,030 3,542,285 Total liabilities and net assets ... . .... .. .. .$ 3,637,485 $ 3,760,740 44
SACRAMENTO MUNICIPAL UTILITY DISTRICT l 2004 NOTE 4. UTILITY PLANT The summarized activity of the District's utility plant during 2004 ispresented below (thousands of dollars):
Balance Transfers Balance December 31, and December 31, 2003 Additions Deletions 2004 Nondepreciable Utility Plant:
Land . . . . . . . . . . . . . . . $ 64,692 $ 1,153 $ $ 65,845 CWIP ............... 425.490 357%929 (169,912) 613,507 Total nondepreciable utility plant . . 490,182 359,082 (169,912) 679,352 Depreciable Utility Plant:
Generation. . . . . .
786,889 17,745 (872) 803,762 Transmission . . . . . . . . . . 173,906 13,805 (1,073) 186,638 Distribution . . . . . . . . . . . 1,087,646 86,075 (4,483) 1,169,238 Investment in gas properties 136,975 136,975 General . 556,277 49,410 (22,236) 583,451 2,741,693 167,035 (28,664) 2,880,064 Less: accumulated depreciation and depletion .............. (992,802) (103,789) 30,960 (1,065,631)
Total depreciable plant .......... 1,748,891 63,246 2,296 1,814,433 Total Utility Plant - Net...... $ 2,239,073 $ 422,328 $ (167,616) $ 2,493,785 The summarized activity of the District's utility plant during 2003 is presented below (thousands of dollars):
Balance Transfers Balance December31, and December 31, 2002 Additions Deletions 2003 Nondepreciable Utility Plant:
Land . . . . . . . . . . . . . 63,970 $ 736 $ (14) $ 64,692 CWIP .. ....... ...... ... 285,843 283,134 (143,487) 425,490 Total nondepreciable utility plant. 349,813 283,870 (143,501) 490,182 Depreciable Utility Plant:
Generation . . . . . . . . . . . . . . . 769,868 23,623 (6,602) 786,889 Transmission . . . . . . . . . . 155,105 19,139 (338) 173,906 Distribution . . . . . . . . . . . 1,028,581 63,676 (4,611) 1,087,646 Investment in gas properties ...... 136,975 136,975 General . . . . . . . . . . . . 557,835 35,075 (36,633) 556,277 2,511,389 278,488 (48,184) 2,741,693 Less: accumulated depreciation and depletion .............. (942,236) (97,529) 46,963 (992,802)
Total depreciable plant .......... 1,569,153 180,959 (1,221) 1,748,891 Total Utility Plant - Net .. .. .. S 1.918.966 S 464.829 S (144.722) S 2.239.073 In 2002, the District began active development of the Cosumnes Power Plant (CPP Project), a 500 megawatts (MW) natural gas fueled generation facility located on the Rancho Seco site. The CPP Project is expected to be operational in 2006 (see note 18 relating to construction contract issues). Included in CWIP at December 31, 2004 and 2003, are cumulative capitalized costs of $356.4 million and S184.7 million, respectively, relating to the CPP Project's construction and development, including the related natural gas pipeline.
45
- -1 SACRAMENTO MUNICIPAL UTILITY DISTRICT l 2004 1_-
NOTE 5. INVESTMENT INJOINT POWERS AGENCY TANC The District and fourteen other California municipal utilities are members of TANC, a JPA. TANC, along with the other California municipal utilities, own and operate the California-Oregon Transmission Project (COTP), a 500-kilovolt transmission line between central California and southern Oregon. The District is obligated to pay 27.1 percent of TANC's COTP debt service and operations costs in exchange for ownership of 339 MW of TANCs 1,269 MW transfer capability. Additionally, the District has a 46 MW share of'TANC's 300 MW firm, bi-directional transmission over Pacific Gas and Electric's (PG&E) system between PG&Es Tesla and Midway substations. The District recorded transmission expenses related to TANC of $10.7 million and $11.5 million in 2004 and 2003, respectively.
Summary financial information for TANC ispresented below:
December 31, 2004 2003 (Unaudited) (Unaudited)
(thousands of dollars)
Total assets .............................. .$ 473 754 $ 489,779 Total liabilities.................... . ........ $ 473,391 $ 489,424 Total net assets ......... ..... .... ..... ... . . 363 355 Total liabilities and net assets .. . .... .. .......... $ 4732754 $ 489,779 Revenues, Expenses and Changes in Net Assets . . . . . . . . . . . $ 5 $ 2 The long-term debt of TANC, which totals $407.7 million (unaudited) at December 31,2004, is collateralized by a pledge and assignment of net revenues of TANC, supported by take-or-pay commitments of the District and other members. Should other members default on their obligations to TANC, the District would be required to make additional payments to cover a portion of such defaulted payments, up to 25 percent of its current obligation of 27.1%.
NOTE 6. COMPONENT UNITS CVFA Carson Cogeneratlon Project CVFA is a JPA formed by the District and the Sacramento Regional County Sanitation District. CVFA operates the Carson Project, a 57 MW (net) natural gas-fired cogeneration facility and a 43 MW (net) natural gas-fired simple cycle peaking plant, which is financed primarily by CVFA non-recourse revenue bonds.
SCA Procter & Gamble Cogeneration Project SCA is a JPA formed by the District and the Sacramento Municipal Utility District Financing Authority (SMUDFA). SMUDFA is a JPA formed by the District and the Modesto Irrigation District. SCA operates the Procter & Gamble Project, a 120 MW (net) natural gas-fired cogeneration facility and a 44 MW (net) natural gas-fired simple cycle peaking plant, which is financed primarily by SCA non-recourse revenue bonds.
SPA Campbell Soup Cogeneration Project SPA isa ]PA formed by the District and SMUDFA. SPA operates the Campbell Soup Project, a 160 MW (net) natural gas-fired cogeneration facility, which is financed primarily by SPA non-recourse revenue bonds.
Copies of CVFA's, SCAls, and SPA's annual financial reports may be obtained from their Executive Oflice at 6201 S Street, P.O. Box 15930, Sacramento, California 95852.
SACRAMENTO MUNICIPAL UTILITY DISTRICT l 2004 NOTE 7. CASH, CASH EQUIVALENTS, AND INVESTMENTS At December 31,2004 and 2003, the District's cash, cash equivalents and investments consist of the following:
December 31, 2004 2003 (thousands of dollars)
Cash and cash equivalents:
Investments:
LAIF .............................. .$ 104,047 $ 292,204 United States (U.S.) government securities . 79,055 102,066 Money market mutual funds . 58,682 52,340 Securities lending transactions. 66,427 65,486 Commercial paper ...................... . . 13,187 39,830 Total cash and cash equivalents . 321,398 551,926 Investments:
U.S. government securities . 217,184 126,066 Total cash, cash equivalents and investments .$.... . . .. 538,582 $ 677,992 At December 31,2004 and 2003, the District reported its book overdraft of S2.7 million and $11.8 million, respectively, as a component of Accounts Payable on the consolidated balance sheets.
The District's cash, cash equivalents, investments and securities lending collateral are classified in the consolidated balance sheets as follows: l December 31, 2004 2003 (thousands of dollars)
Total cash, cash equivalents and investments:
Revenue bond reserve, debt service and construction funds:
Revenue bond reserve fund. $ 82,671 $ 89,624 Debt service fund .......... .. ...... .... . . . 37,558 45,134 Component unit bond reserve and construction funds...... 59,564 68,495 Total revenue bond reserve, debt service and construction funds. 179,793 203,253 Nuclear decommissioning trust fund . ...... .... ..... 87,968 91,346 Rate stabilization fund....................... 75,000 87,317 Securities lending collateral. 66,427 65,486 Other restricted funds. 6,072 3,625 Unrestricted funds . 123,322 226,965 Total cash, cash equivalents and investments . $ 538,582 $ 677,992 47
SACRAMENTO MUNI(:IPAL UTILITY DISTRICT l 2004 Investment Risk Categories Investments held by the District are classified as to credit risk by categories and summarized as follows: Category I includes investments that are insured or registered or for which securities are held by the District or its agent in the District's name and Category 2 includes uninsured and unregistered investments for which securities are held by the counterparty's trust department or agent in the Districfs name. At December 31, 2004 and 2003, investments in U.S government securities and Commercial Paper totaling $309.4 million and
$268.0 million, respectively, are classified as Category 1 investments. At December 31, 2004 and 2003, the District had no investments in corporate securities that would be classified as Category 2 investments. All other investments, which comprise of LAIF, money market mutual funds and securities lending transactions are uncategorized.
Cash Equivalents and Investments Cash deposits held in the District's name are fully insured by the Federal Deposit Insurance Corporation or are collateralized in accordance with the terms of the District's indentures and applicable federal and state laws. In accordance with state laws and the bond resolutions, the District is authorized to invest in the following types of instruments: obligations which are unconditionally guaranteed by the U.S. or its agencies or instrumentalities; direct and general obligations of the State of California (State) or any local district within the State; bankers' acceptances; certificates of deposit; repurchase agreements; reverse repurchase agreements; interest rate swap agreements; securities lending agreements; and corporate indebtedness, including commercial paper and medium-term notes with a maximum term of five years. Investments in corporate indebtedness must be rated A-1' or its equivalent for commercial paper, and WA or equivalent for medium-term notes by a nationally recognized rating agency. The component units' bond indentures allow investing in various other securities in addition to the ones described above. The District's custodial agent maintains records showing the securities are solely owned by the District, or by one of its component units, where applicable. A portion of these securities may be pledged as collateral or for other purposes. The District's investments in money market mutual funds are comprised of only non-derivative financial securities that are backed by federal or corporate issuers.
The LAIF is a component of the Pooled Money Investment Account Portfolio managed by the State Treasurer. At December 31, 2004 and 2003, the Pooled Money Investment Account Portfolio includes approximately 2.6 percent and 2.1 percent, respectively, in certain derivative-type products, which are in the form of structured notes and asset-backed securities.
Securities Lending Transactions The District enters into securities lending agreements for up to 20 percent of its investment portfolio only with counterparties that are primary dealers of the Federal Reserve Bank of New York. At December 31, 2004, the District had no credit risk exposure to borrowers because the amount the District owes the borrowers exceeds the amounts the borrowers owe the District. The contract with the District's custodial bank requires it to indemnify the District if the borrowers fail to return the securities (and the collateral is inadequate to replace the securities lent) or fail to pay the District for income distributions by the securities' issuers while the securities were on loan.
NOTE 8. REGULATORY DEFERRALS The District's Board has taken various regulatory actions that result in differences between the recognition of revenues and expenses for rate-making purposes and their treatment under generally accepted accounting principles for non-regulated entities. These actions result in regulatory assets and liabilities, which are summarized in the tables below. Changes to these balances, and their inclusion in rates, occur only at the direction of the Board.
Regulatory Assets Decommissioning The District's regulatory asset relating to the unfunded portion of its decommissioning liability is being collected in rates and through interest earnings on the Trust Fund, through 2008 when radiological decommissioning is expected to be complete. Subsequently, nuclear fuel storage costs and non-radiological decommissioning costs are to be collected in rates commencing in 2009.
SACRAMENTO MUNICIPAL UTILITY DISTRICT I 2004 Wholesale Power Receivables The District's regulatory asset relates to its wholesale receivables that were fully reserved as uncollectible in 2001. These wholesale receivable reserves relate to amounts due from the ISO and PX totaling $23.9 million and $40.2 million at December 31, 2004 and 2003, respectively. The ultimate recovery of these amounts is dependent on numerous factors and cannot be determined at this time. This regulatory asset will be reversed concurrent with the reasonable certainty of collections or by inclusion in rates in future periods. In connection with the tentative settlement of one of its receivable balances due from the California ISO in 2004 (See note 2), the District reduced the related regulatory asset by $16.7 million. Of this amount, $5.5 was recorded as an increase to net receivables (now determined to be collectable), and S11.2 million was recorded as a reduction to 2004 wholesale revenues.
TANC Operations Costs The District's regulatory asset relating to deferred TANC costs comprises the difference between its cash payments made to TANC and its share of TANC's accrual-based costs of operations. This regulatory asset is being collected in rates over the life ofTANC's assets during the period that cash payments to TANC exceed TANC's accrual-based costs.
U.S. Bureau of Reclamation In December 2004, the District established a regulatory asset to defer recognizing the expense related to the settlement with the U.S.
Bureau of Reclamation (Bureau) on a billing dispute. The District will make increased payments in future rates to settle the dispute (See Note 17). This regulatory asset will be collected in rates for future water service over the twenty-five year period the District is committed to making the increased rate payments to the Bureau.
Enrichment Facility Decommissioning Assessment The District's regulatory asset relating to obligations associated with the federal nuclear fuel enrichment program is being collected in rates, based on cash payments made, through 2008.
Derivative Financial Instruments The District's regulatory asset relating to derivative financial instruments is intended to defer the net difference between the fair value of derivative instruments and their cost basis, if any. The balance is charged or credited into rates as the related asset or liability is utilized.
Precipitation Hedges Settlements of Precipitation Agreements are included in rates in the year settled, and accordingly the intrinsic value of open precipitation hedges is deferred as regulatory assets or liabilities.
The District's total regulatory costs for future recovery are presented below:
December 31, 2004 2003 (As Restated)
(thousands of dollars)
Regulatory costs for future recovery:
Decommissioning. $ 233,345 $ 227,679 Wholesale power receivables .................... 23,928 40,193 TANC operations costs .............. ...... . . . . 14,864 16,960 U.S. Bureau of Reclamation .... ................. 12,485 Enrichment facility decommissioning assessment .... ..... 4,651 5,697 Derivative financial instruments .................. 71,234 87,571 Precipitation hedges ...... . . ................ 1,702 Total regulatory costs . .. ...... .... ...... .. . . 362,209 378,100 Less: regulatory costs to be recovered within one year. (72,836) (76,790)
Total regulatory costs for future recovery - net .. ...... $ 289,373 $ 301,310 49
SACRAMENTO MUNICIPAL UTILITY DISTRICT l 2004
-t Regulatory Liabilities CIAC In 2004 and 2003, the District capitalized CIAC totaling 518.2 million and $20.9 million, respectively, in Plant in Service in the consolidated balance sheets and recorded $5.8 million and S5.2 million, respectively, of depreciation expense in the consolidated statements of revenues, expenses and changes in net assets. The District's regulatory credit relating to CIAC is intended to offset the revenue and expense associated with this accounting treatment. Thus, this regulatory credit is being amortized into rates over the depreciable lives of the related contributed distribution plant assets in order to offset the earnings effect of these nonexchange transactions.
Rate Stabilization The District's regulatory credit relating to Rate Stabilization is intended to defer the need for future rate increases when costs exceed existing rates. Each year, at the direction of the Board, amounts are either transferred into this fund (which reduces revenues) or amounts are transferred out of this fund (which increases revenues). For several years through 2003, the Board deferred all residual income or loss into this account, as part of its strategy to maintain break-even operations while building up the Rate Stabilization Fund. In 2004, the Board ceased this practice and adopted a practice of authorizing Rate Stabilization Fund transfers on an event driven basis. In 2004, the Board determined that $12.3 million should be withdrawn in connection with payments made to PG&E associated with the Scheduling Coordinator Services (SCS) Tariff issue as described in Note 17.
El Paso Settlement In December 2004, the District established a regulatory credit relating to the settlement of a class action lawsuit with El Paso Natural Gas (El Paso), which iscomprised of the present value of the amount the District will collect from El Paso over the twenty year repayment tern. This regulatory deferral will be credited to revenue as payments from El Paso are realized.
Public Good The District's regulatory credit relating to Public Good comprises the amounts collected in rates for specifically identified Public Good programs that have not been fully expended. These regulatory deferrals are credited to revenue in the period when the expenditures on identified projects occur.
The District's total regulatory credits for future revenue recognition are presented below:
December31, 2004 _ 2003 (As Restated)
(thousands of dollars)
Regulatory Credits for Future Revenue Recognition:
C IAC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 163,197 $ 150,776 Rate stabilization .......................... 75,000 87,317 El Paso Settlement ......................... 6,900 Public good ............................. 895 714 Total regulatory credits for future revenue recognition. .... . 245,992 238,807 Less - regulatory credits to be recognized within one year .. .. . (7495) (5,044)
Total regulatory credits - net . $ 23$,497 $ 233,763
SACRAMENTO MUNICIPAL UTILITY DISTRICT l 2004 NOTE 9. DERIVATIVE FINANCIAL INSTRUMENTS The District enters into contracts for electricity and natural gas to meet the expected needs of its retail customers. The District sells excess capacity during periods when it is not needed to meet its retail requirements. The District's energy risk management program uses various physical and financial contracts to hedge exposure to fluctuating commodity prices. The District also enters into interest rate swap agreements to reduce Interest rate risk or to enhance the relationship between the risk and return regarding the District's assets or debt obligations. During 2004 and 2003, the District executed numerous new gas related and power related purchase agreements, which are accounted as derivative financial instruments and are included in the table below.
The fair value of the District's derivative financial instruments are as follows:
December 31, 2004 2003 (As Restated)
(thc)usands of dollars)
Derivative Financial Instrument Assets:
Gas related agreements ...... . . . . . . . . . . . . . . . . . $ 41,371 $ 11,758 Electric related agreements ...... . . ........ . . . . . 119,987 108,855 Treasury related agreements ...... . . ....... . . . . . 21,922 25,116 Total derivative financial instruments .... ....... . . . 183,280 145,729 Less - derivative financial instruments maturing within one year . . (32,309) (24.731)
Total derivative financial instrument assets -,net .... . . .$ 150,971 $ 120,998 Derivative Financial Instrument Liabilities:
Gas related agreements . . . . . . . . . . . . . . . . . . . . . . . $ 3,515 $ 2,264 Electric related agreements ...... . . ......... . . . . 173,010 146,214 Treasury related agreements . . ... . .. ...... ..... . 27,315 29,548 Total derivative financial instruments .... ....... . . . 203,840 178,026 Less - derivative financial instruments maturing within one year . . (48,317) (30,304)
Total derivative financial instrument liabilities - net . . 5$... 155,523 $ 147,722 The Board has deferred recognition of the effects of reporting the fair value of derivative financial instruments for rate-making purposes, and in 2001, established a regulatory account to defer the accounting impact of these accounting adjustments (see Note 8).
-91 SACRAMENTO MUNICIPAL UTILITY DISTRICT l 2004 NOTE 10. LONG-TERM DEBT The District's total long-term debt is presented below:
December31, 2004 2003 (thousands of dollars)
Electric revenue bonds:
Electric revenue bonds, 2.5%-6.5%,2005-2033 . ..... ... .. $ 1,727,090 $ 1,638,760 Subordinated electric revenue bonds, 1.45%-8.0%, 2005-2028 478,850 487,650 Total electric revenue bonds ... . ..... ... ....... 2,205,940 2,126,410 Component unit cogeneration project revenue bonds, 5.0%-7.0%,2005-2022 ....................... 295,625 310,525 Total long-term debt outstanding ig............... 2,501,565 2,436,935 Bond premiums - net ................... 78,614 84,881 Deferred losses on bond refundings - net ........... (106,689) (118,861)
Total long-term debt. . . ...... 2,473,490 2,402,955 Less: amounts due within one year .................. (67,165) (44,245)
Total long-term debt - net .................. $ 2,40_6,325 $ 2,358,710 The summarized activity of the District's long-term debt during 2004 is presented below (thousands of dollars):
Amounts December31, Payments or December 31, Due Within 2003 Additions Amortization 2004 OneYear Electric revenue bonds $ 1,638,760 $ 130,950 5 (42,620) $ 1,727,090 $ 57,840 Subordinate electric revenue bonds . . . . 487,650 (8,800) 478,850 425 Component unit cogeneration project revenue bonds . . . . 310,525 (14,900) 295,625 8,900 Total . . . . 2,436,935 130,950 (66,320) 2,501,565 $ 67,165 Unamortized premiums - net . . . 84,881 2,412 (8,679) 78,614 Deferred losses on bond refundings - net . . . (118,861) (1,518) 13,690 (106,689)
Total long-term debt. . $ 2,402,955 5 131,844 $ (61,309) $
= :==-
2,473,490
SACRAMENTO MUNICIPAL UTILITY DISTRICT I 2004 I
The summarized activity of the District's long-term debt during 2003 is presented below (thousands of dollars):
Amounts December 31, Payments or December 31, Due Within 2002 Additions Amortization 2003 OneYear Electric revenue bonds. . $ 1,486,455 $ 812,445 $ (660,140) $ 1,638,760 $ 25,245 Subordinate electric revenue bonds . . . . 384,125 111,900 (8,375) 487,650 8,400 Component unit cogeneration project revenue bonds . . . . 332,590 (22.065) 310.525 10.600 Total ....... . 2,203,170 924,345 (690,580) 2,436,935 S 44,245 Unamortized premiums - net . . . 154 81,636 3,091 84,881 Deferred losses on bond refundings - net . . . (94,674) (33,972) 9,785 (118,861)
Total long-term debt. . . $ 2,108,650 $ 972,009 $ (677,704) $ 2,402,955 At December 31, 2004, scheduled annual principal maturities and interest are as follows (thousands of dollars):
Principal Interest Total 2005 . .. .... .. ...... .... ... $ 67,165 $ 123,151 $ 190,316 2006. .......................... 85,160 119,299 204,459 2007. ..................... 98,390 115,050 213,440 2008 . ...... .... ..... ... . . 88,225 110,407 198,632 2009 .... .. ............. .... ..... . 79,645 106,355 186,000 2010 - 2014 ........................ 587,450 451,480 1,038,930 2015 - 2019. ...................... 643,995 293,548 937,543 2020 - 2024 ........................ 472,230 148,448 620,678 2025 - 2029 ........................ 311,930 56,254 368,184 2030 - 2033 ........................ 67,375 7,612 74,987 Total requirements .................... $:
Wv 205 4:
w 1.531.64A
^ asua i
w A All
_'svJ Rv-1-ssv 69 Interest in the preceding table includes interest requirements for variable rate debt ranging from 2.4 percent to 4.5 percent using the debt interest rate in effect at December 31, 2004 for each issue.
2004 Electric Revenue Bonds In May 2004, the District issued $130.9 million of 2004 Series T Electric Revenue Bonds at a premium of S2.4 million. Proceeds from the 2004 Series T Bonds and $1.4 million of available District funds were used to refund $101.0 million of Commercial Paper Notes (Notes) and $16.9 million of previously issued revenue bonds through a legal defeasance. and accordingly, the liability for the defeased bonds has been removed from Long-term Debt in the consolidated balance sheets. The refunding resulted in the recognition of a deferred accounting loss of $1.5 million, which is being amortized over the life of the refunding issue; and a current accounting loss of S0.5 million, which is included in Interest on Debt in the consolidated statements of revenues, expenses and changes in net assets.
The 2004 refunding reduced future aggregate debt service payments by $3.3 million and resulted in a total economic gain of $1.3 million, the difference between the present value of the old and new debt service payments. Proceeds from the 2004 Series T Bonds were also used to fund S14.0 million of capital expenditures.
53
SACRAMENTO MUNICIPAL UTILITY DISTRICT l 2004 2003 Revenue Bonds Refundings and Defeasances In 2003, the District issued $924.4 million of Electric Revenue and Subordinated Electric Revenue Bonds at a premium of $81.6 million.
Proceeds from these bonds were used to refund S115.3 million of Notes and $600.3 million of previously issued revenue bonds. The refundings resulted in the recognition of deferred accounting losses of $65.1 million, which are being amortized over the lives of the refunding issues; and a current accounting loss of $2.0 million, which is included in Interest on Debt in the consolidated statements of revenues. The 2003 refundings reduced future aggregate debt service payments by $101.9 million and resulted in a total economic gain of
$71.7 million, the difference between the present values of the old and new debt service payments.
Interest Rate Swap Agreements The District has a fixed-to-variable interest rate swap agreement with a notional amount of $131.0 million, which is equivalent to the principal amount of the District's 1997 Series K Electric Revenue Bonds. Under this swap agreement, the District pays a variable rate equivalent to the Bond Market Association (BMA Index) (1.99 percent at December 31,2004) and receives fixed rate payments of 5.15 percent. In connection with the swap agreement, the District has a put option agreement, also with a notional amount of $131.0 million which gives the counterparty the right to sell to the District, at par, either the 1997 Series K bonds, or a portfolio of securities sufficient to defease the 1997 Series K bonds. The exercise of the option terminates the swap at no cost to the District. The combination of these financial transactions brings the District's net cost of borrowing to the BMA Index less 8 basis points. The term of both the swap and the put is equal to the maturity of the 1997 Series K bonds.
Additionally, the District has three variable-to-fixed interest rate swap agreements with a combined notional amount of $407.8 million for the purpose of fixing the effective interest rate associated with certain of its Subordinated Bonds. Under these agreements, the District makes fixed payments of between 2.89 percent and 4.50 percent and receives variable payments from the counterparties of between 63 percent and 70 percent of the one-month London Interbank Offered Rate for U.S. dollar deposits (2.40 percent at December 31,2004).
The swap agreements expire in 2010 ($27.2 million notional value), 2018 ($269.1 million) and 2028 ($111.5 million). The notional values of all three swaps are amortized over the life of the respective swap agreements concurrently with scheduled principal payments.
The District can terminate all swap agreements at any time, with payment or receipt of the fair market value of the swaps as of the date of termination.
Subordinated Electric Revenue Bonds Payment of and interest on the Subordinated Electric Revenue Bonds is subordinate to the payment of the principal and interest on the District's Electric Revenue Bonds.
Variable Rate Bonds The District's variable rate bonds bear interest at daily, weekly and monthly rates, ranging from 1.45 percent to 1.60 percent at December 31.2004. The District can elect to change the interest rate period or fix the interest rate, with certain limitations. Certain variable rate bondholders have the right to tender the bonds to the tender agent. The District's variable rate bonds cannot be put to the District by the bondholders. Accordingly, the District has recorded such bonds as long-term debt, less amounts scheduled for redemption within one year.
Component Unit Cogeneratlon Bonds The component units of the District have each issued bonds to finance their respective cogeneration projects. These bonds are limited-recourse to the District. Principal and interest associated with these bonds are paid solely from the component units' revenues and receipts collected in connection with the operation of the cogeneration projects. Most operating revenues earned by the component units are collected from the District in connection with the sale of electricity to the District. The ability of the component units to service the debt isdependent upon the successful operation of the respective cogeneration projects (see Note 6).
Callable Bonds The District has $24.6 million of fixed rate system revenue bonds that are currently callable and $921.3 million of bonds that become callable from 2006 through 2014. These bonds can be called until maturity. In addition, all $454.3 million of the District's variable rate subordinated bonds are currently callable.
SACRAMENTO MUNICIPAL UTILITY DISTRICT l 2004 Collateral The principal and interest on the District's bonds are payable exclusively from, and are collateralized by a pledge of, the net revenues of the electric system of the District. Neither the credit nor the taxing power of the District is pledged to the payment of the bonds and the general fund of the District is not liable for the payment thereof.
Covenants The District's bond resolutions contain various covenants that include requirements to maintain minimum debt service coverage ratios, certain other financial ratios, stipulated minimum funding of revenue bond reserves, and various other requirements.
NOTE 11. COMMERCIAL PAPER NOTES The District issues Notes to finance or reimburse capital expenditures. At December 31, 2004, there were no Notes outstanding and as of December 31,2003 Notes principal totaled $51.0 million. The effective interest rate for the Notes outstanding at December 31,2003 was 0.98 percent and the average term was 37 days. The District maintains a $173.0 million letter of credit to support the sale of these outstanding Notes and incurs an annual fee of 0.50 percent. There has not been a term advance under the letter of credit agreement. In January 2005, the District issued $50.0 million of Notes.
NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the value:
Investments The fair values of investments, including cash equivalents, are based upon quoted market prices.
Long-term Debt The fair value of Long-term Debt, which includes the short-term portion, was calculated by determining the value of each individual series using a standard bond pricing formula and market yields from representative yield curves. The District's electric revenue bonds, including subordinated bonds, were priced using the fair market curve for insured municipal revenue bonds, except the taxable Series F Bonds, which were priced using the taxable general obligation bond curve. A similar fair value calculation was performed for the component units' bonds, except that all uninsured component unit debt wvas priced using the yield curve for BBB' rated municipal power bonds and insured component debt was calculated using the yield curve for A rated municipal power bonds. All yield curves were obtained from Bloomberg L.P.
Interest Rate Swap and Put Agreements The fair values of interest rate swap and put agreements are based on quoted market prices.
Gas and Electricity Related Derivatives The fair values of gas and electricity price swap agreements and electricity option agreements are based on forward prices from established indexes for the applicable regions. The fair values of electricity purchase agreements are based on fornard prices from established indexes from applicable regions and discounted using established interest rate indexes. Additionally, for electricity purchase contracts that include options and/or exchanges, the fair values of such contracts are based on models prepared by District staff that includes forecasted future usage and/or exchanges and electricity pricing based on price curves as described above for the periods covered by the agreements.
55
Ut SACRAMENTO MUNIC PAL UTILITY DISTRICT l 2004 The estimated fair values of the District's financial instruments are presented below:
December 31, 2004 Recorded Value FairValue (thousands of dollars)
Investments, including cash and cash equivalents ........ . . .$ 583,582 $ 583,582 Long-term debt ........................... (2,473,490) (2,683,913)
Interest rate swap and put agreements ............... (5,393) (5,393)
Gas and electricity related derivatives ................ (15,167) (15,167)
December 31, 2003 Recorded Value FairValue (As Restated) (As Restated)
(thousands of dollars)
Investments, including cash and cash equivalents. . . . . . . . . .$ 677,992 $ 677,992 Long-term debt .................. . . . . . . . . (2,402,955) (2,606,844)
Interest rate swap and put agreements ...... . .. (4,432) (4,432)
Gas and electricity related derivatives....... (27,865) (27,865)
NOTE 13. RANCHO SECO DECOMMISSIONING LIABILITY
Background
The Rancho Seco decommissioning liability relates to the nuclear decommissioning of the former 913 MW nuclear power plant, which terminated commercial operations in 1989. Nuclear decommissioning is the process of safely removing nuclear facilities from service and reducing residual radioactivity to a level that permits termination of the Nuclear Regulatory Commission (NRC) license and release of the property for unrestricted use. ihe NRC has approved the District's decommissioning plan, which provides for removing low-level radioactive material beginning in 1997 and completing active decommissioning in 2008. The plant license is planned to be terminated in phases. The license for the main areas of the Rancho Seco power plant site will be terminated in 2008 after removal of waste, most of which will be sent to licensed disposal sites or licensed radioactive waste processors. The remaining waste will be stored on site for an unspecified period after 2008 pending availability of appropriate disposal sites. The license for the storage facilities will be terminated after the waste is removed.
The Department of Energy (DOE), under the Nuclear Waste Policy Act of 1982, is responsible for permanent disposal of spent nuclear fuel and high-level radioactive waste. The District has a contract with the DOE for the removal and disposal of spent nuclear fuel and high-level (greater than class C': GTCC) radioactive waste. However, the date when fuel and GTCC waste removal will be complete is uncertain. The DOE recently announced that it would not meet the projected 2010 opening date for the Yucca Mountain waste site. The rate at which DOE will remove fuel is also uncertain. The District has constructed and separately licensed an on-site independent spent fuel storage facility (Storage Facility) for dry storage of the fuel in sealed canisters and completed movement of the fuel into the facility in 2002. The District has applied for a license amendment to store the GTCC waste at the Storage Facility. The Storage Facility will remain under the regulation of NRC until such time as it is decommissioned after the DOE removes the nuclear fuel and GTCC radioactive waste.
SACRAMENTO MUNICIPAL UTILITY DISTRICT l 2004 Asset Retirement Obligations Rancho Seco is one of the first large commercial nuclear power plants to be removed from service. Due to the substantial technical, regulatory and legal issues in connection with its nuclear decommissioning, the District cannot predict with certainty how long various decommissioning processes will take nor the eventual cost of decommissioning. These financial statements reflect the District's current estimate of its obligation for the cost of decommissioning under the requirements of SFAS No. 143 based on studies completed in 2004 and 2003. The 2004 study included an increase of $26.1 million, which related primarily to additional internal and outsourced staffing costs and other support costs related to spent fuel management from 2009 through the date of removal of spent nuclear fuel.
Rancho Seco's decommissioning liability is presented below (thousands of dollars):
December 31, 2004 2003 Active decommissioning .$..... . . . . . . . . . . . . . . . . . $ 217,341 $ 249,332 Spent fuel management ...... . . . . . . . ... . . . . . . . . 103,208 67,208 Total ARO ................ . 320,549 316,540 Less: Current portion ...... . . . . . . ...... . . . . . . . 41,500 39,081 Total non-current portion of ARO ............... . $ 279,049 $ 277,49 The summarized activity of the Rancho Seco decommissioning liability during 2004 and 2003 are presented below (thousands of dollars):
December31.
2004 2003 ARO at beginning of year . . . . . . . . . . . . . . . . . . . . . . .$ 316,540 $ 336,622 Accretion ......... . . . ................ .. . 16,158 17,488 Expenditures and annual adjustments .... . ........ . . . (38,221) (37,570)
Additional decommissioning liability from 2004 study . .. . 26,072 Total ARO . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ .
320,549
$ 316,540 The District contributed $27.0 million to the Trust Fund in 2004 and 2003, and plans the same contribution rate in 2005.
57
11 LI SACRAMENTO MUNICIPAL UTILITY DISTRICT I 2004 NOTE 14. PENSION PLANS Defined Benefit Pension Plan The District participates in the California Public Employee's Retirement System (PERS), an agent multiple-employer public employee defined benefit pension plan. PERS provides retirement and disability benefits, annual cost-of-living adjustments, and death benefits to plan members and beneficiaries. PERS acts as a common investment and administrative agent for part icipating public entities within the State. Benefit provisions and all other requirements are established by State statute and District policies. Copies of PERS annual financial report may be obtained from their Executive Office at 400 P Street, Sacramento, California 95814.
Funding Policy Participants are required to contribute approximately 7.0 percent of their annual covered salary. The District makes either the full or partial contributions required of District employees on their behalf and for their account. The District is not currently required to contribute to the plan because of its current funding excess. The contribution requirements of plan members and the District are established and may be amended by PERS.
Annual Pension Cost For 2004, 2003 and 2002, the Districts annual pension cost for PERS was $0 since it was not required to make, and did not make, pension contributions. The lack of required contributions was determined by PERS as part of the annual actuarial valuation based on the entry age normal actuarial cost method. The actuarial assumptions included (a) a 7.75 percent investment rate of return (net of administrative expenses), (b) projected annual salary increases that vary by duration of service, and (c)3.0 percent per year cost-of-living adjustments.
Both (a)and (b) also included an inflation component of 3.0 percent. The actuarial value of PERS assets was determined using techniques that smooth the effects of short-term volatility in the market value of investments over a four-year period (smoothed market value).
Three-year trend information for PERS is presented below:
Annual Pension Percentage of Fiscal Year Cost (APC) APC Contribution 6/30/02 $ 100%
6/30/03 $ 100%
6/30/04 $ 100%
Required supplementary information for PERS is presented below for the three most recent years fir which the District has available data (dollars in thousands):
Actuarial Entry Age Actuarial Funded Annual Funding Excess Valuation Normal Value of Funding Status Covered as a Percent Date Liability Assets Excess Percent Payroll of Payroll 6/30/01 791,426 1,120,055 328,629 141.5 128,366 256.0 6/30/02 858,245 1,043,256 185,011 121.6 137,257 134.8 6/30/03 980,081 1,045,473 65,392 106.7 146,404 44.7
SACRAMENTO MUNICIPAL UTILITY DISTRICT I 2004 Other Plans The District provides its employees with two cash deferred compensation plans, one pursuant to Internal Revenue Code (IRC) Section 401(k) [401(k) Plan] and one pursuant to IRC Section 457 (457 Plan) (collectively, the Plans). The Plans are contributory plans in which the District's employees contribute the funds. Each of the District's eligible full-time or permanent part-time employees may participate in either or both Plans and amounts contributed are vested immediately. Such funds are held by a Trustee in trust for the employees upon retirement from District service and, accordingly, are not subject to the general claims of the District's creditors. The District is responsible for ensuring compliance with IRC requirements concerning the Plans and has the duty of reasonable care in the selection of investment alternatives, but neither the District nor its Board or officers have any liability for market variations in the Plans' asset values.
District employees are responsible for determining how their funds are to be invested and pay all ongoing fees related to the Plans. The Plans are currently not subject to discrimination testing or the requirements of the Employee Retirement Income Security Act of 1974.
The District employees participating in the Plans are allowed to contribute up to a portion of their gross income not to exceed the annual dollar limits prescribed by the IRC.
The District makes annual contributions to the 401(k) Plan on behalf of certain employees pursuant to a memorandum of understanding with one of its collective bargaining units. The District does not match employee contributions nor make contributions on behalf of its employees to the 457 Plan. Participating employees and the District made contributions into the Plans totaling $13.9 million and $0.3 million in 2004, respectively, and $12.1 million and $0.3 million in 2003, respectively.
NOTE 15. OTHER POST-EMPLOYMENT BENEFITS The District provides post-employment health care benefits, in accordance with District policy and negotiated agreements with employee representation groups, to all employees who retire from the District, and their dependents, on or after attaining age 50 with at least 5 years of service. The District also provides post-employment health care benefits to covered employees who are eligible for disability retirement. The District contributes the full cost of coverage for employees hired before January 1, 1991, and a portion of the cost based on credited years of service for employees hired after January 1,1991. The District also contributes a portion of the costs of coverage for these employees' dependents. Currently, 2,560 post-employment participants, including retirees, spouses of retirees, surviving spouses, and eligible dependents, participate in the District's health care benefits program.
The post-employment health care benefits are unfunded. The District records post-employment health care benefit expenses on a pay-as-you-go basis. During 2004 and 2003, post-employment health care benefit expenditures were $95 million and $7.9 million, respectively. At December 31, 2004 and 2003, the District estimates that the actuarially determined accumulated post-employment benefit obligation was approximately $321.1 million and $394.6 million, respectively. The significant decrease in this estimate in 2004 was caused primarily by decreased starting claims cost assumptions based on the most recent 2005 renewals related to Medicare Advantage plans, an increase in the discount rate (from 6.25 percent to 7.1 percent) due to a change from FASB reporting to GASB reporting, and an increase in the estimated value of additional governmental subsidies. The health care inflation rate assumption used to estimate the net present value of the post-employment benefit obligation for 2004 ranged between 5.0 percent and 13.0 percent compared to a range of 5.0 percent to 15.0 percent used in the 2003 study for various elements of the health care obligations. The decrease reflects most recent experience and expectations. The effect of a one percent change in these assumed health care cost trends would increase or decrease the District's total benefit obligation by approximately $48.6 million or $39.7 million, respectively.
SACRAMENTO MUNICIPAL UTILITY DISTRICT I 2004 NOTE 16. INSURANCE PROGRAMS AND CLAIMS The District is exposed to various risks of loss related to torts, theft of and destruction to assets, errors and omissions, and natural disasters. In addition, the District is exposed to risks of loss due to injuries to, and illnesses of, its employees. The District carries commercial insurance coverage to cover most claims in excess of specific dollar thresholds, which range from S0.2 million to $1.0 million per claim with total excess liability insurance coverage for most claims of $100.0 million. District property insurance coverage is based on the replacement value of the asset. There have been no significant reductions in insurance coverage in 2004. In 2004 and 2003, the insurance policies in effect have adequately covered all settlements of the claims against the District. The claims liability is included as a component of Self Insurance, Deferred Credits and Other in the consolidated balance sheets.
The District's total claims liability at December 31, 2004 and 2003 is presented below:
2004 2003 (thousands of dollars)
WVorkers'compensation claims ................... .$ 6,429 $ 5,285 General and auto c laims .. ................... .. . . ............... 3.069 3,055 Short- and long-term disability claims .. 2,501 2,233 Claims liability ........ $ 1,99 S 10573 Changes in the District's total claims liability during 2004 and 2003 is presented below:
2004 2003 (thousands of dollars)
Claims liability, beginning of year .................. .$ 10,573 $ 7,123 Add: provisions for claims ............ . 5,851 7,248 Less: payments on claims ...... . . . . . . . . . . . . . . . .. (4,425) (3,798)
Claims liability, end of year ................. 5$ 11999 $ 10,573
SACRAMENTO MUNICIPAL UTILITY DISTRICT l 2004 NOTE 17. COMMITMENTS Electric Power Purchase Agreements The District has numerous power purchase agreements with other power producers to purchase capacity and associated energy to supply a portion of its load requirements. The District has minimum take-or-pay commitments for energy on most contracts. Certain contracts allow for the District to exchange energy, primarily in the summer months, when the District most needs the energy and to provide energy during the winter months, or other subsequent periods.
At December 31, 2004, the approximate minimum obligations for these contracts over the next five years are as follows:
Amount Year Ending: (thousands of dollars) 2005 . ... ..... .... .. $ 431,907 2006 . ........ . 318,817 2007 . ........ . 188,603 2008 . ........ . 149,546 2009 . ........ . 150,949 Contractual Commitments beyond 2009 Several of the District's purchase power contracts extend beyond the five-year summary presented above. These contracts expire between 2010 and 2024 and provide for power under various terms and conditions. The District estimates its annual minimum commitments under these contracts range between $152.6 million in 2010 and $49.6 million in 2024. The District's largest purchase power source is the Western Area Power Administration contract (Western), whereby the District can purchase up to 360 MW of capacity at cost-based rates, depending on the amount of energy available from Western in any given year. The Western contract expires in 2024.
Gas Supply Agreements The District has numerous long-term natural gas supply agreements with Canadian and U.S. companies to supply a portion of the consumption needs of the District's natural gas fired cogeneration power plants, which expire through 2008.
Gas TransportCapacity Agreements The District has numerous long-term gas transport capacity agreements with Canadian and U.S. companies to transport natural gas to the District's natural gas fired cogeneration power plants from the supply basins in Alberta to the California-Oregon border and from supply basins in the southwest and Rocky Mountains to the Southern California border. These gas transport capacity agreements provide for the delivery of gas into District owned pipeline capacity within California. The gas transport capacity agreements provide the District with 32.000 decatherms per day (Dth/d) of natural gas pipeline capacity to the Canadian Basins through 2023 and 40,000 Dthld to the Southwest or Rocky Mountain Basins through at least 2018.
SACRAMENTO MUNICIPAL UTILITY DISTRICT I 2004 Gas Storage Agreements The District also has an agreement for the storage of up to 1.5 million Dth of natural gas at a regional facility. The gas storage agreement expires in 2009.
At December 31, 2004, the approximate minimum obligations for these natural gas related contracts over the next five years are as follows:
Amount Year Ending: (thousands of dollars) 2005 .............. .$ 98,000 2006 . .128,050 2007 . .122,563 2008 . .36,993 2009 . .6,302 Contractual Commitments Beyond 2009 Several of the District's gas transport and gas storage contracts extend beyond the five-year summary presented above. These contracts expire between 2009 and 2023 and provide for transportation and storage under various terms anai conditions. The District estimates its annual minimum commitments under these contracts to be $5.8 million from 2010 through 2023.
Gas Price Swap Agreements The District has entered into numerous variable to fixed rate swaps with notional amounts totaling 79,545,000 million British Thermal Units (mmbtu) for the purpose of fixing the rate on the District's natural gas purchases for its gas fueled power plants and gas indexed electric contracts. These gas price swap agreements result in the District paying fixed rates ranging from $3.60 to $7.47 per mmbtu.
The swap agreements expire periodically from March 2005 through 2010.
Capital Expenditures The District's 2005 budget for capital expenditures (excluding AFUDC) totals $276.0 million, of which approximately 5165.3 million is for power supply projects (including $52.1 million for the Solano Wind Project and $46.0 million related to the construction of the 500 MW CPP Project), $66.8 million is for distribution projects and $43.9 million is for other capital projects.
NOTE 18. CLAIMS AND CONTINGENCIES U.S. Bureau of Reclamation Water Service Contract Billing Dispute The District entered into a 40-year water service contract with the Bureau, which expires in 2012, for the delivery of up to 75,000 acre-feet of water per year to originally meet the District's needs at Rancho Seco. This amount includes 60.000 acre-feet of municipal and industrial (M&l) water from the Central Valley Project (CVP). Over time, Bureau revenues have been insufficient to cover actual CVP operations and maintenance (O&M) costs; contractor payments have been insufficient to cover amortization of their respective shares of CVP capital costs and, in the case of M&I contractors, have been insufficient to cover interest on unpaid capital. Although the District's contract contains a specific rate methodology, the Bureau maintains that the District and other M&l contractors are running substantial O&M deficits which, by the Bureau's definition, includes as O&M costs both unpaid interest on capital and interest on the O&M deficit.
The Bureau also claims interest has compounded on the O&M deficits.
In 2003 and 2004, the District worked with several M&l contractors, with similar contracts and significant deficits claimed by the Bureau, to resolve this matter with the Bureau. The District, in concert with the M&l contractors, filed their complaint against the Bureau in March 2003 in the U.S. District Court. Under the guidance of a federal magistrate, negotiations were held and a proposed settlement was reached.
In general, the settlement reduces each contractor's obligation based on a combination of lower interest rates and simple interest; and the contractors commit to repayment of under-recovered capital and O&M costs. The contractors can either pay off the obligation or retire it in rates. The District estimates that its obligation under this settlement is $12.5 million as of December 2004. In December 2004 the Board approved the settlement and deferred the $12.5 million obligation as a Regulatory item (See Note 7) to be recovered in future rates as the obligation is repaid to the Bureau. This amount is included in Due to U.S. Bureau of Reclamation in the balance sheet at December 31, 2004.
Prior to completing the settlement, the Department of the Interior must give final approval so the Department of Justice can execute the settlement documents and obtain approval by the federal court. Management believes that such approvals are likely to occur.
SACRAMENTO MUNICIPAL UTILITY DISTRICT l 2004 California Energy Market Refund Dispute In 2001. FERC issued an order establishing evidentiary hearings for the purpose of determining the amount of refunds, if any, due to customers of the California ISO and PX spot markets from market participants selling into those markets for the period October 2,2000 through Tune 20,2001. During this time period, the District was both a seller and a buyer in the California spot markets. The Administrative Law judge (ALT) assigned to the proceedings adopted hearing procedures for a three-phase hearing. Phase I of the hearing, held in March 2002, addressed the calculation of the price to be applied to sales into the California ISO and PX market retroactively. Phases 2 and 3 addressed the calculation of refunds and identification of the amount currently owed to each supplier (with separate quantities due from each entity) by the California ISO, the investor owned utilities, and the State. Hearings on Phases 2 and 3 concluded in August 2002.
In December 2002, the ALJ issued his Certification of Proposed Findings (Findings) for all three phases. In March 2003, FERC issued an Order (March Order) accepting most of the Findings and adjusting the formula used Ito calculate the mitigated market-clearing price (MMCP) to be used in retroactively resettling the markets during the refund period. In its March Order, FERC noted that any future FERC findings of energy market manipulation that results from its ongoing review of additional evidence filed would neither result in a resetting of the refund effective date for this proceeding, nor impact the just and reasonable MMCP developed for the refund period.
In April 2003, the District filed a request for rehearing of FERC's March Order and in October 2003, FERC issued an Order on Rehearing, where in relevant part (1) rejected the District's request for rehearing regarding the District's $4.1 million sleeve transaction, (2) rejected the District's request for rehearing regarding adjustments made by the California PX, (3) declined to address the issue of FERC's jurisdiction over municipal sellers and (4) determined that individual sellers, and not the California PX, should be subject to refund liability and refunds should be paid on a pro rata basis. The Order on Rehearing requires the California ISO and PX to submit compliance filings containing the results of their revised market reruns. Currently, the California ISO estimates that it will complete and file its revised market rerun with FERC in the summer of 2005. The District has filed a Petition for Review of the Order on Rehearing with the Court of Appeals for the Ninth Circuit, for the purposes of appealing the decision regarding the District's $4.1 million sleeve transaction.
In November 2001, the Ninth Circuit Court issued an order severing the Petitions for Review of the jurisdictional issues and other transaction issues (which includes the District's sleeve transaction). The Ninth Circuit Court has scheduled oral arguments in April 2005 to consider the transaction issues (including the District's sleeve transaction); and the District anticipates a decision will be issued in the summer of 2005. Under the latest MMCP formula announced by FERC, the District estimated that its potential refund liability could be as high as $12.0 million. Throughout the process, the District has vigorously challenged FERC's jurisdiction over public power in these proceedings and believes it is likely to prevail in this matter; thus, removing any potential liability. If the District is found to be subject to FERC's authority in this matter, the District's liability would likely be partially offset by refunds it would eventually realize as a buyer in the California ISO and PX spot markets. However, since District management believes it is unlikely that it will be found to be subject to the jurisdiction of FERC's refund process, it has not accrued any liability in this matter.
Scheduling Coordinator Services Tariff Dispute In January 2000, PG&E filed its proposed SCS Tariff with FERC. The proposed SCS Tariff is designed to charge the District and other existing wholesale contract customers for the various scheduling services that PG&E provides. PG&E claims that such services were new services that were due to the advent of industry restructuring in California and the California ISO. The District and others believe that their existing contracts require PG&E to provide such services under the terms of their existing contracts. Accordingly, the District and other utilities affected by the proposed SCS Tariff filing are rigorously opposing the proposed tariff action and have participated in numerous FERC proceedings in this regard. Although PG&E's tariff filing was made in 2000, PG&E is seeking to have the proposed SCS Tariff charges apply retroactively from April 1998 when the operations of the California ISO commenced and PG&E began incurring the ISO-related costs it is attempting to recover. In June 2002, the District commenced operations as a separate control area and, therefore, is not subject to the proposed SCS Tariff as of that date.
63
SACRAMENTO MUNICIPAL UTILITY DISTRICT l 2004 In January 2000, FERC accepted for filing PG&E's proposed SCS Tariff, suspended the filing for five months, and set the matter for hearing. In August 2003, the ALI issued an Order Phasing Proceeding bifurcating the proceeding into two phases. In May 2004, the AL issued an initial decision in Phase I of the SCS Tariff Proceeding, in which the ALI found extraordinary circumstances sufficient to grant waiver of the prior notice requirement for a March 31, 1998 effective date, thereby allowing PG&E to recover SCS Tariff charges retroactive to the effective date; and determined that PG&E provides a new service under the SCS Tariff. In October 2004, FERC issued its Phase 1 Opinion in which it found PG&E's SCS Tariff to be a new service, but reversed the ALJ's finding that extraordinary circumstances permitted waiver of the prior notice requirement. Accordingly, the FERC refused to allow PG&E to recover SCS Tariff charges retroactively from April 1998 through December 1999. The District filed a request for rehearing of the Phase I Opinion with respect to the new service issue in November 2004. FERC issued a tolling order in December 2004 and has not acted on any of the parties' requests for rehearing. The Phase 2 proceedings addressing cost allocation are underway with hearings scheduled to begin in May 2005.
In June 2004, PG&E issued the District an invoice in the amount of519.2 million, which the District paid in full. While the District believes it will ultimately prevail in its arguments that PG&E improperly collected the SCS Tariff charges from the District and the District is entitled to a refund from PG&E of any amounts paid under the SCS Tariff, it recorded $16.4 million of this payment to expense in 2004; the amount is included in Purchased Power expense. At a minimum, District management believes that the FERC's October 2004 Order will stand which would result in the District receiving a refund from PG&E of $2.8 million plus interest for the retroactive charges that PG&E assessed the District. Accordingly, a receivable of $2.8 has been recorded at December 31, 2004.
The District's potential liability under the SCS Tariff is also potentially impacted by the settlement reruns that the California ISO is currently undertaking in the California refund case discussed above. The District will continue to vigorously contest any charges associated with the SCS Tariff at the FERC.
Replacement Reserves Dispute In August 2003, PG&E issued invoices totaling $2.2 million for replacement reserve charges purportedly incurred by PG&E for energy scheduled through its Rancho Seco intertie point from July 2000 through June 2002. In September 2003, the District provided PG&E notice of dispute of the invoices due to the fact that the billing was inconsistent with the Restated Interim Agreement, the primary agreement between the parties governing such transactions and, therefore, there should never have been any Replacement Reserve charges incurred in connection with the power deliveries at issue. PG&E functioned as the Scheduling Coordinator on the Dist rict's behalf for transactions with the California ISO at this intertie point until June 2002, when the District became its own control area. These Replacement Reserve charges purportedly relate to power purchased by the California ISO to cover deviations between actual load and forecasted load. The District believes that, even if the charges were appropriate, PG&E's delay in billing within a reasonable timeframe compromised the District's ability to modify its operations or scheduling procedures to eliminate or mitigate the charges. Further, it is unclear whether PG&E has attempted to recover for these Replacement Reserve charges twice, once under the proposed SCS Tariff described above, and once through the Restated Interim Agreement.
Since October 2003 the parties have entered into a series of tolling agreements that hold this dispute in abeyance until the SCS Tariff Dispute described above is resolved.
District management believes that it is likely that it will not be found liable for any charges in this matter, and that in the event that a portion of these charges are ultimately upheld, any payment would be offset against the SCS liability described above for which the District has recorded an expense of $16.4 million in 2004.
SACRAMENTO MUNICIPAL UTILITY DISTRICT I 2004 COTP 11Arbitration The California ISO filed to pass through charges on transactions involving the COTP, the District and Western control area. The California ISO is seeking to pass through $9.0 million in new charges to PG&E as the COTP's and WSestern's control areas proxy scheduling coordinator.
These charges include emissions costs, start-up costs, and minimum load costs. PG&E disputes the California ISO's authority to impose any charges on it as the Scheduling Coordinator for COTP and filed for arbitration in July 2004. The District filed its intervention in the arbitration in July 2001. The California ISO and Southern California Edison Company (Edison) filed motions for summary disposition in November 2004. The District, PG&E, and other aligned parties filed a joint reply to the California ISO's and Edison's motion for summary disposition in January 2005. Oral arguments on the California ISO's and Edison's summary disposition motions are being held in February 2005. The District believes that the California ISO will not prevail in its attempts to pass charges through to the COTP and the District and the Western control area. The District believes that previous COTP arbitration and subsequent FERC orders confirmed that such a pass through was in violation of the California ISO Tariff. Should the California ISO ultimately prevail, the District estimates that its share of the
$9.0 million that the California ISO seeks to charge may be as much as $3.0 million. The District believes that it will prevail in this matter and, therefore, no liability has been recorded at December 31,2004.
Fru-Con Construction Corporation Construction Matters In August 2003, the District entered into a contract with Fru-Con Construction Corporation (Fru-Con) to construct the District's 500 MW CPP Project. Travelers Casualty and Surety Company of America (Travelers) is obligated, under a Performance Bond, to guarantee Fru-Con's performance under the contract. The original construction schedule for the CPP Project called for commercial operation in September 2005. As of mid-February 2005, the CPP Project is about 65 percent complete and the District estimates that the CPP Project is four to six months behind schedule.
Though Fru-Con has previously made claims for comparably smaller amounts that have been resolved through negotiation; in October 2004X, Fru-Con asserted additional claims totaling $26.0 million. Beginning in October 2004 and continuing until early February 2005, the District and Fru-Con participated in negotiations to resolve disputes over both cost and delays in the CPP Project schedule. The parties were unable to resolve the disputes to the satisfaction of the District and on February 11,2005, the District terminated its contract with Fru-Con on the basis of breach of contract by Fru-Con. On February 15,2005 the District received notice from Fru-Con that Fru-Con claims the contract was wrongfully terminated. On February 28,2005, the District filed suit in the Sacramento County Superior Court against Fru-Con and one of its sub-contractors alleging breach of contract. The District is currently engaged in negotiations with existing subcontractors and other potential construction vendors to execute new construction contracts and resume project construction activities. In the event the cost of completing the CPP Project exceeds the amount of the Fru-Con contract, the District expects to seek recovery of such amounts from Fru-Con and its surety, Travelers.
The District does not believe that this jeopardizes the CPP Project or that the District will incur material losses as a result of this matter.
Other Construction Matters The District contracts with various other firms to design and construct facilities for the District. Currently, the District is party to various claims, legal actions and complaints on some of these construction projects. District management believes that it will be successful in refuting these allegations, and estimates that the ultimate resolution of these matters will not have a material adverse effect on the District's financial position. Accordingly, no liability has been recorded at December 31.2004.
Environmental Matters The District is one of many potentially responsible parties that have been named in a number of actions relating to environmental claims and/or complaints. Due to the nature of these claims, legal actions or complaints, the District is unable to predict the range of costs for resolution of these actions and intends to take all actions necessary to defend its position. Some of these matters name the District along with other electric utilities as potentially responsible parties. The District has estimated its exposure to such costs based on its proportionate share of the potential claim and recorded its share as a liability; in most instances this is a relatively small percentage.
However, should other named responsible parties become insolvent and unable to pay their share of the claims, the District's share of these contingent liabilities would increase and could be material. District management does not believe this will occur, and accordingly, management believes that the outcome of these environmental claims will not have a material adverse impact on the District's financial position or results of operations.
Other Matters In the normal operation of business, the District is party to various claims, legal actions and complaints. Management and the District's legal counsel believe that there are no other material loss contingencies that would have a material adverse impact on the District's financial position or results of operations.
Ii Hi SACRAMENTO MUNICIPAL UTILITY DISTRICT I 2004 NOTE 19. SUPPLEMENTAL CASH FLOW INFORMATION A reconciliation of the consolidated statements of cash flows operating activities to operating income is as follows:
Year Ended December 31, 2004 2003 (thousands of dollars)
Operating income ........................... $ 167,749 $ 89,870 Adjustments to reconcile operating income to net cash provided by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . 98,614 92,578 Depletion . 5,265 4,941 Regulatory deferrals collected in rates, including decommissioning . 30,306 76,011 Amortization of advance capacity . . . . . . . . . . . . . . . . 4,711 4,711 Revenue (recognized firom) deferred to regulatory credits . (12.317) 56,069 Federal and State grants revenue ................. 3,727 6,212 Interest income from energy efficiency loans . . ... . . . .. . 2,102 15,989 Other . 945 2,406 Changes in operating assets and liabilities:
Customer and wholesale receivables .. .. . .. .. . . . .. 7,003 (8,502)
Other assets .......................... 6,764 (14,370)
Payables and accruals as.................... 10,167 (2,481)
Decommissioning. (32,830) (26,739)
Net cash provided by operating activities. . . . .. . . . .. . . . .$ 292,206 $ 296,694 The supplemental disclosure of noncash financing and investing activities is as follows:
Year Ended December31, 2004 2003 (As Restated)
(thousands of dollars)
Loss on defeasance of debt. $ (548) $ (3,032)
Amortization of debt related costs .. . .... . ... . . .... . 5,351 8,711 Unrealized holding loss ........................ (1,868) (2,548)
Change in valuation of derivative financial instruments. 11,737 (125,420)
Assets contributed in aid of construction . ',975 5,867 Allowances for funds used during construction . .. .. . .. .. . . 15,370 7,628 Construction costs included in accounts payable ........... 40,868 49,801 Increase in decommissioning liability relating to change in accounting principle le................ 20,245 66
II
' I Larry Carr "Jan E.Schonr
! Ward6 :- GeneralManagerandChief ExecutiveOfficer
! Linda Davi is -James R.Shetler, - -.
- Ward I -AssistantGeneralManagerEnergySupply t Peter R.KE !at John DiStasio President2( 'Cf - AssistantGeneralManager, EnergyDelivery Ward 5 andCustomerServices -
Susan Paitterson Betty Masuoka Ward2 Assistant General Manager, AdministrativeServices Howard Posner Arlen Orchard Ward 3 '-:GeneralCounselandcSecretary N Genevie ve Shiroma James A. Tracy, Vice Preside'nt2005 Chief Risk Officer and Directar, Business Planning and Budget Ward4 Noreen Roche-Carter:
Bill Slato n Treasurer Vice Preside'nt2004, President2005 Ward 7 Cary M. Nethaway Controller -
Produced by C'mmunication & Advertising Services Monica Siewer t Manager Linda Carey Johnson, .
Photo credits t,t:
DirectorofBusiness TechnologyandChangeManagement -
Glen Korengolk1,Susie Gow-Low, Brian Baer, Kevin Graft, Ch arrCroil JeffLandi Q2005SMUD
fff fo::};:::-; i::::: ,000.it :'Sl ffEp/r L SMUD- 0.0;. 00 0 . ;f SACRAMENTO MUNICIPAL UTILITY DISTRICT' The PowerToS Do More.*- 2
.: f
- .>* 0 X
-- ;; * - 0 , SE 0 0 . :: 3 :- w 34
- . - . - . . - : - .- 3. .
,, L ; * :.
- :: ' , R : :- ,-.. D
- : t: r . ': '; 0 - ,; ' -: .5.tSf :0; f . ' ' ' - ' ' 1 [. 0
- E .::
S - ::
- f ;: .::
i - . .
. g,
- : ' , .'- E:
- ' : v f:
- f -- ,
- . , s . ;
ff ' " X' , ' a. a-:
D
. .d ' "t ' 0
. k i z , >
_ .=
f '; X0 '
f ;'-i'0
-___________________\)
MAIN OFFICE: 6201 S Street i Sacramento, CA 95817-1899 Mason MP i MAILING ADDRESS: P.O. BOX 15830 Sacranmento, CA 95852-1830 916.452.3211 :
www.smud.org