ML18143B476
| ML18143B476 | |
| Person / Time | |
|---|---|
| Site: | Rancho Seco, 07200011 |
| Issue date: | 05/15/2018 |
| From: | Tallman D Sacramento Municipal Utility District (SMUD) |
| To: | Allen C, Cruz Z Document Control Desk, Office of Nuclear Material Safety and Safeguards |
| References | |
| DPG 18-099 | |
| Download: ML18143B476 (55) | |
Text
May 15, 2018 DPG 18-099 U.S. Nuclear Regulatory Commission Document Control Desk Washington, DC 20555 Docket No. 50-312 Rancho Seco Nuclear Generating Station License No. DPR-54 Docket No. 72-11 Powering forward. Together.
Rancho Seco Independent Spent Fuel Storage Installation License No. SNM-2510 ANNUAL FINANCIAL REPORT Attention: Zahira Cruz and Chris Allen In accordance with 10 CFR 50.71(b) and 10 CFR 72.80(b), we are submitting the 2017 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 me at (916) 732-4893.
Sincerely, Dan A. Tallm Manager, Rancho Seco Assets Enclosure Cc: NRC, Region IV RIC: 1 F.099 Rancho Seco Nuclear Generating Station I 14440 Twin Cities Road I Herald, CA 95638-9799 I 916.452.3211 I smud.org
- sMuo*
- 1 5 million Service Area Population Record Peak Demand JULY 2006 megawatts on Authorized Budget Customer Contracts (yea e 1d) 628,952 Employees (year end)
Credit Rating AA Standard & Poor's Aa3 Moody's AA Fitch In keeping with our sustainability goals, this marks the first time that SMUD hun't pnnted copies of the annual report. Tb.is report 1s posted onhne 1n PDF form on smud.org.
2 Built to last
?Q 7 SMUD Annu.JI Re,p:rt SMUD Service Area and Board Member Wards The Sacramento Municipal Utility District generates, transmits and distributes electricity to a 900-square-mile territory that includes California's capital city, Sacramento County, and small portions of Placer and Yolo counties. As a publicly owned utility, SMUD is governed by a seven-member Board of Directors elected by the voters to staggered four-year terms. The SMUD Board of Directors determines policy and appoints the chief executive officer and general manager, who is responsible for SMUD's day-to-day operations.
Executive Management Arlen Orchard CEO & General Ma 1ager Laura Lewis C,.f Legal Of
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Jennifer Davidson ChiP.f F1nar.._*al Off t Paul Lau Grid Strategy ip,,. a,o :.OI e Gary King N 'ktor _ Of 1""
Frankie McDermott Chief Energy Delivery Officer Nicole Howard ief Custome, ()fficer Stephen Clemons Jn *on,.,
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Board of Directors Brandon Rose Wardl Nancy Bui-Thompson "Jard Gregg Fishman Ward")
Pr dent Genevieve Shiroma j4
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.l'll Rob Kerth
.YanJ Dave Tamayo W:J.rd6 V1.e Pre 1d 1t )018 Bill Slaton p
d Produced by Communications, Marketing & Community Relations CEO Letter Arlen Orchard ()
While I'm pleased to report that SMUD had an outstanding financial year in 2017, the steps we took last year to lay the foundation for a successful future will prove at least as significant to our customers and community moving forward. There's no time to waste in an industry changing as fast as ours. As technology, customer expectations, big data and climate change reshape our industry, SMUD is nimbly adapting to meet the challenges and embrace the opportunities that come our way.
This report shines a light on SMUD's 2017 accomplishments, which were numerous. By implementing Time-of-Day Rates for all residential customers, we're aligning rates with costs while giving customers greater control over their electricity bills. We revamped our low-income assistance program to ensure that rate relief and energy efficiency programs are targeted to help those customers who need it most. The remarkable growth of our SolarShares" program gave some of our largest business customers the opportunity to meet their clean-energy and sustainability goals while ensuring that SMUD retains these customers for the next 20 years. We secured new revenue streams by contracting to provide services to two new community choice aggregators located in Northern California.
20 7 $MUD Annu~I ReNrt Built to last 3
What these accomplishments have in common is that they'll help SMUD meet the challenges of a rapidly changing energy environment. Our updated five-year strategic plan is focused on SMUD's core purpose of enhancing the quality of life for our customers and community while strengthening our long-term financial vitality and viability.
SMUD will be operating under a different business model early in the next decade. We recognize that our relationship with our customers will look very different as it moves to one where control is shared among SMUD, our customers and third parties. We are reshaping many of our business practices, programs and services to ensure we remain the trusted partner our customers first turn to for all of their energy related needs.
Even with a 1.5-percent rate increase for residential customers in 2018, SMUD's electricity rates remain among the lowest in California. The rate increase is helping us make additional investments in the grid, technology projects and communication infrastructure.
Here at SMUD we embrace the need to transition to a low-carbon economy. We're on track to exceed the state's renewable energy mandate of 33 percent by 2020, and our energy supply is currently around 50 percent carbon free.
SMUD's financial position is extremely strong. Our net income in 2017 was $181.4 million, or $53.7 million more than planned. We were able to replenish our Rate and Hydro Stabilization funds and to make a sizable contribution to our post-employment benefits trust for retiree medical costs. Our credit ratings are the best they've been in more than three decades.
The biggest challenge to the day-to-day business of providing reliable electric service in 2017 came in January and February, when the heaviest storms in recent memory caused extensive damage to SMUD's system and widespread outages. Our customers 4
Built to last I 2017 SMUD Annual Report appreciated the SMUD crews that worked around the clock to restore their power. Technology helped improve the customer experience with our improved outage map providing better information on estimated restoration times. We also took full advantage of Facebook, Twitter and other channels to keep our customers informed and answer their questions. Fortunately, there was a silver lining to the wet winter: Record snowfall in the Sierra Nevada ensured full reservoirs for hydroelectric generation in SMUD's Upper American River Project.
In our 70 years of providing reliable, affordable power to the residents and businesses of California's capital region, we've come to be regarded by our customers as a prized community asset. They trust their community-owned utility to always put their interests first.
To commemorate our 70th anniversary in 2017 and reiterate our commitment to making this a better place to live, SMUD initiated the "Shine" community development and beautification program. We awarded more than $400,000 in grants to 20 nonprofit organizations across our service territory who will use the funds to improve the neighborhoods and communities they service. Our employees once again showed their passion for doing the right thing by raising more than $470,000 and volunteering 15,000 hours0 days <br />0 hours <br />0 weeks <br />0 months <br /> through the SMUD Cares employee giving and volunteer program.
While it's a challenging time in our industry, SMUD's performance in 2017 shows we're headed in the right direction. I'm confident in saying we're built to last.
Sincerely, Arlen Orchard CEO & General Manager
SMUD has provided more than in energy efficiency loans since 1990.
Since 1997, SMUD has spent $813 million on energy efficiency programs, an investment that saved of electricity-enough to power 351,000 homes for one year.
The difference in SMUD's current electric rates versus PG&E's means a savings of about
$600 million each year for SMUD customers
- money that stays in the 6
Built to last SM... D A a Rep..,r*
Typical monthly residential bills SMUD
$110.30 Rates as of April 1, 2018 37.8%
2.2%
5.1%
17.1%
18.6%
27.3%
50.9%
Yearinreview 0 Weathering a wild winter The storms that battered Northern California in January and February were a double-edged sword.
Heavy snowfall in the Sierra Nevada ensured that the reservoirs in the Upper American River Project would be filled to the brim, providing clean and inexpensive hydroelectricity to SMUD customers in the energy-intensive summer months. The snowpack, coupled with above-average rainfall at lower elevations, enabled SMUD to bolster our Hydro Rate Stabilization Fund.
But wind and rain also damaged power lines across SMUD's service territory, causing an unusually high number of customer outages in the first two months of the year. SMUD experienced four " major events," a classification in which more than 10 percent of SMUD customers experience power outages during that specific storm.
Measures taken in 2017 to improve reliability included:
Replaced more than 1,200 power poles; Trimmed more than 90,000 trees; Installed 38 remote-operated 69-kilovolt switches that helped distribution system operators restore large groups of customers without power more quickly; Delivered an Outage Intelligence Tool that helps engineers perform reliability analysis more quickly and efficiently; and Piloted LiDAR technology that helps identify diseased trees that have potential to cause power outages.
2017 SMUD Annual Report Built to last
Customers give SMUD high grades For the 16th consecutive year, SMUD received the highest scores of any California utility in the J.D.
Power and Associates survey of residential customers.
SMUD also topped all state utilities in the J.D.
Power survey of business customers. In the business customer satisfaction study, we received the highest score in the nation for Corporate Citizenship.
Additionally, SMUD received the highest scores in the nation in the Cogent 2017 Residential Trusted Brand & Customer Engagement Study conducted by Marketing Strategies International. SMUD received top scores in "Engaged Customer Relationship" and "Brand Trust" for electric-only and electric-gas combination utilities.
SMUD credit ratings upgraded SMUD's credit ratings were upgraded by Fitch and by S&P from AA-to AA. This is the strongest SMUD's credit ratings have been in 33 years.
The upgrades will save SMUD and our customers a significant amount of money. For instance, the upgrades will save SMUD $350,000 over the life of just one of SMUD's upcoming bond transactions.
Fitch's press release noted, "The rating upgrade reflects SMUD's strong and sustainable financial performance, moderate leverage with manageable capital needs, and management's proactive plans to comply with environmental mandates and adapt to a rapidly evolving industry."
8 Built to last 2017 SMUD Annu I l;!ei,rt Digital first More than 50 percent of our customers would rather do business with us digitally. By 2020, SMUD will be a digital-first company, meaning digital channels will be the primary way our customers interact with us.
SMUD currently offers customers multiple digital channels: Email, web, text, chat, social media and e-commerce. In November, we rolled out an all-new smud.org, and a mobile app is in development and will be available in 2018.
Online transactions include paperless billing, budget billing, custom due dates, auto bill payments, "move in and move out," high bill alerts, rebate applications and payment arrangements for customers who have trouble paying a monthly bill.
In 2017, SMUD enhanced its digital offerings by launching the online SMUD Energy Store with an e-commerce partner that offers a variety of energy efficiency and connected home products. Many of the items available include rebates.
Year in review 0
- SMUD a:a
- CD Outage Map The outage map on smud.org is the first place customers turn for information when their power is out. The map identifies the locations of our outages, indicates when the customer can expect service restoration, and includes an "outage description" so customers can find out what caused the outage.
SMUD customers can set preferences for text and e-mail alerts about their SMUD bill and energy usage:
The Mid-Bill Alert lets customers know where they stand on the 16th day of their bill cycle.
The Bill Threshold Alert gives customers an alert if they go over the set amount they've established.
The High Bill Alert informs customers if their bill will be higher than usual.
In 2017, more than 35,000 residential customers were receiving bill alert. Additionally, SMUD offers online tools that help customers understand the costs and benefits of rooftop solar and electric vehicles.
Moving to a digital-first strategy is a win-win for SMUD and its customers. Customers get what they want how they want it, and SMUD benefits from improved customer satisfaction and lower operating costs.
2017 SMUD Annual Report 1 Built to last 9
SMUD sets energy storage goals Energy storage is the capture of energy produced at one time for use at a later time. The SMUD Board in 2017 adopted a target of 9 megawatts of energy storage to be procured by Dec. 31, 2020, in SMUD's service territory.
SMUD expects to meet roughly 80 percent of the target with battery energy storage systems and 20 percent with thermal energy storage systems. SMUD also set a longer term goal to install 75 megawatts of storage by 2026.
While storage remains expensive, experts see declining prices for the batteries, perhaps reaching parity from a pricing standpoint as early as 2025.
Moving the needle on electric transportation As a longtime supporter of electric transportation, SMUD helped lay the groundwork for Sacramento being designated the first "Green City" in the Volkswagen Electrify America Investment Plan. The automotive giant committed
$44 million in funding to the capital region, approximately 35 percent of which will be devoted to making electric transportation more accessible in low-income communities.
Electrify America should increase electric vehicle adoption in the Sacramento region by augmenting and complementing existing efforts that lacked the necessary investment to reach their full potential.
SMUD began supporting electric transportation in the 1990s as a way to improve Sacramento's air quality. While continuing to electrify more of its transportation fleet, SMUD has built six fast-charging stations across the region since 2014 and is partnering with local school districts and the air district on electrifying school buses. SMUD also offers a "charge free for two years" incentive to encourage customers to buy or lease electric vehicles.
10 Built to last 2017 SMUD Annual Report Fast charging station SMUD Powenng fol'ward.
Together.
smud.orglp<>v Reducing car-pole accidents With one eye on public safety and the other on limiting power outages, SMUD initiated a five-year pilot program in 2017 aimed at reducing the damage caused by vehicles crashing into power poles.
The number of car pole accidents has increased in recent years, due to a variety of factors, including increased traffic and distracted drivers. It's not a problem confined to SMUD: Utilities across the country are seeing a spike in vehicle accidents that affect power reliability.
SMUD's pilot program focuses on power poles and electrical equipment that's been on the receiving side of a collision more than once. Among the measures being taken are removing and relocating power poles; installing high-visibility reflective strips; and wrapping poles with protective barriers known as "Raptors."
Installed at the base of a power pole, the yellow Raptor is designed to absorb the impact of a vehicle crash.
A single pole replacement can cost more than $11,000, and poles can take upwards of eight hours to replace.
Year in review 0 Big year for SolarShares From a modest beginning on a turkey ranch in rural Sacramento County sprang one of SMUD's most popular clean energy programs.
That would be SolarShares, the innovative program that provides customers the opportunity to purchase solar power and bypass the cost and effort associated with installing solar panels on their rooftops and businesses.
The program started in 2007 with the construction of a 1-megawatt solar array on a turkey ranch in southeastern Sacramento County that sold out almost immediately. At that time, the price of solar generation required sizable subsidies on SMUD's part.
By 2016, however, the declining price of solar generation prompted SMUD to develop a commercial SolarShares program to help business customers meet their sustainability goals. SMUD built an 11-megawatt solar farm at Rancho Seco that provides clean, non-carbon power to the Golden One Center and state office buildings.
SolarShares for large commercial customers took off like a rocket in 2017, jumping from 10 megawatts in January to 113 megawatts at the end of the year.
Among those signing SolarShares agreements with SMUD in 2017 were the California Department of General Services; Apple; Sacramento Regional County Sanitation District and Sacramento Area Sewer District; Gekkeikan-Sake; City of Sacramento; Los Rios Community College School District; and the San Juan Unified School District.
2017 SMLID Annu Rer:: rt Built to last 11
Shining a light on the community To properly celebrate its 70th anniversary throughout 2017, SMUD launched a "70 Years Bright" campaign to strengthen the public utility's already deep roots in the community.
SMUD has a long history of sponsoring charitable causes and organizations, but the anniversary prompted us to create something different for our seventieth - something uplifting and powerful, something that positively impacts our neighborhoods.
Out of that goal came the Shine community development and beautification program. The object of the first-year program was to strengthen community alliances by enhancing and revitalizing neighborhoods.
The response was phenomenal. One hundred and seventy-eight (178) local nonprofits expressed interest, and 105 went through the full application process. An extensive screening process enabled SMUD to select 20 recipients for more than $400,000 in funding across its 900-square-mile service territory.
In considering a broad range of potential projects, SMUD applied greater weight to the following areas:
Neighborhood revitalization or clean-up; STEM education; Environmental, energy efficiency, energy conservation or greenhouse gas reduction; and General beautification.
2017 SMUD Annual Report I Built to last 13
\\ \\ I I pklKf.:(ft recipients
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if' California FAA Foundation Center for Land-Based Learning Common Ground Community Development Corporation Crocker Art Museum Del Paso Boulevard Partnership Fairytale Town Greater Broadway Partnership Health Education Council My Sister's House Rosemont Community Foundation Sacramento Native American Health Center Sacramento Neighborhood Housing Services, Inc.
Sacramento Parks Foundation Sierra Nevada Journeys Square Root Academy Stockton Boulevard Partnership Sunrise Little League Watt Avenue Partnership William Land Elementary - Parent Teacher Association Wind Youth Services Previous Shine pilot recipients:
Downtown Sacramento Partnership Mutual Assistance Network Wellspring Women's Center 14 Built to last 2017 SMUD Annual Report
New markets help relieve pressure on rates SMUD's decades-long promotion of energy efficiency means the average customer's usage is declining. To relieve upward pressure on rates while continuing to invest in grid infrastructure, SMUD took significant steps in 2017 toward developing new sources of revenue.
SMUD entered the CCA (Community Choice Aggregation) market by signing an agreement with the Valley Clean Energy, a Joint Powers Authority in neighboring Yolo County. Later in the year, SMUD negotiated a second CCA contract with East Bay Community Energy, which serves about 575,000 customers in Alameda County and 11 of its cities.
California law allows CCAs to supply electricity to customers within their borders. Unlike municipal utilities such as SMUD, CCAs don't own the transmission and distribution systems. (CCAs cannot form in SMUD's service territory since we're a publicly owned utility.)
The trend toward CCAs is driven by a number of factors, including desire for community control over energy supply decisions and a cleaner power mix.
SMUD's mission aligns with the CCA model of local control, renewable energy, greenhouse gas reduction, customer choice and price stability. The CCA partnerships aren't annexation efforts. SMUD is not expanding its service territory, only assisting the community alliances in meeting their energy goals.
For the Valley Clean Energy Alliance in Yolo County, SMUD will be providing technical and financial analysis; data management and call center services; wholesale energy services; and operational staff services. For East Bay Community Energy, SMUD will be providing data management and call center services. SMUD does not supply power from its own portfolio to serve CCA customers.
In addition to the CCA agreements, SMUD signed a multi-year partnership with The NEC Group and Space Time Insight to provide smart energy solutions to Japanese power companies and retail energy providers. The success of SMUD's SmartSacramento* project, coupled with our high level of customer satisfaction and innovative energy solutions, prompted NEC and Space Time to approach SMUD about forming a partnership.
Closer to home, SMUD created the SMUD Energy Store to give customers an opportunity to buy a variety of energy-efficient products, including smart thermostats, LED lighting, water-saving products and advanced power strips. The link is smudenergystore.com.
For years customers have been asking SMUD to recommend products that will help them save energy and money. Many items in SMUD Energy Store come w~h instant rebates, significantly lowering out-of-pocket costs for products such as NEST thermostats and Phillips LED bulbs.
In just three months, SMUD Energy Store exceeded
$1 million in sales (before rebates).
SMUD will be the first large California utility to make time-of-day rates standard for all residential customers beginning Jan. 1, 2019. The new rate is called residential Time-of-Day (5 to 8 p.m. Peak)
Rate, or TOD Rate.
Reasons for the switch include:
Time-of-day rates reflect the cost of service; Customers can manage their usage and have a financial incentive to shift energy use to lower-cost, off-peak hours; and TOD rates provide customers with a flexible design that allows them to better control their energy costs; and Reducing peak energy use benefits the community and environment by lessening SMUD's need to build new power plants and purchase power at peak market prices from plants that generally emit more greenhouse gases.
SMUD's commercial customers have been on TOD rates for many years.
With the TOD Rate, when customers use electricity is just as important as the amount they use. Customers pay different rates based on the time of day they use electricity. The time of highest price is 5 p.m. to 8 p.m. on weekdays. Most customers will see lower bills during the eight non-summer months (October through May) and higher bills during the summer months (June through September).
After being transitioned to the standard residential TOD Rate, customers have the choice of a Fixed Rate option.
Recognizing that this is a big change for customers, we developed a comprehensive outreach plan to educate customers about the reasons behind the switch and the ways in which they can better control their electricity bills. SMUD is also undertaking extensive social media and traditional media outreach efforts.
Helping those who need it most In conjunction with the move to Time-of-Day Rates, SMUD restructured its Energy Assistance Program Rate (EAPR) that makes electricity more affordable for qualified customers. Historically, EAPR eligibility has been based on income and the size of the discount was largest for customers who used the most energy.
The new EAPR rate, which begins going into effect in October 2018, is designed to help the customers who need it most. The program will serve the same approximate number of customers; however, those customers with the lowest household incomes, based on the federal poverty level (FPL), will receive the largest discounts. The discount will be lower for those customers in the higher range of the FPL.
Additionally, SMUD will invest more than $10 million over the next few years to provide energy efficiency measures for customers with the greatest needs. These improvements will make a lasting impact by improving the energy efficiency of local housing and lowering customers' energy bills.
SMUD has a partnership with GRID Alternatives North Valley to help customers in underserved neighborhoods save energy and money by making their homes more energy efficient and providing them with free solar electric systems.
In early 2018, SMUD and GRID Alternatives completed their 100th solar installation.
2017 SMUD Annual Report Built to last 19
Rehabilitating a Sacramento landmark On May 23, 1960, Dwight Eisenhower was in the White House. Babe Ruth still held the single-season home run record. The Soviets were winning the Space Race.
That very day in 1960, in one small step for mankind but a giant leap for a teenaged utility, the first customer passed through the doors of the new SMUD Headquarters on S Street.
"The striking new electric service center has beauty and features unequaled in other public buildings in the Sacramento region," reporter Tom Arden wrote on the front page of The Sacramento Bee.
Its visibility from Highway 50, accentuated by the striking "Water City" mural created by artist Wayne Thiebaud, made the SMUD building a Sacramento landmark. In 2010, the building was listed in the National Register of Historic Places as an excellent example of Modern International Design.
2017 SMUD Annual Report Built to last 21
To bring the aging building up to modern standards without sacrificing its historical integrity, the SMUD Board approved in 2014 a renovation project that includes safety, security, environmental and structural upgrades.
Following demolition and abatement work in 2017, construction began in early 2018 under a collaborative design-assist process with Roebbelen Contracting and the architectural firm of Dreyfuss & Blackford.
Assisting on the rehabilitation is Alan Dreyfuss, a preservationist architect and son of the late Albert Dreyfuss. Albert Dreyfuss and Leonard Blackford founded the Sacramento firm that designed the SMUD Headquarters in the late 1950s.
"It's one of the best modernist buildings, certainly in California and maybe in the nation," said Alan Dreyfuss, who admittedly didn't pay much attention as a young boy when his father and Leonard Blackford were working on the project. "As a preservationist architect, it's a thrill for me to see the original drawings. The 22 Built to last I 2017 SMUD Annual Report louvers and overhangs work so well and are such a beautiful part of the building. The original design was so thoughtful."
The original design incorporated the characteristic features of classic Miessian Modernist design, including steel frame construction and glass curtain walls. Vertical louvers on the south side of the building could be set level in the summer and tilted 45 degrees in the winter
- an innovative means of temperature and glare control.
The remodeled Headquarters is scheduled to open in 2019. The renovation is a timely opportunity for SMUD to create an environment that fosters innovation and collaboration with an emphasis on flexibility, open work spaces and increased mobility with full ADA compliance.
As for the beloved "Water City" tile mosaic, which is currently covered by plywood to protect it from damage, don't worry. It's being cleaned and restored and will adorn the southern, western and eastern sides of the building for decades to come.
Going the extra mile (3,500, in fact)
With the new year approaching and hundreds of thousands of Puerto Ricans still without electricity four months after Hurricane Maria, SMUD reached across the continent to extend a helping hand.
Dozens of SMUD employees worked quickly to organize our portion of the mutual assistance effort. Two weeks into 2018, two SMUD line crews and 15 trucks were in the Carolina region of Puerto Rico, working to rebuild the Caribbean island's electrical infrastructure damaged by the Category 5 hurricane.
For 60 days, a total of four six-man SMUD crews, assisted by two supervisors, a vehicle mechanic and support staff, battled narrow roads, mountainous terrain, thick vegetation and the occasional tarantula to restore power to approximately 2,000 Puerto Rican residents.
"We had to chop our way into a lot of areas," said Mike Bazil, a SMUD line supervisor who spent more than a month on the ground in Puerto Rico. "Poles and wires were down everywhere. A lot of poles had to be hand set.
It was so gratifying to be able to help them out. "
2017 SMUD Annual Report I Built to last 25
One resident expressed his gratitude in a letter to the SMUD workers:
Over 5 months my family and I didn't have power in our house. Now, thanks to you guys, I can see light... God bless all of you in a huge way. You guys deserve the best. We are so happy!!!
Your sacrifice to my island doesn't have a name.
Puerto Rico needed you and you were there. I admire all of you.
For the SMUD workers, the experience was unlike any other in their careers.
"It's something that every lineman will have in his memory bank forever," SMUD line manager Todd Prangley said.
Mike McGee, a journey lineworker, said the experience made the weeks away from his family worthwhile.
"The people had really been put through the ringer,"
McGee said. "I would go again in a heartbeat. We gave them their life back, in a way."
The Puerto Rico Electric Power Authority (PREPA) sent the initial request for mutual aid to the American Public Power Association and the Edison 26 Built to last 2017 SMUD Annual Report Electric Institute, an industry group for investor owned utilities. SMUD signed a memorandum of understanding with PREPA. The labor and material costs of SMUD's effort will be reimbursed by the Federal Emergency Management Agency, or FEMA.
Our support for the Puerto Rican restoration did not compromise service to SMUD's customers.
When utilities are overwhelmed by natural disasters such as wildfires and winter storms, it's not unusual for SMUD and other utilities to provide mutual assistance.
For instance, around the same time Hurricane Maria ravaged Puerto Rico, SMUD crews assisted PG&E in restoring power lost due to the wine country fires. But traveling more than 3,500 miles to assist in a two-month restoration effort represented a first for SMUD.
McGee recalled an incident that capsulized the experience for him and his co-workers. As they were setting up one morning on top of a remote hillside, McGee noticed two Puerto Rican women arguing in the street. He thought they were arguing about who should get their power restored first.
"They were arguing about who was going to serve us lunch," McGee said. "It's hard not to get choked up, thinking about how grateful they were to us for doing something we do every day."
C
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<. 1 Arnu f"..e-ro 5 YEAR
SUMMARY
(Unaudited)
Operating Statistics (i) 2017 2016 2015 2014 2013 Customer contracts at year-end 628.952 626.460 621.990 618.895 615.047 KWH Sales (thoosandsl Sales to customers -
Res1denual 4.957.24{)
4.670.304 4.654,571 4.639.175 4.651,219 Commercial. industrial & other 5.819.110 5.750,831 5.819.228 5,858,785 5,795.408 Sub1otal 10.776.350 10.421.135 10,473.799 10.497.960 10.446.627 Sales of surplus power 1.788.719 1.826.687 1.677.566 1,906.263 2.072.396 Total 12.565.069 12.247.822 12.151.365 12.404.223 12.519.023 Revenues (thousands of dollars)
SaJes to customers -
Res1denual 689.806 645.430 s 621.830 594.644 572,701 Commercial. mdustriaJ & other 771.763 743.377 733,778 711.208 696,439 Sublotal 1.461.569 1,388,807 1,355.608 1,305,852 1.269.140 Sales of surplus power 59.787 62.382 55.189 84,158 78.316 Sales of surplus gas 84.751 25.708 26,863 82.104 52.814 Total(ii) 1.6(16.107 1,476,897 1,437,660 1.472.114 s 1.400.270 Average kWh sales per residential customer 8.%9 8,495 8.522 8.545 8.634 A\\"erage revenue per residential kWh sold (cenlS) 14 05 13.90 13 48 12.92 12.47 Po" er supply (thousands of kWh)
Hydroelectric 2.462.(M12 1.904.442 497.766 765.190 1,018.659 Cogeneration
-t612.178 5.816.886 6.146.848 5.919.981 5.880.239 Windpo"er 2(Ml.41 l 212.466 212.782 211.359 237.410 Photovoltaic 269 292 102 5
51 Purchases 5.757.332 4.798.517 5.746.573 5.963.656 5.846,971 Peak demand - MW 3.157 2.972 2.956 3.003 3,014 Employees at year-end 2.293 2.219 2.121 2.071 2.073 Financial Statistics (thousands of dollars)
Operating re\\'enues 1.559.336 1.494.833
$1.478.748 1.529.344 1.428.395 Operating expenses -
Purchased and interchanged power 283.693 243.031 288,835 316.082 273.596 Operation and maintenance 848.433 800,556 785,707 813.581 794,728 Depreciation and amoniz.ation 194.925 184,043 188.928 184,810 180,718 Regulatory amounts collected in rates 12.253 12.127 7.299 5.401 6,140 Total operating expenses 1.339.304 1.239.757 1.270.769 1,319,874 1.255. 182 Operating income 220.1132 255.076 207,979 209.470 173.213 Other income 58.573 43.077 35.040 79.125 22.441 lncome before interest charges 278.(,05 298.153 243.019 288.595 195.654 interest charges 97.251 102.895 112.942 121.931 125.956 Change in net position 181.354 s 195.258 s 130.077 166.664 69.698 Funds a,*ailable for Debt Sen*ice 534.151 s
507.318 s 452.029 476.757 431,100 Debt Semce (iii) 235.076 s 234.300 s 243.341 248.868 230.311 Fixed Charge Coverage Ratio 2 27 2.17 1.86 1.92 1.87 Electric utility plant - net 3.353.775 s 3.344.860 3.323.900 3.331.965 3.322.977 Capitalization Long-tenn debt 2.341.775 s 2.504,650 s 2.674. 120 s 2,881.701 s
3.075.802 Net Position 1.515.277 s 1,333.923 s 1,138,665 1,013.369 846.705 i Financial infonnation is consolidated.
ii Prior to the nc1 deferral/transfer of rc,*enues to/from the Rate Stabilization Fund and nc1 deJerraUrccognition of Public Good..
Senate 81111. and.Assembly Bill 32 rc,*cnucs hi Includes SMUD and compone.. unil bond debt service (cxclucbng Northern California Gas Aulhority No. I). SMUD's ponion ofTran.smissionAgcocy of orthcm California's debt service. and expenses related to intercsl rate swaps and commercial paper.
2017 $MUD Annual Report Built to last 29
Sacramento Municipal Utility District I 2017 Annual Report TABLE OF CONTENTS Report of Independent Auditors Management's Discussion and Analysis (Unaudited)
Consolidated Financial Statements Notes to Consolidated Financial Statements Note 1. Organization Note 2. Summary of Significant Accounting Policies Note 3. Accounting Change Note 4. Utility Plant Note 5. Investment in Joint Powers Authority Note 6. Component Units Note 7. Cash, Cash Equivalents, and Investments Note 8. Regulatory Deferrals Note 9. Derivative Financial Instruments Note 10. Long-term Debt Note 11. Commercial Paper Notes Note 12. Fair Value Measurement Note 13. Rancho Seco Decommissioning Liability Note 14. Pension Plans Note 15. Other Postemployment Benefits Note 16. Insurance Programs and Claims Note 17. Commitments Note 18. Claims and Contingencies Required Supplementary Information (Unaudited) 30 Builttolast I 2017SMUDAnnualReport 31 33 44 49 49 60 60 61 63 67 69 71 76 82 82 85 87 93 96 97 99 101
~AKER TILLY Sacramento Municipal Utility District 12017 Annual Report INDEPENDENT AUDITORS' REPORT To the Board of Directors of Sacramento Municipal Utility District, Sacramento, California Report on the Financial Statements We have audited the accompanying consolidated financial statements of Sacramento Municipal Utility District and its blended component units, which comprise the Consolidated Statements of Net Position as of December 31,
2017 and 2016, and the related Consolidated Statements of Revenues, Expenses and Changes in Net Position, and Consolidated Statements of Cash Flows for the years then ended and the related notes to the financial statements.
Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America~ this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors' Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Gm,ernmem Auditing Standarris issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors' judgment. including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control over financial reporting relevant to the Sacramento Municipal Utility District's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Sacramento Municipal Utility District's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion Continued 2017 SMUD Annual Report I Built to last 31
INDEPENDENT AUDITORS' REPORT continued Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sacramento Municipal Utility District and its blended component units at December 31, 2017 and 20 16, and the changes in their financial position and their cash flows for the years then ended, in accordance with accounting principles generally accepted in the United States of America.
Other Matter Accounting principles generally accepted in the United States of America require that the Management's Discussion and Analysis and Schedule of Funding Progress infonnation as listed in the table of contents be presented to supplement the financial statements. Such information, although not a part of the consolidated financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part offinancia1 reporting for placing the consolidated financia1 statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the infonnation and comparing the infonnation for consistency with management's responses to our inquiries, the consolidated financia1 statements, and other knowledge we obtained during our audit of the consolidated financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.
Other Reporting Required by Government Auditing Standards ln accordance with Go1*emment Auditing S1andards, we will also issue a report on our consideration of Sacramento Municipal Utility District's internal control over financial reporting and on our tests of its compliance with certain provisions oflaws, regulations, contracts, grant agreements, and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Sacramento Municipal Utility District's internal control over financial reporting and compliance.
Madison, Wisconsin February 16, 2018 32 Built to last I 2017 SMUD Annual Report Sa *r* mento.M.ltJ,.. pa ft ;.,.
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MANAGEMENT'S DISCUSSION AND ANALYSIS (Unaudited)
Using this Financial Report This annual financial repon for Sacramento Municipal Utility District (SMUD) consists of management's discussion and analysis and the consolidated financial statements, including notes to the financial statements. The Consolidated Financial Statements consist of the Statements of Net Position, the Statements of Revenue, Expenses and Changes in Net Position and the Statements of Cash Flows.
SMUD maintains its accounting records in accordance with Generally Accepted Accounting Principles for proprietary funds as prescribed by the Governmental Accounting Standards Board (GASB). SMUD'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 accounting for contributions of utility property in aid of construction.
Overview of the Financial Statements The fol lowing discussion and analysis of the financial performance of SMUD provides an overview of the financial activities for the years ended December 31, 2017 and 2016. This discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes, which follow this section.
The Consolidated Statements of Net Position 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 Position report all of SMUD's revenues and expenses fo r the periods shown.
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 debt service and capital additions.
The Notes to Consolidated Financial Statements provide additional detailed information to support the fi nancial statements.
Nature of Operations Under provisions of California's Municipal Uti lity District Act, the citizens of Sacramento voted in 1923 to form their own electric utility - SMUD. The independently run community-owned utility began operations on December 3 I, 1946 and is not subject to regulation or oversight by the California Public Utilities Commission. It is now the sixth largest community-owned electric utility in the nation.
Governed by an elected board of directors (Board), SMUD has the rights and powers to fix rates and charges for commodities and services it furnishes, incur indebtedness, and issue bonds or other obligations. SMUD is responsible for the acquisition, generation, transmission and distribution of electric power to its service area with a population of approximately 1.5 mill ion - most of Sacramento County and small adjoining portions of Placer and Yolo Counties. Its purpose is to enhance the quality of life for its customers and community through creative energy solutions. The Board has independent authority to set SMUD's rates and charges. Changes in rates require a public hearing and formal action by the Board. In July 2015, the Board approved a 2.5 percent rate increase for both 2016 and 2017 to allow for additional investments in technology and infrastructure and declared its intent to 2017 SMUD Annual Report I Built to last 33
Sacramento Municipal Utility District 2017 Annual Report MANAGEMENT'S DISCUSSION AND ANALYSIS (Unaudited) make time-of-day (TOD) rates the default rate for residential customers in 2018. In July 2017, the Board approved a I percent rate increase in both 2018 and 2019 for commercial customers and a 1.5 percent rate increase in 2018 for residential customers and approved the TOD rate as the standard rate for residential customers in 2019. TOD rates better align with the cost of providing electricity, send more accurate price signals to customers, and give customers the opportunity to better manage their electricity bills by shifting usage to lower-cost time periods. Even with these increases, SMUD's rates continue to remain amongst the lowest in the state. In 2017, the average system rate was 32 percent below the average rate of the nearest investor owned utility SMUO's vision is to be the trusted partner with its customers and the community, providing innovative solutions to ensure energy affordability and reliability, improve the environment, reduce the region's carbon footprint, and enhance the vitality of the community. SMUD's business strategy focuses on serving its customers in a progressive, forward looking manner, addressing current regulatory and legislative issues and potential competitive forces. This includes ensuring financial stability by establishing rates that provide acceptable cash coverage of all fixed charges on a consolidated basis, taking into consideration the impact of capital expenditures and other factors on cash flow.
Financial & Operational Highlights In 2017, SMUD focused on meeting customers' expectations for reliable, affordable and environmentally responsible energy, while adapting to a rapidly changing industry, technology advances and growing customer expectations. SMUD began implementing its 5-Year Strategic plan with an increased focus on operational excellence throughout the organization and embarked on exploring new business opportunities that open the door to new markets and revenue sources, such as providing Community Choice Aggregator services and launching the SMUD Energy Store. It experienced the strongest bond ratings in more than 30 years by having its credit ratings upgraded to AA by two of the three major rating agencies, making SMUD one of the highest credit rated publicly-owned utilities in California. In addition to exceeding the fixed debt service coverage goal, SMUD refinanced a portion of variable rate bonds with fixed rate bonds in order to reduce risk and provide additional options and savings opportunities in the future.
SMUD was recognized by its residential customers as the top California utility by J.D. Power and was ranked highest in both California and the West region for commercial customers. SMUD was also recognized nationally as the top-ranked electric utility for brand trust in the "2017 Utility Most Trusted Brands & Customer Engagement: Residential Customers" in the Cogent Reports study by Market Strategies International. SMUD celebrated 70 years of community service through its <<70 Years Bright" campaign and launched the Shine community development awards program, awarding grants totaling $400,000 to 23 organizations across the region. SMUD is on target to exceed the Board's 2020 carbon reduction goals bringing its energy portfolio to more than 50% carbon free. The Greenergy program celebrated 20 years of bringing renewable power to customers, providing 750 GWh ofrenewable energy to over 74,000 customers. In addition it continued a 27-year partnership with the Sacramento Tree Foundation where almost 600,000 trees have been planted in the community - reducing carbon by nearly 600 million pounds. The Commercial SolarShares program exceeded its goals with the execution of nearly I 00 MW of 20-year SolarShare contracts with some ofSMUD's largest commercial customers, including both the State of California and the City of Sacramento.
SMUD also played a major role in supporting the "Green City" designation for Sacramento which will result in the investment of $44.0 million by Volkswagen over a 30 month period to support the expansion of electric vehicles Through its economic development program, SMUD played a key role in the attraction, retention and expansion of several companies in its service territory which led to the creation of over 700 jobs.
34 Built to last J 2017 SMUD Annual Report Sai:::ramento Mut ic p,1l Ut*J;ty District 2017 Ar1nua1 Report MANAGEMENT'S DISCUSSION AND ANALYSIS (Unaudited)
In July 2014, FERC issued a new fifty year license for the Upper American River Project (UARP) which consists of three relatively large storage reservoirs and eight powerhouses containing eleven turbines. The UARP is one of SMUD's lowest cost power sources. In addition to providing clean hydroelectric power and operational flexibility, it provides habitat for fish and wildlife and a variety of recreational opportunities, including camping, fishing, boating, hiking, horseback riding, mountain biking, and cross-country skiing. The combined capacity of the UARP is approximately 673 MW and represents about 15 percent of SMUD's average annual retail energy requirements.
SMUD's other power generation facilities include a 3 MW of solar photovoltaic installations, a 102 MW Solano Wind Project, and five local gas-fired power plants with total capacity of approximately 1,017 MW. In addition, SMUD has entered into several power purchase agreements to help meet its remaining power requirements.
As part of the hydro relicensing process, SMUD entered into long-term contracts to provide certain services to four different government agencies - U.S. Department of Interior Bureau of Land Management, U.S. Department of Agriculture Forest Service, El Dorado County, and the California Department of Parks and Recreation. At December 31, 2017 and 2016, the liability for these contract payments was $57.8 million.
In 2017, California's governor issued an order to officially end the then-current drought state of emergency for most parts of the state. SMUD's total reservoir storage in the UARP reached 111 percent of the historical average for the water year period ended October I, 2017. Although reservoir levels in the UARP have increased since 2015, there remains the potential for wide swings in precipitation from year to year and dry conditions could return again in any year. A Hydro Rate Stabilization Fund (HRSF) was established to help absorb higher energy costs when hydroelectric production is down and to serve as a buffer against unexpected financial developments. In April 2017 and 2016, $52.4 million and $10.0 million were transferred into the HRSF, respectively, due to above average precipitation. The balance in the HRSF at December 31, 2017 and 20 16 was $62.4 million and $ I 0.0 million, respectively, and is an indicator of the significant impact of the rainfall and snowfall in 2017 and 2016.
SMUD also has a long-term agreement with the Western Area Power Administration (WAPA) to purchase power generated by the Central Valley Project, a series of federal hydroelectric facilities operated by the U.S. Bureau of Reclamation. SMUD uses a Rate Stabilization Fund (RSF) to offset any excess or deficits in WAPA energy deliveries. In 2017 due to excess deliveries by WAPA, $12.3 million was transferred to the RSF. In 2016, WAPA's deliveries fell short which resulted in a $5.1 million transfer from the RSF. At December 31, 2017 and 2016, the balance of the RSF was $37.5 million and $25.2 million, respectively.
Decommissioning SMUD has made significant progress toward completing the Decommissioning Plan for its Rancho Seco nuclear facility, which was shut down in 1989. The plan consists of two phases that allow SMUD to terminate its possession-only license. Phase I of the decommissioning was completed at the end of 2008. Phase II consists of a storage period for the Class Band Class C radioactive waste overseen by the existing facility staff, followed by shipment of the waste for disposal, and then complete termination of the possession-only license. SMUD also established and funded an external decommissioning trust fund as part of its assurance to the Nuclear Regulatory Commission (NRC) to pay for the cost of decommissioning. Shipment of the previously stored Class B and Class C radioactive waste was completed in November 2014 to a low-level radioactive waste facility located in Andrews, Texas. The remaining Phase II decommissioning activities required for tennination of the possession-only license commenced in 2015. In September 2017, SMUD formally requested the tennination of the possession-only license and expects termination of 2017 SMUD Annual Report I Built to last 35
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MANAGEMENT'S DISCUSSION AND ANALYSIS (Unaudited) the possession-only license to be completed in early 2018. The Accrued Decommissioning balance in the Consolidated Statements of Net Position includes $149.8 million and $148.0 million for costs related to Rancho Seco as of December 31, 2017 and 2016, respectively.
As part of the Decommissioning Plan, the nuclear fuel and Greater Than Class C (GTCC) radioacuve waste is being stored in a dry storage facility constructed by SMUD and licensed separately by the NRC. The U.S. Department of Energy (DOE), under the Nuclear Waste Policy Act of 1982, was responsible for permanent disposal of used nuclear fuel and GTCC radioactive waste and SMUD contracted with the DOE for removal and disposal of that waste. The DOE has yet to fulfill its contractual obligation to provide a pennanent waste disposal site. SMUD has filed a senes of successful lawsuits against the federaJ government for recovery of the past spent fuel costs, with recoveries to date in excess of $104.0 m1llion, including $28.9 million received in 2017. SMUD will continue to pursue cost recovery claims until the DOE fulfills its obligation.
Employee Relations and Benefits In 2017, SMUD was successful in negotiating a new four year memorandum of understanding (MOU) with both of its collective bargaining units, the IntemationaJ Brotherhood of Electrical Workers Local Union 1245 and the Organization of SMUD Employees, effective January 2018 SMUD participates in the California Public Employees' Retirement System (PERS), an agent multiple-employer public employee defined benefit pension plan. In 2015, SMUD implemented GASB Statement of Governmental Accounting Standards (SGAS) No. 68, "Accounting and Financial Reporting/or Pensions -An Amendment of GASB Statement No. 27," and in 2017, SGAS
- o. 73, "Accounting and Financial Reporting/or Pensions and Related Assets that are not within the Scope of GASB Stateme.nt 68, and Amendments to Certain Provll*ions of GASB Statements 67 and 68". The primary objective of these standards is to improve accounting and financiaJ reporting by state and local governments for pensions. SMUD is required to report the Net Pension Liability (NPL), which is the difference between the actuariaJ present vaJue of projected pension benefit payments attributable to employees' past service and the pension plan's fiduciary net position, in its Consolidated Statements of Net Position. At December 31, 2017 and 2016, the NPL was $565.8 million and $499.2 million, respectively. SMUD elected to follow accounting for regulated operations under GASB SGAS No. 62, "Codification of Accounting and Financial Reporting Guidance Contained in Pre-No1't!mher 30, /989 FASB and A/CPA Pronouncements," (GASB No. 62) and recorded a regulatory asset as of December 31, 2014, m the amount of $425.7 million to account for the net effect of required prior period adjustments to recognize the net pension liability. Amortiz.ation of the regulatory asset will begin in 2018 over a period of25 years.
SMUD provides postemployment healthcare benefits (OPEB) to all employees who retire from SMUD and the,r dependents, in accordance with SMUD policy and MOUs. These benefits are funded through the PERS California Employer's Retiree Benefit Trust, an agent multiple-employer plan. SMUD opted to make additional $84.7 million and
$17.9 million contributions to the trust in 2017 and 2016, respectively. At June 30, 2017, the plan was 77.2 percent funded and the balance of the OPEB asset at December 31, 2017 and 2016 was $229.2 million and SI 27 9 million, respectively.
Developments in the Energy Market New developments in the energy market at both the federaJ and state level kept SMUD on high alert as it continued to monitor and address the potentia1 impacts on the organiz.ation. Legislation at the federal level include policies on cyber security, regulations related to regional transmission planning. the onh American Electric Reliability Corporation reliability standards, anti-market manipulation rules, and greenhouse gas emissions (GHG) Legislauon at the state 36 Built to last I 2017 SMUO Annual Report MANAGEMENT'S DISCUSSION AND ANALYSIS (Unaudited) level includes bills that provide for GHG standards and greater investment in energy efficient and environmenta11y friendly generation alternatives through more stringent renewable portfolio standards Additionally, ongoing regulatory proceedings address water flow and quality issues related to Sacramento-San Joaquin River Delta.
Significant Accounting Policies In accordance with GASB No. 62, the Board has taken regulatory actions for ratemaking that result in the deferral of expense and revenue recognition. These actions result in regulatory assets and liabilities. SMUD has regulatory assets that cover costs related to decommissioning. derivative financia1 instruments, debt issuance costs, and pension costs. As of December 31, 2017 and 2016, total regulatory assets were $594.4 and $598 4, respectively. SMUD also has regulatory credns that cover costs related to contributions maid of construction, the RSF and HRSF, Energy Assistance Program Rate (EAPR) reserves, SB-I, grant revenues, and Transm1ss1on Agency of Northern California operauons costs. As of December 31, 2017 and 2016, total regulatory credits were $445.7 million and $370 2 m1lhon, respectively.
FINANCIAL POSITION Condensed Consolidated Statements of Net Position Assets Electric Utility Plant - net Restricted and Designated Assets Current Assets Noncurrent Assets Total Assets Deferred Outflows of Resources Total Assets and Deferred Outflows of Resources Liabilities Long-Term Debt
- net Current Liabilities Noncurrent Liabilities Total Liabilities Deferred Inflows of Resources Net Position et Investment in Capital Assets Restricted Unrestricted Tota1 Liabilities, Deferred Inflows of Resources, and Net Position 2017 3,354 121 1,200 1,114 5,789 280 6,069 2,342 607 895 3,844 710 980 58 477 6,069 December 31, 2016 (millions or dollars) 3,345 57 1,084
~
5,674 279 S
5,953 2,504 630 840 3,974 645 816 77 441 2015 3,324 47 1,021 1,236 5,628 263 5,891 2,674 650 766 4,090 662 658 72 409 5,891 2017 SMUD Annual Report Built to last 37
Sacn1mento ~1unicip* u Distcict 2l 17 Ar Repor MANAGEMENT'S DISCUSSION AND ANALYSIS (Unaudrted)
ASSETS AND DEFERRED OUTFLOWS OF RESOURCES Electric Utility Plant - net 2017 compared to 2016 As of December 31, 2017, SMUD has invested approximately $3,354.0 million in electric utility plant assets and construction work in progress (CWIP) net of accwnulated depreciation. Electric Utility Plant - net makes up about 55 percent ofSMUD's Total Assets and Deferred Outflows of Resources, which is similar to 2016. In 2017, SMUD capitalized approximately $147.2 million of additions to electric utility plant in the Consolidated Statements of Net Position. The additions were primarily due to distribution line work, major overhauls in the Joint Power Authorities (JPAs),
investments in software and hardware and purchases related to the replacement of bulk substations. These additions were offset by the retirement of communication equipment, distribution assets, and software and hardware equipment.
2016 compared to 2015 As of December 31, 2016, SMUD has invested approximately $3,345.0 million in electric utility plant assets and construction work in progress (CWIP) net of accumulated depreciation. Electric Utility Plant. net makes up about 56 percent of SMUD's Total Assets and Deferred Outflows of Resources, which is similar to 2015. In 2016, SMUD capitalized approximately $173.1 million of additions to electric utility plant in the Consolidated Statements of Net Position. The additions were primarily due to distribution line work, major overhauls in the JPAs and purchases related to the replacement of bulk substations. These additions were offset by the retirement of communication equipment, fleet assets, and hardware equipment.
The following chans show the breakdown of Electric Utility Plant - net by major plant category -Generation (Gen),
Transmission (Trans), Distribution (Distr), and Other:
December 31, 2017 December 31, 2016 Restricted and Designated Assets December 31, 2015 Gen Trans Distr Othu 2017 compared to 2016 SMUD's restricted and designated assets are comprised of debt service reserves, nuclear decommissioning trust funds, rate stabilization reserves, and other third party agreements or Board actions, less the current portion. These assets increased $64.4 million during 2017. The increase was due to a net transfer of
$64.7 million to the RSF (including the HRSF) as a result of higher precipitation and higher energy deliveries from WAPA, and a decrease of$22.0 million in current portion, offset by a decrease of$22.2 million in the revenue bond and debt service reserves.
2016 compared to 2015 SMUD's restricted and designated assets are comprised of debt service reserves, nuclear decommissioning trust funds, rate stabilization reserves, and other third party agreements or Board actions, less the current portion. These assets increased $9.3 million during 2016. The increase was due to a net transfer of $4.9 million to the RSF (including the HRSF) as a result of higher precipitation and lower energy deliveries from WAPA, an increase of$2.5 million in both the revenue bond and debt service reserves and other funds, and a decrease of $1.9 million in current portion.
38 Built to last ! 2017 SMUD Annual Report MANAGEMENT'S DISCUSSION AND ANALYSIS (Unaudrted)
Current Assets 2017 compared to 2016 Total current assets increased $115.6 million in 2017. Prepayments and other increased by $1 23.0 million. SMUD submitted its notice of intent to exercise the option to buy back the Solano Wind plant and recorded the prepayment for purchased power as current Unrestricted cash and cash equivalents and regulatory costs to be recovered within one year increased $27.0 million. These increases were offset by a tota1 decrease of restricted and designated cash and cash equivalents and restricted and designated investments of $35.1 million.
2016 compared to 2015 Current assets increased $63.7 million in 2016. The unrestricted investments increased by $101.7 million, along with a total increase of$6.9 million in receivables - net and prepaid gas to be delivered within one year. This increase was offset by total decreases of $23.2 million in unrestricted cash and cash equivaJents, regulatory costs to be recovered within one year, inventories, and prepayments and other, along with a decrease of$20.5 million in credit support collateral deposits.
Noncurrent Assets 2017 compared to 2016 Total noncurrent assets decreased $73.7 million. Prepaid power and capacity decreased by $128.6 million partially due to the prepayment for purchased power for Solano being recorded as current (see Current Assets). In addition, prepaid gas and regulatory costs for future recovery decreased by $47.3 million. These decreases were offset by an increase in prepayments and other of $1 03.0 million primarily due to the increase in the OPEB asset as a result of additional contributions.
2016 compared to 2015 Total noncurrent assets decreased $47.4 million. There were reductions in regulatory costs for future recovery, prepaid gas, prepaid power and capacity, energy efficiency loans - net and credit support collateral deposits of$80.6 million offset by increases in due from affiliated entity and prepayments and other of
$34.3 million Deferred Outflows of Resources 2017 compared to 2016 Total deferred outflows of resources for 20 17 was comparable to 2016 due to a $26.8 million increase in deferred pension outflows, offset by a total decrease of $26.8 million in the value of hedging derivative instruments and amortization of bond losses.
2016 compared to 2015 Total deferred outflows of resources increased $15.9 million due to a total of $90.6 million increase in deferred pension outflows and amortization of bond losses, offset by a decrease of $74.7 mi llion in the value of hedging derivative instruments.
2017 SMUD Annual Report J Built to last 39
Sacr'l.n ento MUI rlpol Uti.itY' D strict 2 17 Arir 1, t<::*'P 1r1 MANAGEMENT'S DISCUSSION AND ANALYSIS (Unaudited)
LIABILITIES AND DEFERRED INFLOWS OF RESOURCES Long-Term Debt - net 2017 compared to 2016 In December 2017, SMUD issued $202.5 million of2017 Series E Electric Revenue Refunding Bonds. The purpose of this transacuon was to refund variable rate debt with fixed rate debt to reduce the risk of increased interest rates. Proceeds from the 2017 Series Bonds, in addition to $13.0 million of funds on hand, were used to def ease $26.1 million of a por11on of the Series 2016 bonds, $26.1 million of a por11on of the Series 2016 0 bonds, $120.0 million of all of the outstanding 2016 Series P bonds, and $77.9 million of all of the outstanding Series 2016 Q bonds. A total of $250.1 million bonds were defeased through a legal defeasance, and accordingly, the liability for the defeased bonds has been removed from long-term debt - net in the Consolidated Statements of Net Position. The refunding resulted in the recognition of a deferred accounting loss of $5.5 million, which is being amortized over the life of the refunding issue. Based on an assumed LIBOR rate of I. 7 percent for the life of the debt, the 2017 refunding increased future aggregate debt service payments by $0.6 million and resulted in a total economic loss of$I.4 million, which is the difference between the present value of the old and new debt service payments.
2016 compared to 2015 In June 2016, SMUD issued $149 9 million of2016 Series D Electric Revenue Refunding Bonds. Proceeds from the 2016 Series Bonds were used to refund $125.4 million of the outstanding 2008 Series U Bonds, and $43.6 million ofoutstanding 2011 Series X Bonds, through a legal defeasance, and accordingly, the liability for the def eased bonds has been removed from long-term debt - net in the Consolidated Statements of Net Position. The refunding resulted in the recognition of a deferred accounting loss of$ I 2.6 million, which is being amortized over the life of the refunding issue. The 2016 refunding reduced future aggregate debt service payments by $27.2 million and resulted in a total economic gain of $23.4 million, which is the difference between the present value of the old and new debt service payments.
In October and November of 2016, SMUD completed transactions to convert all of the outstanding 2008 Series J, 2008 Series K, 2012 Series L, and 2012 Series M Bonds to direct placements, totaling $341.9 million (see Note I 0). As part of each transaction, new bonds were issued to def ease the old bonds, and as a result, the reimbursement agreements with Bank of America, State Street, and US Bank were tenninated. The scheduled principal payments remain unchanged unless the bonds aren't successfully remarketed at the end of the term. Accordingly, SMUD has recorded such bonds as long-tenn debt - net, less amounts due within one year in the Consolidated Statements of Net Position.
o additional deferred gain or loss or economic gain resulted from these transactions.
40 Built to last I 2017 SMUD Annual Report
-r 1ento t,1u 1c L
Rt MANAGEMENT'S DISCUSSION AND ANALYSIS (Unaudited)
The following table shows SMUD's future debt service requirements through 2022 as of December 31, 2017:
Debt Service Requirements JOO -----------
I 200 i 150
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~ 100 -11a--1* -
- 1---1-2018 2019 2020 2021 2022 lnt*nt Princ:i.,.l As of December 31, 2017, SMUD's bonds had an underlying rating of"AA" from Standard & Poor's, "AA" from Fitch, and "Aa3" from Moody's. Some ofSMUD's bonds are insured and are rated by the rating agencies at the higher of the insurer's rating or SMUD's underlying rating.
Current Liabilit ies 2017 compared to 2016 Total current liabilities decreased $22.4 million during 2017. The decrease was mainly due to decreases in long-tenn debt due within one year, interest payable and investment and hedging derivative instruments maturing within one year of $35.2 million, offset by an increase in accounts payable of $11.2 million.
2016 compared to 2015 Total current liab,hties decreased $19.8 million dunng 2016 The decrease was mainly due to decreases in investment and hedging derivative instruments matunng within one year of $43.0 million, offset by increases in long-term debt due within one year and customer deposits and other totaling $24.1 million.
Noncurrent Liabilities 2017 compared to 2016 Total noncurrent liabilities increased $54.0 million during 2017. The increase was mainly due to a $66.6 million increase in the net pension liability, offset by a total decrease of$16.5 million in investment and hedging derivative instruments 2016 compared to 2015 Total noncurrent liabilities increased $74.3 million during 2016. The increase was mainly due to a $117.9 million increase in the net pension liability, offset by a $47.5 million decrease in investment and hedging denvative instruments Deferred Inflows of Resources 2017 compared to 2016 Total deferred inflows of resources increased $65.1 million. Regulatory credits increased $75.4 million due to a total of $64.7 million transfer to the rate stab1lizat1on funds as a result of higher precipitation and higher energy del1venes from WAPA and a $10.1 increase of SB-I. This increase was offset by a reduction of $10.9 million for Solano Phase 3 wind facilities.
2016 compared to 2015 Total deferred inflows of resources decreased $17.9 million due to a $22.4 million reduction in deferred pension inflows and $10.6 million for Solano Phase 3 wind facilities. These reductions were offset by a $16.4 million increase in regulatory credits due to a $4.9 million net transfer to the rate stabilization funds as a result of higher precipitation and lower energy deliveries from WAPA, and a $10.0 million reserve for future expenditures for energy efficiency programs for EAPR customers.
2017 SMUD Annual Report I Built to last 41
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~t: r or MANAGEMENT'S DISCUSSION AND ANALYSIS (Unaud ited)
RESULTS OF OPERATIONS Condensed Consolidated Statements of Revenues, Expenses, and Changes in Net Position December 31, 2017 2016 2015 (millions of dollars)
Operating revenues 1,559 1,495 1,479 Operating expenses (1,339)
(1,240)
(1,271)
Operating income 220 255 208 Other revenues 58 43 35 Interest charges (97)
(103)
(113)
Change in net position 181 195 130 Net position - beginning of year 1,334 1,139 1,009 Net position - end of year 1,515 1,334 1,139 Operating Revenues 20 17 compared to 2016 Total operating revenues increased $64.5 million in 2017. An increase of$69.3 million from retail sales includes the 2.5 percent rate increase that went into effect January I, 2017. As of December 31.
2017, the number of customers increased to 628,952 at a slightly higher average revenue per kilowatt hour as compared to the end of 2016.
[n 2017, SMUD transferred $52.4 million to the HRSF and $12.3 million to the RSF. In 2016, $10.0 million was transferred to the HRSF, while $5.1 million was transferred from the RSF.
Wholesale revenues are comprised of both surplus gas and energy sales which are part of the operational strategy in managing fuel and energy costs. In 2017, surplus gas sales were higherthan 2016 by $59.0 million due to higher gas prices and an increase in the volume of gas sold. Energy sales were lower in 2017 by $2.6 million as compared to 2016 due to lower prices and lower energy sales.
2016 compared to 2015 Total operating revenues decreased $16.1 million in 2016 mainly due to higherretail revenues of$29.2 million offset by a $10.0 million deferral for public good. As of December 31, 2016, the number of customers remained flat at 626,460.
In 2016, SMUD transferred $5.1 million from the RSF and $10.0 million to the HRSF. In 2015, transfers from both the RSF and HRSF were made in the amounts of $12.0 million and $3. I million, respectively. The 1.3 percent HGA surcharge that was implemented in 2015 was removed from customers' billings in 2016 as a result of higher precipitation.
Wholesale revenues are comprised of both surplus gas and energy sales which are part of the operational strategy in managing fuel and energy costs. ln 2016. surplus gas sales were lower than 2015 by $55.2 million due to lower gas prices and less gas sold. Energy sales were higher in 2016 by $7.2 million as compared to 2015 due to higher prices and higher energy sales.
42 Built to last ! 2017 SMUD Annual Report t
- t L -t ct 21
~
1-a R MANAGEMENT'S DISCUSSION AND ANALYSIS (Unaudit ed)
The following charts show the megawatt hour (MWh) sales, and sales revenue for the past three years by surplus energy sales (Surplus), commercial and industrial (C&I) and residential (Res) customers:
MWh Sales 7,000 6,000 5,000
- e 4,000 j
i 3,000
~
2,000 1,000 2017 2016 2015 Operating Expenses Sales Revenues
$800,000 -----------
$700,000
$600,000
.'.t3
$500,000 1
$400,000 S.300,000
$200,000
$100,000 so 2017 2016 2015 Res C&I Surplus 2017 compared to 2016 Total operating expenses increased $99.5 million compared to 2016. Administrative, general and customer increased $43.5 million. Operations which includes purchased power, production, transmission and distribution, and depletion, increased by $35.3 million mainly due to higher purchased power volumes. Maintenance increased by $15.8 million.
2016 compared to 2015 Total operating expenses decreased $31.0 million compared to 2015. Operations which includes purchased power. production, transmission and distribution, and depletion, decreased by $40.9 million mainly due to lower gas and power prices as well as lower volumes. This decrease was offset by a $9.9 million increase in the remaining other operating costs.
The following charts show the breakdown of operating expenses:
2017 Open1tin51 Expenu,s Other Revenues 2016 Oper.ting Expenses 2015 Operating Expenses Purchased Power Production Other 2017 compared to 2016 Total other revenues were $15.5 million higher in 2017, which was partially attributable to the difference of $9.2 million received for the judgment for Rancho Seco nuclear waste disposal litigation in 2017 and the PG&E refund received in 2016, and $6. 7 million of higher interest and lower ineffective gas and interest rate swaps.
2016 compared to 2015 Total other revenues were $8.0 million higher in 2016, which was mainly attributable to a $17.9 mill ion refund from PG&E, offset by higher ineffective gas swaps, lower equity earnings from affiliate and lower grant revenues.
2017 SMUD Annual Report I Built to last 43
Sacramento Mumcip* l Ot ity District 2( P Ar
, Report.
CONSOLIDATED STATEMENTS OF NET POSITION Assets Electric Utility Plant Plant in sentice Less accurnu1ated depreciation and depletion Plant in sen1ice - net Construction work in progress Total electric utility plant - net Restricted and Designated Assets Revenue bond and debt service reserves Nuclear decommissioning trust fond Rate stabilization fund Other funds Less current ix:>rtion Total restricted and designated assets Current Assets Unrestricted cash and cash equivalents Unrestricted investments Restricted and designated cash and cash equfralents Restricted and designated im*estrnents Receivables - net:
Retail customers Wholesale and other Regulatory costs to be reco,*ered within one year Investment derivative instruments maturing within one year Hedging derivative instruments maturing within one year Inventories Prepaid gas to be delh*ered within one year Prepayments and other Total current assets Noncurrent Assets Regulatory costs for future reco,*ery Prepaid gas Prepaid power and capacity Investment derivative instruments Hedging derivative instruments Energy efficiency Joans - net Credit support collateral deposits Due from affiliated entity Prepayments and other Total noncurrent assets Total Assets Deferred Outflows of Resources Accumulated decrease in fair value of hedging derivatives Deferred pension outflows Unamortized bond losses Total Deferred Outflows of Resources Total Assets and Deferred Outflows of Resources The accompanying notes are an integral par1 of these consolidated financial statements.
44 Built to last I 2017 SMUD Annual Report December 31, 2017 2016 (thousands of dollars) 5.914.377 5,781,353 (2.841.294)
(2,652,574) 3.073.083 3.128,779 280.692 216.081 3.353.775 3,344,860 93.322 115,465 SAIi 8)57 99.899 35,154 10.235 10.487 (90.757)
(112,722) 121.110 56.741 227.657 209,282 424.759 442)52 38.262 43,104 52.495 69,6 18 162.192 163.629 37.3-16 31,100 20.178 11,523 420 2.868 7,881 58.135 55,644 34.587 30.909 141.759 18.785 1.200.239 1.084.647 574.197 586,895 222.348 256,935 1.2 11 129.847
-(~
175 18.359 20.389 21.817 23.586 LSOO LSOO 22.406 18,975 252.483 149,702 1.114.321 1.188,004 5.789.445 5.674,252 105.6-15 124,895 143.034 116.253 30.584 38,053 279.263 279.201 6.068.708 5.953.453 a1*r ment l,1.un * *1 Ut,,. Dis *ict 2i 1
"'7
\\
Repor CONSOLIDATED STATEMENTS OF NET POSITION Liabilities long-Term Debt - net Current Liabilities Commercial paper notes Accounts payable Purchased power payable Credit support collateral obligation Long-tenn debt due within one year Accrued decommissioning Interest payable Accrued salaries and compensated absences Investment deri,*ati,*e instruments maturing "ithin one year Hedging derh*atl,*e instruments maturing "ithin one year Customer deposits and other Total current liabilities Noncurrent Liabilities Net pension liability Accrued decommissioning Investment derirntive instruments Hedging derivative instruments Self insurance and other liabilities Total noncurrent liabilities Total Liabilities Deferred Inflows of Resources Accumulated increase in Cair,*alue of hedging deri,*ati\\'eS Regulatory credits Deferred pension inflows Financing obligation and other Total Deferred Inflows or Resources Net Position Net im*estment in capital assets Restricted:
Re\\'enue bond and debt sen*ice Other funds Unrestricted Total Net Position Commitments, Claims and Contingencies {Notes 17 and 18)
Total Liabilities. Deferred Inflows of Resources. and et Position December 31,
2017 2016 (thousands or dollars) 2.341.775 2504,650 200.()()()
200.000 83.991 72.796 19,968 18552 3.364 3,937 132.440 160,585 5.775 6,439 33.147 35.754 38.551 36,926 2.833 6.521 27500 28.234 59.710 59.907 607.279 629,651 565.800 499.228 156.431 153.121 11.697 9.641 78.145 96.661 82.543 81.952 894.616 840.603 3.843.670 3.974.904 21.227 28,270 445,657 370.2 12 32.921 25,187 209.956 220,957 7(~).761 644,626 979.724 816.295 51.833 70.197 7.031 6.7 10 476.689 440.721 1.515.277 1.333.923 6.0(,8,708 5.953,453 The accompan~ ing nolcs arc an integral part of these consolidated financial statements.
2017 SMUD Annual Report I Built to last 45
r t 1
p CONSOLIDATED STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET POSITION Year Ended December 31, 2017 2016 (thousands of dollars)
Operating Revenues Residential 689.806 s
645,430 Commeraal and industrial 727.574 702.690 Street lighting and other 44 189 40.687 Wholesale 144.538 88.090 Senate Bill - I re\\'enue deferral (10.124)
(5,142)
AB-32 re\\'enue 28.()97 37.981 Public Sood deferral (10,000)
Rate stabili1..ation fund transfers (64 744)
(4,903)
Total operating re\\'enues 1559.336 1,494.833 Operating Expenses Operauons:
Purchased power 283.693 243,031 Production 346.523 355.360 Transmission and distribution 78.922 71.3 12 Administrati\\'e, general and customer 235. 147 191,658 Public good 59.081 65.2 10 Maintenance 120.759 104.913 Depreciation 194.925 184,043 Depletion 8.l~ll 12,103 Regulatory amounts collected in rates 12.253 12.127 Total operating expenses 1.339.304 1,239.757 Operating Income 220.032 255.076 Non-Operating Revenues and Expenses Other revenues and (expenses):
Interest income 11.848 8.646 Investment expense (9.589)
(13,134)
Other income - net 56.31 4 47.565 Total other re,*enues and (expenses) 58.573 43,077 Interest charges:
Interest on debt llKl.485 105.141 AJlowance for funds used during construction (3.234)
(2,246)
Total interest charges 97.251 102.895 Change in Net Position 181.354 195.258 Net Position* Beginning of Year 1.333.923 1.138.665 Net Position* End of Year 1.515.277 s
1.333.923 11w: ICCOnipafl} 1~ no(CS are an integral part ofthex consohd11ed financial statcmml$
46 Built to last 2017 SMUD Annual Report 2
CONSOLIDATED STATEMENTS OF CASH FLOWS Cash Flows From Operating Activities Receipts from customers Receipts from surplus po"er sales Receipts from surplus gas sales Receipts from steam sales Other receipts Payments/receipts for credit suppon collateral Issuance/repayment of energy efficiency loans
- net Payments to employees. payroll and other Payments for wholesale po"er Payments for gas purchases Payments to,*endors/others Payments for decommissioning Net cash proYided by operating acuvities Cash Flows From Noncapital Financing Activities Repayment of debt Receipts from federal and state grants Interest on debt et cash used in noncapital financing acti,*ities Cash Flows From Capital and Related Financing Activities Construction expenditures Contn but ions in aid of construcuon Net proceeds from bond issues Repayments and refundings of debt Interest on debt Net cash used in capital and related financing acti,*ities Cash Flows From Investing Activities SaJes and maturities ofsecunties Purchases of securities Interest and di,*idends receiYed lnrestment re,*enue/expenses
- net Net cash used in i"'*esting actirities Net increase in cash and cash equivalents Cash and cash equivalents at the be&inning of the year Cash and cash equivalents at the end of the year Cash and cash equivalents included in:
Unrestricted cash and cash eqwvalents Restricted and designated cash and cash equi,*alents Restricted and designated assets (a component of the total ofS12 l.110 and $56.741 at December 31. 2017 and 2016. respectively)
Cash and cash equivalents at the end of the year Year Ended December 31, 2017 2016 (thousands of doll an) 1.458.707 1,387,897 60.592 61.370 83.571 24.976 5.lll9 3.998 60.081 58.950 (573) 43.568 2.659 5.824 (287.607)
(279.360)
(284.9(~))
(249.919)
(194.675)
(194.279)
(372.033)
(300.456)
(7.055)
(9.111) 523.8 16 553.458 (28.395)
(25.925) 9.832 9.600 (12. 143)
(13.22 1)
(30.706)
(29.546)
(217.042)
(197.465) 13.183 14,491 237.082 (382.290)
(126,855)
(l!Kl.82 1)
(103.860)
(449.888)
(4 13.689) 316.145 227.820 (347.(l-19)
(332.209) 11.2()4 7.864 (9.607)
( 13,509)
(29.307)
(110,034) 13.9 15 189 262.772 262.583 276.687 262.772 227.657 209.282 38.262 43.104 10.768 10.386 276.687 262.772 The accompanym@ notes*~ an integral par1 of these conllOl.idatcd fi111nc11I statements.
2017 SMUD Annual Report Built to last 47
S :r 1ment r,1ut p.1, Uti ity Di ;tri~**
_ 11 Ar port SUPPLEMENTAL CASH FLOW INFORMATION A reconciliation oflhe consolidated statements of cash nows operating activities to operating income as follows:
Operating income Adjustments to reconcile operating income to net cash pro\\*ided by operating activities:
Depreciation Depletion Regulatory amoni1.ation Amortization of ad\\*ance capacity and olher Amonization of prepaid gas supply Re\\'enue recognized from regulatory credits. net Other receipts/payments. net Changes in operating assets. deferred outflows, liabilities and deferred inflows:
Recen*ables. retail customers. wholesale and other Inventories, prepayments and other Credit support collateral deposits Deferred pension outflows Payables and accruals Credit suppon collateral obligation Decommissioning Net pension liability Deferred pension inflows Net cash pro\\ided by operating activities The supplemental disclosure ofnoncash financing and investing actfrities is as follows.
Amonization of debt related (expenses) and premiums* net Unrealized holding loss Change m \\*aluation of derfratiYe financial instruments Amorti1.ation of re\\*enue for assets contributed in aid of construction Allo"ance for funds used during construction Construction expenditures included in accounts payable Bond proceeds deposited into an escrow account for purposes of refunding long*tenn debt The accompam mg nolcs are an integral pm of these con1ohdatcd fir11nc1al suitcmcn\\J.
48 Built to last I 2017 SMUD Annual Report Year Ended December 31,
2017 2016 (thousandsofdollan) 220.(>32 194.925 8.lXll 12.253 (1.427) 30.909 N.8(>8 31.346 6Jl99
( I03.348) (26.781)
I0.261 (573)
(7.055) 66.572 7.734 523.816 255,076 184.043 12.1 03 12.127 (1,427) 27.768 20.045 17,532 4.929 (24.31 9) 44,020 (88.610) 4.239 (452)
(9.111) 117.887 (22,392) 553.458 Year Ended December 31,
2017 2016 (thousands of dollars) 9.813 9.135 (2.033)
(543) 13.245 89,925 19,437 18.988 3.234 2.246 22.199 20.141
-(<
186,324 r rr n J Mur it 2
1 7 l' NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 ORGANIZATION The Sacramento Municipal Utility District (SMUD) was formed and operates under the State of California Municipal Utility District Act (Act). The Act gives SMUD the rights and powers to fix rates and charges for commodities or services it furnishes, and to incur indebtedness and issue bonds or other obligations. As a community*owned utility, SMUD 1s not subject to regulation or oversight by the CaJifomia Public Utilities Commission SMUD is responsible for the acquis1uon, generation, transmission, and distribution of electnc power to its service area, which includes most of Sacramento County and small adjoining portions of Placer and Yolo Counties. The Board of Directors (Board) determines SMUD's rates.
SMUD is exempt from payment of federal and state mcome taxes and, under most circumstances, reaJ and persona]
property taxes. SMUD is not exempt from real and personal property taxes on assets it holds outside of California In addition, SMUD is responsible for the payment of a portion of the property taxes associated with its real property in California that lies outside of its service area.
NOTE2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES Method of Accounting. SMUD's accounting records are maintained in accordance with Generally Accepted Account mg Principles for proprietary funds as prescnbed by the Governmental Accounting Standards Board (GASB). SMUD's accounti ng 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 1n wd of construcuon. SMUD'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 1s incurred, regardless of the timing of the related cash flows.
Electric revenues and costs that are directly related to the acquisition, generation, transm1ss1on, and distribuuon of electricity are reported as operating revenues and expenses. All other revenues and expenses are reponed 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 (U.S.) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liab1lit1es 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 SMUD and its component units. Although the component units are legally separate from SMUD, they are blended into and reported as part of SMUD because of the extent of their operational and financiaJ relationships with SMUD All significant mter-component transactions have been elimmated in consol idation Component Units. The component units include the Central Valley Financing Authority (CVFA), the Sacramento Cogeneration Authority (SCA), the Sacramento Municipal Utility Distri ct Financing Authority (SFA), the Sacramento Power Authority (SPA), and the Northern California Gas Authority No. I (NCGA). The primary purpose ofCVFA, SCA, SFA and SPA is to own and operate electric utility plants that supply power to SMUD.
The primary purpose ofNCGA is to prepay for natural gas and to sell the natural gas to SMUD. SMUD's Board comprises the Commissions that govern these entities (see Note 6).
2017 SMUD Annual Report I Built to last 49
C !'
n R,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Plant in Service. Capital assets are generally defined by SMUD as tangible assets with an initial, individual cost of more than three thousand dollars and an estimated useful life in excess of two years 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 SMUD retires portions of its Utility Plant, retirements are recorded against Accumulated Depreciation and the retired portion of 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. SMUD generally computes depreciation on Plant in Service on a straight-line, service-life basis. The consolidated average annual composite depreciation rates for 2017 and 2016 were 3.5 and 3.3 percent, respectively. Depreciation is calculated using the following estimated lives:
Generation Transmission and Distnbution Gas Pipeline General S to 80 years IS to SO years IS to 90 years 3 to 90 years Investment in Joint Powers Authority (JPA). SMUD's investment in the Transmission Agency of Northern California (TA C) is accounted for under the equity method of accounting and is reported as a component of Plant in Service. SMUD's share of the TANC debt service costs and operations and maintenance expense, inclusive of depreciation, is included m Transmission and Distribution expense in the Consolidated Statements of Revenues, Expenses and Changes in Net Position (see Note 5).
SMUD's investment in the Balancing Authority of Northern California (BANC) is accounted for under the equity method of accounting. SMUO's share of the BANC operations and maintenance expense is included m Transmission and Distribution expense in the Consolidated Statements of Revenues, Expenses and Changes in et Position (see Note 5).
Investment in Gas Properties. SMUD has an approximate 21 percent non-operating ownership interest in the Rosa Unit gas properties in New Mexico of which, SMUD's portion of the extracted gas is transported for use in its component unit natural gas-fired power plants (see Note 6). SMUD uses the successful efforts method of accounting for its investment m 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 Statements of Net Position. 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. SMUD has purchased proven reserves and has not panicipated in exploratory dri lling. Capitalized costs of producing gas properties, after considering estimated residua] salvage values, are depleted by the unit-of-production method based on the estimated future production of the proved developed producing wells. SMUD's investment in gas properties is reponed as a component of Plant in Service Restricted and Designated Assets. Cash, cash equivalents, and investments, which are restricted under terms of certain agreements for payments to third pan1es are included as restricted assets. Board actions limiting the use of such funds are included as designated assets. When SMUD restncts or designates funds for a specific purpose, and restricted and designated and unrestricted resources are available for use, it is SMUD's policy to use restricted and designated resources first, then unrestricted resources as they are needed.
SO Built to last I 2017 SMUO Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Restricted Bond Funds. SMUD's Indenture Agreements (Indenture) requires the maintenance of minimum levels of reserves for debt service on the 1997 Series K Bonds uclear Decommissioning Trust Fund. SMUD made annual contributions to Its uclear Decommissionmg Trust Fund (Trust Fund) through 2008 to cover the cost of its primary decommiss,omng 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. Interest earnings on the Trust Fund assets are recorded as Interest Income and are accumulated in the Trust Fund.
Accrued Decommissioning. SMUD accrues decomm1ss1oning costs related to Utility Plant when an obligation to decommission facilities 1s legaJly required. Adjustments are made to such liabilities based on estimates in accordance with FASB ASC 410, "Asset Retirement and £n.,ironmental Obligations" (FASB ASC 410). For active plants, such costs are included in the Utility Plant's cost and as a component of Operating Expense over the Utility Plant's life. Expenditures for decommissioning activities are recorded as reductions to Accrued Decommissioning liability Changes in the Rancho Seco decommissioning liability estimates arising from inflation, annual accretion, and other changes to the cost assumptions are recorded to Accrued Decommissioning with a corresponding adjustment to the related regulatory deferral The current portion of the Accrued Decommissioning liability represents SMUD's estimate of actual expenditures in the next year, as set forth in the annual budget.
SMUD has identified potential retirement obligations related to certain generation, distribution and transmission facilities. SMUD's non-perpetual leased land rights generally are renewed continuously because SMUD intends to utilize these facilities indefinitely. Since the timing and extent of any potential asset retirements are unknown, the fair value of any obligations associated with these fac1l1ties cannot be reasonably estimated. Accordingly, a liability has not been recorded.
At December 31, 2017 and 2016, SMUD'sAccrued Decommissioning balance m the Consolidated Statements of Net PositJon relating to Rancho Seco was $149.8 million and $148.0 million, respectively (see Note 13). The Accrued Decommissioning balance in the Consolidated Statements of Net Position relating to other electricity generation and gas production facilities totaled $12.4 million and $11 6 million as of December 31, 2017 and 2016, respecttvely.
Cash and Cash Equivalents. Cash and cash equivalents include all debt instruments purchased with an onginal matunty of90 days or less, all investments in the Local Agency Investment Fund (LAIF), and money market funds. LAIF has an equity interest in the State ofCahfomia (State) Pooled Money Investment Account (PMIA).
PMIA funds are on deposit wnh the State's Centralized Treasury System and are managed in compliance with the California Government Code according to a statement of investment policy which sets forth permitted investment vehicles, liquidity parameters, and maximum maturity of investments. SMUD's deposits with LAIF comprise cash representing demand deposits up to a $65.0 million maximum and cash equivalents representing amounts which may be withdrawn once per month after a thirty-day penod (see Note 7)
Investments. SMUD's investments are reported at fair value in accordance with Statement of Governmental Accounting Standards (SGAS) No 72, "Fair Value Measurement and Application" (see Note 12). Realized and unrealized gains and losses are included in Other Income - Net in the Consolidated Statements of Revenues, Expenses and Changes in Net Position. Premiums and discounts on zero coupon bonds are amortized using the effective interest method. Premiums and discounts on other securities are amortized using the straight-line method, which approximates the effective interest method 2017 SMUD Annual Report I Built to last 51
S r:J.t ten o 1'-1unir:ipd., TTt ity... 1stri :t 2 1 7 At IR, p Jr NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Electric Operating Revenues. Electric revenues are billed on the basis of monthly cycle bills and are recorded as revenue when the electricity is delivered. SMUD 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, 2017 and 2016, unbilled revenues were
$72.6 million and $72.2 million, respectively Purchased Power Expenses. A ponion ofSMUD'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 Position in the period the power is received. The costs or credits, associated with energy swap agreements (gas and electric) or other arrangements that affect the net cost of Purchased Power are recognized in the period m which the underlying power delivery occurs. Contract tennination payments and adjustments to prior billings are included m Purchased Power expense once the payments or adjustments can be reasonably estimated.
Advanced Capacity Payments. Some long-tenn agreements to purchase energy or capacity from other providers call for up-front payment. Such costs are generally recorded. as an asset and amonized over the length of the contract.
Credit and Market Risk. SMUD enters into forward purchase and sales commitments for physical delivery of gas and electncity with utilities and power marketers. SMUD is exposed to credit risk related to nonperformance by its wholesale counterpanies under the terms of these contractual agreements. In order to limit the risk of counterparty default, SMUO has a wholesale counterparty risk policy which includes using the credit agency ratmgs ofSMUO's counterpanies and other credit services, credit enhancements for counterpanies 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. SMUD is also subject to similar reqmrements for many of its gas and power purchase agreements. SMUD uses a combination of cash and securities to satisfy its collateral requirements to counterpart1es.
SMUD's component unit, NCGA, entered into a guaranteed mvestment contract and is exposed to credit risk related to nonperformance by its investment provider. The investment provider provides collateral if their credit ratings fall below agreed upon levels. At December 31, 2017 and 2016, respectively, SMUD held $3.4 million and $3.9 million on deposit by counterpanies and an investment provider. The amount is recorded as unrestricted cash and current restricted cash with an associated current liability. At December 31, 2017 and 2016, SMUD posted cash collateral of
$1.S mill ion with counterparties.
Accounts Receivable and Allowance for Doubtful Accounts. Accounts Receivable is recorded at the invoiced amount and does not bear interest, except for accounts related to energy efficiency loans. SMUD recognizes an estimate ofuncollectible accounts for its receivables related to electric service, energy efficiency loans, and other non-electric billings, based upon its historical experience with collections and current energy market condittons.
For large wholesale receivable balances, SMUD determines its bad debt reserves based on the specific credit issues for each account. SMUD records bad debts for its estimated uncollectible accounts related to electric service as a reduction to the related operating revenues in the Consolidated Statements of Revenues, Expenses and Changes in Net Position. SMUD records bad debts for its estimated. uncollectible accounts related to energy efficiency Joans and other non-electric billings in Administrative, General and Customer expense in the Consolidated Statements of Revenues, Expenses and Changes in Net Position.
52 Built to last I 2017 SMUD Annual Report A
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The summarized activity of the changes in the allowance for doubtful accounts during 2017 and 2016 is presented below:
Balance at (Write-offs)
Balance beginning and at end of of Year Additions Recoveries Year (thousands of dollars)
Other Non-Electric:
December 31, 2017 831 1,326 (633) 1,524 December 31, 2016 1,771 663 (1,603) 831 Retail Customers:
December 31, 2017 2,397 6,760 (5,985) 3,172 December 31, 2016 3,116 3,920 (4,639) 2,397 Energy Efficiency Loans:
December 31, 2017 804 (675) 548 677 December 31, 2016 1,041 (953) 716 804 Regulatory Deferrals. The Board has the authority to establish the level of rates charged for all SMUD services.
As a regulated entity, SMUD's financial statements are prepared in accordance with SGAS Statement o. 62, "Codification of Accounting and Financial Reporting Guidance Contained in Pre-No,*ember JO, 1989 FASB and A/CPA Pronouncements," which requires that the effects of the rate-making process be recorded in the financial statements. Accordingly, certain expenses and credits, normally reflected. in Change in Net Position as incurred, are recognized when included in rates and recovered from or refunded to customers. SMUD records various regulatory assets and credits to reflect rate-making actions of the Board (see Note 8).
Materials and Supplies. Materials and supplies are stated at average cost, which approximates the first-in, first-out method.
Compensated Absences. SMUD accrues vacation leave and compensatory time when employees earn the rights to the benefits. SMUD does not record sick leave as a liability until it is taken by the employee, since there are no cash payments made for sick leave when employees terminate or retire. At December 31, 2017 and 2016, the total estimated liability for vacation and other compensated absences was $26.0 million and $24 9 million, respectively.
Public Good. Public Good expenses consist of non-capital expenditures for energy efficiency programs, low income subsidies, renewable energy resources and technologies, and research and development.
Gains/Losses on Bond Refundings. Gams and losses resultmg from bond refundings are mcluded as a component of Deferred Inflows of Resources or Deferred Outflows of Resources on the Consolidated Statements of Net Position and amonized as a component of Interest on Debt in the Consolidated Statements of Revenues, Expenses and Changes in Net Position over the shoner of the life of the refunded debt or the new debt usmg the effective interest method.
Gains/Losses on Bond Defeasances or Extinguishments. Gains and losses resulting from bond defeasances or extinguishments 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 Position 2017 SMUD Annual Report I Built to last 53
Sacramento Mur,,...ip, Utility Dis,.rict 2017 Ar m.ia R11por NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Allowance for Funds Used During Construction (AFUDC). SMUD capitalizes, as an additional cost of Construction Work In Progress (CWIP), AFUDC, which represents the cost of borrowed funds used for such purposes. The amount capitalized JS detennined by a fonnula prescribed by FERC. The AFUDC rate for 2017 and 20 16 was 2.4 percent and 2.3 percent, of eligible CWIP, respectively.
Derivative Financial Instruments. SMUD records derivative financial instruments (interest rate swap and gas price swap agreements. certain wholesale sales agreements, certain power purchase agreements and option agreements) at fair val ue on its Consolidated Statements of Net Position. SMUD does not enter into agreements for speculative purposes. Fair value is estimated by comparing contract prices to forward market prices quoted by third party market participants and/or provided in relevant industry publications. SMUD is exposed to risk ofnonperfonnance if the counterparties default or if the swap agreements are terminated. SMUD repons derivative financial instruments with remaining maturities of one year or Jess and the portion of long-term contracts with scheduled transactions over the next twelve months as current on the Consolidated Statements of Net Position (see Note 9).
Interest Rate Swap Agreements. SMUD enters into interest rate swap agreements to modify the effective interest rates on outstanding debt (see Notes 9 and 10).
Gas and Electricity Price Swap and Option Agreements. SMUD uses forward contracts to hedge the impact of market volatility on gas commodity prices for its natural gas-fueled power plants and for energy prices on purchased power for SMUD's retail load (see Note 9).
Solano Wind Sale. SMUD entered into an agreement to sell the Solano Wind Phase 3 plant in December 2011 with a corresponding Power Purchase Agreement for all output of the plant (see Note 17). The prepayment for purchased power over the life of the contract has been recorded as Prepaid Power and Capacity on the Consolidated Statements of Net Position and is amortized as Purchased Power expense on the Consolidated Statements of Revenues, Expenses and Changes in Net Position over the life of the agreement. ln April 2012, under the terms of the Construction Management Agreement, SMUD, on behalf of the purchaser, completed construction of the plant, which was accounted for as a financing agreement, and the revenue recognition from the transaction, would occur over the life of the contracts. The sale proceeds have been recorded as Deferred Inflows of Resources on the Consolidated Statements of Net Position and are amortized as Purchased Power expense on the Consolidated Statements of Revenues, Expenses and Changes in Net Position over the life of the agreement. Pursuant to the Facility Administration Agreement, SMUD will perform services at the facility under the direction and for the benefit of the purchaser. Pursuant to the ground and property lease, SMUD is leasing the site to the purchaser for a term of twenty years with an option to extend for five additional years.
SMUD has the option to buy the plant back. In October 2017, SMUD submitted its notice of intent to exercise this option which will occur in April 2018. As a result of SMUD's intent to purchase Solano, the prepayment for purchased power at December 31, 2017 is recorded as Prepayments and Other under Current Assets.
Precipitation Hedge Agreements. SMUD enters into non-exchange traded precipitation hedge agreements to hedge the cost of replacement power caused by low precipitation years (Precipitation Agreements). SMUD records the intrinsic value of the Precipitation Agreements as Prepayments and Other under Current Assets on the Consolidated Statements of Net Position. 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 an average rainfall year, and the actual rainfall during the same period.
54 Built to last I 2017 SMUD Annual Report S* crament M.1 nit Jtiiit
- District 2! 1 A1 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Insurance Programs. SMUD records liabilities for unpaid claims at their present value when they are probable in occurrence and the amount can be reasonably estimated. SMUD records a liability for unpaid claims associated with general, auto, workers' compensation, and short-term and long-term disability based upon estimates derived by SMUD's claims administrator or SMUD staff The liability comprises the present value of the claims outstanding, and includes an amount for claim events incurred but not reported based upon SMUD's experience (see Note 16).
Pollution Remediation. SGAS
- o. 49, '1Accounting and Financial Reporting/or Pollution Remediation Obligations," (GASB No. 49) requires that a liability be recognized for expected outlays for remediating existing pollution when certain triggering events occur. SMUD recorded a pollution remediation obligation for its North City Substallon, which was built on a former landfill, for the Former Community Linen Rental Services Property, and for its Headquarters building that is being renovated. In 2017 and 2016, SMUD identified and recorded pollution remediation obligations for land sites, including one where it will be building a substation (see Note 18).
At December 31, 2017 and 2016, the total pollution remediation liability was $33.6 million and $35.3 million, respectively, and recorded as either Current Liabilities, Customer Deposits and Other or Noncurrent Liabilities, Self Insurance and Other Liabilities in the Consolidated Statements of et Position. Costs were estimated using the expected cash flow technique prescribed under GASB No. 49, including only amounts that are reasonably estimable Hydro License. SMUD owns and operates the Upper American Ri ver Hydroelectric Project (UARP). The original license to construct and operate the UARP was issued in 1957 by FERC. Effective July I, 2014, SMUD received a new SO-year hydro license. As part of the hydro licensing process, SMUD entered into four contracts with government agencies whereby SMUD makes annual payments to them for various services for the term of the license. At December 31, 2017 and 2016, the liability for these contract payments was $57.8 million and recorded as either Current Liabilities, Customer Deposits and Other or Noncurrent Liabilities, Self Insurance and Other Liabilities in the Consolidated Statements of Net Position (see Note 17).
Assembly Bill 32. California Assembly Bill 32 (AB-32) was an effort by the State of California to set a greenhouse gas (GHG) emissions reduction goal into law, and initially was set through 2020. In 2015, the state established a 2030 goal for GHG emissions at 40% below 1990 levels, and in July of 2017 AB-398 was approved by the Governor. Central to these initiatives is the Cap and Trade program, which covers major sources ofGHG emissions in the State including power plants; AB-398 extended Cap and Trade through 2030. The Cap and Trade program mcludes an enforceable emissions cap that will decline over time. The State distributes allowances, which are tradable permits, equal to the emissions allowed under the cap. Sources under the cap are required to surrender allowances and offsets equal to their emissions at the end of each compliance period. SMUD is subject to AB-32 and participated in the program auctions in 2016 and 2017. In a normal water year, SMUD expects its free allocation of allowances from the Air Resources Board to cover its compliance costs associated with electricity delivered to its retail customers. SMUD expects to recover compliance costs associated with wholesale power sales costs through its wholesale power sales revenues. SMUD continues to monitor new legislation and proposed programs that could impact AB-32 and its subsequent extensions.
Net Pension Liability (NPL). SMUD implemented SGAS No. 73, "Accounting and Financial Reporting/or Pensions and Related Assets that are not within the Scope of GASB Statement 68, and Amendments to Certain Provisions o/GASB Statements 67 and 68," (GASB No. 73) in 2017 (see Note 3) and SGAS No. 68, "Accounting and Financial Reporting/or Pensions-An Amendment of GASB Statement No. 27," (GASB No. 68) in 2015.
The NPL is the difference between the actuarial present value of projected pension benefit payments attributable to employees' past service and the pension plan's fiduciary net position. At December 31, 2°017 and 2016, the NPL was
$565.8 million and $499.2 million, respectively (see Note 14).
2017 SMUD Annual Report ! Built to last 55
S* *ram, 1to Mur 1c\\pw t.. lity Dist.,...i *t 2 1 Ct-por NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Net Position. SMUD classifies its net position into three components as follows:
Net investment in capital assets - This component of net position consists of capital assets, net of accumulated deprec1a11on, reduced by the outstanding debt ba1ances, net of unamortized debt expenses Deferred inflows and outflows of resources that are attributable to the acquisition, construction or improvement of those assets or related debt are also included.
Restricted - This component of net position consists of assets with constraints placed on their use, either externally or intema11y. 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. These restricted assets are reduced by liabilities and deferred inflows of resources related to those assets Unrestricted - This component of net position consists of net amount of the assets, deferred outflows of resources, liabilities, and deferred inflows ofresources that do not meet the definition of"Net investment in capital assets" or "Restricted."
Contributions in Aid of Construction (CIAC). SMUD records CIAC from customer contributions, primarily relating to expansions to SMUD's distribution facilities, as Other Income -
et in the Consolidated Statements of Revenues, Expenses and Changes in Net Pos1uon Contributions of capital are valued at acquisition value. For rate-making purposes, the 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 Revenues and Expenses. SMUD distinguishes operating revenues and expenses from non-operating items.
Operating revenues and expenses generally result from providing services and producing and delivering goods 1n connection with SMUD's principaJ ongoing operations. The pnnc1paJ operating revenues ofSMUD are charges to customers for sales and services. Operating expenses include the cost of sales and services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as Non-Operating Revenues and Expenses.
Grants. SMUD receives grant proceeds from federal and state assisted programs for its projects which include, but are not limited to, advanced and renewable technologies, electric transportation, and energy efficiency. SMUD aJso periodicaJly receives grant proceeds from federaJ or state assistance programs as partial reimbursements for costs it has incurred as a result of naturaJ disasters, such as storm or fire damages. When applicable, these programs may be subject to financiaJ and compliance audits pursuant to regulatory requirements. SMUD considers the possibility of any material disallowances to be remote. During 2017, SMUD recorded $4.9 million of grant proceeds and recognized
$3.0 million as a component of Other Income - Net, in the Consolidated Statements of Revenues, Expenses and Changes in Net Position, and $1.9 million as a Regulatory Credit. During 2016, SMUD recorded $0.5 million of grant proceeds and recognized $0.3 million as a component of Other Income - Net, in the Consolidated Statements of Revenues, Expenses and Changes in et Position, and $0.2 million as a Regulatory Credit (see Note 8).
In 20IO, SMUD issued taxable Build America Bonds. SMUD receives an interest subsidy from the federaJ government equal to 35 percent of the interest paid (see Note 10). SMUD received reduced subsidy payments in 2017 and 2016 due to budget sequestration by the federal government. SMUD recognized $9.1 million in revenues in 2017 and aJso in 2016 for its Build America Bonds, as a component of Other Income-Net, in the Consolidated Statements of Revenues, Expenses and Changes in Net Position.
56 Built to last I 2017 SMUD Annual Report m
t lLl NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Customer Sales and Excise Taxes. SMUD is required by various govemmentaJ authorities. including states and municipalities. to collect and remit taxes on certain customer sales. Such taxes are presented on a net basis and excluded from revenues and expenses in the Consolidated Statements of Revenues, Expenses and Changes in et Position.
Rancho Seco Litigation. In June 1983, SMUD and the U.S. Department of Energy (DOE) entered into a contract whereby the DOE would build a repository for the acceptance and disposal ofSMUD's spent nuclear fuel (SNF) and/or high-level radioactive waste (HLW). SMUD paid the DOE a total of approximately $40 0 million in fees under the contract, thus satisfying its obligation of performance under the contract. The DOE did not build a repository and therefore breached Its obhgauon under the contract to commence acceptance of SNF and HLW by January 31, 1998. As a result, SMUD incurred costs to design, license, and fabricate its own on-site storage facility for the long term dry storage of its spent fuel at Rancho Seco. In June 2015, SMUD filed a suit against DOE which covered the costs incurred from 2010 through June 2015. In June 2017, SMUD received an award for $28.9 million from the U.S. Court of Claims of which $27.1 million was recorded as Other Income - Net in the Consolidated Statements of Revenues, Expenses and Changes m Net Position and $1. 7 million was recorded as CIAC since a portion of the award constituted a reimbursement for the cost of capital assets.
Pacific Gas & Electric (PG&E) Refund. In June 2016, SMUD received a $17.9 m,lhon refund from PG&E in association with the PG&E 2010 natural gas transmission pipeline explosion in San Bruno. The CaJifom1a Public Utihties Commission imposed a penalty on PG&E requirmg them to provide a one-time bill credit to naturaJ gas customers on their June 2016 bills based on usage for a prescribed ume period. The $17.9 mill1on refund was recorded as Other Income - Net in the Consolidated Statements of Revenues, Expenses and Changes m Net Position and passed through to the component units Subsequent Events. Subsequent events for SMUD have been evaluated through February 16, 2018, which is the date that the financial statements were available to be issued.
Reclassifications. Certain amounts in the 2016 Consolidated Financial Statements have been reclassified in order to conform to the 2017 presentation.
Recent Accounting Pronouncements. In June 2015, GASB issued SGAS No. 75, 41Accounting and Financial Reporting/or Postemployment Benefits Other Than Pensions" (GASB No. 75). The primary objective ofGASB No. 75 is to improve accounung and financial reporting by state and local governments for postemployment benefits other than pensions (other postemployment benefits or OPES). This statement replaces the requirements ofSGAS No. 45, "Accounting and Financial Reporting by Employers/or Postemployment Benefits Other Than Pensions,"
as amended, and SGAS No. 57, "OPEB Measurements by Agent Employers and Agent Multiple-Employer Plans." This statement establishes standards for measuring and recognizing liabilities, deferred outflows and deferred inflows of resources, and expenses. For defined benefit OPEB, GASB No. 75 identifies the methods and assumptions that are required to be used to project benefit payments, discount projected benefit payments to their actuarial present vaJue, and attribute that present value to periods of employee service. Note disclosure and required supplementary information requirements about defined benefit OPES aJso are addressed. In addition, this statement details the recognition and disclosure requirements for employers with payables to defined benefit OPES plans that are administered through trusts that meet the specified criteria. This statement is effective for SMUD in 2018.
SMUD is currently assessing the financial statement impact of adopting this statement.
2017 SMUD Annual Report Built to last 57
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~' r p,r NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In November 2016, GASB issued SGAS No. 83, "Certain Asset Retirement Obligations" (GASB No. 83). An Asset Retirement Obligation (ARO) is a lega11y enforceable liability associated with the retirement of a tangible capita] asset. A government that has legal obligations to perform future asset retirement activities related to its tangible capita1 assets should recognize a liability based on the guidance m this statement. GASB o 83 establishes the criteria for detennining the timing and pattern of recognition of a liability and a corresponding deferred outflow of resources for AROs. Recognition occurs when the liability is both incurred and reasonably estimable. The detennination of when the liability is incurred should be based on the occurrence of extema1 laws, regulations, contracts, or coun judgments, together with the occurrence of an internal event that obligates the government to perfonn the asset retirement activities. GASB No. 83 requires the measurement of the ARO be based on the probability weighted best estimate of the current value of outlays expected to be incurred, and adjusted for general inflation or deflation at least annually. It requires a government to evaluate all relevant factors at least annually to detennine whether the effects of one or more of the factors are expected to significantly change the estimated asset retirement outlays. The ARO should only be remeasured when the result of the evaluation indicates a significant change in the estimated outlays. GASB No. 83 also requires disclosures of descriptive infonnation about the nature of a government's AR Os including the methods and assumptions used for the estimates of the liabilities, the estimated remaining useful life of the associated tangible capital assets, how any funding and assurance requirements are being met, and the amount of any assets restricted for payment of the AR Os (1f not separately displayed in the financial statements). lf a liability for an ARO (or ponions thereof) has been incurred by a government but is not yet recognized because it is not reasonably estimable, the government should disclose that fact and the reasons therefor. This statement 1s effective for SMUD in 2019. SMUD is currently assessing the financial statement impact of adopting this statement. SMUD currently records AROs following the FASB guidance (see Accrued Decommissioning under Note 2).
In January 2017, GASB issued SGAS No. 84, "Fiduciary Activities" (GASB No. 84). This statement establ,shes standards of accounting and financial reporting for fiduciary activities. GASB No. 84 establishes criteria for identifying fiduciary activities of all state and local governments The focus of the criteria generally is on (I) whether a government is controlling the assets of the fiduciary activity and (2) the beneficiaries with whom a fiduciary relationship exists. An activity meeting the criteria should be reponed in a fiduciary fund in the basic financial statements. Governments with activities meeting the criteria should present a statement of fiduciary net position and a statement of changes in fiduciary net position. The statement of fiduciary net position repons the assets, deferred outflows of resources, liabilities, deferred inflows of resources, and fiduciary net position of the fiduciary activities. The statement of changes in fiduciary net position reports the additions to and deductions from the fiduciary fund(s). This statement also provides for the recognition of a liability to the beneficiaries in a fiduciary fund when an event has occurred that compels the government to disburse fiduciary resources. This statement 1s effective for SMUD in 2019. SMUD is currently assessing the financial statement impact of adopting this statement.
In March 2017, GASB issued SGAS No. 85, "Omnibus 2017" (GASB No. 85). GASB
- a. 85 addresses a variety of topics including issues related to blending component units, goodwill, fair value measurement and application, and postemployment benefits (pensions and other postemployment benefits). This statement 1s effective for SMUD in 2018. SMUD is currently assessing the financial statement impact of adopting this statement but does not expect it to be material.
58 Built to last 2017 SMUD Annual Report ne JI Rer rl NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In May 20 I 7, GASB issued SGAS No. 86, "Certain Debt Extinguishment fo*ues" (GASB No. 86). The primary objective of this statement is to improve consistency in accounting and financial reporting for in-substance defeasance of debt by providing guidance for transactions in which cash and other monetary assets acquired with only existing resources (resources other than the proceeds of refunding debt) are placed in an irrevocable trust for the sole purpose of extinguishing debt. GASS
- o. 86 a1so improves accounting and financial reporting for prepaid insurance on debt that is extinguished and notes to financia1 statements for debt that is def eased in substance. This statement is effective for SMUD in 2018. SMUD 1s currently assessing the financial statement impact of adopting this statement.
In June 2017, GASB,ssued SGAS No 87, "l~ases" (GASB o. 87) The obJective ofth,s statement is to better meet the information needs of financial statement users by improving accounting and financial reporting for leases by governments. GASB No. 87 requires recognition of certain lease assets and liabilities for leases that previously were classified as operating leases and recognized as inflows of resources or outflows of resources based on the payment provisions of the contract. It establishes a single model for lease accounting based on the foundational principle that leases are financings of the right to use an underlying asset. Under GASB No. 87, a lessee 1s required to recognize a lease liability and an intangible right-to-use lease asset, and a lessor is required to recognize a lease receivable and a deferred inflow of resources. The lease liability should be measured at the present va1ue of payments expected to be made dunng the lease term. As payments are made the lease liability 1s reduced and an outflow of resources (interest expense) is recognized for the interest on the liability. The lease asset should be amortized in a systematic and rationa1 manner over the shorter of the lease term or the useful life of the underlying asset. The lease receivable should be measured at the present value of the lease payments expected to be received during the lease tenn. Any payments received are first a11ocated to accrued interest receivable and then to lease receivable. The deferred inflow of resources should be recognized as inflows of resources (revenue) in a systematic and rational manner over the tenn of the lease. The lessor should not derecogmze the asset underlying the lease. A lease is defined as a contract that conveys control of the right to use another entity 's nonfinancial asset (the underlying asset) as specified in the contract for a penod of time m an exchange or exchange-like transaction.
Examples of nonfinancial assets include buildings, land, vehicles, and equipment. Any contract that meets this definition should be accounted for under the leases guidance, unless specifically excluded in this statement. The lease term is defined as the period during which a lessee has a noncancellable right to use an underlying asset, plus the following periods, if applicable A short-term lease is defined as a lease that, at the commencement of the lease term, has a maximum possible term under the lease contract of 12 months (or less), including any options to extend, regardless of their probability of being exercised. Lessees and lessors should recognize short-tenn lease payments as outflows of resources (expenses) or inflows of resources (revenues), respectively, based on the payment provisions of the lease contract. This statement 1s effective for SMUD in 2020. SMUD 1s currently assessing the financial statement impact of adopting this statement.
2017 SMUD Annual Rep Ht Built to last 59
Sacramento MuP1c1pal Utility District 2017 A, n" R, por NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 ACCOUNTING CHANGE In June 2015, GASB issued GASB No. 73, which extends the approach to accounting and financial reporting established in GASB No. 68 to all pensions. It also requires that information similar to that required by GASB No.
68 be included in the notes to consolidated financial statements and required supplementary information.
SMUD implemented GASB No. 73 in 2017 for a supplemental benefit in lieu of California Public Employees' Retirement System (PERS) Single Highest Year. The implementation impacted the Consolidated Statements of Net Position when the net pension liability and corresponding deferred outflows and deferred inflows of resources were recorded. The implementation a1so impacted the Consolidated Statements of Revenues, Expenses and Changes in Net Position as pension expense was also recorded (see Note 14 and the Required Supplementary Information).
NOTE 4 UTILITY PLANT The summarized activity of SMUD's Utility Plant during 2017 is presented below:
Nondepreciable Utility Plant:
Land and land rights CWIP Total nondepreciable utility plant Depreciable Utility Plant:
Generation Transmission Distribution Investment in gas properties Investment in JPAs Intangibles General Less: accumulated depreciation and depletion Less: accumulated amortization on JPAs Total depreciable plant Total Utility Plant - net 60 Built to last I 2017 SMUD Annual Report Balance January 1, 2017 135,340 216,081 351,421 1,669,687 305,426 2,179,486 206,621 15,649 388,049 881,095 5,646,013 (2,646,547)
(6,027)
(2,652,574) 2,993,439 3,344,860 Additions Transfers and Disposals (thousands of dollars) 2,822 209,506 212,328 28,730 3,505 75,318 25,913 13,759 147,225 (204,603)
(313)
(204,916)
(57,691) 154,637 (15)
(144,895)
(144,910)
(3,200) 1,264 (8,650)
(4)
(439)
(717)
(5,262)
(17,008) 16,196 16,196 (812)
(145,722)
Balance December 31, 2017 138,147 280,692 418,839 1,695,217 310,195 2,246,154 206,617 15,210 413,245 889,592 5,776,230 (2,834,954)
(6,340)
(2,841,294) 2,934,936 3,353,775 S, 'r,mento M.utJi1 ;p< Ut
,t
'"'I nc1 2l 1 ~ Ar
,al ~epor1 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The summarized activity of SMUD's Utility Plant during 2016 is presented below:
Nondepreciable Utility Plant:
Land and land rights CWIP Total nondepreciable utility plant Depreciable Utility Plant:
Generation Transmission Distribution Investment in gas properties Investment in JPAs In1angibles General Less: accumulated depreciation and depletion Less: accumulated amortization on JPAs Total depreciable plant Total Utility Plant - net Balance January 1, 2016 130,052 176,071 306,123 1,651,815 301,944 2,112,536 206,579 16,448 357,283 860,992 5,507,597 (2,484,106)
(5,714)
(2,489,820) 3,017,777 3,323,900 NOTE 5 INVESTMENT IN JOINT POWERS AUTHORITY Additions Transfers and Disposals (thousands of dollan) 5,324 217,050 222,374 19,736 3,521 77,576 42 32,083 40,183 173,141 (195,844)
(313)
(196,157)
(23,016) 199,358 (36)
(177,040)
(177,076)
(1,864)
(39)
(10,626) (799)
(1,317)
(20,080)
(34,725) 33,403 33,403 (1,322)
(178,398)
Balance December 31, 2016 135,340 216,081 351,421 1,669,687 305,426 2,179,486 206,621 15,649 388,049 881,095 5,646,013 (2,646,547)
(6,027)
(2,652,574) 2,993,439 3,344,860 TANC. SMUD and fourteen other California municipal utilities are members ofTANC, 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. SMUD is obligated to pay approximately 39 percent of TA C's COTP debt service and operations costs in exchange for entitlement to approximately 536 megawatts (MW) ofTANC's I,390 MW transfer capability. Additionally, SMUD has a 48 MW share ofTANC's 300 MW firm, bi-directional transmission over PG&E's system between PG&E's Tesla and Midway substations (SOT). The total entitlement shares for the COTP and SOT described above include the long-term agreements listed below.
2017 SMUD Annual Report l Built to last 61
S 'T 2 1
., pr, NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ln 2009, SMUD entered into a I 5-year long-term layoff agreement with TANC and certain members, expiring January 31, 2024. This agreement provides for the assignment of all rights and obligations of the City of Palo Alto and the City of Roseville related to their COTP and SOT entitlements. This agreement increased SMUD's COTP entitlement by 36 MW and SOT entitlement by 2 MW Effective July I, 2014, an amendment provides for the return to the City of Roseville of all rights and obligations related to the COTP entitlements, which decreased SMUD's COTP entitlement by 13 MW.
Effective July I, 2014, SMUD entered into a 25-year long-term layoff agreement with TANC and certain members that provides for the assignment of all rights and obligations of orthern Ca1ifornia Power Agency and pan1al rights and obligations of the City of Santa Clara related to their COTP entitlements. This agreement increased SMUD's COTP entitlements by 130 MW.
The long-term debt ofTANC, which totals $208.4 million (unaudited) at December 31, 2017, is collateralized by a pledge and assignment of net revenues ofTANC supported by take or pay commitments ofSMUD and other members.
Should other members default on their obligations to TANC, SMUD would be required to make additional payments to cover a portion of such defaulted payments, up to 25 percent of its current obligation. SMUD recorded transmission expenses related to TANC of$14.6 million and $15.7 million in 2017 and 2016, respectively.
Summary financial information for TA C is presented below*
December 31, 2017 2016 (Unaudited)
(Uraudited)
(lhousands or dollan)
Total Assets 341,672 338,213 Total Deferred Outflows of Resources 2,922 4,139 Total Assets and Deferred Outflows of Resources 344,594 342,352 Total Liabilities 330,927 328,767 Total Net Position 13,667 13,585 Total Liabilities and Net Position 344,594 342,352 Changes in Net Position for the Six Months Ended December 31 (424)
(374)
Copies of the TANC annual financial reports may be obtained from SMUD at PO Box 15830, Sacramento, California 95852 or online at www Jane.us.
BA C. SMUD, City of Redding, City of Roseville, Modesto Irrigation District (MID), City of Shasta Lake, and Trinity Public Utilities District are members of BANC, a IPA formed in 2009. In 2011, operationaJ control of Balancing Authority Area (BAA) operations was transferred from SMUD to BANC. BANC performs FERC approved BAA reliability functions that are managed by North American Electric Reliability Corporation (NERC),
nationally, and by Western Electricity Coordinating Council functions in the west. SMUD recorded expenses related to BANC of $1.6 million in 2017 and $2.0 million in 2016.
62 Built to last I 2017 SMUD Annual Report Mu..
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Summary financiaJ information for BANC is presented below:
Total Assets Total Liabilities Total Net Position Total Liabilities and Net Position Changes in Net Position for the Year Ended December 31 December 31, 2017 2016 (Audited)
(Audited)
(thousands of dollan) 2,092 1,594 2,092 1,594 2,092 1,594 $ Copies of the BANC annual financial reports may be obtained from SMUD at PO Box 15830, Sacramento, California 95852.
NOTE6 COMPONENT UNITS CVFA Carson Cogeneration Project. CVFA is a JPA formed by SMUD and the Sacramento Regional County Samtauon District. CVFA operates the Carson Project, a 65 MW (net) natural gas-fired cogeneration facility and a 42 MW (net) natura1 gas-fired simple cycle peaking plant The revenue stream to pay the CVFA bonds' debt service is provided by a "take-or-pay" power purchase agreement between SMUD and CVFA.
SCA Procter & Gamble Cogeneration Project. SCA is a JPA formed by SMUD and the SFA. SCA operates the Procter & Gamble Project, a 136 MW (net) natural gas-fired cogeneration facility and a 50 MW (net) natural gas-fired simple cycle peaking plant The revenue stream to pay the SCA bonds' debt service is provided by a "take-or-pay" power purchase agreement between SMUD and SCA.
SFA Cosumnes Power Plant Project. SFA is a JPA formed by SMUD and MID. SFA operates the Cosumnes Power Plant Project, a 501 MW (net) natural gas-fired, combined cycle facility The revenue stream to pay the SFA bonds' debt service is provided by a "take-or-pay" power purchase agreement between SMUD and SFA.
SPA Campbell Soup Cogeneration Project. SPA is a JPA formed by SMUD and the SFA SPA operates the Campbell Soup Project, a 160 MW (net) natural gas-fired cogeneration facility, and the McClellan Project, a 72 MW (net) natural gas-fired simple cycle peaking plant.
NCGA. NCGA is a JPA formed by SMUD and the SFA. NCGA has a prepaid gas contract with Morgan Stanley Capital Group (MSCG) expiring in 2027, which is financed primarily by NCGA revenue bonds. SMUD has contracted with NCGA to purchase all of the gas delivered by MSCG to NCGA, based on market prices. NCGA is obligated to pay the principal and interest on the bonds. Neither SMUD nor SFA is obligated to make debt service payments on the bonds. NCGA can terminate the prepaid gas contract under certain circumstances, including a failure by MSCG to meet its gas delivery obligation to NCGA or a drop in MSCG's credit raung below a specified level. If this occurs, MSCG will be required to make a termmation payment to NCGA based on the unamortized prepayment proceeds received by MSCG 2017 SMUD Annual Report Built to last 63
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,t
.1, t,1~\\p JtiJit, Dist6 *
"l<'.* 111 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The summarized activity of SMUD's component units for 20 17 is presented below:
CONDENSED STATEMENTS OF CASH FLOWS CONDENSED STATEMENTS OF NET POSITION December 31, 2017 December 31, 2017 (thousands of dollars)
(IMUsands of dollars)
CVFA SCA SFA SPA NCGA CVFA SCA SFA SPA NCGA Net Cash Provided by Operating Assets Activities 12,357 s
11,998 35,590 s
1,722 41,174 Electric Uhlity Plant - net s
50,685 72,074
$ 219,260 65,055
$ Net Cash Provided by (Used in)
Current Assets 18,468 35,485 51,238 19,295 59,786 oncapital Financing Activities (41,347)
Noncurrent Assets 54 IOI 1,209 2
223,372 Net Cash Used in Capital Financing Total Assets 69,207 107,660 271,707 84,352 283,158 Activities (10,539)
(7,956)
(33,607)
(353) Deferred Outflows of Resources 289 495 3,031 Net Cash Provided by Investing Total Assets and Deferred Outflows of Activities 37 111 122 33 758 Resources 69,496
$ 108, 155
$ 274,738 84,352 283,158 Net Increase in Cash and Cash Liabilities Equivalents 1,855 4,153 2,105 1,402 585 Long-Term Debt - net 10,790 19,518
$ 152,830 233,170 Cash and Cash Equivalents at the Current Liabilities 11,459 14,983 42,418 8,040 37,328 Beginning of the Year 6,910 16,197 22,704 5,795 20,654 Noncurrent Liabilities 10,428 Cash and Cash Equivalents at the Total Liabilities 32,677 34,501 195,248 8,040 270,498 End of the Year s
8,765 20,350 24,809 7,197 21,239 Net Position 36,819 73,654 79,490 76,312 12,660 TotaJ Liabilities and Net Position s
69,496
$ 108,155
$ 274,738 84,352 283,158 The summarized activity ofSMUD's component umts for 20161s presented below CONDENSED STATEMENTS OF NET POSITION CONDENSED STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET POSITION December 31, 2016 December 31, 2017 (thousand, of dollars)
(lhousands of dollars)
CVFA SCA SFA SPA NCGA CVFA SCA SFA SPA NCGA Assets Operating Revenues 32,007 51,777 163,942 31,959 41,895 Electric Utility Plant - net 51,674 77,777
$ 234,671 72,233
$ Operating Expenses 27,207 45,471 151,250 37,809 31,083 Restricted Assets Operating Income 4,800 6,306 12,692 (5,850) 10,812 Current Assets 19,580 29,882 63,780 18,138 55,347 Non-Operating Revenues and Expenses Noncurrent Assets 88 139 1,308 258,079 Other Revenues 50 146 140 44 785 Total Assets 71,342 107,798 299,759 90,374 313,427 Interest Charges and Other (924)
(1,365)
(4,538) (11,870)
Deferred Outflows of Resources 505 758 3,528 Change in Net Posibon Before Distributions Total Assets and Deferred Outflows of and Contributions 3,926 5,087 8,294 (5,806)
(273)
Resources 71,847
$ 108,556
$ 303,287 90,374 313,427 Distribution to Member (809)
Liabilities Member Contributions and Adjustments 69 Long-Term Debt - net 15,907 25,549
$ 170,479 264,475 Change in Net Position 3,926 5,087 8,294 (5,806)
(1,013)
Current Liabilities 13,321 14,440 61,612 8,256 35,279 Net Position - Beginning of Year 32,893 68,567 71,196 82,118 13,673 Noncurrent Liabil ities 9,726 Net Position - End of Year 36,819 73,654 79,490 76,3 12 12,660 Total Liabilities 38,954 39,989 232,091 8,256 299,754 Net Position 32,893 68,567 71,196 82,118 13,673 Total Liabilities and Net Position 71,847
$ 108,556
$ 303,287 90,374 313,427 64 Built to last I 2017 SMUD Annual Report 2017 SMUD Annual Report Built to last 65
o r
,1ut p 11 Jt l ty Di,.r,,.
,,r R
"lr NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONDENSED STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET POSITION December 31, 2016 (thousands of dollars)
CVFA SCA Operating Revenues Operating Expenses Operating Income Non-Operating Revenues and Expenses Other Revenues Interest Charges and Other Change in Net Position Before Distributions 35,854 33,295 2,559 1,607 (1,169) and Contributions 2,997 Distribution to Member Member Contributions and Adjustments Change in Net Position 2,997 Net Position - Beginning of Year 29,896 et Position - End of Year 32,893 56,602 51,541 5,061 2,999 (1,618) 6,442 6,442 62,125 68,567 SFA
$ 210,631 196,941 13,690 I0,021 (4,670) 19,041 19,041 52,155 71,196 CONDENSED STATEMENTS OF CASH FLOWS December 31, 2016 Net Cash Provided by Operating Activities Net Cash Provided by (Used in)
Noncapital Financing Activities Net Cash Used in Capital Financing Act1v1t1es et Cash Provided by Investing Activities Net Increase rn Cash and Cash Equivalents Cash and Cash Equivalents at the Beginning of the Year Cash and Cash Equivalents at the End of the Year (thouslnds of dot tan)
CVFA SCA 9,498 15,257 (8,965)
(11,328) 28 538 3,957 6,372 12,240 6,9 10 16,197 SFA 39,808 (38,835) 33 1,006 21,698 22,704 SPA 44,719 49,179 (4,460) 3,378 (1,082) (1,082) 83,200 82,118 SPA 8,661 (7,028) 1,638 4,157 5,795 NCGA 40,338 27,943 12,395 707 (12,973) 129 (748) 71 (548) 14,221 13,673 NCGA 39,769 (39,893) 693 569 20,085 S
20,654 As described in Note 2, all of the activities and balances of the component units are blended into and reported as part of SMUD because of the extent of their operationa1 and financial relationships with SMUD. Copies ofCVFA's, SCA's, SF A's, SPA's and NCGA's annual financial reports may be obtained from their Executive Office at PO Box 15830, Sacramento, California 95852 or online at www smud ocg.
66 Built to last 2017 SMUD Annual Report r m~ tt !.lUn l., -t Ar ep *r NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 CASH, CASH EQUIVALENTS, AND INVESTMENTS Cash Equivalents a nd Investments. SMUD's investment policy 1s governed by the Cahforn1a State and Municipal Codes and its Indenture, which allow SMUD's investments to include: obligations which are unconditionally guaranteed by the U.S Government or its agencies or mstrumentaliues; direct and general obligations of the State or any local agency within the State; bankers' acceptances, commerc1al paper~ certificates of deposit; repurchase and reverse repurchase agreements; medium term corporate notes; LAIF; and money market funds SMUD's investment policy includes restrictions for investments relaung to maximum amounts mvested as a percentage of total portfolio and with a single issuer, maximum matunttes, and minimum credit ratings.
Credit Rjsk. This is the nsk that an issuer ofan investment will not fulfill its obligation to the holder of the investment.
To mitigate this risk, SMUD limits investments to those rated, at a minimum, "A-I" or equivalent for short-term investments and "A" or equiva1ent for medium-term corporate notes by a nationally recognized rating agency.
C ustodial Credit Risk. This is the risk that, in the event of the failure ofa depository financial institution or counterpa.ny to a transaction, SMUD's deposits may not be returned or SMUO will not be able to recover the value of Its deposits, investments or collateral secunues that are in the possession of another pany. SMUD does not have a deposit policy for custodial credit risk As of December 31, 2017 and 2016, $18 3 million and $11 3 million rn deposits were unrnsured, respecllvely. The bank balance is also, per a depository pledge agreement between SMUD and SMUD's bank, collateralized at 134 percent and 122 percent of the collect1ve funds on deposit (increased by the amount of accrued but uncredited interest, reduced by deposits covered by FDIC) at December 31, 2017 and 2016, respecllvely SMUD had money market funds of $117 7 million and $111 3 million which were uninsured at December 31, 2017 and 2016, respectively SMUD's mvestments and money market funds are held in SMUD's name Concentration of Credit Risk. This is the risk of loss attnbuted to the magnitude of an entity 's investment in a smgle issuer. SMUD places no limit on the amounts invested in any one issuer for repurchase agreements and federal agency securities. The following are the concentrations of risk greater than five percent in either year:
Investment Type:
Federal Home Loan Banks Freddie Mac Federal Farm Credit Bank Corporate Note - Berkshire Hathaway Corporate Note-Wells Fargo Bank December 31, 2017 2016 20%
13%
13%
5%
5%
19"/o 34%
2%
3%
6%
In terest Rate Risk. This is the risk of loss due to the fair va1ue of an investment declining due to interest rates nsing. Though SMUD has restrictions as to the mat unties of some of the investments, It does not have a formal policy that limits investment maturities as a means of managing its exposure to fair value losses arising from increasing interest rates. SMUD is exposed to interest rate risk on its interest rate swaps (see Note 9).
The following schedules indicate the credit and interest rate risk at December 31, 2017 and 2016. The credit ratings listed are from Standard & Poor's (S&P) or Moody 's (NIA is defined as not applicable to the ratrng disclosure requirements.)
2017 SMUD Annua1 Rep rt Built to last 67
Sacramento t-1ur ""lpc, Jtility Distri<*t 2( 17 Ar nual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 201 7, SMUD's cash, cash equivalents, and investments consist of the followi ng:
Remaining Maturities (in years)
Credit Less More Description Rating than 1 1-5 than 5 (thousands of dollars)
Cash and Cash Equivalents:
Cash NIA 16,738
$ $ LAIF Not Rated 119,832 Money Market Funds AAAm 117,727 Deposit at Notice NIA 4,545 Commercial Paper A-I 17 845 Total cash and cash equivalents 276,687 Investments:
Fannie Mae AA+ 19,497 Federal Farm Credit Bank AA+ 68,266 Federal Home Loan Bank AA+ 103,430 Freddie Mac AA+IA-1 +
9,890 59,608 Financing Corp FICO NIA 12,777 U.S. Treasury Obligations AA+ 163,120 Corporate Notes AAAIAAIM-IA+IA 106,170 Municipal Bonds AA-15,073 Commercial Paper A-l+IA-1 29 765 Total investments 39 655 547 941 Total cash, cash equivalents, and investments
$ 316 342
$ 547941
$ At December 31, 2016, SMUD's cash, cash equivalents, and investments consist of the following:
Remaining Maturities (in years)
Credit Less More Description Rating than 1 1-5 than 5 (thousands of dollars)
Cash and Cash Equivalents:
Cash NIA 1,614
$ $ LAIF Not Rated 130,689 Money Market Funds AAAm 111,323 Deposit at Notice NIA 2,446 Commercial Paper A-I 16 700 Total cash and cash equivalents 262,772 lnvestments:
Fannie Mae AA+ 19,488 Federal Farm Credit Bank AA+ 9,891 Federal Home Loan Bank AA+
34,924 63,597 Freddie Mac AA+
139,886 34,777 Financi ng Corp FICO Aaa 13,808 U.S. Treasury Obligations NIA 14,999 43,760 Corporate Notes AAAIAAIM-IA+IA 76,043 74,062 Municipal Bonds AA-23,082 Commercial Paper AA-10 408 Total investments 299 342 259 383 Total cash, cash equivalents, and investments
$ 562 114 259 383
$ 68 Built to last I 2017 SMUD Annual Report Total Fair Value 16,738 119,832 117,727 4,545 17 845 276,687 19,497 68,266 103,430 69,498 12,777 163,120 106,170 15,073 29.765 587,596 864 283 Total Fair Value 1,614 130,689 111,323 2,446 16 700 262,772 19,488 9,891 98,521 174,663 13,808 58,759 150,105 23,082 10408 558 725
$ 821 497 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SMUD's cash, cash equiva1ents, and investments are classified in the Consolidated Statements of Net Position as follows:
Total Cash, Cash Equivalents, and Investments:
Revenue bond reserve and debt service funds:
Revenue bond reserve fund Debt service fund Component unit bond reserve and debt service funds Total revenue bond reserve and debt service funds Nuclear decommissioning trust fund Rate stabilization fund Component unit other restricted funds Escrow fund Other restricted funds Unrestricted funds Total cash, cash equivalents, and investments NOTES REGULATORY DEFERRALS December 31,
2017
{lhousands of dollm )
6,432 51,841 35,049 93,322 8,411 99,899 3,207 6,374 654 652,4 16 864,283 2016 7,395 68,964 39,106 115,465 8,357 35,154 3,777 6,056 654 652,034 821,497 The 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 (see Note 2). These actions result in regulatory assets and deferred inflow of resources, 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 (Costs)
Decommissioning. SMUD's regulatory asset relating to the unfunded portion of its decommissioning liability is being collected through interest earnings on the Trust Fund. Nuclear fuel storage costs and non-radiological decommissioning costs have been collected in rates since 2009.
Derivative Financial Instruments. SMUD's regulatory costs and/or credits relating to investment derivative instruments are intended to defer the net difference between the fair value of derivative instruments and their cost basis, if any. Investment derivative instruments are reflected in rates at contract cost and as such, the balance is charged or credited into rates as the related asset or deferred inflow of resource is utilized (see Note 9).
Debt Issuance Costs. SMUD established a regulatory asset for costs incurred in connection with the issuance of debt obligations, principally underwriter fees and legal costs. The regulatory asset is amortized through 2017 for the portion related to SMUD's debt issuance costs and over the life of the bonds for the portion related to the component units' debt issuance costs. Debt issuance costs after December 31, 2013 are expensed.
Pension. SMUD established a regulatory asset for pension costs related to the implementation ofGASB No. 68 which requires SMUD to record a net pension liability. The regulatory asset will be amortized over a period of25 years starting in 2018.
2017 SMUD Annual Report I Built to last 69
S,ramentoMunicipal Utility District 2017 Ar n*ral Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SMUD's total regulatory costs for future recovery are presented below:
Regulatory Costs:
Decommissioning Derivative financial instruments Debt issuance costs Pension Total regulatory costs Less: regulatory costs to be recovered within one year Total regulatory costs for future recovery - net Regulatory Credits December 31, 2017 2016 (thousands of dollars) 151,640 14,529 2,526 425,680 594,375 (20,178) 574 197 149,258 15,567 7,913 425,680 598,418 (11,523) 586 895 CIAC. In 2017 and 2016, SMUD added CIAC totaling $14.6 million and $15.6 million, respectively, to Regulatory Credits in the Consolidated Statements of Net Position and recorded $11.9 million and $11.4 million of amortization, respectively, to Other Income - Net in the Consolidated Statements of Revenues, Expenses and Changes in Net Position. SMUD'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 assets in order to offset the earnings effect of these non-exchange transactions.
Rate Stabilization. SMUD's regulatory credit relating to Rate Stabilization is intended to defer the need for future rate increases when costs exceed existing rates. At the direction of the Board, amounts may be either transferred into this fund (which reduces revenues), or amounts are transferred out of this fund (which increases revenues).
The Board authorizes Rate Stabilization Fund (RSF) transfers on an event driven basis. In 2017, $12.3 million was transferred from revenue to the RSF as a result of higher than budgeted energy deliveries from Western Area Power Administration (Western). In 2016, $5.1 million was transferred from the RSF to revenue as a result of lower than budgeted energy deliveries from Western.
Hydro Rate Stabilization. The Hydro Rate Stabilization Fund (HRSF) was established through the Hydro Generation Adjustment (HGA) mechanism, which helps manage volatility in energy costs. The HGA mechanism applies a fonnula based on precipitation and wholesale electricity prices to calculate needed withdrawals from or deposits to the HRSF. The maximum baJance of the HRSF is 5 percent of the budgeted retail revenue and the maximum annual transfer in or out of the HRSF is 4 percent of budgeted retail revenue. If the HRSF is depleted, SMUD will apply a hydro rate surcharge to customers' bills up to 4 percent. When the HRSF is fully replenished, a wet year can trigger a hydro rebate or credit on the customers' bills. In 2017 and 2016, $52.4 million and $10.0 million, respectively, was transferred from revenue to the HRSF as a result of high precipitation.
Energy Assistance Program Rate (EAPR), In 2016, The Board authorized SMUD to transfer $10.0 million of revenue to a regulatory credit related to EAPR. This regulatory credit is intended to offset future expenditures for energy efficiency programs for EAPR customers from the period 2018-2020.
Senate Bill 1. SMUD implemented a per kilowatt hour solar surcharge, effective January I, 2008 in order to fund investments in solar required by Senate Bill 1 (SB-I). The difference between the surcharge revenues received and the funds spent on solar initiatives will be recognized or deferred into future years. SMUD has spent less than it collected in SB-I revenues and has recorded a regulatory credit. Collection of the solar surcharge ended in December 2017 when total collections reached $130.0 million.
70 Built to last I 2017 SMUD Annual Report Sa**ramenD 1'-1.u1 icip Util t Dlstri<'t 2( 1 Ar al Re~ ;,r1 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Grant Revenues. In 2009, SMUD was awarded several large grants under the ARRA, which provided significant reimbursements for capital expenditures. In 20 I 0, the Board authorized the deferral of grant income for capital expenditures as regulatory liabilities. Thus, this regulatory credit will be deferred to match the depreciable lives of the related capital assets in order to offset the earnings effect of these non-exchange transactions.
TANC Operations Costs. SMUD's regulatory asset relating to deferred TANC costs comprises the difference between its cash payments made to TANC and its share ofTANC'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. SMUD's cash payments to TANC exceeded TANC's accrual-based costs and SMUD has recorded a regulatory credit.
SMUD's total regulatory credits for future revenue recognition are presented below:
Regulatory Credits:
CIAC Rate stabilization Hydro rate stabilization EAPR Senate Bill I Grant revenues TANC operations costs Total regulatory credits NOTE9 DERIVATIVE FINANCIAL INSTRUMENTS December 31, 2017 2016 (thousandsofdollaN) 254,328 37,509 62,390 10,000 12,049 46,975 22,406 445 657 251,623 25,188 9,966 10,000 1,925 52,535 18,975 370 212 To help provide stable electric rates and to meet the forecasted power needs of its retail customers reliably, SMUD enters into various physical and financial fixed price purchase contracts for electricity and naturaJ gas. These fixed price contracts and swap agreements are intended to hedge the exposure due to highly volatile commodity prices. SMUD also enters into interest rate swap agreements to reduce interest rate risk. SMUD utilizes these derivative financial instruments to mitigate its exposure to certain market risks associated with ongoing operations. SMUD has established policies set by an executive committee for the use of derivative financial instruments for trading purposes. These contracts are evaluated pursuant to SGAS No. 53, "Accounting and Financial Reporting/or Deritiative Instruments," (GASB No.
- 53) to detennine whether they meet the definition of derivative instruments, and if so, whether they effectively hedge the expected cash flows associated with interest rate and commodity price risk exposures.
SMUD applies hedge accounting for derivatives that are deemed effective hedges. Under hedge accounting, the increase or (decrease) in the fair value of a hedge is reported as a Deferred Inflow or Deferred Outflow on the Consolidated Statements of Net Position. Derivatives that do not meet the effectiveness tests are deferred for rate-making purposes as regulatory assets or liabilities on the Consolidated Statements of Net Position (see Note 8).
During 2017 and 2016, SMUD executed numerous new gas and power related purchase agreements, some of which are recorded as hedging or investment derivatives and are therefore included in the following table. All hedging or investment derivatives are recorded at fair value on the Consolidated Statements of Net Position.
2017 SMUD Annual Report Built to last 71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For electricity and gas derivatives, fair values are estimated by comparing contract prices to forward market prices quoted by an independent external pricing service. When external quoted market prices are not available for derivative contracts, SMUD uses an internally developed valuation model utilizing short tenn observable inputs. For interest rate derivatives, SMUD calculates the fair value by discounting the expected cash flows at their correspondi ng zero coupon rate.
The following is a summary of the fair values, changes in fair value and notional amounts of derivative instruments, grouped by trading strategy, outstanding at December 31, 2017 (amounts in thousands~ gains shown as positive amounts, losses as negative):
2017 Changes in Fair Value Fair Value at December 31, 201 7 Current Nonrurrent Cash Flow Hedges:
(thousands of dollars)
(thousands ofDcl.athcmu (Ckh))
Amount Asset: Investment Derivative Instruments Gas - Commodity S
Gas - Storage Gas-Transportation Total Investment Derivative Instruments Asset: Hedging Derivative Instruments Gas-Basis Gas - Commodity Gas - Storage Gas - Transportation Interest Rate Total Hedging (401)
I (19)
(419) 265 (307)
(341) 5 (4,635)
Derivative Instruments (5,013)
Liability: Investment Derivative Instruments Gas-Basis S
(34)
Gas - Commodity (623)
Gas - Transportation (30)
Interest Rate (3,001)
Total Investment Derivative Instruments (3,688)
Liability: Hedging Derivative Instruments Gas-Basis S
(515)
Gas - Commodity
( 168)
Gas - Storage II Gas - Transportation (62)
Total Hedging Amount (175) (175) (394) (1,636)
(2,030)
$ 2,645 (589) 2,056 $
(18,516) Current Amount 265 526 2
52 2,023 2,868 1,636 1,197 2,833 27,219 202 79 Derivative Instruments (734)
(18,516) 27,500 72 Built to last I 2017 SMUD Annual Report Noncurrent Amount 228 18, 131 18,359 3,900 7,797 11,697 78,145 78,145 Notional 78 Dth 3,960 Dth 9,258 Dth 78 Dth 2,290 Dth
$317,785 7,833 Dth
$122,115 91,660 Dth 2,590 Dth 4,563 Dth Tl NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The followmg is a summary of the fair values, changes in fair value and notional amounts of derivative instruments, grouped by trading strategy, outstanding at December 31, 2016 (amounts in thousands; gains shown as positive amounts, losses as negative) 2016 Changes in Fair Value Cash Flow Hedges:
(lhoosandsofdoll1r1)
(thousands ofDc~thenns (Ckh))
Current Amount Asset: Investment Denvative Instruments Gas - Commodity Gas - Transportation Total Investment Derivative Instruments Asset: Hedging Derivative Instruments Gas - Basis S
Gas - Commodity Gas - Storage Gas - Transportation Interest Rate Total Hedging Derivative Instruments 401 19 420 (323) 29 298 (237) 374 141 L1ab1lity: Investment Derivative Instruments Gas - Basis (34)
Gas - Commodity 4,785 Gas - Transportation (30)
Interest Rate 1,337 Noncurrent Amount 175 175 622 (1,954)
(1,332) 5,949 3,787 Fair Value at December 31, 2016 Current Amount 401 19 420 833 343 47 6,658 7,881 34 2,259 30 4,198 Noncurrent Amount 175 175 622 19,767 20,389 1,255 8,386 Notional 1,795 Dth 380 Dth 7,013 Dth 1,428 Dth 2,600 Dth
$331,190 225 Dth 6,885 Dth 155 Dth
$151,830 Total Investment Derivative Instruments 6,058 9,736 6,52 1 9,641 Liability: Hedgmg Derivative Instruments Gas - Basis S
(352)
Gas - Commodity 37,062 Gas - Storage 190 Gas - Transportation 66 Total Hedging Derivative Instruments 36,966
$ 37,761 37,761 515 27,387 191 141 28,234
$ 96,661 96,661 5,925 Dth 104,117 Dth 930 Dth 1,458 Dth 2017 SMUD Annual Report Built to last 73
Sacramento Municipal Utility District 2017 Annual Repo~
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Objectives and Terms of Hedging Derivative Instruments. The objectives and tenns of SMUD's hedging derivative instruments that were outstanding at December 31, 2017 are summarized in the table below. The table is aggregated by the trading strategy. Credit ratings of SMUD's counterparties can be found in the table under Credit Risk. Details ofSMUD's interest rate derivati ve instruments can be found in Note 10.
Notional Beginning Ending Minimum Maximum Amount 0th Date Date Price/0th Price/Dth Gas - Basis 3,960 01/01 /18 12/31/18 (156)
(1.42)
Gas - Commodity 100,918 01/01/08 12/31/22 2.61 7.17 Gas - Storage 2,668 01/01/18 03/31/18
(.26)
.25 Gas - Transportation 6,853 01/01/18 12/31/18 (42)
(.20)
The objectives and terms of SMUD's hedging derivative instruments that were outstanding at December 31, 2016 are summarized in the table below. The table is aggregated by the trading strategy.
Notional Beginning Ending Minimum Maximum Amount 0th Date Date Price/0th Price/0th Gas-Basis 5,925 0 1/01/17 12/31/17 (0.99)
(0.96)
Gas - Commodity 111,130 01/01/08 12/31/22 2.75 7.17 Gas - Storage 2,358 01/01/17 03/31/17
.10 43 Gas - Transportation 4,058 01/01/17 03/31/17 (0.18)
.II SMUD hedges its interest rate exposure with several swaps. One swap is used to convert some of the mterest expense associated with fixed rate bonds to a variable rate interest expense. SMUD also has two forward starting swaps that are designed to partially fix the interest expense associated with variable rate bonds (see Note I 0).
SMUD hedges its power and natural gas costs so that it can offer predictable rates to its retail electric customers and support its credit rating. SMUD maintains a risk management program to control the price, credit, and operational risks arising from its power and natural gas market activities. Under the program, authorized SMUD employees assemble a portfolio of swaps, futures, and forward contracts over time with the goal of making SMUD's purchased power and fuel budget more predictable.
The hedged risks include those related to interest rate and commodity price fluctuations associated with certain forecasted transactions, including interest rate risk on long-term debt, and forward purchases of gas and electricity to meet load.
Derivatives Not Designated as Hedging Instruments Gas and Electric Contracts. SMUD utilizes certain gas swap and electric swap agreements under GASB No. 53 not designated as hedging derivative instruments to mitigate exposure to changes in the market price of natural gas and electricity. The fair value of each agreement, excluding the actual settlements to be paid or received as of the end of the period, is recorded on the Consolidated Statements of Net Position in either Current or Noncurrent Assets, Investment Derivative Instruments ifin an asset position or Current or Noncurrent Liabilities, Investment Derivative Instruments if in a liability position. An offsetting amount is included in Current or Noncurrent Regulatory Costs 74 Built to last I 2017 SMUD Annual Report Sacr~ment Municip I Ut, ity District 2017 A,
,a Rep' NOTES TO CONSOLIDATED FINANCIAL STATEMENTS or Regulatory Credits for future recovery in the Consolidated Statements of Net Position. The actual settlement payable is recorded in Accounts Payable on the Consolidated Statements of Net Position, and the actual settlement receivable is recorded in Receivables - Net: Wholesale and Other on the Consolidated Statements of Net Position.
The payments and receipts of the actual settlement are recorded as Investment Expense in the Consolidated Statements of Revenues, Expenses and Changes in Net Position.
Interest Rate Contracts. SMUD utilizes certain interest rate swap agreements not designated as hedging derivative instruments under GASB No. 53 to mitigate exposure to fluctuations in interest rates. The fair value of each agreement, excluding the balance of interest to be paid or received as of the end of the period, is recorded on the Consolidated Statements of Net Position in either Current or Noncurrent Assets, Investment Derivative Instruments if in an asset position or Current or Noncurrent Liabilities, Investment Derivative Instruments ifin a liability position. An offsetting amount is included in Current or Noncurrent Regulatory Costs or Deferred Outflows or Inflows of Resources in the Consolidated Statements of Net Position. The interest receivable is recorded in Receivables - Net: Wholesale and Other on the Consolidated Statements of Net Position and the accrued interest is recorded in Interest Payable on the Consolidated Statements of Net Position. The payments or receipts of the actual settlement are recorded as Investment Expense in the Consolidated Statements of Revenues, Expenses and Changes in Net Position.
The Board has deferred recognition of the effects of reporting the fair value of Investment Derivative Instruments for rate-making purposes, and maintains regulatory accounts to defer the accounting impact of these accounting adjustments (see Note 8). Market values may have changed significantly since December 31, 20 17.
Basis Risk. This is the risk that arises when a hedged item and a derivative that is attempting to hedge that item are based on different indices. SMUD is exposed to basis risk when it hedges its natural gas purchases, which are priced at various locations, and with NYMEX futures contracts, which settle based on the price at Henry Hub, Louisiana.
SMUD enters into basis swaps to hedge against this risk.
Termination Risk. This is the risk that a derivative will terminate prior to its scheduled maturity due to a contractual event. Contractual events include bankruptcy, illegality, default, credit events upon merger, and other events. One aspect of termination risk is that SMUD would lose the hedging benefit of a derivative that becomes subject to a termination event. Another aspect of termination risk is that, if at the time of termination the mark to market value of the derivative was a liability to SMUD, SMUD could be requi red to pay that amount to the counterparty. Termination risk is associated with all ofSMUD's derivatives up to the fair value amounts.
Credit Risk. This is the risk of loss resulting when the counterparty is unable or unwilling to fulfill its present and future financial obligations. SMUD can be exposed to significant counterparty credit risk on all derivative instruments.
SMUD seeks to minimize credit risk by transacting with creditworthy counterparties. SMUD has established and maintained strict counterparty credit guidelines. SMUD continuously monitors counterpany credit risk and utilizes numerous counterparties to diversify the exposure to potential defaults. Under certain conditions as outlined in SMUD's credit risk management policy, SMUD may require additional credit support under its trading agreements.
Some ofSMUD's derivative master agreements contain credit contingent provisions that enable SMUD to maintain unsecured credit as a result of positive investment quality credit ratings from each of the major credit rating agencies. IfSMUD's credit rating were to be downgraded, there could be a step-down in SMUD's unsecured credit thresholds, and SMUD's counterparties would require additional collateral. lfSMUD's credit rating were to decrease below investment grade, SMUD's unsecured credit thresholds would be reduced to zero, and counterparties to the derivative instruments would demand ongoing full collateralization on derivative instruments in net out of the money positions (see Note 2).
2017 SMUD Annu3l Report Built to last 75
S
~1.,f'nto.Mu i NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The counterparties' current credit rating at December 31, 2017 is shown in the table below. The credit ratings listed are from S&P or Moody's.
Counterpany Gas Contracts:
Bank of Montreal Barclays Bank PLC Cargill Inc.
Citigroup Inc.
EDF Trading Group J.P. Morgan Ventures Energy Corp.
Merrill Lynch Morgan Stanley Capital Group, Inc.
Shell Trading Market Risk Interest Rate Contracts:
Goldman Sachs Capital Markets, L.P.
Goldman Sachs Mitsui Marine Derivative Products, L.P Morgan Stanley Capital Services, Inc.
Wells Fargo & Company Bank of America Corporation NOTE 10 LONG-TERM DEBT SMUD's total long-term deb1 is presented below:
Electric revenue bonds, 2.0'/o-6.32%, 2018-2041 Subordinated electric revenue bonds, index rates, 2018-2041 Total electric revenue bonds Component unit project revenue bonds, 3.0'/o-5 25%, 2018-2030 Gas supply prepayment bonds, index rates, 2018-2027 Total long-term debt outstanding Bond premiums - net Total long-term debt Less: amounts due within one year Total long-term debt - net 76 Built to last I 2017 SMUD Annual Report Counterparty Credit Rating A+
A-A BBB+
BBB A-BBB+
BBB+
A BBB+
AA-BBB+
AA-A+
December 31,
2017 (thousands of dollars) 1,783,660 88,750 1,872,410 186,890 264,475 2,323,775 150,440 2,474,215 (132,440) 2,341,775 2016 1,676,315 341,850 2,018,165 220,925 292,870 2,531,960 133,275 2,665,235 (160,585) 2,504,650 Mui NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The summarized activity of SMUD's Jong-term debt during 2017 is presented below:
December 31,
Payments or December 31, 2016 Addrtions Amortization 2017 (thousands of dollar,)
Electric revenue bonds
$ 1,676,3 I 5 202,500 (95,155) 1,783,660 Subordinate electric revenue bonds 341,850 (253,100) 88,750 Component unit project revenue bonds 220,925 (34,035) 186,890 Gas supply prepayment bonds 292,870 (28,395) 264,475 Total 2,531,960 202,500 (410,685) 2,323,775 Unamortized premiums - net 133,275 34,582 (17,417) 150,440 Total long-term debt
$ 2,665,235 237,082 (428,102)
$ 2,474,215 The summarized activity ofSMUD's long-term debt during 2016 is presented below:
Dec.ember 31, Payments or December 31, 2015 Additions Amortization 2016 (thousands of dollars)
Electric revenue bonds
$ 1,786,080 149,890 (259,655) 1,676,315 Subordinate electric revenue bonds 344,850 341,850 (344,850) 341,850 Component unit project revenue bonds 253,375 (32,450) 220,925 Gas supply prepayment bonds 318,795 (25,925) 292,870 Total 2,703,100 491,740 (662,880) 2,531,960 Unamortized premiums - net 123,080 36,437 (26,242) 133,275 Total long-term debt
$ 2,826,180 528, I 77 (689,122)
$ 2,665,235 At December 31, 2017 scheduled annual principal maturities and interest are as follows:
Principal Interest (thousand:1 of dollars) 2018 132,440 112,762 2019 148,270 110,003 2020 132,810 103,089 2021 136,955 96,426 2022 138,170 89,790 2023 - 2027 (combined) 725,910 346,275 2028 - 203 2 ( combined) 400,690 190,652 2033 - 2037 (combined) 397,435 74,781 2038 - 2041 (combined) 111,095 11,892 Total Requirements 2,323,775 1,135,670 Amounts OueWrthin One Year 76,300 24,835 31,305 132,440 Amounts DueWrthin One Year 95,155 3,000 34,035 28,395 160,585 Total 245,202 258,273 235,899 233,381 227,960 1,072,185 591,342 472,216 122,987 3,459,445 2017 SMUD Annual Report 1 Built to last 77
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS lnterest in the preceding table includes interest requirements for fixed rate debt at their stated rates, variable rate debt covered by interest rate swaps at their fixed rate, and variable rate debt not covered by interest rate swaps using the debt interest rate of 70 percent of I month London Interbank Offered Rate (LIBOR) plus a fixed fee. The LIBOR rate 1s based on the rate m effect at December 31, 2017 for the issues.
The following bonds have been issued and are outstanding at December 31, 2017:
Final Interest Original Outstanding Date Issue Maturity Rate Amount Amount (thouands of dollars)
Electric Revenue Bonds 06/15/ 1997 1997 Series K Bonds 07/01 /2024 5.25%
- 5.9%
131,030 117,625 06/09/2008 2008 Senes U Bonds 08/15/2028 3.0%
- 5.0%
521,730 219,895 05/15/2009 2009 Series V Bonds 05/ 15/2036 6.322%
200,000 200,000 07/29/20 10 20 IO Series W Bonds 05/15/2036 6.156%
250,000 250,000 I 0/04/20 11 20 II Series X Bonds 08/15/2028 1.5%
- 5.0%
325,550 228,995 05/31/2012 2012 Senes Y Bonds 08/15/2033 3.0"/o
- 5.0"/,
196,945 185,5 15 05/21/2013 2013 Series A Bonds 08/15/2041
- 3. 75%
- 5.0"/,
132,020 132,020 05/21/2013 2013 Series B Bonds 08/15/2033 3.0"/,
- 5.0"/,
118,615 97,220 07/14/2016 2016 Series D Bonds 08/1 5/2028 2 ()'I,* 5.0"/o 149,890 149,890 12/14/2017 2017 Series E Bonds 08/15/2028 5 00"/o 202,500 202,500 JPA Electric Revenue Bonds 08/19/2009 2009 CYFA Bonds 07/01/2020 2.25%. 5.25%
48,920 15,555 08/19/2009 2009 SCA Bonds 07/01/202 1 4.0"/o
- 5.25%
57,530 24,695 06/03/2015 2015 SFA Bonds 07/01/2030 2 0%
- 5.0"/o 193,335 146,640 05/31/2007 2007B NCGA#l Bonds 07/01/2027 Index Rate 668,470 264,475 Subordinated Electric Revenue Bonds 10/27/2016 2016 Senes N Bonds 08/15/2041 Index Rate 72,000 44,375 10/27/2016 2016 Series O Bonds 08/15/2041 Index Rate 72,000 44,375 201 7 Bond Refunding. In December 2017, SMUD issued $202.5 million of 2017 Series E Electric Revenue Refunding Bonds. The purpose of this transaction was to refund variable rate debt with fixed rate debt to reduce the nsk of increased interest rates. Proceeds from the 2017 Senes Bonds, rn addition to $13.0 million of funds on hand, were used to defease $26.1 million of a portion of the Series 2016 N bonds, $26.1 million of a portion of the Senes 2016 0 bonds, $120.0 million of all of the outstandmg 2016 Series P bonds, and $77.9 million of all of the outstanding Series 20 16 Q bonds. A total of $250.1 mi llion bonds were defeased through a legal defeasance, and accordingly, the liability for the defeased bonds has been removed from Long-Tenn Debt - net in the Consolidated Statements of Net Position. The refunding resulted in the recognition of a deferred accounting loss of $5.5 mil lion, which is being amortized over the life of the refunding issue. Based on an assumed LI BOR rate of 1.7 percent for the life of the debt, the 2017 refunding increased future aggregate debt service payments by $0.6 million and resulted in a total economic loss of$I.4 million, which 1s the difference between the present value of the old and new debt service payments.
78 Built to last I 2017 SMUO Annual Report 1u NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2016 Bond Refunding. In June 2016, SMUD issued $149.9 million of2016 Series D Electric Revenue Refunding Bonds Proceeds from the 2016 Series Bonds were used to refund $125.4 million of the outstanding 2008 Series U Bonds, and $43.6 million of outstanding 2011 Senes X Bonds, through a legal defeasance, and accordingly, the hab1hty for the defeased bonds has been removed from Long-Tenn Debt-net m the Consolidated Statements of et Pos111on The refunding resulted rn the recognition of a deferred accounting loss of SI 2 6 m1lhon. which is being amon1zed over the life of the refunding issue. The 2016 refunding reduced future aggregate debt service payments by $27.2 million and resulted in a total economic gain ofS23.4 million. which 1s the difference between the present value of the old and new debt service payments.
2016 Conversion to Direct Placement. (n October and November of 2016, SMUD completed transactions to convert all of the outstandmg 2008 Series J, 2008 Senes K, 2012 Series L, and 2012 Sen es M Bonds to d,rect placements, totaling $341.9 million (see Direct Purchase Agreements below). As part of each transaction, new bonds were issued to def ease the old bonds, and as a result, the reimbursement agreements with Bank of America, State Street, and US Bank were terminated The scheduled principal payments remain unchanged unless the bonds aren't successfully remarketed at the end of the term. Accordingly, SMUD has recorded such bonds as Long-Tenn Debt, less amounts due within one year in the Consolidated Statements of Net Position. No additional deferred gain or loss or economic gain resulted from these transactions Interest Rate Swap Agreements. A summary of SMUD's five interest rate swap agreements are as follows The credn raungs listed are from S&P Notional Counterparty Amount SMUD Fixed Floating Termination Credit (thouiands)
Pays Rate Rate Date Rating 11 7,625 Variable 5.154%
SIFMA 07/01 /24 BBB+
26,015 Fixed 4.345%
70"/, ofLIBOR 08/15/18 AA*
96,100 Fixed 2.894%
63% ofLIBOR 08/15/28 BBB+
79,714 Fixed 1.172%
67% ofLIBOR 08/15/28 AA*
120,446 Fixed 1.113%
67% ofLIBOR 08/15/28 A+
SMUD has a fixed-to-vanable interest rate swap agreement with a notional amount of $117 6 million, which 1s equivalent to the principal amount of SMUD's 1997 Series K Electric Revenue Bonds. Under this swap agreement, SMUD pays a variable rate equivalent to the Securities Industry and Financial Markets Association (SIFMA) Index (1.71 percent at December 31, 2017) and receives fixed rate payments of 5.154 percent In connection with the swap agreement. SMUD has a put option agreement, a1so with a notional amount of St 17.6 m1llion, which gives the counterparty the right to sell to SMUD, at par, either the 1997 Series K Bonds, or a portfolio of securities sufficient to defease the 1997 Senes K Bonds SMUD receives fixed rate payments of0.268 percent m connection with the put option agreement The exercise of the option termmates the swap at no cost to SMUD The tenn of both the swap and the put is equal to the maturity of the 1997 Series K Bonds.
SMUD has two variable-to-fixed interest rate swap agreements with a combined notional amount of $122.1 million originally entered into for the purpose of fixing the effective interest rate associated with certain of its subordinated bonds that were refunded during 2008. The notional values of the two swaps are amortized over the life of the respective swap agreements. SMUD can terminate all swap agreements at any time, with payment or receipt of the fa1r market value of the swaps as of the date oftermmation The obligations ofSMUD under the swap agreements are not secured by a pledge of revenues ofSMUD's electnc system or any other property ofSMUD.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Additionally, in June 2016, SMUD executed variable-to-fixed interest rate swap agreements with Wells Fargo and Bank of America with a combined notional amount of $200.2 million. These were entered into for the purpose of fixing the effective interest rate associated with subordinated bonds that are expected to be issued in July of 2018. The swaps do not take effect until July 12. 2018. The notional values of the two swaps are amortized over the life of their respective swap agreements. SMUD can terminate both swap agreements at any time, with payment or receipt of the fair market value of the swaps as of the date oftenmination. Additionally, on August 15, 2023 and for the remaining hfe of the swaps, the swaps can be terminated at no cost to SMUD. The obligations of SMUD under the swap agreements are not secured by a pledge of revenues of SMUD's electric system or any other property ofSMUD.
Component Unit Interest Rate Swap Agreements. NCGA has two interest rate swap agreements, which are summarized as follows. The credit ratings listed are from S&P.
Notional Credit Support Amount NCGA Fixed Floating Termination Provider Credit (thousands)
Pays Rate Rate Date Rating 65,865 Fixed 4.144%
67% of LIBOR +.63%
07/01/19 BBB+
198,610 Fixed 4 304%
67% ofLIBOR +.72%
07/01 /27 BBB+
At December 31, 2017, CGA had two variable-to-fixed interest rate swap agreements with a counterparty for the purpose of fixing the effective interest rate associated with the 2007 Series B Bonds. NCGA pays the counterparty a fixed rate on the notional amount and receives a floating rate equal to 67 percent of the three month LIBOR (1.69 percent at December 31, 2017) plus an interest rate spread, as specified in each swap agreement. The total notional amount of the two swaps at December 31, 2017 was $264.5 million and was equiva1ent to the outstanding principal ba1ance on the CGA Bonds. The swaps are amortized over the life of their respective swap agreements in a manner corresponding to the principal repayment schedule of the CGA Bonds. Early termination of the swaps would occur upon termination of the prepaid agreement for any reason. Upon early termination, the swaps would have no value to either party.
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 SMUD's Electric Revenue Bonds.
Direct Purchase Agreements. On October 31, 2016, SMUD completed two transactions m which US Bank and State Street purchased all of the outstanding 2012 Series Land Series M Bonds, respectively. As a result of these transactions, SMUD issued the 2016 Series and the Sen es O Bonds for the purpose of def easing the 2012 Series Land Series M Bonds, respectively. During 2017 and 2016, SMUD paid interest on both series on a monthly basis at the rate of 67 percent of one-month LIBOR plus a fixed fee. Following tax reform, on January I, 2018, SMUD will pay interest at the rate of 85 percent of one-month LLBOR plus a fixed fee. The terms are three and a half years, at the end of which SMUD can remark et the bonds, utilize another interest rate mode, or if remarketing is unsuccessful, pay the bonds over five years. The scheduled principal payments for the 2016 Series N and Senes 0 Bonds are the same as the defeased 2012 Series Land Series M Bonds, however the 2017 Bond Refunding defeased all the maturities between 2018 and 2028. The term is three and a half years, at the end of which SMUD can remarket the bonds, utilize another interest rate mode, or if remarketing is unsuccessfu l, pay the bonds over five years. The scheduled principal payments remain unchanged unless the bonds aren't successfully remarketed at the end of the term.
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1cJ1 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On ovember 16, 2016, SMUD completed a transaction in which Bank of America purchased all of the outstanding 2008 Series J and 2008 Series K Bonds As a result of this transaction, the bonds were renamed the 2016 Senes P and the 2016 Series Q Bonds, and SMUD paid interest on a monthly basis at the rate of 67 percent of one-month LIBOR plus a fixed fee. As a result of the 2017 Bond Refundmg, all of the 2016 Series P and Series Q bonds were defeased.
Component Unit Bonds. The component units ofSMUD have each issued bonds to finance their respective projects. The revenue stream to pay CVFA, SCA, and SFA bonds' debt service is provided by "take-or-pay" power purchase agreements, and is therefore not dependent on the successful operation of the projects. SMUD guarantees to make payments sufficient to pay pnnc1pal and interest and a11 other payments required to be made under the CVFA's, SCA's, and SF A's indenture of trust. CVFA, SCA, and SFA are not required to repay SMUD for any amounts paid under this guarantee. The revenue stream to pay NCGA bonds' debt service 1s provided by a "take-and-pay" purchase agreement. Therefore, principal and interest associated with these bonds are paid solely from the revenues and receipts collected in connection with the operation of the proJect. Most operating revenues earned by NCGA are collected from SMUD m connection with the sale of gas to SMUD. The ability for CGA to service debt is dependent on various parties (particularly MSCG, as gas supplier) meeting their contractual obligations.
Callable Bonds. SMUD has $538.8 million of Electric Revenue Bonds that are currently callable, $450 0 million of which are fixed rate Build Amenca Bonds debt and $88.8 million of subordmate bonds SMUD also has $730.6 million of bonds that become callable from 2018 through 2026, and these bonds can be called until maturity.
Collateral. The principal and interest on SMUD's bonds are payable exclusively from, and are collateralized by a pledge of, the net revenues of SMUD's electric system.
either the credit nor the taxing power of SMUD is pledged to the payment of the bonds and the general fund of SMUD is not liable for the payment thereof.
Covenants. SMUD'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 includmg a rate covenant to raise rates to maintain minimum debt service coverage.
SMUD has pledged future net electric revenues, component unit net project revenues, and net gas supply prepayment revenues to repay, in electric revenue, component unit project revenue, and gas supply prepayment revenue bonds issued from 1997 through 2017. Proceeds from the bonds provided financing for various capital improvement projects, component unit capital projects, and the prepayment of a twenty-year supply of natural gas.
The bonds are payable solely from the net revenues generated by SMUD's electrical sales, component unit project revenues, and gas supply prepayment revenues and are payable through 2041 at December 31, 2017.
GASB Statement o. 48, "Sales and Pledges of Recei1>ables and Future Rei*enues and Intra-Entity Transfers of Assets and Future Rel*enues," disclosures for pledged revenues are as follows:
Pledged future revenues Principal and interest payments for the year ended Total net revenues for the year ended Total remaining principal and interest to be paid Annual principal and interest payments as a percent of net revenues For the year ended December 31,
2017 2016 (thousands of dollan) 2,323,775 2,531,960 273,549 269,141 786,647 786,764 3,459,445 3,724,778 35%
34%
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Sacramento Mun*cipaJ Utilit~ District 21 '17 Ai 1n1 ~I Repori NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11
- COMMERCIAL PAPER NOTES SMUD issues Commercia1 Paper Notes (Notes) to finance or reimburse capita1 expenditures. At December 31, 2017 and 2016 Notes outstanding tota1ed $200.0 million. The average interest rate for the Notes outstanding at December 31, 2017 and 2016 was 1.03 percen1 and.75 percent and the average term was 80 days and 68 days, respectively.
SMUD has a $204.9 million letter of credit agreement, and there have not been any term advances under it.
The summarized activity of SMUD's Notes during 2017 and 2016 is presented below:
Balance at Balance at December 31, 2017 December 31, 2016 NOTE 12 FAIR VALUE MEASUREMENT Beginning of Year 200,000 200,000 End of Additions Reductions Year
{thousands of dollars) $ $
200,000 $ $
200,000 Effective January I, 2016, SMUD adopted GASB No. 72, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). SMUD utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique.
GASB No. 72 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identica1 assets or liabilities (Level I) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy defined by GASB No. 72 are as follows:
Level I inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 inputs are inputs other than quoted prices included in Level I that are observable for an asset or liability, either directly or indirectly.
Level 3 inputs are unobservable inputs that reflect SMUD's own assumptions about factors that market participants would use in pricing the asset or liability.
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... t 2( 1' Ar 1a1 1er NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The valuation methods of the fair value measurements are disclosed below.
LAIF - uses the fair value of the pool 's share price multiplied by the number of shares held. This pool can include a variety of investments such as U.S. government securities, federal agency securities, negotiable certificates of deposit, bankers' acceptances, commercial paper, corporate bonds, bank notes, and other investments. The fair values of the securities are genera11y based on quoted and/or observable market prices.
U.S. Government Agency Obligations - uses a market based approach which considers yield, price of comparable securities, coupon rate, maturity, credit quality and dealer-provided prices.
U.S. Treasury Obligations - uses a market approach based on institutional bond quotes. Evaluations are based on various market and industry inputs.
Corporate Notes - uses a market based approach. Evaluations are based on various market and industry inputs.
Municipal Bonds - uses a market approach based on institutional bond quotes. Evaluations are based on various market and industry inputs.
Investment Derivative Instruments:
Interest rate swap agreements - uses the present value technique. The fair value of the interest rate swap agreements are calculated by discounting the expected cash flows at their corresponding zero coupon rate.
The cash flows are estimated based on a I-month LIBOR forward curve from Bloomberg, and assuming SIFMA is equal to 70 percent of I-month LIBOR.
Gas related agreements - uses the market approach based on monthly quoted prices from an independent external pricing service. The fair va1ues for natural gas and electricity derivative financial instruments are calculated based on prevailing market quotes in active markets (i.e., Henry Hub and So Cal) where identical contracts are available.
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,: Jr NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table identifies the level within the fair vaJue hierarchy that SMUD's financial assets and liabilities were accounted for on a recurring basis as of December 31, 2017 and 2016, respectively. As required by GASB No.
72, financial assets and liabilities are classified in their entirety based on the lowest level ofmput that 1s significant to the fair value measurement. SMUD's assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuauon of the fair value of liabilit,es and their placement within the fair value hierarchy levels.
Recurring Fair Value Measures Investments, including cash and cash equivalents:
LAIF U.S. Government Agency Obligations U.S. Treasury Obligations Corporate Notes Municipal Bonds Total Investments, including cash and cash equivalents Investment Denvat1ve Instrument Assets:
Gas related agreements Total Investment Derivative Instrument Assets lnvestment Derivative Instrument Liabilities*
Gas related agreements Interest rate swap agreements Total Investment Derivative Instrument Liabilities Investments, including cash and cash equivalents:
LAIF U.S Government Agency Obligations U.S. Treasury Obligations Corporate Notes Municipal Bonds Total Investments, including cash and cash equivalents Investment Derivative Instrument Assets:
Gas related agreements Total Investment Derivative Instrument Assets Investment Derivative Instrument Liabilities:
Gas related agreements Interest rate swap agreements Total Investment Derivative Instrument Liabilities 84 Built to last I 2017 SMUD Annual Report At fair value as of December 31, 2017 Level 1 Level 2
{thousands o(dollm )
119,832 163,120 263,578 106,170 15,073 163 120 504 653 $
5,536
$ 8,994 5 536
$===8'=99=4
Total 119,832 263,578 163,120 106,170 15,073 667 773 5,536 8,994 14 530 At fair value as of December 31, 2016 Level 1 58,759 58 759 595 595 3,578 3 578 Level 2 (thouu.nds of dollm) 130,689 267,609 150,105 23,082 571 485
$ $ $ 12,584 12 584 Tot.al 130,689 267,609 58,759 150,105 23,082 630 244 595 595 3,578 12,584 S
16 162 T mtnt 1--1.urLe; lt1 Lt lC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 RANCHO SECO DECOMMISSIONING LIABILITY Background. The Rancho Seco decommissionmg liability relates to the nuclear decommissioning of the former 913 MW nuclear power plant, which shutdown permanently in June 1989. Decommissioning will require termination of the Part 50 license that now only consists of the Interim On site Storage Building (IOSB) on a I-acre site and the separately hcensed Independent Spent Fuel Storage Installation (ISFSI) facihty hcensed under Part 72.
Nuclear decommissiomng 1s 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) licenses and release of the property for unrestricted use. The NRC approved SMUD's decomm1SS10ning plan m March 1995 and SMUD began decommissioning m February 1997. Decommissioning of the Part 50 licensed facility involved a phased process and the first phase of physical work was completed,n 2009, when a maJority of the facility land area.
including the major plant systems and structures, was released from licensed control. Final decommissioning of the !SFSI will occur after the spent nuclear fuel (SNF) and high level waste are removed from the site and SMUD demonstrates that the site is suitable for release in accordance with release criteria specified in IO CFR 20, Part E and the approved License Termination Plan.
In 2009, the NRC released all of the land formerly under the Part 50 license for unrestricted use with the exception of the IOSB, which contained some Class Band Class C radioactive waste (Low-Level Rad1oact1ve Waste: LLRW) produced during the decommissioning of the nuclear reactor facility. In 2014, this waste was shipped to a sunable disposal facility. In 2016, Phase !I decommisStonmg of the IOSB was completed, including the Final Site Status Surveys that demonstrate that the IOSB and surrounding sne are suitable for release. With the submittaJ of the Final Status Survey Summary Report and accompanying License Amendment Request, the former Part 50 operating license should be terminated in 2018 The DOE, under the Nuclear Waste Policy Act of 1982, is responsible for permanent disposal of spent nuclear fuel and high-level radioactive waste, which are currently stored in the Part 72 licensed ISFSI SMUD has a contract with the DOE for the removal and disposal of SNF and high-level (Greater Than Class "C": GTCC) radioactive waste. All of SMUD's SNF and GTCC waste are currently stored in sealed canisters in the ISFSI. However, the date when DOE will remove the fuel and GTCC is uncertain. In 2010, the DOE formally withdrew the application for licensing of Yucca Mountain as a high-level waste repository, essentially removing Yucca Mountain as an option for disposal of SMUD's used nuclear fuel. The DOE also announced in January 2010 the creation of a Blue Ribbon Commission to study alternatives for developing a repository for the nation's used nuclear fuel. The Commission provided a final report on alternatives in January 2012 The DOE evaluated the recommendations and published the report "Strategy for the Management and Disposal of Used Nuclear Fuel and High-Level Radioactive Waste" m January 2013 The next phase of the process will be for Congress and the President of the United States to consider the recommendations and enact legislation to implement the recommendations. At this time, several companies have applied to the NRC to construct and operate a Consolidated lntenm Storage Facility that would store SNF and GTCC on an intenm basis. These applications are in process. lfthe NRC licenses one or both of these facilities, Congress will have to modify the Nuclear Waste Pohcy Act (NWPA) to allow for its use. Currently, Rep. Doris Matsui and 109 other members of Congress have co-sponsored H.R. 3053 - the Nuclear Waste Policy Amendments Act. This bill includes a Consolidated Interim Storage Facility pilot program to remove fuel from permanently shut down sites like Rancho Seco. Passage of this legislation would be a significant step towards removal of the used nuclear fuel from the Rancho Seco facility. Until then, SMUD is committed to the safe and secure storage of its SNF and GTCC waste under its Part 72 license until DOE fulfills its obligation to dispose of this material in accordance with NWPA.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Asset Retirement Obligations (ARO). These financial statements reflect SMUD's current estimate of its obligation for the cost of decommissioning (including the cost of managing the Storage Facility until 11 can be decommissioned) under the requirements of FASB ASC 410, based on studies completed each year. Each year, SMUD evaluates the estimate of costs of decommissioning and there was an increase in costs in the 2017 study. The ARO estimate assumes all spent nuclear fuel will be removed from the site by 2035.
Rancho Seco 's ARO 1s presented below December 31,
2017 2016 (thousum or dollars)
Active decommissioning 14,559 s
13,787 Spent fuel management 135,221 134,183 Total ARO 149,780 147,970 Less: current portion (5,775)
(6,439)
Total non-current portion of ARO 144,005 141,531 The summarized activity of 1he Rancho Seco ARO during 2017 and 2016 are presented below. The annual adjustments mclude a savings computed as the difference between the fair value of the obligation as 1fthe decommissioning activities were performed by a third pany and the amount actually incurred by SMUD performing the decommissioning activities.
ARO at beginning of year Accretion Expenditures Change in study Annual adjustments ARO at end of year 86 Built to last I 2017 SMUD Annual Report December 31, 2017 2016 (lhousandJ ofdollan) 147,970 7,521 (7,439) 2,969 (1,241) 149,780 150,372 7,429 (9,207) 2,033 (2,657) 147,970
-111 L
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 PENSION PLANS Summary of Significant Accou nting Policies. For purposes of measuring net pension liab1hty, deferred outflows of resources and deferred mflows of resources related to pensions, and pension expense, information about the fiduciary net position of the pension plans and add1t1ons to/deductions from the Plan's fiduciary net position have been determined on the same basis as they are reported by the PERS Financial Office For this purpose, benefit payments (including refunds of employee conmbutions) are recognized when currently due and payable in accordance with the benefit tenns. Investments are reported at fair value.
Plan Description and Benefits Provided. SMUD participates in PERS, an agent multiple-employer public employee defined benefit pension plan (PERS 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 mvestment and administrative agent for participating public entities within the State. Benefit provisions and all other requirements are established by State statute and SMUD policies. The pension plan provides retirement benefits, survivor benefits, and death and disability benefits based upon employee's years of credited service, age, and final compensation. A full descnption of the pension plan regarding number of employees covered, benefit provision, assumptions (for funding, but not accounting purposes), and membership information are included in the annual actuarial valuation reports as of June 30, 2016 and June 30, 2015 SMUD also provides a supplemental benefit in heu of PERS' Single Highest Year (SHY) for certain represented employees hired before January I, 2013. For these employees, if the present value of pension allowance under the PERS Plan with the employer paid member contribuuons (EPMC) benefit enhancement program is less than the present value of what the employee would have received under the PERS Plan benefit with SHY earnings but no EPMC, SMUD pays a lump sum equi valent to the difference. There are no assets accumulated ma trust for SHY.
SMUD implemented GASB No. 73 to record SHY in 2017 (see Note 3).
GASB No. 68 and GASB
- o. 73 require that the reported results must pertain to liability and asset information within certain defined timeframes. The following llmeframes are used for the year ended PERS Plan Valuauon date Measurement date SHY Valuation date and Measurement date December 31,
2017 2016 June 30, 2016 June 30, 2017 June 30, 2015 June 30, 2016 December 31,
2017 2016 June 30, 2017 NIA 20 7 SMUD Annual Rep >rt Built to last 87
Sacramento Municipal Utility District 2017 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Employees Covered by Benefit Terms. The following employees were covered by the benefit terms for the year ended:
PERS Plan Inactive employees or beneficiaries currently receiving benefit payments Inactive employees entitled to but not yet receiving benefit payments Active employees Total employees covered by benefit terms SHY Inactive employees or beneficiaries currently receiving benefit payments Inactive employees entitled to but not yet receiving benefit payments Active employees Total employees covered by benefit terms December 31, 2017 2016 2,777 921 2,125 5,823 2,7 18 944
~
5,676 December 31, 2017 2016 NIA 276 276 Contributions. Section 208 l 4(c) of the California Public Employees' Retirement Law requires that the employer contribution rates for all public employers be determined on an annual basis by the actuary and shall be effective on the July I following notice of a change in the rate. The total plan contributions are determined through PERS' annual actuarial valuation process. The actuarially determined rate is the estimated amount necessary to finance the costs of benefits earned by employees during the year, with an additional amount to finance any unfunded accrued liability. The employer is required to contribute the difference between the actuarially determined rate and the contribution rate of employees. For the PERS fiscal year ended June 30, 2017 and 2016, the average active employee contribution rate is 6.9 percent of annual pay for both years, and the employer's contribution rate is 16.0 percent and 14.1 percent of annual payroll, respectively. Employer contribution rates may change if plan contracts are amended. For the year ended December 31, 2017 and 2016, SMUD made contributions recognized by the PERS Plan in the amount of $32.4 million and $27.6 million, respectively.
Net Pension Liability. SMUD's NPL at December 31, 2017 and 2016 was measured at June 30, 2017 and 2016, respectively. The total pension liability used to calculate the NPL was determined by actuarial valuations as of June 30, 2016 and 2015 rolled forward using generally accepted actuarial procedures to the June 30, 2017 and 2016 measurement dates for the PERS Plan and an actuarial valuation as of June 30, 2017 for SHY.
88 Built to last I 2017 SMUD Annual Report Sacramento Municipal Utility District 2017 Ar Pua I Repor NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Actuarial Methods and Assumptions. The actuarial methods and assumptions used for the December 31, 2017 and December 31, 2016 total pension liabilities are as follows for the PERS Plan:
Actuarial Cost Method Discount Rate Inflation Entry age normal 7 15% (2017), 7.65% (2016) 2.75%
Varies by entry age and service Salary Increases Mortality Rate Table The mortality table used was developed based on PERS' specific data.
The table includes 20 years of mortality improvements using Society of Actuaries Scale BB.
Post Retirement Benefit Increase Contract COLA up to 2.75% until Purchase Power Protection Allowance Floor on Purchasing Power applies, 2.75% thereafter All other actuarial assumptions used for both years were based on the results of an actuarial experience study for the period from 1997 to 2011, including updates to salary increase, mortality and retirement rates.
The actuarial methods and assumptions used for the December 31, 2017 total pension liabilities are as follows for SHY:
Actuarial Cost Method Entry age nonnal Discount Rate Bond Buyer 20 Index - 3.58%
Inflation
- 2. 75%
Salary Increases 3.00%; merit: PERS 1997-2011 Experience Study Mortality, retirement, disability, Termination PERS 1997-2011 Experience Study Mortality Improvement Mortality projected 20 years with Scale BB Discount Rates. For the PERS Plan, the discount rate used to measure the total pension liability for the years ended December 31, 2017 and 2016 was 7.1 S percent and 7.65 percent, respectively. To detennine whether the municipal bond rate should be used in the calculation of a discount rate for each plan, PERS stress tested plans that would most likely result in a discount rate that would be different from the actuarially assumed discount rate. The tests revealed the assets would not run out. Therefore, the discount rates used for the valuations are appropriate and the use of the municipal bond rate calculation is not deemed necessary. The long-tenn expected discount rates are applied to all plans in the Public Employees Retirement Fund. The cash flows used in the testing were developed assuming that both members and employers will make their required contributions on time and as scheduled in all future years.
The long-term expected rate of return on pension plan investments was determined using a building-block method in which expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. Using historical returns of all the funds' asset classes, expected compound (geometric) returns were calculated over the short-term (first 10 years) and the long-term (11 -60 years) using a building-block approach.
2017 SMUD Annual Report j Built to last 89
no,.,1
'1 ~1 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The table below reflects long-term expected real rate of return by asset class. The rate of return was calculated using the capital market assumptions applied to determine the discount rate and asset allocation The target allocation shown below used for the June 30, 2016 valuation was adopted by the PERS' Board effective on July I, 2014 Current Target Real Retum Real Retum Asset Class Allocation Years1-10 Years11+
Global Equity 47.0%
4.9%
5.38%
Global Fixed Income 19.0%
.8%
227%
Inflation Sensitive 6.0%
.6%
139%
Private Equity 12.0%
6.6%
6.63%
Real Estate 11.0%
2.8%
5.21%
Infrastructure and Forestland 3.0%
3.9%
5.36%
Liquidity 2.0%
(2.2%)
(2.70%)
The target allocation shown below used for the June 30, 2015 valuation was adopted by the PERS' Board effective on July 1, 2014.
Current Target Real Retum Real Return Asset Class Allocation Years1 -1 0 Years 11+
Global Equity 51.0%
5.25%
5.71%
Global Fixed Income 20.0%
.99%
2.43%
Inflation Sensitive 6.0%
.45%
3 36%
Private Equity 10.0%
6.83%
6.95%
Real Estate 10.0%
4.50%
5.13%
Infrastructure and Forestland 2.0%
4.50%
509%
Liquidity 1.0%
(.55%)
(105%)
90 Built to last I 2017 SMUD Annual Report
~- Ul, NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Changes in the NPL. The following table shows the changes in NPL recognized over the year ended December 31, 2017:
Increase Total Pension (Decrease) Plan Net Pension Liability Fiduciary Net Liab!ity (a)
Posnion (b)
(a).(b)
(1housands of doll1r1)
Balances at January I, 2017
$ 2,040,497 1,541,269 499,228 Changes recognized for the measurement period:
Service cost 35,340 35,340 Interest 150,312 150,312 Changes in assumptions 122,216 122,216 Differences between expected and actual experience (30,190) (30,190)
Contributions - employer 32,389 (32,389)
Contributions - employee 15,845 (15,845)
Net investment income 171,596 (171,596)
Benefit payments (104,428)
(104,428) Adm1n1strative expense (2,275) 2,275 GASB No. 73 implementation adjustment 6,449 6,449 Net changes 179,699 113,127 66,572 Balances at December 31, 2017 2.220,196 I 654 396 565 800 The following table shows the changes in NPL recognized over the year ended December 31, 2016:
Increase Total Pension (Decrease) Plan Net Pension Liability Fiduciary Net Liability (a)
Position(b)
(a) -(b)
(thousands ofdoll1r1)
Balances at January I, 2016 1,971,468 1,590,127 381,341 Changes recognized for the measurement period:
Service cost 29,044
- O*
29,044 Interest 147,497 147,497 Differences between expected and actual experience (8,357)
- O*
(8,357)
Contributions - employer 27,645 (27,645)
Contributions - employee
-0*
15,271 (15,271)
Net investment income 8,316 (8,316)
Benefit payments (99,155)
(99,155) Administrative expense (969) 969 Other
-0*
34 (34)
Net changes 69,029 (48,858) 117,887 Balances at December 31, 2016 2 040 497 I 541 269 499 228 2017 SMUD Annual Report Built to last 91
S r n t Mur
- 't,ri NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Sensitivity of the NPL to C hanges in the Discount Rate. The following presents the NPL of the Plan as of the measurement date, calculated using the current discount rate. as well as what the net pension liability would be if It were calculated using a discount rate that is I percentage-pomt lower or l percentage-point higher than the current discount rate:
1% 0ecrease Current Or5count 1% Increase PERS Plan (6.15%)
Rate (7.15%)
(8.1 5%)
(thousands of dollars)
Plan's NPL, December 31, 2017 855,323 560,599 316,456 1% 0ecrease Current OtScount 1% Increase (6.65%)
Rate (7.65%)
(8.65%)
(thousandsofdollan)
Plan's NPL, December 31, 2016 762,987 499,228 280,048 1% Decrease Current Discount 1% Increase SHY (2.58%)
Rate (3.58%)
(4.58%)
(thousands ofdollan)
Plan's NPL, December 31, 2017 s
6,373 5,201 4,280 Pension Plan Fiduciary et Position. Detailed information about the PERS Plan's fiduciary net position 1s available in the separately issued PERS Plan financial statements. This repon, the audited financial statements, and other repons can be obtained at the PERS' website at www caloers ca.gov.
Pension Expense and Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pensions.
For the year ended December 31, 2017 and 2016, SMUD recognized pension expense of $78.5 million and $39.2 million, respectively.
At December 31, 2017 and December 31, 2016, SMUD reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources*
December 31, 2017 2016 (thousandsofdoltan)
Deferred outflows of resources:
Changes of assumptions 90,688 s Differences between projected and actual earnings on pension plan investments Employer's contributions to the Plan subsequent to the measurement 21,648 83,954 of total pens,on liability Total deferred outflows or resources Deferred inflows of resources:
Changes of assumptions Differences between expected and actual experience Total deferred inflows of resources 92 Builtto last I 2017 SMUD Annual Report 30,698 32,299 143,034 s
116,253 (5,636)
(14,669)
(27,285)
(10,518)
(32,921)
(25,187)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Amounts reported as deferred outflows of resources and deferred inflows of resources related to pensions will be recognized in pension expense as follows:
Year ended December 31 2018 2019 2020 2021 2022 Thereafter 15,052 50,502 27,092 (12,810)
(62)
(360)
Other Plans. SMUD provides its employees with two cash deferred compensation plans: one pursuant to Internal Revenue Code (!RC) Section 40J(k) (401 (k) Plan) and one pursuant to !RC Section 457 (457 Plan) (collectively, the Plans). The Plans are contributory plans in which SMUD's employees contribute the funds. Each ofSMUD's eligible full-time or permanent pan-time employees may panicipate 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 SMUD service and, accordmgly, are not subject to the general claims of SMUD's creditors. SMUD is responsible for ensuring compliance with lRC requirements concern mg the Plans and has the fiduciary duty of reasonable care m the selection of investment alternative~ but neither SMUD, nor its Board or officers have any liability for market vanat1ons m the Plans* asset values SMUD employees are responsible for determining how their funds are to be mvested and pay all ongoing fees related to the Plans. The Plans are currently not subject to discnmination testing, nor the requirements of the Employee Retirement Income Security Act of 1974. SMUD employees panicipating in the Plans are allowed to contribute a ponion of their gross income not to exceed the annual dollar limits prescribed by the IRC.
SMUD makes annual contributions to the 40 I (k) Plan on behalf of certain employees pursuant to a memorandum of understanding with both of its collective bargainmg units. SMUD also matches non-represented employee contributions to the 401(k) Plan up to a set amount. SMUD made contributions into the 40l(k) Plan of$4.4 million in 2017 and $3.9 million in 2016. SMUD does not match employee contributions, nor make contributions on behalf of its employees to the 457 Plan. Panicipating employees made contributions into both Plans totaling $21.3 million in 2017 and $19.7 million in 2016.
NOTE 1s OTHER POSTEMPLOYMENT BENEFITS SMUD provides postemployment healthcare benefits, in accordance with SMUD policy and negotiated agreements with employee representation groups in a single employer defined benefit plan, to all employees who retire from SMUD, and their dependents. SMUD also provides postemployment healthcare benefits to covered employees who are eligible for disability retirement SMUD contributes the full cost of coverage for retirees hired before January I, 1991, and a portion of the cost based on credited years of service for retirees hired after January I, 1991. SMUD also contributes a portion of the costs of coverage for these retirees' dependents. Retirees are required to contribute the ponion that is not paid by SMUD. The benefit, benefit levels, retiree contributions and employer contributions are governed by SMUD and can be amended by SMUD through its personnel manual and union contracts. At June 30, 2017, 5,205 postemployment participants, including retirees, spouses of retirees, surviving spouses, and eligible dependents, were eligible to panic1pate in SMUD's healthcare benefits program.
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.. ri Rt por' NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OPEB arises from an exchange of salaries and benefits for employee services rendered. and refers to postemployment benefits other than pension benefits such as postemployment healthcare benefits. SMUD considers the following benefits to be OPEB: Medical, Dental and Long-Tenn Disability.
Plan Description. SMUD JS a member of the California Employers Retiree Benefit Trust (CERBT) for prefunding of OPEB obligations. The CERBT Fund is an IRC Section 115 Trust set up for the purpose of receiving employer contributions to prefund health and other postemployment benefits for retirees and their beneficiaries. The plan 1s an agent multiple employer plan administered by PERS, which provides medical, dental and long-term disability benefits for retirees and their beneficiaries. Any changes to these benefits would be approved by SMUD's Board and umons. To obtain a CERBT report, please contact PERS at 888-CALPERS.
The funding of a plan occurs when the following events take place: the employer makes payments of benefits directly to or on behaJf of a retiree or beneficiary; the employer makes premium payments to an insurer; or the employer irrevocably transfers assets to a trust or other third party acting in the role of trustee. where the plan assets are dedicated to the sole purpose of the payments of the plan benefits, and creditors of the government do not have access to those assets.
Funding Policy. SMUD has elected to net fund to PERS, so the contributions are the Annual Required Contribution
{ARC) less the estimated cash flow for retiree benefit costs for each year. SMUD elected to put additional contribuuons into the trust in 2017 and 2016 of $84.7 million and $17.9 million, respectively. In 2017 and 2016, the net ARC contribution to the CERBTwas $7.7 million and $6 6 million, respectively. During 2017 and 2016, SMUD made healthcare benefit contributions by paying actuaJ medical costs of$23.8 million and $20.7 million, respectively.
Funding Status and Funding Progress. At June 30, 2017 and 2016, SMUD estimates that the actuanally determined accumulated postemployment benefit obligation was approximately $442.4 million and $377.0 milhon, respectively. At June 30, 2017 and 2016, the plan was 77 2 percent and 59.7 percent funded, respectively. The covered payroll (annual payroll of active employees covered by the plan) at June 30, 2017 and 2016, was $224.2 million and $2!0.3 million, respectively. The ratio of the unfunded actuarial accrued liability (UAAL) to covered payroll was 45.1 percent and 72.3 percent at June 30, 2017 and 2016, respectively.
Annual OPED Cost. The annual OPEB cost (expense) is calculated based on the ARC of the employer, an amount actuarially determined in accordance with the parameters of SGAS o. 45, "Accounting and Financial Reporting by Employers for Postemploymenl Benefits Other Than Pensions." The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover the normal cost each year and amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed 30 years. For 2017 and 2016, SMUD's annual OPEB cost (expense) was $14.9 million and $13.4 million, respectively 94 Built to last 2017 SMUD Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table shows the components ofSMUD's annual OPEB cost for the year, the amount actually paid in premiums. and changes m the net OPEB asset:
Annual required contribution Interest on net OPEB asset Annual required contribution adjustment Annual OPEB cost Contnbutions made Changes in net OPEB asset Net OPEB asset, beginning of year Net OPEB asset, end of year Year Ended December 31, 2017 2016 (thousands or dollm) 16,472 (9,010) 7,397 14,859 (116,181)
(101,322)
(127,907)
(229,229) 14,760 (6,772) 5,455 13,443 (45,270)
(31,827)
(96,080)
(127,907)
SMUD's net OPEB asset is recorded as a component of Prepayments and Other under Noncurrent Assets on the Consolidated Statements of Net Position.
SMUD's annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and the net OPEB asset for 2017 and the two preceding years 1s as follows Percentage of Annual Year Ending Annual OPEB Cost OPEB Cost Contributed Net OPEB Asset (thousands of dollar.i)
December 31, 2017 14,859 782%
(229,229)
December 31, 2016 13,443 377%
(127,907)
December 31, 2015 27,690 166%
(96,080)
Actuarial Methods and Assumptions. Projections of benefits for financial reponmg purposes are based on the substantive plan (the plan as understood by the employer and plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing the benefit costs between the employer and plan members to that point. The actuariaJ methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuariaJ accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations.
The entry age normal was used m the June 30, 20 I 7 and 20 I 6 actuarial valuations The actuarial assumptions used for the June 30, 2017 and 2016 valuauons were 6. 75 percent and 7.25 percent mvestment rate of return {net of administrative expenses) and 2.75 percent and 3.0 percent mflation assumption, respectively. The actuariaJ assumptions for an annual healthcare cost trend growth rate for 2017 and 2018 was based on actual and preliminary premiums, respectively, and ranged from 6.5 to 7.5 percent for 2019. The UAAL at June 30, 2017 is amortized as a level percentage of payroll over a closed 28-year period. At June 30, 2017 and 2016 the actuarial value of the assets was $341.4 million and $225 0 million, respectively 2017 SMUD Annual Report Built to last 95
S r 1I' nto lv11 1 A NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future Examples include assumptions about future employment, mortality and the healthcare cost trends. Amounts detenmned regarding the funded status of the plan and the ARC of the employer are subject to continual reVlsion as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented as RSI following the notes to the financial statements, presents multi-year trend information that shows whether the actuanal value of plan assets 1s increasing or decreasing over time relative to the actuarial accrued liabilities for benefits.
NOTE 16 INSURANCE PROGRAMS AND CLAIMS SMUD 1s exposed to various risks of loss related to torts. theft of and destruction to assets, errors and omissions, cyber activities, natural disasters, employee injuries and illnesses, and others. SMUD carries commercial insurance coverage to cover most claims in excess of specific dollar thresholds, which range from $5 thousand to $2.5 million per claim with total excess liability insurance coverage limits for most claims of$140.0 million. SMUD's property insurance coverage is based on the replacement value of the asset. There have been no significant reductions in insurance coverage, and in some cases, certain coverages increased. In 2017, 2016 and 2015, the insurance policies in effect have adequately covered all settlements of the claims against SMUD. No claims have exceeded the limits of property or liability insurance in any of the past three years The claims liability is included as a component of Self Insurance and Other Liabilities in the Consolidated Statements of Net Position.
SMUD's total claims liability, comprising claims received and claims incurred but not reported, at December 31, 2017, 2016 and 2015 is presented below:
2017 2016 (thol151ndi or dollars)
Workers' compensation claims 9,823 10,820 General and auto claims 1,941 2,227 Short and long-term disability claims 113 212 Claims liability 11,877 13,259 Changes in SMUD's total claims liability during 2017, 2016 and 2015 are presented below:
Claims liability, beginning of year Add. provision for claims, current year Increase in provision for claims in prior years Less: payments on claims attributable to current and prior years Claims liability, end of year 96 Built10 last I 20t7 SMUD Annual Report 2017 13,259 1,840 1,595 (4,817) 11,877 2016 (thousands of dollars) 12,024 2,304 5,638 (6,707) 13,259 2015 10,983 698 343 12,024 2015 S
12,166 1,827 2,782 (4,751) 12,024 J. ~,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17 COMMITMENTS Electric Power and Gas Supply Purchase Agreements. SMUD has numerous power purchase agreements with other power producers to purchase capacity, transm1ss1on, and associated energy to supply a portion of its load requirements. SMUD has m1mmum take-or-pay commitments for energy on some contracts. SMUD has numerous long-term natural gas supply, gas transponation and gas storage agreements with Canadian and U.S. companies to supply a portion of the consumption needs of SMUD's natural gas-fired power plants, which expire through 2040.
At December 31,2017, the approximate minimum obligations for the "take-or-pay" contracts over the next five years are as follows:
Electric Gas (thousands or dollars) 2018 44,324 12,133 2019 43,054 11,724 2020 40,882 11,812 2021 33,512 11,963 2022 33,946 12,021 At December 31, 2017, the approximate minimum obligations for the remaining contracts, assuming the energy or gas is delivered over the next five years, are as follows:
2018 2019 2020 2021 2022 Electric (thollil.nds of dollars) 150,478 190,883 198,400 202,267 143,316 Gas 110, 161 95,650 94,145 86,778 82,667 Contractual Commitments beyond 2022 - Electricity. Several ofSMUD's purchase power and transmission contracts extend beyond the five-year summary presented above. These contracts expire between 2023 and 2043 and provide for power under various terms and conditions. SMUD estimates its annual minimum commitments under the take or pay contracts ranges between $34.4 million in 2023 and $7. 7 million in 2033 SMUD estimates its annual minimum commitments under the remaining contracts, assuming the energy 1s delivered, ranges between
$144 7 million in 2023 and $0 2 million in 2043. SMUD's largest purchase power source (in volume) is the Western Base Resource contract, whereby SMUD receives 25.5 percent of the amount of energy made available by Western, which equals an equal share of their revenue requirement. The Western contract expires on December 31, 2024.
Contractual Commitments beyond 2022
- Ga,. Several ofSMUD's natural gas supply, gas transportation and gas storage contracts extend beyond the five-year summary presented above. These contracts expire between 2023 and 2040 and provide for transportation and storage under various terms and conditions. SMUD estimates its annual minimum commitments under the take or pay contracts ranges between $12.2 million in 2023 and $5.8 million in 2040. SMUD estimates llS annual minimum commitments under the remaining contracts, assuming the gas is delivered, ranges between $82 3 million in 2023 and $13.9 million in 2040.
2017 SMUD Annual Report Built to last 97
rm nt
- 1.
fl LJls.. r1...
2 1 1-\\ r NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Solano Wind. In December 2011, SMUD entered into an agreement to sell the Solano Wind Phase 3 project (see Note 2). SMUD will buy all output from the plant under the terms of the Power Purchase Agreement. The plant began commercial operation in April 2012 and SMUD receives all output generated Under the terms of the various agreements, SMUD has the option to buy the plant back upon the sixth, eighth, or fifteenth anniversary of the commcrcia1 operation date or the end of the delivery term In October 2017, SMUD submitted its notice of intent to exercise this option upon the sixth anniversary of commercial operation date which is April 26, 2018.
Gas Price Swap Agreements. SMUD has entered into numerous variable to fixed rate swaps with notional amounts totaling 120,522,500 Dths for the purpose of fixing the rate on SMUD's natural gas purchases for its gas-fueled power plants and gas indexed electric contracts. These gas price swap agreements result in SMUD paying fixed rates ranging from $2.61 to $7.17 per Dth. The swap agreements expire periodica11y from January 2018 through December 2022.
Gas Transport Capacity Agreements. SMUD has numerous long-term natural gas transport capacity agreements with Canadian and U.S. companies to transport natural gas to SMUD's natural gas-fired 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 SMUD-owned pipeline capacity within California The gas transport capacity agreements provide SMUD wnh 56,700 Dth per day (Dth/d) of natural gas pipeline capacity from the North, including the Canadian Basins through 2023 and 51,300 Dth/d from the Southwest or Rocky Mountain Basins through at least 201 9 GH Storage Agreements. SMUD also has an agreement for the storage ofup to 2.0 million 0th of natural gas at regional facilities through March 2020, dropping to 1.0 mil hon Dth through March 2023.
Hydro License Agreements. SMUD has a hydro license for a term of 50 years effective July I, 2014 (see Note 2).
SMUD entered into four contracts with government agencies whereby SMUD makes annual payments to them for various services for the tenn of the license. Each contract is adjusted annually by an inflation index. The present value of the sum of the annual payments is $57.8 million at December 31, 2017.
Construction Contracts. In December 2017, the SMUD Board authorized a contract for the renovation of the Headquarters building located in Sacramento. The contract price is a not-to-exceed amount of $72. 7 million The contract tenn ends March 31, 2019. Additionally, a contract was signed to replace the hot gas com busters at SFA The contract price is for $35.6 million over three years. As of December 31, 2017, $72.0 million and $34.6 million, respectively, remain on these contracts.
In June 2016, the SMUD Board authorized a contract for the design and build of the South Fork Powerhouse and Boating Flow Release Facility located in El Dorado County, California. The contract price is a not-to-exceed amount of $14.2 million and the contract term ends December 31, 2018. The DOE has committed to fund approximately $1.S million of the project through a grant award to SMUD. As of December 31, 2017, $8 9 m11l1on remains available for this contract.
98 Built to last I 2017 SMUD Annual Report m
n1
},1u, NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18 CLAIMS AND CONTINGENCIES FERC Administrative Proceedings. SMUD is involved in a number of FERC admm1strat1ve proceedings related to the operation of wholesa1e energy markets, regional transmission planning. gas transportation, and the development of NERC reltability standards While these proceedings are complex and numerous, they generally fall mto the following categories: (i) filings initiated by the California Independent System Operator Corporation (CAISO) (or other market participants) to adopt/modify the CAISO Tariff and/or establish market design and behavior rules; (ii) filings initiated by existing transmission owners (i.e., PG&E and the other Investor Owned Utilities) to pass through costs to their existing wholesale transmission customers; (iii) filings initiated by FERC on market participants to establish market design and behavior rules or to complain about or investigate market behavior by certam market participants; (1v) filings initiated by transm1ss1on owners under their transmission owner tariffs for the purpose of establishing a regiona1 transm1ss1on planning process; (v) filings mitiated by providers offinn gas transportation services under the Natural Gas Act; and (vi) filings initiated by NERC to develop reliabiltty standards applicable to owners, users, and operators of the bulk electric system. ln addiuon, SMUD is an active participant in other FERC administrative proceedings, including those related to reliability and cybersecurity standards, variable resource integration, and transmission planning and cost allocation. SMUD's management believes that the ultimate resolution of these matters will not have a material adverse effect on SMUD's financial position, liquidity or results of operations Construction Matters. SMUD contracts with vanous firms to design and construct facilities for SMUD Currently, SMUD 1s party to various claims, legal actions and complarnts relaung to such construction projects SMUD's management believes that the ulumate resolution of these matters will not have a material adverse effect on SMUD's financial position, liquidity or results of operations Environmental Matters. SMUD was one of many potentially responsible parties that had been named in a number of actions relating to environmental claims and/or complaints. SMUD has resol ved these environmental claims and/or complaints and entered into settlement agreements and/or consent orders. These settlement agreements and consent orders have statutory reopener provisions which allow regulatory agencies to seek additional funds for environmenta1 remediation under certain limited circumstances. While SMUD believes it 1s unlikely that any of the prior settlements or consent orders will be reopened, the possibility exists. If any of the settlements or consent orders were to be reopened, SMUD management does not believe that the outcome will have a material adverse impact on SMUD's financial position, liquidity or results of operations.
North City Environmental Remediation. In 1950, SMUD purchased property (North City Site) from the City of Sacramento and the Western Railroad Company. Portions of the North City Site prior to the sale had been operated as a mumcipal landfill by the City of Sacramento. SMUD currently operates a bulk substation on the North City Site and plans to decommission the facility m the next few years. SMUD intends to assure compliance with State standards at closed landfill sites and 1s m the process of detennimng the appropnate remed1at1on for the orth City Sue. In 2009, SMUD established a regulatory asset to defer recognition of the expense related to the investigation, design and remediation necessary for the North City Site, and recorded a liability for the full S 12.0 m1lhon estimated for the project. In 2012, the regulatory asset was fully amortized. As the owner of the North City Site, SMUD will play the principal role in the remediation selection and activities. SMUD has estimated the total exposure for closing the site at as high as $12.0 million based on initial tests and studies of the site and approve and implemented cap designs for nearby former landfill areas. Costs could exceed that amount based on the need to design around transmission-related mfrastructure improvements. SMUD's management does not believe this will occur Even if remediation costs associated with the North City Site were to mcrease, SMUD management believes that any increased costs will not have a material adverse impact on SMUD's financial pos111on, liquidity or results of operations.
2017 SMUD Annual Report Built to last 99
Sacramento J\\1umc1p Jti ity District 2017 A1 n11a Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Station E Site Remediation. In October 2013, SMUD purchased property for development of a new substation to replace North City Substation (Station E). Initial development of the site in 2016 uncovered solid waste in quantities not indicated by pre-purchase due diligence. SMUD thereafter worked with the Sacramento County Environmental Management Division, the local enforcement agency for the California Department of Resources Recycling and Recovery to obtain approval of soil handling and land use plans for development of the site, which approval was given in third quarter 2017. The plans include installing a final cover, grading, drainage, maintenance, and landfill gas control measures at the site. The estimated costs of implementing these plans are estimated at $16.1 million and SMUD recorded a liability for those costs in 2016. The ultimate financial responsibility for the closure activities has not been determined and remains uncertain, though SMUD is investigating which parties may have been responsible for the disposa1 and will pursue appropriate action to ensure those parties pay the costs of remediation. SMUD management believes that any increased costs ultimately borne by SMUD will not have a material adverse impact on SMUD's financial position, liquidity or results of operations.
Buena Vista Biomass Power LLC. On October 2, 20 I 5, SMUD informed Buena Vista of its intent to terminate its existing power purchase agreement in accordance with the terms of the power purchase agreement, due to Buena Vista's fai lure to meet its contractual obligations. On December 4, Buena Vista informed SMUD that it disputed SMUD's right to terminate. On December 21, SMUD issued Buena Vista a termination notice, effective December 31, 2015. At the same time, the parties entered into a short term power purchase agreement effective January I, 2016, while the parties attempt to negotiate a longer term arrangement on commercial terms acceptable to both parties. The short term agreement expired on February 29, 2016, and further negotiations with Buena Vista proved unsuccessful. Buena Vista filed an arbitration demand against SMUD on June 6, 2016. Buena Vista claims damages against SMUD in excess of $130.0 million on a theory of wrongful termination. SMUD is defending the action and expects to prevail due to the clear language in the Purchase Power Agreement (PPA) which allows for termination for failure to meet contractual energy production figures for multiple consecutive years. The arbitration hearing concluded in early December 2017. We expect a ruling by the arbitrator in April 2018. However, SMUD management does not believe that the outcome will have a material adverse impact on SMUD's financial position, liquidity or results of operations.
Patua Acquisition Company, LLC. On April 16, 2010, SMUD entered into a 23-year PPA with Patua Project, LLC.
The fifth amendment to the PPA was signed on November 30, 2016, with the new project owner, Patua Acquisition Company, LLC. The PPA requires Patua to provide a warranty for the annuaJ amount of energy and green attributes produced and delivered to SMUD. lf Patua fails to meet the warranty for two consecutive years, it triggers SMUD's right to reduce the Guaranteed Capacity and Transmission Capacity Requirement as defined in the PPA.
On February 16, 2017, SMUD sent Patua a Notice of Failure to Meet Annual Performance Guarantee, Reduction of Phase I Guaranteed Capacity Resizing, and Reduction of Transmission Capacity Requirement pursuant to the terms of the PPA. Patua disagreed with the reductions and on June 9, 2017, after meetings with SMUD staff, sent a letter requesting a meeting with a senior officer to work towards a resolution in accordance with the dispute resolution provisions of the PPA. A meeting of the senior officers occurred. Staff continues to work through the issue with Patua. However, SMUD management does not believe that the outcome will have a material adverse impact on SMUD's financial position, liquidity or results of operations.
Other Matters. Currently, SMUD is party to various claims, legal actions and complaints relating to its operations, including but not limited to: property damage and personal injury, contract disputes, torts, and employment matters.
SMUD's management believes that the ultimate resolution of these matters will not have a material adverse effect on SMUD's financial position, liquidity or results of operations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED)
Schedule of Changes in Net Pension Liability and Related Ratios During the Measurement Period PERS Plan. The schedule of changes in NPL and related ratios is presented below for the years for which SMUD has available data. SMUD will add to this schedule each year and when it reaches IO years it will contain the last IO years data which will then be updated each year going forward.
December 31, 2017 2016 2015 2014 (thousands of dollars)
Total pension liability:
Service cost 35.040 29.044 27.991 28.170 Interest 150, 119 147.497 142.468 137,546 Changes of assumptions 123,043 (34.228) Differences between expected and actual experience (29.276)
(8,357)
(10.613) Benefit payments, including refunds of employee contributions (104.428)
(99. 155)
(94,636)
(90.175)
Net change in total pension liability 174.498 69,029 30.982 75.541 Total pension liability. beginning of year 2.040.497 1.971.468 1.940.486 1.864.945 Total pension liability. endofyear(a) 2.214.995 s 2.040 497 1.971.468 1.940.486 Plan fiduciary net position:
Contributions - employer 32.389 27.645 22.499 21,511 Contributions - employee 15.845 15.271 14.503 15,346 Net in\\'eStment income 171.5%
8.316 35.797 245.659 Benefit payments. including refunds of employee contributions (104.428)
(99.155)
(94,636)
(90,175)
Administrari\\'e expense (2.275)
(969)
(1.795)
(2.028)
Other changes 34 (25) Net change in plan fiduciary net position 113.127 (48.858)
(23.657) 190,313 Plan fiduciary net position. beginning of year 1,541.269 1.590,127 1.613.784 1.423.471 Plan fiduciary net position.. end of year (b) 1.654.3%
1.541.269 1.590.127 1.613.784 Net pensioo liabili~*. ending (a) - (b) 560.599 499 228 381.341 326.702 Plan fiduciary net position as a percentage of the total pension liability 74.7%
75.5%
80.7%
83.2%
Covered payroll 223.685 207.119 197.481 191,439 Net pension liability as a percentage of co,,ered payroll 250.6%
241.0%
193.1%
170.7%
Notes to Schedule Benefit Changes: The figures above do not include any liability impact that may have resulted from plan changes which occurred after the June 30, 2016 valuation date. This applies for voluntary benefit changes as well as any offers of two years additional service credit.
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S* cramento.Municip* Ut lity District 2017 Ar
,al Reper' NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Changes in Assumptions: In 2017, the accounting discount rate reduced from 7.65 percent to 7.15 percent. ln 2016, there were no changes. In 20 15, amounts reported reflect an adjustment of the discount rate from 7.5 percent (net of administrative expense) to 7.65 percent (without a reduction for pension plan administrative expense). In 2014, amounts reported were based on the 7.5 percent discount rate.
Schedule of Changes in Net Pension Liability and Related Ratios During the Measurement Period SHY. The schedule of changes in NPL and related ratios is presented below for the years for which SMUD has avai lable data. SMUD will add to this schedule each year and when it reaches 10 years it will contain the last 10 years data which will then be updated each year going forward.
Total pension liability*
Service cost Interest Changes of assumptions Differences between expected and actual experience Benefit payments, including refunds of employee contributions Net change in total pension liability Total pension liability, beginning of year Total pension liability, end of year Covered payroll Net pension liability as a percentage of covered payroll Notes to Schedule Benefit Changes: There were no changes to benefits.
December 31, 2017 2016 (thousands of dollars) 300 193 (827)
(914) (1,248) 6,449 5,20 1 21,743 23.9%
218 195 1, 118 1,531 4,918 6,449 21,748 29.7%
Changes in Assumptions: ln 2017, the accounting discount rate increased from 2.85 percent to 3. 58 percent.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Schedule of Plan Contributions PERS Plan. The schedule of pension contributions is presented below for the years for which SMUD has available data. SMUD will add to this schedule each year and when it reaches IO years it will contain the last 10 years data which will then be updated each year going forward.
December 31,
2017 2016 2015 2014 (thousands of dollars)
Actuarially detennined contribution 27.645 22,499 21.511 Conllibutions in relation to the actuarially detennined contribution 32.389 (32.389)
(27.645)
(22.499)
(21,511)
Contribution deficiencv ("'cess) s Co\\"ered payroll 236.219 222,133 213,627 s
195,394 Contributions as a percentage of co,*ered pa~*roll 13.7%
12.5%
10.5%
11.0%
Notes to Schedule The actuarial methods and assumptions used to set the actuarially determined contributions for the year ended December 31, 2017 was derived from the June 30, 2014 funding valuation repon.
Actuarial cost method Amonization method/period Asset valuation method Inflation Salary increases Payroll growth Investment rate of return Retirement age Mortality Entry age normal For details, see June 30, 2014 Funding Valuation Report Market value of assets. For details, see June 30, 2014 Funding Valuation Report 2.75%
Varies by entry age and service 3.0'/o 7.5% Net of pension plan investment and administrative expenses~
includes inflation The probabilities of retirement are based on the 2011 PERS Experience Study for the period from 1997 to 2011 The probabilities of mortality are based on the 2011 PERS Experience Study for the period from 1997 to 2011. Pre-retirement and post-retirement mortality rates include 5 years of projected monality improvement using Scale AA published by the Society of Actuaries.
Prior to 2017, the retirement age and mortality assumptions were based on the 2010 PERS Experience Study for the period from 1997 to 2007. In addition, the mortality assumption for pre-retirement and post-retirement rates included 5 years of projected. mortality improvement using Scale AA published. by the Society of Actuaries.
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,.,..., t r NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Schedule of Funding Progress OPEB. The schedule of funding progress for the other postemployment benefit healthcare plan is presented below for the three recent years for which SMUD has available data Actuarial UAAL as a Actuarial Acaued Unfunded Percentage Actuarial Value of Liabirrty AAL Funded Covered of Covered Valuation Assets (AAl.)
(UAALJ Ratio Payroll Payroll Dat9 (a)
(bl (b-a)
(alb)
(cJ
((b-a)/c)
(thousands of dollars) 06/30/2017 341,403 442,414 101,011 77.2%
224,202 45 1%
06/30/2016 225,044 377,045 152,001 59.7%
210,341 723%
06/30/2015 176,239 3 19,431 143,192 55.2%
191,414 74.8%
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