ML20323A232
| ML20323A232 | |
| Person / Time | |
|---|---|
| Site: | Palo Verde  |
| Issue date: | 11/17/2020 |
| From: | Arizona Public Service Co, City of Los Angeles, CA, Dept of Water & Power, KPMG, LLP |
| To: | Office of Nuclear Material Safety and Safeguards, Office of Nuclear Reactor Regulation |
| Shared Package | |
| ML20323A230 | List: |
| References | |
| 102-08184-MDD/MSC | |
| Download: ML20323A232 (110) | |
Text
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Financial Statements and Required Supplementary Information June 30, 2019 and 2018 (With Independent Auditors Report Thereon)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Table of Contents Page(s)
Independent Auditors Report 1-2 Managements Discussion and Analysis (Unaudited) 3-20 Basic Financial Statements; Statements of Net Position 21-22 Statements of Revenue, Expenses, and Changes in Net Position 23 Statements of Cash Flows 24-25 Notes to Financial Statements26-102 Required Supplementary Information (Unaudited) 103-108
Arvrfu KPMG LLP Suite 1500 550 South Hope Street Los Angeles, CA 90071-2629 Independent Auditors Report The Board of Water and Power Commissioners City of Los Angeles Department of Water and Power; Report on the Financial Statements We have audited the accompanying financial statements of the Department of Water and Power of the City of Los Angeles Power Revenue Fund (Power System), an enterprise fund of the City of Los Angeles, California, as of and for the years ended June 30, 2019 and 2018, and the reiated notes to the financial statements, as listed in the table of contents.
Managements Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of 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 financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to ot3tain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of materiai misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Department of Water and Power of the City of Los Angeles Power Revenue Fund as of June 30, 2019 and 2018, and the changes in its net position and its cash flows for the years then ended, in accordance with U.S. generally accepted accounting principles.
KPMG LLP is a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG international Cooperative ("KPMG International"), a Swiss entity.
vwm Emphasis of Matters As discussed in note 1(a) to the financial statements, the financial statements present only the Power System and do not purport to, and do not, present fairly the financial position of the City of Los Angeles, California as of June 30, 2019 and 2018 the changes in its financial position, or where applicable, its cash flows for the years then ended in accordance with U.S. generally accepted accounting principles. Our opinion is not modified with respect to this matter.
As discussed in note 2 (a) to the financial statements, in fiscal year 2019, the Power System adopted the provisions of Governmental Accounting Standards Board Statement No. 83, Certain Asset Retirement Obligations, retroactive to July 1,2017. Our opinion was not modified with respect to this matter.
Other Matters Required Supplementary Information U.S. generally accepted accounting principles require that the Managements Discussion and Analysis on pages 3-20 and the other required supplementary information on pages 103-108 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with managements responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.
Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated November 26, 2019 on our consideration of the Power Systems internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters.
The purpose of that report is solely 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 effectiveness of the Power Systems internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Power Systems internal control over financial reporting and compliance.
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Los Angeles, California November 26, 2019
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Managements Discussion and Analysis June 30, 2019 and 2018 (Unaudited)
The following discussion and analysis of the financial performance of the Department of Water and Power of the City of Los Angeles Power Revenue Fund (the Power System) provides an overview of the financial activities for the fiscal years ended June 30, 2019 and 2018. Descriptions and other details pertaining to the Power System are included in the notes to the financial statements. This discussion and analysis should be read in conjunction with the Power Systems financial statements, which begin on page 21.
Using this Financial Report This annual financial report consists of the Power Systems financial statements and required supplementary information and reflects the self-supporting activities of the Power System that are funded primarily through the sale of energy, transmission, and distribution services to the public it serves.
Statements of Net Position; Statements of Revenue, Expenses, and Changes in Net Position; and Statements of Cash Flows The financial statements provide an indication of the Power Systems financial health. The statements of net position include all of the Power Systems assets, deferred outflows, liabilities, deferred inflows, and net position using the accrual basis of accounting, as well as an indication about which assets can be utilized for general purposes and which assets are restricted as a result of bond covenants and other commitments as of June 30, 2019 and 2018. The statements of revenue, expenses, and changes in net position report all of the revenue and expenses during the fiscal years ended June 30, 2019 and 2018. The statements of cash flows report the cash provided by and used in operating activities, noncapital financing activities, capital and related financing activities, and investing activities during the fiscal years ended June 30, 2019 and 2018.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Management's Discussion and Analysis June 30, 2019 and 2018 (Unaudited)
The following tables summarize the financial position and changes in net position of the Power System as of and for the fiscal years ended June 30, 2019, 2018, and 2017; Table 1 - Condensed Schedule of Assets, Deferred Outflows, Liabilities, Deferred inflows, and Net Position (Amounts in millions)
June 30 Assets and Deferred Outflows 2019 2018(a) 2017(a)
Utility plant, net $ 12,174 11,531 10,926 Restricted investments 639 602 593 Other noncurrent assets 2,284 2,685 3,045 Current assets 2,943 2,419 2,449 Deferred outflows 660 945 1,226 Total assets and deferred outflows $ 18,700 18,182 18,239 Net Position, Liabilities, and Deferred Inflows Net position:
Net investment in capital assets $ 1,811 1,773 1,433 Restricted 916 883 1,484 Unrestricted 2,885 2,729 2,851 Total net position 5,612 5,385 5,768 Long-term debt, net of current portion 10,107 9,507 9,276 Other long-term liabilities 1,396 1,738 1,894 Current liabilities 1,062 991 942 Deferred inflows 523 561 359 Total liabilities and deferred inflows 13,088 12,797 12,471 Total net position, liabilities and deferred inflows $ 18,700 18,182 18,239 (a) Certain amounts were restated to reflect the adoption of Governmental Accounting Standards Board Statement No. 83, Certain Asset Retirement Obligations (GASB 83).
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Managements Discussion and Analysis June 30, 2019 and 2018 (Unaudited)
Table 2 - Condensed Schedule of Revenue, Expenses, and Changes in Net Position (Amounts in millions)
Year ended June 30 2019 2018 2017 Operating revenues:
Residential 1,376 1,266 1,180 Commercial and industrial 2,561 2,429 2,331 Sales for resale 112 91 88 Other 51 51 134 Uncollectible accounts (28) (33) (35)
Total operating revenues 4,072 3,804 3,698 Operating expenses; Fuel for generation and purchased power (1,561) (1,413) (1,458)
Maintenance and other operating expenses (1,413) (1,112) (1,107)
Depreciation and amortization (585) (554) (521)
Total operating expenses (3,559) (3,079) (3,086)
Operating income 513 725 612 Nonoperating revenue (expenses):
Investment income 94 32 22 Federal bond subsidies 34 34 33 Other nonoperating revenue, net 111 27 59 Debt expense, net (350) (340) (317)
Total nonoperating revenue (expenses), net (111) (247) (203)
Income before capital contributions and transfers 402 478 409 Capital contributions 58 42 32 Transfers to the reserve fund of the the City (233) (242) (264)
Increase in net position 227 278 177 Beginning balance of net position 5,385 5,768 5,591 Cumulative effect of change in accounting for other postemployment benefits (OPEB) _ (661)
Ending balance of net position 5,612 5,385 5,768 (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Managements Discussion and Analysis June 30, 2019 and 2018 (Unaudited)
Assets Utility Plant During fiscal years 2019 and 2018, the Power Systems net utility plant increased $643 million and $605 million, respectively. Net utility plant consists of significant investments in generation, transmission, distribution, and general plant infrastructure and fuel resources less accumulated depreciation.
During fiscal year 2019, depreciable utility plant additions totaled $767 million and construction work in progress (CWIP) expenditures totaled $351 million. Major CWIP additions/expenditures during the year included $35 million for Sylmar Converter Station AC filter replacement, $27 million for Substation Automation System, $18 million for 138kv Underground Transmission Cable replacement, $12 million for Design and Construction of Distribution Trunk Lines, $11 million to upgrade Valley - Rinaldi 230kv Transmission Lines 1 and 2, $11 million for new 230kv line between Haskell Canyon switching station and Sylmar switching station,
$9 million for Owens Gorge flow restoration upgrades, $9 million for major inspection overhauls related to reliability program, and $8 million for customer station design and construction. $451 million in CWIP projects were transferred from CWIP to plant accounts. Transfers from CWIP included $149 million for construction of new Scattergood-Olympic 230KV cable line, $38 million for new construction and reliability replacement program of distribution stations, $41 million for the Sylmar Ground Return System Replacement Project,
$41 million for 138kv underground transmission cable replacement, $29 million for Energy Storage Project at Beacon, and $27 million for replacement of Haiwee Power Plant Penstock. The completion of these large projects along with current year CWIP additions caused the balance in the CWIP account to decrease by
$144 million.
Direct additions are mostly related to improvements in distribution infrastructure as part of the Power System Reliability Program (PSRP). Many of the Departments assets were installed between 1920 and 1970. The PSRP is a program that evaluates and prioritizes which assets should be replaced first to reduce the frequency of electric service disruptions and the duration of each disruption. Approximately, $508 million and $28 million were additions to distribution and transmission plant accounts, respectively. Major direct additions included
$124 million for replacement of deteriorated poles and cross arms, $75 million for new business line customer facilities, $59 million for reliability replacement of 4.8KV and 34.5KV cables, $52 million for customer stations design and construction, $20 million for permanent electric service restorations, and $17 million for automatic reading meter installations.
The accumulated depreciation balance increased by a net of $346 million in fiscal year 2019, which included retirements of $81 million offset by annual depreciation of $427 million net of depreciation charged to shared services.
During fiscal year 2018, depreciable utility plant additions totaled $682 million and construction work in progress (CWIP) expenditures totaled $360 million. Major CWIP additions/expenditures during the year included $27 million for Substation Automation Systems, $25 million for Scattergood-Olympic cable, $23 million for energy storage project at Beacon Solar site, $17 million to replace Sylmar Converter Station AC filters, and
$13 million to replace submarine segment of Sylmar electrode line. About $198 million in CWIP projects were transferred from CWIP to plant accounts. Transfers from CWIP included $49 million for Castaic Power Plant (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Managements Discussion and Analysis June 30. 2019 and 2018 (Unaudited) modernization and additions, $37 million for Beacon solar plant site development, $17 million to replace 138 KV underground transmission cable at Fairfax RS-D to Gramercy line 1 & 2, $15 million for purchase of 6060 Sepulveda Blvd office building, and $13 million for transformer replacement program. The completion of these large projects along with current year CWIP additions caused the balance in the CWIP account to increase to
$161 million.
Direct additions are mostly related to improvements in distribution infrastructure as part of the PSRP. Many of the Departments assets were installed between 1920 and 1970. The PRP is a program that evaluates and prioritizes which assets should be replaced first to reduce the frequency of electric service disruptions and the duration of each disruption. Approximately, $489 million and $26 million were additions to distribution and transmission plant accounts, respectively.
Major direct additions included $131 million for replacement of deteriorated poles and cross arms, $69 million for new business line customer facilities, $55 million for design and construction of customer stations and facilities, $49 million for reliability replacement of 4.8kv and 34.5kv cables, $20 million for automatic meter reading installations, and $18 million for permanent electric service restorations.
The accumulated depreciation balance increased by a net of $438 million in fiscal year 2018, which included retirements of $1.5 million offset by annual depreciation of $440 million net of depreciation charged to shared services . The $154 million reserve for decommissioning cost for Palo Verde generating station was reclassed to liability with the adoption of GASB 83. .
Additional information regarding the Power Systems utility plant assets can be found in note 3 to the accompanying financial statements.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Managements Discussion and Analysis June 30, 2019 and 2018 (Unaudited)
The Power System is a vertically integrated utility, meaning it owns its own energy-generating assets, transmission system, and distribution system. The Power System has diverse power resources. The tables that follow summarize the generating resources available to the Power System as of June 30, 2019. These resources include those owned by the Power System (either solely or jointly with other utilities), as well as resources available through long-term purchase agreements. Generating station capacity is measured in megawatts (MWs).
Table 3 - Power System-owned Facilities Net Net maximum dependable Number of Number of capacity capacity Type of fuel facilities units (MWs) (MWs)
(1)
Natural gas 4 29 3,404 3,319 (2)
Large hydro 1 7 1,265 1,265 Renewables 62 208 455 300 Subtotal 67 244 5,124 4,884 Less payable to the California Department of Water Resources (120) (53)
Total 67 244 5,004 4,831 Consists of the four Los Angeles Basin Stations (Haynes, Valley, Harbor, and Scattergood).
Consists of the Castaic Plant which is undergoing modernization work which is scheduled to be completed during the calendar year 2019.
Includes 21 of the hydro units at the Los Angeles Aqueduct, Owens Valley and Owens Gorge hydro units that are certified as renewable resources by the California Energy Commission (CEC). Also included are microturbine units at the Lopez Canyon Landfill, Department-built photovoltaic solar installations, the Pine Tree Wind Project, and a local small hydro plant. Not included are the units that were upgraded at the Castaic Plant.
Figure based on statistical modeling of likely output without consideration of weather conditions that may affect the ability of certain renewable resources to reach its dependable capacity.
Energy payable to the California Department of Water Resources for energy generated at the Castaic Plant. This amount varies weekly up to a maximum of 120 MWs.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Managements Discussion and Analysis June 30, 2019 and 2018 (Unaudited)
Table 4-Jointly Owned Facilities, Long-Term Purchase Commitments and Energy Entitlements Departments Departments net maximum net dependable capacity capacity Number entitlement entitlement Type of facilities (6) (MWs) (MWs)
(1)
Coal - Intermountain Power Project 1 1,202 1,202 Natural gas - Apex Generating Station 1 578 483 (2)
Large hydro - Hoover Power Plant 1 496 282 (3)
Nuclear - Palo Verde Nuclear Generating Station 1 387 380 Renewables/distributed generation (DG) 39,503 2,413 759 Total 39,507 5,076 3,106 The Power Systems Intermountain Power Project (IPP) entitlement is 48.6% of IPPs plant capacity of 1,800 MWs. An additional 18.2% of the IPP entitlement is subject to variable recall. The IPP is owned by the Intermountain Power Agency, a subdivision of the State of Utah.
The Power Systems Hoover Power Plant (Hoover) contract entitlement is 496 MWs, 23.9% of the Hoover total capacity of 2,075 MWs As of May 2019, low water levels, procedures relating to the operation of Lake Mead, and scheduled maintenance activities have reduced the Departments dependable capacity to approximately 282 MWs.
The Power Systems Palo Verde Nuclear Generating Station entitlement is 9.7% of the maximum net plant capacity of 4,003 MWs.
The Power Systems contract renewable resources in-service include landfill gas units at certain landfills in the Los Angeles area; hydro unit locally; wind farms in Oregon, Washington, Utah, and Wyoming; and customer solar photovoltaic installations and DG units located in the Los Angeles region.
Figure based on statistical modeling of likely output without consideration of weather conditions that may affect the ability of certain renewable resources to reach its dependable capacity.
The Power System is a member of the Southern California Public Power Authority (SCPPA), which is a California Joint Powers Agency that finances the construction or acquisition of generation, transmission, and renewable energy projects. The Power System records its transactions with SCPPA as purchased power expense and the assets purchased by SCPPA and related debt are on SCPPAs financial statements.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Management's Discussion and Analysis June 30, 2019 and 2018 (Unaudited)
Other Noncurrent Assets and Deferred Outflows During fiscal year 2019, other noncurrent assets had a net decrease of $401 million primarily due to a decrease in notes receivable of $168 million related to note principal payments received from IPA during the year, a decrease in regulatory assets associated with pension of $167 million, a decrease in regulatory assets associated with other postemployment benefits (OPEB) of $44 million, a decrease in under recovered costs of
$30 million, a decrease of $13 million in regulatory assets primarily for costs related to energy efficiency programs, offset by an increase in restricted cash and cash equivalents of $20 million.
During fiscal year 2019, deferred outflows decreased approximately $285 million due primarily to a $159 million decrease in deferred outflows related to pension resulting from the actual earnings on plan investments being higher than projected and a net decrease of $98 million in deferred outflows related to the recognition of decommissioning expenses under GASB 83 connected to the planned Navajo plant closure, a decrease of
$15 million in gas derivative instruments due to the maturity of natural gas hedges, a $14 million decrease in the year-over-year contributions made after the measurement date for pension, a decrease of $6 million for deferred outflows on debt refunding due to amortization of gains and losses on bond refinancing, offset by a
$5 million increase in deferred outflows related to year-over-year contributions made after the measurement date for OPEB, and a $3 million increase in deferred outflows related to OPEB.
During fiscal year 2018, other noncurrent assets had a net decrease of $359 million primarily due to the write off of the previously reported net postretirement asset of $661 million in conjunction with the adoption of the provisions of Governmental Accounting Standards Board Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions, a decrease in regulatory assets associated with pension of $133 million, a decrease in notes receivable of $116 million and decrease in under recovered costs of $30 million, offset by an increase in regulatory assets associated with other postemployment benefits (OPEB) upon adoption of GASB 75 effective July 1, 2017, of $430 million and an increase of $143 million in regulatory assets primarily for costs related to energy efficiency programs.
During fiscal year 2018, deferred outflows decreased approximately $281 million due primarily to a $387 million decrease in deferred outflows related to pension. This decrease is primarily attributable to actual income on plan investments being higher than projected income. At June 30, 2017, the cumulative unamortized balance of such differences was a net deferred outflow of $232 million. At June 30, 2018, the cumulative unamortized balance of such differences was a net deferred inflow of $50 million as a result of earnings on pension plan investments being significantly higher than projected during the net pension liability measurement period ended June 30, 2017, which is the measurement date for reporting the pension for the Power Systems fiscal year 2018. The remaining decrease represents the current years recognition of deferred outflows due to changes in assumptions and net excess of projected earnings on plan investments over actual earnings.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Managements Discussion and Analysis June 30, 2019 and 2018 (Unaudited)
Current Assets During fiscal year 2019, current assets increased $524 million, or 22%. This increase is primarily comprised of a $391 million increase in unrestricted cash and cash equivalents and a $20 million increase in accrued unbilled revenue due to increases in operating revenue as a result of increased rates and consumption. Other increases and decreases included the following; a $42 million increase in restricted cash and cash equivalents, a $35 million increase in the current portion of long-term notes receivable due to higher scheduled note maturities, a $30 million increase in the current portion of under recovered costs due to less consumption than forecasted causing pass-through revenue to decrease below forecasted costs, a $5 million decrease in net accounts receivable due to increases in rates and consumption and a $11 million increase in other current assets.
During fiscal year 2018, current assets decreased $30 million, or 1.2%. The majority of the decrease was due to a $240 million decrease in unrestricted cash and cash equivalents due to higher expenditures and debt service costs paid and a $29 million decrease in net accounts receivable due to a $2 million year-over-year decrease in the accounts receivable gross balance, net of a $27 million increase in the Power Systems allowance based on managements analysis of aged accounts. This decrease is offset by a $98 million increase in the current portion of under recovered costs due to less consumption than forecasted causing pass-through revenue to decrease and not be adequate to cover forecasted costs, a $75 million increase in the current portion of long-term notes receivable due to higher scheduled note maturities, a $34 million increase in cash and cash equivalents, restricted due to higher principal and interest payments, a $13 million increase in cash collateral from secure lending transactions, and an aggregate increase in other current assets of $19 million.
Liabilities and Net Position Long-Term Debt As of June 30, 2019, the Power Systems total outstanding long-term debt balance, including the current portion was approximately $10.4 billion. The increase of $598 million over the prior years balance was due to five new debt issuances in FY 2019 totaling $1,345.9 million, $230.9 million in issue premiums, offset by scheduled maturities of $153.7 million, defeasance of $746.7 million in the Power Systems revenue bonds, and
$78.7 million in amortization on premiums and discounts. Two issues were to defease existing debt, two issues were to finance capital improvements, and one issue was used to defease debt and finance capital improvements.
As of June 30, 2018, the Power Systems total outstanding long-term debt balance, including the current portion was approximately $9.8 billion. The increase of $253 million over the prior years balance resulted from the sale of $729.4 million in the Power Systems revenue bonds issued plus $134.9 million in issue premiums, offset by scheduled maturities of $131.8 million, defeasance of $415.7 million in the Power Systems revenue bonds, and
$64.0 million in amortization on premiums and discounts.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Managements Discussion and Analysis June 30, 2019 and 2018 (Unaudited)
Outstanding principal, plus scheduled interest as of June 30, 2019, is scheduled to mature as shown in the chart below:
Chart: Debt Service Requirements
$4,000,000
$3,500,000
$3,000,000
$2,500,000 mim
$2,000,000
$1,500,000
$1,000,000
$500,000 2024 2029 2044 2049 2054 2034 2039 Five-year period ending In addition, the Power System had $474.8 million and $460.6 million in restricted investments available for the use of debt reduction as of June 30, 2019 and 2018, respectively.
In March 2019, Moodys Investors Service affirmed the Power Systems bond rating of Aa2. In August 2019, Fitch Ratings affirmed the Power Systems bond rating of AA. Also, in September 2019, S&P Global Ratings affirmed the Power Systems bond rating of AA. These ratings are due to the Power Systems broad revenue stream and a competitive power supply portfolio that has historically provided competitive retail electricity rates and evident strategic focus on positioning the utility to improve system reliability while meeting state mandated greenhouse emission rules and renewable energy standards.
The Master Bond Resolution allows for parity debt to be issued as long as the Power System maintains a maximum annual adjusted debt service coverage of 1.25. The debt service coverage ratio is computed by taking operating revenue less operating expense excluding depreciation expense to obtain net revenue. Net revenue is then divided by the current debt service. The Power System debt service coverage for fiscal year 2018 to 2019 was 2.40%.
Additional information regarding the Power Systems long-term debt can be found in note 9 to the financial statements.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Managements Discussion and Analysis June 30, 2019 and 2018 (Unaudited)
Pensions The Power Systems proportionate share of the Departments net pension liability decreased $299 million from fiscal year 2018 to 2019 and decreased $576 million from fiscal year 2017 to 2018 due to the below pension activity; Fiscal year ended Description 2019 2018 2017 Beginning net pension liability 916,758 1,492,508 771,122 Pension expense 116,889 165,984 214,407 Employer contributions (297,803) (269,172) (248,620)
New net deferred inflows/outflows (96,398) (411,259) 661,546 Recognition of prior deferred inflows/outflows (21,436) (61,303) 94,053 Ending net pension liability 618,010 916,758 1,492,508 For fiscal year 2019, the net pension liability decreased due to two primary factors: actual earnings from investments being 8.84% versus projected returns of 7.25% and changes in crediting rates from 7.5% to 7.25%
for Tier 2 employee contributions. For fiscal year 2018, the decrease in pension liability was due to actual earnings from investments being 12% versus projected returns of 7.25%. Assuming actuarial projections are in the line with actual results, the pension liability increases with pension expense and decreases with employer contributions. Differences between expected and actual experience with economic and demographic factors; the effects of changes in assumptions about future economic and demographic factors; differences between actual and projected earnings and plan investments; differences between proportionate share of collective contributions and employers actual contributions; and the effects of changes in proportion of the collective pension amounts are recorded as deferred outflows and deferred inflows and are amortized over periods ranging from five to six years in fiscal years 2019 and 2018.
OPEB The Power Systems proportionate share of the Departments net OPEB liability and related activity are shown below; Description Healthcare Death benefit Total Beginning net OPEB liability at July 1, 2018 $ 297,306 81,373 378,679 OPEB expense 25,862 5,882 31,744 Employer contributions (65,574) (5,494) (71,068)
New net deferred inflows/outflows (20,298) (2,012) (22,310)
Recognition of prior deferred inflows/outflows 23,097 (561) 22,536 Ending net OPEB liability at June 30, 2019 $ 260,393 79,188 339,581 (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Managements Discussion and Analysis June 30, 2019 and 2018 (Unaudited)
Description Healthcare Death benefit Total Beginning net OPEB liability at July 1, 2017 $ 436,658 80,173 516,831 OPEB expense 41,835 6,015 47,850 Employer contributions (63,379) (5,581) (68,960)
New net deferred inflows/outflows (119,669) 638 (119,031)
Recognition of prior deferred inflows/outflows 1,861 128 1,989 Ending net OPEB liability at June 30, 2018 $ 297,306 81,373 378,679 In fiscal year 2019, the OPEB liability decreased $39 million from the prior year due to a 9.08% return on plan investments versus projected earnings of 7.25%.
In fiscal year 2018, the Power System adopted the provisions of the GASB Statement No. 75, which resulted in a $661 million decrease in the net position and the recognition of a regulatory asset of $451 million, which was effective at the beginning of the period (July 1, 2017).
Other Long-term Liabilities and Deferred Inflows During fiscal year 2019, other long-term liabilities decreased $342 million primarily due to a $299 million reduction of net pension liability, a $39 million reduction of net other postemployment benefits liabilities, a
$15 million decrease in derivative instrument liability, a $14 million decrease in asset retirement obligation, offset by an increase of $25 million in estimated environmental remediation liabilities.
As discussed above, net pension and OPEB liabilities and the related inflows decreased from prior year due to actual investment returns being more than the projected 7.25% return. Asset retirement obligations decreased due to decommissioning costs of $20 million being paid in fiscal year 2019 related to Navajo Generating Station. Environmental liabilities increased due to new cost estimates being performed in the current year using industry specific cost software.
During fiscal year 2018, other long-term liabilities had a net decrease of $156 million primarily due to the recognition of the a $379 million net other postemployment benefits liability that resulted from the adoption of GASB 75, an increase of $30 million for estimated environmental remediation liability, an aggregate $8 million increase in derivative instruments, a $3 million increase in accrued workers compensation claims, offset by a
$576 million reduction of the net pension liability.
Also, during fiscal year 2018, deferred inflows had a net increase of $202 million and this was mainly driven by an increase of $80 million to deferred inflows related to pension and an increase of $120 million to deferred inflows related to net other postemployment benefits that resulted from the adoption of GASB 75.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Managements Discussion and Analysis June 30, 2019 and 2018 (Unaudited)
Current Liabilities During fiscal year 2019, current liabilities increased $71 million, or 7%, due to a $48 million increase in accounts payable and accrued expenses, a $21 million increase in accrued interest, an $11 million increase in accrued employee expenses, offset by a decrease of $7 million in securities lending obligations by the City and a $2 million decrease in the current portion of long-term debt.
During fiscal year 2018, current liabilities increased $49 million, or 5% due to a $22 million increase in the current portion of long-term debt, a $6 million increase in accrued interest, an $11 million increase in accrued employee expenses, a $13 million increase in securities lending obligations by the City offset by a $3 million decrease in accounts payable and accrued expenses.
Changes in Net Position Operating Revenue The Power Systems rates are established by rate ordinances set by the Board of Water and Power Commissioners (the Board) based on the Boards powers and duties established in Section 676 of the City Charter. The Power System recognizes energy costs in the period incurred and accrues for estimated energy sold but not yet billed. Through a set of rate ordinances, the Power System bills its revenue through fixed and pass-through factors. As of April 15, 2016, the effective date of the 2016 Incremental Electric Rate Ordinance, all pass-through billing factors charged as part of the 2016 rates are uncapped, and a base rate revenue target (BRRTA) was established for fiscal year 2016 through fiscal year 2020 to ensure sufficient revenue to meet fixed costs while implementing an aggressive energy efficiency program. The base rate revenue target is a decoupling mechanism that separates cost recovery from the energy usage underlying the calculated overall rate. This allows the Power System to meet its financial obligations while still promoting energy conservation.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Managements Discussion and Analysis June 30, 2019 and 2018 (Unaudited)
The operating revenue of the Power System is generated from wholesale and retail customers. There are four major customer categories of retail revenue. These categories include residential, commercial, industrial, and other, which includes public street lighting. Table 5 summarizes the percentage contribution of retail revenue from each customer segment in fiscal years 2019, 2018, and 2017:
Table 5 - Revenue and Percentage of Revenue by Customer Class (Amounts in thousands)
Rscal year 2019 Fiscal year 2018 Rscalyear 2017 Revenue Percentage Revenue Percentage Revenue Percentage Type of retail customer:
Residential $ 1,376,341 35 % $ 1,265,713 34 % $ 1,179,514 33%
Commercial and Industrial 2,560,098 64 2,429,322 65 2,331,599 64 Other, net 22,949 1 17,835 1 98,712 3 3,959,388 100% 3,712,870 100% 3,609,825 100 %
Sales for resale 111,542 91,351 88,099 Total revenue $ 4,070,930 $ 3,804,221 $ 3,697,924 While commercial customers consume the most electricity, residential customers represent the largest customer class. As of June 30, 2019, 2018, and 2017, the Power System had approximately 1.5 million customers. As shown in table 6 below, 1.4 million, or 91%, of total customers were in the residential customer class in fiscal years 2019, 2018, and 2017, respectively.
Table 6 - Number of Customers and Percentage of Customers by Customer Class (Amounts in thousands)
Fiscal year 2019 Rscal year 2018 Fiscal year 2017 Number Percentage Number Percentage Number Percentage Type of retail customer:
Residential 1,397 91 % 1,384 91 % 1,378 91 %
Commercial 116 8 114 8 113 8 Industrial 10 1 10 1 10 1 Other 6 7 7 1,529 100% 1,515 100 % 1,508 100 %
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Managements Discussion and Analysis June 30, 2019 and 2018 (Unaudited)
Fiscal Year 2019 Operating revenue increased $267 million due to a $76 million increase in base rate revenue from the Base Rate Revenue Target Adjustment (BRRTA). The 2016 Electric Rate Ordinance establishes the BRRTA for fiscal years 2016 through 2020. For fiscal year 2020 to 2021, and fiscal years thereafter, a BRRTA shall be established by the Board. As result of the departments interim rate review required by the ordinance, the Base Rate Revenue Target has been reduced by 2% for fiscal year 2019 and 2% for fiscal year 2020. Under recovered costs of $342 million were recognized as revenue and will be billed during fiscal year 2020.
Fiscal Year 2018 Operating revenue increased $106 million due to a $76 million increase in base rate revenue from BRRTA. For fiscal year 2020 to 2021, and fiscal years thereafter, a BRRTA shall be established by the Board. Under recovered costs of $312 million were recognized as revenue and will be billed during fiscal year 2019.
Operating Expenses Fuel for generation and purchased power are two of the largest operating expenses that the Power System incurs each fiscal year. Fuel for generation expense includes the cost of fuel that is used to generate energy.
The majority of fuel costs include the cost of natural gas, coal, and nuclear fuel.
The table below summarizes the Power Systems operating expenses during fiscal years 2019, 2018, and 2017; Table 7 - Operating Expenses and Percentage of Expense by Type of Expense (Amounts in thousands)
Fiscal year 2019 Rscal year 2018 Rscal year 2017 Expense Percentage Expense Percentage Expense Percentage Type of expense:
Fuel for generation $ 296,506 8% $ 268,610 9 $ 292,557 9%
Purchased power 1,264,133 36 1,143,535 37 1,165,303 38 Other operating expenses 1,079,358 30 799,074 26 829,347 27 Maintenance 333,392 9 313,389 10 277,771 9 Depreciation and amortization 585,231 17 554,354 18 521,220 17
$ 3,558,620 100 % $ 3,078,962 100 % $ 3,086,198 100%
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Managements Discussion and Analysis June 30, 2019 and 2018 (Unaudited)
Fiscal Year 2019 Fiscal year 2019 operating expenses were $480 million higher when compared to fiscal year 2018, driven primarily by a $280 million increase in other operating expenses, a $121 million increase in purchased power costs, a $31 million increase in depreciation and amortization expense, a $28 million increase in fuel for generation costs, and a $20 million increase in maintenance expenses.
The $280 million increase in other operating expenses is mainly due to the recognition of a $103 million decommissioning expense in fiscal year 2019 related to the announcement of the closure of Navajo Generating Station (see note 18b), an increase of $66 million in customer services and information expenses related to an increase in customer rebates for solar programs and energy efficiency programs, an increase of $36 million in customer accounting and collecting expenses connected to a reclass of CCB regulatory assets (Note 6), an increase of $41 million in distribution expenses, an increase of $29 million in transmission expenses, and a net
$3 million increase in other expenses.
The $121 million increase in purchased power costs can be primarily attributed to an increase in renewable energy purchases connected to the Power Systems continuing efforts in providing more environmentally friendly, renewable energy to its customers.
The $31 million increase in depreciation and amortization expense can mainly be attributed to year-over-year increases in depreciation and amortization for regulatory assets ($14 million), distribution plant ($8 million),
transmission plant ($5 million), and generation plant ($4 million).
The $28 million increase in fuel for generation costs is primarily due to higher natural gas prices, year over year.
The $20 million increase in maintenance expense for utility plant assets is mainly due to higher year-over-year maintenances costs for production plant ($11 million) and distribution plant ($9 million).
Fiscal Year 2018 Fiscal year 2018 operating expenses were $8 million lower as compared to fiscal year 2017, driven primarily by a $24 million decrease in fuel for generation costs, a $22 million decrease in purchased power costs, a
$30 million decrease in other operating expenses, offset by a $36 million increase in maintenance expenses, and a $33 million increase in depreciation and amortization expense.
The $22 million decrease in purchased power costs can be primarily attributed to reduced energy purchases from coal fired plants such as IPP. The $24 million decrease in fuel for generation costs is due to lower natural gas prices, year over year. The $30 million decrease in other operating expenses is due to lower administrative and general expenses ($30 million) due to decreased injuries and damages costs, lower customer accounting and collection expense ($10 million) due to the improvements in customer billing process and systems, offset by higher production expense ($5 million), higher distribution expenses ($3 million), and higher marketing expenses ($2 million).
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Managements Discussion and Analysis June 30, 2019 and 2018 (Unaudited)
The $36 million increase in maintenance expense for utility plant assets is mainly due to higher year-over-year maintenances costs for production plant ($11 million), distribution plant ($18 million), and transmission plant
($5 million).
The $33 million increase in depreciation and amortization expense can mainly be attributed to year-over-year increases in depreciation and amortization for regulatory assets ($14 million), distribution plant ($11 million),
transmission plant ($5 million), and generation plant ($3 million).
Nonoperating Revenue and Expenses Fiscal Year 2019 The major nonoperating activities of the Power System for fiscal year 2019 included the transfer of $233 million to the City General Fund, investment income of $94 million, $34 million in federal bond subsidies, $111 million in other nonoperating income, and $350 million in debt expenses.
The $62 million increase in investment income is due mainly to changes in market values of investments and income from the Intermountain Power Agreements long-term notes.
The $84 million increase in other nonoperating income is due mainly due to an increase in the net sale of C02 emission allowances which were recorded to other nonoperating income.
The $10 million increase in debt expenses is mainly due to the interest expense on new bonds issued during the fiscal year net of a year-over-year decrease in capitalized interest of $3 million.
The $15.9 million increase in capital contributions is mainly due to a year-over-year increases in amounts received from Metropolitan Transportation Authority (MTA) for various projects ($6.3 million), the City for Los Angeles International Airport projects ($4.9 million), and customers for various projects ($4.7 million).
Fiscal Year 2018 The major nonoperating activities of the Power System for fiscal year 2018 included the transfer of $242 million to the City General Fund, investment income of $32 million, $34 million in federal bond subsidies, $27 million in other nonoperating income, and $340 million in debt expenses.
The $10 million increase in investment income is due mainly to changes in market values of investments and income from the Intermountain Power Agreements long-term notes.
The $32 million decrease in other nonoperating income is due mainly to a reduction of C02 emission allowances as the Power System did not have to sell these credits on the market in 2018.
The $23 million increase in debt expenses is mainly due to the interest expense on new bonds issued during the fiscal year net of a decrease in capitalized interest of $1 million on the year.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Managements Discussion and Analysis June 30, 2019 and 2018 (Unaudited)
The $10.3 million increase in capital contributions is mainly due to amounts received from the City for Los Angeles International Airport projects ($2.7 million), FEMA for the Grants-Creek/Skirball Fires and the January 2017 Storms ($3.9 million), and Los Angeles County for various projects ($3.7 million) as compared to the prior year.
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Statements of Net Position June 30, 2019 and 2018 (Amounts in thousands)
Assets and Deferred Outflows 2019 2018 Noncurrent assets:
Utility plant:
Generation 6,090,845 5,987,567 Transmission 2,026,678 1,727,489 Distribution 9,579,922 9,012,299 General 2,025,892 1,848,581 Total 19,723,337 18,575,936 Accumulated depreciation (8,434,447) (8,088,454)
Total utility plant, net 11,288,890 10,487,482 Construction work in progress 676,237 820,472 Nuclear fuel, at amortized cost 42,406 41,528 Natural gas field, net 166,299 181,548 Total 12,173,832 11,531,030 Restricted investments 638,861 602,258 Cash and cash equivalents - restricted 339,126 318,455 Long-term notes receivables, net of current portion 262,027 429,764 Under recovered costs 95,670 125,649 885,901 898,696 Regulatory assets - other Regulatory assets - pension 315,185 482,193 Regulatory assets - OPEB 386,123 430,072 Total noncurrent assets 15,096,725 14,818,117 Current assets; Cash and cash equivalents - unrestricted 1,142,128 751,164 Cash and cash equivalents - restricted 427,140 384,648 Cash collateral received from securities lending transactions 17,605 24,114 Customer and other accounts receivable, net of $178,600 and $208,933 allowance for losses for 2019 and 2018, respectively 315,766 320,279 Current portion of long-term notes receivable 159,309 123,545 Current portion of under recovered costs 341,775 311,646 Due from Water System 2,261 9,846 Accrued unbilled revenue 217,787 197,811 184,988 176,233 Materials and fuel 134,564 119,814 Prepayments and other current assets Total current assets 2,943,323 2,419,100 18,040,048 17,237,217 Total assets 7,015 22,206 Deferred outflows on derivative instruments 21,759 27,363 Deferred outflows on debt refunding 29,989 127,659 Deferred outflows - asset retirement obligation 243,002 403,310 Deferred outflows - pension 5,525 2,626 Deferred outflows - OPEB Deferred outflows - pension contributions made after measurement date 282,388 296,294 Deferred outflows - OPEB contributions made after measurement date 70,274 65,649 659,952 945,107 Total deferred outflows 18,700,000 18,182,324 Total assets and deferred outflows (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Statements of Net Position June 30, 2019 and 2018 (Amounts in thousands)
Net Position, Liabilities, and Deferred Inflows 2019 2018 Net position:
Net investment in capital assets $ 1,811,237 1,772,899 Restricted:
Debt service 686,280 643,121 Other purposes 228,865 239,575 Unrestricted 2,885,471 2,729,311 Total net position 5,611,853 5,384,906 Long-term debt, net of current portion 10,106,782 9,507,256 Other noncurrent liabilities:
Accrued workers compensation claims 70,474 70,474 Asset retirement obligation 266,685 281,236 Net OPEB liability 339,581 378,679 Net pension liability 618,010 916,758 Other noncurrent liability 100,942 90,551 Total other noncurrent liabilities 1,395,692 1,737,698 Current liabilities:
Current portion of long-term debt 263,296 265,005 Accounts payable and accrued expenses 420,592 372,755 Accrued interest 209,257 188,662 Accrued employee expenses 151,461 140,932 Obligations under securities lending transactions 17,605 24,114 Total current liabilities 1,062,211 991,468 Total liabilities 12,564,685 12,236,422 Deferred inflows on debt refunding 14,348 13,233 Deferred inflows - pension 281,901 324,374 Deferred inflows - OPEB 122,341 119,669 Deferred inflows from regulated business activities 104,872 103,720 Total deferred inflows 523,462 560,996 Total net position, liabilities, and deferred inflows $ 18,700,000 18,182,324 See accompanying notes to financial statements.
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Statements of Revenue, Expenses, and Changes in Net Position Years ended June 30, 2019 and 2018 (Amounts in thousands) 2019 2018 Operating revenue:
Residential $ 1,376,341 1,265,713 Commercial and industrial 2,560,098 2,429,323 Sales for resale 111,542 91,351 Other 50,911 50,830 Uncollectible accounts (27,962) (32,996)
Total operating revenue 4,070,930 3,804,221 Operating expenses:
Fuel for generation 296,506 268,610 Purchased powrer 1,264,133 1,143,535 Maintenance and other operating expenses 1,412,750 1,112,463 Depreciation and amortization 585,231 554,354 Total operating expenses 3,558,620 3,078,962 Operating income 512,310 725,259 Nonoperating revenue:
Investment income 94,217 32,135 Federal bond subsidies 33,723 33,580 Other nonoperating income 113,498 29,646 Total nonoperating revenue 241,438 95,361 Other nonoperating expenses (2,226) (2,702)
Total nonoperating revenue, net 239,212 92,659 Debt expenses:
Interest on debt 355,433 348,264 Allowance for funds used during construction (5,042) (7,924)
Total debt expenses 350,391 340,340 Income before capital contributions and transfers 401,131 477,578 Capital contributions 58,373 42,460 Transfers to the reserve fund of the City of Los Angeles (232,557) (241,848)
Increase in net position 226,947 278,190 Net position:
Beginning of year 5,384,906 5,767,946 Cumulative effect of change in accounting for postemployment benefits other than pensions, effective July 1,2018 (661,230)
End of year $ 5,611,853 5,384,906 See accompanying notes to financial statements.
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Statements of Cash Flows Years ended June 30, 2019 and 2018 (Amounts in thousands) 2019 2018 Cash flows from operating activities:
Cash receipts:
Cash receipts from customers 4,380,251 3,961,723 Cash coliected from customers for other agency services 711,477 679,562 Cash receipts from interfund services provided 834,998 677,655 Cash disbursements:
Cash payments to employees (762,631) (687,098)
Cash payments to suppliers (2,113,161) (1,931,532)
Cash payments for interfund services used (1,004,569) (909,214)
Cash payments to other agencies for fees collected (711,280) (675,764)
Other operating cash payments (15,921) (24,058)
Net cash provided by operating activities 1,319,164 1,091,274 Cash flows from noncapital financing activities:
Payments to the reserve fund of the City of Los Angeles (232,557) (241,848)
Interest paid on noncapitai revenue bonds (6,323) (5,946)
Net cash used in noncapital financing activities (238,880) (247,794)
Cash flows from capital and related financing activities:
Additions to plant and equipment, net (1,182,253) (1,100,185)
Capital contributions 57,741 44,579 Principal payments and maturities on long-term debt (153,615) (131,756)
Proceeds from issuance of bonds and revenue certificates 828,123 445,126 Debt interest payments (399,553) (399,872)
Federal bond subsidies 33,723 33,580 Net cash used in capital and related financing activities (815,834) (1,108,528)
Cash flows from investing activities:
Purchases of investment securities (741,483) (758,995)
Sales and maturities of investment securities 713,425 746,712 Proceeds from notes receivable 123,545 48,512 Investment income 94,190 29,381 Net cash provided by investing activities 189,677 65,610 Net change cash and cash equivalents 454,127 (199,438)
Cash and cash equivalents:
Beginning of year 1,454,267 1,653,705 End of year 1,908,394 1,454,267 (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Statements of Cash Flows Years ended June 30, 2019 and 2018 (Amounts in thousands) 2019 2018 Reconciliation of operating income to net cash provided by operating activities:
Operating income 512,310 725,259 Adjustments to reconcile operating income to net cash provided by operating activities:
Depreciation and amortization 585,231 554,354 Depletion expense 15,439 16,618 Amortization of nuclear fuel 12,143 13,185 Provision for losses on customer and other accounts receivables 27,962 32,996 Changes in assets and liabilities:
Customer and other accounts receivable (22,906) (7,768)
Accrued unbilled revenue (19,976) (2,978)
Underrecovered costs 29,979 29,979 Current portion of underrecovered costs (30,129) (97,734)
Materials and fuel (8,755) (6,168)
Regulatory assets 138,908 (511,058)
Due from Water System 7,585 (1,244)
Deferred outflows 264,361 164,330 Accounts payable and accrued expenses 64,311 (12,859)
Net pension liability (298,748) (575,750)
Net OPEB liability (39,098) 378,679 Other noncurrent liability 25,580 30,303 Deferred inflows (37,532) 202,497 Asset retirement obligation (14,551) 281,236 Prepayments and other 107,050 (122,603)
Net cash provided by operating activities 1,319,164 1,091,274 Supplemental disclosures of noncash capital and relating financing activities:
During the year ended June 30, 2019, the Power System issued capital bonds to refund previously issued debt. The $278.9 million of proceeds were deposited immediately into an irrevocable trust for the defeasance of $278.1 million of debt. Additionally, $468.6 million of proceeds were deposited immediately to a paying agent for the redemption of $468.6 million of debt. The net gain on refunding, after the write-off of previously reoorded unamortized premiums, resulted in $2.9 million, which will be amortized over the debt repayment period and recorded as a deferred inflow.
During the year ended June 30. 2018, the Power System issued capital bonds to refund previously issued debt The $418.5 million of proceeds were deposited immediately into an irrevocable trust for the defeasance of $415.7 million of debt. The net loss on refunding, after the write-off of previously recorded unamortized premiums, in the amount of $7.7 million, will be amortized over the debt repayment period and recorded as a deferred outflow.
Accounts payable related to capital expenditures 90,010 115,483 See accompanying notes to financial statements.
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
(1) Summary of Significant Accounting Policies The Department of Water and Power (the Department) exists as a separate department of the City of Los Angeles (the City) under and by virtue of the City Charter enacted in 1925, and as revised effective July 2000. The Departments Power Revenue Fund (the Power System) is responsible for the generation, transmission, and distribution of electric power for sale in the City. The Power System is operated as an enterprise fund of the City.
(a) Method of Accounting The accounting records of the Power System are maintained in accordance with U.S. generally accepted accounting principles (GAAP) for state and local governmental entities. The financial statements have been prepared using the economic resources measurement focus and the accrual basis of accounting. The Power System is accounted for as an enterprise fund and applies all applicable Governmental Accounting Standards Board (GASB) pronouncements in its accounting and reporting.
The financial statements of the Power System are intended to present the net position, and the changes in net position and cash flows, of only that portion of the business-type activities and each major fund of the City that is attributable to the transactions of the Power System. They do not purport to, and do not, present fairly the financial position of the City as of June 30, 2019 and 2018, the changes in its financial position, or, where applicable, its cash flows for the years then ended, in conformity with GAAP.
The Power Systems rates are determined by the Board of Water and Power Commissioners (the Board) and are subject to review and approval by the Los Angeles City Council. As a regulated enterprise, the Power System follows the regulatory accounting criteria set forth in GASB Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AlCPA Pronouncements, which requires that the effects of the rate-making process be reported in the financial statements. Such effects primarily concern the time at which various items enter into the determination of changes in net position. Accordingly, the Power System records various regulatory assets and liabilities to reflect the Boards actions and by deferring expenses and revenue that are recoverable or payable from rates provided in the electric rate ordinances. Regulatory liabilities comprise overrecovered costs, and deferred inflows and regulatory assets comprise regulatory assets and underrecovered costs in the statement of net position. Management believes that the Power System meets the criteria for continued application of GASB Statement No. 62, but will continue to evaluate its applicability based on changes in the regulatory and competitive environment. See note 6.
(b) Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
(c) Utility Plant The costs of additions to utility plant and replacements of retired units of property are capitalized. Costs include labor, materials, an allowance for funds used during construction, and allocated indirect charges, such as engineering, supervision, transportation and construction equipment, retirement plan contributions, healthcare costs, and certain administrative and general expenses. The costs of maintenance, repairs, and minor replacements are charged to the appropriate operations and maintenance expense accounts.
(d) Intangibles The Power System follows GASB Statement No. 51, Accounting and Financial Reporting for Intangible Assets, which requires that an intangible asset be recognized in the statement of net position only if it is considered identifiable. Additionally, it establishes a specified-conditions approach to recognize intangible assets that are internally generated. Effectively, outlays associated with the development of such assets are not capitalized until certain criteria are met. Outlays incurred prior to meeting these criteria are expensed as incurred. Intangible assets consist of land easements, water rights, and computer software and are included in general utility plant on the statements of net position.
(e) Impairment of Long-Lived Assets The Power System follows GASB Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries. Governments are required to evaluate prominent events or changes in circumstances affecting capital assets to determine whether impairment of a capital asset has occurred. A capital asset is considered impaired when its service utility has declined significantly and unexpectedly. Under GASB Statement No. 42, impaired capital assets that will no longer be used by the government should be reported at the lower of carrying value or fair value. Impairment losses on capital assets that will continue to be used by the government should be measured using the method that best reflects the cause of the diminished service utility of the capital asset.
(f) Depreciation and Amortization Beginning in fiscal year 2017, depreciation expense is computed using the straight-line method for all assets. Depreciation rates are in accordance with the Power Systems 2017 Depreciation Study.
The Power System uses the composite method of depreciation and, therefore, groups assets into composite groups for purposes of calculating depreciation expense. Estimated service lives range from 5 to 75 years. Amortization expense for computer software is computed using the straight-line method over 5 to 15 years. Depreciation and amortization expense as a percentage of average depreciable utility plant in service was 2.9% for both fiscal years ended 2019 and 2018. Amortization periods of regulatory assets are discussed in note 6.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
(g) Nuclear Fuel Nuclear fuel is amortized and charged to fuel for generation on the basis of actual thermal energy produced relative to total thermal energy expected to be produced over the life of the fuel. Under the provisions of the Nuclear Waste Policy Act of 1982, the federal government assesses each utility with nuclear operations, including the Power System, $1 per megawatt hour of nuclear generation. The Power System includes this charge as a current year expense in fuel for generation.
(h) Natural Gas Field In July 2005, the Power System acquired approximately a 74.5% ownership interest in gas properties located in Pinedale, Wyoming. The Power System uses the successful efforts method of accounting for its investment in gas-producing properties. Costs to acquire the mineral interest in gas-producing properties, to drill and equip exploratory wells that find proven reserves, and to drill and equip development wells are capitalized. Costs to drill exploratory wells that do not find proven reserves are expensed. Capitalized costs of gas-producing properties are depleted by the unit-of-production method based on the estimated future production of the proven wells.
Depletion expense related to the gas field is recorded as a component of fuel for generation expense.
During fiscal years 2019 and 2018, the Power System recorded $15.4 million and $16.6 million of depletion expense, respectively.
(i) Cash and Cash Equivalents As provided for by the State of California Government Code, the Power Systems cash is deposited with the City Treasurer in the Citys general investment pool for the purpose of maximizing interest earnings through pooled investment activities. Cash and cash equivalents in the Citys general investment pool are reported at fair value on a recurring basis and changes in unrealized gains and losses are recorded in the statements of revenue, expenses, and changes in net position. Interest earned on such pooled investments is allocated to the participating funds based on each funds average daily cash balance during the allocation period. The City Treasurer invests available funds of the City and its independent operating departments on a combined basis. The Power System classifies all cash and cash equivalents that are restricted either by creditors, the Board, or by law as restricted cash and cash equivalents in the statements of net position. The Power System considers its portion of pooled investments in the Citys pool to be unrestricted cash and cash equivalents and the unspent construction funds as long-term restricted cash and cash equivalents.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
At June 30, 2019 and 2018, restricted cash and cash equivalents include the following (amounts in thousands):
June 30 2019 2018 Bond redemption and interest funds 384,525 345,602 Other restricted funds 42,615 39,046 Cash and cash equivalents - current portion 427,140 384,648 Self-insurance funds 202,856 192,886 Rate Stabilization fund 100,000 100,000 Bond redemption funds 36,198 25,569 Construction funds 72 Cash and cash equivalents - noncurrent 339,126 318,455 Total restricted cash and cash equivalents 766,266 703,103 (j) Customer and Other Accounts Receivable and Allowance for Doubtful Accounts The Power Systems accounts receivables consist of customer and other receivables. The receivables are reported net of allowance for losses. Customer account receivables result from the sale of energy to city residents. Other receivables consist of billings to customers, federal, state, and local governments for work performed to improve or enhance energy distribution, energy sales to other utilities, and other miscellaneous receivables.
Power Systems residential customers are billed bimonthly, and customers on monthly billings include commercial, governmental, and industrial. The Power System records an estimate for uncollectible accounts for its receivables related to electric customer accounts and other nonelectric customer billings based on an analysis of the balances in the Power Systems accounts receivable aging reports.
These estimates are reviewed and adjusted annually.
The Power System records bad debt for its estimated uncollectible accounts related to electric customer accounts as a reduction in the Power Operating Revenue. The Power System records its estimated uncollectible accounts related to nonelectric customer billings as a reduction to related operating revenue in the Power System.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
At June 30, 2019 and 2018, customer and other accounts receivable include the following (amounts in thousands):
June 30 2019 2018 Customer accounts receivable 421,305 476,694 Allowance for losses (163,000) (198,233)
Customer accounts receivable 258,305 278,461 Other receivables 73,061 52,518 Allowance for losses, other (15,600) (10,700)
Other receivables 57,461 41,818 Total customer and other accounts receivable 315,766 320,279 (k) Materials and Fuel Materials and supplies are recorded at average cost. Fuel is recorded at lower of cost or market on an average-cost basis.
(l) Accrued Unbilled Revenue Accrued unbilled revenue is the receivable for estimated energy sales during the period for which service has been provided but the customer has not yet been billed.
(m) Investments The Power System follows GASB Statement No. 72, Fair Value Measurement and Application, which addresses accounting and fair value reporting issues related to fair value measurements by clarifying the definition of fair value, establishing general principles for measuring fair value, providing additional fair value application guidance, and enhancing disclosures about fair value measurements. This statement established a three-level hierarchy of inputs to valuation techniques used to measure fair value. Investments are reported at fair value on a recurring basis, and changes in unrealized gains and losses are recorded in the statements of revenue, expenses, and changes in net position.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
(n) Accrued Employee Expenses Accrued employee expenses include accrued payroll and an estimated liability for vacation leave, sick leave, and compensatory time, which are accrued when employees earn the rights to the benefits.
Below is a schedule of accrued employee expenses as of June 30, 2019 and 2018:
June 30 2019 2018 Type of expenses:
Accrued payroll 59,556 54,895 Accrued vacation 54,736 52,224 Accrued sick leave 14,566 13,583 Compensatory time 22,603 20,230 Total 151,461 140,932 (o) Debt Expenses Debt premiums and discounts are capitalized and amortized to interest expense using the effective-interest method over the lives of the related debt issues. Gains and losses on refundings related to bonds redeemed by proceeds from the issuance of new bonds are amortized to interest expense using the effective-interest method over the shorter of the life of the new bonds or the remaining term of the bonds refunded. Debt issuance costs are expensed in the year debt is issued.
(p) Accrued Workers Compensation Claims Liabilities for unpaid workers compensation claims are recorded at their net present value. See note 16(c).
(q) Customer Deposits Customer deposits represent deposits collected from customers upon opening of new accounts. These deposits are obtained when the customer does not have a previously established credit history with the Power System. Original deposits plus interest are paid to the customer once a satisfactory payment history is maintained, generally after one to three years.
The Departments Water Revenue Fund (the Water System) is responsible for collection, maintenance, and refunding of these deposits for all the Departments customers, including those of the Power System. As such, the Water Systems statements of net position include a deposit liability of
$235 million and $205 million as of June 30, 2019 and 2018, respectively, for all customer deposits collected. In the event that the Water System defaults on refunds of such deposits, the Power System would be required to pay amounts it owes its customers.
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DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
(r) Capital Contributions Capital contributions and other grants received by the Power System for constructing utility plant and other activities are recognized when all applicable eligibility requirements, including time requirements, are met.
(s) Allowance for Funds Used during Construction (AFUDC)
An AFUDC charge represents the cost of borrowed funds used for the construction of utility plant.
Capitalized AFUDC is included as part of the cost of utility plant and as a reduction of interest expense.
As of June 30, 2019 and 2018, the average AFUDC rates were 3.51% and 3.71%, respectively.
(t) Use of Restricted and Unrestrictive Resources The Power Systems policy is to use unrestricted resources prior to restricted resources to meet expenses to the extent that it is prudent from an operational perspective. Otherwise, restricted resources will be utilized to meet intended obligations.
(u) Pensions Eligible employees of the Power System are members of the Water and Power Employees Retirement Plan (the Plan), which is a single-employer defined-benefit pension plan. The Power Systems policy is to fund all the required actuarially determined contributions; such costs to be funded are determined annually as of July 1 by an actuary utilized by the Plan. The assets of the Plan are accumulated and reported at fair value in a special trust fund of the City and, therefore, are not reported in the accompanying financial statements.
The Power System recognizes a net pension liability, which represents the Power Systems proportionate share of the excess of the total pension liability over the fiduciary net position of the pension plan as reflected in the financial statements of the Plan. The net pension liability is measured as of the Power Systems prior fiscal year-end. Changes in the net pension liability are recorded, in the period incurred, as pension expense or as deferred inflows of resources or deferred outflows of resources depending on the nature of the change. The changes in net pension liability that are recorded as deferred inflows of resources or deferred outflows of resources (that arise from changes in actuarial assumptions or other inputs and differences between expected or actual experience) are amortized over the weighted average remaining service life of all participants in the respective pension plan and are recorded as a component of pension expense beginning with the period in which they are incurred. Projected earnings on pension investments are recognized as a component of pension expense. Differences between projected and actual investment earnings are reported as deferred inflows of resources or deferred outflows of resources and amortized as a component of pension expense on a closed basis over a five-year period beginning with the period in which the difference occurred. Each subsequent year will incorporate an additional closed basis five-year period of recognition. Contributions made after the measurement date are recorded as deferred outflows and a reduction to the pension regulatory asset.
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DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
For purposes of measuring the net pension liability and deferred outflows/inflows or resources relating to pensions and pension expense, information about the fiduciary net position of the Power Systems pension plan and additions to/deductions from the plans fiduciary net position has been determined on the same basis as they are reported by the Plan. For this purpose, benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with the benefits terms.
(v) Other Retirement Plan Benefits Eligible employees of the Power System are members of the Plan, which comprises a single-employer defined-benefit plan and a system of benefits. In addition to pension benefits, retirees can also receive Other Postemployment benefits (OPEB), mainly, healthcare and death benefits. The level of benefits is determined based on their years of civil service, age, and which pension tier they belong to. Active employees who qualify for disability can receive permanent disability benefits in accordance with the plan provisions up until retirement and temporary disability for up to 24 months.
The Power Systems policy is to fund all the required actuarially determined contributions; such costs to be funded are determined annually as of July 1 by an actuary utilized by the Plan. The assets of the Plan are accumulated and reported at fair value in a special trust fund of the City and, therefore, are not reported in the accompanying financial statements.
Beginning with the year ended June 30, 2018, the Power System recognizes a net OPEB liability, which represents the Power Systems proportionate share of the excess of the total OPEB liability over the fiduciary net position of the Plan as reflected in the financial statements of the Plan. The net OPEB liability is measured as of the Power Systems prior fiscal year-end. Changes in the net OPEB liability are recorded, in the period incurred, as OPEB expense or as deferred inflows of resources or deferred outflows of resources depending on the nature of the change. The changes in net OPEB liability that are recorded as deferred inflows of resources or deferred outflows of resources (that arise from changes in actuarial assumptions or other inputs and differences between expected or actual experience) are amortized over the weighted average remaining service life of all participants in the respective OPEB plan and are recorded as a component of OPEB expense beginning with the period in which they are incurred. Projected earnings on pension investments are recognized as a component of OPEB expense. Differences between projected and actual investment earnings on Plan investments are reported as deferred inflows of resources or deferred outflows of resources and amortized as a component of OPEB expense on a closed basis over a five-year period beginning with the period in which the difference occurred. Each subsequent year will incorporate an additional closed basis five-year period of recognition. Contributions made after the measurement date are recorded as deferred outflows and a reduction to the OPEB regulatory asset.
For purposes of measuring the net OPEB liability and deferred outflows/inflows or resources relating to OPEB and OPEB expense, information about the fiduciary net position of the Plan and additions to/deductions from the Plans fiduciary net position have been determined on the same basis as they are reported by the Plan. For this purpose, benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with the benefit terms.
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DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
(w) Reclassifications Certain reclassifications have been made to 2018 amounts to conform to the 2019 financial statement presentation. There was no impact on the previously reported change in net position of the Power System.
(2) Recent Accounting Pronouncements (a) GASS Statement No. 75 The Power System adopted the provisions of Statement No. 75 in fiscal year 2018. This statement replaced the requirements of GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, as amended, and establishes standards for recognizing and measuring liabilities, deferred outflows of resources, deferred inflows of resources, and expenses. Accordingly, the cumulative effect of the impact on net position was
$(661,230) which was reflected in the prior year financial statements.
(b) GASB Statement No. 83 In November 2016, the GASB issued Statement No. 83, Accounting and Financial Reporting for Certain Asset Retirement Obligations. This statement addresses accounting and financial reporting for certain asset retirement obligations (AROs). An ARO is a legally enforceable liability associated with the retirement of a tangible asset. A government that has legal obligations to perform future asset retirement activities related to its tangible capital assets should recognize a liability based on the guidance of this statement. The Power System adopted the provisions of Statement No. 83 in fiscal year 2019 retroactive to July 1,2017. The Power Systems net position was not restated as a result of adoption of this standard. See note 18b.
(c) GASB Statement No. 84 In January 2017, the GASB issued Statement No. 84, Fiduciary Activities, effective for the Power Systems fiscal year beginning July 1,2019. The purpose of this statement is to enhance consistency in reporting by identifying fiduciary activities and how they should be reported. Management has not yet determined the impact of GASB Statement No. 84 on the Power Systems financial statements.
(d) GASB Statement No. 87 In June 2017, the GASB issued Statement No. 87, Leases, effective for the Power Systems fiscal year beginning July 1,2020. The purpose of this statement is to enhance consistency in accounting and financial reporting by providing a methodology for identifying and reporting lease arrangements and obligations. Management has not yet determined the impact of GASB Statement No. 87 on the Power Systems financial statements.
(e) GASB Statement No. 88 In March 2018, the GASB issued Statement No. 88, Certain Disclosures Related to Debt, including Direct Borrowings and Direct Placement. The Power System adopted the provisions of Statement 88 in fiscal year 2019 retroactive to July 1, 2017. The purpose of this statement is to improve the information that is disclosed in the notes to government financial statements related to debt, including direct 34 (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands) borrowings and direct placements. It also clarifies which liabilities governments should include when disclosing information related to debt. The Power Systems net position was not restated as a result of adoption of this standard. See additional required disclosures at note 11.
(f) GASB Statement No. 89 In June 2018, the GASB issued Statement No. 89, Accounting for Interest Cost Incurred before the End of a Construction Period, effective for the Power Systems fiscal year beginning July 1, 2020. The objectives of this statement are (1) to enhance the relevance and comparability of information about capital assets and the cost of borrowing and (2) to simplify accounting for interest cost incurred before the end of a construction period. The Power System is evaluating the impact of this Statement on their financial statements.
(3) Utility Plant The Power System had the following activities in utility plant during fiscal year 2019 (amounts in thousands):
Balance Retirements Balance June 30,2018 Additions and disposals Transfers June 30,2019 Nondepreciable utility plant:
Land and land rights $ 221,719 10,300 232,019 820,472 351,199 (44,729)
(450,705) 676,237 Construction work in progress Nuclear fuel 41,528 13,021 (12,143) 42,406 181,548 189 (15,438) 166,299 Natural gas field Total nondepreciable utility plant 1,265,267 374,709 (72,310) (450,705) 1,116,961 Depreciable utility plant:
Generation 5,916,210 61,576 (2.181) 40,711 6,016,316 Transmission 1,645,198 28,679 (750) 271,143 1,944,270 Distribution 8,969,584 508,121 (50,024) 109,527 9,537,208 General 1,823,225 168,927 (27,952) 29,324 1,993,524 Total depreciable utility plant 18,354,217 767,303 (80,907) 450,705 19,491,318 Accumulated depreciation:
Generation (2,431,131) (102,923) 2,181 (2,531,873)
(561,413) (38,005) 750 (598,668)
Transmission (4,079,476) (228,862) 50,024 (4,258,314)
Distribution (1,045,592)
General (1,016,434) (57,110) 27,952 Total accumulated depreciation (8,088,454) (426,900) 80,907 (8,434,447)
Total utility plant, net $ 11,531,030 715,112 (72,310) 12,173,832 (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
The Power System had the following activities in utility plant during fiscal year 2018 (amounts in thousands):
Balance Retirements Balance June 30, 2017 Additions and disposals Transfers June 30,2018 Nondepreciable utility plant:
Land and land rights $ 201,904 19,815 221,719 658,992 359,581 820,472 Construction work in progress (198,101)
Nuclear fuel 41,465 13,250 (13,187) 41,528 (16,618) 181,548 Natural gas field 198,145 21 Total nondepreciable utility plant 1,100,506 392,667 (29,805) (198,101) 1,265,267 Depreciable utility plant:
Generation 5,721,886 112,237 (1,175) 83,262 5,916,210 Transmission 1,576,865 25,580 (7) 42,760 1,645,198 Distribution 8,425,080 488,779 (7) 55,732 8,969,584 General 1,751,994 55,225 (341) 16,347 1,823,225 Total depreciable utility plant 17,475,825 681,821 (1,530) 198,101 18,354,217 Accumulated depreciation:
Generation (2,303,619) (128,687) 1,175 (2,431,131)
(561,413)
Transmission (528,663) (32,757) 7 Distribution (3,854,509) (224,974) 7 (4,079,476)
(963,410) (53,365) 341 (1,016,434)
General Total accumulated depreciation (7,650,201) (439,783) 1,530 (8,088,454)
Total utility plant, net $ 10,926,130 634,705 (29,805) 11,531,030 Depreciation and amortization expense during fiscal years 2019 and 2018 was $585.2 million and
$554.4 million, respectively. Depreciation and amortization expense on the statements of revenue, expenses, and changes in net position and cash flows includes amortization expense on software and regulatory assets, which is not included in additions to accumulated depreciation above.
Land and land rights are included in the balance sheet as utility plant assets in their functional category.
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DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
(4) Jointly Owned Utility Plant The Power System has undivided direct interests in several electric generating stations and transmission systems that are jointly owned with other utilities, as defined in GASB Statement No. 14, The Financial Reporting Entity. As of June 30, 2019 and 2018, utility plant includes the following amounts related to the Power Systems ownership interest in each jointly owned utility plant (amounts in thousands, except as indicated):
Utility plant in service Utility plant in service Share of June 30, 2019 June 30, 2018 Ownership capacity Accumulated Accumulated interest (MWs) Cost depreciation Cost depreciation Palo Verde Nuclear Generating Station 5.7% 224 $ 603,203 419,957 598,434 412,775 Mohave Generating Station 30% 3,409 229 3,408 229 Pacific Intertie DC Transmission Line 40% 1,240 235,276 85,544 190,174 81,045 Other transmission systems Various 118,918 71,450 112,929 68,718 960,806 577,180 904,945 562,767 The Power System will incur certain minimal operating costs related to the jointly owned facilities, regardless of the amount or its ability to take delivery of its share of energy generated. The Power Systems proportionate share of the operating costs of the joint plants is included in the corresponding categories of operating expenses.
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DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
(5) Purchased Power Commitments As of June 30, 2019, the Power System has entered into a number of energy and transmission service contracts that, regardless of the energy they take, they are obligated to pay the following minimum costs to cover debt service on these facilities through 2044 when the debt is repaid:
______________________The Power System's interest in agencys share_________
Interest Agency Principal payments/
Agency share Interest Capacity payments (receipts) Total Intermountain Power Project IPA 100% 63.7 1,170 $ 269,356 (10,051) 259,305 Mead-Melanto Transmission Project SCPPA 68.0 48.9 539 37,192 8,565 45,757 Mead-PhoenixTransmission Project SCPPA 17.8-22.4 50,4 647 22,750 6,454 29,204 Southern Transmission Project SCPPA 100.0 59.5 1,429 253,642 46,315 299,957 Milford Wind 1 SCPPA 100.0 92.5 185 154,938 50,694 205,632 Windy Point SCPPA 100.0 100.0 262
- 364,175 119,352 483,527 Linden Wind Energy Project SCPPA 100.0 100.0 50
- 109,870 58,200 168,070 MIfordWind II SCPPA 100.0 100,0 102
- 119,135 44,979 164,114 Apex Power Project SCPPA 100.0 100.0 520 281,170 151,657 432,827 Total $ 1,612,228 476,165 2,088,393
- The Power System will receive 100% of the energy, unless City of Glendale exercises its option to repurchase any of its contract output entitlement share.
IPA-The Intermountain Power Agency (IPA) is an agency of the State of Utah established to own, acquire, construct, operate, maintain, and repair the Intermountain Power Project (IPP). The Power System serves as the project manager and operating agent of IPP. IPP is considered a related party. See note 17.
SCPPA - The Southern California Public Power Authority (SCPPA) is a California joint powers agency that finances the construction or acquisition of generation, transmission, and renewable energy projects. The Power System is a member of SCPPA. SCPPA is considered a related party. See note 17.
Unlike joint utility plant disclosed in note 4, the Power System does not have ownership of any assets related to these service contracts. As costs are paid each year, they are recorded as purchase power expense in the statements of revenue, expenses, and changes in net position.
In addition to commitments noted above for debt service, the Power System is required to pay an average annual fixed charge of approximately $702 million during each of the next five years and for operating and maintenance costs related to actual deliveries of energy under these agreements. The Power System made total payments under these agreements of approximately $994 million and $905 million in fiscal years 2019 and 2018, respectively, and they are recorded as purchased power expense in the statements of revenue, expenses, and changes in net position. These agreements are scheduled to expire from 2027 to 2044.
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DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
The Power System is reimbursed for services provided to IPP under the IPP project manager and operating agent agreements totaling $41 million and $29 million in fiscal years 2019 and 2018, respectively.
These fees are recorded as a reduction to maintenance and other expense on the accompanying statements of revenue, expenses, and net position.
(a) Long-Term Notes Receivable Under the terms of its purchase power agreement with IPA, the Power System is charged for its output entitlements based on its share of IPAs costs, including debt service. During fiscal year 2000 and 2005, the Power System restructured a portion of this obligation by transferring a total of $1.28 billion to IPA in exchange for long-term notes receivable. The funds transferred were obtained from the debt reduction funds and through the issuance of new variable rate debentures. IPA used the proceeds from these transactions to defease and tender various bonds.
The IPA notes are subordinate to all of IPAs publicly held debt obligations. The Power Systems future payments to IPA will be partially offset by interest payments and principal maturities from the subordinated notes receivable. The net IPA notes receivable balance totaled $421 million and
$553 million as of June 30, 2019 and 2018, respectively.
The IPA notes pay interest and principal monthly and mature on July 1,2023. The interest rates range from 3.95% to 5.71%, subject to adjustments related to IPA bond refundings.
Scheduled annual principal maturities are as follows:
Amount Yean 2020 159,309 2021 155,920 2022 68,365 2023 74,425 2024 6,303 464,322 Unamortized discount (42,986) 421,336 Less current portion (159,309)
Noncurrent portion 262,027 (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statennents June 30, 2019 and 2018 (In thousands)
(b) Energy Entitlement Contracts The Power System has a contract through September 2067 with the U.S. Department of Energy for the purchase of available energy generated at the Hoover Power plant. The Power Systems contractual share of contingent capacity at Hoover is 491 MW (maximum-rated capability). The cost of power (approximately 455 MW of capacity and 599,000 MWH of energy) purchased under this contract, including the Lower Colorado River Basin Development Fund Contribution Charge, was approximately
$16 million for both June 30, 2019 and 2018. On December 20, 2011, President Barack Obama signed H.R. 470, the Hoover Power Allocation Act of 2011, into law. The legislation reallocated, for 50 more years, power from the Hoover Power plant to existing contractors while creating an additional pool of 5% power for new entrants. The Power System has entered into contracts with SCPPA to purchase available renewable energy generated at various renewable energy project sites.
Unlike service contracts noted earlier in note 5, the Power System only pays costs related to these contracts if energy is delivered. As of June 30, 2019, the Power System energy entitlement contracts with SCPPA allowed for additional capacity with the associated cost over the life of the contract as follows (dollar amounts in millions):
The Power Systems interest in agencys share Agency Capacity Cost of power Contract Agency share Interest (MWs) purchased expiration Pebble Springs Wind Project SCPPA 100.0 69.6 68.7 $ 9.1 2025 Don A Campbell 1 SCPPA 100.0 84.6 13.7 12.8 2033 Don A Campbell II SCPPA 100.0 100.0 16.2 11.2 2035 Copper Mountain Solar 3 SCPPA 100.0 84.0 210.0 47.1 2040 Heber 1 Geothermal SCPPA 100.0 66.7 41.7 18.0 2025 Springbok 1 Wnd Farm SCPPA 100.0 100.0 105.0 19.9 2040 Springbok 2 Wnd Farm SCPPA 100.0 100.0 155.0 23.8 2045 Ormat Northern Nevada SCPPA 100.0 100.0 150.0 42.0 2042 Ormesa SCPPA 100.0 85.7 30.0 15.8 2042 ARP-Loyalton Biomass SCPPA 66.6 74.1 8.9 1.9 2043 Springbok 3 Wnd Farm SCPPA 100.0 100.0 90.0 1.5 Total purchase power costs under entitlement agreements 203.1 (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
As of June 30, 2018, the Power System energy entitlement contracts with SCPPA allowed for additional capacity with the associated cost over the life of the contract as follows (dollar amounts in millions):
The Power Systems interest in agencys share Agency Capacity Cost of power Contract Agency share Interest (MWs) purchased expiration Pebble Springs Wind Project SCPPA 100.0 69.6 68.7 $ 10.4 2025 Don A Campbell 1 SCPPA 100.0 84.6 13.7 14.2 2033 Don A Campbell II SCPPA 100.0 100.0 16.2 13.2 2035 Copper Mountain Solar 3 SCPPA 100.0 84.0 210.0 49.6 2040 Heber 1 Geothermal SCPPA 100.0 66.7 41.7 17.3 2025 Springbok 1 Wnd Farm SCPPA 100.0 100.0 105.0 20.4 2040 Springbok 2 Wnd Farm SCPPA 100.0 100.0 155.0 24.0 2045 Ormat Northern Nevada SCPPA 100.0 100.0 150.0 12.4 2042 Ormesa SCPPA 100.0 85.7 30.0 11.7 2042 ARP-Loyalton Biomass SCPPA 66.6 74.1 8.9 0.9 2043 Total energy costs under entitlement agreements 174.1 (c) Electricity Swap and Forward Contracts In order to obtain the highest market value on energy that is sold into the wholesale market, the Power System monitors the sales price of energy, which varies based on which hub the energy is to be delivered. There are three primary hubs within the Power Systems transmission region: Palo Verde, California Oregon Border, and Mead. The Power System enters into various locational swap transactions with other electric utilities in order to effectively utilize its transmission capacity and to achieve the most economical exchange of energy purchased and sold.
The Power System procures renewable energy resources located remotely. These resources provide intermittent and limited source of energy and some of these resources are not directly connected to the Power Systems transmission system. In order to receive firm renewable energy, the Power System entered into a green-for-green energy exchange with the same or different Renewable Energy Credit source.
The Power System enters into power and natural gas forward contracts in order to meet the electricity requirements to serve its customers. To assist the Power System in achieving its Renewable Portfolio Standards (RPS), some of the forward purchases made were renewable energy and biomethane gas.
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DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
The Power System does not enter into swap and forward transactions for trading purposes. All of these transactions are intended to be used in the Power Systems normal course of operations. The Power System is exposed to risk of nonperformance if the counterparties default or if the swap agreements are terminated.
As of June 30, 2019, the Power System had the following Electricity Forward Contract, which is not recorded in the Power Systems financial statements based on the criteria in GASB Statement No. 53 (amounts in thousands):
Notional Contract amount price range First Last (total contract dollar effective termination Fair Cash paid Description quantities) per unit date date value at inception Forward contracts:
Electricity 184,800 Mwh $ 56.75-65.52 07/01/2019 09/30/2019 $ (1.333)
As of June 30, 2018, the Power System had the following Electricity Swap and Forward Contracts, which are not recorded in the Power Systems financial statements based on the criteria in GASB Statement No. 53 (amounts in thousands):
Notional Contract amount price range First Last (total contract dollar effective termination Fair Cash paid Description quantities) per unit date date value at inception Forward contracts:
Electricity 249,600 Mwh $ 33.92-45.25 07/01/2018 09/30/2018 $ 1,799 (6) Regulatory Assets and Liabilities Regulatory assets and liabilities are created by the actions of the Board of Water and Power Commissioners by deferring certain expenses and revenue that are recoverable or payable by future rate charges in accordance with the current rate ordinances so as to more evenly match the recognition of revenue and expenses with the electric rates charged to retail customers.
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DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
Below is a summary of the Power Systems regulatory assets and deferred inflows; June 30, June 30, Description 2018 Additions Reductions 2019 Assets:
(a) Underrecovered costs - long term $ 125,649 (29,979) 95,670 (b) Regulatory assets - legal settlements 96,000 (16,000) 80,000 215,124 2,022 (13,725) 203,421 (c) Regulatory assets - solar incentive program (d) Regulatory assets - energy efficiency program 487,181 153,976 (70,267) 570,890 (e) Regulatory assets - customer care and billing system 100,391 (68,801) 31,590 Regulatory assets - other 898,696 155,998 (168,793) 885,901 (f) Regulatory assets - pension 482,193 (167,008) 315,185 430,072 (43,949) 386,123 (g) Regulatory assets - OPEB Total regulatory assets - noncurrent 1,936,610 155,998 (409,729) 1,682,879 (h) Under recovered costs - current 311,646 30,129 341,775 Total regulatory assets $ 2.248,256 186,127 (409,729) 2,024,654 Deferred inflows:
(i) Defened inflows from business activities $ 103,720 1,152 104,872 Total regulatory deferred inflows $ 103,720 1,152 104,872 June 30, June 30, Description 2017 Additions Reductions 2018 Assets:
(a) Underrecowred costs - long term $ 155,628 (29,979) 125,649 (b) Regulatory assets - legal settlements 112,000 (16,000) 96,000 205,314 22,806 (12,996) 215,124 (c) Regulatory assets - solar incentive program (d) Regulatory assets - energy efficiency program 374,687 166,767 (54,273) 487,181 (e) Regulatory assets - customer care and billing system 63,302 39,967 (2,878) 100,391 Regulatory assets - other 755,303 229,540 (86,147) 898,696 (t) Regulatory assets - pension 614,850 (132,657) 482,193 451,182 (21,110) 430,072 (g) Regulatory assets - OPEB Total regulatory assets - noncurrent 1,525,781 680,722 (269,893) 1,936,610 (h) Under recovered costs - current 213,912 311,646 (213,912) 311,646 Total regulatory assets $ 1,739,693 992,368 (483,805) 2,248,256 Defemed inflows:
- 0) Deferred inflows from business activities $ 103,627 93 103,720 Total regulatory defemed inflows $ 103,627 93 103,720 (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
(a) Under Recovered Costs - Long Term These represent future receivables from customers related to costs incurred for renewable energy projects and the investments made in power reliability. The 2012 and 2016 Electric Rate Ordinances allow for these costs to be recovered though current rates. The costs are amortized over a 10-year period and are expected to be fully recovered by 2022, and thus, the Power system has classified them as noncurrent.
(b) Regulatory Assets - Legal Settlement In June 2007, the Power System reached an agreement from the courts related to the inclusion of capital components in the rates charged to other governmental organizations. The agreement required the payment of $160,000 to the governmental organizations. The payment settlement included an immediate payout of $127,800, bill credits of $17,200 to be issued over a 10-year period, and $15,000 in payments to be paid over a 3-year period.
As provided in the Power Systems rate structure, beginning in July 2014, customers bills include a charge for this legal settlement to be collected over a 10-year period. As rates are established at a level sufficient to recover all such costs, the Power System recorded a regulatory asset.
(c) Regulatory Assets - Solar Incentive Programs As part of the California Solar Incentive Program, initiated by 2006 Senate Bill 1 (SB1), the Power System implemented a multiyear program to provide customers with solar incentives for installing solar panels and necessary equipment to generate energy. The programs, per SB1, concluded at the end of calendar year 2018. Some payments for these incentives were processed in 2018 and 2019.
As provided in the Power Systems rate structure, beginning April 2011, customers bills include a charge for these solar incentive programs to be collected over a 15-year period. As rates are established at a level sufficient to recover all such costs, the Power System recorded a regulatory asset.
(d) Regulatory Assets - Energy Efficiency Programs As part of the Power Systems ongoing efforts to reduce energy consumption and improve the environment, the Power System implemented numerous multiyear programs. The program began in June 2012 and is expected to continue through 2020. At June 30, 2019, the Power System has 26 energy efficiency programs.
As provided in the Power Systems rate structure, beginning July 2011, customers bills include a charge for these energy efficiency programs to be collected over a 5 to 15 year period, depending on the program. As rates are established at a level sufficient to recover all such costs, the Power System recorded a regulatory asset.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30. 2019 and 2018 (In thousands)
(e) Regulatory Assets - Customer Care and Billing System In 2013, the Power System implemented the customer care and billing system (CC&B). The implementation of the system required significant investment in training of the Power Systems employees.
As provided in the Power Systems rate structure, beginning January 2014, customers bills include a charge related to training for the CC&B to be collected over a 10-year period. As rates are established at a level sufficient to recover all such costs, the Power System recorded a regulatory asset.
During fiscal year 2019, the Power System management determined certain costs originally capitalized as a regulatory asset were not expected to move forward for regulatory asset rate recovery. As a result,
$68,801 was removed from regulatory assets and reclassified as operating expenses or general plant assets based on the expenditure. Remaining costs in CC&B regulatory asset relate to training costs on the system and will be recovered through future rates.
(f) Regulatory Assets - Pension In connection with the recognition of the net pension liability under GASB Statement No. 68, the Power System established a regulatory asset in the amount of $1,563,012, equal to the net pension liability reported at July 1, 2013. The pension regulatory asset is expected to be amortized over a period not to exceed 15 years. Amortization of the regulatory asset is the difference between the actuarial determined contributions and actual pension expense and totaled $167,008 and $132,657 for the years ended June 30, 2019 and 2018, respectively.
(g) Regulatory Assets - OPEB In connection with the recognition of the net OPEB liability under GASB Statement No. 75, the Power System established a regulatory asset in the amount of $451,182 equal to the net OPEB liability reported at July 1, 2017, less the calculated balance of OPEB deferred outflows for contributions after the measurement date. The OPEB regulatory asset is expected to be amortized over a period not to exceed 15 years. Amortization of the regulatory asset is the difference between amounts paid toward actuarial determined contributions and OPEB expense and totaled $43,949 and $21,110 for the year ended June 30, 2019 and 2018.
(h) Underrecovered Costs - Current As provided in the electric rate ordinances, the Power System is required to maintain balancing accounts to record differences between specific costs incurred and amounts billed through rates to recover those costs. The Power System plans to adjust pass-through rates to recover the accumulated balance in underrecovered costs in the next 12 months, and thus, overrecovered costs are shown as a current liability and underrecovered costs are shown as a current asset and represent the net amount in the balancing accounts when the amount billed through rates is higher or lower than the costs the Power System has incurred. The Power Systems current cost recovery policy recovers previous fiscal year underrecovered costs first prior to any new costs incurred in the current fiscal year. The Power System had $341,775 and $311,646 in current under recovered costs for the years then ended June 30, 2019 and 2018.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
(i) Deferred Inflows from Regulated Business Activities These amounts represent revenue collected from customers where funds are deferred for future stabilization or deferred because the earnings process is not complete. For the year ended June 30, 2019, the Power System did not recognize any of this revenue. The Power System has $104,872 and
$103,720 in these accounts at June 30, 2019 and 2018. For the years ended June 30. 2019 and 2018, the Power System did not recognize any revenue related to any of these accounts.
(7) Cash, Cash Equivalents, and Investments (a) Restricted and Other Investments A summary of the Power Systems restricted investments is as follows:
June 30 2019 2018 Restricted and other investments:
Restricted investments:
Debt reduction funds 474,814 460,613 Nuclear decommissioning funds 140,699 134,004 Natural gas fund 21,014 5,366 Hazardous waste treatment fund 2,334 2,275 Total restricted investments 638,861 602,258 The Power System also has $17.6 million and $24.1 million of cash collateral received from securities lending transactions in the Citys securities lending program as of June 30, 2019 and 2018, respectively.
All restricted investments are to be used for a specific purpose as follows:
(i) Debt Reduction Funds The debt reduction funds were established to provide for funding of the payment of principal and interest on long-term debt obligations and purchased power obligations arising from the Power Systems participation in IPP and SCPPA. The Power System has transferred funds from purchased power precollections into these funds. Funds from operations may also be transferred by management as funds become available. See note 5.
(ii) Nuclear Decommissioning Funds Nuclear decommissioning funds will be used to pay the Power Systems share of decommissioning PVNGS at the end of its useful life. See note 18(b).
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statennents June 30, 2019 and 2018 (In thousands)
(Hi) Natural Gas Fund The natural gas fund was established to serve as a depository to pay for costs and post margin or collateral in connection with contracts for the purchase and delivery of financial transactions for natural gas. These transactions are entered into to stabilize the natural gas portion of the Power Systems fuel for generation costs.
(iv) Hazardous Waste Treatment Storage and Disposal Fund The hazardous waste treatment storage and disposal fund was established to provide financial assurance for closure of the Main Street treatment and disposal facility.
As of June 30, 2019 and 2018, the Power Systems restricted investments and their maturities are as follows (amounts in thousands):
Investment maturities 2019 1to30 31 to 60 61 to 365 366 days Over investment type Fair value days days days to 5 years 5 years U.S. government securities $ 27,930 4,997 19,932 3,001 U.S. agencies 220,208 8,125 16,608 74,336 99,481 21,658 Supranationals 36,197 4,996 100 19,906 11,195 Medium-term corporate notes 159,408 16 48,295 111,097 Commercial paper 36,721 12,987 14,704 9,030 41,067 17,628 Certificates of deposit 7,503 15,936 Bankers acceptances 1,827 1,827 California local agency bonds 33,397 5,000 15,546 2,000 10,851 California state bonds 24,976 7,494 17,482 Other state bonds 36,109 750 20,053 15,306 Money market funds 21,021 21,021
$ 638,861 77,347 54,461 216,982 268,413 21,658 Investment maturities 2018 1to30 31 to 60 61 to 365 366 days Over investment type Fair value days days days to 5 years 5 years U.S. government securities $ 32,759 4,998 19,941 7,820 7,246 11,983 101,523 87,421 26,501 U.S. agencies 234,674 Supranationals 16,867 1,999 4,997 4,935 4,936 Medium-term corporate notes 154,596 5,030 83,931 65,635 Commercial paper 20,097 9,995 4,986 5,116 Certificates of deposit 48,041 16,897 31,144 California local agency bonds 33,950 2,500 8,412 6,430 16,608 California state bonds 24,868 7,252 17,616 Other state bonds 30,914 5,966 6,179 18,769 Money market funds 5,492 5,492
$ 602,258 54,157 36,344 266,451 218,805 26,501 (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
(v) Interest Rate Risk The Power Systems investment policy limits the maturity of its investments to a maximum of 30 years for U.S. government and U.S. government agency securities; 5 years for medium-term corporate notes, California local agency obligations, California state obligations, and other state obligations; 270 days for commercial paper; 397 days for certificates of deposit; and 180 days for bankers acceptances.
(vi) Credit Risk Under its investment policy and the California Government Code, the Power System is subject to the prudent investor standard of care in managing all aspects of its portfolios. The prudent investor standard requires that the Power System shall act with care, skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to, the general economic conditions and the anticipated needs of the agency, that a prudent person acting in a like capacity and in familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the agency.
The U.S. government agency securities in the portfolio consist of securities issued by government-sponsored enterprises, which are not explicitly guaranteed by the U.S. government. Of the U.S. government agency securities in the portfolio as of June 30, 2019, $206,993 (94%) was rated with either the highest or second highest possible credit ratings by the Nationally Recognized Statistical Rating Organizations (NRSROS) that rated them and $13,215 (6%) was not rated. Of the U.S. government agency securities in the portfolio as of June 30, 2018, $226,539(97%) was rated with either the highest or second highest possible credit ratings by the NRSROS that rated them and $8,136(3%) was not rated.
The Power Systems investment policy specifies that supranational notes must be rated AA or its equivalent or better by an NRSRO upon purchase. As of June 30, 2019 and 2018, the Power Systems investments in supranational notes were rated with the highest possible credit ratings by each of the NRSROs that rated them.
The Power Systems investment policy specifies that medium-term corporate notes must be rated in a rating category of A or its equivalent or better by a NRSRO. Of the Power Systems investments in corporate notes as of June 30, 2019, $3,999 (2%) was rated in the category of AAA,
$55,344 (35%) was rated in the category of AA, and $100,049(63%) was rated in the category of A by at least one NRSRO. The remaining $16 (less than 1%) of investments in corporate notes was not rated. Of the Power Systems investments in corporate notes as of June 30, 2018, $7,926 (5%)
was rated in the category of AAA, $51,034, (33%) was rated in the category of AA, and $95,605 (62%) was rated in the category of A by at least one NRSRO. The remaining $31 (less than 1%) of investments in corporate notes was not rated.
The Power Systems investment policy specifies that commercial paper must be of the highest ranking or of the highest letter and number rating as provided for by at least two NRSROs. As of June 30, 2019 and 2018, all of the Power Systems investments in commercial paper were rated with at least the highest letter and number rating as provided by at least two NRSROs.
48 (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
The Power Systems investment policy provides that negotiable certificates of deposit must be of the highest ranking or letter and number rating as provided for by at least two NRSROs and that for nonnegotiable certificates of deposit, the full amount of principal and interest is insured by the Federal Deposit Insurance Corporation or National Credit Union Administration. As of June 30, 2019 and 2018, all of the Power Systems investments in certificates of deposit consisted of negotiable certificates of deposit with at least the highest letter and number rating as provided by at least two NRSROs.
The Power Systems investment policy specifies that California local agency obligations must be rated in a rating category of A or its equivalent or better by a NRSRO. Of the Power Systems investments in California local agency bonds as of June 30, 2019, $6,164 (18%) was rated in the category of AAA, $13,700 (41%) was rated in the category of AA, and $13,533 (41%) was rated in the category of A or the equivalent or better short-term rating. Of the Power Systems investments in California local agency bonds as of June 30, 2018, $5,688 (17%) was rated in the category of AAA, $20,844, (61%) was rated in the category of AA, and $7,4184 (22%) was rated in the category of A or the equivalent or better short-term rating.
The Power Systems investment policy specifies that State of California obligations must be rated in a rating category of A or its equivalent or better by a NRSRO. As of June 30, 2019 and 2018, all of the Power Systems investments in State of California obligations were rated in the category of AA by at least one NRSRO.
The Power Systems investment policy specifies that obligations of other states in addition to California must be rated in a rating category of A or its equivalent or better by a NRSRO. Of the Power Systems investments in other state obligations as of June 30, 2019, $4,995(14%) was rated in the category of AAA, $23,067 (64%) was rated in the category of AA, and $8,047 (22%) was rated in the category of A by at least one NRSRO. Of the Power Systems investments in other state obligations as of June 30, 2018, $12,880 (41%) was rated in the category of AAA, $10,100 (33%) was rated in the category of AA, and $7,935 (26%) was rated in the category of A by at least one NRSRO.
The Power Systems investment policy specifies that money market funds may be purchased as allowed under the Government Code, which requires that the fund must have either (1) attained the highest ranking or highest letter and numerical rating provided by not less than two NRSROs or (2) retained an investment adviser registered or exempt from registration with the Securities and Exchange Commission (SEC) with not less than five years experience in managing money market mutual funds with assets under management in excess of $500 million. As of June 30, 2019 and 2018, each of the money market funds in the portfolio had the highest possible ratings by at least two NRSROs.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
(vii) Concentration of Credit Risk The Power Systems investment policy specifies that there is no percentage limitation on the amount that can be invested in U.S. government agency securities, except that a maximum of 30%
of the cost value of the portfolio may be invested in the securities of any single U.S. government agency issuer.
Of the Power Systems total investments as of June 30, 2019, $96,296 (15%) was invested in securities issued by the Federal Home Loan Bank, $51,700 (8%) was invested in securities issued by the Federal Home Loan Mortgage Corporation, and $31,327 (5%) was invested in securities issued by the Federal National Mortgage Association.
Of the Power Systems total investments as of June 30, 2018, $79,853 (13%) was invested in securities issued by the Federal Home Loan Mortgage Corporation, $68,478 (11%) was invested in securities issued by the Federal Home Loan Bank, $49,565 (8%) was invested in securities issued by the Federal National Mortgage Association, and $27,612 (5%) was invested in securities issued by the Federal Farm Credit Bank.
(viii) Custodial Risk All investments are held in the Power Systems name, and therefore, they do not have custodial risk.
(ix) Fair Value Measurements The Power System holds investments and derivative instruments that are measured at fair value on a recurring basis. Because investing is not a core part of the Power Systems mission, the Power System determines that the disclosures related to these investments only need to be disaggregated by major type. The Power System chooses a tabular format for disclosing the levels within the fair value hierarchy. The Power System categorizes its fair value measurements within the fair value hierarchy established by U.S. GAAP.
The hierarchy is based on the valuation inputs used to measure the fair value of the asset, as follows:
Level 1 inputs are quoted prices for identical assets or liabilities in an active market.
Level 2 inputs are quoted prices of similar assets or liabilities in active or not active markets.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
Level 3 inputs are unobservable inputs using the best information available to management.
Fair value using Quoted prices in active Significant markets other Significant for identical observable unobservable June 30, assets inputs inputs Not 2019 (Level 1) (Level 2) (Level 3) Classified (In thousands)
Investments by fair value level:
Debt securities; U.S. government securities S 27,930 27,930 U.S. agencies 220,208 220,208 Supranationals 36,197 36,197 Medium-term corporate notes 159,408 159,408 California local agency bonds 33,397 33,397 _
California state bonds 24,976 24,976 Other state bonds 36,109 36,109 Total debt securities 538,225 27,930 510,295 Other; Commercial paper $ 36,721 _ 36,721 Certificates of deposit 41,067 41,067 Bankers acceptances 1,827 1,827 Money market funds 21,021 21,021 Total other 100,636 _ 79,615 21,021 Total investments by fairvaiue level $ 638,861 27,930 589,910 21,021 Derivative instruments:
Financial natural gas hedges $ (7,015) (7,015)
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
Fair value using Quoted prices in active Significant markets other Significant for identical observable unobservable June 30, assets inputs inputs Not 2018 (Level 1) (Level 2) (Level 3) Classihed (In thousands)
Investments by fair value level:
Debt securities:
U.S. government securities $ 32,759 32,759 U.S. agencies 234,674 234,674 Supranationals 16,867 16,867 154,596 154,596 Medium-term corporate notes California local agency bonds 33,950 33,950 24,868 24,868 California state bonds 30,914 30,914 Other state bonds Total debt securities 528,628 32,759 495,869 Other:
Commercial paper $ 20,097 20,097 48,041 48,041 Certificates of deposit 5,492 5.492 Money market funds Total other 73,630 68,138 5,492 Total investments by fair value level $ 602,258 32,759 564,007 5,492 Derivative instruments:
Financial natural gas hedges $ (22,204)
(22,204)
Debt and other securities classified in Level 1 of the fair value hierarchy are valued using prices quoted in active markets for identical securities. Debt securities classified in Level 2 of the fair value hierarchy are valued using a multidimensional relationship model or matrix pricing model utilizing market data, including, but not limited to, benchmark yields, reported trades, and broker-dealer quotes. Natural gas hedges are valued using forward market prices available from broker quotes and exchanges. Money market funds have maturities of less than one year and, thus, are recorded at amortized cost and not required to be classified.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
(b) Pooled Cash The Power Systems cash, cash equivalents, and its collateral value of the Citys securities lending program are included within the City Treasurys general and special investment pool. As of June 30, 2019 and 2018, the Power Systems share of the Citys general and special investment pool was
$1,925,999 and $1,478,381, which represents approximately 16.8% and 15.3% of the pool, respectively. Amounts pooled in the City Treasurys general and special investment pool are not required to be classified in the fair value hierarchy per GASB Statement No. 72 since they are part of an internal investment pool.
Pooled cash is recorded as follows on the statements of net position as of June 30, 2019 and 2018 (in thousands):
June 30 2019 2018 Cash and cash equivalents - unrestricted 1,142,128 751,164 Cash and cash equivalents - restricted noncurrent 339,126 318,455 Cash and cash equivalents - restricted current 427,140 384,648 Subtotal cash and cash equivalents per cash flow 1,908,394 1,454,267 Cash - securities lending transactions 17,605 24,114 1,925,999 1,478,381 The cash balances of substantially all funds on deposit in the City Treasury are pooled and invested by the City Treasurer for the purpose of maximizing interest earnings through pooled investment activities, but safety and liquidity still take precedence over return. Special pool participants include the City, airports, the Department of Water and Power, harbor, sanitation, and the Municipal Improvement Corporation of Los Angeles. Interest earned on pooled investments is allocated to and recorded in certain participating funds, as authorized by the Council and permitted by the City Charter and the Government code, based on each funds average daily deposit balance. Unless allocation provisions are specifically stipulated in City ordinance. Council action, or funding source, interest earned on certain funds is allocated to and recorded in the general fund. The City measures and categorizes its investments using fair value measurement guidelines established by GAAP.
Pursuant to California Government Code Section 53607 and the Council File No. 94-2160, the City Treasury shall render to the Council a statement of investment policy (the Policy) annually. Council File No. 11-1740 was adopted on December 12, 2016 as the Citys investment policy. This policy shall remain in effect until the Council and the mayor approve a subsequent revision. The Policy governs the Citys pooled investment practices. The Policy addresses soundness of financial institutions in which the City Treasurer will deposit funds and types of investment instruments permitted by California Government Code Sections 53600-53638, 16340, and 16429.1. The City Treasury further reports that the current policy allows for the purchase of investments with maturities up to 30 years.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
At June 30, 2019, the investments held in the City Treasurys general and special investment pool programs and their maturities are as follows (in thousands):
Investment maturities 1to30 31 to 60 61 to 365 366 days Over Type of investments Amount days days days to 5 years S years U.S, Treasury bills $ 39,788 _ _ 39,788 U.S. Treasury notes 5,660,280 79,959 624,349 4,911,134 44,838 U.S. agencies securities 1,010,212 275,207 125,256 284,339 262,654 62,756 Medium-term notes 1,488,515 30,108 36,976 342,954 1,078,477 Mutual funds 2,441 2,441 Commercial paper 2,590,611 1,173,961 543,183 873,467 Municipal bonds 45,163 45,163 Asset-backed securities 240,768 240,768 Supranational obligations 223,242 15,900 95,255 16,045 96,042 Short-term investment funds 53,652 53,652 Securities lending short-term repurchase agreement 112,525 112,525 Total general and special pools $ 11,467,197 1,663,794 880,629 2,180,942 6,634,238 107,594 Interest Rate Risk. The Policy limits the maturity of its investments to 5 years for U.S. Treasury and U.S. agency obligations, medium-term notes, certificate of deposit placement service, negotiable certificates of deposit, collateralized bank deposits, mortgage pass-through securities, supranational obligations, and bank/time deposits; 1 year for repurchase agreements; 270 days for commercial paper; 180 days for bankers acceptances; 92 days for reverse repurchase agreements; and no maturity for mutual funds. The Policy also allows city funds with longer-term investments horizons to be invested in securities that, at the time of the investment, have a term remaining to maturity in excess of 5 years but with a maximum final maturity of 30 years.
Credit Risk. The Policy establishes minimum credit rating requirements for investments. There are no credit quality requirements for local agency bonds, U.S. Treasury obligations. State of California obligations, California Local Agency obligations, and U.S. agency (U.S. government-sponsored enterprises) securities. The Citys $1.0 billion investments in U.S. government-sponsored enterprises consist of securities issued by the Federal Home Loan Bank - $478.9 million. Federal National Mortgage Association (Fannie Mae) - $442.5 million, and Federal Home Loan Mortgage Corporation (Freddie Mac) - $88.8 million. Of the Citys $1.0 billion investments in U.S. agency securities,
$560.2 million were rated A-1+ by S&P and P-1 by Moodys while the remaining $450.0 million were rated AA+ by S&P and Aaa by Moodys.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
Medium-term notes must be issued by corporations organized and operating within the United States or by depository institutions licensed by the United States or any state and operating within the United States. Medium-term notes must have at least an A rating at the time of purchase. The Citys
$1.5 billion investments in medium-term notes consist of securities issued by banks and corporations that comply with these requirements and were rated A or better by S&P and A3 or better by Moodys.
One issuer of $20.6 million medium-term notes was downgraded to A- by S&P and Baal by Moodys.
Commercial paper issues must have the highest letter and number rating by NRSRO. The issuing corporation must be organized and operating within the United States and have assets in excess of
$500 million. The Citys $2.6 billion investments in commercial paper were rated A-1+/A-1 by S&P and P-1 by Moodys.
Mutual funds must receive the highest ranking by at least two NRSROs. The Citys $2.4 million in investments in mutual funds were rated AAA by S&P and Aaa by Moodys.
Municipal bonds have no minimum rating requirement. The Citys $45.2 million investments in municipal bonds were rated AA- by S&P and Aa3 by Moodys.
The Citys investments in supranational coupons of $96 million were rated AAA by S&P and Aaa by Moodys; $127.2 million were rated A-1+ by S&P and P-1 by Moodys. These short-term securities are backed by the full faith of the issuing entities, which are rated AAA/Aaa.
Investments in asset-backed securities of $105.4 million were rated AAA by S&P and Aaa by Moodys,
$74.2 million were rated Aaa by Moodys and were not rated by S&P, the remaining $61.2 million were rated AAA by S&P and were not rated by Moodys.
Concentration of Credit Risk. The Policy does not allow more than 40% of its investment portfolio be invested in commercial paper or bankers acceptances, 30% in certificates of deposit, medium-term notes and supranational obligations, 20% in mutual funds, money market mutual funds or mortgage pass-through securities. The Policy further provides for a maximum concentration limit of 10% in any one issuer including its related entities. There is no percentage limitation on the amounts that can be invested in U.S. Treasury and U.S. Agency obligations. The Citys pooled investments comply with these requirements. GAAP requires disclosure of certain investments in any one issuer that represent 5% or more of total investments. Of the Citys total pooled investments, no one issuer represented 5%
or more of the total investments as of June 30, 2019.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
At June 30, 2018, the investments held in the City Treasurys general and special investment pool programs and their maturities were as follows (in thousands):
Investment maturities 1to30 31 to 60 61 to 365 366 days Over Type of investments Amount days days days to S years 5 years U.S. Treasury bills $ 48,872 7,765 41,107 _ _ _
U.S. Treasury notes 5,749,557 878,442 4,857,135 13,980 U.S. agencies securities 806,638 181,205 57,937 92,173 427,013 48,310 Medium-term notes 1,424,599 10,002 186,343 1,228,254 Mutual funds 4,787 4,787 Commercial paper 813,424 632,859 50,950 129,615 Municipal bonds 78,274 19,973 58,301 Asset-backed securities 113,973 113,973 Supranational obligations 298,584 156,606 141,978 Short-term investment funds 177,796 177,796 Securities lending short-term repurchase agreement 163,710 163,710 Total general and special pools $ 9,680,214 1,334,730 149,994 1,306,546 6,826,654 62,290 Interest Rate Risk. The Policy limits the maturity of its investments to 5 years for U.S. Treasury and U.S. agency obligations, medium-term notes, certificate of deposit placement service, negotiable certificates of deposit, collateralized bank deposits, mortgage pass-through securities, supranational obligations, and bank/time deposits; 1 year for repurchase agreements; 270 days for commercial paper; 180 days for bankers acceptances; 92 days for reverse repurchase agreements; and no maturity for mutual funds. The Policy also allows city funds with longer-term investments horizons to be invested in securities that, at the time of the investment, have a term remaining to maturity in excess of 5 years but with a maximum final maturity of 30 years.
Credit Risk. The Policy establishes minimum credit rating requirements for investments. There are no credit quality requirements for local agency bonds, U.S. Treasury obligations. State of California obligations, California Local Agency obligations, and U.S. agency (U.S. government-sponsored enterprises) securities. The Citys $806.6 million investments in U.S. government-sponsored enterprises consist of securities issued by the Federal Home Loan Bank - $227.8 million. Federal National Mortgage Association (Fannie Mae) - $403.7 million, and Federal Home Loan Mortgage Corporation (Freddie Mac) - $175.1 million. Of the Citys $806.6 million investments in U.S. agency securities, $546.1 million were rated AA+ by S&P and Aaa by Moodys; $260.5 million were not rated individually by S&P nor Moodys.
Medium-term notes must be issued by corporations organized and operating within the United States or by depository institutions licensed by the United States or any state and operating within the United States. Medium-term notes must have at least an A rating at the time of purchase. The Citys (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
$1.4 billion investments in medium-term notes consist of securities issued by banks and corporations that comply with these requirements and were rated A or better by S&P and A3 or better by Moodys.
One issuer of $20.0 million medium-term notes was downgraded to A- by S&P and Baal by Moodys.
Commercial paper issues must have the highest letter and number rating by NRSRO. The issuing corporation must be organized and operating within the United States and have assets in excess of
$500.0 million. The Citys $813.4 million investments in commercial paper were rated A-1+/A-1 by S&P and P-1 by Moodys.
Mutual funds must receive the highest ranking by at least two NRSROs, The Citys $4.8 million investments in mutual funds were rated AAAm by S&P and not rated by Moodys, Municipal bonds have no minimum rating requirement. The Citys $78.3 million investments in municipal bonds were rated AA- by S&P and Aa3 by Moodys in supranational obligations must have a minimum of AA rating.
The Citys investments in supranational coupons of $142.0 million were rated AAA by S&P and Aaa by Moodys; $156.6 million were not rated individually by S&P nor Moodys.
Concentration of credit risk. The Policy does not allow more than 40% of its investment portfolio to be invested in commercial paper or bankers acceptances, 30% in certificates of deposit or medium-term notes, or 20% in mutual funds, money market mutual funds, or mortgage pass-through securities. The Policy further provides for a maximum concentration limit of 10% in any one issuer, including its related entities. There is no percentage limitation on the amounts that can be invested in U.S. Treasury and U.S. agency obligations. The Citys pooled investments comply with these requirements. GAAP requires disclosure of certain investments in any one issuer that represent 5% or more of total investments. Of the Citys total pooled investments, no one issuer represented 5% or more of the total investments as of June 30, 2018.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
The following table identifies the investment types that are authorized by the Policy as of June 30, 2019 and 2018:
Maximum specified Minimum Maximum percentage of credit quality Authorized Investment Type maturity
- portfolio requirements Local agency bonds 5 years None None U.S. treasury obligations 5 years* None None State obligations - CA and others 5 years None None CA local agency obligations 5 years None None U.S. agency obligations 5 years* None None Bankers' acceptances 180 days 40%* None Commercial paper - pooled funds* ^ 270 days 40% of the Highest letter and number agencys money E rating by an NRSRO Commercial paper - nonpooled funds* ^ 270 days 25% of the Highest letter and number agencys money rating by an NRSRO
Negotiable certificates of deposits 5 years 30% (combined with placement service CD) None Nonnegotiable certificates of deposits 5 years None None Placement servce deposits 5 years 30% 1 (inclusi\fi of placement service CD) None Placement service certificate of deposits 5 years 30%' (combined with negotiable CD) None Repurchase agreements 1 year None None Reverse repurchase agreements and securities 92 days ' 20% of the base value Lending agreements of the portfolio None'^
Medium-term notes* ' 5 years 30% "A" rating category or its equivalent or better Mutual funds and money market mutual funds N/A 20% Multiple Collateralized bank deposits 5 years None None Mortgage pass-through securities 5 years 20% "AA" rating category or its equivalent or better County pooled in<<stments funds N/A None None Joint powers authority pool N/A None Multiple ° Lxal agency in<<stment fund N/A None None Voluntary investment program fund N/A None None Supranational obligations ^ 5 years 30% "AA" rating category or its equivalent or better (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
- Represents where the Citys investment policy is more restrictive than the California Government Code. The sources used are Sections 16340, 16429.1, 53601, 53601.8, 53635, 53635.2, and 53638. Municipal utilities districts have the authority under the Public Utilities Code Section 12871 to invest in certain securities not addressed here.
Other restrictions on investments are summarized as follows:
^ Section 53601 provides that the maximum term of any investment authorized under this section, unless otherwise stated, is five years. However, the legislative body may grant express authority to make investments either specifically or as a part of an investment program approved by the legislative body that exceeds this five-year maturity limit. Such approval must be issued no less than three months prior to the purchase of any security exceeding the five-year maturity limit.
Percentages apply to all portfolio investments, regardless of source of funds. For instance, cash from a reverse repurchase agreement would be subject to the restrictions.
^ No more than 30% of the agencys money may be in bankers acceptances of any one commercial bank.
° Select agencies are defined as a city, a district, or other local agency that does not pool money in deposits or investment with other local agencies, other than local agencies that have the same governing body.
^ Local agencies, other than counties or a city and county, may purchase no more than 10% of outstanding commercial paper of any single issuer.
^ Issuing corporation must be organized and operating within the United States and have assets in excess of $500.0 million.
Other agencies are counties, a city and county, or other local agency that pools money in deposits or investments with other local agencies, including local agencies that have the same governing body. Local agencies that pool exclusively with other local agencies that have the same governing body must adhere to the limits set for Select agencies above.
^ No more than 30 percent of the agencys money may be in negotiable certificates of deposit that are authorized under Section 53601 (i).
' No more than 30% of the agencys money may be invested in deposits, including CDs, through a placement service. No more than 30% of the agencys money may be invested in CDs through a placement service and negotiable CDs based on Sections 53601.8, 53635.8, and 53601 (i).
Excluding purchases of certificates of deposit pursuant to Sections 53601.8 and 53635.8, no more than 10% of the agencys money may be invested with any one private sector entity that assists in the placement of deposits.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
- Reverse repurchase agreements or securities lending agreements may exceed the 92-day term if the agreement includes a written codicil guaranteeing a minimum earning or spread for the entire period between the sale of a security using a reverse repurchase agreement or securities lending agreement and the final maturity dates of the same security.
Reverse repurchase agreements must be made with primary dealers of the Federal Reserve Bank of New York or with a nationally chartered or state-chartered bank that has a significant relationship with the local agency. The local agency must have held the securities used for the agreements for at least 30 days.
- Medium-term notes are defined in Section 53601 as all corporate and depository institution debt securities with a maximum remaining maturity of five years or less, issued by corporations organized and operating within the U.S. or by depository institutions licensed by the U.S. or any state and operating within the U.S.
No more than 10% invested in any one mutual fund. This limitation does not apply to money market accounts.
A mutual fund must receive the highest ranking by not less than two nationally recognized rating agencies or the fund must retain an investment adviser who is registered with the SEC (or exempt from registration), has assets under management in excess of $500.0 million, and has at least five years experience investing in instruments authorized by Sections 53601 and 53635.
° A money market mutual fund must receive the highest ranking by not less than two nationally recognized statistical rating organizations or retain an investment adviser registered with the SEC or exempt from registration and who has not less than five years experience investing in money market instruments with assets under management in excess of $500.0 million.
^ Issuer must be rated in the category A, or its equivalent or better, as provided by a nationally recognized rating agency.
° A joint powers authority pool must retain an investment advisor who is registered with the SEC (or exempt from registration), has assets under management in excess of $500.0 million, and has at least five years experience investing in instruments authorized by Section 53601, subdivisions (a) to (0).
^ Local entities can deposit between $200.0 million and $10.0 billion into the Voluntary Investment Program Fund upon approval by their governing bodies. Deposits in the fund will be invested in the Pooled Money Investment Account.
Only those obligations issued or unconditionally guaranteed by the International Bank for Reconstruction and Development, International Finance Corporation, and Inter-American Development Bank.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
General Investment Pool Securities Lending Program.
Securities lending is permitted and limited under provisions of California Government Code Section 53601.
The Council approved the Securities Lending Program (the SLP) on October 22, 1991 under Council File No. 91-1860, which complies with the California Government Code. The objectives of the SLP in priority order are safety of loaned securities and prudent investment of cash collateral to enhance revenue from the investment program. The SLP is governed by a separate policy and guidelines.
The Citys custodial bank acts as the securities lending agent. In the event a counterparty defaults by reason of an act of insolvency, the bank shall take all actions, which it deems necessary or appropriate to liquidate permitted investment and collateral in connection with such transaction, and shall make a reasonable effort for two business days (the Replacement Period) to apply the proceeds thereof to the purchase of securities identical to the loaned securities not returned. If during the Replacement Period the collateral liquidation proceeds are insufficient to replace any of the loaned securities not returned, the bank shall, subject to payment by the City of the amount of any losses on any permitted investments, pay such additional amounts, as necessary, to make such replacement.
Under the provisions of the SLP, and in accordance with the California Government Code, no more than 20% of the market value of the General Investment Pool (the Pool) is available for lending. The City loans out U.S. Treasury Notes and U.S. Agencies Securities. The City receives cash as collateral on the loaned securities, which is reinvested in securities permitted under the Policy. In addition, the City receives securities as collateral on loaned securities, which the City has no ability to pledge or sell without borrower default. In accordance with the California Government Code, the securities lending agent marks to market the value of both the collateral and the reinvestments daily. Except for open loans where either party can terminate a lending contract on demand, term loans have a maximum life of 60 days. Earnings from securities lending accrue to the Pool and are allocated on a pro rata basis to all Pool participants.
During the fiscal year 2019 and 2018, collateralizations on all loaned securities were compliant with the required 102% of the market value. The City can sell collateral securities only in the event of borrower default. The lending agent provides indemnification for borrower default. There were no violations of legal or contractual provisions and no borrower or lending agent default losses during the fiscal year. There was no credit risk exposure to the City because the amounts owed to the borrowers exceeded the amounts borrowed. Loaned securities are held by the Citys agents in the Citys name and are not subject to custodial credit risk.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
The following table provides information on securities lent and collateral received as part of the Citys security lending program as of June 30 (in thousands):
2019 2018 Type of investment lent; For cash collateral:
U.S. agency securities $ 36,270 133,116 U.S. Treasury notes 74,064 5,967 Supranational coupons 4,037 Medium-term notes 17,210 Total lent for cash collateral 110,334 160,330 For noncash collateral:
U.S. Treasury notes 466,002 245,904 U.S. agency securities 30,214 Corporate bonds 1,074 Total lent for noncash collateral 467,076 276,118 Total securities lent $ 577,410 436,448 Type of collateral received Cash collateral* $ 112,525 163,710 Noncash collateral**
For lent U.S. Treasury notes, U.S. agency securities, medium-term notes, and supranational coupons 478,083 282,448 Total collateral received $ 590,608 446,158 Amount represents cash collateral received and reinvested in repurchase agreements that have the mark-to-market value of the cash collateral pool at 102% for the liquidity of the porttblio and 100% for the duration portfolio for fiscal years 2018 and 2019 The City has no ability to pledge or sell collateral securities without borrower default.
Fair Value Measurements The City measures and categorizes its investments using fair value measurement guidelines established by generally accepted accounting principles. The hierarchy is based on the valuation inputs used to measure the fair value of the asset or liability. The levels of valuation inputs are as follows:
Level 1 - Quoted prices for identical assets or liabilities in an active market Level 2 - Observable inputs other than quoted market prices; and Level 3 - Unobservable inputs.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
At June 30, 2019 and 2018, the Citys summary of the fair value hierarchy of investments is as follows (in thousands):
June 30, 2019 Fair value measurements using Quoted prices Significant in active other markets for observable identical inputs Investments Amount Assets (Level 1) Assets (Level 2)
Investment Subject to fair value hierarchy:
U.S. Treasury notes 5,660,280 181,352 5,478,928 U.S. agency securities 449,954 449,954 Medium-term notes 1,488,515 1,488,515 Municipal bonds 45,163 45,163 Asset-backed securities 240,768 240,768 Supranational obligations 96,043 96,043 Total investments subject to fair value 7,980,723 $ 181,352 7,799,371 Investment not subject to fair value hierarchy:
U.S. Treasury Bills* 39,788 Short-term investment funds* 53,652 U.S. agency securities* 560,258 Commercial paper* 2,590,611 Supranational obligations* 127,199 Securities lending short-term repurchase agreement ** 112,525 Total investments not subject to fair value hierarchy 3,484,033 Total investments measured at fair value 11,464,756 Investments measured at the net asset value (NAV)
Mutual fund - AMT Free, tax exempt 2,441 Total investments $ 11,467,197
- These investments are recorded at amortized cost that has remaining maturities of one year or less at the time of purchase.
- These investments are recorded based on the cash collateral received and reinvested in repurchase agreement.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
June 30,2018 Fair value measurements using Quoted prices Significant in active other markets for observable identical inputs Investments Amount Assets (Level 1) Assets (Level 2)
Investment Subject to fair value hierarchy:
U.S. Treasury notes 5,749,557 49,763 5,699,794 U.S. agency securities 546,116 546,116 Medium-term notes 1,424,599 1,424,599 Municipal bonds 78,274 78,274 Asset-backed securities 113,973 113,973 Supranational obligations 141,978 141,978 Total investments subject to fair value 8,054,497 $ 49,763 8,004,734 Investment not subject to fair value hierarchy:
Short-term investment funds* 177,796 U.S. Treasury Bills* 48,872 U.S. agency securities* 260,522 Commercial paper* 813,424 Supranational obligations* 156,606 Securities lending short-term repurchase agreement ** 163,710 Total investments not subject to fair value hierarchy 1,620,930 Total investments measured at fair value 9,675,427 Investments measured at the net asset value (NAV):
Mutual fund - AMT Free, tax exempt 4,787 Total investments $ 9,680,214
- These investments are recorded at amortized cost that has remaining maturities of one year or less at the time of purchase.
- These investments are recorded based on the cash collateral received and reinvested in repurchase agreement.
Investments classified in Level 1 of the fair value hierarchy of $181.4 million and $49.8 million at June 30, 2019 and 2018, respectively, are valued using observable unadjusted quoted prices in an active market.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
Investments in the Level 2 classification totaling $7.8 billion and $8 billion at June 30, 2019 and 2018, respectively, are valued using matrix pricing obtained from various pricing sources by the Citys custodian bank. At the time of purchase, securities are automatically assigned a primary pricing source, which is used in the portfolio valuation report and evaluated based on market inputs, such as benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data.
Mutual fund investments measured at NAV normally invest substantially all of their assets in short-term, high-quality municipal obligations that provide income exempt from federal income taxes. The fund also may invest in high-quality, short-term structured notes that are derivative instruments whose value is tied to underlying municipal obligations. There are no restrictions on redemption and no stipulated redemption notice period.
(8) Derivative Instruments In accordance with GASB Statement No. 53, the Power System records the fair value of its financial natural gas hedges, on the statement of net position. As of June 30, 2019 and 2018, the fair values of the financial natural gas hedges were approximately $(7.0) million and approximately $(22.2) million, respectively and were recorded as other noncurrent liabilities on the statement of net position. The Power System enters into natural gas hedging contracts in order to stabilize the cost of gas needed to produce electricity to serve its customers. It is designed to cap gas prices over a portion of the forecasted gas requirements. The Power System does not speculate when entering into financial transactions. Financial hedges are variable to fixed-price swaps and hedge transactions are layered in to achieve dollar cost averaging.
As of June 30, 2019, the Power System's financial natural gas hedges by fiscal year are as follows (amounts in thousands):
Notional amount Contract (total price range First Last contract dollar effective termination Derivative description quantities*) per unit date date Fair value Financial natural gas:
FY 2019-20 20,130,000 $ 1.87-2.83 07/01/19 06/30/20 $ (4,961)
FY 2020-21 13,140,000 1.93-2.61 07/01/20 06/30/21 (1,105)
FY 2021-22 7,300,000 2.04-2,47 07/01/21 06/30/22 (692)
FY 2022-23 1,825,000 2.26-2.50 07/01/22 06/30/23 (257)
Total 42,395,000 $ (7,015)
- Contract quantities in MMBtu - Million British Thermal Units (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
As of June 30, 2018, the Power Systems financial natural gas hedges by fiscal year are the following (fair value in thousands):
Notional amount Contract (total price range First Last contract dollar effective termination Derivative description quantities*) per unit date date Fair value Financial natural gas; FY 2018-19 28.287.500 $ 2.03-2.78 07/01/18 06/30/19 $ (7,575)
FY 2019-20 20.130.000 1.87-2.83 07/01/19 06/30/20 (7,566)
FY 2020-21 13.140.000 1.93-2.61 07/01/20 06/30/21 (3,702)
FY 2021-22 7.300.000 2.04-2.47 07/01/21 06/30/22 (2,658)
FY 2022-23 1.825.000 2.26-2.50 07/01/22 06/30/23 (705)
Total 70.682.500 (22,206)
- Contract quantities in MMBtu - Million British Thermal Units The fair value of the natural gas hedges increased by $15.2 million during the year ended June 30, 2019 due to an increase during the year in natural gas prices and is reported as a noncurrent liability and is offset by a deferred outflow on the statement of net position. All fair values were estimated using Platts forward curves, based on published settlement prices and supplemented by Platts proprietary models wherever there is less liquid market activity.
(a) Credit Risk The Power System is exposed to credit risk related to nonperformance by its counterparties under the terms of contractual agreements. In order to limit the risk of counterparty default, the Department has implemented a Counterparty Evaluation Credit Policy (Credit Policy). The Credit Policy has been amended from time to time, and the latest Board approval was on November 28, 2017. The Credit Policys current scope includes physical power, transmission, physical natural gas, financial natural gas, and environmental products. Also, the credit limit structure are categorized into short-term and long-term structures where the short-term structure is applicable to transactions with terms of up to 18 months and the long-term structure covers transactions beyond 18 months.
The Policy includes provisions to limit risk, including the assignment of internal credit ratings to all of the Power Systems counterparties based on counterparty and/or debt ratings; the use of expected default frequency equivalent credit rating for short-term transactions; the requirement for credit enhancements (including advance payments, irrevocable letters of credit, escrow trust accounts, and parent company guarantees) for counterparties that do not meet an acceptable level of risk; and the use of standardized agreements, which allow for the netting of positive and negative exposures associated with a single counterparty.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
As of June 30, 2019, the five financial natural gas hedge counterparties were rated by Moodys as follows: one at Aa2, two at A2 and two at A3. The counterparties were rated by S&P as follows: one at AA-, one at A, one at A-, and two at BBB+. As of June 30, 2018, the five financial natural gas hedge counterparties were rated by Moodys as follows: one at A1, one at A2, and three at A3. The counterparties were rated by S&P as follows: one at AA-, one at A, one at A-, and two at BBB+.
Based on the International Swap Dealers Association agreements, the Power System or the counterparty may be required to post collateral to support the financial natural gas hedges subject to credit risk in the form of cash, negotiable debt instruments (other than interest-only and principal-only securities), or eligible letters of credit. Collateral posted is held by a custodian. As of June 30, 2019 and 2018, the fair values of the financial natural gas hedges are within the credit limits and collateral posting was not required.
(b) Basis Risk The Department is exposed to minimal to no basis risk between the financial natural gas hedges and the equivalent physical gas deliveries as both are settled using the first of the month NW Rocky Mountains Index, while the physical gas deliveries are received at Kern River Opal, where the Department negotiated firm transmission rights. Both locations are in the same region and are highly correlated.
(c) Termination Risk The Power System or its counterparties may terminate the contractual agreements if the other party fails to perform under the terms of the contract. No termination events have occurred and there are no out-of-the-ordinary termination events contained in contractual documents.
(Continued)
>1^*a.
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
(9) Long-Term Debt Long-term debt outstanding as of June 30, 2019 and 2018 consists of revenue bonds and refunding revenue bonds due serially in varying annual amounts as follows (amounts in thousands):
Fiscal year Effective Of last Date of interest scheduled Principal outstanding Bond issues issue rate% maturity 2019 2018 Issue of 2001, Series B 06/05/01 Variable 2035 $ 579,200 579,200 Issue of 2002, Series A 08/22/02 Variable 2036 334,700 334,700 Issue of 2004, Series C3 04/07/04 4.298 2020 4,230 4,230 Issue of 2006, Series C4 03/01/06 4.040 2022 3,058 3,106 Issue of 2009, Series A 02/19/09 4.773 2040 109,285 Issue of 2009, Series B 06/02/09 4.563 2025 171,590 06/02/10 3.898 2041 616,000 616,000 Issue of 2010, Series A Issue of 2010, Series B 06/02/10 3.015 2023 22,805 28,470 Issue of 2010, Series C 08/25/10 2.188 2028 139,775 139,775 Issue of 2010, Series D 12/02/10 4.342 2046 760,200 760,200 Issue of 2011, Series A 06/30/11 2.715 2023 358,575 442,500 Issue of 2012, Series A 10/25/12 2.936 2036 100,355 100,355 Issue of 2012, Series B 10/25/12 4.164 2044 350,000 350,000 Issue of 2013, Series A 04/02/13 2.504 2032 414,660 456,390 Issue of 2013, Series B 06/04/13 3.347 2033 419,380 427,080 Issue of 2013, Series C 06/04/13 4.441 2038 27,855 27,855 Issue of 2014, Series A 05/06/14 Variable 2039 200,000 200,000 Issue of 2014, Series B 06/10/14 4.008 2044 322,000 322,000 Issue of 2014, Series C 08/05/14 2.912 2030 196,955 196,955 Issue of 2014, Series D 10/23/14 3.785 2045 450,000 450,000 Issue of 2014, Series E 01/08/15 3.833 2045 229,000 229,000 Issue of 2015, Series A 04/16/15 3.636 2041 520,280 520,280 Issue of 2015, Series B 10/01/15 1.179 2019 268,590 05/19/16 3.265 2047 263,215 275,000 Issue of 2016, Series A Issue of 2016, Series B 06/23/16 3.259 2047 225,000 225,000 Issue of 2017, Series A 02/09/17 3.782 2048 500,000 500,000 Issue of 2017, Series B 04/04/17 3.666 2040 345,410 345,410 07/13/17 3.710 2048 375,000 375,000 Issue of 2017, Series C Issue of 2018, Series A 04/19/18 3.357 2039 354,440 354,440 Issue of 2018, Series B 11/01/18 2.244 2027 240,845 11/01/18 2.290 2027 59,155 Issue of 2018, Series C Issue of 2018, Series D 12/20/18 3.587 2049 391,200 02/07/19 3.827 2050 345,845 Issue of 2019, Series A Issue of 2019, Series B 05/09/19 2.305 2036 308,875 Total principal amount 9,458,013 8,812,411 Unamortized premiums and 912,065 759,850 discounts Revenue bonds, net 10.370.078 9,572,261 Revenue certificates 200,000 Bonds and revenue certificates due w ithin one year (including current portion of variable rate debt) (263,296) (265,005)
$ 10,106,782 9,507,256 68 (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
Revenue bonds generally are callable 10 years after issuance. The Power System has agreed to certain covenants with respect to bonded indebtedness. Significant covenants include the requirement that the Power Systems net income, as defined, will be sufficient to pay certain amounts of future annual bond interest and of future annual aggregate bond interest and principal maturities. Revenue bonds and refunding bonds are collateralized by the future revenue of the Power System.
(a) Long-Term Debt Activity The Power System had the following activity in long-term debt for the fiscal years ended June 30, 2019 and 2018 (amounts in thousands);
Balance Balance June 30, 2018 Additions Reductions June 30, 2019 Re\<<nue bonds:
Principal:
Beginning balance $ 8,612,411 8,612,411 Issuances 705,000 705,000 Refunding bonds 640,920 640,920 Scheduled maturities (153,615) (153,615)
Refunded/defeased bonds (546,703) (546,703) 8,612,411 1,345,920 (700,318) 9,258,013 Premium (discount):
Beginning balance 759,850 759,850 Issuances 123,123 123,123 Refunding bonds 107,763 107,763 Scheduled amortization (73,405) (73,405)
Written off due to refunding (5,266) (5,266) 759,850 230,886 (78,671) 912,065 Revenue bonds, net 9,372,261 1,576,806 (778,989) 10,170,078 Revenue certificates 200,000 (200,000)
Direct placements 200,000 200,000 Total $ 9,772,261 1,576,806 (978,989) 10,370,078 (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
Balance Balance June 30, 2017 Additions Reductions June 30, 2018 Revenue bonds:
Principal:
Beginning balance $ 8,430,402 8,430,402 Issuances 375,000 375,000 Refunding bonds 354,440 354,440 Scheduled maturities (131,756) (131,756)
Refunded/defeased bonds (415,675) (415,675) 8,430,402 729,440 (547,431) 8,612,411 Premium (discount):
Beginning balance 688,876 688,876 Issuances 70,125 70,125 Refunding bonds 64,819 64,819 Scheduled amortization (69,614) (69,614)
Written off due to refunding 5,644 5,644 688,876 140,588 (69,614) 759,850 Revenue bonds, net 9,119,278 870,028 (617,045) 9,372,261 Revenue certificates 200,000 200,000 Direct placements 200,000 200,000 Total $ 9,519,278 870,028 (617,045) 9,772,261 (b) New Issuances Fiscal Year 2019 In November 2018, the Power System issued $240.9 million of Power System Revenue Bonds, 2018 Series B. The net proceeds of $268.6 million, including a $27.7 million issue premium net of underwriters discount, were used to refund all of the outstanding Power System Revenue Bonds, 2015 Series B, amounting to $268.6 million. The transaction resulted in a net gain for accounting purposes of
$0.8 million, which was capitalized as deferred inflows on debt refunding and is being amortized over the life of the refunded bonds.
In November 2018, the Power System issued $59.2 million of Power System Revenue Bonds, 2018 Series C. The net proceeds of $68.4 million, including a $9.2 million issue premium net of underwriters discount, were deposited into the construction fund to be used for capital improvements.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
In December 2018, the Power System issued $391.2 million of Power System Revenue Bonds, 2018 Series D. The net proceeds of $457.9 million, including a $66.7 million issue premium net of underwriters discount, were used to pay for capital improvements, and refund all of the outstanding Power System Revenue Bonds, 2009 Series A, amounting to $106.5 million. The transaction resulted in a net present value savings of $18.8 million and a net gain for accounting purposes of $0.7 million, which was capitalized as deferred inflows on debt refunding and is being amortized over the life of the refunded bonds.
In February 2019, the Power System issued $345.9 million of Power System Revenue Bonds, 2019 Series A. The net proceeds of $406.9 million, including a $61.0 million issue premium net of underwriters discount, were deposited into the construction fund to be used for capital improvements.
In May 2019, the Power System issued $308.9 million of Power System Revenue Bonds, 2019 Series B. The net proceeds of $372.2 million, including a $63.4 million issue premium net of underwriters discount, were used to refund all of the outstanding Power System Revenue Bonds, 2009 Series B, amounting to $171.6 million and all of the outstanding Power System Revenue Commercial Paper Notes, amounting to $200 million. The transaction resulted in a net present value savings of
$26.4 million and a net gain for accounting purposes of $1.4 million, which was capitalized as deferred inflows on debt refunding and is being amortized over the life of the refunded bonds.
Fiscal Year 2018 In July 2017, the Power System issued $375 million of Power System Revenue Bonds, 2017 Series C.
The net proceeds of $444.3 million, including a $69.3 million issue premium net of underwriters discount, were deposited into the construction fund to be used for capital improvements.
In April 2018, the Power System issued $354.4 million of Power System Revenue Bonds, 2018 Series A. The net proceeds of $418.5 million, including a $64.1 million issue premium net of underwriters discount, were used to refund all of the outstanding Power System Revenue Bonds, 2008 Series A, Subseries A-1, amounting to $200 million, and Subseries A-2, amounting to $215.7 million.
The transaction resulted in a net present value savings of $85.8 million and a net loss for accounting purposes of $7.7 million, which was capitalized as deferred outflows on debt refunding and is being amortized over the life of the refunded bonds.
Outstanding Debt Defeased The Power System defeased certain revenue bonds in the current and prior years by placing cash and the proceeds of new revenue bonds in irrevocable trusts to provide for all future debt service payments on the old bonds. Accordingly, the trust account assets and the liability for the defeased bonds are not included in the Power Systems financial statements.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30. 2019 and 2018 (In thousands)
At June 30, 2019, the following revenue bonds outstanding are considered defeased (amounts in thousands):
Principal Bond issues outstanding Second issue of 1993 5,175 Refunding issue of 1994 Issue of 1994 3,450 Issue of 2009 Series B 171,590 Issue of 2009 Series B 535 Issue of 2010 Series B 15 Issue of 2011 Series A 1,285 Issue of 2013 Series A 2,125
____ 184,175 (10) Variable Rate Bonds As of June 30, 2019 and 2018, the Power System had $1,114 million in variable rate bonds of which
$200 million is in direct placement bonds as discussed in note 11. The variable rate bonds currently bear interest at weekly and daily rates ranging from 0.75% to 1.68% as of June 30, 2019 and 0.45% to 1.5% as of June 30, 2018. The Power System can elect to change the interest rate period of the bonds with certain limitations. The bondholders have the right to tender the bonds to the tender agent on any business day with seven days prior notice. The Power System has entered into standby and line-of-credit agreements with a syndicate of commercial banks in an initial amount of $579 million and $335 million to provide liquidity for the variable rate bonds. The extended standby agreements expire in January 2020 for the
$106 million, January 2021 for the $267 million, and in January 2023 for the $206 million, for a total of
$579 million, and in May 2020 for the $335 million.
Under the agreements, the $579 million variable-rate bonds will bear interest that is payable monthly at the greatest of (a) the prime rate plus 1.00%; (b) the federal funds rate plus 2.00%; (c) LIBOR quoted rate plus 3.00%; (d) 7.00%; and (e) 7.50%, while the $335 million variable rate bonds will bear interest that is payable monthly at the greatest of (a) the prime rate plus 1.00%; (b) the federal funds rate plus 2.00%; and (c) 7.00%. The unpaid principal of each liquidity advance made by the liquidity provider is payable in 10 equal semiannual installments 90 days immediately following the related liquidity advance. At its discretion, the Power System has the ability to convert the outstanding bonds to fixed-rate obligations, which cannot be tendered by the bondholders.
The variable-rate bonds have been classified as long term in the statements of net position as the liquidity facilities give the Power System the ability to refinance on a long-term basis and the Power System intends to either renew the facility or exercise its right to tender the debt as a long-term financing. The portion that would be due in the next fiscal year in the event that the outstanding variable rate bonds were tendered and purchased by the commercial banks under the standby agreements has been included in the current portion of long-term debt and was $91 million at both June 30, 2019 and 2018.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
(11) Direct Placements and Line of Credit Under GASB 88, Certain Disclosures Related to Debt, including Direct Borrowings and Direct Placements, the Power System has the following direct placement debt and unused line of credit:
In May 2017, the Power System entered into a First Amendment to Continuing Covenant Agreement (Amended CCA) with Wells Fargo Bank to extend the expiration date of the current Continuing Covenant Agreement (CCA) to May 4, 2020. In May 2014, the $200 million Power System Revenue Bonds, 2014 Series A (Power 2014A Bonds) were sold under the CCA in an index floating rate mode under a direct purchase structure. Under the Amended CCA, the Power 2014A Bonds will pay interest at a fixed spread of 23 basis points (0.23%) above the Securities Industry and Financial Markets Association Index for the three-year term. At the end of the three-year term, the Power System would have the option to either renegotiate and renew a new index floating rate term with Wells Fargo or another bank or convert the bonds to another mode, such as a fixed-rate mode or a traditional variable-rate mode, which utilizes a standby agreement. Certain default provisions under the Amended CCA include, but are not limited to, failure to pay amounts due under the Amended CCA and certain other obligations of the Power System, failure to perform certain covenants under the Amended CCA, actions taken in connection with a debt restructuring or similar of the Department, significant rating downgrades of obligations payable from the Power Revenue Fund, and significant nonappealable judgments against the Department. Such defaults may result in a mandatory redemption of the Power 2014A Bonds or other remedial actions taken by Wells Fargo Bank. The Power System does not have any assets pledged as collateral for direct placement debt, termination events with finance-related consequences, or subjective acceleration clauses.
On December 14, 2018, the Power System entered into an Amended and Restated Revolving Credit Agreement (Amended RCA) and the related Amended and Restated Fee and Interest Rate Agreement with Wells Fargo Bank, National Association with a $300 million commitment and the option to request additional commitment, as needed up to a total commitment of $500 million. The Department can request loans for Water System improvements. Power System improvements and/or such other lawful purposes of the Department. The interest charged for tax-exempt loans is based on SIFMA plus a spread of 0.50% or 75% of one-month LIBOR plus a spread of 0.45%. The interest charge for taxable loans is based on one-month LIBOR plus a spread of 0.45%. The Amended RCA expires in December 2023. As of June 30, 2019, the Power System has no obligations outstanding under the Amended RCA.
(12) Revenue Certificates In May 2019, the Power System refunded all outstanding commercial paper notes, amounting to
$200 million, bearing interest at an average rate of 1.67%. As of June 30, 2019, the Power System has no outstanding commercial paper notes.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
(13) Principal Maturities and interest As of June 30, 2019, annual principal maturities and interest on an accrual basis are as follows (amounts in thousands):
Interest and Principal amortization Fiscal year(s) ending June 30:
2020 171,906 371,094 2021 189,516 364,859 2022 205,536 361,261 2023 252,053 355,477 2024 274,926 347,108 2025-2029 1,633,534 1,568,897 2030-2034 1,919,326 1,228,841 2035-2039 1,789,410 900,497 2040-2044 2,002,905 450,343 2045-2049 943,660 55,904 2050-2054 39,043 Total requirements 9,421,815 6,004,281 Debt service payments already paid to sinking fund-201OC bonds 36,198 9,458,013 6,004,281 Interest and amortization are net of $905 million of unamortized discount/premium and gain/loss due to issuances of new and refunding bonds.
The schedule is presented assuming that the tender options on the variable rate bonds, as discussed in notes 10 and 11 will not be exercised and should the bondholders exercise the tender options, the Power System would be required to redeem the $1,114 million in variable rate bonds and direct placement over the next six years, as follows: $91 million in fiscal year 2020, $223 million in each of the fiscal years 2021 through 2024, and $131 million in fiscal year 2025. Accordingly, the statements of net position recognize the possibility of the exercise of the tender options and reflect the $91 million that could be due in fiscal year 2020 as a current portion of long-term debt payable. Interest and amortization include interest requirements for variable rate bonds. Variable debt interest rate in effect at June 30, 2019 averages 1.410%.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
(14) Retirement Plan (a) Plan Description The Department has a funded contributory retirement plan covering substantially all of its employees.
The Plan operates as a single-employer defined-benefit plan to provide pension benefits to eligible department employees. The Retirement Funds assets are held in a special trust fund of the City. Plan benefits are generally based on years of service, age at retirement, and the employees highest 12 consecutive months of salary before retirement. Active participants who joined the Plan on or after June 1, 1984 are required to contribute 6% of their annual covered payroll. Participants who joined the Plan prior to June 1, 1984 contribute an amount based upon an entry-age percentage rate. A new Tier 2 was added to the Plan and applies to members hired on or after January 1, 2014. Tier 2 plan participants are required to contribute 10% of their salary, and plan benefits are based on a three-year final average salary period.
Under the provisions of the City Charter, the Retirement Board of Administration (the Retirement Board) has the responsibility and authority to administer the Plan and to invest its assets. The Retirement Board members serve as trustees and must act in the exclusive interest of the Plans members and beneficiaries. The Retirement Board has seven members: one member of the Retirement Board of Water and Power Commissioners, the general manager, the chief accounting employee, three employee members who are elected for three-year terms by active members of the Plan, and one retiree who is appointed by the Board of Water and Power Commissioners for a three-year term.
Plan amendments must be approved by both the Retirement Board and the Board. The Plan issues separately available financial statements on an annual basis. Such financial statements can be obtained from the Department of Water and Power Retirement Office, 111 North Hope, Room 357, Los Angeles, CA 90012.
(b) Benefits Provided The Plan provides retirement benefits to eligible employees. Most employees of the Los Angeles Department of Water and Power become members of the Plan effective on the first day of biweekly payroll following employment or immediately following transfer from another city department. Members employed prior to January 1,2014 are designated as Tier 1, and those hired on or after January 1, 2014 are designated as Tier 2 (unless a specific exemption applies to employee providing a right to Tier 1 status).
Tier 1 members are eligible to retire once they attain the age of 60 with 5 or more years of service or at age 55 with 10 or more years of service credit acquired in the last 12 years prior to retirement. A Tier 1 member with 30 years of service is eligible to retire regardless of age. Tier 2 members are eligible to retire once they attain the age of 60 with at least 5 years of continuous Department service or at any age with 30 years of service. For both tiers, combined years of service between the Plan and the Los Angeles City Employees Retirement System is used to determine retirement eligibility, and at least 5 years must be actual employment at the Department or City (not purchased). For both tiers, members receiving Permanent Total Disability benefits may retire regardless of age. For Tier 1, to be eligible for (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30. 2019 and 2018 (In thousands) a Formula Pension, the employee must have worked or been paid disability four of the last 5 years immediately preceding eligibility to retire or while eligible to retire.
The Formula Pension benefit the member will receive is based upon the age at retirement, monthly average salary base, and years of retirement service credit. The Tier 1 Formula Pension is equal to 2.1% times years of service credit times monthly average salary base. In addition, members retiring after attaining age 55 with 30 years of service credit receive an increase in the benefit factor from 2.1%
to 2.3%. A reduced early retirement benefit is paid for those members attaining age 55 with 10 years of service or any age (under 55) with 30 years of service. The reduction is 1.5% for each year of retirement age between 60 and 55 and 3.0% for each year of retirement before age 55.
Under Tier 2, there are various benefit factors that apply, as shown below:
- 1.5% at age 60 with 5 years of continuous Department service or 10 years of qualifying service
- 2.0% at age 55 with 30 years of service credit
- 2.0% with 30 years of qualifying service
- 2.0% at age 63 with 5 years of continuous Department service or 10 years of qualifying service 2.1% at age 63 with 30 years of qualifying service The reduced early retirement benefits for Tier 2 are the same as Tier 1. These are applied to the age 60 benefit for members (with 2.0% formula) who retire before age 60 with less than 30 years of service credit. Service Credit with the Department and with Lacers is combined for satisfying this requirement.
For Tier 1 members, the maximum monthly retirement allowance is 100% of monthly average salary base. For Tier 2 members, the maximum monthly retirement allowance is 80% of monthly average salary base. Under Tier 1, pension benefits are calculated based on the highest average salary earned during a 12-month period. Under Tier 2. pension benefits are calculated based on the average salary earned during a 36-month period.
The member may elect the full allowance or choose an optional retirement allowance. The full allowance provides the highest monthly benefit and up to a 50% continuance to an eligible surviving spouse or domestic partner. There are five optional retirement allowances the member may choose from. Each of the optional retirement allowances requires a reduction in the full allowance in order to allow the member the ability to provide various benefits to a surviving spouse, domestic partner, or named beneficiary.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
(c) Plan Membership As of the June 30, 2018 and 2017 measurement dates for the June 30, 2019 and 2018 net pension liability, pension plan membership, which consisted of Water and Power System members, consisted of the following; 2019 2018 Retired members or beneficiaries currently receiving benefits 9,165 9,272 Vested terminated members entitled to, but not yet receiving, benefits 1,728 1,648 Active members 10,114 9,806 Total 21,007 20,726 (d) Contributions The Department contributes $1.10 for each $1 contributed by participants plus an actuarially determined annual required contribution as determined by the Plans independent actuary. The required contributions are allocated between the Power System and the Water System based on the current-year labor costs.
Employer contribution rates are adopted annually based upon recommendations received from the Plans actuary after the completion of the annual actuarial valuation. The average employer contribution rates for fiscal years 2019, 2018, and 2017 (based on the July 1, 2018, 2017, and 2016 valuations) were 40.15%, 44.62%, and 45.25% of compensation, respectively. The average member contribution rate for fiscal years 2019, 2018, and 2017 (based on the July 1, 2018, 2017, and 2016 valuations) was 7.10% of compensation. Most Tier 1 members contribute at 6% of compensation and all Tier 2 members contribute at 10% of compensation. Employer contributions in fiscal years 2019, 2018, and 2017 amounted to $298 million, $269 million, and $249 million, respectively.
(e) Net Pension Liability At June 30, 2019 and 2018, the Power System reported a liability of $618 million and $917 million for its proportionate share of the net pension liability, respectively. The net pension liability was measured as of June 30, 2018 and 2017, and the total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of the same dates. The Power Systems proportion of the net pension liability was based on the Power Systems projected compensation for the year following the measurement date, relative to the projected compensation for the same period for both the Water System and the Power System. At June 30, 2019, the Power Systems proportion was 67.9%
compared to 68.3% and 68.1% as of June 30, 2018 and 2017, respectively.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
Actuarial Assumptions The Departments net pension liability as of June 30, 2019 and 2018 was measured as of June 30, 2018 and 2017 using actuarial valuations as of June 30, 2018 and 2017 respectively. The actuarial assumptions used in these valuations were based on the results of an experience study for the period from July 1,2012 through June 30, 2015. The following assumptions were applied to all periods included in the measurement for the June 30, 2018 and 2017 actuarial valuations:
Actuarial assumptions 2018 2017 Inflation 3.00% 3.00%
Salary increases 4.50%-10.00% 4.50%-10.00%
ln\estment rate of return 7.25% 7.25%
Cost-of-liVng adjustments 3.00% (Actual increases are 3.00% (Actual increases are contingent upon CPi increases, contingent upon CPI increases, with a 3.00% maximum for with a 3.00% maximum for Tier 1 and 2.00% maximum for Tier 2.) Tier 1 and 2.00% maximum for Tier 2.)
Mortality Healthy postretirement: RP-2014 Healthy Annuitant Healthy postretirement: RP-2014 Healthy Annuitant Mortality Table set back one year Mortality Table set back one year with MP-2015 projection scale with MP-2015 projection scale (g) Discount Rate The discount rate used to measure the pension liability was 7.25% as of both June 30, 2019 and 2018.
The projection of cash flows used to determine the discount rate assumed that plan member contributions will be made at the current contribution rate and that employer contributions will be made at rates equal to the actuarially determined contribution rates. For this purpose, only employee and employer contributions that are intended to fund benefits for current plan members and their beneficiaries are included. Projected employer contributions that are intended to fund the service costs for future plan members and their beneficiaries, as well as projected contributions from future plan members, are not included. Based on those assumptions, the Plans fiduciary net position was projected to be available to make all projected future benefit payments for current and inactive plan members. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments, which is estimated to be 104 years, to determine the total pension liability at June 30, 2019 and 2018.
(h) Long-Term Expected Rate of Return The long-term expected rate of return on pension plan investments was determined using a building-block method in which the best estimate ranges of expected future real rates of return (expected returns, net of inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset proportionate share, adding expected inflation and subtracting expected investment expenses. The target allocation and projected best estimates of arithmetic real rates of return for each major asset class, after deducting inflation but before deducting investment expenses, used in the derivation of the long-term expected investment rate of return assumption are summarized in the following table:
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
June 30, 2019 and 2018 Long-term Target expected real Asset class allocation rate of return Domestic equity 29 % 5.76 %
Developed international equity 19 7.25 Fixed income 25 1.74 Real estate 8 4.37 Real return 5 2.39 Private equity 8 7.75 Covered calls 5 3.50 Cash and cash equivelents 1 (0.46)
Total 100 %
(i) Sensitivity of the Net Pension Liability to Changes in the Discount Rate The following presents the net pension liability of the Power System as of June 30, 2019 and 2018, calculated using the discount rate of 7.25%, as well as what the Power Systems pension liability would be if it were calculated using a discount rate that is one percentage point lower (6.25%) or one percentage point higher (8.25%) than the current rate (amounts in thousands):
Current 1% decrease discount 1% increase Net pension liability (6.25%) rate (7.25%) (8.25%)
June 30, 2019 $ 1,826,112 618,010 (380,974)
Current 1% decrease discount 1% increase Net pension liability (6.25%) rate (7.25%) (8.25%)
June 30, 2018 $ 2,090,307 916,758 (52,845)
(j) Pension Plan Fiduciary Net Position The pension plans fiduciary net position is determined based on the accrual basis of accounting, which is on the same basis of accounting as the Plan. Pension plan investments are recorded at fair value except for short-term investments, which are recorded at amortized cost. Benefit payments include costs as designated by the plan document, refunds of employee contributions due to terminations and member deaths, and administrative expenses.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
Pension Expense, Deferred Outflow of Resources, and Deferred Inflow of Resources In addition to amortization expense of the regulatory asset discussed at note 6, the Power System recognized pension expense of $116,889 and $165,984 for the years ended June 30, 2019 and 2018, respectively. Pension expense is recorded as operation and maintenance expense or construction work in progress, depending on where the related payroll is charged. At June 30, 2019 and 2018, the Power System reported $248,836 and $403,310, respectively, for deferred outflows of resources and deferred inflows of resources of $287,735 and $324,374, respectively.
The below tables summarize the deferred inflows of resources and deferred outflows of resources at June 30, 2019 and 2018 (amounts in thousands):
June 30 Deferred outflows of resources 2019 2018 Changes in proportion and differences between entity contributions and proportionate share of contributions $ 3,804 5,563 Changes of assumptions and other inputs 239,198 397,747 Total deferred outflows of resources $ 243,002 403,310 June 30 Deferred inflows of resources 2019 2018 Changes in proportion and differences between entity contributions and proportionate share of contributions $ 6,022 3,343 Net difference between projected and actual earnings on pension plan investments 95,011 49,754 Difference between expected and actual experience in the total pension liability 180,868 271,277 Total deferred inflows of resources $ 281,901 324,374 In addition to the deferred outflows noted above, there is also $282,388 and $296,294 of deferred outflows related to pension contributions made after the measurement date as of June 30, 2019 and 2018, respectively. These deferred outflows of resources are recognized as a reduction of the net pension liability in the subsequent fiscal year.
80 (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
The net amount of deferred outflows of resources and deferred inflows of resources related to pensions that will be recognized in pension expense during the next five years and thereafter by the Power System is as follows; June 30 Year 2019 2018 2019 _ 21,553 2020 61,185 85,741 2021 23,235 47,579 2022 (78,866) (55,081) 2023 (44,832) (20,856) 2024 321 2025 58 Total (38,899) 78,936 (15) Other Postemployment Benefit Plans (a) General Information About the Plan As discussed in note 2, beginning with the year ended June 30, 2018, the Power System adopted the provisions of GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions.
The Department provides retirees medical and dental benefits and death benefits to active and retired employees and their dependents. The retiree healthcare plan and death benefit plan are administered by the Department and the Retirement Board, respectively. The Retirement Board and the Board of Commissioners have the authority to approve provisions and obligations. Eligibility for benefits for retired employees is dependent on a combination of age and service of the participants pursuant to a predetermined formula. Any changes to these provisions must be approved by the Retirement Board and the Board.
The retiree healthcare and death benefit plans are single-employer, defined-benefit plans. Plan assets are administered through irrevocable trusts for each fund used solely for the benefit of providing benefits to eligible participants in the Plan. Assets of the trust are legally protected from creditors and dedicated to providing postemployment reimbursement of eligible medical, dental, and vision expenses to current and eligible future retirees and their spouses in accordance with the terms of the Plan. Death benefits are provided to active and inactive employees in accordance with terms of the Plan.
The funds are administered in separate trust funds and presented as part of the retirement system financial statements. Such financial statements can be obtained from the Department of Water and Power Retirement Office, 111 North Hope, Room 357, Los Angeles, California 90012.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
(b) Benefits Provided For retiree healthcare, a medical subsidy is computed by a formula related to years of service and attained age of retirement. The subsidy limit is applied to the combined medical carrier and Medicare Part B premium but not the dental premium. For Tier 1, the monthly medical subsidy ranges from
$30.32 to $1,751.18 depending on age and service at retirement. Tier 2, the monthly medical subsidy ranges from $30.32 to $875.59, depending on age and service at retirement. The monthly dental subsidy for most retirees is $35.79. The dental subsidy is not available to pay for premiums for married and surviving spouses or domestic partners. All members hired before January 1,2014 are Tier 1. All members hired after January 1, 2014 are Tier 2.
The death benefit fund pays death benefits to the beneficiaries of eligible employees. Generally, to be eligible for the family death benefit allowance, an employee must be a full member of the Plan and contributing to the Plan at the time of death. If death occurs after retirement, the retired member must be receiving a monthly retirement allowance from the Plan and had a least five years of department service at retirement. The Family Death Benefit program pays a monthly allowance of $416 to the surviving spouse of a member with minor (or disabled) children plus $416 for each minor (or disabled) child up to a maximum monthly allowance of $1,170. In addition, the spouses portion will not be paid if the spouse is receiving a survivors optional death benefit allowance or an eligible spouse allowance from the retirement plan.
The Supplemental Family Death Plan, which is part of the Death Benefit Fund, is optional and subject to making additional member contributions. The Supplemental Family Death Benefit Plan pays a monthly allowance of $520 for each surviving spouse or child, in addition to the amounts payable from the Family Death Benefit Plan, subject to a maximum of $1,066 for the additional benefits. The insured lives death benefit plan for contributing members provides death benefits to employees that die while employed by the Department. Generally, to be eligible, an employee must be a full member of the Plan and contributing to the Plan at the time of death. The benefit paid from the death benefit fund is a single sum that is equal to the lesser of 14 times the members monthly compensation with no maximum.
The insured lives death benefit plan for noncontributing members provides death benefits to employees that were employed by the Department for at least five years and death occurred after retirement. The death benefit is paid in a single sum that is equal to the lesser of 14 times the members monthly full retirement allowance or $20,000.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
(c) Employees Covered by Benefit Terms At the Departments measurement date of June 30, 2018 for the June 30, 2019 reporting period, the following employees were covered by the benefit terms:
Retiree Plan Membership healthcare Death benefit Beneficiaries currently receiving benefits 91 Retired members currently receiving benefits 8,185 7,199 Vested terminated members not receiving benefits 656 Active members 10,114 10,114 Total 18,299 18,060 3 30, 2018 reporting period, the following employees were covered by the benefit terms:
Reti ree
________________ Plan Membership________ healthcare Death benefit Beneficiaries currently receiving benefits - - 93 Retired members currently receiving benefits 8,038 7,113 Vested terminated members not receiving benefits 726 Active members 9,806 9,806 Total 17,844 17,738 (d) Contributions The Board of Commissioners establishes rates for retiree healthcare plan based on an actuarially determined rate. For the years ended June 30, 2019 and 2018, the Department's average contribution rate was 9.9% and 10.1% of covered-employee payroll, respectively. Employees are not required to contribute to the retiree healthcare plan. Power System contributions to the retiree healthcare plan were $64.6 million and $60.2 million including administrative expenses of $0.5 million for the fiscal years ended June 30, 2019 and 2018, respectively.
The Department contributes to the death benefit plan based on actuarially determined contribution rates adopted by the board of administration. Employer contribution rates are adopted annually based (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30. 2019 and 2018 (In thousands) on recommendations received from the Plans actuary after the completion of the review of the death benefit fund. The employer and member contribution rates as of June 30, 2019 are as follows; Members Department Active Retired Family death benefit $1.76 monthly per active member N/A N/A Supplemental ^mily death benefit insured lives N/A $2.25 biweekly $4.9 monthly Contributing $.21 per $100 of payroll $1.00 biweekly N/A Noncontributing $1.01 per $100 of monthly N/A N/A retirement benefit Power System contributions to the death benefits plan were $5.7 million including administrative expenses of $0.7 million for the fiscal year ended June 30, 2019.
The employer and member contribution rates as of June 30, 2018 are as follows:
Members Department Active Retired Family death benefit $1.62 monthly per active member N/A N/A Supplemental family death benefit insured lives N/A $2.25 biweekly $4.9 monthly Contributing $0.22 per $100 of payroll $1.00 biweekly N/A Noncontributing $11.05 per $100 of monthly N/A N/A retirement benefit Power System contributions to the death benefit plan were $5.5 million including administrative expenses of $0.6 million for the fiscal year ended June 30, 2018.
(e) Net OPEB Liability The Power System reported a liability of $340 million and $379 million for its proportionate share of the net OPEB liability for retiree healthcare plan and the death benefit plan as of June 30, 2019 and 2018.
The net OPEB liabilities for each of the plans was measured as of June 30, 2018 and 2017 and the total OPEB liability used to calculate the net OPEB liability was determined by actuarial valuations as of June 30, 2018 and 2017. The Power Systems proportion of the net OPEB liability was based on the Power Systems projected compensation for the year following the measurement date, relative to the projected compensation for the same period for both the Water System and the Power System. At June 30, 2019 and 2018, the Power Systems proportion of the retiree healthcare plan and the death benefit plan net OPEB liabilities was 67.9% and 68.3%.
84 (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
The following table shows the Power Systems proportionate share of the net OPEB liability for each of the plans as of June 30, 2019 (amounts in thousands):
2019 2018 OPEB liability for retiree healthcare plan 260,393 297,306 OPEB liability for death benefit plans 79,188 81,373 Net OPEB liability 339,581 378,679 All assumptions are based on the results of an actuarial experience study for the period July 1,2012 to June 30,2016.
The total OPEB liability in the June 30, 2018 and 2017 actuarial valuations used for the Power Systems June 30, 2019 and 2018 financial statements was determined using the following actuarial assumptions:
Insured lives Insured lives benefit death benefit Retiree Family Supplemental (contributing (noncontributinc healthcare plan death benefit death benefit active members) members)
Cost method Entry Age Entry Age Entry Age Entry Age Entry Age Investment rate of return 7.25% 3.5% 3.5% 3.5% 3.5%
Inflation rate 3 3 3 3 3 Real across the board salary increases 0.5% 0.5% 0.5% 0.5% 0.5%
Projected salary increase 4.50 to 10% 4.50 to 10% 4.50 to 10% 4.50 to 10% 4.50 to 10%
Mortality table RP-2014 mortality table reflected for mortality experience as of the measurement date.
Medical cost trends:
Non-Medicare medical plan 7.00, graded down to 4.5% over 10 years Medicare medical plans 6.50, graded down to 4.5% owr 8 years Dental and Medicare Part B 4.5%
Member contribution rate None None $2.25 per $1.00 per None biweekly period biweekly or $4.90 per payroll month if retired period (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
Insured lives Insured lives benefit death benefit Retiree Family Supplemental (contributing (noncontributin; healthcare plan death benefit death benefit active members) members)
Department contribution rate 10.12% $1.62 per month Any additional $0.22 per $100 $1.05 per $100 lunds necessary of payroll of monthly to fund the retirement benefits benefit Age and service requirements Tierl -Age60with Preretirement Preretirement Any age with Death occurs 5 years of service; death of an death of an six months of alter retirement age 55 with 10 years active, lull. active, full. continuous service. and member of service in the last contributing contributing Preretirement was receiving a 12 years; any age with member at member at death of an retirement 30 years of service; or any age; or any age; or active, lull. monthly receiving permanent Postretirement Postretirement contributing allowance total disability benefits death of a death of a member to from WPERP from the Plan. member receiving member receiving WPERP and had at Tier 2 - Age 60 with a montNy monthly least five years 5 years of continuous retirement from retirement from ofservceat service with the Plan WPERPwithat WPERP retirement immediately prior to least five years reaching eligibility; of service at or age 60 with 10 years retirement of service; or any age with 30 yeats of service; or receiving permanent total disability benefits fan the Plan 86 (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30. 2019 and 2018 (In thousands)
Insured lives Insured lives benefit death benefit Retiree Family Supplemental (contributing (noncontributing healthcare plan death benefit death benefit active members) members)
Per Capita Cost De\<<lopment The assumed per capita claims cost by age is calculated using age based factors for Retiree ranging from 90.3% to 123% and Spouse ranging from 71.1% to 122.6% and applying these factors to premiums (eligible spouses and sun/ivors are not eligible for DWP dental subsidy) -
Monthly benett fieri -$30.32 to $416 per month $520 per A single sum A single sum
$1,751.18. Tier 2 to each suwvng month to distribution distribution
$30.32 to $875.59 child plus each surviving equal to 14 times equal to 14 times
$416 per month child plus monthly salary the member's to eligible spouse $520 per foil retirement month to allowance up eligible spouse to $20000 Participation rate 97% for medical and 95% for dental Mortality rates were based on the RP-2014 Healthy Annuitant Mortality Table with no age adjustments for male or females and set back one year for females, projected generationally with the two-dimensional MP-2015 projection scale. The actuarial assumptions used in the June 30, 2017 valuation were based on the long-term expected rate of return on OPEB plan investments was determined using a building-block method in which best-estimate ranges of expected future real rates of return (expected returns, net of OPEB plan investment expense and inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands) adding expected inflation. The target allocation and best estimates of arithmetic real rates of return for each major asset class are summarized in the following table for each fund:
Long-term expected Targeted arithmetic real allocation rate of return Retiree healthcare:
Asset class 29 % 5.76 %
Domestic equity 19 7.25 International equity 25 1.74 Custom fixed income 8 4.37 Real estate 5 2.39 Real return 8 7.75 Private equity 5 3.50 1 (0.46) 100 %
Long-term expected Targeted arithmetic real allocation rate of return Death benefit:
Fixed income 96% (0.82) %
Cash and cash equivalents 4 (0.46) 100 %
For the retiree healthcare fund, the discount rate used to measure the total OPEB liability was 7.25%
for the years ended June 30, 2019 and 2018. The projection of cash flows used to determine the discount rate assumed that Departments contributions will be made at rates equal to the actuarially determined contribution rates. Based on those assumptions, the OPEB plans fiduciary net position was projected to be available to make all projected OPEB payments for current active and inactive employees. Therefore, the long-term expected rate of return on OPEB plan investments was applied to all periods of projected benefit payments to determine the total OPEB liability.
For the death benefit fund, the discount rate was determined to be 3.50%, which is equivalent to the 20-year municipal bond rate for the years ended June 30, 2019 and 2018. The fiduciary net position of this fund was not projected to cover all future benefit payments, and thus, the 20-year municipal bond rate was used to calculate the total OPEB liability.
88 (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
(f) Sensitivity of Net OPEB Liability to Changes in the Discount Rate Rates The following table represents the net OPEB liability of the Power System, calculated using the stated discount rate assumption as well as what the Power Systems net OPEB liability would be if it were calculated using a discount rate that is one percentage point lower or 1 percentage-point higher than the current discount rate (amounts in thousands):
June 30. 2019 1% decrease Current 1% increase Discount rate 6.25 % 7.25 % 8.25 %
Net OPEB liability - Retiree healthcare plan $ 493,344 260,393 69,038 Discount rate 2.50 % 3.50 % 4.50 %
Net OPEB liability - Death benefit plan $ 93,938 79,188 67,457 June 30, 2018 1% decrease Current 1% increase Discount rate 6.25 % 7.25 % 8.25 %
Net OPEB liability - Retiree healthcare plan $ 516,109 297,306 116,378 Discount rate 2.50 % 3.50 % 4.50 %
Net OPEB liability - Death benefit plan $ 96,065 81,373 69,617 89 (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
(g) Sensitivity to Net OPEB Liability to Changes in Healthcare Cost Trend Rates The following table represents the net OPEB liability of the Power System, calculated using the stated healthcare cost trend assumption as well as what the Power Systems net OPEB liability would be if it were calculated using a healthcare cost trend that is one percentage point lower or one percentage point higher than the current healthcare cost trend rates (amounts in thousands):
__________ June 30, 2019 1% decrease Current 1% increase Net OPEB liability - Retiree healthcare plan $ 45,178 260,393 549,393
- Current trend rates: 7.00% graded down to 4.50% over 10 years for non-Medicare medical plan costs; 6.50% graded down to 4.50% over 8 years for Medicare medical plan costs, and 4.00%
all years for dental and Medicare Part B subsidy costs There is no trend rate assumption used in \aluing the death benefit plan.
June 30, 2018 1% decrease Current 1% increase Net OPEB liability - Retiree healthcare plan $ 91,891 297,306 571,778
- Current trend rates: 7.00% graded down to 4.50% o\er 10 years for non-Medicare medical plan costs; 6.50% graded down to 4.50% over 8 years for Medicare medical plan costs, and 4.50%
all years for dental and Medicare Part B subsidy costs There is no trend rate assumption used in valuing the death benefit plan.
(h) OPEB Plan Fiduciary Net Position Detailed information about the Plans fiduciary net position is available in the separately issued plan financial report.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
OPES Expense and Deferred Outflows and Inflows of Resources Related to OPEB In addition to amortization expense of the regulatory asset discussed at note 6, the Power System recognized OPEB expense of $25.9 million and $5.9 million for its proportionate share of the retiree healthcare and death benefits plans for the year ended June 30, 2019, respectively. At June 30, 2019, the Power System reported deferred outflows and inflows of resources related to OPEB plans from the following sources; Retiree healthcare plan Death benefits plan Total Deferred Deferred Deferred Deferred Deferred Deferred outflows of inflows of outflows of inflows of outflows of irrflows of resources resources resources resources resources resources Change In proportion and differences between employer categorys contributions $ 1,547 1,558 106 384 1,653 1,942 Changes of assumptions 2,803 34,048 2,803 34,048 Net difference between projected and actual earnings on OPEB plan investments 58,175 1,008 1,008 58,175 Differences between expected and actual experience 25,578 61 2,598 61 28,176 4,350 119,359 1,175 2,982 5,525 122,341 Employer contributions subsequent to the measurement date 64,593 5,681 70,274 Totals $ 68,943 119,359 6,856 2,982 75,799 122,341 (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
For the year ended June 30, 2018, the Power System recognized OPEB expense of $41.8 million and
$6 million for its proportionate share of the healthcare and death benefits plans, respectively. At June 30, 2018, the Power System reported deferred outflows and inflows of resources related to OPEB plans from the following sources; Retiree healthcare fund Death benefits fund Total Deferred Deferred Deferred Deferred Deferred Deferred outflows of inflows of outflows of inflows of outflows of inflows of resources resources resources resources resources resources Change in proportion and differences between employer category's contributions S 1,861 128 1,989 41,179 41,179 Changes of assumptions Net difference betw een projected and actual earnings on OPB plan investments 52,469 564 564 52,469 Differences between expected and actual experience 26,021 73 73 26,021 1,861 119.669 765 2,626 119,669 Bnployer contributions subsequent to the measurement date 60,154 5,495 65,649 Totals S 62,015 119,669 6,260 68,275 119,669 Contributions after the measurement date shown above will be recognized as deferred outflows of resources in the accompanying financial statements.
Other amounts reported as deferred outflows of resources and deferred inflows of resources related to OPEB will be recognized in OPEB expense in future reporting periods as follows:
For the year ended June 30, 2019 Retiree healthcare Death plan benefits plan Total Year ended June 30:
2020 $ (29,219) (159) (29,378) 2021 (29,218) (159) (29,377) 2022 (29,218) (159) (29,377) 2023 (16,172) (298) (16,470) 2024 (10,646) (448) (11,094)
Thereafter (536) (584) (1,120)
$ (115,009) (1,807) (116,816)
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
For the year ended June 30, 2018 Retiree healthcare Death plan benefits plan Total Year ended June 30:
2019 (24,136) 175 (23,961) 2020 (24,136) 175 (23,961) 2021 (24,136) 175 (23,961) 2022 (24,136) 175 (23,961) 2023 (11,018) 34 (10,984)
Thereafter (10,246) 31 (10,215)
(117,808) 765 (117,043)
(j) Healthcare Reform Legislation The Patient Protection and Affordable Care Act (PPACA) was signed into law on March 23, 2010. One key provision of the PPACA is the assessment of the excise tax on high-cost plans beginning in 2018.
Under this act, a 40% excise tax applies to plans with costs exceeding certain annual thresholds for non-Medicare retirees aged 55-64 ($11,850 for single coverage, and $30,950 for family coverage). For all other retirees, the thresholds in 2018 are $10,200 for single coverage and $27,500 for family coverage. Significant uncertainties exist regarding the impact of the excise tax on high-cost plans without further regulatory guidance. Management estimated the potential impact of this tax on the liability is based on unadjusted thresholds and assuming the tax is shared between the Department and its participants in the same way that the current costs are shared. The estimated impact of the 40%
excise tax provision on high-cost plans beginning in 2018, under the healthcare reform, is reflected in all actuarial valuation reports after July 1, 2010.
(k) Disability Benefits The Power Systems allocated share of disability benefit plan costs and administrative expenses totaled $12.5 million and $12.0 million for the fiscal years 2019 and 2018, respectively. Disability benefits are paid to active employees who qualify under the Plans provisions and terminate with the employees retirement.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
(16) Other Long-Term Liabilities and Deferred Inflows (a) Other Long-Term Liabilities and Deferred Inflows The Power System has the following other long-term liabilities and deferred inflows (amounts in thousands):
Balance, Balance, June 30, June 30, 2018 Additions Reductions 2019 Deferred inflows from regulated business activities:
Rate stabilization $ 100,000 100,000 Green Power Program 3,720 1,152 4,872
$ 103,720 1,152 104,872 Accrued workers compensation claims $ 70,474 70,474 Other liabilities Derivative instrument liabilities 22,204 (15,189) 7,015 Environmental remediation liability 68,347 25,580 93,927
$ 90,551 25,580 (15,189) 100,942 Balance, Balance, June 30, June 30, 2017 Additions Reductions 2018 Deferred inflows from regulated business activities:
Rate stabilization $ 100,000 100,000 Green Power Program 3,627 93 3,720
$ 103,627 93 103,720 Accrued workers compensation claims $ 67,410 3,064 70,474 Other liabilities:
Derivative instrument liabilities 14,640 7,564 22,204 Environmental remediation liability 38,043 30,304 68,347
$ 52,683 37,868 90,551 (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
(b) Deferred Inflows from Regulated Business Activities The Power System has deferred inflows that are related to revenue collected from customers but have not been earned. These funds are deferred and recognized as costs related to these deferrals are incurred.
(i) Rate Stabilization Account In April 2008, the Citys council approved an amendment to the electric rate ordinance, which required the balance of the rate stabilization account to be maintained separately from the energy cost adjustment account. The ordinance also directed that the deferred amount within the energy cost adjustment account be the beginning balance of the rate stabilization account.
In August 2017, the Board passed resolutions setting the rate stabilization target at $100 million as of June 30, 2017, recognizing the amount above the $100 million in the rate stabilization account as other operating income and creating a rate stabilization fund to match the $100 million in the rate stabilization account. As of June 30, 2019 and 2018, the balance in the rate stabilization account was $100 million.
(c) Accrued Workers Compensation Claims Liabilities for unpaid workers' compensation claims are recorded at their net present value when they are probable of occurrence and the amount can be reasonably estimated. The liability is actuarially determined based on an estimate of the present value of the claims outstanding and an amount for claim events incurred but not reported based on the Power Systems loss experience, less the amount of claims and settlements paid to date. The discount rate used to calculate the accrued workers compensation liability as presented in the statements of net position was 2% at both June 30, 2019 and 2018. The Power System has third-party insurance coverage for workers compensation claims over
$600,000.
Overall indicated reserves for workers compensation claims for both the Water System and the Power System, undiscounted, have been estimated at $88 million and $120 million for both June 30, 2019 and 2018. Workers compensation claims typically take longer than one year to settle and close out. The entire discounted liability is shown as long term on the statements of net position as of June 30, 2019 and 2018.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
Changes in the Departments undiscounted workers compensation liability since June 30, 2017 are summarized as follows (amounts in thousands);
June 30 2019 2018 2017 Balance at beginning of year 120,026 115,104 103,699 Current year claims and changes in estimates (4,121) 34,292 37,501 Payments applied (27,665) (29,370) (26,096)
Balance at end of year 88,240 120,026 115,104 The Power Systems portion of the discounted accrued workers compensation liability is estimated at
$70 million for both June 30, 2019 and 2018.
(17) Related Parties (a) City of Los Angeles Under the provisions of the Citys charter, the Power System transfers funds at its discretion to the reserve fund of the City. Pursuant to covenants contained in the bond indentures, the transfers may not be in excess of the increase in net position before transfers to the reserve fund of the City of the prior fiscal year. Management believes such payments are not in $27 lieu of taxes and are recorded as a transfer in the statements of revenue, expenses, and changes in net position. The Power System also reimburses the City for administrative and Office of Public Accountability costs incurred on behalf of the Power System. During fiscal years 2019 and 2018, the Power System transferred $233 million and
$242 million in transfers and $28 million and $27 million in administrative and Office of Public Accountability reimbursements to the City. See note 18(a).
(b) Southern California Public Power Authority SCPPA is a California Joint Powers Agency that finances the construction or acquisition of generation, transmission, and renewable energy projects. The Power System is a member of SCPPA and records its transactions as purchased power expense. See note 5 of the financial statements for a description of the purchased power commitments the Power System has with SCPPA.
(c) Intermountain Power Agency The Intermountain Power Agency (IPA) is an agency of the State of Utah established to own, acquire, construct, operate, maintain, and repair the Intermountain Power Project. The Power System serves as the project manager and operating agent of IPP. See note 5 for of the financial statements for a description of the financial activities of IPA.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
(d) La Kretz Innovative Campus The Power System has entered into a 50-year prepaid lease agreement for $12 million to lease an office building to the La Kretz Innovative Campus (LKIC), a 501(c)(3) nonprofit organization. LKIC prepaid the lease in fiscal year 2015, and the $12 million is amortized to other nonoperating income starting February 2016. LKIC, in turn, leases some of the work spaces in the building to assist energy innovation companies with the resources needed to validate energy-efficient technology. The Power System does have energy efficiency staff also located at the building to work with inventors and determine if there are new energy efficiency programs to launch.
(18) Commitments and Contingencies (a) Transfers to the Reserve Fund of the City of Los Angeles Under the provisions of the Citys charter, the Power System transfers funds at its discretion to the reserve fund of the City. Pursuant to covenants contained in the bond indentures, the transfers may not be in excess of the increase in fund net assets before transfers to the reserve fund of the City of the prior fiscal year. Such payments are not in lieu of taxes and are recorded as a transfer in the statements of revenue, expenses, and changes in fund net assets.
On September 14, 2017, the Los Angeles County Superior Court preliminarily approved a settlement of a class action lawsuit under which revenue collected under the 2016 Incremental Electric Rate Ordinance (the 2016 Ordinance) is precluded from being transferred to the reserve fund of the City. As of June 30, 2017, the Power System had billed approximately $52 million under the 2016 Ordinance that under-the-settlement agreement needed to be returned to customers net of attorneys fees and other administrative costs. Accordingly, for the fiscal year ended June 30, 2017, the Power System reduced retail revenue by the same $52 million and increased current accrued expenses accordingly.
In October 2017, $52 million was placed in an escrow account for return to customers. Upon proof of such return, the Power System can request funds from the escrow account accordingly. Going forward, the 2016 Ordinance rates will be reduced through the variable energy cost adjustment so that no revenue for transfers is billed under the 2016 Ordinance.
During fiscal year 2019, the 2008 Electric Rate Ordinance (the 2008 Ordinance) and the 2016 Ordinance were in effect. Revenue from each ordinance is listed below as well as revenue from other sources, including contracts for wholesale energy and transmission revenue. The 12.628 cents under the 2008 Ordinance is determined based on the fiscal years revenue billed and kilowatt hour (kWh) usage as of November 3, 2010. The 2008 Ordinance was the only ordinance in effect at that time.
(Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
The following table relates to revenue billed to customers for the year ended June 30, 2019; Basis of under the 2008 Revenue type revenue kWh ordinance Revenue Retail sales TTie 2008 Ordinance 21,961,383 $ 0,12628 $ 2,773,283 Retail sales Rie 2016 Ordinance 21,961,383 1,180,716 Wholesale sales Contract 28,817 Transmission sales Contract 72,569 Rent from electric property Contract 1,519 Other service charges Fee schedule 21,765 Unbilled sales Estimated 20,223 Bad debt expense Estimated (27,962)
Total operating revenue 4,070,930 The following table relates to revenue billed to customers for the year ended June 30, 2018:
Rate per kWh Basis of under the 2008 Revenue type revenue kWh ordinance Revenue Retail sales The 2008 Ordinance 22,383,310 $ 0.12628 $ 2,826,564 Retail sales The 2016 Ordinance 22,383,310 834,552 Wholesale sales Contract 6,256 Transmission sales Contract 74,918 Rent from electric property Contract 1,451 Other service charges Fee schedule 22,591 Unbilled sales Estimated 70,885 Bad debt expense Estimated (32,996)
Total operating revenue 3,804,221 The Power System authorized total transfers of $233 million and $242 million in fiscal years 2019 and 2018, respectively, from the Power System to the reserve fund of the City.
(b) Asset Retirement Obligations As described in note 2, the Power System adopted GASB Statement No. 83, Certain Asset Retirement Obligations, in fiscal year 2019, retroactive to July 1, 2017. This standard required the Power System to record a liability and deferred outflow associated with the retirement of tangible capital assets that it has an enforceable legal obligation to retire. GASB 83 requires governmental entities to record a liability and a corresponding deferred outflow at the time there is an external obligating event such as a federal or state regulation, a legally binding contract or court judgment and when there is an internal obligating event which is at the time an asset is acquired or if constructed placed in service. In 98 (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30. 2019 and 2018 (In thousands) accordance with GASB 83, the Power System estimated and recorded its asset retirement obligations at the current value of outlays expected to be incurred using site specific cost studies performed by third-party consultants or published cost studies of similar sites. Current value is the amount that would be paid if all equipment, facilities, and services included in the estimate were acquired at the end of the current reporting period. This approach includes probability weighting of potential outcomes when this data can be obtained at a reasonable cost.
The Power System is the minority owner of Palo Verde Nuclear Generating System. The Power Systems minority share interest is 5.7% of the total decommissioning liability of $2,962,612 and
$2,848,665 at June 30, 2019 and 2018. Arizona Public Service has operating responsibility as well as minority interest (29.1%). Other minority owners are Salt River Project (17.5%), El Paso Electric Company (15.8%), Public Service Company of New Mexico (10.2%) and Southern California Public Power Authority (5.9%). In accordance with GASB 83, the Power System recorded its proportionate share of the asset retirement obligation based on its ownership percentage of estimates made by the primary owner of the asset which measures its liability under standards set by the Financial Accounting Standards Board.
The Power System had the following asset retirement obligations at June 30, 2019; Timeframe required June 30, June 30, Asset Obligating event for decommissoninq 2018 Additions Payments 2019 Navajo Generating Station Legal agreement resulting from Sales Plant will be out of commission Contract with Salt River Project as of December 20f 9 $ 102,623 (21,473) 81,150 Palo Verde Nuciear Generating Ovmership agreement Unit f: June 1,2045 Station Unit 2: April 24,2046 Unit 3: November 25,2047 162.374 6,495 168,869 Other 2029-2064 16,239 427 16,666 Lessee or ownership agreements -
Total asset retirement obligation liability $ 281.236 6,922 (21,473) 266,685 The Power System had the following asset retirement obligations at June 30, 2018:
Timeframe required June 30, June 30, Asset Obliaabng event for decommissioning 2017 Additions Payments 2018 Navajo Generating Station Legal agreement resulting from Sales Plant will be out of commission Contract with Salt River Project as of December 2019 $ 111,579 (8,956) 102,623 Palo Verde Nuclear Generating Ownership agreement Unit 1: June 1,2045 Station Unit 2: April 24, 2046 Unit 3: November 25,2047 156,129 6,245 162,374 Other 2029-2064 15,877 362 16,239 Lessee or ownership agreements -
Total asset retirement obligation liability $ 263,585 6,607 (8,956) 281.236 The Power System amortizes its deferred outflows using the straight-line method over the remaining useful life of the asset or lease term, if leased. The liability is reduced as actual decommissioning costs are paid. Amortization of the deferred outflow is recorded as operating and maintenance expense in the 99 (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands) statements of revenue, expenses, and changes in net position. Prior to the adoption of GASB 83, the Power System had funded an obligation for decommissioning of Palo Verde Nuclear Generating Station. The Power System has restricted investments in the amount of $140.7 million and $134 million for the years ended June 30, 2019 and 2018 related to this reserve and has reduced the deferred outflow related to this asset retirement obligation by these amounts.
Deferred outflows related to the Power Systems assets retirement obligations are as follows for the year ended June 30, 2019:
Remaining useful life of asset/ June 30, June 30, Asset lease term 2018 Additions /Amortization 2019 Navajo Generating Station 1 102,623 (102,623)
Palo V^rde Nuclear Generating Station 29 8,797 6,495 (429) 14,863 Other 1146 16,239 427 (1,540) 15,126 Total deferred outflows -
asset retirement obligations 127,659 6,922 (104,592) 29,989 In fiscal year 2019, the Power System amortized the remaining balance of its deferred outflow on the Navajo Generating Station due to the announcement of the plants closure in December 2019.
Deferred outflows related to the Power Systems assets retirement obligations are as follows for the year ended June 30, 2018:
Remaining useful life of asset/ June 30, June 30, Asset lease term 2017 Additions /Amortization 2018 Navajo Generating Station 2 111,579 (8,956) 102,623 Palo Verde Nuclear Generating Station 30 2,552 6,245 8,797 Other 30^7 15,877 362 16,239 Total deferred outflows -
asset retirement obligations 130,008 6,607 (8,956) 127,659 (c) Environmental Liabilities Numerous federal, state, and local environmental laws and regulations affect the Power Systems facilities and operations. The Power System monitors its compliance with laws and regulations and reviews its remediation obligations on an ongoing basis. The Power System follows GASB Statement No. 49, Accounting and Financial Reporting for Pollution and Remediation Obligations. This statement addresses accounting and financial reporting standards for pollution (including contamination) remediation obligations, which are obligations to address the current or potential detrimental effects of 100 (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands) existing pollution by participating in pollution remediation activities, such as site assessments and cleanups.
The Power System estimates its environmental liabilities using the expected cash flow method as required by GASB 49. This method estimates the current value of outlays expected to be incurred measured as a sum of the probability weighted amounts in a range of possible estimated amounts. The Power Systems environmental liabilities are primarily related to generating and service stations they own that have had release of hazardous materials or waste they are obligated by a regulator to clean up. The estimated time frame for clean-up and monitoring of these sites is 5-25 years. The Power Systems obligations are included in other noncurrent liabilities on the statements of net position and were approximately $94 million and $68 million as of June 30, 2019 and 2018, respectively. These estimates are reviewed and updated annually.
(d) Litigation A number of claims and suits are pending against the Power System for alleged damages to persons and property and for other alleged liabilities arising out of its operations. In the opinion of management, any ultimate liability, which may arise from these actions, is not expected to materially impact the Power Systems financial position, results of operations, or cash flows as of June 30, 2019.
(e) Risk Management The Power System is subject to certain business risks common to the utility industry. The majority of these risks are mitigated by external insurance coverage obtained by the Power System. For other significant business risks, however, the Power System has elected to self-insure. Management believes that exposure to loss arising out of self-insured business risks will not materially impact the Power Systems financial position, results of operations, or cash flows as of June 30, 2019.
(f) Credit Risk Financial instruments, which potentially expose the Power System to concentrations of credit risk, consist primarily of retail and wholesale receivables. The Power Systems retail customer base is concentrated on commercial, industrial, residential, and governmental customers located within the City. Although the Power System is directly affected by the Citys economy, management does not believe significant credit risk exists as of June 30, 2019 except as provided in the allowance for losses.
The Power System manages its credit exposure by requiring credit enhancements from certain customers and through procedures designed to identify and monitor credit.
(19) Subsequent Events (a) Bond Sale In October 2019, the Power System issued $325 million of revenue bonds, 2019 Series C. The net proceeds of $410.5 million, including a $85.5 million issue premium net of underwriters discount, were deposited into the construction fund to be used for capital improvements.
101 (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Notes to Financial Statements June 30, 2019 and 2018 (In thousands)
(b) FBI Investigation In July 2019, the Federal Bureau of Investigation began conducting an investigation of the Department and the Office of the City Attorney. The Department is cooperating fully with the investigators. The Department has been requested by the investigating agency to exercise confidentiality with respect to the investigation. The Department can generally state that the search warrants served by the Federal Bureau of Investigation on the Department and the Office of the City Attorney relate to issues that have arisen over the class action litigation and settlement regarding the Departments billing system and the lawsuit against Price Waterhouse Coopers. Based on the Departments understanding of the nature of the investigation and the current status of the lawsuits relating to the new billing system, the Department does not believe that the investigation or the billing-system-related lawsuits will have a material adverse effect on the Departments operations or financial position.
102
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Required Supplementary Information June 30, 2019 (Unaudited)
Schedule of the Power Systems Proportionate Share of the Net Pension Liability*
Last 10 Fiscal Years*
(Amounts in thousands other than percentages) 2019 2018** 2017 2016 2015 Power Systems proportion of the collective net pension liability 67.879% 68.252% 68.108% 67.397% 67.656%
Power Systems proportionate share of the collective net pension liability $ 618,010 916,758 1,492,508 771,121 860,748 Power Systems covered-employee payroll 647,319 609,035 586,967 565,605 554,731 Power Systems proportionate share of the collective net pension liability as a percentage of covered payroll 95.47% 150.53% 254.27% 136.34% 155.16%
Pension plans fiduciary net position as a percentage of total pension liability 93.10% 89.39% 82.17% 89.80 % 88.41 %
- The Power System implemented GASB Statement No. 68 effective July 1, 2013; therefore, no information is available for the measurement periods prior to July 1,2013.
- The measurement period for each year presented is on a one-year lag and thus the measurement periods are June 30, 2014-2018 for the Power Systems fiscal years of June 30, 2015-2019, respectively.
See accompanying independent auditors report.
103 (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Required Supplementary Information June 30, 2019 (Unaudited)
Schedule of the Departments Pension Contributions
- Last 10 Fiscal Years Contributions in relation to the Contributions Reporting date for Actuarially actuarially Contributions Power Systems as a percentage Power System determined required deficiency covered of covered June 30' contributions'^ contributions payroll payroll (excess) 2019 $ 408,750,192 410,165,124 (1,414,932) 1,028,212,002 39.89 %
2018 425,512,236 433,412,569 (7,900,333) 953,635,670 45.45 2017 403,780,319 391,717,359 12,062,960 892,331,196 43.90 2016 368,599,924 362,359,894 6,240,030 861,818,854 42.05 2015 387,464,759 376,902,022 10,562,737 839,213,254 44.91 2014 387,823,989 384,265,892 3,558,097 819,923,866 46.87 2013 376,667,610 368,426,348 8,241,262 817,421,028 45.07 2012 336,874,865 321,688,919 15,185,946 819,923,866 39.23 2011 304,431,910 286,699,384 17,732,526 791,760,493 36.21 2010 200,578,728 201,034,807 (456,079) 767,912,436 26.18 The measurement date under GASB Statement No. 68 is on a one-year lag.
All actuarially determined contributions through June 30, 2015 were determined as the annual requirement under GASB Statements No. 25 and No. 27.
Contributions do not include administrative expenses paid to the Plan.
- Information in this schedule was not separately available for the Power System.
See accompanying independent auditors' report.
104 (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Required Supplementary Information June 30, 2019 (Unaudited)
Schedule of Power Systems Proportionate Share of the Net OPEB Liability - Retiree Healthcare Plan Last 10 Fiscal Years (Amounts in thousands other than percentages)
Proportionate share of the Plans net OPEB fiduciary net Proportionate Proportionate liability as position as a share of share of a percentage percentage of Reporting date of Measurement net OPEB net OPEB Projected Covered of covered the total employer date liability liability compensation payroll payroll OPEB liability June 30,2019 June 30,2018 67.88 % $ 260,393 728,719 $ 647,319 40.23 % 84.46 %
June 30,2018 June 30,2017 68.25 297,306 676,930 609,032 48.82 81.44 See accompanying independent auditors report.
105 (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Required Supplementary Information June 30. 2019 (Unaudited)
Schedule of Power Systems Proportionate Share of the Net OPEB Liability - Death Benefit Plan Last 10 Fiscal Years (Amounts in thousands other than percentages)
Proportionate share of the Plans net OPEB fiduciary net Proportionate Proportionate liability as position as a share of share of a percentage percentage of Reporting date of Measurement net OPEB net OPEB Projected Covered of covered the total employer date liability liability compensation payroll payroll OPEB liability June 30,2019 June 30,2018 67.88 % $ 79,188 728,719 $ 647,319 12.23 % 18.91 %
June 30,2018 June 30,2017 68.25 81,372 676,930 609,032 13.36 18.79 See accompanying independent auditors report.
106 (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Required Supplementary Information June 30, 2019 (Unaudited)
Schedule of Department Contributions - Retiree Healthcare Plan*
Last 10 Fiscal Years (Amounts in thousands other than percentages)
Contributions in relation to the Contributions Reporting date for the Actuariatly actuarially Contributions Power Systems as a percentage Power System, determined required deficiency covered of covered June 30 contributions' contributions (excess) payroll payroll___
2019 $ 80,851 S 101,595 (20,744) 1,028,212 9,88 %
2018 85,339 95,233 (9,894) 953,635 9.99 2017 93,920 90,310 3,610 892,332 10.12 2016 61,971 79,896 (17,925) 861,819 9.27 2015 70,748 78,497 (7,749) 839,214 9.35 2014 58,453 74,106 (15,653) 819,924 9.04 2013 36,908 67,563 (30,655) 817,421 8.27 2012 40,095 101,721 (61,626) 805,607 12,63 2011 66,188 140,133 (73,945) 791,760 17.70 2010 56,294 160,237 (103,943) 767,912 20.87 All actuarially determined contributions through June 30, 2017 were determined as the annual requirement under GASB Statements No. 43 and No. 45.
Contributions do not include administrative expenses paid to the Plan.
- Information in this schedule was not separately available for the Power System.
See accompanying independent auditors' report.
107 (Continued)
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES POWER SYSTEM Required Supplementary Information June 30, 2019 (Unaudited)
Schedule of Department Contributions - Death Benefit Pian
- Last 10 Fiscal Years (Amounts in thousands other than percentages)
Contributions in relation to the Contributions Reporting date for the Actuarially actuarially Contributions as a percentage Power System, determined required deficiency Covered of covered contributions* contributions (excess) payroll payroll June 30 2019 $ 7,260 7,260 1,028,212 0.71 %
2018 7,137 7,137
_ 953,636 0.75 2017 7,138 7,138 892,332 0.80 Contributions do not include administrative expenses paid to the Plan.
- Information in this schedule was not available separately for the Power System.
See accompanying independent auditors report.
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