ML15133A220: Difference between revisions
StriderTol (talk | contribs) (Created page by program invented by StriderTol) |
StriderTol (talk | contribs) (Created page by program invented by StriderTol) |
||
| (4 intermediate revisions by the same user not shown) | |||
| Line 2: | Line 2: | ||
| number = ML15133A220 | | number = ML15133A220 | ||
| issue date = 05/05/2015 | | issue date = 05/05/2015 | ||
| title = | | title = Kansas Electric Power Cooperative, Inc., 2014 Annual Report | ||
| author name = | | author name = | ||
| author affiliation = Kansas Electric Power Cooperative, Inc | | author affiliation = Kansas Electric Power Cooperative, Inc | ||
| Line 17: | Line 17: | ||
=Text= | =Text= | ||
{{#Wiki_filter:2014 Annual Report Kansas Electric Power Cooperative, Inc. | |||
Contents Page Page Financial Statements Organization and Resources ....................... 1 Balance Sheets ............................................ 14-15 Leadership Message ........................................ 2-5 Statements of Margin .......................... | |||
WCNOC disposes of all classes of its low-level radioactive waste at existing third-party repositories. | WCNOC disposes of all classes of its low-level radioactive waste at existing third-party repositories. | ||
Should disposal capability become unavailable, WCNOC is able to store its low-level radioactive | Should disposal capability become unavailable, WCNOC is able to store its low-level radioactive waste in an on-site facility for up to three years under current regulations. | ||
Nuclear Fuel -The cost of nuclear fuel in the process of refinement, conversion, enrichment | Nuclear Fuel - The cost of nuclear fuel in the process of refinement, conversion, enrichment and fabrication is recorded as a utility plant asset at original cost and is amortized to nuclear fuel expenses based upon the quantity of heat produced for the generation of electric power. Under the Nuclear Waste Policy Act of 1982, the Department of Energy (DOE) is responsible for the permanent disposal of spent nuclear fuel. Wolf Creek paid into a federal Nuclear Waste Fund administered by the DOE a quarterly fee for the future disposal of spent nuclear fuel. In November 2013, a federal court of appeals ruled that the DOE must stop collecting this fee effective May 2014. KEPCo's share of the fee, calculated as one tenth of a cent for each kilowatt-hour of net nuclear generation delivered to customers, was $104,499 and $388,024 in 2014 and 2013, respectively. KEPCo included these costs in fuel and purchased power expense on the consolidated statements of margin. | ||
KEPCo included these costs in fuel and purchased | Nuclear Decommissioning - Nuclear decommissioning is a nuclear industry term for the permanent shutdown of a nuclear power plant and the removal of radioactive components in accordance with Nuclear Regulatory Commission (NRC) requirements. The NRC will terminate a plant's license and release the property for unrestricted use when a company has reduced the residual radioactivity of a nuclear plant to a level mandated by the NRC. The NRC requires companies with nuclear plants to prepare formal financial plans to fund nuclear decommissioning. These plans are designed so that sufficient funds required for nuclear decommissioning will be accumulated prior to the expiration of the license of the related nuclear power plant. Wolf Creek files a nuclear decommissioning site study with the KCC every three years. | ||
-Nuclear decommissioning is a nuclear industry term for the permanent shutdown of a nuclear power plant and the removal of radioactive components in accordance | The KCC reviews nuclear decommissioning plans in two phases. Phase one is the approval of the revised nuclear decommissioning study including the estimated costs to decommission the plant. Phase two involves the review and approval of a funding schedule prepared by the owner of the plant detailing how it plans to fund the future-year dollar amount of its pro rata share of the decommissioning costs. | ||
The NRC will terminate a plant's license | In 2011, the nuclear decommissioning study was revised. Based on the study, KEPCo's share of decommissioning costs, including decontamination, dismantling and site restoration, is estimated to be | ||
These plans are designed so | $37.8 million. This amount compares to the prior site study estimate of $35.6 million. The site study cost 20 | ||
Based on the study, KEPCo's share | |||
This amount compares to the prior site study estimate of $35.6 million. | Notes to Consolidated Financial Statements estimate represents the estimate to decommission Wolf Creek as of the site study year. The actual nuclear decommissioning costs may vary from the estimates because of changes in regulations and technologies as well as changes in costs for labor, materials, and equipment. | ||
The site study | KEPCo is allowed to recover nuclear decommissioning costs in its prices over a period equal to the operating license of Wolf Creek, which is through 2045. The NRC requires that funds sufficient to meet nuclear decommissioning obligations be held in a trust. KEPCo believes that the KCC approved funding level will also be sufficient to meet the NRC requirement. The consolidated financial results would be materially affected if KEPCo was not allowed to recover in its prices the full amount of the funding requirement. | ||
KEPCo is allowed to recover nuclear decommissioning costs in its prices over a period equal to | KEPCo recovered in its prices and deposited in an external trust fund for nuclear decommissioning approximately $0.5 million in 2014 and $0.5 million in 2013. KEPCo records its investment in the Nuclear Decommissioning Trust fund at fair value, which approximated $19.4 million and $17.8 million as of December 31, 2014 and 2013, respectively. | ||
The consolidated financial results would | Asset retirement obligation - KEPCo recognizes and estimates the legal obligation associated with the cost to decommission Wolf Creek. KEPCo initially recognized an asset retirement obligation at fair value for the estimated cost with a corresponding amount capitalized as part of the cost of the related long-lived asset and depreciated over the useful life. | ||
KEPCo recovered in its prices and deposited in an external trust fund for nuclear decommissioning approximately | A reconciliation of the asset retirement obligation for the years ended December 31, 2014 and 2013 is as follows: | ||
$0.5 million in 2014 and $0.5 million in 2013. KEPCo records its investment in | 2014 2013 Balance at January 1 $ 12,542,673 $ 11,810,322 Accretion 777,952 732,351 Balance at December 31 $ 13,320,625 $ 12,542,673 Any net margin effects are deferred in the Wolf Creek decommissioning regulatory asset and will be collected from members in future electric rates. | ||
$19.4 million and $17.8 | Cash and Cash Equivalents - All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents and are stated at cost, which approximates fair value. Cash equivalents consisted primarily of repurchase agreements, money market accounts and certificates of deposit. | ||
Asset retirement obligation | The Federal Deposit Insurance Corporation insures amounts held by each institution in the organization's name up to $250,000. At various times during the fiscal year, the organization's cash in bank balances exceeded the federally insured limits. | ||
-KEPCo recognizes and estimates the legal obligation associated | KEPCo's repurchase agreements have collateral pledged by a financial institution, which are securities that are backed by the federal government. | ||
$ 11,810,322 Accretion 777,952 732, | 21 | ||
$ 12,542,673 Any net margin effects are deferred in the Wolf Creek decommissioning regulatory asset and will | |||
-All highly liquid investments purchased with an original maturity of | Notes to Consolidated Financial Statements Accounts Receivable - Accounts receivable are stated at the amount billed to members and customers. KEPCo provides allowances for doubtful accounts, which is based upon a review of outstanding receivables, historical collection information and existing economic conditions. | ||
At various times during the fiscal year, the organization's cash | Materials and Supplies Inventory - Materials and supplies inventory are valued at average cost. | ||
21 Notes to Consolidated Financial Statements Accounts Receivable | Unamortized Debt Issuance Costs - Unamortized debt issue costs relate to the issuance of the floating/fixed rate pollution control revenue bonds, mortgage notes payable to the National Rural Utilities Cooperative Finance Corporation (CFC) trusts and fees for re-pricing the Federal Financing Bank (FFB) debt. These costs are being amortized using the effective interest method over the remaining life of the bonds and notes. | ||
-Accounts receivable are stated at the amount billed to members | Cash Surrender Value of Life Insurance Contracts - The following amounts related to Wolf Creek Nuclear Operating Corporation (WCNOC) corporate-owned life insurance contracts, primarily with one highly rated major insurance company, are included in other long-term assets on the consolidated balance sheets. 4 2014 20134 Cash surrender value of contracts $ 7,169,655 $ 6,814,094 Borrowings against contracts (6,922,117) (6,578,912) | ||
KEPCo provides allowances for doubtful | $ 247,538 $ 235,182 Borrowings against contracts include a prepaid interest charge. KEPCo pays interest on these borrowings at a rate of 5.00% for the years ended December 31, 2014 and 2013. | ||
Revenues - Revenues are recognized during the month the electricity is sold. Revenues from the sale of electricity are recorded based on usage by member cooperatives and customers and on contracts and scheduled power usages as appropriate. | |||
Materials and Supplies Inventory | Income Taxes - As a tax-exempt cooperative, KEPCo is exempt from income taxes under Section 501 (c)(12) of the Internal Revenue Code of 1986, as amended. Accordingly, provisions for income taxes have not been reflected in the accompanying consolidated financial statements. KEPCo is no longer subject to federal or state income tax examinations by taxing authorities for years prior to 2011. | ||
-Materials and supplies inventory are valued at average cost.Unamortized Debt Issuance Costs -Unamortized debt issue costs relate to the issuance of | KEPCo Services, Inc., a subsidiary of Kansas Electric Power Cooperative, Inc., is not exempt from income taxes. The organization's present accounting policy for the evaluation of uncertain tax positions is to review those positions on an annual basis. A liability would be recorded in the financial statements during the period which, based on all available evidence, management believes it is more likely than not that the tax position would not be sustained upon examination by taxing authorities and the liability would be incurred by the organization. | ||
-The following amounts related to Wolf | There has been no interest or penalties recognized neither in the statements of margin nor in the balance sheets related to uncertain tax positions. In addition, no tax positions exist for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next twelve months. Tax years with open statutes of limitations are 2011 and forward. | ||
22 | |||
$ 7,169,655 | |||
$ 6,814,094 Borrowings against contracts (6,922,117) | Notes to Consolidated Financial Statements (2) Factors That Could Affect Future Operating Results KEPCo currently applies accounting standards that recognize the economic effects of rate regulation and, accordingly, has recorded regulatory assets and liabilities related to its generation and transmission operations in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 980, Regulated Operations. In the event KEPCo determines that it no longer meets the criteria of ASC 980, the accounting impact could be a noncash charge to operations of an amount that would be material. Criteria that could give rise to the discontinuance of ASC 980 include: | ||
(6,578,912) | : 1) increasing competition that restricts KEPCo's ability to establish prices to recover specific costs and | ||
$ 247,538 $ 235, | : 2) a significant change in the manner in which rates are set by regulators from a cost-based regulation to another form of regulation. KEPCo periodically reviews these criteria to ensure the continuing application of ASC 980 is appropriate. Any changes that would require KEPCo to discontinue the application of ASC 980 due to increased competition, regulatory changes or other events may significantly impact the valuation of KEPCo's investment in utility plant, its investment in Wolf Creek and necessitate the write-off of regulatory assets. At this time, the effect of competition and the amount of regulatory assets that could be recovered in such an environment cannot be predicted. | ||
-Revenues are recognized during the month the electricity is sold. Revenues from the | The 1992 Energy Policy Act began the process of restructuring the United States electric utility industry by permitting the Federal Energy Regulatory Commission to order electric utilities to allow third parties to sell electric power to wholesale customers over their transmission systems. KEPCo has elected to deregulate its rate making for sales to its members under recent statutory amendments. | ||
Income Taxes -As a tax-exempt cooperative, KEPCo is exempt from income taxes under Section 501(c)(12) of the Internal Revenue Code of 1986, as amended. | Subject to the possibility of KCC review, KEPCo's member rates are now set by action of the Board. | ||
Accordingly, provisions for income | KEPCo's ability to timely recover its costs is enhanced by this change. | ||
KEPCo is no | (3) Departures From Generally Accepted Accounting Principles Effective February 1, 1987, the KCC issued an order to KEPCo requiring the use of present worth (sinking fund) depreciation and amortization. Such depreciation and amortization methods constituted phase-in plans that did not meet the requirements of ASC 980-340 Regulated Operation, Other Assets and Deferred Costs. | ||
Effective February 1, 2002, the KCC issued an order that extended the depreciable life of Wolf Creek from 40 years to 60 years. This order also permitted recovery in rates of the $53.5 million cumulative difference between historical present worth (sinking fund) depreciation and amortization and straight-line depreciation and amortization of the Wolf Creek generation plant and disallowed costs over a 15-year period. Recovery of these costs in rates is included in operating revenues, and the related amortization expense is included in deferred charges in the consolidated statements of margin. | |||
There has been no interest or penalties recognized neither in the statements of margin nor in | The effect of these departures from accounting principles generally accepted in the United States of America is to overstate (understate) the following items in the consolidated financial statements by the following amounts: | ||
In addition, no tax positions exist for which it | 2014 2013 Deferred charges $ 7,127,268 $ 10,690,902 Patronage capital $ 7,127,268 $ 10,690,902 Net margin $ (3,563,634) $ (3,563,634) 23 | ||
In the event KEPCo determines that it | |||
Criteria that could give rise to the discontinuance of ASC 980 include:1) increasing competition that restricts KEPCo's ability to establish prices to recover specific costs | Notes to Consolidated Financial Statements Wolf Creek Disallowed Costs - Effective October 1, 1985, the KCC issued a rate order relating to KEPCo's investment in Wolf Creek, which disallowed $26.0 million of KEPCo's investment in Wolf Creek ($8.8 million net of accumulated amortization as of December 31, 2014). A subsequent rate order, effective February 1, 1987, allows KEPCo to recover these disallowed costs and other costs related to the disallowed portion (recorded as deferred charges) for the period from September 3, 1985 through January 31, 1987, over a 27.736-year period starting February 1, 1987. Pursuant to a KCC rate order dated December 30, 1998, the disallowed portion's recovery period was extended to a 30-year period. Through December 31, 2001, KEPCo used the present worth (sinking fund) method to recover the disallowed costs, which enabled it to meet the times-interest-earned ratio and debt service requirements in the KCC rate order dated January 30, 1987. The method used by KEPCo through 2001 constituted a phase-in plan that did not meet the requirements of ASC 980-340, Regulated Operations, Other Assets and Deferred Costs. | ||
KEPCo periodically reviews these criteria to ensure the continuing application of ASC 980 is appropriate. | Effective February 1, 2002, the KCC issued an order permitting recovery in rates of the $6.5 million cumulative difference between historical present worth (sinking fund) and straight-line amortization of Wolf Creek disallowed costs over a 15-year period. Such depreciation practice does not constitute a phase-in plan that meets the requirements of ASC 980-340. | ||
Any changes that would require KEPCo to discontinue | If the disallowed costs were recovered using a method in accordance with U.S. generally accepted accounting principles, the costs would have been expensed in their entirety upon implementation of the KCC order, with a corresponding decrease in patronage capital. | ||
The 1992 Energy Policy Act began the process of restructuring the United States electric utility | Amortization of the Wolf Creek disallowed costs is included in amortization of disallowed charges and amounts to $0.8 million for each of the years ended December 31, 2014, and 2013. | ||
KEPCo has elected | Wolf Creek Deferred Plant Costs - Effective February 1, 2002, the KCC issued an order permitting recovery in rates of the $46.9 million cumulative difference between historical present worth (sinking fund) depreciation and straight-line depreciation of Wolf Creek generation plant over a 15-year period. | ||
Subject to the possibility of KCC review, KEPCo's member rates are now set by action of the Board.KEPCo's ability to timely recover its costs is enhanced by this change.(3) Departures From Generally Accepted Accounting Principles Effective February 1, 1987, the KCC issued an order to KEPCo requiring the use of present worth(sinking fund) depreciation and amortization. | Such depreciation practice does not constitute a phase-in plan that meets the requirements of ASC 980-340. In 2002, this cumulative difference was reclassified from utility plant allowance for depreciation to deferred charges on the consolidated balance sheets to reflect the amount as a regulatory asset. | ||
Such depreciation and amortization methods constituted phase-in plans that did not meet the requirements of ASC 980-340 Regulated Operation, Other | Amortization of the Wolf Creek deferred plant costs is included in amortization of deferred charges and amounts to $3.1 million for each of the years ended December 31, 2014 and 2013. | ||
If the deferred plant costs were recovered using a method in accordance with accounting principles generally accepted in the United States of America, the costs would have been expensed in their entirety upon implementation of the KCC order, with a corresponding decrease in patronage capital. | |||
$ 10,690,902 Patronage capital $ 7,127,268 | (4) Investments in Associated Organizations Investments in associated organizations are carried at cost. At December 31, 2014 and 2013, investments in associated organizations consisted of the following: | ||
$ 10,690,902 Net margin $ (3,563,634) | 24 | ||
$ (3,563,634) 23 Notes to Consolidated Financial Statements Wolf Creek Disallowed Costs -Effective October 1, 1985, the KCC issued a rate order relating | |||
$26.0 million of KEPCo's investment in | Notes to Consolidated Financial Statements 2014 2013 Cooperative Financial Corporation Memberships $ 1,000 $ 1,000 Capital term certificates 395,970 395,970 Patronage capital certificates 1,317,279 1,054,664 Equity term certificates 10,027,496 8,142,902 Member capital certificates - 2,500,000 11,741,745 12,094,536 Other 264,976 252,077 | ||
In 2002, this cumulative difference was reclassified from utility plant allowance | $ 12,006,721 $ 12,346,613 (5) Bond Fund Reserve KEPCo has entered into a bond covenant whereby KEPCo is required to maintain, with a trustee, a bond fund reserve of approximately $4.4 million. This stipulated amount is sufficient to satisfy certain future interest and principal obligations. The amount held in the bond fund reserve is invested by the trustee in tax-exempt municipal securities, pursuant to the restrictions of the indenture agreement, which are carried at amortized cost. | ||
24 Notes to Consolidated Financial Statements 2014 | (6) Deferred Charges Deferred Incremental Outage Costs - In 1991, the KCC issued an order that allowed KEPCo to defer its 6% share of the incremental operating, maintenance and replacement power costs associated with the periodic refueling of Wolf Creek. Such costs are deferred during each refueling outage and are being amortized over the approximate 18-month operating cycle coinciding with the recognition of the related revenues. Additions to the deferred incremental outage costs were $.6 million and $10.4 million in 2014 and 2013, respectively. The current year amortization of the deferred incremental outage costs was $5.7 million and $5.4 million in 2014 and 2013, respectively. | ||
$ 1,000 $ 1, | Other Deferred Charges - KEPCo includes in other deferred charges the early call premium resulting from refinancing. These early call premiums are amortized using the effective interest method over the remaining life of the new agreements. | ||
-2,500,000 11,741,745 12,094,536 Other 264,976 252,077$ 12,006,721 | (7) Line of Credit As of December 31, 2014, KEPCo has a $20 million line of credit available with the Cooperative Finance Corporation. There were no funds borrowed against the line of credit at December 31, 2014 and 2013. | ||
$ 12,346,613 (5) Bond Fund | The line of credit requires the Cooperative to pay down the balance to zero annually. Interest rates vary and were 2.90% at December 31, 2014 and 2013. This line of credit expires in March 3, 2017. | ||
$4.4 million. | At December 31, 2014, KEPCo has a $10 million line of credit available with CoBank, ACB. There were no funds borrowed against the line of credit at December 31, 2014 and 2013. Interest rate options, as selected by the Company, are a weekly quoted variable rate in which CoBank establishes a rate on the first business day of each week or a LIBOR option at a fixed rate equal to LIBOR plus 1.6%. This line of credit expires May 31, 2015. | ||
This stipulated amount is sufficient to satisfy | 25 | ||
The amount held in the bond fund reserve is invested by | |||
Additions to the deferred incremental outage costs were $.6 million and $10.4 | Notes to Consolidated Financial Statements (8) Short-Term Note Payable As of December 31, 2014 and 2013, KEPCo had a $1.4 million and $6.5 million short-term note payable to the Cooperative Finance Corporation at an interest rate of 3.08% and 2.5%, respectively. | ||
The current year amortization of the deferred incremental outage | (9) Long-Term Debt Long-term debt consists of mortgage notes payable to the United States of America acting through the Federal Financing Board, the CFC and others. Substantially all of KEPCo's assets are pledged as collateral. The terms of the notes as of December 31 are as follows: | ||
Other Deferred Charges -KEPCo includes in other deferred charges the early call | 2014 2013 Mortgage notes payable to the FFB at fixed rates varying from .818% to 9.21%, payable in quarterly installments through 2043 $ 62,732,450 $ 49,124,279 Mortgage notes payable to the Grantor Trust Series 1997 at a rate of 7.522%, payable semi-annually, principal payments commencing in 1999 and continuing annually through 2017 13,140,000 18,440,000 Floating/fixed rate pollution control revenue bonds, City of Burlington, Kansas, Pooled Series 1985C, variable interest rate of .34%, payable annually through 2015 1,995,000 5,795,000 Note payable to CoBank at a rate of 3.03%, payable in E quarterly installments through 2023 1,111,684 1,228,745 I Mortgage notes payable, equity certificate loans and member capital security notes to the CFC at fixed rates of 2.45% to 7.50%, payable quarterly through 2045 88,831,738 88,365,951 167,810,872 162,953,975 Less current maturities (15,683,929) (22,493,911) | ||
These early call premiums are amortized using the effective interest | $ 152,126,943 $ 140,460,064 Aggregate maturities of long-term debt for the next five years and thereafter are as follows: | ||
(7) Line of | 2015 $ 15,683,929 2016 10,678,447 2017 9,806,759 2018 6,421,411 2019 6,531,740 Thereafter 118,688,586 | ||
There were no funds borrowed against the line of credit at December 31, 2014 and 2013.The line of credit requires the Cooperative to pay down the balance to zero annually. | $ 167,810,872 26 | ||
Interest rates | |||
(9) Long-Term | Notes to Consolidated Financial Statements Restrictive covenants related to the CFC debt require KEPCo to design rates that would enable it to maintain a times-interest earned ratio of at least 1.05 and debt-service coverage ratio of at least 1.0, on average, in the two best years out of the three most recent calendar years. The covenants also prohibit distribution of net patronage capital or margins until, after giving effect to any such distribution, total patronage capital equals or exceeds 20% of total assets, unless such distribution is approved by the Rural Utility Service. KEPCo was in compliance with such restrictive covenants as of December 31, 2014 and 2013. | ||
The terms of the notes as of December 31 are as follows:Mortgage notes payable to the FFB at | Restriction covenants related to the CoBank debt require KEPCo to design rates that would enable it to maintain a debt-service coverage ratio, as defined by CoBank of at least 1.10. KEPCo was in compliance with the restrictive covenant as of December 31, 2014 and 2013. | ||
$ 152,126,943 | In 1997, KEPCo refinanced its mortgage notes payable to the 1988 CFC Grantor Trust through the establishment of a new CFC Grantor Trust Series 1997 (the Series 1997 Trust) by CFC. This refinancing reduced the guaranteed interest rate payable on the mortgage notes to a fixed rate of 7.522%. The mortgage notes payable are pre-payable at any time with no prepayment penalties. The Trust holds certain rights KEPCo assigned to the Trust under an interest rate swap agreement. The swap agreement was put into place in order to mitigate the interest rate risk inherent in the Trust, which holds a fixed rate asset with a variable rate obligation. | ||
$ 140,460,064 Aggregate maturities of long-term debt for the next five years and thereafter are as follows:2015 $ 15,683,929 2016 10,678,447 2017 9,806,759 2018 6,421,411 2019 6,531,740 Thereafter 118,688,586 | The swap agreement terminates in 2017, but is subject to early termination upon the early redemption of the debt. However, any termination costs relating to the termination of the assigned interest rate swaps is KEPCo's responsibility. At December 31, 2014, the termination obligation associated with the assigned swap agreement to early retire the mortgage notes payable is approximately $1.5 million. | ||
$ 167,810,872 26 Notes to Consolidated Financial Statements Restrictive covenants related to the CFC debt require KEPCo to design rates that would enable it | This fair value estimate is based on information available at December 31, 2014, and is expected to fluctuate in the future based on changes in interest rates and outstanding principal balance. | ||
KEPCo was in compliance with such restrictive covenants as of December 31,2014 and 2013.Restriction covenants related to the CoBank debt require KEPCo to design rates that would enable it | KEPCo also is exposed to possible credit loss in the event of noncompliance by the counterparty to the swap agreement. However, KEPCo does not anticipate nonperformance by the counterparty. | ||
(10) Benefit Plans National Rural Electric Cooperative Association (NRECA) Retirement and Security Program - KEPCo participates in the NRECA Retirement and Security Program for its employees. | |||
The NRECA is a defined benefit pension plan qualified under Section 401 and tax-exempt under Section 501(a) of the Internal Revenue Code. It is a multiemployer plan under the accounting standards. | |||
The swap agreement terminates in 2017, but is subject to early termination upon the early redemption | The plans sponsor's Employer Identification Number is 53-0116145 and the Plan Number is 333. | ||
At December 31, 2014, the termination obligation associated with | A unique characteristic of a multiemployer plan compared to a single employer plan is that all plan assets are available to pay benefits of any plan participant. Separate asset accounts are not maintained for participating employers. This means that assets contributed by one employer may be used to provide benefits to employees of other participating employers. | ||
$1.5 million.This fair value estimate is based on information available at December 31, 2014, and is expected | KEPCo's contributions to the RS Plan in 2014 and 2013 represented less than 5 percent of the total contributions made to the plan by all participating employers. KEPCo's expense under this program was approximately $0.4 million and $0.4 million, for the year ended December 31, 2014 and 2013, respectively. There have been no significant changes that affect the comparability of 2014 and 2013 contributions. | ||
27 | |||
(10) Benefit | |||
The NRECA is a defined benefit pension plan qualified under Section 401 and tax-exempt | Notes to Consolidated Financial Statements For the RS Plan, a "zone status" determination is not required, and therefore not determined, under the Pension Protection Act (PPA) of 2006. In addition, the accumulated benefit obligations and plan assets are not determined or allocated separately by individual employer. In total, the RS Plan was over 80 percent funded on January 1, 2014, and over 80 percent funded on January 1, 2013, based on the PPA funding target and PPA actuarial value of assets on those dates. | ||
The plans sponsor's Employer Identification Number is 53-0116145 and the Plan Number is 333.A unique characteristic of a multiemployer plan compared to a single employer plan is that all | Because the provisions of the PPA do not apply to the RS Plan, funding improvement plans and surcharges are not applicable. Future contribution requirements are determined each year as part of the actuarial valuation of the plan and may change as a result of plan experience. | ||
Separate asset accounts are not maintained for participating employers. | NRECA Savings 401(k) Plan - All employees of KEPCo are eligible to participate in the NRECA Savings 401(k) Plan. Under the plan, KEPCo contributes an amount not to exceed 5%, dependent upon each employee's level of participation and completion of one year of service, of the respective employee's base pay to provide additional retirement benefits. KEPCo contributed approximately | ||
This means that assets contributed by one employer may be used | $90,000 to the plan for the years ended December 31, 2014 and 2013. | ||
KEPCo's contributions to the RS Plan in 2014 and 2013 represented less than 5 percent of the | WCNOC Pension and Postretirement Plans - KEPCo has an obligation to the WCNOC retirement, supplemental retirement and postretirement medical plans for its 6% ownership interest in Wolf Creek. | ||
KEPCo's expense under this program | The plans provide for benefits upon retirement, normally at age 65. In accordance with the Employee Retirement Income Security Act of 1974, KEPCo has satisfied its minimum funding requirements. | ||
$0.4 million and $0.4 million, for the year ended December 31, 2014 and 2013,respectively. | |||
There have been no significant changes that affect the comparability of 2014 and | |||
27 Notes to Consolidated Financial Statements For the RS Plan, a "zone status" determination is not required, and therefore not determined, under | |||
In total, the RS Plan was over | |||
Future contribution requirements are determined each year as part | |||
NRECA Savings 401(k) Plan -All employees of KEPCo are eligible to participate in the | |||
KEPCo contributed approximately | |||
$90,000 to the plan for the years ended December 31, 2014 and 2013.WCNOC Pension and Postretirement Plans -KEPCo has an obligation to the WCNOC retirement, supplemental retirement and postretirement medical plans for its 6% ownership interest in Wolf Creek.The plans provide for benefits upon retirement, normally at age 65. In accordance with the | |||
Benefits under the plans reflect the employee's compensation, years of service and age at retirement. | Benefits under the plans reflect the employee's compensation, years of service and age at retirement. | ||
WCNOC uses a measurement date of December 31 for its retirement plan, supplemental retirement plan and postretirement plan (collectively, the Plans). Information about KEPCo's 6% of the Plans'funded status is on the following page.28 Notes to Consolidated Financial Statements Pension Benefits Postretirement | WCNOC uses a measurement date of December 31 for its retirement plan, supplemental retirement plan and postretirement plan (collectively, the Plans). Information about KEPCo's 6% of the Plans' funded status is on the following page. | ||
Benefit obligation beginning | 28 | ||
Notes to Consolidated Financial Statements Pension Benefits Postretirement Benefits 2014 2013 2014 2013 Change in benefit obligation: | |||
( | Benefit obligation beginning of year $ 20,785,543 $ 22,581,857 $ 1,277,753 $ 1,406,813 Service cost 726,956 872,519 22,122 26,348 Interest cost 1,081,152 965,450 59,182 52,648 Plan participants' contributions 97,847 88,823 Benefits paid (643,257) (555,243) (164,795) (130,531) | ||
$ 20,785,543 | Actuarial (gains) losses 4,898,967 (3,079,040) (240,184) (166,348) | ||
$ 1, | Benefit obligations, end of year $ 26,849,361 $ 20,785,543 $ 1,051,925 $ 1,277,753 Change in plan assets: | ||
Fair value of plan assets, beginning of year $ 14,646,824 $ 12,517,154 $ 1,990 $ 1,698 Actual return on plan assets 973,542 1,680,711 Employer contributions 905,022 973,210 65,720 42,000 Plan participants' contributions 97,847 88,823 Benefits paid (611,384) (524,251) (164,795) (130,531) | |||
$ | Fair value of plan assets, end of year 15,914,004 14,646,824 762 1,990 Funded status, end ofyear $ (10,935,357) $ (6,138,719) $ (1,051,163) $ (1,275,763) | ||
$ 1, | Amounts recognized in the consolidated balance sheets: | ||
( | 2014 2013 Other long-term liabilities Wolf Creek pension and postretirement benefit plans $ 12,004,519 $ 7,432,482 29 | ||
Notes to Consolidated Financial Statements Amounts recognized in accumulated other comprehensive income (loss) not yet recognized as components of net periodic benefit cost consist of: | |||
$ | Pension Benefits Postretirement Benefits 2014 2013 2014 2013 Net loss $ (8,304,185) $ (3,728,059) $ (3,718) $ (264,963) | ||
$1, | Prior service cost (71,323) (78,759) | ||
$ | Accumulated other comprehensive loss $ (8,375,508) $ (3,806,818) $ (3,718) $ (264,963) | ||
Information for the pension plan with an accumulated benefit obligation in excess of plan assets: | |||
Amounts recognized in | Pension Benefits Postretirement Benefits 2014 2013 2014 2013 Projected benefit obligation $ 26,849,361 $ 20,785,543 $ 1,051,925 $ 1,277,752 Accumulated benefit obligation 22,880,170 17,547,994 Fair value of plan assets $ 15,914,004 $ 14,646,824 $ 762 $ 1,990 Weighted average actuarial assumptions used to determine net periodic benefit obligation: | ||
Pension Ben efits Postretirement Benefits 2014 2013 2014 2013 Discount rate 4.20% 4.16% 4.70% 4.70% | |||
(71,323)$ (8,375,508) | Annual salary increase rate 4.00% 4.00% N/A N/A Wolf Creek uses a measurement date of December 31 for its pension and post-retirement benefit plans. The discount rate to determine the current year pension obligation and the following year's pension expense is based on a bond selection-settlement portfolio approach. This approach develops a discount rate by selecting a portfolio of high quality, non-callable corporate bonds that generate a sufficient cash flow to provide for the projected benefit payments of the plan. After the bond portfolio is selected, a single interest rate is determined that equates the present value of the plan's projected benefit payments discounted at this rate with the market value of the bonds selected. | ||
$ (3, | 30 | ||
Notes to Consolidated Financial Statements Pension Benefits Postretirement Benefits 2014 2013 2014 2013 Components of net periodic cost (benefit): | |||
Service cost $ 726,956 $ 872,519 $ 22,122 $ 26,348 Interest cost 1,081,152 965,450 59,182 52,648 Expected return on plan assets (1,031,989) (941,266) | |||
Information for the pension plan with an accumulated benefit obligation in excess of plan assets:Pension | Amortization Transition obligation, net 32 Prior service cost 7,436 7,436 Actuarial loss, net 381,287 691,984 21,062 33,807 Net periodic cost $1,164,842 $1,596,123 $ 102,366 $ 112,835 Other changes in plan obligations recognized in other comprehensive income: | ||
$ | Current year actuarial loss(gain) $4,957,414 $ (3,818,485) $ (240,184) $ (166,348) | ||
$ | Amortization of actuarial loss (381,287) (691,984) (21,062) (33,807) | ||
$ 14,646,824 | Amortization of prior service cost (7,436) (7,436) | ||
$ | Amortization of transition obligation Total recognized in other comprehensive income 4,568,691 (4,517,905) (261,246) (200,187) | ||
$ 1, | Total recognized in net periodic cost and other comprehensive income $ 5,733,533 $ (2,921,782) $ (158,880) $ (87,352) | ||
Weighted average actuarial assumptions used to determine net periodic cost: | |||
Pension Benefits | Discount rate 4.20% 4.16% 4.70% 4.70% | ||
This approach develops a discount rate by selecting a portfolio of high quality, non-callable corporate bonds that generate a sufficient cash flow to provide for | Expected long term return on plan assets 7.50% 7.50% N/A N/A Compensation rate increase 4.00% 4.00% N/A N/A 31 | ||
30 Notes to Consolidated Financial Statements Pension | |||
Service | Notes to Consolidated Financial Statements KEPCo estimates they will amortize the following amounts from regulatory assets into net periodic cost in 2015: | ||
Pension Postretirement Benefits Benefits Actuarial loss $ 381,287 $ 21,062 Prior service cost 7,436 _ | |||
Total $ 388,723 $ 21,062 The expected long-term rate of return on plan assets is based on historical and projected rates of return for current and planned asset classes in the plans' investment portfolios. Assumed projected rates of return for each asset class were selected after analyzing long-term historical experience and future expectations of the volatility of the various asset classes. Based on target asset allocations for each asset class, the overall expected rate of return for the portfolios was developed, adjusted for historical and expected experience of active portfolio management results compared to benchmark returns and for the effect of expenses paid from plan assets. | |||
For measurement purposes, the assumed annual health care cost growth rates were as follows: | |||
$ 102, | 2014 2013 Health care cost trend rate assumed for next year 7.00% 7.50% | ||
Rate to which the cost trend rate is assumed to decline 5.00% 5.00% | |||
( | Year that the rate reaches the ultimate trend rate 2019 2019 The health care cost trend rate affects the projected benefit obligation. A 1% change in assumed health care cost growth rates would have effects shown in the following table: | ||
$ ( | One percentage One percentage point increase point decrease Effect on total service and interest cost $ (1,050) $ 1,026 Effect on post-retirement benefit obligation $ (14,116) $ 14,448 In 2012, Wolf Creek changed its investment advisor resulting in the sale of its then existing levels 1, 2 and 3 investments and the purchase of other level 2 and 3 investments. Its pension and post-retirement plan investment strategy is to manage assets in a prudent manner with regard to preserving principal while providing reasonable returns. It has adopted a long-term investment horizon such that the chances and duration of investment losses are carefully weighed against the long-term potential for appreciation of assets. Part of its strategy includes managing interest rate sensitivity of plan assets relative to the 32 | ||
(21,062)(33,807)(7,436)4,568,691 (4,517,905) | Notes to Consolidated Financial Statements associated liabilities. The primary objective of the pension plan is to provide a source of retirement income for its participants and beneficiaries, and the primary financial objective of the plan is to improve its funded status. The primary objective of the post-retirement benefit plan is growth in assets and preservation of principal, while minimizing interim volatility, to meet anticipated claims of plan participants. Wolf Creek delegates the management of its pension and post-retirement benefit plan assets to independent investment advisors who hire and dismiss investment managers based upon various factors. The investment advisors strive to diversify investments across asset classes, sectors and manager styles to minimize the risk of large losses, based upon objectives and risk tolerance specified by Wolf Creek, which include allowable and/or prohibited investment types. It measures and monitors investment risk on an ongoing basis through quarterly investment portfolio reviews and annual liability measurements. | ||
(261,246) | The target allocations for Wolf Creek's pension plan assets are 31% to international equity securities, 25% to domestic equity securities, 25% to debt securities, 10% to real estate securities, 5% to commodity investments and 4% to other investments. The investments in both international and domestic equity include investments in large-, mid- and small-cap companies, private equity funds and investment funds with underlying investments similar to those previously mentioned. The investments in debt include core and high-yield bonds. Core bonds include funds invested in investment grade debt securities of corporate entities, obligations of U.S. and foreign governments and their agencies, and private debt securities. High-yield bonds include a fund with underlying investments in non-investment grade debt securities of corporate entities, private placements and bank debt. Real estate securities include funds invested in commercial and residential real estate properties while commodity investments include funds invested in commodity-related instruments. | ||
(200,187) | All of Wolf Creek's pension plan assets are recorded at fair value using daily net asset values as reported by the trustee. However, level 3 investments in real estate funds and alternative funds are invested in underlying investments that are illiquid and require significant judgment when measuring them at fair value using market and income-based models. Significant unobservable inputs for underlying real estate investments include estimated market discount rates, projected cash flows and estimated value into perpetuity. Alternative funds invest in a wide range of investments typically with low correlations to traditional investments. | ||
$ 5,733,533 | Similar to other assets measured at fair value, GAAP establishes a hierarchal framework for disclosing the transparency of the inputs utilized in measuring pension and post-retirement benefit plan assets at fair value. From time to time, the Wolf Creek pension trust may buy and sell investments resulting in changes within the hierarchy. Where quoted market prices are available in an active market, plan assets are classified within Level 1 of the valuation hierarchy. Level 1 plan assets include cash equivalents, equity and debt investments. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of plan assets with similar characteristics or discounted cash flows. | ||
$ (2,921,782) | Level 2 investments include cash equivalents, equity, debt and commodity investments. In certain cases where Level 1 or Level 2 inputs are not available, plan assets are classified within Level 3 of the hierarchy and include certain real estate investments. Significant inputs and valuation techniques used in measuring Level 3 fair values include market discount rates, projected cash flows and the estimated value into perpetuity. | ||
$ (158,880) | 33 | ||
$ (87,352)4.20% | |||
Assumed projected rates | Notes to Consolidated Financial Statements The following table provides the fair value of KEPCo's 6% share of Wolf Creek's pension plan assets and the corresponding level of hierarchy as of December 31, 2014 and 2013: | ||
Based on target asset allocations for | Fair Value Measurements Using Quoted prices in active Significant markets for other Significant identical observable unobservable December 31, assets inputs inputs 2014 Fair Value (Level 1) (Level 2) (Level 3) | ||
Cash equivalents $ 56,659 $ $ 56,659 $ | |||
A 1% change in assumed | Equity securities U.S. companies 4,031,564 4,031,564 International 4,930,736 4,930,736 Debt securities Core bonds 4,066,416 4,066,416 Commodities 751,579 751,579 Alternative investments 550,033 550,033 Real estate 1,527,017 805,883 721,134 Total $ 15,914,004 $ $ 14,642,837 $ 1,271,167 Fair Value Measurements Using Quoted prices in active Significant markets for other Significant identical observable unobservable December 31, assets inputs inputs 2013 Fair Value (Level 1) (Level 2) (Level 3) | ||
$ (14,116) | Cash equivalents $ 52,886 $ $ 52,886 $ | ||
$ 14, | Equity securities U.S. companies 3,906,209 3,906,209 International 4,706,569 4,706,569 companies Debt securities Core bonds 3,437,348 3,437,348 Commodities 669,611 669,611 Alternative investments 529,374 529,374 Real estate 1,344,827 694,486 650,341 Total $ 14,646,824 $- $ 13,467,109 $ 1,179,715 34 | ||
Its pension and post-retirement | |||
It has adopted a long-term investment horizon such that the chances | Notes to Consolidated Financial Statements The following tables provides reconciliation of KEPCo's 6% share of Wolf Creek's pension plan assets measured at fair value using significant level 3 inputs for the years ended December 31, 2014 and 2013: | ||
The primary objective of the pension plan is to provide a source of retirement income for its participants and beneficiaries, and the primary financial objective of the plan is to | Real Estate Alternative Securities Investments Balance at January 1, 2014 $ 650,341 $ 529,374 Actual return on plan assets Relating to assets still held at the reporting date 70,793 20,659 Balance at December 31, 2014 $ 721,134 $ 550,033 Balance at January 1, 2013 $ 579,665 $ 497,891 Actual return on plan assets Relating to assets still held at the reporting date 70,676 31,483 Balance at December 31, 2013 $ 650,341 $ 529,374 Estimated future benefit payments as of December 31, 2014, for the Plans, which reflect expected future services, are as follows: | ||
Wolf Creek delegates the management of its pension and post-retirement benefit | Pension Benefits Postretirement Benefits From company From company To/from trust assets To/from trust assets Expected contributions: | ||
The investment advisors strive to diversify investments across asset classes, | 2015 $ 600,000 $ 32,229 $ 74,801 $ | ||
The target allocations for Wolf Creek's pension plan assets are 31% to international equity securities, 25% to domestic equity securities, 25% to debt securities, 10% to real estate securities, 5% | Expected benefit payments: | ||
The investments in both international | 2015 $ 657,236 $ 32,229 $ 75,563 $ | ||
The investments | 2016 747,571 31,819 77,469 2017 838,007 31,383 79,351 2018 929,036 30,919 82,821 2019 1,019,979 30,425 84,518 2020-2024 6,378,979 144,248 411,801 35 | ||
High-yield bonds include a fund with underlying investments in non-investment grade debt securities of corporate | Notes to Consolidated Financial Statements (11) Commitments and Contingencies Current Economic Environment - KEPCo considers the current economic conditions when planning for future power supply and liquidity needs. The current economic climate may also affect KEPCo's ability to obtain financing. | ||
Given the volatility of the current economic conditions, the values of assets and liabilities recorded in the financial statements could change rapidly, resulting in material future adjustments that could negatively impact the Cooperative's ability to meet debt covenants or maintain sufficient liquidity. Currently under state statutes, the Cooperative's rate making is deregulated and, therefore, expects to be able to recover any economic losses through future rates. | |||
All of Wolf Creek's pension plan assets are recorded at fair value using daily net asset values | Litigation - The Cooperative is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have an adverse effect on the consolidated financial position, results of operations and cash flows of the Cooperative. | ||
There is a provision in the Wolf Creek operating agreement whereby the owners treat certain claims and losses arising out of the operations of Wolf Creek as a cost to be borne by the owners separately (but not jointly) in proportion to their ownership shares. Each of the owners has agreed to indemnify the others in such cases. | |||
Alternative funds invest in a wide range of investments typically with | Letter of Credit - KEPCo has an open letter of credit with the Cooperative Finance Committee in the amount of $1,500,000 which matures May 23, 2015. This letter of credit renews automatically each year unless notice is given. The letter of credit is intended to provide financial security to Southwest Power Pool pursuant to its credit policy. | ||
Similar to other assets measured at fair value, GAAP establishes a hierarchal framework for disclosing the transparency of the inputs utilized in measuring pension and post-retirement benefit plan assets | Nuclear Liability Insurance - Pursuant to the Price-Anderson Act, which has been reauthorized through December 31, 2025, by the Energy Policy Act of 2005, the Cooperative is required to insure against public liability claims resulting from nuclear incidents to the current limit of public liability, approximately $13.6 billion. This limit of liability consists of the maximum available commercial insurance of $375.0 million and the remaining $13.2 billion is provided through mandatory participation in an industry-wide retrospective assessment program. In addition, Congress could impose additional revenue-raising measures to pay claims. Under this retrospective assessment program, the owners of Wolf Creek are jointly and severally subject to an assessment of up to $127.3 million (KEPCo share is | ||
Where quoted market prices are available in an active market, plan | $7.64 million), payable at no more than $19.0 million (KEPCo share is $1.14 million) per incident per year per reactor. Both the total and yearly assessment is subject to an inflationary adjustment every five years with the next adjustment in 2018. | ||
Level 1 plan assets include cash equivalents, equity and debt investments. | The owners of Wolf Creek carry decontamination liability, premature nuclear decommissioning liability and property damage insurance for Wolf Creek totaling approximately $2.8 billion (KEPCo's share is | ||
If quoted market prices are not available, then fair values are estimated | $168 million). In the event of an accident, insurance proceeds must first be used for reactor stabilization and site decontamination in accordance with a plan mandated by the NRC. KEPCo's share of any remaining proceeds can be used to pay for property damage or, if certain requirements are met, including decommissioning the plant, toward a shortfall in the NDT fund. | ||
In certain | 36 | ||
Significant inputs and valuation techniques | |||
33 Notes to Consolidated Financial Statements The following table provides the fair value of KEPCo's 6% share of Wolf Creek's pension plan | Notes to Consolidated Financial Statements The owners also carry additional insurance with Nuclear Energy Industry Limited (NEIL) to cover costs of replacement power and other extra expenses incurred during a prolonged outage resulting from accidental property damage at Wolf Creek. If significant losses were incurred at any of the nuclear plants insured under the NEIL policies, KEPCo may be subject to retrospective assessments under the current policies of approximately $2.36 million. | ||
$$ 14,642,837 | Although KEPCo maintains various insurance policies to provide coverage for potential losses and liabilities resulting from an accident or an extended outage, KEPCo's insurance coverage may not be adequate to cover the costs that could result from a catastrophic accident or extended outage at Wolf Creek. Any substantial losses not covered by insurance, to the extent not recoverable in rate prices, would have a material effect on KEPCo's consolidated financial results. | ||
$ 1,271,167 Fair Value Measurements | Decommissioning Insurances - KEPCo carries premature decommissioning insurance that has several restrictions, one of which can only be used if Wolf Creek incurs an accident exceeding $500 million in expenses to safely stabilize the reactor, to decontaminate the reactor and reactor station site in accordance with a plan approved by the Nuclear Regulatory Commission (NRC) and to pay for on-site property damages. | ||
$-$ 13,467,109 | Once the NRC property rule requiring insurance proceeds to be used first for stabilization and decontamination has been complied with, the premature decommissioning coverage could pay for the decommissioning fund shortfall in the event an accident at Wolf Creek exceeds $500 million in covered damages and causes Wolf Creek to be prematurely decommissioned. | ||
$ 1,179,715 34 Notes to Consolidated Financial Statements The following tables provides reconciliation of KEPCo's 6% share of Wolf Creek's pension plan | Nuclear Fuel Commitments - At December 31, 2014, KEPCo's share of WCNOC's nuclear fuel commitments was approximately $3.5 million for uranium concentrates expiring in 2017, $0.5 million for conversion expiring in 2017, $11.9 million for enrichment expiring at various times through 2045 and | ||
$4.3 million for fabrication through 2045. | |||
Purchase Power Commitments - KEPCo has supply contracts with various utility companies to purchase power to supplement generation in the given service areas. KEPCo has provided the Southwest Power Pool a letter of credit to help insure power is available if needed. | |||
-KEPCo considers the current economic conditions | (12) Fair Value of Assets and Liabilities ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. | ||
Given the volatility of the current economic conditions, the values of assets and liabilities recorded in | ASC Topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: | ||
Currently | 37 | ||
-The Cooperative is subject to claims and lawsuits that arise primarily in the | |||
It is the opinion of management that the disposition or ultimate resolution of | Notes to Consolidated Financial Statements II Level I Quoted prices in active markets for identical assets or liabilities I | ||
I Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities 4 | |||
There is a provision in the Wolf Creek operating agreement whereby the owners treat certain claims | Following is a description of the valuation methodologies used for assets and liabilities measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as 4 | ||
-Pursuant to the Price-Anderson Act, which has been reauthorized through December 31, 2025, by the Energy Policy Act of 2005, the Cooperative is required to | the general classification of such assets and liabilities pursuant to the valuation hierarchy. | ||
$13.6 billion. | Decommissioning Fund - The decommissioning fund consists of various mutual funds where I4 fair value is determined by quoted market prices in an active market and, as such, are classified within Level 1 of the valuation hierarchy. 4 The following table presents the fair value measurements of assets and liabilities recognized in the 4 | ||
This limit of liability consists of the maximum available commercial insurance of $375.0 million and the remaining | accompanying consolidated balance sheets measured at fair value on a recurring basis and the level 4 within the ASC 820 fair value hierarchy in which the fair value measurements fall at December 31, 2014: 4 4 | ||
$13.2 billion is provided through mandatory participation in an industry-wide retrospective assessment program. | Fair Value Measurements Using I | ||
In addition, Congress could impose additional revenue-raising measures to pay claims. Under this retrospective assessment | I Quoted price in active Significant markets for other Significar identical observable unobserva ble assets inputs inputs Fair Value (Level 1) (Level 2) (Level 3 .4 Decommissioning fund Domestic fund International fund Domestic bond fund | ||
$ 10,754,081 1,462,801 6,820,595 | |||
payable at no more than $19.0 million (KEPCo share is $1.14 million) per incident | $ 10,754,081 1,462,801 6,820,595 I | ||
Both the total and yearly assessment is subject to an inflationary adjustment every | Money market 34,802 34,802 | ||
$2.8 billion (KEPCo's share is$168 million). | $ 19,072,279 $ 19,072,279 $ $ | ||
In the event of an accident, insurance proceeds must first be used for reactor stabilization and site decontamination in accordance with a plan mandated by the NRC. KEPCo's share of | Total 4 | ||
$2.36 million.Although KEPCo maintains various insurance policies to provide coverage for potential losses | A 4 | ||
-KEPCo carries premature decommissioning insurance that | 4 38 4- I | ||
$ | |||
Nuclear Fuel Commitments | Notes to Consolidated Financial Statements The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying consolidated balance sheets at amounts other than fair value. | ||
-At December 31, 2014, KEPCo's share of WCNOC's nuclear | Cash and Cash Equivalents - Due to the short term maturity of cash and cash equivalents, the carrying amount approximates fair value. | ||
$3.5 million for uranium concentrates expiring in 2017, $0.5 million | Investments in CFC and Other Associated Organizations - KEPCo considers CFC and other associated organizations certificates to be a condition of borrowing and patronage capital certificates to be directly related to borrowing. As such, KEPCo management believes the fair value of these assets is not determinable and they are reflected at their carrying amount. | ||
-KEPCo has supply contracts with various utility companies | Bond Fund Reserve - The bond fund reserve consists of various held-to-maturity securities where the fair value is primarily based on quoted market prices. | ||
Decommissioning Fund -The decommissioning fund consists of various mutual funds | Line of Credit and Long-Term Debt Variable-Rate Debt - The carrying amount approximates fair value because of the short-term variable rates of those debt instruments. | ||
The following table presents the fair value measurements of assets and liabilities recognized in | Fixed-Rate Debt - The fair value of all fixed-rate debt is based on the sum of the estimated value of each issue, taking into consideration the current rate offered to KEPCo for debt of similar remaining maturities. | ||
-Due to the short term maturity of cash and cash equivalents, | The following table presents estimated fair values of KEPCo's financial instruments at December 31, 2014 and 2013: | ||
-KEPCo considers CFC and | December 31, 2014 December 31, 2013 Carrying Fair Carrying Fair Value Value Value Value Financial assets: | ||
As such, KEPCo management believes the fair value of these assets | Cash and cash equivalents $ 1,202,643 $ 1,202,643 $ 5,181,544 $ 5,181,544 Bond fund reserve 4,490,786 4,531,117 4,465,868 4,579,181 Financial liabilities: | ||
Fixed-Rate Debt -The fair value of all fixed-rate debt is based on the sum of the estimated value | Long-term debt $ 167,810,872 $ 187,686,399 $ 162,953,975 $ 170,011,842 39 | ||
The following table presents estimated fair values of KEPCo's financial instruments | |||
$ 1,202,643 | Notes to Consolidated Financial Statements (13) Patronage Capital In accordance with KEPCo's bylaws, KEPCo's current margins are to be allocated to members. | ||
$ 1,202,643 | KEPCo's current policy is to allocate to the members based on revenues collected from the members as a percentage of total revenues. As disclosed in note 3, if KEPCo's consolidated financial statements were adjusted to reflect accounting principles generally accepted in the United Stated of America, total patronage capital would be substantially less. As noted in the consolidated statements of changes in patronage capital, no patronage capital distributions were made to members in 2014 and 2013. | ||
$ 5,181,544 | (14) Subsequent Events The Company has evaluated subsequent events through April 2, 2015, which is the date the financial statements were available to be issued. No events were significant enough to warrant disclosures in the accompanying financial statements or notes. | ||
$ 5,181,544 Bond fund reserve 4,490,786 4,531,117 4,465,868 4,579,181 Financial liabilities: | 40 | ||
Long-term debt $ 167,810,872 | |||
$ 187,686,399 | KEPCo's Mission Statement KEPCo exists on behalf of its Members to produce, procure, transmit, deliver and maintain a reliable supply of wholesale electricity within financialguidelines and risk tolerances established by the Board. | ||
$ 162,953,975 | KEPCo Member Area Map KEPCo's Vision Statement KEPCo will work to provide Consumer-Members the best possible value in reliable electricity and to play an active role in helping improve the economy and quality of life. | ||
$ 170,011,842 39 Notes to Consolidated Financial Statements (13) Patronage | 41 | ||
As disclosed in note 3, if KEPCo's consolidated financial statements were adjusted to reflect accounting principles generally accepted in the United Stated of America, | |||
Kansas Electric Power Cooperative, Inc. | |||
A Touchstone Energy Cooperative *!,1)ý PO Box 4877 - Topeka, KS 66604 600 SW Corporate View - Topeka, KS 66615 (785)-273-7010 www.kepco.org}} | |||
*!,1)ýPO Box 4877 -Topeka, KS | |||
Latest revision as of 11:46, 5 February 2020
| ML15133A220 | |
| Person / Time | |
|---|---|
| Site: | Wolf Creek  |
| Issue date: | 05/05/2015 |
| From: | Kansas Electric Power Cooperative |
| To: | Document Control Desk, Office of Nuclear Reactor Regulation |
| Shared Package | |
| ML15133A210 | List: |
| References | |
| RA 15-0047 | |
| Download: ML15133A220 (44) | |
Text
2014 Annual Report Kansas Electric Power Cooperative, Inc.
Contents Page Page Financial Statements Organization and Resources ....................... 1 Balance Sheets ............................................ 14-15 Leadership Message ........................................ 2-5 Statements of Margin .................................. 16 2014 Highlights ................................................ 6-7 Statements of Patronage Capital ................. 17 KEPCo Trustees and Managers .................... 8-11 Statements of Cash Flows ........................... 18 Operating Statistics ...................................... 12 Notes to Financial Statements ..................... 19-40 Report of Independent Public Accountants ....... 13 Mission & Vision Statement / Area Map ..... 41 4
4 4
4 KEPCo Staff 4 Marcus Harris ................ Executive Vice President Maurice Hall ....... Sr. SCADA/Metering Technician
& Chief Executive Officer Robert Hammersmith ......................... Sr. SCADA/
Les Evans ........................... Senior Vice President Metering Technician
& Chief Operating Officer Shari Koch ............................. Finance & Accounts William Riggins ......... Senior Vice President, Chief Payable/Payroll Specialist Strategic Officer & General Counsel Elizabeth Lesline ............ Administrative Assistant/
Coleen Wells .................................. Vice President Receptionist
& Chief Financial Officer Mitch Long ......................................... Sr. SCADA/
Stephanie Anderson ................................ Finance Metering Technician
& Benefits Analyst Matt Ottman ...... Information System Specialist 2 Mark Barbee ......... Vice President of Engineering, KSI Vice President of Engineering John Payne ................................ Senior Engineer Chris Davidson ..................................... Engineer 3 Rita Petty ............................... Executive Assistant
& Manager of Office Services Terry Deutscher ........................ Manager, SCADA
& Meter Maintenance Kelsey Schrempp ........... Administrative Assistant
& Benefits Specialist Mark Doljac ........... Director of Rates & Regulation Paul Stone .................................. System Operator Carol Gardner ......................... Operations Analyst Jill Taggart ...... Director of Forecasting & Planning Shawn Geil .......... Director of Information Systems Phil Wages ............. Director of Member Services, Government Affairs & Business Development
Organization and Resources Kansas Electric Power Cooperative, Inc. (KEPCo), headquartered in Topeka, Kansas, was incorporated in 1975 as a not-for-profit generation and transmission cooperative (G&T). It is KEPCo's responsibility to procure an adequate and reliable power supply for its nineteen distribution rural electric cooperative members at a reasonable cost.
Through their combined resources, KEPCo Members support a wide range of other services, such as rural economic development, marketing and diversification opportunities, power requirement and engineering studies, and rate design, among others.
KEPCo is governed by a Board of Trustees representing each of its nineteen Members which collectively serve more than 120,000 electric meters in two-thirds of Kansas. The KEPCo Board of Trustees meets regularly to establish policies and act on issues that often include recommendations from working committees of the Board and KEPCo staff. The Board also elects a seven-person Executive Committee which includes the President, Vice President, Secretary, Treasurer, and three additional Executive Committee members.
KEPCo was granted a limited certificate of convenience and authority by the Kansas Corporation Commission in 1980 to act as a G&T public utility. KEPCo's power supply resources consist of: 70 MW of owned generation from the Wolf Creek Generating Station; 30 MW of owned generation from the latan 2 Generating Unit; the 20 MW Sharpe Generating Station located in Coffey County; hydropower purchases of an equivalent 100 MW from the Southwestern Power Administration; and 14 MW from the Western Area Power Administration; plus partial requirement power purchases from regional utilities.
KEPCo is a Touchstone Energy@ Cooperative. Touchstone Energy@ is a nationwide alliance of more than 700 cooperatives committed to promoting the core strengths of electric cooperatives -
integrity, accountability, innovation, personal service and a legacy of community commitment. The national program is anchored by the motto "The Power of Human Connections."
Kansas Electric Power Cooperative, Inc.
P.O. Box 4877 Topeka, KS 66604 600 SW Corporate View Topeka, KS 66615 (785) 273-7010 A Touchstone Energy Cooperative * -.
1
2014 Message from Scott Whittington KEPCo President Marcus Harris Executive Vice President
& Chief Executive Officer The costs associated with which KEPCo's wholesale rate 2014 was highlightedby the the production and adjusters are calculated.
selection of Marcus Harms transmission of electricity are as the new Executive Vice of utmost concern for every Nationwide, the cost to Presidentand Chief electric utility. In today's produce electricity continues to Executive Officer of KEPCo. regulatory-laden environment, rise. Cost drivers such as Harrisreplaces Charles these concerns have been labor, materials, maintenance, "Chuck"Terrill who retired in augmented even more. Efforts and ever-increasing regulatory December. Harris comes to to control costs are of compliance costs have caused KEPCo from South Carolina paramount importance to rates to increase. In an effort Electric and Gas Company KEPCo, as our core to slow this trend, a strategic (SCE&G), where he responsibility is to provide decision was made in 2013 to amassed over twenty-three economic and reliable refinance the debt instruments years of leadership wholesale power to our associated with Wolf Creek. By experience in various roles nineteen Member electric doing so, KEPCo is able to within the utility, including cooperatives. Reflective of more closely match the debt wholesale power marketing, this responsibility was the payment with the useful life of operationsplanning, decision made to refinance Wolf Creek, which, a few years transmission and distribution KEPCo's debt associated with ago, received an operating operations,power the Wolf Creek Nuclear license extension to 2045.
originationand most Generating Station (Wolf Completed in 2014, the recently, directing the Creek), which included the refinancing of the debt renewable and demand side refinancing of KEPCo's instruments resulted in a four Grantor Trust Series and mill, or nearly five percent, management activities of pollution control revenue reduction in wholesale rates.
SCE&G.
bonds, and the method in 2
In July, KEPCo staff presented to the KEPCo performance was further illustrated with its Board of Trustees a plan to change the method equity-to-asset ratio improving to 21.2%.
in which several wholesale rate adjustments are calculated and applied to the Member's rates. In 2013, KEPCo implemented a Member Later in the year, the Board unanimously Investment Program, which ended this year with approved the new rate adjustment method, a balance of over $3 million. The program offers which was implemented on January 1, 2015. By Members an alternative investment resource at implementing the change, the basic wholesale a competitive rate of return, while providing rate structure remains unchanged, a better KEPCo with an additional source of capital.
timing of revenue and expenses are realized, KEPCo also allocated over $3 million in and KEPCo will have a more accurate picture of patronage capital to its Members, and since its financial position, since KEPCo will use 1995, KEPCo has allocated more than $80 budgeted cost figures rather than historical million in capital credits.
costs. KEPCo's Margin Stabilization Adjustment will flow back any over-recovery or collect any KEPCo's peak demand of 433 MW was under-recovery, in aggregate, while maintaining virtually the same as last year, and is nearly KEPCo's margin to meet its minimum financial five percent less than the all-time peak KEPCo requirements. set in 2011 of 455 MW. Energy sales to Members increased by four percent, which Access to low-cost capital through the Rural follows a two percent increase in 2013. Since Utilities Service (RUS) is critical in keeping 2010, KEPCo's energy sales have increased KEPCo's cost of borrowing as low as possible, nearly eight percent. The increase in energy which in turn keeps KEPCo's wholesale rate sales and the decline and flattening of demand more economical. KEPCo completed a ten-year reflects Member load management response to financial forecast as part of the requirement for KEPCo's pricing signals, thereby shifting load a RUS Wolf Creek capital addition loan from peak demand hours to other times of day, application, which was completed and filed late and also reflects somewhat milder temperatures in the year. The forecast shows a modest in more recent years during the peaking increase in rates over the ten-year period, when summer season. In addition, a few Member compared to the previous ten-year period. The cooperatives have installed peaking generators financial forecast illustrates the positive rate that are called upon during peak times, which impact of the Wolf Creek debt restructuring and have contributed to decreasing KEPCo's peak the change in rate adjuster calculations. demand, and several more Member cooperatives are in the process of installing KEPCo had a strong financial performance in peaking generators that will be available for the 2014. KEPCo's total assets, including those of 2015 summer season. KEPCo's Members its subsidiary, KEPCo Services Incorporated benefit from the flattening of demand growth (KSI), were nearly $281 million, an increase of when energy consumption grows more rapidly, over $6 million from 2013. KEPCo achieved a as capacities of generating, transmission and net margin sufficient to meet all of its financial delivery systems are better utilized and costs requirements, which provided the needed per unit of energy are reduced because the flexibility for the successful operation of the associated fixed costs are spread over a company. KEPCo's positive financial greater quantity of energy consumption.
3
KEPCo's generation resources continue to be that, in 2014, provided KEPCo with nearly the cornerstone of KEPCo's ability to provide seven percent of its energy. This is less than an economic and reliable power supply. In the production level achieved in 2013 due to a 2014, Matt Sunseri, CEO of the Wolf Creek scheduled 52-day maintenance outage.
Nuclear Operating Company, retired and Adam Heflin was selected as his successor. Prior to coming to Wolf Creek, Heflin was the Chief Nuclear Officer for Ameren Missouri, where he led the operations of the Callaway Energy Center, a plant nearly identical in design to Wolf Creek. Heflin's previous experience and responsibilities enabled a smooth transition into the responsibility of leading improvements in latan 2 the efficiency and reliability at Wolf Creek while maintaining the plant's strong safety record. To provide further surety of KEPCo's diverse power supply, in December, KEPCo executed a contract extension for hydropower with the Western Area Power Administration (WAPA) to year 2054. Since 1989, KEPCo has received 14 MW of energy annually from WAPA and is one of KEPCo's least-cost resources. The contract extension will provide KEPCo and its members the security of firm, low-cost energy for the next 40 years.
On behalf of the Board of Wolf Creek Nuclear Generating Station Trustees and KEPCo staff, a well-deserved thank you is For the past few years, the electric utility extended to Chuck Terrill for industry has had to react to several new EPA his service to KEPCo.
regulations by expending money and resources Chuck served as EVP &
to retrofit existing coal-fired generating facilities CEO on two separate with environmental controls to comply with the occasions; the first from regulations. These mandated actions have Chuck Terrill 1988 to 1995 and the contributed greatly to the rise in costs second from 2013 until his retirement associated with the production of electricity. in December of 2014. During both tenures, Completing its fourth year of operation in 2014, Chuck provided KEPCo with leadership and and since it became commercially operational guidance, while orchestrating many in 2010, latan 2 has met or exceeded all EPA accomplishments that will be long-lasting and regulations without expending resources for appreciated by KEPCo Member cooperatives any additional environmental control for many years to come. From your friends at equipment, thus shielding KEPCo members KEPCo, thank you for your service and we wish from regulatory compliance costs on a resource you a long and healthy retirement.
4
A special thank you is also extended to the skilled individuals working through the KEPCo Board of Trustees and KEPCo staff for complexities of today's energy industry and their hard work and dedication during the past showing the resolve to work on compound year. It is gratifying to have so many highly energy issues for the future of rural Kansas.
ý9c.44 4ý-r -
Marcus Harris Scott Whittington KEPCo EVP & CEO KEPCo President Back row, left to right: Scott Whittington - President; Kevin Compton - Vice President; Dean Allison - Secretary. Front row, left to right; Bryan Coover - Executive Committee; Kirk Thompson - Executive Committee. Not pictured: Dale Short - Treasurer; Larry Stevens -
Executive Committee.
5
2014 KEPCo Highlights Mr. Marcus Harris was selected by the KEPCo Board of Trustees as the Executive Vice-President & CEO of KEPCo. Mr. Harris succeeds Mr. Charles "Chuck" Terrill who retired in December.
The KEPCo Board of Trustees unanimously approved a change in the method in which wholesale rate adjustments are calculated. The change will facilitate a better timing of revenue and expenses, which will allow KEPCo to have a more position.
Marcus Harris accuratepicture of its financial Beginning in 2013 and finalized in 2014, KEPCo refinanced the debt instruments associated with the Wolf Creek Nuclear Generating Station. This action resulted in a cumulative wholesale rate reduction of approximately five percent.
KEPCo completed a ten-year financial forecast that was unanimously approved by the KEPCo Board of Trustees.
Wolf Creek Nuclear Generating Station KEPCo successfully appealed its Kansas property valuation tax assessment, resulting in a significant savings for KEPCo and its Member cooperatives.
At the May Board meeting, KEPCo conducted a business retreat at which various aspects of distributed generation were discussed. Representatives from several renewable and distributed generation companies gave presentations to the Board, discussing topics which included solar panel design and performance, optimal solar array configuration, cost and financing structures, marketing strategies, and utility rate design.
Chuck Terrill addresses the Board during the retreat KEPCo negotiated with Sunflower to restructure terms of its Wholesale Power Agreement, resulting in a savings for KEPCo and its Member cooperatives over the remainder of the contract, which expires in 2020.
6
KSI conducted Arc Flash Hazard Assessments for 13 member electric cooperatives and two non-member electric cooperatives.
The assessments were prepared as a guide to assist cooperatives in selecting appropriate clothing for workers that could be exposed to S hazards from flames or electric arcs. In addition, KSI completed E r '
Construction Work Plans for four Member electric cooperatives. lI nee r lnn KEPCo Staff continues to work diligently with KEC and Sunflower on legislative issues in Kansas and Washington, D.C. Staff testified on several bills in 2014 and tracked numerous pieces of legislation. In Washington, D.C., KEPCo staff participated in the NRECA Legislative Conference.
Kansas State Capitol, Topeka, Kansas KEPCo executed the documents to extend its Western Area Power Administration (WAPA) contract to 2054.
KEPCo receives 14MW of energy from WAPA and is one of KEPCo's least-cost energy resources.
Parker Dam - Lake Havasu KEPCo continues to work with its Member cooperatives in an USDA ~aggressive rural development program that has successfully Rural created ruraljobs and wealth retention in Kansas. The USDA Development Rural Economic Development Loan & Grant (REDLG) program Committed to the future of rural communities. provides zero interest loans to worthy projects.
Safety of our employees is essential to the continued operational success of KEPCo. Several safety meetings are conducted throughout the year for KEPCo's SCADA Technicians and administrative personnel. KEPCo is proud to report there were no lost time accidents recorded in 2014.
7
KEPCo Member Cooperatives Trustees, Alternates and Managers Ark Valley Electric Cooperative Assn., Inc.
PO Box 1246, Hutchinson, KS 67504 620-662-6661 Trustee Rep. -- Joseph Seiwert Alternate Trustee -- Bob Hall Manager -- Bob Hall Joseph Seiwert Bob Bluestem Electric Cooperative, Inc.
PO Box 5, Wamego, KS 66547 785-456-2212 PO Box 513, Clay Center, KS 67432 785-632-3111 Trustee Rep. -- Kenneth J. Maginley Alternate Trustee -- Robert Ohlde Manager -- Kenneth J. Maginley Ken Maginley Bob I Brown-Atchison Electric Cooperative, Assn., Inc.
PO Box 230, Horton, KS 66439 785-486-2117 Trustee Rep. -- Kevin Compton Alternate Trustee -- James Currie Manager -- James Currie Kevin Compton Jim urrle Butler Rural Electric Cooperative Assn., Inc.
PO Box 1242, El Dorado, KS 67402 316-321-9600 Trustee Rep. -- Dale Short Alternate Trustee -- Riley Walters Manager -- Dale Short Dale Short Riley\ Nalters Caney Valley Electric Cooperative Assn., Inc.
PO Box 308, Cedar Vale, KS 67204 620-758-2262 Trustee Rep. -- Dwane Kessinger Alternate Trustee -- Allen A. Zadorozny Manager -- Allen A. Zadorozny Dwane Kessinger Allen Zadorozny 8
CMS Electric Cooperative, Inc.
PO Box 790, Meade, KS 67864 620-873-2184 Trustee Rep. -- Kirk A. Thompson Alternate Trustee -- Clifford Friesen Manager -- Kirk A. Thompson DS&O Electric Cooperative, Inc.
PO Box 286, Solomon, KS 67480 785-655-2011 Trustee Rep. -- Dean Allison Alternate Trustee -- Donald Hellwig Manager -- Donald Hellwig Flint Hills Electric Cooperative Assn., Inc.
PO Box B, Council Grove, KS 66846 620-767-5144 Trustee Rep. -- Robert E. Reece Alternate Trustee -- William Hein Manager -- Robert E. Reece Heartland Rural Electric Cooperative, Inc.
PO Box 40, Girard, KS 66743 620-724-8251 Trustee Rep. -- Dennis Peckman Alternate Trustee -- Dale Coomes Manager -- Dale Coomes Dennis Peckman uaie L;oomes LJEC PO Box 70, McLouth, KS 66054 913-796-6111 Trustee Rep. -- Larry Stevens Alternate Trustee -- Steven 0. Foss Manager -- Steven 0. Foss Lyon-Coffey Electric Cooperative, Inc.
PO Box 229, Burlington, KS 66839 620-364-2116 Trustee Rep. -- Scott Whittington Alternate Trustee -- Donna Williams Manager -- Scott Whittington 9
KEPCo Member Cooperatives q Trustees, Alternates and Managers 4
4 Ninnescah Electric Cooperative Assn., Inc. 4 PO Box 967, Pratt, KS 67124 620-672-5538 4 Trustee Rep. -- Curtis Durall 4 Alternate Trustee -- Teresa Miller Manager -- Teresa Miller 4
Curtis Durall Teresa Miller Prairie Land Electric Cooperative, Inc. 4 PO Box 360, Norton, KS 67654 785-877-3323 District Office, Bird City 785-734-2311 4 District Office, Concordia 785-243-1750 Trustee Rep. -- Gilbert Berland Alternate Trustee -- Allan J. Miller 4 Gilbert Berland Manager -- Allan J. Miller Allan Miller Radiant Electric Cooperative, Inc. 4 PO Box 390, Fredonia, KS 66736 620-378-2161 Trustee Rep. -- Dennis Duft 4 Alternate Trustee -- Tom Ayers Administrative Manager -- Leah Tindle Operations Manager -- Dennis Duft 4 Dennis Duft Tom Ayers Leah Tindle 4
Rolling Hills Electric Cooperative, Inc. 4 PO Box 307, Mankato, KS 66956 785-378-3151 4 District Offices, Belleville 785-527-2251 Ellsworth 785-472-4021 Trustee Rep. -- Leon Eck Alternate Trustee -- Douglas J. Jackson 4 Leon Eck Manager -- Douglas J. Jackson Doug Jackson 4 Sedgwick County Electric Cooperative Assn., Inc. 4 PO Box 220, Cheney, Ks 67025 316-542-3131 Trustee Rep. -- Donald Metzen 4 Alternate Trustee -- David Childers 4 Manager -- David Childers 4 Donald Metzen Dave Childers 10 I
Sumner-Cowley Electric Cooperative, Inc.
PO Box 220, Wellington, KS 67152 620-326-3356 Trustee Rep. -- Charles Riggs Alternate Trustee -- Cletas Rains Manager -- Cletas Rains Cletas Rains Twin Valley Electric Cooperative, Inc.
PO Box 368, Altamont, KS 67330 620-784-5500 Trustee Rep. -- Bryan Coover Alternate Trustee -- Ron Holsteen Manager -- Ron Holsteen Victory Electric Cooperative Assn., Inc.
PO Box 1335, Dodge City, KS 67801 620-227-2139 Trustee Rep.-- Shane Laws Alternate Trustee -- Daryl Tieben Manager -- Shane Laws Shane Laws 2014 - 2015 KEPCo Executive Committee Scott Whittington - President Kevin Compton - Vice President Dale Short - Treasurer Dean Allison - Secretary Bryan Coover - Committee Member Larry Stevens - Committee Member Kirk Thompson - Committee Member 11
Operating Statistics 4 4
2,300,000 4 4
Operating Expenses 0 KEPCO O&M Nuclea rFuel andA&G 2.0 %latan 2 Fuel 3.8% 1.6%
1,800,000 nteresý 1
C 001L 0atan20&M and A&G Depr. and Amort. 1.2%
6.4%
Wolf Creek O&M-2 and A&G Purchased Power 1,300,000 10.9% 68.3%
2010 2011 2012 2013 2014 Year 500 450 1400 Sources of Energy WAPA 350 latan 2 6.7%--
1 3.8%
300 2010 2011 2012 2013 2014 8.2%
Year 85 -WestarEnergy 41.4%
SunflowerU 17.4%
\-Wolf Creek S65 22.5%
45 2010 2011 2012 2013 2014 Year 12
INDEPENDENT AUDITORS'REPORT To the Board of Directors Kansas Electric Power Cooperative, Inc.
Topeka, Kansas We have audited the accompanying consolidated financial statements of Kansas Electric Power Cooperative, Inc. and subsidiary ("KEPCo"), which comprise the consolidated balance sheets as of December 31, 2014 and 2013, and the related consolidated statements of margin, patronage capital, and cash flows for the years then ended and the related notes to the financial statements.
Management's Responsibility for the FinancialStatements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors' Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion.
Basis for Qualified Opinion As more fully described in Note 3 to the financial statements, certain depreciation and amortization methods have been used in the preparation of the 2014 and 2013 consolidated financial statements which, in our opinion, are not in accordance with accounting principles generally accepted in the United States of America. The effects on the consolidated financial statements of the aforementioned departure are explained in Note 3.
Qualified Opinion In our opinion, except for the effects of using the aforementioned depreciation and amortization methods as discussed in Note 3, the consolidated financial statements referred to in the first paragraph present fairly, in all material respects, the financial position of KEPCo as of December 31, 2014 and 2013, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we also have issued our report dated April 2, 2015, on our consideration of KEPCo's internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standardsin considering KEPCo's internal control over financial reporting and compliance.
Mayer Hoffman McCann P.C.
Topeka, Kansas April 2, 2015 13
Consolidated Balance Sheets Assets December 31, 2014 2013 Utility Plant 4 In-service $ 340,615,798 $ 318,326,772 Less allowances for depreciation (148,469,211) (143,755,156)
Net in-service 192,146,587 174,571,616 Construction work in progress 9,776,657 18,837,972 Nuclear fuel (less accumulated amortization of $23,151,678 and
$19,911,283 for 2014 and 2013, respectively) 9,809,670 7,806,307 Total utility plant 211,732,914 201,215,895 Restricted Assets 4
Investments in the National Utilities Cooperative Finance Corpo- 4 ration 11,741,745 12,094,536 4 Bond fund reserve 4,490,786 4,465,868 Decommissioning fund 19,378,279 17,844,344 4
Investments in other associated organizations 264,976 252,077 4 Total restricted assets 35,875,786 34,656,825 4 Current Assets 4
Cash and cash equivalents 1,202,643 5,181,544 Member account receivables 14,041,772 5,664,940 Materials and supplies inventory 6,391,899 5,756,835 Other assets and prepaid expenses 699,236 734,937 Total current assets 22,335,550 17,338,256 Other Long-term Assets Deferred charges 4
Wolf Creek disallowed costs (less accumulated amortization of
$17,178,044 and $16,420,880 for 2014 and 2013, respectively) 8,804,877 9,562,041 Wolf Creek deferred plants costs (less accumulated amortization of $40,688,954 and $37,559,034 for 2014 and 2013, respectively) 6,259,839 9,389,759 Wolf Creek decommissioning regulatory asset (7,217,629) (6,499,881)
Deferred incremental outage costs 1,185,502 6,259,359 Other deferred charges (less accumulated amortization of
$9,515,076 and $9,279,497 for 2014 and 2013, respectively) 391,103 801,338 I
Unamortized debt issuance costs 80,055 147,664 Other 247,538 235,182 Prepaid pension cost 1,073,323 1,545,694 Total long-term assets 10,824,608 21,441,156 Total assets $ 280,768,858 $ 274,652,132 14
Consolidated Balance Sheets Liabilities and Patronage Capital December 31, 2014 2013 Patronage Capital Memberships $ 3,200 $ 3,200 Patronage capital 73,517,749 70,025,317 Accumulated other comprehensive loss (8,379,226) (4,071,781)
Total patronage capital 65,141,723 65,956,736 Long-term Debt 152,126,943 140,460,064 Other Long-term Liabilities Wolf Creek decommissioning liability 13,320,625 12,542,673 Wolf Creek pension and postretirement benefit plans 12,004,519 7,432,482 Wolf Creek deferred compensation 1,314,323 1,120,601 Total other long-term liabilities 26,639,467 21,095,756 Current Liabilities Current maturities of long-term debt 15,683,929 22,493,911 Accounts payable 14,199,898 14,523,217 Payroll and payroll-related liabilities 257,523 243,044 Short term note payable 1,429,000 6,500,000 Deferred revenue 3,325,322 1,224,424 Accrued property taxes 1,371,811 1,519,915 Accrued income taxes 3,518 635,065 Accrued interest payable 589,724 Total current liabilities 36,860,725 47,139,576 Total patronage capital and liabilities $ 280,768,858 $ 274,652,132 15
Consolidated Statements of Margin For the years ending December 31, 2014 2013 Operating Revenues Sale of electric energy $ 172,576,128 $ 164,048,145 Operating Expenses Power purchased 116,339,132 107,958,510 Nuclear fuel 3,402,688 3,303,643 Plant operations 16,231,337 18,223,619 Plant maintenance 6,647,651 6,115,338 Administrative and general 6,284,806 6,105,859 Amortization of deferred charges 4,122,663 4,185,313 Depreciation and decommissioning 7,444,553 6,944,842 Total operating expenses 160,472,830 152,837,124 Net operating revenues 12,103,298 11,211,021 Interest and Other Deductions Interest on long-term debt 9,415,650 9,599,108 Amortization of debt issuance costs 67,609 77,813 Other deductions 407,649 190,317 Total interest and other deductions 9,890,908 9,867,238 Operating income 2,212,390 1,343,783 Other Incomel(Expense)
Interest income 915,409 859,711 Other income 370,401 390,286 Income tax (5,768)
Total other income 1,280,042 1,249,997 Net margin $ 3,492,432 $ 2,593,780 Net Margin $ 3,492,432 $ 2,593,780 Other comprehensive (loss)/income Net (loss)/earnings arising during year on pension obligation (4,717,230) 3,984,833 Amortization of prior year service costs included in net periodic pension costs 409,785 733,259 Comprehensive (loss)/income $ (815,013) $ 7,311,872 16
Consolidated Statements of Patronage Capital Accumulated Other Patronage Comprehensive Memberships Capital Income (Loss) Total Balance at December 31, 2012 $ 3,200 $67,431,537 $ (8,789,873) $ 58,644,864 Net margin 2,593,780 2,593,780 Defined benefit pension plans:
Net earnings arising during year 3,984,833 3,984,833 Amortization of prior year service costs included in net periodic pension costs - 733,259 733,259 Balance at December 31, 2013 3,200 70,025,317 (4,071,781) 65,956,736 Net margin 3,492,432 - 3,492,432 Defined benefit pension plans:
Net loss arising during year (4,717,230) (4,717,230)
Amortization of prior year service costs included in net periodic pension costs 409,785 409,785 Balance at December 31, 2014 $ 3,200 $ 73,517,749 $ (8,379,226) $ 65,141,723 17
Consolidated Statements of Cash Flows 4 For the years ending December 31, 2014 2013 q
Cash Flows From Operating Activities Net margin $ 3,492,432 $ 2,593,780 Adjustments to reconcile net margin to net cash flows from operating activities Depreciation and amortization 7,028,254 6,540,599 Decommissioning 1,495,700 2,904,092 Amortization of nuclear fuel 3,240,394 2,819,442 Amortization of deferred charges 4,122,662 4,175,257 Amortization or deferred incremental outage costs 5,668,059 5,386,940 Amortization of debt issuance costs 67,609 77,813 Changes in Member accounts receivable (8,376,832) 7,609,332 Materials and supplies (635,064) (485,950)
Other assets and prepaid expense 35,701 106,504 Accounts payable (323,319) 599,854 Payroll and payroll-related liabilities 14,479 (102,839)
Accrued property tax (148,104) (67,149)
Accrued interest payable (45,341) 12,556 Accrued income taxes 3,518 1,092 Other long-term liabilities 445,958 1,147,579 Prepaid pension cost 472,371 (1,545,694)
Deferred revenue 2.100.898 1.224.424 Net cash flows from operating activities 18,659,375 32,997,632 4
Cash Flows From Investing Activities Additions to electrical plant (15,556,312) 7,278,012)
Additions to nuclear fuel (5,243,757) (503,127)
Reductions in deferred charges 174,656 95,335 Additions to deferred incremental outage costs (594,202) 0,359,443)
Investments in decommissioning fund assets (1,533,935) 2,942,327)
Proceeds from associated organizations 339,892 (3 17,442 Investments in bond reserve assets (24,918) (26,164)
Proceeds from the sale of property 14,402 41,837 Net cash flows from investing activities (22,424,174) ~0, 954,459)
Cash Flows From Financing Activities Principal payments on long-term debt (19,429,155) (2:0,168,539) 2 Proceeds from issuance of long-term debt 25,993,166 11,594,273 Short term notes payable (5,071,000) 6,500,000 1744 Payments unapplied (1,707,113) 2,388,503 (2 ,14 Net cash flows from financing activities (214,102) 314,237 Net (decrease) increase in cash and cash equivalents (3,978,901) 2,357,410 Cash and Cash Equivalents, Beginning of Year 5,181,544 2,824,134 Cash and Cash Equivalents, End of Year $ 1,202,643 5,181,544 Supplemental Disclosure of Cash Flow Information Interest paid 18
$ 9,868,600 9,776,900 3
Notes to Consolidated Financial Statements (1) Nature of Operations and Summary of Significant Accounting Policies Nature of Operations - Kansas Electric Power Cooperative, Inc., and its subsidiary (KEPCo),
headquartered in Topeka, Kansas, was incorporated in 1975 as a not-for-profit generation and transmission cooperative (G&T). KEPCo was granted a limited certificate of convenience and authority by the Kansas Corporation Commission (KCC) in 1980 to act as a G&T public utility. It is KEPCo's responsibility to procure an adequate and reliable power supply for its 19 distribution rural electric cooperative members pursuant to all requirements of its power supply contracts. KEPCo is governed by a board of trustees representing each of its 19 members, which collectively serve approximately 120,000 electric meters in rural Kansas.
System of Accounts - KEPCo maintains its accounting records substantially in accordance with the Rural Utilities Service (RUS) Uniform Systems of Accounts and in accordance with accounting practices prescribed by the KCC.
Rates - Under a 2009 change in Kansas state law, KEPCo has elected to be exempt from KCC regulation for most purposes, including the setting of rates. Rates are set by action of the Board, subject only to statutory review by the KCC if demanded by four or more members. KEPCo's rates were last set by the KCC by an order effective September 1, 2008. KEPCo's rates now include an Energy Cost Adjustment (ECA) mechanism, an annual Demand Cost Adjustment (DCA) mechanism and a Margin Stabilization Adjustment (MSA) mechanism, allowing KEPCo to pass along increases in certain energy and demand costs to its member cooperatives.
Principles of Consolidation - The consolidated financial statements include the accounts of KEPCo and its wholly owned subsidiary, KEPCo Services, Inc. Undivided interests in Wolf Creek Nuclear Operating Corporation and latan 2 generation facilities are consolidated on a pro rata basis. All material intercompany accounts and transactions have been eliminated in consolidation.
Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Utility Plant and Depreciation - Utility plant is stated at cost. Cost and additions to utility plant include contractual work, direct labor, materials and interest on funds used during construction. No interest has been capitalized in 2014 and 2013. The cost of repairs and minor replacements are charged to operating expenses as appropriate. The original cost of utility plant retired and the cost of removal less salvage are charged to accumulated depreciation.
The composite depreciation rates for electric generation plant for the years ended December 31, 2014 and 2013 are 3.59% and 3.44%, respectively.
The provision for depreciation computed on a straight-line basis for electric and other components of utility plant is as follows:
Transportation and equipment 25-33 years Office furniture and fixtures 10-20 years Leasehold improvements 20 years Transmission equipment (metering, communication and SCADA) 10 years 19
Notes to Consolidated Financial Statements latan 2 - latan 2 is an 850 MW high efficiency coal-fired power plant utilizing state-of-the-art environmental controls that became commercially operational December 31, 2010. KEPCo owns a 3.53% share of latan 2, or 30 MW. latan 2, located in Weston, MO, is operated and majority owned by KCP&L.
Wolf Creek Nuclear Operating Corporation - KEPCo owns 6% of Wolf Creek Nuclear Operating Corporation (WCNOC), which is located near Burlington, Kansas. The remainder is owned by the Kansas City Power & Light Company (KCPL) 47% and Kansas Gas & Electric Company (KGE) 47%.
KGE is a wholly owned subsidiary of Westar Energy, Inc. KCPL is a wholly owned subsidiary of Great Plains Energy, Inc. KEPCo's undivided interest in WCNOC is consolidated in the financial statements on a pro rata basis. KEPCo is entitled to a proportionate share of the capacity and energy from WCNOC, which is used to supplement a portion of KEPCo's members' requirements. KEPCo is billed on a daily basis for 6% of the operations, maintenance, administrative and general costs, and cost of plant additions related to WCNOC.
WCNOC's operating license expires in 2045. Wolf Creek is regulated by the Nuclear Regulatory Commission (NRC), with respect to licensing, operations and safety related requirements.
WCNOC disposes of all classes of its low-level radioactive waste at existing third-party repositories.
Should disposal capability become unavailable, WCNOC is able to store its low-level radioactive waste in an on-site facility for up to three years under current regulations.
Nuclear Fuel - The cost of nuclear fuel in the process of refinement, conversion, enrichment and fabrication is recorded as a utility plant asset at original cost and is amortized to nuclear fuel expenses based upon the quantity of heat produced for the generation of electric power. Under the Nuclear Waste Policy Act of 1982, the Department of Energy (DOE) is responsible for the permanent disposal of spent nuclear fuel. Wolf Creek paid into a federal Nuclear Waste Fund administered by the DOE a quarterly fee for the future disposal of spent nuclear fuel. In November 2013, a federal court of appeals ruled that the DOE must stop collecting this fee effective May 2014. KEPCo's share of the fee, calculated as one tenth of a cent for each kilowatt-hour of net nuclear generation delivered to customers, was $104,499 and $388,024 in 2014 and 2013, respectively. KEPCo included these costs in fuel and purchased power expense on the consolidated statements of margin.
Nuclear Decommissioning - Nuclear decommissioning is a nuclear industry term for the permanent shutdown of a nuclear power plant and the removal of radioactive components in accordance with Nuclear Regulatory Commission (NRC) requirements. The NRC will terminate a plant's license and release the property for unrestricted use when a company has reduced the residual radioactivity of a nuclear plant to a level mandated by the NRC. The NRC requires companies with nuclear plants to prepare formal financial plans to fund nuclear decommissioning. These plans are designed so that sufficient funds required for nuclear decommissioning will be accumulated prior to the expiration of the license of the related nuclear power plant. Wolf Creek files a nuclear decommissioning site study with the KCC every three years.
The KCC reviews nuclear decommissioning plans in two phases. Phase one is the approval of the revised nuclear decommissioning study including the estimated costs to decommission the plant. Phase two involves the review and approval of a funding schedule prepared by the owner of the plant detailing how it plans to fund the future-year dollar amount of its pro rata share of the decommissioning costs.
In 2011, the nuclear decommissioning study was revised. Based on the study, KEPCo's share of decommissioning costs, including decontamination, dismantling and site restoration, is estimated to be
$37.8 million. This amount compares to the prior site study estimate of $35.6 million. The site study cost 20
Notes to Consolidated Financial Statements estimate represents the estimate to decommission Wolf Creek as of the site study year. The actual nuclear decommissioning costs may vary from the estimates because of changes in regulations and technologies as well as changes in costs for labor, materials, and equipment.
KEPCo is allowed to recover nuclear decommissioning costs in its prices over a period equal to the operating license of Wolf Creek, which is through 2045. The NRC requires that funds sufficient to meet nuclear decommissioning obligations be held in a trust. KEPCo believes that the KCC approved funding level will also be sufficient to meet the NRC requirement. The consolidated financial results would be materially affected if KEPCo was not allowed to recover in its prices the full amount of the funding requirement.
KEPCo recovered in its prices and deposited in an external trust fund for nuclear decommissioning approximately $0.5 million in 2014 and $0.5 million in 2013. KEPCo records its investment in the Nuclear Decommissioning Trust fund at fair value, which approximated $19.4 million and $17.8 million as of December 31, 2014 and 2013, respectively.
Asset retirement obligation - KEPCo recognizes and estimates the legal obligation associated with the cost to decommission Wolf Creek. KEPCo initially recognized an asset retirement obligation at fair value for the estimated cost with a corresponding amount capitalized as part of the cost of the related long-lived asset and depreciated over the useful life.
A reconciliation of the asset retirement obligation for the years ended December 31, 2014 and 2013 is as follows:
2014 2013 Balance at January 1 $ 12,542,673 $ 11,810,322 Accretion 777,952 732,351 Balance at December 31 $ 13,320,625 $ 12,542,673 Any net margin effects are deferred in the Wolf Creek decommissioning regulatory asset and will be collected from members in future electric rates.
Cash and Cash Equivalents - All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents and are stated at cost, which approximates fair value. Cash equivalents consisted primarily of repurchase agreements, money market accounts and certificates of deposit.
The Federal Deposit Insurance Corporation insures amounts held by each institution in the organization's name up to $250,000. At various times during the fiscal year, the organization's cash in bank balances exceeded the federally insured limits.
KEPCo's repurchase agreements have collateral pledged by a financial institution, which are securities that are backed by the federal government.
21
Notes to Consolidated Financial Statements Accounts Receivable - Accounts receivable are stated at the amount billed to members and customers. KEPCo provides allowances for doubtful accounts, which is based upon a review of outstanding receivables, historical collection information and existing economic conditions.
Materials and Supplies Inventory - Materials and supplies inventory are valued at average cost.
Unamortized Debt Issuance Costs - Unamortized debt issue costs relate to the issuance of the floating/fixed rate pollution control revenue bonds, mortgage notes payable to the National Rural Utilities Cooperative Finance Corporation (CFC) trusts and fees for re-pricing the Federal Financing Bank (FFB) debt. These costs are being amortized using the effective interest method over the remaining life of the bonds and notes.
Cash Surrender Value of Life Insurance Contracts - The following amounts related to Wolf Creek Nuclear Operating Corporation (WCNOC) corporate-owned life insurance contracts, primarily with one highly rated major insurance company, are included in other long-term assets on the consolidated balance sheets. 4 2014 20134 Cash surrender value of contracts $ 7,169,655 $ 6,814,094 Borrowings against contracts (6,922,117) (6,578,912)
$ 247,538 $ 235,182 Borrowings against contracts include a prepaid interest charge. KEPCo pays interest on these borrowings at a rate of 5.00% for the years ended December 31, 2014 and 2013.
Revenues - Revenues are recognized during the month the electricity is sold. Revenues from the sale of electricity are recorded based on usage by member cooperatives and customers and on contracts and scheduled power usages as appropriate.
Income Taxes - As a tax-exempt cooperative, KEPCo is exempt from income taxes under Section 501 (c)(12) of the Internal Revenue Code of 1986, as amended. Accordingly, provisions for income taxes have not been reflected in the accompanying consolidated financial statements. KEPCo is no longer subject to federal or state income tax examinations by taxing authorities for years prior to 2011.
KEPCo Services, Inc., a subsidiary of Kansas Electric Power Cooperative, Inc., is not exempt from income taxes. The organization's present accounting policy for the evaluation of uncertain tax positions is to review those positions on an annual basis. A liability would be recorded in the financial statements during the period which, based on all available evidence, management believes it is more likely than not that the tax position would not be sustained upon examination by taxing authorities and the liability would be incurred by the organization.
There has been no interest or penalties recognized neither in the statements of margin nor in the balance sheets related to uncertain tax positions. In addition, no tax positions exist for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next twelve months. Tax years with open statutes of limitations are 2011 and forward.
22
Notes to Consolidated Financial Statements (2) Factors That Could Affect Future Operating Results KEPCo currently applies accounting standards that recognize the economic effects of rate regulation and, accordingly, has recorded regulatory assets and liabilities related to its generation and transmission operations in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 980, Regulated Operations. In the event KEPCo determines that it no longer meets the criteria of ASC 980, the accounting impact could be a noncash charge to operations of an amount that would be material. Criteria that could give rise to the discontinuance of ASC 980 include:
- 1) increasing competition that restricts KEPCo's ability to establish prices to recover specific costs and
- 2) a significant change in the manner in which rates are set by regulators from a cost-based regulation to another form of regulation. KEPCo periodically reviews these criteria to ensure the continuing application of ASC 980 is appropriate. Any changes that would require KEPCo to discontinue the application of ASC 980 due to increased competition, regulatory changes or other events may significantly impact the valuation of KEPCo's investment in utility plant, its investment in Wolf Creek and necessitate the write-off of regulatory assets. At this time, the effect of competition and the amount of regulatory assets that could be recovered in such an environment cannot be predicted.
The 1992 Energy Policy Act began the process of restructuring the United States electric utility industry by permitting the Federal Energy Regulatory Commission to order electric utilities to allow third parties to sell electric power to wholesale customers over their transmission systems. KEPCo has elected to deregulate its rate making for sales to its members under recent statutory amendments.
Subject to the possibility of KCC review, KEPCo's member rates are now set by action of the Board.
KEPCo's ability to timely recover its costs is enhanced by this change.
(3) Departures From Generally Accepted Accounting Principles Effective February 1, 1987, the KCC issued an order to KEPCo requiring the use of present worth (sinking fund) depreciation and amortization. Such depreciation and amortization methods constituted phase-in plans that did not meet the requirements of ASC 980-340 Regulated Operation, Other Assets and Deferred Costs.
Effective February 1, 2002, the KCC issued an order that extended the depreciable life of Wolf Creek from 40 years to 60 years. This order also permitted recovery in rates of the $53.5 million cumulative difference between historical present worth (sinking fund) depreciation and amortization and straight-line depreciation and amortization of the Wolf Creek generation plant and disallowed costs over a 15-year period. Recovery of these costs in rates is included in operating revenues, and the related amortization expense is included in deferred charges in the consolidated statements of margin.
The effect of these departures from accounting principles generally accepted in the United States of America is to overstate (understate) the following items in the consolidated financial statements by the following amounts:
2014 2013 Deferred charges $ 7,127,268 $ 10,690,902 Patronage capital $ 7,127,268 $ 10,690,902 Net margin $ (3,563,634) $ (3,563,634) 23
Notes to Consolidated Financial Statements Wolf Creek Disallowed Costs - Effective October 1, 1985, the KCC issued a rate order relating to KEPCo's investment in Wolf Creek, which disallowed $26.0 million of KEPCo's investment in Wolf Creek ($8.8 million net of accumulated amortization as of December 31, 2014). A subsequent rate order, effective February 1, 1987, allows KEPCo to recover these disallowed costs and other costs related to the disallowed portion (recorded as deferred charges) for the period from September 3, 1985 through January 31, 1987, over a 27.736-year period starting February 1, 1987. Pursuant to a KCC rate order dated December 30, 1998, the disallowed portion's recovery period was extended to a 30-year period. Through December 31, 2001, KEPCo used the present worth (sinking fund) method to recover the disallowed costs, which enabled it to meet the times-interest-earned ratio and debt service requirements in the KCC rate order dated January 30, 1987. The method used by KEPCo through 2001 constituted a phase-in plan that did not meet the requirements of ASC 980-340, Regulated Operations, Other Assets and Deferred Costs.
Effective February 1, 2002, the KCC issued an order permitting recovery in rates of the $6.5 million cumulative difference between historical present worth (sinking fund) and straight-line amortization of Wolf Creek disallowed costs over a 15-year period. Such depreciation practice does not constitute a phase-in plan that meets the requirements of ASC 980-340.
If the disallowed costs were recovered using a method in accordance with U.S. generally accepted accounting principles, the costs would have been expensed in their entirety upon implementation of the KCC order, with a corresponding decrease in patronage capital.
Amortization of the Wolf Creek disallowed costs is included in amortization of disallowed charges and amounts to $0.8 million for each of the years ended December 31, 2014, and 2013.
Wolf Creek Deferred Plant Costs - Effective February 1, 2002, the KCC issued an order permitting recovery in rates of the $46.9 million cumulative difference between historical present worth (sinking fund) depreciation and straight-line depreciation of Wolf Creek generation plant over a 15-year period.
Such depreciation practice does not constitute a phase-in plan that meets the requirements of ASC 980-340. In 2002, this cumulative difference was reclassified from utility plant allowance for depreciation to deferred charges on the consolidated balance sheets to reflect the amount as a regulatory asset.
Amortization of the Wolf Creek deferred plant costs is included in amortization of deferred charges and amounts to $3.1 million for each of the years ended December 31, 2014 and 2013.
If the deferred plant costs were recovered using a method in accordance with accounting principles generally accepted in the United States of America, the costs would have been expensed in their entirety upon implementation of the KCC order, with a corresponding decrease in patronage capital.
(4) Investments in Associated Organizations Investments in associated organizations are carried at cost. At December 31, 2014 and 2013, investments in associated organizations consisted of the following:
24
Notes to Consolidated Financial Statements 2014 2013 Cooperative Financial Corporation Memberships $ 1,000 $ 1,000 Capital term certificates 395,970 395,970 Patronage capital certificates 1,317,279 1,054,664 Equity term certificates 10,027,496 8,142,902 Member capital certificates - 2,500,000 11,741,745 12,094,536 Other 264,976 252,077
$ 12,006,721 $ 12,346,613 (5) Bond Fund Reserve KEPCo has entered into a bond covenant whereby KEPCo is required to maintain, with a trustee, a bond fund reserve of approximately $4.4 million. This stipulated amount is sufficient to satisfy certain future interest and principal obligations. The amount held in the bond fund reserve is invested by the trustee in tax-exempt municipal securities, pursuant to the restrictions of the indenture agreement, which are carried at amortized cost.
(6) Deferred Charges Deferred Incremental Outage Costs - In 1991, the KCC issued an order that allowed KEPCo to defer its 6% share of the incremental operating, maintenance and replacement power costs associated with the periodic refueling of Wolf Creek. Such costs are deferred during each refueling outage and are being amortized over the approximate 18-month operating cycle coinciding with the recognition of the related revenues. Additions to the deferred incremental outage costs were $.6 million and $10.4 million in 2014 and 2013, respectively. The current year amortization of the deferred incremental outage costs was $5.7 million and $5.4 million in 2014 and 2013, respectively.
Other Deferred Charges - KEPCo includes in other deferred charges the early call premium resulting from refinancing. These early call premiums are amortized using the effective interest method over the remaining life of the new agreements.
(7) Line of Credit As of December 31, 2014, KEPCo has a $20 million line of credit available with the Cooperative Finance Corporation. There were no funds borrowed against the line of credit at December 31, 2014 and 2013.
The line of credit requires the Cooperative to pay down the balance to zero annually. Interest rates vary and were 2.90% at December 31, 2014 and 2013. This line of credit expires in March 3, 2017.
At December 31, 2014, KEPCo has a $10 million line of credit available with CoBank, ACB. There were no funds borrowed against the line of credit at December 31, 2014 and 2013. Interest rate options, as selected by the Company, are a weekly quoted variable rate in which CoBank establishes a rate on the first business day of each week or a LIBOR option at a fixed rate equal to LIBOR plus 1.6%. This line of credit expires May 31, 2015.
25
Notes to Consolidated Financial Statements (8) Short-Term Note Payable As of December 31, 2014 and 2013, KEPCo had a $1.4 million and $6.5 million short-term note payable to the Cooperative Finance Corporation at an interest rate of 3.08% and 2.5%, respectively.
(9) Long-Term Debt Long-term debt consists of mortgage notes payable to the United States of America acting through the Federal Financing Board, the CFC and others. Substantially all of KEPCo's assets are pledged as collateral. The terms of the notes as of December 31 are as follows:
2014 2013 Mortgage notes payable to the FFB at fixed rates varying from .818% to 9.21%, payable in quarterly installments through 2043 $ 62,732,450 $ 49,124,279 Mortgage notes payable to the Grantor Trust Series 1997 at a rate of 7.522%, payable semi-annually, principal payments commencing in 1999 and continuing annually through 2017 13,140,000 18,440,000 Floating/fixed rate pollution control revenue bonds, City of Burlington, Kansas, Pooled Series 1985C, variable interest rate of .34%, payable annually through 2015 1,995,000 5,795,000 Note payable to CoBank at a rate of 3.03%, payable in E quarterly installments through 2023 1,111,684 1,228,745 I Mortgage notes payable, equity certificate loans and member capital security notes to the CFC at fixed rates of 2.45% to 7.50%, payable quarterly through 2045 88,831,738 88,365,951 167,810,872 162,953,975 Less current maturities (15,683,929) (22,493,911)
$ 152,126,943 $ 140,460,064 Aggregate maturities of long-term debt for the next five years and thereafter are as follows:
2015 $ 15,683,929 2016 10,678,447 2017 9,806,759 2018 6,421,411 2019 6,531,740 Thereafter 118,688,586
$ 167,810,872 26
Notes to Consolidated Financial Statements Restrictive covenants related to the CFC debt require KEPCo to design rates that would enable it to maintain a times-interest earned ratio of at least 1.05 and debt-service coverage ratio of at least 1.0, on average, in the two best years out of the three most recent calendar years. The covenants also prohibit distribution of net patronage capital or margins until, after giving effect to any such distribution, total patronage capital equals or exceeds 20% of total assets, unless such distribution is approved by the Rural Utility Service. KEPCo was in compliance with such restrictive covenants as of December 31, 2014 and 2013.
Restriction covenants related to the CoBank debt require KEPCo to design rates that would enable it to maintain a debt-service coverage ratio, as defined by CoBank of at least 1.10. KEPCo was in compliance with the restrictive covenant as of December 31, 2014 and 2013.
In 1997, KEPCo refinanced its mortgage notes payable to the 1988 CFC Grantor Trust through the establishment of a new CFC Grantor Trust Series 1997 (the Series 1997 Trust) by CFC. This refinancing reduced the guaranteed interest rate payable on the mortgage notes to a fixed rate of 7.522%. The mortgage notes payable are pre-payable at any time with no prepayment penalties. The Trust holds certain rights KEPCo assigned to the Trust under an interest rate swap agreement. The swap agreement was put into place in order to mitigate the interest rate risk inherent in the Trust, which holds a fixed rate asset with a variable rate obligation.
The swap agreement terminates in 2017, but is subject to early termination upon the early redemption of the debt. However, any termination costs relating to the termination of the assigned interest rate swaps is KEPCo's responsibility. At December 31, 2014, the termination obligation associated with the assigned swap agreement to early retire the mortgage notes payable is approximately $1.5 million.
This fair value estimate is based on information available at December 31, 2014, and is expected to fluctuate in the future based on changes in interest rates and outstanding principal balance.
KEPCo also is exposed to possible credit loss in the event of noncompliance by the counterparty to the swap agreement. However, KEPCo does not anticipate nonperformance by the counterparty.
(10) Benefit Plans National Rural Electric Cooperative Association (NRECA) Retirement and Security Program - KEPCo participates in the NRECA Retirement and Security Program for its employees.
The NRECA is a defined benefit pension plan qualified under Section 401 and tax-exempt under Section 501(a) of the Internal Revenue Code. It is a multiemployer plan under the accounting standards.
The plans sponsor's Employer Identification Number is 53-0116145 and the Plan Number is 333.
A unique characteristic of a multiemployer plan compared to a single employer plan is that all plan assets are available to pay benefits of any plan participant. Separate asset accounts are not maintained for participating employers. This means that assets contributed by one employer may be used to provide benefits to employees of other participating employers.
KEPCo's contributions to the RS Plan in 2014 and 2013 represented less than 5 percent of the total contributions made to the plan by all participating employers. KEPCo's expense under this program was approximately $0.4 million and $0.4 million, for the year ended December 31, 2014 and 2013, respectively. There have been no significant changes that affect the comparability of 2014 and 2013 contributions.
27
Notes to Consolidated Financial Statements For the RS Plan, a "zone status" determination is not required, and therefore not determined, under the Pension Protection Act (PPA) of 2006. In addition, the accumulated benefit obligations and plan assets are not determined or allocated separately by individual employer. In total, the RS Plan was over 80 percent funded on January 1, 2014, and over 80 percent funded on January 1, 2013, based on the PPA funding target and PPA actuarial value of assets on those dates.
Because the provisions of the PPA do not apply to the RS Plan, funding improvement plans and surcharges are not applicable. Future contribution requirements are determined each year as part of the actuarial valuation of the plan and may change as a result of plan experience.
NRECA Savings 401(k) Plan - All employees of KEPCo are eligible to participate in the NRECA Savings 401(k) Plan. Under the plan, KEPCo contributes an amount not to exceed 5%, dependent upon each employee's level of participation and completion of one year of service, of the respective employee's base pay to provide additional retirement benefits. KEPCo contributed approximately
$90,000 to the plan for the years ended December 31, 2014 and 2013.
WCNOC Pension and Postretirement Plans - KEPCo has an obligation to the WCNOC retirement, supplemental retirement and postretirement medical plans for its 6% ownership interest in Wolf Creek.
The plans provide for benefits upon retirement, normally at age 65. In accordance with the Employee Retirement Income Security Act of 1974, KEPCo has satisfied its minimum funding requirements.
Benefits under the plans reflect the employee's compensation, years of service and age at retirement.
WCNOC uses a measurement date of December 31 for its retirement plan, supplemental retirement plan and postretirement plan (collectively, the Plans). Information about KEPCo's 6% of the Plans' funded status is on the following page.
28
Notes to Consolidated Financial Statements Pension Benefits Postretirement Benefits 2014 2013 2014 2013 Change in benefit obligation:
Benefit obligation beginning of year $ 20,785,543 $ 22,581,857 $ 1,277,753 $ 1,406,813 Service cost 726,956 872,519 22,122 26,348 Interest cost 1,081,152 965,450 59,182 52,648 Plan participants' contributions 97,847 88,823 Benefits paid (643,257) (555,243) (164,795) (130,531)
Actuarial (gains) losses 4,898,967 (3,079,040) (240,184) (166,348)
Benefit obligations, end of year $ 26,849,361 $ 20,785,543 $ 1,051,925 $ 1,277,753 Change in plan assets:
Fair value of plan assets, beginning of year $ 14,646,824 $ 12,517,154 $ 1,990 $ 1,698 Actual return on plan assets 973,542 1,680,711 Employer contributions 905,022 973,210 65,720 42,000 Plan participants' contributions 97,847 88,823 Benefits paid (611,384) (524,251) (164,795) (130,531)
Fair value of plan assets, end of year 15,914,004 14,646,824 762 1,990 Funded status, end ofyear $ (10,935,357) $ (6,138,719) $ (1,051,163) $ (1,275,763)
Amounts recognized in the consolidated balance sheets:
2014 2013 Other long-term liabilities Wolf Creek pension and postretirement benefit plans $ 12,004,519 $ 7,432,482 29
Notes to Consolidated Financial Statements Amounts recognized in accumulated other comprehensive income (loss) not yet recognized as components of net periodic benefit cost consist of:
Pension Benefits Postretirement Benefits 2014 2013 2014 2013 Net loss $ (8,304,185) $ (3,728,059) $ (3,718) $ (264,963)
Prior service cost (71,323) (78,759)
Accumulated other comprehensive loss $ (8,375,508) $ (3,806,818) $ (3,718) $ (264,963)
Information for the pension plan with an accumulated benefit obligation in excess of plan assets:
Pension Benefits Postretirement Benefits 2014 2013 2014 2013 Projected benefit obligation $ 26,849,361 $ 20,785,543 $ 1,051,925 $ 1,277,752 Accumulated benefit obligation 22,880,170 17,547,994 Fair value of plan assets $ 15,914,004 $ 14,646,824 $ 762 $ 1,990 Weighted average actuarial assumptions used to determine net periodic benefit obligation:
Pension Ben efits Postretirement Benefits 2014 2013 2014 2013 Discount rate 4.20% 4.16% 4.70% 4.70%
Annual salary increase rate 4.00% 4.00% N/A N/A Wolf Creek uses a measurement date of December 31 for its pension and post-retirement benefit plans. The discount rate to determine the current year pension obligation and the following year's pension expense is based on a bond selection-settlement portfolio approach. This approach develops a discount rate by selecting a portfolio of high quality, non-callable corporate bonds that generate a sufficient cash flow to provide for the projected benefit payments of the plan. After the bond portfolio is selected, a single interest rate is determined that equates the present value of the plan's projected benefit payments discounted at this rate with the market value of the bonds selected.
30
Notes to Consolidated Financial Statements Pension Benefits Postretirement Benefits 2014 2013 2014 2013 Components of net periodic cost (benefit):
Service cost $ 726,956 $ 872,519 $ 22,122 $ 26,348 Interest cost 1,081,152 965,450 59,182 52,648 Expected return on plan assets (1,031,989) (941,266)
Amortization Transition obligation, net 32 Prior service cost 7,436 7,436 Actuarial loss, net 381,287 691,984 21,062 33,807 Net periodic cost $1,164,842 $1,596,123 $ 102,366 $ 112,835 Other changes in plan obligations recognized in other comprehensive income:
Current year actuarial loss(gain) $4,957,414 $ (3,818,485) $ (240,184) $ (166,348)
Amortization of actuarial loss (381,287) (691,984) (21,062) (33,807)
Amortization of prior service cost (7,436) (7,436)
Amortization of transition obligation Total recognized in other comprehensive income 4,568,691 (4,517,905) (261,246) (200,187)
Total recognized in net periodic cost and other comprehensive income $ 5,733,533 $ (2,921,782) $ (158,880) $ (87,352)
Weighted average actuarial assumptions used to determine net periodic cost:
Discount rate 4.20% 4.16% 4.70% 4.70%
Expected long term return on plan assets 7.50% 7.50% N/A N/A Compensation rate increase 4.00% 4.00% N/A N/A 31
Notes to Consolidated Financial Statements KEPCo estimates they will amortize the following amounts from regulatory assets into net periodic cost in 2015:
Pension Postretirement Benefits Benefits Actuarial loss $ 381,287 $ 21,062 Prior service cost 7,436 _
Total $ 388,723 $ 21,062 The expected long-term rate of return on plan assets is based on historical and projected rates of return for current and planned asset classes in the plans' investment portfolios. Assumed projected rates of return for each asset class were selected after analyzing long-term historical experience and future expectations of the volatility of the various asset classes. Based on target asset allocations for each asset class, the overall expected rate of return for the portfolios was developed, adjusted for historical and expected experience of active portfolio management results compared to benchmark returns and for the effect of expenses paid from plan assets.
For measurement purposes, the assumed annual health care cost growth rates were as follows:
2014 2013 Health care cost trend rate assumed for next year 7.00% 7.50%
Rate to which the cost trend rate is assumed to decline 5.00% 5.00%
Year that the rate reaches the ultimate trend rate 2019 2019 The health care cost trend rate affects the projected benefit obligation. A 1% change in assumed health care cost growth rates would have effects shown in the following table:
One percentage One percentage point increase point decrease Effect on total service and interest cost $ (1,050) $ 1,026 Effect on post-retirement benefit obligation $ (14,116) $ 14,448 In 2012, Wolf Creek changed its investment advisor resulting in the sale of its then existing levels 1, 2 and 3 investments and the purchase of other level 2 and 3 investments. Its pension and post-retirement plan investment strategy is to manage assets in a prudent manner with regard to preserving principal while providing reasonable returns. It has adopted a long-term investment horizon such that the chances and duration of investment losses are carefully weighed against the long-term potential for appreciation of assets. Part of its strategy includes managing interest rate sensitivity of plan assets relative to the 32
Notes to Consolidated Financial Statements associated liabilities. The primary objective of the pension plan is to provide a source of retirement income for its participants and beneficiaries, and the primary financial objective of the plan is to improve its funded status. The primary objective of the post-retirement benefit plan is growth in assets and preservation of principal, while minimizing interim volatility, to meet anticipated claims of plan participants. Wolf Creek delegates the management of its pension and post-retirement benefit plan assets to independent investment advisors who hire and dismiss investment managers based upon various factors. The investment advisors strive to diversify investments across asset classes, sectors and manager styles to minimize the risk of large losses, based upon objectives and risk tolerance specified by Wolf Creek, which include allowable and/or prohibited investment types. It measures and monitors investment risk on an ongoing basis through quarterly investment portfolio reviews and annual liability measurements.
The target allocations for Wolf Creek's pension plan assets are 31% to international equity securities, 25% to domestic equity securities, 25% to debt securities, 10% to real estate securities, 5% to commodity investments and 4% to other investments. The investments in both international and domestic equity include investments in large-, mid- and small-cap companies, private equity funds and investment funds with underlying investments similar to those previously mentioned. The investments in debt include core and high-yield bonds. Core bonds include funds invested in investment grade debt securities of corporate entities, obligations of U.S. and foreign governments and their agencies, and private debt securities. High-yield bonds include a fund with underlying investments in non-investment grade debt securities of corporate entities, private placements and bank debt. Real estate securities include funds invested in commercial and residential real estate properties while commodity investments include funds invested in commodity-related instruments.
All of Wolf Creek's pension plan assets are recorded at fair value using daily net asset values as reported by the trustee. However, level 3 investments in real estate funds and alternative funds are invested in underlying investments that are illiquid and require significant judgment when measuring them at fair value using market and income-based models. Significant unobservable inputs for underlying real estate investments include estimated market discount rates, projected cash flows and estimated value into perpetuity. Alternative funds invest in a wide range of investments typically with low correlations to traditional investments.
Similar to other assets measured at fair value, GAAP establishes a hierarchal framework for disclosing the transparency of the inputs utilized in measuring pension and post-retirement benefit plan assets at fair value. From time to time, the Wolf Creek pension trust may buy and sell investments resulting in changes within the hierarchy. Where quoted market prices are available in an active market, plan assets are classified within Level 1 of the valuation hierarchy. Level 1 plan assets include cash equivalents, equity and debt investments. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of plan assets with similar characteristics or discounted cash flows.
Level 2 investments include cash equivalents, equity, debt and commodity investments. In certain cases where Level 1 or Level 2 inputs are not available, plan assets are classified within Level 3 of the hierarchy and include certain real estate investments. Significant inputs and valuation techniques used in measuring Level 3 fair values include market discount rates, projected cash flows and the estimated value into perpetuity.
33
Notes to Consolidated Financial Statements The following table provides the fair value of KEPCo's 6% share of Wolf Creek's pension plan assets and the corresponding level of hierarchy as of December 31, 2014 and 2013:
Fair Value Measurements Using Quoted prices in active Significant markets for other Significant identical observable unobservable December 31, assets inputs inputs 2014 Fair Value (Level 1) (Level 2) (Level 3)
Cash equivalents $ 56,659 $ $ 56,659 $
Equity securities U.S. companies 4,031,564 4,031,564 International 4,930,736 4,930,736 Debt securities Core bonds 4,066,416 4,066,416 Commodities 751,579 751,579 Alternative investments 550,033 550,033 Real estate 1,527,017 805,883 721,134 Total $ 15,914,004 $ $ 14,642,837 $ 1,271,167 Fair Value Measurements Using Quoted prices in active Significant markets for other Significant identical observable unobservable December 31, assets inputs inputs 2013 Fair Value (Level 1) (Level 2) (Level 3)
Cash equivalents $ 52,886 $ $ 52,886 $
Equity securities U.S. companies 3,906,209 3,906,209 International 4,706,569 4,706,569 companies Debt securities Core bonds 3,437,348 3,437,348 Commodities 669,611 669,611 Alternative investments 529,374 529,374 Real estate 1,344,827 694,486 650,341 Total $ 14,646,824 $- $ 13,467,109 $ 1,179,715 34
Notes to Consolidated Financial Statements The following tables provides reconciliation of KEPCo's 6% share of Wolf Creek's pension plan assets measured at fair value using significant level 3 inputs for the years ended December 31, 2014 and 2013:
Real Estate Alternative Securities Investments Balance at January 1, 2014 $ 650,341 $ 529,374 Actual return on plan assets Relating to assets still held at the reporting date 70,793 20,659 Balance at December 31, 2014 $ 721,134 $ 550,033 Balance at January 1, 2013 $ 579,665 $ 497,891 Actual return on plan assets Relating to assets still held at the reporting date 70,676 31,483 Balance at December 31, 2013 $ 650,341 $ 529,374 Estimated future benefit payments as of December 31, 2014, for the Plans, which reflect expected future services, are as follows:
Pension Benefits Postretirement Benefits From company From company To/from trust assets To/from trust assets Expected contributions:
2015 $ 600,000 $ 32,229 $ 74,801 $
Expected benefit payments:
2015 $ 657,236 $ 32,229 $ 75,563 $
2016 747,571 31,819 77,469 2017 838,007 31,383 79,351 2018 929,036 30,919 82,821 2019 1,019,979 30,425 84,518 2020-2024 6,378,979 144,248 411,801 35
Notes to Consolidated Financial Statements (11) Commitments and Contingencies Current Economic Environment - KEPCo considers the current economic conditions when planning for future power supply and liquidity needs. The current economic climate may also affect KEPCo's ability to obtain financing.
Given the volatility of the current economic conditions, the values of assets and liabilities recorded in the financial statements could change rapidly, resulting in material future adjustments that could negatively impact the Cooperative's ability to meet debt covenants or maintain sufficient liquidity. Currently under state statutes, the Cooperative's rate making is deregulated and, therefore, expects to be able to recover any economic losses through future rates.
Litigation - The Cooperative is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have an adverse effect on the consolidated financial position, results of operations and cash flows of the Cooperative.
There is a provision in the Wolf Creek operating agreement whereby the owners treat certain claims and losses arising out of the operations of Wolf Creek as a cost to be borne by the owners separately (but not jointly) in proportion to their ownership shares. Each of the owners has agreed to indemnify the others in such cases.
Letter of Credit - KEPCo has an open letter of credit with the Cooperative Finance Committee in the amount of $1,500,000 which matures May 23, 2015. This letter of credit renews automatically each year unless notice is given. The letter of credit is intended to provide financial security to Southwest Power Pool pursuant to its credit policy.
Nuclear Liability Insurance - Pursuant to the Price-Anderson Act, which has been reauthorized through December 31, 2025, by the Energy Policy Act of 2005, the Cooperative is required to insure against public liability claims resulting from nuclear incidents to the current limit of public liability, approximately $13.6 billion. This limit of liability consists of the maximum available commercial insurance of $375.0 million and the remaining $13.2 billion is provided through mandatory participation in an industry-wide retrospective assessment program. In addition, Congress could impose additional revenue-raising measures to pay claims. Under this retrospective assessment program, the owners of Wolf Creek are jointly and severally subject to an assessment of up to $127.3 million (KEPCo share is
$7.64 million), payable at no more than $19.0 million (KEPCo share is $1.14 million) per incident per year per reactor. Both the total and yearly assessment is subject to an inflationary adjustment every five years with the next adjustment in 2018.
The owners of Wolf Creek carry decontamination liability, premature nuclear decommissioning liability and property damage insurance for Wolf Creek totaling approximately $2.8 billion (KEPCo's share is
$168 million). In the event of an accident, insurance proceeds must first be used for reactor stabilization and site decontamination in accordance with a plan mandated by the NRC. KEPCo's share of any remaining proceeds can be used to pay for property damage or, if certain requirements are met, including decommissioning the plant, toward a shortfall in the NDT fund.
36
Notes to Consolidated Financial Statements The owners also carry additional insurance with Nuclear Energy Industry Limited (NEIL) to cover costs of replacement power and other extra expenses incurred during a prolonged outage resulting from accidental property damage at Wolf Creek. If significant losses were incurred at any of the nuclear plants insured under the NEIL policies, KEPCo may be subject to retrospective assessments under the current policies of approximately $2.36 million.
Although KEPCo maintains various insurance policies to provide coverage for potential losses and liabilities resulting from an accident or an extended outage, KEPCo's insurance coverage may not be adequate to cover the costs that could result from a catastrophic accident or extended outage at Wolf Creek. Any substantial losses not covered by insurance, to the extent not recoverable in rate prices, would have a material effect on KEPCo's consolidated financial results.
Decommissioning Insurances - KEPCo carries premature decommissioning insurance that has several restrictions, one of which can only be used if Wolf Creek incurs an accident exceeding $500 million in expenses to safely stabilize the reactor, to decontaminate the reactor and reactor station site in accordance with a plan approved by the Nuclear Regulatory Commission (NRC) and to pay for on-site property damages.
Once the NRC property rule requiring insurance proceeds to be used first for stabilization and decontamination has been complied with, the premature decommissioning coverage could pay for the decommissioning fund shortfall in the event an accident at Wolf Creek exceeds $500 million in covered damages and causes Wolf Creek to be prematurely decommissioned.
Nuclear Fuel Commitments - At December 31, 2014, KEPCo's share of WCNOC's nuclear fuel commitments was approximately $3.5 million for uranium concentrates expiring in 2017, $0.5 million for conversion expiring in 2017, $11.9 million for enrichment expiring at various times through 2045 and
$4.3 million for fabrication through 2045.
Purchase Power Commitments - KEPCo has supply contracts with various utility companies to purchase power to supplement generation in the given service areas. KEPCo has provided the Southwest Power Pool a letter of credit to help insure power is available if needed.
(12) Fair Value of Assets and Liabilities ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
ASC Topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
37
Notes to Consolidated Financial Statements II Level I Quoted prices in active markets for identical assets or liabilities I
I Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities 4
Following is a description of the valuation methodologies used for assets and liabilities measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as 4
the general classification of such assets and liabilities pursuant to the valuation hierarchy.
Decommissioning Fund - The decommissioning fund consists of various mutual funds where I4 fair value is determined by quoted market prices in an active market and, as such, are classified within Level 1 of the valuation hierarchy. 4 The following table presents the fair value measurements of assets and liabilities recognized in the 4
accompanying consolidated balance sheets measured at fair value on a recurring basis and the level 4 within the ASC 820 fair value hierarchy in which the fair value measurements fall at December 31, 2014: 4 4
Fair Value Measurements Using I
I Quoted price in active Significant markets for other Significar identical observable unobserva ble assets inputs inputs Fair Value (Level 1) (Level 2) (Level 3 .4 Decommissioning fund Domestic fund International fund Domestic bond fund
$ 10,754,081 1,462,801 6,820,595
$ 10,754,081 1,462,801 6,820,595 I
Money market 34,802 34,802
$ 19,072,279 $ 19,072,279 $ $
Total 4
A 4
4 38 4- I
Notes to Consolidated Financial Statements The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying consolidated balance sheets at amounts other than fair value.
Cash and Cash Equivalents - Due to the short term maturity of cash and cash equivalents, the carrying amount approximates fair value.
Investments in CFC and Other Associated Organizations - KEPCo considers CFC and other associated organizations certificates to be a condition of borrowing and patronage capital certificates to be directly related to borrowing. As such, KEPCo management believes the fair value of these assets is not determinable and they are reflected at their carrying amount.
Bond Fund Reserve - The bond fund reserve consists of various held-to-maturity securities where the fair value is primarily based on quoted market prices.
Line of Credit and Long-Term Debt Variable-Rate Debt - The carrying amount approximates fair value because of the short-term variable rates of those debt instruments.
Fixed-Rate Debt - The fair value of all fixed-rate debt is based on the sum of the estimated value of each issue, taking into consideration the current rate offered to KEPCo for debt of similar remaining maturities.
The following table presents estimated fair values of KEPCo's financial instruments at December 31, 2014 and 2013:
December 31, 2014 December 31, 2013 Carrying Fair Carrying Fair Value Value Value Value Financial assets:
Cash and cash equivalents $ 1,202,643 $ 1,202,643 $ 5,181,544 $ 5,181,544 Bond fund reserve 4,490,786 4,531,117 4,465,868 4,579,181 Financial liabilities:
Long-term debt $ 167,810,872 $ 187,686,399 $ 162,953,975 $ 170,011,842 39
Notes to Consolidated Financial Statements (13) Patronage Capital In accordance with KEPCo's bylaws, KEPCo's current margins are to be allocated to members.
KEPCo's current policy is to allocate to the members based on revenues collected from the members as a percentage of total revenues. As disclosed in note 3, if KEPCo's consolidated financial statements were adjusted to reflect accounting principles generally accepted in the United Stated of America, total patronage capital would be substantially less. As noted in the consolidated statements of changes in patronage capital, no patronage capital distributions were made to members in 2014 and 2013.
(14) Subsequent Events The Company has evaluated subsequent events through April 2, 2015, which is the date the financial statements were available to be issued. No events were significant enough to warrant disclosures in the accompanying financial statements or notes.
40
KEPCo's Mission Statement KEPCo exists on behalf of its Members to produce, procure, transmit, deliver and maintain a reliable supply of wholesale electricity within financialguidelines and risk tolerances established by the Board.
KEPCo Member Area Map KEPCo's Vision Statement KEPCo will work to provide Consumer-Members the best possible value in reliable electricity and to play an active role in helping improve the economy and quality of life.
41
Kansas Electric Power Cooperative, Inc.
A Touchstone Energy Cooperative *!,1)ý PO Box 4877 - Topeka, KS 66604 600 SW Corporate View - Topeka, KS 66615 (785)-273-7010 www.kepco.org