Document Anaheim_doc_013a6aed95

CITY OF ANAHEIM ELECTRIC UTILITY FUND Financial Statements June 30, 2014 and 2013 (With Independent Auditors’ Report Thereon) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Table of Contents Page Independent Auditors’ Report 1 Management’s Discussion and Analysis (Unaudited) 3 Financial Statements: Statements of Net Position 19 Statements of Revenues, Expenses, and Changes in Net Position 21 Statements of Cash Flows 22 Notes to Financial Statements 24 ---PAGE BREAK--- Independent Auditors’ Report The Honorable City Council City of Anaheim, California: We have audited the accompanying financial statements of the Electric Utility Fund of the City of Anaheim, California (the Fund), as of and for the years ended June 30, 2014 and 2013, and the related notes to the financial statements, which collectively comprise the Fund’s basic financial statements as listed in the table of contents. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the 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 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 financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. KPMG LLP Suite 700 20 Pacifica Irvine, CA 92618-3391 KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative (“KPMG International”), a Swiss entity. ---PAGE BREAK--- Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Electric Utility Fund of the City of Anaheim, California, as of June 30, 2014 and 2013, and the changes in its financial position and its cash flows for the years then ended in accordance with U.S. generally accepted accounting principles. Emphasis of Matter As discussed in note 1 to the financial statements, the financial statements present only the Electric Utility Fund of the City of Anaheim, California, and do not purport to, and do not, present fairly the financial position of the City of Anaheim, California (City) as of June 30, 2014 and 2013, and the changes in its financial position and its cash flows, where applicable, for the years then ended, in conformity with U.S. generally accepted accounting principles. Our opinion is not modified with respect to this matter. Other Matter Required Supplementary Information U.S. generally accepted accounting principles require that management’s discussion and analysis on pages 3 through 18 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated December 10, 2014 on our consideration of the City’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the result of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the City’s internal control over financial reporting and compliance. December 10, 2014 2 ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Management’s Discussion and Analysis (Unaudited) June 30, 2014 and 2013 (In thousands) As management of Anaheim Public Utilities, a department of the City of Anaheim (City), we offer the readers of the City of Anaheim Electric Utility Fund (Electric Utility) financial statements a narrative overview and analysis of the financial statements for the fiscal years ended June 30, 2014 and 2013. We encourage readers to consider the information presented here in conjunction with the accompanying financial statements. Financial Highlights • The Electric Utility’s total net position for fiscal years 2014 and 2013 was $351,905 and $349,991, respectively. Net investment in capital assets increased by $24,206 to improve the distribution system as one of the nation’s most reliable electric utilities without adding long-term debt. • Interest expenses for fiscal years 2014 and 2013 were $27,340 and $31,480, respectively. A 13.2% decrease reflects improved debt management conditions. The Electric Utility will continue to seek prudent bond refinancing opportunities to help reduce debt service costs. • The Electric Utility’s Public Benefit Program expended $5,880 in community service-related programs for the 2014 fiscal year. The program has provided public benefits in the areas of energy efficiency incentives, low income rate discounts, lighting incentives, and renewable energy for residential and business customers. • The Electric Utility invested $6,463 installing the largest city-owned and roof-mounted, solar panel system on the Anaheim Convention Center. The system will generate enough energy to power 600 homes for a year and is included in the Electric Utility’s renewable energy portfolio. It shows Anaheim’s commitment to renewable energy initiatives and clean energy environment. • Purchased power for fiscal years 2014 and 2013 were $275,013 and $279,842, respectively. A decrease of $4,829 reflects the Electric Utility’s strategies to procure lower power costs and to comply with Renewable Portfolio Standards (RPS) requirements. Overview of the Financial Statements This discussion and analysis is intended to serve as an introduction to the Electric Utility’s financial statements. Because the Electric Utility is a business-type activity of the City, an enterprise fund is used to account for its operations. These financial statements include only the activities of the Electric Utility and provide comparative information for the last two fiscal years. Information on citywide financial results is available in the City’s Comprehensive Annual Financial Report as of June 30, 2014. The Electric Utility’s financial statements comprise two components: financial statements and notes to financial statements. Included as part of the financial statements are the statement of net position, statements of revenues, expenses, and changes in net position, and statements of cash flows. 3 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Management’s Discussion and Analysis (Unaudited) June 30, 2014 and 2013 (In thousands) The statements of net position present information on assets and deferred outflows of resources, and liabilities and deferred inflows of resources with the difference between the two reported as net position. Over time, increases or decreases in net position may serve as a useful indicator of whether the financial condition of the Electric Utility is improving or deteriorating. The statements of revenues, expenses, and changes in net position present Electric Utility’s revenues and expenses during the most recent two fiscal years. The statements provide information showing how the Electric Utility’s net position changed. The statements of cash flows present the flows of cash and cash equivalents provided by and used for operating activities, other cash sources, and uses in capital as well as investing activities during the last two fiscal years. The notes to financial statements provide additional information that is essential to the full understanding of the data provided in the financial statements. 4 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Management’s Discussion and Analysis (Unaudited) June 30, 2014 and 2013 (In thousands) Financial Analysis The Electric Utility’s condensed statements of net position at June 30 are as follows: Condensed statements of net position 2012 2014 2013 as restated * Current and other assets $ 426,126 499,339 440,017 Net utility plant 855,077 827,439 821,462 Deferred outflows of resources 2,756 3,352 4,099 Total assets and deferred outflows of resources 1,283,959 1,330,130 1,265,578 Long-term liabilities, net of current portion 767,761 794,608 822,714 Current liabilities 75,195 117,568 52,483 Deferred inflows of resources 89,098 67,963 59,392 Total liabilities and deferred inflows of resources 932,054 980,139 934,589 Net investment in capital assets 255,497 231,291 233,903 Restricted 40,283 42,981 36,387 Unrestricted 56,125 75,719 60,699 Total net position $ 351,905 349,991 330,989 * Restatement due to implementation of Governmental Accounting Standards Board (GASB) Statement No. 65. As of June 30, 2014 Assets and Deferred Outflows of Resources Total assets and deferred outflows of resources as of June 30, 2014 were $1,283,959 reflecting a decrease of $46,171 mainly due to the following: • Current and other assets, comprised of restricted and unrestricted assets, had a net decrease of $73,213 – Restricted assets decreased by $84,833 mainly due to $61,078 of restricted cash for debt service used to retire the 2002-B Electric Revenue Bonds, and $29,862 of 2011 bond proceeds to fund capital projects. 5 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Management’s Discussion and Analysis (Unaudited) June 30, 2014 and 2013 (In thousands) – Unrestricted assets increased by $11,620 mainly due to an increase of $27,005 in prepaid power costs offset by a decrease of the cash reserve fund of $5,422 for underground capital programs and other unrestricted cash fund. • Net utility plant increased by $27,638 mainly due to implementing a new Customer Information System (CIS) and continued improvements in the distribution system to continue Anaheim’s recognition as one of the nation’s most reliable electric utilities. • Deferred outflows of resources, consisting of deferred charge on refunding bonds, decreased by $596 (17.8%) due to current year amortization. Liabilities and Deferred Inflows of Resources Total liabilities and deferred inflows of resources as of June 30, 2014 were $932,054 reflecting a decrease of $48,085 due to the following: • Long-term liabilities, including the current portion of $23,355 in current liabilities, decreased a total of $79,287 (9.3%).This decrease occurred through a sustained focus on accelerating principal payments to various long-term liabilities in an effort to continually strengthen the financial position. (See note 7 of the notes to financial statements for additional information regarding long-term liabilities). • Current liabilities, excluding the current portion of $23,355 related to debt liabilities increased by $10,067 (24.1%) mainly due to a $13,495 increase in accounts payable and accrued expenses resulting from increases in compliance obligation liabilities for the Cap and Trade program. • Deferred inflow of resources, consisting of regulatory credits increased by $21,135 (31.1%) due to less revenues were recognized in current year in anticipation of future regulatory and legislatively mandated cost increases. (See note 1 of the notes to financial statements for additional information regarding regulatory credits). Net Position The Electric Utility’s net position, which represents the difference between the Electric Utility’s total assets and deferred outflows of resources less total liabilities and deferred inflows of resources, may serve over time as a useful indicator of the Electric Utility’s financial position. This net position at June 30, 2014, totaled $351,905, an increase of $1,914 mainly due to the following: • The net investment in capital assets of $255,497 reflects the investment in the Electric Utility’s capital assets, less any related outstanding debt used to acquire those assets. This portion increased by $24,206 (10.5%) due to the Electric Utility investing in more capital assets to provide reliable and efficient services to customers. Resources needed to repay the outstanding debt must come from other sources such as operations. 6 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Management’s Discussion and Analysis (Unaudited) June 30, 2014 and 2013 (In thousands) • The restricted net position total of $40,283 represents resources reserved for external restrictions on how they may be used, such as debt service payments, the Public Benefit Program, and other legally restricted purposes. This portion decreased by $2,698 primarily due to less resources required for debt service. • The unrestricted net position of $56,125 decreased by $19,594 (25.9%) primarily due to more resources used for investments in capital assets without increases from other revenue resources. As of June 30, 2013 Assets and Deferred Outflows of Resources Total assets and deferred outflows of resources as of June 30, 2013 and 2012 were $1,330,130 and $1,265,578, respectively. The $64,552 increase was due to a $59,322 increase in current and other assets and a $5,977 increase in net utility plant, offset by a $747 decrease in deferred outflows of resources. Current and other assets increased 13.5% primarily due to an increase of $47,202 in cash and investments of which $44,000 was unspent proceeds from the Revolving Credit Agreement (see statements of cash flows for additional information regarding changes in cash and cash equivalents), and an increase of $10,026 in prepaid purchase power for various transmission projects, the Magnolia power project in the Southern California Public Power Authority (SCPPA), new Cap and Trade Compliance, and the Intermountain Power Agency (IPA) prepaid estimated power costs being higher than actual costs. Net utility plant increased 0.7% due to current year’s net capital asset additions of $45,946 related to production, distribution, and general utility plant, which was offset by depreciation expense of $39,969. Deferred outflows of resources, consisting of deferred charge on refunding bonds, decreased by $747 (18.2%) due to the current year amortization. 7 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Management’s Discussion and Analysis (Unaudited) June 30, 2014 and 2013 (In thousands) Liabilities and Deferred Inflows of Resources Total liabilities and deferred inflows of resources as of June 30, 2013 and 2012 were $980,139 and $934,589, respectively. The $45,550 increase was due to a $65,085 increase in current liabilities and an $8,571 increase in deferred inflow of resource offset by a $28,106 decrease in long-term liabilities. Current liabilities increased by $65,085 was mainly due to a $60,205 planned early retirement of 2002-B Revenue Bonds in July 2013, and an increase of $6,151 in accounts payable and accrued expenses resulting from increased purchased power costs. Total long-term debt decreased by $28,106 was primarily due to the issuance of note payable of $46,600 under the Revolving Credit Agreement offset by a $60,205 of long-term debt move to current liabilities for early retirement of 2002-B Revenue Bonds and $18,995 of the current year principal payments. Deferred inflow of resource, consisting of regulatory credits increased by $8,571 (14.4%) (See note 1 of the notes to financial statements for additional information regarding regulatory credits). Net Position Total net position as of June 30, 2013 and 2012 were $349,991 and $330,989, respectively. Total net position increased by $19,002 primarily due to an increase in unrestricted net position of $15,020, and an increase in restricted net position of $6,549. Unrestricted net position increased 24.7% primarily due to an increase in unrestricted cash and investments from better operating result during this fiscal year. Restricted net position increased 18.1% primarily due to an increase of $2,903 restricted for debt service and an increase of $3,342 restricted for public benefit program during fiscal year 2013. 8 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Management’s Discussion and Analysis (Unaudited) June 30, 2014 and 2013 (In thousands) The Electric Utility’s statements of revenues, expenses, and changes in net position for the years ended June 30 are summarized as follows: Condensed statements of revenues, expenses, and changes in net position 2012 2014 2013 as restated Revenues: Retail sales, net $ 316,916 329,311 313,921 Wholesale sales 42,374 26,322 19,506 Rate Stabilization Account revenues 26,500 41,000 24,000 Surplus natural gas sales 1,107 9,127 2,767 Transmission revenues 34,912 41,854 33,923 Other revenues 4,242 4,344 3,814 Interest income 4,731 1,991 7,662 Capital contributions 4,362 3,782 5,727 Total revenues 435,144 457,731 411,320 Expenses: Purchased power 275,013 279,842 245,442 Fuel and generation 23,643 21,987 21,884 Operations, maintenance, and 43,079 42,937 46,905 administration Depreciation 41,770 39,969 38,995 Interest expense 27,340 31,480 32,558 Total expenses 410,845 416,215 385,784 Transfers: Transfer to the General Fund of the City (17,127) (17,504) (15,067) Transfer of right-of-way fee to the City (5,555) (5,069) (4,845) Transfers from (to) other funds of the City 297 59 (872) Total transfers (22,385) (22,514) (20,784) Changes in net position 1,914 19,002 4,752 Net position at beginning of year, as restated 349,991 330,989 326,237 Net position at end of year $ 351,905 349,991 330,989 9 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Management’s Discussion and Analysis (Unaudited) June 30, 2014 and 2013 (In thousands) Revenues Year ended June 30, 2014 Total revenues for the year ended June 30, 2014 were $435,144, a decrease in total revenues of $22,587 mainly due to the following: • Retail sales, net of bad debt, totaled $316,916. A decrease of $12,395 was due to lower retail sales volumes resulting from cooler weather and a continued investment in conservation and efficiency measures during the 2014 fiscal year 2014. Retail sales are the primary revenue source for Electric Utility that represents 72.8% of total revenues. The Electric Utility continues to provide competitive rates for its customers. • Wholesale sales totaled $42,374. An increase of $16,052 (61.0%) was mainly due to a 65% increase in wholesale sales volumes, resulting from competitive rates in the wholesale market, more surplus energy available from the increased renewable resources purchased, and reduced retail sales in the fiscal year. • Rate Stabilization Account (RSA) revenues of $26,500 were recognized in this fiscal year in order to maintain at least a $50 million reserve balance, and to retain a sound debt service coverage ratio for the Electric Utility. A decrease of $14,500 (35.4%) was due to decreased purchased power costs and reduced debt service requirements in the fiscal year. • Surplus natural gas sales were $1,107. A decrease of $8,020 (87.9%) was due to less natural gas available for resale in the spot market and more purchased gas used for Magnolia power plant resulting in an 96% increase in its power production. • Transmission revenues were $34,912. A decrease of $6,942 (16.6%) was due to lower revenue derived from Congestion Revenue Rights (CRR) in the market and lower transmission demand. Transmission revenues are based upon the Electric Utility providing use of its transmission entitlements to the California Independent System Operator (CAISO) as a participating transmission owner. These revenues are based upon transmission rates charged by CAISO and demand in the participants market. Year ended June 30, 2013 Total revenues for the year ended June 30, 2013 were $457,731 as compared with $411,320 in the prior year, an increase in total revenues of $46,411 This increase was primarily due to an increase of $15,390 in retail sales, an increase of $6,816 in wholesale sales, an increase of $17,000 in Rate Stabilization Account (RSA) revenues, and an increase of $7,931 in transmission revenues. The increase of 4.9% in retail sales revenue was due to higher sales volumes in the summer months with higher rate during fiscal year of 2013. The increase of 34.9% in wholesale sales revenue was mainly due to higher wholesale price with more surplus power available from the increasing renewable resource purchased in this fiscal year. 10 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Management’s Discussion and Analysis (Unaudited) June 30, 2014 and 2013 (In thousands) The increase of 70.8% and $41,000 in RSA revenues were recognized in this fiscal year in order to maintain approximately $50 million reserve balance, to retain good debt service coverage ratio for the Electric Utility bond ratings, and to cover increasing purchase power costs. The increase of 23.4% in transmission revenues was mainly due to a higher price for transmission Congestion Revenue Rights (CRR) in the market when San Onofre Nuclear Generating Station (SONGS) plant was shut down causing heavy traffic congestion in this fiscal year. Transmission revenues are based upon the Electric Utility providing use of its transmission entitlements to the CAISO as a participating transmission owner. These revenues are based upon the transmission rates charged by CAISO and the demand in the participants market. Revenues by Source Retail Sales, net 73% Wholesale Sales 10% RSA Revenues 6% Transmission Revenues 8% Surplus Natural Gas Sales Other Revenues 1% Capital Contributions 1% Interest Income 1% Year ended June 30, 2014 11 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Management’s Discussion and Analysis (Unaudited) June 30, 2014 and 2013 (In thousands) Revenues by Source Expenses Year ended June 30, 2014 Total expenses for the year ended June 30, 2014 were $410,845, a decrease in total expenses of $5,370 mainly due to the following: • Power costs totaled $275,013. A decrease of $4,829 was due primarily to the combination of strategies to procure lower power costs from renewable resource to comply with RPS requirements, long-term commitments with conventional power supplies and internal power generation. • Fuel and generation totaled $23,643, an increase of $1,656 mainly due to higher decommissioning-related expenses for SONGS. • Depreciation expense was $41,770, an increase of $1,801 reflecting an increase in depreciable capital assets from additions and improvements during the fiscal year. • Interest expense was $27,340, a decrease of $4,140 (13.2%) mainly reflecting a decrease in outstanding bonds and lower interest rates from continually reviewing and improving the debt management strategy. Retail Sales, net 72% Wholesale Sales 6% RSA Revenues 9% Transmission Revenues 9% Surplus Natural Gas Sales 2% Other Revenues 1% Capital Contributions 1% Interest Income < 1% Year ended June 30, 2013 12 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Management’s Discussion and Analysis (Unaudited) June 30, 2014 and 2013 (In thousands) Year ended June 30, 2013 Total expenses for the year ended June 30, 2013 were $416,215 as compared with $385,784 in the prior year. This $30,431 increase in total expenses was mainly the result of an increase in purchased power costs of $34,400, offset by a decrease in operations, maintenance, and administration of $3,968. The 14.0% increase in purchased power costs was due primarily to the combination of increases in the renewable power purchase of $17,751 to reach the resource mix of 25% by 2016, higher market power purchase of $10,810 and higher Canyon Power costs of $5,195 due to the outages from Magnolia and San Juan plants. The 8.5% decrease in operations, maintenance, and administrative expenses was mainly due to various reductions in administrative expenses, and larger amount of overhead costs being eligible for capitalization. During fiscal year 2013, the Electric Utility added construction work in progress of $45,717. Transfers Year ended June 30, 2014 • Transfers to the City’s General Fund, as defined by City Charter, are equal to a maximum of 4% of total operating revenues. The transfer to the City’s General Fund was $17,127 for fiscal year 2014, which is based on the current year’s total operating revenues and true-up adjustments on prior year’s total operating revenues. There were no significant changes in the amount of transferred to the City during fiscal year 2014 when compared with fiscal year 2013. • The transfer of the right-of-way fee to the City is equal to 1.5% of retail electric revenues of the prior fiscal year. The right-of-way fee transferred to the City was $5,555 for fiscal year 2014. There were no significant changes in the amount of right-of-way fee transferred to the City during fiscal year 2014 when compared with fiscal year 2013. • Transfers from other funds of the City in fiscal year 2014 were $297 as compared with transfers from other funds of $59 in the prior fiscal year. The $297 was related to joint capital assets with the Water Utility, and transferred its share to Electric Utility upon completion. Year ended June 30, 2013 Transfers to the City’s General Fund, as defined by City Charter, are equal to a maximum of 4% of total operating revenues. The transfer to the City’s General Fund was $17,504 for fiscal year 2013, which is based on the current year’s total operating revenues and true-up adjustments on prior year’s total operating revenues. An increase of $2,437 was mainly due to the increased operating revenue in the fiscal year 2013. 13 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Management’s Discussion and Analysis (Unaudited) June 30, 2014 and 2013 (In thousands) The transfer of the right-of-way fee to the City is equal to 1.5% of retail electric revenues of the prior fiscal year. The right-of-way fee transferred to the City was $5,069 for fiscal year 2013. There were no significant changes in the amount of right-of-way fee transferred to the City during fiscal year 2013 when compared with fiscal year 2012. Transfers from other funds of the City in fiscal year 2013 were $59 as compared with transfers to other funds of $872 in the prior fiscal year. There was no significant amount in this fiscal year. The $872 was capital assets of facility lighting enhancement and Arena Box Office Green Roof construction transferred to the Convention Center in the prior year. Expenses and Transfers Purchased Power 64% Fuel and Generation 6% Operations, Maintenance, and Administration 10% Depreciation 9% Transfers 5% Interest Expense 6% Year ended June 30, 2014 14 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Management’s Discussion and Analysis (Unaudited) June 30, 2014 and 2013 (In thousands) Expenses and Transfers Capital Assets and Debt Administration Capital Assets The Electric Utility’s capital assets as of June 30 are as follows: 2014 2013 2012 Production $ 123,622 123,412 119,144 Transmission 94,220 92,323 92,229 Distribution 877,903 851,842 805,703 General plant 127,752 112,045 109,346 Land 35,671 35,671 35,671 Construction in progress 55,001 34,814 46,201 Total utility plant 1,314,169 1,250,107 1,208,294 Less accumulated depreciation (459,092) (422,668) (386,832) Net utility plant $ 855,077 827,439 821,462 Additional information on the Electric Utility’s capital assets can be found in note 3 of the notes to the financial statements. Purchased Power 64% Fuel and Generation 5% Operations, Maintenance, and Administration 10% Depreciation 9% Transfers 5% Interest Expense 7% Year ended June 30, 2013 15 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Management’s Discussion and Analysis (Unaudited) June 30, 2014 and 2013 (In thousands) As of June 30, 2014 The Electric Utility’s investment in utility plant, net of accumulated depreciation, was $855,077 as of June 30, 2014. An increase of $27,638 was due to total utility plant increasing by $64,062 and partial offset by $36,424 in accumulated depreciation mainly due to the following: • Distribution assets totaled $877,903, an increase of $26,061 mainly due to the completion of 2.6 miles of underground conversion on Brookhurst Street and Douglass Road, replacement of 116 high-voltage transformers, 48 high-voltage switches, six 220kV circuit breakers at Lewis Substation, and about 50,000 feet of degraded direct buried cable. • General assets totaled $127,752, an increase of $15,707 (14.0%) mainly due to implementation of a new Customer Information System (CIS) system to replace the 20-year-old existing system. This updated system will provide more efficient and functional services to Anaheim’s customers. • Construction in progress totaled $55,001, an increase of 20,187 (58.0%) mainly due to the replacement of aging overhead electrical lines with state-of-the-art underground projects on Lincoln Avenue, West Street and Westmont Street; the installation of a photovoltaic system (solar panels) at the Anaheim Convention Center, replacement of aging circuit breakers, and improvements at substations. • Accumulated depreciation of $459,092 increased by $36,424 mainly due to the current year’s depreciation expense of $41,770 offset by $5,346 from retired assets. As of June 30, 2013 The Electric Utility experienced an increase in total utility plant this fiscal year of $41,813 which includes the expansion or improvement of existing substations, transmission and distribution systems improvements, the replacement of aging overhead electrical lines with state-of-the-art underground projects on Brookhurst street, La Palma street, and between Lincoln and Magnolia streets, and upgrading equipment for San Juan plant. Accumulated depreciation increased $35,836 mainly due to current year depreciation expense of $39,969. 16 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Management’s Discussion and Analysis (Unaudited) June 30, 2014 and 2013 (In thousands) Long-Term Debt The Electric Utility’s outstanding long-term debt as of June 30 is as follows: 2014 2013 2012 Revenue bonds $ 606,885 678,680 701,755 Electric system notes 35,600 44,000 — Long-term debt 642,485 722,680 701,755 Less: Current portion (23,355) (78,395) (18,995) Unamortized bond premium 14,967 16,390 9,009 Total noncurrent long-term debt outstanding $ 634,097 660,675 691,769 • The Utility’s bond indentures require the Utility to maintain a minimum debt service coverage ratio of 1.25. The Utility’s debt service coverage ratios were 2.0 at June 30, 2014 and 2013, respectively. The revenues of the Electric Utility have been pledged to pay the outstanding long-term debt. • The credit rating of the Electric Utility was AA-by Fitch Ratings, and AA- by Standard & Poor’s Corporation. These ratings reflect the Utility’s good debt service coverage levels, strong liquidity position, stable financial performance, and mature and diverse customers in an economy growth area. Additional information on the Electric Utility’s long-term liabilities can be found in note 7 of the notes to financial statements. As of June 30, 2014 Total long-term debt decreased by $80,195 (11.1%) due to the $60,205 early retirement of the 2002-B Revenue Bonds, $11,590 of scheduled principal payments for other revenue bonds, and a $8,400 decrease in Electric system notes. As of June 30, 2013 Total long-term debt outstanding increased $23,525 due to new debt from revolving credit agreement of $46,600 offset by current year principal payments of $18,995 and pay-down of $4,080 on the refunded 2002-B Revenue Bonds by the 2012-A Revenue Bonds. The revenues of the Electric Utility have been pledged to pay the outstanding long-term debt. 17 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Management’s Discussion and Analysis (Unaudited) June 30, 2014 and 2013 (In thousands) Economic Factors and Rates California Senate Bill 1X 2 (California Renewable Energy resources Act) signed into law in April 2011 mandated that all California utilities are required to reach 25% renewable power in their power portfolios by 2016, and 33% by 2020. The higher renewable power costs will increase future power supply costs, but the Electric Utility has a number of strategies to mitigate the potential cost impacts. There have not been any base rate increases since fiscal year 2012. Requests for Information This financial report is designed to provide a general overview of the Electric Utility’s finances. Questions concerning any information provided in this report or requests for additional financial information should be addressed to the Assistant General Manager – Finance and Administration, Anaheim Public Utilities, 201 South Anaheim Boulevard, Suite 1101, Anaheim, California 92805. 18 ---PAGE BREAK--- 19 (Continued) CITY OF ANAHEIM ELECTRIC UTILITY FUND Statements of Net Position June 30, 2014 and 2013 (In thousands) Assets and Deferred Outflows of Resources 2014 2013 Utility plant: Production $ 123,622 123,412 Transmission 94,220 92,323 Distribution 877,903 851,842 General plant 127,752 112,045 Total depreciable utility plant 1,223,497 1,179,622 Less accumulated depreciation (459,092) (422,668) Net depreciable utility plant 764,405 756,954 Land 35,671 35,671 Construction in progress 55,001 34,814 Net utility plant 855,077 827,439 Restricted assets: Cash and cash equivalents 22,846 33,688 Investments 192,757 209,461 Total restricted assets 215,603 243,149 Other assets: Prepaid purchased power 62,064 56,519 Unamortized prepaid bond insurance 1,103 1,254 Total other assets 63,167 57,773 Total noncurrent assets 1,133,847 1,128,361 Current assets: Cash and cash equivalents 10,006 17,538 Investments 28,549 36,354 Restricted cash and cash equivalents 6,988 62,515 Restricted investments 16,179 17,939 Accounts receivable, net 41,205 43,220 Accrued interest receivable 1,051 1,218 Materials and supplies inventory 11,968 9,683 Prepaid purchased power 31,410 9,950 Total current assets 147,356 198,417 Total assets 1,281,203 1,326,778 Deferred outflows of resources: Deferred charge of refunding bonds 2,756 3,352 Total deferred outflows of resources 2,756 3,352 Total assets and deferred outflows of resources $ 1,283,959 1,330,130 ---PAGE BREAK--- 20 CITY OF ANAHEIM ELECTRIC UTILITY FUND Statements of Net Position June 30, 2014 and 2013 (In thousands) Liabilities and Deferred Inflows of Resources 2014 2013 Long-term liabilities: Long-term debt obligation, less current portion $ 634,097 663,275 Provision for decommissioning costs 133,664 131,333 Total long-term liabilities 767,761 794,608 Current liabilities (payable from restricted assets): Current portion of long-term debt 11,916 68,898 Accounts payable 3,566 3,133 Wages payable 125 134 Arbitrage rebate liabilities 337 158 Accrued interest payable 7,223 8,131 Total current liabilities (payable from restricted assets) 23,167 80,454 Current liabilities (payable from unrestricted current assets): Current portion of long-term debt 11,439 9,497 Accounts payable and accrued expenses 36,093 23,031 Interfund payable — 104 Wages payable 650 391 Deposits 3,846 4,091 Total current liabilities (payable from unrestricted current assets) 52,028 37,114 Total liabilities 842,956 912,176 Deferred inflows of resources: Deferred regulatory credits 89,098 67,963 Total deferred inflows of resources 89,098 67,963 Total liabilities and deferred inflows of resources 932,054 980,139 Net position: Net investment in capital assets 255,497 231,291 Restricted for: Debt service 12,263 16,536 Renewal and replacement 16,001 15,852 Other purposes 12,019 10,593 Unrestricted 56,125 75,719 Total net position 351,905 349,991 Total liabilities, deferred inflows of resources, and net position $ 1,283,959 1,330,130 See accompanying notes to financial statements. ---PAGE BREAK--- 21 CITY OF ANAHEIM ELECTRIC UTILITY FUND Statements of Revenues, Expenses, and Changes in Net Position Years ended June 30, 2014 and 2013 (In thousands) 2014 2013 Operating revenues: Retail sales of electricity, net $ 316,916 329,311 Wholesale sales of electricity 42,374 26,322 Rate Stabilization Account revenues 26,500 41,000 Surplus natural gas sales 1,107 9,127 Transmission revenues 34,912 41,854 Other operating revenues 4,242 4,344 Total operating revenues 426,051 451,958 Operating expenses: Purchased power 275,013 279,842 Fuel and generation 23,643 21,987 Operations, maintenance, and administration 43,079 42,937 Depreciation 41,770 39,969 Total operating expenses 383,505 384,735 Operating income 42,546 67,223 Nonoperating revenues (expenses): Interest income 4,731 1,991 Interest expense (27,340) (31,480) Net nonoperating expenses (22,609) (29,489) Income before capital contributions and transfers 19,937 37,734 Capital contributions 4,362 3,782 Transfer to the General Fund of the City (17,127) (17,504) Transfer of right-of-way fee to the City (5,555) (5,069) Transfers from (to) other funds of the City 297 59 Change in net position 1,914 19,002 Net position at beginning of year 349,991 330,989 Net position at end of year $ 351,905 349,991 See accompanying notes to financial statements. ---PAGE BREAK--- 22 (Continued) CITY OF ANAHEIM ELECTRIC UTILITY FUND Statements of Cash Flows Years ended June 30, 2014 and 2013 (In thousands) 2014 2013 Cash flows from operating activities: Receipts from customers and users $ 446,926 457,545 Receipts from services provided to other funds of the City 2,030 2,019 Payments to suppliers (309,304) (305,121) Payments to employees (37,615) (35,790) Payments for services provided by other funds of the City (8,030) (8,808) Net cash provided by operating activities 94,007 109,845 Cash flows from noncapital financing activities: Proceeds from short-term borrowings of line-of-credit 7,400 2,600 Payments on short-term borrowings of line-of-credit (10,000) — Transfers to the General Fund and other funds of the City (22,682) (22,573) Net cash used for noncapital financing activities (25,282) (19,973) Cash flows from capital and related financing activities: Proceeds from borrowings — 147,984 Principal payments on long-term debt (80,195) (18,995) Transfer to escrow account — (96,603) Capital purchases (66,491) (46,101) Interest paid (30,542) (33,880) Issuance costs — (470) Transfers from other funds of the City for capital purposes 297 110 Capital contributions 3,138 3,169 Net cash used for capital and related financing activities (173,793) (44,786) Cash flows from investing activities: Purchases of investment securities (50,336) (93,116) Proceeds from sale and maturity of investment securities 76,761 83,249 Interest income received 4,742 6,709 Net cash provided by (used for) investing activities 31,167 (3,158) (Decrease) increase in cash and cash equivalents (73,901) 41,928 Cash and cash equivalents at beginning of year 113,741 71,813 Cash and cash equivalents at end of year $ 39,840 113,741 ---PAGE BREAK--- 23 CITY OF ANAHEIM ELECTRIC UTILITY FUND Statements of Cash Flows Years ended June 30, 2014 and 2013 (In thousands) 2014 2013 Reconciliation of operating income to net cash provided by operating activities: Operating income $ 42,546 67,223 Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation 41,770 39,969 Increase in provision for decommissioning costs 2,331 388 Changes in assets, liabilities and deferred inflows of resources that provided (used) cash: Accounts receivable, net 2,015 (951) Materials and supplies inventory (2,285) (1,378) Prepaid purchased power (27,005) (10,026) Accounts payable and accrued expenses 13,495 6,047 Wages payable 250 16 Regulatory credits 21,135 8,571 Deposits (245) (14) Total adjustments 51,461 42,622 Net cash provided by operating activities $ 94,007 109,845 Schedule of noncash investing, capital, and financing activities: Capital contributions $ 1,224 613 Transfers from other funds of the City — 51 Increase (decrease) in fair value of investments 156 (4,593) Reconciliation of cash and cash equivalents: Cash and cash equivalents $ 10,006 17,538 Restricted cash and cash equivalents, current portion 6,988 62,515 Restricted cash and cash equivalents, noncurrent portion 22,846 33,688 Total cash and cash equivalents $ 39,840 113,741 See accompanying notes to financial statements. ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) Summary of Significant Accounting Policies Basis of Accounting The Electric Utility Fund (Electric Utility) of the City of Anaheim, California (City) was established on June 30, 1971, at which time the portion of the City’s General Fund net position related to electric system operations was transferred to the Electric Utility. The financial statements of the Electric Utility, an enterprise fund, are presented on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles and methods prescribed by the Federal Energy Regulatory Commission (FERC). The Electric Utility is not subject to the regulations of the FERC. New Accounting Pronouncements; Changes in Accounting Principles and Restatements On July 1, 2013, the Electric Utility adopted the following new accounting pronouncements issued by the Governmental Accounting Standards Board (GASB): • GASB Statement No. 66, Technical Corrections – 2012: an Amendment of GASB Statement No. 10 and No. 62. The requirements of this Statement are effective for financial statements for periods beginning after December 15, 2012. • GASB Statement No. 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees. This Statement establishes accounting and financial reporting standards for situations where a state or local government, as a guarantor, agrees to indemnify a third-party obligation holder under specified conditions nonexchange financial guarantees). The issuer of the guaranteed obligation can be a legally separate entity or individual, including a blended or discretely presented component unit. Guidance is provided for situations where a state or local government extends or receives a nonexchange financial guarantee. The requirements of this Statement are effective for financial statements for reporting periods beginning after June 15, 2013. Implementation of these pronouncements has no material effect on amounts reported in the Electric Utility’s financial statements for the fiscal year ended June 30, 2014. The Electric Utility is currently reviewing its accounting practices to determine the potential impacts on the financial statements for the following GASB Statements: • GASB Statement No. 68, Accounting and Financial Reporting for Pension; an amendment of GASB Statement No. 27. This Statement replaces the requirements of Statement No. 27 and No. 50 related to pension plans that are administered through trusts or equivalent arrangements. The requirements of Statements No. 27 and No. 50 remain applicable for pensions that are not administered as trusts or equivalent arrangements. The requirements of this Statement are effective for financial statements for fiscal years beginning after June 15, 2014. 24 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) • GASB Statement No. 69, Government Combinations and Disposals of Government Operations. This Statement establishes accounting and financial reporting standards for mergers, acquisitions, and transfers of operations government combinations). The Statement also provides guidance on how to determine the gain or loss on a disposal of government operations. This Statement applies to all state and local governmental entities. The requirements of this Statement should be applied prospectively and are effective for government combinations and disposals of government operations occurring in financial reporting periods beginning after December 15, 2013. • GASB Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date, an amendment of GASB Statement No. 68. This Statement should be applied simultaneously with GASB Statement No. 68. Electric Utility Plant and Depreciation The costs of additions to the Electric Utility plant in service and replacement of property units are capitalized. The Electric Utility plant is recorded at cost, including capitalized interest, or in the case of contributed plant, at fair market value at the date of the contribution. Cost includes labor, materials, allocated indirect charges such as engineering, supervision, construction, and transportation equipment, retirement plan contributions and other fringe benefits, and certain administrative and general expenses. The cost of minor replacements is included in maintenance expense. The net book value of assets retired or disposed of, related salvage value, and cost of removal are recorded in accumulated depreciation. Depreciation of Electric Utility plant is provided by the straight-line method based on the following estimated service lives of the properties: Production 30 years Transmission and distribution 20 to 75 years General plant 5 to 50 years Pooled Cash and Investments The City pools available cash from all funds for the purpose of enhancing investment income through investment activities. Investments in U.S. Treasury obligations, U.S. agency securities, and corporate notes are carried at fair value based on quoted market prices. Participating guaranteed investment contracts and flexible repurchase agreements are carried at fair value. Money market mutual funds are carried at fair value based on the fund’s share price. The City’s investment in the State of California Local Agency Investment Fund (LAIF) is carried at fair value based on the value of each participating dollar as provided by LAIF. LAIF is authorized by California Government Code (Government Code) Section 16429 under the oversight of the Treasurer of the State of 25 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) California. Commercial paper, nonparticipating guaranteed investment contracts, and negotiable certificates of deposit are carried at amortized cost (which approximates fair value). Interest income, which includes changes in fair value, on investments is allocated to all funds on the basis of average daily cash and investment balances. The Electric Utility’s cash and investments pooled with the City Treasurer (Treasurer) are carried at fair value based on the value of each participating dollar. Additional information pertinent to the value of these investments is provided in note 2. For the purpose of the statements of cash flows, the Electric Utility considers cash equivalents to be highly liquid short-term investments that are readily convertible to known amounts of cash and mature within three months of the date they are acquired. Cash and cash equivalents are included in the City’s cash and investments pool and in accounts held by fiscal agents. Restricted Assets Certain proceeds of the Electric Utility bonds, as well as certain resources set aside for their repayment, are classified as restricted on the statement of net position because they are maintained in separate bank accounts and their use is limited by applicable debt covenants. Additionally, resources set aside by the Electric Utility for future decommissioning of its former ownership share of the San Onofre Nuclear Generating Station, Units 2 and 3 (SONGS) and the San Juan Generating Station, Unit 4 (SJ) are classified as restricted on the statement of net position. Generally, the Electric Utility would first apply restricted resources when expenses incurred for which both restricted and unrestricted resources are available. Deferred Outflows of Resources Deferred outflows of resources represent consumptions of net position that apply to future periods and so will not be recognized as an outflow of resources (expense) until then. In the statements of net position as of June 30, 2014 and 2013, the Electric Utility reported deferred charges on refunding bonds in this category of $2,756 and $3,352, respectively. A deferred charge on refunding results from the difference in the carrying value of debt and its reacquisition price. This amount is deferred and amortized over the shorter of the life of the refunded or refunding debt. Deferred Inflows of Resources Deferred inflows of resources represent acquisitions of net position that apply to future periods and so will not be recognized as an inflow of resources (revenue) until that time. The Electric Utility included its regulatory credits in this category. Regulatory credits represent amounts accumulated from collections, which provide recovery in the current period for costs to be incurred in future periods. At June 30, 2014 and 2013, the amounts recorded for regulatory credits totaled $89,098 and $67,963, respectively. See note 1 for further discussion of regulatory credits. 26 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) Operating Revenues Operating revenues are revenues generally derived from activities that are billable in accordance with the Electric Utility’s Rate, Rules, and Regulations. Revenue is recorded in the period earned. The Electric Utility accrues estimated unbilled revenues for energy sold but not billed at the end of a fiscal period. Most residential and some smaller commercial accounts are billed and all other customers are billed Unbilled electric service charges are included in accounts receivable at year-end. Unbilled accounts receivable totaled $22,479 and $20,923 at June 30, 2014 and 2013, respectively. Revenues are reported net of uncollectible amounts. Total uncollectible amounts written off are $786 and $771 for the years ended June 30, 2014 and 2013, respectively. The applicable allowances for uncollectible accounts are $616 and $366 at June 30, 2014 and 2013, respectively. See note 6 for discussion of pledged revenue. Operating Expenses Purchased power includes all open market purchases of energy, firm contracts for the purchase of energy, and the costs of entitlements for energy and transmission, as discussed in note 11. Fuel and generation include all costs associated with the City’s ownership interest in SJ, the Combustion Turbine located in Anaheim, and the City’s portion of SONGS spent fuel storage costs and insurance premiums after the sale of SONGS on December 29, 2006. This includes the amortization of decommissioning costs for SONGS and SJ. Operations, maintenance, and administration expenses include all costs associated with the distribution of energy, administration, operating and maintaining the local facilities, customer service, and public benefit programs. Regulatory Credits The Electric Utility’s Rates, Rules, and Regulations provide for the Rate Stabilization Account (RSA), which contains two components: the Power Cost Adjustment (PCA) that was adopted by City Council on April 1, 2001, and the Environmental Mitigation Adjustment (EMA) that was adopted by the City Council on January 13, 2009. The PCA has mitigated variations in the power supply or fuel costs. The EMA will allow the recovery of environmental mitigation costs, such as greenhouse gas emissions costs, the marginal cost differential between renewable power and traditional fossil-fuel-based power, and environmental mitigation costs. The RSA provides the City with operational and billing flexibility to mitigate material fluctuations in the cost of energy, loss of revenues, or unplanned costs including unexpected long-term loss of a generating facility, unplanned 27 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) limits on the ability to transmit energy to the City, or major disasters. The RSA funded by PCA and EMA collections is billed to customers through standard rates. As permitted by GASB Statement No. 65, Items Previously Reported as Assets and Liabilities, and approved by the City Council, amounts collected for the RSA are deferred and recorded as regulatory credits in the statement of net position. As of August 1, 2013, the PCA rates were the same as $0.0150 per kWh for all domestic retail customers, excluding residential lifeline customers, and as $0.0100 per kWh for all commercial, industrial, municipal customers, and large Time-of-Use (TOU) customers. As of June 30, 2014 and 2013, the Electric Utility recorded deferred inflows of resources for regulatory credits of $45,602 and $40,707, respectively. During fiscal years 2014 and 2013, $16,825 and $40,756, respectively, was recognized as RSA revenues to mitigate the impact of energy costs and operation costs. As of August 1, 2013, the EMA rates were the same as $0.0150 per kWh for all domestic customers and as $0.0100 per kWh for all other customers, including large TOU customers. As of June 30, 2014 and 2013, the Electric Utility recorded deferred inflows of resources for regulatory credits of $43,496 and $27,256, respectively. During fiscal years 2014 and 2013, $9,675 and $244, respectively, was recognized as RSA revenues to mitigate the impact of environmental mitigation costs. Provision for Decommissioning Costs Federal regulations require the Electric Utility to provide for the future decommissioning costs of its former ownership share of SONGS. The Electric Utility has established a provision for decommissioning costs of SONGS and restoration of the beachfront at San Onofre. A separate irrevocable trust account was established for amounts funded, and these amounts are classified as restricted assets in the accompanying statement of net position. As of June 30, 2014 and 2013, the Electric Utility has recorded a provision for decommissioning costs for SONGS of $129,264 and $127,373, respectively. For the years ended June 30, 2014 and 2013, the Electric Utility has recorded decommissioning costs incurred for SONGS of $1,891 and $52, respectively, which are included in the fuel and generation component in operating expenses. On June 7, 2013, the Southern California Edison (SCE) announced the permanent retirement of the SONGS plant. The Electric Utility will continue to fund the reserve and recognize the expense until the new decommissioning study is approved by the Nuclear Regulatory Commission (NRC). SCE submitted a decommissioning cost analysis study to NRC on September 23, 2014. According to the new study for the decommissioning costs of SONGS, the Electric Utility’s share of decommissioning costs is $108,860 for June 30, 2014. The Electric Utility currently has $129,264 in an irrevocable trust for the decommissioning costs, which is about 18% more than the study’s requirement. 28 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) The Electric Utility has a 10.04% ownership interest of SJ. The Electric Utility is providing for the future demolition and reclamation costs of its ownership share of SJ. As of June 30, 2014 and 2013, the Electric Utility has recorded a provision for decommissioning costs for SJ of $4,400 and $3,960, respectively. Electric Utility currently has $580 in irrevocable trust and $3,820 in the City restricted cash account. For the years ended June 30, 2014 and 2013, the Electric Utility has recorded decommissioning costs incurred for SJ of $440 and $440, respectively, which are included in the fuel and generation component of operating expenses. Based on cost projections, it is estimated that $440 will be required per year until 2027 to fund this obligation. Debt Issuance Costs Debt issuance costs, with the exception of prepaid insurance costs, are recognized as an expense in the period when the debt is issued, in accordance with the provisions of GASB 62. Prepaid insurance costs are capitalized and amortized over the lives of the related bond issues on a basis that approximates the effective-interest method. Bond Refunding Costs Bond refunding costs are deferred and amortized over the life of the old debt or the life of the new debt, whichever is shorter, on a basis that approximates the effective-interest method. These costs are shown as a deferred outflow of resources on the accompanying financial statements Vacation and Sick Pay Vacation and sick pay for all City employees are paid by the General Benefits and Insurance Fund of the City. The General Benefits and Insurance Fund is reimbursed through payroll charges to the Electric Utility based on estimates of benefits to be earned during the year. Vested vacation and sick pay benefits are accrued in the General Benefits and Insurance Fund, and amounted to $1,803 and $1,801 for the Electric Utility at June 30, 2014 and 2013, respectively. Transfers (to) from Other Funds of the City The City Charter provides that transfers to the General Fund of the City shall not exceed 4% of total operating revenues. Such transfers are not in lieu of taxes, and amounted to $17,127 and $17,504 for the years ended June 30, 2014 and 2013, respectively. The transfer of right-of-way fees to the City represents the City Council approved transfer of 1.5% of retail electric revenues of the prior fiscal year to the General Fund of the City. Bond disclosure requirements designate that this transfer must be recognized as an expense in the calculation of bond coverage. The transfer of right-of-way fee to the City amounted to $5,555 and $5,069 for the years ended June 30, 2014 and 2013, respectively. 29 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) Other transfers to or from other funds of the City are either cash transfers or capital asset transfers between City funds. The net amount of transfers from was $297 and $59 for the years ended June 30, 2014 and 2013, respectively. Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. As such, actual results could differ from those estimates. Deposits and Investments The City maintains a cash and investment pool, which includes the cash balances of all funds, and is invested by the City Treasurer to enhance interest earnings. The pooled interest earned, net of administrative fees, is reallocated to each fund based on their respective average daily cash balances. The City’s pooled investment fund has been reviewed by Standard and Poor’s Corporation (S&P) and received a credit rating of AAf/S1 in August 2013. The City’s investment policy further limits the permitted investments in Government Code Sections 53600 et al, 16429.1 and 53684 to the following: obligations of the U.S. government, federal agencies, and government-sponsored enterprises; medium-term corporate notes; certificates of deposit; bankers’ acceptances; commercial paper; LAIF; repurchase agreements; reverse repurchase agreements; and money market mutual funds. The Electric Utility maintains cash equivalents and investments at June 30 with the following carrying amounts: 2014 2013 Cash equivalents and investments pooled with the Treasurer $ 96,459 137,913 Investments held with trustee 180,866 239,582 $ 277,325 377,495 30 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) At June 30, the Electric Utility’s cash equivalents and investments are recorded as follows: 2014 2013 Restricted assets – cash equivalents and investments $ 238,770 323,603 Unrestricted assets – cash equivalents and investments 38,555 53,892 $ 277,325 377,495 Investments The Treasurer prepares an investment policy statement annually, which is presented to the Budget, Investment, and Technology Commission for review and the City Council for approval. The approved investment policy statement is submitted to the California Debt and Investment Advisory Committee in accordance with Government Code. The policy provides the basis for the management of a prudent, conservative investment program. Public funds are invested for the maximum security of principal and to meet daily cash flow needs while providing a return. All investments are made in accordance with the Government Code and, in general, the City Treasurer’s policy is more restrictive than Government Code. 31 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) Investments Authorized by the Government Code and the City’s Investment Policy The following table identifies the investment types that are authorized for the City by its investment policy, which is more restrictive than Government Code. The table also identifies certain provisions of the City’s investment policy that address interest rate risk, credit risk, and concentration of credit risk. This table does not address investments of debt proceeds held by bond trustees that are governed by the provisions of debt agreements of the City, rather than the general provisions of the Government Code or the City’s investment policy. Minimum Maximum rating Maximum investment (S&P/ Authorized investment Maximum percentage in one Moody’s/ type maturity of portfolio* issuer Fitch) U.S. Treasury obligations 5 years 100 100 None U.S. agency securities 5 years 100 40 None Bankers’ acceptances 180 days 40 5 None Commercial paper 270 days 25 5 A-1/P-1/F-1 Negotiable certificates of deposit 360 days 25 5 None Repurchase agreements 1 year 30 None None Reverse repurchase agreements 90 days 20 None None Medium-term corporate notes 5 years 30 5 A Money market mutual funds N/A 20 10 None LAIF N/A $50 million $50 million None per account per account Time certificates of deposit (TCD) 1 year 20 5 None * Excluding amounts held by bond trustees that are not subject to Government Code restrictions The City’s pooled investments comply with the requirements of the investment policy. GAAP requires disclosure of certain investments in any one issuer that exceeds five percent concentration of the total investments. 32 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) At June 30, the following investments represent five percent or more of the City’s total pooled investments: 2014 2013 Issuer Investment type Fair value Percentage Fair value Percentage Federal National Mortgage Association U.S. agency securities $ 101,816 24% $ 113,988 26% LAIF LAIF 61,290 14 60,256 14 Federal Home Loan Bank U.S. agency securities 44,701 10 55,981 13 Federal Home Loan U.S. agency securities 38,443 9 29,760 7 Mortgage Corporation Federal Farm Credit Bank U.S. agency securities 34,142 8 26,161 6 Investments Authorized by Debt Agreements Investment of debt proceeds held by bond trustees is governed by provisions of the debt agreements, rather than the general provisions of the Government Code or the City’s investment policy. The table below identifies the investment types that are authorized for investments held by bond trustees. The table also identifies certain provisions of these debt agreements that address interest rate risk, credit risk, and concentration of credit risk. Maximum Maximum Maximum percentage investment Authorized investment type maturity of portfolio in one issuer U.S. Treasury obligations None None None U.S. agency securities None None None Guaranteed investment contracts None None None Collateralized investment contracts None None None Flexible repurchase agreements None None None Money market mutual funds None None None LAIF None None None City of Anaheim Treasurer investment portfolio None None None 33 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) At June 30, 2014, the following investments represent five percent or more of the City’s total investments controlled by bond trustees: 2014 2013 Issuer Investment type Fair value percentage Fair value percentage Federal National Mortgage U.S. agency securities $ 61,682 19% $ 35,926 9% Association Morgan Stanley Flexible repurchase agreement 42,000 13% 32,257 8 Federal Home Loan Bank U.S. agency securities 31,712 10 51,620 13 LAIF LAIF 31,230 9 45,352 11 Dreyfus Treas 521 Money market mutual fund 24,471 7 23,029 6 Federal Home Loan Bank U.S. agency securities 17,712 5 — — Mortgage Corporation Federal Farm Credit Bank U.S. agency securities 17,059 5 23,382 6 US Bank Money Market Money market mutual fund 17,037 5 21,342 5 Bank of America Guaranteed Investment Contract 16,645 5 — — Blackrock #61 Money market mutual fund — — 54,904 14 All guaranteed investment contracts have downgrade language that requires collateral should credit ratings drop below certain levels. Custodial Credit Risk Custodial credit risk for investments is the risk that the City will not be able to recover the value of investment securities that are in the possession of an outside party. All securities owned by the City, with the exception of LAIF and money market mutual funds, are deposited in trust for safekeeping with a custodial bank different from the City’s primary bank. Securities are not held in broker accounts. Funds held by LAIF and money market mutual funds are held in the City’s name. Custodial credit risk for investments held by bond trustee is the risk that the City will not be able to recover the value of investment securities that are in the possession of an outside party. All securities held by the bond trustee are in the name of the bond issue in trust for safekeeping with the bond trustee, which is different from the City’s primary bank. Interest Rate Risk Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. The City Treasurer mitigates this risk by investing in longer-term securities only with funds that are not needed for current cash flow purposes and holding these securities to maturity. The City Treasurer uses the segmented-time distribution method to identify and manage interest rate risk. In accordance with the City investment policy, the City Treasurer monitors the segmented time distribution of its investment portfolio and analysis of cash flow demand. 34 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) Investments held by bond trustees are typically long-term securities, which are not adversely affected by interest rate changes. Guaranteed investment contracts for construction funds are usually limited to three years or less. Information about the sensitivity of the fair values of the City’s investments (including investments held by bond trustees) to market interest rate fluctuations is provided by the following table that shows the distribution of the City’s investments by maturity at June 30, 2014. Information about the sensitivity of the fair values of the Electric Utility’s investments (including investments held by bond trustees) to market interest rate fluctuations for the fiscal years 2014 and 2013 is provided by the following tables. 35 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) The distribution of the Electric Utility’s investments by maturity at June 30, 2014 and 2013 is as follows: Credit rating Fair value, (S&P/ June 30, 12 months 13 to 24 25 to 36 37 to 60 More than Investments Moody’s) 2014 or less months months months 60 months Treasurer’s pooled investments: U.S. agency securities AA+/Aaa $ 49,605 7,527 4,020 10,173 27,885 — Medium term notes AAA/Aaa 5,814 — 4,182 1,133 499 — Medium term notes AA+/Aaa 1,134 — — 1,134 — — Medium term notes AA+/A1 3,484 1,143 1,146 1,195 — — Medium term notes AA/Aa1 2,557 — 456 1,416 685 — Medium term notes AA/Aa2 680 — 680 — — — Medium term notes AA-/Aa3 683 — 683 — — — Medium term notes A+/A1 681 — — — 681 — Medium term notes A+/A2 1,359 229 — — 1,130 — Medium term notes A/A3 2,519 1,382 1,137 — — — Medium term notes A-/A3 1,589 — 1,589 — — — Medium term notes A-/Baa1 1,180 — 1,180 — — — Commercial paper A-1/P-1 9,821 9,821 — — — — Money market mutual funds AAA/Aaa 1,477 1,477 — — — — LAIF Unrated 13,876 13,876 — — — — Total investments controlled by City Treasurer 96,459 35,455 15,073 15,051 30,880 — Investments controlled by bond trustees: U.S. agency securities AA+/Aaa 128,165 8,308 27,143 9,446 83,268 — Guaranteed investment contracts Unrated 24,145 — 7,500 — — 16,645 Collateralized investment contracts Unrated 3,669 — — — — 3,669 Flexible repurchase agreements Unrated 10,082 10,082 — — — — Money market mutual funds AAA/Aaa 14,805 14,805 — — — — Total investments controlled by bond trustees 180,866 33,195 34,643 9,446 83,268 20,314 Total Electric Utility investments $ 277,325 68,650 49,716 24,497 114,148 20,314 36 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) Credit rating Fair value, (S&P/ June 30, 12 months 13 to 24 25 to 36 37 to 60 More than Investments Moody’s) 2013 or less months months months 60 months Treasurer’s pooled investments: U.S. agency securities AA+/Aaa $ 70,672 12,171 13,682 15,093 29,726 — Medium term notes A-/A3 1,633 — — 1,633 — — Medium term notes A/A2 3,504 — 1,950 1,554 — — Medium term notes A+/A1 923 — — — 923 — Medium term notes A+/A2 1,842 — 316 — 1,526 — Medium term notes AA/Aa1 1,556 — — 626 930 — Medium term notes AA/Aa2 943 — — 943 — — Medium term notes AA+/A1 4,825 — 3,178 — 1,647 — Medium term notes AA+/Aa3 934 — — 934 — — Medium term notes AAA/Aaa 6,757 946 — 5,811 — — Commercial paper A-1/P-1 17,745 17,745 — — — — Money market mutual funds AAA/Aaa 7,727 7,727 — — — — LAIF Unrated 18,852 18,852 — — — — Total investments controlled by City Treasurer 137,913 57,441 19,126 26,594 34,752 — Investments controlled by bond trustees: U.S. agency securities AA+/Aaa 126,652 49,190 8,492 27,437 41,533 — Guaranteed investment contracts Unrated 30,320 — — 7,500 — 22,820 Collateralized investment contracts Unrated 3,669 — — — — 3,669 Flexible repurchase agreements Unrated 10,082 — 10,082 — — — Money market mutual funds AAA/Aaa 68,859 68,859 — — — — Total investments controlled by bond trustees 239,582 118,049 18,574 34,937 41,533 26,489 Total Electric Utility investments $ 377,495 175,490 37,700 61,531 76,285 26,489 37 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) Electric Utility Plant The following is a summary of changes in capital assets: Balance as Balance as Balance as of June 30, of June 30, of June 30, 2012 Additions Deletions 2013 Additions Deletions 2014 Production $ 119,144 4,268 — 123,412 210 — 123,622 Transmission 92,229 129 (35) 92,323 1,906 94,220 Distribution 805,703 48,644 (2,505) 851,842 30,290 (4,229) 877,903 General plant 109,346 2,699 — 112,045 16,816 (1,109) 127,752 Depreciable utility plant 1,126,422 55,740 (2,540) 1,179,622 49,222 (5,347) 1,223,497 Less accumulated depreciation (386,832) (39,969) 4,133 (422,668) (41,770) 5,346 (459,092) Net depreciable utility plant 739,590 15,771 1,593 756,954 7,452 764,405 Land 35,671 — — 35,671 — — 35,671 Construction in progress 46,201 45,717 (57,104) 34,814 68,066 (47,879) 55,001 Nondepreciable utility plant 81,872 45,717 (57,104) 70,485 68,066 (47,879) 90,672 Net utility plant $ 821,462 61,488 (55,511) 827,439 75,518 (47,880) 855,077 Operating Expenses Total operating expenses shared with the City’s Water Utility Fund amounted to $29,679 and $28,788 for the years ended June 30, 2014 and 2013, respectively, of which $22,556 and $21,879, respectively, were allocated to the Electric Utility. The shared expenses are allocated to each utility based on estimates of the benefits each utility derives from those common expenses. Jointly Owned Utility Projects SONGS The City sold its 3.16% ownership interest of SONGS to SCE on December 29, 2006. As such, the Electric Utility ceased recording all related operating expenses, except marine mitigation costs and spent fuel storage charges, as of December 29, 2006. Based on the SONGS settlement agreement, the Electric Utility is responsible for the City’s share of marine mitigation costs up to $2,300, and SCE is responsible for costs between approximately $2,300 and $7,300. The Electric Utility is responsible for spent fuel storage charges until the federal government takes possession. 38 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) As a former participant in SONGS, the Electric Utility is subject to assessment of retrospective insurance premiums in the event of a nuclear incident at SONGS or any other licensed reactor in the United States of America. San Juan Generating Station The Electric Utility also owns a 10.04% ownership interest in the existing coal-fired SJ, Unit 4, located near Waterflow, New Mexico. Other participants include Public Service of New Mexico, 45.485%; the City of Farmington, 8.475%; the County of Los Alamos, 7.200%; and M-S-R Public Power Agency, 28.800%. The Electric Utility’s original purchase cost and cumulative share of ongoing construction costs included in utility plant at June 30, 2014 and 2013 amounted to $84,616 and $84,407, respectively. There are no separate financial statements for this venture, as each participant’s interest is reflected in its respective financial statements. Short-Term Debt The Electric Utility had Revolving Credit Agreement with Wells Fargo Bank, National Association in the form of short-term taxable notes for financing the Cap-and-Trade program. At June 30, 2014, the Electric Utility has drawn $7,400 from this note and repaid $10,000 for Cap-and-Trade program as follows: Beginning of Due within June 30, 2014 year Additions Retirements End of year one year Electric system note $ 2,600 7,400 (10,000) — — Total short-term liabilities $ 2,600 7,400 (10,000) — — 39 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) Long-Term Liabilities The following is a summary of changes in long-term liabilities: Beginning of Due within June 30, 2014 year Additions Retirements End of year one year Anaheim Public Financing Authority Revenue Bonds $ 678,680 — (71,795) 606,885 12,155 Electric system note 44,000 — (8,400) 35,600 11,200 Provision for decommissioning costs 131,333 2,331 — 133,664 — 854,013 2,331 (80,195) 776,149 $ 23,355 Less current portion (75,795) (23,355) 75,795 (23,355) Add unamortized bond premium 16,390 — (1,423) 14,967 Total long-term liabilities $ 794,608 (21,024) (5,823) 767,761 Beginning of Due within June 30, 2013 year Additions Retirements End of year one year Anaheim Public Financing Authority Revenue Bonds $ 701,755 92,130 (115,205) 678,680 71,795 Electric system note — 44,000 — 44,000 4,000 Provision for decommissioning costs 130,945 388 — 131,333 — 832,700 136,518 (115,205) 854,013 $ 75,795 Less current portion (18,995) (75,795) 18,995 (75,795) Add unamortized bond premium 9,009 9,254 (1,873) 16,390 Total long-term liabilities $ 822,714 69,977 (98,083) 794,608 40 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) Long-term debt consists of the following at June 30: 2014 2013 Anaheim Public Financing Authority Revenue Bonds, issue of 1999, with an initial interest rate of 4.625%, dated September 1, 1999, sold on September 29, 1999 in the amount of $45,000. On the conversion date, October 2, 2005, the 1999 bond was remarked in the amount of $43,010. The remaining principal of $29,930 at rates ranging from 4.00% to 5.00% is maturing from October 1, 2014 through 2027 in annual principal installments ranging from $1,535 to $2,795. The total debt service is $39,385 to maturity. $ 29,930 32,315 Anaheim Public Financing Authority Revenue Bonds, issue of 2002, TIC 4.97%, dated February 15, 2002, sold on March 12, 2002 in the amount of $178,705. The remaining principal of $60,205 was pay-off by electric system note on July 15, 2013. — 60,205 Anaheim Public Financing Authority Revenue Bonds, issue of 2003, TIC 3.99%, dated April 1, 2003, sold on April 9, 2003 in the amount of $60,415. The Series 2003-A was issued in the amount of $37,735 as serial bond. The remaining principal of $27,725 at rate of 5% maturing from October 1, 2013 to 2022 in annual principal installments ranging from $2,045 to $3,590 The Series 2003-B was issued in the amount of $22,680. There is no remaining principal. The total debt service is $35,362 to maturity. 25,680 27,725 Anaheim Public Financing Authority Revenue Bonds, issue of 2004, TIC 4.99%, dated June 1, 2004, sold June 30, 2004 in the amount of $131,265, of which: $97,060 was issued as serial bonds. The remaining principal of $77,065 at rates ranging from 4.00% to 5.25% is maturing from October 1, 2013 to 2025 in annual principal installments ranging from $2,830 to $9,595; $13,325 was issued as term bonds at a rate of 5.00% maturing from October 1, 2026 through 2029 in annual principal installments from $3,085 to $3,585; and $20,880 was issued as term bonds at a rate of 5.00% maturing from October 1, 2026 through 2034 in annual principal installments ranging from $3,770 to $4,605. The total debt service is $173,792 to maturity. 108,440 111,270 41 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) 2014 2013 Anaheim Public Financing Authority Revenue Bonds, issue of 2007, TIC 4.49%, dated and sold on February 7, 2007 in the amount of $206,035, of which: $73,000 was issued as serial bonds. The remaining principal of $65,030 at rates ranging from 4.00% to 5.00% is maturing from October 1, 2013 through 2028 in annual principal installments ranging from $3,100 to $11,530; $24,410 was issued as term bonds at a rate of 4.75% maturing on October 1, 2026 and 2027 in annual principal installments from $11,685 to $12,725; $36,675 was issued as term bonds at a rate of 4.50% maturing from October 1, 2029 through 2032 in annual principal installments from $7,665 to $12,550; and $71,950 was issued as term bonds at a rare of 4.50% maturing from October 1, 2033 through 2037 in annual principal installments ranging from $13,125 to $15,715. The total debt service is $343,566 to maturity. $ 194,965 198,065 Anaheim Public Financing Authority Revenue Bonds, issue of 2009, TIC 4.98%, dated and sold on March 10, 2009 in the amount of $70,000, of which: $37,405 was issued as serial bonds. The remaining principal of $32,755 at rates ranging from 4.00% to 5.00% is maturing from October 1, 2013 through 2030 in annual principal installments ranging from $1,230 to $2,765; $12,610 was issued as term bonds at a rate of 5.25% maturing on October 1, 2031 through 2034 in annual principal installments from $2,910 to $3,405; and $19,985 was issued as term bonds at a rate of 5.25% maturing from October 1, 2035 through 2039 in annual principal installments ranging from $3,590 to $4,430. The total debt service is $122,679 to maturity. 65,350 66,580 Anaheim Public Financing Authority Revenue Bonds, issue of 2011, TIC 4.91%, dated and sold on May 11, 2011 in the amount of $90,390, of which: $63,005 was issued as serial bonds. The remaining principal of $63,005 at rates ranging from 3.00% to 5.25% is maturing from October 1, 2016 through 2031 in annual principal installments ranging from $1,825 to $5,880 and $27,385 was issued as term bonds at a rate of 5.375% maturing on October 1, 2032 and 2036 in annual principal installments from $4,905 to $6,080. The total debt service is $161,683 to maturity. 90,390 90,390 42 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) 2014 2013 Anaheim Public Financing Authority Revenue Bonds, issue of 2012, TIC 3.38%, dated and sold on September 19, 2012 in the amount of $92,130, issued as serial bonds at rates ranging from 3.125% to 5.00% is maturing from October 1, 2021 through 2031 in annual principal installments ranging from $1,455 to $17,080. The total debt service is $151,733 to maturity. $ 92,130 92,130 Total Anaheim Public Financing Authority Revenue Bonds $ 606,885 678,680 Annual debt service requirements, excluding amounts for decommissioning costs, at June 30, 2014 to maturity are as follows: Principal Interest Total Fiscal year(s) ending June 30: 2015 $ 12,155 28,632 40,787 2016 12,690 28,078 40,768 2017 15,115 27,438 42,553 2018 15,810 26,735 42,545 2019 16,570 25,978 42,548 2020–2024 117,380 113,843 231,223 2025–2029 152,630 80,329 232,959 2030–2034 160,410 42,536 202,946 2035–2039 99,695 10,742 110,437 2040–2041 4,430 116 4,546 $ 606,885 384,427 991,312 On March 1, 2013, the Electric Utility entered into a Revolving Credit Agreement with Wells Fargo Bank, National Association at a maximum loan amount not to exceed $100,000 of which $86,000 is made available for Electric Utility and $14,000 for Water Utility. The note has three-year term at a variable interest rate based on LIBOR Daily Index Rate and a spread. The annual commitment fee is based on 0.175% on the total note amount of $100,000. On July 13, 2013, the Electric Utility used $44,000 from the proceeds of the Revolving Credit Agreement with Wells Fargo Bank, National Association, together with funds from the 2002-B Electric Revenue Bonds reserve and debt service balances of $10,030 and funds of $7,053 from the City, to retire the outstanding principal balance of $60,205 and interest balance of $878 on the 2002-B Electric Revenue Bonds. 43 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) On June 30, 2014, the Electric Utility has repaid $8,400 of the tax-exempt note, and has outstanding debt of $35,600. Interest costs of $1,798 and $1,779 have been capitalized to utility plant for the years ended June 30, 2014 and 2013, respectively. In accordance with the bond resolutions, a reserve for maximum annual debt service has been established, and a reserve for renewals and replacements is being accumulated in an amount equal to a maximum of 2% of the depreciated book value of the Electric Utility plant in service. The bond resolutions require the establishment of a bond service account by accumulating one-sixth of the interest, which will become due and payable on the outstanding bonds within the next six months, and one-twelfth of the principal amount, which will mature and be payable on the outstanding bonds within the next 12 months. Those amounts have been recorded in net position restricted for debt service on the accompanying statement of net position. There are various limitations and restrictions contained in the Electric Utility’s bonds. The management of the Electric Utility believes it is in compliance with all limitations and restrictions. Electric Utility has pledged future electric revenues to repay a total of $991,312 and $1,093,145 outstanding long-term obligations, principal, and interest for the years ended June 30, 2014 and 2013, respectively. Proceeds from bonds provide financing for various capital improvements, primarily distribution assets. The Electric Utility’s bonds are payable solely from electric net revenues and are payable through fiscal year 2040. As of June 30, 2014 and 2013, the annual principal and interest payments on the bonds, excluded early retired bond, are 46.7% and 47.9% of net revenues, respectively. Bond debt service paid and total net revenues were $41,629 and $89,047, and $52,331 and $109,183 for the years ended June 30, 2014 and 2013, respectively. On September 19, 2012, the Electric Utility issued 2012-A Electric Revenue Refunding Bonds in the principal amount of $92,130 at a premium of $9,254. The proceeds totaled $101,384 together with balance of the 2002-A Electric Revenue Bonds Reserve fund of $6,047 and Bond Service fund of $2,003 were deposited in escrow funds to refund the outstanding balance of $96,210 on the 2002-A Electric Revenue Bonds and to fund the 2012-A required reserve fund of $10,102. The true interest cost is 3.38% maturing serially from October 1, 2021 to 2023. The total debt service payments over the life of the bonds until fiscal year 2032 will be $153,817. The Electric Utility obtained an economic gain of $17,815. 44 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) Restricted cash and investments include reserve provisions as well as undisbursed bond proceeds, at June 30, as follows: 2014 2013 Held by fiscal agent: Bond reserve fund $ 48,877 48,468 Bond service fund 2,586 63,878 Bond construction fund 8,634 38,496 Decommissioning reserve 129,403 127,236 Held by Treasurer: Bond service account 16,900 14,819 Renewal and replacement account 16,001 15,852 Decommissioning and fuel reserves 3,820 3,508 Public benefit program fees 12,212 11,188 Restricted rebate 337 158 $ 238,770 323,603 The Electric Utility’s interest and other finance charges, excluding capitalized interest, for the years ended June 30, 2014 and 2013 were $27,340 and $31,480, respectively. Advance Refundings When conditions have warranted in prior years, the Electric Utility has sold various issues of bonds to provide for the refunding of previously issued obligations. The proceeds received from the sales of the bond issues were used to refund the outstanding bond issues or to deposit in an irrevocable escrow fund held by the escrow agent, an amount, which, when combined with interest earnings thereon, is at least equal to the sum of the outstanding principal amount of the bonds, the interest to accrue thereon, and including the first optional redemption date thereof, and the premium required to redeem the bonds outstanding on such date. Accordingly, the trust account assets and the liability for defeased bonds are not included in the Electric Utility’s financial statements. Amount of defeased debt still outstanding at June 30, 2014 and 2013 were Pension Plan The City contributes to the State of California Public Employees’ Retirement System (PERS), an agent multiple-employer, public employee retirement system that acts as a common investment and administrative agent for California cities that participate in this retirement plan. For both years ended June 30, 2014 and 2013, as a condition of participation, employees are required to contribute 8% of their annual covered salary to PERS. The City pays 7% of the employees’ required contributions and the employees pay the remaining For management employees hired after January 10, 2012, the entire 8% is paid by employees. Management and 45 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) I.B.E.W. employees who are hired on or after January 1, 2013 and who have no prior membership in any California public retirement system, are required to contribute employee rate of 6.75% of their annual covered salary to PERS. The entire 6.75% is paid by employees. The City is required to contribute the remaining amounts necessary to fund PERS, using the actuarial basis recommended by the PERS actuaries and actuarial consultants and adopted by the PERS Board of Administration. The Electric Utility is allocated its portion of the City’s required contribution, as determined by PERS actuaries. This allocation is based on eligible employee wages. The Electric Utility contributed 100% of its allocated required contributions of $7,164, $7,104, and $6,700 to PERS for the years ended June 30, 2014, 2013, and 2012, respectively. Information is not available separately for the Electric Utility as to the cost of benefits funded, the actuarially computed present value of vested and nonvested accumulated plan benefits, the related assumed rates of return used, and the actuarially computed value of vested benefits over the related pension fund assets. Refer to the City’s Comprehensive Annual Financial Report as of June 30, 2014 for further information. (10) Self-Insurance Program The Electric Utility participates in the City’s self-insured workers’ compensation and general liability program. The liability for such claims, including claims incurred but not reported, is transferred to the City in consideration of self-insurance premiums paid by the Electric Utility. Premiums for workers’ compensation and general liability programs are charged to the Electric Utility by the City based on various allocation methods that include actual cost, trends in claims experience, exposure base, and number of participants. Premiums charged and paid were $1,603 and $1,459 for the years ended June 30, 2014 and 2013, respectively. At June 30, 2014, the City was fully funded for self-insured workers’ compensation and general liability claims (self-insured retention levels of $750 per occurrence for workers’ compensation claims and $1,000 per occurrence for general liability claims). Above these self-insured retention levels, the City’s potential liability is covered through various commercial insurance and intergovernmental risk pooling programs. Settled claims have not exceeded total insurance coverage in any of the past three years, nor does management believe that there are any pending claims that will exceed total insurance coverage. (11) Commitments and Contingencies Take-or-Pay Contracts Intermountain Power Agency The Electric Utility has entered into a power purchases contract with the Intermountain Power Agency (IPA) for delivery of electric power. The share of IPA power is equal to 13.225% of the generation output of IPA’s two recently updated coal-fueled generating 46 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) units located in Delta, Utah (Unit 1 and 2 net output is 900 mega watts each). The Electric Utility is obligated for the following percentage of electrical facilities at IPA: Entitlement Expiration Generation: Intermountain Power Project 13.225% 2027 The contract constitutes an obligation of the Electric Utility to make payments from revenues and requires payment of certain minimum charges. These minimum charges include debt service requirements on the financial obligations used to construct the plant. These requirements are considered a cost of purchased power. Southern California Public Power Authority The Electric Utility is a member of the Southern California Public Power Authority (SCPPA), a joint powers agency. SCPPA provides for the financing and construction of electric generating and transmission projects for participation by some or all of its members. To the extent the Electric Utility participates in projects developed by SCPPA, it is obligated for its proportional share of the cost of the project. The Electric Utility is obligated for the following percentage of electrical facilities owned by SCPPA: Entitlement Expiration Transmission: Southern Transmission System (STS) 17.6% 2027 Mead-Adelanto Project (MAP) 13.5 2030 Mead-Phoenix Project (MPP) 24.2 2030 Generation: Hoover Dam Uprating (Hoover) 42.6% 2018 Magnolia Generating Station (Magnolia) 38.0 2037 Canyon Power Project (Canyon) 100.0 2040 Natural gas reserves project (Natural Gas): SCPPA Natural gas project-Pinedale, Wyoming 35.7% 2033 SCPPA Natural gas project-Barnett, Texas 45.5 2033 Take-or-Pay Commitments As part of the take-or-pay commitments with IPA and SCPPA, the Electric Utility has agreed to pay its share of current and long-term obligations. Payment for these obligations will be made from the operating revenues received during the year that the payment is due. A long-term obligation has not been recorded on the accompanying financial statements, as these commitments do not represent an obligation of the Electric Utility until the year the power is available to be delivered to the Electric Utility. The following schedule details the 47 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) amount of debt service that is due and payable by the Electric Utility for each project and the final maturity date: Fiscal Natural year(s) IPA STS MAP MPP Hoover Magnolia gas Canyon Total 2015 $ 37,201 11,732 2,799 1,507 869 6,315 5,729 6,385 72,537 2016 30,101 14,579 3,016 1,611 957 8,548 7,091 12,769 78,672 2017 27,584 14,322 2,994 1,606 957 8,550 6,831 19,504 82,348 2018 24,741 14,108 2,971 1,596 957 6,658 6,081 19,505 76,617 2019 29,555 13,955 2,946 1,580 — 6,659 5,457 19,505 79,657 2020–2024 88,334 70,723 5,108 2,735 — 33,454 21,385 97,504 319,243 2025–2029 — 25,456 — — — 37,796 14,560 97,517 175,329 2030–2034 — — — — — 39,054 8,274 97,513 144,841 2035–2039 — — — — — 42,318 — 97,514 139,832 2040–2041 — — — — — — — 39,009 39,009 $ 237,516 164,875 19,834 10,635 3,740 189,352 75,408 506,725 1,208,085 In addition to debt service, the City’s entitlement requires the payment for fuel costs, operations and maintenance costs administration and general costs and other miscellaneous costs associated with the generation and transmission facilities discussed above. These costs do not have a similar structured payment schedule as debt service; however, prior experience indicates that annual costs are generally consistent from year to year. The fiscal year 2014 and 2013 billings for fuel, O&M, A&G, and other costs at these projects are as follows: Fiscal Natural year IPA STS MAP MPP Hoover Magnolia gas Canyon Total 2014 $ 49,586 6,034 321 355 449 22,424 1,134 6,545 86,848 2013 48,886 5,681 351 319 519 17,297 1,207 7,461 81,721 48 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) Prepaid Purchased Power The Electric Utility has prepaid purchased power costs for the following take-or-pay contracts as of June 30: 2014 2013 SCPPA – Stabilization fund prepayment $ 39,220 36,482 SCPPA – Magnolia power prepayment 21,866 19,060 SCPPA – Ormat prepayment 450 450 SCPPA – Canyon prepayment 2,225 2,225 SCPPA – building fund 528 528 SJ – fuel acquisition prepayment 561 — Cap and Trade Compliance 21,124 2,697 IPA – power prepayment 7,500 5,027 Prepaid purchased power $ 93,474 66,469 Cap-and-Trade Program California Senate Bill (AB) 32 requires that Utilities in California reduce their greenhouse gas (GHG) emissions to 1990 level by the year 2020. It directed the California Air Resources Board (CARB) to develop regulations of GHG that became effective January 2012. Emission compliance obligations under the Cap-and-Trade regulation began in January 2013. The Cap-and-Trade program (Program) was implemented in the beginning January 1, 2013. This Program requires Electric Utilities to have GHG allowances on an annual basis to offset GHG emissions associated with generating electricity. CARB will provide a free allocation of GHG allowance to each electric utility to mitigate retail rate impacts. This free allocation of GHG allowances is expected to be sufficient to meet the Electric Utility’s GHG compliance obligations for retail sales. During this fiscal year, an unused portion of retail allowance was sold for $5,740 to reduce renewable energy costs for retail customers. The compliance obligation for the wholesale sales requires the allowance to be obtained through the auction or in the secondary market quarterly. At June 30, 2014, the value of prepaid Cap and Trade allowance is $21,124, and the value of the Cap and Trade obligation is $13,506. Litigation A number of claims and suits are pending against the City for alleged damages to persons and property and for other alleged capital expenditures liabilities arising out of matters usually incidental to the operation of a utility such as the electric system of the City. In the opinion of management, the exposure under these claims and suits would not materially affect the financial position of the Electric Utility as of June 30, 2014 and 2013. 49 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) Construction Commitments At June 30, 2014, the Electric Utility had the following commitments with respect to unfinished capital projects: Remaining Expected construction completion Capital project commitment date Vehicle Acquisitions $ 287 2014 Electric Equipment Acquisitions 2,111 2014 Smart Grid Project 855 2014 Underground District # 57 PH1, Lincoln Avenue 3,066 2015 Underground District # 60 West/Westmont 4,417 2015 Transformers Acquisitions 1,654 2014 At June 30, 2013, the Electric Utility has construction commitments totaling $14,044. (12) Subsequent Event On October 8, 2014, the Electric Utility issued 2014-A Revenue Refunding Bonds in a principal amount of $109,350 at a premium of $19,921 to refund the outstanding balances of $23,490 on the 2003-A Revenue Bond and $105,485 on the 2004-A Revenue Bond. The true interest cost is 1.89% maturing serially from April 1, 2015 to October 1, 2025. Annual debt service requirements, beginning April 1, 2015, range from $3,279 to $15,223 at rates ranging from 2.0% to 5.0%. This 2014A refunding bond will reduce the Electric Utility’s total debt service payments by $44,999 at the net present value of $32,405. 50