Document Anaheim_doc_69b458d9ec

CITY OF ANAHEIM ELECTRIC UTILITY FUND Financial Statements June 30, 2008 and 2007 (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: Balance Sheets 17 Statements of Revenues, Expenses, and Changes in Fund Net Assets 19 Statements of Cash Flows 20 Notes to Financial Statements 22 ---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 (Electric Utility) of the City of Anaheim, California (the City) as of and for the years ended June 30, 2008 and 2007, as listed in the accompanying table of contents. These financial statements are the responsibility of the City’s management. 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. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Electric Utility’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in note 1 to the financial statements, the financial statements present only the Electric Utility Fund and do not purport to, and do not, present fairly the financial position of the City, as of June 30, 2008 and 2007, and 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. 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, 2008 and 2007, and the changes in its financial position and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. KPMG LLP, a U.S. limited liability partnership, is the U.S. member firm of KPMG International, a Swiss cooperative. KPMG LLP Suite 700 600 Anton Boulevard Costa Mesa, CA 92626-7651 ---PAGE BREAK--- 2 Management’s discussion and analysis on pages 3 through 16 is not a required part of the basic financial statements, but is supplementary information required by U.S. generally accepted accounting principles. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. Orange County, California December 3, 2008 ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Management’s Discussion and Analysis (Unaudited) June 30, 2008 and 2007 (In thousands) 3 (Continued) 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 this narrative overview and analysis of the financial statements for the fiscal years ended June 30, 2008 and 2007. We encourage readers to consider the information presented here in conjunction with the accompanying financial statements. Financial Highlights The assets of the Electric Utility exceeded its liabilities at the close of the most recent two fiscal years by $328,391 and $320,429, respectively. Of these amounts, $100,803 and $128,731, respectively, may be used to meet the Electric Utility’s ongoing obligations to creditors and customers (unrestricted fund net assets). The Electric Utility’s total fund net assets increased by $7,962 for the fiscal year ended June 30, 2008, but decreased by $20,441 for the fiscal year ended June 30, 2007. Unrestricted fund net assets represented 30.8% and 40.8% of annual operating expenses for fiscal years 2008 and 2007, respectively. 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, 2008. 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 balance sheets, statements of revenues, expenses, and changes in fund net assets, and statements of cash flows. The balance sheets present information on assets and liabilities with the difference between the two reported as fund net assets. Over time, increases or decreases in fund net assets 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 fund net assets present information showing how the Electric Utility’s fund net assets changed during the most recent two fiscal years. Results of operations are recorded using the accrual basis of accounting, whereby transactions are reported as underlying events occur, regardless of the timing of cash flows. Thus, revenues and expenses are reported in these statements for some items that will result in cash flows in future fiscal periods, such as accounts receivable and accounts payable. The accrual basis of accounting is more fully described in the accompanying notes to financial statements. The statements of cash flows present the flows of cash and cash equivalents during the last two fiscal years, including certain restricted amounts. ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Management’s Discussion and Analysis (Unaudited) June 30, 2008 and 2007 (In thousands) 4 (Continued) The notes to financial statements provide additional information that is essential to the full understanding of the data provided in the financial statements. Financial Analysis As noted earlier, fund net assets may serve over time as a useful indicator of the Electric Utility’s financial position. In the case of the Electric Utility, assets exceeded liabilities by $328,391 and $320,429 at June 30, 2008 and 2007, respectively. A portion of the Electric Utility’s fund net assets (60.5% and 51.1% as of June 30, 2008 and 2007, respectively) reflects its investment in capital assets, such as land, production, transmission, distribution facilities, and general plant, less any related debt that remains outstanding used to acquire those assets. The Electric Utility uses these capital assets to provide services to customers; consequently, these assets are not available for future spending. Resources needed to repay the outstanding debt on the balance sheets must come from other sources such as operations. An additional portion of the Electric Utility’s fund net assets (8.8% and 8.7% as of June 30, 2008 and 2007, respectively) represents resources that are subject to external restrictions on how they may be used. These restrictions are for items such as debt repayment and other legally restricted purposes. The unrestricted portion of the Electric Utility’s fund net assets (30.7% and 40.2% as of June 30, 2008 and 2007, respectively) may be used to meet the Electric Utility’s ongoing obligations to creditors and customers. The Electric Utility’s condensed statements of fund net assets at June 30 are as follows: Condensed Statements of Fund Net Assets 2008 2007 2006 Current and other assets $ 420,217 498,720 447,743 Net utility plant 754,923 672,452 574,621 Total assets 1,175,140 1,171,172 1,022,364 Long-term liabilities, net of current portion 706,325 714,515 585,719 Current liabilities 140,424 136,228 95,775 Total liabilities 846,749 850,743 681,494 Invested in capital assets, net of related debt 198,591 163,918 180,175 Restricted 28,997 27,780 24,937 Unrestricted 100,803 128,731 135,758 Total fund net assets $ 328,391 320,429 340,870 ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Management’s Discussion and Analysis (Unaudited) June 30, 2008 and 2007 (In thousands) 5 (Continued) As of June 30, 2008 Assets Total assets as of June 30, 2008 and 2007 were $1,175,140 and $1,171,172, respectively. The $3,968 increase in total assets is due to an $82,471 increase in net utility plant, which was offset by a $78,503 decrease in current and other assets. Net utility plant increased 12.3% primarily due to current year’s net capital asset additions of $110,662 related to land, production, transmission, distribution, and general utility plant, which was offset by current year’s depreciation expense of $28,191. Current and other assets decreased 15.7% primarily due to $105,922 of cash and cash equivalents used for current year capital purchases, which were offset by an increase of $10,892 in prepaid purchased power and an increase of $10,887 in accounts receivable. Liabilities Total liabilities as of June 30, 2008 and 2007 were $846,749 and $850,743, respectively. The $3,994 decrease in total liabilities was due to an $8,190 decrease in long-term liabilities and a $4,196 increase in current liabilities. Long-term liabilities decreased 1.1% primarily due to current year’s principal reductions of $14,839, which were offset by an increase of $7,479 in the provision for decommissioning costs. Current liabilities increased 3.1% primarily due to an increase in accounts payable and accrued expenses of $7,318, which were offset by a net decrease in regulatory credits of $2,330 (see note 1 of the notes to financial statements for additional information regarding regulatory credits.) Fund Net Assets Total fund net assets as of June 30, 2008 and 2007 were $328,391 and $320,429, respectively. Total fund net assets increased by $7,962 primarily due to an increase in amounts invested in capital assets, net of related debt of $34,673, offset by a decrease in unrestricted amounts of $27,928. Invested in capital assets, net of related debt increased 21.2% primarily due to increases in capital assets that exceeded increases in capital related debt during fiscal year 2008. Unrestricted net assets decreased 21.7% primarily due to the investment in capital assets in fiscal year 2008. ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Management’s Discussion and Analysis (Unaudited) June 30, 2008 and 2007 (In thousands) 6 (Continued) As of June 30, 2007 Assets Total assets as of June 30, 2007 were $1,171,172. The $148,808 (14.6%) increase in total assets was due to a $97,831 increase in net utility plant and a $50,977 increase in current and other assets. Net utility plant increased 17.0% primarily due to current year net capital asset additions of $147,758 related to land, production, transmission, distribution, and general utility plant, which were offset by current year depreciation expense of $49,927. Current and other assets increased 11.4% due to a $52,275 increase in cash and investments primarily due to cash provided by operating activities and an increase in bond funds due to the new 2007 bond issue. Liabilities Total liabilities as of June 30, 2007 and 2006 were $850,743 and $681,494, respectively. The $169,249 (24.8%) increase in total liabilities was due to a $128,796 increase in long-term liabilities and a $40,453 increase in current liabilities. Long-term liabilities increased 22.0% primarily due to an increase of $122,545 in long-term debt that was a net addition from the new 2007 bond issue after current year principal reductions, and an increase of $6,251 in the provision for decommissioning costs. Current liabilities increased 42.2% primarily due to net additional regulatory credits of $21,470 (42.0%) as a result of increased collections of regulatory fees (see note 1 of the notes to financial statements for additional information regarding regulatory credits), an increase in accounts payable and accrued expenses of $13,140, and an increase in deposits of $3,580. Fund Net Assets Total fund net assets as of June 30, 2007 and 2006 were $320,429 and $340,870, respectively. Total fund net assets decreased by $20,441 primarily due to a decrease in amounts invested in capital assets, net of related debt of $16,257 and a decrease in unrestricted amounts of $7,027. Invested in capital assets, net of related debt decreased 9.0% primarily due to an increase in capital related debt that exceeded increases in capital assets during fiscal year 2007. Unrestricted net assets decreased 5.2% primarily due to the results of operations in fiscal year 2007. ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Management’s Discussion and Analysis (Unaudited) June 30, 2008 and 2007 (In thousands) 7 (Continued) The Electric Utility’s statements of revenues, expenses, and changes in fund net assets for the years ended June 30 are summarized as follows: Revenues, Expenses, and Changes in Fund Net Assets 2008 2007 2006 Revenues: Retail sales, net $ 262,352 238,656 235,231 Wholesale sales 22,228 28,835 41,454 PCRSA revenues 21,800 5,000 — Surplus natural gas sales 8,328 6,162 16,601 Transmission revenues 33,690 28,797 25,903 Other revenues 2,889 2,674 3,866 Interest income 22,555 20,297 13,036 Capital contributions 8,594 2,908 3,293 Total revenues 382,436 333,329 339,384 Expenses: Purchased power 235,301 198,957 193,482 Fuel and generation 25,382 35,154 39,696 Operations, maintenance, and administration 38,851 31,229 35,096 Depreciation 28,191 29,387 31,831 Accelerated SONGS depreciation — 20,540 42,002 Interest expense 25,091 22,188 23,342 Total expenses 352,816 337,455 365,449 Transfers: Transfer to the General Fund of the City (12,393) (12,331) (11,472) Transfer of right-of-way fee to the City (3,655) (3,528) (3,528) Transfers to other funds of the City (5,610) (456) (449) Total transfers (21,658) (16,315) (15,449) Changes in fund net assets 7,962 (20,441) (41,514) Fund net assets at beginning of year 320,429 340,870 382,384 Fund net assets at end of year $ 328,391 320,429 340,870 ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Management’s Discussion and Analysis (Unaudited) June 30, 2008 and 2007 (In thousands) 8 (Continued) Revenues Year ended June 30, 2008 Total revenues for the year ended June 30, 2008 were $382,436 as compared with $333,329 in the prior year, an increase in total revenues of $49,107 This increase was primarily due to an increase of $23,696 in retail sales, an increase of $16,800 in Power Cost Adjustment/Rate Stabilization Account (PCRSA) revenues, an increase of $5,686 in capital contributions, and an increase of $4,893 in transmission revenues. The increase of 9.9% in retail sale revenues was caused by two major factors. First, the overall average 5.0% rate increase for all class customers on November 1, 2007. The second factor was one cent of the variable PCRSA rate was moved to the fixed portion of retail base rates on November 1, 2007. PCRSA revenues of $21,800 were recognized in the fiscal year 2008 in order to maintain a debt service coverage ratio of 1.6. This coverage ratio is needed to retain the Electric Utility bond ratings. The increase in the recognition of PCRSA revenues of 336% was necessary due to higher purchase power costs in this fiscal year. The increase of 195.5% in capital contributions was due to various development projects within the City. 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 the transmission rates charged by CAISO and the demand in the participants market. The increase of 17.0% in transmission revenues was mainly due to hotter than expected summer months, causing higher transmission demand across the state, and higher transmission rates charged by CAISO. Revenues Year ended June 30, 2007 Total revenues for the year ended June 30, 2007 were $333,329 as compared with $339,384 in the prior year, a decrease in total revenues of $6,055 This decrease was the result of a $12,619 decrease in wholesale energy revenues and a decrease of $10,439 in sales of surplus natural gas, which were partially offset by an increase of $3,425 in retail sales, an increase of $5,000 in PCRSA revenues, and an increase of $7,261 in interest income. The decrease of 30.4% in wholesale energy revenues was caused by two major factors. First, the sales volume was lower due to the termination of San Onofre Nuclear Generating Station, Unit 2 and 3 (SONGS) participation in mid-year of fiscal year 2007, limiting the amount of surplus power available for the wholesale market. The second factor was the downward swing in wholesale market prices this year when the natural gas prices were dramatically higher caused by the hurricane damage in the prior ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Management’s Discussion and Analysis (Unaudited) June 30, 2008 and 2007 (In thousands) 9 (Continued) year. With energy prices tied closely to the movement in the natural gas price market, average wholesale energy prices were 19% lower than last year’s prices. The decrease of 62.9% in surplus natural gas sales were also caused by two major factors. First, the prepurchase of gas for Magnolia and Combustion Turbine plants reduced unused gas sold back to the gas market during outages. The second factor was the lower natural gas price in this year as mentioned above. The increase of 1.5% in retail sales was due to an average 2.0% increase in the volume of sales when the weather was extremely hot during summer months of fiscal year 2007. PCRSA revenues of $5,000 were recognized in the fiscal year 2007 in order to maintain debt service coverage ratio of 1.60. This coverage ratio is needed to retain the Electric Utility bond ratings. The increase of 55.7% in interest income was due to an increase of $2,049 from a decrease in unrealized investment losses, an increase of $2,242 interest income earned on decommissioning funds, and the rest from higher interest rates earned on increased cash balances in fiscal year 2007 compared with 2006. Revenues by Source Year ended June 30, 2008 Interest Income 6% Capital Contributions 2% Other Revenues 1% Surplus Natural Gas Sales 2% Transmission Revenues 9% PCRSA Revenues 6% Wholesale Sales 6% Retail Sales 68% ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Management’s Discussion and Analysis (Unaudited) June 30, 2008 and 2007 (In thousands) 10 (Continued) Revenues by Source Year ended June 30, 2007 Interest Income 6% Capital Contributions 1% Other Revenues 1% Surplus Natural Gas Sales 2% Transmission Revenues 9% PCRSA Revenues 1% Wholesale Sales 9% Retail Sales 71% Expenses Year ended June 30, 2008 Total expenses for the year ended June 30, 2008 were $352,816 as compared with $337,455 in the prior year. This $15,361 increase in total expenses was the result of a $36,344 increase in purchased power costs, a $7,622 increase in operations, maintenance and administration costs, and a $2,903 increase in interest expense, which was offset by $21,736 decrease in depreciation expense and a $9,772 decrease in fuel and generation expense. The 18.3% increase in purchased power costs was due primarily to the significant increase in natural gas prices coupled with an unplanned four-month outage at the Electric Utility’s San Juan generation facility. As a result of this extended outage, the Electric Utility was forced to replace the power that would have been provided by San Juan by running its Magnolia facility more than originally planned at a higher variable cost due to the rise in natural gas prices. In addition, the Electric Utility was forced to purchase power from the wholesale market to make up the power needed that Magnolia could not provide. The outage at San Juan cost the Electric Utility an additional $11 million. The Electric Utility has also begun to purchase more of its power from renewable supplies in order to reduce its carbon footprint. Renewable power currently costs more to produce than traditional fossil fuel-based power; therefore, the Electric Utility is incurring increased purchased power expenses as a result of this shift. Transmission costs also increased significantly as a result of higher than normal demand caused by the abnormally hot spring and early summer months. ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Management’s Discussion and Analysis (Unaudited) June 30, 2008 and 2007 (In thousands) 11 (Continued) Operations, maintenance and administrative expenses increased by $7,622 or 24.4% as a result of several factors. The Electric Utility increased its conservation and energy efficiency programs in order to reduce overall demand in the long term. Over time, these increased expenditures will be returned through a reduction in future power supply costs as the need for additional power will be reduced. The Electric Utility also experienced significant increases in copper, aluminum, fuel, and other commodity prices. Because copper and aluminum are such an integral part of the electric distribution system maintenance and repair costs are particularly sensitive to price increases for these commodities. The Electric Utility has also embarked on several new internal efficiency programs that have increased administrative costs in 2008, but it is expected that these programs will have a significant return in the future through increased labor and process efficiency. The 13.1% increase in interest expenses was due to more interest expense paid for the 2007 bond issue because the Electric Utility paid interest on this particular issuance for a full 12 months. The 43.5% decrease in depreciation expenses was attributable to SONGS depreciation expense. Because the Electric Utility ended its participation in SONGS in fiscal year 2007, all of the associated depreciation expenses ended as well. The 27.8% decrease in fuel and generation expense from the prior year was primarily due to a decrease of $9,825 in SONGS operation costs resulting from SONGS termination in the middle of fiscal year 2007. Year ended June 30, 2007 Total expenses for the year ended June 30, 2007 were $337,455 as compared with $365,449 in the prior year. This $27,994 decrease in total expenses was primarily due to a $23,906 decrease in depreciation expenses and a $4,542 decrease in fuel and generation expenses. The 32.4% decrease in depreciation expenses was primarily attributable to SONGS depreciation expense. Because SONGS participation ended in the middle of fiscal year 2007, only a half-year of depreciation expense was recognized. Fuel and generation expense decreased by 11.4% from the prior year, and was primarily due to a decrease of $6,321 in SONGS operation costs resulting from SONGS termination in the middle of fiscal year 2007, partially offset by an increase of $1,386 in Combustion Turbine fuel costs. ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Management’s Discussion and Analysis (Unaudited) June 30, 2008 and 2007 (In thousands) 12 (Continued) Transfers Year ended June 30, 2008 Transfers to the City’s General Fund, as defined by City Charter, are equal to a maximum of 4% of total operating revenues of the prior fiscal year. The transfer to the City’s General Fund was $12,393 for fiscal year 2008. 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 $3,655 for fiscal year 2008. There were no significant changes in the amount of the General Fund and right-of-way fee transferred to the City during fiscal year 2008 when compared with fiscal year 2007. Transfers to other funds in fiscal year 2008 were $5,610 as compared with $456 in the prior fiscal year. This increase was mainly due to the transfer of a police heliport to the City in the amount of $5,141. Year ended June 30, 2007 Transfers to the City’s General Fund, as defined by City Charter, are equal to a maximum of 4% of total operating revenues of the prior fiscal year. The transfer to the City’s General Fund was $12,331 for fiscal year 2007. 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 $3,528 for fiscal year 2007. There were no significant changes in the amount of the General Fund and right-of-way fee transferred to the City during fiscal year 2007 when compared with fiscal year 2006. Expenses and Transfers Year ended June 30, 2008 Purchased Power 63% Operations, Maintenance and Administration 10% Fuel and Generation 7% Depreciation 7% Interest Expense 7% Transfers 6% ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Management’s Discussion and Analysis (Unaudited) June 30, 2008 and 2007 (In thousands) 13 (Continued) Expenses and Transfers Year ended June 30, 2007 Purchased Power 56% Operations, Maintenance and Administration 9% Fuel and Generation 10% Depreciation 14% Interest Expense 6% Transfers 5% Capital Assets and Debt Administration Capital Assets The Electric Utility’s investment in net utility plant as of June 30, 2008 and 2007 was $754,923 and $672,452, respectively, net of accumulated depreciation. This includes investments in land, production, transmission, and distribution-related facilities as well as general plant capital assets. The Electric Utility’s investment, before depreciation, in total utility plant at June 30, 2008 was $1,016,324, an increase of $108,513 (12%) over the prior fiscal year. San Onofre Nuclear Generating Station The Electric Utility continues to proactively manage its power portfolio to balance the need to supply Anaheim with reliable and cost-effective power, with the effects from rising fuel prices, costly changes in electric market operating regulations, and increasing legislative and regulatory environmental pressures to use more renewable resources and cut greenhouse gases. Consequently, the City sold the Electric Utility’s ownership share in SONGS to Southern California Edison (SCE) on December 29, 2006. The Electric Utility’s decision to divest SONGS was largely based on the need for operating flexibility to provide both peak and base load power, ongoing cost concerns for environmental disposal of nuclear waste and marine mitigation, as well as escalating decommissioning costs. ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Management’s Discussion and Analysis (Unaudited) June 30, 2008 and 2007 (In thousands) 14 (Continued) Before this decision, the Electric Utility estimated the useful life of the SONGS capital assets to be through the year 2022, the expiration date of the SONGS operating license. When the ownership share was sold to SCE, the original useful life date of the SONGS capital assets changed from 2022 to mid-year of fiscal year 2007. See notes 1 and 5 of the notes to financial statements for additional information regarding SONGS. The Electric Utility’s capital assets as of June 30 are as follows: 2008 2007 2006 Production $ 110,666 103,450 311,160 Transmission 88,489 59,757 43,330 Distribution 592,045 499,316 460,277 General plant 84,670 75,483 78,426 Land 35,009 33,974 15,347 Construction in progress 105,445 135,831 71,700 Nuclear fuel, at amortized cost — — 2,792 Total utility plant 1,016,324 907,811 983,032 Less accumulated depreciation (261,401) (235,359) (408,411) Net utility plant $ 754,923 672,452 574,621 As of June 30, 2008 This fiscal year experienced an increase in gross utility plant of $108,513 which includes land purchases for a new Anaheim Substation, the expansion or improvement of existing substations, transmission and distribution system improvements, and the replacement of aging overhead electrical lines with state-of-the-art underground facilities. The accumulated depreciation increased $26,042 (11.1%) mainly due to current year depreciation expense of $28,191. ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Management’s Discussion and Analysis (Unaudited) June 30, 2008 and 2007 (In thousands) 15 (Continued) As of June 30, 2007 This fiscal year experienced a decrease in gross utility plant of $75,221 mainly due to the retirement of $226,336 of fully depreciated assets, partially offset by an $151,115 increase in additional capital assets, which includes land purchases for a gas turbine plant, the expansion or improvement of existing substations, transmission and distribution system improvements, and the replacement of aging overhead electrical lines with state-of-the-art underground facilities. The $226,336 of retired assets largely resulted from SONGS and nuclear fuel assets when the SONGS operation terminated on December 29, 2006. Accumulated depreciation decreased $173,052 (42.4%) mainly due to the retirements of $222,979 of fully depreciated assets offset by current year depreciation expense of $49,927. Long-Term Debt As of June 30, 2008 and 2007, the Electric Utility had total long-term debt outstanding of $608,730 and $623,569, respectively. The Electric Utility’s outstanding long-term debt as of June 30 is as follows: 2008 2007 2006 Revenue bonds $ 608,730 623,420 480,230 Certificates of participation — — 21,110 Capital leases — 149 167 Total long-term debt outstanding 608,730 623,569 501,507 Less: Current portion (15,370) (14,768) (13,821) Unamortized bond premium 8,331 9,173 9,026 Unamortized refunding costs (6,289) (6,903) (8,186) Total noncurrent long-term debt outstanding $ 595,402 611,071 488,526 During fiscal year 2008, the credit rating of the Electric Utility was rated AA- by Fitch Ratings, A1 by Moody’s Investors Service, and AA- by Standard & Poor’s Corporation. Additional information on the Electric Utility’s long-term liabilities can be found in note 6 of the notes to financial statements. ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Management’s Discussion and Analysis (Unaudited) June 30, 2008 and 2007 (In thousands) 16 As of June 30, 2008 Total long-term debt outstanding decreased $14,839 mainly due to current year principal payments on outstanding debts of $14,690. The revenues of the Electric Utility have been pledged to pay the outstanding long-term debt. As of June 30, 2007 Total long-term debt outstanding increased $122,062 (24.3%) mainly due to the new 2007 bond issue of $206,035, partially offset by refunded amounts of $70,735, and by $13,314 payment of principal on outstanding debt. The revenues of the Electric Utility have been pledged to pay the outstanding long-term debt. Economic Factors and Rates The second phase 5% increase of the electric base rate change on all customer classes (approved in October 2007) became effective on November 1, 2008. 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. ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Balance Sheets June 30, 2008 and 2007 (In thousands) Assets 2008 2007 Utility plant: Production $ 110,666 103,450 Transmission 88,489 59,757 Distribution 592,045 499,316 General plant 84,670 75,483 Total depreciable utility plant 875,870 738,006 Less accumulated depreciation (261,401) (235,359) Net depreciable utility plant 614,469 502,647 Land 35,009 33,974 Construction in progress 105,445 135,831 Net utility plant 754,923 672,452 Restricted assets: Cash and cash equivalents 14,347 13,540 Investments 181,166 234,643 Total restricted assets 195,513 248,183 Other assets: Prepaid purchased power 36,985 26,047 Unamortized debt issuance costs 6,508 6,992 Due from other funds of the City, less current portion — 140 Total other assets 43,493 33,179 Total noncurrent assets 993,929 953,814 Current assets: Cash and cash equivalents 39,660 55,135 Investments 82,298 115,764 Accounts receivable, net 45,926 35,039 Current portion of due from other funds of the City 929 280 Accrued interest receivable 3,382 4,150 Materials and supplies inventory 8,919 6,847 Prepaid purchased power 97 143 Total current assets 181,211 217,358 Total assets $ 1,175,140 1,171,172 17 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Balance Sheets June 30, 2008 and 2007 (In thousands) Fund Net Assets and Liabilities 2008 2007 Fund net assets: Invested in capital assets, net of related debt $ 198,591 163,918 Restricted for: Debt service 11,706 10,690 Renewal and replacement 12,989 10,685 Other purposes 4,302 6,405 Unrestricted 100,803 128,731 Total fund net assets 328,391 320,429 Long-term liabilities: Long-term debt obligation, less current portion 595,402 611,000 Long-term capital lease — 71 Provision for decommissioning costs 110,923 103,444 Total long-term liabilities 706,325 714,515 Current liabilities (payable from restricted assets): Current portion of long-term debt 11,528 11,018 Accounts payable 824 445 Wages payable 23 31 Arbitrage rebate liabilities 811 213 Accrued interest payable 7,278 7,447 Total current liabilities (payable from restricted assets) 20,464 19,154 Current liabilities (payable from unrestricted current assets): Current portion of long-term debt 3,842 3,672 Current portion of long-term capital lease — 78 Accounts payable and accrued expenses 39,568 32,629 Wages payable 750 902 Regulatory credits 70,310 72,640 Deposits 5,490 7,153 Total current liabilities (payable from unrestricted current assets) 119,960 117,074 Total liabilities 846,749 850,743 Total fund net assets and liabilities $ 1,175,140 1,171,172 See accompanying notes to financial statements. 18 ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Statements of Revenues, Expenses, and Changes in Fund Net Assets Years ended June 30, 2008 and 2007 (In thousands) 2008 2007 Operating revenues: Retail sales of electricity, net $ 262,352 238,656 Wholesale sales of electricity 22,228 28,835 PCRSA revenues 21,800 5,000 Surplus natural gas sales 8,328 6,162 Transmission revenues 33,690 28,797 Other operating revenues 2,762 2,624 Total operating revenues 351,160 310,074 Operating expenses: Purchased power 235,301 198,957 Fuel and generation 25,382 35,154 Operations, maintenance, and administration 38,851 31,229 Depreciation 28,191 29,387 Accelerated SONGS depreciation — 20,540 Total operating expenses 327,725 315,267 Operating income (loss) 23,435 (5,193) Nonoperating revenues (expenses): Interest income 22,555 20,297 Interest expense (25,091) (22,188) Grants 127 50 Total nonoperating expenses, net (2,409) (1,841) Income (loss) before capital contributions and transfers 21,026 (7,034) Capital contributions 8,594 2,908 Transfer to the General Fund of the City (12,393) (12,331) Transfer of right-of-way fee to the City (3,655) (3,528) Transfers to other funds of the City (5,610) (456) Change in fund net assets 7,962 (20,441) Fund net assets at beginning of year 320,429 340,870 Fund net assets at end of year $ 328,391 320,429 See accompanying notes to financial statements. 19 ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Statements of Cash Flows Years ended June 30, 2008 and 2007 (In thousands) 2008 2007 Cash flows from operating activities: Receipts from customers and users $ 335,484 338,666 Receipts from services provided to other funds of the City 796 695 Payments to suppliers (252,076) (204,909) Payments to employees (35,598) (32,277) Payments for services provided by other funds of the City (10,187) (8,640) Net cash provided by operating activities 38,419 93,535 Cash flows from noncapital financing activities: Receipts of interfund balances — 280 Payments to interfund balances (509) — Transfers to the General Fund and other funds of the City (16,048) (15,859) Grant receipts 127 50 Net cash used in noncapital financing activities (16,430) (15,529) Cash flows from capital and related financing activities: Proceeds from borrowings, net of premium — 209,453 Transfer to escrow agent — (72,178) Principal payments on long-term debt (14,690) (13,314) Capital purchases (105,922) (142,797) Interest paid (29,737) (25,419) Issuance costs — (2,418) Transfers to other funds of the City for capital purposes (426) — Capital contributions 3,852 1,916 Net cash used in capital and related financing activities (146,923) (44,757) Cash flows from investing activities: Purchases of investment securities (799,756) (641,644) Proceeds from sale and maturity of investment securities 888,558 646,514 Interest income received 21,464 19,867 Net cash provided by investing activities 110,266 24,737 Increase (decrease) in cash and cash equivalents (14,668) 57,986 Cash and cash equivalents at beginning of year 68,675 10,689 Cash and cash equivalents at end of year $ 54,007 68,675 20 (Continued) ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Statements of Cash Flows Years ended June 30, 2008 and 2007 (In thousands) 2008 2007 Reconciliation of operating income (loss) to net cash provided by operating activities: Operating income (loss) $ 23,435 (5,193) Adjustments to reconcile operating income (loss) to net cash provided by operating activities: Depreciation 28,191 49,927 Amortization of nuclear fuel — 548 Increase in provision for decommissioning costs 7,479 6,251 Changes in assets and liabilities: Accounts receivable, net (10,887) Materials and supplies inventory (2,072) 1,632 Prepaid purchased power (10,892) 2,132 Accounts payable and accrued expenses 7,318 13,140 Wages payable (160) 56 Regulatory credits (2,330) 21,470 Deposits (1,663) 3,580 Total adjustments 14,984 98,728 Net cash provided by operating activities $ 38,419 93,535 Schedule of noncash investing, capital, and financing activities: Capital contributions $ 4,742 2 Transfers (to) from other funds of the City (5,184) 1,496 Increase (decrease) in fair value of investments 1,859 (841) Capital assets financed through capital leases — 76 See accompanying notes to financial statements. 21 ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 22 (Continued) 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 assets related to electric system operations was transferred to Electric Utility Fund. 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. Under Governmental Accounting Standards Board Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting, the Electric Utility has elected not to apply Financial Accounting Standards Board (FASB) pronouncements issued after November 30, 1989. Electric Utility Plant and Depreciation The cost of additions to the Electric Utility plant and replacement of retired units is 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, net of proceeds, is 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 based on net realizable 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 ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 23 (Continued) Government Code (Government Code) Section 16429 under the oversight of the Treasurer of the State of 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. Revenue Recognition 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 $18,076 and $14,456 at June 30, 2008 and 2007, respectively. Revenues are reported net of uncollectible amounts. Total uncollectible amounts written off are $755 and $352 for the years ended June 30, 2008 and 2007, respectively. The applicable allowance for uncollectible accounts is $340 and $108 at June 30, 2008 and 2007, 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 10. Fuel and generation include all costs associated with the City’s ownership interest in San Onofre Nuclear Generating Station, Units 2 and 3 (SONGS), up to the sale of SONGS on December 29, 2006, San Juan Generating Station, Unit 4 (SJ), and the Combustion Turbine located in Anaheim. This includes the amortization of nuclear fuel and 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. ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 24 (Continued) Regulatory Credits The Electric Utility’s Rates, Rules, and Regulations provide for a Power Cost Adjustment/Rate Stabilization Account (PCRSA) to reflect variations in the cost of power to the Electric Utility and to build a rate stabilization fund. The PCRSA provides increased flexibility by allowing the adjustment of revenues from the sale of electricity for differences between the Electric Utility’s actual cost of power and other relevant operational costs, and the amount billed to customers through standard rates. As permitted by FASB Statement No. 71, Accounting for the Effects of Certain Types of Regulation, and approved by the City Council, amounts collected for the PCRSA are deferred and recorded as regulatory credits in the balance sheets. The Electric Utility obtained City Council approval to apply a PCRSA rate to all retail kilowatt/hour (kWh) sales of electricity, except residential lifeline usage, beginning April 1, 2001. In addition, the City Council granted the Electric Utility the authority to implement PCRSA adjustments subsequent to April 1, 2001 in accordance with the PCRSA, as defined in the Electric Utility’s Rates, Rules, and Regulations. Since inception, the Electric Utility has collected $103,110 in regulatory credits. As of November 1, 2007, the PCRSA rate was changed from $0.0149 to $0.0049 for all domestic retail customers and from $0.0140 to $0.0040 for all nondomestic retail customers, excluding residential lifeline customers. As of June 30, 2008 and 2007, the Electric Utility recorded a liability for regulatory credits of $70,310 and $72,640, respectively. During fiscal year 2008 and 2007, $21,800 and $5,000, respectively, was recognized as PCRSA revenues to mitigate the impact of energy costs. Nuclear Fuel The Electric Utility amortizes the cost of nuclear fuel to expense using the “as burned” method. In accordance with the Nuclear Waste Disposal Act of 1982, the Electric Utility is charged a fee for the disposal of nuclear fuel at the rate of one million per kWh for the Electric Utility’s share of electricity generated by SONGS. The Electric Utility pays the fee quarterly to Southern California Edison Company (SCE), which is acting as the agent for SONGS participants. On December 29, 2006, the Electric Utility sold its ownership share of SONGS to SCE. Provision for Decommissioning Costs Federal regulations require the Electric Utility to provide for the future decommissioning costs of its ownership share of SONGS. The Electric Utility has established a provision for decommissioning costs of SONGS and restoration of the beachfront at San Onofre. The Electric Utility funded the reserve and recognized this expense over the useful life of the generating plant. A separate trust account was established for amounts funded and these amounts are classified as restricted assets in the accompanying balance sheets. As of June 30, 2008 and 2007, the Electric Utility has recorded a provision for decommissioning costs for SONGS of $109,163 and $102,124, respectively. For the years ended June 30, ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 25 (Continued) 2008 and 2007, the Electric Utility has recorded decommissioning costs incurred for SONGS of $7,039 and $5,811, respectively, which are included in the fuel and generation component in operating expenses. The California Public Utilities Commission approved a cost estimate by SCE for the decommissioning costs of SONGS. At June 30, 2008, SCE’s future cost estimate for the Electric Utility’s share of decommissioning costs is $109,445. The Electric Utility currently has $109,163 in trust for the decommissioning costs. Based on an assumed 4% rate of return, it is estimated that the Electric Utility’s current reserve of $109,163 will grow to $189,034 by 2022, which exceeds SCE’s future cost estimate of $158,984. Based on these estimates, the Electric Utility does not expect that it will need to further fund the provision for decommissioning with cash contributions for SONGS. 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, 2008 and 2007, the Electric Utility has recorded a provision for decommissioning costs for SJ of $1,760 and $1,320, respectively. For the years ended June 30, 2008 and 2007, the Electric Utility has recorded decommissioning costs incurred for SJ of $440 for each year, 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 are deferred 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. Bond refunding costs are recorded as a reduction of the long-term debt obligation 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 $1,684 and $1,640 for the Electric Utility at June 30, 2008 and 2007, respectively. ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 26 (Continued) Transfers (to) from Other Funds of the City Article XII of the City Charter provides that transfers to the General Fund of the City shall not exceed 4% of total operating revenues, as defined by City Charter, of the prior fiscal year. Such transfers are not in lieu of taxes and amounted to $12,393 and $12,331 for the years ended June 30, 2008 and 2007, respectively. The transfer of right-of-way fee 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 $3,655 and $3,528 for the years ended June 30, 2008 and 2007. 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 City funds, and is invested by the Treasurer to enhance interest earnings. The pooled interest earned, net of administrative fees, is reallocated to each fund based on average daily cash balances. The City’s investment policy further limits the permitted investments in California Government Code (Government Code) Sections 53600, 16429.1, and 53684 et seq. 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 rated A-1 by Standard & Poor’s Corporation P-1 by Moody’s Investors Service (Moody’s); or F-1 by Fitch Ratings (Fitch); Local Agency Investment Fund (LAIF); repurchase agreements; reverse repurchase agreements; and money market mutual funds. ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 27 (Continued) The Electric Utility maintains cash equivalents and investments at June 30 with the following carrying amounts: 2008 2007 Cash equivalents and investments pooled with the Treasurer $ 160,203 206,935 Investments held with trustee 157,268 212,147 $ 317,471 419,082 At June 30, the Electric Utility’s cash equivalents and investments are recorded as follows: 2008 2007 Restricted assets – cash equivalents and investments $ 195,513 248,183 Unrestricted assets – cash equivalents and investments 121,958 170,899 $ 317,471 419,082 Investments The Treasurer prepares an investment policy statement annually, which is presented to the Investment Advisory 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 the 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 Treasurer’s policy is more restrictive than Government Code. ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 28 (Continued) 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. Maximum Maximum Maximum percentage investment Authorized investment type maturity of portfolio* in one issuer U.S. Treasury obligations 5 years None None U.S. agency securities 5 years 75% 20% Bankers’ acceptances 180 days 25 5 Commercial paper 270 days 25 5 Negotiable certificates of deposit 3 years 15 5 Repurchase agreements 90 days 75 None Reverse repurchase agreements 92 days 20 None Medium-term corporate notes 5 years 15 5% Money market mutual funds N/A 20 10 LAIF N/A $80,000 None Time certificates of deposit (TCD) 5 years 30% 5% * Excluding amounts held by bond trustees that are not subject to Government Code restrictions. At June 30, 2008, the City exceeded 5% concentration in the following federal agency securities: Federal National Mortgage Association $67,245 Federal Home Loan Bank $61,647 Federal Farm Credit Bank $50,027 and Federal Home Loan Mortgage Corporation $43,621 At June 30, 2007, the City exceeded 5% concentration in the following federal agency securities: Federal Home Loan Bank $74,162 Federal Farm Credit Bank $47,143 Federal National Mortgage Association $41,516 and Federal Home Loan Mortgage Corporation $33,341 ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 29 (Continued) Investments Authorized by Debt Agreements Investment of debt proceeds held by bond trustees are 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 At June 30, 2008, the City’s investments controlled by fiscal agents exceeded 5% concentration in the following U.S. agency securities, guaranteed investment contracts, collateralized investments contracts, and money market mutual funds: Federal Home Loan Mortgage Corporation $43,406 Federal Home Loan Bank $33,736 Federal Farm Credit Bank $23,177 Morgan Stanley $23,775 Bank of America $16,645 and Dreyfus Institutional Reserve Treasury Fund $14,270 All guaranteed investment securities have downgrade language that requires collateral should credit ratings drop below certain levels. At June 2007, the City’s investments controlled by fiscal agent exceeded 5% concentration in the following federal agency securities, guaranteed investment securities, and collateralized investments: Federal Home Loan Bank $58,312 Federal Home Loan Mortgage Corporation $26,928 XL Asset Funding Corporation $47,412 and Rabobank Nederland $62,244 All guaranteed investment securities 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. ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 30 (Continued) 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 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 Treasurer uses the segmented time distribution method to identify and manage interest rate risk. In accordance with the City’s investment policy, the Treasurer monitors the segmented time distribution of its investment portfolio and analysis of cash flow demand. Interest rate risk for investments held by bond trustees is offset by the fact that the long-term investments are for the reserve funds with the semiannual interest payments used to pay a portion of the debt service. These are long-term securities, which are not adversely affected by interest rate changes. Investment contracts for construction funds are usually limited to three years or less. Money market mutual funds are used to accumulate or semiannual debt service payments. 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 2008 and 2007 is provided by the following tables. ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 31 (Continued) The distribution of the Electric Utility’s investments by maturity at June 30, 2008 and 2007 is as follows: Fair value Credit June 30, 12 months 13 to 24 25 to 36 37 to 60 More than Investments rating 2008 or less months months months 60 months Treasurer's pooled investments: U.S. Treasury obligations Exempt $ 21,666 21,666 — — — — U.S. agency securities AAA 77,492 16,315 2,500 25,645 33,032 — Medium-term notes Aa2-AA- 7,069 1,777 3,590 — 1,702 — Commercial paper P1-A1+ 17,381 17,381 — — — — Money market mutual funds AAA 10,819 10,819 — — — — LAIF Unrated 25,776 25,776 — — — — Total Treasurer's pooled investments 160,203 93,734 6,090 25,645 34,734 — Investments controlled by fiscal agents: U.S. agency securities AAA 107,427 — 15,200 20,789 71,438 — Guaranteed investment agreements Unrated 22,751 — — — — 22,751 Collateralized investment contracts Unrated 16,114 — — — — 16,114 Flexible repurchase agreements Unrated 9,066 — — — 9,066 — Money market mutual funds AAA 1,910 1,910 — — — — Total investments controlled by fiscal agents 157,268 1,910 15,200 20,789 80,504 38,865 Total Electric Utility investments $ 317,471 95,644 21,290 46,434 115,238 38,865 ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 32 (Continued) Fair value Credit June 30, 12 months 13 to 24 25 to 36 37 to 60 More than Investments rating 2007 or less months months months 60 months Treasurer's pooled investments: U.S. Treasury obligations Exempt $ 58,800 36,787 22,013 — — — U.S. agency securities AAA 72,924 20,912 18,472 2,542 30,998 — Medium-term notes Aa2-AA- 8,070 2,556 1,813 3,701 — — Commercial paper P1-A1+ 38,153 38,153 — — — — Money market mutual funds AAA 12,269 12,269 — — — — LAIF Unrated 16,719 16,719 — — — — Total Treasurer's pooled investments 206,935 127,396 42,298 6,243 30,998 — Investments controlled by fiscal agents: U.S. agency securities AAA 100,058 — — 28,411 24,859 46,788 Guaranteed investment agreements Unrated 6,106 — — — — 6,106 Collateralized investment contracts Unrated 95,003 31,122 31,122 — — 32,759 Flexible repurchase agreements Unrated 9,066 — — — — 9,066 Money market mutual funds AAA 1,914 1,914 — — — — Total investments controlled by fiscal agents 212,147 33,036 31,122 28,411 24,859 94,719 Total Electric Utility investments $ 419,082 160,432 73,420 34,654 55,857 94,719 ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 33 (Continued) 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, 2006 Additions Deletions 2007 Additions Deletions 2008 Production $ 311,160 6,424 (214,134) 103,450 7,216 — 110,666 Transmission 43,330 16,513 (86) 59,757 28,810 (78) 88,489 Distribution 460,277 39,861 (822) 499,316 93,148 (419) 592,045 General plant 78,426 5,028 (7,971) 75,483 9,187 — 84,670 Depreciable utility plant 893,193 67,826 (223,013) 738,006 138,361 (497) 875,870 Less accumulated depreciation (408,411) (49,927) 222,979 (235,359) (28,191) 2,149 (261,401) Net depreciable utility plant 484,782 17,899 (34) 502,647 110,170 1,652 614,469 Land 15,347 18,627 — 33,974 1,035 — 35,009 Construction in progress 71,700 148,286 (84,155) 135,831 138,648 (169,034) 105,445 Nuclear fuel, at amortized cost 2,792 531 (3,323) — — — — Nondepreciable utility plant 89,839 167,444 (87,478) 169,805 139,683 (169,034) 140,454 Net utility plant $ 574,621 185,343 (87,512) 672,452 249,853 (167,382) 754,923 Operating Expenses Total operating expenses shared with the City’s Water Utility Fund amounted to $26,164 and $23,727 for the years ended June 30, 2008 and 2007, respectively, of which $20,931 and $16,609, 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 Pursuant to a settlement agreement with SCE dated August 4, 1972, the City was granted the right to acquire a 1.66% ownership interest in SONGS, and subsequently, ownership was later increased to 3.16% by agreement of the parties. In the settlement agreement, SCE agreed to provide the necessary transmission service to deliver the output of SONGS to the City. As a result of a restructuring agreement between SCE and the City, these transmission services were subsequently provided by California Independent System ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 34 (Continued) Operator (CAISO). SCE and the City entered into the SONGS Operating Agreement that sets forth the terms and conditions under which the City, through the Electric Utility, participated in the ownership and output of SONGS. Other participants in the project include SCE, 75.05%; San Diego Gas & Electric Company, 20.00%; and the City of Riverside, 1.79%. Maintenance and operation of SONGS remained the responsibility of SCE, as operating agent for the participants under various agreements, including an operating agreement. There are no separate financial statements for this venture, as each participant’s interest is reflected in its respective financial statements. On June 22, 2004, SCE, as operating agent for the SONGS, gave notice that SCE had, pursuant to Section 16 of the Second San Onofre Operating Agreement (Agreement), declared an Operating Impairment. As a result of SCE’s action, on October 11, 2004, the City exercised its option, pursuant to Section 16 of the Agreement, not to participate in the restoration work related to the impairment and to have its ownership share reduced per provisions of the Agreement. On December 20, 2005, the City and SCE entered into an agreement for the City to transfer its interest in SONGS to SCE as soon as SCE obtained approval from the California Public Utilities Commission, California State Lands Commission, and U.S. Nuclear Regulatory Commission. SCE obtained all such approvals prior to the sale date. The City sold its 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. The original useful life (through 2022) of the SONGS utility plant assets was decreased and depreciation was accelerated in fiscal year 2007. 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. 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 10.040% ownership interest in the existing coal-fired San Juan Generating Station, 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, 2008 and 2007 amounted to $74,144 and $66,929, respectively. There are no separate financial statements for this venture, as each participant’s interest is reflected in its respective financial statements. ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 35 (Continued) Long-Term Liabilities The following is a summary of changes in long-term liabilities: Beginning of Due within June 30, 2008 year Additions Retirements End of year one year Electric Revenue Bonds $ 6,615 — (6,615) — — Anaheim Public Financing Authority Revenue Bonds 616,805 — (8,075) 608,730 15,370 Capital leases 149 — (149) — — Provision for decommissioning costs 103,444 7,479 — 110,923 — 727,013 $ 7,479 (14,839) 719,653 15,370 Less current portion (14,768) (15,370) Add unamortized bond premium 9,173 8,331 Less unamortized refunding costs (6,903) (6,289) Total long-term liabilities $ 714,515 706,325 Beginning of Due within June 30, 2007 year Additions Retirements End of year one year Electric Revenue Bonds $ 12,945 — (6,330) 6,615 6,615 Anaheim Public Financing Authority Revenue Bonds 467,285 206,035 (56,515) 616,805 8,075 Electric System Certificates of Participation 21,110 — (21,110) — — Capital leases 167 76 (94) 149 78 Provision for decommissioning costs 97,193 6,251 — 103,444 — 598,700 $ 212,362 (84,049) 727,013 14,768 Less current portion (13,821) (14,768) Add unamortized bond premium 9,026 9,173 Less unamortized refunding costs (8,186) (6,903) Total long-term liabilities $ 585,719 714,515 ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 36 (Continued) Long-term debt consists of the following at June 30: 2008 2007 Electric Revenue Bonds, issue of 1993, true interest cost (TIC) 5.07%, dated June 1, 1993, sold on June 23, 1993 in the amount of $60,700, of which $1,690 was advance refunded on September 29, 1999. The final principal of $6,615 was matured on October 1, 2007. $ — 6,615 Total Electric Revenue Bonds $ — 6,615 Anaheim Public Financing Authority Revenue Bonds, issue of 1998, TIC 5.08%, dated May 1, 1998, sold on June 2, 1998 in the amount of $65,000 of which $49,625 was advance refunded on February 7, 2007. The remaining principal of $6,585, at a rate of 5.00%, is maturing from October 1, 2008 through 2011 in annual principal installments ranging from $1,525 to $1,770. The total debt service is $7,264 to maturity. $ 6,585 8,035 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 that conversion date, October 2, 2005, the 1999 bond was remarked in the amount of $43,010. The remaining principal of $40,555 at rates ranging from 3.00% to 5.00% is maturing from October 1, 2008 through 2027 in annual principal installments ranging from $1,075 to $2,795. The total debt service is $60,119 to maturity. 40,555 41,805 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 Series 2002-A was issued in the amount of $96,210, of which $3,025 was issued as serial bonds at a rate of 4.90%, maturing from October 1, 2021 to 2022 in annual principal installments ranging from $1,390 to bonds at $1,635 and $93,185 was issued as term bonds at a rate of 5.00%, maturing from October 1, 2023 through 2031 in annual principal installments from $5,210 to $18,045. The Series 2002-B was issued as $82,495 of serial bonds at rates ranging from 3.30% to 5.25%, maturing from October 1, 2008 through 2020 in principal installments ranging from $2,210 to $10,450. The total debt service is $305,846 to maturity. 178,705 178,705 ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 37 (Continued) 2008 2007 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 bonds at rates ranging from 4.00% to 5.00%, maturing from October 1, 2010 to 2022 in annual principal installments ranging from $1,915 to $5,600. The Series 2003-B was issued in the amount of $22,680. The remaining principal of $16,445 at rates ranging from 4.00% through to 5.00%, is maturing from October 1, 2008 through 2010 in principal installments ranging from $4,115 to $6,295. The total debt service is $71,492 to maturity. $ 54,180 55,990 Anaheim Public Financing Authority Revenue Bonds, issue of 2004, TIC 4.99%, dated June 1, 2004, sold on June 30, 2004 in the amount of $131,265, of which: $97,060 was issued as serial bonds. The remaining principal of $89,385 at rates ranging from 4.00% to 5.25% is maturing from October 1, 2008 through 2025 in annual principal installments ranging from $2,310 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, 2030 through 2034 in annual principal installments ranging from $3,770 to $4,605. The total debt service is $215,998 to maturity. 123,590 126,235 Anaheim Public Financing Authority Revenue Bonds, issue of 2007, TIC 4.49%, dated February 1, 2007, sold on February 7, 2007 in the amount of $206,035, of which: $73,000 was issued as serial bonds. The remaining principal of $72,080 at rates ranging from 4.00% to 5.00% is maturing from October 1, 2008 through 2028 in annual principal installments ranging from $960 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 $12,550 to $47,665; and $71,950 was issued as term bonds at a rate 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 $396,515 to maturity. 205,115 206,035 Total Anaheim Public Financing Authority Revenue Bonds $ 608,730 616,805 ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 38 (Continued) Annual debt service requirements, excluding amounts for decommissioning costs, at June 30, 2008 to maturity are as follows: Principal Interest Total Fiscal year ending June 30: 2009 $ 15,370 28,798 44,168 2010 15,995 28,123 44,118 2011 16,725 27,379 44,104 2012 17,040 26,609 43,649 2013 17,810 25,856 43,666 2014 – 2018 102,080 115,605 217,685 2019 – 2023 98,635 89,935 188,570 2024 – 2028 114,080 64,117 178,197 2029 – 2033 130,060 33,242 163,302 2034 – 2038 80,935 8,840 89,775 $ 608,730 448,504 1,057,234 Interest costs of $5,331 and $4,897 have been capitalized to utility plant for the years ended June 30, 2008 and 2007, 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 6 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 assets restricted for debt service on the accompanying balance sheets. There are various limitations and restrictions contained in the Electric Utility’s bonds and certificates of participation. 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 $1,057,234 and $1,101,375 outstanding long-term obligations, principal and interest for the years ended June 30, 2008 and 2007, 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 2038. As of June 30, 2008 and 2007, the annual principal and interest payments on the bonds are 59.4% and 59.1% of net revenues, respectively. Debt service paid and total net revenues were $44,140 and $74,308, and $38,491 and $65,081 for the years ended June 30, 2008 and 2007, respectively. ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 39 (Continued) Restricted cash and investments include reserve provisions as well as undisbursed bond proceeds, at June 30, as follows: 2008 2007 Held by fiscal agent: Bond reserve fund $ 47,932 48,069 Bond service fund 1,448 1,201 Bond construction fund — 62,244 Decommissioning reserve 107,888 100,634 Held by Treasurer: Bond service account 17,536 16,936 Renewal and replacement account 12,989 10,685 Decommissioning and fuel reserves 1,760 1,320 Public benefit program fees 5,149 6,881 Restricted rebate 811 213 $ 195,513 248,183 The Electric Utility’s interest and other finance charges, excluding capitalized interest, for the years ended June 30, 2008 and 2007 were $25,091 and $22,188, 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. In February 2007, the Electric Utility issued revenue bonds in total principal amount of $206,035. The proceeds totaled $209,453, of which $73,467 was deposited in escrow funds to defease $21,110 in Electric System Certificates of Participation, Issue of 1997 and $49,625 in Anaheim Public Financing Authority Revenue Bonds, Series 1998. The Electric Utility reduced its total debt service payments over the life of the bonds by $9,236, and obtained an economic gain (difference between net present value of the debt service payments on the old debts and new debts) of $4,315. The outstanding amount of the refunded bonds totaled $52,290 and $52,865 at June 30, 2008 and 2007, respectively. ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 40 (Continued) A summary of bonds defeased by the Electric Utility and outstanding as of June 30 is as follows: Issue 2008 2007 1997 FARECal Certificates of Participation $ 2,665 3,240 1998 Anaheim Public Financing Authority Revenue Bonds 49,625 49,625 $ 52,290 52,865 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, 2008 and 2007, 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 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 $3,646, $3,198, and $2,742 to PERS for the years ended June 30, 2008, 2007, and 2006, 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, 2008 for further information. 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 $501 and $418 for the years ended June 30, 2008 and 2007, respectively. ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 41 (Continued) At June 30, 2008, the City was fully funded for self-insured workers’ compensation and general liability claims (self-insured retention levels of $1,000 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 insurance coverage in any of the past three years, nor does management believe that there are any pending claims that will exceed insurance coverage. (10) 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 uprated coal-fueled generating 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. ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 42 (Continued) 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 SCPPA Natural Gas Project-Pinedale 62.5 2033 SCPPA Natural Gas Project-Barnett 55.6 2033 SCPPA Natural Gas Prepaid 16.5 2040 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 for these commitments. The following schedule details the amount of debt service that is due and payable by the Electric Utility for each project and the final maturity date. Natural Natural Gas Fiscal year IPA STS MAP MPP Hoover Magnolia Gas Prepaid Total 2009 $ 35,373 12,239 2,196 1,209 782 5,935 5,392 — 63,126 2010 39,561 12,327 2,858 1,586 956 8,990 7,461 4,221 77,960 2011 40,190 12,462 2,928 1,822 957 8,988 9,175 5,126 81,648 2012 42,113 15,366 2,918 1,815 956 8,989 9,836 5,094 87,087 2013 39,028 13,894 2,916 1,813 958 8,987 8,096 4,979 80,671 2014 – 2018 167,990 68,710 14,500 7,973 4,785 43,045 34,519 23,457 364,979 2019 – 2023 118,200 70,221 8,717 4,667 — 35,418 23,210 24,406 284,839 2024 – 2028 — — — — — 35,526 15,692 27,483 78,701 2029 – 2033 — — — — — 35,700 10,774 31,256 77,730 2034 – 2038 — — — — — 44,425 — 34,885 79,310 2039 – 2040 — — — — — — — 16,477 16,477 Total $ 482,455 205,219 37,033 20,885 9,394 236,003 124,155 177,384 1,292,528 ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 43 (Continued) 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 2008 and 2007 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 Total 2008 $ 46,305 1,642 340 464 225 36,577 916 86,4 2007 44,739 2,680 213 304 263 37,964 365 86,5 69 28 Prepaid Purchased Power The Electric Utility has prepaid purchased power costs for the following take-or-pay contracts as of June 30: 2008 2007 SCPPA – Stabilization fund prepayment $ 27,621 20,454 SCPPA – Magnolia power prepayment 6,940 5,593 SCPPA – Hoover required prepayment — 63 SCPPA – Canyon prepayment 2,424 — SJ – Fuel acquisition prepayment 97 80 Prepaid purchased power $ 37,082 26,190 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, 2008 and 2007. ---PAGE BREAK--- CITY OF ANAHEIM ELECTRIC UTILITY FUND Notes to Financial Statements June 30, 2008 and 2007 (In thousands) 44 Construction Commitments At June 30, 2008, the Electric Utility had the following commitments with respect to unfinished capital projects: Remaining Expected construction completion Capital project commitment date Underground District No. 48 Harbor Street $ 3,820 2011 Underground District No. 49 Sunkist Street 5,200 2011 Underground District No. 50 Euclid Street 6,350 2012 Underground District No. 51 Lincoln Street 3,500 2011 Underground District No. 53 La Palma/Brookhurst Street 5,500 2012 Underground District No. 56 Magnolia Street 7,500 2012 Harbor Substation 45,000 2012 (11) Subsequent Events Canyon Power Project The City is currently in the licensing process to build a 200 megawatt peaking facility within the City limits. The new Combustion Turbine Generation (CTG) facility will be owned by SCPPA but operated by Anaheim. Scheduled to come online in the summer of 2011, the Canyon Power Project (CPP) will increase City’s local electric resources. The CPP will lower the City’s dependence on wholesale purchases to meet peak demand, reduce the need to purchase additional local capacity, reduce potential CAISO fees for back stop resource procurement, and allow the City to meet reliability requirements. Construction of internal generation will enable the City to more reliably meet retail load and satisfy a large portion of the City’s generation reserve requirement. In December 2008, $104 million of revenue anticipation notes were sold through SCPPA to cover the cost of the turbines. These are 12-month notes that will be paid for with long-term financing that will be issued next fiscal year for approximately $320 million to finance the entire project.