The past year was a significant one for Turlock Irrigation District; what appears on the pages that follow will attest to that. Many critical projects were advanced or completed in 2010, everything from the 174-megawatt Almond 2 Power Plant (A2PP) gaining state approval for construction to the District integrating a water safety video into its Education Program. All of this in addition to a successful water year. And, fortunately, despite the mounting challenges of – and mandates to – providing renewable energy in California, the District was able to keep electrical rates stable and without increase. Additionally, upon the departure of General Manager Larry Weis over the summer, the District’s Board of Directors began a national GM search and selected me to serve as General Manager. Looking at where the District has been, there is no better time than the present to address where the District is going. While the future offers few certainties, the manner by which the District arrives at its destinations is of utmost importance. Here are three areas of focus for the District moving forward. First, the District will give increased attention to customer service and the benefits ratepayers receive. To be a successful public utility, a reverence for customers is a requirement; one that is as important today as it was nearly 125 years ago when the District was formed by those who were stewards of the land long before us. A good example of this is the District’s digital phone system. The new system updated an antiquated phone system that frustrated many customers and employees, allowing for the more efficient routing of calls so customers can get the information and service they desire. Secondly, open communication and transparency in operations will be key, both internally and externally. While it’s important for employees, customers and other interested parties to know what’s happening at the District, it’s of greater importance for people to know why things are happening. Communication with the public is one of many reasons why a redesigned tid.com was launched. The new site is able to clearly direct users to board information, hourly hydrological data, press releases and outage information. Additionally, the creation of the @turlockid Twitter account helped disseminate similar information in a different venue.
Electric Service Area Number of Electric Accounts at year end Customers per mile of Distribution Line Customers per mile of Transmission Line Miles of Distribution Line Irrigation Service Area Number of Acres Irrigated Number of Employees
Established in 1887, TID was the first publicly owned irrigation district in the state and one of only four in California today that also provides electric retail energy directly to homes, farms and businesses. Organized under the Wright Act, TID operates under the provisions of the California Water Code as a special district. TID is also a balancing authority and is governed by a five-member Board of Directors.
Third, the District will remain true to its forward-thinking behavior. Innovation develops more efficient ways of performing duties. And because of innovation, the impossible can become routine. Coupled with determination, innovation will help the District to overcome challenges and seize opportunities. With the progress of A2PP and the Hughson-Grayson Project, the District is working to provide timely solutions by developing generation and increasing reliability, thereby averting problems that would have otherwise been menacing. Therein lies the importance of foresight. The District wouldn’t be here without it. Thankfully, with it, exciting times lie ahead.
The District continued compiling documents and putting processes in motion to prepare for the long and arduous Federal Energy Regulatory Commission (FERC) process to relicense the Don Pedro Hydroelectric Project. Specifically, the District worked in concert with Modesto Irrigation District in preparing to submit a Notice of Intent (NOI) and a Pre-Application Document (PAD) to FERC. The Districts are co-applicants for the license, as both are the current license holders and both have a vested interest in Don Pedro, irrigation water, and the clean, hydroelectric power that the Don Pedro Power Plant generates. The original license took effect in 1966 and expires in 2016. FERC will evaluate many items before making its relicensing decision, including impacts related to Project operations, engineering, water resources, environmental resources, recreation, cultural resources, and socioeconomics.
Though classified as average by California Department of Water Resources standards, the 2010 water year brought much success to the District. The year’s full natural flow to the Tuolumne River Watershed registered 1,877,648 acre feet, with roughly 74 percent of that runoff coming between April and July. The 2010 watershed runoff was up nearly 200,000 acre feet from the previous year. Irrigation water users received a full water allotment of 48 inches per acre, allowing growers to continue to be able to irrigate and produce crops that help feed the masses and stimulate the state’s sagging economy.
In December, the California Energy Commission (CEC) approved the construction of the District’s proposed Almond 2 Power Plant (A2PP), paving the way for a state-of-the-art, natural-gas fired, simple-cycle peaking power generation facility that will be located next to the existing Almond Power Plant in Ceres, CA. Once completed in 2012, the plant will add 174 megawatts of generation to the District’s portfolio. This additional output will help the District to meet reliability obligations as a Balancing Authority. Additionally, A2PP will improve the economy, efficiency, and flexibility of the District’s electrical system, including the integration of state-mandated, intermittent renewable resources such as wind and solar.
A2PP will use clean, efficient, and proven natural gas technology to generate electricity in a manner that will minimize the use of fuel, emissions of criteria pollutants, and potential effects on ambient air quality. The power plant will also use recycled water from the City of Ceres’ Wastewater Treatment Plant for the project’s process water needs.
In November, the District’s Board of Directors certified the Final Environmental Impact Report and also selected a route for the Hughson-Grayson 115-kV Transmission Line and Substation Project. Once completed, the project will bring added reliability to the District’s electrical system, specifically the Ceres service area, which was previously served by only 69-kV transmission lines. Additionally, the new 115-kV line helps reduce the possibility of power outages occurring in the area, provides capacity for future growth, and provides another dedicated transmission crossing of the heavily traveled State Route 99.
Always searching for innovative ways to educate people about water and electrical safety, the District worked to create “Dexter Duck’s Swim Safe Safety Tips”, an animated water safety video geared toward educating elementary students about how to stay safe around water. The Dexter video is the latest brainchild of the District’s Education Program. Other programs include in-classroom presentations about water, electricity and safety, the promotion of water stewardship, the TID Education Trailer and much more. The video, when used on the heels of an in-class water safety presentation, further reinforces one of the most important messages the District can convey: canals are not places to play or swim.
In response to customer feedback, internal advisement and the ever-changing, fast-paced nature of the Internet, the District felt it was prudent to redesign its website, www.tid.com, and jump into the social media arena. In addition to creating LinkedIn and YouTube accounts, the District also launched a Twitter account to help deliver messages and other information to interested parties. A new tid.com was launched in December, resulting in a clean, simple-designed website that above all else offers customers increased functionality and ease of use. In addition to improved navigation and an updated search function, the new tid.com features real-time electrical outage information, hourly updates to TID hydrological data and supplemental board meeting information. Concurrent with the website’s release was the District’s creation of a Twitter account (@turlockid). Among other bits of useful information, being active on Twitter affords the District opportunities to alert customers and others of outages, media releases and upcoming board meetings. As well as to inform many about energy saving measures in addition to electrical and water safety tips, and promote projects, rebates and assistance programs.
The District began revamping its employee orientation philosophy, the trademark piece being a new orientation video. The video details the District’s rich history of providing water and power to the region, as well as informs new hires of various departmental roles. The 50-minute video contains chapters that integrate the existing presentations of various Human Resource orientation components such as safety, workers compensation, health and wellness benefits and retirement. One aspect of new employee orientation involved the updating and redesigning of an existing Supervisor’s Checklist manual into a Hiring Manager Handbook. The manual’s processes have long served as a template for managers to ensure that employees are getting tours of the building, meeting their co-workers, and learning appropriate safety procedures, in addition to other requirements. Another aspect is an informative flipbook that provides general information to new hires. The video, handbook and flipbook are designed to work as a complete set that will help develop employee morale and workplace aptitude from an employee’s first interactions with the District, further benefiting customers in various indirect, yet important methods.
The District upgraded its phone system with a new Voice-Over-Internet Protocol (VOIP) system. The District set out to research the best and most cost-efficient phone systems that would help better meet customer needs. In addition to adding more lines to better handle customer service needs and making voicemail easier to use, the phone system allows for better communication to those attempting to reach District employees. A simple yet profound example of this is illustrated in the versatile on-hold message that greets external callers. New messages can be recorded instantly in the event of power outages or other high-volume call scenarios, allowing information to be given to customers in an efficient manner. The system helps further the efficiency of call routing, all in the hope that customers can obtain the information they seek in a timely manner.
Michael Frantz Charles Fernandes Joe Alamo Rob Santos Ron Macedo
Casey Hashimoto
Joseph Malaski James Farrar Keith Cargill Larry Gilbertson Brian LaFollette Robert Nees
Griffith & Masuda Orrick, Herrington & Sutcliffe LLP PricewaterhouseCoopers LLP Public Financial Management, Inc. SAIC Energy, Environment & Infrastructure, LLC
Moody’s Fitch Standard & Poor’s
The attached disc contains the Turlock Irrigation District’s 2010 Financial Statements. This document is stored in Adobe Acrobat (PDF) format. To view the document you will need to have the Adobe Acrobat Reader® installed on your computer. The PDF files are also available through the TID website at www.tid.com or by calling the TID business office at 209.883.8300.
333 East Canal Drive P.O. Box 949 Turlock, CA 95381 209.883.8300 www.tid.com
Turlock Irrigation District Consolidated Financial Statements December 31, 2010 and 2009
Turlock Irrigation District Contents December 31, 2010 and 2009
Page Report of Independent Auditors ............................................................................................................ 1 Management’s Discussion and Analysis .............................................................................................. 2 Financial Statements .......................................................................................................................... 11 Notes to Financial Statements: Note 1.
Organization, Description of Business and Liquidity ................................................ 16
Note 2.
Summary of Significant Accounting Policies............................................................. 16
Note 3.
Acquisition ................................................................................................................. 23
Note 4.
Utility Plant ................................................................................................................ 24
Note 5.
Participation in Joint Powers Agencies .................................................................... 25
Note 6.
Cash, Cash Equivalents and Investments ................................................................ 28
Note 7.
Long-term Debt ......................................................................................................... 32
Note 8.
Commercial Paper and Short-Term Borrowings ....................................................... 35
Note 9.
Regulatory Deferrals ................................................................................................. 36
Note 10. Derivative Financial Instruments ............................................................................... 38 Note 11. Pension Plan ............................................................................................................. 41 Note 12. Other Post Employment Benefits .............................................................................. 43 Note 13. Commitments ............................................................................................................ 45 Note 14. Contingencies ........................................................................................................... 46 Required Supplementary Information (Unaudited) ................................................................... 48
Report of Independent Auditors
To the Board of Directors of Turlock Irrigation District
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of revenues, expenses and changes in net assets and of cash flows present fairly, in all material respects, the financial position of Turlock Irrigation District and its blended component units ("TID�) at December 31, 2010 and 2009, and changes in financial position and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of TID's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements 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 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, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The management's discussion and analysis included on pages 2 through 10, and the schedules of funding progress of benefit plans included on page 48 are not required parts of the basic financial statements but are supplementary information required by the Governmental Accounting Standards Board. 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.
April 11, 2011
PricewaterhouseCoopers LLP, Three Embarcadero Center, San Francisco, CA 94111 T: (415) 498 5000, F: (415) 498 7100, www.pwc.com/us
Turlock Irrigation District Management’s Discussion and Analysis December 31, 2010 and 2009 The following management’s discussion and analysis of Turlock Irrigation District ("TID”) and its financial performance provides an overview of TID’s financial activities for the years ended December 31, 2010 and 2009. This management’s discussion and analysis should be read in conjunction with TID’s financial statements and accompanying notes, which follow this section. Background TID is an irrigation district organized under the provisions of the Wright Act and has the powers provided therein. Organized in 1887, TID was the first of 65 irrigation districts to be formed in the State of California. The Board of Directors (the “Board”) governs TID. The five members of the Board are elected from geographic divisions of TID for staggered four-year terms. The Board appoints a general manager and certain other senior managers who are responsible for the operations of TID. Since 1923, TID has provided all the electric service within its 425 square-mile service area, which includes portions of Stanislaus, Merced and Tuolumne counties. TID’s service area includes the cities of Turlock, Ceres, Hughson and a part of Modesto and the unincorporated communities of Ballico, Keyes, Denair, Hickman, Delhi and Hilmar. In December 2003, TID completed the acquisition of Pacific Gas and Electric's (PG&E) electric distribution facilities in a portion of the west side of Stanislaus County, including the City of Patterson, the community of Crows Landing and certain adjacent rural areas (collectively, the “Westside”). The Westside covers approximately 237 square miles and includes 10,421 electric customer accounts. To provide electric service within its service area, TID owns and operates an electric system, which includes generation, transmission and distribution facilities. Its generating facilities include hydroelectric, wind, gas-fired and other facilities. TID also purchases power and transmission service from other sources and participates in other utility arrangements. TID also supplies water for irrigation use within 308 square miles of its service area, comprising approximately 5,800 parcels of land and 250 miles of gravity flow canals and laterals. TID’s electric and irrigation systems are operated and accounted for as a single entity; hence, revenues from both systems are available to pay the obligations of TID. Rates and Charges TID’s Board has full and independent authority to establish revenue levels and rate schedules for all electric service provided by TID. TID is not subject to retail rate regulation by any state or federal regulatory body, and is empowered to set retail rates effective at any time. TID has maintained rates for electric service that have been sufficient to provide for all operating and maintenance costs and expenses, debt service, repairs, replacements and renewals and to provide for base capital additions to the system. The Board fixes rates and charges of TID based on a cost of service methodology. Effective February 1, 2009, TID increased electric rates by an average of 15.00%. TID has a credit requirement for all new service connections, which requires new customers to verify their good credit standing with their former electric utility provider or to place a deposit with TID if an acceptable credit standing cannot be verified.
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Turlock Irrigation District Management’s Discussion and Analysis December 31, 2010 and 2009 Financial Reporting TID maintains its accounts in accordance with generally accepted accounting principles for proprietary funds as prescribed by the Governmental Accounting Standards Board (GASB), and where not in conflict with GASB pronouncements, accounting principles prescribed by the Financial Accounting Standards Board (FASB). TID is accounted for as an enterprise fund and is financed and operated in a manner similar to that of a private business enterprise. TID uses the economic resources measurement focus and the accrual basis of accounting. Under this method, revenues are recorded when earned and expenses are recorded at the time liabilities are incurred. TID’s accounting records generally follow the Uniform System of Accounts for public utilities and licensees prescribed by the Federal Energy Regulatory Commission (FERC), except as it relates to the accounting for contributions in aid of construction (CIAC). In accordance with the FASB accounting rules which govern regulatory accounting, the Board has taken various regulatory actions for ratemaking purposes that result in the deferral of revenue or expense recognition. At December 31, 2010 and 2009, TID had regulatory assets of $0 and $24.4 million, respectively. At December 31, 2010 and 2009, TID had total regulatory credits of $25.0 million and $18.2 million, respectively. The regulatory assets and credits will be recognized in the statement of revenues, expenses and changes in net assets when determined by the Board for ratemaking purposes. Investment Policies and Procedures The Board reviews the investment policy on an annual basis. TID also has an Investment Committee, comprised of the Treasurer, Deputy Treasurer, General Manager and two members of the Board. This committee meets on an as-needed basis to review issues related to TID’s investments. TID has contracted with Public Financial Management, Inc. (PFM), a leading investment manager of public entity funds, to invest TID's cash and investments. PFM only purchases investments on behalf of TID which are permitted by TID’s investment policy. The Bank of New York Western Trust Company holds these investments in custody. Debt Management Program TID regularly reviews its debt structure, which includes the issuance of refunding bonds to achieve debt service savings. Component Units The Walnut Energy Center Authority (the “Authority”) was formed in 2003 for the purposes of developing and operating a 250 MW natural gas fueled generation facility located in TID’s service territory. Although the Authority is a separate legal entity from TID, it is blended into and reported as part of TID because of the extent of its operational and financial relationship with TID. Accordingly, all operations of the Authority are consolidated into TID’s financial statements. The Tuolumne Wind Project Authority (“TWPA”) was formed in 2008 for the purpose of purchasing a wind farm in the State of Washington. On July 14, 2009, the TWPA completed the purchase of the membership interest in a 136.6 MW wind farm, consisting of 62-wind turbine generators located in Klickitat County, Washington. Although TWPA is a separate legal entity from TID, it is blended into and reported as part of TID because of the extent of its operational and financial relationship with TID. Accordingly, all operations of the TWPA are consolidated into TID’s financial statements since the acquisition date of July 14, 2009. Using this Financial Report This annual financial report consists of management’s discussion and analysis and the financial statements, including notes to the financial statements. The annual financial report reflects the activities of TID primarily funded through the sale of energy, transmission, and distribution services to its retail and wholesale customers, as well as irrigation services.
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Turlock Irrigation District Management’s Discussion and Analysis December 31, 2010 and 2009 Balance Sheets, Statements of Revenues, Expenses and Changes in Net Assets, and Statements of Cash Flows The balance sheets include all of TID’s assets and liabilities, using the accrual basis of accounting, as well as information about which assets can be utilized for general purposes, and which assets are restricted as a result of bond covenants and other commitments. The statements of revenues, expenses, and changes in net assets report all of the revenues and expenses during the time periods indicated. The statements of cash flows report the cash provided and used by operating activities, as well as cash payments for debt service and capital expenditures and cash proceeds from investments.
Summary of Financial Position and Changes in Net Assets (dollars in thousands) as of and for the years ended December 31, 2010, 2009 and 2008
Assets Utility plant, net Cash and investments Other non-current assets Other current assets Liabilities and Net Assets Long-term debt Other non-current liabilities and deferred credits Other current liabilities Total liabilities Net assets: Invested in capital assets, net of related debt Restricted Unrestricted Total net assets
Revenue, Expenses and Changes in Net Assets Operating revenues Operating expenses Operating income
2010
2009
$ 1,229,492 362,456 17,528 47,462 $ 1,656,938
$ 1,200,225 183,908 32,158 50,131 $ 1,466,422
$
$
$
$
978,516 40,183 307,710 1,326,409
743,205 35,980 335,432 1,114,617
254,332 15,066 82,407 351,805 $ 1,466,422
$
$
$
$
329,562 (319,142) 10,420
314,120 (298,225) 15,895
(31,696)
(20,201)
Increase (decrease) in net assets
(21,276)
(4,306)
$
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$
208,197 15,176 107,156 330,529 $ 1,656,938
Nonoperating income (expense), net
Net assets, beginning of year Net assets, end of year
2008
351,805 330,529
$
356,111 351,805
782,936 134,382 21,918 55,762 994,998 383,911 35,544 219,432 638,887
280,956 11,060 64,095 356,111 994,998
336,563 (324,014) 12,549 (318) 12,231
$
343,880 356,111
Turlock Irrigation District Management’s Discussion and Analysis December 31, 2010 and 2009 Management's Discussion and Analysis as of and for the Year Ended December 31, 2010 ASSETS Utility Plant TID has invested approximately $1,229.5 million in utility plant assets, net of accumulated depreciation at December 31, 2010. TID transferred approximately $30.6 million of assets from construction in progress to utility plant assets in 2010. Net utility plant makes up 74% of TID's assets at December 31, 2010, compared to 82% in the prior year. The following chart shows the breakdown of net utility plant by major plant category at December 31, 2010 - generation, transmission, distribution, natural gas supply, pipeline, unamortized future power rights, irrigation and other:
PG&E Pipeline Natural Gas 1% Other Irrigation Supply 3% 4% 6% Unamortized Future Power Rights 1% Distribution 15%
Transmission 5%
Generation 65%
During 2010, TID capitalized $86.1 million of additions to utility plant. TID invested $52.3 million in the Almond power plant expansion, $12.6 million to add/upgrade certain transmission and distribution assets, $7.4 million for routine expansion which consists of transformers, T&D lines, meters, lights, and new services, $6.9 million investment in gas fields, $2.0 million in Irrigation improvements, $1.8 million in vehicle additions and the remaining $3.1 million in additions is made up of individually insignificant items. Cash, Cash Equivalents and Investments TID’s cash and investments increased $178.5 million during 2010. This was primarily due to the issuance of the TID first priority subordinated revenue bonds notes, series 2010 in the amount of $191.0 million for the purposes of financing the Almond power plant expansion which was offset by capital financed from revenues totaling $11.8 million in 2010. Other Non-current Assets Other non-current assets decreased $14.6 million during 2010. This decrease was primarily due to a change in regulatory assets of $24.4 million offset by the recording a receivable of $7.8 million for the recovery of costs incurred to date on the construction of a domestic water project which was abandoned during 2010, for which TID is entitled to cost recovery under the contract. In addition there was a net decrease in unamortized debt issue costs of $1.9 million related to the issuance of the TID revenue refunding bonds, 2010 series A, the WECA revenue refunding bonds, 2010 series A & B and TID first priority subordinated revenue bonds notes, series 2010 and normal amortization.
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Turlock Irrigation District Management’s Discussion and Analysis December 31, 2010 and 2009 Other Current Assets Other current assets decreased $2.7 million during 2010. The decrease was due to a decrease in gas inventories of $2.3 million, a decrease in derivative financial instruments of $1.6 million and a decrease in prepaid pension costs of $0.6 million. This decrease was offset by an increase in wholesale account receivables of $1.9 million due to an increase in wholesale power sales. LIABILITIES AND CHANGES IN NET ASSETS Long-term Debt Long-term debt increased $235.0 million primarily due to the issuance of the TID revenue refunding bonds, 2010 series A in the amount of $154.6 million and the WECA revenue refunding bonds, 2010 series A & B in the amount of $138.6 million which was offset by scheduled principal payments and the refunding of existing debt. The following table shows TID’s future debt service requirements from 2011 through 2015 at December 31, 2010 (dollars in thousands):
$80,000 $70,000 $60,000 $50,000 Interest
$40,000
Principal
$30,000 $20,000 $10,000 $0 2011
2012
2013
2014
2015
At December 31, 2010, TID’s bond ratings are A1 from Moody’s, A+ from Fitch and A+ from Standard and Poor’s.
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Turlock Irrigation District Management’s Discussion and Analysis December 31, 2010 and 2009 Other Non-current Liabilities and Deferred Credits Other non-current liabilities and deferred credits increased $4.2 million in 2010. The increase was due to an increase of $6.9 million in deferred regulatory credits offset by a decrease in TID’s PG&E Pipeline obligation of $1.3 million and a $1.8 million decrease in TID’s share of the Transmission Agency of Northern California's obligation. Other Current Liabilities Other current liabilities decreased $27.4 million in 2010. This was primarily the result of a net decrease in Commercial Paper and short-term financings of $27.2 million. Accounts payable and purchase power and fuel payables decreased $6.0 million and derivative financial instruments decreased $1.7 million offset by an increase in accrued interest payable of $6.6 million, due to 2010 bond issued, an increase in customer deposits of $0.5 million and an increase in current portion of long-term debt of $0.4 million. CHANGES IN NET ASSETS Operating Revenues Operating revenues increased $15.4 million from $314.1 million in 2009 to $329.6 million in 2010. Wholesale revenues increased $28.0 million to $80.0 million in 2010 from $52.0 million in 2009 as a result of an increase in average sales price and increase in volume sold. Average sales price increased approximately 23.3% from an average of $38/megawatt hour (MWh) in 2009 to $44/MWh in 2010 and volumes increased by approximately 29.7% when compared to 2010. Wholesale gas revenues increased $0.6 million due to an increase in sales volume. Retail power revenues were down $14.0 million primarily due to a decrease of 3.7% in consumption and deferral of $10.9 million in revenues as a result of the Power Supply Adjustment. Operating Expenses Purchased power, generation and fuel expenses were $214.6 million in 2010 compared to $200.5 million in 2009. The increase is due to increased purchased power of $24.7 million due to the recognition of $24.4 million of previously deferred public power supply adjustment. The purchased power increase was offset by a decrease of $10.7 million in generation and fuel which was primarily due to a decrease in net fuel cost of $18.3 million offset by an increase in TWPA cost of $5.0 million, as a result of a full year of operations. Other electric, Irrigation and Administration and General Expense are collectively up $1.0 million due to lower maintenance expense. Depletion expense decreased $1.9 million due to decreased production and depreciation expense increased $8.9 million due primarily to a full year of depreciation on the 2009 addition of TWPA. Net Investment Income Net investment income in 2010 was $1.0 million lower than in 2009, primarily as a result of lower yields on investments. Derivative Gain (Loss) Net gain on derivatives increased $5.6 million, primarily due to lower gas and power prices at time of contract settlement compared to prices as of December 31, 2009. Other Income Other income is up $1.2 million in 2010 when compared to 2009. This increase is primarily the result of a $2.0 million increase in Federal subsidy from the issuance of Build America Bonds issued in 2009 offset by a $0.9 million decrease in contribution in aid of construction with the remaining decrease a result of individually insignificant items.
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Turlock Irrigation District Management’s Discussion and Analysis December 31, 2010 and 2009 Interest Expense Interest expense increased $17.3 million in 2010 as compared to 2009 primarily due to a full year of interest on the 2009 TWPA revenue bonds which resulted in an increase in interest expense of $13.4 million. The remaining increase is due to interest on the TID revenue refunding bonds, 2010 Series and the WECA revenue refunding bonds, 2010 series A & B issued during 2010.
Management's Discussion and Analysis as of and for the Year Ended December 31, 2009 ASSETS Utility Plant TID has invested approximately $1,200.2 million in utility plant assets, net of accumulated depreciation at December 31, 2009. TID transferred approximately $52.3 million of assets from construction in progress to utility plant assets in 2009. Net utility plant makes up 82% of TID's assets at December 31, 2009, compared to 79% in the prior year. The following chart shows the breakdown of net utility plant by major plant category at December 31, 2009 - generation, transmission, distribution, natural gas supply, pipeline, unamortized future power rights, irrigation and other:
Irrigation 4%
Natural Gas Supply 6%
PG&E Pipeline 1% Other 3%
Unamortized Future Power Rights 1%
Distribution 16%
Generation 64%
Transmission 5%
During 2009, TID capitalized $456.8 million of additions to utility plant. TID invested $389.2 million in the Tuolumne Wind project. TID also invested $33.1 million for the Almond power plant expansion, $16.1 million to add/upgrade certain transmission and distribution assets, $9.4 million for routine expansion which consists of transformers, T&D lines, meters, lights, and new services and $2.3 million in Irrigation improvements. Cash and Investments TID’s cash and investments increased $49.5 million during 2009. This was primarily due to cash financing activities regarding the TWPA Bond issuance. Total proceeds from the issuance amounted to approximately $428.9 million of which a total of $391.5 was used to acquire the wind farm resulting in a net increase in cash and investments of approximately $37.4 million. Of the $37.4 million increase, $36.1 million of the amount makes up the TWPA bond reserve and TID has added $11.5 million for TWPA debt service due January 1, 2010 as of December 31, 2009.
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Turlock Irrigation District Management’s Discussion and Analysis December 31, 2010 and 2009 Other Non-current Assets Other non-current assets increased $10.3 million during 2009. This increase was primarily due to change in regulatory assets of $7.4 million and debt issue costs related to TWPA financing and short-term borrowings of $3.8 million offset by a net decrease in debt issue costs of $0.9 million related to the Authority B & C refinancing and normal amortization. Other Current Assets Other current assets decreased $5.6 million during 2009. This was primarily due to a decrease in derivative financial instruments of $13.1 million and a decrease in interest receivable of $1.5 million offset by an increase in retail and wholesale receivables of $5.6 million, TWPA prepaid spare parts of $0.6 million, increase of gas inventories of $2.4 million, and an increase in prepaid OPEB costs of $0.3 million. LIABILITIES AND CHANGES IN NET ASSETS Long-term Debt Long-term debt increased $359.3 million due to the issuance of the 2009 TWPA revenue bonds of $427.6 million, which is partially offset by scheduled principal payments. At December 31, 2009, TID’s bond ratings are A1 from Moody’s, A+ from Fitch and A+ from Standard and Poor’s. Other Non-current Liabilities and Deferred Credits Other non-current liabilities and deferred credits increased $0.5 million in 2009. The increase was due primarily to the recording of a asset retirement obligation due to the acquisition of the Tuolumne Wind Project in the amount of $2.7 million, an increase of $0.8 million in TID’s share of the Transmission Agency of Northern California's obligation offset by decreases in deferred regulatory credits of $1.6 million and an increase in TID’s PG&E Pipeline obligation of $1.4 million. Other Current Liabilities Other current liabilities increased $116.0 million in 2009. This was primarily the result of $177.8 million issued in short-term financing offset by a decrease in Commercial Paper of $74.0 million. The short-term financings were issued to retire commercial paper and refinance WECA Bonds Series B & C. In addition, accounts payable is up $9.1 million due to capital projects and interest payable increased $12.8 million due to TWPA debt service. This was offset by a decrease in short-term financial derivatives of $10.1 million due to the change in derivative contract values held as of December 31, 2009 when compared to contract values as of December 31, 2008. CHANGES IN NET ASSETS Operating Revenues Operating revenues decreased $22.5 million from $336.6 million in 2008 to $314.1 million in 2009. Wholesale revenues decreased $45.4 million to $52.0 million from $97.4 million in 2008 as a result of a decrease in average sales price and decrease in volume sold. Average sales price decreased approximately 50% from an average of $75/megawatt hour (MWh) in 2008 to $38/MWh in 2009 and volumes decreased by approximately 13% when compared to 2008. Wholesale gas revenues decreased $4.1 million due to decrease in gas prices of approximately 53%. Retail power revenues were up $26.5 million primarily due to an average rate increase of 15.0% effective February 1, 2009, which was slightly offset by a 1.6% decrease in consumption.
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Turlock Irrigation District Management’s Discussion and Analysis December 31, 2010 and 2009 Operating Expenses Purchased power, generation and fuel expenses were $200.5 million in 2009 compared to $239.3 million in 2008. Walnut Energy Center Fuel cost decreased $22.3 million due to decreased volume and gas prices. Other electric expense and Administration and General Expense are up due to an increase in cost of employee benefits related to poor market conditions. Public Benefits expense was up $0.6 million in 2009 due to new solar programs. Depletion expense decreased $1.0 million due to decreased production and depreciation expense increased $8.0 million due primarily to the addition of TWPA. Net Investment Income Net investment income in 2009 was $10.0 million lower than in 2008, primarily as a result of the recognition in 2008 of $8.0 million in interest revenue that was released from the regulatory credits in connection with rate action authorized by TID Board of Directors. Derivative (Loss) Gain Net loss on derivatives increased $3.6 million, primarily as a result of contracts no longer meeting the definition of an effective hedge upon settlement. Other Income Other income is up $0.6 million in 2009 when compared to 2008. This increase is the result of a $1.7 million Federal subsidy from the issuance of Build America Bonds offset by a $0.9 million decrease in contribution in aid of construction. Interest Expense Interest expense increased $7.0 million in 2009 as compared to 2008 primarily due to the addition of 2009 TWPA revenue bonds which had interest of $11.6 million. This increase was offset by a decrease in interest expense due to refinancing during the year and a decrease on variable rate debt resulting in a decrease in interest expense of approximately $4.6 million.
-10-
Turlock Irrigation District Consolidated Balance Sheets December 31, 2010 and 2009
(dollars in thousands)
Assets Utility plant, net Investments and other long-term assets: Cash and cash equivalents restricted for long-term purposes Short-term investments, restricted for long-term purposes Long-term investments, including restricted amounts Debt issuance costs and other assets Deferred regulatory asset
Current assets: Cash and cash equivalents, including restricted amounts Short-term investments, including restricted amounts Retail accounts receivable, net Wholesale accounts receivable, net Accrued interest and other receivables Materials and supplies, net Prepaid expenses and other current assets Derivative financial instruments Total assets
2010
2009
$ 1,229,492
$ 1,200,225
12,410 3,570 124,664 17,528 -
44,925 58,741 7,800 24,358
158,172
135,824
200,089 21,723 18,239 11,327 5,449 3,073 8,612 762
63,798 16,444 18,440 9,465 4,964 3,151 11,736 2,375
269,274
130,373
$ 1,656,938
$ 1,466,422
The accompanying notes are an integral part of these financial statements. -11-
Turlock Irrigation District Consolidated Balance Sheets, continued December 31, 2010 and 2009
(dollars in thousands) 2010
Capitalization and Liabilities Capitalization: Net assets: Invested in capital assets, net of related debt Restricted Unrestricted
$
Total net assets Long-term debt, net of current portion Total capitalization Liabilities and deferred credits: Deferred regulatory credits Derivative financial instruments, net of current portion Asset Retirement Obligation Long-term lease obligation Deferred Inflow Affiliate obligation
Current liabilities: Commercial paper notes and short term financings Current portion of long-term debt Power purchases and gas payables Accounts payable and accrued expenses Accrued salaries, wages and related benefits Customer deposits and advances Accrued interest payable Current portion of lease obligation Derivative financial instruments
208,197 15,176 107,156
2009
$
254,332 15,066 82,407
330,529
351,805
965,676
730,725
1,296,205
1,082,530
25,037 556 2,782 7,840 9 3,959
18,184 173 2,628 9,158 5,837
40,183
35,980
230,915 12,840 11,746 19,860 7,023 7,696 26,567 1,538 2,365
258,111 12,480 15,743 21,875 6,833 7,161 20,011 1,669 4,029
320,550
347,912
$ 1,656,938
$ 1,466,422
Commitments and contingencies Total capitalization and liabilities
The accompanying notes are an integral part of these financial statements. -12-
Turlock Irrigation District Consolidated Statements of Revenues, Expenses and Changes in Net Assets For the years ended December 31, 2010 and 2009
(dollars in thousands) 2010
Operating revenues: Electric: Retail Wholesale Irrigation Wholesale gas Other
$
227,547 80,039 7,382 11,049 3,545
2009
$
241,500 52,047 6,832 10,472 3,269
329,562
314,120
96,084 118,518 25,087 10,582 21,568 47,303
71,352 129,202 26,412 11,257 20,576 39,426
319,142
298,225
10,420
15,895
2,666 7,643 2,668 (44,673)
3,660 6,446 (2,963) (27,344)
(31,696)
(20,201)
Decrease in net assets
(21,276)
(4,306)
Net assets, beginning of year
351,805
Operating expenses: Purchased power Generation and fuel Other electric Irrigation Administration and general Depreciation and amortization Operating income Nonoperating revenues and expenses: Net investment income Other income, net Investment derivative gain (loss) Interest expense
Net assets, end of year
$
330,529
356,111 $
The accompanying notes are an integral part of these financial statements. -13-
351,805
Turlock Irrigation District Consolidated Statements of Cash Flows For the years ended December 31, 2010 and 2009
(dollars in thousands) 2010
Cash flows from operating activities: Receipts from electric customers Receipts from wholesale power sales Receipts from irrigation customers Receipts from sales of gas Payments to vendors for purchased power Payments to employees and vendors for generation and fuel and other electric Payments to employees and vendors for irrigation Payments to employees and vendors for administration and general Other receipts and payments, net
$
Net cash provided by operating activities Cash flows from capital and related financing activities: Acquisition and construction of capital assets Proceeds from contributions in aid of construction Proceeds from issuance of long-term debt Repayment of long-term debt Repayment of long-term lease obligation Repayment of commercial paper and short-term borrowings Proceeds from issuance of commercial paper and short-term borrowings Interest payments on debt Interest payments on long-term lease obligation Build America Bond receipts Net cash provided by capital and related financing activities
234,877 78,177 7,358 10,567 (73,278)
2009
$
239,950 47,988 6,791 10,854 (78,022)
(138,672) (10,582) (22,045) 2,918
(143,451) (14,166) (20,634) (3,040)
89,320
46,270
(86,935) 874 298,423 (64,910) (1,449) (227,810) 200,236 (36,967) (610) 3,671
(445,866) 1,812 425,138 (69,515) (1,143) (134,389) 238,698 (13,344) (694) 1,702
84,523
2,399
2,473 1,973 (179,948) 105,435
4,003 (2,236) (94,743) 85,688
(70,067)
(7,288)
Net increase in cash and cash equivalents
103,776
41,381
Cash and cash equivalents, beginning of year
108,723
67,342
Cash flows from investing activities: Investment income Derivative (loss) gain Purchases of investments Sales of investments Net cash provided used in investing activities
Cash and cash equivalents, end of year
$
212,499
$
108,723
Reconciliation of cash and equivalents to balance sheet: Cash and cash equivalents restricted for long-term purposes Cash and cash equivalents, including restricted amounts
$
12,410 200,089 212,499
$
44,925 63,798 108,723
$
The accompanying notes are an integral part of these financial statements. -14-
$
Turlock Irrigation District Consolidated Statements of Cash Flows, continued For the years ended December 31, 2010 and 2009
(dollars in thousands) 2010
Adjustment to reconcile operating income to net cash provided by operations: Operating income Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation and amortization Change in fair value of derivative financial instruments Other income Other changes in operating assets and liabilities: Accounts receivable Materials and supplies Prepaid expenses and other current assets Regulatory assets and credits Power purchases payable Accounts payable and accrued expenses Accrued salaries, wages and related benefits Customer deposits and advances Affiliate obligation Net cash provided by operating activities Supplemental non-cash investing and financing activities: Accounts payable related to construction of capital assets Domesic water receivable transfer from construction in progress Investment (loss) income from derivatives Asset Retirement Obligation Refunding loss
$
10,420
2009
$
47,303 1,036 4,818
39,426 (8,685) 2,980
(1,953) 78 2,879 30,952 (3,997) (1,063) 190 535 (1,878)
(4,493) (89) 7,092 (8,074) 558 808 43 38 771
$
89,320
$
46,270
$
9,703 7,847 695 526
$
10,501 (726) 2,827 801
The accompanying notes are an integral part of these financial statements. -15-
15,895
Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2010 and 2009
(dollars in thousands)
1. Organization, Description of Business and Liquidity The Turlock Irrigation District (“TID”) was organized under the Wright Act in 1887 and operates under the provisions of the California Water Code as a special district of the State of California. As a public power utility, TID is not subject to regulation or oversight by the California Public Utilities Commission (CPUC). TID provides electric power and irrigation water to its customers. TID’s Board of Directors (the “Board”) determines its rates and charges for its commodities and services. TID levies ad valorem property taxes on property located in the counties of Stanislaus and Merced. TID may also incur indebtedness, including issuing bonds, and is exempt from payment of federal and state income taxes. The District has short-term debt obligations maturing in 2011 totaling $190,950, which exceeds existing working capital resources. TID's plans to sustain liquidity and refinance the debt are described in the last paragraph of Note 8. 2. Summary of Significant Accounting Policies Method of Accounting TID maintains its accounts in accordance with generally accepted accounting principles for proprietary funds as prescribed by the Governmental Accounting Standards Board (GASB), and where not in conflict with GASB pronouncements, accounting principles prescribed by the Financial Accounting Standards Board (FASB). TID is accounted for as an enterprise fund and is financed and operated in a manner similar to that of a private business enterprise. TID uses the economic resources measurement focus and the accrual basis of accounting. Under this method, revenues are recorded when earned and expenses are recorded at the time liabilities are incurred. TID’s accounting records generally follow the Uniform System of accounts for public utilities and licensees prescribed by the Federal Energy Regulatory Commission (FERC), except as it relates to the accounting for contributions in aid of construction (CIAC). Component Units The Walnut Energy Center Authority (the “Authority”) owns and operates a 250 MW natural gas fueled generation facility, which commenced commercial operations on February 28, 2006. The Tuolumne Wind Project Authority (“TWPA”) was formed in 2008 for the purpose of purchasing a wind farm in the State of Washington. On July 14, 2009, the TWPA completed the purchase of the membership interest in a 136.6 MW wind farm, consisting of 62-wind turbine generators located in Klickitat County, Washington (see Note 3). Although the Authority and TWPA are separate legal entities from TID, they are blended into and reported as part of TID because of the extent of their operational and financial relationship with TID. Accordingly, all operations of the Authority and TWPA are consolidated into TID’s financial statements. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. TID's more significant estimates include fair value estimates for investments and derivative financial instruments; allowance for doubtful accounts; estimated useful lives of utility plant; health insurance reserves; and workers' compensation reserves.
-16-
Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2010 and 2009
(dollars in thousands)
Long-term and Short-term Debt Long-term debt is recorded at the principal amounts of the obligations adjusted for original issue discounts and premiums. The premiums and discounts on bonds issued are amortized over the terms of the bonds using the effective interest method as a component of interest expense. Debt defeasance charges result from debt refunding transactions and comprise the difference between the reacquisition costs and the net outstanding debt balances including deferred costs of the defeased debt at the date of the defeasance transaction. Such charges are included as a component of long-term debt and amortized as a component of interest expense over the shorter of the life of the refunded debt or the new debt, using the effective interest method. Utility Plant Utility plant is recorded at cost. The cost of additions, renewals and betterments are capitalized; repairs and minor replacements are charged to operating expenses as incurred. Interest and related financing costs are capitalized as a component of major utility plant development projects. TID incurred gross interest costs of $48,118 and $29,460 during the years ended December 31, 2010 and 2009, respectively, of which $3,445 and $2,116 were capitalized during 2010 and 2009, respectively. Depreciation is computed using the straight-line method over the estimated useful lives, which generally range from 20 to 40 years and 40 to 150 years for electric and irrigation related assets, respectively. The estimated useful lives of furniture, fixtures, equipment and other assets range from 5 to 25 years. Upon retirement of an asset that was previously in service, the cost of depreciable utility plant, plus removal costs, less salvage, is charged to accumulated depreciation. If a capital asset is disposed of prior to being put into service, the costs capitalized to date are expensed. During the years ended December 31, 2010 and 2009 TID had retirements and disposals totaling $1,702 and $49, respectively. Future power rights are costs incurred by TID in development of hydroelectric facilities owned by others who provide power to TID. Such costs are recorded as a component of utility plant and are being amortized on a straight-line basis over the 49-year periods to which these rights apply. Impairment of Long-Lived Assets TID accounts for potential impairments in accordance with GASB accounting rules which govern, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries under which TID evaluates prominent events or changes in circumstances affecting capital assets to determine whether impairment of a capital asset has occurred. A capital asset is considered impaired when its service utility has declined significantly and unexpectedly and when full recovery through utility rates or other means is not considered probable. Intangible Assets TID accounts for intangible assets in accordance with GASB accounting rules which governs Accounting and Financial Reporting for Intangible Assets, and provides guidance regarding how to identify, account for and report intangible assets. Intangible assets are defined as assets that lack physical substance, are nonfinancial in nature, and have an initial useful life extending beyond a single reporting period. Accounting and Financial Reporting for Intangible Assets provide that intangible assets be classified as capital assets, except for items explicitly excluded from the scope of the standard. Included in utility plant are costs related to emission credits acquired that may be necessary to operate the gas fired facility which meet the definition of an intangible asset as defined. Such credits have an indeterminate life and are therefore, not amortized. At December 31, 2010 and 2009, TID had emission credits totaling $20,187.
-17-
Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2010 and 2009
(dollars in thousands)
Investments in Gas Properties TID owns non-operating ownership interests in gas producing properties in Wyoming and Texas. TID uses the successful efforts method of accounting for its investments in gas producing properties. Costs to drill and complete wells that access economically recoverable reserves are capitalized as a component of utility plant on the balance sheet. Costs to drill wells that do not find economically recoverable reserves are expensed. The capitalized costs of producing gas properties, after considering estimated residual salvage values, are depleted by the unit-of-production method based on the estimated future production of proved reserves for the properties. Gas production from TID’s share of these properties is sold to wholesale buyers as an economic hedge to offset the net cost of TID’s gas supply. Sales of gas in 2010 and 2009 totaled $13,572 and $10,472, respectively. Depletion expense, which is included as a component of depreciation expense in the accompanying statement of revenues, expenses and changes in net assets, totaled $4,177 and $6,089, respectively, in 2010 and 2009. Cash, Cash Equivalents and Investments Cash equivalents include all debt instruments with original maturity dates of three months or less from the date of purchase and all investments in the California Asset Management Program (CAMP) and the Local Agency Investment Fund (LAIF). The debt instruments are reported at amortized cost which approximates fair value and the CAMP and LAIF are reported at the value of their pool shares. CAMP is a joint powers authority (JPA) and public agency whose investments are limited to those permitted by the California Government Code. Investments in CAMP shares are not insured by the Federal Deposit Insurance Corporation (FDIC) or any other governmental agency. LAIF has an equity interest in the State of California Pooled Money Investment Account (PMIA). PMIA funds are on deposit with the State's Centralized Treasury System and are managed in compliance with the California Government Code, according to a statement of investment policy which sets forth permitted investment vehicles, liquidity parameters and maximum maturity of investments. The PMIA cash and investments are recorded at amortized cost which approximates market. TID's deposits with CAMP and LAIF are generally available for withdrawal on demand. All investments are carried at their fair market value, generally based on market prices quoted by dealers for those or similar investments. Investment income includes both realized gains and losses and unrealized changes in the fair market value of investments, unless deferred as a regulatory asset or credit. In accordance with provisions of the credit agreements relating to TID’s long-term debt obligations, restricted funds held by trustees have been established to provide for certain debt service and project funding requirements. The restricted funds held by trustees are invested primarily in United States (U.S.) government securities and related instruments with maturities no later than the expected date of the use of such funds. Participation in Joint Power Authorities TID’s ownership investments in JPAs, all representing less than 20% ownership interests except for the Authority and TWPA, are accounted for using the cost method. Debt Issuance Costs Costs incurred in connection with the issuance of debt obligations, principally underwriters’ and legal fees, are deferred on the balance sheet as debt issuance costs and are amortized, as a component of interest expense, over the terms of the related obligations using the effective interest method.
-18-
Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2010 and 2009
(dollars in thousands)
Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable arise from billings to customers for the sale of power and water, and certain improvements made to customers’ properties. Accounts receivable also includes an estimate for unbilled retail and wholesale revenues related to power delivered between the last billing and the last day of the reporting period. TID recognizes an estimate of uncollectible accounts for its retail and wholesale receivables based upon its historical experience with collections, current market conditions and specific identification of known losses. At December 31, 2010 and 2009, the allowance for doubtful accounts relating to retail electric receivables totaled $469 and $420, respectively. At both December 31, 2010 and 2009, the allowance on the wholesale receivables was $3,820, which relates to collectibility issues resulting from the uncertain California wholesale energy markets. TID records bad debt expense related to electric service and wholesale activities as administration and general in the statements of revenues, expenses and changes in net assets. In 2010 and 2009, bad debt expense relating to uncollectible accounts receivable was $550 and $561, respectively. Domestic Water Plant Receivable TID aligned itself in 2006 with the four municipalities to advance the construction of a Regional Surface Water Treatment Plant capable of producing up to 42.5 million gallons per day of clean drinking water for those who inhabit those communities. As set forth in the Drinking Water agreement, TID is responsible for development and construction of the facilities and will own the facility. In 2010 TID and the municipalities decided to suspend development of the project and, as a result TID has billed the municipalities for $7,847, representing full reimbursement of TID's incurred costs which had been accumulated in construction in progress. Management believes this amount is fully realizable from the municipalities based on the termination provisions within the prevailing agreements. As such the amount is included as a component of debt issuance costs and other assets in the balance sheet at December 31, 2010. Materials and Supplies Materials and supplies are used in TID’s operations and are recorded at average cost, net of reserves for obsolete items. Reserves for obsolete items totaled $301 at December 31, 2010 and 2009. Long-term Lease Obligation In connection with completing the Walnut Energy Center, TID entered into a long-term transmission arrangement with Pacific Gas and Electric (PG&E) which included PG&E constructing new, and reinforcing existing natural gas transmission facilities. The arrangement represents, in substance, a capital lease wherein TID (lessee) is obligated to repay all costs associated with the construction and reinforcement of the transmission facilities to PG&E through billings on transmission usage. As such, TID records its obligation to PG&E as a long-term lease obligation and the associated assets in utility plant in accordance with FASB accounting rules governing lease accounting. At inception, the contract required an up-front payment of $1,600 plus an irrevocable payment obligation which totals $13,800 on a net present value basis to be paid over a ten year period with the amounts due within one year classified as current. Contract provisions provides for periodic evaluation of TID's usage of natural gas which has resulted in additional amounts being paid to PG&E or received from PG&E in the first three years of the contract. The lease obligation is included in TID's balance sheet at December 31, 2010 and 2009 with a balance of $9,378 and $10,827, respectively, along with the related assets with a net book value of $7,996 and $9,543, respectively, in utility plant. Future lease payments are approximately $1.5 million in each of the next six years.
-19-
Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2010 and 2009
(dollars in thousands)
Deferred Regulatory Asset and Credits TID’s Board has the authority to establish the level of rates charged for all District services. As a regulated entity, TID’s financial statements are prepared in accordance with FASB accounting rules governing regulatory accounting, which requires the effects of the rate making process be recorded in the financial statements. Accordingly, certain expenses and income, normally reflected in operations as incurred, are recognized when included in rates and recovered from or refunded to customers as set forth in rate actions taken by the Board. Compensated Absences TID accrues vacation leave, sick leave and other compensated absences earned as liabilities when the employees earn the benefits. At December 31, 2010 and 2009, the total estimated liability for vacation, sick, and other compensated absences was $4,161 and $4,100, respectively, and is included in accrued salaries, wages and related benefits in the accompanying balance sheets. Self-insurance Liability Substantially all of TID’s assets are insured against possible losses from fire and other risks. TID carries insurance coverage to cover general liability claims in excess of $1,000 per occurrence up to $35,000 and worker’s compensation claims in excess of $750 per occurrence. Excess insurance for medical claims for the years ended December 31, 2010 and 2009 was $150 and $150, respectively, per employee and covered retiree. TID records liabilities for unpaid claims when they are probable of occurrence and the amount can be reasonably estimated. TID purchases its excess worker's compensation insurance from the California State Association of Counties (CSAC) Excess Insurance Authority. The risk of loss in excess of $750 per occurrence is transferred to the insurance pool. The accompanying financial statements include accrued expenses for general liability, workers’ compensation and medical, dental and vision claims based on TID’s best estimates of the ultimate cost of settling outstanding claims and claims incurred, but not reported. At December 31, 2010 and 2009, TID’s estimated self-insurance liability for its worker’s compensation claims totaled $3,924 and $4,200, respectively, and is reported as a component of accounts payable and accrued expenses in the consolidated balance sheets. At both December 31, 2010 and 2009, TID’s estimated selfinsurance liability for its medical claims totaled $780 and $780, respectively, and is reported as a component of accrued salaries, wages and related benefits in the consolidated balance sheets. Gas Price Swap and Option Agreements TID uses forward purchase agreements, swaps and option agreements to hedge the impact of market volatility on gas prices for its gas fueled power plants. Expenses under the contracts, net of the payments received, are reported as a component of generation and fuel expense, in the period in which the underlying gas and power deliveries occur. Derivative Financial Instruments TID accounts for derivative instruments in accordance with GASB accounting rules, Accounting and Financial Reporting for Derivative Instruments, which establishes accounting and financial reporting standards for the recognition, measurement, and disclosure of information regarding derivative instruments entered into by state and local governments (See Note 10). TID records derivative financial instruments, consisting of gas price swap agreements, option agreements, and gas and electricity purchase and sales agreements that are not treated as normal purchases and normal sales, at fair value on its balance sheets. Normal purchases and normal sales are contracts that are for the purchase or sale of a commodity, such as natural gas or electricity, to be used in the normal course of operations, provided that it is probable TID will take or make delivery of the commodity specified in the derivative instrument. Changes in the fair value of derivatives that do
-20-
Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2010 and 2009
(dollars in thousands)
not meet the requirements of an effective hedge transaction are included in nonoperating revenues and expenses as a derivative gain (loss). Changes in the fair value of derivatives which are effective hedges, are deferred on the balance sheet and included in prepaid expenses and other current assets and accounts payable for current derivative contracts and in debt issue costs and other assets for non-current derivative contracts. The fair values of gas price swap and option agreements are based on forward prices from established indexes for the applicable regions, where available and forward prices obtained from a pricing service utilized by TID. The fair values of gas and electricity purchase and sales agreements are based on forward prices from both published indexes from applicable regions and discounted using established interest rate indexes, where applicable, and information obtained from a pricing service where a published index is not available. TID reports derivative financial instruments with remaining maturities of one year or less and the portion of long-term contracts with scheduled transactions over the next twelve months as current on the consolidated balance sheets. TID is exposed to risk of nonperformance if the counterparties default or if the agreements are terminated. TID monitors these risks and does not anticipate nonperformance. Net Assets TID classifies its net assets into three components – invested in capital assets, net of related debt; restricted; and unrestricted. These classifications are defined as follows: Invested in capital assets, net of related debt – This component of net assets consists of capital assets, net of accumulated depreciation reduced by the outstanding debt balances, net of unamortized debt expenses and unspent debt proceeds. Restricted – This component consists of net assets with external constraints placed on their use. Constraints include those imposed by debt indentures, grants or laws and regulations of other governments, by law through constitutional provisions or enabling legislation. Unrestricted – This component of net assets consists of net assets that do not meet the definition of “restricted” or “invested in capital assets, net of related debt”. Board Designated Net Assets Net assets include amounts that TID’s Board designates as reserves for debt service, capital improvements and rate stabilization. The rate stabilization fund represents amounts reserved for the purpose of stabilizing electric utility rates in future periods. The Board determines the annual transfers into and out of these reserves. While the Board designates these funds as reserve funds, they are not restricted and the Board can utilize such funds for any purpose. The designated funds included in unrestricted net assets were as follows at December 31: 2010 Rate stabilization Capital improvements
-21-
2009
$
34,076 7,791
$
34,076 7,791
$
41,867
$
41,867
Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2010 and 2009
(dollars in thousands)
Purchased Power Expenses A portion of TID’s power needs are provided by power purchase agreements. Expenses from such agreements, along with associated transmission costs paid to other utilities, are charged to purchased power expense in the period the power was received. Adjustments to prior billings are included in purchased power expense once the payments or adjustments can be reasonably estimated. Gains or losses on power purchase and sale transactions that are settled without physical delivery are recorded as net additions or reductions to purchased power expense. Additionally, any changes in the Power Supply Adjustment (see Note 9) balance resulting in a deferred regulatory asset are recorded as additions or reductions to purchased power expense and any changes resulting in a deferred regulatory liability are recorded as additions or reductions to retail revenues. For the year ended December 31, 2010, the Power Supply Adjustment balance decreased resulting in an increase to purchased power expense of $24,358 and a reduction to retail revenues of $10,936, and for the year ended December 31, 2009, the Power Supply Adjustment balance increased resulting in a reduction to purchased power expense of $7,408. CIAC and Grants TID receives CIAC for customer contributions relating to expansions to TID’s distribution facilities. TID also receives grant proceeds from federal and state assisted programs for its river restoration programs and other programs. The contributions and grant proceeds are included in other income in the accompanying financial statements. When applicable, these programs may be subject to financial and compliance audits pursuant to regulatory requirements, although TID considers the possibility of any material grant disallowances to be remote. Asset Retirement Obligations TID accounts for potential asset retirement obligations in accordance with FASB accounting rules which require the recognition and measurement of liabilities for legal obligations associated with the retirement of tangible long-lived assets. Under these rules, an obligation is recorded only when legally binding retirement obligations exist under enacted laws, statutes, written contracts or oral contracts. Asset retirement obligations (AROs) are recognized at fair value as incurred and capitalized as a component of the cost of the related tangible long-lived assets with a corresponding amount recorded as a liability. TID has identified retirement obligations related to certain generation, transmission and distribution facilities located on properties that do not have perpetual leases. TID’s nonperpetual leased land rights generally are renewed continuously because TID intends to utilize these facilities indefinitely. Since the timing and extent of any potential asset retirements are unknown, the fair value of any obligations associated with these facilities cannot be reasonably estimated. Accordingly, no liability has been recorded at December 31, 2010 or 2009. In conjunction with the purchase of the Tuolumne Wind Project, TID recorded an ARO of $2,553 related to a decommissioning plan approved by Klickitat County. As the decommissioning plan represents a legal obligation to clean up the site at the retirement of the asset to comply with the approved contract with the Klickitat County, Washington, it meets the definition of an ARO. During the years ended December 31, 2010 and 2009 TID recorded $155 and $73 of accretion expense, respectively. Subsequent Events Subsequent events have been assessed through April 11, 2011.
-22-
Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2010 and 2009
(dollars in thousands)
Recent Accounting Pronouncements In December 2010, the GASB issued Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements The objective of the Statement is to update and improve existing standards regarding financial reporting and disclosure requirements of certain financial instruments and external investment pools for which significant issues have been identified in practice. The requirements of Statement No. 62 are effective for TID for the year ending December 31, 2011 although earlier application is permitted. Management of TID is currently evaluating the impact this statement will have on TID's future financial statements. Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation, with no effect on the consolidated increase or decrease in net assets or capitalization. 3. Acquisition During 2008, TID and the Authority formed a JPA, the Tuolumne Wind Project Authority (TWPA) for the purpose of purchasing newly constructed wind farm assets in the State of Washington. In December 2008, the TWPA entered into an agreement to purchase the membership interest in Tuolumne Wind Project LLC which owns the 136.6 MW wind farm, consisting of 62-wind turbine generators located in Klickitat County, Washington. The acquisition was completed on July 14, 2009 (Acquisition Date) in conjunction with the funding of the TWPA 2009 series A & B revenue bonds for a total purchase price of $383,516. The acquisition has been accounted for as an asset acquisition as the wind farm did not meet the definition of a business. The total capitalized costs of the asset recorded as of the acquisition date was $389,186 which includes the purchase price plus acquisition costs of $3,117 and an ARO asset of $2,553. Upon completion of the acquisition, Tuolumne Wind LLC was dissolved and the wind farm was contributed to TWPA along with all relevant agreements. TWPA has no employees and all the output of TWPA is sold to TID through a Power Purchase Agreement. Operations and Maintenance Agreement TWPA is being operated and maintained pursuant to an operating and maintenance agreement with the operator, which expires November 2018. After the initial term, the operating and maintenance agreement may be extended through successive one year periods. Total expense under the operations and maintenance agreement amounted to $358 and $141 for the year ended December 31, 2010 and for the period from July 14, 2009 (Acquisition Date) to December 31, 2009, respectively. Service Agreements There are two service agreements with each of the manufacturers of the 62 turbines. One service agreement is for 42 turbines and expires in May 2011. The other service agreement is for 20 turbines and expires in May 2014. Both service agreements are for standard operations and maintenance on the respective manufacturer's turbines over the life of the agreement. Total expense under the two service agreements amounted to $1,981 and $1,143 for the year ended December 31, 2010 and for the period from July 14, 2009 (Acquisition Date) to December 31, 2009, respectively.
-23-
Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2010 and 2009
(dollars in thousands)
Interconnection and Transmission Service Agreements The TWPA has two interconnection and transmission agreements with local utilities in the Pacific Northwest. The interconnection agreements allow for the delivery of the wind energy output from TWPA to various delivery points in the Northwest. The agreements have an initial term of 10 years and 20 years, one of which also includes a 10 year renewal option. Total expense under the two interconnection service agreements amounted to $1,955 and $833 for the year ended December 31, 2010 and for the period from July 14, 2009 (Acquisition Date) to December 31, 2009, respectively. Land Leases The TWPA has leases with 9 land owners on which the turbines are located. The land owners are paid a fixed price per kilowatt-hour based on the output of the respective turbines. Each agreement is for 20 years with two 10 year renewal options. Total expense for the year ended December 31, 2010 and for the period from July 14, 2009 (Acquisition Date) to December 31, 2009 was $1,099 and $635, respectively. The annual lease expense under the remaining initial term of the land leases (based on average wind data for the last 10 years) is estimated as follows: Amount 2011 2012 2013 2014 2015 Thereafter
$
1,154 1,154 1,154 1,154 1,154 15,579
$
21,349
4. Utility Plant The summarized activity of TID’s utility plant during 2010 is presented below:
December 31, 2009 Nondepreciable utility plant Land Emission credits Construction in progress Total nondepreciable utility plant Depreciable utility plant Generation Distribution Transmission General Future power rights Irrigation Investment in gas properties Total depreciable utility plant Less: accumulated depreciation, amortization and depletion Depreciable utility plant, net Utility plant, net
$
26,448 20,187 54,117 100,752
Additions
$
792,325 277,137 94,709 70,172 26,481 55,570 93,817 1,410,211
$
(310,738) 1,099,473 1,200,225
Transfers
1,378 84,759 86,137
$
-
$
-24-
(47,303) (47,303) 38,834
$
(30,649) (30,649)
December 31, 2010
Disposals
$
(9,528) (9,528)
$
27,826 20,187 98,699 146,712
3,227 14,004 293 4,755 37 1,454 6,879 30,649
(2,466) (822) (1) (3,289)
795,552 288,675 95,002 74,105 26,518 57,023 100,696 1,437,571
30,649 -
3,250 (39) (9,567)
(354,791) 1,082,780 1,229,492
$
$
Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2010 and 2009
(dollars in thousands)
The summarized activity of TID’s utility plant during 2009 is presented below: December 31, 2008 Nondepreciable utility plant Land Emission credits Construction in progress Total nondepreciable utility plant Depreciable utility plant Generation Distribution Transmission General Future power rights Irrigation Investment in gas properties Total depreciable utility plant Less: accumulated depreciation, amortization and depletion Depreciable utility plant, net Utility plant, net
$
$
26,273 20,187 36,264 82,724
Additions
$
175 70,184 70,359
Transfers
$
December 31, 2009
Disposals
- $ (52,331) (52,331)
-
$
26,448 20,187 54,117 100,752
388,100 259,964 93,428 62,961 26,465 52,615 90,909 974,442
386,405 386,405
17,825 18,190 1,281 9,156 16 2,955 2,908 52,331
(5) (1,017) (1,945) (2,967)
792,325 277,137 94,709 70,172 26,481 55,570 93,817 1,410,211
(274,230) 700,212 782,936
(39,426) 346,979 417,338 $
52,331 -
2,918 (49) (49)
(310,738) 1,099,473 1,200,225
$
$
$
5. Participation in Joint Powers Agencies Transmission Agency of Northern California TID is a member of the Transmission Agency of Northern California (TANC), a JPA consisting of fifteen municipal utilities. TANC is a participant, with a 79.3% share of the California-Oregon Transmission Project (COTP) and other facilities for electric power transmission. TANC develops, operates and manages these projects. The COTP provides electric transmission between the Pacific Northwest and California. TID's entitlement share of TANC’s portion of the COTP and other facilities is 15.1%, representing approximately 206 megawatts (MW) of transmission capacity. TID also has a 7.4% entitlement share of TANC’s transmission under the South of Tesla transmission agreements, which provides TID with 22 MW of transmission during normal operating conditions between Tesla and Midway. Under the TANC agreements, TID is responsible for TANC’s development, operating and debt service costs on a take-or-pay basis proportionate to its entitlement share. During 2010 and 2009, TID’s total expenses in connection with its TANC agreements, included in purchased power expense, totaled $7,145 and $8,825, respectively. At December 31, 2010 and 2009, TID has an affiliate obligation payable to TANC of $3,959 and $5,837, respectively, relating to certain non-cash expenses and other cumulative differences between expenses recognized for accounting purposes and cash payments made to TANC. Northern California Power Agency TID is a member of the Northern California Power Agency (NCPA), a JPA consisting of seventeen member agencies. NCPA develops and operates projects for the generation and transmission of electric power.
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Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2010 and 2009
(dollars in thousands)
TID has a 6.3% entitlement share in the capacity and energy from NCPA Geothermal Plants l and 2 (the “Geothermal Project”). TID is responsible for development, operating and debt service costs on a take-or-pay basis in proportion to its entitlement share. TID’s expenses relating to the Geothermal Project, included in purchased power expense, were $3,137 and $4,076 in 2010 and 2009, respectively. At December 31, 2010 and 2009, TID has prepaid expenses related to the Geothermal Project to NCPA of $0 and $1,480, respectively, which is included in prepaid expenses and other current assets on the balance sheets. As described in Note 12, TID purchases natural gas and pays related transmission costs to NCPA for delivery of natural gas to some of TID's natural gas fired power plants. Such natural gas purchases and transmission expenses amounted to $1,785 and $5,686 for the years ended December 31, 2010 and 2009, respectively, included in generation and fuel expenses on the consolidated statements of revenues, expenses and changes in net assets. During 2010 TID provided notice to NCPA that it would be terminating its membership in the agency. The termination will be effective in 2011. The membership termination does not necessarily require TID to terminate its participation in the NCPA Geothermal Plants. TID plans to maintain its participation interest going forward. Financial Summary of NCPA and TANC The combined summarized financial information of NCPA and TANC is as follows at December 31: 2010 (unaudited)
2009 (unaudited)
Total assets
$ 1,619,616
$ 1,346,120
Total liabilities Total net assets
$ 1,571,200 48,416
$ 1,314,246 31,874
$ 1,619,616
$ 1,346,120
$
$
Excess of revenues over expenses for the year
29,105
282
The long-term debt of TANC and NCPA is collateralized by a pledge and assignment of net revenues of each JPA, supported by the take-or-pay commitments of TID and other members. As such, TID is contingently obligated for its proportionate share of TANC’s liabilities of $479,982 and NCPA’s debt related to the Geothermal Project of $36,251 at December 31, 2010. Should other members of TANC or NCPA default on their obligations to these JPAs, TID would be required to make “step up” payments, up to 25% of its proportionate share, to cover a portion of the defaulted payments and would be entitled to the same proportion of additional power production or transmission.
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Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2010 and 2009
(dollars in thousands)
Walnut Energy Center Authority TID and Merced Irrigation District formed the Authority for the principal purpose of owning and operating a 250 MW natural gas fueled generation facility that is blended into and reported as a component unit of TID. All operations of the Authority are consolidated into TID's financial statements. The Authority’s balance sheet as of December 31, 2010 and 2009 and the changes in its financial position for the years ended December 31, 2010 and 2009 is summarized as follows: 2010
Summarized Balance Sheets
2009
Current assets Noncurrent assets
$
10,723 328,304
$
6,233 305,542
Total assets
$
339,027
$
311,775
Current liabilities Long-term debt, net of current portion
$
54,401 284,626
$
163,832 147,943
Total liabilities
$
339,027
$
311,775
Summarized Statements of Revenues, Expenses and Changes in Net Assets Operating revenues Operating expenses Operating income
$
92,539 80,774 11,765
$
109,632 100,728 8,904
Nonoperating revenues and expenses, net
(11,765)
Changes in net assets
$
-27-
-
(8,904) $
-
Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2010 and 2009
(dollars in thousands)
Tuolumne Wind Project Authority As described in Note 3, TWPA was formed for the principal purpose of acquiring and operating wind farm assets. TWPA is blended into and reported as a component unit of TID. All operations of TWPA are consolidated into TID's financial statements. The TWPA’s balance sheet as of December 31, 2010 and 2009 and the changes in its financial position for the year ended December 31, 2010 and for the period from July 1, 2009 (Acquisition Date) to December 31, 2009 is summarized as follows: 2010
Summarized Balance Sheets
2009
Current assets Noncurrent assets
$
16,669 429,405
$
15,429 428,988
Total assets
$
446,074
$
444,417
Current liabilities Noncurrent liabilities Long-term debt, net of current portion
$
14,484 2,782 428,808
$
12,901 2,628 428,888
Total liabilities
$
446,074
$
444,417
Summarized Statements of Revenues, Expenses and Changes in Net Assets Operating revenues Operating expenses Operating income
$
30,656 9,849 20,807
$
14,719 4,838 9,881
Nonoperating revenues and expenses, net
(20,807)
Changes in net assets
$
-
(9,881) $
-
6. Cash, Cash Equivalents and Investments TID’s investment policies are governed by the California Government Codes and its Bond Indenture, which restricts TID’s investment securities to obligations which are unconditionally guaranteed by the U.S. Government or its agencies or instrumentalities; direct and general obligations of the State of California (State) or any local agency within the State; bankers’ acceptances; commercial paper; certificates of deposit; time certificates of deposit; repurchase agreements; medium-term corporate notes; shares of beneficial interest; mortgage pass-through securities; and deposits with the LAIF and CAMP. Investments in CAMP and LAIF are unregistered, pooled funds. TID’s investment policy includes restrictions for investments relating to maximum amounts invested as a percentage of the total portfolio and with a single issuer, maximum maturities, and minimum credit ratings.
-28-
Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2010 and 2009
(dollars in thousands)
Credit Risk To mitigate the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment, TID limits investments to those rated, at a minimum, “A1” or equivalent for medium-term notes and "A" for commercial paper by a nationally recognized rating agency. The following schedule presents the credit risk at December 31, 2010 and 2009. The credit ratings listed are from Standard and Poor’s. NR means not rated and TSY refers to U.S. Treasury securities. Credit Rating
2010
2009
Cash and cash equivalents: Deposits California Asset Management Program Repurchase agreements Local Agency Investment Fund
NR AAA NR NR
Short-term investments: Corporate notes Certificates of Deposit Commercial Paper Government sponsored enterprises U.S. Treasury Bills U.S. Treasury Notes
A, AA A-1+ A-1+ AAA TSY TSY
2,590 2,004 1,899 825 5,285 9,120 21,723
4,839 4,112 5,285 2,208 16,444
Cash and cash equivalents restricted for long-term purposes: Deposits California Asset Management Program
NR AAA
12,190 220 12,410
44,925 44,925
Short-term investments restricted for long-term purposes: Government sponsored enterprises
AAA
3,570 3,570
-
Long-term investments: Government sponsored enterprises Certificates of Deposit U.S. Treasury Notes Corporate notes
AAA AATSY AA+, AA,AA-,A+,A
73,535 2,000 31,418 17,711 124,664 362,456
31,346 14,556 12,839 58,741 183,908
$
$
-29-
42,296 20,070 13,340 124,383 200,089
$
$
42,733 7,775 13,290 63,798
Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2010 and 2009
(dollars in thousands)
The schedule below presents restricted and unrestricted balances of cash, cash equivalents and investments as of December 31, 2010 and 2009: 2010 General operating funds: Operating accounts Funds designated for rate stabilization Funds designated for capital improvements
$
Restricted funds: Construction funds Reserve funds Debt service funds Letter of Credit Deposit $
67,924 47,200 7,791 122,915
115,688 82,136 39,513 2,204 239,541 362,456
2009 $
$
30,860 47,200 7,791 85,851
62,196 33,670 2,191 98,057 183,908
Custodial Credit Risk This is the risk that in the event of the failure of a depository financial institution or counterparty to a transaction, TID’s deposits may not be returned or TID will not be able to recover the value of its deposits, investments or collateral securities that are in the possession of another party. TID does not have a deposit policy for custodial credit risk. At December 31, 2010 and 2009, cash, cash equivalents and investments, excluding the LAIF and CAMP, totaling $217,783 and $176,134, respectively, are collateralized with securities held by the pledging bank’s trust department in TID’s name; of which $6,186 and $13,185, respectively, are also insured by the FDIC. Investments in the LAIF and CAMP at December 31, 2010 and 2009, of $144,675 and $7,775, respectively, were uninsured and uncollateralized. Currently the FDIC offers unlimited deposit insurance coverage for noninterest-bearing transaction accounts and $250 for interest bearing accounts. Under the Temporary Liquidity Guarantee Program (TLGP) announced in October 2008, the FDIC has agreed to guarantee new senior unsecured bank debt issued after April 1, 2009 and before October 31, 2009 and maturing on or before December 31, 2012. TID has a total of $3,388 and $3,398 in interest bearing and non-interest bearing accounts at December 31, 2010 and 2009, respectively, and $2,590 and $9,537 in investments at December 31, 2010 and 2009, respectively, which are guaranteed by the FDIC under the TLGP.
-30-
Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2010 and 2009
(dollars in thousands)
Concentration of Credit Risk This is the risk of loss attributed to the magnitude of an entity’s investment in a single issuer. TID places no limit on the amounts invested in any one issuer for federal agency securities, except for mortgage pass through securities, which may not exceed 20% of TID's portfolio. For disclosure purposes, investments issued or explicitly guaranteed by the U.S. government and investment in mutual funds and external investment pools are not required to be evaluated for concentration of credit risk. The following are the concentrations of risk representing 5% or greater in a single issuer in either year: Investment type Federal Home Loan Bank* Federal National Mortgage Association* Federal Home Loan Mortgage Coporation*
2010
2009
5% 13% 6%
11% 5% 18%
* Indicates a government sponsored enterprise
Interest Rate Risk Although TID has restrictions as to the maturities of some of the investments, it does not have a formal policy that limits investment maturities as a means of managing its exposure to fair value losses arising from increases in interest rates. Of TID’s total portfolio at December 31, 2010, all of TID’s cash and cash equivalents have maturities of 90 days or less. Investments maturing within one year are classified as current. At December 31, 2010 TID has the following investments which are subject to interest rate risks: Investment type Corporate Notes Government Sponsored Enterprises Commercial Paper Certificate of Deposits U.S Treasury Notes U.S Treasury Bill Total Fair Value Portfolio Weighted Average Maturity
Fair Value $
$
20,301 77,930 1,899 4,004 40,538 5,285 149,957
Weighted Average Maturity (Years) 2.32 2.22 0.27 1.27 2.07 0.48 2.09
In accordance with provisions of the credit agreements relating to certain of TID's long-term debt obligations, restricted funds are maintained at levels set forth in the agreements to provide for debt service reserve and project funding requirements. These funds are held by trustees and are invested in U.S. Government securities and related instruments with maturities no later than the expected date of the use of the funds.
-31-
Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2010 and 2009
(dollars in thousands)
7. Long-term Debt Long-term debt consists of the following at December 31: 2010 Revenue bonds, fixed interest rates of 2.0% to 6.3%, maturing through 2034
$
Revenue bonds, variable interest rates, maturing through 2034
475,150
2009
$
244,820
4,690
5,650
427,575
427,575
Certificates of participation, fixed interest rates of 4.5% to 5.0%, maturing through 2033
26,785
26,785
Certificates of participation, variable interest rates, maturing through 2031
32,500
33,600
966,700
738,430
(12,840) 15,019 (3,203)
(12,480) 7,867 (3,092)
TWPA revenue bonds, fixed interest rates of 3.0% to 6.9%, maturing through 2034
Total long-term debt outstanding Less: Current portion Unamortized premiums and discounts, net Deferred losses on bond refundings, net Total long-term debt, net
$
965,676
$
730,725
Debt Issuance and Refunding In May 2010, TID issued revenue refunding bonds, 2010 series A totaling $154,595, the proceeds of which were combined with $7,407 from a reserve fund, and used to refinance the 1998 Series A revenue refunding bonds of $52,430, fund the 1992 Series A revenue refunding bonds reserve and retire the TID first priority subordinated refunding revenue notes in the amount of $98,135 on the maturity date of June 8, 2010. This refunding resulted in a net deferred accounting loss of $526, which is being amortized over the life of the refunding issue. The refunding reduced aggregate debt service payments by $6,202 and resulted in a total economic gain of $3,617. Concurrent with the TID revenue refunding bonds, 2010 series A issue, TID issued WECA revenue refunding bonds, 2010 series A & B in the amount of $138,585. The proceeds from the issued WECA revenue refunding bonds, 2010 series A & B were used to retire the Authority revenue refunding bonds in the amount of $79,675 on the stated maturity date of June 8, 2010 and pay down a portion of the outstanding taxable commercial paper balance in the amount of $50,000. In July 2009, TID issued 2009 Series A and B TWPA revenue bonds totaling $427,575, for the purpose of financing the acquisition of the Tuolumne Wind Project. The Series B bonds were sold as Build America Bonds under the American Recovery and Reinvestment Act passed in February 2009. The Build America Bonds were sold as a taxable issue and TID receives a federal subsidy of 35% of the interest paid on the bonds. For the years ended December 31, 2010 and 2009 TID received $3,671 and $1,703 in a federal subsidy which is included in other income on the Statement of Revenues, Expenses, and Changes in Net Assets.
-32-
Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2010 and 2009
(dollars in thousands)
In May 2009, TID issued 2009 Series A revenue refunding bonds of $79,675, the proceeds of which were combined with $4,135 from a reserve fund, and used to refinance the Series 2004 Series B & C revenue bonds of $58,300 and pay down $25,650 of commercial paper. This refunding resulted in a deferred accounting loss of $831, which is being amortized over the life of the refunding issue. The 2009 Series A revenue refunding bonds are further described in Note 8. The summarized activity of TID's long-term debt during 2010 and 2009 is presented below:
December 31, 2009 Revenue bonds Certificates of participation
$
Total Less: Unamortized premiums and (discounts), net Deferred losses on bond refundings, net Total long-term debt, net
678,045 60,385
Additions $
$
Total Less: Unamortized premiums and (discounts), net Deferred losses on bond refundings, net Total long-term debt, net
$
$
(63,810) (1,100)
$
907,415 59,285
$
11,740 1,100
$
12,840
293,180
(64,910)
966,700
7,867
7,811
(659)
15,019
743,205
(526) $
December 31, 2008 Revenue bonds Certificates of participation
293,180 -
318,885 61,485
300,465
415 $
Payments and amortization
Additions $
(65,154)
427,575 -
$
(68,415) (1,100)
(3,203) $
978,516
$
678,045 60,385
$
11,380 1,100
$
12,480
427,575
(69,515)
738,430
7,106
1,350
(589)
7,867
(3,565)
-
473
(3,092)
$
428,925
$
(69,631)
Amounts Due Within One Year
December 31, 2009
380,370
383,911
Amounts Due Within One Year
December 31, 2010
738,430
(3,092) $
Payments and amortization
$
743,205
Variable Rate Debt Most of TID’s variable rate revenue bonds were refinanced with the issuance of the 2009 Series A revenue bonds in May 2009. TID's remaining variable rate bonds and certificates of participation bear interest at daily and weekly rates, which had an average effective rate on outstanding obligations of 0.29% at December 31, 2010. TID has two letters of credit totaling $38,700 with a bank, which expire in July 15, 2011. These facilities provide liquidity support for TID’s variable rate revenue bonds and TID’s variable rate Certificates of Participation (COPs). The credit rating of the bank is A+ (Standard & Poor's) as of December 31, 2010. Management is considering a number of financing alternatives related to its variable rate debt obligations and the related liquidity facility which expires in July 15, 2011. If the District does not renew the letters of credit at acceptable rates, management plans to either refinance the debt with fixed rate securities or repay the obligations with available working capital or some combination thereof.
-33-
Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2010 and 2009
(dollars in thousands)
General The COPs and TID revenue bonds are collateralized by a pledge of, and a lien on, the revenues of the electric system after deducting maintenance and operation costs, as defined in the bond resolutions. The COPs are subordinate to the TID revenue bonds and commercial paper. TID’s bond resolutions contain various covenants that include requirements to maintain minimum debt service coverage ratios, certain financial ratios, stipulated minimum funding of revenue bond reserves, and various other requirements. Certain of TID's bonds are enhanced by bond insurance provided by two different counterparties. The credit quality of these two bond insurers has declined subsequent to the origination of the policies. However, the impact on the District's current liquidity is mitigated because the bonds cannot be put to TID before their maturity dates. Variable rate bonds totaling $4,690 may be subject to redemption by TID at any interest date without a premium or discount. Fixed rate revenue bonds totaling $23,705, $125,410, and $85,105 may be subject to redemption during 2013, 2014 and 2019, respectively, by TID without a premium or discount. Fixed rate revenue bonds totaling $205,675 may be subject to redemption by TID at any interest date with a make whole premium. COPs totaling $32,500 may be subject to redemption by TID at any interest date without a premium or discount. Additionally, COPs totaling $26,785 may be subject to redemption by TID during 2013 without a premium or discount. TID’s scheduled future annual principal maturities and estimated interest are as follows at December 31, 2010: Estimated Interest
Principal 2011 2012 2013 2014 2015 2016-2020 2021-2025 2026-2030 2031-2035 2036-2040
Total
$
12,840 13,350 24,585 25,340 23,830 151,735 189,955 226,225 222,135 76,705
$
49,476 48,822 47,897 46,940 45,854 209,512 167,955 111,815 41,185 8,045
$
62,316 62,172 72,482 72,280 69,684 361,247 357,910 338,040 263,320 84,750
$
966,700
$
777,501
$
1,744,201
TID used the interest rates in effect as of December 31, 2010, to estimate the future interest requirements for its variable rate debt, included in the table above. At December 31, 2010 and 2009, the estimated fair values of TID's long-term debt, calculated by determining the net present value using appropriate maturity dates of future debt service payments discounted at the bond buyer’s revenue bond index rate, are as follows: 2010
2009
Carrying amount
$
978,516
$
743,205
Fair value
$ 1,008,750
$
809,551
-34-
Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2010 and 2009
(dollars in thousands)
8. Commercial Paper and Short-Term Borrowings Commercial Paper TID has two commercial paper programs, one established in December 2006 for various financing needs up to $100,000. There was no outstanding balance under this commercial paper program at December 31, 2010 and 2009, respectively. TID continues to monitor letter of credit interest rates and may look to obtain a new letter of credit when interest rates become economical. The other commercial paper program is used to finance capital expenditures. At December 31, 2010 and 2009, the balance outstanding under TID's other commercial paper program was $39,965 and $79,939, respectively, of which $24,965 and $74,939 was taxable, respectively. The effective interest rate for the notes outstanding at December 31, 2010 and 2009 was 0.33% and 0.30%, respectively, and the average term was 85 and 84 days, respectively. A letter of credit of $87,200 supports the sale of these outstanding notes and TID incurs an annual fee for this service. There has not been a term advance under the letter of credit, which expires in September 2012. The counterparty to the letter of credit is a national bank whose credit rating is AA- Negative (Standard & Poor's). The consolidated activity of TID's commercial paper during 2010 and 2009 is presented below: 2010
2009
Balance, beginning of year Additions Payments
$
79,939 10,026 (50,000)
$
154,069 60,259 (134,389)
Balance, end of year
$
39,965
$
79,939
Short-Term Borrowings In May 2009 TID issued TID First Priority Subordinated Refunding Revenue Notes (TID Note) in the amount of $98,135. The proceeds of the TID Note were utilized to pay down the outstanding balance of the commercial paper programs. The TID Note bears interest at 1.5% and has a stated maturity of June 8, 2010 and therefore has been classified as current on the balance sheet at December 31, 2009. Concurrent with the TID Note issue, TID issued the Authority Revenue Refunding Bonds (Authority Note) in the amount of $79,675. The proceeds from the Authority Note was used to refinance the 2004 Series B & C Revenue Bonds in the amount of $58,300 and pay down a portion of the outstanding commercial paper balance in the amount of $25,650. The refunding of the 2004 Series B & C resulted in a refunding loss of $831, which is being amortized over the life of the Authority Note. The Authority Note is a multi-mode instrument and has a due date of January 1, 2034, however, the initial issue was sold in term mode bearing an interest rate of 1.5% with a mandatory redemption of June 8, 2010 and therefore has been classified as current on the balance at December 31, 2009. In July 2010, TID issued First Priority Subordinated Revenue Notes, Series 2010 (TID Note 2) in the amount of $190,950, for the purpose of financing the construction of TID’s Almond Power Plant Expansion. TID Note 2 bears interest at 0.75% and has a stated maturity of August 12, 2011 and therefore has been classified as current on the balance sheet at December 31, 2010. As of December 31, 2010, the fair value of the TID Note 2 approximates its carrying value.
-35-
Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2010 and 2009
(dollars in thousands)
The summarized activity of TID's Short-Term Borrowings during 2010 is presented below: December 31, 2009 Authority Note TID Note TID Note 2 Total Less: Unamortized premiums Deferred losses on refundings, net Total long-term debt, net
$
79,675 98,135 177,810
$
718
$
Payments and amortization
Additions
(356) 178,172
190,950 190,950
$
(79,675) (98,135) (177,810)
-
$
December 31, 2010 $
190,950 190,950
(718)
190,950
$
-
356 (178,172)
190,950
$
Planned refinancing transaction At December 31, 2010, TID has principal outstanding on the TID Note 2 totaling $190,950, which has a due date of August 12, 2011. TID is in the process of refinancing the TID Note 2 through a public offering of new debt securities prior to the stated due date of August 12, 2011. While there is no absolute assurance that TID will be successful in refinancing this debt, management expects such financing to occur as planned. Management believes TID's current credit ratings and history of ready access to public debt markets are indicative of their ability to successfully complete the debt offering by August 2011. Should market conditions deteriorate, TID may be required to accept interest rates that are higher than current prevailing rates. 9. Regulatory Deferrals TID’s Board has taken various regulatory actions that result in differences between recognition of revenues and expenses for rate-making purposes as reflected in these consolidated financial statements and as incurred. These actions result in regulatory assets and credits. Deferred Regulatory Assets Deferred regulatory assets consist of the following at December 31: 2010 Deferred power supply adjustment
$
2009 -
$
24,358
Deferred Regulatory Credits Deferred regulatory credits consist of the following at December 31: 2010 Electric rate stabilization Public benefit Deferred power supply adjustment Unrealized gain on investments
-36-
2009
$
13,124 10,936 977
$
13,124 4,342 718
$
25,037
$
18,184
Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2010 and 2009
(dollars in thousands)
Power Supply Adjustment TID’s Rate Schedule PSA (Power Supply Adjustment) billing factor provides for an adjustment to the kilowatt-hour (KWh) portion of customer bills to reflect variations in the variable cost of power supply, which comprises purchased power, fuel used for generation of electric energy and gas field costs including related capital costs, reduced by revenue from wholesale sales of gas and energy to other entities. The PSA rate is reset semi-annually in June and December. The Board has limited reset amounts to ($0.005) to $0.01 per KWh. A balancing account is maintained in an amount by which the energy revenues collected from retail customers are less than (or more than) the actual cost of power supply. Excesses or (deficiencies) in the balancing account are adjusted by increasing (or decreasing) the PSA billing factor. On December 31, 2010 had an excess of $10,937 or a deferred regulatory credit and on December 31, 2009, TID had a deficiency in the balancing account of ($24,358) resulting in a deferred regulatory asset. Electric Rate Stabilization Historically, TID deferred interest earnings on net assets designated for electric rate stabilization. These amounts are recognized as increases in income in future periods based on a rate program approved by the Board of Directors which releases rate stabilization amounts under identified circumstances. Public Benefit TID’s Board has specified a component of its rates, 2.85%, to be committed to public benefit expenditures. Public benefit expenditures consist of non-capital and capital expenditures for energy efficiency programs and renewable energy resources. Differences between amounts collected, as a component of rates and amounts expended for public benefit are included in this regulatory account. Unrealized Gain on Investments TID defers unrealized holding gains and losses on its investments until such investments mature or are sold which is consistent with TID’s rate setting process.
-37-
Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2010 and 2009
(dollars in thousands)
10. Derivative Financial Instruments TID enters into contracts for the purchase of electricity to meet the expected needs of its retail customers and for the purchase, transportation and storage of natural gas to meet its generation needs. TID also enters into hedging transactions to reduce the price volatility of some of these agreements. Many of these contracts are considered derivative financial instruments under the provisions of GASB accounting rules, Accounting and Financial Reporting for Derivative Instruments. For those contracts, substantially all of the electricity contracts and most of the gas related contracts qualify as normal purchases or normal sales under the GASB accounting rules because TID takes or makes delivery under the related contract, and as a result, the contracts are not required to be recorded at fair value. The fair values of TID’s derivative instruments that are not considered normal purchases or normal sales are as follows: December 31, 2010 2009 Derivative financial instrument assets: Gas related contracts $ 80 $ 676 Electric related contracts 691 1,699 Total derivative financial instruments 771 2,375 Less current portion (762) (2,375)
Derivative financial instrument liabilities: Gas related contracts Electric related contracts
$
9
$
-
$
2,572 349
$
2,655 1,547
Total derivative financial instruments Less current portion $
-38-
2,921 (2,365) 556 $
4,202 (4,029) 173
Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2010 and 2009
(dollars in thousands)
The fair value balances and notional amounts of derivative instruments outstanding as of December 31, 2010 and 2009, classified by type, are as follows: Classification Investment Derivatives: Gas related contracts Nonoperating revenues and expense Electric related contracts Nonoperating revenues and expense Electric related contracts Nonoperating revenues and expense Gas related contracts Nonoperating revenues and expense Net investment derivatives gain (loss) Cash Flow Hedges Gas related contracts Gas related contracts Net deferred outflow
$
Deferred Inflow Deferred Outflow
45 691 (349) (355) 32 35 (2,217) (2,182)
Total derivative contracts loss
$
Classification Investment Derivatives: Gas related contracts Nonoperating revenues and expense Electric related contracts Nonoperating revenues and expense Electric related contracts Nonoperating revenues and expense Gas related contracts Nonoperating revenues and expense Net investment derivatives gain (loss) Cash Flow Hedges Gas related contracts Gas related contracts Net deferred outflow
December 31, 2010 Fair Value
Deferred Inflow Deferred Outflow
Total derivative contracts loss
$
2,945-232,500 MMBtu 7,200-12,480 MWh 3,840-10,400 MWh 6,324-174,484 MMBtu
30,000-155,000 MMBtu 28,000-120,000 MMBtu
(2,150)
December 31, 2009 Fair Value
$
Notional
Notional
454 1,699 (1,546) (1,332) (725)
4,185-161,200 MMBtu 7,200-10,800 MWh 7,200-10,800 MWh 1,500-330,000 MMBtu
221 (1,323) (1,102)
50,000-100,000 MMBtu 50,000-200,000 MMBtu
(1,827)
The investment derivatives are gas and electric contracts that do not meet the definition of effective hedges as defined in GASB accounting rules, Accounting and Financial Reporting for Derivative Instruments. Changes in the fair value of these contracts are recorded in the statement of revenues, expenses and changes in net assets. For the years ending December 31, 2010 and 2009, TID recorded a gain (loss) on derivative contracts that did not meet the definition of effective hedges resulting in $2,668 and $(2,963), respectively, and is included in the nonoperating revenues and expenses section on the Statement of Revenues, Expenses and Changes in Net Assets. Of the $2,668 and $(2,963) gain (loss) recorded for the year ended December 31, 2010 and 2009, respectively, $2,636 and $(2,236) represents contracts that did not meet the definition of an effective hedge at the time of settlement. The deferred gain related to hedged derivative financial instruments of $35 and $221 is included in accounts payable and accrued expenses on the balance sheet at December 31, 2010 and 2009, respectively. The current deferred loss related to hedged derivative financial instruments of $1,774 and $1,150 is included as a component of prepaid expenses and other current assets on the balance sheet at December 31, 2010 and 2009, respectively, and the remaining non-current deferred loss of $443 and $173 is included as a component of debt issuance costs and other assets on the balance sheet at December 31, 2010 and 2009, respectively.
-39-
Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2010 and 2009
(dollars in thousands)
Objective and Terms of Hedging Derivative Instruments The following table displays the classification and terms of TID’s derivative instruments outstanding at December 31, 2010 and 2009, along with the credit rating of the associated counterparty. All of the hedge contracts are designed to hedge against changes in cash flows due to market price fluctuations related to expected purchases of natural gas and were initiated in 2009 and 2010. Type
Classification
Notional Amount
Maturity Date
Commodity forward contract (gas sales)
Investment Derivative (ineffective hedge)
1,410,000 MMBtu
0-12 months
Fixed Price & Basis
Commodity forward contract (electric sales)
Investment Derivative (ineffective hedge)
283,420 MWh
0-12 months
Commodity forward contract (electric sales)
Investment Derivative (ineffective hedge)
283,420 MWh
Commodity forward contract (gas purchases)
Effective Hedge
Commodity forward contract (gas purchases)
Effective Hedge
Terms
December 31, 2010 Value
Counterparty Credit Rating
(309)
A, A-, BBB-
Fixed Price
456
AAA, A, A-, BBB
12-36 months
Fixed Price
(114)
US Dept. Energy (No Rating)
1/097,000 MMBtu
0-12 months
Fixed Price
(1,749)
490,000 MMBtu
12-36 months
Fixed Price
(434)
Total derivative contracts gain (loss)
$
$
Type
Classification
Notional Amount
Maturity Date
Commodity forward contract (gas sales)
Investment Derivative (ineffective hedge)
4,432,000 MMBtu
0-12 months
Fixed Price & Basis
Commodity forward contract (gas purchases)
Investment Derivative (ineffective hedge)
1,231,000 MMBtu
0-12 months
Commodity forward contract (electric purchases)
Investment Derivative (ineffective hedge)
219,000 MWh
Commodity forward contract (electric sales)
Investment Derivative (ineffective hedge)
Commodity forward contract (gas purchases)
AAA, A
AAA
(2,150)
December 31, 2009 Value
Counterparty Credit Rating
$
(814)
AA, A, A-, BBB
Fixed Price & Basis
(64)
A-
0-12 months
Fixed Price
200
AA
274,225 MWh
0-12 months
Fixed Price
(48)
AA
Effective Hedge
2,585,000 MMBtu
0-12 months
Fixed Price
(831)
AA, A, A-
Commodity forward contract (gas purchases)
Effective Hedge
827,000 MMBtu
12-24 months
Fixed Price
(173)
AA
Commodity collar (gas purchase)
Effective Hedge
300,000 MMBtu
0-12 months
Fixed Price
(116)
A
Commodity collar (gas sale)
Effective Hedge
300,000 MMBtu
0-12 months
Fixed Price
19
A
Total derivative contracts gain (loss)
Terms
$
-40-
(1,827)
Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2010 and 2009
(dollars in thousands)
Credit risk TID is exposed to credit risk on hedging derivative instruments that are in asset positions. To minimize its exposure to loss related to credit risk, TID’s policy is to establish a credit limit for each counterparty with a maximum limit of $5,000 and no single counterparty can account for more than 15% of the total exposure to TID without approval from the Board. When a counterparty does not have a credit rating, a written guarantee is required from the counterparty’s parent company which must have an acceptable credit rating. TID's agreements generally require netting whenever it has entered into more than one derivative instrument transaction with a counterparty. Under the terms of these agreements, should one party become insolvent or otherwise default on its obligations, close-out netting provisions permit the nondefaulting party to accelerate and terminate all outstanding transactions and net the transactions’ fair values so that a single sum will be owed by, or owed to, the nondefaulting party. The aggregate fair value of hedging derivative instruments in a net asset position at December 31, 2010 totaled $366 and was with three counterparties. Basis risk TID is exposed to basis risk on some of its commodity forward contracts because the expected commodity purchase being hedged will price based on a pricing point different than the pricing point at which the forward contract is expected to settle. The majority of these exposures relate to gas contracts that settle at NYMEX whereas the hedged gas purchase will be delivered at PG&E City gate. At December 31, 2010, prices at those delivery points were $4.19 and $4.35, respectively. Termination risk TID or its counterparties may terminate a derivative instrument if the other party fails to perform under the terms of the contract. If at the time of termination, a hedging derivative instrument is in a liability position, TID would be liable to the counterparty for a payment equal to the liability, subject to netting arrangements. 11. Pension Plan TID has a single-employer group defined benefit pension plan (the “Retirement Plan”) which provides retirement benefits covering substantially all of its employees who have completed one year of continuous service. Employees may retire after age 55 with benefits based on compensation and years of service to actual retirement date. The Retirement Plan also provides death benefits for those employees having reached age 55. TID, through the action of its Board may amend or establish Retirement Plan provisions. The Board has appointed third parties to carry out substantially all administrative responsibilities, including custody of the Retirement Plan assets and as a result, excludes the pension trust funds from these financial statements. The Retirement Plan is a governmental plan under section 414(d) of the Internal Revenue Code (IRC). Copies of the Retirement Plan’s annual financial report may be obtained from TID’s executive office at 333 East Canal Drive, Turlock, California 95381. The Retirement Plan's annual financial report is the responsibility of TID. Funding Policy To participate in the Retirement Plan, employees who are not members of a bargaining unit are required to contribute 2.25% of their earnings and employees who are members of a bargaining unit are required to contribute 3.25% of their earnings. Under the Retirement Plan provisions established by the Board, the Retirement Plan is to be funded in amounts equal to the normal costs of the Retirement Plan plus an amortization of the past service liability. Contributions made by the employees vest immediately. Contributions made by TID are fully vested after five years of participation.
-41-
Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2010 and 2009
(dollars in thousands)
Annual Pension Cost The annual required contributions for 2010 and 2009 were determined by actuarial valuations using the frozen entry age actuarial cost method. The actuarial assumptions utilized for the January 1, 2010 and 2009 actuarial valuations were as follows: • • • •
Investment rate of return applied to assets of 8.5% per year; Discount rate applied to the pension benefit obligation of 8.5% per year; Salary increases of 4.5% per year; and Cost of living adjustment of 3.5% per year.
Realized and unrealized gains are phased in to the actuarial value of Retirement Plan assets over a three year period, and may be adjusted so that the actuarial value of Retirement Plan assets are not less than 80% or more than 120% of the fair market value of the Retirement Plan’s assets as of the current valuation date. The unfunded actuarial accrued liability (UAAL) is being amortized as a portion of annual pension cost. TID’s annual pension cost and net pension obligation for 2010 and 2009, based on valuations as of January 1, 2010 and 2009, respectively, are as follows: 2010 Annual required contribution Interest on net pension obligation Adjustment to annual required contribution
$
Annual pension cost Contributions made Increase in net pension obligation Net pension (prepaid) balance at beginning of year Net pension obligation (prepaid) balance at end of year
-42-
$
10,756 (54) 75
2009 $
10,611 (54) 76
10,777
10,633
10,081
10,633
696
-
(636) 60
$
(636) (636)
Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2010 and 2009
(dollars in thousands)
Summarized Historical Trend Information Three year trend information is presented below:
Fiscal Period Ending
Annual Pension Cost (APC)
12/31/10 12/31/09 12/31/08
$ $ $
Percentage of APC Contributed
10,777 10,633 6,352
94% 100% 100%
Net Pension Obligation (Asset) $ $ $
60 (636) (636)
Deferred Compensation Plan In addition, TID offers its employees a deferred compensation plan (the “Deferred Plan”), which provides employees the option to defer part of their compensation until termination, retirement, death, or unforeseeable emergency. TID makes no contribution to the Deferred Plan. TID has the duty of reasonable care in the selection of investment alternatives, but neither TID nor its directors or officers have any liability for losses under the Deferred Plan. TID holds all deferred compensation assets in the name of the Deferred Plan, and accordingly, the Deferred Plan assets and corresponding liability are not recorded in the accounts of TID. 12. Other Post Employment Benefits TID follows GASB accounting rules, Accounting and Financial Reporting by Employers for Post Employment Benefits other than Pensions (OPEB), which establishes standards of accounting and financial reporting for OPEB expense and related OPEB liabilities or assets. OPEB arises from an exchange of salaries and benefits for employee services rendered. TID considers post employment healthcare benefits to be OPEB costs. TID provides post-retirement medical benefits in accordance with TID policy to qualified retirees and their spouses through TID’s Employee Health Care Plan ( the “Health Plan”) until the retiree and participating spouse reach age 65. The Health Plan is a single-employer group, for which TID is the administrator and through the action of its Board may amend or establish Health Plan provisions. The qualification requirements for these benefits are the same as those under TID’s Retirement Plan. The Board has appointed third parties to carry out certain administrative responsibilities. TID contributes the full cost of coverage for retirees; however, retirees contribute the estimated health care cost of dependents. However, at the time of retirement an employee may utilize the remaining balance of unused sick leave, at the rate defined in the employee’s applicable employee contract for one month's medical coverage for an eligible dependent. Covered retirees are also responsible for personal deductibles and co-payments. Currently, 140 retirees and surviving dependents are receiving post-employment health care benefits. Actuarial Methods and Assumptions Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and the plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the employer and plan members to that point. The actuarial methods and
-43-
Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2010 and 2009
(dollars in thousands)
assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations. In the most recent actuarial valuation the entry age actuarial cost method was used. The actuarial assumptions included a 7.75 percent investment rate of return and an annual healthcare cost trend rate of 10 percent initially, reduced by decrements to an ultimate rate of 5 percent after ten years. Assets of the Health Plan, as of the latest actuarial report, were valued on a market value basis. Future gains and losses may be averaged over five years subject to a corridor. The UAAL is being amortized as a level percentage of projected payroll basis. The remaining amortization period in the latest actuary report, was twenty-six years. Funding Policy In December 2008, TID joined the CALPERS Pre-funding OPEB Plan, which is an irrevocable multiemployer trust and plan consisting of an aggregation of single-employer plans, with pooled administrative and investment functions. At that time TID made an incremental contribution of $5,000 to the CALPERS Pre-funding OPEB Plan. During 2010 and 2009, TID’s post-retirement health care benefit contributions were $1,439 and $2,086, respectively, net of premiums received from retirees for eligible dependents. Annual OPEB Cost and Net OPEB Obligation TID's annual OPEB cost (expense) is calculated based on the annual required contribution of the employer (ARC), an amount actuarially determined in accordance with the parameters of GASB 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed thirty years. For the years ended December 31, 2010 and 2009, TID’s annual OPEB expense of $1,884 and $1,788, respectively, was equal to the ARC. The following table shows the components of TID’s annual OPEB cost for the year, the amount actually contributed to the plan, and changes in TID's net OPEB obligation: 2010 Annual required contribution
$
Annual OPEB cost Contributions made (Increase) decrease in net OPEB prepaid
1,884
2009 $
1,884
1,788
1,439
2,086
445
Net OPEB prepaid at beginning of year
(298)
(4,026)
Net OPEB prepaid at end of year
$
-44-
1,788
(3,581)
(3,728) $
(4,026)
Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2010 and 2009
(dollars in thousands)
TID's annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and the net OPEB prepaid for the years ended December 31, 2010, 2009 and 2008 is as follows:
Fiscal Period Ending
Annual OPEB Cost (AOC)
12/31/10 12/31/09 12/31/08
$ $ $
Percentage of AOC Contributed
1,884 1,788 1,647
76% 117% 379%
Net OPEB Obligation (Asset) $ $ $
(3,581) (4,026) (3,728)
13. Commitments Power Sales Agreement During 2010 and 2009 TID continued to supply power and energy to Merced Irrigation District (MeID) under a full requirement Power Supply Agreement that expired Jan. 31, 2011. TID supplied all of MeID’s needs except for MeID’s share of the Central Valley Project marketed by Western Area Power Administration. TID received an energy payment in accordance with the formula defined in the agreement, based in part on the market price of energy in California. Sales and services provided under the Power Sales Agreement and Interconnection Agreement totaled $20,483 and $19,519 in 2010 and 2009, respectively. Subsequent to December 31, 2010, TID negotiated a new Power Sale Agreement with Merced that began February 1, 2011, and continues through June 2014. Under the agreement TID sells power on a full requirements basis to meet all the MeID energy and capacity requirements except as defined under the agreement. TID receives an energy payment in accordance with the formula defined in the agreement, based in part on the market price of energy in California. Under a separate Interconnection Agreement, TID is compensated for the use of its transmission system. Power Exchange and Transmission Agreements In 2009, TID entered into a power sales agreement with a counterparty where TID sells all of the output of the TWPA at day-ahead or hourly Mid-Columbia (MID-C) market prices. The counterparty sells at least the same amount of energy to TID at the California-Oregon Border (COB) at prices based on the COB indexes plus a service fee. TID is obligated to schedule and pay for transmission from TWPA to MID-C. TID has secured firm point to point transmission service for the majority of the MWh to be delivered from the Bonneville Power Administration. The agreement expires on December 31, 2013, but can be canceled by either party with six months notice. Total sales were $23,942 and $7,106 for the years ended December 31, 2010 and 2009, respectively, and purchases under the agreement were $25,644 and $11,900 for the years ended December 31, 2010 and 2009, respectively. Power Purchase Agreements TID has two long-term power purchase agreements with other power producers to purchase capacity and associated energy to meet its load requirements, which expire through December 2024. Capacity and certain energy is purchased on a take-or-pay basis. Power purchased under these agreements totaled $19,843 and $18,382 in 2010 and 2009, respectively.
-45-
Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2010 and 2009
(dollars in thousands)
City and County of San Francisco TID and the City and County of San Francisco (CCSF) have a power sales agreement which allocates a share of excess Hetch Hetchy Project capacity and energy to TID through 2015. TID purchased $6,545 and $4,143 of power in 2010 and 2009, respectively, under the CCSF agreement. Gas Purchase Agreements TID has two long-term natural gas supply agreements with two companies to meet the consumption need of its natural gas fired power plants, which expire through January 2011. TID can purchase up to 27,000 million British Thermal Units (MMBtu) per day from NCPA (see Note 5); the other contract is with another counterparty, which allows for the purchase of all required natural gas for the Walnut Energy Center not to exceed 55,000 MMBtu per day. Pricing for both contracts are indexed to certain natural gas indexes, or a mutually agreed upon price, as defined in the gas purchase agreements. Fuel purchased under both agreements totaled $28,697 and $37,721 in 2010 and 2009, respectively. Gas Transportation Capacity and Storage Agreements TID has nine long-term gas transportation capacity agreements and one long-term gas storage agreement with Canadian and U.S. companies to transport natural gas to TID’s natural gas fired power plants from gas supply basins in Alberta, Canada. The gas transportation capacity agreements complement TID’s gas purchase agreements, described above, but expire through 2033. Payments under these agreements totaled $4,001 and $3,757 in 2010 and 2009, respectively. The approximate future minimum obligations for the above described power purchase, gas supply, and gas transportation and storage contracts are as follows at December 31, 2010: Amount 2011 2012 2013 2014 2015 Thereafter
$
26,960 27,206 25,504 27,617 28,168 154,102
$
289,557
14. Contingencies California Energy Market Refund Proceedings In July 2001, FERC issued an order establishing evidentiary hearings for the purpose of determining the amount of refunds, if any, due to customers of the California ISO and PX organized spot markets from market participants selling into those markets for the period October 2, 2000 through June 20, 2001 (the refund period). During this time period, TID was both a seller and a buyer in the markets. The Administrative Law Judge (ALJ) assigned to the proceedings, among other issues, addressed the calculation of refunds and identification of the amount currently owed to each supplier (with separate quantities due from each entity) by the California ISO, the investor owned utilities, and the State of California. In December 2002, the ALJ issued his Certification of Proposed Findings (the “Findings”) and found that TID owes $1,243 in refunds for these sales. In March 2003, FERC revised its ruling to include the impact of gas price mitigation to be applied to sales into the California ISO and PX market retroactively. In July 2004, the California ISO completed the calculation of revised Mitigated Market Clearing Prices (MMCPs) for the refund period using the methodology that had been developed by the administrative process at FERC, including mitigated gas pricing. TID’s potential refund liability under the MMCPs increased to approximately $3,600.
-46-
Turlock Irrigation District Notes to Consolidated Financial Statements December 31, 2010 and 2009
(dollars in thousands)
On September 6, 2005 the Ninth Circuit Court of Appeals issued its decision regarding FERC's authority regarding the imposing of refunds on non public utilities. The Court concluded that FERC does not have authority over non public authorities making sales in wholesale energy markets. In any event, TID does not expect to be liable for any refunds because TID’s final refund liability, if any, would likely not require a cash payment; rather it would probably be fully offset against amounts owed by the California ISO to TID of $4,340. TID has recorded an allowance of $3,820 against the amount owed by the California ISO related to the uncertainty of the ultimate amount that it will collect. TID believes such allowance is sufficient to cover its refund obligation, if any, and accordingly, no liability has been recorded. In November 2010, TID reached a settlement agreement which provides for TID receiving a portion of its receivable from the California ISO and related markets and would remove the potential liability asserted above. This settlement agreement is subject to the approval of both the FERC and the CPUC before amounts can be paid in execution of final settlement. To date the settlement agreement has not been filed with FERC or the CPUC and TID management expects the approval process to take between three and six months once the agreement is filed with these regulatory agencies. Given these uncertainties TID did not record any contingent gain associated with this settlement in 2010. California Parties vs. Government Entities Complaint for Damages for 2000 and 2001 Power Sales Following the 9th Circuit Court of Appeals ruling that FERC could not order refunds in the California Refund proceeding, TID and other publicly owned utilities were sued in U.S. District Court in March 2006, by PG&E, California Edison Company and California Electricity Oversight Board and by San Diego Gas & Electric (collectively the “California Parties”). In April 2007, the U.S. District Court dismissed the claims and the California Parties have appealed, which is still pending. Additionally, the California Parties filed a similar lawsuit in California Superior Court, which is currently in the discovery phase. The claims are for damages arising from sales of wholesale power and ancillary services from May 1, 2000 through June 20, 2001. No actual dollar damage amounts were cited in the complaints. The complaints state they are based upon the same facts as were included in the FERC and 9th Circuit Court cases. However, unlike the California Refund proceeding, the complaints extend the period in dispute back five months making the starting date May 1, 2000, instead of October 2, 2000. During the May 1, 2000 through October 1, 2000 period TID made no sales to the California ISO. Thus, the transactions in dispute in the California Parties’ Complaints are believed to be the same transactions in dispute in the California Refund proceeding before FERC. District management believes it is reasonably possible, but not probable, that TID will ultimately incur a liability in this matter due to the strength of its legal defenses and because these complaints are a result of the California parties’ defeat in the 9th Circuit Court of Appeals and addresses the same issues raised in those proceedings. Consistent with the offsetting impacts of the receivables and potential liabilities described in the FERC-related proceeding described above, District management believes that any settlement would not involve cash outflows by TID. As such, no liability has been recorded. General Contingencies In the normal course of operations, TID is party to various claims, legal actions and complaints, including possible liability for environmental matters. Although the ultimate outcome of these matters is not presently determinable, TID’s management believes the resolution of all such pending matters will not have a material adverse effect on TID’s financial position or results of operations.
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Turlock Irrigation District Required Supplementary Information (Unaudited) December 31, 2010 and 2009
(dollars in thousands)
Schedules of Funding Progress Pension Plan As discussed in Note 11, the schedule of funding progress presents multiyear trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liability for benefits. The schedule of funding progress is presented below and is required supplementary information:
Actuarial Valuation Date
Actuarial Value of Assets (a)
12/31/10 12/31/09 12/31/08
$ 128,816 $ 126,070 $ 107,968
Actuarial Accrued Unfunded Liability (AAL) AAL Entry Age (UAAL) (b) (b-a) $ $ $
205,580 189,518 164,590
$ $ $
76,764 63,448 56,622
Funded Ratio (a/b) 62.7% 66.5% 65.6%
Covered Payroll (c) $ $ $
33,960 33,878 32,705
UAAL as a Percentage of Covered Payrol ([b-a]/c) 226.0% 187.3% 173.1%
Other Post Employment Benefits As discussed in Note 12, the schedule of funding progress presents trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liability for benefits. The schedule of funding progress is presented below:
Actuarial Valuation Date 12/31/10 12/31/08
Actuarial Value of Assets (a) $ $
8,254 5,086
Actuarial Accrued Unfunded Liability (AAL) AAL Entry Age (UAAL) (b) (b-a) $ $
23,577 19,869
$ $
15,323 14,783
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Funded Ratio (a/b) 35.0% 25.6%
Covered Payroll (c) $ $
35,829 35,009
UAAL as a Percentage of Covered Payrol ([b-a]/c) 42.8% 42.2%
HISTORICAL OPERATING STATISTICS 2006 - 2010 (unaudited) 2010 AVERAGE CUSTOMERS AT END OF PERIOD: Residential Commercial Industrial Other (1) Total
2009
2008
2007
2006
71,559 6,907 781 20,361 99,608
71,333 6,915 787 20,418 99,453
70,594 6,923 792 20,239 98,548
70,981 6,851 784 19,807 98,423
70,715 6,748 766 19,214 97,443
MWh SALES: Residential Commercial Industrial Other (1) Total Retail Wholesale Power Total
675,876 121,267 724,489 393,778 1,915,410 1,877,222 (6) 3,792,632
712,053 125,498 730,828 420,577 1,988,956 1,440,480 (6) 3,429,436
712,387 128,553 754,527 425,399 2,020,866 1,260,069 (6) 3,280,935
706,977 125,614 753,617 422,016 2,008,224 1,392,429 (6) 3,400,653
729,792 125,050 709,315 395,600 1,959,757 995,658 (6) 2,955,415
SOURCES OF MWh: Generated by district Purchased Subtotal System losses Total
2,541,574 1,345,918 (6) 3,887,492 94,860 3,792,632
2,157,278 1,346,677 (6) 3,503,955 74,519 3,429,436
1,924,982 1,445,451 (6) 3,370,433 89,498 3,280,935
1,748,714 1,706,265 (6) 3,454,979 54,326 3,400,653
1,762,745 1,239,151 (6) 3,001,896 46,481 2,955,415
ELECTRIC ENERGY REVENUES: (IN THOUSANDS) Residential Commercial Industrial Other (1) Total Retail Energy Electric Service Charges Other Electric Revenue Electric Energy Retail Wholesale Power Total
$99,806 15,545 74,618 36,981 226,950 385 212 227,547 80,039 (6) $307,586
$102,662 15,893 74,812 47,632 240,999 322 179 241,500 52,047 (6) $293,547
$91,826 14,807 66,688 41,100 214,421 344 190 214,955 97,385 (6) $312,340
$86,561 13,587 62,058 38,534 200,740 373 270 201,383 86,408 (6) $287,791
$81,956 12,874 55,026 32,521 182,377 324 165 182,866 57,083 (6) $239,949
497
493
520
AVERAGE MWh SALES PER CUSTOMER FOR THE PERIOD Residential Commercial Industrial
9.445 17.557 927.643
9.982 18.149 928.625
10.091 18.569 952.686
9.960 18.335 961.246
10.320 18.531 925.999
AVERAGE REVENUE PER MWh FOR THE PERIOD Residential Commercial Industrial
$147.67 $128.19 $102.99
$144.18 $126.64 $102.37
$128.90 $115.18 $88.38
$122.44 $108.16 $82.35
$112.30 $102.95 $77.58
SYSTEM PEAK DEMAND (MW)
AVERAGE COST OF POWER PER KWh FOR RETAIL LOAD(2)
$0.086
$0.085 (7)
(1) Includes agricultural and municipal water pumping, street lighting, and interdepartmental meters. (2) Includes depreciation, excludes debt service. (3) Summary accounts are now counted by individual connections. (4) Includes the benefits of well above normal wholesale power margins. (5) District acquired Westside Service territory which included 5,778 accounts. (6) Includes adjustments for transaction "bookouts" which were not physically settled into the District's system. (7) Revised to reflect PG&E pipeline depreciation.
$0.078 (7)
516
$0.067 (7)
534
$0.055 (7)
HISTORICAL RESULTS OF OPERATIONS 2006 - 2010 (unaudited) (IN THOUSANDS) OPERATING REVENUES: Electric energy - Retail Electric energy - Wholesale Small Hydropower Other Electric Irrigation Other Total Operating Revenue OPERATING EXPENSES: Power Supply: Purchased Power Generation and Fuel Total Power Supply Other Electric O&M Irrigation O&M Public Benefits Administration and General Depreciation and amortization Total Operating Expenses OPERATING INCOME (LOSS)
2010 $
2009
2008
2007
2006
227,547 $ 80,039 (2)
241,500 $ 52,047 (2)
214,955 $ 97,385 (2)
201,383 $ 86,408 (2)
182,866 57,083 (2)
7,382 14,594 329,562
6,832 13,741 314,120
6,570 17,653 336,563
6,571 12,406 306,768
6,168 11,803 257,920
96,084 (2) 118,518 214,602 20,074 10,582 5,013 21,568 47,303 319,142
71,352 (2) 129,202 200,554 19,801 11,257 6,611 20,576 39,426 298,225
95,460 (2) 143,792 239,252 17,259 10,239 6,041 18,819 32,404 324,014
93,293 (2) 112,255 205,548 16,541 10,240 3,111 17,650 27,854 280,944
65,177 (2) 89,172 (5) 154,349 15,416 10,482 3,429 18,357 23,126 225,159
10,420
15,895
12,549
25,824
32,761
6,044
5,761
OTHER INCOME (EXPENSE): Interest/Deriative (loss)gain Unrealized (Loss) Gain on Investments Miscellaneous Total Other Income
5,334
697
7,643 12,977
6,446 7,143
5,808 20,070
6,634 12,678
6,402 12,163
INTEREST EXPENSE Long Term Debt
44,673
27,344
20,388
23,894
20,955
0
0
0
0
0
TRANSFER (TO) FROM DEFERRED REGULATORY CREDITS
14,262 (6)
LOSS FROM ADVANCE REFUNDING NET INCOME (LOSS) RETAINED EARNINGS: BEGINNING OF YEAR GASB 33 Accounting Principle END OF YEAR DEBT SERVICE COVERAGE REVENUE BONDS/COP'S
(21,276)
(4,306)
12,231
14,608
23,969
46,502
50,808
38,577
23,969
0
$25,226
$46,502
$50,808
$38,577
$23,969
3.16x
1.67x
(1) Revised 2002 to reflect Public Benefits. (2) Includes adjustments for transaction "bookouts" which were not physically settled into the District's system. (3) Revised 2003 to reflect changes in reporting format. (4) Rate Stabilization transfer of $7,240. (5) Walnut Energy Center went commercial 2/28/06. (6) Electric Rate Stabiliation transfer of $8,000
2.13x (6)
1.91x
2.38x