Reports on Audit of Combined Financial Statements and Supplementary Information For the Years Ended June 30, 2012 and 2011
Reports on Audit of Combined Financial Statements and Supplementary Information Table of Contents For the Years Ended June 30, 2012 and 2011 Independent Auditor s Report... 1 Management s Discussion and Analysis Required Supplementary Information... 2 Combined Financial Statements: Combined Balance Sheets... 9 Combined Statements of Revenues, Expenses and Changes in Net Assets...11 Combined Statements of Cash Flow...12 Notes to Combined Financial Statements...14 Page Independent Auditor s Report on Supplementary Information...36 Combining Financial Statements For Purposes of Additional Analysis: Combining Balance Sheets...37 Combining Statements of Revenues, Expenses and Changes in Net Assets...39 Combining Statements of Cash Flow...40 Generation Entitlement Shares...42
REPORT OF INDEPENDENT AUDITORS The Board of Commissioners Northern California Power Agency and Associated Power Corporations We have audited the accompanying combined balance sheets of Northern California Power Agency and Associated Power Corporations (the Agency) as of June 30, 2012 and 2011 and the related combined statements of revenues, expenses and changes in net assets and cash flows for the years then ended. These financial statements are the responsibility of the Agency s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Agency s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Agency as of June 30, 2012 and 2011 and the combined results of its operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Accounting principles generally accepted in the United States of America require that the management's discussion and analysis on pages 2 through 8 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Portland, Oregon October 29, 2012 1
MANAGEMENT S DISCUSSION AND ANALYSIS The following management s discussion and analysis of the Northern California Power Agency (the Agency) and its financial performance provides an overview of the Agency s financial activities for the years ended June 30, 2012 and 2011. This discussion should be read in conjunction with the Agency s financial statements and accompanying notes, which follow this section. BACKGROUND The Northern California Power Agency is a joint powers agency formed by member public entities under the laws of the State of California. The Agency is responsible for purchasing, generating, transmitting, and selling electrical energy and for providing other related services to its members as each may require. The Agency provides a portion of certain of its members power needs and certain of its members also self-provide and or purchase power and transmission from other public and private sources. The Agency is governed by a Commission comprised of one representative for each member. The Commission is responsible for the general management of the affairs, property, and business of the Agency. Under the direction of the General Manager, the staff of the Agency is responsible for providing various administrative, operating and planning services for the Agency. The Agency's project construction and development programs have been individually financed by project revenue bonds that are collateralized by the Agency's assignment of all payments, revenues, and proceeds associated with its interest in each project. Each of the Agency's members may choose which projects in which it wishes to participate, as to each such project in which an Agency member participates, that member is known as a "project participant." Each project participant has agreed to pay its proportionate share of debt service and other costs of the related project, notwithstanding the suspension, interruption, interference, reduction or curtailment of output from the project for any reason (that is, the take-or-pay member agreements). Certain of the revenue bonds are additionally supported by municipal bond insurance credit enhancements. Power sales by the Agency to its members for their resale include both sales of power to project participants generated by operating plants and power purchased from outside sources. Rates for power sales are designed to recover costs that include budgeted annual operating costs and debt service. Additional amounts for operating reserves or rate stabilization may be included in rates under the terms of bond indentures. The Agency s rates for electric service are not subject to the regulatory jurisdiction of the California Public Utilities Commission (CPUC) or the Federal Energy Regulatory Commission (FERC). Rather, the Agency s rates are established annually in connection with its budget, which is approved by its governing Commission. Various legal and tax considerations caused the Agency to provide that separate not-for-profit corporations should be delegated by the Agency to own the geothermal electrical generating projects undertaken by the Agency ("the Associated Power Corporations"). The Associated Power Corporations, consisting of Northern California Municipal Power Corporation Nos. Two and Three, have delegated to the Agency the authority to construct, operate and manage their respective geothermal plants and related assets. The Agency, in return for financing the costs of acquisition and construction, acquires all the capacity and energy generated by the plants. Because the Agency is a separate, governmental and not-for-profit organization that serves its participating members, who are also the Agency s principal customers, the net results of operations flow through to its participating members as either net revenues or net expenses. 2
MANAGEMENT S DISCUSSION AND ANALYSIS FINANCIAL REPORTING For accounting purposes, the Agency is a special-purpose governmental entity that is engaged in a businesstype activity, principally as a supplier of wholesale electricity and transmission to its member participants. As such, the Agency s financial statements are presented as an enterprise type fund. The records of the Agency and the Associated Power Corporations are maintained substantially in accordance with the FERC Uniform System of Accounts. Accounting principles generally accepted in the United States of America are applied by the Agency in conformance with pronouncements of the Governmental Accounting Standards Board (GASB) and, where not in conflict with GASB pronouncements, the Financial Accounting Standards Board (FASB) pronouncements issued on or before November 30, 1989. The combined financial statements encompass the Agency and Associated Power Corporations on an accrual accounting basis. All significant intercompany balances and transactions have been eliminated from the combined amounts reported. In accordance with FASB Accounting Standards Codification (ASC) 980, Regulated Operations, the Agency has deferred the net of certain items of expense and revenue that otherwise would have been charged to operations as such items will be recovered in the future years operations. The Agency expects to recover these items in rates over the term of the related debt obligations it has issued. COMBINED BALANCE SHEETS, COMBINED STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS, AND COMBINED STATEMENTS OF CASH FLOW The combined balance sheets include all the Agency s assets and liabilities, using the accrual method of accounting, as well as information about which assets can be used for general purposes and which assets are restricted as a result of bond covenants and other commitments. The combined balance sheets provide information about the nature and amount of resources and obligations at a specific point in time. The combined statements of revenues, expenses, and changes in net assets report all the revenues and expenses during the time periods indicated. The combined statements of cash flow report the cash provided and used by operating activities as well as other cash sources, such as investment income and debt financing; and, other cash uses such as payments for debt service and capital additions. NEW PROJECT The Agency is currently developing a new Agency project the Lodi Energy Center. The Lodi Energy Center (LEC) is a 280 MW base load, combined cycle, natural gas-fired, combustion turbine generating station (one gas turbine and one steam turbine) to be located in Lodi, California. Environmental review was completed through the Application For Certification Process (AFC) at the California Energy Commission in May 2010 and construction began in August 2010. Commercial operation is expected near the end of 2012. Pursuant to the Lodi Energy Center Power Sales Agreement, the Agency has agreed to construct and operate the LEC and has sold all of the capacity and energy of the LEC to thirteen participants (including four nonmembers) in accordance with their respective generation entitlement shares (GES). Each participant has agreed to unconditionally provide for its share of the costs of construction of the LEC and all capital improvements and to pay its share of the operation and maintenance expenses based on its GES. Estimated cost of construction for the project is $388.5 million. 3
MANAGEMENT S DISCUSSION AND ANALYSIS FINANCIAL HIGHLIGHTS The following is a summary of the Agency s combined financial position and results of operations for the years ended June 30, 2012, 2011, and 2010. June 30, Condensed Balance Sheets (in thousands) 2012 2011 2010 Assets Current assets $ 68,042 $ 65,552 $ 66,022 Restricted assets 221,700 312,148 508,400 Electric plant 684,399 584,928 410,304 Other assets and deferred charges 212,421 197,328 186,839 $ 1,186,562 $ 1,159,956 $ 1,171,565 Liabilities and Net Assets Long-term debt, net $ 843,692 $ 857,643 $ 866,874 Current liabilities 80,481 78,070 84,654 Non-current liabilities and deferred credits 233,992 196,244 186,256 Net assets 28,397 27,999 33,781 $ 1,186,562 $ 1,159,956 $ 1,171,565 Condensed Statements of Revenues, Expenses and Changes in Net Assets Years Ended June 30, (in thousands) 2012 2011 2010 Sales for resale $ 277,257 $ 268,469 $ 304,345 Operating expenses 241,977 250,018 257,851 Net operating revenues 35,280 18,451 46,494 Other expenses (28,608) (27,423) (29,903) Future recoverable (refundable) costs 6,514 15,426 (5,251) Refunds to participants (12,788) (12,236) (9,573) Increase (decrease) in net assets 398 (5,782) 1,767 Net assets, beginning of year 27,999 33,781 32,014 Net assets, end of year $ 28,397 $ 27,999 $ 33,781 4
MANAGEMENT S DISCUSSION AND ANALYSIS 2012 Compared to 2011 ASSETS Restricted Assets Restricted assets decreased $90.4 million or 29.0% from the prior year. This is primarily a result of Lodi Energy Center Project expenditures related to construction of $99.3 million and debt service of $17.5 million, which were offset by (1) an increase of General Operating Reserve participant deposits of $7.8 million; (2) increases in the Capital Facilities Project debt service account of $2.3 million, Hydroelectric Project debt service and other reserve accounts of $5.8 million and $4.7 million, respectively, due to the effects of increased debt service requirements and the 2012A refunding; (3) an increase in budgeted reserves of $5.7 million; and, (4) a decrease in interest receivable of $0.1 million due to the declining LEC construction and debt service balances. Electric Plant The Agency has invested approximately $684.4 million in plant assets and construction work in progress, net of accumulated depreciation, at June 30, 2012. Net utility plant makes up approximately 57.7% of the Agency s assets. The $99.5 million increase from the prior year is a result of an increase in construction work in progress of $122.6 million primarily related to the Lodi Energy Center Project, offset by $24.0 million in depreciation, net of retirements of $0.9 million. For additional detail, refer to Note B. Other Assets and Deferred Charges Other assets and deferred charges increased $15.1 million compared to 2011. This was primarily due to reduced bond principal collections compared to scheduled asset depreciation and bond cost amortizations. LIABILITIES Long-Term Debt, net Long-term debt decreased $14.0 million in 2012 as a result of scheduled principal payments of $11.2 million and the net change in current portion of long-term debt of $9.5 million offset by the effects of $3.7 million related to the refunding of certain Hydroelectric bonds and approximately $3.0 million in amortization of deferred losses on bond refunding and net discounts. For additional detail, refer to Note D. Current Liabilities Current liabilities increased by $2.4 million in 2012. This is primarily due to an increase in current portion of long-term debt of $9.5 million, which was offset by decreases in accounts and retentions payable - restricted of $6.0 million related primarily to the Lodi Energy Center Project, and net decreases of approximately $1.1 million in accrued interest, reserves and advances. Non-Current Liabilities and Deferred Credits Non-current liabilities and deferred credits increased by approximately $37.7 million in 2012. This was primarily due to (1) a $16.8 million increase in operating reserves and other deposits, including increases of $7.8 million in the General Operating Reserve, an increase in budgeted reserves of $4.9 million, and additional deposits of $4.1 million to meet Balancing Account and project O&M reserve requirements; (2) an $11.3 million increase of deferred revenues primarily related to the Lodi Energy Center Project; and, (3) a net increase of $9.6 million in the interest rate swap liability. 5
MANAGEMENT S DISCUSSION AND ANALYSIS 2012 Compared to 2011 - Continued CHANGES IN NET ASSETS The Agency is intended to operate on a not-for-profit basis. Therefore, net assets primarily represent differences between total revenues collected, using rates based on estimated operating expenses and debt service, and the total actual expenses incurred. In subsequent periods of operation, excess collections (net of encumbrances) may be refunded to participants or appropriated for other uses at the discretion of the Agency's governing Board of Commissioners. In the event the Agency incurs a net expense at year-end, the balance would be subject to recovery in participant rates under the terms of the related participating member agreements. See Notes A, B and D to the Combined Financial Statements. Sales For Resale Sales for resale revenues for fiscal year 2012 were approximately $8.8 million or 3.3% higher than in the prior fiscal year. This was the net result of the following: (1) higher sales for resale revenues from Agency participants of $6.0 million or 2.5% which was caused primarily by increased budget requirements for steam drilling and scheduled debt service, which was offset by reduced power purchase requirements due to a decline in participant demand with a lower average cost of power and a reduction of budgeted management services requirements compared to 2011; and (2) higher other third-party revenues of $2.8 million or 11.3%, which was the result of increased drill rig rental activity of $3.1 million and additional solar rebates of $1.7 million. This additional revenue was offset by $2.0 million of lower market power sales, ancillary services and other revenues. Operating Expenses Operating expenses decreased by approximately $8.0 million or 3.2% in fiscal year 2012, as compared with the prior year. This was the net result of the following: (1) the cost of the purchased power component decreased by $7.3 million or 6.4%, largely due to the reduced need for power previously noted above; (2) the operations cost component increased by $3.5 million or 11.1% primarily due to increased steam field drilling expenses of $5.2 million offset by a net decrease in other projects of $1.7 million; and (3) decreases in maintenance expense, depreciation and administrative expenses totaling approximately $4.4 million. 2011 Compared to 2010 ASSETS Restricted Assets Restricted assets decreased $196.3 million or 38.6% from the prior year. This is primarily a result of expenditures related to the Lodi Energy Center Project of $147.1 million, a reduction of General Operating Reserve participant deposits of $11.3 million, reduction of geothermal construction funds of $3.0 million used for the completion of work on unit 4 turbine and steam path upgrades, and net reductions of approximately $34.9 million in debt service and reserve accounts resulting primarily from lower debt service requirements and the final maturities of certain Geothermal, Combustion Turbine and Transmission bond issues. Electric Plant The Agency has invested approximately $584.9 million in plant assets and construction work in progress, net of accumulated depreciation, at June 30, 2011. Net utility plant makes up approximately 50.4% of the Agency s assets. The $174.6 million increase from the prior year is a result of net capital additions of $21.4 million and an increase in construction work in progress of $178.8 million primarily related to the Lodi Energy Center Project, offset by $25.6 million in depreciation, net of retirements. Net capital additions were primarily related to the unit 4 turbine and steam path upgrades. For additional detail, refer to Note B. 6
MANAGEMENT S DISCUSSION AND ANALYSIS 2011Compared to 2010 - Continued Other Assets and Deferred Charges Other assets and deferred charges increased $10.5 million compared to 2010. This was primarily due to reduced bond principal collections compared to scheduled asset depreciation and bond cost amortizations. LIABILITIES Long-Term Debt, net Long-term debt decreased $9.2 million in 2011 as a result of scheduled principal payments of $41.7 million offset by the net change in current portion of long-term debt of $30.3 million and approximately $2.2 million in amortization of deferred losses on bond refunding and net discounts. For additional detail, refer to Note D. Current Liabilities Current liabilities decreased by $6.6 million in 2011. This is primarily due to a decrease in current portion of long-term debt of $30.3 million, which was offset by increases in accounts and retentions payable - restricted of $21.4 million related to the Lodi Energy Center Project, and net increases of approximately $2.3 million in accrued interest, accounts payable, reserves and advances. Non-Current Liabilities and Deferred Credits Non-current liabilities and deferred credits increased by approximately $10.0 million in 2011. This was primarily due to a $20.8 million increase in deferred revenues related to the Lodi Energy Center Project offset by reductions of approximately $6.1 million in operating reserves and other deposits and $4.7 million of interest rate swap liability. CHANGES IN NET ASSETS The Agency is intended to operate on a not-for-profit basis. Therefore, net assets primarily represent differences between total revenues collected, using rates based on estimated operating expenses and debt service, and the total actual expenses incurred. In subsequent periods of operation, excess collections (net of encumbrances) may be refunded to participants or appropriated for other uses at the discretion of the Agency's governing Board of Commissioners. In the event the Agency incurs a net expense at year-end, the balance would be subject to recovery in participant rates under the terms of the related participating member agreements. See Notes A, B and D to Combined Financial Statements. Sales For Resale Sales for resale revenues for fiscal year 2011 were approximately $35.9 million or 11.8% less than in the prior fiscal year. This was the net result of the following: (1) lower sales for resale revenues from Agency participants by approximately $51.2 million or 17.4%, which was caused by reduced revenue requirements due to: $33.4 million lower budgeted plant costs; reduced power purchase requirements of $9.4 million due to a decline in participant demand with a lower average cost of power; reduced natural gas pass through sales of $4.3 million; a $4.1 million reduction of management services costs compared to 2010; and (2) higher other third-party revenues from electric power and ancillary services by $15.3 million or 159.0%, which was primarily caused by increased availability of excess energy for sale from the Agency s power resources. Operating Expenses Operating expenses decreased by approximately $7.8 million or 3.0% in fiscal year 2011, as compared with the prior year. This was the net result of the following: (1) the cost of the purchased power component decreased by $12.3 million or 9.7%, largely due to the reduced need for power previously noted above; (2) the transmission cost component increased by $10.2 million or 26.2% primarily due to rate increases for transmission services from the Independent System Operator; and (3) decreases in operations expense and 7
MANAGEMENT S DISCUSSION AND ANALYSIS depreciation totaling approximately $9.4 million were offset by a slight increase of $3.5 million in maintenance and administrative expenses. FINANCING ACTIVITIES During 2012 the Agency continued to implement strategies to further improve its competitive position and financial flexibility. These actions included (1) the refunding of fixed rate debt for debt service savings and (2) replacing the letter of credit provider related to outstanding variable rate bonds. In February 2012, the Agency refunded $88,355,000 principal amount of 1998 Hydroelectric Refunding Revenue Bonds Series A maturing on July 1 in each of the years 2024 through 2032. The refunding was completed through the issuance of $76,665,000 fixed rate tax exempt debt (2012 Series A) and $7,120,000 fixed rate taxable debt (2012 Series B) with yields of 3.05% to 4.32% with varying principal maturities ranging from $4,475,000 to $13,040,000 through July 1, 2032. The refunding is estimated to have decreased project debt service by an estimated $14.4 million over the next 21 years, which results in an estimated economic gain to the Agency of approximately $9.4 million. The Agency has issued variable rate 2008 Hydroelectric Refunding Series A ($85,160,000) bonds and 2008 Hydroelectric Refunding Series B ($3,165,000) bonds. To support this financing, the Agency entered into two irrevocable direct pay letter of credit agreements with Dexia Credit Local, which were to expire on April 2, 2013. Due to certain impacts on Dexia s credit rating and the resulting negative potential effect on NCPA s variable interest rate, on September 27, 2011, the irrevocable direct pay letter of credit agreements with Dexia Credit Local related to the 2008 Hydroelectric Refunding Series A and B bonds were terminated. Replacement letters of credit with Citibank N.A. were issued on the same day. The Citibank letters of credit are for a period of three years and expire on September 27, 2014. Ratings assigned to the Agency s outstanding project bonds as of June 30, 2012 are as follows: Debt Credit Ratings: Standard & Poor s Fitch Moody s Geothermal A-, stable A+, stable A1, stable Hydroelectric A+, stable A+, stable A2, stable Capital Facilities A-, stable Not rated A3, stable Lodi Energy Center (Issue One) A-, stable A, stable A3, stable Lodi Energy Center (Issue Two) AAA, stable Not rated Aa2, stable OUTLOOK The Agency s vision is to provide reliable, affordable, and clean energy to our members in an environmentally responsible way. We partner with our state and federal governments to support forward thinking policies that promote clean energy sources, protect our environment, and reflect the interests of the consumers we serve. SUMMARY The management of the Agency is responsible for preparing the information in this management s discussion and analysis, combined financial statements and notes to combined financial statements. Financial statements were prepared according to accounting principles generally accepted in the United States of America, and they fairly portray the Agency s financial position and results of operations. The notes to the financial statements are an integral part of the basic financial statements and provide additional financial information. 8
COMBINED BALANCE SHEETS ASSETS June 30, 2012 2011 (in thousands) CURRENT ASSETS Cash and cash equivalents $ 56,553 $ 57,518 Accounts receivable Participants 3,373 52 Other 1,215 1,124 Interest receivable 12 29 Inventory and supplies at average cost 5,923 5,807 Prepaid expenses 966 1,022 TOTAL CURRENT ASSETS 68,042 65,552 RESTRICTED ASSETS Cash and cash equivalents 68,932 161,352 Investments 152,575 150,467 Interest receivable 193 329 TOTAL RESTRICTED ASSETS 221,700 312,148 ELECTRIC PLANT Electric plant in service 1,072,275 1,073,021 Less: accumulated depreciation (804,203) (781,848) 268,072 291,173 Construction work-in-progress 416,327 293,755 TOTAL ELECTRIC PLANT 684,399 584,928 OTHER ASSETS AND DEFERRED CHARGES Deferred expenses to be recovered in future years 200,000 183,686 Unamortized debt issuance expenses 11,168 12,492 Preliminary survey and investigation costs 1,253 1,150 TOTAL OTHER ASSETS AND DEFERRED CHARGES 212,421 197,328 TOTAL ASSETS $ 1,186,562 $ 1,159,956 See notes to combined financial statements 9
COMBINED BALANCE SHEETS LIABILITIES June 30, 2012 2011 (in thousands) CURRENT LIABILITIES Accounts payable $ 21,715 $ 22,060 Accounts and retentions payable restricted for construction 19,293 24,997 Member advances 2,158 1,954 Operating reserves 3,111 3,125 Current portion of long-term debt 20,635 11,175 Accrued interest payable 13,569 14,759 TOTAL CURRENT LIABILITIES 80,481 78,070 NON-CURRENT LIABILITIES AND DEFERRED CREDITS Operating reserves and other deposits 127,163 110,409 Deferred revenues regulatory liability 84,487 73,141 Deferred interest rate swap liability 22,342 12,694 Long-term debt, net 843,692 857,643 TOTAL NON-CURRENT LIABILITIES AND DEFERRED CREDITS 1,077,684 1,053,887 TOTAL LIABILITIES 1,158,165 1,131,957 NET ASSETS Invested in capital assets, net of related debt (51,007) (49,429) Restricted 52,873 50,652 Unrestricted 26,531 26,776 TOTAL NET ASSETS 28,397 27,999 TOTAL LIABILITIES AND NET ASSETS $ 1,186,562 $ 1,159,956 See notes to combined financial statements 10
COMBINED STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS Years Ended June 30, 2012 2011 (in thousands) SALES FOR RESALE Participants $ 249,439 $ 243,463 Other Third-Party 27,818 25,006 TOTAL SALES FOR RESALE 277,257 268,469 OPERATING EXPENSES Purchased power 107,158 114,428 Transmission 49,440 49,366 Operations 35,396 31,868 Depreciation 24,008 25,595 Administrative and general 15,296 16,001 Maintenance 10,679 12,760 TOTAL OPERATING EXPENSES 241,977 250,018 NET OPERATING REVENUES 35,280 18,451 OTHER (EXPENSES) REVENUES Interest expense (45,966) (46,063) Interest income 1,229 1,940 Capitalized interest 15,984 15,637 Amortization of deferred charges (410) (464) Other 555 1,527 TOTAL OTHER EXPENSES (28,608) (27,423) FUTURE RECOVERABLE AMOUNTS 6,514 15,426 REFUNDS TO PARTICIPANTS (12,788) (12,236) INCREASE (DECREASE) IN NET ASSETS 398 (5,782) NET ASSETS, Beginning of year 27,999 33,781 NET ASSETS, End of year $ 28,397 $ 27,999 See notes to combined financial statements 11
COMBINED STATEMENTS OF CASH FLOW Years Ended June 30, 2012 2011 (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Received from participants $ 257,464 $ 264,747 Received from others 31,727 28,216 Payments for employee services (30,592) (29,894) Payments to suppliers for goods & services (180,746) (181,245) NET CASH FROM OPERATING ACTIVITIES 77,853 81,824 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities and sales of investments 210,240 256,782 Interest received on cash and investments 1,799 3,282 Purchase of investments (212,919) (283,692) NET CASH FROM INVESTING ACTIVITIES (880) (23,628) CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Expenditures for debt issuance costs (2,431) (197) Acquisition and construction of electric plant (107,495) (184,583) Interest paid on long-term debt (44,175) (42,114) Principal repayment on long-term debt (11,175) (41,475) Proceeds from bond issues 94,108 - Payments to refund debt (87,059) - NET CASH FROM CAPITAL AND RELATED FINANCING ACTIVITIES (158,227) (268,369) CASH FLOWS FROM NON-CAPITAL AND RELATED FINANCING ACTIVITIES Advances from members 204 (154) Other proceeds 556 1,527 Preliminary survey and investigation costs (103) (73) Refunds to participants (12,788) (12,236) NET CASH FROM NON-CAPITAL AND RELATED FINANCING ACTIVITIES (12,131) (10,936) DECREASE IN CASH AND CASH EQUIVALENTS (93,385) (221,109) CASH AND CASH EQUIVALENTS Beginning of year 218,870 439,979 End of year $ 125,485 $ 218,870 See notes to combined financial statements 12
COMBINED STATEMENTS OF CASH FLOW-Continued Years Ended June 30, 2012 2011 (in thousands) RECONCILIATION OF NET OPERATING REVENUES TO NET CASH FROM OPERATING ACTIVITIES Net operating revenues $ 35,280 $ 18,451 Adjustments to reconcile net operating revenues to net cash from operating activities: Depreciation 24,008 25,595 59,288 44,046 CASH FLOWS IMPACTED BY CHANGES IN Accounts receivable (3,412) 1,552 Inventory and prepaid expense (60) (312) Operating reserves and other deposits 16,740 (5,960) Deferred revenues 11,346 20,777 Accounts payable (6,049) 21,721 NET CASH FROM OPERATING ACTIVITIES $ 77,853 $ 81,824 CASH AND CASH EQUIVALENTS AS STATED IN THE COMBINED BALANCE SHEETS Cash and cash equivalents - current assets $ 56,553 $ 57,518 Cash and cash equivalents - restricted assets 68,932 161,352 End of year $ 125,485 $ 218,870 See notes to combined financial statements 13
NOTE A -- ORGANIZATION NOTES TO COMBINED FINANCIAL STATEMENTS June 30, 2012 and 2011 The Agency Northern California Power Agency (Agency) was formed in 1968 as a joint powers agency of the State of California. The membership consists of eleven cities with publicly-owned electric utility distribution systems, one port authority, a transit authority, and two other associate member entities. The Agency is generally empowered to purchase, generate, transmit, distribute, and sell electrical energy. Members participate in the projects of the Agency on an elective basis. Various legal and tax considerations caused the Agency to provide that separate not-for-profit corporations should be delegated by the Agency to own the geothermal electrical generating projects undertaken by the Agency ( the Associated Power Corporations ). The Associated Power Corporations, Northern California Municipal Power Corporations Nos. Two and Three, have delegated to the Agency the authority to construct, operate and manage their respective geothermal plants and related assets. The Agency, in return for financing the costs of acquisition and construction, acquires all the capacity and energy generated by the plants. See Note D Projects and Related Financing. The Agency is governed by a Commission comprised of one representative for each member. The Commission is responsible for the general management of the affairs, property, and business of the Agency. Under the direction of the General Manager, the staff of the Agency is responsible for providing various administrative, operating and planning services for the Agency. NOTE B -- SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting and Principles of Combination For accounting purposes, the Agency is a specialpurpose governmental entity that is engaged in a business-type activity, principally as a supplier of wholesale electricity and transmission to its member participants. As such, the Agency s financial statements are presented as an enterprise type fund. The records of the Agency and its Associated Power Corporations are maintained substantially in accordance with the Federal Energy Regulatory Commission (FERC) Uniform System of Accounts. Accounting principles generally accepted in the United States of America are applied by the Agency in conformance with pronouncements of the Governmental Accounting Standards Board (GASB) and, where not in conflict with GASB pronouncements, the Financial Accounting Standards Board (FASB) pronouncements issued on or before November 30, 1989. The combined financial statements encompass the Agency and Associated Power Corporations on an accrual accounting basis. All significant intercompany balances and transactions have been eliminated from the combined amounts reported. Cash Operating cash is maintained in interest-bearing depository accounts, which are fully collateralized, in accordance with state law. Cash balances are invested in either overnight repurchase agreements, which are fully collateralized by U.S. Government Securities, or in money market funds invested in short-term U.S. Treasury Securities. The Agency commingles operating cash for investment purposes only. Separate detailed accounting records are maintained for each account's related investments. All cash of the Agency is held by either the Agency s custodian or its primary bank and revenue bond trustee. Cash Equivalents Cash equivalents are short-term investments purchased with original maturities of 90 days or less. Cash equivalents consist primarily of portions of guaranteed investment contracts, U.S. Treasury and Agency Securities, California State Treasurer s pooled Local Agency Investment Fund (LAIF), and money market mutual funds. 14
NOTES TO COMBINED FINANCIAL STATEMENTS - Continued Restricted Cash and Investments Long-term debt and other agreements require the maintenance of certain restricted asset accounts. Cash and investments held in these accounts are restricted for specific uses, including project construction, operations, debt service, and special reserve requirements. Investments are stated at cost adjusted for amortization of premiums and accretion of discounts, which approximates market. Inventory and Supplies Inventory and supplies consist primarily of spare parts for the maintenance of plant assets and are stated at average cost. Restricted Assets Cash and cash equivalents, investments and related accrued interest which are restricted under terms of certain agreements, trust indentures or Commission actions limiting the use of such funds, are included in restricted assets. Electric Plant Electric plant in service is recorded at historical cost. The cost of additions, renewals and betterments is capitalized; repairs and minor replacements are charged to operating expenses as incurred. The original cost of property retired, net of removal and salvage costs, is charged to accumulated depreciation. Depreciation expense is computed using the straight-line method over the estimated useful lives of the related assets. The provision for depreciation was approximately 2% of the average electric plant in service for the Agency during 2012 and 2011. Depreciation is calculated using the following estimated lives: Generation and Transmission 25 to 42 years General Plant 5 to 25 years Transportation Equipment 5 years A summary of changes in electric plant for the year ended June 30, 2012 is as follows: Balance June 30, 2011 Additions Deletions Balance June 30, 2012 (in thousands) Structures and Leasehold Improvements $ 292,944 $ 68 $ - $ 293,012 Reservoirs, Dams and Waterways 249,449 79 (210) 249,318 Equipment 355,205 931 (1,614) 354,522 Furniture and Fixtures 3,478 - - 3,478 901,076 1,078 (1,824) 900,330 Accumulated Depreciation (781,848) (24,008) 1,653 (804,203) 119,228 (22,930) (171) 96,127 Construction Work-In-Progress 293,755 123,310 (738) 416,327 Land and Land Rights 171,945 - - 171,945 Electric Plant, Net $ 584,928 $ 100,380 $ (909) $ 684,399 15
NOTES TO COMBINED FINANCIAL STATEMENTS - Continued A summary of changes in electric plant for the year ended June 30, 2011 is as follows: Balance June 30, 2010 Additions Deletions Balance June 30, 2011 (in thousands) Structures and Leasehold Improvements $ 292,661 $ 4,011 $ (3,728) $ 292,944 Reservoirs, Dams and Waterways 249,436 13-249,449 Equipment 352,850 15,672 (13,317) 355,205 Furniture and Fixtures 1,853 1,701 (76) 3,478 896,800 21,397 (17,121) 901,076 Accumulated Depreciation (773,470) (25,596) 17,218 (781,848) 123,330 (4,199) 97 119,228 Construction Work-In-Progress 114,933 199,362 (20,540) 293,755 Land and Land Rights 172,041 - (96) 171,945 Electric Plant, Net $ 410,304 $ 195,163 $ (20,539) $ 584,928 Construction Work-In-Progress Construction work-in-progress (CWIP) includes the capitalized cost of land, material, equipment, labor, interest (net of interest income), certain other financing costs incurred to facilitate the projects and an allocated portion of general and administrative expenses related to the development of electric plant. In addition, CWIP ultimately includes costs incurred during the test and startup phase of projects prior to commencement of commercial operations. Preliminary Surveys and Investigations Expenditures for preliminary surveys, plans and investigations (PS&I) are deferred until the ultimate feasibility of the contemplated project is determined. When a project is continued, these expenditures are capitalized as part of construction work-in-progress and the related advances provided by members to fund such expenditures are repaid out of the permanent financing of the project. If a project is abandoned, such expenditures and related advances are included in operations when such determination is made. Deferred Expenses/Revenues to be Recovered/Refunded in Future Years In accordance with FASB Accounting Standards Codification (ASC) 980, Regulated Operations, the Agency has deferred the net of certain items of expense and revenue that otherwise would have been charged to operations because it is probable that such items will be recovered in the future years operations. The Agency expects to recover these items in rates over the term of the related debt obligations it has issued. On an ongoing basis, the Agency reviews its operations to determine the continued applicability of these deferrals under ASC 980. The items of expense that have been deferred are those originally paid from bond proceeds, including depreciation, certain bond amortizations and interest paid from bond proceeds. Revenues used to acquire electric plant have also been deferred to future years. As of June 30, 2012 and 2011, the Agency had accumulated deferred expenses (net of deferred revenues) to be recovered in future years of approximately $115,513,000 and $110,545,000, respectively. 16
NOTES TO COMBINED FINANCIAL STATEMENTS - Continued Unamortized Debt Issuance Expenses Debt issuance expenses are amortized over the term of the related issue. Amortization is computed using the effective interest method. Unamortized Excess Cost on Advance Refunding of Debt Gains and losses on refunding of debt are included as a component of long-term debt and are amortized to interest expense using the effective interest method over the shorter of the term of the original debt refunded or the term of the refunding debt obligation. Long-Term Debt Long-term debt is stated net of unamortized discounts and premiums and excess cost on advance refunding of debt. Discounts and premiums are amortized over the term of the related obligation using the effective interest method. Amortization of debt discounts and premiums is included in total interest expense for the period. See Note D - Projects and Related Financing. Operating Reserves The Agency has established various funded operating reserves for anticipated periodic operating costs and related liabilities including, but not limited to, scheduled maintenance other than ordinary repairs and replacements. Certain amounts funded each year are charged to operating expense because the rates established by the Agency for power sales to its members include these costs on a prospective basis. Changes to operating reserve levels are periodically authorized by the Agency's Commission during its annual budgeting process. A non-project specific, individual participant controlled, general operating reserve is also maintained for participating Agency members. Rates Power sales to participants for their resale include both power generated by operating plants and power purchased from outside sources. Rates for power sales are designed to recover costs that include budgeted annual operating costs and debt service. Additional amounts for operating reserves or rate stabilization may be included in rates under the terms of bond indentures. During fiscal years 2012 and 2011, no amounts were specifically collected for rate stabilization. The Agency s rates for electric service are not subject to the regulatory jurisdiction of the California Public Utilities Commission (CPUC) or FERC. Rather, the Agency s rates are established annually in connection with its budget, which is approved by its governing Commission. Power, Transmission and Fuel Forward Transactions In the normal course of its business, the Agency is required to manage loads, resources, and energy price risk on behalf of its members. Consequently, the Agency buys and sells power, transmission, and fuel in wholesale markets as required. The Agency does not enter into such agreements solely for trading purposes. All such transactions are normal purchases and sales subject to settlement at the agreed to contract prices for quantities delivered. While authorized to transact forward purchase contracts for terms of up to five years, forward contract purchases at fiscal year ended June 30, 2012 were for periods not greater than four and one half years duration beyond the current fiscal year. In the event of default, undelivered transactions are required to be marked-to-market subject to the following limitations. If the Agency, as buyer, is the defaulting entity, the Agency s termination settlement amount is capped at the agreed to contract cost for all future undelivered commodities. If the selling counterparty is the defaulting entity, the seller s termination settlement is not capped for all future undelivered commodities. The defaulting entity is also subject to resultant transmission charges, brokerage fees, attorney fees, and all other reasonable expenses. See Note G - Commitments and Contingencies, Power Purchase Contracts. 17
NOTES TO COMBINED FINANCIAL STATEMENTS - Continued Fair Values of Financial Instruments The following methods and assumptions were used by the Agency in estimating its fair value disclosures for financial instruments: Cash and Cash Equivalents - The carrying amount reported in the balance sheets for cash and cash equivalents approximates its fair value. Investments - The fair values for investments are based on quoted market prices. See Note C. Swaps - The fair values take into consideration the prevailing interest rate environment, the specific terms and conditions of a given transaction and any upfront payments that were received. All fair values were estimated using the zero-coupon discounting method. This method calculates the future payments required by the swap, assuming that the current forward rates implied by the yield curve are the market s best estimate of future spot interest rates. These payments are then discounted using the spot rates implied by the current yield curve for a hypothetical zero-coupon rate bond due on the date of each future net settlement on the swaps. While the current net mark to market values are negative, this valuation would be realized only if the swaps were terminated at the valuation date. Net Assets The Agency 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 outstanding debt balances, net of unamortized debt expenses and unspent bond proceeds. Restricted This component consists of net assets with constraints placed on their use. Constraints include those imposed by debt indentures and other agreements; grants, laws and regulations of other governments; or, by the Agency s governing Board of Commissioners. Unrestricted This component of net assets consists of net assets that do not meet the definition of invested in capital assets, net of related debt or restricted. The Agency and the Associated Power Corporations are intended to operate on a not-for-profit basis. Therefore, any balance of net assets represents differences between total revenues collected, using rates based on estimated operating expenses and debt service, and the total actual expenses incurred. In subsequent periods of operation, excess collections (net of encumbrances) that the participating members do not direct be held by or released to the Agency for expenditure by the Agency are refunded to the participating members. Estimated encumbrances at June 30, 2012 and 2011 were $6,116,000 and $4,495,000, respectively. In the event the Agency incurs a negative net assets balance, the balance would be subject to recovery in rates under the terms of the related take-or-pay member agreements. See Note D. Recent Accounting Pronouncements In June 2011, the Agency adopted GASB issued Statement No.64, Derivative Instruments: Application of Hedge Accounting Termination Provisions an amendment of GASB No. 53. GASB No. 64 clarifies whether an effective hedging relationship continues after the replacement of a swap counterparty or a swap counterparty s credit support provider. The statement sets forth criteria that establish when the effective hedging relationship continues and hedge accounting should continue to be applied. This statement is effective for the Agency in the current fiscal year. This statement had no material impact on the financial statements of the Agency. 18
NOTES TO COMBINED FINANCIAL STATEMENTS - Continued Use of Estimates in the Preparation of Financial Statements 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 amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. 19
NOTES TO COMBINED FINANCIAL STATEMENTS - Continued NOTE C -- INVESTMENTS The Agency is authorized to invest in obligations of the U.S. Government and its agencies and instrumentalities, in certificates of deposit, commercial paper, banker s acceptances, repurchase and reverse repurchase agreements, passbook savings account demand deposits, municipal bonds, the State Treasurer's LAIF pool, and in other instruments authorized by applicable sections of the Government Code of the State of California. The Agency s investments are stated at cost adjusted for amortization of premiums and accretion of discounts, which approximates market. Investments at June 30, 2012 Wtd. Avg Carrying Market Maturity Description Value Value (In years) (in thousands) U.S. Agencies $ 152,575 $ 152,780 1.01 TOTAL INVESTMENTS $ 152,575 $ 152,780 Investments at June 30, 2011 Wtd. Avg Carrying Market Maturity Description Value Value (In years) (in thousands) U.S. Agencies $ 149,431 $ 149,646 1.46 U.S. Treasury 1,036 1,036.16 TOTAL INVESTMENTS $ 150,467 $ 150,682 The Agency s investment policy requires investments that assure safety of the principal, liquidity to meet specific obligations of the Agency when due, and investment quality all in compliance with California State law and the Agency s revenue bond indentures. Generally, operating investment maturities are limited to one year and reserve funds to five year maturities, except for debt service reserve funds, which are allowed maturities up to fifteen years. All U.S. Government and U.S. Government Agency securities held by the Agency are either in effect or actually AA rated. All securities owned by or held on behalf of the Agency are held by either the Agency s custodian, Union Bank of California, N.A., or its revenue bond trustee, U.S. Bank Trust, N.A. 20