This Preliminary Official Statement and the information contained herein are subject to completion, revision and amendment without notice. Under no circumstances shall this Preliminary Official Statement constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these bonds in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. must readtheentireOfficial Statementtoobtaininformationessentialthemaking ofaninformedinvestmentdecision. New York, byFastAutomatedSecuritiesTransfer. 2016,throughthefacilitiesofDTCin LLP, Spokane,Washington.TheBondsareexpectedtobedelivered onoraboutOctober 26, Pepper PLLC, Seattle, Washington, Bond Counsel. Certain legal matters will be passed upon for the Underwriters by Kutak Rock Corporation. guaranteed underaninsurancepolicytobeissuedconcurrently withthedeliveryofBondsbyNationalPublicFinanceGuarantee Series 2015A,andtheBondsmaybeissuedsubjecttocertainlimitations. See“SECURITYFORTHEBONDS.” Build America Bonds – Direct Payment), Electric Revenue and Refunding Bonds, Series 2013, Electric Revenue and Refunding Bonds, (Taxable ElectricRevenueBonds,Series 2010 on aparitywiththeoutstandingElectricRevenueandRefundingBonds,Series 2006, Net RevenuesoftheElectricSystemandotherfundspledgedthereforbyResolution(asdefinedherein).Additionalbonds payable Washington ispledgedtothepaymentofBonds.TheprincipalandinterestonBondsarepayablesolelyfromsecured by subdivision thereofotherthantheDistrict,andneitherfullfaithcreditnortaxingpowerofDistrictor Stateof “PURPOSE ANDAPPLICATIONOFBONDPROCEEDS.” Provisions.” Owners isdescribedunderAppendix D—“BOOK-ENTRYSYSTEM.” Owner oftheBonds,suchpaymentswillbemadedirectlytoRegisteredOwner.Disbursements Beneficial or priorredemption,bytheBondRegistrar(currently,U.S.BankNationalAssociation).AslongasDTCitsnomineeisRegistered Bonds. Purchasers oftheBonds(the“BeneficialOwners”)willnotreceivecertificatesrepresentingtheirbeneficialownershipinterests inthe Individual purchasesoftheBondswillbemadeinprincipalamount$5,000oranyintegralmultiplethereofwithinasingle maturity. nominee forTheDepositoryTrustCompany(“DTC”),inNewYork,York.DTCwillactassecuritiesdepositoryofthe Bonds. Co. (the “Registered Owner”), as will be issuedasfully registered bonds under a book-entrysystem, registered in the name of Cede & Dated: DateofDelivery * Preliminary, subjecttochange. of interestontheBondsmayhaveotherfederaltaxconsequencesforcertaintaxpayers.See“TAXMATTERS.” the BondsreceivedbyforeigncorporationswithUnitedStatesbranchesmaybesubjecttoabranchprofitstax.Receipt tax applicabletocorporations,interestontheBondsreceivedbycertainScorporationsmaybesubjecttax,and corporations istakenintoaccountinthecomputationofadjustedcurrentearningsforpurposesalternativeminimum of taxpreferenceforpurposesthealternativeminimumapplicabletocorporations,interestonBondsreceivedby purposes ofthealternativeminimumtaxapplicabletoindividuals.However,whileinterestonBondsalsoisnotanitem interest ontheBondsisexcludedfromgrossincomeforfederaltaxpurposesandnotanitemofpreference the InternalRevenueCodeof1986,asamended(the“Code”),thatmustbesatisfiedsubsequenttoissuedateBonds, BOOK-ENTRY ONLY NEW ISSUE This coverpagecontainscertain informationforquickreferenceonly.Itisnotasummary ofthisissue.Investors The Bondsareofferedwhen,asandifissuedreceived by theUnderwriters,subjecttoapprovaloflegalityFoster 2032,whenduewillbe It isexpectedthatthescheduledpaymentofprincipaland interestontheBondsmaturingJuly 1, The BondsarespeciallimitedobligationsoftheDistrict,andnotStateWashingtonoranypolitical The BondsarebeingissuedtorefundcertainoutstandingbondsoftheDistrictandpaycostsissuanceBonds. See The Bondsaresubjecttoredemptionpriormaturityasdescribedhereinunder“DESCRIPTIONOFTHEBONDS—Redemption Interest ontheBondsispayableJanuary 1, 2017,andthereaftersemiannuallyonJuly 1 andJanuary 1 ofeachyear,untilmaturity The PublicUtilityDistrictNo. 1 ofGraysHarborCounty,Washington,ElectricRevenueRefundingBonds,Series 2016 (the“Bonds”) In theopinionofBondCounsel,underexistingfederallawandassumingcompliancewithapplicablerequirements
PRELIMINARY OFFICIAL STATEMENT DATED OCTOBER 4, 2016 of E lectric G rays P MATURITY SCHEDULE—SeeInsideCover ublic R H evnu arbor U tility $16,325,000* R efunding C
ounty
D istrict B onds , W See “UNDERWRITINGANDLEGAL—Ratings” ashington , S Due: July 1,asshownontheinsidecoverpage S&P GlobalRating:A(2032maturity:AA-) N eris o . 1 2016 Moody’s Rating:A1 Fitch Rating:A Dated ______,2016
MATURITY SCHEDULE, INTEREST RATES, YIELDS AND CUSIP NUMBERS
$16,325,000* Electric Revenue Refunding Bonds, Series 2016 Maturity Interest Initial Reoffering CUSIP (July 1)* Amount* Rate Yield No.** 2017 $ 2,140,000 2018 2,005,000 2019 2,065,000 2020 2,145,000 2021 2,230,000 2022 2,245,000 2032 3,495,000***
* Preliminary, subject to change. ** The CUSIP data herein is provided by CUSIP Global Services, managed on behalf of the American Bankers Association by S&P Global Market Intelligence. The CUSIP numbers are not intended to create a database and do not serve in any way as a substitute for CUSIP service. CUSIP numbers have been assigned by an independent company not affiliated with the District and are provided solely for convenience and reference. The CUSIP numbers for a specific maturity are subject to change after the issuance of the Bonds. Neither the District nor the Underwriters take responsibility for the accuracy of the CUSIP numbers. *** Expected to be insured by National Public Finance Guarantee Corporation.
PUBLIC UTILITY DISTRICT NO. 1 OF GRAYS HARBOR COUNTY 2720 Sumner Avenue Aberdeen, Washington 98520 (360) 532-4220 ∗ www.ghpud.org
Commissioners
Russ Skolrood ...... President Arie Callaghan ...... Vice President Dave Timmons ...... Secretary
Administrative Staff
David Ward ...... General Manager Kathryn Skolrood ...... Treasurer and Chief Financial Officer Steve Easton ...... Operations Manager Robert Hanny ...... Chief Information Officer Melinda James-Saffron ...... Power Manager Richard Pitt ...... General Counsel Schuyler Burkhart ...... Engineering Manager
Bond and Disclosure Counsel Foster Pepper PLLC Seattle, Washington
Financial Advisor Piper Jaffray & Co. Seattle, Washington
Underwriters’ Counsel Kutak Rock LLP Spokane, Washington
Paying Agent and Registrar (currently, the Fiscal Agent of the State of Washington) U.S. Bank National Association Seattle, Washington
∗ The District’s website is not part of this Official Statement, and investors should not rely on information presented in the District’s website in determining whether to purchase the Bonds. This inactive textual reference to the District’s website is not a hyperlink and does not incorporate the District’s website by reference.
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TABLE OF CONTENTS
Page Page
INTRODUCTION ...... 1 District’s Largest Customers ...... 26 PURPOSE AND APPLICATION OF Financial Policies ...... 27 BOND PROCEEDS ...... 1 Capital Improvements ...... 2 7 Refunding Plan ...... 1 THE DISTRICT’S POWER SUPPLY ...... 28 Sources and Uses of Funds ...... 3 General ...... 28 SECURITY FOR THE BONDS ...... 3 Bonneville Power Administration ...... 28 Pledge of Revenues and Other Funds ...... 3 Frederickson CT Project ...... 29 Rate Covenant and Rate Stabilization Franklin PUD/Grays Harbor PUD Peak Account ...... 4 Generating Station ...... 3 0 Future Parity Bonds ...... 4 Nine Canyon Wind Project ...... 30 Separate Systems and Contract Resource Coastal Energy Project ...... 31 Obligations ...... 5 Sierra Pacific Industries ...... 31 Reserve Account ...... 5 Market Purchases and Sales ...... 31 Other Covenants ...... 7 Power Scheduling ...... 32 Flow of Funds Under the Resolution ...... 7 Agreement with Benton PUD and No Acceleration Upon Default ...... 7 Franklin PUD ...... 32 Contingent Payment Obligations and Risk Management ...... 32 Hedges ...... 7 Power Swaps ...... 33 DESCRIPTION OF THE BONDS ...... 8 Conservation Programs ...... 33 General ...... 8 Initiative 937 (The Energy Independence Procedure in the Event of Revisions to Act) ...... 34 Book-Entry Transfer System ...... 8 Climate Change ...... 34 Redemption Provisions ...... 9 Various Factors Affecting the Electric Open Market Purchases ...... 9 Utility Industry ...... 35 Defeasance of the Bonds ...... 9 GENERAL AND ECONOMIC BOND INSURANCE ...... 10 INFORMATION ...... 35 National Public Finance Guarantee TAX MATTERS ...... 38 Corporation ...... 10 Tax Exemption ...... 38 Regulation ...... 11 Certain other Federal Tax Consequences ...... 39 Financial Strength Ratings of National ...... 11 CERTAIN INVESTMENT Recent Litigation ...... 11 CONSIDERATIONS ...... 39 National Financial Information ...... 11 Initiatives and Referendum ...... 39 Incorporation of Certain Documents by Limitations on Remedies; Bankruptcy ...... 40 Reference ...... 12 Natural Disasters ...... 41 DEBT SERVICE REQUIREMENTS ...... 12 UNDERWRITING AND LEGAL ...... 41 Junior Lien Debt ...... 13 Ratings ...... 41 Additional Borrowing ...... 1 4 Litigation ...... 41 THE DISTRICT ...... 14 Underwriting ...... 41 General ...... 14 Financial Advisor ...... 41 Management ...... 14 Approval of Counsel ...... 41 Strategic Plan and Overall Direction ...... 15 Conflicts of Interest ...... 42 Labor Relations, Pensions and Other Post- CONTINUING DISCLOSURE Employment Benefits ...... 16 UNDERTAKING ...... 42 Accounting and Financial Statements ...... 19 Prior Compliance with Continuing Insurance ...... 19 Disclosure Undertakings ...... 43 Cash and Investments ...... 20 MISCELLANEOUS ...... 43 General Obligation Bonds and Taxation ...... 21 THE ELECTRIC SYSTEM ...... 21 Appendix A — Audited Financial Statements for Electric Rates ...... 21 2015 Comparative Electric Bills ...... 23 Appendix B — Summary of Certain Provisions of Telecommunications ...... 2 3 the Resolution Historical Customers, Energy Sales, Appendix C — Form of Opinion of Bond Counsel Energy Requirements and Revenues Appendix D — Book-Entry System From Sales ...... 24 Appendix E — Specimen Municipal Bond Historical Operating Results ...... 25 Insurance Policy Management Discussion ...... 26 -iii-
The information within this Official Statement has been compiled from official and other sources considered reliable and, while not guaranteed as to accuracy, is believed by the District to be correct as of its date. The District makes no representation regarding the accuracy or completeness of the information in Appendix D—“BOOK-ENTRY SYSTEM,” which has been obtained from DTC’s website, information concerning National Public Finance Guarantee Corporation (“National”) contained in “BOND INSURANCE” and Appendix E—“SPECIMEN MUNICIPAL BOND INSURANCE POLICY” herein, or regarding the Underwriters or the Financial Advisor. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made by use of this Official Statement shall, under any circumstances, create any implication that there has been no change in the affairs of the District since the date hereof.
Information on website addresses set forth in this Official Statement is not incorporated into this Official Statement and cannot be relied upon to be accurate as of the date of this Official Statement, nor can any such information be relied upon in making investment decisions regarding the Bonds.
No dealer, broker, salesperson, or other person has been authorized by the District or the Underwriters to give any information or to make any representations with respect to the Bonds other than those contained in this Official Statement and, if given or made, such information or representations must not be relied upon as having been authorized by the District or the Underwriters. This Official Statement does not constitute an offer to sell or a solicitation of an offer to buy, nor shall there be any sale of the Bonds by any person in any jurisdiction in which it is unlawful for such person to make such offer, solicitation or sale.
The Underwriters have provided the following sentence for inclusion in this Official Statement. The Underwriters have reviewed the information in this Official Statement in accordance with, and as part of, their responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information.
In connection with this offering, the Underwriters may over allot or effect transactions which stabilize or maintain the market price of the Bonds at levels above that which might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued or recommenced at any time without prior notice to any person.
The Bonds have not been registered under the Securities Act of 1933, as amended, and the Resolution has not been qualified under the Trust Indenture Act of 1939, as amended, in reliance upon exemptions contained in such acts. The Bonds have not been recommended by any federal or state securities commission or regulatory authority. Furthermore, the foregoing authorities have not confirmed the accuracy or determined the adequacy of this document. Any representation to the contrary may be a criminal offense.
The presentation of certain information, including tables of receipts from revenues, is intended to show recent historic information and is not intended to indicate future or continuing trends in the financial position or other affairs of the District. No representation is made that past experience, as it might be shown by such financial and other information, will necessarily continue or be repeated in the future.
Certain statements contained in this Official Statement do not reflect historical facts, but rather are forecasts and “forward-looking statements.” No assurance can be given that the future results discussed herein will be achieved, and actual results may differ materially from the forecasts described herein. In this respect, the words “estimate,” “forecast,” “project,” “anticipate,” “expect,” “intend,” “believe” and other similar expressions are intended to identify forward-looking statements. The forward-looking statements in this Official Statement are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by such statements. All estimates, projections, forecasts, assumptions and other forward-looking statements are expressly qualified in their entirety by the cautionary statements set forth in this Official Statement. These forward-looking statements speak only as of the date they were prepared. The District specifically disclaims any obligation to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of this Official Statement, except as otherwise expressly provided in “CONTINUING DISCLOSURE UNDERTAKING.”
The order and placement of materials in this Official Statement, including the Appendices, are not to be deemed to be a determination of relevance, materiality or importance, and this Official Statement, including the Appendices, must be considered in its entirety. The offering of the Bonds is made only by means of this entire Official Statement.
This Preliminary Official Statement, as of its date, is in a form “deemed final” by the District for purposes of Securities and Exchange Commission Rule 15c2-12(b)(1) but is subject to revision, amendment, and completion in a final Official Statement which will be available within seven business days of the sale date.
National makes no representation regarding the Bonds or the advisability of investing in the Bonds. In addition, National has not independently verified, makes no representation regarding, and does not accept any responsibility for the accuracy or completeness of this Official Statement or any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of the information regarding National supplied by National and presented under the heading “BOND INSURANCE” and “Appendix E – “SPECIMEN MUNICIPAL BOND INSURANCE POLICY”.
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OFFICIAL STATEMENT
OF
PUBLIC UTILITY DISTRICT NO. 1 OF GRAYS HARBOR COUNTY, WASHINGTON
RELATING TO ITS
$16,325,000∗ ELECTRIC REVENUE REFUNDING BONDS, SERIES 2016
INTRODUCTION
Public Utility District No. 1 of Grays Harbor County, Washington (the “District” or “Grays Harbor PUD”), a municipal corporation duly organized and existing under the laws of the State of Washington (the “State”), furnishes this Official Statement, which includes the cover page and appendices hereto, in connection with the offering of $16,325,000* aggregate principal amount of Electric Revenue Refunding Bonds, Series 2016 (the “Bonds”), dated their date of delivery. This Official Statement provides information concerning the District, the Bonds and the electric system presently owned and operated by the District (the “Electric System”).
The Bonds are to be issued pursuant to Title 54 (the “Enabling Act”) and chapters 39.46 and 39.53 of the Revised Code of Washington (“RCW”) and Resolution No. 4829 of the District, adopted on April 6, 2015 (the “Resolution”), authorizing the issuance of the Bonds. See APPENDIX B—“SUMMARY OF CERTAIN PROVISIONS OF THE RESOLUTION—Certain Definitions” for the meanings of certain capitalized terms used in this Official Statement.
The District has outstanding $17,655,000 principal amount of Electric Revenue and Refunding Bonds, Series 2006 (the “2006 Bonds”), all or a portion of which is expected to be refunded with a portion of the Bonds, $27,090,000 principal amount of Electric Revenue Bonds, Series 2010 (Taxable Build America Bonds – Direct Payment) (the “2010 Bonds”), $32,430,000 principal amount of Electric Revenue and Refunding Bonds, Series 2013 (the “2013 Bonds”) and $50,860,000 principal amount of Electric Revenue and Refunding Bonds, Series 2015A (the “2015 Bonds”). The Bonds are being issued on a parity with the 2006 Bonds, 2010 Bonds, 2013 Bonds and 2015 Bonds. See “SECURITY FOR THE BONDS.”
PURPOSE AND APPLICATION OF BOND PROCEEDS
The Bonds are being issued to refund certain outstanding Electric System bonds of the District as described in the following subsection and to pay costs of issuance of the Bonds.
Refunding Plan
If market conditions are favorable, in order to effect a debt service savings, a portion of the proceeds of the Bonds and other District funds, if necessary, will be used to retire, defease and refund a portion of the following 2006 Bonds (the “Refunding Candidates”), in the following amounts at a price of par on their redemption date. The Refunding Candidates refunded with proceeds of the Bonds will be the Refunded Bonds.
∗ Preliminary, subject to change.
Refunding Candidates
Maturity Date Par Interest Redemption Date CUSIP Bond (July 1) Amount Rate (at 100%) Numbers Electric Revenue and Refunding Bonds, Series 2006 Serials 2017 $2,025,000 5.000% 01/01/2017 389532JR4 2018 2,125,000 5.000 01/01/2017 389532JL7 2019 2,230,000 5.000 01/01/2017 389532JM7 2020 2,340,000 5.000 01/01/2017 389532JN3 2021 2,455,000 5.000 01/01/2017 389532JP8 2022 2,500,000 5.000 01/01/2017 389532JQ6 Term 2032 3,790,000 5.000 01/01/2017 389532JT0 Total $17,465,000
A portion of the net proceeds from the sale of the Bonds will be deposited in the Refunding Account (the “Refunding Account”) and used to purchase Acquired Obligations (as defined below) to be held by U.S. Bank National Association (the “Refunding Trustee”) under a refunding trust agreement (the “Refunding Trust Agreement”), dated the date of delivery of the Bonds, between the District and the Refunding Trustee. Funds will be irrevocably deposited in the Refunding Account and will be used to purchase direct, noncallable obligations of the United States of America (the “Acquired Obligations”). The Acquired Obligations will mature at such times and pay interest in such amounts so that, with other available funds held by the Refunding Trustee under the Refunding Trust Agreement, sufficient money will be available to pay the interest on the Refunded Bonds coming due on and prior to their respective maturity or redemption dates and to redeem and retire the Refunded Bonds on the respective dates set forth above. Since all payments of principal of and interest on the Refunded Bonds will thereafter be provided for from money and securities on deposit with the Refunding Trustee under the Refunding Trust Agreement, the liens, pledges and covenants securing the Refunded Bonds will terminate and be discharged and released.
An independent verification shall be obtained from Grant Thornton LLP stating that the Acquired Obligations held by the Refunding Trustee and the interest to be earned thereon, together with any money held by the Refunding Trustee, will be sufficient to make all interest payments to the maturity or redemption date for the Refunded Bonds and to pay the principal and premium, if any, of the Refunded Bonds on the dates fixed for redemption. The verification will also confirm the correctness of the mathematical computations supporting the conclusion of Bond Counsel that the Bonds are not “arbitrage bonds” as defined by Section 148 of the Internal Revenue Code of 1986, as amended.
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Sources and Uses of Funds
The proceeds from the Bonds are estimated to be applied as follows:
Sources and Uses
Sources of Funds Principal Amount of the Bonds $ Net Original Issue Premium Total Sources of Funds $
Uses of Funds Deposit to Refunding Account $ Underwriters’ Discount and Issuance Costs(1) Total Uses of Funds $
(1) Includes underwriters’ discount, bond insurance premium, bond counsel fees, financial advisor fees, rating agency fees, legal fees, Refunding Trustee fees, costs of posting and printing this Official Statement and contingency amount.
SECURITY FOR THE BONDS
Pledge of Revenues and Other Funds
The principal of and interest on the outstanding 2006 Bonds, 2010 Bonds, 2013 Bonds, 2015 Bonds, Bonds and Future Parity Bonds (collectively, the “Parity Bonds”) are payable solely from and secured by a pledge of: (1) all income, revenues and receipts derived by the District through the ownership and operation of the Electric System, excluding certain investment income and income from separate utility systems (the “Revenues”), subject to the payment of Operating Expenses (“Net Revenues”), and (2) the money and investments in the Bond Fund and proceeds of the Parity Bonds held in the Revenue Fund and any construction funds, subject only to the provisions of the Resolution permitting the application thereof for the purposes and on the terms and conditions set forth in the Resolution. The District has a $10,000,000 line of credit (none of which has been drawn) and a Community Economic Revitalization Board (“CERB”) loan from the State in the outstanding principal amount of $137,920 with liens on Net Revenues junior to the lien of the Parity Bonds. See “DEBT SERVICE REQUIREMENTS—Junior Lien Debt.” See APPENDIX B—“SUMMARY OF CERTAIN PROVISIONS OF THE RESOLUTION” for a summary of defined terms and certain provisions of the Resolution. The District does not have any separate systems.
The Bonds are payable solely from the Electric Revenue Bond Fund (the “Bond Fund”). In the Resolution, the District obligates and binds itself irrevocably to set aside and pay into the Bond Fund out of the Net Revenues of the Electric System (Revenues less Operating Expenses of the Electric System, which Operating Expenses may include Contract Resource Obligations and expenses associated with any separate system that is combined with the Electric System, see “Separate Systems and Contract Resource Obligations” below), amounts sufficient, together with other money legally available to be used therefor, to pay when due the principal of and premium, if any, and interest on all of the Parity Bonds and to provide the required payments, if any, into the Reserve Account.
The Bonds are special limited obligations of the District. Neither the State nor any political subdivision thereof, other than the District, is obligated to pay the principal of and interest on the Bonds and neither the full faith and credit nor the taxing power of the District or the State is pledged to the payment of the Bonds.
In the opinion of Bond Counsel, the rights of the owners of the Bonds under the terms of the Bonds and under the Resolution, and the enforceability thereof, may be subject to judicial discretion and valid bankruptcy, receivership, reorganization, moratorium, or other laws of general application affecting creditors’ rights, or the availability of any particular remedy.
State law provides that the revenue obligations issued by a public utility district and interest thereon are a valid claim of the owner thereof only as against the special fund or funds provided for the payment of such obligations
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and the proportion or amount of the revenues pledged to such fund or funds, and that (i) such pledge of the revenues or other money or obligations are valid and binding from the time made, (ii) the revenues or other money or obligations so pledged and thereafter received by a public utility district are immediately subject to the lien of such pledge without any physical delivery or further act, and (iii) the lien of any such pledge is valid and binding as against any parties having claims of any kind in tort, contract or otherwise against a district irrespective of whether such parties have notice thereof. The Bonds are not secured by a mortgage, deed of trust, or security interest in the Electric System or any of the physical plant and facilities thereof.
Rate Covenant and Rate Stabilization Account
The District has covenanted in the Resolution to establish, maintain and collect rates or charges for electric energy and other services, facilities and commodities sold, furnished or supplied by it in connection with the operation of the Electric System which shall be fair and nondiscriminatory and adequate to provide in each calendar year Net Revenues equal to at least 1.25 times the Annual Debt Service on all outstanding Parity Bonds.
The District has created a Rate Stabilization Account in the Revenue Fund. For purposes of calculating the coverage requirement and the Future Parity Bonds test, (i) there may be added to Net Revenues collected in any year any amount withdrawn from the Rate Stabilization Account in such year and deposited into the Revenue Fund and (ii) there must be subtracted from Net Revenues collected in any year any amount withdrawn from the Revenue Fund and deposited into the Rate Stabilization Account in such year. Currently there is no money in the Rate Stabilization Account.
Future Parity Bonds
The District may issue Future Parity Bonds, payable on a parity with the outstanding 2006 Bonds, 2010 Bonds, 2013 Bonds, 2015 Bonds and Bonds, and secured by an equal charge and lien on Revenues, for (1) any lawful purpose of the District related to the Electric System, including acquiring, constructing and installing additions, betterments and improvements to and extensions of, acquiring necessary equipment for, or making necessary renewals, repairs, replacements and capital improvements to the Electric System or (2) the purpose of retiring at or prior to their maturity any Parity Bonds or any reimbursement obligations made pursuant to the Resolution.
The District may issue such Future Parity Bonds only upon compliance with the following conditions:
(a) Except as to Future Parity Bonds issued for purposes of clause (2) above, at the time of the issuance of such Future Parity Bonds there is no deficiency in the Bond Fund.
(b) Except as to Future Parity Bonds issued for purposes of clause (2) above, at the time of the issuance of such Future Parity Bonds no Event of Default has occurred and is continuing.
(c) Except as to Future Parity Bonds issued for the purposes of clause (2) above, at the time of issuance of such Future Parity Bonds the District shall have on file either:
(i) a certificate of the Treasurer of the District stating that Net Revenues in any 12 consecutive months out of the most recent 24 months preceding the delivery of the Future Parity Bonds were not less than 125% of the Maximum Annual Debt Service on all outstanding Parity Bonds and on the Future Parity Bonds to be issued, or
(ii) a certificate from a Professional Utility Consultant stating that the adjusted Net Revenues for any 12 consecutive months out of the most recent 24 months preceding the delivery of the Future Parity Bonds were not less than 125% of the Maximum Annual Debt Service on all outstanding Parity Bonds and on the Future Parity Bonds to be issued. The Professional Utility Consultant may adjust such Net Revenues to reflect changes to Net Revenues during such 12-month period resulting from new rates and charges and customers as if the new rates and charges had been in effect and such new customers had been added for the entire 12-month period and to reflect the Net Revenues estimated to be received as a result of completion of certain facilities financed from Future Parity Bonds.
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(d) If Future Parity Bonds are being issued for purposes of clause (2) above, the District shall have on file a certificate of the Treasurer of the District showing that the Annual Debt Service in any calendar year thereafter shall not be increased by more than $5,000 by reason of the issuance of the Future Parity Bonds, or the District shall have on file either of the certificates required by paragraph (c) above.
Separate Systems and Contract Resource Obligations
The Resolution authorizes the District to create, acquire, construct, finance, own and operate one or more additional electric utility systems for the purpose of generating, transmitting or distributing electric energy. The Commission may declare any such system to be a separate utility system not financed from Revenues except as a Contract Resource Obligation or except on a basis junior and inferior to the lien on Revenues pledged to secure the Parity Bonds. The District does not currently have any Contract Resource Obligations.
Contract Resource Obligation means an obligation of the Electric System to pay the following costs, whether or not Power and Services (as defined in the Resolution) are available to the Electric System in return for such payment:
1. Costs associated with generation, transmission or distribution and related facilities (including any common undivided interest therein) subsequently acquired, purchased or constructed by the District and declared by the Commission to be a separate utility system, which costs shall include but are not limited to costs of normal operation and maintenance, renewals and replacements, additions and betterments and debt service on bonds or other obligations of such separate electric utility system, or
2. Costs associated with the purchase of Power and Services under a contract.
A Contract Resource Obligation may be included in the Electric System’s Operating Expenses if:
1. No Event of Default has occurred and is continuing;
2. There is on file with the Commission a certificate of a Professional Utility Consultant stating that the annual Net Revenues, as estimated in accordance with the Resolution, for each calendar year in the period specified below shall be at least equal to 125% of Maximum Annual Debt Service; the period for the determination of annual Net Revenues shall be the period beginning with the first calendar year following the earlier of (a) the date to which interest is capitalized or (b) the date of initial operation or acquisition of the facilities to be financed, and ending with the 5th full calendar year after such date; and
3. There is on file with the Commission an opinion of a Professional Utility Consultant to the effect that:
(a) if the Contract Resource Obligation is to be used to supply Power and Services, such additional source of Power and Services is sound from a power supply planning standpoint and is technically and economically feasible in accordance with prudent utility practice and that the estimated cost of such Contract Resource Obligation is reasonable, or
(b) if the Contract Resource Obligation is to be used to supply transmission capability, such capability will be necessary within a reasonable time after the estimated date of commercial operation of the transmission facilities and that the estimated cost of such Contract Resource Obligation is reasonable.
Reserve Account
In the Resolution, the District has covenanted to maintain a Reserve Account for the Parity Bonds in an amount equal to the least of: (1) 125% of the average Annual Debt Service on all outstanding Parity Bonds, (2) 10% of the proceeds on the date of issuance of all outstanding Parity Bonds, or (3) the Maximum Annual Debt Service on the outstanding Parity Bonds (the “Reserve Requirement”). The cash and surety policy described below will satisfy the Reserve Requirement for the Bonds. In any Future Parity Bond Resolution, the District may provide for the accumulation, in five approximately equal annual installments, of amounts necessary to fund the Reserve Requirement. Money in the Reserve Account will be used to make up any deficiency in the Principal Account or Interest Account, and if so used will be replenished as set forth in the Resolution. In addition to the surety policy described below there is currently $4,225,634 of cash and investments in the Reserve Account.
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With the consent of the appropriate percentage of Parity Bond owners, the Commission may adopt a Supplemental Resolution supplementing the Resolution for the purpose of providing that in calculating the Reserve Requirement the District may deduct the direct payment the District is expected to receive in respect of the 2010 Bonds or other Future Parity Bonds for which the federal government will provide the District with a direct payment of a portion of the interest from the interest portion of Annual Debt Service. The owners of the 2010 Bonds, the 2013 Bonds, 2015 Bonds and the Bonds by taking and holding the same shall be deemed to have consented to the adoption by the District of such amendment. See APPENDIX B—“SUMMARY OF CERTAIN PROVISIONS OF THE RESOLUTION—Certain Definitions—Annual Debt Service.”
In addition, with the consent of the appropriate percentage of Parity Bond owners, the resolution authorizing any Future Parity Bonds may establish a separate debt service reserve account for any such Future Parity Bonds and set forth the reserve account requirement for such bonds or provide that some or all of such Future Parity Bonds be secured by the Reserve Account. The owners of the 2015 Bonds and the Bonds by taking and holding the same shall be deemed to have consented to the adoption by the District of such amendment.
The District has reserved the right to substitute municipal bond insurance, a surety bond, an irrevocable letter of credit or other similar security (“Reserve Account Instruments”) for the cash and securities held in the Reserve Account, on the conditions that such Reserve Account Instruments are issued by an institution having one of the two highest credit ratings for such institution as of the time of issuance of such Reserve Account Instruments from either Moody’s Investors Service (“Moody’s”) or S&P Global Ratings (“S&P”), and that such Reserve Account Instruments are not cancellable on less than five years’ notice.
On December 12, 2006, Financial Guaranty Insurance Company (“FGIC”) issued a surety policy to fund the Reserve Requirement attributable to the 2006 Bonds in the amount of $5,651,586 (the “Surety Policy”), which Surety Policy remains in full force and effect. Pursuant to a Novation Endorsement dated August 19, 2013, National Public Finance Guarantee Corporation (“National”) has assumed and accepted all liabilities of FGIC under the express contractual terms of the Surety Policy for the Bonds issued by FGIC. The Surety Policy was amended to extend through the maturity or early redemption of the Bonds. See “Reserve Account Surety Policy” below.
Reserve Account Surety Policy. The Surety Policy provides that upon notice from the Bond Registrar to National to the effect that insufficient amounts are on deposit in the Bond Fund to pay the principal of (at maturity or pursuant to mandatory redemption requirements) and interest on the Bonds, National will promptly deposit with the Bond Registrar an amount sufficient to pay the principal of and interest on the Bonds or the available amount of the Surety Policy, whichever is less. Upon the later of: (i) one day after receipt by National of a demand for payment executed by the Bond Registrar; or (ii) the payment date of the Bonds as specified in the demand for payment presented by the Bond Registrar to National, National will make a deposit of funds in an account with U.S. Bank Trust National Association, in New York, New York, or its successor, sufficient for the payment to the Bond Registrar, of amounts which are then due to the Bond Registrar (as specified in the demand for payment) subject to the Surety Policy coverage.
The available amount of the Surety Policy is the initial face amount of the Surety Policy less the amount of any previous deposits by National with the Bond Registrar, which have not been reimbursed by the District. The District and National have entered into a Financial Guaranty Agreement (the “Agreement”). Pursuant to the Agreement, the District is required to reimburse National, with interest, within one year of any deposit, the amount of such deposit made by National with the Bond Registrar under the Surety Policy. No optional redemption of Bonds may be made until the District’s Surety Policy is reinstated. The Surety Policy is held by the Bond Registrar in the Bond Fund and is provided as an alternative to the District depositing funds equal to the Reserve Account Requirement for outstanding Parity Bonds.
In the event the amount on deposit in, or credited to, the Reserve Account exceeds the amount of the Surety Policy, any draw on the Surety Policy shall be made only after all the funds in the Reserve Account have been expended. In the event that the amount on deposit in, or credited to, the Reserve Account, in addition to the amount available under the Surety Policy, including amounts available under a Reserve Account Instrument, draws on the Surety Policy and additional Reserve Account Instrument shall be made on a pro rata basis to fund the insufficiency. The Surety Policy does not insure against nonpayment caused by the insolvency or negligence of the Bond Registrar.
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National is currently rated “AA-,” “A3” and “AA+,” by S&P, Moody’s and Kroll Bond Rating Agency, Inc. (“KBRA”), respectively. See “BOND INSURANCE—Financial Strength Ratings of National.” The resolutions authorizing the outstanding Parity Bonds do not require that the Reserve Account be funded when the providers of Reserve Account Instruments are downgraded.
Other Covenants
The District also has covenanted in the Resolution, among other things, to maintain the properties of the Electric System in good repair, to sell or otherwise dispose of the Electric System in its entirety only if provision is made for the redemption of all Parity Bonds then outstanding, to self-insure or insure properties of the Electric System if and to the extent insurance is usually maintained by like utilities and to keep proper books of account of the Electric System. See APPENDIX B—“SUMMARY OF CERTAIN PROVISIONS OF THE RESOLUTION—Bond Covenants.”
Flow of Funds Under the Resolution
The Revenues of the District shall be deposited in the Revenue Fund and credited to the following accounts and used only for the following purposes and in the following order of priority:
1. to pay the Operating Expenses when due;
2. to make all payments required to be paid into the Interest Account in the Bond Fund;
3. to make all payments required to be paid into the Principal Account in the Bond Fund and payments required to be paid into any other account in the Bond Fund as Sinking Fund Installments;
4. to make all payments required to be paid into the Reserve Account in the Bond Fund and to make all payments required to be made pursuant to a reimbursement agreement in connection with a Reserve Account Instrument;
5. to make all debt service payments on subordinate lien obligations; and
6. for any other lawful purpose of the District, including, without limitation, payment into the Principal Account in the Bond Fund to retire Parity Bonds in advance of their maturities and deposits to the Rate Stabilization Account.
No Acceleration Upon Default
Upon the occurrence and continuance of an Event of Default under the Resolution, payment of the principal amount of the Bonds is not subject to acceleration. The District thus would be liable only for principal and interest payments as they became due, and the bondowners would be required to seek a separate judgment for each payment, if any, not made. Any such action for money damages would be subject to any limitations on legal claims and remedies against public bodies under Washington State law. Amounts recovered would be applied to unpaid installments of interest prior to being applied to unpaid principal and premium, if any, which had become due. The District has never defaulted in the payment of principal or interest on any of its bonds.
Contingent Payment Obligations and Hedges
The District has entered into, and may in the future enter into, contracts and agreements in the course of its business that include an obligation on the part of the District to make payments or post collateral contingent upon the occurrence or nonoccurrence of certain future events, including events that are beyond the direct control of the District. These agreements may include interest rate swaps and other similar agreements, agreements with respect to the delivery of electric energy or other energy, letter of credit agreements and other financial and energy hedging transactions. Such contingent payments or posting of collateral may be conditioned upon the future credit ratings of the District and/or other parties, maintenance by the District of specified financial ratios, future changes in energy prices, and other factors. The District has entered into an agreement with the Bonneville Power Administration (“Bonneville”) and Western Systems Power Pool Agreements that includes such contingent payment obligations as well as numerous power hedging arrangements as described under “THE DISTRICT’S POWER SUPPLY—Power
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Swaps.” The agreements include obligations on the part of the District to post collateral or a letter of credit contingent upon the occurrence or nonoccurrence of certain future events, such as future credit ratings below investment grade or defaults under power marketing contracts or indebtedness.
To the extent permitted by Washington State law, the District may enter into Derivative Products secured by a pledge and lien on Revenues on a parity with the Parity Bonds subject to the satisfaction of certain conditions precedent. A “Derivative Product” is a written contract between the District and a third party obligating the District to make District Payments (subject to certain conditions) on one or more scheduled and specified payment dates in exchange for a Reciprocal Payor’s obligation to pay or cause to be paid Reciprocal Payments to the District on scheduled and specified payment dates. Derivative Products include agreements providing for an exchange of payments based on interest rates (known as interest rate swaps) or providing for ceilings or floors on such payments. The District has not entered into any derivative products in connection with any bonds. For a definition of terms used in this paragraph and a summary of the conditions precedent to the District’s entering into a Derivative Products, see APPENDIX B—“SUMMARY OF CERTAIN PROVISIONS OF THE RESOLUTION—Payment Agreements/Derivative Products.”
DESCRIPTION OF THE BONDS
General
The Bonds will be issued in the aggregate principal amount of $16,325,000∗ and will be dated the date of their delivery. The Bonds will bear interest at the rates per annum set forth on the inside cover page hereof, payable January 1, 2017, and semiannually thereafter on each July 1 and January 1 of each year until maturity or prior redemption, and will mature on July 1 in each year as set forth on the inside cover page hereof.
The Bonds will be issuable in registered form, in the denomination of $5,000 or any integral multiple thereof within a single maturity. Interest is calculated based on a 360-day year consisting of 12 months of 30 days each. The fiscal agent of the State of Washington, currently U.S. Bank National Association, is the initial Registrar and Paying Agent for the Bonds.
The Bonds will be issued in fully registered form initially in the name of Cede & Co., as registered owner and nominee of The Depository Trust Company, New York, New York (“DTC”). DTC will act as securities depository for the Bonds. Individual purchases may be made in book-entry form only as described under APPENDIX D— “BOOK-ENTRY SYSTEM.” Purchasers will not receive certificates representing their interest in the Bonds purchased. So long as Cede & Co. is the registered owner of the Bonds, as nominee of DTC, references herein to the “registered owners” or “bondowners” shall mean Cede & Co. and shall not mean the “Beneficial Owners” of the Bonds. In this Official Statement, the term “Beneficial Owner” shall mean the person for whom a DTC participant acquires an interest in the Bonds.
Procedure in the Event of Revisions to Book-Entry Transfer System
If the District is unable to retain a qualified successor to DTC or the District has determined that it is in the best interest of the District not to continue the book-entry system of transfer or that interests of Beneficial Owners of the Bonds might be adversely affected if the book-entry system of transfer is continued, the District will execute, authenticate and deliver at no cost to the Beneficial Owners of the Bonds or their nominees, Bonds in fully registered form, in the denomination of $5,000 or any integral multiple thereof within a maturity. Thereafter, the principal of the Bonds will be payable upon due presentment and surrender thereof at the principal office of the Bond Registrar, interest on the Bonds will be payable by check or draft mailed to the persons in whose names such Bonds are registered, at the address appearing upon the registration books on the 15th day of the month next preceding an interest payment date, and the Bonds will be transferable as provided in the Resolution.
∗ Preliminary, subject to change.
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Redemption Provisions
Optional Redemption. The Bonds maturing in the years 2017 through 2022, inclusive, shall be issued without the right or option of the District to redeem those Bonds prior to their stated maturity dates. The District reserves the right and option to redeem the Bonds maturing on July 1, 2032, prior to their stated maturity date at any time on or after July 1, 2026, as a whole or in part (within one or more maturities selected by the District), at par plus accrued interest to the date fixed for redemption.
Mandatory Redemption. The Bonds maturing on July 1, 20__ (which are Term Bonds) shall be redeemed prior to maturity (or paid at maturity), no later than January 1 in the years and in the sinking fund installment amounts set forth below (to the extent such Bonds have not been previously redeemed or purchased), by payment of the principal amount thereof, together with the interest accrued thereon to the date fixed for redemption.
Term Bonds Year Sinking Fund Installment $
* * Maturity.
Notice of Redemption. Notice of any such redemption shall be sent by the Bond Registrar by first-class mail, postage prepaid, not less than 20 or more than 60 days prior to the date fixed for redemption to the Registered Owner of each Bond to be redeemed at the address shown on the Bond Register. Such notice requirement shall be deemed to be complied with when notice is mailed as provided in the Resolution, regardless of whether or not it is actually received by the Registered Owner of any Bond. When so called for redemption, the Bonds will cease to accrue interest on the specified redemption date, provided funds for redemption are on deposit at the place of payment at that time, and shall not be deemed to be Outstanding as of such redemption date. So long as the Bonds are in book-entry form, notice of redemption shall be sent to DTC as provided in a letter of representations between the District and DTC.
The District makes no assurances that DTC participants or other nominees of the Beneficial Owners will distribute such redemption notices to the Beneficial Owners of the Bonds or that they will do so on a timely basis. Notice of redemption shall also be sent to the Municipal Securities Rulemaking Board.
Partial Redemption. If less than all of the Bonds of a series are to be redeemed, the District may select the series and maturity or maturities to be redeemed. If less than all of the Bonds of a series of any maturity are to be redeemed, the Bonds or portions thereof to be redeemed are to be selected by the Registrar or DTC, as applicable, randomly, or in accordance with their respective standard procedures. The Resolution provides that the portion of any Bonds of a denomination of more than $5,000 to be redeemed will be in the principal amount of $5,000 or any integral multiple thereof and that in selecting portions of such Bonds for redemption, the Registrar will treat each such Bonds as representing that number of such Bonds of $5,000 denomination that is obtained by dividing the principal amount of such Bonds to be redeemed in part by $5,000.
Open Market Purchases
The District has reserved the right to purchase the Bonds on the open market at any time and at any price. The Bonds so purchased need not be cancelled.
Defeasance of the Bonds
In the event that the District, in order to effect the payment, retirement or redemption of any Bond, sets aside in a special account, held in trust by a trustee, cash or noncallable Government Obligations, as such obligations are now or hereafter defined in chapter 39.53 RCW, which, together with the known earned income from the investment thereof are sufficient to redeem, retire or pay such Bond in accordance with its terms and to pay when due the interest and redemption premium, if any, thereon, and such cash and/or noncallable Government Obligations are irrevocably set aside and pledged for such purpose, then no further payments need to be made into the Bond Fund
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for the payment of the principal of and interest on such Bond, and the owner of such Bond shall cease to be entitled to any lien, benefit or security of the Resolution except the right to receive payment of principal, premium, if any, and interest from such special account, and such Bonds shall be deemed not to be outstanding under the Resolution.
The term “Government Obligations” has the meaning given in chapter 39.53 RCW, as amended, currently: (1) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by the United States of America and bank certificates of deposit secured by such obligations; (2) bonds, debentures, notes, participation certificates, or other obligations issued by the Banks for Cooperatives, the Federal Intermediate Credit Bank, the Federal Home Loan Bank system, the Export-Import Bank of the United States, Federal Land Banks, or the Federal National Mortgage Association; (3) public housing bonds and project notes fully secured by contracts with the United States; and (4) obligations of financial institutions insured by the Federal Deposit Insurance Corporation or the Federal Savings and Loan Insurance Corporation, to the extent insured or to the extent guaranteed as permitted under any other provision of Washington State law.
BOND INSURANCE
The following information has been furnished by National Public Finance Guarantee Corporation (“National”) for use in this Official Statement.
National does not accept any responsibility for the accuracy or completeness of any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of the information regarding National and the Financial Guaranty Insurance Policy issued by National (the “Policy”). Additionally, National makes no representation regarding the Bonds or the advisability of investing in the Bonds. A specimen of the Policy is attached hereto as Appendix E.
The Policy unconditionally and irrevocably guarantees the full and complete payment required to be made by or on behalf of the District to the Paying Agent or its successor of an amount equal to (i) the principal of (either at the stated maturity or by an advancement of maturity pursuant to a mandatory sinking fund payment) and interest on, the Bonds maturing on July 1, 2032 (the “Insured Bonds”), as such payments shall become due but shall not be so paid (except that in the event of any acceleration of the due date of such principal by reason of mandatory or optional redemption or acceleration resulting from default or otherwise, other than any advancement of maturity pursuant to a mandatory sinking fund payment, the payments guaranteed by the Policy shall be made in such amounts and at such times as such payments of principal would have been due had there not been any such acceleration, unless National elects in its sole discretion, to pay in whole or in part any principal due by reason of such acceleration); and (ii) the reimbursement of any such payment which is subsequently recovered from any Owner of the Insured Bonds pursuant to a final judgment by a court of competent jurisdiction that such payment constitutes an avoidable preference to such Owner within the meaning of any applicable bankruptcy law (a “Preference”).
The Policy does not insure against loss of any prepayment premium which may at any time be payable with respect to any Insured Bonds. The Policy does not, under any circumstance, insure against loss relating to: (i) optional or mandatory redemptions (other than mandatory sinking fund redemptions); (ii) any payments to be made on an accelerated basis; (iii) payments of the purchase price of Insured Bonds upon tender by an owner thereof; or (iv) any Preference relating to (i) through (iii) above. The Policy also does not insure against nonpayment of principal of or interest on the Insured Bonds resulting from the insolvency, negligence or any other act or omission of the Paying Agent or any other paying agent for the Insured Bonds.
National Public Finance Guarantee Corporation
National is an operating subsidiary of MBIA Inc., a New York Stock Exchange listed company. MBIA Inc. is not obligated to pay the debts of or claims against National. National is domiciled in the State of New York and is licensed to do business in and subject to regulation under the laws of all 50 states, the District of Columbia, the Commonwealth of Puerto Rico and the U.S. Virgin Islands.
The principal executive offices of National are located at 1 Manhattanville Road, Suite 301, Purchase, New York 10577 and the main telephone number at that address is (914) 765-3333.
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Regulation
As a financial guaranty insurance company licensed to do business in the State of New York, National is also subject to the New York Insurance Law which, among other things, prescribes minimum capital requirements and contingency reserves against liabilities for National, limits the classes and concentrations of investments that are made by National and requires the approval of policy rates and forms that are employed by National. State law also regulates the amount of both the aggregate and individual risks that may be insured by National, the payment of dividends by National, changes in control with respect to National and transactions among National and its affiliates.
The National Insurance Policy is not covered by the Property/Casualty Insurance Security Fund specified in Article 76 of the New York Insurance Law.
Financial Strength Ratings of National
National’s current financial strength ratings from the major rating agencies are summarized below:
Agency Ratings Outlook
S&P AA- Stable
Moody’s A3 Negative
KBRA AA+ Stable
Each rating of National should be evaluated independently. The ratings reflect the respective rating agency's current assessment of the creditworthiness of National and its ability to pay claims on its policies of insurance. Any further explanation as to the significance of the above ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the Insured Bonds, and such ratings may be subject to revision or withdrawal at any time by the rating agencies. Any downward revision or withdrawal of any of the above ratings may have an adverse effect on the market price of the Insured Bonds. National does not guaranty the market price of the Insured Bonds nor does it guaranty that the ratings on the Insured Bonds will not be revised or withdrawn.
Recent Litigation
In the normal course of operating its business, National may be involved in various legal proceedings. Additionally, MBIA Inc. may be involved in various legal proceedings that directly or indirectly impact National. For additional information concerning material litigation involving National and MBIA Inc., see MBIA Inc.’s Annual Report on Form 10-K for the year ended December 31, 2015 and Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, which is hereby incorporated by reference into this Official Statement and shall be deemed to be a part hereof, as well as the information posted on MBIA Inc.’s web site at http://www.mbia.com.
MBIA Inc. and National are defending against/pursuing the aforementioned actions and expect ultimately to prevail on the merits. There is no assurance, however, that they will prevail in these actions. Adverse rulings in these actions could have a material adverse effect on National's ability to implement its strategy and on its business, results of operations and financial condition.
Other than as described above and referenced herein, there are no other material lawsuits pending or, to the knowledge of National, threatened, to which National is a party.
National Financial Information
Based upon statutory financials, as of June 30, 2016, National had total net admitted assets of $4.8 billion (unaudited), total liabilities of $2.1 billion (unaudited), and total surplus of $2.7 billion (unaudited) determined in accordance with statutory accounting practices prescribed or permitted by insurance regulatory authorities.
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For further information concerning National, see the financial statements of MBIA Inc. and its subsidiaries as of December 31, 2015, prepared in accordance with generally accepted accounting principles, included in the Annual Report on Form 10-K of MBIA Inc. for the year ended December 31, 2015, which are hereby incorporated by reference into this Official Statement and shall be deemed to be a part hereof.
Incorporation of Certain Documents by Reference
The following documents filed by MBIA Inc. with the Securities and Exchange Commission (the “SEC”) are incorporated by reference into this Official Statement:
MBIA Inc.’s Annual Report on Form 10-K for the year ended December 31, 2015;
MBIA Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016.
Any documents, including any financial statements of National that are included therein or attached as exhibits thereto, or any Form 8-K, filed by MBIA Inc. pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of MBIA Inc.’s most recent Quarterly Report on Form 10-Q or Annual Report on Form 10-K, and prior to the termination of the offering of the Insured Bonds offered hereby shall be deemed to be incorporated by reference in this Official Statement and to be a part hereof from the respective dates of filing such documents.
Any statement contained in a document incorporated or deemed to be incorporated by reference herein, or contained in this Official Statement, shall be deemed to be modified or superseded for purposes of this Official Statement to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Official Statement.
MBIA Inc., files annual, quarterly and special reports, information statements and other information with the SEC under File No. 1-9583. Copies of MBIA Inc.’s SEC filings (MBIA Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 and MBIA Inc.’s Annual Report on Form 10-K for the year ended December 31, 2015) are available (i) over the Internet at the SEC’s web site at http://www.sec.gov; (ii) at the SECs public reference room in Washington D.C.; (iii) over the Internet at MBIA Inc.’s web site at http://www.mbia.com; and (iv) at no cost, upon request to National at its principal executive offices.
DEBT SERVICE REQUIREMENTS
Debt service on the outstanding 2006 Bonds, 2010 Bonds, 2013 Bonds, 2015 Bonds and the Bonds is set forth below. In addition, the District has a $10,000,000 line of credit and a CERB loan from the State with an outstanding balance of $137,920 in principal amount with liens on Net Revenues junior to the lien of the Parity Bonds. A portion of the federal credit payments the District should receive for a portion of the 2010 Bonds has been reduced as a result of the Federal sequestration. The reduction is expected to be 6.9% as of October 1, 2016; the reduction was 6.8% from October 1, 2015 through September 30, 2016; 7.3% from October 1, 2014 through September 30, 2015; and 7.2% from October 1, 2013 through September 30, 2014.
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Debt Service Requirements
Outstanding The Bonds Total Debt Year Parity Bonds(1)(2) Principal Interest Total Service(3) 2017 $10,020,076 2018 10,074,576 2019 10,077,401 2020 10,073,976 2021 10,076,026 2022 10,079,001 2023 10,034,051 2024 10,030,676 2025 10,047,333 2026 10,061,014 2027 10,065,539 2028 10,061,539 2029 10,063,664 2030 10,059,226 2031 10,100,619 2032 10,152,850 2033 10,058,841 2034 5,942,731 2035 5,882,744 2036 5,822,095 2037 5,755,281 2038 5,691,848 2039 5,619,998 2040 5,544,214 2041 2,095,906 2042 2,095,700 2043 2,091,425 2044 947,538 Total(3) $218,625,888
(1) Includes the Refunding Candidates. January 1 debt service payments are shown as occurring the prior fiscal year. See APPENDIX B—“SUMMARY OF CERTAIN PROVISIONS OF THE RESOLUTION—Certain Definitions.” (2) Before the federal credit payments. (3) Totals may not add due to rounding.
Junior Lien Debt
In January 2015, the District entered into a line of credit with Bank of America, N.A. in the principal amount of not to exceed $10,000,000 to provide interim financing for general District capital needs and other operating expenses of the District and to provide security for certain contractual obligations of the District. Draws on the line of credit may be taken for tax-exempt or taxable purposes. Interest on draws under the line of credit are set at the time of the draw, and is payable quarterly. Principal on the line of credit is due at maturity on January 28, 2017. As of July 1, 2016, the District has no outstanding draws on the line of credit.
In 2006, the District was awarded a CERB loan with the State in the amount of $1,000,000 to provide funding for Grays Harbor Paper to install a biomass turbine system that burned wood waste and converted the energy into electricity. In 2012, the CERB forgave part of this loan. As of December 31, 2015, the District had $137,920 outstanding on this loan, which is due in 2021, and bears interest at zero percent.
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Additional Borrowing
The District has no plans to issue Future Parity Bonds in the next 12 months. However, if market conditions allow for the refunding of higher rate outstanding Parity Bonds, such refunding will be considered. The District’s financial policy has established plans to maintain the funding of gross non-generation capital improvements with a ratio of 60% from current revenue (rates) and 40% from long-term bonds. See “THE ELECTRIC SYSTEM— Financial Policies.”
THE DISTRICT
General
The District, a municipal corporation of the State, was established at a general election in 1938 and exists under and by virtue of the Enabling Act, for the purpose of engaging in the purchase, generation, transmission, distribution and sale of electric energy.
The District serves nearly all of Grays Harbor County’s 72,820 residents and commercial and industrial customers, except for the City of McCleary and its roughly 1,685 inhabitants. The largest city in the District’s service area is Aberdeen, population 16,780, in which the District maintains its general offices. The District is located in southwestern Washington, approximately 110 miles southwest of Seattle, Washington, 50 miles west of Olympia, Washington, and 135 miles northwest of Portland, Oregon.
Pursuant to the Enabling Act, the District is empowered to: (1) purchase electric energy, (2) sell electric energy at wholesale and retail, (3) acquire, construct and operate electric generating plants and transmission and distribution facilities, and (4) issue revenue obligations for the purpose of financing the acquisition and construction of electric properties and for other corporate purposes. Additionally, the District is authorized under RCW 54.16.330 to provide wholesale telecommunication services.
Although cities in the District’s service area have statutory authority to provide electric service, only McCleary provides electric service, and the District is not aware of any other city that is considering providing electric service. The District also has statutory rights of eminent domain, which, subject to certain limitations, enable the District to acquire various assets and property rights, including electric distribution facilities in Grays Harbor County of any investor-owned utility company that may seek to serve Grays Harbor County. The District’s facilities in any city and its right to provide electric service in any city are subject to the reasonable oversight of such city.
Under Washington State law, public utility districts (such as the District) are authorized to provide retail electrical service beyond their boundaries. Further, investor-owned utilities are not prohibited from providing retail electrical service beyond their current service area.
Management
Commission. A three-member Commission, each representing a commissioner district, establishes policy, operating rates, budgets and expenditures and reviews the District’s operations. Members serve six-year terms with one member elected every two years. The present members of the Commission are:
Commissioner Term Expires Russ Skolrood, President December 31, 2020 Arie Callaghan, Vice President December 31, 2018 Dave Timmons, Secretary December 31, 2016
Administrative Staff. The Commission appoints the General Manager, Auditor and Treasurer. The General Manager chooses other management staff. Key members of the senior management staff of the District include the following:
David Ward, General Manager, joined the District in June 2013, and has worked in the electric utility industry for 31 years. He was the Transmission and Distribution Manager at Tacoma Power prior to his appointment as General Manager. He holds a Bachelor’s Degree in Electrical Engineering from Washington State University and is a
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licensed Professional Engineer in the State. He also completed Willamette University's Utility Management Certificate program.
Kathryn Skolrood, Treasurer and Chief Financial Officer, joined the District in April 2016. Prior to coming to the District, Ms. Skolrood was the Finance Director for the City of Aberdeen between 2006 and 2016, and the Finance Director for the City of Hoquiam between 2001 and 2006. Ms. Skolrood also served as the Deputy Director for the Grays Harbor County Public Health and Social Services Department and as the Audit Manager for Preszler, Larner, Mertz & Company in Aberdeen. She is a graduate of Grays Harbor College and Saint Martins University.
Steve Easton, Operations Manager, joined the District in January 1992 as a Journeymen Lineman and has worked in the utility industry for 33 years. He has held several positions within the District, including Service Lineman and Line Superintendent before being awarded the Operations Manager position.
Robert Hanny, Chief Information Officer, joined the District in November 1997, and has worked in the electric utility industry for 17 years and has worked in the Information Technology field for 27 years. He has held several positions within the District before being promoted to the Chief Information Officer.
Melinda James-Saffron, Power Manager, joined the District in 2010. Prior to joining the District, she served as a Power Marketer for Seattle City Light and has worked in similar capacities at Mirant Corporation and Bonneville. Mrs. Saffron earned her undergraduate degree in Political Science from Portland State University and a Master of Business Administration from George Fox University. Ms. Saffron also holds certifications in Negotiation and Mediation and Project Management.
Richard Pitt, General Counsel, joined the District in 2007. Mr. Pitt has practiced law in Washington for over 30 years. Prior to joining the District, Mr. Pitt was general counsel for the Polygon Group, a multifaceted real estate development organization with operations throughout the Western United States. Mr. Pitt has a degree in economics from the University of Washington and earned his law degree from Creighton University.
Schuyler Burkhart, Engineering Manager, joined the District in March 2014. Mr. Burkhart has a Bachelor of Science degree in Electrical Engineering from the University of Washington, and has been registered as a Professional Engineer since 1999. He built experience managing projects, processes and people in engineering, supervisory and operational roles at a large industrial shipyard and Tacoma Power for 19 years before joining the District.
Strategic Plan and Overall Direction
In 2014, the District created a five-year vision for its future through the development of a strategic plan. The strategic plan was developed with involvement from the Commission, management and staff. Key employees were selected to lead each focus area group. The strategic plan provided a direction for the District and created a sense of pride and ownership for the employees. There is an annual review of the plan and quarterly check-ins. The strategic planning process included the rewrite of the District’s mission statement: “Serve our community with high value utility services at the lowest practical cost.”
Key initiatives from the process includes: (1) improve customer outreach and communications, (2) update financial policies and improve financial reporting, (3) emphasize safety, reliability and efficiency, (4) focus on asset management, (5) implement an enterprise-wide software system and (6) improve employee recruitment, engagement and development. The District is in the process of updating the strategic plan for 2016, in time for the 2017 budget process.
In mid-2015, the District implemented the first phase of an enterprise-wide software system. The system selected was National Information Solutions Cooperative (NISC) and the first phase implementation included finance, customer service and human resources functionality. Future phases include engineering and operations (work order process), fleet and facilities functionality.
The District has focused on renewal and replacement of aging transmission, main distribution circuits and substation transformers, along with focused vegetation management. The intent is to maintain or improve safety, service and reliability.
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Labor Relations, Pensions and Other Post-Employment Benefits
Labor Relations. As of June 30, 2016, the District had 162 employees, of which 120 are represented by the International Brotherhood of Electrical Workers. The District and the union have three labor contracts, the largest of which is effective through March 31, 2018. The District strives to promote sound labor relation policies that are beneficial to the District and its employees. There have been no labor stoppages in more than 30 years.
Pensions. Pensions for the District’s employees are provided by the Washington State Public Employees Retirement System (“PERS”) through three different retirement plan options. These plans are administered by the State. The Washington State Investment Board, a 15-member board created by the Legislature in 1981, invests the funds in the plans. PERS Plan 1 and Plan 2 are defined benefit plans. PERS Plan 3 is both a defined benefit plan (employer share) and defined contribution plan (employee share). Contributions by both employees and employers are based on gross wages. PERS participants who joined the system by September 30, 1977 are Plan 1 members. Those PERS participants who joined on or after October 1, 1977 are Plan 2 members, unless they exercise an option to transfer to Plan 3. PERS participants joining on or after September 1, 2002 have the irrevocable option of choosing membership in PERS Plan 2 or PERS Plan 3.
Washington State law requires systematic actuarial based funding to finance the retirement plans. Actuarial calculations to determine employer and employee contributions are prepared by the Office of the State Actuary (“OSA”), a nonpartisan legislative agency charged with advising the Legislature and Governor on pension benefits and funding policy. To calculate employer and employee contribution rates necessary to pre-fund the plans’ benefits, OSA uses actuarial cost and asset valuation methods selected by the Legislature as well as economic and demographic assumptions. The Legislature adopted the following economic assumptions for contribution rates beginning July 1, 2015: (1) 7.8% rate of investment return; (2) general salary increases of 3.75%; (3) 3.0% rate of Consumer Price Index increase; and (4) 0.95% growth in membership. The long-term investment return assumption is used as the discount rate for determining the liabilities for a plan. The 10-year annualized return on the investment returns as of March 31, 2016 on the retirement funds was 6.12%.
All State-administered retirement plans are funded by a combination of funding sources: (1) contributions from the State; (2) contributions from employers (including the State as employer and the District and other governmental employers); (3) contributions from employees; and (4) investment returns.
Under State statute, contribution rates are adopted by the Pension Funding Council (“PFC”) in even-numbered years for the next ensuing State biennium. The rate-setting process begins with an actuarial valuation by the OSA, which makes non-binding recommendations to the Select Committee on Pension Policy, which then recommends contribution rates to the PFC. No later than the end of July in even-numbered years, the PFC adopts contribution rates, which are subject to revision by the Legislature. The following table outlines the current contribution rates of employers and employees. Contribution Rates for the 2015-17 Biennium Expressed as a Percentage of Covered Payroll
Employer(1) Employee PERS Plan 1 11.18% 6.00% PERS Plan 2 11.18 6.12 PERS Plan 3 11.18 Variable (2) ______(1) Includes a 0.18% State Department of Retirement Systems administration expense fee. (2) Rates vary from 5.0% minimum to 15.0% maximum based on the rate selected by the PERS 3 member. Source: Department of Retirement Systems.
In July 2016, the PFC adopted the second step of the phase-in increases to contribution rates. Adopted employer contribution rates will increase by 14% for all PERS plans, effective beginning July 1, 2017, subject to the review of the Legislature.
In 2014, the District contributed $1,318,644 to the PERS system, on a covered payroll of $14,352,469, and in 2015, the District contributed $1,498,019, on a covered payroll of $14,660,261. For additional information, see Note 7 to the Audited Financial Statements for the Year Ended December 31, 2015, attached hereto as Appendix A.
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Plan Funding Status and Unfunded Actuarial Liability. While the District’s contributions represent its full current liability under the retirement systems, any unfunded pension benefit obligations could be reflected in future years as higher contribution rates. It is expected that the contribution rates for employees and employers in the PERS Plans 2 and 3 will increase in the coming years. The OSA website includes information regarding the values, funding levels and investments of these retirement plans.
Historically, OSA used the Projected Unit Credit (“PUC”) cost method and the Actuarial Value of Assets (“AVA”) to report a plan’s funded status. PUC was one of several acceptable measures of a plan’s funded status under current GASB rules. The PUC cost method projects future benefits under the plan, using salary growth and other assumptions and applies the service that has been earned as of the valuation date to determine accrued liabilities. The AVA is calculated using a methodology which smoothes the effect of short-term volatility in the Market Value of Assets (“MVA”) by deferring a portion of annual investment gains or losses over a period of up to eight years.
In September 2015, OSA adopted the Entry Age Normal (“EAN”) cost method to estimate accrued pension liabilities for the purposes of reporting funded status. The EAN method represents each plan member’s benefits as a constant share of payroll throughout the member’s career. This liability estimate incorporates the statutorily set discount rate and fully reflects the demographic assumptions revised in the June 30, 2013 valuation, which included projected improvements in mortality rates.
During the years 2001 through 2010 the rates adopted by the Legislature were lower than those that would have been required to produce actuarially required contributions to PERS Plan 1, a closed plan with a large proportion of the retirees. The State Actuary’s actuarial valuation for PERS Plan 1 as of June 20, 2013 showed a 63% funded ratio (unfunded liability of $4.831 billion) while PERS Plans 2 and 3 had valuation assets that exceed their accrued liability by $537 million (a 102% funded ratio). The State Actuary’s actuarial valuation for PERS Plan 1 as of June 30, 2014, showed a 61% funded ratio (unfunded liability of $4.965 billion) while PERS Plans 2 and 3 had valuation assets that exceed their accrued liability by $214 million (a 101% funded ratio). The decrease in the funded status and increase in the unfunded accrued actuarial liability primarily reflect changed demographic assumptions, including projected improvements in mortality rates, and the statutory requirement that the assumed rate of return be reduced to 7.8% from 7.9%.
The State Actuary’s actuarial valuation for PERS Plan 1 and PERS Plans 2 and 3 as of June 30, 2015, showed a 58% funded ratio (unfunded liability of $5.239 billion) and a 88% funded ratio (unfunded liability of $3.715 billion), respectively. Using the EAN cost method, the State Actuary’s actuarial valuation for PERS Plan 1 and PERS Plans 2 and 3 as of June 30, 2014, showed a 61% and 90% funded ratio, respectively. In comparing the funded status as of June 30, 2014 to June 30, 2015, there was a small decline from 87% to 86%, partly due to the drop in the statutorily defined discount rate from 7.8% to 7.7%.
PERS Plans 2 and 3 are accounted for in the same pension trust fund and may legally be used to pay the defined benefits of any PERS Plans 2 and 3 member. Assets for one plan may not be used to fund benefits for another plan: however, all employers in PERS are required to make contributions at a rate (percentage of payroll) determined by the OSA every two years for the sole purpose of amortizing the PERS 1 unfunded actuarial accrued liability within a rolling 10-year period. The Legislature established maximum contribution rates that began in 2009 to 2015 and certain minimum contribution rates that became effective in 2015 and remain in effect until the actuarial value of assets in PERS Plan 1 equals 100% of the actuarial accrued liability of PERS Plan 1. These rates are subject to change by future legislation enacted by the State Legislature to address future changes in actuarial and economic assumptions and investment performance.
The information in this section has been obtained from the District’s financial statements and information on the OSA and DRS websites.
New GASB Reporting Rules. The Government Accounting Standard Board (“GASB”) has implemented new pension regulations that require employers, including the District, to report their pension liabilities on a generally accepted accounting principles (“GAAP”) basis rather than a funding basis. Beginning with its 2015 financial statements, the District reported its proportionate share of the net plan asset or liability for each pension plan in which District employees participate. The liability is based on the actuarial present value of projected benefit payments to periods of employee service, a discount rate that considers the availability of plan assets and
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recognition of projected investment earnings. The DRS determines each participating employers’ proportionate share of the plan liability and OSA determines each plan’s accounting valuation. The GASB rules impact accounting for pensions and not the funding status of the plans calculated by OSA or pension contribution rates that are set based on statutory assumptions.
DRS has calculated the collective net pension liability for the various retirement plans based on the new GASB reporting requirements as well as the District’s share of such liability. Net pension liability equals the total pension liability (a measure of the total cost of future pension benefit payments already earned, stated in current dollars) minus the value of the assets in the pension trust that can be used to make benefit payments. Contributions from plan members and employers are assumed to continue to be made at contractually required rates, the assumed long- term rate of investment return is 7.50%, the assumed economic inflation is 3.0%, and the assumed salary inflation is 3.7%. The following table shows the District’s share of the net pension liability for the plans it participates in for the State fiscal year ended June 30, 2015 based on its share of contributions for the year.
District’s Share of Pension Liabilities/(Assets) For Year Ended June 30, 2015
Net District’s Share of Net Liability/(Assets) District Percent Liability/(Assets) PERS 1 $5,230,930,000 0.126008% $6,591,390 PERS 2/3 3,573,057,000 0.155214 5,545,885
Source: DRS CAFR for Fiscal Year Ended June 30, 2015.
Other Post-Employment Benefits. Governmental Accounting Standard No. 45 provides guidance for the accounting and financial reporting for post-employment benefits other than pensions. In accordance with collective bargaining agreements, the District currently provides 90% employer paid post-retirement medical, vision and prescription benefits for qualified retired employees and their eligible dependents until age 65. The District funds its post-retirement health care benefits when the actual health care costs are incurred for retirees and their eligible dependents. The District is evaluating the option of pre-funding all or a portion of the actuarial calculated annual required contribution. The District’s annual required 2015 other post-employment benefits (“OPEB”) expense was $2,420,466 and is equal to the annual required contribution plus interest. In 2015, the payment of employment health care benefits for retirees and their eligible dependents totaled $1,565,567, resulting in an accrued OPEB liability of $854,899. As of December 31, 2015, the District had $1,904,842 set aside for its OPEB obligation.
The District’s required contribution is based upon projected pay-as-you-go financing requirements. Net OPEB Obligation for 2015 Normal Cost at Year End $ 812,438 Amortization of UAAL 1,608,028 Annual Required Contribution (“ARC”) $ 2,420,466 ARC $ 2,420,466 Contributions Made 1,565,567 Increase in Net OPEB Obligation $ 854,899 Net OPEB Obligation (beginning of year) $ 10,613,690 Net OPEB Obligation (end of year) $ 11,468,589 ______Source: District’s 2015 financial statements. 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. The schedule of funding progress, presented as required supplementary information following the notes to the financial statements included as Appendix A, presents
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multiyear trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits.
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 District used Aon Consulting to provide the method and calculation for OPEB benefits. The assumptions included in the valuation included a rate of return on investments of 4% and an annual increase of between 6% and 12% of health care costs. Other assumptions included estimates of future employment levels, retirement ages of active employees, and morbidity/termination rates.
Deferred Compensation Plans. The District offers its employees deferred compensation programs created in accordance with Internal Revenue Code Sections 401 and 457. The plans are available to all District employees, and permit them to defer a portion of their current salary, up to defined limits, until future years. The District’s 401(k) Savings Plan provides that participants may make voluntary payroll deferral contributions, on a pre-tax basis, up to the amount established annually by the IRS as the deferral ceiling. All plan assets are held in trust for the exclusive benefit of participants and their beneficiaries, and therefore are not included in the District’s financial statements.
Accounting and Financial Statements
The accounting and reporting policies of the District conform to standards as promulgated by the Federal Energy Regulatory Commission and conform to Generally Accepted Accounting Principles. The District, as a municipal corporation authorized by Washington State law, is subject to review by the Washington State Auditor’s Office, which has oversight responsibility for and currently conducts the annual audit of the District’s financial statements. The District Treasurer exercises general supervision over all financial transactions involving District funds. The audited financial statements of the District for the 12 months ended December 31, 2015, have been included in this Official Statement as Appendix A.
Insurance
The District and 16 other public utility districts and one joint operating agency, NoaNet, participate in a joint self- insurance pool in affiliation with the Public Utility Risk Management System (the “PURMS Fund”). The PURMS Fund self-insures its members to $1,000,000 for liability and maintains a reserve of at least $3,000,000. Members of the PURMS Fund are automatically assessed to make up any shortfall in the reserve amount, once the fund balance has dropped below $2,500,000. General comprehensive liability insurance in excess of $1,000,000 is insured through Associated Electric and Gas Insurance Services Limited up to a limit of $35,000,000, and for an additional $25,000,000 through Energy Insurance Mutual Limited. The fund maintains $35,000,000 in directors and officers liability coverage with a retention level of $500,000. The members share joint liability and administrative costs of the fund among themselves. As all members share in replenishing the fund, the District’s exposure to any single claim is minimized. The District recorded approximately $371,178 and $334,544 in 2014 and 2015, respectively, for premiums and assessments for the fund’s liability insurance. The PURMS Fund and its members are involved in ongoing litigation and claim processing of which the total dollar value of the risk posed is unknown.
In addition to liability insurance coverage, the District maintains property insurance with the PURMS Fund. The self-insurance level for property insurance is $250,000 with reserves of $750,000. In addition, the PURMS Fund purchases $200,000,000 of excess insurance over the $250,000 (or higher) retention level. The District recorded $232,882 and $173,889 in 2014 and 2015, respectively, for premiums and assessments for property insurance within the PURMS Fund. Property insurance includes earth movement and flood coverage.
The District provides its employees and retirees with a self-funded dental program. The District is responsible for 90% of the cost of the dental program and both the District and its employees participate in the cost of monthly medical premiums. The District purchases individual stop loss insurance in the amount of $50,000, and maintains a rate stabilization reserve for claims funding. Medical and dental claims expenses for 2014 were $4,266,423 and
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contributions by the District and its employees were $4,304,955. Medical and dental claims expenses for 2015 were $4,250,812 and contributions by the District and its employees were $4,502,999.
Cash and Investments
The District invests its available funds in a manner that emphasizes preserving principal, maintaining necessary liquidity, matching investment maturities to estimated cash flow requirements, and achieving maximum yield consistent with the foregoing criteria. The District’s allowable investments are restricted by Washington State Law, and eligible investments include: (i) bonds of the State or any local government in the State, (ii) general obligation bonds of any other state or local government thereof which have at the time of investment one of the three highest credit ratings of a nationally recognized rating agency, (iii) registered warrants of a local government in the same county as the local government making the investment, (iv) obligations of the U.S. government, its agencies and wholly owned corporations, or obligations issued or guaranteed by supranational institutions, provided, that at the time of investment, the United States government must be the largest shareholder of such institution, (v) obligations of the Federal Home Loan Bank, Fannie Mae and other government-sponsored corporations, (vi) bankers’ acceptances purchased on the secondary market, (vii) commercial paper purchased on the secondary market, subject to state investment board policies, and (viii) corporate notes purchased on the secondary market, subject to state investment board policies. Investments generally are made so that securities can be held to maturity. The District does not derive funds for investment from reverse repurchase agreements. In addition, the District does not invest in complex and/or volatile financial products such as “inverse floaters” or structured notes.
The State Treasurer’s Office administers the Washington State Local Government Investment Pool (the “LGIP”), a $12.759 billion dollar (as of June 30, 2016) fund that invests money on behalf of more than 530 participants. In its management of LGIP, the State Treasurer is required to adhere, at all times, to the principles appropriate for the prudent investment of public finds. These are, in priority order, (i) the safety of principal; (ii) the assurance of sufficient liquidity to meet cash flow demands; and (iii) to attain the highest possible yield within the constraints of the first two goals. Historically, the LGIP has had sufficient liquidity to meet all cash flow demands.
The LGIP, authorized by chapter 43.250 RCW, is a voluntary pool which provides its participants the opportunity to benefit from the economies of scale inherent in pooling. It is also intended to offer participants increased safety of principal, 100 percent liquidity on a daily basis and the ability to achieve a higher investment yield than would otherwise be available to them. The LGIP manages a portfolio of securities that meet the maturity, quality, diversification and liquidity requirements set forth in Statement No. 79 of the Governmental Accounting Standards Board (“GASB”) for external investment pools who wish to measure all investments at amortized cost for financial reporting purposes. The maximum weighted average maturity is 60 days and a maximum weighted average life is 120 days. The maximum final maturity is 397 days except for floating- and variable-rate securities and securities that are used for repurchase agreements. The weighted average maturity of the LGIP generally ranges from 30 to 60 days. Investments permitted under the pool’s guidelines include U.S. government and agency securities, bankers’ acceptances, high quality commercial paper, repurchase and reverse repurchase agreements, motor vehicle fund warrants, and certificates of deposit issued by qualified Washington State depositories. The benchmarks utilized for the LGIP are the Government and Agency money market net and gross yields reported by iMoneyNet. The net yield is utilized for external comparisons while the gross yield is used internally to assess portfolio manager performance.
The Resolution provides that money in the Bond Fund, Reserve Account and Project Fund be invested in any investments permitted by Washington State law.
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As of December 31, 2014 and 2015, the District’s funds were invested or held as cash as indicated in the following table: Cash and Investments Investment Description 2014 2015 Cash in banks (fully insured) $ 20,525,165 $ 17,391,800 Petty Cash -- 8,550 LGIP 1,873,863 1,877,108 Federal National Mortgage Association 1,000,000 1,000,000 Federal Home Loan Bank 1,000,000 1,000,000 Federal FICO Strips CPN 1,018,000 -- Municipal Securities 1,000,000 -- $ 26,417,028 $ 21,277,458
General Obligation Bonds and Taxation
The District is authorized to issue nonvoter-approved general obligation bonds for any capital purpose of the District in an amount up to 3/4 of 1% of the total assessed value of the taxable property within the District. In addition, the District is authorized to levy an annual tax on all taxable property within the District up to $0.45 per $1,000 of assessed value in any one year for general District purposes. The District does not levy the tax and has no outstanding general obligation bonds. The proceeds of any such tax would not be available to pay or secure the Bonds.
THE ELECTRIC SYSTEM
In 1940, the District initiated its electric utility operations by purchasing the electric facilities of the Grays Harbor Railway and Light Company and the Twin Harbors Electric Company. In 1948, the District acquired the Elma- Montesano properties of Puget Sound Power & Light Company, now Puget Sound Energy (“Puget”), located near Elma and McCleary in Grays Harbor County (the “County”). In 1964, the District acquired through condemnation the electric facilities owned by Puget in the Oakville area. In 1966, the District acquired the properties of the Quinault Light Company, a Rural Electric Administration-financed cooperative that served the Lake Quinault area.
The District’s present service area consists of all of the County, except for the City of McCleary (which owns and operates a municipal electric utility), and portions of the adjacent Jefferson, Thurston, Lewis and Pacific Counties. The District’s service area comprises approximately 1,959 square miles.
In 2015, the District served an average of 41,601 customers, sold 1,243,591 megawatt hours (“MWh”) of electric energy, and received operating revenues of $114,773,317. During 2015, the District operated approximately 1,820 miles of transmission and distribution lines. The Electric System also has 36 substations. As of December 31, 2015, the District’s gross investment in its Electric System was $370,167,488 and the net investment was $234,099,256.
Electric Rates
The District is empowered and required under the laws pursuant to which it was organized and by the covenants of the Resolution to establish, maintain, and collect rates and charges for electric power and energy and other services adequate to provide revenues sufficient for the prompt payment of the principal of, premium, if any, and interest on all outstanding indebtedness, to pay for the proper operation and maintenance expenses of the Electric System and to make all necessary repairs, replacements and renewals thereof. The District has the exclusive authority to set rates and charges for electric energy and services and is by law free from the ratemaking jurisdiction and control of the Washington Utilities and Transportation Commission or any other state, federal or local agency having the authority to set rates and charges for electric energy services.
A person or entity that has requested wholesale telecommunications services from a public utility district may petition the Washington Utilities and Transportation Commission if it believes that the District’s rates, terms and conditions are unduly or unreasonably discriminatory or preferential. The commission may issue an order finding non-compliance. The District charges wholesale providers of telecommunications services based on a published rate schedule.
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Because the District is a preference customer of Bonneville, purchasing approximately 81% of its electric power from Bonneville, the District’s cost of purchased power is closely related to Bonneville’s wholesale power rates. The Commission has final authority over the timing and frequency of rate modifications. The District has adjusted its rates to accommodate increases in operating expenses, principally in the cost of wholesale power purchased from Bonneville. Since 2010, the District has had the following rate increases:
Rate Increases
Year Average Increase 2010 (February 1) 8.00% 2011 (February 1) 7.00 2013 (January 1) 8.00 2014 (January 1) 3.75 2014 (August 1) 1.50 2015 (September 1) 2.50 2016 (May 1) 4.00
The District completed a Cost of Service Study in 2015 as part of its ongoing effort to maintain fiscally prudent and fair rates for its electric utility customers. The study included analysis of revenue requirements, cost of service and rate design. The study resulted in a realignment of the residential, small commercial rate and street and yard lighting classifications to cover costs. The District also added a new lower rate for LED lights. As part of the study, the District anticipates a rate increase between 1.50% to 3.0% in July 2017. For additional information regarding the rate restructure in 2016, see “Management Discussion.”
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Comparative Electric Bills
The following table shows a comparison of the District’s monthly electric rates for selected residential, commercial and industrial loads with the rates charged by certain major public and private Northwest utilities. The comparative monthly electric bills shown are based on specific rate schedules for each utility; the use of other schedules applicable to particular customers will yield different results.
Electric System(1) Comparable Monthly Electric Bills as of June 30, 2016 (Winter/Summer Average Rates where applicable) Commercial Industrial Residential (30 kW (400 kW (1,350 kWh) 9,000 kWh) 150,000 kWh) The District $140 $830 $11,844 Washington State Public Utility Districts Benton County PUD No. 1 108 572 8,982 Clallam County PUD No. 1 125 709 8,959 Clark Public Utilities 122 718 9,734 Cowlitz County PUD No. 1 114 794 11,099 Franklin County PUD No. 1 120 682 9,221 Grant County PUD No. 2 75 398 4,947 Jefferson County PUD No. 1 136 851 13,144 Lewis County PUD No. 1 102 575 8,418 Mason County PUD No. 3 132 778 10,431 Snohomish County PUD No. 1 133 799 12,244 Washington Cities City of Port Angeles 123 680 9,499 City of Seattle 154 745 14,296 City of Tacoma 111 713 9,229 Private Power Companies Avista 117 963 15,330 Pacific Power (a PacifiCorp Company) 117 798 10,370 Portland General Electric 155 819 12,234 Puget Sound Energy 145 888 13,638
(1) Computed from the rate schedules provided by or found on the websites of the utilities listed. There are some variations in rate schedules and rate classification of the various utilities. Source: The District and individual utilities. Telecommunications
The District has constructed a fiber optic backbone that encompasses just under 300 miles of cable. The District presently operates a digital microwave system that provides communications throughout the County. The District intends to continue to expand its fiber optic network to critical points in its transmission and distribution system, as well as to its substation facilities. The District allows retail providers to lease wholesale services, which include excess fiber optic capacity, microwave radio circuits, space on the District microwave towers and poles, and co- location space. The District sells bandwidth and services to retail providers on a wholesale basis. Under a separate contract, the District operates eight fiber optic/co-location nodes within the County.
The District recognized $361,507 in operating revenues from the telecommunications system in 2015, and had expenses of $38,148.
The District withdrew its membership in Northwest Open Access Network (“NoaNet”) in 2005. NoaNet is a Washington nonprofit mutual corporation established in 2000 and is comprised of nine other Washington public utility districts and Energy Northwest. NoaNet leases a fiber optic network from Bonneville and was created to
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provide its members and their respective rural communities with a high speed fiber optic transmission system to serve their needs and to provide cost-effective technology communications facilities and other services for use by the members and others. On September 26, 2016, NoaNet defeased its remaining outstanding $2,790,000 in bonds, of which up to 11.95% was guaranteed by the District.
Historical Customers, Energy Sales, Energy Requirements and Revenues From Sales
The following table shows the District’s historical energy requirements, cost of power, customers, and revenues from energy sales for the years 2011 through 2015. Variations in energy sales and revenues are primarily a result of weather conditions and wholesale energy prices.
Historical Customers, Energy Sales, Energy Requirements and Revenues from Sales
2011 2012 2013 2014 2015 No. of Customers (Average) Residential 34,769 34,660 34,610 34,835 35,449 Commercial 4,303 4,229 4,220 4,109 4,431 Industrial(1) 34 34 18 18 18 Public Street Lighting/Irrigation 2,501 2,491 2,481 2,481 1,727 Total Customers 41,607 41,413 41,329 41,443 41,625
Energy Sales (MWh) Residential 525,645 497,856 490,491 463,924 439,379 Commercial 306,588 301,746 311,348 307,139 308,625 Industrial 182,432 172,475 157,679 136,083 134,475 Public Street Lighting/Irrigation 3,826 3,784 3,851 4,129 4,427 Subtotal 1,018,491 975,861 963,369 911,275 886,906 Sales for Resale 616,424 650,946 633,559 838,088 736,436 Total Energy Sales 1,634,915 1,626,807 1,596,928 1,749,363 1,623,342
System Losses 13,591 24,621 23,443 23,547 21,915 Total Energy Requirements 1,648,506 1,651,428 1,620,372 1,772,910 1,645,257 Peak Demand (kW) 236,000 231,000 214,000 261,544 230,000
Cost of Resources: Total Cost of Resources $ 56,478,128 $55,502,133 $ 60,929,248 $ 63,532,930 $ 63,590,166 Less Revenues from Sales for Resale and Sales of Surplus Energy 18,908,387 14,940,051 18,829,612 22,794,813 20,615,742 Net Cost of Resources $ 37,569,741 $40,562,082 $ 42,099,636 $ 40,738,117 $ 42,974,424 Average Cost of Resources (cents/kWh) 2.28 2.46 2.59 2.59 2.61
Revenue from Energy Sales Residential $ 43,900,397 $42,397,006 $ 44,925,065 $ 44,328,053 $43,660,160 Commercial 24,313,108 24,420,669 27,132,672 28,110,941 28,741,620 Industrial 10,925,635 9,818,052 9,640,602 8,540,746 7,829,066 Public Street Lighting/Irrigation 564,732 542,585 768,019 821,282 658,066 Subtotal 79,703,872 77,178,312 82,466,357 81,801,022 80,888,912 Sales for Resale 18,908,387 14,940,051 18,829,612 22,794,813 20,615,742 Total Energy Revenues $ 98,612,259 $92,118,363 $101,295,969 $104,595,835 $101,504,654
(1) Some industrial customers were reclassified.
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Historical Operating Results
The following table sets forth the revenues and expenses of the Electric System as derived from the audited financial statements of the Electric System for the years 2011 through 2015.
Historical Operating Results
2011 2012 2013 2014 2015 Operating Revenues Retail Energy Sales $79,703,872 $77,178,312 $ 82,470,674 $81,801,022 $80,888,912 Wholesale Sales 18,908,387 14,940,051 18,829,612 22,794,813 20,615,742 Other Operating Revenues 11,795,563 11,975,115 12,899,568 13,027,958 13,268,663 Total Operating Revenues $110,407,822 $104,093,478 $114,199,854 $117,623,793 $114,773,317
Operating and Maintenance Expenses Power Supply $56,478,128 $55,502,133 $60,929,248 $63,532,930 $63,590,167 Transmission 6,341,099 6,466,726 6,426,959 6,209,554 6,973,343 Operating 11,686,278 10,860,431 11,378,895 11,028,233 14,910,431(4) Maintenance 7,938,285 8,549,415 8,336,127 9,113,106 8,717,002 Taxes & Tax Equivalents 9,069,814 8,404,993 9,420,181 9,448,606 8,155,531 Conservation 2,402,359 1,774,753 1,778,833 1,785,455 1,520,890 Depreciation & Amortization 10,698,030 11,019,028 11,022,676 10,226,161 10,182,720 Total Power Supply & Operating Expenses $104,613,993 $102,577,479 $109,292,919 $111,344,045 $114,050,084
Operating Income $5,793,829 $1,515,999 $ 4,906,935 $ 6,279,748 $723,233
Nonoperating Revenue (Expenses) Interest & Dividend Income $ 956,674 $ 1,111,500 $ 422,341 $ 85,631 $ 17,532 Interest Expense (7,153,894) (4,727,919) (5,856,576) (6,202,154) (5,737,325) State Grants ------2,700,000 Gain (Loss) on Capital Asset/Extraordinary Items -- (5,139,046)(1) -- (1,775,764)(2) (3,371,284)(2) Other Nonoperating Revenues (Expenses) 90,816 275,519 303,569 295,535 440,341 Total Nonoperating Expenses $(6,106,404) $(8,479,946) $ (5,130,660) $(7,596,752) $(5,950,736)
Loss Before Transfers $ (312,575) $(6,963,947) $ (223,731) $(1,317,004) $(5,227,503)
Available for Debt Service(3) $16,491,859 $12,535,027 $ 15,929,611 $16,505,909 $10,905,953
Actual Debt Service $10,309,470 $9,245,519 $ 9,781,576 $8,814,394 $8,398,319
Debt Service Coverage 1.60x 1.36x 1.63x 1.87x 1.30x
Cash Reserves $22,045,330 $17,254,557 $22,940,948 $20,753,230 $15,901,580
Days of Cash on Hand 77 61 77 68 69
(1) Relating to the generating facilities at Grays Harbor Paper (now known as Harbor Paper). See “District’s Largest Customers.” (2) Lease commitment clean-up costs related to the Harbor Paper site. See “THE DISTRICT’S POWER SUPPLY--Franklin PUD/Grays Harbor PUD Peak Generating Station.” (3) Excludes depreciation and amortization and nonoperating revenue and expenses. (4) Excludes extraordinary, nonrecurring expense of $2,719,315 in connection with the adjustment of receivables related to prior computer system error in balance.
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Management Discussion
The District implemented a 4.0% rate increase effective May 1, 2015, and a total rate increase of 5.25% for 2014. The District finished 2015 over-budget for operating and maintenance expenses by 7%, driven mostly by contract obligations for the Grays Harbor Paper close-out (see “District’s Largest Customers”), $2.7 million bad debt write- off related to prior years’ accumulation of uncollectible customer receivables, $608,000 offset of current pension expenses from new GASB requirements, and a series of storms in the fall of 2015 awaiting FEMA reimbursement of approximately $357,000. Additionally, retail revenues were below forecast due to mild winter conditions and the wholesale power market continues to be soft, affecting sales for resale revenues. The District ended 2015 with approximately $16 million in unrestricted cash reserves. In order to work towards aligning with the District’s Financial Policy, the District responded by conducting a cost-of-service analysis (“COSA”) that resulted in a modification of the residential rate structure as follows:
Old Rate New Rate (effective May 1, 2016) System Charge $40.54 $39.00 First 360 kWh $0.0124/kWh $0.054/kWh Above 360 kWh $0.087/kWh $0.082/kWh
The COSA also resulted in an increase of 1.5% to small and medium commercial customers, and an increase to municipal street and yard lighting. Through July 2016, retail revenues are exceeding the same time period of 2015 by $2.7 million.
The financial plan for the District calls for smaller rate increases on July 1 of each year through 2018.
The District’s operations for the six months ending June 30, 2016, reflect revenues in excess of expenses of $2.3 million. The current year-to-date results are more in line with the District’s historical results prior to 2015. Indications are that 2015 was a perfect storm of unusual and infrequent issues.
District’s Largest Customers
The District’s ten largest customers accounted for 185,665,273 kilowatt-hours, or 21%, of the District’s total energy sales for the fiscal year ended December 31, 2015. The following table reflects the diversity of the District’s largest customers:
Ten Largest Customers - 2015 % of Total % of Retail Total Electric Customer Industry kWh kWh(1) Revenue Revenue(2) Cosmo Specialty Fibers Paper Production 85,032,190 9.59% $ 4,161,408 5.14% State Department of State – Prison Corrections 15,100,800 1.70 1,056,438 1.31 Ocean Gold Seafood Food Processing 14,498,400 1.63 1,061,651 1.31 Willis Enterprises Lumber, Wood products 14,172,589 1.60 1,267,741 1.57 Ocean Spray Cranberries Food Processing 13,323,947 1.50 981,894 1.21 Vertillus Performance Chemicals and Allied Chemicals Products 12,894,320 1.45 912,615 1.13 Imperium Grays Harbor Petro, Refining and Related Industries 8,386,200 0.95 1,225,917 1.52 Hoquiam Plywood Lumber, Wood Products 8,041,929 0.91 564,045 0.70 Murphy Company Lumber, Wood Products 7,454,718 0.84 592,915 0.73 GH Community Hospital Hospital 6,760,180 0.76 505,611 0.63 Total 185,665,273 20.93 $12,330,235 15.24
(1) Total kWh for 2015 was 886,906,272. (2) Total retail electric revenue for 2015 was $80,888,912.
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Cosmo has on-site generation that can process load of approximately 18 MW. This generation is not sufficient to cover Cosmo’s total process load; therefore, Cosmo has a net load requirement on the District. The net load is served on the District’s Schedule 96.3 industrial rate, which is a “market based” rate tied directly to the Mid- Columbia Index to serve the load.
Grays Harbor Paper was a large industrial customer of the District and beginning in 2001, the District began purchasing the output of wood-waste fired generators of Grays Harbor Paper. The District acquired and expanded the generating facilities and leased the facility back to Grays Harbor Paper. In 2011, Grays Harbor Paper entered receivership. The District received compensation in the form of cash and loan forgiveness; however, it took a loss of $5,139,046 on the sale in 2012. The facility has since closed. The District was contractually obligated to certain site clean-up activities which totaled approximately $4.46 million between 2014-2016. The District received a State of Washington Department of Ecology grant in the amount of $2.7 million to aid in the clean-up, resulting in a net project cost of approximately $1.76 million. The District’s obligations with the Grays Harbor Paper site have come to a close.
Financial Policies
In 2015, the Commission adopted a financial policy as a target for the District to meet in the next several years. The policy provides guidance in the following areas: (1) maintaining reserves to provide end-of-year cash balances sufficient to provide 90 days of operating expenses; (2) a minimum debt service coverage of 1.75 times annual debt service; (3) financing on average no more than 40% of non-generation capital improvements through long-term financing; and (4) maintaining a Risk Management Committee to manage power supply risk and maintain and update risk management policies and risk limits.
As shown in the Historical Operating Results table, the District’s days of cash on hand for 2015 was 69 days. The District policy does allow the inclusion of a $10 million line of credit to supplement the cash reserves for calculating days of cash on hand, which, if included, would result in 112 days of cash on hand. The Historical Operating Results also reflect Debt Service Coverage of 1.30 times, which is not in compliance with the policy. See “Management Discussion” that highlights several factors that affected the 2015 results as it relates to compliance with the financial policy.
Capital Improvements
Total capital expenditures for the years 2011 through 2015, budgeted capital spending in 2016 and projected capital spending from 2017 to 2019 are presented in the following table. During the period 2011 through 2015, the District received approximately $14 million in contributions in aid of construction which offset the total capital expenditures listed in the table. In the next four years, approximately 40% of the capital projects will be for distribution, 22% for substations, 21% for transmission and 17% for general plant projects. Although fiscal policies allow for the funding of capital expenditures through a combination of 40% debt and 60% rates, the projected expenditures through 2019 are expected to be financed from annual operating revenues.
Capital Expenditures
Year Expenditures 2011 $14,834,000 2012 9,851,000 2013 7,534,000 2014 8,518,000 2015 10,247,000 2016(1) 7,800,000 2017(2) 8,000,000 2018(2) 8,000,000 2019(2) 8,000,000 2020(2) 8,000,000 ______(1) Budgeted. (2) Estimated.
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The capital expenditures include substation and transmission improvements, continued replacement of distribution facilities and replacing the District’s customer information, financial and human resources systems.
THE DISTRICT’S POWER SUPPLY
General
The District obtains most of its power supply (about 81% of its actual load) pursuant to a long-term Block and Slice contract with Bonneville. See “Bonneville Power Administration.” The District’s remaining power supply requirements are supplied by various District-owned generation and contract purchases. The following chart reflects the power supply breakdown for 2013, 2014 and 2015.
Power Supply Resources
Average MW (aMW) Resource 2013 2014 2015 Bonneville Slice 86.0 86.0 68.0 Bonneville Block 62.0 62.0 64.0 Frederickson 45.0 45.0 45.0 Nine Canyon 20.0 20.0 20.0 Sierra Pacific 5.0 11.0 11.0 Coastal Energy Project 1.5 1.5 1.5
The District is projected to be generally in load/resource balance in most months to slightly surplus in some months of the operating year on a firm power supply basis. The District sells into the spot market any surplus it has and finds it necessary from time to time to purchase incidental energy in the spot market to cover any existing resource shortfall.
Bonneville Power Administration
Bonneville was established by the Bonneville Project Act of 1937. Bonneville markets power from 31 federal hydroelectric projects, one non-federally owned nuclear plant, several small power plants in the Pacific Northwest, and from various contractual rights having an expected aggregate output in operating year 2017 (August 1, 2016 through July 31, 2017) of 10,309 annual average megawatts (“aMW”) under median water conditions and 8,089 annual aMW under low water conditions (the “Federal System”). Annual aMW are the number of megawatt-hours of electric energy used, transmitted, or produced over the course of one year and each annual aMW is equal to 8,760 megawatt-hours. These hydroelectric projects, built and operated by the United States Bureau of Reclamation and the United States Army Corps of Engineers, are located in the Columbia River basin. The region’s sole nuclear facility was built and is being operated by Energy Northwest. The Federal System currently produces more than one-third of the region’s electric energy supply. Bonneville’s transmission system includes over 15,000 circuit miles of transmission lines, provides approximately 80% of the Pacific Northwest’s high-voltage bulk transmission capacity, and serves as the main power grid for the Pacific Northwest. Bonneville sells electric power at wholesale rates to more than 125 utility, industrial and governmental customers in the Pacific Northwest. Its service area covers over 300,000 square miles and has a population of about 12 million.
The District and other publicly owned utilities and cooperatives are “preference” customers of Bonneville pursuant to federal legislation, which requires Bonneville to give preference and priority to public agencies and cooperatives in the distribution and marketing of federal power.
The District obtains power from Bonneville under a long-term power purchase agreement. Bonneville supplies the District’s power under a 20-year Block and Slice Power Sales Agreement, which extends from October 1, 2008 through September 30, 2028. Power deliveries under the contract are for a 17-year period that began on October 1, 2011. This contract provides federal power in the form of two products: Block and Slice. The Block product provides power in monthly amounts ranging between 52 MW to 81 MW. The Slice product provides the District 0.96996% of the output of the Federal System. The District’s share of the Slice product is expected to be 92 aMW in an average year, but varies considerably based on water conditions within the Northwest.
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Under the Power Sale Agreement, Bonneville requires preference customers to post collateral if Bonneville determines that it is necessary to secure the payments under the contract. Bonneville has not required the District to post collateral, and the District does not expect to be required to post collateral in the future.
Under all of the Bonneville contracts, the amount of power that Bonneville’s preference customers may purchase under Bonneville’s lowest cost rate is limited to an amount equal to the generating output of the current Federal System, with some limited amounts of augmentation (“Tier 1” power). Any incremental purchases by preference customers from Bonneville above this base amount of power is sold at a higher rate reflecting the incremental cost to Bonneville of obtaining additional power (“Tier 2” power). Bonneville has established for each preference customer a contractually defined level of access to power available at Bonneville’s lowest cost preference rate (“Tier 1” rates). This Tier 1 amount is based on the customer’s net requirement load for the 12 month period ending September 23, 2010. The District has not and does not expect to purchase any Tier 2 power from Bonneville.
Bonneville Transmission Services. The District traditionally purchased bundled electric power and transmission services from Bonneville under the District’s power sales contract. However, in response to changed Federal Energy Regulatory Commission (“FERC”) regulations, Bonneville unbundled its electric transmission services in the late 1990’s, and now requires that transmission be purchased separately. The District’s current contract with Bonneville for transmission services expires on July 1, 2023. Bonneville raised its average transmission rates approximately 4.4% effective October 1, 2015.
Bonneville Rates. Bonneville is required by federal law to recover all of its costs through the rates it charges its customers. Bonneville conducts a rate case every two years. Bonneville’s current average preference customer rate is $33.75 per MWh. Bonneville raised its rates 7.1% overall effective October 1, 2015, which increased the District’s rates 5.86%. Bonneville conducts a rate case every two years, but the rates are subject to a cost recovery adjustment clause that allows power rates to increase during a two-year rate period if certain events occur. There are any number of factors that have and could impact Bonneville’s cost of service and rates, including federal legislation, Bonneville’s obligations regarding its outstanding federal debt, number of customers, water conditions, fish and other environmental regulations, capital needs of the Federal System, outcome of various litigation, and regional transmission issues. The next rate increase will be effective October 1, 2017.
The District adjusts its rates as required to pass through to its customers any increases or decreases in the cost of Bonneville power. See “THE DISTRICT – District Rate Increases.”
Bonneville and Energy Northwest. Energy Northwest is a municipal corporation and a joint operating agency organized and existing under the laws of the State. The District is a member of Energy Northwest and a participant in Energy Northwest’s Nuclear Projects Nos. 1, 2, and 3. Project No. 2, known as the Columbia Generating Station, currently is operating. The other projects have been terminated. The District, Energy Northwest, and Bonneville have entered into separate Net Billing Agreements with respect to $5.4 billion in outstanding bonds (as of December 31, 2015) for Energy Northwest’s Project No. 1, Project No. 2, and 70% ownership share of Project No. 3 (collectively, the “Net Billed Projects”) under which the District has purchased from Energy Northwest and, in turn, assigned to Bonneville a maximum of 2.769%, 3.075%, and 2.386% of the capability of Projects No. 1, Columbia Generating Station, and Energy Northwest’s ownership share of Project No. 3, respectively. Under the agreements, the District is unconditionally obligated to pay Energy Northwest its pro rata share of the total costs of the projects, including debt service, whether or not construction is terminated. Under the Net Billing Agreements, Bonneville is responsible for the District’s percentage share of the total annual cost of each project, including debt service on revenue bonds issued to finance the costs of construction. The District’s electric revenue requirements are not directly affected by the cost of completion of the Net Billed Projects. The revenue requirements are affected only to the extent that the costs of the projects result in increases in Bonneville’s wholesale power rates.
Frederickson CT Project
On March 26, 2001, the District entered into an agreement with Frederickson Power, L.P. for the purchase of 45 MW of contract capacity from the Frederickson combined-cycle natural-gas fired combustion turbine project near Tacoma, Washington (the “Frederickson CT Project”). The period of power delivery is 20 years commencing on the date of commercial operation in September 2002, and expiring in August 2022. Public Utility District No. 1 of Benton County, Washington (“Benton PUD”) and Public Utility District No. 1 of Franklin County, Washington (“Franklin PUD”) also purchase contract capacity under separate but substantially similar agreements.
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The Frederickson CT Project is used to supplement the District’s variable Bonneville Slice resource. To ensure economic operation, the plant is dispatched based on an economic protocol that has been agreed to by all project capacity owners. Power deliveries and variable energy charges are based on a deemed heat rate of 7,100 British thermal units (“BTUs”) per kilowatt-hour. Power costs include a capacity charge and fixed and variable operation and maintenance charges indexed to performance and escalation factors. Under the contract the District is obligated to pay whether or not the Frederickson CT Project produces energy. The District believes that the cost of Frederickson CT Project generation compares favorably with other similar combined-cycle turbines.
The District, together with Benton PUD and Franklin PUD, have secured firm pipeline transportation for fuel between the plant and the Canadian receipt point of Huntingdon. Furthermore, to assist in sourcing gas in British Columbia, Alberta, and the Northwest Territories, the District successfully obtained long-term firm capacity in Westcoast Energy’s open season for Southern Mainline and Westcoast Alberta capacity. The Energy Authority is the District’s marketing agent for gas purchases and sales. In June 2001, the District entered into a long-term agreement through October 2018 with Westcoast Energy for natural gas pipeline transportation capacity to serve its share of the Frederickson CT Project. The transportation capacity is dedicated to provide natural gas for Frederickson operations when the plant is economically viable and the transportation capacity is economically viable. In January 2006, the District executed a permanent assignment of most of this capacity, transferring its right, title and interest to Terasen Gas, Inc., for the period November 1, 2006 through October 31, 2018. In October 2007, the District executed an agreement to assign the remaining pipeline capacity to Terasen Gas, Inc. for the period November 1, 2007 through October 31, 2018. The contract covers all of the District’s share of the operation and maintenance costs of the project.
Franklin PUD/Grays Harbor PUD Peak Generating Station
Franklin PUD and the District (the “PUDs”) have jointly constructed a four-unit, 44 MW, simple-cycle gas-turbine generating station located in Franklin PUD’s service area in Pasco, Washington. Commercial operation began in July 2002. The PUDs jointly own the commonly-owned facilities and individually own the separately-owned facilities, i.e., the turbines and outfitted exhaust systems. The District’s 22 MW of capacity is used during periods of heavy load and/or high market prices.
Franklin PUD is the project manager for construction, operation, and maintenance. Project decisions are made as though both PUDs are 50% owners of the entire facility. Fixed costs are shared equally; variable costs are shared in proportion to the energy generated by each PUD. In 2010, Franklin PUD determined that the Pasco Combustion Turbine Generating Station was temporarily impaired and in late 2011 Franklin PUD determined that the plant was surplus to its needs. The District made a similar determination in 2012. District management determined the fair market value of the plant is approximately $5.4 million based on sales of similar assets. As a result, the District wrote down the carrying value of the asset by $979,802 to reflect this change in valuation.
Nine Canyon Wind Project
The Nine Canyon Wind Project is another Energy Northwest generation project. It is located in the Horse Heaven Hills area southwest of Kennewick, Washington (approximately 185 miles southeast of Seattle, Washington). The District entered into a Nine Canyon Wind Farm Project Power Purchase Agreement with Energy Northwest for the purchase of 10.01 MW of generating capacity. The Power Purchase Agreement will terminate on July 1, 2023 for Phase I and Phase II, and on July 1, 2030 for Phase III.
The Wind Project, including Phase I, Phase II, and Phase III, has been created as a separate system of Energy Northwest. The Wind Project does not include Energy Northwest’s other projects, facilities or systems, or any future facilities that are constructed or acquired by Energy Northwest as part of a system declared by Energy Northwest’s Board of Directors to be separate from the Wind Project.
Phase I, which commenced commercial operation in September 2002, consists of 37 wind turbines with an aggregate generating capacity of approximately 48 MW. Phase II commenced commercial operation in December 2003 and consists of an additional 12 wind turbines with an aggregate generating capacity of approximately 15.6 MW. Phase III of the Project commenced commercial operation in May 2008 and consists of an additional 14 wind turbines with an aggregate generating capacity of approximately 32 MW.
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Energy Northwest entered into the Second Amended and Restated Nine Canyon Wind Project Power Purchase Agreement dated October 30, 2006 (the “Power Purchase Agreement”) with the following PUDs: the District, PUD No. 1 of Benton County, PUD No. 1 of Chelan County, PUD No. 1 of Cowlitz County, PUD No. 1 of Douglas County, Franklin PUD, PUD No. 2 of Grant County, PUD No. 1 of Lewis County, PUD No. 3 of Mason County and PUD No. 1 of Okanogan County (collectively, the “Phase I Purchasers”). The Power Purchase Agreement sets forth the terms and conditions under which the Phase I Purchasers will obtain shares of project output in exchange for paying certain costs of the project, including amounts equal to debt service on Phase I bonds. In addition, the Power Purchase Agreement sets forth the terms and conditions under which the District and PUDs No. 1 of Chelan, Douglas and Okanogan Counties and PUD No. 3 of Mason County will obtain additional shares of project output in exchange for paying certain costs of the project, including debt service on the Phase II bonds whether or not the project is operating. The Power Purchase Agreement also sets forth the terms and conditions under which the District and PUDs No. 1 of Benton, Franklin and Lewis Counties and PUD No. 3 of Mason County will obtain additional shares of project output in exchange for paying costs of the project including debt service on the Phase III bonds. Energy Northwest issued $70,675,000 of bonds for Phase I, $21,720,000 of bonds for Phase II and $69,410,000 of bonds for Phase III. Energy Northwest refunded a portion of the Phase 1 bonds in 2005 and again in 2014, a portion of the Phase II bonds in 2012, and a portion of the Phase III bonds in January 2015.
The District is responsible for 20.89% of the annual operation and maintenance budget for the Nine Canyon Wind Project and is entitled to the same amount of project output. The District is responsible for 12.50% of the debt service of Phases I and II and 37.52% of the debt service of Phase III. Annual costs, including repayment of debt service of the outstanding revenue bonds, are paid by the purchasers. The District could be required to pay up to an additional 25% of the District’s share in the event of a default by another purchaser or purchasers. In 2015, the District received 44,314 MWh of wind generation output from the Nine Canyon Wind Project at the cost of $93 per MWh. The Nine Canyon Wind Project is a renewable resource and may be used to meet the District’s requirement under I-937. See “THE DISTRICT—General” for a discussion of I-937.
Coastal Energy Project
The District has contracted with the Coastal Community Action Program to purchase the output of its wind project in Grayland, Washington. Total nameplate capacity is 6 megawatts, and expected output will average 1.5 megawatts. The contract is a 20 year agreement that expires on May 31, 2030, for $75 per megawatt hour produced with a 2% annual escalator. In 2015, the District received 13,201 MWh of wind generation from the Coastal Energy project.
Sierra Pacific Industries
The District has contracted with Sierra Pacific Industries under a contract that ends on July 31, 2022, to purchase a portion of the output from its biomass energy project located in Grays Harbor County. The total capacity of the generation project is 15 megawatts, although the District currently purchases 11 average MWh. A portion of the generation serves the mill load and Sierra Pacific agreed to sell the balance to the District in a tiered agreement designed to match the stepped-up requirements of I-937.
Market Purchases and Sales
The District participates in wholesale markets to buy, sell, and exchange electricity and transmission services as necessary to best effect a reliable and economic balance between its varied resource portfolio and changing loads. The District is a party to the Western Systems Power Pool Agreement and has executed netting agreements with each of its preferred traders in order to expedite transactions and reduce counterparty risk.
In addition to long-term resources, the District enters into short and medium-term purchases. These purchases augment the District’s capability of serving forecasted firm loads as well as short-term load variations, enhancing the reliability and economic performance of the District’s power portfolio. The District does not engage in speculative power trading, but manages its net position in accordance with specific guidelines from its risk management policies and procedures.
In preparing its budget, the District budgets for wholesale power sales based on a P15 case (15th driest year out of 100) and, therefore, regularly exceeds its budget expectation. For example, in 2015, the District budgeted
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$12 million in wholesale revenues, and actual sales were $17 million. See “THE ELECTRIC SYSTEM— Management Discussion.” The Risk Management Policy allows the District to sell forward one-half of its surplus Bonneville Slice power under the conservative budget case. Surplus power is defined as power remaining after meeting forecasted load requirements. Once more information is received regarding the water supply year, the District can then transact additional forward sales if they are in a surplus position. In addition to Slice power, the District markets the excess energy from its other resources, including the Frederickson CT Project, Nine Canyon Wind Project and Coastal Energy wind projects and biomass generation from Sierra Pacific Industries.
Power Scheduling
The District entered into a Resource Management Agreement with The Energy Authority (“TEA”) in 2006 to provide scheduling, dispatching, fuel management and other power management services, primarily relating to the District’s power from its Bonneville Slice contract. The agreement has been extended and expires in 2028. The District has the unilateral right to terminate the agreement upon two years’ written notice. The agreement also provides for annual consulting task orders to provide for a variety of power management services. Under the agreement, TEA is authorized to trade real time and day-ahead transactions as principal (utilizing TEA’s credit and contracts) on behalf of the District. This arrangement allows a financial benefit to the District with TEA trading in aggregated larger power blocks and passing the resulting transaction pricing on to the District. It also provides the advantages of simplified settlement, lower operational and settlement risk, and rigorous documentation and equitable allocation of pricing for like transactions across public utility districts. TEA trades forward transactions specifically approved by the District, as agent.
TEA is headquartered in Jacksonville, Florida, with a satellite office in Bellevue, Washington. TEA, a Georgia nonprofit entity, was formed in 1997 and is owned by eight public utility systems located in the southeast, midwest and the State. The District is not an owner/member, but is a “partner” of TEA. TEA serves over 50 public power entities throughout the United States.
Agreement with Benton PUD and Franklin PUD
On April 27, 2001, the District entered into a joint scheduling agreement with Benton County PUD and Franklin County PUD. Under this agreement, the three PUDs, with the assistance of their scheduling agent, TEA, will coordinate operation of their respective systems to maximize the benefits of purchases, sales, and scheduling of electric power and transmission. The agreement has been expanded as TEA has brought on new clients. In addition to the original three members, the following utilities have been added: Clark Public Utilities, Cowlitz County PUD, Klickitat County PUD, Pacific County PUD, Emerald Peoples Utility District and Lewis County PUD. The Joint Scheduling Operating Committee, consisting of a representative from each PUD, meets each month to provide continuing direction and policy to TEA with respect to executing the annual operating plan. All members, like the District, are Slice/Block purchasers, have non-Federal resources, and have developed risk management policies and procedures similar to the District’s policies. The members have diverse generation and load profiles. The joint scheduling agreement seeks to take advantage of the fact that the coincident peak load of the PUDs is lower, hence theoretically less costly to serve, than the total non-coincidental loading. The joint scheduling agreement also affords the parties greater resource diversity, hence increased resource reliability. The joint scheduling agreement contract requires two years notice in order for a member, or TEA, to terminate. See “THE DISTRICT’S POWER SUPPLY—Power Scheduling.”
Risk Management
The District has Policies and Procedures for Risk Management and Trading Operations, which were originally adopted in 2001 and most recently updated in 2013. These detail guidelines for considering and/or engaging in any power and gas trading agreements. The District’s Risk Management Committee (“RMC”), with oversight and review by the Board, actively manages financial risk. See “Power Swaps” below. Key attributes of the District’s risk management program include the following:
• The Board of Commissioners approved a Risk Policy and Procedures document; • The Board of Commissioners articulates budget and financial goals and objectives; • The District does not engage in speculative trading;
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• The District’s net position drives all wholesale market trading activity; • The RMC holds monthly meetings to discuss strategy and performance; • Monthly reporting to the RMC of the District’s net position under a range of Bonneville Slice generation scenarios for the balance of the current year; • Daily reporting of power budgets marked to current forward power and natural gas prices, as well as current Slice generation outlooks; and • Daily monitoring of counterparty credit exposures against approved limits.
Power Swaps
The District has entered into hedging agreements in the form of the International Swap Dealers Association Agreements (“ISDA Agreements”) with 10 counterparties. The ISDA Agreements are used by the District to manage market price purchase risk for natural gas or other energy supplies and occasionally to manage the market price risk in the disposition of natural gas or other energy when the District cannot consume its full supply of energy. The District expects that it will use the ISDA Agreements primarily as a financial hedge so that the District will pay or receive the equivalent of a fixed or known price for energy purchased or disposed of. The ISDA Agreements also permit the District to hedge the risk of an underlying physical position of the District by using call options, put options, runoff insurance and weather insurance. TEA is managing the use of these ISDA Agreements on the District’s behalf. The ISDA Agreements do require early termination and a potential payment in the event of default by either party. In addition, the District could be required to post a letter of credit or collateral if the District’s credit rating or financial position deteriorated. The District anticipates continuing to execute ISDA Agreements with creditworthy counterparties in the future. See “SECURITY FOR THE BONDS—Contingent Payment Obligations” and Appendix A―“AUDITED FINANCIAL STATEMENTS FOR 2015—Note 3.”
At December 31, 2015, the District had the following derivative instruments outstanding:
Fair Value at December 31, 2015 Cash Flow Hedges Classification Amount(1) Notional Commodity Forward Sales Derivative Asset $ 4,794,080 875,818 MWh Commodity Forward Purchases Derivative Liability (2,086,982) 446,224 MWh
(1) Value of forward sales and purchases.
The District has entered into several power purchase contracts in the form of mutual netting/settlement agreements. The agreements establish an arrangement by which monetary amounts that become due and owing to the counterparty by the District are to be set off against monetary amounts that become due and owing to the District by the counterparty. The agreements also provide for remedies in the event of default.
Conservation Programs
In addition to activities on the power supply front, the District is implementing a number of measures to help customers deal with rising electricity prices. For the 2016-2017 biennium, the Commission adopted a target of 0.74 aMW of conservation. The District’s current expenditures on conservation average approximately $1,500,000 per year, made up of a combination of internal and Bonneville funds. Conservation spending has increased due to the passage of I-937, which now requires the District to perform all cost effective conservation. The District completed a conservation potential analysis and has enacted expanded programs to meet the State requirement. See “THE DISTRICT’S POWER SUPPLY—General” for a discussion of I-937.
For residential customers, the District provides rebates on home weatherization, electric heating system upgrades, solar water heating systems, energy efficient lighting, and some appliances. Non-residential customers can take advantage of a flexible offering of conservation incentives. The majority of projects implemented involve heating and cooling system upgrades, energy efficient lighting, and motor and compressor upgrades for industrial customers.
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Initiative 937 (The Energy Independence Act)
State Initiative 937 (“I-937”), which was approved at the November 6, 2006, election, requires electric utilities that serve more than 25,000 customers to obtain at least (1) 3% of their electricity from renewable resources by January 1, 2012, and each year thereafter through December 31, 2015; (2) 9% of their electricity from renewable resources by January 1, 2016, and each year thereafter through December 31, 2019; and (3) 15% of their electricity from renewable resources by January 1, 2020, and each year thereafter. I-937 also requires qualifying electric utilities to undertake various cost-effective energy conservation efforts. The District currently has 41,601 customers and, therefore, I-937 applies to the District.
In addition, I-937 requires that by January 1, 2010, each qualifying utility shall establish its ten-year cost-effective conservation plan and review/update it every two years thereafter. The District’s ten-year plan must use methodologies consistent with the Northwest Power and Conservation Council.
The State Auditor examines the District’s compliance for renewable energy under I-937 and has found the District to have met its 2012, 2013 and 2014 targets. The District expects that its current resources will be sufficient to meet the District’s I-937 requirements through 2020.
Climate Change
The State Legislature enacted legislation requiring the State Governor to develop policy recommendations for achieving specific greenhouse gas reduction targets and requiring that power supply contracts of five years or more comply with certain emission standards. Various federal energy legislation proposed could set national standards for renewable energy generation, conservation efforts, and encourage greenhouse gas reduction. Bonneville participated in formulating rules to implement the standards.
An initiative will be on the November 2016 ballot in Washington to approve a tax on the carbon pollution from fossil fuels. The carbon-emissions tax would start at $15 per metric ton in 2017, increase to $25 in 2018 and increase annually at 3.5% plus inflation, up to $100 per metric ton. If the initiative passes, open market purchases by utilities, unspecified as to their source, would be taxed based on one metric ton of carbon per megawatt hour, equivalent to a coal-fired generation plant. The tax would be on the first user of natural gas or electricity in the State. As a result, the majority of the tax will be on the consumer of electricity and added as a tax on customer bills. The utility would be required to collect the tax and remit to the State. The District will have some additional costs as a result of the tax related to the operation of the Frederickson CT plant due to the natural gas used by the plant. The Commission adopted a resolution opposing the initiative.
Federal, regional, state and international initiatives have been proposed or adopted to address global climate change by controlling or monitoring greenhouse gas emissions, by encouraging renewable energy development and by implementing other measures. The U.S. Environmental Protection Agency established a rule under the Federal Clean Air Act, which would regulate carbon emissions in the electricity industry by setting state-specific rate-based goals for carbon dioxide emissions from the power section. This rule, however, is being challenged in court and has been stayed until the legal challenge is complete. The District cannot predict whether or when new laws and regulations or proposed initiatives would take effect in a manner that would affect the District, and, if so, how they would affect the District.
The U.S. Environmental Protection Agency has proposed a rule that would regulate carbon emissions in the electric industry by setting “state specific rate-based goals for carbon dioxide emissions from the power sector.” Bonneville has stated that it expects that the direct impact of this rule, if adopted, on Bonneville would be limited because the Federal System’s generating projects are hydro-or nuclear based generation or wind-based purchases, which are not greenhouse gas emitting.
The physical effects of climate change could affect the generation capability of Bonneville to meet the loads of its power purchasers, including the District. Bonneville’s generating capacity is primarily hydroelectric generation and is reliant on precipitation and snow pack. Climate change could affect the amount, timing and availability of hydroelectric generation, which could result in increased costs to the District. As noted under the “Electric System Customers, Energy Sales and Peak Demand” table, energy sales have decreased because of milder weather.
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Various Factors Affecting the Electric Utility Industry
The electric utility industry in general has been, or in the future may be, affected by a number of factors which could impact the financial condition and competitiveness of many electric utilities and the level of utilization of generating and transmission facilities. Such factors include, among others, (1) effects of compliance with rapidly changing environmental, safety, licensing, regulatory and legislative requirements, (2) changes resulting from conservation and demand-side management programs on the timing and use of electric energy, (3) changes resulting from a national energy policy, (4) effects of competition from other electric utilities (including increased competition resulting from mergers, acquisitions, and “strategic alliances” of competing electric and natural gas utilities and from competitors transmitting less expensive electricity from much greater distances over an interconnected system) and new methods of, and new facilities for, producing low-cost electricity, (5) Federal laws and regulations and congressional inaction, (6) increased competition from independent power producers and marketers, brokers and federal power marketing agencies, (7) issues integrating wind generation, (8) cybersecurity and other security breaches, (9) “self-generation” or “distributed generation” (such as microturbines and fuel cells) by industrial and commercial customers and others, (10) issues relating to the ability to issue tax-exempt obligations, including severe restrictions on the ability to sell to nongovernmental entities electricity from generation projects and transmission service from transmission line projects financed with outstanding tax-exempt obligations, (11) effects of inflation on the operating and maintenance costs of an electric utility and its facilities, (12) changes from projected future load requirements, (13) increases in costs and uncertain availability of capital, (14) shifts in the availability and relative costs of different fuels (including the cost of natural gas), (15) sudden and dramatic increases in the price of energy purchased on the open market that may occur in times of high peak demand in an area of the country experiencing such high peak demand, such as has occurred in California, (16) inadequate risk management procedures and practices with respect to, among other things, the purchase and sale of energy and transmission capacity, (17) other legislative changes, voter initiatives, referenda and statewide propositions, (18) effects of the changes in the economy, (19) effects of possible manipulation of the electric markets, (20) natural disasters or other physical calamities, including, but not limited to, earthquakes, lahars, mudslides, tsunamis, windstorms and floods, (21) man- made physical and operational disasters, including, but not limited to, terrorism, cyber attacks and collateral damage from computer viruses and (22) changes to the climate. Any of these factors (as well as other factors) could have an adverse effect on the financial condition of any given electric utility, including the District, and likely will affect individual utilities in different ways.
The District is unable to predict what impact such factors will have on its business operations and financial condition. This Official Statement includes a brief discussion of certain of these factors. This discussion does not purport to be comprehensive or definitive, and these matters are subject to change subsequent to the date hereof.
GENERAL AND ECONOMIC INFORMATION
Grays Harbor County (the “County”) is located in southwestern Washington. It is bordered by the Pacific Ocean to the west, Jefferson County to the north, Pacific and Lewis Counties to the south, and Mason and Thurston Counties to the east. Development in the County is oriented towards the Pacific Ocean, which provides an avenue of commerce for the lumber and wood products that form the base of the local economy, and a livelihood for fishermen and recreational opportunities for the State’s urban population. The two largest cities are the seaports of Aberdeen and Hoquiam, which are located at the head of Grays Harbor, the large natural harbor from which the County takes its name.
The County has a total area of 1,910 square miles and a total population of approximately 72,820. Most of the County’s land area consists of private timber holdings, Indian reservations, the Olympic National Forest and the Capitol State Forest. These areas are virtually unpopulated and, except for acreage adjacent to urban areas, are not expected to become available for private development. The topography is generally low and rolling tree-covered hills to sandy ocean beaches. Interior river valleys give way to mountains in the northern portion of the County.
Historical population for the County and the Cities of Hoquiam and Aberdeen are illustrated below:
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Historical Population
Year Grays Harbor County City of Aberdeen City of Hoquiam 2016 72,820 16,780 8,580 2015 73,110 16,780 8,575 2014 73,300 16,850 8,625 2013 73,200 16,860 8,620 2012 73,150 16,890 8,655
Source: State of Washington Office of Financial Management.
The County’s economy is based primarily on government, timber harvesting, wood-product related manufacturing, forest management, lumber processing, boats, paper, fishing and tourism. Following are selected economic indicators for the County:
Aberdeen Metropolitan Statistical Area (Grays Harbor County) Resident Labor Force and Employment Data
2012 2013 2014 2015 2016(1) Labor Force 28,869 28,097 27,178 26,909 27,301 Employed 25,138 24,721 24,445 24,501 24,844 Unemployed 3,731 3,376 2,733 2,408 2,457 County Unemployment Rate 12.9% 12.0% 10.1% 8.9% 9.0%
(1) Average through August 2016. Source: Washington State Employment Security Department, Labor Market and Economic Analysis Branch.
Grays Harbor County Nonagricultural Wage and Salary Employment
NAICS Industry Title 2012 2013 2014 2015 2016(1) Goods Producing Mining, Logging & Construction 1,200 1,150 1,120 1,150 1,150 Manufacturing 2,830 2,490 2,380 2,440 2,300 Total(2) 4,030 3,640 3,490 3,590 3,450 Services Providing Trade, Transportation & Utilities 3,860 3,650 3,700 3,740 3,830 Information & Financial Activities 1,000 1,030 1,000 960 920 Professional & Business Services 1,130 1,050 1,110 1,190 1,250 Education & Health Services 3,240 3,100 3,150 2,940 2,940 Leisure & Hospitality 2,200 2,160 2,260 2,280 2,490 Government 6,190 6,250 6,290 6,360 6,400 (2) Total 18,400 18,040 18,320 18,270 18,660 Total Nonfarm(2) 22,430 21,680 21,800 21,860 22,100
(1) Average through August 2016. (2) Totals may not add due to rounding. Source: Washington State Employment Security Department, Labor Market and Economic Analysis Branch.
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The following is a list of the major employers in the County:
Grays Harbor County Major Employers
Employer Product or Business Employees Grays Harbor Community Hospital Healthcare 734 Stafford Creek Corrections Center Corrections 582 Aberdeen School District Education 466 Quinault Nation Government 450 Westport Shipyard Manufacturing 375 Quinault Beach Resort Hospitality 371 Grays Harbor College Education 300 Wal-Mart Retail 305 Sierra Pacific Manufacturing 210 Washington Crab Producers Food Processing 200 Simpson Door Plant Doors 191 Safeway Foods Retail 178 Cosmo Specialty Fibers Manufacturing 172 City of Aberdeen Government 172 Hanner Enterprises Hospitality 170 The District Utilities 164
Source: Greater Grays Harbor Inc. 2016 and the District.
Grays Harbor County and State of Washington Personal and Per Capita Income
Grays Harbor County State of Washington Total Total Personal Income Per Capita Personal Income Per Capita Year (000’s) Income (000’s) Income 2014(1) $2,430,866 $34,326 $350,321,729 $49,610 2013 2,285,186 32,185 331,031,362 47,468 2012 2,314,630 32,280 326,496,701 47,344 2011 2,249,586 31,110 305,628,042 44,800 2010 2,173,485 29,842 288,694,995 42,821
(1) Most current data available. Source: U.S. Department of Commerce, Bureau of Economic Analysis.
Grays Harbor County Assessed Valuation
Year Assessed Valuation 2016 $5,835,628,957 2015 5,828,201,186 2014 6,004,054,364 2013 6,244,148,112 2012 6,375,028,341
Source: Grays Harbor County Assessor’s Office.
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Grays Harbor Taxable Retail Sales
Tax Year Grays Harbor County 2016(1) $ 211,117,108 2015 930,430,637 2014 1,196,483,539 2013 819,684,510 2012 794,767,516 2011 902,674,089
(1) For the first quarter of 2016; latest data available. The taxable retail sales for the first quarter of 2015 was $202,807,666. Source: Washington State Department of Revenue.
TAX MATTERS
Tax Exemption
Exclusion From Gross Income. In the opinion of Bond Counsel, under existing federal law and assuming compliance with applicable requirements of the Internal Revenue Code of 1986, as amended (the “Code”), that must be satisfied subsequent to the issue date of the Bonds, interest on the Bonds is excluded from gross income for federal income tax purposes and is not an item of tax preference for purposes of the alternative minimum tax applicable to individuals.
Continuing Requirements. The District is required to comply with certain requirements of the Code after the date of issuance of the Bonds in order to maintain the exclusion of the interest on the Bonds from gross income for federal income tax purposes, including, without limitation, requirements concerning the qualified use of Bond proceeds and the facilities financed or refinanced with Bond proceeds, limitations on investing gross proceeds of the Bonds in higher yielding investments in certain circumstances, and the requirement to comply with the arbitrage rebate requirement to the extent applicable to the Bonds. The District has covenanted in the Resolution to comply with those requirements, but if the District fails to comply with those requirements, interest on the Bonds could become taxable retroactive to the date of issuance of the Bonds. Bond Counsel has not undertaken and does not undertake to monitor the District's compliance with such requirements.
Corporate Alternative Minimum Tax. While interest on the Bonds also is not an item of tax preference for purposes of the alternative minimum tax applicable to corporations, under Section 55 of the Code, tax exempt interest, including interest on the Bonds, received by corporations is taken into account in the computation of adjusted current earnings for purposes of the alternative minimum tax applicable to corporations (as defined for federal income tax purposes). Under the Code, alternative minimum taxable income of a corporation will be increased by 75% of the excess of the corporation's adjusted current earnings (including any tax exempt interest) over the corporation’s alternative minimum taxable income determined without regard to such increase. A corporation’s alternative minimum taxable income, so computed, that is in excess of an exemption of $40,000, which exemption will be reduced (but not below zero) by 25% of the amount by which the corporation's alternative minimum taxable income exceeds $150,000, is then subject to a 20% minimum tax.
A small business corporation is exempt from the corporate alternative minimum tax for any taxable year beginning after December 31, 1997, if its average annual gross receipts during the three-taxable-year period beginning after December 31, 1993, did not exceed $5,000,000, and its average annual gross receipts during each successive three- taxable-year period thereafter ending before the relevant taxable year did not exceed $7,500,000.
Tax on Certain Passive Investment Income of S Corporations. Under Section 1375 of the Code, certain excess net passive investment income, including interest on the Bonds, received by an S corporation (a corporation treated as a partnership for most federal tax purposes) that has Subchapter C earnings and profits at the close of the taxable year may be subject to federal income taxation at the highest rate applicable to corporations if more than 25% of the gross receipts of such S corporation is passive investment income.
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Foreign Branch Profits Tax. Interest on the Bonds may be subject to the foreign branch profits tax imposed by Section 884 of the Code when the Bonds are owned by, and effectively connected with a trade or business of, a United States branch of a foreign corporation.
Possible Consequences of Tax Compliance Audit. The Internal Revenue Service (the “IRS”) has established a general audit program to determine whether issuers of tax-exempt obligations, such as the Bonds, are in compliance with requirements of the Code that must be satisfied in order for interest on those obligations to be, and continue to be, excluded from gross income for federal income tax purposes. Bond Counsel cannot predict whether the IRS would commence an audit of the Bonds. Depending on all the facts and circumstances and the type of audit involved, it is possible that commencement of an audit of the Bonds could adversely affect the market value and liquidity of the Bonds until the audit is concluded, regardless of its ultimate outcome.
Certain other Federal Tax Consequences
Bonds Not “Qualified Tax-Exempt Obligations” for Financial Institutions. Section 265 of the Code provides that 100% of any interest expense incurred by banks and other financial institutions for interest allocable to tax-exempt obligations acquired after August 7, 1986, will be disallowed as a tax deduction. However, if the tax-exempt obligations are obligations other than private activity bonds, are issued by a governmental unit that, together with all entities subordinate to it, does not reasonably anticipate issuing more than $10,000,000 of tax-exempt obligations (other than private activity bonds and other obligations not required to be included in such calculation) in the current calendar year, and are designated by the governmental unit as “qualified tax-exempt obligations,” only 20% of any interest expense deduction allocable to those obligations will be disallowed.
The District is a governmental unit that, together with all subordinate entities, reasonably anticipates issuing more than $10,000,000 of tax-exempt obligations (other than private activity bonds and other obligations not required to be included in such calculation) during the current calendar year and has not designated the Bonds as “qualified tax-exempt obligations” for purposes of the 80% financial institution interest expense deduction. Therefore, no interest expense of a financial institution allocable to the Bonds is deductible for federal income tax purposes.
Reduction of Loss Reserve Deductions for Property and Casualty Insurance Companies. Under Section 832 of the Code, interest on the Bonds received by property and casualty insurance companies will reduce tax deductions for loss reserves otherwise available to such companies by an amount equal to 15% of tax exempt interest received during the taxable year.
Effect on Certain Social Security and Retirement Benefits. Section 86 of the Code requires recipients of certain Social Security and certain Railroad Retirement benefits to take receipts or accruals of interest on the Bonds into account in determining gross income.
Other Possible Federal Tax Consequences. Receipt of interest on the Bonds may have other federal tax consequences as to which prospective purchasers of the Bonds may wish to consult their own tax advisors.
Potential Future Federal Tax Law Changes. From time to time, there are legislative proposals in Congress which, if enacted, could adversely affect the tax treatment, market value or marketability of the Bonds. It cannot be predicted whether future legislation may be proposed or enacted that would affect the federal tax treatment of interest received on the Bonds. Prospective purchasers of the Bonds should consult with their own tax advisors regarding any proposed or pending legislation that would change the federal tax treatment of interest on the Bonds.
CERTAIN INVESTMENT CONSIDERATIONS
Initiatives and Referendum
Under the State Constitution, the voters of the State have the ability to initiate legislation and require the State Legislature to refer legislation to the voters through the powers of initiative and referendum, respectively. The initiative power in the State may not be used to amend the State Constitution. Initiatives and referenda are submitted to the voters upon receipt of a petition signed by at least 8% (initiatives) and 4% (referenda) of the number of voters registered and voting for the office of Governor at the preceding regular gubernatorial election. Any law approved in this manner by a majority of the voters may not be amended or repealed by the State
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Legislature within a period of two years following enactment, except by a vote of two-thirds of all the members elected to each house of the State Legislature. After two years, the law is subject to amendment or repeal by the State Legislature in the same manner as other laws.
In recent years there has been an increase in the number of initiatives and referenda filed in the State, including initiatives affecting the powers of local jurisdictions. The District cannot predict whether this trend will continue, whether any filed initiatives will receive the requisite signatures to be certified to the ballot, and whether such initiatives will be approved by the voters and, if challenged, upheld by the courts. See “THE DISTRICT’S POWER SUPPLY—Climate Change.”
Limitations on Remedies; Bankruptcy
Any remedies available to the owners of the Bonds upon the occurrence of an event of default under the Resolution are in many respects dependent upon judicial actions which are in turn often subject to discretion and delay and could be both expensive and time-consuming to obtain. If the District fails to comply with its covenants under the Resolution or to pay principal of or interest on the Bonds, there can be no assurance that available remedies will be adequate to fully protect the interests of the owners of the Bonds.
In addition to the limitations on remedies contained in Washington State law, the rights and obligations under the Bonds and the Resolution may be limited by and are subject to bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium, and other laws relating to or affecting creditors’ rights, to the application of equitable principles, and to the exercise of judicial discretion in appropriate cases.
The opinion to be delivered by Foster Pepper PLLC, Seattle, Washington as Bond Counsel, concurrently with the issuance of the Bonds, will be subject to limitations regarding bankruptcy, insolvency and other laws relating to or affecting creditors’ rights. The various other legal opinions to be delivered concurrently with the issuance of the Bonds will be similarly qualified. A complete copy of the proposed form of opinion of Bond Counsel is set forth in Appendix C.
A municipality such as the District must be specifically authorized under state law in order to seek relief under Chapter 9 of the United States Bankruptcy Code (the “Bankruptcy Code”). Chapter 39.64 RCW, entitled the “Taxing Relief Bankruptcy Act,” permits any “taxing district” (defined to include any municipality or political subdivision, such as the District) to voluntarily petition for relief under the predecessor statute to the Bankruptcy Code. A creditor cannot bring an involuntary bankruptcy proceeding against a municipality, including the District. Under Chapter 9, a federal bankruptcy court may not appoint a receiver for a municipality or order the dissolution or liquidation of the municipality. The federal bankruptcy courts have some discretionary powers under the Bankruptcy Code. Taxing districts in the State, including the District, are expressly authorized to carry out a plan of readjustment if approved by the appropriate court. Should the District file for bankruptcy, there could be adverse effects on the holders of the Parity Bonds, including the Bonds.
Under the Bankruptcy Code, if the District became a debtor in a federal bankruptcy proceeding, the owners of the Parity Bonds would continue to have a statutory lien on Gross Revenue after the commencement of the bankruptcy case so long as the Gross Revenues constitute “special revenues” within the meaning of the Bankruptcy Code. “Special revenues” are defined under the Bankruptcy Code to include, among other things, receipts by local governments from the ownership, operation or disposition of projects or systems that are primarily used to provide utility services. The Bankruptcy Code provides that “special revenues” can be applied to necessary operating expenses of the project or system, before they are applied to other obligations. It is not clear which expenses would constitute necessary operating expenses.
If the District is in bankruptcy, parties (including the Bond Registrar and the holders of the Bonds) may be prohibited from taking any action to collect any amount from the District or to enforce any obligation of the District, unless the permission of the bankruptcy court is obtained.
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Natural Disasters
The State is in an area of seismic activity, with frequent small earthquakes and occasionally moderate and larger earthquakes. In addition to various faults beneath the State, the State is within the Cascadia subduction zone, a fault beneath the Pacific Ocean, which produced a large earthquake several hundred years ago and is thought to be capable of causing extensive damage if another such earthquake occurs. The most recent notable earthquake in the State, which measured 6.8 on the Richter Scale, occurred in 2001. Other natural disasters, including tsunamis, mudslides and wind storms, are possible. The loss of life and property damage that could result from a major earthquake or other major natural disasters could have a material and adverse impact on the District and its economy and financial condition.
UNDERWRITING AND LEGAL
Ratings
As noted on the cover page of this Official Statement, Moody’s, S&P and Fitch have assigned their ratings of “A1,” “A” and “A,” respectively, to the Bonds. S&P is expected to assign its ratings of and “AA-” to the Insured Bonds with the understanding that upon delivery of the Insured Bonds, a policy insuring the payment when due of principal of and interest on the Insured Bonds will be issued by National. The ratings were applied for by the District and certain information was supplied by the District to the rating agencies to be considered in evaluating the Bonds. The ratings reflect only the views of the rating agencies and an explanation of the significance of the ratings may be obtained from the rating agencies. There is no assurance that the ratings will be retained for any given period of time or that the ratings will not be revised downward or withdrawn entirely by the rating agencies if, in their judgment, circumstances so warrant. Any such downward revision or withdrawal of the ratings would be likely to have an adverse effect on the market price of the Bonds.
Litigation
There is no litigation pending or threatened in any court to restrain or enjoin the issuance or delivery of the Bonds, or questioning the creation, organization, existence, or title to office of the Commissioners or officers of the District or the proceedings for the authorization, execution, sale and delivery of the Bonds.
The District is a party to lawsuits in its normal course of business, but the District does not believe any of such litigation will have a significant adverse impact upon the financial condition of the District.
Underwriting
The Bonds are being purchased by Barclays Capital Inc. and KeyBanc Capital Markets Inc. (together, the “Underwriters”) at a price of $______(representing the principal amount of the Bonds plus a net original issue premium of $______less an underwriters’ discount of $______). The Underwriters of the Bonds may offer and sell the Bonds to certain dealers (including dealers depositing Bonds into investment trusts) and others at prices lower than the initial offering prices set forth on the inside cover page of this Official Statement, and such initial offering prices may be changed from time to time by the Underwriters. After the initial public offering, the public offering prices may be varied from time to time.
Financial Advisor
Piper Jaffray & Co., Seattle, Washington, has acted as financial advisor to the District in connection with the issuance of the Bonds. The financial advisor has not audited, authenticated, or otherwise verified the information set forth in this Official Statement or the other information available from the District with respect to the appropriateness, accuracy, and completeness of the disclosure of such information, and the financial advisor makes no guarantee, warranty, or other representation on any matter related to such information.
Approval of Counsel
Legal matters incident to the authorization, issuance and sale of the Bonds by the District are subject to the approving legal opinion of Foster Pepper PLLC, Seattle, Washington, Bond Counsel. The form of the opinion of
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Bond Counsel with respect to the Bonds is attached as Appendix C. The opinion of Bond Counsel is given based on factual representations made to Bond Counsel, and under existing law, as of the date of initial delivery of the Bonds, and Bond Counsel assumes no obligation to revise or supplement its opinion to reflect any facts or circumstances that may thereafter come to its attention, or any changes in law that may thereafter occur. The opinion of Bond Counsel is an expression of its professional judgment on the matters expressly addressed in its opinion and does not constitute a guarantee of result. Bond Counsel will be compensated only upon the issuance and sale of the Bonds.
Certain legal matters will be passed upon for the Underwriters by their counsel, Kutak Rock LLP, Spokane, Washington, and any opinion of such counsel will be limited in scope, addressed solely to the Underwriters, and cannot be relied upon by investors.
Conflicts of Interest
All or a portion of the fees of the Underwriters and Bond Counsel are contingent upon the issuance and sale of the Bonds. In addition, Bond Counsel from time to time serves as counsel to the Underwriters with respect to bonds issued by issuers other than the District. None of the Commissioners or other officers of the District have any conflict of interest in the issuance of the Bonds that is prohibited by applicable law.
CONTINUING DISCLOSURE UNDERTAKING
Basic Undertaking to Provide Annual Financial Information and Notice of Listed Events. To meet the requirements of paragraph (b)(5) of United States Securities and Exchange Commission (“SEC”) Rule 15c2-12 (“Rule 15c2-12”), as applicable to a participating underwriter for the Bonds, the District will undertake (the “Undertaking”) for the benefit of holders of the Bonds to provide or cause to be provided, either directly or through a designated agent, to the Municipal Securities Rulemaking Board (“MSRB”), in an electronic format as prescribed by the MSRB, accompanied by identifying information as prescribed by the MSRB: (a) annual financial information and operating data of the type include in this Official Statement as generally described below (“annual financial information”); and (b) timely notice (not in excess of ten business days after the occurrence of the event) of the occurrence of any of the following events with respect to the Bonds: (1) principal and interest payment delinquencies; (2) non-payment related defaults, if material; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notice of Proposed Issue (IRS Form 5701 – TEB) or other material notices or determinations with respect to the tax status of the Bonds, or other material events affecting the tax status of the Bonds; (7) modifications to rights of holders of the Bonds, if material; (8) Bond calls (other than scheduled mandatory redemptions of Term Bonds), if material, and tender offers; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the Bonds, if material; (11) rating changes; (12) bankruptcy, insolvency, receivership or similar event of the District, as such “Bankruptcy Events” are defined in Rule 15c2-12; (13) the consummation of a merger, consolidation, or acquisition involving the District or the sale of all or substantially all of the assets of the District, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and (14) appointment of a successor or additional trustee or the change of name of a trustee, if material.
The District also will provide to the MSRB timely notice of a failure by the District to provide required annual financial information on or before the date specified below.
Type of Annual Financial Information Undertaken to be Provided. The annual financial information that the District undertakes to provide will consist of: (1) The audited financial statements of the Electric System prepared in accordance with generally accepted accounting principles applicable to government entities and in accordance with regulations prescribed by the Washington State Auditor pursuant to RCW 43.09.200 (or any successor statute) and substantially in accordance with the system prescribed by the Federal Energy Regulatory Commission; provided, that if the Electric System’s financial statements are not yet available, the District shall provide unaudited financial statements in substantially the same format, and audited financial statements when they become available; (2) the outstanding long-term indebtedness of the Electric System; (3) Electric System retail customers, energy sales, peak demands and revenues; (4) Electric System operating results and debt service coverage on the outstanding Parity Bonds; and (5) the aggregate amount and percentage of total energy sold and of retail revenues provided by
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the Electric System’s ten largest customers; and will be provided to the MSRB not later than the last day of the ninth month after the end of each fiscal year of the District (currently, a fiscal year ending December 31), as such fiscal year may be changed as required or permitted by Washington State law, commencing with the District’s fiscal year ending December 31, 2016.
The annual financial information may be provided in a single or multiple documents, and may be incorporated by specific reference to documents available to the public on the Internet website of the MSRB or filed with the SEC.
Amendment of Undertaking. The Undertaking is subject to amendment after the primary offering of the Bonds without the consent of any holder of any Bond, or of any broker, dealer, municipal securities dealer, participating underwriter, rating agency or the MSRB, under the circumstances and in the manner permitted by Rule 15c2-12.
The District will give notice to the MSRB of the substance (or provide a copy) of any amendment to the Undertaking and a brief statement of the reasons for the amendment. If the amendment changes the type of annual financial information to be provided, the annual financial information containing the amended financial information will include a narrative explanation of the effect of that change on the type of information to be provided.
Termination of Undertaking. The District’s obligations under the Undertaking shall terminate upon the legal defeasance of all of the Bonds. In addition, the District’s obligations under the Undertaking shall terminate if those provisions of Rule 15c2-12 which require the District to comply with the Undertaking become legally inapplicable in respect of the Bonds for any reason, as confirmed by an opinion of nationally recognized bond counsel or other counsel familiar with federal securities laws delivered to the District, and the District provides timely notice of such termination to the MSRB.
Remedy for Failure to Comply with Undertaking. As soon as practicable after the District learns of any failure to comply with the Undertaking, the District will proceed with due diligence to cause such noncompliance to be corrected. No failure by the District or other obligated person to comply with the Undertaking will constitute a default in respect of the Bonds. The sole remedy of any holder of a Bond will be to take such actions as that holder deems necessary, including seeking an order of specific performance from an appropriate court, to compel the District or other obligated person to comply with the Undertaking.
Prior Compliance with Continuing Disclosure Undertakings
The resolutions authorizing the Outstanding Parity Bonds required that the District file its annual financial information and certain operating data on or before the ninth month following the end of the District’s fiscal year. The District did not provide certain annual operating data for the fiscal years ended 2010 and 2011 in a timely manner and the data was not posted to each bond issue. Such information was included in the District’s official statement filed on November 13, 2013. In addition, certain annual operating data for the fiscal year ended 2012 was posted December 12, 2013, over two months late. The District filed some, but not all, rating changes that occurred in 2011, 2013 and 2014 relating to the insurers for the 2005 Bonds and the 2006 Bonds. As of the date of this Official Statement, the District has taken steps to be in compliance with its prior undertakings and has policies in place relating to future compliance.
MISCELLANEOUS
At the time of delivery of the Bonds, one or more officials of the District will furnish a certificate stating that to the best of his, her or their knowledge this Official Statement, as of its date and as of the date of delivery of the Bonds, does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained herein, in light of the circumstances under which they were made, not misleading.
Statements in this Official Statement, including matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact. This Official Statement is not to be construed as a contract or agreement between the District and the owners of the Bonds. The distribution of this Official Statement has been authorized by the District. The information contained herein should not be construed as representing all conditions affecting the District or the Bonds. Additional information may be obtained from the District. The statements relating to the Resolution are in summarized form, and in all respects are subject to and qualified in their entirety by express reference to the provisions of the Resolution.
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APPENDIX A
AUDITED FINANCIAL STATEMENTS FOR 2015
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Financial Statements Audit Report Public Utility District No. 1 of Grays Harbor County
For the period January 1, 2015 through December 31, 2015
Published September 26, 2016 Report No. 1017507
Washington State Auditor’s Office
September 26, 2016
Board of Commissioners Public Utility District No. 1 of Grays Harbor County Aberdeen, Washington
Report on Financial Statements Please find attached our report on Public Utility District No. 1 of Grays Harbor County’s financial statements.
We are issuing this report in order to provide information on the District’s financial condition.
Sincerely,
TROY KELLEY STATE AUDITOR OLYMPIA, WA
Insurance Building, P.O. Box 40021 Olympia, Washington 98504-0021 (360) 902-0370 TDD Relay (800) 833-6388 TABLE OF CONTENTS
Independent Auditor’s Report On Internal Control Over Financial Reporting And On Compliance And Other Matters Based On An Audit Of Financial Statements Performed In Accordance With Government Auditing Standards ...... 4
Independent Auditor’s Report On Financial Statements ...... 7
Financial Section ...... 10
About The State Auditor’s Office ......
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Washington State Auditor's Office Page 3 INDEPENDENT AUDITOR’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS
Public Utility District No. 1 of Grays Harbor County January 1, 2015 through December 31, 2015
Board of Commissioners Public Utility District No. 1 of Grays Harbor County Aberdeen, Washington
We have audited, in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States, the financial statements of Public Utility District No. 1 of Grays Harbor County, Washington, as of and for the year ended December 31, 2015, and the related notes to the financial statements, which collectively comprise the District’s basic financial statements, and have issued our report thereon dated September 15, 2016. As discussed in Note 16 to the financial statements, during the year ended December 31, 2015, the District implemented Governmental Accounting Standards Board Statement No. 68, Accounting and Financial Reporting for Pensions – an amendment of GASB Statement No. 27.
INTERNAL CONTROL OVER FINANCIAL REPORTING In planning and performing our audit of the financial statements, we considered the District’s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the District’s internal control. Accordingly, we do not express an opinion on the effectiveness of the District’s internal control.
A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the District's financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of
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deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.
Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified.
In addition, we noted certain matters that we have reported to the management of the District in a separate letter dated September 15, 2016.
COMPLIANCE AND OTHER MATTERS As part of obtaining reasonable assurance about whether the District’s financial statements are free from material misstatement, we performed tests of the District’s compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion.
The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards.
PURPOSE OF THIS REPORT The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the District’s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the District’s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. However,
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Washington State Auditor's Office Page 5 this report is a matter of public record and its distribution is not limited. It also serves to disseminate information to the public as a reporting tool to help citizens assess government operations.
TROY KELLEY STATE AUDITOR OLYMPIA, WA
September 15, 2016
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Washington State Auditor's Office Page 6 INDEPENDENT AUDITOR’S REPORT ON FINANCIAL STATEMENTS
Public Utility District No. 1 of Grays Harbor County January 1, 2015 through December 31, 2015
Board of Commissioners Public Utility District No. 1 of Grays Harbor County Aberdeen, Washington
REPORT ON THE FINANCIAL STATEMENTS We have audited the accompanying financial statements of Public Utility District No. 1 of Grays Harbor County, Washington, as of and for the year ended December 31, 2015, and the related notes to the financial statements, which collectively comprise the District’s basic financial statements as listed on page 10.
Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the District’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of ______
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expressing an opinion on the effectiveness of the District’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Public Utility District No. 1 of Grays Harbor County, as of December 31, 2015, and the changes in financial position and cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America.
Matters of Emphasis As discussed in Note 16 to the financial statements, in 2015, the District adopted new accounting guidance, Governmental Accounting Standards Board Statement No. 68, Accounting and Financial Reporting for Pensions – an amendment of GASB Statement No. 27. Our opinion is not modified with respect to this matter.
Other Matters Required Supplementary Information
Accounting principles generally accepted in the United States of America require that the management’s discussion and analysis on pages 11 through 13, pension plan information on pages 38 through 41 and information on postemployment benefits other than pensions on page 42 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
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provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.
OTHER REPORTING REQUIRED BY GOVERNMENT AUDITING STANDARDS In accordance with Government Auditing Standards, we have also issued our report dated September 15, 2016 on our consideration of the District’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the District’s internal control over financial reporting and compliance.
TROY KELLEY STATE AUDITOR OLYMPIA, WA
September 15, 2016
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FINANCIAL SECTION
Public Utility District No. 1 of Grays Harbor County January 1, 2015 through December 31, 2015
REQUIRED SUPPLEMENTARY INFORMATION Management’s Discussion and Analysis – 2015
BASIC FINANCIAL STATEMENTS Statement of Net Position – 2015 Statement of Revenues, Expenses and Changes in Net Position – 2015 Statement of Cash Flows – 2015 Notes to Financial Statements – 2015 REQUIRED SUPPLEMENTARY INFORMATION Schedule of Proportionate Share of the Net Pension Liability and Notes – PERS Plan 1 – 2015 Schedule of Proportionate Share of the Net Pension Liability and Notes – PERS Plan 2/3 – 2015 Schedule of Employer Contributions and Notes – PERS 1 – 2015 Schedule of Employer Contributions and Notes – PERS 2/3 – 2015 Schedule of Other Post-Employment Benefits – 2015
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PUBLIC UTILITY DISTRICT No. 1 of GRAYS HARBOR COUNTY MANAGEMENT’S DISCUSSION AND ANALYSIS DECEMBER 31, 2015
MANAGEMENT’S DISCUSSION AND ANALYSIS This section provides an overview and analysis of key data presented in the basic financial statements for the year ended December 31, 2015, with additional comparative data for 2014 and 2013. Information within this section should be used in conjunction with the basic financial statements and accompanying notes.
OVERVIEW OF THE FINANCIAL STATEMENTS Public Utility District No. 1 of Grays Harbor County (District) accounts for its financial activities within a single proprietary fund. The District’s financial activities are comprised of purchase, generation, transmission, distribution and sale of electric energy, as well as the sale of wholesale telecommunication services. In accordance with the requirements set forth by the Governmental Account Standards Board, the District’s financial statements employ the accrual basis of accounting in recognizing increases and decreases in economic resources. Accrual accounting recognizes all revenues when earned and expenses when incurred during the year, regardless of when cash is received or paid. The basic financial statements are comprised of:
Statement of Net Position: The District presents its statement of net position using the balance sheet format. The Statement reflects assets, liabilities, and net position (equity) of the District at year-end. The net position section of the statements is separated into three categories: net investment in capital assets; restricted net position; and unrestricted net position. The District’s accumulated gains and losses in fair value from hedging activities are considered deferred inflows and deferred outflows and have been classified as such on the Statement of Net Position.
Statement of Revenues, Expenses and Changes in Net Position: This statement reflects the transactions and events that have increased or decreased the District’s total economic resources during the period. Revenues are presented net of allowances and are summarized by major source. Revenues and expenses are classified as operating or non-operating based on the nature of the transaction.
Statement of Cash Flows: The Statement of Cash Flows provides information about the District’s cash receipts and payments for operations, as well as funds provided and used in investing and financing activities.
The notes to the financial statements presented at the end of the basic financial statements are considered an integral part of the District’s presentation of financial position, results of operations and changes in cash flow.
The following analysis focuses on the District’s Net Assets and Changes in Net Assets during the year. 2014 to 2015 Statement of Net Position 2015 2014 Change 2013
Current Assets $49,085,142 $54,055,246 -9.19% $58,137,494 Noncurrent Assets 5,968,044 5,269,144 13.26% 4,962,942 Capital Assets and Work in Progress 378,145,947 361,873,184 4.50% 355,873,342 Accumulated Depreciation (144,046,693) (134,164,261) 7.37% (124,620,101) Deferred Outflow of Resources 6,208,527 1,047,173 492.88% 1,494,112 Total Assets and Deferred Outflows $295,360,967 $288,080,486 2.53% $295,847,789
Long-Term Liabilities 159,099,807 137,770,230 15.48% 139,995,395 Other Liabilities 18,311,354 14,129,433 29.60% 18,803,180 Deferred Inflows of Resources 6,732,041 3,965,283 69.77% 3,047,462 Total Liabilities and Deferred Inflows 184,143,201 155,864,946 18.14% 161,846,037
Net Investment in Capital Assets 103,599,857 100,109,143 3.49% 106,539,451 Restricted 5,714,911 5,144,635 11.08% 4,874,665 Unrestricted 1,902,998 26,961,762 -92.94% 22,587,636 Total Net Position 111,217,766 132,215,540 -15.88% 134,001,752 Total Liabilities & Net Position $295,360,967 $288,080,486 2.53% $295,847,789
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Washington State Auditor's Office Page 11 PUBLIC UTILITY DISTRICT No. 1 of GRAYS HARBOR COUNTY MANAGEMENT’S DISCUSSION AND ANALYSIS DECEMBER 31, 2015
2015 saw an overall increase in Total Assets and Liabilities. Total assets increased as the District completed several capital projects for system improvements, liabilities increased as a result of the 2015 bond issue.
Capital Assets 2015 saw an overall increase of approximately $16.3 million in Capital Assets and Work in Progress, which is primarily a result of the improvements to the Transmission and Distribution system as well as closing capital projects that were previously in construction in progress. The following is a summary of the major projects in 2015:
Several new poles on the Transmission and Distribution systems were replaced as a result of the District pole treatment and testing program. New substation transformer for the Harding Road Substation. Phase 3 of the upgrade to the District’s microwave system. Accounting and Customer Service Information systems were converted in 2015. Several other projects were completed throughout the service territory as the District strives to increase safety and reliability for its employees and customer owners.
See Note 3 4 for more information regarding capital asset activity for 2015.
Long-Term Liabilities In 2015, long-term liabilities increased slightly, mostly attributable to refunding the 2005 and a portion of the 2006 bonds and the addition of $8 million in series 2015 Revenue Bonds. See note 5 for more information regarding outstanding debt.
Changes in the District’s net assets can be determined by reviewing the following condensed Statement of Revenues, Expenses, and Changes in Net Assets for the year.
Statement of Revenues, Expenses and Changes in Net Position 2014 to 2015 2015 2014 Change 2013 Operating Revenues:
Retail Energy Sales $80,888,911 $81,801,022 -1.12% $82,470,674 Sales for Resale 20,615,742 22,794,813 -9.56% 18,829,612 Other 13,268,663 13,027,958 1.85% 12,899,568 Total Operating Revenue $114,773,316 $117,623,793 -2.42% $114,199,854 Nonoperating Revenue $3,377,255 $461,375 632.00% $780,862 Total Revenues $118,150,571 $118,085,168 0.06% $114,980,716
Operating Expenses:
Power Supply $70,563,510 $69,742,484 1.18% $67,356,207 Operations and Maintenance 26,346,748 20,610,547 27.83% 19,715,022 Conservation 1,520,890 1,785,455 -14.82% 1,778,833 Taxes & Depreciation 18,338,251 19,674,767 -6.79% 20,442,857 Total Operating Expenses $116,769,399 $111,813,253 4.43% $109,292,919 Nonoperating Expenses $9,327,991 $8,058,127 15.76% $5,911,528 Total Expenses $126,097,390 $119,871,380 5.19% $115,204,447
Change in Net Position (7,946,818) $(1,786,212) 344.90% $(223,731) Beginning Net Position $132,465,751 $134,001,752 -1.15% $134,225,483 Cumulative Effect of Restatement (13,301,167) 250,211 - Ending Net Position $111,217,766 $132,465,751 16.04% $134,001,752
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Washington State Auditor's Office Page 12 PUBLIC UTILITY DISTRICT No. 1 of GRAYS HARBOR COUNTY MANAGEMENT’S DISCUSSION AND ANALYSIS DECEMBER 31, 2015
Financial Analysis During 2015, the District’s overall financial position and results of operations decreased from the prior year. The District’s net position decreased $7,946,818. Components of that loss consisted of the following: Operations loss of $1,996,082; nonoperating loss of $2,579,452; and two extraordinary events that resulted in a loss of $3,371,284 (details disclosed in Note 15).
The District’s Net Position was also impacted by the implementation of GASB 68, “Accounting and Financial Reporting for Pensions” with a required reduction of $13,301,167 to net position for retroactive implementation. Please refer to Note 7 for additional information. The following narrative is an analysis of the change in net position by major components of income, with a primary focus on changes between 2015 and 2014.
Operating Revenues In 2015, revenues from sales to retail customers (Retail Energy Sales) decreased by approximately $900,000. This was a result of reduced loads from a warmer than normal winter. Revenues from Sales for Resale also decreased by approximately $2.2 million as a result of reduced market prices and a below average water year for the Federal Hydro System.
Operating Expenses Operation and Maintenance expenses increased approximately $5.7 million in 2015. During a major software conversion process, the District determined certain accounts were no longer collectible and those accounts were written off as bad debt. Additional increases were related to Power Supply purchases from the Bonneville Power Administration, maintenance of lines, customer records and collection expenses.
Non-operating Expenses Non-operating expenses increased approximately $5 million in 2015. This is primarily attributable to the District’s clean up efforts at the former Harbor Paper site. As a result of owning the generation facilities in prior years, the District was required to remove sand ash, grate ash and clarifier solids. A grant from the Department of Ecology was received in 2015 that assisted in offsetting some of the cleanup costs. This work was completed in 2015 and there is no further obligation at the site.
REQUESTS FOR INFORMATION The basic financial statements, notes and management discussion and analysis are designed to provide a general overview of the District’s finances. Questions concerning any of the information provided in this report should be directed to Grays Harbor PUD at PO Box 480, Aberdeen, WA 98520, or by calling (360) 532-4220.
Sincerely,
Kathryn Skolrood, CFO
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PUBLIC UTILITY DISTRICT No.1 of GRAYS HARBOR COUNTY STATEMENT NET POSITION December 31, 2015
ASSETS Current Assets: Cash and Cash Equivalents 15,813,580 Accounts Receivable (Net) 10,848,384 Notes and Other Receivables 1,528,669 Inventory 3,310,543 Prepayments 468,371 Derivative Asset (See Note 3) 4,794,080 Other Current and Deferred Assets 12,321,516 TOTAL CURRENT ASSETS 49,085,142
Noncurrent Assets: Restricted Bond Reserve 2,709,000 Medical Trust 2,617,161 Harbor Paper Concrete Rubble Trust 388,750 Other Noncurrent Assets 253,133 Capital Assets: Plant 370,167,488 Construction in Progress 7,978,459 Less Accumulated Depreciation (144,046,693) Total Capital Assets (Net) 234,099,255 TOTAL NONCURRENT ASSETS 240,067,298
TOTAL ASSETS 289,152,440 DEFERRED OUTFLOW OF RESOURCES Deferred Amount on Refunding Debt 2,739,175 Accumulated Decrease in PERS Liability from GASB 68 1,382,370 Accumulated Decrease in Fair Value of Hedging Derivatives 2,086,982 TOTAL DEFERRED OUTFLOW OF RESOURCES 6,208,527
LIABILITIES Current Liabilities: Accounts Payable 7,117,990 Accrued Taxes 2,251,943 Customer Deposits 1,548,202 Long-Term Debt, due within one year 3,302,240 Derivative Liability (See Note 3) 2,086,982 Compensated Absences 1,951,222 Other Current, Accrued and Deferred Liabilities 52,775 TOTAL CURRENT LIABILITIES 18,311,353 Noncurrent Liabilities: Accrued other post employment benefits (See Note 7) 11,468,589 Accrued PERS Pension Liability 12,137,275 Long-Term Debt due in more than one year 127,095,000 Unamortized Bond Premium 8,278,263 Other Long-Term Debt 120,680 TOTAL NONCURRENT LIABILITIES 159,099,807 TOTAL LIABILITIES 177,411,160
DEFERRED INFLOW OF RESOURCES Accumulated Increase in PERS Pension due to GASB 68 1,937,961 Accumulated Increase in Fair Value of Hedging Derivatives 4,794,080 TOTAL DEFERRED INFLOW OF RESOURCES 6,732,041 NET POSITION Net Investment in Capital Assets 103,599,857 Restricted 5,714,911 Unrestricted 1,902,998 TOTAL NET POSITION 111,217,766
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
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Washington State Auditor's Office Page 14 MCAG No. 1781 PUBLIC UTILITY DISTRICT No.1 of GRAYS HARBOR COUNTY STATEMENT OF REVENUE, EXPENSES AND CHANGES IN NET POSITION FOR THE YEAR ENDED DECEMBER 31, 2015
OPERATING REVENUES Residential Sales $ 43,660,160 Commercial Sales 28,741,620 Industrial Sales 7,829,066 Street Lighting 658,066 Wholesale Sales 20,615,742 Other Operating Revenue 13,268,663 Total Operating Revenues 114,773,317
OPERATING & MAINTENANCE EXPENSES Power Supply 63,590,167 Transmission 6,973,343 Operating 17,629,746 Maintenance 8,717,002 Conservation 1,520,890 Depreciation and Amortization 10,182,720 Taxes and Tax Equivalents 8,155,531 Total Operating & Maintenance Expenses 116,769,399
OPERATING INCOME (LOSS) $ (1,996,082)
NONOPERATING REVENUE AND (EXPENSES) Interest and Divident Income 17,532 Interest Expense (5,737,325) State Grants 2,700,000 Other Nonoperating Revenues 659,723 Other Nonoperating Expenses (219,382) Total Nonoperating Revenue (Expenses) (2,579,452)
Income Before Contributions and Transfers (4,575,534)
Extraordinary Items (see Note 14) (3,371,284) CHANGE IN NET POSITION (7,946,818)
TOTAL NET POSITION, January 1 $ 132,215,540 Changes in Accounting Principle - GASB 68 (13,301,167) Prior Period Correction 250,211 TOTAL NET POSITION, December 31 $ 111,217,766
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
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PUBLIC UTILITY DISTRICT No.1 of GRAYS HARBOR COUNTY STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2015
Cash Flows from Operating Activities Cash Received from Customers $ 113,748,748 Payments for Purchased Power (63,590,167) Payments for Operating, Maintenance and Conservation (13,207,377) Cash Payments to Employees (14,660,261) Taxes Paid (8,155,531) Customer Deposits Received, Net 264 Net Cash Provided (Used) by by Operating Activities 14,135,676
Cash Flows from Capital and Related Financing Activities Repayments of Note (17,240) Bond Principal Payments (2,615,000) Proceeds from Issuance of Note 8,000,000 Acquisition and Construction of Assets (10,909,219) Interest paid on Long-Term Borrowing (5,737,325) Deferred Gain on 2015 Refunding 2,841,500 Net Cash Provided (Used) by Capital & Related Financing Activities (8,437,284)
Cash Flows from Investing Activities Investments (Purchased) or Redeemed (12,486,915) Interest Received on Investments 17,532 Net Cash Provided (Used) by Investing Activities (12,469,383)
Cash Flows from Non-Operating Activities Payments from Telecom Activities 361,507 Cash Received from State Grants 2,700,000 Cash received from Contracting Work 78,835 Net Cash Provided (Used) by Non-Operating Activities 3,140,341
Net (Decrease) Increase in Cash and Cash Equivalents $ (3,630,650)
Cash and Cash Equivalents, Beginning of Year $ 19,444,230
Cash and Cash Equivalents, End of Year $ 15,813,580
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
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PUBLIC UTILITY DISTRICT No.1 of GRAYS HARBOR COUNTY STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2015
Reconciliation of Operating Income (Loss) to Net Cash Provided (Used) by Operating Activities:
Operating Income $ (1,996,082) Adjustments to Reconcile Operating Income to Net Cash Provided (Used) by Operating Activites: Depreciation and Amortization 10,182,720 Provision for Uncollectible Accounts 502,203
Changes in Operating Assets and Liabilities Special Funds and Other 18,766 Customer Accounts Receivable (2,400,124) Other Receivables 2,495,107 Inventories 1,927,071 Prepayments 123,920 Warrants, Notes, A/P and Construction Payables 1,647,027 Customer Deposits 240,741 Accrued Taxes 1,238,881 Miscellaneous Deferred, Accrued and Other Liabilities 154,069 Preliminary Survey and Temporary Facilities 1,378 Total Changes in Operating Assets and Liabilities 5,446,836
Total Adjustments to Reconcile Operating Income to Net Cash Provided (Used) by Operating Activites: 16,131,759
Net Cash Provided (Used ) by Operating Activities $ 14,135,676
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
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