Financial Statements Audit Report Public Utility District ......internal control over financial reporting (internal control) to determine the audit procedures that are appropriate

Financial Statements Audit Report

Public Utility District No. 1 of Cowlitz

County

For the period January 1, 2018 through December 31, 2018

Published June 13, 2019

Report No. 1024045

Insurance Building, P.O. Box 40021 Olympia, Washington 98504-0021 (360) 902-0370 [email protected]

Office of the Washington State Auditor

Pat McCarthy

June 13, 2019

Board of Commissioners

Public Utility District No. 1 of Cowlitz County

Longview, Washington

Report on Financial Statements

Please find attached our report on Public Utility District No. 1 of Cowlitz County’s financial

statements.

We are issuing this report in order to provide information on the District’s financial condition.

Sincerely,

Pat McCarthy

State Auditor

Olympia, WA


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 ................................................................................................... 45

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


January 1, 2018 through December 31, 2018




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 each

major fund of Public Utility District No. 1 of Cowlitz County, as of and for the year ended

December 31, 2018, and the related notes to the financial statements, which collectively comprise

the District’s basic financial statements, and have issued our report thereon dated May 31, 2019.

As discussed in Note 1 to the financial statements, during the year ended December 31, 2018, the

District implemented Governmental Accounting Standards Board Statement No. 75, Accounting

and Financial Reporting for Postemployment Benefits Other Than Pensions.

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 opinions 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

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Washington State Auditor’s Office Page 5

corrected on a timely basis. A significant deficiency is a deficiency, or a combination of

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.

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,


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.

Pat McCarthy

State Auditor

Olympia, WA

May 31, 2019

Page 6


INDEPENDENT AUDITOR’S REPORT ON

FINANCIAL STATEMENTS






REPORT ON THE FINANCIAL STATEMENTS

We have audited the accompanying financial statements of each major fund of Public Utility

District No. 1 of Cowlitz County, as of and for the year ended December 31, 2018, 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 opinions 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

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 opinions.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects,

the respective financial position of each major fund of Public Utility District No. 1 of Cowlitz

County, as of December 31, 2018, and the respective changes in financial position and, where

applicable, 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 1 to the financial statements, in 2018, the District adopted new accounting

guidance, Governmental Accounting Standards Board Statement No. 75, Accounting and

Financial Reporting for Postemployment Benefits Other Than Pensions. 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 and required supplementary information listed on page 10

be presented to supplement the basic financial statements. Such information, although not a part

of the basic financial statements, is required by the Governmental Accounting Standards Board

who considers it to be an essential part of financial reporting for placing the basic financial

statements in an appropriate operational, economic or historical context. We have applied certain

limited procedures to the required supplementary information in accordance with auditing

standards generally accepted in the United States of America, which consisted of inquiries of

management about the methods of preparing the information and comparing the information for


consistency with management’s responses to our inquiries, the basic financial statements, and

other knowledge we obtained during our audit of the basic financial statements. We do not express

an opinion or provide any assurance on the information because the limited procedures do not

provide us with sufficient evidence to express an opinion or provide any assurance.

OTHER REPORTING REQUIRED BY GOVERNMENT AUDITING

STANDARDS

In accordance with Government Auditing Standards, we have also issued our report dated May 31,

2019 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.

Pat McCarthy

State Auditor

Olympia, WA

May 31, 2019


FINANCIAL SECTION



REQUIRED SUPPLEMENTARY INFORMATION

Management Discussion and Analysis – 2018

BASIC FINANCIAL STATEMENTS

Statement of Net Position – 2018

Statement of Revenues, Expenses and Changes in Net Position – 2018

Statement of Cash Flows – 2018

Notes to the Combined Financial Statements – 2018

REQUIRED SUPPLEMENTARY INFORMATION

Schedule of Changes in Total OPEB Liability and Related Ratios – 2018

Schedule of Health Reimbursement Arrangement/Voluntary Employee Beneficiary

Association (HRA/VBA) Contributions – 2018

Schedule of Proportionate Share of Net Pension Liability and Contributions – 2018

MANAGEMENT DISCUSSION AND ANALYSIS For the Year Ended December 31, 2018

This discussion and analysis is designed to provide an overview of the financial activities of Public Utility District No. 1 of Cowlitz County, Washington (the District) for the year ended December 31, 2018 with comparable information for 2017. This supplementary information is to be read in conjunction with the District’s financial statements.

The District is a municipal corporation incorporated in 1936 to serve the citizens of Cowlitz County, Washington. The District is governed by a three-member board of locally elected commissioners, independent of county government. The District manages and operates two systems: Electric and Production (Swift No. 2 Hydroelectric).

Financial Policies and Controls

The District’s financial management system consists of financial policies, financial planning and its internal control structure. This system set standards for rate sufficiency, rate stability, reserve funds, capital investment and debt management that guide the development of budgets, rates and debt issuance.

The District’s Board has the exclusive right to determine rates and charges for services provided. Planning is guided by forecasts of balance sheet, operating and capital items. These tools are used to identify the impacts of anticipated events and initiatives to develop strategies to meet the Board’s financial objectives.

ELECTRIC SYSTEM

The Electric System provides electric service throughout Cowlitz County, which encompasses 1,144 square miles and approximately 49,000 customers. The District is among the largest PUDs in the state of Washington with total 2018 and 2017 retail power sales of 4,839,889 MWHs and 4,825,787 MWHs, respectively. Approximately 70% of the District’s power and 50% of revenues are sold to three industrial customers. Extreme weather and economic conditions are the primary influences on electricity sales.

The Electric System power supply is provided through contracts with BPA and Grant County PUD, as well as the purchase of the output from the District’s Swift No. 2 Hydroelectric Production System on the Lewis River and the power associated with a 2 MW share of Energy Northwest’s Nine Canyon Wind Project. The District also receives and sells energy from interests in two wind projects; 46% of the 204.7 MW White Creek Project (contractual interest) and 30% of the 98.9 MW Harvest Wind Project (tenant in common). Both projects are located in Klickitat County, WA. Approximately 85% of the District’s power supply is purchased from BPA.

Since the majority of the District’s power supply comes from hydroelectric generation, financial performance of the Electric System is largely influenced by the availability of water for generation and by prices obtainable for excess generation in the wholesale markets. Wholesale sales activity can complement sales to retail customers and provides a stabilizing portfolio effect in years when wholesale sales are at or higher than budget. Conversely, when wholesale sales are below budget, this activity will not provide the expected support for retail rates and may cause upward rate pressures. The District also uses forward physical power contracts and financial instruments that set a “floor” to protect the District from commodity price risk. When the amount of water available for generation is at or greater than budget and prices are sufficient, funds can be added to reserves for future uses or used to supplement revenues required for current year operations.

Overall, the Electric System’s net position increased approximately $4.5 million or 2.7% for 2018 and increased approximately $3 million or 1.6% for 2017. The Electric System continued investing in plant infrastructure and cash reserves continue to improve.

Page 11

Selected Financial Data – Electric System

2018 2017

Current Assets 79,484,982$ 139,231,491$ Net Utility Plant 171,302,480 168,825,332 Other Assets and Deferred Outflows 175,963,296 103,924,834 Total Assets and Deferred Outflows 426,750,758 411,981,657

Current Liabilities 48,820,618 42,316,918 Long-Term Debt 125,550,714 136,899,099 Other Liabilities and Deferred Inflows 83,485,095 64,648,093 Total Liabilities and Deferred Inflows 257,856,427 243,864,110

Net investment in capital assets 59,439,003 47,058,932 Restricted 2,504,552 2,052,638 Unrestricted 106,950,776 119,005,977 Total Net Position 168,894,331 168,117,547

Operating Revenues 267,727,167 261,508,497 Operating Expenses 262,941,455 255,236,948 Net Operating Revenues 4,785,712 6,271,549 Other Income (Expense) (303,398) (3,554,438) Change in Net Position 4,482,314 2,717,111

Change in Accounting Principle - (3,705,530) Results of operations are primarily impacted by changes in rates, retail load, power supply costs, particularly generation levels and wholesale prices, conservation activities and rate stabilization decisions. Retail rates were unchanged in 2018 and increased 2.5% in October 2017. In 2018, the District implemented GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions, resulting in a $3.7 million charge to beginning net position. Operating Revenues and Expenses for 2017 have been restated by $11.5 million to be consistent with current year reporting of transfers to rate stabilization. There was no impact on net position for this reclassification. Capital Asset and Long-Term Debt Activity As of year-end, the Electric System had $322 million invested in plant in service, an increase of 3%. Additions are primarily related to a planned construction program with a focus on safety and reliability. Capital construction is funded by a combination of rates, aid-to-construction paid by customers and long-term revenue bonds. Total Electric System utility plant in service as of December 31, 2018 and 2017 consisted of the following:

2018 2017

Intangible 239,963$ 239,963$ Land and Land Rights 3,309,767 3,295,350 Transmission & Distribution 263,102,550 254,103,727 General Plant 55,799,108 55,371,188

Total Plant In Service 322,451,388$ 313,010,228$

At December 31, 2018, the Electric System had outstanding revenue bonds totaling $120 million compared to $129 million at December 31, 2017.

Page 12

PRODUCTION SYSTEM The Production System operates the 66.8 MW Swift No. 2 Hydroelectric Project on the Lewis River. All of the output is sold to the District’s Electric System at cost. The 50-year FERC license expires in June 2058. Overall, the Production System’s net position decreased approximately $613 thousand or .7% for 2018 and decreased approximately $67 thousand or .1% for 2017. Selected Financial Data – Production System

2018 2017

Current Assets 5,436,413$ 26,521,945$ Net Utility Plant 107,234,216 110,280,947 Other Assets and Deferred Outflows 36,231,249 14,422,141 Total Assets and Deferred Outflows 148,901,878 151,225,033

Current Liabilities 2,011,127 2,064,038 Long-Term Debt 46,887,531 48,485,901 Other Liabilities and Deferred Inflows 7,718,924 7,777,412 Total Liabilities and Deferred Inflows 56,617,582 58,327,351

Net investment in capital assets 56,721,447 58,195,533 Restricted - - Unrestricted 35,562,849 34,702,149 Total Net Position 92,284,296 92,897,682

Operating Revenues 6,218,244 6,876,168 Operating Expenses 6,005,467 5,764,788 Net Operating Revenues 212,777 1,111,380 Other Income (Expense) (826,163) (1,178,744) Change in Net Position (613,386) (67,364) Operating revenues are set to cover operating and capital costs, debt service and to fund reserves over time. Fluctuations in operations from year to year are largely impacted by non-recurring or infrequent projects. Capital Asset and Long-Term Debt Activity No substantial capital activity in 2018 or 2017 and no new debt. Total Production System plant in service consisted of the following:

2018 2017

Intangible 3,113,155$ 3,113,155$ Land and Land Rights 1,224,229 1,224,229 Production Plant 144,187,735 144,102,753 Transmission Plant 6,799,262 6,799,262

Total Plant In Service 155,324,381$ 155,239,399$

At December 31, 2018, the Production System had outstanding revenue bonds totaling $46 million compared to $45 million at December 31, 2017.

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Electric Production Total

CURRENT ASSETSCash and cash equivalents 34,776,833$ 325,456$ 35,102,289$ Investments 12,791,468 3,963,022 16,754,490 Customer accounts receivable and unbilled revenues 23,146,203 - 23,146,203 Other accounts receivable 5,188,815 - 5,188,815 Allowance for uncollectible accounts (1,047,455) - (1,047,455) Accounts receivable from assoc. companies 11,593 - 11,593 Current portion of advances to others - 787,247 787,247 Materials and supplies 3,687,503 - 3,687,503 Prepayments 421,541 297,336 718,877 Interest receivable 508,481 63,352 571,833

Total current assets 79,484,982 5,436,413 84,921,395

RESTRICTED ASSETSCash and cash equivalents 8,871,911 4,617,854 13,489,765 Investments 5,960,000 - 5,960,000

Total restricted assets 14,831,911 4,617,854 19,449,765

UTILITY PLANTPlant in service 322,451,388 155,324,381 477,775,769 Construction in progress 9,094,144 - 9,094,144

Total utility plant 331,545,532 155,324,381 486,869,913 Less accumulated depreciation and amortization 160,243,052 48,090,165 208,333,217

Net utility plant 171,302,480 107,234,216 278,536,696

OTHER PROPERTY AND INVESTMENTSInvestments 73,150,879 22,663,430 95,814,309 White Creek Wind Project Energy Purchase Agreement 37,717,454 - 37,717,454 Investment in associated organizations 36,262,285 - 36,262,285 Advances to other funds - 7,749,584 7,749,584 Other charges 3,991,645 494,549 4,486,194

Total other property and investments 151,122,263 30,907,563 182,029,826

DEFERRED OUTFLOWS OF RESOURCES 10,009,122 705,832 10,714,954

TOTAL ASSETS AND DEFERRED OUTFLOWS OF RESOURCES 426,750,758$ 148,901,878$ 575,652,636$

The accompanying notes are an integral part of these financial statements.

PUBLIC UTILITY DISTRICT NO. 1 OF COWLITZ COUNTY, WASHINGTONSTATEMENT OF NET POSITION

DECEMBER 31, 2018

Page 14


CURRENT LIABILITIESCurrent portion of long-term debt 10,072,247$ 1,230,000$ 11,302,247$ Accounts payable 24,961,436 29,088 24,990,524 Accounts payable to assoc. companies - 11,593 11,593 Accrued wages and benefits 2,104,041 - 2,104,041 Customer deposits 2,081,923 - 2,081,923 Taxes payable 7,517,743 42,337 7,560,080 Interest payable 2,077,557 698,109 2,775,666 Other current liabilities 5,671 - 5,671

Total current liabilities 48,820,618 2,011,127 50,831,745

LONG-TERM LIABILITIESBonds payable 111,205,000 43,470,000 154,675,000 Premium on bonds payable 6,145,821 3,417,531 9,563,352 Advances from other funds 7,749,584 - 7,749,584 Loan payable 450,309 - 450,309

Total long-term liabilities 125,550,714 46,887,531 172,438,245

OTHER LIABILITIES AND CREDITSNet pension liability 7,391,938 - 7,391,938 Lewis River Cost-Share Agreement - 7,208,147 7,208,147 Compensation reserve 104,538 - 104,538 Other credits 6,440,151 - 6,440,151 Post-retirement benefit obligation 5,304,831 - 5,304,831

Total other liabilities and credits 19,241,458 7,208,147 26,449,605

TOTAL LIABILITIES 193,612,790 56,106,805 249,719,595

COMMITMENTS AND CONTINGENCIES

DEFERRED INFLOWS OF RESOURCES 64,243,637 510,777 64,754,414

NET POSITIONNet investment in capital assets 59,439,003 56,721,447 116,160,450 Restricted 2,504,552 - 2,504,552 Unrestricted 106,950,776 35,562,849 142,513,625

TOTAL NET POSITION 168,894,331 92,284,296 261,178,627

TOTAL LIABILITIES, DEFERRED INFLOWS OF RESOURCES AND NET POSITION 426,750,758$ 148,901,878$ 575,652,636$


DECEMBER 31, 2018

PUBLIC UTILITY DISTRICT NO. 1 OF COWLITZ COUNTY, WASHINGTONSTATEMENT OF NET POSITION

Page 15


OPERATING REVENUESRetail sales 271,118,031$ 6,218,244$ 277,336,275$ Wholesale sales 6,556,979 - 6,556,979 Transfer to rate stabilization fund (13,000,000) - (13,000,000) Other operating revenues 3,052,157 - 3,052,157

Total operating revenues 267,727,167 6,218,244 273,945,411

OPERATING EXPENSESPower costs 209,489,785 - 209,489,785 Operations expense 18,336,712 1,860,262 20,196,974 Maintenance expense 7,320,996 971,049 8,292,045 Depreciation and amortization 11,881,923 3,131,713 15,013,636 Taxes 15,912,039 42,443 15,954,482

Total operating expenses 262,941,455 6,005,467 268,946,922

OPERATING INCOME 4,785,712 212,777 4,998,489

OTHER INCOME (EXPENSE)Interest and dividend income 1,886,988 952,091 2,839,079 Interest on long-term debt (5,984,521) (1,750,492) (7,735,013) Amortization of regulatory asset (43,890) (27,862) (71,752) Income from Harvest Wind Project 755,447 - 755,447 Miscellaneous nonoperating income (expense) (3,847) 100 (3,747)

Total other income (expense) (3,389,823) (826,163) (4,215,986)

CHANGE IN NET POSITION BEFORECONTRIBUTIONS AND SUBSIDY 1,395,889 (613,386) 782,503

Contributions in aid of construction 2,144,522 - 2,144,522 BAB subsidy 941,903 - 941,903

CHANGE IN NET POSITION 4,482,314 (613,386) 3,868,928

TOTAL NET POSITION, beginning of year 168,117,547 92,897,682 261,015,229

ACCUMULATED ADJUSTMENT FOR CHANGEIN ACCOUNTING PRINCIPLE (3,705,530) - (3,705,530)

TOTAL NET POSITION, as restated 164,412,017 92,897,682 257,309,699

TOTAL NET POSITION, end of year 168,894,331$ 92,284,296$ 261,178,627$


PUBLIC UTILITY DISTRICT NO. 1 OF COWLITZ COUNTY, WASHINGTONSTATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET POSITION

FOR THE YEAR ENDED DECEMBER 31, 2018

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CASH FLOWS FROM OPERATING ACTIVITIESCash received from customers 278,775,705$ 6,218,244$ 284,993,949$ Cash payments to suppliers (213,981,727) (2,916,977) (216,898,704) Cash payments to employees (13,805,428) - (13,805,428) Cash payments for taxes (15,707,049) (62,581) (15,769,630)

Net cash from operating activities 35,281,501 3,238,686 38,520,187

CASH FLOWS FROM NON-CAPITAL FINANCING ACTIVITIESInter-System Advances (752,670) 752,670 -

Net cash from non-capital financing activities (752,670) 752,670 -

CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIESConstruction and acquisition of utility plant, net (14,359,071) (84,982) (14,444,053) Principal paid on long-term debt (8,936,629) (1,185,000) (10,121,629) Interest paid on long-term debt and notes (7,106,903) (2,153,937) (9,260,840) Harvest Wind Project, net 2,779,577 - 2,779,577 Contributions in aid of construction 2,144,522 - 2,144,522 BAB subsidy 941,903 - 941,903 Materials and supplies (31,660) - (31,660)Other charges, net (84,348) - (84,348)Miscellaneous nonoperating (3,847) 100 (3,747)

Net cash from capital and related financing activities (24,656,456) (3,423,819) (28,080,275)

CASH FLOWS FROM INVESTING ACTIVITIESNet investment activity (85,942,347) (26,626,452) (112,568,799) Interest and dividends on investments 1,653,148 888,739 2,541,887 Investment in associated organizations (250,161) - (250,161)

Net cash from investing activities (84,539,360) (25,737,713) (110,277,073)

NET CHANGE IN CASH (74,666,985) (25,170,176) (99,837,161)

CASH AND CASH EQUVALENTS, beginning 118,315,729 30,113,486 148,429,215

CASH AND CASH EQUVALENTS, end of year 43,648,744$ 4,943,310$ 48,592,054$


PUBLIC UTILITY DISTRICT NO. 1 OF COWLITZ COUNTY, WASHINGTONSTATEMENT OF CASH FLOWS


Page 17

Reconciliation of operating income to net cash from

operating activities: Electric Production Total

Operating income 4,785,712$ 212,777$ 4,998,489$

Adjustments to reconcile operating income to net cash

from operating activities:

Depreciation and amortization 11,881,923 3,131,713 15,013,636

Amortization of energy purchase agreement 4,317,725 - 4,317,725

Changes in assets and liabilities:

Customer accounts receivable and unbilled (586,033) - (586,033)

Other accounts receivable (1,628,561) - (1,628,561)

Accounts receivable from assoc. companies (2,138) - (2,138)

Prepayments (98,690) (23,693) (122,383)

Accounts payable 5,672,664 (64,111) 5,608,553

Accounts payable to assoc. companies - 2,138 2,138

Accrued wages and benefits 117,013 - 117,013

Net pension liability and related (2,059,858) - (2,059,858)

Customer deposits 265,270 - 265,270

Taxes payable 204,990 (20,138) 184,852

Other current liabilities (29,275) - (29,275)

Rate stabilization fund 13,000,000 - 13,000,000

Deferred compensation and retirement (39,987) - (39,987)

Other credits 60,830 - 60,830

Post-retirement benefit obligation (580,084) - (580,084)

35,281,501$ 3,238,686$ 38,520,187$



PUBLIC UTILITY DISTRICT NO. 1 OF COWLITZ COUNTY, WASHINGTON

STATEMENT OF CASH FLOWS

Page 18

PUBLIC UTILITY DISTRICT NO. 1 OF COWLITZ COUNTY, WASHINGTON NOTES TO THE COMBINED FINANCIAL STATEMENTS

For the Year Ended December 31, 2018 These notes are an integral part of the accompanying financial statements. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Reporting Entity

Public Utility District No. 1 of Cowlitz County, Washington (the District) was founded on November 3, 1936 and is a municipal corporation of the State of Washington. The District is governed by an elected three-member board of commissioners that have the responsibility to set rates and charges for services provided. The District’s reporting entity is comprised of the combined Electric System and Production System (66.8 MW Lewis River Swift Plant No. 2 Hydroelectric System). Inter-company balances and transactions have not been eliminated from the combined amounts reported. The District has no component units. The District’s wholesale activity is generated from the sale of the output from interests in two wind projects; 46% of the 204.7 MW White Creek Project (contractual interest) and 30% of the 98.9 MW Harvest Wind Project (tenant in common). Both projects are located in Klickitat County, WA.

B. Basis of Accounting and Presentation

The District’s accounting policies are in accordance with accounting principles generally accepted in the United States of America. The District applies accounting and reporting standards of the Governmental Accounting Standards Board (GASB), exclusively. The financial statements use a flow of economic resources measurement focus to determine financial position and the change in financial position. The accounting principles used are similar to those applicable to businesses in the private sector and, thus, are maintained on the accrual basis of accounting. Revenues are recognized when earned and expenses are recognized when incurred. Accounting records are maintained in accordance with methods prescribed by the State Auditor under the authority of Chapter 43.09 RCW and the Uniform System of Accounts prescribed by the Federal Energy Regulatory Commission (FERC).

C. New Accounting Standards

GASB has issued the following Statements for which the District is evaluating the impact on its combined financial statements:

Statement No. 83, Certain Asset Retirement Obligations, effective for financial statements for fiscal years beginning after June 15, 2018

Statement No. 85, Omnibus 2017, effective for financial statements for fiscal years beginning after June 15, 2017

Statement No. 87, Leases, effective for financial statements for fiscal years beginning after December 15, 2019

Statement No. 88, Certain disclosures related to debt, including direct borrowings and direct placements, effective for financial statements for fiscal years beginning after June 15, 2018

Statement No. 89, Accounting for interest cost incurred before the end of a construction period, effective for financial statements for fiscal years beginning after December 15, 2019

Statement No. 90, Majority Equity Interests, effective for financial statements for fiscal years beginning after December 15, 2018

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Change in Accounting Principle In 2018, the District implemented GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions. The primary objective of this Statement is to improve accounting and financial reporting by state and local governments for postemployment benefits other than pensions (other postemployment benefits or OPEB). This Statement establishes standards for recognizing and measuring liabilities, deferred outflows of resources, deferred inflows of resources and expense/expenditures. For defined benefit OPEB, this Statement identifies the methods and assumptions that are required to be used to project benefit payments, discount projected benefit payments to their actuarial present value and attribute that present value to periods of employee service. The collective financial impact resulting from the implementation of GASB Statement No. 75 is the restatement of 2018 beginning net position by $3.7 million (See Note 9).

D. Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

E. Cash Equivalents

The District considers all highly liquid investments (including restricted assets) with a maturity of three months or less to be cash equivalents. Balances in the Local Government Investment Pool (LGIP) are considered cash equivalents as they can be converted to cash within one day.

F. Investments

The District records investments at fair value, with changes in unrealized gains and losses reported as investment income (See Note 2). The District categorizes its fair value measurements within the fair value hierarchy established by GAAP. The hierarchy is based on the valuation inputs used to measure the fair value of the asset. Level 1 inputs are quoted prices in active markets for identical assets, Level 2 inputs are significant other observable inputs and Level 3 inputs are significant unobservable inputs. The District’s fair market measurements are classified as Level 2.

G. Accounts Receivable and Allowance for Uncollectible Accounts

Accounts receivable are recorded when invoices are issued and are written-off when they are determined to be uncollectible. The allowance for uncollectible accounts includes amounts estimated through an evaluation of specific accounts, based on the best available information, of customers that may be unable to meet their financial obligations, and a reserve based on historical experience. Actual losses between twelve and fifteen months old are then charged against the provision for uncollectible accounts quarterly.

H. Other Accounts Receivable

Other accounts receivable consists of certain wholesale transactions, conservation reimbursements, aid to construction billings and other miscellaneous customer and non-customer items that may require invoicing that would not normally be entered into the customer service billing system.

I. Interfund Balances and Transactions

The District’s Electric System makes payments for goods, services and taxes on behalf of the Production System. This is reflected in the statement of net position as “accounts receivable from associated companies.” Alternatively, the amounts due by the Production System to the Electric System are reflected in the statement of net position as “accounts payable to associated companies.” These accounts include only short-term obligations, which are paid monthly and are not interfund loans. A description of loans and long-term advances between funds is contained in Note 7.

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J. Materials and Supplies Materials and supplies consist of items for plant maintenance and construction and are stated at average cost.

K. Restricted Assets

In accordance with bond resolutions and certain related agreements, separate restricted funds are required to be established. Cash and investments held in these funds are restricted for specific uses, including debt service and other special reserve requirements.

L. Utility Plant and Depreciation

Utility plant is stated at original cost or, if donated, fair value (See Note 3). Cost includes labor, materials and related indirect costs. Additions, renewals and betterments with a minimum cost of $1,000 per item are capitalized. Repairs and minor replacements are charged to operating expenses. When an asset is removed from service and retired, unless it is a major retirement or a general plant asset, the cost of property plus removal cost less salvage is charged to accumulated depreciation. No material utility plant impairments were noted for the year ended December 31, 2018. Contributions by developers and customers are recorded at contract price or cost as contributions in aid-of-construction and recorded in the statement of revenues, expenses and changes in net position. Depreciation is computed on the straight-line method over estimated useful lives as follows: Distribution Plant - 20 to 33 years; Transmission Plant - 33 years; General Plant - 4 to 50 years; Production Plant - 10 to 50 years; FERC License - 50 years.

M. White Creek Wind Project Energy Purchase Agreement

In November 2007, the White Creek Wind Project began energy production and the District paid $85,572,237 under the Amended and Restated White Creek Wind Project Energy Purchase Agreement to receive a 46% share of the energy for 20 years. With certain exceptions, the Agreement stipulates a minimum Annual Energy Quantity (225,917 MWh). The payment was made with unrestricted funds ($70,354,497) and a loan from the Production System to the Electric System ($15,217,740 – See Note 7). The prepayment is being amortized on a straight-line basis over the life of the contract. In addition, the District is responsible for its share of annual operating costs.

N. Regulatory Assets

The District has deferred costs to be charged to future periods matching the time periods when the expenses are included in rates.

O. Unamortized Bond Premiums Bond premiums are amortized to interest expense using the effective interest method over the term of the bonds.

P. Debt Refundings

For current and advance refundings, the difference between the reacquisition price and the net carrying amount of the old debt (gain or loss) is deferred and amortized as a component of interest expense over the remaining life of the old debt or the new debt, whichever is shorter. These amounts are reported as deferred inflows or outflows of resources on the statement of net position.

Q. Fair Value of Financial Instruments

The carrying amounts of current assets, including restricted cash and investments, and current liabilities approximate fair value due to the short-term maturity of those instruments. The fair value of the District’s investments and debt are estimated based on the quoted market prices for the same or similar issues.

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R. Derivative Instruments The District enters into derivative energy transactions to hedge its known or expected positions within its approved Risk Management policy. Decisions are made to enter into forward transactions to protect its financial position, specifically to deal with expected long and short positions as determined by projected load and resource balance positions, with the objective of providing stable rates and meeting budget. Subject to certain exceptions, GASB requires that every derivative instrument be recorded on the statement of net position as an asset or liability measured at its fair value, and that changes in the derivative’s fair value be recognized currently in earnings unless such derivatives meet specific hedge accounting criteria to be determined as effective. Effective hedges qualify for hedge accounting and such changes in fair values are deferred. These are recorded on the statement of net position as deferred inflows/outflows of resources as accumulated increase/decrease in fair value of hedging derivatives. It is the District’s policy to document and apply as appropriate the normal purchase and normal sales exception under GASB. The District has reviewed its various contractual arrangements to determine applicability of these standards. Purchases and sales of forward electricity and option contracts that require physical delivery and which are expected to be used or sold by the reporting entity in the normal course of business are generally considered “normal purchases and normal sales.” These transactions are excluded under GASB and therefore are not required to be recorded at fair value in the financial statements. Certain put and call options and financial swaps for electricity are considered to be derivatives under GASB, but do not generally meet the “normal purchases and normal sales” criteria.

As of December 31, 2018, the District had the following derivative instruments outstanding. Options are amortized to power costs over the exercise period of the option. Fair value of derivative assets are recorded under other charges and fair value of derivative liabilities are recorded under other credits on the statement of net position.

Options and Swaps Hedging Derivatives

2018

Notional value 32,339,685$ Volumes (MWH) 1,415,452 Fair value - asset 3,288,328$ Fair value - liability 5,805,566$ Reference rates Mid-C indexDates entered into 3/16 - 12/18Dates of maturity 1/19 - 12/22Cash paid -$

The fair values used for the mark-to-market amounts are based on the futures price curve for the Mid-Columbia Intercontinental Exchange. The District categorizes its fair value measurements within the fair value hierarchy established by GAAP. The hierarchy is based on the valuation inputs used to measure fair value. Level 1 inputs are quoted prices in active markets for identical instruments; Level 2 inputs are significant other observable inputs; Level 3 inputs are significant unobservable inputs. The District’s fair market measurements are classified as Level 2. The District has developed a credit policy that establishes guidelines for setting credit limits and monitoring credit exposure on a continuous basis. The policy addresses frequency of counterparty credit evaluations, credit limits per specific counterparty and counterparty credit concentration limits. Commodity transactions, both physical and financial, are entered into only with counterparties approved by the District’s Risk Management Committee for creditworthiness. The District has entered into master enabling agreements with various counterparties, such as International Swaps and Derivatives Association Agreements (ISDA) for financial transactions. All of the enabling agreements have provisions addressing credit exposure and provide for various remedies to assure financial performance, including the ability to call on additional collateral as conditions warrant,

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generally as determined by the exposed party. The District also uses netting provisions in the agreements to diffuse a portion of the risk. The District proactively works to eliminate or minimize basis risk on energy transactions by entering into derivative transactions that settle pursuant to an index derived from market transactions at the point physical delivery is expected to take place. There are no derivative transactions outstanding that carry basis risk as of December 31, 2018. As of December 31, 2018, no termination events have occurred, and there are no outstanding transactions with material termination risk. There is no rollover, interest rate or market access risk for these derivative products at December 31, 2018.

S. Compensated Absences

The District accrues personal leave benefits as the obligation is incurred.

T. Rate Stabilization Fund The District’s Board of Commissioners deferred amounts as allowed for under regulatory accounting and bond covenants. Such amounts will be amortized to income consistent with ratemaking decisions. For the year ended December 31, 2018, the District deferred $13,000,000 of revenue.

U. Compensation Reserve Personal leave accruals may be transferred, according to the District’s Banked Personal Leave Plan, into the Banked Personal Leave Fund. Employee amounts in the Banked Personal Leave Fund are no longer tied to the employee’s wage rate, but accrue interest according to the earnings of the Banked Personal Leave Fund investments.

V. Net Position Net position consists of:

Net investment in capital assets – This component of net position consists of capital assets, net of accumulated depreciation, less outstanding balances of any bonds and other borrowings that are attributable to the acquisition, construction, or improvement of those assets.

Restricted – This component consists of net assets on which constraints are placed as to

their use. Constraints include those imposed by creditors (such as through debt covenants), contributors, or laws or regulation of other governments or constraints imposed by law through constitutional provisions or through enabling legislation.

Unrestricted – This component of net position consists of net assets that do not meet the

definition of “restricted” or “net investment in capital assets,” including the White Creek Wind Project Energy Purchase Agreement and joint venture in the Harvest Wind Project (net of inter-system advances).

W. Operating Revenues and Expenses

Operating revenues and expenses result from providing services in connection with the District’s principal ongoing operations. Operating revenues are recognized when billed and expenses are recognized when incurred. In addition, the District recognizes unbilled revenue, revenues from services provided, but not yet billed. The principal operating revenues of the District are charges to customers for electric service. Operating expenses for the District include the cost of power, operations, maintenance, administrative expenses, depreciation on capital assets and taxes. All revenues and expenses not meeting this definition are reported as non-operating revenues and expenses. Approximately 50% of Electric System retail sales were from three industrial customers. The credit practices of the District require an evaluation of each customer’s credit worthiness on a case-by-case basis. Based on policy, a deposit or other credit assurance may be obtained from the customer. Except for the three large industrial customers, for which the District has credit assurance instruments in place, concentrations of credit risk with respect to receivables for retail customers are

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limited due to the number of customers comprising the District’s customer base. Credit losses have been within management’s expectations. Similar to its evaluation of residential, commercial and industrial customers’ credit reviews, the District evaluates its wholesale power customers by reviewing credit ratings and financial credit worthiness of existing and new customers.

X. Significant Risks and Uncertainties The District is subject to certain business risks that could have a material impact on future operations and financial performance. These risks include, but are not limited to, weather and natural disaster related disruptions; employee matters; collective bargaining labor disputes (current contract expires March 31, 2021); fish and other Endangered Species Act issues; Environmental Protection Agency regulations; federal and state government regulations or orders; deregulation of the electric industry; and market risks inherent in buying and selling of power, a commodity with inelastic demand characteristics and minimal storage capability. The District maintains insurance coverage for property, casualty and liability claims and is self-insured for employee health benefits up to certain stop-loss limits ($100,000 per individual and $3.5 million aggregate). Health benefit claims paid for the year ended December 31, 2018 totaled approximately $3 million. The District participates in a State of Washington plan for workers compensation and is self-insured for unemployment benefits.

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2. DEPOSITS AND INVESTMENTS

The District’s deposits are entirely secured by the Federal Depository Insurance Corporation (FDIC) or by collateral held in a multiple financial institution collateral pool administered by the Washington Public Deposit Protection Commission (PDPC). Deposits and investments as of December 31, 2018 consisted of the following:

Electric ProductionSystem System Total

Cash in banks 20,647,784$ 3,114,328$ 23,762,112$ Investment in Local Government

Investment Pool 23,000,960 1,828,982 24,829,942 Securities 91,902,347 26,626,452 118,528,799

Total deposits and investments 135,551,091$ 31,569,762$ 167,120,853$

Unrestricted:Cash and cash equivalents 34,776,833$ 325,456$ 35,102,289$ Investments 85,942,347 26,626,452 112,568,799

Total unrestricted, includes ES ratestabilization fund of $58.2 million 120,719,180$ 26,951,908$ 147,671,088$

Restricted:Cash and cash equivalents:

Debt service and reserve accounts 6,367,359$ 4,617,854$ 10,985,213$ Escrow funds 1,004,552 - 1,004,552 Self-insured health coverage reserve 1,500,000 - 1,500,000

Total cash and cash equivalents 8,871,911 4,617,854 13,489,765

Investments:Debt service and reserve accounts 5,960,000 - 5,960,000

Total investments 5,960,000 - 5,960,000

Total restricted 14,831,911$ 4,617,854$ 19,449,765$

Total deposits and investments 135,551,091$ 31,569,762$ 167,120,853$

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Investments as of December 31, 2018 consisted of the following:

Less Than 1 to 5Investment Type - Electric System Fair Value 1 Year Years

Federal Farm Credit Bank 1,600,000$ -$ 1,600,000$ Federal Home Loan Bank 2,730,000 - 2,730,000 Federal Home Loan Mortgage Corp 500,000 - 500,000 Federal National Mortgage Association 1,130,000 - 1,130,000 US Treasury Notes 85,942,347 12,791,468 73,150,879

Totals 91,902,347$ 12,791,468$ 79,110,879$

Less Than 1 to 5Investment Type - Production System Fair Value 1 Year Years

US Treasury Notes 26,626,452$ 3,963,022$ 22,663,430$

Totals 26,626,452$ 3,963,022$ 22,663,430$

Investment Maturities

Investment Maturities

Custodial credit risk is the risk that, in the event of the failure of the counterparty, the District will not be able to recover the value of its investments or collateral securities that are in the possession of an outside party. All the aforementioned investments are held in the District’s name by a third-party custodian. As required by state law and District policy, all investments of the District's funds are obligations of the U.S. Government or deposits with Washington State banks and savings and loan institutions. The District has an investment policy that addresses diversification of investments by security type and institution and limits its exposure to fair value losses resulting from rising interest rates. Investments in Local Government Investment Pool (LGIP) The District is a participant in the Local Government Investment Pool. The LGIP was authorized by Chapter 294, Laws of 1986, and is managed and operated by the Washington State Treasurer. The State Finance Committee is the administrator of the statute that created the pool and adopts rules. The State Treasurer is responsible for establishing the investment policy for the pool and reviews the policy annually and proposed changes are reviewed by the LGIP Advisory Committee. Investments in the LGIP, a qualified external investment pool, are reported at amortized cost, which approximates fair value. The LGIP is an unrated external investment pool. The pool portfolio is invested in a manner that meets the maturity, quality, diversification and liquidity requirements set forth by GASBS 79 for external investments pools that elect to measure, for financial reporting purposes, investments at amortized cost. The LGIP does not have any legally binding guarantees of share values. The LGIP does not impose liquidity fees or redemption gates on participant withdrawals. The Office of the State Treasurer prepares a stand-alone LGIP financial report. A copy of the report is available from the Office of the State Treasurer, PO Box 40200, Olympia, Washington 98504-0200, online at http://www.tre.wa.gov.

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3. UTILITY PLANT AND DEPRECIATION

A schedule of changes in utility plant and depreciation for the year ended December 31, 2018:

Balance Balance

Electric System Utility Plant Jan. 1, 2018 Increases Decreases Dec. 31, 2018

Intangible (1) 239,963$ -$ -$ 239,963$

Land and Land Rights (1) 3,295,350 14,417 - 3,309,767

Transmission 29,859,097 3,675,840 801,841 32,733,096

Distribution 224,244,630 9,458,350 3,333,526 230,369,454

General Plant 55,371,188 486,597 58,677 55,799,108

Plant in Service 313,010,228 13,635,204 4,194,044 322,451,388

Construction in Progress 8,232,155 14,449,187 13,587,198 9,094,144

Total Utility Plant 321,242,383 28,084,391 17,781,242 331,545,532

Less Accumulated Depreciation 152,417,051 11,881,923 4,055,922 160,243,052

Net Electric System Utility Plant 168,825,332$ 16,202,468$ 13,725,320$ 171,302,480$

Balance BalanceProduction System Utility Plant Jan. 1, 2018 Increases Decreases Dec. 31, 2018

Intangible 3,113,155$ -$ -$ 3,113,155$

Land and Land Rights (1) 1,224,229 - - 1,224,229 Production 144,102,753 84,982 - 144,187,735 Transmission 6,799,262 - - 6,799,262

Plant in Service 155,239,399 84,982 - 155,324,381 Construction in Progress - 84,982 84,982 -

Total Utility Plant 155,239,399 169,964 84,982 155,324,381 Less Accumulated Depreciation and Amortization 44,958,452 3,131,713 - 48,090,165

Net Production System Utility Plant 110,280,947$ (2,961,749)$ 84,982$ 107,234,216$

(1) Plant not being depreciated.

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4. INVESTMENTS IN ASSOCIATED ORGANIZATIONS

Investments in associated organizations at December 31, 2018 consisted of the following: Electric System 2018

Harvest Wind Project 33,628,343$ White Creek Project, LLC 365,114 The Energy Authority 2,268,828

Totals 36,262,285$

Harvest Wind Project The District is party to a Joint Ownership Agreement whereby the District made an equity investment in the Harvest Wind Project, a 98.9 MW wind generating facility located in Klickitat County, WA. The District’s share of the Project is 30%. During 2009, the joint owners of Harvest Wind elected to classify the Project as a taxable corporation. At the time of the election all project assets were treated as contributed to the corporation and the joint owners received shares in proportion to their ownership. Owners share in power output, income and expenses according to their ownership shares. Commercial operations began on December 15, 2009.

The District is committed, through an energy purchase agreement, to purchase its share of the output from the Project and pay its share of Project expenses through the year 2029. Additionally, the District is committed, through a transmission service agreement and a transmission payment agreement, to subsidize the initial construction of transmission lines, deposit funds to ensure contract performance and purchase transmission from the owner of the transmission lines through the year 2029.

The investment in Harvest Wind consists of the District’s share of the costs to develop the Project, 30% of the Project’s net income and losses and any distributions. During 2018, the District received $2,587,500 in distributions. Also included is $2,144,858 in prepaid transmission system and related costs, which are being amortized on a straight-line basis over 20 years. White Creek Project, LLC The District has a 46% contractual interest in the 204.7 MW White Creek Wind Project located in Klickitat County, WA. The investment in White Creek Project, LLC (WCP, LLC) is being carried as an equity investment. Assets of WCP, LLC consist of cash and other assets related to the White Creek Wind Project Phases I and II. Commercial operations began in November 2007 (See Note 1). The Energy Authority On March 30, 2010, the District became a member of The Energy Authority (TEA), a nonprofit corporation that provides, among other services, power energy trading, risk management and hedging services and power management services to public utilities across the nation. The Membership Agreement required: (a) payment of a $1 million Membership Fee; (b) payment of a $2.8 million Capital Contribution, representing the District’s ownership interest in TEA; and (c) the Advance Agreement of $9,642,857, consisting of a $1 million Bank Guarantee and a Trade Guarantee of $8,642,857. The Bank Guarantee makes certain credit representations and guarantees to the bank, which will then be able to issue a letter of credit to any counterparty requiring a letter of credit as a condition of any particular transaction. Like the Bank Guarantee, the Trade Guarantee makes certain credit assurances allowing TEA this amount of unsecured credit to trade on behalf of its members. Effective January 1, 2019 the District withdrew from TEA membership and is now contracting services from TEA. The District received approximately $1.5 million in settlement of its equity interest and is no longer obligated under the Advance Agreement.

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5. OTHER CHARGES AND CREDITS

Other charges consist of the following: Electric System 2018

Regulatory asset 600,856$ Derivatives at fair value 3,288,328 Miscellaneous charges 102,461

Total Other Charges 3,991,645$

Production System 2018

Regulatory asset 494,549$

Total Other Charges 494,549$

Other credits consist of the following: Electric System 2018

Derivatives at fair value 5,805,566$ Other credits 634,585

Total Other Credits 6,440,151$

6. DEFERRED OUTFLOWS AND INFLOWS OF RESOURCES Deferred outflows of resources consist of the following:

Electric System 2018

Unamortized loss on reacquired debt 2,895,294$ Pension - See Note 10 1,308,262 Accum. decrease in fair value of hedging derivatives 5,805,566

Total Deferred Outflows of Resources 10,009,122$


Unamortized loss on reacquired debt 705,832$

Total Deferred Outflows of Resources 705,832$

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Deferred inflows of resources consist of the following:


Rate stabilization fund 58,200,000$ Accum. increase in fair value of hedging derivatives 3,288,328 Pension - See Note 10 2,755,309

Total Deferred Inflows of Resources 64,243,637$


Unamortized gain on reacquired debt 510,777$

Total Deferred Inflows of Resources 510,777$

7. LONG-TERM DEBT

Electric System Revenue Bonds

In August 2006 the District issued $61.465 million in Electric System Revenue and Refunding Bonds to fund capital improvements, repay $8 million on a line of credit, pay for bond issuance costs (including bond insurance), fund the bond reserve account and to refund $11.635 million of outstanding 2001 Electric Distribution System Revenue Bonds (Series 2001 Bonds). Principal payments on the 2006 Revenue and Refunding Bonds began in September 2012, maturing annually in varying amounts through September 2026. The bonds have annual interest rates ranging from 4.50% to 5.00%. In May 2015, these bonds were partially refunded with the issuance of the 2015 Electric System Revenue and Refunding Bonds for $41.5 million. Additionally the proceeds of the 2015 Bonds were used to establish a $6 million construction fund for capital improvements and pay costs of issuing the bonds. The bonds mature beginning in 2016 through 2036 and have interest rates varying from 2.00% to 5.00%. In October 2007 the District issued $64.755 million in Electric System Revenue Bonds to fund capital improvements, pay for bond issuance costs (including bond insurance) and fund bond debt service and reserve accounts. Principal payments on these bonds began in September 2010, maturing annually in varying amounts through September 2027. The bonds have annual interest rates ranging from 4.375% to 5.00%. In November 2015, these bonds were partially refunded with the issuance of the 2015B Electric System Revenue Refunding Bonds for $38.305 million. Additionally the proceeds of the 2015B Bonds were used to pay costs of issuing the bonds (including bond insurance). The bonds mature beginning in 2018 through 2027 and have an interest rate of 5.00%.

In February 2010 the District issued Electric System Revenue Bonds consisting of $17.805 million in tax-exempt bonds (2010A) and $46.18 million in taxable “Build America Bonds” (2010B) to fund capital improvements, pay for bond issuance costs and fund bond debt service and reserve accounts. Principal payments on these bonds began in September 2013, maturing annually in varying amounts through September 2032. The 2010A bonds are not subject to redemption prior to maturity and carry a coupon rate of 5.00% with an all-in true interest cost of 3.59%. The 2010B bonds are subject to redemption by the District prior to their stated maturities and carry coupon rates of 2.52% – 6.884% before a thirty-five percent subsidy payment from the United States Treasury, subject to certain conditions. The all-in true interest cost for the 2010A and 2010B bonds is 4.26%.

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Scheduled principal maturities and interest requirements on the Revenue Bonds are as follows:

Principal Interest Total

2019 9,285,000$ 6,232,673$ 15,517,673$ 2020 9,750,000 5,768,423 15,518,423 2021 10,195,000 5,325,923 15,520,923 2022 10,705,000 4,816,173 15,521,173 2023 11,115,000 4,342,458 15,457,458 2024 - 2028 49,070,000 13,553,120 62,623,120 2029 - 2033 19,215,000 3,509,479 22,724,479 2034 - 2036 1,155,000 93,600 1,248,600

Total 120,490,000$ 43,641,849$ 164,131,849$

Loan Payable In 2007, the District entered into a contract for a general obligation loan in the amount of $800,000 and a $200,000 grant from the State of Washington Community Economic Revitalization Board. The loan is to be repaid at the rate of 1.60% per annum over a twenty-year term. The District is using these funds to provide power to a new business at the Port of Kalama. Scheduled principal maturities and interest requirements on the loan are as follows:


2019 -$ -$ -$ 2020 46,917 7,205 54,122 2021 47,668 6,454 54,122 2022 48,430 5,692 54,122 2023 49,205 4,917 54,122 2024 - 2028 258,089 11,667 269,756

Total 450,309$ 35,935$ 486,244$

Production System In May 2014, the District issued $33.56 million in 2014 Production System Revenue Refunding Bonds to refund the 2004 Production System Revenue Bonds, fund the reserve account requirement and pay costs of issuing the bonds. The bonds mature serially over a 20-year period beginning in 2015 and have interest rates varying from 2.00% to 5.00%. In August 2006, the District issued $27.54 million in Production System Revenue Bonds for continuing expenditures for Swift No. 2 Hydroelectric Project reconstruction and to provide for capital expenditures associated with FERC licensing. The bonds mature in 2036 and have interest rates varying from 3.00% to 5.00%. In May 2015, these bonds were partially refunded with the issuance of the 2015 Production System Revenue Refunding Bonds for $15.645 million. Additionally the proceeds of the 2015 Bonds were used to fund the reserve account requirement and pay costs of issuing the bonds. The bonds mature beginning in 2025 through 2036 and have interest rates varying from 3.25% to 5.00%.

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Scheduled principal maturities and interest requirements on the Revenue Bonds are as follows:


2019 1,230,000$ 2,106,538$ 3,336,538$ 2020 1,295,000 2,045,038 3,340,038 2021 1,355,000 1,980,288 3,335,288 2022 1,425,000 1,912,538 3,337,538 2023 1,490,000 1,841,288 3,331,288 2024 - 2028 13,505,000 7,863,964 21,368,964 2029 - 2033 19,155,000 3,791,064 22,946,064 2034 - 2036 5,245,000 345,693 5,590,693

Total 44,700,000$ 21,886,411$ 66,586,411$

Interfund Advances

In 2007, the District’s Board of Commissioners approved a loan from the Production System to the Electric System for up to $16 million. Proceeds from this loan were used to partially fund the White Creek Wind Project Energy Purchase Agreement (See Note 1). The interest rate is 4.50% and the obligation is to be repaid over a period not to exceed twenty years. Scheduled principal maturities and interest requirements on this loan follow:


2019 787,247$ 368,052$ 1,155,299$ 2020 823,413 331,886 1,155,299 2021 861,240 294,059 1,155,299 2022 900,806 254,493 1,155,299 2023 942,189 213,110 1,155,299 2024 - 2027 4,221,936 399,258 4,621,194

Total 8,536,831$ 1,860,858$ 10,397,689$

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Long-term debt activity for the year ended December 31, 2018 follows:

Date of Outstanding OutstandingOriginal Date of Debt as of Amount Amount Debt as of

Electric System Issue Maturity Jan. 1, 2018 Issued Redeemed Dec. 31, 2018

Electric Revenue Bonds,2.52% to 6.884% Feb-10 Sep-32 52,835,000$ -$ 2,530,000$ 50,305,000$

Electric Revenue & Refunding Bonds,2.00% to 5.00% May-15 Sep-36 38,195,000 - 3,270,000 34,925,000

Electric Revenue Refunding Bonds,5.00% Nov-15 Sep-27 38,305,000 - 3,045,000 35,260,000

Loan Payable - State of Washington, 1.60% Jun-07 Jun-28 541,938 - 91,629 450,309

Loan Payable - ProductionSystem, 4.50% Dec-07 Dec-27 9,289,501 - 752,670 8,536,831

Total Electric System Long-Term Debt 139,166,439$ -$ 9,689,299$ 129,477,140$

Date of Outstanding OutstandingOriginal Date of Debt as of Amount Amount Debt as of

Production System Issue Maturity Jan. 1, 2018 Issued Redeemed Dec. 31, 2018

Production System RevenueRefunding Bonds, 2.00% to 5.00 May-14 Sep-34 30,240,000$ -$ 1,185,000$ 29,055,000$

Production System RevenueRefunding Bonds, 3.25% to 5.00 Jun-15 Sep-36 15,645,000 - - 15,645,000

Total Production System Long-Term Debt 45,885,000$ -$ 1,185,000$ 44,700,000$

8. LEWIS RIVER COST-SHARE AGREEMENT

The District reached a cost-sharing agreement with PacifiCorp, assigning the operational and capital expenditure payments to be made by the District for fish passage and other aquatic measures, which are required under the Lewis River Settlement Agreement and under the FERC License for Swift No. 2. Operational payments are made annually for each year of the 50-year license and range from $197,000 to $291,000 (2003 dollars) indexed for inflation. During 2018, the District paid $303,973 on this obligation. The Agreement requires capital payments to be made according to the following schedule, which has been indexed for inflation using 2003 dollars. Actual payments using a 3% escalator are estimated to be $11.3 million: Production System 2018

2022 2,252,546$ 2023 2,252,546 2024 2,252,546 2037 450,509

Total 7,208,147$

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9. OTHER POST-EMPLOYMENT BENEFIT (OPEB) OBLIGATION

Plan Description In addition to pension benefits, the District provides (subject to eligibility requirements) as a single-employer post-employment health care benefits to its retirees until the earlier of age 65 or eligible for Medicare. The District covers the medical insurance premium for those eligible retirees. The District does not pay for a Medicare supplement for any retiree eligible for Medicare. The Plan is established and may be amended by action of the Board of Commissioners. Eligibility To be eligible, the employee must (this benefit is a one-time election):

Voluntarily retire, be age 55 or older at the time of retirement, have been employed with the District full-time for at least ten consecutive years and not be eligible to receive medical insurance coverage through another employer (even if coverage is declined).

Voluntarily retire drawing Washington PERS benefit and be age 55 or older at the time of retirement.

Number of Covered EmployeesActive 132 Retired 19

151

Funding Policy The District pays, on a pay-as-you-go basis, medical insurance for retirees and there are no assets accumulated in a qualifying trust. Such payments are limited to premiums for coverage not in excess of coverage made available for active employees and limited to payments for a number of months not to exceed the number of months the retiree actually worked for the District; provided, however, such retiree may pay their own premiums for the balance of time up to age 65 or when they become eligible for Medicare, whichever occurs first. As long as the retired employee is afforded coverage, medical will be made available to the spouse paid by the employee. Methods and Assumptions The District’s Total OPEB Liability is calculated using The Entry Age Normal Level Percent of Pay Cost Method. Under this method, the actuarial present value of the projected benefits of each active employee included in the valuation is allocated on a level percent of pay basis over the service of the active employee between assumed entry age (date of hire) and assumed exit age(s). The portion of this actuarial present value allocated to the valuation year is called the service cost for that active employee. The sum of these individual service costs is the Plan’s Service Cost for the valuation year. The present value of benefits for current retirees plus the accumulated value of all prior Service Costs is the Total OPEB Liability. Under this method, the actuarial gains (losses), as they occur, reduce (increase) the Total OPEB Liability. Rates of retirement and mortality are the rates applicable for general public employees used in the actuarial valuation report for 2017 published by the Office of the State Actuary in Olympia, Washington. The discount rate assumption is the December 31, 2018 rate in the 20-Year General Obligation Municipal Bond Index published by Bond Buyer. The health care trend rate is based on a combination of recent plan experience and national average experience. AssumptionsDiscount Rate 4.10%Inflation Rate 2.75%Salary Scale 3.50%Health Care Trend Rate 5.00% In the prior valuation, the discount rate was 3%, inflation rate was 2.5% and salary scale was 3.75%.

Page 34

Total OPEB Liability The following table shows the components of the District’s Total OPEB Liability, fiduciary net position, percent of covered payroll and expense for the year ended December 31, 2018 (measurement and valuation date): Electric System 2018

Beginning Total OPEB Liability 5,884,915$

Benefit Payments - Explicit Medical (193,743) Benefit Payments - Implicit Medical (106,134)

Service Cost 263,517 Interest on Total OPEB Liability 235,134

Change of Benefit Terms - Change in Assumptions (304,224) Experience (Gain)/Loss (474,634)

Ending Total OPEB Liability 5,304,831$

Fiduciary Net Position - Funded Status 0%

Covered Payroll 15,031,073$ Total OPEB Liability as a Percent of Covered Payroll 35%

OPEB Expense (580,084)$

The effects of the deferred outflows and inflows of resources from the change in assumptions and experience are not material and have been recognized in income for the current year and not amortized. Beginning in 2022, a 40% excise tax will be imposed under the Affordable Care Act on employers if the aggregate value of medical coverage exceeds a threshold limit. At this point, the District estimates the impact to not be material and has excluded from the OPEB calculations. Sensitivity The tables below present the District’s Total OPEB Liability calculated using a discount rate and health care trend rate 1-percentage point lower and 1-percentage point higher than the current rate: Discount Rate Sensitivity Analysis 1% Decrease Current 1% Increase

Total OPEB Liability 5,817,121$ 5,304,831$ 4,832,978$

Health Care Trend Sensitivity Analysis 1% Decrease Current 1% Increase

Total OPEB Liability 4,658,222$ 5,304,831$ 6,073,121$

Page 35

Health Reimbursement Arrangement/Voluntary Employee Beneficiary Association (HRA/VEBA) The District participates in the Health Reimbursement Arrangement/Voluntary Employee Beneficiary Association (HRA/VEBA). Employee contributions and terms are determined by group and may be adjusted from time-to-time, but no more frequently than once every 12 months, by a majority vote of the specific HRA/VEBA group. The District contributes $.15 per straight-time hour worked for eligible employees plus an additional $.15 per straight-time hour worked for eligible wellness program employees. Total District contributions for the year ended December 31, 2018 were $76,000.

10. RETIREMENT PLANS

Public Employees Retirement System – Plans 1, 2 and 3

Aggregate Pension Amounts - Electric System 2018

Net Pension Liability PERS 1 5,010,355$ PERS 2 & 3 2,381,583

7,391,938$

Deferred Outflows of Resources PERS 2 & 3 319,780$ PERS Contributions 988,482

1,308,262$

Deferred Inflows of Resources PERS 1 199,109$ PERS 2 & 3 2,556,200

2,755,309$

Pension Expense - PERS 1, 2 & 3 (144,776)$

State Sponsored Pension Plans Substantially all District full-time and qualifying part-time employees participate in one of the following statewide retirement systems administered by the Washington State Department of Retirement Systems, under cost-sharing, multiple-employer public employee defined benefit and defined contribution retirement plans. The state Legislature establishes and amends laws pertaining to the creation and administration of all public retirement systems. The Department of Retirement Systems (DRS), a department within the primary government of the State of Washington, issues a publicly available comprehensive annual financial report (CAFR) that includes financial statements and required supplementary information for each plan. The DRS CAFR may be obtained by writing to: Department of Retirement Systems Communications Unit P.O. Box 48380, Olympia, WA 98504-8380 Or it may be downloaded from the DRS website at www.drs.wa.gov.

Page 36

Public Employees' Retirement System (PERS) PERS members include elected officials, state employees, employees of local governments and higher education employees not participating in higher education retirement programs. PERS is comprised of three separate pension plans for membership purposes. PERS Plans 1 and 2 are defined benefit plans and PERS Plan 3 is a defined benefit plan with a defined contribution component. PERS Plan 1 provides retirement, disability and death benefits. Retirement benefits are determined as 2 percent of the member’s average final compensation (AFC) times the member’s years of service. The AFC is the average of the member’s 24 highest consecutive service months. Members are eligible for retirement from active status at any age with at least 30 years of service, at age 55 with at least 25 years of service, or at age 60 with at least 5 years of service. Members retiring from active status prior to the age of 65 may receive actuarially reduced benefits. Retirement benefits are actuarially reduced to reflect the choice of a survivor benefit. Other benefits include duty and non-duty disability payments, an optional cost-of-living adjustment (COLA), and a one-time duty-related death benefit, if found eligible by the Department of Labor and Industries. PERS 1 members were vested after the completion of 5 years of eligible service. The plan was closed to new entrants on September 30, 1977. The PERS Plan 1 member contribution rate is established by State statute at 6 percent. The employer contribution rate is developed by the Office of the State Actuary. Each biennium, the state Pension Funding Council adopts Plan 1 employer contribution rates. PERS Plan 2/3 provides retirement, disability and death benefits. Retirement benefits are determined as 2 percent of the member’s average final compensation (AFC) times the member’s years of service for Plan 2 and 1 percent of AFC for Plan 3. The AFC is the average of the member’s 60 highest-paid consecutive service months. There is no cap on years of service credit. Members are eligible for retirement with a full benefit at 65 with at least 5 years of service credit. Retirement before age 65 is considered an early retirement. PERS Plan 2/3 members who have at least 20 years of service credit and are 55 years of age or older, are eligible for early retirement with a benefit that is reduced by a factor that varies according to age for each year before age 65. PERS Plan 2/3 members who have 30 or more years of service credit and are at least 55 years old can retire under one of two provisions: With a benefit that is reduced by 3 percent for each year before age 65; or With a benefit that has a smaller (or no) reduction (depending on age) that imposes stricter return-to-

work rules. PERS Plan 2/3 members hired on or after May 1, 2013 have the option to retire early by accepting a reduction of 5 percent for each year of retirement before age 65. This option is available only to those who are age 55 or older and have at least 30 years of service credit. PERS Plan 2/3 retirement benefits are also actuarially reduced to reflect the choice of a survivor benefit. Other PERS Plan 2/3 benefits include duty and non-duty disability payments, a cost-of-living allowance (based on the CPI), capped at 3 percent annually and a one-time duty related death benefit, if found eligible by the Department of Labor and Industries. PERS 2 members are vested after completing 5 years of eligible service. Plan 3 members are vested in the defined benefit portion of their plan after 10 years of service; or after 5 years of service if 12 months of that service are earned after age 44. PERS Plan 3 defined contribution benefits are totally dependent on employee contributions and investment earnings on those contributions. PERS Plan 3 members choose their contribution rate upon joining membership and have a chance to change rates upon changing employers. As established by statute, Plan 3 required defined contribution rates are set at a minimum of 5 percent and escalate to 15 percent with a choice of six options. Employers do not contribute to the defined contribution benefits. PERS Plan 3 members are immediately vested in the defined contribution portion of their plan. The PERS Plan 2/3 employer and employee contribution rates are developed by the Office of the State Actuary to fully fund Plan 2 and the defined benefit portion of Plan 3. The Plan 2/3 employer rates include a component to address the PERS Plan 1 UAAL. Each biennium, the state Pension Funding Council adopts Plan 2/3 contribution rates.

Page 37

The required contribution rates expressed as a percentage of covered payroll as of December 31, 2018 were:

2018 Plan 1 Plan 2 Plan 3Employer 1/18 - 8/18 12.70% 12.70% 12.70%Employer 9/18 - 12/18 12.83% 12.83% 12.83%Employee 1/18 - 8/18 6.00% 7.38% VariesEmployee 9/18 - 12/18 6.00% 7.41% Varies

Both the District and the employees made the required contributions. The District’s required contributions for the years ended December 31, 2018, 2017 and 2016 were as follows:

Plan 1 Plan 2 Plan 3

2018 27,855$ 1,743,543$ 143,684$ 2017 24,523$ 1,599,189$ 110,131$ 2016 33,365$ 1,498,092$ 81,049$

Actuarial Assumptions The total pension liability (TPL) for each of the DRS plans was determined using the most recent actuarial valuation completed in 2018 with a valuation date of June 30, 2017. The actuarial assumptions used in the June 30, 2017 valuation were based on the results of the Office of the State Actuary’s (OSA) 2007-2012 Experience Study Report and the 2017 Economic Experience Study. Additional assumptions for subsequent events and law changes are current as of the 2017 actuarial valuation report. The TPL was calculated as of the valuation date and rolled forward to the measurement date of June 30, 2018. Plan liabilities were rolled forward reflecting each plan’s service cost (using the Entry Age cost method), assumed interest and actual benefit payments.

Inflation (economic): 2.75% Salary Increases: 3.50% inflation, plus promotions and longevity Investment Rate of Return: 7.4%

Mortality rates were based on the RP-2000 report’s Combined Healthy Table and Combined Disabled Table, published by the Society of Actuaries. The OSA applied offsets to the base table and recognized future improvements in mortality by projecting the mortality rates using 100% Scale BB. Mortality rates are applied on a generational basis, meaning members are assumed to receive additional mortality improvements in each future year throughout their lifetimes. Changes in methods and assumptions since the last valuation:

Updated the valuation interest rate, general salary growth and inflation assumptions to be consistent with the assumptions adopted by the Pension Funding Council. o The valuation interest rate was lowered from 7.70% to 7.50% o The assumed general salary growth was lowered from 3.75% to 3.50% o The assumed inflation was lowered from 3.00% to 2.75%

Discount Rate The discount rate used to measure the total pension liability for all DRS plans was 7.40 percent. To determine the discount rate, an asset sufficiency test was completed to test whether the pension plan’s fiduciary net position was sufficient to make all projected future benefit payments of current plan members. Consistent with current law, the completed asset sufficiency test included an assumed 7.50 percent long-term discount rate to determine funding liabilities for calculating future contribution rate requirements. Consistent with the long-term expected rate of return, a 7.40 percent future investment rate of return on invested assets was assumed for the test. Contributions from plan members and employers are assumed to continue to be made at contractually required rates (including PERS Plan 2/3, whose rates include a component for the PERS Plan 1 liability). Based on those assumptions, the pension plan’s fiduciary net position was projected to be available to make all projected future benefit

Page 38

payments of current plan members. Therefore, the long-term expected rate of return of 7.40 percent on pension plan investments was applied to determine the total pension liability. Long-Term Expected Rate of Return The long-term expected rate of return on DRS pension plan investments of 7.40 percent was determined using a building-block-method. The Washington State Investment Board (WSIB) used a best estimate of expected future rates of return (expected returns, net of pension plan investment expense, including inflation) to develop each major asset class. Those expected returns make up one component of WSIB’s capital market assumptions. WSIB uses the capital market assumptions and their target asset allocation to simulate future investment returns over various time horizons. Estimated Rates of Return by Asset Class Best estimates of arithmetic real rates of return for each major asset class included in the pension plan’s target asset allocation as of June 30, 2018 are summarized in the table below. The inflation component used to create the table is 2.20 percent and represents WSIB’s most recent long-term estimate of broad economic inflation.

Long-TermTarget Expected Real Rate

Asset Class Allocation of Arithmetic Return

Fixed Income 20% 1.70%Tangible Assets 7% 4.90%Real Estate 18% 5.80%Global Equity 32% 6.30%Private Equity 23% 9.30%

100%

Sensitivity of NPL The table below presents the District’s proportionate share of the net pension liability calculated using the discount rate of 7.40 percent, as well as what the District’s proportionate share of the net pension liability would be if it were calculated using a discount rate that is 1-percentage point lower (6.40 percent) or 1-percentage point higher (8.40 percent) than the current rate.

1% Decrease Current Rate 1% Increase6.40% 7.40% 8.40%

PERS 1 6,157,413$ 5,010,355$ 4,016,770$ PERS 2 & 3 10,893,413$ 2,381,583$ (4,597,169)$ Pension Plan Fiduciary Net Position Detailed information about the State’s pension plans’ fiduciary net position is available in the separately issued DRS financial report. District’s Proportionate Allocation Proportionate Allocation of Collective Pension Amounts 2018 2017 Change

Net Pension Liability PERS 1 0.112188% 0.118119% -0.005931% PERS 2 & 3 0.139485% 0.145650% -0.006165% Employer contribution transmittals received and processed by DRS for the fiscal year ended June 30 are used as the basis for determining each employer’s proportionate share of the collective pension amounts reported by DRS in the Schedules of Employer and Non-employer Allocations for all plans.

Page 39

Deferred Outflows of Resources and Deferred Inflows of Resources Deferred outflows and inflows of resources related to pensions are from the following sources: Deferred Outflows/Inflows - Electric System 2018

Deferred Outflows of Resources PERS 2 & 3 Differences between expected and actual experience 291,920$ Change of assumptions 27,860 PERS Contributions - July - December 988,482

1,308,262$

Deferred Inflows of Resources PERS 1 Net difference between projected and actual investment earnings 199,109$ PERS 2 & 3 Differences between expected and actual experience 416,971 Net difference between projected and actual investment earnings 1,461,449 Change of assumptions 677,780

2,755,309$

Deferred outflows of resources related to the District’s contributions subsequent to the measurement date will be recognized as a reduction of the net pension liability in the year ended December 31, 2019. The effect of change in the District’s proportionate allocation percentage and differences between actual and proportionate share of contributions are not material and have been expensed. Other amounts reported as deferred outflows and deferred inflows of resources related to pensions will be recognized in pension expense as follows: Amortization - Deferred Outflows of Resources2019 127,848$ 2020 47,845 2021 43,663 2022 43,663 2023 43,663 Thereafter 13,098

319,780$

Amortization - Deferred Inflows of Resources2019 352,842$ 2020 574,884 2021 1,065,092 2022 404,879 2023 162,550 Thereafter 195,062

2,755,309$

Page 40

Deferred Compensation – 401(k) and 457 Plans

The District offers its employees a 401(k) Deferred Compensation Plan created in accordance with Internal Revenue Code Section 401(k) which permits employees to defer a portion of their salary. Assets of the plan are deposited, as specified by each participating employee, with Fidelity Investments as trustee. The District matches employee contributions to the plan up to four percent of eligible employee compensation. During 2018, the District made matching contributions of $465,662. The District also offers its employees the State of Washington Department of Retirement System’s Deferred Compensation Program. This Deferred Compensation Plan is in accordance with Internal Revenue Code Section 457, which permits employees to defer a portion of their salary. Distributions from the plan can be made after separation from service or upon the death of the participant. Participants can elect to receive an in-service distribution once every two years for an amount not to exceed $5,000.

11. COMMITMENTS AND CONTINGENCIES

Bonneville Power Administration (BPA) During 2008, the District entered into purchase power agreements with BPA for Block and Slice running from October 1, 2011 through September 30, 2028. The Block Product provides a set amount of energy delivered in a flat block over all hours of the month, with the blocks of energy varying from month-to-month to correspond to seasonal variations in the District’s loads. The Slice Product represents a specified percentage (or “slice”) of the output of the Federal System, so that the District receives increased or decreased energy supply depending on the output of the Federal System. The District is required to pay a corresponding percentage of the costs of the portion of the Federal System allocated to the Slice Product. The amounts payable by the District under the 2011 Power Sales Agreement are subject to adjustment from time to time by BPA to recover the costs of the Federal System. The District is required to submit an annual load forecast for acceptance by BPA. In 2017, BPA did not initially accept the District’s lower FY2018 load forecast. BPA offered a liquidated damages contract amendment to resolve the dispute, which the District accepted. The intent of the liquidated damages provision is to compensate BPA as if the District purchased additional power at BPA’s priority firm rate when the District’s actual load exceeds the forecast to make BPA whole for the uncertainty of the load forecast. The District expects no net financial impact related to this contract amendment as the costs will be contractually passed-through. The District, along with over 80 percent of BPA’s Consumer Owned Utility (COU) customers and the region’s Investor Owned Utilities (IOUs), entered into an agreement to settle the amount of the residential exchange benefits paid by BPA to the IOUs. The settlement included a provision for BPA to continue to provide COU’s a discount on BPA power bills through September 2019. Swift Plant No. 2 Power Contract

The Swift No. 2 Hydroelectric Production System is located on the Lewis River and consists of a 3.2-mile long power canal with an adjacent power house and transmission switchyard. It operates in conjunction with the Swift No. 1 Project, which is owned by PacifiCorp. Swift No. 1 consists of an earthen dam and power house, which discharges into the Swift No. 2 power canal. Swift No. 2 is operated under contract by PacifiCorp. The operating agreement provides that the District is entitled to 26% of the combined output of Swift No. 1 and Swift No. 2. The District’s share of the output is purchased by the Electric System at the cost of production of the energy, whether or not it is producing energy.

Page 41

Grant County PUD

The District acquires power from Grant County PUD pursuant to the “New Power Sales Contracts”, which became effective on November 1, 2005. The New Power Sales Contracts, which apply to both the Priest Rapids Development (as of November 1, 2005) and the Wanapum Development (as of November 1, 2009), consist of three separate contracts with terms that extend until expiration of the new long-term license for the Priest Rapids Project (April 1, 2052). The power available to the District is about 1 aMW on a firm basis.

Energy Northwest’s Nine Canyon Wind Project

The District entered into a contract with Energy Northwest in December 2003 for the purchase of the output associated with 2 megawatts of the Nine Canyon Wind Project. The District utilizes the power to serve its customers by use of a BPA wind integration product. The “green tags” or “renewable energy credits” associated with the District’s share of output are used for District load. White Creek Wind Project Transmission Service Agreement In 2006, the District entered into a Transmission Service Agreement with Klickitat PUD (KPUD) for power transmission from the White Creek Project Substation to the Rock Creek Substation where the transmission line and the facilities of BPA are connected. The District is billed and pays for services under this Agreement monthly. In accordance with the Agreement, the District was to provide KPUD an irrevocable standby Letter of Credit and for the contract year commencing August 1, 2010 and for the contract years thereafter, the District petitioned and KPUD has waived the requirement for a Letter of Credit or an alternate Letter of Credit. The Energy Authority Services Agreement The District entered into an agreement with The Energy Authority (TEA) to provide power energy trading, risk management and hedging services and power management services for the District’s power supply. Beacon Hill Sewer District (BHSD) Effective January 1, 2008, the District entered into an Inter-Local Agreement with BHSD, a Washington municipal corporation. Under the Agreement BHSD operated and maintained the District’s Water System under joint oversight by the Boards of Commissioners of both the District and BHSD until full ownership was transferred to BHSD on December 28, 2010. Under the terms of the Transfer Agreement, the District may be obligated to assist BHSD with obtaining financing for certain capital needs subject to various conditions, restrictions and limitations through December 28, 2020. Claims and Litigation The District is involved in various claims arising in the normal course of business. The District does not believe that the ultimate outcome of these matters will have a material impact on its financial position, results of operations or cash flows.

Page 42

Required Supplementary Information

SCHEDULE OF CHANGES IN TOTAL OPEB LIABILITY AND RELATED RATIOS FOR THE YEAR ENDED DECEMBER 31, 2018


Beginning Total OPEB Liability 5,884,915$

Benefit Payments - Explicit Medical (193,743) Benefit Payments - Implicit Medical (106,134)

Service Cost 263,517 Interest on Total OPEB Liability 235,134

Change of Benefit Terms - Change in Assumptions (304,224) Experience (Gain)/Loss (474,634)

Ending Total OPEB Liability 5,304,831$

Fiduciary Net Position - Funded Status 0%

Covered Payroll 15,031,073$ Total OPEB Liability as a Percent of Covered Payroll 35% Notes: Until a full 10-year trend is compiled, only information for those years available is presented. No assets are accumulated in a trust that meets the criteria in paragraph 4 of GASB 75.

SCHEDULE OF HEALTH REIMBURSEMENT ARRANGEMENT/VOLUNTARY EMPLOYEE BENEFICIARY ASSOCIATION (HRA/VEBA) CONTRIBUTIONS

AS OF DECEMBER 31, 2018 Electric System 2018 2017 2016 2015 2014 2013 2012 2011

HRA/VEBA Contributions 75,909$ 75,956$ 80,605$ 76,779$ 73,639$ 73,387$ 76,068$ 67,817$

Note: Until a full 10-year trend is compiled, only information for those years available is presented.

Page 43

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Page 44


ABOUT THE STATE AUDITOR’S OFFICE

The State Auditor's Office is established in the state's Constitution and is part of the executive

branch of state government. The State Auditor is elected by the citizens of Washington and serves

four-year terms.

We work with our audit clients and citizens to achieve our vision of government that works for

citizens, by helping governments work better, cost less, deliver higher value, and earn greater

public trust.

In fulfilling our mission to hold state and local governments accountable for the use of public

resources, we also hold ourselves accountable by continually improving our audit quality and

operational efficiency and developing highly engaged and committed employees.

As an elected agency, the State Auditor's Office has the independence necessary to objectively

perform audits and investigations. Our audits are designed to comply with professional standards

as well as to satisfy the requirements of federal, state, and local laws.

Our audits look at financial information and compliance with state, federal and local laws on the

part of all local governments, including schools, and all state agencies, including institutions of

higher education. In addition, we conduct performance audits of state agencies and local

governments as well as fraud, state whistleblower and citizen hotline investigations.

The results of our work are widely distributed through a variety of reports, which are available on

our website and through our free, electronic subscription service.

We take our role as partners in accountability seriously, and provide training and technical

assistance to governments, and have an extensive quality assurance program.

Contact information for the State Auditor’s Office

Public Records requests [email protected]

Main telephone (360) 902-0370

Toll-free Citizen Hotline (866) 902-3900

Website www.sao.wa.gov

http://www.sao.wa.gov/investigations/Pages/FraudProgram.aspx

http://www.sao.wa.gov/investigations/Pages/Whistleblower.aspx

http://www.sao.wa.gov/investigations/Pages/CitizenHotline.aspx

http://www.sao.wa.gov/Pages/default.aspx

https://portal.sao.wa.gov/saoportal/Login.aspx

mailto:[email protected]

Documents

Financial Statements Audit Report Public Utility District ......internal control over financial reporting (internal control) to determine the audit procedures that are appropriate