LOS ANGELES DEPARTMENT OF WATER AND POWER 

POWER SYSTEM 

Financial Statements and 

Required Supplementary Information 

June 30, 2013 and 2012 

(With Independent Auditors’ Report Thereon) 
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Table of Contents

Page(s)

Independent Auditors’ Report 1–2

Management’s Discussion and Analysis 3–13

Financial Statements:

Statements of Net Position 14–15

Statements of Revenues, Expenses, and Changes in Net Position 16

Statements of Cash Flows 17–18

Notes to Financial Statements 19–69

Required Supplementary Information 70
Independent Auditors’ Report 

The Board of Water and Power Commissioners 

Department of Water and Power 

 City of Los Angeles: 

Report on the Financial Statements 

We have audited the accompanying financial statements of the City of Los Angeles’ Department of Water 

and Power’s Power Revenue Fund (Power System), an enterprise fund of the City of Los Angeles, 

California, as of and for the years ended June 30, 2013 and 2012, and the related notes to the financial 

statements, which collectively comprise the Power System’s basic financial statements as listed in the table 

of contents. 

Management’s Responsibility for the Financial Statements 

Management is responsible for the preparation and fair presentation of these financial statements in 

accordance with U.S. generally accepted accounting principles; 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. 

Auditors’ Responsibility 

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted 

our audits in accordance with auditing standards generally accepted in the United States of America 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 auditors’ 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 entity’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 entity’s internal 

control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of 

accounting policies used and the reasonableness of significant accounting estimates made by management, 

as well as evaluating the overall presentation of the financial statements. 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our 

audit opinion. 

Opinion 

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

financial position of the Power System as of June 30, 2013 and 2012, and changes in its financial position 

KPMG LLP 

Suite 2000 

355 South Grand Avenue 

Los Angeles, CA 90071-1568 

KPMG LLP is a Delaware limited liability partnership, 

the U.S. member firm of KPMG International Cooperative 

(“KPMG International”), a Swiss entity. 
2 

and its cash flows for the years then ended in accordance with U.S. generally accepted accounting 

principles. 

Emphasis of Matter 

As discussed in note 1, the financial statements present only the Power System and do not purport to, and 

do not, present fairly the financial position of the City of Los Angeles, California, as of June 30, 2013 and 

2012, the changes in its financial position, or, where applicable, its cash flows for the year then ended in 

accordance with accounting principles generally accepted in the United States of America. Our opinion is 

not modified with respect to this matter. 

Other Matters 

Required Supplementary Information 

U.S. generally accepted accounting principles require that the management’s discussion and analysis and 

the required supplementary information on pages 3–13 and 70 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 November 25, 

2013 on our consideration of the Power System’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 Power System’s internal control over 

financial reporting and compliance. 

Los Angeles, California 

November 25, 2013 
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Management’s Discussion and Analysis

June 30, 2013 and 2012

3 (Continued)

The following discussion and analysis of the financial performance of the City of Los Angeles’ (the City) 

Department of Water and Power’s (the Department) Power Revenue Fund (the Power System) provides an 

overview of the financial activities for the fiscal years ended June 30, 2013 and 2012. Descriptions and other 

details pertaining to the Power System are included in the notes to the financial statements. This discussion and 

analysis should be read in conjunction with the Power System’s financial statements, which begin on page 14.

Using This Financial Report

This annual financial report consists of the Power System’s financial statements and required supplementary 

information and reflects the self-supporting activities of the Power System that are funded primarily through the 

sale of energy, transmission, and distribution services to the public it serves.

Statements of Net Position, Statements of Revenues, Expenses, and Changes in Net Position, and 

Statements of Cash Flows

The financial statements provide an indication of the Power System’s financial health. The statements of net 

position include all of the Power System’s assets, deferred outflows, and liabilities using the accrual basis of 

accounting, as well as an indication about which assets can be utilized for general purposes, and which assets are 

restricted as a result of bond covenants and other commitments. The statements of revenues, expenses, and 

changes in net position report all of the revenues and expenses during the time periods indicated. The statements 

of cash flows report the cash provided by and used in operating activities, as well as other cash sources and uses, 

such as investment income and cash payments for bond principal and capital additions and betterments.
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Management’s Discussion and Analysis

June 30, 2013 and 2012

4 (Continued)

The following table summarizes the financial condition and changes in net position of the Power System as of 

and for the fiscal years ended June 30, 2013, 2012, and 2011:

Table 1 – Condensed Schedule of Assets, Deferred Outflows, Liabilities, and Net Position

(Amounts in millions)

June 30

Assets and Deferred Outflows 2013 2012 2011

Utility plant, net $ 8,621 8,114 7,431 

Restricted investments 634 639 634 

Other noncurrent assets 2,523 2,100 2,534 

Current assets 1,992 1,684 1,847 

Deferred outflows on derivative

instruments 67 91 74 

$ 13,837 12,628 12,520 

Liabilities and Net Position

Long-term debt, net of current portion $ 7,495 6,354 6,498 

Other long-term liabilities 297 302 248 

Current liabilities 854 917 838 

8,646 7,573 7,584 

Fund net position:

Net investment in capital assets 1,325 1,533 1,307 

Restricted 1,554 1,525 1,417 

Unrestricted 2,312 1,997 2,212 

Total net position 5,191 5,055 4,936 

$ 13,837 12,628 12,520 
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Management’s Discussion and Analysis

June 30, 2013 and 2012

5 (Continued)

Table 2 – Condensed Schedule of Revenues, Expenses, and Changes in Net Position

(Amounts in millions)

Year ended June 30

2013 2012 2011

Operating revenues:

Residential $ 1,020 977 966 

Commercial and industrial 2,062 2,040 2,047 

Sales for resale 68 36 84 

Other 13 29 29 

Total operating revenues 3,163 3,082 3,126 

Operating expenses:

Fuel for generation and purchased power (1,342) (1,314) (1,289) 

Maintenance and other operating

expenses (925) (922) (1,019) 

Depreciation and amortization (418) (394) (387) 

Total operating expenses (2,685) (2,630) (2,695) 

Operating income 478 452 431 

Nonoperating revenues (expenses):

Investment income 46 78 82 

Federal bond subsidies 34 35 28 

Other nonoperating revenues and

expenses, net 19 14 12 

Debt expense, net (241) (237) (265) 

Total nonoperating expenses (142) (110) (143) 

Income before capital

contributions and transfers 336 342 288 

Capital contributions 47 27 28 

Transfers to the reserve fund of the

City of Los Angeles (247) (250) (259) 

Increase in net position 136 119 57 

Beginning balance of net position 5,055 4,936 4,879 

Ending balance of net position $ 5,191 5,055 4,936 
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Management’s Discussion and Analysis

June 30, 2013 and 2012

6 (Continued)

Assets

Utility Plant

During fiscal years 2013 and 2012, the Power System capitalized $1,284 million and $503 million of additions, 

respectively, including transfers from construction work in progress to utility plant in service. Of the 

$1,284 million, $811 million, or 63%, is mostly related to generation plant assets including repowering of 

Haynes Generating Station adding 6 simple–cycle gas turbines at $648 million, or 80%, of total capitalized in 

generation. The remaining capitalized included addition of Pine Tree Photovoltaic System, improvements to 

Haynes Unit 8, and upgrades of 5 main generating units at Castaic Power Plant. In addition, $322 million, or 

25%, is related to distribution plant assets and mostly attributable to the Power Reliability Program (PRP) to 

improve distribution system reliability including replacement of aging poles, crossarms, cables, station 

equipment, and transformers. Other distribution system additions included construction of new business line 

facilities and installation of Substation Automation System (SAS) at various receiving and distribution stations. 

In addition, $63 million, or 5%, is related to general plant assets including purchases of fleet equipment and 

installation of fiber optics. Of the $503 million during fiscal year 2012, $294 million, or 59%, is related to 

distribution plant assets and mostly attributable to the Power Reliability Program (PRP) to improve distribution 

system reliability including replacement of aging poles, crossarms, cables, station equipment, and transformers. 

Other distribution system additions included construction of new business line facilities and installation of meters 

related to the Automatic Meter Infrastructure (AMI). In addition, $128 million, or 26%, is mostly related to 

generation plant assets including improvements to generator units at in-basin stations and construction of 

Adelanto Photovoltaic System. In addition, $57 million, or 11%, is related to general plant assets including 

purchases of transportation equipment, improvements to general facilities, and installation of fiber optics.

Construction work in progress decreased by $327 million in fiscal year 2013 and increased by $526 million in 

fiscal year 2012. The 2013 decreases are mostly attributable to capitalization of generation system assets 

including repowering of Haynes generating station units 5 and 6, construction of Pine Tree Photovoltaic System, 

and Haynes Unit 8 overhaul. Also, some increases in 2013 are attributable to Repowering of Scattergood Unit 3, 

replacement of Customer Information System (CIS), and Castaic Modernization. The 2012 increases are mostly 

attributable to generation system assets including repowering of Haynes generating station units 5 and 6, 

construction of Pine Tree Photovoltaic System, improvements at in-basin generating stations, and the Customer 

Information System (CIS) replacement.

Additional information regarding the Power System’s utility plant assets can be found in note 4 to the 

accompanying financial statements.
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Management’s Discussion and Analysis

June 30, 2013 and 2012

7 (Continued)

The tables that follow summarize the generating resources available to the Department as of June 30, 2013. 

These resources include those owned by the Department (either solely or jointly with other utilities) as well as 

resources available through long-term purchase agreements. Generating station capacity is measured in 

megawatts (MWs).

Table 3 – Department-Owned Generation Facilities

Notional Net Net

amount maximum dependable

(number of Number of capability capability

Type of fuel facilities) units (MWs) (MWs)

Natural gas 4 (1) 27 3,464 3,383 

Large hydro 1 7 (2) 1,247 1,175 

Renewables 39 208 (3) 462 (4) 227 

Subtotal 44 242 5,173 4,785 

CDWR — — (120) (5) (54) 

Total 44 242 5,053 4,731 

(1) Consists of the following generating stations: Harbor Station, Haynes Station, Scattergood Station, and 

Valley Station.

(2) The Castaic Plant currently has six (1,075 MWs) out of seven units available due to ongoing 

modernization work scheduled to be completed by 2014.

(3) The Department-owned renewable resources in service include the Los Angeles Aqueduct, Owens Valley, 

and Owens Gorge small hydro units that qualify under the Department’s renewable resource definition. 

Also included are microturbine units at the Lopez Canyon Landfill and Department built photovoltaic solar 

installations, the Pine Tree Wind Project, Linden Wind Farm, and a local small hydro plant. Not included 

in the counts are the units that were upgraded at the Castaic Plant. Also not included are the two 

Scattergood gas-fueled units that partially burn digester gas in which the output related to the digester gas 

also qualifies under the Department’s renewable resource definition.

(4) Included are the 30 MWs of qualify renewable capacity addition at the Castaic Plant. Also included are the 

16 MWs of renewable energy generated at the Scattergood Station by burning digester gas from the 

Hyperion Treatment Plant.

(5) Energy payable to the California Department of Water Resources (CDWR) for energy generated at the 

Castaic Plant. This amount varies weekly up to maximum of 120 MWs.
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Management’s Discussion and Analysis

June 30, 2013 and 2012

8 (Continued)

Table 4 – Jointly Owned and Contracted Facilities

Net Net

maximum dependable

Number of capability capability

Type facilities (MWs) (MWs)

Large hydro 1 491 (1) 455 

Nuclear 1 387 (2) 380 

Coal 2 1,679 (3) 1,679 

Renewables/DG 7,767 (4) 934 256 

Total 7,771 3,491 2,770 

(1) The Department’s Hoover Plant contract entitlement is 25.16% of the Hoover total contingent capacity of 

1,951 MWs. Current reduced lake level has reduced available capacity to about 468 MWs annual average.

(2) The Department’s Palo Verde Station (PVNGS) entitlement is 9.66% of the maximum net plant capability 

of 4,003 MWs.

(3) The Department’s current Intermountain Station (IPP) entitlement is 66.79% of the maximum net plant 

capability of 1,800 MWs. A portion of the IPP entitlement is subject to variable recall. The Department’s 

Navajo Station entitlement is 21.20% of the maximum net plant capability of 2,250 MWs.

(4) The Department’s contracted renewable resources in service include units at several landfill sites in the 

Los Angeles area; biogas fuel purchases outside of California; local hydro unit; wind farms in Wyoming, 

Oregon, Utah, and Washington; customer solar photovoltaic installations locally, and customer distributed 

generation (DG) units located in Los Angeles also provide energy resources.

Liabilities and Net Position

Long-Term Debt

As of June 30, 2013, the Power System’s total outstanding long-term debt balance was approximately 

$7.744 billion. The increase of $1.143 billion over the prior year’s balance resulted from the sale of 

$1.761 billion in Power System revenue bonds plus $293.2 million in issue premiums (gross of underwriter's 

discount), offset by scheduled maturities of $129 million, defeasance of $744 million in Power System revenue 

bonds, $22 million in net amortized premiums/discounts, and debt-related costs (including net loss on refunding 

of $16.7 million).

As of June 30, 2012, the Power System’s total outstanding long-term debt balance was approximately 

$6.601 billion. The decrease of $76 million over the prior year’s balance resulted from the scheduled maturities 

of $62 million and $14 million amortized premiums, discounts, and debt-related costs (including net loss on 

refundings).
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Management’s Discussion and Analysis

June 30, 2013 and 2012

9 (Continued)

Outstanding principal, plus scheduled interest as of June 30, 2013, is scheduled to mature as shown in the chart 

below:

Chart: Debt Service Requirements

In addition, the Power System had $490.3 million and $490.4 million on deposit in trust funds restricted for the

use of debt reduction as of June 30, 2013 and 2012, respectively.

In June 2013, Standard & Poor’s Rating Services, Moody’s Investors Service, and Fitch Ratings affirmed the 

Power System’s bond rating of AA-, Aa3, and AA-, respectively, due to the Power System’s broad revenue 

stream and a competitive power supply portfolio that has historically provided competitive retail electricity rates 

and evident strategic focus on positioning the utility to improve system reliability while meeting state mandated 

greenhouse emission rules and renewable energy standards. Additional information regarding the Power 

System’s long-term debt can be found in note 10 to the financial statements.

Current Assets

During fiscal year 2013, current assets increased $308 million. Cash and cash equivalents increased $199 million 

due to reimbursements from the construction fund for capital expenditures, customer and other accounts 

receivables increased $46 million due to higher rates and higher consumption, the current portion of 

underrecovered costs increased $27 million, a receivable, due from the Water System for materials and services 

increased $24 million, the current portion of long-term notes receivable increased $8 million, prepayments and 

other current assets increased by $11 million, offset by a $7 million decrease in materials and fuel.

Other Noncurrent Assets

During fiscal year 2013, other noncurrent assets increased $423 million due to an increase of $426 million of 

restricted cash and cash equivalents for construction purposes, $83 million increase in regulatory assets due to 

greater customer participation in the Departments’ Solar Incentive and Energy Efficiency programs and an 

$-

$500,000 

$1,000,000 

$1,500,000 

$2,000,000 

$2,500,000 

$3,000,000 

2018 2023 2028 2033 2038 2043 2048

In $000s

Five-Year Period Ending
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Management’s Discussion and Analysis

June 30, 2013 and 2012

10 (Continued)

increase of $21 million in the postemployment asset due to higher funding than actuarially required

contributions. These increases were offset by reductions in Long-term Notes Receivable of $68 million due to 

maturities and underrecoved costs of $39 million.

Changes in Net Position

Operating Revenues

The operating revenues of the Power System are generated from wholesale and retail customers. There are four 

major customer categories of retail revenue. These categories include residential, commercial, industrial, and 

other, which includes public street lighting. Table 5 summarizes the percentage contribution of retail revenues 

from each customer segment in fiscal years 2013 and 2012:

Table 5 – Revenue and Percentage of Revenue by Customer Class

(Amounts in thousands)

Fiscal year 2013 Fiscal year 2012

Revenue Percentage Revenue Percentage

Type of customer:

Residential $ 1,019,656 33% $ 976,820 32%

Commercial 1,826,307 59 1,803,794 59

Industrial 235,330 8 235,728 8

Other 13,445 — 29,202 1

$ 3,094,738 100% $ 3,045,544 100%

While commercial customers consume the most electricity, residential customers represent the largest customer 

class. As of June 30, 2013 and 2012, the Power System had approximately 1.5 million customers. As shown in 

Table 6, 1.3 million, or 87%, of total customers were in the residential customer class in fiscal years 2013 and

2012.

Table 6 – Number of Customers and Percentage of Customers by Customer Class

(Amounts in thousands)

Fiscal year 2013 Fiscal year 2012

Number Percentage Number Percentage

Type of customer:

Residential 1,280 87% 1,274 87%

Commercial 184 12 183 12

Industrial 14 1 12 1

Other 1 — 2 —

1,479 100% 1,471 100%
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Management’s Discussion and Analysis

June 30, 2013 and 2012

11 (Continued)

Fiscal Year 2013

Retail revenues increased $49 million from fiscal year 2012. The increase in retail revenue was mainly due to an 

increase in consumption of approximately 511 gigawatts year over year and an increase in the Incremental 

Energy Cost Adjustment Factors that became effective during November 2012. The ECA rate during fiscal year

2012 was frozen at $0.0569/kilowatt hours; by June 2013, the rates were $0.0609/kWh.

Fiscal Year 2012

Retail revenues remained stable and wholesale revenues decreased $48 million from fiscal year 2011. The 

decrease in wholesale revenue was mainly due to $38 million of wholesale revenue being designated as deferred 

revenue and transferred to the Rate Stabilization Account. Retail consumption of energy decreased 27 gigawatt 

hours, or less than 1% year over year while wholesale consumption decreased 271 gigawatt hours.

Operating Expenses

Fuel for generation and purchased power are two of the largest expenses that the Power System incurs each fiscal 

year. Fuel for generation expense includes the cost of fuel that is used to generate energy. The majority of fuel 

costs include the cost of natural gas, coal, and nuclear fuel.

Purchased power expense includes the cost of buying power on the open market and paying the current portion of 

the Power System’s purchased power contracts. Under these purchase power contracts, the Department has an 

entitlement to the energy that is produced at various generating stations and an entitlement to the use of various 

transmission facilities. Most of these contracts require the Department to pay for these services regardless of 

whether the energy or transmission is used. These types of contracts are referred to as “take-or-pay” contracts.

Depreciation expense is computed using the straight-line method based on service lives for all projects completed 

after July 1, 1973, and for all office and shop structures, related furniture and equipment, and transportation and 

construction equipment. Depreciation for facilities completed prior to July 1, 1973 is computed using the 5% 

sinking fund method based on estimated service lives. The Department uses the composite method of 

depreciation and, therefore, groups assets into composite groups for purposes of calculating depreciation 

expense. Estimated service lives range from 5 to 75 years. Amortization expense for computer software is 

computed using the straight-line method over 5 years.
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Management’s Discussion and Analysis

June 30, 2013 and 2012

12 (Continued)

The table below summarizes the Power System’s operating expenses during fiscal years 2013 and 2012:

Table 7 – Operating Expenses and Percentage of Expense by Type of Expense

(Amounts in thousands)

Fiscal year 2013 Fiscal year 2012

Expense Percentage Expense Percentage

Type of expense:

Fuel for generation $ 446,450 17% $ 403,406 15%

Purchased power 895,092 33 909,910 35

Other operating expenses 623,033 23 617,456 23

Maintenance 301,674 11 304,750 12

Depreciation and amortization 418,485 16 394,019 15

$ 2,684,734 100% $ 2,629,541 100%

Fiscal Year 2013

Fiscal year 2013 operating expenses were $55 million higher as compared to fiscal year 2012, driven primarily 

by a $43 million increase in fuel for generation, a $24.5 million increase in depreciation and amortization 

expense, and a $5.6 million increase in other operating expenses, offset by lower purchased power, and 

maintenance expenses.

The $43 million increase in fuel for generation can be primarily attributed to higher consumption and higher 

natural gas prices. The $24.5 million increase in depreciation and amortization expense is primarily due to capital 

improvements in distribution plant, as well as additional amortization expense from the regulatory assets. The 

$5.6 million increase in other operating expenses is due to higher administrative and general expenses.

The decrease in maintenance expense was mainly due to lower maintenance costs associated with production 

plant ($6.0 million) and transmission plant ($18.9 million) capital assets offset by an increase in maintenance 

costs for distribution plant ($19.4 million) and other production plant ($2.4 million) capital assets.

Fiscal Year 2012

Fiscal year 2012 operating expenses were $66 million lower as compared to fiscal year 2011, driven primarily by 

an $82 million decrease in other operating expenses. Fuel and Purchased Power expenses increased $24 million

due to a year-over-year increase of $56 million in renewable generation expenditures.

The $82 million decrease in other operating expenses can be primarily attributed to a decrease of $70 million in 

the expensing of demand side management (energy efficiency) and solar incentive program expenditures. 

Demand side management and solar programs for customers are treated as regulatory assets, and therefore, these 

expenditures are now capitalized and amortized over the expected useful life. Maintenance expenses decreased 

$14 million year over year, primarily due to lower transmission plant and steam plant maintenance costs. The 

$7.1 million increase in depreciation and amortization expense is primarily due to capital improvements in Steam 

Production plant, as well as additional amortization expense from the regulatory assets mentioned above.
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Management’s Discussion and Analysis

June 30, 2013 and 2012

13

Nonoperating Revenues and Expenses

Fiscal Year 2013

The major nonoperating activities of the Power System for fiscal year 2013 included the transfer of $247 million

to the City’s General Fund, interest income earned on investments of $46 million, $34 million in federal bond 

subsidies, and $241 million in debt expenses.

The transfer to the City is based on 8% of the previous year’s operating revenues. Operating revenues for fiscal 

year 2012 were $3.082 billion, which generated a city transfer of $247 million.

The $32 million decrease in investment income is due to changes in market values of investments and decreases 

in funds held in the related restricted investments.

The $1.5 million decrease in federal bond subsidies is directly related to interest payment subsidies that are 

received from the U.S. Treasury.

The $4.8 million increase in other nonoperating income is mainly due to insurance reimbursements and a gain 

from the sale of land.

The $5.0 million increase in interest on debt is mainly due to interest expense for new money bond issuances 

offset by amortization costs and interest savings from debt refinancing undertaken by the Power System during 

fiscal year 2013.

Fiscal Year 2012

The major nonoperating activities of the Power System for fiscal year 2012 included the transfer of $250 million

to the City’s General Fund, interest income earned on investments of $78 million, $35 million in federal bond 

subsidies, and $237 million in debt expenses.

The transfer to the City is based on 8% of the previous year’s operating revenues. Operating revenues for fiscal 

year 2011 were $3.1 billion, which generated a city transfer of $250 million.

The $4 million decrease in interest income is due to declining market interest rates coupled with decreases in 

funds held in the related restricted investments.

The $7 million increase in federal bond subsidies is directly related to interest payment subsidies that are 

received from the U.S. Treasury.

The $7 million decrease in interest on debt is mainly due to the debt refinancing undertaken by the Power System 

during fiscal year 2011.
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Statements of Net Position

June 30, 2013 and 2012

(Amounts in thousands)

Assets and Deferred Outflows 2013 2012

Noncurrent assets:

Utility plant:

Generation $ 5,158,303 4,318,819 

Transmission 1,089,835 1,046,800 

Distribution 6,659,814 6,338,353 

General 1,365,206 1,318,063 

14,273,158 13,022,035 

Accumulated depreciation (6,853,589) (6,462,915) 

7,419,569 6,559,120 

Construction work in progress 884,378 1,211,851 

Nuclear fuel, at amortized cost 44,686 49,687 

Natural gas field, net 272,157 293,006 

8,620,790 8,113,664 

Restricted investments 633,903 639,121 

Cash and cash equivalents – restricted 448,184 20,730 

Long-term notes and other receivables, net of current portion 770,495 838,755 

Under recovered costs 273,839 312,373 

Regulatory assets 378,752 296,223 

Net postemployment asset 652,439 631,479 

Total noncurrent assets 11,778,402 10,852,345 

Current assets:

Cash and cash equivalents – unrestricted 597,525 417,895 

Cash and cash equivalents – restricted 414,369 395,225 

Cash collateral received from securities lending transactions 3,164 — 

Customer and other accounts receivable, net of $18,900 and

$20,000 allowance for losses for 2013 and 2012, respectively 398,458 352,856 

Current portion of long-term notes receivable 73,759 65,593 

Current portion of under recovered costs 27,218 — 

Due from Water System 24,059 — 

Accrued unbilled revenue 175,635 173,233 

Materials and fuel 163,088 169,839 

Prepayments and other current assets 114,320 109,293 

Total current assets 1,991,595 1,683,934 

Total assets 13,769,997 12,536,279 

Deferred outflows on derivative instruments 67,275 91,296 

Total assets and deferred outflows $ 13,837,272 12,627,575 

14 (Continued)
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Statements of Net Position

June 30, 2013 and 2012

(Amounts in thousands)

Net Position and Liabilities 2013 2012

Net position:

Net investment in capital assets $ 1,324,962 1,533,344 

Restricted:

Debt service 624,468 620,688 

Capital projects 122,584 123,627 

Other postemployment benefits 652,439 631,479 

Other purposes 154,891 148,949 

Unrestricted 2,311,877 1,996,651 

Total net position 5,191,221 5,054,738 

Long-term debt, net of current portion 7,494,766 6,354,469 

Other noncurrent liabilities:

Accrued liabilities 7,047 8,767 

Deferred credits 120,254 139,876 

Accrued workers’ compensation claims 52,221 43,475 

Derivative instrument liabilities 67,275 91,296 

Net pension liability 50,773 18,209 

Total other noncurrent liabilities 297,570 301,623 

Current liabilities:

Current portion of long-term debt 249,245 246,582 

Accounts payable and accrued expenses 333,422 341,942 

Accrued interest 145,338 139,872 

Accrued employee expenses 104,477 102,271 

Deferred credits 18,069 21,100 

Due to Water Services — 64,978 

Obligations under securities lending transactions 3,164 — 

Total current liabilities 853,715 916,745 

Total liabilities 8,646,051 7,572,837 

Total net position and liabilities $ 13,837,272 12,627,575 

See accompanying notes to financial statements.

15
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Statements of Revenues, Expenses, and Changes in Net Position

Years ended June 30, 2013 and 2012

(Amounts in thousands)

2013 2012

Operating revenues:

Residential $ 1,019,656 976,820 

Commercial and industrial 2,061,637 2,039,522 

Sales for resale 67,764 36,136 

Other 36,329 53,036 

Uncollectible accounts (22,884) (23,834) 

3,162,502 3,081,680 

Operating expenses:

Fuel for generation 446,450 403,406 

Purchased power 895,092 909,910 

Maintenance and other operating expenses 924,707 922,206 

Depreciation and amortization 418,485 394,019 

2,684,734 2,629,541 

Operating income 477,768 452,139 

Nonoperating revenues (expenses):

Investment income 46,076 77,747 

Federal bond subsidies 33,614 35,143 

Other nonoperating income 22,342 17,571 

102,032 130,461 

Other nonoperating expenses (2,480) (3,380) 

99,552 127,081 

Debt expenses:

Interest on debt 274,835 269,875 

Allowance for funds used during construction (33,672) (32,187) 

241,163 237,688 

Income before capital contributions and transfers 336,157 341,532 

Capital contributions 46,860 26,731 

Transfers to the reserve fund of the City of Los Angeles (246,534) (250,077) 

Increase in net position 136,483 118,186 

Net position:

Beginning of period 5,054,738 4,936,552 

End of period $ 5,191,221 5,054,738 

See accompanying notes to financial statements.

16
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Statements of Cash Flows

Years ended June 30, 2013 and 2012

(Amounts in thousands)

2013 2012

Cash flows from operating activities:

Cash receipts:

Cash receipts from retail customers $ 3,168,084 3,010,270 

Cash receipts from retail customers for other agency services 620,256 593,026 

Cash receipts from interfund services provided 484,169 476,406 

Cash disbursements:

Cash payments to employees (565,396) (547,522) 

Cash payments to suppliers (1,581,590) (1,471,947) 

Cash payments for interfund services used (710,161) (572,341) 

Cash payments to other agencies for fees collected (616,206) (591,684) 

Other operating cash payments (38,079) (44,598) 

Net cash provided by operating activities 761,077 851,610 

Cash flows from noncapital financing activities:

Payments to the reserve fund of the City of Los Angeles (246,534) (250,077) 

Interest paid on noncapital revenue bonds (589) — 

Net cash used in noncapital financing activities (247,123) (250,077) 

Cash flows from capital and related financing activities:

Additions to plant and equipment, net (953,376) (1,093,491) 

Capital contributions 47,728 25,167 

Principal payments and maturities on long-term debt (129,250) (62,158) 

Proceeds from issuance of bonds and revenue certificates 1,294,185 — 

Debt interest payments (291,439) (270,936) 

Federal bond subsidies 33,614 35,143 

Net cash provided by (used in) capital and related

financing activities 1,462 (1,366,275) 

Cash flows from investing activities:

Purchases of investment securities (872,717) (1,224,872) 

Sales and maturities of investment securities 870,251 1,220,159 

Proceeds from notes receivable 68,260 64,300 

Investment income 45,018 116,008 

Net cash provided by investing activities 110,812 175,595 

Net increase (decrease) in cash and cash equivalents 626,228 (589,147) 

Cash and cash equivalents:

Cash and cash equivalents at July 1 (including $415,955 and

$861,582 reported in restricted accounts, respectively) 833,850 1,422,997 

Cash and cash equivalents at June 30 (including $862,553 and

$415,955 reported in restricted accounts, respectively) $ 1,460,078 833,850 

17 (Continued)
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Statements of Cash Flows

Years ended June 30, 2013 and 2012

(Amounts in thousands)

2013 2012

Reconciliation of operating income to net cash provided by

operating activities:

Operating income $ 477,768 452,139 

Adjustments to reconcile operating income to net cash

provided by operating activities:

Depreciation and amortization 418,485 394,019 

Depletion expense 26,176 29,064 

Amortization of nuclear fuel 13,859 13,248 

Provision for losses on customer and other accounts

receivable 22,884 23,834 

Changes in assets and liabilities:

Customer and other accounts receivable (68,780) (36,155) 

Accrued unbilled revenue (2,402) (17,154) 

Under recovered costs 38,534 (18,147) 

Current portion of under recovered costs (27,218) — 

Materials and fuel 6,751 (15,349) 

Regulatory assets (82,529) (117,061) 

Due from Water System (24,059) 3,267 

Net pension asset — 14,386 

Accounts payable and accrued expenses 12,883 81,921 

Deferred credits (22,655) (58,014) 

Due to Water Services (64,978) 64,978 

Net pension liability 32,564 18,209 

Net other postemployment benefit asset (20,959) (40,793) 

Prepayments and other 24,753 59,218 

Net cash provided by operating activities $ 761,077 851,610 

Supplemental disclosure of noncash capital and related financing activities:

During the year ended June 30, 2013, the Power System issued capital bonds to refund previously

issued debt. The $755.76 million of proceeds were deposited immediately into an irrevocable trust for the

defeasance of $744.24 million of debt. The net loss on refunding, after the write-off of previously recorded

unamortized discounts, resulted in $16.72 million, which will be amortized over the debt repayment period.

During the year ended June 30, 2012, the Power System did not refund any capital bonds.

See accompanying notes to financial statements.

18
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

19 (Continued)

(1) Summary of Significant Accounting Policies

The Department of Water and Power of the City of Los Angeles (the Department) exists as a separate 

proprietary department of the City of Los Angeles (the City) under and by virtue of the City Charter 

enacted in 1925 and as revised effective July 2000. The Department’s Power Revenue Fund (the Power 

System) is responsible for the generation, transmission, and distribution of electric power for sale in the 

City. The Power System is operated as an enterprise fund of the City.

(a) Method of Accounting

The accounting records of the Power System are maintained in accordance with U.S. generally 

accepted accounting principles (GAAP) for governmental entities. The financial statements have 

been prepared using the economic resources measurement focus and the accrual basis of accounting. 

The Power System is accounted for as an enterprise fund and applies all applicable Governmental 

Standards Board (GASB) pronouncements in its accounting and reporting.

The financial statements of the Power System are intended to present the net position, and the 

changes in net position, and cash flows of only that portion of the business-type activities and each 

major fund of the City of Los Angeles, California that is attributable to the transactions of the Power 

System. They do not purport to, and do not, present fairly the net position of the City of Los Angeles, 

California as of June 30, 2013 and 2012, the changes in its financial position or, where applicable, its 

cash flows for the years then ended, in conformity with GAAP.

The Department’s rates are determined by the Board of Water and Power Commissioners 

(the Board) and are subject to review and approval by the Los Angeles City Council (City Council). 

As a regulated enterprise, the Department follows the regulatory accounting criteria set forth per the 

GASB Codification (GASB Statement No. 62), which requires that the effects of the rate-making 

process be recorded in the financial statements. Such effects primarily concern the time at which 

various items enter into the determination of changes in net position. Accordingly, the Power System 

records various regulatory assets and liabilities to reflect the Board’s actions. Regulatory liabilities 

are recorded in deferred credits and regulatory assets are included as deferred debits and under 

recovered costs in the statement of net position. Management believes that the Power System meets 

the criteria for continued application, but will continue to evaluate its applicability based on changes 

in the regulatory and competitive environment (see notes 3 and 14(d)i).

(b) Use of Estimates

The preparation of financial statements in conformity with GAAP 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.

(c) Utility Plant

The costs of additions to utility plant and replacements of retired units of property are capitalized. 

Costs include labor, materials, an allowance for funds used during construction (AFUDC), and 

allocated indirect charges, such as engineering, supervision, transportation and construction 
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

20 (Continued)

equipment, retirement plan contributions, healthcare costs, and certain administrative and general 

expenses. The costs of maintenance, repairs, and minor replacements are charged to the appropriate 

operations and maintenance expense accounts.

(d) Intangibles

The Department follows GASB Statement No. 51, Accounting and Financial Reporting for 

Intangible Assets (GASB Statement No. 51), which requires that an intangible asset be recognized in 

the statement of net position only if it is considered identifiable. Additionally, it establishes a 

specified-conditions approach to recognize intangible assets that are internally generated. 

Effectively, outlays associated with the development of such assets are not capitalized until certain 

criteria are met. Outlays incurred prior to meeting these criteria are expensed as incurred. The 

capitalized amounts are included in construction work in progress on the statement of net position.

(e) Impairment of Long-Lived Assets

The Department follows GASB Statement No. 42, Accounting and Financial Reporting for 

Impairment of Capital Assets and for Insurance Recoveries (GASB Statement No. 42). Governments 

are required to evaluate prominent events or changes in circumstances affecting capital assets to 

determine whether impairment of a capital asset has occurred. A capital asset is considered impaired 

when its service utility has declined significantly and unexpectedly. Under GASB Statement No. 42, 

impaired capital assets that will no longer be used by the government should be reported at the lower 

of carrying value or fair value. Impairment losses on capital assets that will continue to be used by 

the government should be measured using the method that best reflects the cause of the diminished 

service utility of the capital asset.

(f) Depreciation and Amortization

Depreciation expense is computed using the straight-line method based on service lives for all 

projects completed after July 1, 1973, and for all office and shop structures, related furniture and 

equipment, and transportation and construction equipment. Depreciation for facilities completed 

prior to July 1, 1973 is computed using the 5.0% sinking fund method based on estimated service 

lives. The Department uses the composite method of depreciation and, therefore, groups assets into 

composite groups for purposes of calculating depreciation expense. Estimated service lives range 

from 5 to 75 years. Amortization expense for computer software is computed using the straight-line 

method over five years. Depreciation and amortization expense as a percentage of average 

depreciable utility plant in service was 3.1% for fiscal years 2013 and 2012.

(g) Nuclear Decommissioning

The Department owns a 5.70% direct ownership interest in the Palo Verde Nuclear Generating 

Station (PVNGS). In addition, through its participation in the Southern California Public Power 

Authority (SCPPA), the Department is party to a contract for an additional 3.95% of the output of 

PVNGS. Nuclear decommissioning costs associated with the Power System’s output entitlement are 

included in purchased power expense (see note 6).
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

21 (Continued)

Decommissioning of PVNGS is expected to commence subsequent to the year 2044, since the 

Nuclear Regulatory Commission (the NRC) approved a request for license extension in April 2011. 

However, the owners of PVNGS have not yet amended the participation agreement to extend the 

term of the agreement to cover the license extension of PVNGS. The total cost to decommission the 

Power System’s direct ownership interest in PVNGS is estimated to be $146 million in 2012 dollars. 

This estimate is based on an updated site-specific study prepared by an independent consultant in 

2010. As of June 30, 2013 and 2012, the Power System has recorded $142.1 million and 

$143.2 million, respectively, to accumulated depreciation to provide for the decommissioning 

liability.

Prior to December 1999, the Power System contributed $70.2 million to external trusts established in 

accordance with the PVNGS participation agreement and NRC requirements. During fiscal year 

2000, the Department suspended contributing additional amounts to the trust funds, as management 

believes that contributions made, combined with reinvested earnings, will be sufficient to fully fund 

the Department’s share of decommissioning costs. The Department will continue to reinvest its 

investment income on the trust investments into the decommissioning trusts. The balance in the 

decommissioning funds declined in fiscal year 2013 by $1.0 million due to market value losses, after 

increasing by $2.2 million in fiscal year 2012. Decommissioning funds, which are included in 

restricted investments, totaled $122.6 million and $123.6 million as of June 30, 2013 and 2012 (at 

fair value), respectively. The Department’s current accounting policy recognizes any realized and 

unrealized investment earnings from nuclear decommissioning trust funds as a component of 

accumulated depreciation.

(h) Nuclear Fuel

Nuclear fuel is amortized and charged to fuel for generation on the basis of actual thermal energy 

produced relative to total thermal energy expected to be produced over the life of the fuel. Under the 

provisions of the Nuclear Waste Policy Act of 1982, the federal government assesses each utility 

with nuclear operations, including the Power System, $1 per megawatt hour of nuclear generation. 

The Power System includes this charge as a current year expense in fuel for generation. See note 14 

for discussion of spent nuclear fuel disposal.

(i) Natural Gas Field

In July 2005, the Power System acquired approximately a 74.5% ownership interest in gas properties 

located in Pinedale, Wyoming. The Power System uses the successful efforts method of accounting 

for its investment in gas producing properties. Costs to acquire the mineral interest in gas producing 

properties, to drill and equip exploratory wells that find proven reserves, and to drill and equip 

development wells are capitalized. Costs to drill exploratory wells that do not find proven reserves 

are expensed. Capitalized costs of gas producing properties are depleted by the unit-of-production 

method based on the estimated future production of the proven wells.

Depletion expense related to the gas field is recorded as a component of fuel for generation expense. 

During fiscal years 2013 and 2012, the Power System recorded $26.2 million and $29.1 million of 

depletion expense, respectively.
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

22 (Continued)

(j) Cash and Cash Equivalents

As provided for by the State of California Government Code (the Code), the Power System’s cash is 

deposited with the City Treasurer in the City’s general investment pool for the purpose of 

maximizing interest earnings through pooled investment activities. Cash and cash equivalents in the 

City’s general investment pool are reported at fair value and changes in unrealized gains and losses 

are recorded in the statements of revenues, expenses, and changes in net position. Interest earned on 

such pooled investments is allocated to the participating funds based on each fund’s average daily 

cash balance during the allocation period. The City Treasurer invests available funds of the City and 

its independent operating departments on a combined basis. The Power System classifies all cash and 

cash equivalents that are restricted either by creditors, the Board, or by law, as restricted cash and 

cash equivalents in the statement of net position. The Power System considers its portion of pooled 

investments in the City’s pool to be cash and cash equivalents and the unspent construction funds as 

long-term restricted cash as cash equivalents.

At June 30, 2013 and 2012, restricted cash and cash equivalents include the following (amounts in 

thousands):

June 30

2013 2012

Bond redemption and interest funds $ 280,470 271,328 

Self-insurance fund 133,899 123,897 

Cash and cash equivalents – current

portion 414,369 395,225 

Construction funds – classified as long-term restricted

cash 448,184 20,730 

Total restricted cash and cash equivalents $ 862,553 415,955 

(k) Materials and Fuel

Materials and supplies are recorded at average cost. Fuel is recorded at lower of cost or market, on 

an average cost basis.

(l) Accrued Unbilled Revenue

Accrued unbilled revenue is the receivable for estimated energy sales during the period for which 

service has been provided but the customer has not been billed.

(m) Restricted Investments

Restricted investments include primarily commercial paper, U.S. government and governmental 

agency securities, and corporate bonds. Investments are reported at fair value and changes in 

unrealized gains and losses are recorded in the statements of revenues, expenses, and changes in net 
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

23 (Continued)

position except for Nuclear Decommissioning Trust Funds. The stated fair value of investments is 

generally based on published market prices or quotations from major investment dealers (see note 7).

(n) Accrued Employee Expenses

Accrued employee expenses include accrued payroll and an estimated liability for vacation leave, 

sick leave, and compensatory time, which is accrued when employees earn the rights to the benefits. 

Below is a schedule of accrued employee expenses as of June 30, 2013 and 2012 (amounts in 

thousands):

2013 2012

Type of expenses:

Accrued payroll $ 27,122 26,254 

Accrued vacation 48,648 48,689 

Accrued sick leave 11,883 11,845 

Compensatory time 16,824 15,483 

Total $ 104,477 102,271 

(o) Debt Expenses

Debt premium, discount, and issue expenses are capitalized and amortized to debt expense using the 

effective-interest method over the lives of the related debt issues. Gains and losses on refundings 

related to bonds redeemed by proceeds from the issuance of new bonds are amortized to interest 

expense using the effective-interest method over the shorter of the life of the new bonds or the 

remaining term of the bonds refunded.

(p) Accrued Workers’ Compensation Claims

Liabilities for unpaid workers’ compensation claims are recorded at their net present value (see 

note 13).

(q) Customer Deposits

Customer deposits represent deposits collected from customers upon opening of new accounts. These 

deposits are obtained when the customer does not have a previously established credit history with 

the Department. Original deposits plus interest are paid to the customer once a satisfactory payment 

history is maintained, generally after one to three years.

The Department’s Water Revenue Fund (Water System) is responsible for collection, maintenance, 

and refunding of these deposits for all the Department customers, including those of the Power 

System. As such, the Water System’s statement of net position includes a deposit liability of 

$92 million and $77 million as of June 30, 2013 and 2012, respectively, for all customer deposits 

collected. In the event that the Water System defaults on refunds of such deposits, the Power System 

would be required to pay amounts it owes its customers.
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

24 (Continued)

(r) Revenues

The Power System’s rates are established by a rate ordinance, which is approved by the City 

Council. The Power System sells energy to the City’s other departments at rates provided in the 

ordinance. The Power System recognizes energy costs in the period incurred and accrues for 

estimated energy sold but not yet billed.

Through a set of rate ordinances, the Power System bills its revenue through fixed and pass-through 

factors. As of November 11, 2012, pass-through factors consist of Capped Energy Cost Adjustment 

Factor (CECAF), Variable Energy Adjustment Factor (VEAF), Variable Renewable Portfolio 

Standard Energy Adjustment Factor (VRPSEAF), Capped Renewable Portfolio Standard Energy 

Adjustment Factor (CRPSEAF), Reliability Cost Adjustment Factor (RCAF), Incremental Reliability 

Cost Adjustment Factor (IRCAF), and Energy Subsidy Adjustment Factor (ESAF).

On October 1, 2006, the Energy Cost Adjustment Factor (ECAF) and now known as the CECAF, 

was unfrozen from its 2.94 cents/kWh charge. This change allows the Power System to increase or 

decrease the factor on a quarterly basis to adjust for fuel and purchased power expenses incurred in 

the production of energy. On November 10, 2012, CECAF has reached 5.69 cents/kWh and is once 

again frozen (or capped) by the City Council. To continue to recover fuel and purchased power 

expenses, the City Council enacted the VEAF, VRPSEAF, and CRPSEAF, which are aggregately 

known as the Incremental Energy Cost Adjustment Factors (IECAFs) to supplement the CECAF that

is capped. The VEAF is used to recover nonrenewable energy expenses; the VRPSEAF is used to 

recover variable renewable energy expenses; and the CRPSEAF is used to recover fixed renewable

energy expenses (i.e., debt service and O&M).

On May 1, 2008, the RCAF was established to recover expenses incurred on Power System 

reliability related work and was set at 0.1 cents/kWh for residential customers or 0.32 cents/kW for 

commercial customers. The RCAF reached its maximum allowable limit of 0.3 cents/kWh for 

residential customers and 0.96 cents/kWh for commercial customers in fiscal year 2010–11. To 

allow further recovery of reliability related expenses, the City Council established the IRCAF on

November 11, 2012. Currently, the IRCAF is a fixed pass-through predetermined for fiscal years

2012–13 and 2013–14.

On November 11, 2012, a pass-through factor, Base Rate Revenue Target Adjustment Factor 

(BRRTAF) was established by the City Council to adjust base revenue collection (nonpass-through 

revenue) to reach its annual target. This action will decouple the risks to the Department on retail 

load sales, which are dependent on economic health or weather-driven events. Effectively, the 

Department is assured its revenue requirement to operate the Power System.

On April 1, 1998, the ESAF was frozen and continued to be frozen at 0.147 cents/kWh for 

residential customers and 0.46 cents/kW for commercial customers.

As of June 30, 2013 and 2012, the amount of under-recovered costs, including the CECAF and the 

RCAF was $273.8 million and $312.4 million, respectively. The balances for the CECAF and the 

RCAF are recorded as noncurrent assets in the statement of net position. As of June 30, 2013, the 

amount of under-recovered costs, including the VEAF, VRPSEAF, CRPSEAF, and the BRRTAF 
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

25 (Continued)

was $27.2 million. The balances for the VEAF, VRPSEAF, CRPSEAF, and the BRRTAF are 

recorded as current assets in the statement of net position.

(s) Capital Contributions

Capital contributions and other grants received by the Department for constructing utility plant and 

other activities are recognized when all applicable eligibility requirements, including time 

requirements, are met.

(t) Allowance for Funds Used during Construction (AFUDC)

An AFUDC charge represents the cost of borrowed funds used for the construction of utility plant. 

Capitalized AFUDC is included as part of the cost of utility plant and as a reduction of debt 

expenses. As of June 30, 2013 and 2012, the average AFUDC rates were 3.7% and 6.0%, 

respectively.

(u) Use of Restricted and Unrestrictive Resources

The Power System’s policy is to use unrestricted resources prior to restricted resources to meet 

expenses to the extent that it is prudent from an operational perspective. Once it is not prudent, 

restricted resources will be utilized to meet intended obligations.

(2) Recent Accounting Pronouncements

(a) GASB Statement No. 62

In December 2010, the GASB issued Statement No. 62, Codification of Accounting and Financial 

Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements

(GASB Statement No. 62). The requirements in this Statement will improve financial reporting by 

contributing to the GASB’s efforts to codify all sources of generally accepted accounting principles 

for state and local governments so that they derive from a single source. The Power System adopted 

GASB Statement No. 62 effective July 1, 2012 and there was no material impact of this 

pronouncement on the financial statements.

(b) GASB Statement No. 63

In June 2011, the GASB issued Statement No. 63, Financial Reporting of Deferred Outflows of 

Resources, Deferred Inflows of Resources, and Net Position (GASB Statement No. 63). The 

requirements of this Statement will improve financial reporting by standardizing the presentation of 

deferred outflows of resources and deferred inflows of resources and their effects on a government’s 

net position. It alleviates uncertainty about reporting those financial statement elements by providing 

guidance where none previously existed. The Power System adopted GASB Statement No. 63 

effective July 1, 2012 and the primary change to the financial statements was changing references 

from net assets to net position.
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

26 (Continued)

(c) GASB Statement No. 64

In June 2011, the GASB issued Statement No. 64, Derivative Instruments: Application of Hedge 

Accounting Termination Provisions – an amendment of GASB Statement No. 53

(GASB Statement No. 64). The objective of this Statement is to clarify whether an effective hedging 

relationship continues after the replacement of a swap counterparty or a swap counterparty’s credit 

support provider. This Statement sets forth criteria that establish when the effective hedging 

relationship continues and hedge accounting should continue to be applied. The Power System 

adopted GASB Statement No. 64 effective July 1, 2012 and there was no material impact of this 

pronouncement on the financial statements.

(d) GASB Statement No. 65

In March 2012, the GASB issued Statement No. 65, Items Previously Reported as Assets and 

Liabilities (GASB Statement No. 65). The requirements of this Statement establishes accounting and 

financial reporting standards that reclassify, as deferred outflows of resources or deferred inflows of 

resources, certain items that were previously reported as assets and liabilities and recognizes, as 

outflows of resources or inflows of resources, certain items that were previously reported as assets 

and liabilities. It will improve financial reporting by clarifying the appropriate use of the financial 

statement elements deferred outflows of resources and deferred inflows of resources to ensure 

consistency in financial reporting. The provisions of this Statement are effective for financial 

statements for periods beginning after December 15, 2012. The Power System has approximately 

$32.1 million of prepaid bond issue costs in its statement of net position, as of June 30, 2013 which 

will result in a decrease in net position upon the adoption of GASB Statement No. 65.

(e) GASB Statement No. 67

In June 2012, the GASB issued Statement No. 67, Financial Reporting for Pension Plans – an 

amendment of GASB Statement No. 25 (GASB Statement No. 67). The requirements of this 

Statement will improve financial reporting primarily through enhanced note disclosures and 

schedules of required supplementary information that will be presented by the pension plans that are 

within its scope. The new information will enhance the decision-usefulness of the financial reports of 

these pension plans, their value for assessing accountability, and their transparency by providing 

information about measures of net pension liabilities and explanations of how and why those 

liabilities changed from year to year. The provisions of this statement are effective for financial 

statements for periods beginning after June 15, 2013. The Power System is currently evaluating the 

impact of this pronouncement on financial statements.

(f) GASB Statement No. 68

In June 2012, the GASB issued Statement No. 68, Accounting and Financial Reporting for Pension 

Plans – an amendment of GASB Statement No. 27 (GASB Statement No. 68). This Statement 

establishes standards for measuring and recognizing liabilities, deferred outflows of resources, and 

deferred inflows of resources, and expense/expenditures. For defined benefit pensions, this 

Statement identifies the methods and assumptions that should be used to project benefit payments, 

discount projected benefit payments to their actuarial present value, and attribute that present value 
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

27 (Continued)

to periods of employee service. The provisions of this Statement are effective for financial 

statements for periods beginning after June 15, 2014. The Power System is currently evaluating the 

impact of this pronouncement on the financial statements.

(3) Regulatory Matters

(a) Federal Energy Legislation of 2005

On August 8, 2005, the Energy Policy Act of 2005 (EP Act) was enacted, the first comprehensive 

energy legislation in over a decade. One of the most significant provisions of EP Act empowers the

Federal Energy Regulatory Commission (FERC) to certify an Electric Reliability Organization 

(ERO) to improve the reliability of the nation’s “bulk power system” through mandatory and 

enforceable electric reliability standards (in contrast to the long-standing voluntary system). The 

definition of “bulk power system” does not include facilities used in the local distribution of electric 

energy. The ERO is to file any proposed reliability standard or modification with FERC. “Reliability 

standards” are a set of criteria and requirements relating to the reliable operation of the bulk-power 

system. Such a standard includes requirements for the operation of existing transmission facilities or 

the design of planned additions or modifications (to the extent necessary) to provide for reliable 

operation. It does not include, and the ERO may not impose, any requirement to enlarge existing or 

to construct new transmission or generation facilities. All users, owners, and operators of the 

bulk-power system are required to comply with the electric reliability standards. The ERO may 

impose a penalty on a user, owner, or operator for violating a reliability standard, and FERC may 

order compliance with such a standard and impose a penalty if it finds that a user, owner, or operator 

is about to engage in an act that would violate a reliability standard.

Based on the EP Act authority vested upon the FERC, the FERC approved the North American 

Electric Reliability Corporation (NERC) as the ERO. Currently, there are more than 100 mandatory 

NERC and Western Electricity Coordinating Council (WECC) reliability standards, all of which are 

subject to penalties ranging from $1,000 to $1,000,000, depending on the impact of the violation to 

reliability, and other factors. The Department has implemented a NERC/WECC Reliability 

Standards Compliance Program to proactively prevent, monitor, and stop potential violations to these 

standards.

The Department currently complies with the mandatory NERC/WECC Reliability Standards.

(b) Cybersecurity

Congress and the White House have been working to address the nation’s cybersecurity concerns for 

a number of years. The last few years, the White House and the Senate Democrats have supported a 

comprehensive regulatory approach that defines critical infrastructure and regulates cybersecurity 

through the Department of Homeland Security. Senate Republicans have sought to address concerns 

through voluntary actions. Senate did not get the necessary support of 60 Senators to consider a 

comprehensive legislative approach twice in 2012. In 2013, the congress has no intention of moving 

cybersecurity legislation.
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

28 (Continued)

On February 12, 2013, the President of the United States issued an Executive Order to encourage 

voluntary information sharing. The order sets up a process run by the National Institute of Standards 

and Technology (NIST) to establish a national Cybersecurity Framework. Currently the NIST is 

implementing this executive directive.

Public power entities support the Administration’s effort through the Executive Order and for the 

existing mandatory and enforceable NERC-FERC standards for the electric sector to remain in place.

On April 18, 2013, the House passed H.R.624, the Cyber Intelligence Sharing and Protection Act 

(CISPA) by a bipartisan vote of 288-127. This bill was authorized by chairman of the House Intel 

Committee Rogers (R-MI) and the Ranking Member Ruppersberger (D-MD).

Public power entities (such as LADWP) view CISPA as an important first step in creating an 

information-sharing and liability protection framework for the nation’s infrastructure. On the other 

hand, many Democrats and Republicans are concerned about the privacy protections in an 

information sharing approach.

The Department currently complies with current cybersecurity NERC Reliability Standards.

(c) Final Rule on Transmission Planning and Cost Allocation – FERC Order No. 1000 

(RM10-23-000)

On July 21, 2011, the FERC issued its order on transmission planning and cost allocation 

(Order 1000). On May 17, 2012, FERC issued Order 1000-A, stating that nonjurisdictional entities 

(such as LADWP) must formally enroll in a transmission planning region before it can be assessed 

costs under the regional cost allocation methodology. FERC also stated that nonjurisdictional entities 

must have a right to withdraw and avoiding cost allocations from the region.

However, Order 1000 and 1000A contain language that would significantly broaden FERC’s 

authority to allocate transmission costs. FERC takes the unprecedented position that transmission 

costs may be allocated to entities in the absence of a contract or service relationship.

Most jurisdictional transmission providers filed their compliance filings to amend their tariffs to 

include a regional planning process in October 2012. FERC has recently issued orders with findings 

that many of the compliance filings in planning regions did not meet the requirements of Order 1000 

with respect to cost allocation. LADWP as a nonjurisdictional entity was not required to make a 

filing.

The Final Rule urges, but does not require, government-owned utilities such as the Department and 

cooperative utilities to participate in regional transmission planning and cost allocation. FERC 

indicates that if “nonjurisdictional” transmission owners do not comply with Order No. 1000, they 

may not meet reciprocity requirements, and thus may have access to third-party transmission 

services limited.
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

29 (Continued)

(d) Dodd-Frank Wall Street Reform and Consumer Protection Act

On July 21, 2010, the “Dodd-Frank Wall Street Reform and Consumer Protection Act”

(Dodd-Frank) was signed into law. Dodd-Frank was enacted to minimize systemic risk to the 

U.S. financial system, in part by establishing new rules related to swaps and other derivatives.

 First, Dodd-Frank generally requires that parties to swap transactions provide collateral for 

their swaps. This “margining” requirement means that a party to a swap must set aside cash or 

other collateral to secure its obligations under the swap.

 Second, Dodd-Frank generally requires that swap transactions be conducted or “cleared”

through financial intermediaries. This clearing requirement means that parties generally cannot 

enter into a swap that is customized to the needs of the parties, as is typically the case for 

public power and other electric utilities. Dodd-Frank did, however, provide exceptions to both 

the margining and clearing requirements for “end users” that are using swaps to hedge 

commercial risks.

 Third, Dodd-Frank is to impose reporting requirements on swap transactions, including 

additional reporting for end-user transactions.

 Finally, Dodd-Frank imposed additional limitations on swaps with “special entities,” including 

public power and other governmental entities, to ensure that these special entities are being 

properly advised and dealt with fairly in consummating swap transactions. These rules require 

that swap counterparty ensure that a special entity has an independent swap advisor and 

impose on the advisor a duty to act in the best interests of the special entity.

The CFTC has recently finalized a swap dealer definition exempting entities doing less than 

$3 billion ($8 billion during a transition period) in swaps from being regulated as a “swap dealer,”

and has further exempted transactions done between not-for-profit utilities from being considered 

swaps. Unfortunately, the swap dealer definition also includes a $25 million subthreshold over a 

12-month period for entities doing business with “special entities” (e.g., governmental entities such 

as LADWP) that will cause counterparties that do not want to be swap dealers (e.g., natural gas 

producers, independent generators, and utility companies) to severely limit their swap activities with 

government-owned utilities to avoid reaching the $25 million threshold.

Various organizations representing the “special entities” have requested the CFTC to exclude 

government-owned utilities’ swap transactions related to utility operations from counting toward the 

$25 million de minimis threshold, and rather be subjected to the overall $3 billion threshold.

There is a proposed legislation (H.R.1038: Public Power Risk Management Act of 2013) that 

provides that the CFTC, in making a determination to exempt swap dealing activities below a

de minimis threshold, cannot treat a utility operations-related swap with a utility special entity any 

differently than a utility operations-related swaps with an entity that is not a special entity.

The overall impact of these CFTC rulings on LADWP cannot be predicted at this time.
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

30 (Continued)

(4) Utility Plant

The Power System had the following activities in utility plant during fiscal year 2013 (amounts in 

thousands):

Balance Retirements Balance

June 30, 2012 Additions and disposals Transfers June 30, 2013

Nondepreciable utility plant:

Land and land rights $ 166,137 31,390 (122) — 197,405 

Construction work in progress 1,211,851 508,405 — (835,878) 884,378 

Nuclear fuel 49,687 8,858 (13,859) — 44,686 

Natural gas field 293,006 5,328 (26,176) — 272,158 

Total nondepreciable

utility plant 1,720,681 553,981 (40,157) (835,878) 1,398,627 

Depreciable utility plant:

Generation 4,281,370 62,858 (2,383) 747,951 5,089,796 

Transmission 967,068 2,817 — 39,886 1,009,771 

Distribution 6,295,169 279,055 (96) 42,623 6,616,751 

General 1,312,291 58,090 (16,365) 5,418 1,359,434 

Total depreciable

utility plant 12,855,898 402,820 (18,844) 835,878 14,075,752 

Accumulated depreciation:

Generation (2,595,719) (118,151) 2,383 — (2,711,487) 

Transmission (389,938) (26,503) — — (416,441) 

Distribution (2,691,780) (217,210) 96 — (2,908,894) 

General (785,478) (47,654) 16,365 — (816,767) 

Total accumulated

depreciation (6,462,915) (409,518) 18,844 — (6,853,589) 

Total utility

plant, net $ 8,113,664 547,283 (40,157) — 8,620,790 

Depreciation and amortization expense during fiscal year 2013 was $418.5 million.
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

31 (Continued)

The Power System had the following activities in utility plant during fiscal year 2012 (amounts in 

thousands):

Balance Retirements Balance

July 1, 2011 Additions and disposals Transfers June 30, 2012

Nondepreciable utility plant:

Land and land rights $ 166,137 — — — 166,137 

Construction work in progress 685,485 665,133 — (138,767) 1,211,851 

Nuclear fuel 44,328 18,607 (13,248) — 49,687 

Natural gas field 256,622 65,448 (29,064) — 293,006 

Total nondepreciable

utility plant 1,152,572 749,188 (42,312) (138,767) 1,720,681 

Depreciable utility plant:

Generation 4,155,019 52,106 (2,047) 76,292 4,281,370 

Transmission 942,278 10,792 (35) 14,033 967,068 

Distribution 6,001,869 255,548 (240) 37,992 6,295,169 

General 1,265,941 46,054 (10,154) 10,450 1,312,291 

Total depreciable

utility plant 12,365,107 364,500 (12,476) 138,767 12,855,898 

Accumulated depreciation:

Generation (2,471,119) (126,647) 2,047 — (2,595,719) 

Transmission (365,076) (24,897) 35 — (389,938) 

Distribution (2,498,732) (193,288) 240 — (2,691,780) 

General (751,764) (43,868) 10,154 — (785,478) 

Total accumulated

depreciation (6,086,691) (388,700) 12,476 — (6,462,915) 

Total utility

plant, net $ 7,430,988 724,988 (42,312) — 8,113,664 

Depreciation and amortization expense during fiscal year 2012 was $394.0 million.
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

32 (Continued)

(5) Jointly Owned Utility Plant

The Power System has direct interests in several electric generating stations and transmission systems, 

which are jointly owned with other utilities. As of June 30, 2013 and 2012, utility plant includes the 

following amounts related to the Power System’s ownership interest in each jointly owned utility plant 

(dollar amounts in thousands):

Utility plant in service Utility plant in service

Share of June 30, 2013 June 30, 2012

Ownership capacity Accumulated Accumulated

interest (MWs) Cost depreciation Cost depreciation

Palo Verde Nuclear Generating

Station 5.7% 224 $ 615,703 389,158 602,408 374,273 

Navajo Generating Station 21.2 477 348,099 317,782 345,952 312,378 

Mohave Generating Station 10.0 — 65,317 57,852 64,639 57,852 

Pacific Intertie DC Transmission

Line 40.0 1,240 182,091 58,636 186,301 54,171 

Other transmission systems — Various 90,384 54,774 89,205 52,027 

$ 1,301,594 878,202 1,288,505 850,701 

The Power System will incur certain minimal operating costs related to the jointly owned facilities, 

regardless of the amount or its ability to take delivery of its share of energy generated. The Power System’s 

proportionate share of the operating costs of the joint plants is included in the corresponding categories of 

operating expenses.

(6) Purchase Power Commitments

As of June 30, 2013, the Power System has entered into a number of energy and transmission service 

contracts, which involve substantial commitments as follows (dollar amounts in thousands):

The Power System’s interest in agency’s share

Agency Capacity Outstanding

Agency share Interest (MWs) principal

Intermountain Power Project IPA 100.0% 68.6% 1,234 $ 866,807 

Palo Verde Nuclear Generating

Station SCPPA 5.9 67.0 151 39,155 

Mead-Adelanto Project SCPPA 68.0 35.7 313 51,412 

Mead-Phoenix Project SCPPA 17.8–22.4 24.8 148 11,134 

Southern Transmission System SCPPA 100.0 59.5 1,429 451,056 

Milford I Wind SCPPA 100.0 92.5 188 205,147 

Windy Point SCPPA 100.0 92.4 242 446,295 

Linden Wind Energy SCPPA 100.0 90.0 45* 119,210 

Milford II Wind SCPPA 100.0 95.1 97 145,719 

* For the first three years, Power System will receive 100% (50 MWs), unless City of Glendale 

exercises its option to take 10%.
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

33 (Continued)

IPA – The Intermountain Power Agency (IPA) is an agency of the State of Utah established to own, 

acquire, construct, operate, maintain, and repair the Intermountain Power Project (IPP). The Power System 

serves as the project manager and operating agent of IPP.

SCPPA – The Southern California Public Power Authority is a California Joint Powers Agency that 

finances the construction or acquisition of generation, transmission, and renewable energy projects.

The above agreements require the Power System to make certain minimum payments, which are based 

primarily upon debt service requirements. In addition to average annual fixed charges of approximately 

$291 million during each of the next five years, the Power System is required to pay for operating and 

maintenance costs related to actual deliveries of energy under these agreements (averaging approximately 

$471 million annually during each of the next five years). The Power System made total payments under 

these agreements of approximately $782 million and $751 million in fiscal years 2013 and 2012, 

respectively. These agreements are scheduled to expire from 2027 to 2035.

The Power System earned fees under the IPP project manager and operating agent agreements totaling 

$23.8 million and $18.9 million in fiscal years 2013 and 2012, respectively.

(a) Long-Term Notes Receivable

Under the terms of its purchase power agreement with IPA, the Department is charged for its output 

entitlements based on its share of IPA’s costs, including debt service. During fiscal year 2000, the 

Department restructured a portion of this obligation by transferring $1.11 billion to IPA in exchange 

for long-term notes receivable. The funds transferred were obtained from the debt reduction trust 

funds and through the issuance of new variable rate debentures (see notes 7 and 10). IPA used the 

proceeds from these transactions to defease and to tender bonds with par values of approximately 

$618 million and $611 million, respectively.

On September 7, 2000, the Department paid $187 million to IPA in exchange for additional 

long-term notes receivable. IPA used the proceeds to defease bonds with a face value of 

$198 million.

On July 20, 2005, the Department paid $97 million to IPA in exchange for additional long-term 

notes receivable. IPA used the proceeds to defease bonds with a face value of $92 million.

The IPA notes are subordinate to all of IPA’s publicly held debt obligations. The Power System’s 

future payments to IPA will be partially offset by interest payments and principal maturities from the 

subordinated notes receivable. The net IPA notes receivable balance totaled $844 million and 

$904 million as of June 30, 2013 and 2012, respectively.

The IPA notes pay interest and principal monthly and mature on July 1, 2023. The interest rates 

range from 0.6% to 5.4%, subject to adjustments related to IPA bond refundings.

(b) Energy Entitlement

The Department has a contract through 2017 with the U.S. Department of Energy for the purchase of 

available energy generated at the Hoover Power Plant. The Department’s contractual share of 
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

34 (Continued)

contingent capacity at Hoover is 491 MW (maximum rated capability). The cost of power 

(approximately 455 MW of capacity and 599,000 MWH of energy) purchased under this contract, 

including the Lower Colorado River Basin Development Fund Contribution Charge, was 

approximately $21 million and $18 million as of June 30, 2013 and 2012, respectively.

On December 20, 2011, the President signed H.R. 470, the “Hoover Power Allocation Act of 2011,”

into law. The legislation reallocates, for 50 more years, power from the Hoover Dam Power Plant to 

existing contractors while creating an additional pool of 5% power for new entrants.

The Department has a contract through 2026 with SCPPA for the purchase of available energy 

generated at the Pebble Springs Wind Project located in Gilliam County, Oregon. The Power 

System’s share of capacity at Pebble Springs is approximately 69 MWs (maximum capacity). The 

cost of power purchased under this contract was $16.5 million and $18 million as of June 30, 2013 

and 2012, respectively.

(c) Electricity Swap and Forward Contracts

In order to obtain the highest market value on energy that is sold into the wholesale market, the 

Department monitors the sales price of energy, which varies based on which hub the energy is to be 

delivered. There are three primary hubs within the Department’s transmission region: Palo Verde, 

California Oregon Border, and Mead. The Department enters into various locational swap 

transactions with other electric utilities in order to effectively utilize its transmission capacity and to 

achieve the most economical exchange of energy purchased and sold.

The Department procures renewable energy resources located remotely. These resources provide 

intermittent and limited source of energy and these resources are not directly connected to the 

Department’s transmission system. In order to receive firm renewable energy, the Department 

entered into a green for green energy exchange with the same or different Renewable Energy Credit 

source.

The Department enters into power and natural gas forward contracts in order to meet the electricity 

requirements to serve its customers. To assist the Department in achieving its Renewable Portfolio 

Standards (RPS) goal of 20%, some of the forward purchases made are renewable energy and 

biomethane gas.

The Department does not enter into swap and forward transactions for trading purposes. All of these 

transactions are intended to be used in the Department’s normal course of operations. The 

Department is exposed to risk of nonperformance if the counterparties default or if the swap 

agreements are terminated.
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

35 (Continued)

As of June 30, 2013, the Power System had the following Electricity Swap and Forward Contracts, 

which are not recorded in the Power System’s financial statements based on the criteria in 

GASB Statement No. 53 (amounts in thousands):

Notional amount Contract First Last

(total contract price range effective termination Fair Cash paid

Description quantities) dollar per unit date date value at inception

Electricity swaps:

Purchases 353,280 MW $ 35.82–38.83 07/01/13 12/31/13 $ (12,991) — 

Sales 353,280 MW 38.32–41.33 07/01/13 12/31/13 13,874 — 

Forward contracts:

Electricity 555,980 MW 26.50–53.65 07/01/13 06/30/14 (3,940) — 

Natural gas 37,655,600 MMBtu 5.49–10.85 07/01/13 10/31/21 (218,672) — 

As of June 30, 2012, the Power System had the following Electricity Swap and Forward Contracts, 

which are not recorded in the Power System’s financial statements (amounts in thousands):

Notional amount Contract First Last

(total contract price range effective termination Fair Cash paid

Description quantities) dollar per unit date date value at inception

Electricity swaps:

Purchases 325,760 MW $ 29.00–34.75 07/01/12 12/31/12 $ (10,101) — 

Sales 325,760 MW 33.31–35.50 07/01/12 12/31/12 10,953 — 

Forward contracts:

Electricity 260,274 MW 12.00–47.98 07/01/12 06/30/13 604 — 

Natural gas 50,314,600 MMBtu 5.49–10.85 07/01/12 10/31/21 (295,805) — 

(7) Cash, Cash Equivalents, and Investments

(a) Restricted and Other Investments

A summary of the Power System’s restricted and other investments is as follows (amounts in 

thousands):

June 30

2013 2012

Restricted and other investments:

Restricted investments:

Debt Reduction Trust Funds $ 490,325 490,444 

Nuclear Decommissioning Trust Funds 122,584 123,627 

Natural Gas Trust Fund 287 268 

Hazardous Waste Treatment Trust Fund 2,182 2,177 

SCPPA Palo Verde investment 18,525 22,605 

Total restricted investments $ 633,903 639,121 
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

36 (Continued)

The Power System also has $3.2 million and $0 of cash collateral received from securities lending 

transactions in the City’s securities lending program as of June 30, 2013 and 2012, respectively (see 

notes 7(b) and 8).

All restricted and other investments are to be used for a specific purpose as follows:

Debt Reduction Trust Funds

The debt reduction trust funds were established during fiscal year 1997 to provide for the payment of 

principal and interest on long-term debt obligations and purchased power obligations arising from 

the Department’s participation in IPP and SCPPA (see note 6). The Department has transferred funds 

from purchased power precollections into these trust funds. Funds from operations may also be 

transferred by management as funds become available.

Nuclear Decommissioning Trust Funds

Nuclear decommissioning trust funds will be used to pay the Department’s share of 

decommissioning PVNGS at the end of its useful life (see note 1).

Natural Gas Trust Fund

The natural gas trust fund was established to serve as depository to pay for costs and to post margin 

or collateral in connection with contracts for the purchase and delivery of financial transactions for 

natural gas. These transactions are entered into to stabilize the natural gas portion of the 

Department’s fuel for generation costs.

Hazardous Waste Treatment Storage and Disposal Trust Fund

The hazardous waste treatment storage and disposal trust fund was established to provide financial 

assurance for closure of the Main Street treatment and disposal facility.

SCPPA Palo Verde Investment

The SCPPA Palo Verde investment is a fixed rate investment held by SCPPA to be drawn down over 

the next four years to pay for purchased power obligations arising from the Department’s 

participation in the SCPPA Palo Verde project. The fixed interest rate is 4.97% and the maturity date 

is June 25, 2017.
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

37 (Continued)

As of June 30, 2013, the Power System’s restricted investments and their maturities are as follows 

(amounts in thousands):

Investment maturities

1 to 30 31 to 60 61 to 365 366 days Over

Investment type Fair value days days days to 5 years 5 years

U.S. agencies $ 267,575 — — 25,136 182,121 60,318 

Medium-term corporate notes 154,635 377 1,000 49,778 103,480 — 

Commercial paper 64,737 34,748 19,998 9,991 — — 

Certificates of deposit 16,000 6,000 5,000 5,000 — — 

California local agency bonds 45,331 — — 24,807 20,524 — 

California state bonds 18,215 — — 5,175 13,040 — 

Other State Bonds 38,639 — — 440 38,199 — 

Bankers’ acceptances 250 — — 250 — — 

Money market funds 9,996 9,996 — — — — 

SCPPA Palo Verde

investment 18,525 — — — 18,525 — 

$ 633,903 51,121 25,998 120,577 375,889 60,318 

As of June 30, 2012, the Power System’s securities lending cash collateral and restricted investments 

and their maturities are as follows (amounts in thousands):

Investment maturities

1 to 30 31 to 60 61 to 365 366 days Over

Investment type Fair value days days days to 5 years 5 years

U.S. agencies $ 358,744 — — 6,374 288,421 63,949 

Medium-term corporate notes 113,650 388 1,004 35,215 77,043 — 

Commercial paper 39,726 4,999 — 34,727 — — 

Certificates of deposit 35,022 11,001 — 24,021 — — 

California local agency bonds 42,614 5,000 — 16,287 21,327 — 

California state bonds 8,718 — — — 8,718 — 

Bankers’ acceptances 505 — — 505 — — 

Money market funds 17,537 17,537 — — — — 

SCPPA Palo Verde

investment 22,605 — — — 22,605 — 

$ 639,121 38,925 1,004 117,129 418,114 63,949 

i. Interest Rate Risk

The Department’s investment policy limits the maturity of its investments to a maximum of 

30 years for U.S. government agency securities; 5 years for medium-term corporate notes, 

California local agency obligations, California state obligations, and other state obligations; 

270 days for commercial paper; 397 days for certificates of deposit; 180 days for bankers’

acceptances; and 45 days for repurchase agreements purchased with cash collateral from 

securities lending agreements.
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

38 (Continued)

ii. Credit Risk

Under its investment policy and the Code, the Department is subject to the prudent investor 

standard of care in managing all aspects of its portfolios. The prudent investor standard 

requires that the Department “shall act with care, skill, prudence, and diligence under the 

circumstances then prevailing, including, but not limited to, the general economic conditions 

and the anticipated needs of the agency, that a prudent person acting in a like capacity and in 

familiarity with those matters would use in the conduct of funds of a like character and with 

like aims, to safeguard the principal and maintain the liquidity needs of the agency.”

The U.S. government agency securities in the portfolio consist of securities issued by 

government-sponsored enterprises, which are not explicitly guaranteed by the 

U.S. government. Of the U.S. government agency securities in the portfolio as of June 30, 

2013, $260,358,151 (97%) was rated with either the highest or second highest possible credit 

ratings by the Nationally Recognized Statistical Rating Organizations (NRSROs) that rated 

them and $7,216,510 (3%) was not rated. Of the U.S. government agency securities in the 

portfolio as of June 30, 2012, $330,708,464 (92%) was rated with either the highest or second 

highest possible credit ratings by the Nationally Recognized Statistical Rating Organizations 

(NRSROs) that rated them and $28,035,284 (8%) was not rated.

The Department’s investment policy specifies that medium-term corporate notes must be rated 

in a rating category of “A” or its equivalent or better by a NRSRO. Of the Power System’s 

investments in corporate notes as of June 30, 2013, $8,060,781 (5%) was rated in the category 

of AAA, $75,473,574 (49%) was rated in the category of AA, and $70,724,196 (46%) was 

rated in the category of A by at least one NRSRO. The remaining $376,598 (less than 1%) of 

investments in corporate notes was not rated. Of the Power System’s investments in corporate 

notes as of June 30, 2012, $8,067,221 (7%) was rated in the category of AAA, $59,342,325 

(52%) was rated in the category of AA, and $45,848,830 (40%) was rated in the category of A 

by at least one NRSRO. The remaining $387,999 (less than 1%) of investments in corporate 

notes was not rated.

The Department’s investment policy specifies that commercial paper must be of the highest 

ranking or of the highest letter and number rating as provided for by at least two NRSROs. As 

of June 30, 2013 and 2012, all of the Power System’s investments in commercial paper were 

rated with at least the highest letter and number rating as provided by at least two NRSROs.

The Department’s investment policy specifies that negotiable certificates of deposit must be of 

the highest ranking or letter and number rating as provided for by at least two NRSROs and 

that for nonnegotiable certificates of deposit, the full amount of principal and interest is 

insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union 

Administration. As of June 30, 2013, the Power System’s investments in certificates of 

deposits included $15,000,980 of negotiable certificates of deposit with at least the highest 

letter and number rating as provided by at least two NRSROs and $1,000,000 of nonnegotiable 

certificates of deposit fully insured by the FDIC. As of June 30, 2012, the Power System’s 

investments in certificates of deposits included $34,021,657 of negotiable certificates of 
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

39 (Continued)

deposit with at least the highest letter and number rating as provided by at least two NRSROs 

and $1,000,000 of nonnegotiable certificates of deposit fully insured by the FDIC.

The Department’s investment policy specifies that California local agency obligations, which 

include municipal commercial paper, must be rated in a rating category of “A” or its 

equivalent or better by a NRSRO. Of the Power System’s investments in California local 

agency bonds as of June 30, 2013, $26,055,858 (57%) was rated in the category of AA; 

$3,990,207 (9%) was rated in the category of A; and $15,284,920 (34%) was rated with the 

highest short-term letter and number rating as provided by at least one NRSRO. Of the Power 

System’s investments in California local agency bonds as of June 30, 2012, $6,034,780 (14%) 

was rated in the category of AAA; $17,101,513 (40%) was rated in the category of AA; 

$6,205,572 (15%) was rated in the category of A; and $13,272,640 (31%) was rated with the 

highest short-term ranking as provided by at least one NRSRO.

The Department’s investment policy specifies that State of California obligations must be 

rated in a rating category of “A” or its equivalent or better by a NRSRO. As of June 30, 2013 

and 2012, all of the Power System’s investments in State of California Obligations were rated 

in the rating category of A by at least one NRSRO.

The Department’s Investment Policy was amended effective August 22, 2012 to permit the 

purchase of obligations of other states in addition to California, rated in a rating category of 

“A” or its equivalent or better by a NRSRO. Of the Power System’s investments in other state 

obligations as of June 30, 2013, $15,933,055 (41%) was rated in the category of AAA and 

$22,706,260 (59%) was rated AA by at least one NRSRO. As of June 30, 2012, the Power 

System did not hold any investments in obligations of states other than California.

The Department’s investment policy specifies that banker’s acceptances must be of the highest 

ranking or letter and number rating as provided for by at least two NRSROs. As of June 30, 

2013 and 2012, all of the Power System’s investments in banker’s acceptances were rated with 

at least the highest letter and number rating as provided by three NRSROs.

The Department’s investment policy specifies that money market funds may be purchased as 

allowed under the Code, which requires that the fund must have either (1) attained the highest 

ranking or highest letter and numerical rating provided by not less than two NRSROs or (2) 

retained an investment advisor registered or exempt from registration with the Securities and 

Exchange Commission with not less than five years experience in managing money market 

mutual funds with assets under management in excess of $500 million. As of June 30, 2013 

and 2012, each of the money market funds in the portfolio had the highest possible ratings by 

at least two NRSROs.

iii. Concentration of Credit Risk

The Department’s investment policy specifies that there is no percentage limitation on the 

amount that can be invested in U.S. government agency securities, except that a maximum of 

30% of the cost value of the portfolio may be invested in the securities of any single 

U.S. government agency issuer.
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

40 (Continued)

Of the Power System’s total investments as of June 30, 2013, $130,545,599 (21%) was 

invested in securities issued by the Federal National Mortgage Association; $85,643,771 

(14%) was invested in securities issued by the Federal Home Loan Mortgage Corporation; and 

$38,070,812 (6%) was invested in securities issued by the Federal Home Loan Bank.

Of the Power System’s total investments as of June 30, 2012, $121,438,988 (19%) was 

invested in securities issued by the Federal National Mortgage Association; $88,677,400 

(14%) was invested in securities issued by the Federal Home Loan Mortgage Corporation; 

$85,555,628 (13%) was invested in securities issued by the Federal Home Loan Bank; and 

$35,036,448 (5%) was invested in securities issued by the Federal Farm Credit Bank.

(b) Pooled Investments

The Power System’s cash, cash equivalents, and its collateral value of the City’s securities lending 

program (SLP) are included within the City Treasury’s general and special investment pool 

(the Pool). As of June 30, 2013 and 2012, the Power System’s share of the City’s general and special 

investment pool was $1,463,242,000 and $833,850,000, which represents approximately 17.3% and 

10.4% of the Pool, respectively.

The cash balances of substantially all funds on deposit in the City Treasury are pooled and invested 

by the City Treasurer for the purpose of maximizing interest earnings through pooled investment 

activities but safety and liquidity still take precedence over return. Interest earned on pooled 

investments is allocated to the participating funds based on each fund’s average daily deposit balance 

during the allocation period with all remaining interest allocated to the General Fund. Investments in 

the City Treasury are stated at fair value based on quoted market prices except for commercial paper 

and money market investments that have remaining maturities of one year or less at time of 

purchase, which are reported at amortized cost.

Pursuant to California Government Code Section 53607 and the Los Angeles City Council File 

No. 94-2160, the City Treasury shall render to the City Council a statement of investment policy 

(the Policy) annually. City Council File No. 09-3050 was adopted on January 27, 2010 as the City’s 

investment policy. This Policy shall remain in effect until the Los Angeles City Council and the 

Mayor approve a subsequent revision. The Policy governs the City’s pooled investment practices. 

The Policy addresses soundness of financial institutions in which the City Treasurer will deposit 

funds and types of investment instruments permitted by California Government Code 

Sections 53600-53635 and 16429.1.

Examples of investments permitted by the Policy are obligations of the U.S. Treasury and 

government agencies, commercial paper notes, certificates of deposit (CD) placement service, 

bankers’ acceptances, medium-term notes, mutual funds, money market mutual funds, and the State 

of California Local Agency Investment Fund.
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

41 (Continued)

At June 30, 2013, the investments held in the City Treasury’s General and Special Investment Pool 

Programs and their maturities are as follows (amounts in thousands):

Investment maturities

1 to 30 31 to 60 61 to 365 366 days Over

Type of investments Amount days days days to 5 years 5 years

U.S. Treasury bills $ 184,540 20,999 — 163,541 — — 

U.S. Treasury notes 3,705,030 — — — 3,687,736 17,294 

U.S. Sponsored Agency Issues 1,980,334 153,076 240,942 512,318 1,060,252 13,746 

Medium term notes 1,467,556 8,913 32,361 201,292 1,224,990 — 

Commercial paper 1,071,321 962,231 33,999 75,091 — — 

Municipal bonds 9,774 — — — 9,774 — 

Certificates of deposit 7,000 — — 7,000 — — 

Short-term investment funds 22,261 22,261 — — — — 

Securities lending short-term

collateral investment pool 31,659 31,659 — — — — 

Total general

and special

pools $ 8,479,475 1,199,139 307,302 959,242 5,982,752 31,040 

Interest Rate Risk. The Policy limits the maturity of its investments to five years for the 

U.S. Treasury and government agency securities, medium term notes, CD placement service, 

negotiable certificate of deposits, collateralized bank deposits, mortgage pass-through securities, and 

bank/time deposits; one year for repurchase agreements; 270 days for commercial paper; 180 days 

for bankers’ acceptances; and 92 days for reverse repurchase agreements. The Policy also allows 

City funds with longer-term investments horizons, to be invested in securities that at the time of the 

investment have a term remaining to maturity in excess of five years, but with a maximum final 

maturity of thirty years.

Credit Risk. The Policy establishes minimum credit ratings requirement for investments. There is no 

credit quality requirement for local agency bonds, U.S. Treasury Obligations, State of California 

Obligations, California Local Agency Obligations, and U.S. Sponsored Agencies (U.S. government 

sponsored enterprises) securities. The City’s $2.0 billion investments in U.S. government sponsored 

enterprises consist of securities issued by the Federal Home Loan Bank – $292.5 million, Federal 

National Mortgage Association – $880.9 million, Federal Home Loan Mortgage Corporation –

$617.1 million, Federal Farm Credit Bank – $121.7 million, Tennessee Valley Authority –

$62.0 million and Farmer Mac Discount Note – $6.1 million. Of the City’s $2.0 billion investments 

in U.S. Sponsored Agencies securities, $1,281.6 million were rated “AA+” by S&P and “Aaa” by 

Moody’s; $698.7 million were not rated individually by S&P nor Moody’s (issuers of these 

securities are rated “A-1+” by S&P and “P-1” by Moody’s).

Medium term notes must be issued by corporations organized and operating within the United States 

or by depository institutions licensed by the United States or any state and operating within the 

United States. Medium term notes must have at least an “A” rating. The City’s $1.5 billion

investments in medium term notes consist of securities issued by banks and corporations that comply 

with these requirements and were rated “A” or better by S&P and “A3” or better by Moody’s. 
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

42 (Continued)

Subsequent to purchase, one issuer of $12.0 million medium term notes was downgraded to “BBB”

by S&P and Baa1 by Moody’s.

Commercial paper issues must have a minimum of “A-1” or equivalent rating. If the issuer has 

issued long-term debt, it must be rated “A” without regard to modifiers. Issuing corporation must be 

organized and operating within the United States and have assets in excess of $500.0 million. Of the 

City’s $1.1 billion investments in commercial paper, $971.0 million were rated A-1 +/A-1 by S&P 

and P-1 by Moody’s; $33.0 million were rated P-1 by Moody’s and not rated by S&P; $67.3 million

were not rated individually by S&P nor Moody’s. The issuers of the certificates of deposit and 

municipal bonds were not rated.

Concentration of Credit Risk. The Policy does not allow more than 40% of its investment portfolio 

be invested in commercial paper and bankers’ acceptances, 30% in certificates of deposit and 

medium term notes, and 20% in mutual funds, money market mutual funds, and mortgage 

pass-through securities. The Policy further provides for a maximum concentration limit of 10% in 

any one issuer of commercial paper as well as in any one mutual fund, and 30% in bankers’

acceptances of any one commercial bank. There is no percentage limitation on the amount that can 

be invested in the U.S. government agencies. The City’s pooled investments comply with these 

requirements. GAAP requires disclosure of certain investments in any one issuer that represent 5% 

or more of total investments. Of the City’s total pooled investments as of June 30, 2013, 

$617.1 million (7%) was invested in securities issued by Federal Home Loan Mortgage Corporation, 

and $880.9 million (10%) was invested in securities issued by Federal National Mortgage 

Association.

At June 30, 2012, the investments held in the City Treasury’s General and Special Investment Pool 

Programs and their maturities are as follows (amounts in thousands):

Investment maturities

1 to 30 31 to 60 61 to 365 366 Days Over

Type of investments Amount days days days to 5 years 5 years

U.S. Treasury Notes $ 3,773,466 1,988 — 62,617 3,689,504 19,357 

U.S. Treasury Bills 37,004 28,035 6,009 2,960 — — 

U.S. Sponsored Agency Issues 2,018,682 164,006 562,587 207,749 1,073,235 11,105 

Medium term notes 1,318,929 14,500 — 195,072 1,109,357 — 

Commercial paper 829,790 741,152 88,638 — — — 

Certificates of deposit 6,000 — — 6,000 — — 

Short term investment funds 4,447 4,447 — — — — 

Total general and

special pools $ 7,988,318 954,128 657,234 474,398 5,872,096 30,462 

Interest Rate Risk. The Policy limits the maturity of its investments to five years for the 

U.S. Treasury and government agency securities, medium term notes, CD placement service, 

collateralized bank deposits, mortgage pass-through securities, and bank/time deposits; one year for 

repurchase agreements; 270 days for commercial paper; 180 days for bankers’ acceptances, and 

92 days for reverse repurchase agreements. The Policy also allows City funds with longer-term 
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

43 (Continued)

investments horizons, to be invested in securities that at the time of the investment have a term 

remaining to maturity in excess of five years, but with a maximum final maturity of thirty years.

Credit Risk. The Policy establishes minimum credit ratings requirement for investments. There is no 

credit quality requirement for local agency bonds, U.S. Treasury Obligations, State of California 

Obligations, California Local Agency Obligations, and U.S. Sponsored Agencies (U.S. government 

sponsored enterprises) securities. The City’s $2.0 billion investments in U.S. government sponsored 

enterprises consist of securities issued by the Federal Home Loan Bank – $581.8 million, Federal 

National Mortgage Association – $602.4 million, Federal Home Loan Mortgage Corporation –

$646.1 million, Federal Farm Credit Bank – $124.0 million, and Tennessee Valley Authority –

$64.4 million. Of the City’s $2.0 billion investments in U.S. Sponsored Agencies securities, 

$1,253.9 million were rated “AA+” by S&P and “Aaa” by Moody’s; $764.8 million were not rated 

individually by S&P nor Moody’s (issuers of these securities are rated “A-1+” by S&P and “P-1” by 

Moody’s).

Medium term notes must be issued by corporations organized and operating within the United States 

or by depository institutions licensed by the United States or any state and operating within the 

United States. Medium term notes must have at least an “A” rating. The City’s $1.3 billion

investments in medium term notes consist of securities issued by banks and corporations that comply 

with these requirements and were rated “A” or better by S&P and “A3” or better by Moody’s. 

Subsequent to purchase, two issuers representing $27.5 million (2.1%) in investments were 

downgraded to “BBB+” by S&P.

Commercial paper issues must have a minimum of “A-1” or equivalent rating. If the issuer has 

issued long-term debt, it must be rated “A” without regard to modifiers. Issuing corporation must be 

organized and operating within the United States and have assets in excess of $500.0 million. Of the 

City’s $829.8 million investments in commercial paper, $709.8 million were rated A-1 +/A-1 by 

S&P and P-1 by Moody’s; $120.0 million were not rated individually by S&P nor Moody’s. The 

issuers of the certificates of deposit were not rated.

Concentration of Credit Risk. The Policy does not allow more than 40% of its investment portfolio 

be invested in commercial paper and bankers’ acceptances, 30% in certificates of deposit and 

medium term notes, and 20% in mutual funds, money market mutual funds, and mortgage 

pass-through securities. The Policy further provides for a maximum concentration limit of 10% in 

any one issuer of commercial paper as well as in any one mutual fund, and 30% in bankers’

acceptances of any one commercial bank. There is no percentage limitation on the amount that can 

be invested in the U.S. government agencies. The City’s pooled investments comply with these 

requirements. GAAP requires disclosure of certain investments in any one issuer that represent 5% 

or more of total investments. Of the City’s total pooled investments as of June 30, 2012, 

$581.8 million (7%) was invested in securities issued by the Federal Home Loan Bank, 

$646.1 million (8%) was invested in securities issued by Federal Home Loan Mortgage Corporation, 

and $602.4 million (8%) was invested in securities issued by Federal National Mortgage Association.
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

44 (Continued)

(8) Securities Lending Transactions

The Power System participates in an SLP. As of June 30, 2013 and 2012, amounts held in the City of 

Los Angeles Program are as follows (collateral amounts in thousands):

June 30

Program 2013 2012

City of Los Angeles Program $ 3,164 — 

General Investment Pool Program

The Power System participates in the City’s SLP through the pooled investment fund. The Department 

recognizes its proportionate share of the cash collateral received for securities loaned and the related 

obligation for the general investment pool. Securities lending is permitted and limited under provisions of 

California Government Code Section 53601. The City Council approved the SLP on October 22, 1991 

under Council File No. 91-1860, which complies with the California Government Code. The objectives of 

the SLP in priority order are safety of loaned securities and prudent investment of cash collateral to 

enhance revenue from the investment program. The SLP is governed by a separate policy and guidelines.

The City’s custodial bank acts as the securities lending agent. In the event a counterparty defaults by 

reason of an act of insolvency, the bank shall take all actions which it deems necessary or appropriate to 

liquidate permitted investment and collateral in connection with such transaction and shall make a 

reasonable effort for two business days (Replacement Period) to apply the proceeds thereof to the purchase 

of securities identical to the loaned securities not returned. If during the Replacement Period the collateral 

liquidation proceeds are insufficient to replace any of the loaned securities not returned, the bank shall, 

subject to payment by the City of the amount of any losses on any permitted investments, pay such 

additional amounts as necessary to make such replacement.

Under the provisions of the SLP, and in accordance with the California Government Code, no more than 

20% of the market value of the General Investment Pool (the Pool) is available for lending. The City 

receives cash as collateral on loaned securities, which is reinvested in securities permitted under the Policy. 

In addition, the City receives securities as collateral on loaned securities, which the City has no ability to 

pledge or sell without borrower default. In accordance with the California Government Code, the securities 

lending agent marks to market the value of both the collateral and the reinvestments daily. Except for open 

loans where either party can terminate a lending contract on demand, term loans have a maximum life of 

60 days. Earnings from securities lending accrue to the Pool and are allocated on a pro rata basis to all Pool 

participants.

During the fiscal year 2013, collateralizations on all loaned securities were compliant with the required 

102% of the market value. The City can sell collateral securities only in the event of borrower default. The 

lending agent provides indemnification for borrower default. There were no violations of legal or 

contractual provisions and no borrower or lending agent default losses during the fiscal year. There was no 

credit risk exposure to the City because the amounts owed to the borrowers exceeded the amounts 

borrowed. Loaned securities are held by the City’s agents in the City’s name and are not subject to 

custodial credit risk.
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

45 (Continued)

(9) Derivative Instruments

In June 2008, GASB issued GASB Statement No. 53. The statement specifically requires governments to 

measure and report most derivative instruments at fair value in their financial statements that are prepared 

using the economic resources measurement focus and the accrual basis of accounting. The requirement of 

reporting the derivative instruments at fair value on the face of the basic financial statements gives the 

users of those statements a clearer look into the risks their governments are sometimes exposed to when 

they enter into these transactions and how those risks are managed. The statement also addresses hedge 

accounting requirements and improves disclosures, providing a summary of the government’s derivative 

instrument activity, its objectives for entering into derivative instruments, and its significant terms and 

risks. The Power System implemented GASB Statement No. 53 in the 2010 fiscal year.

In accordance with GASB Statement No. 53, the Power System records the fair value of its hedging 

derivative instruments, financial natural gas hedges, on the statement of net position. As of June 30, 2013 

and 2012, the fair values of the financial natural gas hedges were approximately $(67.3) million and 

approximately $(91.3) million, respectively.

(a) Financial Natural Gas Hedges

The Department enters into natural gas hedging contracts in order to stabilize the cost of gas needed 

to produce electricity to serve its customers. It is designed to cap gas prices over a portion of the 

forecasted gas requirements.

The Department does not speculate when entering into financial transactions. Financial hedges are 

variable to fixed rate swaps and are layered by volumetric averaging. The Department is exposed to 

financial settlement risk if the counterparties default and/or the agreements are terminated.

As of June 30, 2013, the Power System’s financial natural gas hedges by fiscal year are the following 

(amounts in thousands):

Notional

amount

(Total Contract First Last Cash paid

Derivative contract price range effective termination Fair at derivative

description quantities*) dollar per unit date date value inception

Financial natural gas:

FY 2013-14 $ 5,027,000 6.37–8.31 07/01/13 06/30/14 $ (17,750) — 

FY 2014-15 5,384,500 6.37–9.38 07/01/14 06/30/15 (18,834) — 

FY 2015-16 4,488,000 6.42–9.85 07/01/15 06/30/16 (15,447) — 

FY 2016-17 3,197,500 6.61–9.83 07/01/16 06/30/17 (10,203) — 

FY 2017-18 2,190,000 6.76–7.14 07/01/17 06/30/18 (5,041) — 

Total $ 20,287,000 6.37–9.85 07/01/13 06/30/18 $ (67,275) — 

* Contract quantities in MMBtu – Million British Thermal Units
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

46 (Continued)

As of June 30, 2012, the Power System’s financial natural gas hedges by fiscal year were the 

following (amounts in thousands):

Notional

amount

(Total Contract First Last Cash paid

Derivative contract price range effective termination Fair at derivative

description quantities*) dollar per unit date date value inception

Financial natural gas:

FY 2012-13 $ 6,387,500 5.96–8.31 07/01/12 06/30/13 $ (24,631) — 

FY 2013-14 5,027,000 6.37–8.31 07/01/13 06/30/14 (17,221) — 

FY 2014-15 5,384,500 6.37–9.38 07/01/14 06/30/15 (18,412) — 

FY 2015-16 4,488,000 6.42–9.85 07/01/15 06/30/16 (15,312) — 

FY 2016-17 3,197,500 6.61–9.83 07/01/16 06/30/17 (10,317) — 

FY 2017-18 2,190,000 6.76–7.14 07/01/17 06/30/18 (5,403) — 

Total $ 26,674,500 5.96–9.85 07/01/12 06/30/18 $ (91,296) — 

* Contract quantities in MMBtu – Million British Thermal Units

The fair value of the natural gas hedges increased by $24.0 million and is reported as a deferred 

outflow on the statement of net position. All fair values were estimated using forward market prices 

available from broker quotes and exchanges.

(b) Credit Risk

The Power System is exposed to credit risk related to nonperformance by its wholesale 

counterparties under the terms of contractual agreements. In order to limit the risk of counterparty 

default, the Department has implemented a Wholesale Marketing Counterparty Evaluation Policy, 

which was amended and renamed as Counterparty Evaluation Credit Policy (the Counterparty 

Policy), and was approved by the Board on May 6, 2008. Under the new policy, the scope has been 

expanded beyond physical power to include transmission, physical natural gas, and financial natural 

gas. Also, the credit limit structure has been categorized into short-term and long-term structures 

where the short-term structure is applicable to transactions with terms of up to 18 months and the 

long-term structure to cover transactions beyond 18 months.

The Policy includes provisions to limit risk including: the assignment of internal credit ratings to all 

Department’s counterparties based on counterparty and/or debt ratings; the use of expected default 

frequency equivalent credit rating for short-term transactions; the requirement for credit 

enhancements (including advance payments, irrevocable letters of credit, escrow trust accounts, and 

parent company guarantees) for counterparties that do not meet an acceptable level of risk; and the 

use of standardized agreements, which allow for the netting of positive and negative exposures 

associated with a single counterparty.

As of June 30, 2013, the 10 financial natural gas hedge counterparties were rated by Moody’s as 

follows: three at Aa3, three at A2, three at A3, and one at Baa1. The counterparties were rated by 

S&P as follows: two at AA-, two at A+, four at A, and two at A-. As of June 30, 2012, the 

10 financial natural gas hedge counterparties were rated by Moody’s as follows: three at Aa3, three 
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

47 (Continued)

at A2, three at A3, and one at Baa1. The counterparties were rated by S&P as follows: two at AA-, 

two at A+, four at A, and two at A-.

Based on the International Swap Dealers Association agreements, the Department or the 

counterparty may be required to post collateral to support the financial natural gas hedges subject to 

credit risk in the form of cash, negotiable debt instruments (other than interest-only and 

principal-only securities), or eligible letters of credit. Collateral posted is held by a custodian. As of 

June 30, 2013 and 2012, the fair values of the financial natural gas hedges are within the credit limits 

and collateral posting was not required.

(c) Basis Risk

The Department is exposed to basis risk between the financial natural gas hedges, which are settled 

monthly at NW Rocky Mountains Index, and the hedged gas deliveries, which are daily spot 

purchases at Kern River, Opal prices. However, these pricing points are in the same region and are 

highly correlated.

(d) Termination Risk

The Power System or its counterparties may terminate the contractual agreements if the other party 

fails to perform under the terms of the contract. No termination events have occurred and there are 

no out-of-the-ordinary termination events contained in contractual documents.
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

48 (Continued)

(10) Long-Term Debt

Long-term debt outstanding as of June 30, 2013 and 2012 consists of revenue bonds and refunding revenue 

bonds due serially in varying annual amounts as follows (amounts in thousands):

Fiscal year

of last

Date of Effective- scheduled Principal outstanding

Bond issues issue interest rate % maturity 2013 2012

Issue of 2001, Series B 06/05/01 Variable 2035 $ 580,800 580,800 

Issue of 2001, Series C1 11/15/01 4.788 2017 2,003 2,003 

Issue of 2002, Series A 08/22/02 Variable 2036 388,500 388,500 

Issue of 2002, Series C2 11/22/02 4.375 2018 5,475 8,094 

Issue of 2003, Series A1 07/31/03 3.409 2017 37,600 184,955 

Issue of 2003, Series A2 08/19/03 4.662 2032 — 515,830 

Issue of 2003, Series B 08/28/03 5.013 2036 4,245 128,225 

Issue of 2004, Series C3 04/07/04 4.298 2020 7,147 7,229 

Issue of 2005, Series A1 12/28/05 4.700 2041 530,285 544,285 

Issue of 2005, Series A2 12/28/05 4.700 2031 315,195 315,195 

Issue of 2006, Series C4 03/01/06 4.040 2017 5,149 5,204 

Issue of 2007, Series A1 10/18/07 4.659 2040 330,630 333,630 

Issue of 2007, Series A2 10/18/07 4.638 2033 191,125 191,125 

Issue of 2008, Series A1 11/25/08 5.583 2039 200,000 200,000 

Issue of 2008, Series A2 11/25/08 5.039 2033 336,840 343,420 

Issue of 2009, Series A 02/19/09 4.773 2040 120,410 121,355 

Issue of 2009, Series B 06/02/09 4.563 2025 172,125 172,125 

Issue of 2010, Series A 06/02/10 3.898 2041 616,000 616,000 

Issue of 2010, Series B 06/02/10 3.015 2023 45,600 50,800 

Issue of 2010, Series C 08/25/10 2.188 2028 139,775 139,775 

Issue of 2010, Series D 12/02/10 4.342 2046 760,200 760,200 

Issue of 2011, Series A 06/30/11 2.715 2023 640,290 694,130 

Issue of 2012, Series A 10/25/12 2.936 2036 104,075 — 

Issue of 2012, Series B 10/25/12 4.164 2044 350,000 — 

Issue of 2012, Series C 10/25/12 0.958 2016 300,000 — 

Issue of 2013, Series A 04/02/13 2.504 2032 527,310 — 

Issue of 2013, Series B 06/04/13 3.347 2033 452,145 — 

Issue of 2013, Series C 06/04/13 4.441 2038 27,855 — 

Total principal amount 7,190,779 6,302,880 

Revenue certificates 200,000 200,000 

Unamortized premiums,

discounts, and debt-related

costs (including net loss on

refundings), net 353,232 98,170 

Debt due within one year

(including current portion of

variable rate debt) (249,245) (246,582) 

$ 7,494,766 6,354,468 
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

49 (Continued)

Revenue bonds generally are callable 10 years after issuance. The Department has agreed to certain 

covenants with respect to bonded indebtedness. Significant covenants include the requirement that the 

Power Systems’ net income, as defined, will be sufficient to pay certain amounts of future annual bond 

interest and of future annual aggregate bond interest and principal maturities. Revenue bonds and 

refunding bonds are collateralized by the future revenues of the Power System.

(a) Long-Term Debt Activity

The Power System had the following activity in long-term debt for the fiscal years ended June 30, 

2013 and 2012 (amounts in thousands):

Balance, Balance, Current

July 1, 2012 Additions Reductions June 30, 2013 portion

Long-term debt:

Bonds $ 6,401,050 2,054,674 (911,713) 7,544,011 229,245 

Revenue certificates 200,000 — — 200,000 20,000 

Total $ 6,601,050 2,054,674 (911,713) 7,744,011 249,245 

Balance, Balance, Current

July 1, 2011 Additions Reductions June 30, 2012 portion

Long-term debt:

Bonds $ 6,476,599 — (75,549) 6,401,050 226,582 

Revenue certificates 200,000 — — 200,000 20,000 

Total $ 6,676,599 — (75,549) 6,601,050 246,582 

(b) New Issuances

Fiscal Year 2013

In October 2012, the Power System issued $104.08 million of Power System Revenue Bonds, 2012 

Series A. The net proceeds of $123.86 million, including a $19.78 million issue premium net of 

underwriter’s discount, were used to refund a portion of the Power System Revenue Bonds, 2003 

Series B amounting to $119.91 million. The transaction resulted in a net present value savings of 

$25.55 million and a net loss for accounting purposes of $4.82 million, which was capitalized and is 

being amortized over the life of the new bonds.

Also, in October 2012, the Power System issued $350 million and $300 million of Power System 

Revenue Bonds, 2012 Series B and Series C, respectively. The net proceeds of $733.31 million, 

including a $83.31 million issue premium net of underwriter’s discount, were deposited into the 

construction fund to be used for capital improvements.

In April 2013, the Power System issued $527.31 million of Power System Revenue Bonds, 2013 

Series A. The net proceeds of $631.90 million, including a $104.59 million issue premium net of 

underwriter’s discount, were used to refund a portion of the Power System Revenue Bonds, 2003 
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

50 (Continued)

Series A, Subseries A-1, amounting to $108.50 million and all of the $515.83 million outstanding 

Power System Revenue Bonds, 2003 Series A, Subseries A-2. The transaction resulted in a net 

present value savings of $104.73 million and a net loss for accounting purposes of $11.90 million, 

which was capitalized and is being amortized over the life of the new bonds.

In June 2013, the Power System issued $452.15 million of Power System Revenue Bonds, 2013 

Series B. The net proceeds of $533.14 million, including a $80.99 million issue premium net of 

underwriter’s discount, were deposited into the construction fund to be used for capital 

improvements.

Lastly, in June 2013, the Power System issued $27.86 million of Power System Revenue Bonds, 

2013 Series C. The net proceeds of $27.74 million, excluding a $0.12 million underwriter’s discount, 

were deposited into the construction fund to be used for renewable energy projects. The Power 2013 

Series C Bonds, designated as direct payment Qualified Energy Conservation Bonds (QECBs), 

enabled the Department to receive subsidy payments from the U.S. Treasury equal to 3.14% 

representing 70.00% of the tax credit rate of 4.49% (the credit rate determined under 

Section 54(A)(b)(3) of the Internal Revenue Code of 1986). The financing provided a weighted 

average life of 24.1 years, an average coupon rate of 4.41%, and an effective-interest rate of 1.29% 

(net of the tax subsidy).

Fiscal Year 2012

The Power System did not issue any new money or refunding Power System Revenue Bonds for 

fiscal year 2012.

(c) Outstanding Debt Defeased

The Power System defeased certain revenue bonds in current and prior years by placing cash or the 

proceeds of new revenue bonds in irrevocable trusts to provide for all future debt service payments 

on the old bonds. Accordingly, the trust account assets and the liability for the defeased bonds are 

not included in the Power System’s financial statements.

At June 30, 2013, the following revenue bonds outstanding are considered defeased (amounts in 

thousands):

Principal

Bond issues outstanding

Second issue of 1993 $ 7,200 

Refunding issue of 1994 14,625 

Issue of 1994 4,810 

Issue of 2003 Series A, Subseries A-1 108,500 

Issue of 2003 Series A, Subseries A-2 515,830 

Issue of 2003 Series B 119,905 

$ 770,870 
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

51 (Continued)

(d) Variable Rate Bonds

As of June 30, 2013 and 2012, the Power System had $969.3 million in variable rate bonds. The 

variable rate bonds currently bear interest at weekly and daily rates ranging from 0.04% to 0.06% as 

of June 30, 2013 and 0.15% to 0.17% as of June 30, 2012. The Power System can elect to change the 

interest rate period of the bonds with certain limitations. The bondholders have the right to tender the 

bonds to the tender agent on any business day with seven days’ prior notice. The Power System has 

entered into standby and line-of-credit agreements with a syndicate of commercial banks in an initial 

amount of $580.8 million and $388.5 million to provide liquidity for the variable rate bonds, 

respectively. The extended standby agreements expire in January 2015 for the $580.8 million and in 

June 2014 for the $388.5 million.

Under the agreements, the $580.8 million variable rate bonds will bear interest that is payable 

quarterly at the greatest of: (a) the Prime Rate plus 1.00%; (b) the Federal Funds Rate plus 2.00%;

and (c) 7.50%, while the $388.5 million variable rate bonds will bear interest that is payable 

quarterly at the greatest of: (a) the Prime Rate plus 2.00%; (b) the Federal Funds Rate plus 2.00%; 

(c) the Daily One-Month LIBOR plus 0.5%; and (d) 7.50%. The unpaid principal of each liquidity 

advance made by the liquidity provider is payable in 10 equal semiannual installments ninety days 

immediately following the related liquidity advance. At its discretion, the Power System has the 

ability to convert the outstanding bonds to fixed rate obligations, which cannot be tendered by the 

bondholders.

The variable rate bonds have been classified as long-term in the statement of net position as the 

liquidity facilities give the Power System the ability to refinance on a long-term basis and the Power 

System intends to either renew the facility or exercise its right to tender the debt as a long-term 

financing. The portion that would be due in the next fiscal year in the event that the outstanding 

variable rate bonds were tendered and purchased by the commercial banks under the standby 

agreements has been included in the current portion of long-term debt and was $96.9 million at both 

June 30, 2013 and 2012.

(e) Revenue Certificates

As of June 30, 2013 and 2012, the Power System has outstanding $200 million of commercial paper 

bearing interest at an average rate of 0.17%. The commercial paper matures not more than 270 days 

from the date of issuance.

The Department entered into a letter-of-credit and reimbursement agreement (the Agreement) with a 

commercial bank in the amount of $200 million to provide liquidity and credit support for the 

Department’s commercial paper program. The agreement secures the payment when due of the 

principal and interest on commercial paper issued on or after August 27, 2010. Drawings on the 

agreement will represent advances to the Department and will bear interest that is payable monthly at 

the highest of (i) the Prime Rate plus 1.00%, (ii) Federal Funds Rate plus 2.00%, (iii) the Daily 

One-Month LIBOR plus 3.00%, and (iv) 7.00%. The unpaid principal of each advance is payable in 

10 equal semiannual installments, commencing on the date six months after the advance. The 

Agreement terminates on August 26, 2013.
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

52 (Continued)

The revenue certificates have been classified as long-term debt in the statement of net position as the 

Agreement gives the Power System the ability to refinance on a long-term basis and the Power 

System intends to either renew the Agreement or exercise its option to draw on the Agreement. The 

portion that would be due in the next fiscal year in the event that the outstanding revenue certificates 

were advanced by the commercial bank under the Agreement has been included in the current 

portion of long-term debt and was $20 million at both June 30, 2013 and 2012.

(f) Scheduled Principal Maturities and Interest

Scheduled annual principal maturities and interest are as follows (amounts in thousands):

Interest and

Principal amortization

Fiscal year(s) ending June 30:

2014 $ 132,315 309,278 

2015 110,645 304,170 

2016 413,235 298,647 

2017 114,381 293,019 

2018 157,313 287,847 

2019–2023 905,782 1,351,200 

2024–2028 1,141,573 1,151,508 

2029–2033 1,386,805 873,336 

2034–2038 1,076,780 615,811 

2039–2043 1,200,670 309,011 

2044–2048 551,280 32,195 

Total requirements $ 7,190,779 5,826,022 

Interest and amortization are net of $353.23 million of unamortized discount/premium and gain/loss 

due to issuances of new and refunding bonds.

The maturity schedule presented above reflects the scheduled debt service requirements for all of the 

Power System’s long-term debt. The schedule is presented assuming that the tender options on the 

variable rate bonds, as discussed on the previous page, will not be exercised and that the full amount 

of the revenue certificates will be renewed. Should the bondholders exercise the tender options and 

the Power System convert all of the revenue certificates under the line of credit, the Power System 

would be required to redeem the $1,169.3 million in variable rate bonds and revenue certificates 

outstanding over the next six years, as follows: $116.93 million in fiscal year 2014, $233.86 million

in each of the fiscal years 2015 through 2018, and $116.93 million in fiscal year 2019. Accordingly, 

the statements of net position recognize the possibility of the exercise of the tender options and 

reflect the $116.93 million that could be due in fiscal year 2014 as a current portion of long-term 

debt payable. Interest and amortization include interest requirements for variable rate bonds.

Variable debt interest rate in effect at June 30, 2013 averages 0.054%.
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

53 (Continued)

(11) Retirement, Disability, and Death Benefit Insurance Plan

The Department has a funded contributory retirement, disability, and death benefit insurance plan covering 

substantially all of its employees. The Water and Power Employees’ Retirement, Disability, and Death 

Benefit Insurance Plan (the Plan) operates as a single-employer defined benefit plan to provide pension 

benefits to eligible department employees and to provide disability and death benefits from the respective 

insurance funds. Plan benefits are generally based on years of service, age at retirement, and the 

employee’s highest 12 consecutive months of salary before retirement. Active participants who joined the 

Plan on or after June 1, 1984 are required to contribute 6% of their annual covered payroll. Participants 

who joined the Plan prior to June 1, 1984 contribute an amount based upon an entry-age percentage rate. 

The Department contributes $1.10 for each $1.00 contributed by participants plus an actuarially determined 

annual required contribution (ARC) as determined by the Plan’s independent actuary, taking into 

consideration the amount of net pension asset or obligation currently recorded in the statement of net 

position. The required contributions are allocated between the Power System and the Water System based 

on the current year labor costs.

The Retirement Board of Administration (the Retirement Board) is the administrator of the Plan. The Plan 

is subject to provisions of the Charter of the City and the regulations and instructions of the Board. The 

Plan is an independent pension trust fund of the City.

Plan amendments must be approved by both the Retirement Board and the Board. The Plan issues 

separately available financial statements on an annual basis. Such financial statements can be obtained 

from the Department of Water and Power Retirement Office, 111 N. Hope, Room 357, Los Angeles, 

California 90012.

The annual pension cost (APC) and net pension asset for the Department’s Plan consist of the following 

(amounts in thousands):

Year ended June 30

2013 2012

Annual required contribution $ 408,475 363,886 

Interest on net pension asset (7,278) (8,719) 

Adjustment to annual required contribution 11,028 13,211 

APC (including $156.7 million and $127.9 million

of amounts capitalized in fiscal years 2013

and 2012, respectively) 412,225 368,378 

Department contributions (368,174) (326,200) 

Change in net pension asset 44,051 42,178 

Net pension (asset) at beginning of year (9,924) (52,102) 

Net pension liability (asset) at end of year $ 34,127 (9,924) 
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

54 (Continued)

The Power System’s allocated share of the Plan’s APC and net pension asset consists of the following 

(amounts in thousands):

Year ended June 30

2013 2012

Annual required contribution $ 277,763 247,443 

Interest on net pension asset (4,949) (5,929) 

Adjustment to annual required contribution 7,499 8,983 

APC (including $97.9 million and $78.7 million

of amounts capitalized in fiscal years 2013

and 2012, respectively) 280,313 250,497 

Power System contributions (247,749) (217,902) 

Change in net pension asset 32,564 32,595 

Net pension liability (asset) at beginning of year 18,209 (14,386) 

Net pension liability at end of year $ 50,773 18,209 

ARCs are determined through actuarial valuations using the entry-age normal actuarial cost method. The 

actuarial value of assets in excess of the Department’s Actuarial Accrued Liability (AAL) is being 

amortized by level contribution offsets over rolling 15-year periods effective July 1, 2000.

In accordance with actuarial valuations, the Department’s required contribution rates are as follows:

Deficit Contribution

Fiscal year Normal cost amortization rate

2013 15.06% 29.30% 46.08%

2012 15.08 25.18 41.82

The significant actuarial assumptions include an investment rate of return of 7.75%, projected inflation 

adjusted salary increases of 3.50%, and cost-of-living increases of 3.00%. The actuarial value of assets is 

determined using techniques that smoothen the effects of short-term volatility in the market value of 

investments over a five-year period. Plan assets consist primarily of corporate and government bonds, 

common stocks, mortgage-backed securities, and short-term investments.
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

55 (Continued)

Trend information for fiscal years 2013, 2012, and 2011 for the Power System is as follows (amounts in 

thousands):

Percentage

Net pension of APC

Year ended June 30 liability (asset) contributed APC

2013 $ 50,773 88% $ 280,313 

2012 18,209 87 250,497 

2011 (14,386) 83 227,488 

(a) Disability and Death Benefits

The Power System’s allocated share of disability and death benefit plan costs and administrative 

expenses totaled $19.4 million and $20 million for fiscal years 2013 and 2012, respectively.

(b) Funded Status and Funding Progress Based on Latest Actuarial Study

On October 1, 2013, the latest actuarial study as of July 1, 2013 was completed for the Department 

for fiscal year 2014. As of July 1, 2013, the Department’s actuarial value of assets was $7.96 billion

and AAL for benefits was $10.1 billion, resulting in an Unfunded Actuarial Accrued Liability 

(UAAL) of $2.14 billion. The covered payroll (annual payroll of active employees covered by the 

Plan) was $900 million, and the ratio of the UAAL to the covered payroll was 237%.

As of July 1, 2012, the Department’s actuarial value of assets was $7.57 billion and AAL for benefits 

was $9.69 billion, resulting in an Unfunded Actuarial Accrued Liability (UAAL) of $2.12 billion. 

The covered payroll (annual payroll of active employees covered by the Plan) was $887 million, and 

the ratio of the UAAL to the covered payroll was 239%.

As of July 1, 2011, the Department’s actuarial value of assets was $7.5 billion and AAL for benefits 

was $9.3 billion, resulting in a UAAL of $1.8 billion. The covered payroll (annual payroll of active 

employees covered by the Plan) was $870.2 million, and the ratio of the UAAL to the covered 

payroll was 211%.

Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and 

assumptions about the probability of occurrence of events far into the future. Examples include 

assumptions about future employment, mortality, and the salary increases. Amounts determined 

regarding the funded status of the Plan and the ARCs of the Department are subject to continual 

revision as actual results are compared with past expectations and new estimates are made for the 

future. The schedule of funding progress, presented as required supplementary information, presents 

information about whether the actuarial value of plan assets is increasing or decreasing over time 

relative to the AAL for benefits.
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

56 (Continued)

(12) Other Postemployment Benefit (Healthcare) Plan

(a) Plan Description

The Department provides certain other postemployment benefits (OPEB), such as medical and dental 

plans, to active and retired employees and their dependents. The healthcare plan is administered by 

the Department. The Retirement Board and the Board have the authority to approve provisions and 

obligations. Eligibility for benefits for retired employees is dependent on a combination of age and 

service of the participants pursuant to a predetermined formula. Any changes to these provisions 

must be approved by the Retirement Board and the Board. The total number of active and retired 

Department participants entitled to receive benefits was approximately 16,319 and 16,340 for the 

fiscal years ended June 30, 2013 and 2012, respectively.

The health plan is a single-employer defined benefit plan. During fiscal year 2007, the Retiree Health 

Benefits Fund (the Fund) was created to fund the postemployment benefits of the Department. The 

Fund is administered as a trust and has its own financial statements. Such financial statements can be 

obtained from the Department of Water and Power Retirement Office, 111 N Hope, Room 357, 

Los Angeles, California 90012.

(b) Funding Policy

The Department pays a monthly maximum subsidy of $1,617 for medical and dental premiums 

depending on the employee’s work location and benefits earned. Participants choosing plans with a 

cost in excess of the subsidy they are entitled to are required to pay the difference.

Although no formal funding policy has been established for the future benefits to be provided under 

this plan, the Department has made significant contributions into the Fund during previous years. In 

fiscal year 2013, the Department transferred $0 into the Fund and paid $69.1 million in retiree 

medical premiums. In fiscal year 2012, the Department transferred $37.5 million in cash into the 

Fund and paid an additional $64.1 million in retiree medical premiums. The Power System’s portion 

of retiree medical premium payments was $47.0 million and $69.1 million for 2013 and 2012, 

respectively.

(c) Annual OPEB Cost and Net OPEB Obligation

The annual OPEB cost (expense) is calculated based on the employer ARC, an amount actuarially 

determined in accordance with the parameters of GASB Statement No. 45, Accounting and Financial 

Reporting by Employers for Postemployment Benefits Other Than Pensions. The ARC represents a 

level of funding that, if paid on an ongoing basis, is projected to cover normal cost under each year 

and amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed 

30 years.
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

57 (Continued)

The following table shows the components of the Department’s annual OPEB cost for the year, the 

amount actually contributed to the Plan, and changes in the net OPEB asset (amounts in thousands):

Year ended June 30

2013 2012

Annual required contribution $ 49,496 53,691 

Interest on net OPEB asset (73,943) (69,046) 

Adjustment to annual required contribution 62,758 56,975 

Annual OPEB costs 38,311 41,620 

Department contributions made (69,127) (101,610) 

Change in net OPEB asset (30,816) (59,990) 

Net OPEB asset – beginning of year (923,874) (863,884) 

Net OPEB asset – end of year $ (954,690) (923,874) 

The following table shows the components of the Power System’s share in annual OPEB cost for the 

year, the amount actually contributed to the Plan, and changes in the net OPEB asset (amounts in 

thousands):

Year ended June 30

2013 2012

Annual required contribution $ 33,657 36,510 

Interest on net OPEB asset (50,281) (46,952) 

Adjustment to annual required contribution 42,675 38,743 

Annual OPEB costs 26,051 28,301 

Power System contributions made (47,011) (69,094) 

Change in net OPEB asset (20,960) (40,793) 

Net OPEB asset – beginning of year (631,479) (590,686) 

Net OPEB asset – end of year $ (652,439) (631,479) 
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

58 (Continued)

The Department’s annual OPEB cost, the percentage of ARC contributed to the Plan, and the net 

postemployment asset for fiscal years 2013, 2012, and 2011 were as follows (amounts in thousands):

2013 2012 2011

Annual OPEB cost $ 38,311 41,620 56,464

Percentage of OPEB costs

contributed 180% 244% 249%

Net postemployment asset at

end of year $ 954,690 923,874 863,884

The Power System’s share in the annual OPEB cost, the percentage of ARC contributed to the Plan, 

and the net retirement asset for fiscal years 2013, 2012, and 2011 were as follows (amounts in 

thousands):

2013 2012 2011

Annual OPEB cost $ 26,051 28,301 38,395

Percentage of OPEB costs

contributed 180% 244% 249%

Net postemployment asset at

end of year $ 652,439 631,479 590,686

(d) Funded Status and Funding Progress Based on Latest Actuarial Study

On November 6, 2013, the latest actuarial study as of July 1, 2013 was completed for fiscal year

2014.

As of July 1, 2012, the Department’s actuarial value of assets was $1.25 billion and AAL for benefits 

was $1.57 billion, resulting in a UAAL of $0.32 billion. The covered payroll (annual payroll of 

active employees covered by the Plan) was $887 million, and the ratio of the UAAL to the covered 

payroll was 36%.

As of July 1, 2011, the Department’s actuarial value of assets was $1.1 billion, and AAL for benefits 

was $1.6 billion, resulting in a UAAL of $418 million. The covered payroll (annual payroll of active 

employees covered by the Plan) was $870 million, and the ratio of the UAAL to the covered payroll 

was 73%.

Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and 

assumptions about the probability of occurrence of events far into the future. Examples include 

assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined 

regarding the funded status of the Plan and ARCs of the Department are subject to continual revision 

as actual results are compared with past expectations and new estimates are made for the future. The 

schedule of funding progress, presented as required supplementary information, presents information 
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

59 (Continued)

about whether the actuarial value of plan assets is increasing or decreasing over time relative to the 

AAL for benefits.

(e) Actuarial Methods and Assumptions

Projections of benefits for financial reporting purposes are based on the substantive plan (the plan 

understood by the Department and the plan members) and include the types of benefits provided at 

the time of each valuation and the historical pattern of sharing of benefit costs between the 

Department and the plan members to that point. The actuarial methods and assumptions used include 

techniques that are designed to reduce the effects of short-term volatility in AAL and the actuarial 

value of assets, consistent with the long-term perspective of the calculations.

In the July 1, 2012 actuarial valuation, the entry-age normal cost method was used. The actuarial 

assumptions include 7.75% discount rate, which represents the expected long-term return on plan 

assets, an annual healthcare cost trend rate of 8.50% initially, reduced by decrements to an ultimate 

rate of 5.00% over 7 years. Both rates include a 3.50% inflation assumption. The actuarial value of 

assets was determined using techniques that spread UAAL being amortized as a level percentage of 

projected payroll over a closed 30-year period with 23 years remaining.

In the July 1, 2011 actuarial valuation, the entry-age normal cost method was used. The actuarial 

assumptions include 7.75% discount rate, which represents the expected long-term return on plan 

assets, an annual healthcare cost trend rate of 9.00% initially, reduced by decrements to an ultimate 

rate of 5.00% over 10 years. Both rates include a 3.50% inflation assumption. The actuarial value of 

assets was determined using techniques that spread UAAL being amortized as a level percentage of 

projected payroll over a closed 30-year period with 24 years remaining.

(f) Healthcare Reform Legislation

The Patient Protection and Affordable Care Act (PPACA) was signed into law on March 23, 2010. 

One key provision of the PPACA is the assessment of the excise tax on high cost plans (Cadillac 

Plans) beginning in 2018. Under this act, a 40% excise tax applies to plans with costs exceeding 

certain annual thresholds for non-Medicare retirees aged 55–64 ($11,850 for single coverage; 

$30,950 for families coverage). For all other retirees the thresholds in 2018 are $10,200 for single 

coverage and $27,500 for family coverage. Significant uncertainties exist regarding the impact of the 

excise tax on high cost plans without further regulatory guidance. Management estimated the 

potential impact of this tax on the liability is based on unadjusted thresholds and assuming the tax is 

shared between the Department and its participants in the same way that the current costs are shared. 

The estimated impact of the 40% excise tax provision on high cost plans beginning in 2018, under 

the healthcare reform, is reflected in all actuarial valuation reports after July 1, 2010.
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

60 (Continued)

(13) Other Long-Term Liabilities

(a) Other Long-Term Liabilities

The Power System has the following other long-term liabilities:

Balance Balance

July 1, June 30, Current

 2012 Additions Reductions 2013 portion

Accrued liabilities $ 8,767 — (1,720) 7,047 — 

Deferred credits:

Purchased power 45,165 — (27,096) 18,069 18,069 

Rate stabilization 113,000 4,443 — 117,443 — 

Other 2,811 — — 2,811 — 

$ 160,976 4,443 (27,096) 138,323 18,069 

Accrued workers’

compensation claims $ 43,475 8,746 — 52,221 — 

Derivative instrument

liabilities $ 91,296 — (24,021) 67,275 — 

Balance Balance

July 1, June 30, Current

 2011 Additions Reductions 2012 portion

Accrued liabilities $ 10,487 — (1,720) 8,767 — 

Deferred credits:

Purchased power $ 140,995 — (95,830) 45,165 21,100 

Rate stabilization 75,000 38,000 — 113,000 — 

Other 2,995 — (184) 2,811 — 

$ 218,990 38,000 (96,014) 160,976 21,100 

Accrued workers’

compensation claims $ 40,300 3,175 — 43,475 — 

Derivative instrument

liabilities $ 73,770 17,526 — 91,296 — 

(b) Deferred Credits

The Department has deferred credits that are related to revenues collected from customers, but have 

not been earned. These funds are deferred and recognized as costs related to these deferrals are 

incurred.
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

61 (Continued)

Purchased Power Deferrals

During fiscal year 2006, the Board approved the suspension of deferring precollected purchased 

power costs and the reversal of the precollected purchased power costs recorded in prior years. The 

amount reversed is the cost of energy from IPP less the amount designated in rates for out-of-market 

purchased power costs. The reversal of the deferred credit is credited to retail sales. During fiscal 

years 2013 and 2012, the Power System reversed $27.1 million and $95.8 million, respectively, 

related to precollected purchase power costs. At June 30, 2013 and 2012, $18.1 million and 

$45.2 million, respectively, remain as part of deferred credits related to precollected purchased 

power costs.

Rate Stabilization Account

In April 2008, the City Council approved an amendment to the electric rate ordinance, which 

required the balance of the Rate Stabilization Account to be maintained separately from the Energy 

Cost Adjustment Account. The ordinance also directed that the deferred amount within the Energy 

Cost Adjustment Account be the beginning balance of the Rate Stabilization Account. During fiscal 

years 2013 and 2012, $4.4 million and $38 million, respectively, were deferred from the current year 

sales for resale. As of June 30, 2013 and 2012, the balance in the Rate Stabilization Fund, was 

$117.4 million and $113 million, respectively.

(c) Accrued Workers’ Compensation Claims

Liabilities for unpaid workers’ compensation claims are recorded at their present value when they 

are probable of occurrence and the amount can be reasonably estimated. The liability is actuarially 

determined, based on an estimate of the present value of the claims outstanding and an amount for 

claim events incurred but not reported based upon the Department’s loss experience, less the amount 

of claims and settlements paid to date. The discount rate used to calculate this liability at its present 

value was 4% at June 30, 2013 and 2012. The Department has third-party insurance coverage for 

workers’ compensation claims in excess of $1 million.

Overall indicated reserves for workers’ compensation claims, for both the Water System and the 

Power System, undiscounted, have increased from $74 million as of June 30, 2012 to $91 million as 

of June 30, 2013. The increase is mainly attributable to an increase in the number of cases filed at the 

Department. Workers’ compensation claims typically take longer than one year to settle and close 

out. The entire discounted liability is shown as long-term in the statement of net position as of 

June 30, 2013 and 2012.
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

62 (Continued)

Changes in the Department’s undiscounted liability since June 30, 2011 are summarized as follows 

(amounts in thousands):

June 30

2013 2012 2011

Balance at beginning of year $ 74,300 69,155 69,692 

Current year claims and changes in

estimates 37,561 26,769 19,541 

Payments applied (20,967) (21,624) (20,078) 

Balance at end of year $ 90,894 74,300 69,155 

The Power System’s portion of the discounted reserves as of June 30, 2013 and 2012 is $52.2 million

and $43.5 million, respectively.

(14) Commitments and Contingencies

(a) Transfers to the Reserve Fund of the City of Los Angeles

Under the provisions of the City Charter, the Power System transfers funds at its discretion to the 

reserve fund of the City. Pursuant to covenants contained in the bond indentures, the transfers may 

not be in excess of the increase in net position before transfers to the reserve fund of the City of the 

prior fiscal year. Such payments are not in lieu of taxes and are recorded as a transfer in the 

statements of revenues, expenses, and changes in net position.

The Department authorized total transfers of $247 million and $250 million in fiscal years 2013 and 

2012, respectively, from the Power System to the reserve fund of the City.

(b) Palo Verde Nuclear Generating Station (PVNGS) Matters

As a joint project participant in PVNGS, the Department has certain commitments with respect to 

nuclear spent fuel and waste disposal. Under the Nuclear Policy Act, the Department of Energy 

(DOE) is to develop facilities necessary for the storage and disposal of spent fuel and to have the 

first such facility in operation by 1998; however, the development of the repository designated at 

Yucca Mountain in the state of Nevada was postponed indefinitely for political reasons after DOE 

spent billions of dollars conducting feasibility studies. A Blue Ribbon Committee was formed by the 

federal government to look into other alternatives for nuclear waste disposal. In 2012, the committee 

submitted a final list of recommendations which include prompt efforts to develop a new geological 

disposal facility and one or more consolidated storage facilities, and early preparation for eventual 

large-scale transport of spent fuel to storage and disposal facilities.

Capacity in existing fuel storage pools at PVNGS was exhausted in 2003. A Dry Cask Storage 

Facility (also called the Independent Spent Fuel Storage Installation, ISFSI) was built and completed 

in 2003 at a total cost of $33.9 million (about $1.9 million for the Department). The facility has the 

capacity to store all the spent fuel generated by the plant until the end of its life in 2027. With the 

current operating license extension granted by the Nuclear Regulatory Commission, PVNGS is 
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

63 (Continued)

allowed to operate until 2047. The Dry Cask Storage Facility will be expanded as needed to 

accommodate additional spent fuel until it is removed by DOE.

The Department accrues for current nuclear fuel storage costs as a component of fuel expense as the 

fuel is used. The Department’s share of spent nuclear fuel costs related to its indirect interest in 

PVNGS is included in purchased power expense.

Because of the DOE’s inability to provide a disposal site, the PVNGS operating agent filed damages 

actions against the DOE to recover costs incurred by the PVNGS participants. A settlement was 

reached in August 2010 in the amount of $30.2 million from DOE of which $1.7 million is the 

Department’s share of the settlement which covers costs incurred up to 2006. Additional cost 

recovery is being pursued for the period post-2006.

The Price Anderson Act (the Act) requires that all utilities with nuclear generating facilities share in 

payment for claims resulting from a nuclear incident. Participants in PVNGS currently insure 

potential claims and liability through commercial insurance with a $375 million limit; the remainder 

of the potential liability is covered by the industry-wide retrospective assessment program provided 

under the Act. This program limits assessments to a maximum of $118 million per reactor for each 

licensee for each nuclear incident occurring at any nuclear reactor in the United States; payments 

under the program are limited to $18 million per reactor, per incident, per year. Based on the 

Department’s 5.70% direct interest, the Department would be responsible for a maximum assessment 

of $20 million per incident for all 3 units, limited to payments of $3 million per incident annually.

The NRC guidelines require improved security in immediate areas surrounding the reactor buildings. 

PVNGS has enlarged the protected area with the inclusion of an outage support facility, a new 

warehouse, a minor vehicle maintenance facility, and a fuel depot to reduce vehicular traffic in and 

out of the protected area. While some of these facilities have already been constructed and are 

currently in service, the estimated cost for the remaining facilities is approximately $1.1 million to 

the Department.

Other major capital projects that are currently in progress include the digital upgrade of the Generrex 

generator excitation system, the life extension of the Water Reclamation Facility’s clarifiers, the 

spray pond concrete replacement, the Nuclear Administrative and Technical Manual replacement, 

and the construction of the Learning Center-In Processing facility. These, along with other regulatory 

plant modifications, are currently estimated at $235 million in 2014, which translates to 

approximately $13.4 million for the Department. Also anticipated in the long range plan are 

$224 million ($12.7 million for the Department) worth of capital projects which include the cooling 

tower life extension long range plan, upgrades to the high-pressure turbines and electro-hydraulic 

controls, and the replacement of the reactor coolant pumps, Control Element Drive Mechanism 

Control System (CEDMCS), plant cooling water pipelines, and the Site Work Management System 

(SWMS).

In response to the nuclear event in Fukushima, Japan, the NRC has required PVNGS to increase the 

redundancy in its power supply to emergency cooling systems, reinforce its spent fuel pool, 

accelerate the transfer of spent fuel from the pool to the dry cask storage, and add pipelines and 
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

64 (Continued)

associated equipment necessary for supplying additional cooling water to the reactors. To date, the 

station has purchased additional diesel generators, pumps, and fire trucks, and has also accelerated 

the movement of its spent fuel casks to the ISFSI. In addition to these, Palo Verde has allotted 

approximately $82 million (approximately $4.7 million for the Department) for Fukushima 

initiatives, which include fuel building modifications, an emergency equipment storage facility, 

temporary power connections, seismic and flood hazards validation, and corresponding mitigating 

strategies, among several others. Additional NRC-mandated requirements are anticipated, but the 

costs associated with these future projects are unknown at this time.

(c) Environmental Matters

Numerous environmental laws and regulations affect the Power System’s facilities and operations. 

The Department monitors its compliance with laws and regulations and reviews its remediation 

obligations on an ongoing basis. The following topics highlight some of the major environmental 

compliance issues affecting the Power System:

Air Quality – Nitrogen Oxide (NOx) Emissions

The Power System’s generating station facilities are subject to the Regional Clean Air Incentives 

Market (RECLAIM) NOx emission reduction program adopted by the South Coast Air Quality 

Management District (SCAQMD). In accordance with this program, SCAQMD established annual 

NOx allocations for NOx RECLAIM facilities based on historical emissions and type of emission 

sources operated. These allocations are in the form of RECLAIM trading emission credits (RTCs). 

Facilities that exceed their allocations may buy RTCs from other companies that have emissions 

below their allocations. The Department has a program of installing emission controls and 

purchasing RTCs, as necessary, to meet its emission requirements.

As a result of the installation of NOx control equipment and the repowering of existing units, the 

Department has sufficient RTCs to meet its native load requirements for normal operations.

Air Quality – Greenhouse Gas Emissions

In September 2006, the state of California adopted two new laws designed to reduce greenhouse gas 

(GHG) emissions in California. The first, Assembly Bill 32, the California Global Warming 

Solutions Act of 2006, requires the California Air Resources Board (ARB) to develop regulations to 

reduce statewide GHG emissions back to 1990 levels by 2020. In 2007, the ARB established 

California’s 1990 GHG emissions baseline, and developed a mandatory reporting regulation to 

require California sources to report their GHG emissions annually starting with 2008 data. In 

December 2008, the ARB adopted a Climate Change Scoping Plan, which identifies nearly 

70 potential strategies and measures to achieve the state’s GHG emissions reduction goal. 

Subsequently, the ARB adopted regulations to implement a number of the emission reduction 

measures identified in the Scoping Plan.

The Scoping Plan includes the following emission reduction measures applicable to the electricity 

sector: (1) increase renewable energy to 33%, (2) expand energy efficiency programs, (3) reduce SF6 

emissions from gas insulated electrical switchgear, and (4) establish a GHG cap-and-trade program. 
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

65 (Continued)

The cap-and-trade program sets a statewide cap on GHG emissions beginning in January 2013, with 

the cap declining two to three percent per year from 2013 to 2020. The cap-and-trade program covers 

GHG emissions from all electricity generated in California or imported from other states, in-state 

industrial and manufacturing facilities, as well as natural gas and transportation fuels consumed in 

California.

The second bill adopted by the state of California is designed to reduce greenhouse gas emissions 

from the generation of electricity consumed in California. Senate Bill 1368 requires the California 

Public Utilities Commission (CPUC) and the California Energy Commission (CEC) to establish a 

greenhouse gas emissions performance standard and implement regulations governing long-term 

financial commitments in base load generation made by load serving entities (LSEs) including 

publicly owned electric utilities (POUs). These regulations are intended to prohibit any California 

LSE from entering into or renewing a long-term financial commitment with a base load generating 

resource that exceeds the greenhouse gas emissions performance standard, currently set at 

1,100 pounds carbon dioxide per megawatt hour of electricity generated. This means that when 

existing contracts with high-emitting generating resources expire, those resources will be replaced by 

lower emitting generating resources that comply with the greenhouse gas emissions performance 

standard.

At the federal level, several legislative bills have been proposed or introduced, but none have passed 

Congress. As such, a federal cap-and-trade program is unlikely to be established in the same time 

frame (2012) as a state cap-and-trade program, but may be considered in future years. However, the 

United States Environmental Protection Agency (EPA) adopted its Prevention of Significant 

Deterioration (PSD) and Title V Greenhouse Gas Tailoring Rule in June 2010. The Power System’s 

in-basin repowering projects requiring PSD permits after January 2, 2011 would be impacted as they 

would be required to submit a GHG Best Available Control Technology (BACT) analysis. EPA is 

expected to issue its GHG BACT guidance for public review in the future. Also, any new GHG 

requirements will be incorporated in the Power System’s generating stations’ Title V operating 

permits when the permits are renewed.

EPA Coal Combustion Residuals Proposed Rules

On June 21, 2010, the U.S. Environmental Protection Agency (EPA) proposed to establish federal 

standards to regulate coal combustion residuals (coal ash). The two options being considered are to 

designate coal ash as either hazardous or nonhazardous. The hazardous waste proposal would phase 

out the disposal of ash in wet storage ponds. The nonhazardous designation would set federal 

guidelines for state disposal that require the installation of additional liners on new wet storage pond. 

Both options set new requirements for storing and monitoring the waste in dry landfills.

The worst-case scenario impact at the Intermountain Power Plant would be $483 million in capital 

cost plus $110 million in annual operating cost for the hazardous option if the existing landfill has to 

be removed and coal ash has to be disposed of at an off-site facility. For the nonhazardous option, 

the impact would be $62 million in capital cost plus $2 million in annual operating cost.

For Mohave Power Plant, the worst-case scenario impact would be $230 million in capital cost for 

the hazardous option if the existing landfill has to be removed and disposed of at an off-site facility. 
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

66 (Continued)

For the nonhazardous option, the impact would be $6 million in capital cost plus $0.25 million in 

annual operating cost.

For the above facilities, the costs translate into electric rate impacts of about 1.4% for the hazardous 

option and 0.18% for the nonhazardous option.

At this time, the EPA is still analyzing over half a million comments received following the rule 

proposal. The EPA is also gathering additional data prior to finalizing the rules and the time frame is 

still unknown at the present time.

Power Plant Once-through Cooling Water Systems

Once-through cooling (OTC) is the process where water is drawn from a source, pumped through 

equipment to provide cooling, and then discharged. Some type of cooling process is necessary for 

nearly every type of traditional electrical generating station, and the OTC process is utilized by many 

electrical generating stations located next to large bodies of water. Typically, the water used for 

cooling is not chemically changed in the process although its temperature is increased.

Due to the Second Circuit Court’s decision to remand most of Environmental Protection Agency 

(EPA’s) 316(b) Rule finalized in July 2004, EPA suspended this Rule and is in the process of 

drafting a new rule. EPA’s proposed new rule for existing facilities was released in the federal 

register for comments on April 20, 2011 for a 120-day comments period, The newly proposed rule 

requirements applies to cooling water intake structures for all existing power generating facilities 

that withdraw more than 2 million gallons per day of water from waters of the United States and use 

at least 25% of the water they withdraw exclusively for cooling purposes. Under this proposed rule, 

an owner or operator of an existing facility would be able to choose one of two compliance options 

for impingement mortality (IM): (1) monitoring to demonstrate that specified performance standards 

for impingement mortality of fish and shellfish have been met or (2) demonstrate that intake velocity 

meets specified design criteria. IM compliance must be met 8 years after the effective date of the 

Rule. For entrainment mortality, the proposed rule requires entrainment studies and allows for 

compliance on a site-specific basis. As part of a settlement agreement, a final rule had to be issued 

by July 2012; however, on July 17, 2012, the parties to the underlying litigation signed a modified 

settlement agreement, which extends the deadline for the Final Rule to June 27, 2013. The language 

for the Final Rule is still subject to change. On June 11, 2012, the EPA published a Notice of Data 

Availability (NODA), for a 30-day comment period, that would allow relief to the IM compliance. 

The Department will need an exemption or some relief from the eight-year IM compliance date. In 

addition, on June 12, 2012, the EPA published a second NODA regarding the willingness to pay for 

quantifying the nonuse benefits of reducing impingement and entrainment. The Department is 

evaluating the potential impacts of the proposed rule on its facilities.

In the absence of EPA’s 316(b) Rule, the California State Water Resources Control Board (State 

Board) decided to move forward and adopted its own Statewide 316 b Policy (Policy) on May 4, 

2010. The Policy became effective on October 1, 2010. This policy requires the Department’s coastal 

power plants to reduce OTC by 93% – equivalent to wet cooling towers using seawater. This is 

referred to as the Track 1 compliance path. If the Track 1 compliance path is found to be infeasible, 

with concurrence from the State Board, a Track 2 compliance path can be pursued, which requires 
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

67 (Continued)

that the cooling water intake structure (CWIS) achieve an impingement mortality and entrainment 

(IM/E) reduction level of 90% of the Track 1 compliance standard or 83.7% on a unit-by-unit basis. 

The Department has made a decision to pursue the Track 1 compliance path, in order to comply with 

the Policy and completely eliminate the use of OTC. Recently, the Department was successful in 

having the Policy amended to extend the compliance dates, for six out of the nine remaining OTC 

units, to 2024 for Scattergood, and 2029 for Haynes and Harbor. The other four OTC units are on 

schedule, due to an SCAQMD settlement, to be repowered with eliminating OTC by 2013 and 2015, 

respectively. The Amendment to the Policy was adopted on July 19, 2011. The Amendment requires 

the Department to submit additional information responsive to the Statewide Advisory Committee on 

Cooling Water Intake Structures (SACCWIS) resolution by December 31, 2012. Depending upon the 

information submitted by LADWP and no later than December 31, 2013, the State Board will 

consider modifications to the 2029 compliance dates. Furthermore, the Amendment requires 

implementation of interim measures; these measures include a proposal to study new and/or viable 

existing technologies to reduce impingement and entrainment. The proposal must be submitted to the 

State Board no later than December 31, 2015. Upon approval of the proposal, the interim measures 

must be in place no later than December 31, 2020. These interim measures will include the funding 

of a mitigation project or the use of screens or an equivalent alternative measure at each OTC unit or 

intake until the facility is in full compliance.

In addition, other regulatory changes have been made that could significantly impact operations at 

the Haynes and Harbor Generating Stations. The Regional Water Quality Control Board reclassified 

the body of water that the OTC water is discharged to an enclosed bay for the Harbor Generating 

Station, and sent a letter of intent to reclassify the receiving water body of water as an estuary for the 

Haynes Generating Station discharge. Even though the Haynes Generating Station will be 

repowering existing units, should there be a reclassification for the water body discharges at the 

Haynes Generating Station, there will be requirements that cannot be met with its existing cooling or 

future repowered configuration. The Department is in the process of reviewing the regulations and 

conducting studies. Once the studies are reviewed, the Department will determine an appropriate 

course of action.

Pollution and Remediation Obligations

The Department follows GASB Statement No. 49, Accounting and Financial Reporting for Pollution 

and Remediation Obligations (GASB Statement No. 49). This statement addresses accounting and 

financial reporting standards for pollution (including contamination) remediation obligations, which 

are obligations to address the current or potential detrimental effects of existing pollution by 

participating in pollution remediation activities such as site assessments and cleanups. The scope of 

the statement excludes pollution prevention or control obligations with respect to current operations, 

and future pollution remediation activities that are required upon retirement of an asset, such as 

landfill closure and postclosure care and nuclear power plant decommissioning. The Power System’s 

obligations were approximately $26 million and $21 million as of June 30, 2013 and 2012, 

respectively.
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

68 (Continued)

(d) Litigation

i. Capital Facilities Fee Claims

In June 2007, the Department received a tentative decision in favor of the state and a number 

of local government agencies that are electric customers of the Department that claimed that 

the Department has rates that include a capital facilities’ charge that violates the state’s statute. 

However, in October 2008, the Department settled the case and recorded the $160 million

settlement amount. Additionally, as permitted by the regulatory accounting criteria set forth 

per the GASB Codification (GASB Statement No. 62), the Board approved to defer all 

potential costs associated with the resolution of this litigation and establish a corresponding 

long-term deferred debit to be recovered through future revenues over a period of up to 

10 years, if necessary.

ii. Other

A number of claims and suits are also pending against the Department for alleged damages to 

persons and property and for other alleged liabilities arising out of its operations. In the 

opinion of management, any ultimate liability, which may arise from these actions, is not 

expected to materially impact the Power System’s financial position, results of operations, or 

cash flows as of June 30, 2013.

(e) Risk Management

The Power System is subject to certain business risks common to the utility industry. The majority of 

these risks are mitigated by external insurance coverage obtained by the Power System. For other 

significant business risks, however, the Power System has elected to self-insure. Management 

believes that exposure to loss arising out of self-insured business risks will not materially impact the 

Power System’s financial position, results of operations, or cash flows as of June 30, 2013.

(f) Credit Risk

Financial instruments, which potentially expose the Power System to concentrations of credit risk, 

consist primarily of retail and wholesale receivables. The Power System’s retail customer base is 

concentrated among commercial, industrial, residential, and governmental customers located within 

the City. Although the Power System is directly affected by the City’s economy, management does 

not believe significant credit risk exists at June 30, 2013, except as provided in the allowance for 

losses. The Power System manages its credit exposure by requiring credit enhancements from certain 

customers and through procedures designed to identify and monitor credit risk.
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

69

(g) Subsequent Events

In July 2013, the three-year Revolving Credit Agreement (RCA) with Wells Fargo Bank, which 

provides liquidity support to the $200 million Power System Revenue Commercial Paper Notes,

scheduled to expire on August 26, 2013 was successfully amended to extend the term for three years, 

from July 1, 2013 to July 1, 2016. The amendment also reduced the liquidity facility fee from 70 

basis points to 27.5 basis points per annum, providing savings to the Power System of approximately 

$2.5 million over three years or $850,000 per year. Finally, Wells Fargo Bank agreed to terminate 

the current RCA 57 days earlier (July 1, 2013 instead of August 26, 2013) thus allowing the Power 

System to immediately benefit from the new lower commitment fee, thus generating additional 

savings of approximately $135,000.

The Power System has evaluated subsequent events through November 25, 2013, the date the 

financial statements were available to be issued, and has determined that no other significant 

subsequent events have occurred through that date.
LOS ANGELES DEPARTMENT OF WATER AND POWER

POWER SYSTEM

Required Supplementary Information

June 30, 2013

70

Pension Plan – Schedule of Funding Progress

The following schedule provides information about the Department’s overall progress made in accumulating 

sufficient assets to pay benefits when due, prior to allocations to the Water System and the Power System 

(amounts in thousands):

Actuarial UAAL as a

Actuarial accrued Unfunded percentage

Actuarial valuation value liability AAL Funded Covered of covered

date July 1 of assets (AAL) (UAAL) ratio payroll payroll

2013 $ 7,958,488 10,094,868 2,136,380 79% $ 900,254 237%

2012 7,573,886 9,692,603 2,118,717 78 886,539 239

2011 7,465,184 9,297,204 1,832,020 80 870,203 211

Postemployment Healthcare Plan – Schedule of Funding Progress

The following schedule provides information about the Department’s overall progress made in accumulating 

sufficient assets to pay benefits when due, prior to allocations to the Water System and the Power System 

(amounts in thousands):

Actuarial UAAL as a

Actuarial accrued Unfunded percentage

Actuarial valuation value liability AAL Funded Covered of covered

date July 1 of assets (AAL) (UAAL) ratio payroll payroll

2013 $ 1,332,136 1,743,727 411,591 76% $ 900,254 46%

2012 1,244,039 1,566,059 322,020 79 886,539 36

2011 1,132,929 1,550,896 417,967 73 870,203 48

See accompanying independent auditors’ report.