## LOS ANGELES DEPARTME NT OF WATER AND POWER

POWER SYSTEM

Financial Statements and Required Supplementary Information

June 30, 2013 and 2012

(With Independent Auditors ’ Report Thereon)LOS ANGELES DEPARTME NT OF WATER AND POWE R
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 Fi nancial Statements 19

– 69

Requi red Supplementary Information 70Independent 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 position2

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 , 2013LOS ANGELES DEPARTME NT OF WATER AND POWE R
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 Depa rtment) 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 analy sis 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 re port 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 DEPARTME NT OF WATER AND POWE R
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:LOS ANGELES DEPARTME NT OF WATER AND POWE R
POWER SYSTEM

Management’s Discussion and Analysis

June 30, 2013 and 2012

5 (Continued)LOS ANGELES DEPARTME NT OF WATER AND POWE R
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 add ing 6 simple

– cycle gas turbines at $648 million

, or 80%

, of total capitalized in generation. The remaining capitalized included addition of Pine Tree Photovoltaic Syst em, improvements to Haynes Unit 8, and upgrades of 5 main generating units at Castaic Pow er 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%

, i s 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 Relia bility 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 inst allation 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 Hay nes generating station units 5 and 6, construction of Pine Tree Photo vol taic 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 generatio n 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 rega rding the Power System ’ s utility pl ant assets can be found in note 4 to the accompanying financial statements.LOS ANGELES DEPARTME NT OF WATER AND POWE R
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).

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

(2) The Castaic Plant currently h as six (1,075 MWs) out of seven units available due to ongoing modernization work scheduled to be completed by 2014.

(3) The Depa rtment

- 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 Landfi ll 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 Scattergo od 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 Plan t. 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

Castai c Plant. This amount var ies weekly up to maximum of 120 MWs.LOS ANGELES DEPARTME NT OF WATER AND POWE R
POWER SYSTEM

Management’s Discussion and Analysis

June 30, 2013 and 2012

8 (Continued) (1) The Department ’ s Hoover Plant contract entitlement is 25.16% of the Hoover tot al 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 n et 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 di stributed 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 increas e 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 app roximately $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 DEPARTME NT OF WATER AND POWE R
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 Sy stem ’ 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

green house 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.

C urrent 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

underre covered 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 mil lion, 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 $42 6 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 EndingLOS ANGELES DEPARTME NT OF WATER AND POWE R
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 underreco ved 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:

While commercial customers consume the most electricity, residential cust omers 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.LOS ANGELES DEPARTME NT OF WATER AND POWE R
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 fi scal 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 mark et 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 req uire 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 li ves 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 s ervice lives range from 5 to 75 years. Amortization expense for computer software is computed using the straight

- line method over 5 years.LOS ANGELES DEPARTME NT OF WATER AND POWE R
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:

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 othe r 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 e xpenses.

The decrease in maintenance expen se 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. F uel 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 am ortized 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 d ue to capital improvements in Steam Production plant, as well as additional amortization expense from the regulatory assets mentioned above.LOS ANGELES DEPARTME NT 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 mil lion 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 th at 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 n ew 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 r evenues. 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 re stricted 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 POWE R
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 POWE R
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.

15LOS ANGELES DEPARTMENT OF WATER AND POWE R
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
Othe r 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.

16LOS ANGELES DEPARTMENT OF WATER AND POWE R
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 POWE R
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.

18LOS ANGELES DEPARTME NT OF WATER AND POWE R
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 t he 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 Wat er 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 eff ects 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 Sy stem meets the criteria for continued application, but will continue to evaluate its applicability based on changes in the regulatory and competitive environment (s ee notes 3 and 14(d)i).

(b) Use of Estimates

The preparation of financial statements in conformi ty 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 a nd 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 constructionLOS ANGELES DEPARTME NT OF WATER AND POWE R
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 cost s 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 generate d. 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). Government s 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 gove rnment 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

pro jects 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 s ervice lives range

from 5 to 75 years. Amorti zation 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 Decommis sioning

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 pu rchased power expense ( see note 6).LOS ANGELES DEPARTME NT OF WATER AND POWE R
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

Nuc lear 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 estim ate is based on an updated site

- specific study prepared by an independent consultant in

2010. As of J une 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 t rusts 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

decommission ing 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 Ju ne 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

Nucl ear 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 fe deral 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 sp ent 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 investme nt 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 th at 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 DEPARTME NT OF WATER AND POWE R
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 Co de (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 investme nt 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 eac h 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 restr icted 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 const ruction 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):

(k) Materials and Fuel

Materials and supplies are recorded a t 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 a re recorded in the statements of revenues, expenses, and changes in netLOS ANGELES DEPARTME NT OF WATER AND POWE R
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 maj or 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):

(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 th e remaining term of the bonds refunded.

(p) Accrued Workers ’ Compensation Claims

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

note 13).

(q) Customer Deposits

Customer deposits represent deposits collected from cu stomers 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 m aintaine d, 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 deposit s, the Power System would be required to pay amounts it owes its customers.LOS ANGELES DEPARTME NT OF WATER AND POWE R
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

factor s. 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 Standar d 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, 20 12, 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/k Wh for commercial customers in f iscal 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 pre determined for fiscal y ear s 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 b ase 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 BRRTAFLOS ANGELES DEPARTME NT OF WATER AND POWE R
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 contri butions 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 GA SB issued Statement No. 62, Codification of Accounting and Financial Reporting Guidance C ontained in Pre

- November 30, 1989 FASB and AICPA Pronouncements ( GA SB 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 princi ples 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) GA SB Statement No. 63

In June 2011, the GA SB is sued Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position ( GA SB Statement No. 63). The requirements of this Statement will improve financial reporting by standardi zing 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 previo usly existed. The Power System adopted GA SB 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 DEPARTME NT OF WATER AND POWE R
POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

26 (Continued) (c) GA SB Statement No. 64

In June 2011, the GA SB issued Statement No

. 64, Derivative Instruments: Application of Hedge Accounting Termination Provisions

– an amendment of GA SB Statement No. 53 ( GA SB Statement No. 64). The objective of this Statement is to clarify whether an effective hedging relationship continues after th e 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 GA SB Statement No. 64 effective July 1, 2012 and there was no material impact of this pronouncement on the financial statements.

(d) GA SB Statement No. 65

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

Liabilities ( GA SB 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 reporte d 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

stat ement 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 S ystem 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 GA SB Statement No. 65.

(e) GA SB Statement No. 67

In June 2012, the GA SB issued Statement No. 67, Financial Reporting for Pension Plans

– an amendment of GA SB Statem ent No. 25 ( GA SB Statement No. 67). The requirements of this Statement will improve financial reporting primarily through enhanced note disclosures and

schedules o f 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 begin ning after June 15, 2013. The Power System is currently evaluating the impact of this pronouncement on financial statements.

(f) GA SB Statement No. 68

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

Plans

– an amendment of GA SB Statement No. 27 ( GA SB Statement No. 68). This Statement establishes standards for measuring and recognizing liabilities, deferred outflows of resources, and

deferred inflows of re sources, 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 valueLOS ANGELES DEPARTME NT OF WATER AND POWE R
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 sta tements.

(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

- stan ding 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 o f 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 necessar y) 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 oper ator 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. Cur rently, there are more than 100 man datory 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 i mplemented 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 DEPARTME NT OF WATER AND POWE R
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 th e 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 framewor k 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 C ost Allocation

– FERC Order No. 1000 (RM10

- 23

- 000)

On July 21, 2011, the FERC issued its order on transmission plan ning and cost allocation (Order 1000). On May 17, 2012, FERC issued O rder 1000

- A, stating that nonju risdictional 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 en tities 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 findi ngs 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, gove rnment

- 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 mee t reciprocity requirements, and thus may have access to third

- party transmission

services limited.LOS ANGELES DEPARTME NT OF WATER AND POWE R
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 collate ral 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, provi de exceptions to both the margining and clearing requirements for “ end users ” that are using swaps to hedge

commercial risks.

 T hird

, Dodd

- Frank is to impose reporting requirements on swap transactions, including additional reporting for end

- user transactio ns.

 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 a n 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) i n swaps from being regulated as a “ swap dealer

, ” and has further exempte d 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 per iod 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 u tility 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 DEPARTME NT OF WATER AND POWE R
POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

30 (Continued) (4) Utility Plant

The Power System had the followi ng activities in utility plant during fiscal year 2013 (amounts in thousands):

Depreciation and amortization expense during fiscal year 2013 was $418.5 million

.LOS ANGELES DEPARTME NT OF WATER AND POWE R
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):

Depreciation and amortization expense during fiscal year 2012 was $394.0 million

.LOS ANGELES DEPARTME NT OF WATER AND POWE R
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 ):

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 proport ionate 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

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

* For the first three years, Power System will receive 100% (50 MWs), unless City of Glendale exercises its option to take 10%.LOS ANGELES DEPARTME NT OF WATER AND POWE R
POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

33 (Continued) IPA

– The Intermou ntain 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 S outhern 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 pa yments, 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 annual ly 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 y ears 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 rest ructured 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 vari able rate debentures (see not es 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 additiona l 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 w ith 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%, subj ect 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 ofLOS ANGELES DEPARTME NT OF WATER AND POWE R
POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

34 (Continued) conti ngent capacity at Hoover is 491 MW (maximum rated capability). The c ost 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 Cha rge, 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 f rom 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 l ocated in Gilliam County, Oregon. The Power System ’ s share of capacity at Peb ble Springs is approximately 69 MWs (maximum capacity). The cost of power purc hased under this contract was $16.5 million and $18 million as of June 30, 2013 and 2012, respectivel y.

(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 transmissi on 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 directl y 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 na tural 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

biometh ane 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 co unterparties default or if the swap agreements are terminated.LOS ANGELES DEPARTME NT OF WATER AND POWE R
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

GA SB S tatement No. 53 (amounts in thousands):

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):

(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):LOS ANGELES DEPARTME NT OF WATER AND POWE R
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 an d 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 Depar tment ’ s participa tion 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 Decommissio ning Trust Funds

Nuclear decommissioning trust funds will be used to pay the Department ’ s share of decommissioning PVNGS at the e nd 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 gene ration 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 b e 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 fixe d interest rate is 4.97% and the maturity date

is June 25, 2017.LOS ANGELES DEPARTME NT OF WATER AND POWE R
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):

As of June 30, 2012, the Power System ’ s se curities lending cash collateral and restricted investments and their maturities are as follows ( amounts in thousands):

i. Interest Rate Risk

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

30 years for U.S. govern ment agency securities; 5 years for medium

- term corporate notes, California local agency obligations, California state obligations, a nd other state obligations;

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

acce ptances; and 45 days for repurchase agreements purchased with cash collateral from securities lending agreements.LOS ANGELES DEPARTME NT OF WATER AND POWE R
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 di ligence 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, wh ich 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 Recogn ized 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 fo r 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 o f 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, 20 12, the Power System ’ s investments in certificates of deposits included $34,021,657 of negotiable certificates ofLOS ANGELES DEPARTME NT OF WATER AND POWE R
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 Pow er System ’ s investments in California local agency bonds as of June 30, 201 3 , $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 r ating 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 rate d 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 it s 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 inves tment 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 highe st 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 Com mission with not less than five years experience in mana ging 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 o f any single

U.S. government agency issuer.LOS ANGELES DEPARTME NT OF WATER AND POWE R
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 Fe deral 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 a nd 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 su bstantially 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 ea rned 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 fai r value based on quoted market prices except for commercial paper and money market investments that h ave remaining maturities of one year or less at time of purchase, which are reported at amortized cost.

Pursuant to Cal ifornia Government Code Section 5360 7 and the Lo s Angeles City Council File

No. 94

- 2160, the City Treasury shall render to the City Council a statement of investment po licy (the Policy) annually. City Council File No. 09

- 3050 was adopted on January 27, 2010 as the City ’ s investment policy. T his 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 Treasure r will deposit funds and types of investment instruments permitted by Cali fornia 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 DEPARTME NT OF WATER AND POWE R
POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

41 (Continued) At June 30, 2013, the investments held in the City Trea sury ’ s General and Special Investment Pool Programs and their maturities are as follows ( amounts in thousands):

Interest Rate Risk

. The Policy limits the matu rity of its investments to five years for the

U.S. Treasury and governme nt 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; 18 0 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 remainin g to maturity in ex cess of five years, but with a m aximum 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 o f 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 issue d 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 (issuer s 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 wi thin 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 DEPARTME NT OF WATER AND POWE R
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 m utual 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. The re 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 M ortgage
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):

Interest Rate Risk . The Policy limits the matu rity 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 securiti es, and bank/time deposits; one year for repurchase agree ments; 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

- termLOS ANGELES DEPARTME NT OF WATER AND POWE R
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

remainin g to maturity in excess of five years, but with a m aximum 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 b onds, 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 enterpri ses 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 Valle y 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 securi ties 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 S tates. 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 b etter 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 mill ion 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 inves tment 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 maxi mum 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 mil lion (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 Mortga ge Association.LOS ANGELES DEPARTME NT OF WATER AND POWE R
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):

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

Cal ifornia 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 C ode. The objectives o f 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 ac ts 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 tra nsaction 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.

Unde r the provisions of the SLP, and in accordance with the California Government Code, no more than

20% of the market value of t he 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 securi ties 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 wa s 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 DEPARTME NT OF WATER AND POWE R
POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

45 (Continued) (9) Derivative Instruments

In June 2 008, GA SB issued GA SB 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 a ccrual 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 whe n 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 i nto derivative instruments, and its significant terms and risks. The Power System implemented GA SB Statement No. 53 in the 2010 fiscal year.

In accordance with GA SB Statement No

. 53, the Power System records the fair value of its hedging

derivative instrum ents, 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 Ga s 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 agreem ents are terminated.

As of June 30, 2013, the Power System ’ s financial natural gas hedges by fiscal year are the following (amounts in thousands):LOS ANGELES DEPARTME NT OF WATER AND POWE R
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):

The fair value of the natural gas hedges increased by $24.0 million and is reported as a deferred

out flow on the statement of net position. All fair values were estimated using forward m arket 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 Counterpart y Evaluation Credit Policy (the Counterparty Policy), and was approved by the Board on May 6, 2008. Under the new poli cy, 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 tran sactions with terms of up to 18 months and the long

- term structure to cover transactions be yond 18 months.

The Policy includes provisions to limit risk including: the assignment of internal credit ratings to all Department ’ s counterparti es 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 accou nts, 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 Jun e 30, 2012, the

10 financial natural gas hedge counterparties were rated by Moody ’ s as follows: three at Aa3, threeLOS ANGELES DEPARTME NT OF WATER AND POWE R
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 wa s 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. Ho wever, 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 terminati on events have occurred and there are

no out

- of

- the

- ordinary termination events contained in contractual documents.LOS ANGELES DEPARTME NT OF WATER AND POWE R
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):LOS ANGELES DEPARTME NT OF WATER AND POWE R
POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

49 (Continued) Revenue bonds generally are calla ble 10 years after issuance. The Department has agreed to certain covenants with respect to bonded indebtedness. Significant covenants inc lude 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 Powe r 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):

(b) New Issuances

Fiscal Year 2013

In October 2012, the Power System issued $104.08 million of Power Sy stem 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 Sy st em 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 t he 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 underwr iter ’ 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 Sy stem Revenue Bonds, 2013

Series A. The net proceeds of $631.90 million , including a $104.59 mi llion issue premium net of

underwriter ’ s discount, were used to refund a portion of the Power System Revenue Bonds, 2003LOS ANGELES DEPARTME NT OF WATER AND POWE R
POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

50 (Continued) S eries A, Subseries A

- 1, amounting to $108.50 million and all of the $515.83 million outstanding Power Sy stem Revenue Bonds, 2003 Serie s 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 Sy stem issued $452.15 million of Power Sy stem 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 Sy stem 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 u sed 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 th e tax credit rate of 4.49% (the credi t 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% (ne t 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 placi ng 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 finan cial statements.

At June 30, 2013, the following revenue bonds outstanding are considered defeased (amounts in thousands):LOS ANGELES DEPARTME NT OF WATER AND POWE R
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 bond s. 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 lim itations. 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 ha s entered into standby and line

- of

- credit agreements with a syndicate of commercial banks in an initial

a mount 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

qu arterly at the greatest of: (a) the Prime Rate plus 1.00% ; (b) the Federa l Funds Rate plus 2.00% ; and (c) 7.50%, while the $388.5 million variable rate bonds will bear interest that is payable

qu arterly 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

advan ce 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 commercia l 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 commer cial 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 Departm ent entered into a letter

- of

- credit a nd 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 payabl e monthly at the highest of (i) the Prime Rate plus 1.00%, (ii) Feder al Funds Rate plus 2.00%, (iii) the Daily

One

- Month LIBOR plus 3.00%, and (iv) 7.00%. The unpaid p rincipal of each advance is payable in

10 equal semiannual installme nts, commencing on the date six months after the advance. The Agreement terminates on August 26, 2013.LOS ANGELES DEPARTME NT OF WATER AND POWE R
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 n et 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 y ear 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 Maturitie s and Interest

Scheduled annual principal maturities and interest are as follows (amounts in thousands):

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 assum ing 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 c onvert 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 bond s and revenue certificates outstanding over the next six years, as follows: $116.93 million in fiscal ye ar 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 tha t could be due in fiscal year 201 4 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 DEPARTME NT OF WATER AND POWE R
POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

53 (Continued) (11) Retirement, Disabili ty, 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 De ath

Benefit Ins urance 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 ye ars 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

wh o 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 determine d 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

o n the current year labor costs.

The Retireme nt 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 i ndependent 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 Departm ent 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):LOS ANGELES DEPARTME NT OF WATER AND POWE R
POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

54 (Continued) The Pow er System ’ s allocated share of the Plan ’ s APC and net pension asset consists of the following (amounts in thousands):

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:

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 v alue 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 sec urities, and short

- term investments.LOS ANGELES DEPARTME NT OF WATER AND POWE R
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):

(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 va lue 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 rat io 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 employ ees 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 a re 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 decreasi ng over time

relative to the AAL for benefits.LOS ANGELES DEPARTME NT OF WATER AND POWE R
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 Re tiree 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 Of fice, 111 N Hope, Room 357,

Los Angeles, California 90012.

(b) F unding 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 r equired 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 De partment 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

deter mined in accordance with the parameters of GA SB 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 cove r normal cost under each year and amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed

30 years.LOS ANGELES DEPARTME NT OF WATER AND POWE R
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 contribu ted to the Plan, and changes in the net OPEB asset (amounts in thousands):

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 cha nges in the net OPEB asset (amounts in thousands):LOS ANGELES DEPARTME NT OF WATER AND POWE R
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 i n thousands):

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):

(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 t he 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 f or the future. The schedule of funding progress, presented as required supplementary information, presents informationLOS ANGELES DEPARTME NT OF WATER AND POWE R
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 s ubstantive 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 actuari al 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 a n ultimate

rate of 5.00% over 7 years. Both rates include a 3.50% inflation assumption. The actuarial value of assets was determined using techn iques 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. Th e 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 Affordabl e 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

certa in 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 uncertaintie s 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 Depar tment 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 DEPARTME NT OF WATER AND POWE R
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:

(b) Deferred Credits

The Department has deferred credits that are related to r evenues collected from customers, but have not been earned. These funds are deferred and recognized as costs related to these deferrals are

incurred.LOS ANGELES DEPARTME NT OF WATER AND POWE R
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 precolle cted 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 t he 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 Rat e 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 f iscal 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) Accrue d 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 est imate 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 liab ility 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 a n increase in the number of cases filed at the Department. Workers ’ compensation claims typi cally 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 DEPARTME NT OF WATER AND POWE R
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 summari zed as follows (amounts in thousands):

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 Fun d 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 inc rease 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, t he 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 su ch 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 billion s of dollars conducting feasibility studies. A Blue Rib bon 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 o ne 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 isLOS ANGELES DEPARTME NT OF WATER AND POWE R
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 u ntil 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 purchas ed 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 be ing pursued for the period post

- 2006.

The Price Anderson Act (the Act) requires that all utilities wit h 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 liab ility is cove red 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 Unit ed 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

wareh ouse, 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 facil ities 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, t he 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 $23 5 mil lion 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 rang e 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 (SW MS).

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 andLOS ANGELES DEPARTME NT OF WATER AND POWE R
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 it s spent fuel casks to the ISFSI. In addition to these, Palo Verde has allotted approximat ely $82 million (approximately $4.7 million for the Department) for Fukushima

initiatives

, which include fuel building modifications, an emergency equipment storage fa cility, 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 basi s. 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

M arket (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 progra m 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 loa d 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 m andatory 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 ach ieve 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 applicabl e to the electricity

sector: ( 1) incre ase renewable energy to 33%, ( 2) expand energy efficiency programs, ( 3) reduce SF6 emissions from gas insulate d electrical switchgear, and ( 4) establish a GHG cap

- and

- trade program.LOS ANGELES DEPARTME NT OF WATER AND POWE R
POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

65 (Continued) The cap

- and

- trade program sets a stat ewide 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

- stat e 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 comm itments 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 ba se load generating resource that exceeds the greenhouse gas emissions performance s tandard, currently set at 1,100 pounds carbon dioxide per megawatt hour of electricity generated. This means that when existing contracts with high

- emitting generating resou rces 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 G HG 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 w hen 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 consi dered 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 instal lation 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 i n annual operating cost.

Fo r 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 DEPARTME NT OF WATER AND POWE R
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 generat ing 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 pe r 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

f or 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 criter ia. IM compliance must be m et 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; ho wever, 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 exemptio n or some relief from the eight

- year IM compliance date. In addition, on June 12, 2012, the EPA p ublished 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) R ule, 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 p ath can be pursued, which requiresLOS ANGELES DEPARTME NT OF WATER AND POWE R
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 remaini ng 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 Ju ly 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 LAD WP and no later than December 31, 2013, the State Board will consider modifications to the 2029 compliance dates. Furthermore, the Amendment requires imp lementation 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 measure s 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 a ddition, 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 enclose d 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, sho uld 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 reg ulations and conducting studies. Once the studies are reviewed, the Department will determine an appropriate

course of action.

Pollution and Remediation Obligations

The Department follows GA SB Statement No. 49, Accounting and Financial Reporting for Pollut ion and Remediation Obligations ( GA SB 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 detrim ental 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 p ollution 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 3 0, 2013 and 2012, respectively.LOS ANGELES DEPARTME NT OF WATER AND POWE R
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 claime d 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 regula tory accounting criteria set forth per the GA SB Codification ( GA SB 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 t hrough future revenues over a peri od 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 Syst em 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 se lf

- 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, w hich 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 DEPARTME NT OF WATER AND POWE R
POWER SYSTEM

Notes to Financial Statements

June 30, 2013 and 2012

69 (g) Subsequent Ev ents

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 amend ed 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 ye ars 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 addit ional savings of approximately $135,000.

The Power System has evaluated subsequent events through November 2 5 , 2013, the date the financial statements were available to be issued, and has determined that no other significant subsequent events h ave occurred through that date.LOS ANGELES DEPARTME NT OF WATER AND POWE R
POWER SYSTEM

Required Supplementary Information

June 3 0, 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 d ue, prior to allocations to the Water System and the Power System (amounts in thousands):

Postemployment Healthcare Plan

– Schedule of Funding Progress

The following schedule provides information about the Department ’ s overall pro gress made in accumulating sufficient assets to pay benefits when due, prior to allocations to the Water System and the Power System (amounts in thousands):

See accompanying independent auditors ’ report.