TOWN OF READING, MASSACHUSETTS
READING MUNICIPAL LIGHT DEPARTMENT
Annual Financial Statements
For the Year Ended June 30, 2006
(With Independent Auditors’ Report Thereon)
TABLE OF CONTENTS
PAGE
INDEPENDENT AUDITORS’ REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
BASIC FINANCIAL STATEMENTS:
Proprietary Funds:
Statement of Net Assets 6
Statement of Revenues, Expenses, and Changes in
Net Assets
Statement of Cash Flows 8
Fiduciary Funds:
Statement of Fiduciary Net Assets 9
Statement of Changes in Fiduciary Net Assets 10
Notes to Financial Statements 11
INDEPENDENT AUDITORS’ REPORT
To the Municipal Light Board
Town of Reading Municipal Light Department
Reading, Massachusetts
We have audited the accompanying financial statements of the business-type activities, and the aggregate remaining fund information of the Town of Reading Municipal Light Department (“the Department”) (an enterprise fund of the Town
of Reading), as of and for the year ended June 30, 2006 which collectively comprise the Department’s basic financial statements as listed in the table of contents. These financial statements are the responsibility of the Department’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all mate- rial respects, the financial position of the business-type activities, and the aggregate remaining fund information of the Town of Reading Municipal Light Department as of June 30, 2006, and the results of its operations and cash flows, where applicable thereof, for the year then ended in conformity with accounting principles generally accepted in the United States of America.
The management’s discussion and analysis, appearing on the following pages, is not a required part of the basic financial statements but is supplementary informa- tion required by the Governmental Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquiries of management
regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it.
Andover, Massachusetts
August 11, 2006
MANAGEMENT’S DISCUSSION AND ANALYSIS
Within this section of the Town of Reading Municipal Light Department’s (“the Department”) annual financial report, management provides a narrative discussion and analysis of the financial activities for the year ended June 30, 2006. The Department’s performance is discussed and analyzed within the context of the accompanying financial statements and disclosures following this section.
Overview of the Financial Statements:
The basic financial statements include (1) the statement of net assets, (2) the statement of revenues, expenses and changes in net assets, (3) the statement of cash flows, and (4) notes to financial statements.
The Statement of Net Assets is designed to indicate our financial position as of
a specific point in time. At June 30, 2006, it shows our net worth of $ 84,078,739 which is comprised of $ 52,864,965 invested in capital assets, $ 3,181,632 restricted for depreciation fund, and $ 28,032,142 unrestricted.
The Statement of Revenues, Expenses and Changes in Net Assets summarizes our operating results and reveals how much, if any, of a profit was earned for
the year. As discussed in more detail below, our net profit for the year ended June 30, 2006 was $ 5,640,705.
The Statement of Cash Flows provides information about the cash receipts and cash payments during the accounting period. It also provides information about the investing and financing activities for the same period. A review of our Statement of Cash Flows indicates that the cash receipts from operating activities adequately covers our operating expenses.
As described in Note 2 of the accompanying financial statements, beginning in 2005, the Department amended its fiscal year end from December 31 to June 30. As a result, the fiscal year 2005 financial statements, which were for the 6-month period ended June 30, 2005, are not comparable to the fiscal year 2006 financial statements, so the following summaries do not include comparative financial information for the prior fiscal year. Comparative information will be presented in future fiscal years.
Summary of Net Assets
Current Assets $ 22,629,195
Noncurrent Assets 107,108,260
Total Assets $ 129,737,455
Current Liabilities $ 33,990,628
Noncurrent Liabilities 11,668,088
Total Liabilities 45,658,716
Net Assets:
Invested in Capital Assets,
Net of Related Debt 52,864,965
Restricted for Depreciation Fund 3,181,632
Unrestricted 28,032,142
Total Net Assets 84,078,739
Total Liabilities and Net Assets $ 129,737,455
Summary of Changes in Net Assets
Operating Revenues $ 75,301,344
Operating Expenses (69,781,440)
Operating Income 5,519,904
Non-operating Revenues 120,801
Change in Net Assets 5,640,705
Beginning Net Assets 78,438,034
Ending Net Assets $ 84,078,739
Financial Highlights:
Electric sales (net of discounts) were $ 77,258,878 in 2006. The Department sold
a total of 704,143,198 kilowatt hours to its ratepayers during the same period. As
a result of increasing energy costs in 2006, ratepayers were charged $ 985,528
for purchase power fuel charge adjustments. In addition, a rate refund totaling $ (2,921,885), as well as purchase power adjustments of $ (21,177), were returned to the ratepayers in 2006.
Operating expenses were $ 69,781,440 in 2006. The largest portion of this total, $ 55,844,567 was for purchase power expenses. Other operating expenses included $ 10,085,819 for general operating and maintenance costs, $ 1,060,708
for voluntary payments to Towns, and depreciation expense of $ 2,790,346. In
fiscal 2006, the depreciation rate remained level at 3.0%.
In the 2006 fiscal year, the Department contributed a total of $ 352,061 to the Reading Municipal Light Department Employees’ Pension Trust (the “Trust”). In addition, the Trust contributed $ 886,726 to the Town of Reading Contributory Retirement System on behalf of the Department’s employees.
CAPITAL ASSET AND DEBT ADMINISTRATION
Capital assets. Total investment in non-depreciable capital assets (land) at year end amounted to $ 1,265,842. Total investment in depreciable capital assets at year end amounted to $ 54,104,123 (net of accumulated depreciation). This investment in depreciable capital assets includes structures and improvements, equipment and furnishings, and infrastructure assets.
REQUESTS FOR INFORMATION
This financial report is designed to provide a general overview of the Reading Municipal Light Department’s finances for all those with an interest in the government’s finances. Questions concerning any of the information provided in this
report or requests for additional financial information should be addressed to:
Accounting/Business Manager
Reading Municipal Light Department
230 Ash Street
Reading, Massachusetts 01867
STMT OF NET ASSETS
PROPRIETARY FUNDS STMT OF REV EXP CHANGES IN FUND NET ASSETS
PROPRIETARY FUNDS STMT OF CASH FLOWS
FIDUCIARY NET ASSETS
CHANGES IN FIDUCIARY NET ASSETS
Town of Reading Municipal Light Department
Notes to Financial Statements
1. Summary of Significant Accounting Policies
The significant accounting policies of the Town of Reading Municipal Light Department (“the Department”) (an enterprise fund of the Town of Reading) are as follows:
A. Business Activity - The Department purchases electricity which it distributes to consumers within the towns of Reading, North Reading, Wilmington, and Lynnfield.
B. Regulation and Basis of Accounting - Under Massachusetts General Laws, the Department’s electric rates are set by the Municipal Light Board and may be changed once every three months. Rate schedules are filed with the Massachusetts Department of Telecommunications and Energy (DTE). While the DTE exercises general supervisory authority over the Department, the Department's rates are not subject to DTE approval. The Department's policy is to prepare its financial statements in conformity
with generally accepted accounting principles.
Proprietary funds distinguish operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connec- tion with a proprietary fund’s principal ongoing operations. The principal operating revenues of the enterprise fund are charges to customers for sales and services. Operating expenses for enterprise funds include the cost of sales and services, administrative expenses and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses.
Private-sector standards of accounting and financial reporting issued
prior to December 1, 1989 generally are followed in the proprietary fund financial statements to the extent that those standards do not conflict with or contradict guidance of the Governmental Accounting Standards Board. Governments also have the option of following subsequent private-sector guidance for their enterprise funds, subject to this same limitation. The Department has elected not to follow subsequent private-sector guidance.
C. Concentrations - The Department operates within the electric utility industry which has undergone significant restructuring and deregulation. Legislation was enacted by the Commonwealth of Massachusetts in 1998 which changed the electric industry. The law introduced competi- tion and provided consumers with choices while assuring continued reliable service. Municipal utilities are not currently subject to this legislation.
D. Retirement Trust - The Reading Municipal Light Department Employees’ Pension Trust (the “Trust”) was established on December 30, 1966, by
the Town of Reading’s Municipal Light Board pursuant to Chapter
164 of the General Laws of the Commonwealth of Massachusetts.
The Trust constitutes the principal instrument of a plan established by the Municipal Light Board for the purpose of funding the Department’s annual required contribution to the Town of Reading Contributory Retirement System (the System), a cost sharing, multi-employer public employee retirement system.
E. Revenues - Revenues are based on rates established by the Department and filed with the DTE. Revenues from sales of electricity are recorded on the basis of bills rendered from monthly meter readings taken on a cycle basis and are stated net of discounts. Recognition is given to the amount of sales to customers which are unbilled at the end of the fiscal period.
F. Cash and Short-term Investments - For the purposes of the Statement of Cash Flows, the Department considers both restricted and unrestricted cash on deposit with the Town Treasurer to be cash or short-term investments. For purpose of the Statement of Net Assets, the proprietary funds consider investments with original maturities of three months or less to be short-term investments.
G. Investments - State and local statutes place certain limitations on the nature of deposits and investments available. Deposits in any financial institution may not exceed certain levels within the financial institution. Non-fiduciary fund investments can be made in securities issued or unconditionally guaranteed by the U.S. Government or agencies that have a maturity of one year or less from the date of purchase and repurchase agreements guaranteed by such securities with maturity dates of no more than 90 days from date of purchase.
Investments for the Department and the Trust consist of marketable securities, corporate bonds, and bank certificates of deposit that are being held to maturity. Investments are carried at cost.
H. Inventory - Inventory consists of parts and accessories purchased for
use in the utility business for construction, operation and maintenance purposes and is stated at average cost. Meters and transformers are capitalized when purchased.
I. Capital Assets and Depreciation - Capital assets, which include property, plant, equipment, and utility plant infrastructure, are recorded at historical cost or estimated historical cost when purchased or constructed. Donated capital assets are recorded at estimated fair market value at the date of the donation.
The cost of normal maintenance and repairs that do not add to the value of the asset or materially extend asset lives are not capitalized.
Major outlays for capital assets and improvements are capitalized as
they are acquired or constructed. Interest incurred during the construc- tion phase of proprietary fund capital assets is included as part of the capitalized value of the constructed asset. When capital assets are retired, the cost of the retired asset, less accumulated depreciation, salvage value and any cash proceeds, is charged to the Department’s unappropriated earned surplus account.
Massachusetts General Laws require utility plant in service to be depreciated at an annual rate of 3%. To change this rate, the Department must obtain approval from the DTE. Changes in annual depreciation rates
may be made for financial factors relating to cash flow for plant expansion, rather than engineering factors relating to estimates of useful lives.
J. Amortization - Costs related to the issuance of bonds have been capitalized and are being amortized over the life of the bonds.
K. Accrued Compensated Absences - Employee vacation leave is vested annually but may only be carried forward to the succeeding year with supervisor approval and, if appropriate, within the terms of the applicable Department policy or union contract. Generally, sick leave may accumulate according to union and Department contracts, and is paid upon normal termination at the current rate of pay. The Department’s policy is to recognize vacation costs at the time payments are made. The Department records accumulated, unused, vested sick pay as a liability. The amount recorded is the amount to be paid at termination at the current rate of pay.
L. Long-Term Obligations - The proprietary fund financial statements report long-term debt and other long-term obligations as liabilities in the proprietary fund statement of net assets.
M. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures for contingent assets and liabilities
at the date of the financial statements, and the reported amounts of the revenues and expenses during the fiscal year. Actual results could vary from estimates that were used.
N. Rate of Return - The Department’s rates must be set such that earnings attributable to electric operations do not exceed eight percent of the net cost of plant. The audited financial statements are prepared in accordance with auditing standards generally accepted in the United States of America. To determine the net income subject to the rate of return, the Department performs the following calculation. Using the net income per the audited financials, the return on investment to the Town of Reading is added back and the fuel charge revenue adjustment is deducted, leaving an adjusted net income figure for rate of return purposes. The investment interest income and bond principal amounts are deducted from this figure to determine the net income subject to the rate of return. The net income subject to the rate of return is then subtracted from the allowable eight percent rate of return, which is calculated by adding the book value of net plant and the investment in
associated companies less the contributions in aid of construction multiplied by eight percent. From this calculation, the Municipal Light Board will determine what cash transfers need to be made at year end.
For the year ended June 30, 2006, the Department’s adjusted net income exceeded the eight percent allowable rate of return by $ 1,230,629. The Board of Commissioners will correct this situation in fiscal 2007.
2. Year-End Change
Historically, the Department reported year-end financial results at December 31. However, in 2005, the Department changed its year-end to June 30, in order to be consistent with the Town of Reading’s fiscal year-end. Because fiscal 2006 is the first full year of implementation for this change,
the information presented in this report is for the period ended June 30, 2006 only. Comparative information will be presented in future fiscal years.
3. Cash and Investments
Cash and investments as of June 30, 2006 are classified in the accompanying financial statements as follows:
Statement of net assets:
Unrestricted cash and short-term investments $ 15,670,859
Restricted cash and short-term investments 47,148,229
Restricted investments 4,400,000
Fiduciary funds:
Cash and short-term investments 1,547,427
Investments 6,501,432
Total cash and investments $ 75,267,947
Cash and investments at June 30, 2006 consist of the following:
Cash on hand $ 3,000
Deposits with financial institutions 64,363,515
Investments 10,901,432
Total cash and investments $ 75,267,947
Disclosures Relating to Interest Rate Risk
Interest rate risk is the risk that the fair value of an investment will be adversely affected by changes in market interest rates. Generally, the longer the maturity of an investment, the greater the sensitivity of its fair value to changes in market interest rates. One of the ways that the Department manages its exposure to interest rate risk is by purchasing a combination
of shorter term and longer term investments and by timing cash flows from maturities so that a portion of the portfolio is maturing or coming close to maturity evenly over time as necessary to provide the cash flow and liquidity needed for operations.
As of June 30, 2006, the Department (including the Pension Trust) had the following investments:
Amount Maturity Date
Certificate of Deposit $ 600,000 September 23, 2006
Certificate of Deposit 600,000 September 23, 2007
Federal National Mtg Assn 500,000 April 1, 2008
Federal Home Loan Mtg Corp 199,750 October 15, 2008
Government National Mtg Assn 1,682 October 15, 2008
Federal Home Loan Mtg Corp 300,000 December 8, 2008
Federal Home Loan Bank 1,800,000 December 18, 2008
Federal Home Loan Mtg Corp 2,900,000 December 15, 2009
Federal National Mtg Assn 700,000 December 30, 2009
Federal Home Loan Bank 1,800,000 June 19, 2013
Federal Home Loan Mtg Corp 500,000 December 15, 2013
Federal Home Loan Mtg Corp 500,000 March 10, 2014
Federal Home Loan Mtg Corp 500,000 August 26, 2014
Total $ 10,901,432
Investments with Fair Values Highly Sensitive to Interest Rate Fluctuations
The Department’s investments (including investments held in the Pension Trust) include the following investments that are highly sensitive to interest rate fluctuations (to a greater degree than already indicated in the information provided above):
Fair Value at
Highly Sensitive Investments Year End
Mortgage backed securities. These securities are
subject to early payment in a period of declining
interest rates. The resultant reduction in expected
total cash flows affects the fair value of these securi-
ties and makes the fair value of these securities highly
sensitive to changes in interest rates. $ 9,701,432
Disclosures Relating to Credit Risk
Generally, credit risk is the risk that the issuer of an investment will not
fulfill its obligation to the holder of the investment. This is measured by the assigning of a rating by a nationally recognized statistical rating organization. Presented below is the actual rating as of year end for each of the Department’s (including the Pension Trust) investment types:
Minimum Rating as of Year End
Legal Not
Investment Type Amount Rating AAA Rated
Federal agency securities $ 9,701,432 N/A $ 9,701,432 $ -
Certificates of deposit 1,200,000 N/A - 1,200,000
Total $ 10,901,432 $ 9,701,432 $ 1,200,000
Concentration of Credit Risk
The Department follows the Town of Reading’s investment policy, which does not limit the amount that can be invested in any one issuer beyond that stipulated by Massachusetts General Laws. Investments in any one issuer (other than U.S. Treasury securities, mutual funds, and external investment pools) that represent more than 5% of the Department’s total investments (including the Pension Trust investments) are as follows:
Reported
Issuer Investment Type Amount
Federal Home Loan Mtg Corp. Federal agency securities $ 4,899,750
Federal Home Loan Bank Federal agency securities 3,600,000
Federal National Mtg Assn. Federal agency securities 1,200,000
Danvers Savings Bank Certificates of deposit 1,200,000
Custodial Credit Risk
Custodial Credit Risk for deposits is the risk that, in the event of the failure
of a depository financial institution, the Department will not be able to recover
its deposits or will not be able to recover collateral securities that are in the possession of an outside party. The custodial credit risk for investments is the risk that, in the event of the failure of the counterparty (e.g., broker-dealer) to a transaction, the Department will not be able to recover the value of its investments or collateral securities that are in the possession of another party. Massachusetts General Laws, Chapter 44, section 55, limits deposits “in a bank or trust company or banking company to an amount not exceeding sixty per cent of the capital and surplus of such bank or trust company or banking company, unless satisfactory security is given to it by such bank
or trust company or banking company for such excess.” The Department follows the Massachusetts statute as written, as well as the Town of Reading’s deposit policy for custodial credit risk.
Because the Department pools its cash with the Town of Reading, the specific custodial credit risk of the Department’s deposits could not be determined at June 30, 2006. As of June 30, 2006, Department investments (including the Pension Trust) in the following investment types were held by the same broker-dealer (counterparty) that was used by the Department to buy the securities:
Investment Type Reported Amount
Federal agency securities $ 9,701,432
Certificates of deposit 1,200,000
Total $ 10,901,432
4. Restricted Cash and Investments
Restricted cash and investments consist of the following at June 30, 2006:
Cash Investments
Depreciation fund $ 3,181,632 $ -
Construction fund 1,000,000 -
Deferred fuel reserve 3,745,148 -
Calpine reserve 33,424,860 -
Rate stabilization 4,113,728 2,900,000
Reserve for uncollectible accounts 28,988 -
Sick leave benefits 767,231 1,500,000
Insurance reserve 35,252 -
Hazardous waste fund 346,897 -
Customer deposits 504,493 -
Total $ 47,148,229 $ 4,400,000
Restricted investments are invested in U.S. Government bonds, which will
be held to maturity, and are reported at book value of $ 4,400,000. The fair market value of the investments at June 30, 2006 was $ 4,317,617.
The Department maintains the following restricted cash accounts:
- Depreciation fund - The Department is required to reserve 3.0% of capital assets each year to fund capital improvements.
- Construction fund - This account reflects a balance set aside by
the Board of Commissioners to fund capital asset purchases.
- Deferred fuel reserve - The Department transfers the difference between the customers’ monthly fuel charge adjustment and actual fuel costs into this account to be used in the event of a sudden increase in fuel costs.
- Calpine Reserve - This represents settlement proceeds from Calpine Corporation for early termination of a power supply contract. These funds are offset by a liability account and are being amortized over
the original contract period.
- Rate stabilization - The Department transfers funds in excess of
8% of capital assets into this account to be used to stabilize customer rates.
- Reserve for uncollectible accounts - This account was set up to offset a portion of the Department’s bad debt reserve.
- Sick leave benefits - This account is used to offset the Department’s actuarially determined compensated absence liability.
- Insurance reserve - This account reflects a balance set aside by the Board of Commissioners as an insurance deductible reserve.
- Hazardous waste fund -This reserve was set up by the Board of Commissioners to cover the Department’s insurance deductible in
the event of a major hazardous materials incident.
- Customer deposits - This represents customer deposits that are held in escrow.
5. Accounts Receivable
Accounts receivable consists of the following at June 30, 2006:
Customer Accounts:
Billed $ 1,834,546
Less allowances:
Uncollectible accounts ( 200,000)
Sales discounts ( 267,233)
Total billed $ 1,367,313
Unbilled, net 3,126,031
Total customer accounts 4,493,344
Other Accounts:
Merchandise sales 189,378
MMWEC Flush 661,311
Liens and other 267,564
Total other accounts 1,118,253
Total net receivables $ 5,611,597
6. Prepaid Expenses
Prepaid expenses consist of the following:
Insurances $ 225,789
Purchase power ( 323,708)
MWEC PASNY prepayment fund 193,297
Total $ 95,378
7. Inventory
Inventory is comprised of supplies and materials at June 30, 2006, and is valued using the average cost method.
8. Investment in Associated Companies
Under agreements with the New England Hydro-Transmission Electric Company, Inc. (NEH) and the New England Hydro-Transmission Corporation (NHH), the Department has made the following advances to fund its equity requirements for the Hydro-Quebec Phase II interconnection. The Department is carrying its investment at cost, reduced by shares repurchased.
The Department’s equity position in the Project is less than one-half of one percent.
Investment in associated companies consists of the following, at June 30, 2006:
New England Hydro-Transmission
Electric Company, Inc. $ 67,147
New England Hydro-Transmission Corporation 96,385
Total $ 163,532
9. Capital Assets
The following is a summary of fiscal year 2006 activity in capital assets (in thousands):
Beginning Ending
Balance Increases Decreases Balance
Capital assets, being depreciated:
Structures and improvements $ 12,214 $ 670 $ - $ 12,884
Equipment and furnishings 21,848 399 ( 69) 22,178
Infrastructure 58,949 3,633 (736) 61,846
Total capital assets, being depreciated 93,011 4,702 (805) 96,908
(continued)
(continued)
Beginning Ending
Balance Increases Decreases Balance
Less accumulated depreciation for:
Structures and improvements ( 5,032) ( 353) - ( 5,385)
Equipment and furnishings (13,895) ( 955) 66 (14,784)
Infrastructure (21,866) (1,482) 713 (22,635)
Total accumulated depreciation (40,793) (2,790) 779 (42,804)
Total capital assets, being depreciated, net 52,218 1,912 ( 26) 54,104
Capital assets, not being depreciated:
Land 1,266 - - 1,266
Total capital assets, not being depreciated 1,266 - - 1,266
Capital assets, net $ 53,484 $ 1,912 $ ( 26) $ 55,370
10. Other Assets
This balance consists primarily of costs associated with the Department’s bonding, which are being amortized over the life of the bonds.
11. Accounts Payable
Accounts payable represent fiscal 2006 expenses that were paid after June 30, 2006.
12. Customer Deposits
This balance represents deposits received from customers that are held in escrow.
13. Customer Advances for Construction
This balance represents deposits received from vendors in advance for work to be performed by the Department. The Department recognizes these deposits as revenue after the work has been completed.
14. Accrued Liabilities
Accrued liabilities consist of the following at June 30, 2006:
Accrued interest $ 52,825
Accrued payroll 112,622
Other 141,201
Total $ 306,648
15. Bonds Payable
Bonds payable consist of the following at June 30, 2006:
Bonds issued July 1, 1996, in the amount of $ 9,680,000 of which $ 2,978,000 is attributable to the Department. Principal is payable annually on July 1 commencing 1997 and continuing to July 1, 2006. Interest is payable semiannually on July 1 and January 1 at an average rate of 4.83%. $ 305,000
Bonds issued December 1, 1999, in the amount of $ 5,500,000. Principal is payable annually on September 1 commencing 2000 and continuing to September 1, 2009. Interest is payable semiannually on September 1 and March 1 at 4.5% for five years with rates thereafter ranging from 4.55% to 4.85%. 2,200,000
Total Bonds Payable 2,505,000
Less: Current installments of bonds payable ( 855,000)
Total Long-Term Bonds Payable $ 1,650,000
The future payments required on the long-term debt are as follows:
Principal Interest Total
2007 $ 855,000 $ 100,863 $ 955,863
2008 550,000 65,862 615,862
2009 550,000 39,738 589,738
2010 550,000 13,337 563,337
Total $ 2,505,000 $ 219,800 $ 2,724,800
The following summarizes activity in bonds payable for the year ended June 30, 2006:
Balance Balance Less Long-Term
07/01/05 Maturities 06/30/06 Current Portion
$ 610,000 $ (305,000) $ 305,000 $ (305,000) $ -
2,750,000 (550,000) 2,200,000 (550,000) 1,650,000
$ 3,360,000 $ (855,000) $ 2,505,000 $ (855,000) $ 1,650,000
16. Accrued Employee Compensated Absences
Department employees are granted sick leave in varying amounts. Upon retirement, termination, or death, certain employees are compensated for unused sick leave (subject to certain limitations) at their then current rates
of pay.
17. Calpine Contract Termination
In October 2001, the Department entered into a Power Supply Agreement (PSA) with Calpine Energy Services, L.P. (Calpine). Under the terms of the PSA, Calpine agreed to supply the Department with energy at contracted rates during the period June 1, 2002 through October 31, 2007. The PSA was guaranteed by Calpine Corporation, the parent corporation of Calpine.
In order to protect the Department from Calpine’s inability to deliver on the terms of the contract, the PSA contained a provision that required Calpine
to deposit funds into an escrow account if Calpine Corporation’s long-term unsecured debt rating dropped below investment grade. In May 2003, the Department entered into an Escrow Agreement with Calpine, and funds
were deposited into this escrow account in accordance with the terms of
this agreement.
In December 2005, Calpine filed for bankruptcy and the Department terminated its PSA with Calpine. In exchange for its agreement to release all further claims against Calpine, the Department received a settlement payment of $ 42,549,683. In accordance with the provisions of Statements of Accounting Standards No. 71, these proceeds, including interest earnings, were recorded as a liability, and will be applied to reduce future customer charges over the remaining 15 months of the original PSA.
In 2006, the Division reduced its power supply expense and its corresponding customer Purchase Power Fuel Charge Adjustment (PPFCA) by $ 9,466,651
(the amount of its 2006 amortization). The remaining balance of $ 33,424,860 (including interest earned to date) will be amortized as follows:
2007 $ 25,605,115
2008 7,819,745
Total $ 33,424,860
18. Restricted Net Assets
The proprietary fund financial statements report restricted net assets when external constraints are placed on net assets. Specifically, restricted net assets represent depreciation fund reserves, which
are restricted for future capital asset purchases.
19. Post-Employment Health Care and Life Insurance Benefits
The Department’s employee contracts provide for health care and life insurance benefits to retirees, their dependent, or their survivors. These benefits are provided through the Town’s group plans. The cost of these benefits
are included in the total cost of benefits for both active and retired employees. The number of participants currently eligible to receive benefits, and cost
of benefits for retirees, their dependents, or their survivors for the year ended June 30, 2006 were 68 and $ 277,798 respectively.
20. Pension Plan
The Department follows the provisions of GASB Statement No. 27, Accounting for Pensions for State and Local Government Employees, with respect
to the employees’ retirement funds.
A. Plan Description
The Department contributes to the Town of Reading Contributory Retirement System (the System), a cost-sharing, multiple-employer, defined benefit pension plan administered by a Town Retirement Board. The System provides retirement, disability and death benefits to plan members and beneficiaries. Chapter 32 of the Massachusetts General Laws assigns the System the authority to establish and amend benefit provisions of the plan, and grant cost-of-living increases, to the State legislature. The System issues a publicly available financial report which can be obtained through the Town of Reading Contributory Retirement System at Town Hall, Reading, MA.
B. Funding Policy
Plan members are required to contribute to the System at rates ranging from 5% to 11% of annual covered compensation. The Department is required to pay into the System, its share of the remaining system wide actuarially determined contribution plus administration costs which are apportioned among the employers based on active covered payroll.
The contributions of plan members and the Department are governed
by Chapter 32 of the Massachusetts General Laws. The Department’s contributions to the System for the year ended June 30, 2006 was $ 886,726 which was equal to its annual required contribution.
21. Participation in Massachusetts Municipal Wholesale Electric Company
The Town of Reading, acting through its Light Department, is a participant in certain Projects of the Massachusetts Municipal Wholesale Electric Company (MMWEC).
MMWEC is a public corporation and a political subdivision of the Commonwealth of Massachusetts, created as a means to develop a bulk power supply for its Members and other utilities. MMWEC is authorized to construct, own, or purchase ownership interests in, and to issue revenue bonds to finance, electric facilities (Projects). MMWEC has acquired ownership interests in electric facilities operated by other entities and also owns and operates its own electric facilities. MMWEC sells all of the capability (Project Capability) of each of its Projects to its Members and other utilities (Project Participants) under Power Sales Agreements (PSAs). Among other things, the PSAs require each Project Participant to pay its pro rata share of MMWEC’s costs related to the Project, which costs include debt service on the
revenue
bonds issued by MMWEC to finance the Project, plus 10% of MMWEC’s
debt service to be paid into a Reserve and Contingency Fund. In addition, should a Project Participant fail to make any payment when due, other
Project Participants of that Project may be required to increase (step-up)
their payments and correspondingly their Participant’s share of that Project’s Project Capability to an additional amount not to exceed 25% of their original Participant’s share of that Project’s Project Capability. Project Participants have covenanted to fix, revise and collect rates at least sufficient to meet
their obligations under the PSAs.
MMWEC has issued separate issues of revenue bonds for each of its eight Projects, which are payable solely from, and secured solely by, the revenues derived from the Project to which the bonds relate, plus available funds pledged under MMWEC’s Amended and Restated General Bond Resolution (GBR) with respect to the bonds of that Project. The MMWEC revenues derived from each Project are used solely to provide for the payment of the bonds of any bond issue relating to such Project and to pay MMWEC’s cost
of owning and operating such Project and are not used to provide for the payment of the bonds of any bond issue relating to any other Project.
MMWEC operates the Stony Brook Intermediate Project and the Stony Brook Peaking Project, both fossil-fueled power plants. MMWEC has a 3.7% interest in the W.F. Wyman Unit No. 4 plant, which is operated and owned
by its majority owner, FPL Energy Wyman IV, a subsidiary of FPL Energy, Inc., and a 4.8% ownership interest in the Millstone Unit 3 nuclear unit, operated by Dominion Nuclear Connecticut, Inc. (DNCI), the majority owner and a subsidiary of Dominion Resources, Inc. DNCI also owns and operates the Millstone Unit 2 nuclear unit. In November 2005, the Nuclear Regulatory Commission (NRC) renewed the operating licenses for the Millstone Unit 2 and Unit 3 nuclear units for an additional twenty years. The license for Unit 2 was extended to July 31, 2035 and the license for Unit 3 was extended to November 25, 2045.
A substantial portion of MMWEC’s plant investment and financing program is an 11.6% ownership interest in the Seabrook Station nuclear generating unit operated by FPL Energy Seabrook, LLC (FPLE Seabrook), the majority
owner and an indirect subsidiary of FPL Group, Inc. In December 2005,
the NRC issued an amendment to the operating license that extends the expiration date from October 2026 to March 2030, to recapture the period from 1986 to 1990 during which time Seabrook Station had an operating license, but did not operate. FPLE Seabrook has stated its intention to request an extension of the Seabrook Station operating license beyond
March 2030.
Pursuant to the PSAs, the MMWEC Seabrook and Millstone Project Participants are liable for their proportionate share of the costs associated with decommissioning the plants, which costs are being funded through monthly Project billings. Also the Project Participants are liable for their proportionate share of the uninsured costs of a nuclear incident that might be imposed under the Price-Anderson Act (Act). Originally enacted in 1957, the Act has been renewed several times. In July 2005, as part of the Energy Policy Act
of 2005, Congress extended the Act until the end of 2025.
Reading Municipal Light Department has entered into PSAs and Power Purchase Agreements (PPAs) with MMWEC. Under both the PSAs and PPAs, the Department is required to make certain payments to MMWEC payable solely from Department revenues. Under the PSAs, each Participant is unconditionally obligated to make payments due to MMWEC whether or not the Project(s) is completed or operating, and notwithstanding the suspension or interruption of the output of the Project(s).
MMWEC is involved in various legal actions. In the opinion of MMWEC management, the outcome of such actions will not have a material adverse effect on the financial position of the company.
As of June 30, 2006, total capital expenditures for MMWEC’s Projects amounted to $ 1,522,918,000, of which $ 109,200,000 represents the amount associated with the Department’s share of Project Capability of the Projects
in which it participates. MMWEC’s debt outstanding for the Projects includes Power Supply System Revenue Bonds totaling $ 784,995,000, of which $ 45,682,000 is associated with the Department’s share of Project Capability of the Projects in which it participates. As of June 30, 2006, MMWEC’s total future debt service requirement on outstanding bonds issued for the Projects is $ 923,592,000, of which $ 51,006,000 is anticipated to be billed to the Department in the future.
The estimated aggregate amount of Reading Municipal Light Department’s required payments under the PSAs and PPAs, exclusive of the Reserve and Contingency Fund billings, to MMWEC at June 30, 2006 and estimated for future years is shown below.
Annual Costs
For years ended June 30, 2007 $ 7,359,000
2008 6,495,000
2009 5,458,000
2010 4,866,000
2011 4,674,000
2012 - 2016 19,900,000
2017 - 2020 2,254,000
Total $ 51,006,000
In addition, the Department is required to pay its share of the Operation
and Maintenance (O&M) costs of the Projects in which it participates. The Department’s total O&M costs including debt service under the PSAs were
$ 15,929,000 and $ 15,090,000 for the years ended June 30, 2006 and 2005, respectively.
22. Risk Management
The government is exposed to various risks of loss related to torts; theft of, damage to and destruction of assets; errors and omissions; and natural disasters for which the government carries commercial insurance. There were no significant reductions in insurance coverage from the previous year and have been no material settlements in excess of coverage in any of the past four fiscal years.
23. Leases
Related Party Transaction - Property Sub-Lease
The Department is sub-leasing facilities to the Reading Massachusetts Town Employees Federal Credit Union. The original sub-lease agreement commenced in December 2000 and ended in November 2005. A new agreement, which extends the lease through November 30, 2008, was signed on December 1, 2005. The following is the future minimum rental income for the years ending June 30:
2007 $ 7,680
2008 8,407
2009 3,630
Total $ 19,717
Other Income - Property Sub-Lease
The Department is sub-leasing facilities to Reading Community Television Inc. The sub-lease agreement commenced in March 2000 and ends in November 2008. The Department, as lessor, has waived the rent for the
term of the lease.
| 
