epri 2015 financial statements · organization—the electric power research institute, inc.’s...

April 11, 2016

I am pleased to present the 2015 audited Financial Statements of the Electric Power Research Institute. The audit was performed by Deloitte & Touche in accordance with generally accepted auditing standards. At the conclusion of the audit, Deloitte & Touche:

• Issued an unqualified audit opinion • Identified "no deficiencies ... which would constitute a material weakness in internal

controls over financial statements and federal awards”

Should you have any questions regarding the assumptions or conclusions made in this year’s statement, please don’t hesitate to contact me.

Sincerely,

PK/ld_160411.01

Electric Power Research Institute, Inc. Consolidated Financial Statements as of and for the Years Ended December 31, 2015 and 2014, Schedule of Expenditures of Federal Awards and Uniform Guidance Compliance Reports for the Year Ended December 31, 2015, and Independent Auditors’ Reports

ELECTRIC POWER RESEARCH INSTITUTE, INC.

TABLE OF CONTENTS

Page

INDEPENDENT AUDITORS’ REPORT 1–2

CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014: Statements of Financial Position 3 Statements of Activities and Changes in Net Assets 4 Statements of Cash Flows 5 Notes to the Consolidated Financial Statements 6–15

SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS AND UNIFORM GUIDANCE COMPLIANCE REPORTS FOR THE YEAR ENDED DECEMBER 31, 2015 16 Independent Auditors’ Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Consolidated Financial Statements Performed in Accordance with Government Auditing Standards 17–18 Independent Auditors’ Report on Compliance for the Major Federal Program and Report on Internal Control over Compliance 19–20 Schedule of Expenditures of Federal Awards 21–25 Notes to Schedule of Expenditures of Federal Awards 26 Schedule of Findings and Questioned Costs 27–28

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors of Electric Power Research Institute, Inc. Palo Alto, California

Report on the Consolidated Financial Statements

We have audited the accompanying consolidated financial statements of Electric Power Research Institute, Inc. and its subsidiaries (the “Institute” or EPRI), which comprise the consolidated statements of financial position as of December 31, 2015 and 2014, and the related consolidated statements of activities and changes in net assets and cash flows for the years then ended, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated 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 consolidated 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 consolidated financial statements are free of material misstatement.

An audit includes performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Institute’s preparation and fair presentation of the consolidated 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 Institute’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 consolidated financial statements.

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

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Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Institute as of December 31, 2015 and 2014, and the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Other Matters

Other Information

Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying schedule of expenditures of federal awards, as required by Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, is presented for purposes of additional analysis and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from, and relates directly to, the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the schedule of expenditures of federal awards is fairly stated, in all material respects, in relation to the consolidated financial statements as a whole.

Other Reporting Required by Government Auditing Standards

In accordance with Government Auditing Standards, we have also issued our report dated April 7, 2016, on our consideration of the Institute’s internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of the 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 the internal control over financial reporting or on compliance. The report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Institute’s internal control over financial reporting and compliance.

April 7, 2016

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CONSOLIDATED STATEMENTS OF FINANCIAL POSITIONAS OF DECEMBER 31, 2015 AND 2014(Dollars in thousands)

2015 2014ASSETS

CURRENT ASSETS: Cash and cash equivalents 48,608$ 31,039$ Investments 104,781 123,573 Receivables—members 7,666 9,157 Receivables—supplemental funding 27,494 36,383 Receivables—other 300 94 Other current assets 5,655 8,302

Total current assets 194,504 208,548

LONG-TERM INVESTMENTS 100,079 68,709

DEFERRED RENT RECEIVABLE 1,689 2,105

OTHER LONG-TERM ASSETS 127 189

PROPERTY, FACILITIES, BUILDING IMPROVEMENTS, AND EQUIPMENT—Net 56,195 54,783

TOTAL 352,594$ 334,334$

LIABILITIES AND NET ASSETS

CURRENT LIABILITIES: Accounts payable 32,529$ 33,211$ Deferred revenue 125,180 136,223 Accrued liabilities 30,056 26,380

Total current liabilities 187,765 195,814

OTHER LONG-TERM LIABILITIES 6,238 1,857

ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION 9,158 9,964

LONG-TERM DEFERRED SUPPLEMENTAL REVENUE 456 500

Total liabilities 203,617 208,135

COMMITMENTS AND CONTINGENCIES (Note 7)

TOTAL UNRESTRICTED NET ASSETS 148,977 126,199

TOTAL 352,594$ 334,334$

See notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF ACTIVITIES AND CHANGES IN NET ASSETSFOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014(Dollars in thousands)

2015 2014

CHANGES IN NET ASSETS: Revenues: Membership 190,694$ 183,631$ Supplemental 210,249 199,766 Other 5,146 5,347

Total revenues 406,089 388,744

Expenses: Environment 35,591 39,338 Power delivery and utilization 102,632 101,898 Generation 58,814 54,408 Nuclear 157,866 147,692 Technology innovation activities 29,283 29,112

Total expenses 384,186 372,448

EXCESS OF REVENUES OVER EXPENSES 21,903 16,296

OTHER INCOME (EXPENSE): Interest income 1,249 795 Loss on investments and asset disposals—net (374) (115)

Total other income 875 680

INCREASE IN NET ASSETS—Unrestricted 22,778 16,976

NET UNRESTRICTED ASSETS—Beginning of year 126,199 109,223

NET UNRESTRICTED ASSETS—End of year 148,977$ 126,199$


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CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014(Dollars in thousands)

2015 2014

CASH FLOWS FROM OPERATING ACTIVITIES: Increase in net assets 22,778$ 16,976$ Adjustments to reconcile increase in net assets to net cash provided by operating activities: Depreciation and amortization 10,399 9,734 Loss on retirement of equipment 24 19 Loss on investments 350 101 Bad debt expense 483 (32) Changes in assets and liabilities: Receivables—members 1,491 2,555 Receivables—supplemental funding 8,405 (5,307) Receivables—other (206) 119 Other current assets 2,647 4,834 Deferred rent receivable 417 347 Other long-term assets 62 (109) Accounts payable (2,152) (10,340) Current and long-term deferred revenue (11,087) (1,360) Accrued liabilities 3,613 320 Other long-term liabilities 982 172 Accumulated postretirement benefit obligation (806) 429

Net cash provided by operating activities 37,400 18,458

CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (5,910) (5,019) Purchases of investments (352,491) (232,687) Proceeds from sale and maturity of investments 339,563 229,830

Net cash used in investing activities (18,838) (7,876)

CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of obligation under capital leases (993) -

Net cash used in financing activities (993) -

NET INCREASE IN CASH AND CASH EQUIVALENTS 17,569 10,582 CASH AND CASH EQUIVALENTS—Beginning of year 31,039 20,457

CASH AND CASH EQUIVALENTS—End of year 48,608$ 31,039$

SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES Capital expenditures in accounts payable 834$ 751$

Capital lease obligation 5,779$ - $


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014

1. DESCRIPTION OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization—The Electric Power Research Institute, Inc.’s (the “Institute” or EPRI) mission is to conduct research and development through science and technology for the benefit of society. To accomplish this objective, EPRI develops and manages research and development programs for improving energy generation, delivery, and usage. Program service expenses are direct charges to the research programs.

EPRI has been determined to be exempt from federal taxes as a scientific organization under Section 501(c)(3) of the Internal Revenue Code (the “Code”). Hence, only unrelated business income, as defined in the Code, is subject to federal income taxes. In 2015, as in prior years, EPRI anticipates no significant taxable income.

The financial statements are consolidated to include the accounts of EPRI and its wholly owned subsidiaries. All intercompany accounts have been eliminated. The EPRI subsidiaries are EPRI Solutions, Inc., EPRI International, Inc., and Electricity Innovation Institute.

Summary of Significant Accounting Policies—

Basis of Presentation—EPRI’s consolidated financial statements are prepared on the accrual basis of accounting and in conformity with accounting principles applicable to not-for-profit organizations. Subsequent events were evaluated through April 7, 2016, the date when the consolidated financial statements were available to be issued.

Cash and Cash Equivalents—EPRI considers all highly liquid investment instruments with an initial or remaining maturity of three months or less at the time of purchase to be cash equivalents.

Investments—Investments are carried at fair value. Realized and unrealized gains or losses on investments are reflected in the consolidated statements of activities and changes in net assets.

Property, Facilities, Building Improvements, and Equipment—Buildings and improvements are depreciated over various lives, ranging from ten to thirty years, using the straight-line method. Equipment is depreciated using the straight-line method over a period of five years. Leasehold improvements are amortized using the straight-line method over the shorter of the terms of the respective leases or their economic lives. The SAP system is amortized using the straight-line method over seven years. Equipment that is highly specialized and offers no alternative future use to EPRI or its contractors is expensed as incurred. Costs associated with individual research and development projects conducted at the facilities are charged to expense as incurred. Any gain or loss from the sale or other disposition of property, facilities, and equipment is recorded in other income.

Other Assets—Other assets consist primarily of prepaid expenses and miscellaneous receivables.

Deferred Rent—Deferred rent consists of rental revenue for three buildings through 2018. EPRI records lease revenue on a straight-line basis over the lease term.

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Membership Revenue—Revenue from memberships is recognized on a straight-line basis over the annual membership period.

Supplemental Revenue—Supplemental funding and other contract services, including federal awards, are considered exchange transactions. Revenue for those projects is recorded when the funding agreement is executed, costs are incurred, and the collection of the resulting receivables is reasonably assured. Advances on projects are reflected as deferred revenue. Supplemental revenue included $5,028,000 in 2015 and $3,194,000 in 2014 of contractual revenue where funding had not yet been received, but related costs had been incurred on cofunding projects.

Other Revenue—Other revenue includes rental revenue, royalty revenue, and revenue from sales of EPRI reports. Rental revenue is recognized on a straight-line basis over the term of the lease. Royalty revenue is recognized as received, as EPRI believes that the revenue is not fixed or determinable at the end of each reporting period.

EPRI maintains reserves for doubtful accounts and other collection issues for membership and supplemental funding on the basis of historical experience and an analysis of specific accounts. Such reserves amounted to $726,000 and $243,000 at December 31, 2015 and 2014, respectively.

Accounts Payable—Certain research contracts provide for the retainage of contract payments by EPRI until completion of the contract. Retainage amounts where the scheduled contract completion date is beyond one year are recorded as long-term research and development expenses payable.

Use of Estimates—The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Adoption of New Accounting Standards—On May 28, 2014, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. This update creates a single, principles-based framework for revenue recognition and is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when goods or services are transferred to customers. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, deferring the effective date of this amendment by one year. Nonpublic companies should apply the guidance to annual reporting periods beginning after December 15, 2018. EPRI is currently evaluating the impact of adopting the new standard on its consolidated financial statements and related disclosures.

In February 2016, the FASB issued an ASU No. 2016-02, Leases (Topic 842). The amendments in this Update create Topic 842, Leases, and supersede the leases requirements in Topic 840, Leases. Topic 842 specifies the accounting for leases. The objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. The amendments in this update are effective for fiscal years beginning after December 15, 2019 for nonpublic companies. EPRI is currently evaluating the impact of adopting the new standard on its consolidated financial statements and related disclosures.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which amends guidance to help improve the recognition and measurement of financial instruments. The amendments in this update are effective for fiscal years beginning after December 15, 2018. EPRI is currently evaluating the impact the guidance will have on its consolidated financial statements and related disclosures.

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2. CASH AND CASH EQUIVALENTS AND INVESTMENTS

The aggregate carrying amounts of investments, including cash and cash equivalents, as of December 31, 2015 and 2014, were as follows (dollars in thousands):

2015 2014

Cash 36,892$ 25,039$ Cash equivalents 11,716 6,000

Cash and cash equivalents 48,608 31,039

Short-term investments: Commercial paper 5,446 17,290 Fixed-income securities 99,335 106,283

Total short-term investments 104,781 123,573

Long-term investments: Fixed-income securities 100,062 68,698 Equity securities 17 11

Total long-term investments 100,079 68,709

Total 253,468$ 223,321$

Fair Value Hierarchy—EPRI follows the guidance offered by Accounting Standards Codification (ASC) 820-10, Fair Value Measurement, to estimate the fair value of its investments. ASC 820-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

Level 1—Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3—Inputs are unobservable inputs for the assets or liabilities. Unobservable inputs shall be used to measure fair value to the extent that the observable inputs are not available. Unobservable inputs shall be developed based on the best information available in the circumstances, which might include the reporting entity’s own data.

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The valuation of the Institute’s investments per ASC 820-10 fair value hierarchy levels as of December 31, 2015 and 2014, are summarized as follows (dollars in thousands):

Quoted Prices in SignificantActive Markets Other Significant

for Identical Observable UnobservableAssets Inputs Inputs

2015 (Level 1) (Level 2) (Level 3) Total

Cash equivalents - $ 11,716$ - $ 11,716$

Commercial paper securities - 5,446 - 5,446

Fixed-income securities: Corporate debt securities - 100,007 - 100,007 Certificates of deposit - 2,251 - 2,251 Foreign debt securities - 43,745 - 43,745 U.S. government debt securities - 53,394 - 53,394

Total fixed-income securities - 199,397 - 199,397

Equity securities 17 - - 17

Total 17$ 216,559$ - $ 216,576$

Fair Value at Reporting Date Using

Quoted Prices in SignificantActive Markets Other Significant

for Identical Observable UnobservableAssets Inputs Inputs

2014 (Level 1) (Level 2) (Level 3) Total

Cash equivalents - $ 6,000$ - $ 6,000$

Commercial paper securities - 17,290 - 17,290

Fixed-income securities: Corporate debt securities - 36,515 - 36,515 Foreign debt securities - 66,054 - 66,054 Municipal debt securities - 1,330 - 1,330 U.S. government debt securities - 71,082 - 71,082

Total fixed-income securities - 174,981 - 174,981

Equity securities 11 - - 11

Total 11$ 198,271$ - $ 198,282$

Fair Value at Reporting Date Using

Cash Equivalents—Cash equivalents consist of money market funds, which are based on a net asset value. These funds seek to provide current income and daily liquidity while maintaining a stable share price of $1. These funds invest primarily in U.S. Treasuries, government agency debentures, and government collateralized repurchase agreements. The net asset value approximates the fair value of the underlying securities.

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Commercial Paper—Commercial paper is issued by large public corporations with high credit ratings through dealer-based, over-the-counter markets.

Corporate and Foreign Debt Securities—Corporate debt securities consist of domestic corporate bonds. Foreign debt securities consist of foreign corporate bonds. All corporate and foreign debt securities are listed on major public exchanges; however, the majority of trading volume is through dealer-based, over-the-counter markets.

Certificates of Deposit—Certificates of deposits bear a maturity date and a fixed interest rate. They are generally issued by commercial banks and are insured by the Federal Deposit Insurance Corporation (FDIC).

U.S. Government and Municipal Debt Securities—U.S. government debt securities (principally U.S. Treasury notes) and municipal debt securities (local government securities) are traded primarily through dealer-based, over-the-counter markets.

3. PROPERTY, FACILITIES, BUILDING IMPROVEMENTS, AND EQUIPMENT

Property, facilities, building improvements, and equipment as of December 31, 2015 and 2014, were as follows (dollars in thousands):

2015 2014

Buildings and land leases 71,441$ 71,441$ Equipment and leasehold improvements (1) 40,603 32,561 Software and computer equipment 36,151 42,461

Total properties, facilities, building improvements, and equipment 148,195 146,463

Accumulated depreciation and amortization (1) (92,000) (91,680)

Property, facilities, building improvements, and equipment—net 56,195$ 54,783$

(1) Includes equipment capital leases of $5,779,000 and the associated accumulated depreciation of $993,000 as of December 31, 2015. The capital lease, entered into in April 2015, relates to leasing information technology (IT) equipment at EPRI’s data center in Charlotte, North Carolina. There was none as of December 31, 2014.

The depreciation and amortization expense for the years ended December 31, 2015 and 2014, was $10,399,000 and $9,734,000, respectively.

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4. ACCRUED LIABILITIES

Accrued liabilities as of December 31, 2015 and 2014, were as follows (dollars in thousands):

2015 2014

Accrued compensation 22,664$ 19,836$Accrued vacation 5,402 5,234 Other 1,990 1,310

Total accrued liabilities 30,056$ 26,380$

5. NET ASSETS—UNRESTRICTED

EPRI’s net assets at December 31, 2015 and 2014, and all activities for the years then ended were unrestricted. Unrestricted net assets may be designated for specific purposes by action of the board of directors. As of December 31, 2015 and 2014, no net assets were so designated by the board of directors.

6. BENEFIT PLANS

EPRI has a defined contribution pension plan for its employees. It is EPRI’s policy to fund pension costs as earned by employees. The pension expense was $13,058,000 for 2015 and $11,568,000 for 2014.

EPRI provides an unfunded postretirement health care benefit plan to employees meeting certain requirements. Prior to January 1, 2007, all employees who retired on or after age 55 with a minimum of five years of service and whose aggregate years of service, plus age totaled 70 years or more were covered by the plan. Effective January 1, 2007, employees are eligible only if the sum of their age plus years of service equaled or exceeded 50 years as of December 31, 2006 and, if upon their retirement from EPRI, they have completed a minimum of five years of service, are at least age 55, and their aggregate age plus years of service totaled 70 years or more. Spouses of eligible participants are also covered. No employee hired or rehired on or after January 1, 2007, is eligible for the benefit. In 2013, the plan was amended to require eligible participants to retire prior to July 1, 2014, in order to receive the benefit. Any participants who did not retire as of July 1, 2014, are no longer eligible for the benefit. Each nonofficer participant and spouse receives up to $75 monthly for medical insurance premium reimbursement. Officers who attained officer status before January 1, 2007, are required to pay 20% of the actual premium cost of the medical plan of their choice. EPRI pays the remaining 80% of the premium cost. For officers, health care costs are assumed to increase by 7.0% for 2016 and then remain at approximately 5.4% to 6.0% increases per year through 2021.

The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 3.78% in 2015 and 3.49% in 2014. The health care trend is assumed to be between 5.4% and 7.0% per year for all future years.

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EPRI recognizes a net liability based on the funded status of its other postretirement benefit plan in its statements of financial position. The benefit obligation is measured by year as follows (dollars in thousands).

2015 2014

Change in benefit obligation: Benefit obligation at end of prior year 10,893$ 10,242$ Service cost 7 9 Interest cost 364 433 Actuarial (gain) loss (835) 647 Benefits paid (426) (438)

Benefits obligation at end of year 10,003$ 10,893$

Change in plan assets: Employer contributions 426$ 438$ Benefits paid (426) (438)

Unfunded status at end of year 10,003$ 10,893$

Amounts recognized in consolidated statements of financial position: Current liabilities 845$ 929$ Noncurrent liabilities 9,158 9,964

Total amounts recognized in consolidated statements of financial position 10,003$ 10,893$

Net periodic benefit costs: Service cost 7$ 9$ Interest cost 364 433 Amortization of net loss 90 51 Amortization of prior service cost (173) (173)

Net periodic benefit cost 288$ 320$

Expected benefit payments to retirees under the postretirement plan, over the next 10 years are summarized below (dollars in thousands):

Years EndingDecember 31 Amount

2016 845$ 2017 799 2018 777 2019 747 2020 725 2021–2025 3,274

Total 7,167$

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7. COMMITMENTS AND CONTINGENCIES

As a matter of business practice, EPRI extends indemnification to its members, funders, and collaborators for certain contractual risks; furthermore, EPRI is required to provide certain indemnifications arising through EPRI’s government contracts. In addition, through its bylaws and/or by operation of law, EPRI may owe indemnification in certain matters to members of its board of directors, officers, and employees.

EPRI had three deposit accounts for cash-secured letters of credit (LOC) in the amount of $414,000. The two workmen’s compensation deposit accounts totaling $250,000 were refunded in 2015 as they are no longer required. The third LOC in the amount of $164,000, which expires on February 3, 2017, is mandated by the state of California and required for EPRI’s disability program. There were no balances outstanding under the remaining LOC at either December 31, 2015 or 2014.

EPRI has entered into operating leases for research, office, and storage facilities and for equipment. Rental expense under these leases was $2,038,000 and $1,830,000 in 2015 and 2014, respectively. The terms included in certain of these leases provide that EPRI is responsible for property taxes, insurance and maintenance expenses, and, in certain leases, renewal options are included.

EPRI leases certain buildings under a long-term noncancelable operating lease. The current lease for the Palo Alto, California, location is in effect until January 31, 2019.

Future minimum noncancelable operating lease commitments with initial terms of one year or more as of December 31, 2015, are as follows (dollars in thousands):

Years Ending TotalDecember 31 Amount

2016 1,679$2017 1,708 2018 1,620 2019 671 2020 352 Thereafter 1,854

Total 7,884$

In April 2015, EPRI entered into a four-year capital lease agreement with a third party to lease IT equipment at its data center in Charlotte, North Carolina.

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Future minimum lease payments under the capital lease as of December 31, 2015, are as follows (dollars in thousands):


2016 1,605$ 2017 1,605 2018 1,605 2019 401

Total 5,216

Less: Interest (430)

Present value of future minimum lease payments 4,786

Less: current portion (1) (1,387)

Non-current portion (1) 3,399$

(1) The current portion of the capital lease obligation is presented in “Accounts Payable” while the noncurrent portion is presented in “Other Long-term Liabilities” in the consolidated statements of financial position as of December 31, 2015.

In 2005, EPRI entered into a long-term operating sublease with a third party for three buildings in Palo Alto, California. The lease expires in 2018. In 2011, EPRI entered into a long-term operating sublease to a third party for part of a building located in Charlotte, North Carolina. This lease expires in 2016. The sum of the two future lease payments to be received by EPRI is $7,850,000 as of December 31, 2015, as follows (dollars in thousands):


2016 2,718$2017 2,528 2018 2,604

Total 7,850$

Annually, EPRI authorizes the maximum amounts that may be expended on research projects. EPRI negotiates research contracts on those projects with companies and organizations that result in a contractual commitment for a given year. Such commitments cannot exceed the cumulative authorization without amending the original agreement. At December 31, 2015, EPRI had commitments with contractors to reimburse their future research costs in the amount of approximately $60,894,000. Generally, EPRI has the right to cancel research and development contract commitments at 30 days’ notice, subject to the payment of certain termination costs.

Certain research contracts are funded from federal government sources. Amounts received from these contracts are subject to audit by the awarding agencies. To date, no significant cost disallowances have resulted from such audits.

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Actions arising from the normal course of business are pending against the Institute. While the outcome of these matters is not presently determinable, in the opinion of management, these matters are not expected to have a material effect on the consolidated financial position or results of operations of the Institute and, accordingly, no provision has been made in the consolidated financial statements.

8. RELATED-PARTY TRANSACTIONS

During 2015, 28 of the 34 seats on EPRI’s board of directors were filled by individuals who were affiliated with companies that are members of EPRI. In addition to membership funding, these member companies may also have provided supplemental funding to EPRI for certain research projects. Those member companies with representation on the board of directors during 2015 and 2014 provided approximately 55% and 58% of membership funding, respectively.

* * * * * *

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SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS AND UNIFORM GUIDANCE COMPLIANCE REPORTS FOR THE YEAR ENDED DECEMBER 31, 2015

INDEPENDENT AUDITORS’ REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF CONSOLIDATED FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS


We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the consolidated financial statements of Electric Power Research Institute, Inc. and its subsidiaries (the “Institute” or EPRI), which comprised the consolidated statement of financial position as December 31, 2015, and the related consolidated statements of activities and changes in net assets and cash flows for the year then ended, and the related notes to the financial statements, and have issued our report thereon dated April 7, 2016.

Internal Control over Financial Reporting

In planning and performing our audit of the consolidated financial statements, we considered the Institute’s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the consolidated financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Institute’s internal control. Accordingly, we do not express an opinion on the effectiveness of the Institute’s internal control.

A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.

Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified.

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Compliance and Other Matters

As part of obtaining reasonable assurance about whether the Institute’s consolidated financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of consolidated financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards.

Purpose of this Report

The purpose of this report is solely to describe the scope of our testing of internal controls and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the Institute’s internal control or on compliance. This report is an integral part of the audit performed in accordance with Government Auditing Standards in considering the Institute’s internal control and compliance. Accordingly, this communication is not suitable for any other purpose.

April 7, 2016

INDEPENDENT AUDITORS’ REPORT ON COMPLIANCE FOR THE MAJOR FEDERAL PROGRAM AND REPORT ON INTERNAL CONTROL OVER COMPLIANCE


Report on Compliance for the Major Federal Program

We have audited Electric Power Research Institute Inc.’s and its subsidiaries (the “Institute” or EPRI) compliance with the types of compliance requirements described in the Office of Management and Budget (OMB) Compliance Supplement that could have a direct and material effect on the Institute’s major federal program for the year ended December 31, 2015. The Institute’s major federal program is identified in the summary of auditors’ results section of the accompanying schedule of findings and questioned costs.

Management’s Responsibility

Management is responsible for compliance with the requirements of federal statutes, regulations, and the terms and conditions of its federal awards applicable to its federal program.

Auditors’ Responsibility

Our responsibility is to express an opinion on compliance for the Institute’s major federal program based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audit contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (“Uniform Guidance”). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the Institute’s compliance with those requirements and performing such other procedures, as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion on compliance for the major federal program. However, our audit does not provide a legal determination of the Institute’s compliance.

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Opinion on the Major Federal Program

In our opinion, the Institute complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on its major federal program for the year ended December 31, 2015.

Report on Internal Control over Compliance

Management of the Institute is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered the Institute’s internal control over compliance with the requirements that could have a direct and material effect on the major federal program in order to determine our auditing procedures that are appropriate in the circumstances for the purpose of expressing our opinion on compliance for the major federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the Institute’s internal control over compliance.

A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect and correct noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented or detected and corrected on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance.

Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified.

The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance. Accordingly, this report is not suitable for any other purpose.

April 7, 2016

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SCHEDULE OF EXPENDITURES OF FEDERAL AWARDSFOR THE YEAR ENDED DECEMBER 31, 2015

Federal Pass-Through Entity Passed-Through Federal Non-Federal TotalCFDA Number Agency/Pass-Through Contract Number Identifying Number to Subrecipients Expenditures Expenditures Expenditures

RESEARCH AND DEVELOPMENT CLUSTER

AMERICAN REINVESTMENT AND RECOVERY ACT: U.S. Department of Energy

81.087 South Coast Air Quality Management District DE-EE0002549 PO10659 10,162,305$ 11,513,519$ 80,351$ 11,593,870$

81.122 Duke Energy DE-OE0000195 CF17096-10759 2,135 8,460 6,039 14,499 81.122 Entergy Services, Inc. DE-OE0000375 PO10285120 - 20,053 552 20,605 81.122 National Association of Regulatory Utility Commissioners DE-OE0000316 NARUC-2013-261-DE0316 41,329 68,892 - 68,892 81.122 National Association of Regulatory Utility Commissioners DE-OE0000316 NARUC-2013-262-DE0316 4,000 13,839 - 13,839 81.122 Southern California Edison DE-OE0000199 TC014236-12532 - - 46,319 46,319

81.122 Total 47,464 111,244 52,910 164,154

81.134 Membrane Technology & Research, Inc. DE-FE-0005795 361-DOE-FE-05795-EPRI 63,133 111,783 27,946 139,729

AMERICAN REINVESTMENT AND RECOVERY ACT TOTAL 10,272,902 11,736,546 161,207 11,897,753

See notes to Schedule of Expenditures of Federal Awards. (Continued)

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DIRECT: U.S. Department of Agriculture (“USDA”)

10.912 USDA Natural Resources Conservation Service NRCS 69-3A75-11-178 - $ - $ 93,935$ 93,935$ 10.912 USDA Natural Resources Conservation Service NRCS 69-3A75-12-254 100,518 118,342 99,089 217,431

10.912 Total 100,518 118,342 193,024 311,366

U.S. Nuclear Regulatory Commission (“U.S. NRC”)77.009 U.S. NRC NRC-04-10-0150 90,985 110,544 1,368,499 1,479,043 77.009 U.S. NRC NRC-HQ-60-14-G-0009 118,235 141,619 327,161 468,780

77.009 Total 209,220 252,163 1,695,660 1,947,823

U.S. Department of Energy (“U.S. DOE”)81.086 U.S. DOE, National Energy Technology Laboratory DE-OE0000614 - 153,757 38,860 192,617 81.086 U.S. DOE, National Energy Technology Laboratory DE-OE0000672 372,329 426,364 227,680 654,044

81.086 Total 372,329 580,121 266,540 846,661

81.087 U.S. DOE, Golden Field Office DE-EE0006382 140,465 160,644 89,919 250,563 81.087 U.S. DOE, Energy Efficiency & Renewable Energy DE-EE0007137 - 52,708 13,177 65,885 81.087 U.S. DOE, Energy Efficiency & Renewable Energy DE-EE0007163 - - 12,668 12,668 81.087 U.S. DOE, National Energy Technology Laboratory DE-OE0006338 701,946 883,203 354,021 1,237,224 81.087 U.S. DOE, Golden Field Office DE-EE0005337 221,886 637,484 360,501 997,985 81.087 U.S. DOE, Golden Field Office DE-EE0006326 188,558 447,167 397,618 844,785

81.087 Total 1,252,855 2,181,206 1,227,904 3,409,110


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DIRECT (continued): U.S. Department of Energy (“U.S. DOE”)

81.089 U.S. DOE, National Energy Technology Laboratory DE-FE0012700 48,049$ 67,352$ 21,745$ 89,097$ 81.089 U.S. DOE, National Energy Technology Laboratory DE-FE0024120 113,886 200,750 84,256 285,006 81.089 U.S. DOE, National Energy Technology Laboratory DE-FE0025959 - 26,001 7,085 33,086 81.089 U.S. DOE, National Energy Technology Laboratory DE-FE0026140 63,143 127,149 93,374 220,523 81.089 U.S. DOE, National Energy Technology Laboratory DE-FE0026260 - 19,567 6,112 25,679

81.089 Total 225,078 440,819 212,572 653,391

81.117 U.S. DOE, Golden Field Office DE-EE0006653 - 73,229 313,643 386,872

81.121 U.S. DOE DE-NE0000539 216,430 273,067 56,521 329,588 81.121 U.S. DOE DE-NE0008211 107,818 160,652 161,478 322,130 81.121 U.S. DOE DE-NE0008445 - 11,140 2,785 13,925 81.121 U.S. DOE, Idaho Operations Office DE-NE0000544 211,212 356,255 211,322 567,577

81.121 Total 535,460 801,114 432,106 1,233,220

81.122 U.S. DOE, National Energy Technology Laboratory DE-OE0000717 - 171,358 - 171,358 81.122 U.S. DOE, National Energy Technology Laboratory DE-OE0000729 89,621 427,191 223,037 650,228

81.122 Total 89,621 598,549 223,037 821,586

81.135 U.S. DOE, Advanced Research Projects Agency-Energy DE-AR0000572 6,137 11,302 12,431 23,733

81.DE-NE0000593 U.S. DOE, Idaho Operations Office DE-NE0000593 4,833,804 5,769,487 1,390,453 7,159,940

DIRECT TOTAL 7,625,022 10,826,332 5,967,370 16,793,702


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PASS-THROUGH: U.S. Department of Energy (“U.S. DOE”)

81.000 Georgia Institute of Technology DOE INL RC936-S3 - $ 28,731$ - $ 28,731$

81.087 Cal Poly Corporation DE-EE0006517 14-20-45059 - 5,265 - 5,265 81.087 Energy Industries of Ohio, Inc. DE-FG26-01NT41175 DE-FG26-01NT41175 - 64,722 24,031 88,753

81.087 Total - 69,987 24,031 94,018

81.089 Aerojet Rocketdyne DE-FE0023998 PO200036217 - 8,033 2,258 10,291 81.089 Alliant Techsystems DE-FE0013122 PO:MP00084109 - - 29,642 29,642 81.089 Energy Industries of Ohio, Inc. DE-FE0000234 DE-FE0000234 49,743 340,591 88,020 428,611 81.089 Energy Industries of Ohio, Inc. DE-FE00025064 DE-FE00025064 - 23,925 5,981 29,906 81.089 Energy Industries of Ohio, Inc. DE-FE0026294 DE-FE0026294 28,528 72,220 18,055 90,275 81.089 InnoSepra DE-FE0007948 Inno-FE0007948-02 - 11,539 7,765 19,304 81.089 Southern States Energy Board DE-FC26-05NT42590 SSEB-SECARB3-973-T13EPRI-T1AR-2007 1,084,870 1,193,827 596,715 1,790,542 81.089 SRI International DE-FE0013123 139-000004 - 1,477 1,089 2,566 81.089 University of Kentucky Research Foundation DE-FE0007395 3048109307-12-623 49,185 173,897 111,501 285,398 81.089 Washington University in St. Louis DE-FE0009702 WU-14-331_PO2923455X - 21,835 5,459 27,294

81.089 Total 1,212,326 1,847,344 866,485 2,713,829

81.117 The Solar Foundation DE-EE0007155 PSA 12/10/15 - 4,256 - 4,256


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PASS-THROUGH (continued): U.S. Department of Energy (“U.S. DOE”)

81.121 AREVA DE-NE0008220 PO14C3011491 320,174$ 503,921$ 154,804$ 658,725$ 81.121 Northwestern University/Idaho National Laboratory DE-AC07-05ID14517 SP0018030-0005667 16,352 50,082 965 51,047 81.121 University of Mississippi DE-NE0008400 Sub#16-10-024 - 4,287 - 4,287 81.121 UT Battelle, Oak Ridge National Laboratory DE-AC05-00OR22725 4000109286 44,073 164,297 - 164,297 81.121 UT Battelle, Oak Ridge National Laboratory DE-AC05-00OR22725 4000112787 - 382,344 10,322 392,666 81.121 UT Battelle, Oak Ridge National Laboratory DE-AC05-00OR22725 4000134818 44,980 121,792 887 122,679

81.121 Total 425,579 1,226,723 166,978 1,393,701

81.122 Aerojet Rocketdyne DE-FE0009448 PO4410012549 - 13,976 3,494 17,470 81.122 Lawrence Berkeley Laboratory DE-AC02-05CH11231 PO7230929 6,714 48,927 - 48,927

81.122 Total 6,714 62,903 3,494 66,397

81.135 The Regents of the University of California—Berkeley DE-AR0000402 PO00008321 - 21,692 4,348 26,040 81.135 Varentec, Inc. DE-AR0000229 DE-AR0000229EPRI - 32,705 8,176 40,881

81.135 Total - 54,397 12,524 66,921

81.DE-AC07-05ID14517 Battelle Energy Alliance (M&O for Idaho National Lab) DE-AC07-05ID14517 41798-03 - 6,499 29,323 35,822 81.DE-AC07-05ID14517 Battelle Energy Alliance (M&O for Idaho National Lab) DE-AC07-05ID14517 41798-10 - 2,921 3,833 6,754 81.DE-AC07-05ID14517 Battelle Energy Alliance (M&O for Idaho National Lab) DE-AC07-05ID14517 41798-11 96,858 136,202 200,919 337,121

81.DE-AC07-05ID14517 Total 96,858 145,622 234,075 379,697

PASS-THROUGH TOTAL 1,741,478 3,439,963 1,307,587 4,747,550

TOTAL—RESEARCH AND DEVELOPMENT 19,639,402$ 26,002,841$ 7,436,164$ 33,439,005$

See notes to Schedule of Expenditures of Federal Awards. (Concluded)

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NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED DECEMBER 31, 2015

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying schedule of expenditures of federal awards (the “Schedule”) has been prepared from Electric Power Research Institute Inc.’s (the “Institute” or EPRI) accounting records and is presented on the accrual basis of accounting in accordance with the requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (“Uniform Guidance”). The purpose of the Schedule is to present a summary of those activities of EPRI for the year ended December 31, 2015, which have been partially financed by the U.S. government (federal awards). Such expenditures are recognized following, as applicable, either the cost principles in Office of Management and Budget Circular A122, Cost Principles for Non-Profit Organizations, or the cost principles contained in the Uniform Guidance, wherein certain types of expenditures are not allowable or are limited as to reimbursement. EPRI has not elected to use the 10-percent de minimis indirect cost rate. For purposes of the Schedule, federal awards include all assistance entered into directly between EPRI and the federal government, between EPRI and other primary recipients of federal government funding (pass-through), and between EPRI and other industry members of EPRI. Amounts included in the Schedule include both federal portions of the award as well as the nonfederal portion representing EPRI’s cost sharing related to those awards. Because the Schedule presents only a selected portion of the activities of the Institute, it is not intended to, and does not, present either the consolidated financial position, changes in net assets, or cash flows of the Institute.

2. NONCASH FEDERAL AWARDS

During the year ended December 31, 2015, the Institute did not receive any nonmonetary assistance.

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SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED DECEMBER 31, 2015

SECTION I—SUMMARY OF AUDITORS’ RESULTS

Financial Statements

Type of report the auditor issued on whether the financial statements audited were prepared in accordance with GAAP: unmodified

Internal control over financial reporting:

• Material weakness(es) identified? yes X no

• Significant deficiency(ies) identified? yes X none reported

Noncompliance material to financial statements noted? yes X no

Federal Awards

Internal control over major federal programs:

• Material weakness(es) identified? yes X no

• Significant deficiency(ies) identified? yes X none reported

Type of auditors’ report issued on compliance for major federal program: unmodified

Any audit findings disclosed that are required to be reported in yes X no accordance with 2 CFR 200.516(a)?

Identification of major federal program:

CFDA Number(s): Various

Name of Federal Program or Cluster: Research and Development Cluster

Dollar threshold used to distinguish between Type A and Type B programs: $780,085

Auditee qualified as low-risk auditee? X yes no

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SECTION II—FINANCIAL STATEMENT FINDINGS

No matters are reportable.

SECTION III—FEDERAL AWARD FINDINGS AND QUESTIONED COST

No matters are reportable.

epri 2015 financial statements · organization—the electric power research institute, inc.’s...

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