Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8 Page 9 Page 10 Page 11 Page 12 Page 13 Page 14 Page 15 Page 16 Page 17 Page 18 Page 19 Page 20 Page 21 Page 22 Page 23 Page 24 Page 25 Page 26 Page 27 Page 28 Page 29 Page 30 Page 31 Page 32 Page 33 Page 34 Page 35 Page 36 Page 37 Page 38 Page 39 Page 40 Page 41 Page 42 Page 43 Page 44 Page 45 Page 46 Page 47 Page 48 Page 49 Page 50 Page 51 Page 52 Page 53 Page 54 Page 55 Page 56 Page 57 Page 58 Page 59 Page 60 Page 61 Page 62 Page 63 Page 64 Page 65 Page 66 Page 67 Page 68 Page 69 Page 70 Page 71 Page 72 Page 73 Page 74 Page 75 Page 76 Page 77 Page 78 Page 79 Page 80 Page 81 Page 82 Page 83 Page 84 Page 85 Page 86 Page 87 Page 88 Page 89 Page 90Seattle City Light 2015 Annual Report 35 THE CITY OF SEATTLE—CITY LIGHT DEPARTMENT NOTES TO FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014 - 35 - Fair Value of Pooled Investments— Fair value of the City’s pooled investments fluctuates with changes in interest rates and the underlying size of the Pooled investment portfolio. To mitigate interest rate risk in the City’s Pooled investment portfolio, the City typically holds its investments to maturity and manages its maturities to ensure sufficient monthly cash flow to meet its liquidity requirements. Overall interest rates for U.S. Treasury Securities declined considerably over the first quarter of 2016 so the net change in the fair value of the City’s Pooled investments was quite favorable. As a result the Department’s share in the Pooled investments was also favorable. Interest Rate Risk—Interest rate risk is the risk that changes in overall interest rates for U.S. Treasury Securities over time will adversely affect the fair value of an investment. To mitigate interest rate risk the City intentionally immunizes its known and expected cash flow needs. Investment Strategy—To best accomplish meeting its investment objectives, the City has divided the Pool into two separate portfolios: Operating and Strategic. The Operating Portfolio is invested to meet reasonably expected liquidity needs over a period of twelve to eighteen months. This portfolio has low duration and high liquidity. Consistent with this profile, and for the purpose of comparing earnings yield, its benchmark is the net earnings rate of the State of Washington’s Local Government Investment Pool (LGIP). The Strategic Portfolio consists of cash that is in excess of known and expected liquidity needs. Accordingly, this portfolio is invested in debt securities with longer maturities than the Operating Portfolio, which over a market cycle, is expected to provide a higher return and greater investment income. Consistent with this profile, and for the purpose of comparing duration, yield and total return, the benchmark for the Strategic portfolio is the Barclays U.S. Government 1-7 year index. The duration of the Strategic Portfolio is targeted between 75% and 125% of the benchmark. To further mitigate interest rate risk a minimum of 60% of the Operating Portfolio and 30% of the Strategic Portfolio must be invested in asset types with high liquidity, specifically U.S. Government obligations, U.S. Government Agency obligations, LGIP, Demand Accounts, Repo, Sweep, and Commercial Paper. Credit Risk and Concentration of Credit Risk - Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligations. Concentration of credit risk is the risk of loss attributed to the magnitude of investments in a single issuer. The City manages concentration risk by limiting its investments in any one issuer in accordance with the City’s investment policy and state statutes. The City has credit risk from its investments in commercial paper, bank notes and taxable municipal bonds and may not hold more than 50% of the total Pooled assets combined in these credit sensitive sectors. The City’s investments in commercial paper may not exceed 25% of the total Pooled investments and no single issuer may account for more than 5% of the Pooled investments. Commercial paper investments must be purchased in the secondary market and are limited to those with maturities not longer than 180 days from the date of purchase and with the highest credit rating by at least two nationally recognized statistical rating organizations (NRSROs). As of December 31, 2015 and 2014, the City’s investments in commercial paper had minimum credit ratings of P-1 by Moody’s Investors Service, A-1 by Standard & Poor’s Rating Service, and F-1 by Fitch Ratings. Furthermore, commercial paper purchases must adhere to the investment policies and procedures adopted by the Washington State Investment Board Policy No. 2.05.500.