PUBLIC UTILITY DISTRICT NO. 1 WHATCOM COUNTY, WASHINGTON $6,025,000 Limited Tax General Obligation Bonds, 2013

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1 OFFICIAL STATEMENT DATED MAY 22, 2013 BANK QUALIFIED STANDARD & POOR S RATING: A+ NEW ISSUE BOOK ENTRY See Rating herein In the opinion of K&L Gates LLP, Bond Counsel, assuming compliance with certain covenants of the District, interest on the Bonds is excludable from gross income for federal income tax purposes under existing law. Interest on the Bonds is not an item of tax preference for purposes of either individual or corporate alternative minimum tax. Interest on the Bonds may be indirectly subject to corporate alternative minimum tax and certain other taxes imposed on certain corporations. See TAX MATTERS herein for a discussion of the opinion of Bond Counsel. Dated: As of Delivery PUBLIC UTILITY DISTRICT NO. 1 WHATCOM COUNTY, WASHINGTON $6,025,000 Limited Tax General Obligation Bonds, 2013 Due: December 1, as shown on inside cover Public Utility District No. 1, Whatcom County, Washington (the District ), Limited Tax General Obligation Bonds, 2013 (the Bonds ) will be issued as fully registered Bonds in the name of CEDE & Co., as nominee for The Depository Trust Company ( DTC ), New York, New York. DTC will act as securities depository for the Bonds. Individual purchases and sales of the Bonds initially will be made in book-entry form only in denominations of $5,000 or any integral multiple thereof within a series and maturity. Purchasers will not receive certificates representing their ownership of the Bonds. Interest on the Bonds will be payable on December 1, 2013 and semiannually thereafter on June 1 and December 1 of each year until their maturity or early redemption. So long as DTC or its nominee is the registered owner of the Bonds, the principal of and interest on the Bonds will be payable by the fiscal agency of the State of Washington (the State ), currently The Bank of New York Mellon in New York, New York (the Bond Registrar ), directly to DTC which, in turn, is obligated to remit such principal and interest to the DTC participants for subsequent disbursement to the owners of the Bonds as described herein in Appendix B BOOK-ENTRY ONLY SYSTEM. MATURITY SCHEDULE - SEE INSIDE COVER The Bonds are subject to redemption prior to their stated maturities as described herein in THE BONDS Redemption Provisions. The Bonds are being issued to pay for the design and upgrade of the District s water treatment plant capacity, to fund other capital improvement projects of the District, and to fund a portion of the reserve account requirement and to pay costs of issuance. The District has designated the Bonds as qualified tax-exempt obligations within the meaning of Section 265(b)(3)(B) of the Code. See TAX MATTERS herein. The Bonds are limited tax general obligations of the District. The District has irrevocably covenanted and agreed that it will include in its annual budget and levy ad valorem taxes annually, within the constitutional and statutory tax limitations provided by law without a vote of the electors of the District, upon all the taxable property within the District in amounts sufficient, together with all other money of the District legally available for such purposes, to pay the principal of and interest on the Bonds as the same shall become due. The full faith, credit and resources of the District have been pledged irrevocably for the annual levy and collection of such taxes and the prompt payment of such principal and interest. The Bonds do not constitute a debt or indebtedness of the State or any political subdivision thereof other than the District. See SECURITY FOR THE BONDS and TAXING POWERS AND DEBT CAPACITY herein. Currently, the District does not levy taxes as allowed by State statute. It is the District s expectation to pay debt service on the Bonds from the net income of its utility enterprise funds. See SECURITY FOR THE BONDS herein. The Bonds are offered by the Underwriter, when, as and if issued, subject to the approving legal opinion of K&L Gates LLP, Seattle, Washington ( Bond Counsel ). The form of Bond Counsel s opinion is attached as Appendix A. It is anticipated that the Bonds will be available for delivery by Fast Automated Securities Transfer, through the facilities of DTC in New York, New York on or about June 5, This cover page contains certain information for quick reference only and is not a summary of the issue. Investors must read the entire Official Statement to obtain information essential to the making of an informed investment decision.

2 MATURITY SCHEDULE, INTEREST RATES, YIELDS AND CUSIP NUMBERS PUBLIC UTILITY DISTRICT NO. 1 OF WHATCOM COUNTY, WASHINGTON Due December 1 $6,025,000 LIMITED TAX GENERAL OBLIGATION BONDS, 2013 Interest Rate Yield CUSIP No.* Amount 2014 $240, % 0.50% DA , DB , DC , DD , DE , DF , DG , DH , DJ , ** DK , ** DL , ** DM , ** DN , ** DP , ** DQ4 $1,635, % Term Bonds due December 1, 2032, with a yield of 3.35%**; CUSIP No.*: DU5 * CUSIP is a registered trademark of the American Bankers Association. CUSIP numbers herein are provided by CUSIP Global Services, managed on behalf of the America Bankers Association by Standard & Poor s, a division of The McGraw- Hill Companies, Inc. The CUSIP numbers are not intended to create a database and do not serve in any way as a substitute for CUSIP service. CUSIP numbers are provided for convenience and reference only, and are subject to change. The District takes no responsibility for the accuracy of such CUSIP numbers. ** Priced to the June 1, 2023 par call date.

3 1705 Trigg Road Ferndale, Washington Phone: (360) Fax: (360) Jeffrey L. McClure Michael J. Murphy Paul D. Kenner Board of Commissioners President Vice President Secretary Staff Stephan Jilk General Manager D. Brian Walters Director of Utility Operations/ Assistant General Manager Annette Smith Director of Finance Keith Willnauer Steven N. Oliver Elected County Officials Assessor Treasurer Bond Counsel K&L Gates LLP Seattle, Washington Financial Advisor A. Dashen & Associates Bellevue, Washington Bond Registrar The Bank of New York Mellon New York, New York * The District s website is not part of this Official Statement, and investors should not rely on information presented in the District s website in determining whether to purchase the Bonds. This inactive textual reference to the District s website is not a hyperlink and does not incorporate the District s website by reference. i

4 No quotations from or summaries or explanations of the provisions of laws or documents herein purport to be complete, and reference is made to such laws and documents for full and complete statements of their provisions. This Official Statement is not to be construed as a contract or agreement between the District and the purchasers or owners of any of the Bonds. The cover page hereof and appendices attached hereto are part of this Official Statement. No dealer, broker, sales representative, or other person has been authorized by the District to give any information or to make any representations other than as contained in this Official Statement in connection with the offering made hereby and, if given or made, such information or representations must not be relied upon as having been authorized by the District. The information and expressions of opinions herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder will, under any circumstances, create any implication that there has been no change in the information set forth herein since the date hereof. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of the Bonds by any person, in any jurisdiction in which it is unlawful for such persons to make such offer, solicitation or sale. The Underwriter has provided the following sentence for inclusion in this Official Statement. The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, their responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. In connection with the offering of the Bonds, the Underwriter may overallot or effect transactions that stabilize or maintain the market price of such Bonds at levels above that which might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time. Certain statements contained in this Official Statement reflect not historical facts but forecasts and forward-looking statements. The words estimate, project, anticipate, expect, intend, believe and similar expressions are intended to identify forward-looking statements. The achievement of certain results or other expectations contained in forward-looking statements involves known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements described to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Except as described in the continuing disclosure undertaking of the District, the District does not plan to issue any updates or revisions to those forward-looking statements if or when their expectations or events, conditions or circumstances on which such statements are based occur. THE BONDS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE BOND RESOLUTION HAS NOT BEEN QUALIFIED UNDER THE TRUST INDENTURE ACT OF 1939, AS AMENDED, IN RELIANCE UPON EXEMPTIONS CONTAINED IN SUCH ACTS. THE REGISTRATION OR QUALIFICATION OF THE BONDS IN ACCORDANCE WITH APPLICABLE PROVISIONS OF SECURITIES LAWS OF THE STATES IN WHICH THE BONDS HAVE BEEN REGISTERED OR QUALIFIED AND THE EXEMPTION FROM REGISTRATION OR QUALIFICATION IN OTHER STATES CANNOT BE REGARDED AS A RECOMMENDATION THEREOF. NEITHER THESE STATES NOR ANY OF THEIR AGENCIES HAVE PASSED UPON THE MERITS OF THE BONDS OR THE ACCURACY OR COMPLETENESS OF THIS OFFICIAL STATEMENT. ANY REPRESENTATION TO THE CONTRARY MAY BE A CRIMINAL OFFENSE. ii

5 Table of Contents THE BONDS... 1 Principal Amount, Date, Interest Rates and Maturities... 1 Bond Registrar and Registration... 1 Redemption Provisions... 1 Purchase... 2 Book-Entry Bonds... 2 Defeasance... 3 PURPOSE AND USE OF PROCEEDS... 3 Purpose... 3 Sources and Uses of Proceeds... 3 SECURITY FOR THE BONDS... 3 General... 3 Reserve Account... 4 TAXING POWERS AND DEBT CAPACITY... 4 Regular Property Tax Limitations... 5 Assessed Valuation Determination... 6 Tax Collection Procedure... 6 Property Values... 7 Major Taxpayers... 7 General Obligation Debt Capacity... 7 Computation of Debt Capacity... 8 DISTRICT DEBT AND OVERLAPPING DEBT INFORMATION... 8 Net Direct and Overlapping Debt... 8 Bonded Debt Ratios... 8 Summary of Overlapping Debt... 9 Overlapping Taxing Districts DEBT SERVICE REQUIREMENTS AND ADDITIONAL BORROWING Summary of Outstanding Debt Additional Borrowing Debt Payment Record AUTHORIZED INVESTMENTS THE DISTRICT General Board of Commissioners Administrative Staff Retirement Plans Other Post Employment Benefits Accounting Practices Risk Management Auditing DISTRICT FINANCIAL INFORMATION Historical Operating Results Statement of Net Assets Management Discussion of Financial Changes from 2011 to Budget THE WATER SYSTEM Description Customers Water System Rate Structure Endangered Species Act THE ELECTRIC SYSTEM CAPITAL IMPROVEMENT PLAN DEMOGRAPHIC INFORMATION INITIATIVE AND REFERENDUM State Initiatives Future Initiatives and Referenda TAX MATTERS CONTINUING DISCLOSURE RATING LEGAL AND UNDERWRITING Approval of Counsel Litigation Financial Advisor Underwriting Concluding Statement FORM OF OPINION OF BOND COUNSEL... APPENDIX A BOOK-ENTRY ONLY SYSTEM... APPENDIX B UNAUDITED 2011 AND 2012 ANNUAL REPORTS... APPENDIX C AUDITED ANNUAL FINANCIAL STATEMENTS... APPENDIX D iii

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7 OFFICIAL STATEMENT Public Utility District No. 1 of Whatcom County, Washington $6,025,000 Limited Tax General Obligation Bonds, 2013, Washington (the District ), a municipal corporation duly organized and existing under and by virtue of the laws of the State of Washington (the State ), furnishes this Official Statement in connection with the offering of $6,025,000 principal amount of Limited Tax General Obligation Bonds, 2013 (the Bonds ). This Official Statement provides information concerning the District and the Bonds. The Bonds are issued pursuant to Title 54 and Chapter of the Revised Code of Washington ( RCW ) Resolution No. 665 (the Bond Resolution ) adopted by the Commission of the District (the Commission ) on March 26, The District currently has outstanding $130,000 Limited Tax General Obligation Bonds, Series 2004A (Tax-Exempt) (the 2004A Bonds ), $360,000 Limited Tax General Obligation Bonds, Series 2004B (Taxable) (the 2004B Bonds ), $2,660,000 Limited Tax General Obligation Bonds, 2010A (Private Activity AMT) (the 2010A Bonds ), $20,980,000 Limited Tax General Obligation Bonds, 2010B (Private Activity Non-AMT) (the 2010B Bonds ), and $5,920,000 Limited Tax General Obligation Refunding Bonds, 2012 (Taxable) (the 2012 Bonds ). Additionally, the District currently has outstanding $2,460,000 Water Revenue Bonds, 2007 (the 2007 Water Revenue Bonds ). It is the District s expectation to pay debt service on the Bonds from the net income of its utility enterprise funds. These utility enterprises include a water utility and an electric utility. For a description of the utility enterprises, see The Water System and The Electric System herein. Collectively, the District s Water System and Electric System are referred to herein as the System. To the extent that net income from the System is insufficient to pay debt service on the Bonds, the District has pledged to levy property taxes within the District in amounts sufficient to pay principal of and interest on the Bonds as the same shall become due. Principal Amount, Date, Interest Rates and Maturities THE BONDS The Bonds will be issued in the principal amount shown on the inside cover hereof and will be dated and bear interest from the date of initial delivery to the Underwriter. The Bonds will mature on the dates and in the principal amounts and will bear interest (payable semiannually on each June 1 and December 1, commencing December 1, 2013) until the maturity or earlier redemption of the Bonds at the rates set forth on the inside cover of this Official Statement. Interest on the Bonds will be computed on the basis of a 360-day year consisting of twelve 30-day months. Bond Registrar and Registration The Bonds will be issued as fully registered bonds and, when issued, will be registered in the name of Cede & Co. as Bond Owner and as nominee for the Depository Trust Company ( DTC ). DTC will act as securities depository for the Bonds. Individual purchases and sales of the Bonds may be made in book-entry form only in minimum denominations of $5,000 within a single maturity and integral multiples thereof. Purchasers ( Beneficial Owners ) will not receive certificates representing their interest in the Bonds. Principal of and interest on the Bonds will be payable by the Bond Registrar (or such other registrar as the Treasurer may from time to time designate). So long as Cede & Co. is the registered owner of the Bonds, principal of and interest on the Bonds are payable by wire transfer by the Bond Registrar to DTC, which in turn is obligated to remit such principal and interest to its Participants for subsequent disbursement to the Beneficial Owners of the Bonds, as further described herein in Appendix B. Redemption Provisions Optional Redemption. The Bonds maturing on December 1 in the years 2014 through 2022 are not subject to redemption prior to their stated dates of maturity. The Bonds maturing on and after December 1, 2023 are subject to optional redemption at any time on or after June 1, 2023, as a whole or in part at a price of par plus accrued interest to the date fixed for redemption. 1

8 Mandatory Redemption. The Bonds maturing on December 1, 2032 are Term Bonds and, if not previously redeemed pursuant to an optional redemption or purchased by the District, will be called for redemption at par plus accrued interest on December 1 in years and amounts as follows: 2032 Term Bonds Year Amount 2029 $ 385, , , * 435,000 * Maturity. If Term Bonds are purchased or optionally redeemed prior to scheduled redemption, the District may reduce the foregoing redemption schedule by the amount so purchased or redeemed in the year(s) selected by the District. Selection of Bonds for Redemption. As long as the Bonds are held in book-entry only form, the maturities to be redeemed will be selected by the District and, within a maturity, the selection of Bonds to be redeemed will be made in accordance with the operational arrangements in effect at DTC. If the Bonds are no longer held in uncertificated form, the selection of such Bonds to be redeemed will be made as follows. If the District redeems at any one time fewer than all of the Bonds having the same maturity date, the particular Bonds or portions of Bonds of such maturity to be redeemed will be selected by lot (or in such other manner determined by the Bond Registrar) in increments of $5,000. In the case of a Bond of a denomination greater than $5,000, the District and the Bond Registrar will treat each Bond as representing such number of separate Bonds and in the denomination of $5,000 as is obtained by dividing the actual principal amount of such Bond by $5,000. In the event that only a portion of the principal sum of a Bond is redeemed, upon surrender of the such Bond at the principal office of the Bond Registrar there will be issued to the Registered Owner, without charge therefor, for the then unredeemed balance of the principal sum thereof, at the option of the Registered Owner, a Bond or Bonds of like maturity and interest rate in any of the denominations authorized in the Bond Resolution. Notice of Redemption. Unless waived by any owner of Bonds to be redeemed, official notice of any such redemption (which notice, in the case of an optional redemption, shall state that redemption is conditioned by the Bond Registrar on the receipt of sufficient funds for redemption) shall be given by the Bond Registrar on behalf of the District by mailing a copy of an official redemption notice by first-class mail, postage prepaid, at least 20 days and not more than 60 days prior to the date fixed for redemption to the Registered Owner of the Bond or Bonds to be redeemed at the address shown on the Register or at such other address as is furnished in writing by such Registered Owner to the Bond Registrar. However, that for so long as the Bonds are held in fully immobilized form by DTC and are registered in the name of CEDE & CO. or its registered assigns, all notices will be given only in accordance with DTC s operational arrangements. Purchase The District reserves the right and option to purchase any or all of the Bonds offered to the District at any time at any price deemed reasonable by the District. Book-Entry Bonds DTC will act as securities depository for the Bonds. The ownership of one fully registered Bond for each maturity of the Bonds, as set forth on the inside cover of this Official Statement, each in the aggregate principal amount of such maturity, will be registered in the name of Cede & Co., as nominee for DTC. See Appendix B attached hereto for additional information. Procedure in the Event of Revisions of Book-Entry Transfer System. If DTC resigns as the securities depository and the District is unable to retain a qualified successor to DTC, or the District has determined that it is in the best interest of the District not to continue the book-entry system of transfer or that interests of the Beneficial Owners of the Bonds might be affected adversely if the book-entry system of transfer is continued, the District will execute, authenticate and deliver at no cost to the Beneficial Owners of the Bonds or their nominees Bonds in fully registered form, in the denomination of $5,000 or any integral multiple thereof within a maturity. In the event the Bonds are transferred by the District to fully registered form, the Bonds may be payable by the Bond Registrar or the State s co-fiscal agent, which is currently Wells Fargo Bank, National Association, in Seattle, Washington. Thereafter, the principal of the Bonds will be payable upon due presentment and surrender thereof at the principal office of the Bond Registrar; interest on the Bonds will be payable by check or draft mailed on the interest payment date to the owners of the Bonds at the address appearing on the Bond 2

9 Register on the 15 th day of the month next preceding the interest payment date, and the Bonds will be transferable as provided in the Bond Resolution. Defeasance The District has reserved the right to defease the Bonds or any portion of them by providing for their payment. Payment of all or any portion of the Bonds may be provided for by irrevocably pledging and setting aside in a special account cash and/or Government Obligations. Such cash and Government Obligations will be applied solely for the purpose of paying the principal of the Bonds at maturity and interest thereon as the same shall become due. Such cash and the maturing principal of and interest on such Government Obligations will be sufficient to pay when due such principal and interest. As currently defined in chapter RCW, the term Government Obligations means (a) direct obligations of or obligations, the principal and interest on which are unconditionally guaranteed by the United States of America and bank certificates of deposit secured by such obligations; (b) bonds, debentures, notes, participation certificates or other obligations issued by the Banks for Cooperatives, the Federal Intermediate Credit Bank, the Federal Home Loan Bank System, the Export-import Bank of the United States, federal land banks or the Federal National Mortgage Association; (c) public housing bonds and project notes fully secured by contracts with the United States; and (d) obligations of financial institutions insured by the Federal Deposit Insurance Corporation to the extent insured or guaranteed as permitted under any other provision of State law. Purpose PURPOSE AND USE OF PROCEEDS The proceeds of the Bonds will be used to pay for the design and upgrade of the District s water treatment plant capacity, to fund other capital improvement projects of the District, to fund a portion of the reserve account requirement and to pay costs of issuance. Sources and Uses of Proceeds The proceeds of the Bonds, including a contribution from the District, are estimated to be applied as follows: Sources of Funds Par Amount $6,025,000 Original Issue Premium 462,194 Cash Contribution 38,097 Total Sources of Funds $6,525,291 Uses of Funds Deposit to Project Fund $6,000,000 Deposit to Reserve Account 452,800 Costs of Issuance (1) 72,491 Total Uses of Funds $6,525,291 (1) Includes Bond Counsel fee, rating fee, financial advisor fee, underwriter s discount, contingency and other costs associated with the issuance of the Bonds. SECURITY FOR THE BONDS General The Bonds are limited tax general obligation bonds of the District. The District, as authorized by law and the Bond Resolution, has irrevocably pledged that, unless the principal of and interest on the Bonds are paid from other sources, it will make annual levies of taxes, within the constitutional and statutory tax limitations provided by law without a vote of the electors of the District, upon all of the property in the District subject to taxation in amounts, together with all other revenues and money of the District legally available for such purposes, sufficient to pay such principal and interest as the same shall become due. See Taxing Powers and Debt Capacity. The District may, subject to applicable laws, apply other funds available to make payments with respect to the Bonds and thereby reduce the amount of future tax levies for such purpose. The Bonds do not constitute a debt or indebtedness of Whatcom County (the County ), the State or any political subdivision thereof other than the District. 3

10 The District is not currently levying any property taxes and has not done so in over 50 years. The District does not expect that it will need to impose a tax levy in order to provide for the payment of the debt service on the Bonds. It is the District s expectation to pay debt service on the Bonds from the net income of its utility enterprise funds. These utility enterprises include a water utility and an electric utility. For a description of the utility enterprises, see The Water System and The Electric System herein. Collectively, the District s Water System and Electric System are referred to herein as the System. To the extent that net income from the System is insufficient to pay debt service on the Bonds, the District has pledged to levy property taxes within the District in amounts sufficient to pay principal of and interest on the Bonds as the same shall become due. Reserve Account The Bond Resolution creates within the Bond Fund a Reserve Account to secure the payment of the principal of and interest on the Bonds. The District has covenanted that on or before the date of issuance of the Bonds it will deposit in the Reserve Account, from proceeds of the Bonds or other sources, an amount sufficient to satisfy the Reserve Requirement for the Bonds, defined in the Bond Resolution as an amount equal to the maximum annual debt service on the Bonds. The District has covenanted that when the required deposit has been made into the Reserve Account, it will at all times maintain therein an amount at least equal to the Reserve Requirement, as re-determined in each calendar year with respect to the Bonds. Whenever there is a sufficient amount in the Bond Fund and Reserve Account to pay the principal of, premium, if any, and interest on all Bonds, the money in the Reserve Account may be used to pay the principal of, premium, if any, and interest on the Bonds. Money in the Reserve Account may also be withdrawn to redeem and retire, and to pay the premium, if any, and interest due to such date of redemption, on the outstanding Bonds, as long as the money remaining on deposit in such Reserve Account is at least equal to the Reserve Requirement determined with respect to the Bonds then outstanding. If there is ever a deficiency in the Bond Fund to meet maturing installments of either interest on or principal of and interest on the Bonds, such deficiency shall be made up by withdrawing money from the Reserve Account. Any deficiency created in the Reserve Account by reason of such withdrawal shall then be made up from any funds of the District legally available therefor. The District has covenanted that if on October 1 of any year either (i) the balance in the Reserve Account is less than the Reserve Requirement or (ii) the balance in the Bond Fund is less than the amount of principal of and interest on the Bonds due and payable on December 1 of such year, it will levy taxes, for collection in the immediately following year, upon all property in the District subject to taxation within and as a part of the tax levy permitted to the District without a vote of the electors in an amount not less than maximum annual debt service on the Bonds and any other limited tax general obligation bonds of the District then outstanding and will continue to levy such taxes in such amount each year thereafter so long as the Bonds are outstanding; provided, however, that the District may thereafter reduce or eliminate the tax levy in one or more years if it receives an opinion of bond counsel or a letter ruling from the Washington State Department of Revenue to the effect that such reduction or elimination of the tax levy in such years shall not impair the District s ability in any subsequent year to resume levying the tax in an amount not less than maximum annual debt service on the Bonds and any other limited tax general obligation bonds of the District then outstanding. Notwithstanding any other provisions of the Bond Resolution to the contrary, the District need not maintain the Reserve Requirement and the Reserve Account may be closed if the District begins making the tax levy provided for in the Bond Resolution in an amount not less than maximum annual debt service on the Bonds and any other limited tax general obligation bonds of the District then outstanding. TAXING POWERS AND DEBT CAPACITY The power of the District to contract debt of any kind is controlled and limited by State law. The District is authorized to impose (i) a regular levy (up to $0.45/$1,000 of assessed value) and (ii) excess levies (unlimited as to rate or amount). The regular levy is imposed without a vote of the people for general purposes, including payment of debt service on the Bonds, and is subject to limitations (see Regular Property Tax Limitations below). Excess levies are imposed, upon voter approval, to pay debt service on unlimited tax general obligation bonds. An excess levy also may be imposed without a vote to prevent the impairment of a contract (RCW ). The District does not currently impose a property tax. However, the District has pledged in the Bond Resolution that, unless the principal of and interest on the Bonds are paid from other sources, it will make annual levies of taxes upon all 4

11 of the property in the District subject to taxation within and as a part of the tax levy permitted to the District without a vote of the electors in amounts sufficient to pay such principal and interest as the same becomes due; provided, however, that the first time any such levy is imposed for any purpose, the amount of the levy will not be less than the amount of maximum annual debt service on the Bonds and any other limited tax general obligation bonds of the District then outstanding. Based on the 2013 collection year assessed value, the levy that would need to be imposed to cover the maximum annual debt service due on all limited tax general obligation ( LTGO ) bonds is approximately $0.15 per $1,000 of assessed valuation. Regular Property Tax Limitations The authority of a District to levy taxes without a vote of the people for general District purposes, including the payment of debt service on limited tax general obligation indebtedness, is subject to the limitations described below. Information relating to regular property tax limitations is based on existing statutes and constitutional provisions. Changes in such laws could alter the impact of other interrelated tax limitations on the District. Statutory Taxing Authority. The District has statutory authority to levy property taxes for the repayment of unlimited tax and limited tax general obligation bonds of the District and for general purposes of the District (the Tax Levy ). The Tax Levy. Pursuant to its statutory authority, the District may impose the Tax Levy without a vote of the electors to pay debt service on its limited tax general obligation bonds and to fund general purposes of the District including capital expenditures and maintenance and operation expenses. Although the Tax Levy collections may not be used to pay debt service on any of the District s revenue bonds, they may be used to fund maintenance and operation expenses. The Tax Levy Allocable for Limited Tax General Obligation Bond Debt Service. For limited tax general obligation bonds (including the Bonds), the Tax Levy is subject to the statutory limitations described below under Levy Limitations but is not subject to the $0.45 limitation applicable to the general purpose portion of the Tax Levy under RCW The Tax Levy Allocable for General Purpose. For general purposes such as operating expenses and capital improvements, the Tax Levy is subject to the statutory limitations described below under Levy Limitations and pursuant to RCW may be imposed in an amount not to exceed $0.45 per $1,000 of assessed valuation (equal to 100 percent of actual value) of taxable property within the District. Levy Limitations. State law provides, in substance, that unless a higher rate is approved by a majority of the voters at an election, the regular property tax levy by a taxing district must be set so that the amount of the property taxes which will become payable to it in a given year will not exceed the amount of taxes levied by the taxing district in the highest of the three most recent years, by a specified percentage (the limit factor ) plus an adjustment for new construction. The limit factor is defined as the greater of (i) the lesser of 101 percent or 100 percent plus inflation or (ii) any percent up to 101 percent, if approved by a majority plus one vote of the governing body of the municipality upon a finding of substantial need. RCW allows the property tax levy to be set at the amount that would be allowed if the tax levy for taxes due in each year since 1986 had been set at the full amount allowed under chapter 84.55RCW. Thus, if in any year a taxing district levies an amount that is less than the maximum allowed under the limit described above, the amount that was not levied will nevertheless be included in the base for determining the levy limit in future years. This is sometimes referred to as banked levy capacity. The District does not currently impose a property tax. Based on the 2013 collection year assessed value, the District could levy up to $0.45 per $1,000 of assessed valuation for an amount equal to $10,567,985. With a majority vote of its electors, a taxing district may levy a greater amount than what otherwise would be allowed by the tax increase limitation. This increase may be imposed indefinitely or for a limited period, and revenues may be (but are not required to be) dedicated to satisfy a limited purpose, all as allowed by RCW This is known as a levy lid lift. A levy lid lift may not be used to increase the levy if it would cause the taxing district s levy to exceed the rate limitations described below. Since the regular property tax increase limitation applies to the dollar amount levied rather than to levy rates, increases in the assessed value of all property in the taxing district (excluding new construction, improvements and State-assessed property) which exceed the rate of growth in taxes allowed by the limit factor result in decreased regular tax levy rates unless voters authorize a higher levy or the taxing district uses banked levy capacity. Decreases in the assessed value of all property in the taxing district (including new construction, improvement and State-assessed property) or increases in such assessed value that are less than the rate of growth in taxes imposed, among other events, may result in increased regular tax levy rates. 5

12 The One Percent Aggregate Regular Levy Limitation. Article VII, Section 2 of the State Constitution, as amended in 1973, limits aggregate regular property tax levies by the State and all taxing districts, except port districts and public utility districts, including the District, to one percent of the true and fair value of property. RCW provides the same limitation by statute. $5.90/$1,000 Aggregate Regular Levy Limitation. Within the one percent limitation under RCW described above, RCW (2) imposes an aggregate limitation on regular tax levies by all taxing districts, other than the State, of $5.90/$1,000 of assessed valuation, except levies for any port or public utility district, including the District; excess levies authorized in Article VII, Section 2 of the State Constitution and certain levies for acquiring conservation futures, levies for emergency medical services or care, and levies to finance affordable housing. Uniformity Requirement. Article VII, Section 1 of the Washington Constitution requires that property taxes be levied at a uniform rate upon the same class of property within the territorial limits of a taxing district levying such taxes. It is possible because of different overlapping taxing districts in different areas of the District that the maximum permissible levy might vary within the District. In that event, to comply with the constitutional requirement for uniformity of taxation, the lowest permissible rate for any part of the District would be applied to the entire District. Prioritization of Levies. RCW provides that if aggregate levies certified by all taxing districts exceed the aggregate levy limitations described above, levies certified by junior taxing districts are reduced or eliminated in order to bring the aggregate levy into compliance with the statutory maximum prescribed by RCW and RCW defines junior taxing districts as all taxing districts other than the state, counties, road districts, cities, towns, port districts, and public utility districts. The District is not a junior taxing district. Authorization of Excess Levies. RCW authorizes the levying of taxes in excess of the $5.90/$1,000 and one percent limits imposed by RCW and , respectively, by any taxing district except school districts, when a larger levy is necessary in order to prevent the impairment of the obligation of contracts. Any such taxing district may also levy taxes in excess of the rates specified by statute when authorized to do so by the voters of such taxing district. Assessed Valuation Determination In the County, the County Assessor (the Assessor ) determines the value of all real and personal property throughout the County (including the District) which is subject to taxation. The Assessor is an elected official whose duties and methods of determining value are prescribed and controlled by statute and by detailed regulations promulgated by the State Department of Revenue. For tax purposes the assessed value of property is 100% of its actual value. All property in the County is subject to revaluation annually. The revaluation occurs in cycles, with one sixth of the County physically inspected each year and all properties subject to statistical revaluation each year. The property is listed by the Assessor on a roll at its current assessed value, and the roll is filed in the Assessor s Office. The Assessor s determinations are subject to revisions by the County Board of Equalization and, for certain property, subject to further revisions by the State Board of Equalization. After all administrative procedures are completed, the District receives the Assessor s final certificate of assessed value of property within the District. The assessed value for property in the District subject to regular property tax in 2013 is $23,484,411,003. Tax Collection Procedure Property taxes in the County are levied in specific amounts and the rates for all taxes levied for all taxing districts in the County (including the District) are determined, calculated and fixed by the Assessor based upon the assessed valuation of the property within the various taxing districts. The Assessor extends the taxes to be levied within each taxing District upon a tax roll which contains the total amount of taxes to be so levied and collected. The tax roll is delivered to the County Treasurer by November 15 of each year, and an abstract of such roll, showing the total amount of taxes collectable in each of the taxing districts for the year, is delivered to the County Auditor at the same time. On or before the first Monday in January, the County Auditor issues to the County Treasurer a directive authorizing the collection of taxes listed on the tax rolls of the County, as certified by the County Assessor. The County Treasurer creates a tax account for each taxpayer by property parcel number and is responsible for the collection of taxes due for each account. All such taxes are due and payable on the 30th of April of each year, but if the amount due from a taxpayer exceeds thirty dollars, one-half may be paid then and the balance paid no later than October 31 of each year. The method of giving notice of payment of taxes due, the accounting for the money collected, the division of the taxes among the various taxing districts, notices of delinquency, and collection procedures are all covered by detailed statutes. 6

13 The lien on property taxes is prior to all other liens or encumbrances of any kind on real or personal property subject to taxation. By law the Treasurer may not commence foreclosure of a tax lien on real property until three years have passed since the first delinquency. The State s courts have not decided whether the Homestead Law (chapter 6.13 RCW) may give the occupying homeowner a right to retain the first $125,000 of proceeds of the forced sale of the family residence or other homestead property for delinquent general property taxes. (See Algona v. Sharp, 30 Wn. App. 837, 638 P.2d 627 (1982), holding the homestead right superior to the improvement district assessments). The United States Bankruptcy Court for the Western District of Washington has held that the homestead exemption applies to the lien for property taxes, while the State Attorney General has taken the position that it does not. Property Values The following table represents the historic regular assessed value for the District: * Assessed value is based upon 100% of actual value. Source: Whatcom County Assessor s Office. Major Taxpayers Regular Assessed Value Collection Assessed Year Value* 2013 $23,484,411, ,531,575, ,729,066, ,077,540, ,264,823,547 Percent of 2013 Collection Year District s Taxpayer Type of Business Assessed Value Total A.V. BP West Coast Products LLC Refinery $ 888,697, % Phillips 66 Refinery 465,370, Puget Sound Energy Utility 258,197, ALCOA Corp. (Intalco) Aluminum production 81,336, PSE Ferndale Generating Stn. (Tenaska) Cogeneration plant 58,980, Bellis Fair Partners Retail 53,706, Northwest Pipeline Corp. Natural gas transmission 49,151, Trans Mountain Pipeline Oil pipeline transmission 48,444, Semiahmoo Resort Company LLC (1) Hotel / Golf Course 43,355, Cascade Natural Gas Corp. Utility 40,907, Total District s Ten Largest Taxpayers $ 1,988,147, % (1) The Semiahmoo Hotel, part of the Semiahmoo Resort, closed December 1, The Semiahmoo Resort Company is seeking a buyer for the hotel. Source: Whatcom County Assessor s Office. General Obligation Debt Capacity As prescribed by statutes of the State of Washington, the unlimited tax general obligation indebtedness permitted for public utility districts, subject to a 60 percent majority vote of qualified electors, is limited to 1.25 percent of a public utility district s assessed valuation for general purposes. Within the 1.25 percent of assessed valuation for general purposes, the District may, without a vote of the electors, incur general obligation indebtedness in an amount not to exceed 0.75 percent of assessed valuation. Additionally, within the 1.25 percent of assessed valuation for general purposes, the District may also, without a vote of the electors, enter into leases, if the total principal component of the lease payments together with the other non-voted general obligation indebtedness of the District, does not exceed 0.75 percent of assessed valuation. The combination of unlimited tax and limited tax general obligation debt for general purposes, including leases, cannot exceed 1.25 percent of assessed valuation. 7

14 The following table shows the District s general obligation debt capacity, adjusted for issuance of the Bonds. Computation of Debt Capacity (As of January 1, 2013) 2013 Collection Year Assessed Valuation $ 23,484,411,003 Non-voted Debt Capacity 0.75% of Assessed Value $ 176,133,083 Less: Outstanding Non-voted Debt (30,050,000) Less: The Bonds (6,025,000) Remaining Non-voted Debt Capacity $ 140,058,083 Voted and Non-voted Debt Capacity 1.25% of Assessed Value $ 293,555,138 Less: Outstanding Non-voted Debt (30,050,000) Less: The Bonds (6,025,000) Less: Outstanding Voted Debt 0 Total Remaining Voted and Non-voted Debt Capacity $ 257,480,138 Net Direct and Overlapping Debt DISTRICT DEBT AND OVERLAPPING DEBT INFORMATION The following table shows general obligation debt of the District adjusted for the issuance of the Bonds and the estimated portion of the debt of overlapping taxing districts allocated to the District s residents. Direct and Estimated Overlapping Debt Direct Debt Unlimited Tax General Obligation Bonds $ - Outstanding Limited Tax General Obligation Bonds 30,050,000 The Bonds 6,025,000 Net Direct Debt $ 36,075,000 Estimated Overlapping Debt (see Summary of Overlapping Debt below) 229,506,649 Total Net Direct and Overlapping Debt $ 265,581,649 Bonded Debt Ratios Assessed Value (2013 Collection Year) - $23,484,411,003 Estimated 2012 Population 203,500 Net Direct Debt to Assessed Value 0.15% Net Direct and Overlapping Debt to Assessed Value 1.13% Per Capita Assessed Value $ 115,403 Per Capita Net Direct Debt $ 177 Per Capita Total Net Direct and Net Overlapping Debt $ 1,305 8

15 Summary of Overlapping Debt (As of February 6, 2013) Overlapping Taxing District 2013 Assessed Value (1) Estimated Percent Overlap Outstanding GO Debt (2) Overlapping Debt Whatcom County $ 23,484,411, % $ 3,965,000 $ 3,965,000 Port of Bellingham 23,484,411, ,725,000 11,725,000 City of Bellingham 8,348,628, ,150,000 28,150,000 City of Blaine 774,011, ,139,381 7,139,381 City of Ferndale 1,096,951, ,029,349 10,029,349 City of Lynden 1,229,260, ,313,811 13,313,811 Lynden Park & Recreation Dist. 1,801,838, , ,000 Fire District No. 4 1,323,154, ,565,000 1,565,000 Fire District No. 7 2,601,451, ,320,000 1,320,000 Fire District No ,632, , ,319 Fire District No ,178, , ,020 Fire District No. 21 3,588,690, ,257,947 2,257,947 Fire District No. 52 1,616,599, , ,228 Sedro Woolley School Dist. No. 101 (3) 18,349, ,910,000 1,567 Bellingham School Dist. No ,971,249, ,615,000 81,615,000 Ferndale School District No ,563,766, ,500,000 29,500,000 Blaine School District No ,601,518, ,915,000 13,915,000 Lynden School District No ,801,838, ,287,808 3,287,808 Meridian School District No ,360, ,625,000 16,625,000 Nooksack Valley SD No ,528, , ,000 Mt. Baker School Dist. No ,504,878, ,637,219 2,637,219 Total $ 229,506,649 (1) Source: Whatcom County Assessor and Skagit County Assessor (Sedro Woolley SD No. 101). (2) Source: Whatcom County Treasurer, Skagit County Treasurer (Sedro Woolley SD No. 101) or individual taxing district. (3) Portion of assessed value in Whatcom County. Total District assessed value is $2,331,754,386. 9

16 Overlapping Taxing Districts The overlapping taxing districts within the District have the statutory power to levy regular property taxes at the following rates subject to the 101 percent limitation described under the heading Levy Limits, and levy excess voter approved property taxes. Representative levy rates for levy code 0100 of the District, as well as the statutory levy authority of each type of potential overlapping district, are listed below. Levy code 0100 is wholly within the District, however it does not include all of the property within the District; as a result, additional taxing districts, not listed below, levy taxes within the District. Representative Levy Rates Statutory Levy Authority Per $1,000 of Per $1,000 of Assessed Value Assessed Value Whatcom County $ (1) $1.80 (4) Flood Control Zone Port of Bellingham City of Bellingham (2) 3.60 (5) The District n/a (3) 0.45 State Schools (6) School District No (7) Total rate for Whatcom County levy code 0100: $ (1) Includes a Conservation Futures levy at a rate of per $1,000 of assessed value. (2) Includes a voter-approved general obligation bond levy of per $1,000 of assessed value and a voter-approved affordable housing levy at a rate of per $1,000 of assessed value. The affordable housing levy does not count against the statutory levy authority. (3) The District is not currently levying any property tax and has not done so in over 50 years. The District does not expect that it will need to impose a tax levy in order to provide for the payment of the debt service on the Bonds. (4) Pursuant to RCW (1), a county may increase its levy from $1.80 per $1,000 to a rate not to exceed $2.475 per $1,000 for general county purposes if (i) the total levies for both the county and any road district within the county do not exceed $4.05 per $1,000 and (ii) no other taxing district has its levy reduced as a result of the increased county levy. (5) RCW $0.225 of the total $3.60 can be used for pension funding purposes, if required; otherwise this tax may be levied and used for any other municipal purpose. (6) RCW (1). The levy by the State shall not exceed $3.60 per $1,000 assessed value adjusted to the State equalized value in accordance with the indicated ratio fixed by the State Department of Revenue to be used exclusively for the support of the common schools. (7) Washington school districts do not have authority to impose nonvoted regular levies. Source: Whatcom County Assessor for Levy Code

17 DEBT SERVICE REQUIREMENTS AND ADDITIONAL BORROWING The following table shows debt service on the District s outstanding water revenue bonds, outstanding LTGO Bonds and the Bonds. Water Revenue Bond and Limited Tax General Obligation Bond Debt Service Requirements Summary of Outstanding Debt The following table shows a summary of the District s outstanding LTGO Bonds, the Bonds and the District s outstanding revenue bonds Date of Date of Amount Amount Limited Tax General Obligations Issue Final Maturity Issued Outstanding 2004A Bonds 02/10/04 12/01/13 $ 2,910,000 $ 130, B Bonds 02/10/04 12/01/13 6,190, , A Bonds 12/30/10 12/01/19 2,660,000 2,660, B Bonds 12/30/10 12/01/30 20,980,000 20,980, Bonds 06/05/12 12/01/24 5,980,000 5,920,000 The Bonds 06/05/13 12/01/32 6,025,000 6,025,000 Revenue Bonds Outstanding The Bonds Total Water Revenue Year LTGO Bonds Principal Interest Debt Service LTGO Bonds Bonds 2013 $ 3,005,429 $ - $ 102,813 $ 102,813 $ 3,108,242 $ 244, ,008, , , ,300 3,458, , ,007, , , ,500 3,457, , ,998, , , ,600 3,449, , ,007, , , ,600 3,458, , ,997, , , ,500 3,448, , ,999, , , ,700 3,451, , ,220, , , ,600 2,670, , ,218, , , ,350 2,670, , ,223, , , ,800 2,676, , ,223, , , ,000 2,674, , ,224, , , ,800 2,672, , ,800, , , ,200 2,251, , ,799, , , ,000 2,247, , ,797, ,000 94, ,400 2,247, , ,795, ,000 80, ,200 2,246, ,800, ,000 65, ,400 2,250, ,799, ,000 50, ,000 2,249, ,000 34, , , ,000 17, , ,400 - $ 42,928,955 $ 6,025,000 $ 2,637,163 $ 8,662,163 $ 51,591,118 $ 3,700,931 Total $ 44,745,000 $ 36,075,000 Water Revenue Bonds, /27/07 11/01/27 $ 2,845,000 $ 2,460,000 11

18 Additional Borrowing The District does not expect to issue additional general obligation bonds or revenue bonds in the next 18 months. Debt Payment Record The District has promptly met all debt service payments on outstanding obligations. No refunding bonds have been issued to prevent an impending default. AUTHORIZED INVESTMENTS The Whatcom County Treasurer is the ex-officio treasurer for the District. In this capacity, the Treasurer receives deposits and makes investments on the District's behalf. At the request of one or more local governments that invest their money with a county, a county treasurer may pool those moneys for the purposes of investment (RCW ). The County currently has such a pool, the Whatcom County Investment Pool ("WCIP"), which operates on an amortized cost-book value basis. The County Finance Committee performs oversight of the pool's performance. There are no legally binding guarantees for the WCIP. Authorized investments for the WCIP are the same as investments held outside of the pool and are defined in the Whatcom County Treasurer's Office Investment Policy. Earnings, including any realized gains/losses in the pool, are distributed monthly, calculated on the average daily balance of the participant s account. The County is authorized by RCW's , 39.58, , , , and to invest in the following types of securities: United States Treasury Obligations; United States Government Agency Obligations and United States Government Sponsored Enterprises (GSE's); Banker's Acceptances (BA's) purchased through State of Washington Financial Institutions and authorized broker/dealers; Commercial Paper; Non-negotiable Certificates of Deposit; Deposit Notes of Financial Institutions; Repurchase Agreements; Bonds of the State and any local government in the State; General obligation bonds of a state other than the State and general obligation bonds of a local government of a state other than the State; registered warrants and notes for the County and those districts in the County for which the Treasurer is the ex-officio treasurer (subject to compliance with RCW ); the Washington State Local Government Investment Pool ("LGIP") and as defined in RCW ; mutual bond funds as and subject to the arbitrage provisions of Section 148 of the Federal Internal Revenue Code (if bond covenants permit investment in mutual funds). The LGIP, authorized by chapter RCW and administered by the State Treasurer, is comparable to a Rule 2a-7 money market fund, as recognized by the Securities and Exchange Commission, and its weighted average maturity does not exceed 90 days. For a full description of the LGIP and its investment structure visit the Washington State Treasurer's website at WCIP Interest Rate Risk: As a means of limiting its exposure to interest rate risk, the County diversifies its investments by security type and institution, and limits holdings in any one type of investment with any one issuer. The County coordinates its investment maturities to closely match cash flow needs and restricts the maximum investment term to five years from the purchase date unless matched to a specific cash flow. In the case of collateralized mortgage obligations, the average expected life at time of purchase must be under five years. The Whatcom County Treasurer's Office Investment Policy details the County's interest rate risk management criteria. WCIP Concentration Risk: The County allows 100 percent investment in United States Treasuries and the LGIP. The County limits its holdings in United States Government operated and sponsored entities to 90 percent of the portfolio and 35 percent per issuer; certificates of deposit, public funds deposit accounts and repurchase agreements to 40 percent of the portfolio and 10 percent per issuer; bankers acceptances to 25 percent of the portfolio and 10 percent per issuer; commercial paper to 25 percent of the portfolio and 5 percent per issuer; State and local government bonds to 20 percent, general obligation bonds outside the State to 15 percent, and deposit notes of financial institutions and reverse repurchase agreements to 10 percent of the portfolio. General THE DISTRICT The District was formed in 1937 by a vote of the people of the County. The District currently has legal authority to supply water and electricity anywhere in the County with the exception of electricity in the cities of Blaine and Sumas because those cities had existing municipal utilities at the time the District was formed. The District currently provides water and electric services to portions of the County. 12

19 The District is located in the County in the northwest portion of the State, approximately 34 miles south of Vancouver, Canada and 88 miles north of the City of Seattle. The District encompasses the entire County, which has a 2012 estimated population of 203,500, but does not provide services to all County residents. If the District imposes a tax levy, it is imposed County-wide. Board of Commissioners The District is managed by a Commission (the Commission ) comprised of three elected officials who serve staggered six-year terms of office. The Commission serves as the governing body of the District and has authority to set rates and charges. The Commission holds regular meetings twice a month and special meetings as needed. The present members of the Commission are as follows: Administrative Staff Commissioners Term Expires Jeffrey L. McClure, President December 31, 2014 Michael J. Murphy, Vice President December 31, 2016 Paul D. Kenner, Secretary December 31, 2018 The District currently has a total of 19 full-time employees. Key administrative officials include the following: Stephan Jilk, General Manager. Mr. Jilk has been with the District as its General Manager since Mr. Jilk is responsible for the management of all facets of the District s operations on a day to day basis by carrying out policy decisions made by the Commission and implementing the Operating and Capital budgets adopted by the Commission. As General Manager, Mr. Jilk administers all personnel actions and supervises District Division managers, selects legal and bond counsel, maintains a permanent journal of Commission proceedings, records and certifies appropriate policies and resolutions and serves as custodian of official District records. Prior to joining the District, Mr. Jilk served as the City of Lynden's City Administrator from 1993 to 2001 and was with the Port of Bellingham as the Economic Development Director from 2001 to 2003 and as the Director of Marine Services from 2003 to Mr. Jilk has 40 years of experience in the private and public sector serving in engineering and financial positions. Mr. Jilk graduated from Winona State University with a degree in Business Administration and is currently involved in numerous organizations including Public Utility District Association water supply committees, County Watershed Planning Board, AWWA water association, volunteers in support of the Lynden Regional Parks and Recreation District acting as management support and long range planner and a member of the Lynden School District Board. Brian Walters, Director of Utility Operations/Assistant GM. Mr. Walters has been with the District since 2002 and in his current position since Mr. Walters is responsible for managing the daily operations of both the electric and water systems. Prior to joining the District, he ran his own energy consulting business serving utility clients throughout the Northwest from 1997 to Mr. Walters has over thirty years of experience working in various facets of the utility industry for both public and private utilities, including Seattle City Light, Snohomish County PUD, and a subsidiary of Puget Sound Energy. He also worked for two utility trade organizations, the Washington PUD Association and the Public Power Council. Mr. Walters graduated from Eastern Washington University with a degree in psychology and later graduated from Western Washington University/Huxley College with a Bachelor of Science degree in Environmental Studies. Annette Smith, Director of Finance. Ms. Smith has been with the District in the Finance department since Ms. Smith supervises the financial affairs of the District as well as the purchasing activities of all departments. Ms. Smith manages the receipt, custody and disbursement of all District funds and also supervises the preparation of the annual budget which provides for the servicing of debt and operations of the District. Prior to joining the District, Ms. Smith was a senior accountant with Homax Products, Inc. from 1997 to 2006 and an accountant in the medical field from 1990 to Ms. Smith graduated with a degree in Business Administration, concentrating in finance, from Western Washington University. Ms. Smith volunteers at various community and school events and is the treasurer of a local soccer team. Professional affiliations include membership with the Washington Finance Officers Association. Bargaining Units The District s contract with its only bargaining unit, Western Conference Teamsters Welfare Trust, expires on December 31,

20 Retirement Plans The District's employees do not participate in any of the plans of the Washington State Department of Retirement Systems. In lieu of the State retirement, the District contributes to each eligible, non-union employee 7.2% of their gross salary to invest as they desire. The District offers its non-union employees a deferred compensation plan (the "Plan") in accordance with Internal Revenue Service Code Section 457. The Plan was adopted in An administrative service agreement was established with Hartford Life Insurance Company to provide individual investment choices for participants with detailed accounting to both the participants and the District. The Plan, available to eligible employees, permits them to defer a portion of their salary until future years. The deferred compensation is not available to employees until termination, retirement, death or unforeseeable emergency. The District has neither fiduciary responsibility nor liability for the Plan and accordingly, no records are reflected on the District's accounts. All eligible union employees are covered under the negotiated contract with Western Conference Teamsters Welfare Trust. Other Post Employment Benefits The Governmental Accounting Standards Board ( GASB ) has issued a new standard concerning Accounting and Financial Reporting by Employers for Post-Employment Benefits Other than Pensions (GASB 45). In addition to pensions, many State and local governmental employers provide other post-employment benefits ( OPEB ) as a part of total compensation to attract and retain the services of qualified employees. OPEB include post-employment health care as well as other forms of post-employment benefits when provided separately from a pension plan. The new standard provides for the measurement, recognition and display of OPEB expenses/expenditures, related liabilities (assets), note disclosures, and, if applicable, required supplementary information in the financial reports. The District does not provide other post-employment benefits and is not required to meet the GASB 45 reporting requirements. Accounting Practices The accounting records of the District are maintained in accordance with methods prescribed by the State Auditor under the authority of chapter RCW. The District uses two systems of accounts: (i) the Uniform System of Accounts for Class A Water Utilities (1996) as prescribed by the National Association of Regulatory Utility Commissioners and (ii) the Uniform System of Accounts Prescribed for Public Utilities and Licenses Subject to the Provisions of the Federal Power Act (1996) as prescribed by the Federal Energy Regulatory Commission. These systems of accounts allocate expenditures according to specific "modes." Modes identify the type of facility where the expense is incurred. Utilities have traditionally used extensive modal detail to classify expenses into categories of "Plant in Service." Because modes classify types of facilities, they are closely related to fixed asset categories and in many cases modal expense categories are the same as the facility categories Plant in Service; e.g.; Source of Supply, Transmission, Distribution, General Plant. Risk Management The District and 20 other entities in the State participate in a joint self-insurance pool in affiliation with the Public Utilities Risk Management Services ("PURMS"). The fund provides liability self-insurance for the first $1 million of individual loss claims. The property program provides property self-insurance for the first $250,000 of individual loss claims. Both pools (liability and property) operate independently of one another. The Fund is financed through assessments of its members. In November 2008, it was decided to raise the Designated Liability Pool Balance from $2 million to $3 million through semi-annual assessments starting in January 2009 and continuing through July The member districts will eventually be obligated to replenish the liability program to a level of $3 million through annual assessments. Interim assessments will be levied whenever the level of the liability program is reduced to an amount less than $2.5 million. An additional AEGIS liability policy covers an additional $35 million over the initial $1 million. At the end of 2009, the District decided to also add another $25 million in coverage through an EIM policy. For the property program, member districts are obligated to replenish to a level of $750,000 through annual assessments. Interim assessments are levied whenever the level of the property program is reduced to an amount less than $500,000. PURMS also maintains an Excess Property Insurance for its members in the Property Pool of $150 million. The District has a separate policy with Marsh USA Inc., through AEGIS Insurance services for Western Interconnect Electric System members, for electric blackouts and/or brownouts for its electric customers. Auditing The State Auditor is required to examine the financial affairs of public utility districts. The examination must include, among other things, the financial conditions and resources of the District, compliance with the State Constitution and 14

21 laws, and the methods and accuracy of the accounts and reports of the District. Reports of the auditor's examinations are required to be filed in the office of the State Auditor and in the auditing department of the District. The last audited financial statements of the District are for calendar years 2009 and 2010, which are included as Appendix D hereto. Unaudited financial statements of the District for the years ending December 31, 2011 and 2012 are included as Appendix C. DISTRICT FINANCIAL INFORMATION The following table shows historical operating results of the District from 2008 through 2012, based on audited financial statements through 2010 and unaudited financial statements for 2011 and The financial statements have been adjusted to exclude depreciation, amortization and other non-cash expenditures, and to show revenues available for debt service and debt service coverage. Although the Bonds are limited tax obligations of the District, the District anticipates paying debt service on the Bonds and its other limited tax general obligations from District revenues. As a result, this debt service is included with revenue bond debt service for purposes of calculating revenues available for debt service and debt service coverage. [Remainder of page intentionally left blank.] 15

22 Historical Operating Results (Fiscal Years Ended December 31) Audited Unaudited OPERATING REVENUE Utility Sales and Service Revenues $ 12,380,207 $ 13,048,056 $ 13,538,617 $ 14,046,385 $ 14,585,954 Other Operating Revenue 2,074 7,262 15,486 81,491 5,581 TOTAL OPERATING REVENUE 12,382,281 13,055,318 13,554,103 14,127,876 14,591,535 OPERATING EXPENSES (1) Operations: Purchased Water $ 46,585 $ 60,638 $ 51,802 $ - $ - Purchased Power 6,906,868 6,534,646 6,692,327 6,748,640 6,829,514 Water Purification 228, , , , ,415 Taxes / Process / Delivery Costs 413, , , , ,850 General Operations 715, , , , ,267 Maintenance 442, , ,991 1,043, ,088 Administration: General Administration 1,228,647 1,425,649 1,398,593 1,686,107 1,762,913 Planning and Development Expense 44, , , ,424 39,103 Utility Tax Expense 254, , , , ,007 TOTAL OPERATING EXPENSES 10,282,242 10,830,026 11,058,685 11,331,230 10,860,157 OPERATING INCOME (LOSS) $ 2,100,039 $ 2,225,292 $ 2,495,418 $ 2,796,646 $ 3,731,378 NONOPERATING REVENUE Lease Income $ 10,764 $ 11,870 $ 11,820 $ 12,805 $ 10,485 Interest Income 281, , , , ,926 Interest Fees (6,781) (6,990) (8,220) (23,845) (20,014) Service Revenues (2) 38,630, , , TOTAL NONOPERATING REVENUE 38,916, , , , ,397 NONOPERATING EXPENSE (3) Loss (Gain) on Property Disposal $ - $ 3,508 $ 17,940 $ 86,026 $ 18,418 BPA Alcoa Transfer (4) 38,410, Rural Electric Expense (5) (64,132) TOTAL NONOPERATING EXPENSE 38,346,542 3,508 17,940 86,026 18,418 INCOME BEFORE CONTRIBUTIONS, AND EXTRAORDINARY ITEMS $ 2,669,795 $ 2,528,897 $ 2,861,709 $ 2,953,818 $ 3,860,357 Capital Contrib. / Connection Charges (6) $ (353,877) $ (89,642) $ - $ 21,037 $ (200,000) Special / Extraordinary Items (7) 949, BALANCE FOR DEBT SERVICE $ 3,265,384 $ 2,439,255 $ 2,861,709 $ 2,974,855 $ 3,660,357 Outstanding Revenue Bonds $ 616,627 $ 558,805 $ 612,155 $ 244,606 $ 244,856 Less: ULUD Assessment Payments (8) (465,661) (326,467) (205,705) (211,110) (199,160) Net Revenue Bonds 150, , ,450 33,496 45,696 Outstanding LTGO Bonds 686, , ,438 1,817,541 1,890,958 TOTAL DEBT SERVICE $ 837,885 $ 1,029,110 $ 1,197,888 $ 1,851,037 $ 1,936,654 BALANCE AVAILABLE FOR OTHER PURPOSES $ 2,427,499 $ 1,410,145 $ 1,663,821 $ 1,123,818 $ 1,723,703 DEBT SERVICE COVERAGE 3.90x 2.37x 2.39x 1.61x 1.89x Source:. See footnotes on the following page. 16

23 (1) Excludes depreciation. (2) Includes revenues associated with the District acting as an intermediary for a monetary benefit payment between the Bonneville Power Administration and Alcoa until December Benefit payments continued through Offsetting expenses are included under Non-Operating Expenses. (3) Excludes interest expense and amortization. (4) See footnote 2. (5) Reflects expenses for an economic development fund, offset by partial tax credits. (6) Customers pay connection charges each time they increase demand. Depending on the contract, customers may receive a refund when they reduce demand. In 2012, the District provided a refund to the City of Ferndale for terminating their contact. In 2008, the District received connection charges from BP for increased water demand and provided a refund to Alcoa for reduced water demand. (7) Reflects a payment from the Bonneville Power Administration related to a residential exchange settlement. (8) Utility Local Utility District ( ULUD ) payments paid to the District from properties benefited by the Local Utility District improvements financed by the 2007 Water Revenue Bonds. [Remainder of page intentionally left blank.] 17

24 ASSETS Statement of Net Assets (Fiscal Years Ended December 31) Audited Unaudited CURRENT ASSETS Cash & Cash Equivalents $ 16,726 $ 19,029 $ 15,660 $ 27,787 $ 45,413 Short Term Investments 4,122,110 5,011,929 23,885,528 22,348,382 15,897,032 Receivables (Net): Customers 1,192,287 1,272,110 1,286,151 1,209,748 1,954,496 LUD #1 West Smith Road Receivable 4,005 5,346 5,346 5,346 5,346 Interfund Receivables 270, ,000 Other 58, ,380 37,388 27,782 26,626 Total Accounts Receivable (Net) 1,524,803 1,718,836 1,328,885 1,242,876 1,986,468 Prepayments 25,772 28,567 29,035 32,712 75,698 TOTAL CURRENT ASSETS $ 5,689,411 $ 6,778,360 $ 25,259,108 $ 23,651,758 $ 18,004,611 NON-CURRENT ASSETS Deferred Charges $ 302,996 $ 278,554 $ 396,348 $ 367,596 $ 548,808 Restricted Assets 1,801,187 1,900,173 3,630,351 3,798,157 3,574,380 Capital Assets Not Being Depreciated 896, ,143 2,160,158 4,451,767 11,767,795 Capital Assets Being Depreciated 25,611,644 26,466,779 26,563,995 27,421,780 28,836,557 Less Accumulated Depreciation (9,635,919) (10,245,166) (11,021,269) (11,759,804) (12,523,379) TOTAL NONCURRENT ASSETS $ 18,976,127 $ 19,380,483 $ 21,729,583 $ 24,279,496 $ 32,204,161 TOTAL ASSETS $ 24,665,538 $ 26,158,843 $ 46,988,691 $ 47,931,254 $ 50,208,772 LIABILITIES CURRENT LIABILITIES Accounts Payable $ 757,970 $ 1,594,946 $ 865,381 $ 1,456,365 $ 2,603,106 Accrued Employee Payable 5, , , , ,199 Accrued Utility Taxes 227, , , , ,655 Contractor Retainage 1,926 1,634 6,052 37,036 84,435 Interfund Payables 270, , Payables from Restricted Assets 711, , ,789 3,313 3,313 TOTAL CURRENT LIABILITIES $ 1,975,156 $ 2,945,609 $ 1,698,844 $ 1,922,748 $ 3,143,708 NON-CURRENT LIABILITIES Energy Green Credit $ 117,297 $ (19,003) $ 66,065 $ 8,953 $ - Payables from Restricted Assets 1999 Water Revenue Refunding Bond 2,965,000 2,730, LTGO Series A&B Bonds 7,315,000 6,885,000 6,435,000 6,462, , Water Revenue Bond 2,785,063 2,764,648 2,689,101 2,588,669 2,483, LTGO Series A&B Bonds ,707,111 23,796,470 23,793, LTGO Bonds ,933,636 TOTAL NON-CURRENT LIABILITIES $ 13,182,360 $ 12,360,645 $ 32,897,277 $ 32,856,225 $ 32,706,189 TOTAL LIABILITIES $ 15,157,516 $ 15,306,254 $ 34,596,121 $ 34,778,973 $ 35,849,897 NET POSITION Net Investment in Capital Assets $ 5,676,944 $ 6,566,756 $ 7,277,672 $ 6,436,479 $ 9,136,761 Restricted for Debt Service 1,801,187 1,900,173 3,586,620 3,729,117 3,514,380 Restricted for Miscellaneous Reserves ,041 60,000 Unrestricted 2,029,891 2,385,660 1,528,279 2,917,644 1,647,734 TOTAL NET POSITION $ 9,508,022 $ 10,852,589 $ 12,392,571 $ 13,152,281 $ 14,358,875 TOTAL LIABILITIES & NET POSITION $ 24,665,538 $ 26,158,843 $ 46,988,692 $ 47,931,254 $ 50,208,772 Source:. 18

25 Management Discussion of Financial Changes from 2011 to 2012 Total Net Position (excluding Extraordinary Items and Capital Contributions for 2012 adjustments) increased from $739,000 in 2011 to $1,407,000 in 2012 (a $668,000 increase). Operating Revenue increased by $464,000 due to rate increases and operating expenses decreased by $426,000 primarily due to a reduction in extraordinary maintenance. Non-operating Revenue reflected an decrease of $108,000, primarily due to a decrease in net Interest Income of $93,000. Non-operating Expenses reflected an overall increase of $114,000, resulting from the increase in interest expense of $45,000, an increase in amortization of $136,000 and a decrease in the Loss on Property Disposal of $67, Budget The table below shows the 2013 budget, modified to include the Bonds and show debt service coverage. Budget 2013 Operating Revenue Water Utility Sales and Revenue $ 6,655,947 Electric Utility Sales and Revenue 10,162,393 Other Operating Revenue 79,552 Total Operating Revenues 16,897,892 Operating Expenses (1) Operations and Maintenance 9,707,770 Taxes (includes taxes passed through to customer) 921,110 Administration 1,798,959 Total Operating Expenses 12,427,839 Operating Income (Loss) 4,470,053 Other Revenues (Expenses)(2) Interest Income (net of fees) 24,848 Total Other Revenues (Expenses) 24,848 Balance Available for Debt Service 4,494,901 Parity Debt Service Outstanding Revenue Bonds 244,869 Less: ULUD Assessment Payments (244,869) Net Revenue Bonds - Outstanding LTGO Bonds 3,005,429 The Bonds 102,813 Total Debt Service 3,108,242 Balance Available for Other Purposes 1,386,659 Debt Service Coverage 1.45x Source:. (1) Excludes depreciation. (2) Excludes interest expense and amortization. 19

26 Description THE WATER SYSTEM The Water System consists of water supply and distribution facilities and includes two separate systems the Cherry Point System and the Grandview System. The Cherry Point System provides approximately 97% of the Water System s gross revenues. The Cherry Point facilities provide non-potable water from the Nooksack River to a number of industrial and agricultural customers within the District. The Cherry Point operation is composed of two treatment facilities, each consisting of an intake plant, a treatment plant and a pump station. The pump stations pressurize water into the transmission plant, which generally forms a loop of 24-inch main about 15 miles in length. The treatment facilities were built with excess capacity with the expectation that additional customers would be added. The design treatment capacity of the Cherry Point System is currently 24 million gallons per day ("mgd"). A portion of the bond proceeds will be used to rebuild Plant 2 which will increase total treatment capacity to 28 mgd. Current usage averages 12 mgd while existing contracts specify future delivery of up to 35.9 mgd. As customer demands increase, the District can increase delivery of water up to present system capacity. If demand increases beyond system capacity, customers are required to fund the cost of increased system capacity to deliver the water. Since their original construction in 1965 and 1971, the Cherry Point treatment facilities have both been expanded and the transmission mains extended to form a loop. Growth has been accommodated through conservation and expansion of the Cherry Point System so that now the Cherry Point System serves the following industrial customers: Alcoa Intalco Works ("Alcoa") aluminum smelter; Phillips 66 s oil refinery; Puget Sound Energy s Ferndale Generating Station; BP America Inc.'s Cherry Point oil refinery; Burlington Northern's rail siding: Puget Sound Energy's Whitehorn natural gas power generation plant; Chemco, a wood treatment facility; Chevron Pipeline Company s Ferndale Storage Terminal; and Praxair s CO2 reduction facility. There are also approximately 33 irrigation customers served by the transmission facilities although they do not represent significant revenue. In addition to these water customers, the District has a contract for future service with Pacific International Terminals, Inc.. This contract is expected to contribute approximately $469,472 in gross revenue in The Water System also operates the Grandview System. The Grandview System serves three industrial parks in an area of light industrial zoning which has potential for significant growth. The Grandview System currently serves 40 customers potable and processed water and represents approximately 2.46% of the Water System's gross water revenue. The County has designated, in its Coordinated Water System Plan, a retail service area for the District consisting of the Cherry Point Heavy Industrial zone and the Grandview light industrial zone. In addition, the District has been designated with a wholesale service area consisting of the entire western portion of the County with the exception of the City of Bellingham and the area south of it. The Water System's historic water demands are shown in the following table: Historical Water System Demands Cherry Point - Plant 1 Cherry Point - Plant 2 Grandview System Average Daily Peak Day Average Daily Peak Day Average Daily Peak Day Usage (mgd) Usage (mgd) (1) Usage (mgd) (1) Usage (mgd) Usage (mgd) Usage (mgd) N/A N/A N/A N/A N/A N/A N/A (1) Usage was down in 2012 due to a fire at the BP refinery and the planned Phillips 66 shutdown for maintenance and repair operations. Source:. 20

27 Customers The Water System provides service to industrial customers (97 percent of revenues), irrigation customers (0.7 percent) and commercial customers (2.7 percent of total water revenues, 100 percent of potable water revenues). The Water System served the City of Ferndale through 2011, which represented 5.6 percent of all water revenues. The City of Ferndale has terminated the contract. The Water System has three major industrial water customers: BP America Inc. ("BP ), Alcoa and Phillips 66 (formerly Conoco Phillips), all of which are served by the Cherry Point system. Together, these customers comprise 98 percent of the Water System's water consumption and 82 percent of revenues in Neither BP, Alcoa, nor Phillips 66 are contractually obligated to make any payments related to the Bonds. The following is a brief description of their operations within the District. BP America Inc. The Cherry Point Refinery, which began operations in 1971 is owned by BP. BP is comprised of assets from the former British Petroleum, Amoco Oil Company, Atlantic Richfield Company and Castrol. The Cherry Point Refinery currently has production capability of 230,000 barrels per day of crude oil, making it the largest refinery in the State and the third-largest refinery on the West Coast. The refinery's products include gasoline, jet fuel, diesel fuel, butane, propane, and calcinated coke. BP recently brought a hydrogen production plant online which will increase the amount of water purchased from the District. These products are primarily marketed in Washington, Oregon and northern California. Current employment is more than 700 full-time employees and 500 contractors. BP markets their gasoline under the ARCO Products brand and is a leading retailer of gasoline on the West Coast with more than 1,300 branded retail outlets in California, Oregon, Washington, Arizona and Nevada. The Cherry Point Refinery is accessible to major supply sources and major markets through marine tankers and pipelines. Automobile gasoline produced by BP, for example, is sold primarily at AM/PM convenience stores and the traditional ARCO-branded service stations. A fire at the BP Refinery in February 2012 impacted BP s short term production and consumption of District water. The BP Refinery returned to normal operations within two months. Alcoa Intalco Works. Alcoa Intalco Works is primarily an aluminum smelter facility and began operations in Ferndale in The plant has three pot lines with two currently in operation. The two pot lines are able to produce a total of 184,000 metric tons per year, which is formed into ingots and shipped to fabrication plants throughout the world. Alcoa employs approximately 640 people. Alcoa recently obtained a 10 year power supply agreement with Bonneville Power Administration to supply them with power through Phillips 66. On May 1, 2012, ConocoPhillips Corporation ( CP ) separated their refining and marketing business from their exploration and production into two separate, stand-alone companies. The ConocoPhillips name stayed with the exploration and production company. Phillips 66 is the global refining and marketing company and assumed all agreements the District previously listed under ConocoPhillips. ConocoPhillips Corporation, under the new name Phillips 66, is one of the largest independent oil refiners and marketers of petroleum products in the United States. The Ferndale refinery has the capacity of processing 100,000 barrels of crude oil per day, creating gasoline, diesel oil, jet fuel, liquid petroleum gas, and residual fuel oil. Phillips 66 employs approximately 270 employees in the County. Historical Number of Water Customers (1) Comm./Light Industrial (potable) Industrial (raw water) Irrigation Total (1) Commercial and Light Industrial combined meters, resulting in a drop in the number of customers. This had no impact on District water revenues. Source:. 21

28 2012 Water Revenue by Customer Customer Total 2012 Water Revenues Percent of Total Water Revenues BP Cherry Point $ 3,135, % Phillips 66 1,010, % Alcoa (Intalco) 528, % PSE Ferndale Generating Station 414, % Pacific International Terminals, Inc. (PIT) 342, % Grandview - Northgate Industrial Park 152, % Irrigation Customers 41, % All Other Customers 91, % $ 5,715, % Source:. Water System Rate Structure The District approves an annual rate adjustment for the following year in December of each year, which is based on the budget that is adopted following a public hearing. Water rates for the District s non-potable Water System consist of four components: fixed capital charges, fixed operating charges, fire protection charges, and volume charges. Fixed capital charges include debt service and direct contributions for certain planned maintenance projects that are of a major capital nature and future capital needs for plant expansion, upgrade or replacement. The debt service component is first allocated between wholesale and retail customers and then prorated between customers within each class by contract demand. The direct capital contribution component is prorated between customers based on contract demand. Fixed operating charges include all administrative costs and a percentage of operation and maintenance ( O&M ) costs. The administrative component of the charge is prorated between customers based on operating demand. The O&M component of the charge is first allocated between retail and wholesale customers and then prorated between customers within each class by operating demand. Fire protection costs are separated from all other costs and are prorated between the customers based on level of fire protection provided. Volume charges include all costs of chemicals and power for pumping and a percentage of O&M costs. Volume charges are recovered in a per million gallons ( mgal ) rate based on the projected total annual millions gallons to be used. The water rates for the potable water system (Grandview) consist of a fixed charge per meter equivalent and a volume charge per 100 cubic feet ( ccf ) of water used. Fixed charges include debt service and direct contributions for certain planned maintenance projects that are of a major capital nature and future capital needs for plant expansion, upgrade or replacement, all administrative costs, and a percentage of O&M costs. Volume charges include all costs of chemicals and power for pumping and a percentage of O&M costs. The following table details the current schedule of rates and charges to each of the Water System's customers, as well as the expiration date of the customers' existing water service contract. 22

29 Water System Rates and Charges by Customer Customer 2012 Average Monthly Charge 2012 Monthly Volume Charge 2013 Estimated Average Monthly Charge 2013 Monthly Volume Charge Contract Expiration NON-POTABLE WATER SYSTEM Total Per mgal Total Per mgal BP Cherry Point $ 261,305 $ $ 296,267 $ /31/2030 Phillips 66 (former ConocoPhillips) 84, , /31/2029 Alcoa (Intalco) 44, , /31/2034 PSE Ferndale Generating Station (former Tenaska) (1) 34, , /31/2014 Pacific International Terminal, Inc. (PIT) (2) 28,501 N/A 40,089 N/A 12/31/2042 Irrigation 3, , annual renewal PSE Whitehorn 2, , /31/2026 Praxair, Inc. 2, , month-to-month Blue Heron LLC , /31/2032 Chevron / Texaco month-to-month Burlington Northern Santa Fe month-to-month Cornerstone (CCC) month-to-month POTABLE WATER SYSTEM Per ME(3) Per ccf Per ME(3) Per ccf Retail Customers $ $ 7.99 $ $ 7.99 no-contract Wholesale Customers $ $ 7.99 no-contract (1) Recently purchased from Tenaska by PSE and in the process of renewing the contract. (2) Currently not purchasing water, but reserves the right to purchase water through contract demand charge. (3) Meter equivalent. A ¾ meter equals 1 ME. Larger meters have proportionally larger meter equivalents. Source:. The overall 2013 revenue requirement for non-potable water increased by 15 percent in 2013 over The non-potable rates are different for each customer due to different contract quantities of water, but are computed from uniform unit costs and are not restricted by any contracts. The overall 2013 revenue requirement for potable water increased by 3 percent in 2013 over Below are the historical water rate increases from 2009 to Historical Water Rate Increases Raw Water (non-potable) System 12.0% 15.1% 13.5% 9.9% 15.0% Grandview (potable) System 8.0% 5.0% 0.0% 5.0% 3.0% Irrigation System 12.0% 0.0% 5.0% 5.0% 5.0% Endangered Species Act In planning future projects, the District evaluates the construction and operation of the facilities to determine if there will be any impact on endangered species through the use of site evaluations, special environmental studies, and preparation of State Environmental Policy Act ("SEPA ) checklists or environmental impact statements, as appropriate. Alternatives are developed to minimize or avoid impacts on endangered species. Where federal permits or funding are involved, the District also complies with the Endangered Species Act's "consultation" requirement, which serves to evaluate and address any potential effect on endangered species. Best management practices are employed during routine operation and maintenance activities to minimize impacts on the environment. 23

30 THE ELECTRIC SYSTEM In 1952, the District gained its first electrical customer when General Petroleum (predecessor of Phillips 66), came to the County looking for a refinery site. At the time, Puget Sound Power and Light (now Puget Sound Energy ( PSE )) was unable to supply the energy or obtain additional energy in the market. The District, through an arrangement with other public utility districts in the State, was able to obtain the energy which permitted the building of the original refinery at Cherry Point. In the process the District constructed a 13 mile 115 kilovolt ampere transmission line and substation at the refinery and the District became a functional utility. In 2011 the District purchased the PSE Ferndale Substation and distribution line that provides power to the District s Water Treatment Plant No.1 and constructed a short section of distribution line connecting directly to the District s 115 kv transmission line. This will reduce operating costs and improve redundancy of service to the District s Water System. In 2012, the District completed the purchase of PSE s Enterprise Substation, which provides power to the District s Water Treatment Plant No.2 ( WTP2 ) and the District s main administrative offices on Trigg Rd. The purchase included the substation yard, two power transformers, and all associated secondary distribution voltage facilities. PSE retained ownership of the incoming 115 kv transmission lines and associated 115 kv facilities. The purchase allowed the District to re-configure the distribution voltage side of the substation to improve electric service reliability by providing redundant electric distribution feeders and also to change the distribution voltage from 2.4 kv to 4.16 kv. The latter improvement was to provide service to the new high head water pumps, installed as part of the WTP2 upgrade project. Along with these substations and distribution line, the current Electric System is comprised of a 115 kilovolts ( kv ) transmission line (three conductors), approximately 13 miles in length, and a 115 kv, 70 megavolt ampere ( MVA ) capacity substation (Refinery substation). The Electric System is interconnected to the high voltage transmission network of the Bonneville Power Administration ( Bonneville ) at Bonneville s Bellingham substation and to PSE s 115 kv network at the Refinery substation. For energy control purposes, the entire Electric System lies within Bonneville s balancing authority. For a description of Bonneville, see The Bonneville Power Administration herein. At present, the District purchases 100 percent of the power supply it needs to meet system electric load requirements from Bonneville at the lowest rate available to Bonneville power customers. The District entered into a new power purchase agreement with Bonneville in The term of the agreement extends through Bonneville s fiscal year The District also has a network transmission services agreement with Bonneville that extends through fiscal year This agreement accommodates the transmission of all power purchased by the District from Bonneville and transmitted to contractually specified points of delivery. For calendar year 2012, the District s energy purchases from Bonneville totaled 204,544 megawatt hours ( MWh ) and the peak energy demand on the Electric System was 29.0 megawatts ( MW ). Currently the Electric System s only large load industrial customer is Phillips 66. The current power supply contract with Phillips 66 runs through September All direct costs from Bonneville are passed through to Phillips 66 without any markup on costs. Phillips 66 is also charged a fixed monthly charge for District services, which includes operation and maintenance costs, administrative costs, debt service costs, and direct contributions for certain planned maintenance projects that are of a major capital nature and future capital needs for plant expansion, upgrade or replacement. The District also purchases power to supply its own facilities including its two large water supply treatment plants and Water Distribution System. As an electric utility with 115 kv facilities, the District is under the jurisdiction of the Federal Energy Regulatory Commission (FERC) and mandatory electric system reliability standards enforced by the National Electric Reliability Council (NERC). Based on an audit of its electric operations conducted by the Western Electricity Coordinating Council (WECC), the District is in compliance with all reliability standards applicable to its electric operations. Bonneville Power Administration Bonneville was established by the passage by Congress of the Bonneville Project Act of Bonneville markets power from 31 federal hydroelectric projects, one non-federally owned nuclear plant, several small power plants in the Pacific Northwest, and from various contractual rights having an expected aggregate output in operating year 2013 of 10,585 annual average megawatts ( amw ) under average water conditions and 8,586 annual amw under critical water conditions (the Federal System ). These projects, built and operated by the United States Bureau of Reclamation and the United States Army Corps of Engineers, are located in the Columbia River basin. The Federal System currently produces more than one-third of the region s electric energy requirements. Bonneville s transmission system includes over 15,000 circuit miles of transmission lines, provides about 75% of the Pacific Northwest s high-voltage bulk transmission 24

31 capacity, and serves as the main power grid for the Pacific Northwest. Bonneville sells electric power at wholesale rates to more than 125 utility, industrial and governmental customers in the Pacific Northwest. Its service area covers over 300,000 square miles and has a population of about 12 million. CAPITAL IMPROVEMENT PLAN The District s capital program spans the years of 2012 through 2017 and includes the capacity design and upgrade of the water treatment plants; retrofits and upgrades to the pumps, intakes, valves, and motors for the water distribution system; purchase of a portion of the Enterprise substation from Puget Sound Energy and upgrade to that substation; replacement of the Electric System transmission line and poles; and the redesign and rebuild of the electric system refinery substation. Also included is a replacement of the District s Supervisory Control and Data Acquisition (SCADA) system, which serves both the Water and Electric Systems. The projected cost of the capital improvement plan for the years 2013 through 2017 is $28 million, a portion of which was funded by bond proceeds received in The remainder of the capital program will be funded with the proceeds of the Bonds, rate contributions, and interest earnings. Capital Improvement Plan Forecast Project Name 2012 Actual Total Internal Services $ 411,492 $ 2,012,121 $ 282,643 $ 239,386 $ 85,220 $ 117,949 $ 2,737,319 Raw Water 5,640,593 14,384, , ,656 1,927,978 59,028 17,338,894 Electric 2,763,694 3,476, ,114 1,315, , ,299 6,125,393 Maintenance 148, , , , , ,950 1,975,060 Total $ 8,964,661 $ 20,114,093 $ 1,734,245 $ 2,936,018 $ 2,529,084 $ 863,226 $ 28,176,666 DEMOGRAPHIC INFORMATION The District is located along the Canadian border in the northwest corner of the State and shares the same borders as the County, encompassing approximately 2,151 square miles. Slightly more than half of the County s population resides in incorporated areas in the western half of the County; the eastern half of the County is primarily forested land. Historical population figures for the County and the cities of Bellingham and Lynden are shown below. Population Whatcom County and Cities of Bellingham and Lynden Year Whatcom County City of Bellingham City of Lynden ,500 81,360 12, ,100 81,070 12, ,140 80,885 11, ,100 76,130 11, ,000 75,750 11, ,300 75,220 11,150 Source: Washington State Office of Financial Management Income. Historic personal income and per capita income levels for the County and the State are shown below: Whatcom County and State of Washington Total Personal and Per Capita Income Whatcom County Total Personal Per Capita Total Personal Income (in thousands) Income Income (in thousands) Source: U.S. Department of Commerce, Bureau of Economic Analysis 25 State of Washington Per Capita Income Year 2011 $7,759,117 $38,098 $299,685,263 $43, ,361,055 36, ,367,864 42, ,151,998 35, ,727,871 41, ,469,301 37, ,433,693 44, ,836,767 35, ,624,864 42, ,163,392 32, ,091,288 39,470

32 Taxable Retail Sales. Taxable retail sales reflect only those sales subject to retail sales tax. Historic taxable retail sales for the County and the City of Bellingham are shown below: Whatcom County Taxable Retail Sales Whatcom County (1) City of Bellingham 2012 $3,260,651,010 $2,172,257, ,026,148,561 2,026,285, ,906,188,021 1,923,766, ,860,207,856 1,843,043, ,159,006,607 2,042,629, ,236,589,942 2,153,523,750 (1) Includes incorporated and unincorporated Whatcom County. Source: Washington State Department of Revenue Building Permits. The number and valuation of new single-family and multi-family residential building permits in the County are listed below: Whatcom County Residential Building Permits New Single Family Units New Multi Family Units Total Year Number Construction Cost Number Construction Cost Construction Cost $ 113,567, $ 19,023,275 $ 132,590, ,858, ,387, ,245, ,635, ,139,434 92,775, ,720, ,757,344 91,477, ,979, ,084, ,063, ,439, ,729, ,169,694 Source: U.S. Bureau of the Census Employment. Major employers located within the County include the following: Whatcom County Major Employers Number of Employees Employer Type of Business St Joseph Hospital / Madrona Medical Group Healthcare 2,753 Western Washington University Higher Education 1,592 Bellingham School District Education 1,312 City of Bellingham Government 899 Whatcom County Government 864 BP Cherry Point Refinery Oil Refinery 800* Heath Tecna Inc Aircraft Interiors 704 Ferndale School District Education 698 Sodexho Services Food Service 652 Lummi Tribal Office Tribal Office 640 Fred Meyers Grocery 613 Alcoa Intalco Aluminum production 605* Silver Reef Casino Casino 544 Matrix Service Incorporated Industrial Service 482 The Markets LLC Grocery 476 * Employee counts are Full-Time Equivalent (FTE). Source: Center for Economics and Business Research, Western Washington University 26

33 Employment within the County is described in the following tables. Civilian Labor Force data is based on household surveys of residents. North American Industrial Classification System ( NAICS ) data are estimates based on surveys of employers and benchmarked based on covered employment as reported by all employers. Bellingham Metropolitan Statistical Area (Whatcom County) Nonagricultural Wage & Salary Workers and Labor Force and Employment Data March Annual Average 2013 (1) Civilian Labor Force 105, , , , , ,360 Total Employment 97, ,550 97,390 96,870 98, ,930 Total Unemployment 8,300 7,970 8,840 9,540 9,070 5,430 Percent of Labor Force 7.9% 7.3% 8.3% 9.0% 8.5% 5.0% March Annual Average NAICS INDUSTRY 2013 (1) Total Nonfarm 81,000 82,900 80,200 78,800 80,300 84,900 Total Private 64,200 66,900 64,100 62,500 64,100 68,800 Goods Producing 14,300 14,500 14,000 13,600 14,400 16,900 Mining, Logging, and Construction 5,500 5,900 5,700 5,700 6,500 8,000 Manufacturing 8,800 8,600 8,400 7,900 7,900 8,900 Service Providing 66,700 68,400 66,200 65,200 65,900 68,000 Private Service Providing 49,900 52,400 50,100 48,900 49,800 51,900 Trade, Transportation, Warehousing, & Utilities 15,600 15,200 14,900 14,700 15,000 15,800 Retail Trade 10,500 10,300 10,200 9,900 10,100 10,600 Financial Activities 3,200 3,000 3,000 2,900 3,000 3,200 Professional and Business Services 6,800 6,900 6,700 6,700 7,100 7,700 Leisure and Hospitality 8,700 9,300 9,200 9,200 9,300 9,900 Government 16,800 16,100 16,100 16,300 16,200 16,100 Federal Government 1,400 1,400 1,400 1,500 1,300 1,200 State Government 5,900 5,200 5,300 5,400 5,200 5,100 Local Government 9,500 9,400 9,500 9,500 9,700 9,900 (1) Preliminary. Source: Washington State Employment Security Department State Initiatives INITIATIVE AND REFERENDUM Under the State Constitution, the voters of the State have the ability to initiate legislation and require the Legislature to refer legislation to the voters through the powers of initiative and referendum, respectively. The initiative power in Washington may not be used to amend the State Constitution. Initiatives and referenda are submitted to the voters upon receipt of a petition signed by at least eight percent (initiative) and four percent (referenda) of the number of voters registered and voting for the office of Governor at the preceding regular gubernatorial election. Any law approved in this manner by a majority of the voters may not be amended or repealed by the Legislature within a period of two years following enactment, except by a vote of two-thirds of all the members elected to each house of the Legislature. After two years, the law is subject to amendment or repeal by the Legislature in the same manner as other laws. Future Initiatives and Referenda In recent years there has been an increase in the number of initiatives and referenda filed in Washington, including state initiatives targeting property taxes imposed by local jurisdictions. The District cannot predict whether this trend will continue, whether any filed initiatives will receive the requisite signatures to be certified to the ballot, and whether such initiatives will be approved by the voters and, if challenged, upheld by the courts. 27

34 TAX MATTERS In the opinion of Bond Counsel, interest on the Bonds is excludable from gross income for federal income tax purposes and is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations; however, interest on the Bonds is taken into account in determining adjusted current earnings for the purpose of computing the alternative minimum tax imposed on certain corporations. Federal income tax law contains a number of requirements that apply to the Bonds, including investment restrictions, periodic payments of arbitrage profits to the United States, requirements regarding the use of proceeds of the Bonds and the facilities financed with proceeds of the Bonds and certain other matters. The District has covenanted to comply with all applicable requirements. Bond Counsel s opinion is subject to the condition that the District comply with the above-referenced covenants and, in addition, will rely on representations by the District and its advisors with respect to matters solely within the knowledge of the District and its advisors, respectively, which Bond Counsel has not independently verified. If the District fails to comply with such covenants or if the foregoing representations are determined to be inaccurate or incomplete, interest on the Bonds could be included in gross income for federal income tax purposes retroactively to the date of issuance of the Bonds, regardless of the date on which the event causing taxability occurs. Except as expressly stated above, Bond Counsel expresses no opinion regarding any other federal or state income tax consequences of acquiring, carrying, owning or disposing of the Bonds. Owners of the Bonds should consult their tax advisors regarding the applicability of any collateral tax consequences of owning the Bonds, which may include original issue discount, original issue premium, purchase at a market discount or at a premium, taxation upon sale or other disposition and various withholding requirements. Prospective purchasers of the Bonds should be aware that ownership of the Bonds may result in collateral federal income tax consequences to certain taxpayers, including, without limitation, financial institutions, property and casualty insurance companies, individual recipients of Social Security or Railroad Retirement benefits, certain S corporations with excess net passive income, foreign corporations subject to the branch profits tax, life insurance companies and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry or have paid or incurred certain expenses allocable to the Bonds. Bond Counsel expresses no opinion regarding any collateral tax consequences. Prospective purchasers of the Bonds should consult their tax advisors regarding collateral federal income tax consequences. Payments of interest on tax-exempt obligations, such as the Bonds, are in many cases required to be reported to the Internal Revenue Service (the IRS ). Additionally, backup withholding may apply to any such payments made to any owner who is not an exempt recipient and who fails to provide certain identifying information. Individuals generally are not exempt recipients, whereas corporations and certain other entities generally are exempt recipients. Bond Counsel gives no assurance that any future legislation or clarifications or amendments to the Code, if enacted into law, will not cause the interest on the Bonds to be subject, directly or indirectly, to federal income taxation, or otherwise prevent owners of the Bonds from realizing the full current benefit of the tax status of the interest on the Bonds. Prospective purchasers of the Bonds should consult their own tax advisors regarding any pending or proposed federal legislation, as to which Bond Counsel expresses no view. Bond Counsel s opinion is not a guarantee of result and is not binding on the IRS; rather, the opinion represents Bond Counsel s legal judgment based on its review of existing law and in reliance on the representations made to Bond Counsel and the District s compliance with its covenants. The IRS has established an ongoing program to audit tax-exempt obligations to determine whether interest on such obligations is includable in gross income for federal income tax purposes. Bond Counsel cannot predict whether the IRS will commence an audit of the Bonds. Owners of the Bonds are advised that, if the IRS does audit the Bonds, under current IRS procedures, at least during the early stages of an audit, the IRS will treat the District as the taxpayer, and the owners of the Bonds may have limited rights to participate in the audit. The commencement of an audit could adversely affect the market value and liquidity of the Bonds until the audit is concluded, regardless of the ultimate outcome. Premium An amount equal to the excess of the purchase price of a Bond over its stated redemption price at maturity constitutes premium on that Bond. A purchaser of a Bond must amortize any premium over that Bond s term using constant yield principles, based on the Bond s yield to maturity. As premium is amortized, the purchaser s basis in the Bond and the amount of tax-exempt interest received will be reduced by the amount of amortizable premium properly allocable to the purchaser. This will result in an increase in the gain (or decrease in the loss) to be recognized for federal income tax purposes on sale or disposition of the Bond prior to its maturity. Even though the purchaser s basis is reduced, no federal 28

35 income tax deduction is allowed. Purchasers of Bonds at a premium, whether at the time of initial issuance or subsequent thereto, should consult their tax advisors with respect to the determination and treatment of premium for federal income tax purposes and the state and local tax consequences of owning such Bonds. Qualified Tax-Exempt Obligations The District has designated the Bonds as qualified tax-exempt obligations within the meaning of Section 265(b)(3)(B) of the Code. CONTINUING DISCLOSURE To assist the Underwriter in complying with the United States Securities and Exchange Commission ( SEC ) Rule 15c2-12(b)(5) (the Rule ), the District agrees to provide or cause to be provided to the Municipal Securities Rulemaking Board ( MSRB ), the following annual financial information and operating data for the prior fiscal year (commencing in 2014 for the fiscal year ended December 31, 2013): (1) Annual financial statements, which statements may or may not be audited, showing ending fund balances for the District s general fund prepared in accordance with the Budgeting Accounting and Reporting System prescribed by the Washington State Auditor pursuant to RCW (or any successor statute) and generally of the type included in this Official Statement for the Bonds under the headings Historical Operating Results and Statement of Net Assets ; (2) The assessed valuation of taxable property in the District; (3) Ad valorem taxes due and percentage of taxes collected; (4) Property tax levy rate per $1,000 of assessed valuation; and (5) Outstanding general obligation debt of the District. Items 2 through 5 shall be required only to the extent that such information is not included in the annual financial statements. The information and data described above shall be provided on or before nine months after the end of the District s fiscal year. The District s current fiscal year ends December 31. The District may adjust such fiscal year by providing written notice of the change of fiscal year to the MSRB. In lieu of providing such annual financial information and operating data, the District may cross refer to other documents available to the public on the MSRB s internet website or filed with the SEC. If not provided as part of the annual financial information discussed above, the District shall provide the District s audited annual financial statement prepared in accordance with the Budgeting Accounting and Reporting System prescribed by the Washington State Auditor pursuant to RCW (or any successor statute) when and if available to the MSRB. Material Events. The District agrees to provide or cause to be provided, in a timely manner, to the MSRB notice of the occurrence of any of the following events with respect to the Bonds not in excess of 10 business days after occurrence of the event: (1) Principal and interest payment delinquencies; (2) Non-payment related defaults, if material; (3) Unscheduled draws on debt service reserves reflecting financial difficulties; (4) Unscheduled draws on credit enhancements reflecting financial difficulties; (5) Substitution of credit or liquidity providers or their failure to perform; (6) Adverse tax opinions, the issuance by the Internal Revenue service of proposed or final determination of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the Bonds, or other material or events affecting the tax status of the Bonds; (7) Modifications to the rights of Bond owners, if material; (8) Bond calls, if material, and tender offers; (9) Defeasances; (10) Release, substitution or sale of property, securing repayment of the Bonds, if material; (11) Rating changes; (12) Bankruptcy, insolvency, receivership or similar event of the District; (13) The consummation of a merger, consolidation, or acquisition of the District or the sale of all or substantially all of the assets of the District, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement to undertake such an action, other than pursuant to its terms, if material; and (14) Appointment of a successor or additional trustee or the change of name of the trustee, if material. 29

36 Solely for purposes of disclosure, and not intending to modify this undertaking, the District advises that no credit enhancement or property secures the payment of the Bonds. The District shall promptly determine whether the events described above are material. Notification Upon Failure to Provide Financial Data. The District agrees to provide or cause to be provided, in a timely manner, to the MSRB notice of its failure to provide the annual financial information described above on or prior to the date set forth above. EMMA; Format for Filings with the MSRB. Until otherwise designated by the MSRB or the SEC, any information or notices submitted to the MSRB in compliance with the Rule are to be submitted through the MSRB s Electronic Municipal Market Access system ( EMMA ), currently located at (such website is not incorporated in this Official Statement by reference). All notices, financial information and operating data required by this undertaking to be provided to the MSRB must be in an electronic format as prescribed by the MSRB. All documents provided to the MSRB pursuant to this undertaking must be accompanied by identifying information as prescribed by the MSRB. Termination/Modification. The District s obligations to provide notices of material events will terminate upon the legal defeasance, prior redemption or payment in full of all of the Bonds. Any provision of this section will be null and void if the District (1) obtains an opinion of nationally recognized bond counsel to the effect that the portion of the Rule that requires that provision is invalid, has been repealed retroactively or otherwise does not apply to the Bonds, and (2) notifies the MSRB of such opinion and the cancellation of this section. The District may amend this section with an opinion of nationally recognized bond counsel in accordance with the Rule. In the event of any amendment of this section, the District will describe such amendment in the next annual report, and will include a narrative explanation of the reason for the amendment and its impact on the type (or in the case of a change of accounting principles, on the presentation) of financial information or operating data being presented by the District. In addition, if the amendment relates to the accounting principles to be followed in preparing financial statements, (i) notice of such change will be given in the same manner as for a material event under this undertaking and (ii) the annual report for the year in which the change is made will present a comparison (in narrative form and also, if feasible, in quantitative form) between the financial statements as prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles. Bondowner s Remedies Related to Continuing Disclosure Undertaking. A Bondowner s or a Beneficial Owner s right to enforce the provisions related to continuing disclosure undertaking will be limited to a right to obtain specific enforcement of the District s obligations related thereto, and any failure by the District to comply with the provisions of this undertaking will not be an event of default with respect to the Bonds under the Resolution. For purposes of this section, Beneficial Owner means any person who has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any Bonds, including persons holding Bonds through nominees or depositories. Other Continuing Disclosure Undertakings of the District. The District has entered into undertakings to provide annual information and the notice of the occurrence of certain events with respect to all bonds issued by the District and is in compliance with all such undertakings. RATING As noted on the cover page of this Official Statement, the District has received a rating for the Bonds from Standard & Poor s Ratings Services ( S&P ). S&P has assigned its rating of A+ to the Bonds. The rating reflects only the views of the rating agency and an explanation of the significance of the rating may be obtained from the rating agency. There is no assurance that the rating will be retained for any given period of time or that the rating will not be revised downward or withdrawn entirely by the rating agency if, in its judgment, circumstances so warrant. Any such downward revision or withdrawal of the rating will be likely to have an adverse effect on the market price of the Bonds. Approval of Counsel LEGAL AND UNDERWRITING Legal matters incident to the authorization, issuance and sale of Bonds by the District are subject to the approving legal opinions of K&L Gates LLP, Bond Counsel. The form of the opinion of Bond Counsel is attached hereto. Bond Counsel will be compensated only upon the issuance and sale of the Bonds. Bond Counsel has not been retained to review and has not reviewed this Official Statement for completeness or accuracy and will not offer an opinion concerning this Official Statement. All or a portion of the fees of Bond Counsel are contingent upon the issuance and sale of the Bonds. 30

37 Litigation There is no litigation pending or threatened questioning the validity of the Bonds nor the power and authority of the District to issue the Bonds. There is no litigation pending or threatened which would materially affect the District s ability to meet debt service requirements on the Bonds. Because of the nature of its activities, the District is subject to certain pending legal actions which arise in the ordinary course of business. Based on the information presently known, the District believes that the ultimate liability for any of such legal actions will not be material to the financial position of the District. Financial Advisor A. Dashen & Associates has served as financial advisor to the District relative to the preparation of the Bonds for sale, timing of the sale and other factors relating to the Bonds. The financial advisor has not audited, authenticated or otherwise verified the information set forth in this Official Statement or other information provided relative to the Bonds. A. Dashen & Associates makes no guaranty, warranty or other representation on any matter related to the information contained in this Official Statement. The financial advisor is an independent financial advisory firm and is not engaged in the business of underwriting, marketing, trading or distributing municipal securities. Underwriting The Bonds are being purchased by Seattle-Northwest Securities Corporation, the Underwriter. The purchase contract provides that the Underwriter will purchase all of Bonds at a price of $6,455,683 and will be reoffered at a price of $6,487,194. After the initial public offering, the public offering prices may be varied from time to time. The Underwriter of the Bonds has entered into a distribution agreement with UBS Financial Services Inc. for the retail distribution of certain municipal securities at the original issue prices. Pursuant to this agreement, the Underwriter will share a portion of its underwriting compensation with respect to the Bonds with UBS Financial Services Inc. On April 17, 2013, the Underwriter entered into a merger agreement with Piper Jaffray Companies. Under the terms of the merger agreement, the Underwriter will be merged into a subsidiary of Piper Jaffray Companies upon closing of the proposed transaction. The transaction is subject to approval by the Underwriter s shareholders and applicable regulatory authorities. At this time, the Underwriter cannot be certain whether shareholder approval will be obtained, and if obtained, if and when final regulatory approval will be granted. Until such approvals are obtained, the Underwriter will continue to operate independently. Concluding Statement So far as any statement herein includes matters of opinion, or estimates of future expenses and income, whether or not expressly so stated, they are intended merely as such and not as representations of fact. The information contained herein should not be construed as representing all conditions affecting the District or the Bonds. Additional information may be obtained from the District. The statements relating to the Resolution are in summarized form, and in all respects are subject to and qualified in their entirety by express reference to the provisions of such document in its complete form. The agreements of the District are set forth in such documents, and the information assembled herein is not to be construed as a contract with the Owners of the Bonds. PUBLIC UTILITY DISTRICT NO. 1 OF WHATCOM COUNTY, WASHINGTON By /s/ Stephan Jilk General Manager 31

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39 Appendix A Form of Opinion of Bond Counsel

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41 June 5, 2013 Ferndale, Washington Seattle-Northwest Securities Corporation Seattle, Washington Re:, Washington Limited Tax General Obligation Bonds, $6,025,000 Ladies and Gentlemen: We have acted as bond counsel to the Public Utility District No. 1 of Whatcom County, Washington (the District ), and have examined a certified transcript of all of the proceedings taken in the matter of the issuance by the District of its Limited Tax General Obligation Bonds, 2013, dated June 5, 2013, in the aggregate principal amount of $6,025,000 (the Bonds ). The Bonds are issued pursuant to Resolution No. 665, adopted on March 26, 2013 (the Bond Resolution ), for the purpose of purpose financing capital improvements to the District s water treatment facilities, funding a deposit to the Reserve Account and paying costs of issuance. Capitalized terms used in this opinion which are not otherwise defined shall have the meanings given to such terms in the Bond Resolution. The Bonds are subject to redemption prior to their stated maturities as provided in the Bond Resolution and the Bond Purchase Agreement. As to questions of fact material to our opinion, we have relied upon representations of the District contained in the Bond Resolution and in the certified proceedings and other certifications of public officials and others furnished to us without undertaking to verify the same by independent investigation. From such examination, as of this date and under existing law, we express the following opinions. 1. The Bonds have been legally issued and constitute valid and binding general obligations of the District, except to the extent that the enforcement of the rights and remedies of the holders and owners of the Bonds may be limited by laws relating to bankruptcy, insolvency, moratorium, reorganization or other similar laws of general application affecting the rights of creditors, by the application of equitable principles and the exercise of judicial discretion. A-1

42 Seattle-Northwest Securities Corporation June 5, 2013 Page 2 2. Unless paid from other sources, both principal of and interest on the Bonds are payable out of annual levies of ad valorem taxes to be made upon all of the taxable property in the District and as a part of the tax levy permitted to public utility districts without a vote of the electors and in amounts which, together with other available funds of the District, will be sufficient to pay such principal and interest as the same shall become due. 3. Interest on the Bonds is excludable from gross income for federal income tax purposes and is not an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations; however, interest on the Bonds is taken into account in determining adjusted current earnings for the purpose of computing the alternative minimum tax imposed on certain corporations. The opinion set forth in the preceding sentence is subject to the condition that the District comply with all requirements of the Internal Revenue Code of 1986, as amended (the Code ), that must be satisfied subsequent to the issuance of the Bonds in order that the interest thereon be, and continue to be, excludable from gross income for federal income tax purposes. The District has covenanted to comply with all applicable requirements. Failure to comply with certain of such covenants may cause interest on the Bonds to be included in gross income for federal income tax purposes retroactively to the date of issuance of the Bonds. The District has designated the Bonds as qualified tax-exempt obligations within the meaning of Section 265(b)(3) of the Code. Except as expressly stated above, we express no opinion regarding any other federal or state income tax consequences of acquiring, carrying, owning or disposing of the Bonds. Owners of the Bonds should consult their tax advisors regarding the applicability of any collateral tax consequences of owning the Bonds, which may include original issue discount, original issue premium, purchase at a market discount or at a premium, taxation upon sale, redemption or other disposition, and various withholding requirements. We have not been engaged nor have we undertaken to review the accuracy, completeness or sufficiency of the official statement or other offering material related to the Bonds (except to the extent, if any, stated in the official statement), and we express no opinion relating thereto, or relating to the undertaking by the District to provide ongoing disclosure pursuant to Securities and Exchange Commission Rule 15c2-12. This opinion is given as of the date hereof, and we assume no obligation to update, revise or supplement this opinion to reflect any facts or circumstances that may hereafter come to our attention or any changes in law that may hereafter occur. Very truly yours, K&L GATES LLP A-2

43 Appendix B Book-Entry Only System

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45 BOOK-ENTRY SYSTEM Book-Entry System The information in this section concerning the Depository Trust Company, New York, New York ( DTC ) and DTC s book-entry system has been obtained from sources that the District believes to be reliable, but the District takes no responsibility for the accuracy thereof. Beneficial Owners (as hereinafter defined) should therefore confirm the following with DTC or the Participants (as hereinafter defined). For purposes of this section, references to the Issuer mean the District, and references to Agent mean the Bond Registrar. For the purposes of this Official Statement, the term Beneficial Owner includes the person for whom the Participant acquires an interest in the Bonds. 1. The Depository Trust Company ( DTC ), New York, NY, will act as securities depository for the Bonds. The Bonds will be issued as fully registered securities registered in the name of Cede & Co. (DTC s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Bond certificate will be issued for each maturity of the Bonds, each in the aggregate principal amount represented by such Bonds, and will be deposited with DTC. 2. DTC, the world s largest depository, is a limited-purpose trust company organized under the New York Banking Law, a banking organization within the meaning of the New York Banking Law, a member of the Federal Reserve System, a clearing corporation within the meaning of the New York Uniform Commercial Code, and a clearing agency registered pursuant to the provisions of Section 17A of the Securities Exchange Act of DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-u.s. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC s participants ( Direct Participants ) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities through electronic computerized book- entry transfers and pledges between Direct Participants accounts. This eliminates the need for physical movement of Bond certificates. Direct Participants include both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ( DTCC ). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ( Indirect Participants ). DTC has Standard & Poor s rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at (which websites are not incorporated herein by reference). 3. Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC s records. The ownership interest of each actual purchaser of each Bond ( Beneficial Owner ) is in turn to be recorded on the Direct and Indirect Participants records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are expected, however, to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Bonds, except in the event that use of the book-entry system for the Bonds is discontinued. 4. To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are to be registered in the name of DTC s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC s records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. B-1

46 5. When notices are given, they shall be sent by the Fiscal Agent to DTC only. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. 6. Redemption notices shall be sent to DTC. If less than all of the Bonds of a maturity are being redeemed, DTC s practice is to determine by lot the amount of the interest of each Direct Participant in such maturity to be redeemed. 7. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the Bonds unless authorized by a Direct Participant in accordance with DTC s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the District as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co. s consenting or voting rights to those Direct Participants to whose accounts the Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). 8. Payments on the Bonds will be made to Cede & Co. or such other nominee as may be requested by an authorized representative of DTC. DTC s practice is to credit Direct Participants accounts upon DTC s receipt of funds and corresponding detail information from the District or the Bond Registrar, on the payable date in accordance with their respective holdings shown on DTC s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in street name, and are the responsibility of such Participant and not of DTC, the Bond Registrar or the District, subject to any statutory or regulatory requirements as may be in effect from time to time. Payments to Cede & Co. (or any other nominee as may be requested by an authorized representative of DTC) are the responsibility of the District or the Bond Registrar, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. 9. DTC may discontinue providing its services as depository with respect to the Bonds at any time by giving reasonable notice to the District or the Bond Registrar. Under such circumstances, in the event that a successor depository is not obtained, Bonds are required to be printed and delivered. 10. The District may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, Bonds will be printed and delivered to DTC. 11. The information in this appendix concerning DTC and DTC s book-entry system has been obtained from sources that the District believes to be reliable, but the District takes no responsibility for the accuracy thereof. B-2

47 Appendix C Unaudited 2011 and 2012 Annual Reports

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49

50 TABLE OF CONTENTS Management Discussion and Analysis (MD&A)... 3 Statement of Net Position... 6 Statements of Revenues, Expenses and Changes in Fund Net Position... 8 Statement of Cash Flows... 9 Notes to Financial Statements Supplemental Schedules PUD No. 1 of Whatcom County Audit Report

51 OVERVIEW OF FINANCIAL STATEMENTS MANAGEMENT'S DISCUSSION AND ANALYSIS For The Year Ended December 31, 2011 The District's Annual Financial Report consists of the following three parts: 1. Management's Discussion and Analysis (MD & A) (this section) 2. Financial statements, including footnotes 3. Required supplemental schedules The financial statements include a statement of net position, statement of revenues, expenses and changes in net position, statement of cash flows, and notes to the financial statements. The statement of net position provides a record of the assets and liabilities of the District at the close of the year. It provides information about the nature and amounts of investments in resources (assets) and obligations to District creditors (liabilities). It provides a basis for evaluating the capital structure of the District and assessing its liquidity and financial flexibility. The statement of revenues, expenses and changes in net position presents the results of the District's business activities for an annual period of time. The information contained in this statement can be used to determine whether the District is successfully recovering its costs through user fees and other charges, and to evaluate profitability and credit worthiness. The statement of cash flows reports cash receipts, cash payments and net changes in cash resulting from operating, financing, and investing activities for a year s period of time. The notes to the financial statements provide information regarding the District's significant accounting policies and significant account balances and activities. All District funds are operated as individual enterprise funds and collectively represent the financial operation of the District. A condensed comparative Statement of Net Position is shown below: AS S ETS Current Assets $ 23,651,757 $ 25,259,108 Non-Current Assets 4,165,754 4,026,699 Capital Assets (Net) 20,113,743 17,702,884 TOTAL ASSETS $ 47,931,254 $ 46,988,692 LIABILITIES Current Liabilities $ 1,922,748 $ 1,822,945 Non-Current Liabilities 32,856,225 32,773,176 TOTAL LIABILITIES $ 34,778,974 $ 34,596,121 NET POSITION Net Investment in Capital Assets $ 6,436,479 $ 7,277,672 Restricted for Debt Service 3,729,117 3,542,889 Restricted for Miscellaneous Reserves 69,041 43,731 Unrestricted 2,917,644 1,528,279 TOTAL NET POSITION $ 13,152,280 $ 12,392,571 TOTAL LIABILITIES AND NET POSITION $ 47,931,254 $ 46,988,692 PUD No. 1 of Whatcom County Audit Report

52 MANAGEMENT'S DISCUSSION AND ANALYSIS For The Year Ended December 31, 2011 A condensed comparative Statement of Revenue, Expenses and Changes in Net Position for the District is shown below: REVENUES Operating Revenue $ 14,127,876 $ 13,554,103 Nonoperating Revenue 454, ,937 TOTAL REVENUE $ 14,582,184 $ 14,144,040 EXPENS ES Operating Expenses 12,129,564 11,891,494 Nonoperating Expenses 1,713, ,565 TOTAL EXPENSES $ 13,843,512 $ 12,604,058 INCOME (LOSS) BEFORE CONTRIBUTIONS AND SPECIAL ITEMS $ 738,673 $ 1,539,982 Capital Contributions 21,037 - Special / Extraordinary Items - - CHANGE IN NET POSITION $ 759,709 $ 1,539,982 BEGINNING NET POSITION $ 12,392,571 $ 10,852,589 ENDING NET POSITION $ 13,152,280 $ 12,392,571 FINANCIAL POSITION Analysis of Changes in Total Net Position from For the twelve months ending December 31, 2011 the total net position of the District increased by approximately $760,000 or 6%. Total assets increased by $943,000 and total liabilities increased by $183,000 producing a net increase in net position. The major components contributing to the increase in assets were an increase in Cash & Cash Equivalents of $12,000 due to the timing of cash transactions, a decrease in Short-Term Investments of $1,537,000 from the use of the proceeds of the 2010 LTGO bond issue, a decrease in net receivables of $86,000 due to the timing of payments, A decrease of $29,000 in Deferred Charges due to the amortization of bond discounts, an increase in assessment investments of $144,000, an increase of $25,000 in Investments Other due to the creation of a Project Reserve Fund and the decrease of the liability set up for the BPA CRC reserve, and an increase in total capital assets net of depreciation of $2,411,000. The major components of the increase in total liabilities included an increase in Accounts Payables of $591,000 due to timing of payments, an increase in Utility Taxes of $74,000 due to the lack of an offsetting credit in Privilege Tax Due, an increase of $31,000 in Contractor Retainage, a decrease of $57,000 in Energy Green Credit Liability and a net decrease in the bonds principal and interest payable of $459,000 due to debt service payments. PUD No. 1 of Whatcom County Audit Report

53 MANAGEMENT'S DISCUSSION AND ANALYSIS For The Year Ended December 31, 2011 RESULTS OF OPERATIONS Analysis of changes in Revenue, Expenses, and change in Net Position for Total Net Position (excluding Extraordinary Items and Capital Contributions for 2011 adjustments) decreased from $1,540,000 in 2010 to $739,000 in 2011 (a $801,000 decrease). Operating Revenue increased by $574,000 due to rate increases and was offset by an increase in operating expenses of $238,000. Non-operating Revenue reflected an increase in net Interest Income of $131,000, a decrease in Service Revenues of $273,000 due to the termination of the Alcoa agreement and a decrease of $6,000 in other non-operating revenue. Non-operating Expenses reflected an overall increase of $1,001,000, resulting from the increase in interest expense due to the 2010 Bonds. CAPITAL ASSETS Analysis of Changes in Capital Assets from During 2011, total capital assets increased by $2,411,000 and were comprised of an overall increase in assets, including construction-work-in-progress for $2,292,000 ($210,000 of construction-work-in-progress were expensed during 2011), the Raw Water Utility (Cherry Point) for $772,000, the Grandview Water Utility for $0, the Electric Utility for $14,000, $72,000 for general utility and office assets accounted for in the Internal Services Fund and an increase in accumulated depreciation of $739,000. SEE NOTE 3. LONG-TERM DEBT Analysis of Changes in Long-Term Debt from During 2011, the District s indebtedness for the 2004 LTGO bond issue was reduced by $450,000, the District s indebtedness for the 2007 Water Revenue Bond was reduced by $100,000, and no principal payments were made on the 2010 LTGO bonds. SEE NOTE 7 and SCHEDULE 09. REQUEST FOR INFORMATION The basic financial statements, notes and management discussion and analysis are designed to provide a general overview of the District s finances. Questions concerning any of the information provided in this report should be directed to the Director of Finance of the, 1705 Trigg Rd, Ferndale, WA PUD No. 1 of Whatcom County Audit Report

54 MCAG No Page 1 of 2 STATEMENT OF NET POSITION As of December 31, 2011 ASSETS CURRENT AS S ETS Cash & Cash Equivalents $ 27,787 Short Term Investments 22,348,382 Receivables (Net): Customers 1,209,748 LUD #1 West Smith Road Receivable 5,346 Other 27,782 Total Accounts Receivables (Net) 1,242,876 Prepayments 32,712 TOTAL CURRENT AS S ETS $ 23,651,757 NON-CURRENT AS S ETS Deferred Charges $ 367,596 Restricted Assets Investments - Bond Reserves 3,296,806 Investments - Assessments 432,310 Investments - Other 69,041 Capital Assets Not Being Depreciated Land 108,000 Construction in Progress 4,343,767 Capital Assets Being Depreciated: Buildings & Structures 8,490,260 Machinery & Equipment 18,065,520 Intangible 866,000 Less Accumulated Depreciation (11,759,804) Total Capital Assets (Net) 20,113,743 TOTAL NONCURRENT AS S ETS $ 24,279,497 TOTAL ASSETS $ 47,931,254 The notes to financial statements are an integral part of this statement. PUD No. 1 of Whatcom County Audit Report

55 MCAG No Page 2 of 2 STATEMENT OF NET POSITION As of December 31, 2011 LIABILITIES CURRENT LIABILITIES Accounts Payable $ 1,456,365 Accrued Employee Payable 188,249 Accrued Utility Taxes 237,785 Contractor Retainage 37,036 Payables from Restricted Assets Deposits & Other Payables 3,313 TOTAL CURRENT LIABILITIES $ 1,922,748 NON-CURRENT LIABILTIES Energy Green Credit $ 8,953 Payables from Restricted Assets 2004 LTGO Series A&B Bonds Principal 6,435, LTGO Series A&B Bonds Interest 27, Water Revenue Bonds Principal 2,565, Water Revenue Bonds Interest 23, LTGO Series A&B Bonds Principal 23,703, LTGO Series A&B Bonds Interest 92,714 TOTAL NON-CURRENT LIABILTIES $ 32,856,225 TOTAL LIABILITIES $ 34,778,974 NET POSITION Net Investment in Capital Assets $ 6,436,479 Restricted for Debt Service 3,729,117 Restricted for Miscellaneous Reserves 69,041 Unrestricted 2,917,644 TOTAL NET POSITION $ 13,152,280 TOTAL LIABILITIES & NET POSITION $ 47,931,254 The notes to financial statements are an integral part of this statement. PUD No. 1 of Whatcom County Audit Report

56 MCAG No Page 1 of 1 STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN FUND NET POSITION For The Year Ended December 31, 2011 OPERATING REVENUE Utility Sales and Service Revenues $ 14,046,385 Other Operating Revenue 81,491 TOTAL OPERATING REVENUE $ 14,127,876 OPERATING EXPENSES Operations: Purchased Power $ 6,748,640 Water Purification 138,207 Taxes / Process / Delivery Costs 428,031 General Operations 834,966 Maintenance 1,043,176 Administration: General Administration 1,686,107 Planning and Development Expense 101,424 Depreciation Expense 798,334 Utility Tax Expense 350,679 TOTAL OPERATING EXPENSES $ 12,129,564 OPERATING INCOME (LOSS) $ 1,998,313 NONOPERATING REVENUE Lease Income $ 12,805 Assessment Income 211,110 Interest Income 254,238 Interest Fees (23,845) Service Revenues - TOTAL NONOPERATING REVENUE $ 454,308 NONOPERATING EXPENSE Interest Expense $ 1,599,492 Amortization 28,430 Loss (Gain) on Property Disposal 86,026 TOTAL NONOPERATING EXPENSE $ 1,713,948 INCOME BEFORE CONTRIBUTIONS, AND EXTRAORDINARY ITEMS $ 738,673 Capital Contributions (Connection Charges) $ 21,037 Special / Extraordinary Items - CHANGE IN NET POSITION $ 759,709 TOTAL NET POSITION - JANUARY 1st $ 12,392,571 TOTAL NET POSITION - DECEMBER 31st $ 13,152,280 The notes to financial statements are an integral part of this statement PUD No. 1 of Whatcom County Audit Report

57 MCAG No Page 1 of 2 STATEMENT OF CASH FLOWS For The Year Ended December 31, 2011 CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers $ 14,855,378 Payments to suppliers (12,851,382) Payments to employees (Labor only) (1,740,563) NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ 263,433 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Proceeds from Capital Debt $ 1,442 Principal paid on Capital Debt (550,000) Interest paid on Capital Debt (1,512,148) NET CASH PROVIDED (USED) BY CAPITAL AND RELATED FINANCING ACTIVITIES $ (2,060,706) CASH FLOWS FROM INVESTING ACTIVITIES Investment Transactions $ 1,809,400 NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES $ 1,809,400 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 12,127 BALANCE BEGINNING OF YEAR $ 15,660 BALANCE END OF YEAR $ 27,787 The notes to financial statements are an integral part of this statement PUD No. 1 of Whatcom County Audit Report

58 MCAG No Page 2 of 2 STATEMENT OF CASH FLOWS For The Year Ended December 31, 2011 PUBLIC UTILITY DISTRICT NO. 1 OF WHATCOM COUNTY STATEMENT OF CASH FLOWS For the Period Ended December 31, 2011 RECONCILIATION OF OPERATING INCOME (LOSS) TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES Operating Income (Loss) $ 1,998,313 Adjustments to reconcile operating income to net cash Cash Provided (Used) by operating activities: Depreciation Expense 798,334 Miscellaneous (101,650) Change in Assets and Liabilities: Decrease (Increase) in Net Accounts Receivable 86,009 Decrease (Increase) in Prepayments (3,677) Decrease (Increase) in Deferred Charges 28,752 Decrease (Increase) in Net Capital Assets (3,209,193) Interfund Transfers (0) Increase (Decrease) in Account Payable 590,984 Increase (Decrease) in Accrued Employee Payable 11,017 Increase (Decrease) in Accrued Utility Taxes 74,395 Increase (Decrease) in Contractor Retainage 30,984 Increase (Decrease) in Deposits & Other Payables (4,760) Increase (Decrease) in Energy Green Credit (57,112) Increase (Decrease) in Contributed Capital 21,037 NET CASH PROVIDED BY OPERATING ACTIVITIES $ 263,433 The notes to financial statements are an integral part of this statement PUD No. 1 of Whatcom County Audit Report

59 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2011 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies of the ( District ) conform to generally accepted accounting principles (GAAP) as applicable to proprietary funds of governments. The following is a summary of the most significant policies (including identification of those policies which result in material departures from generally accepted accounting principles): a. Reporting Entity is a municipal corporation governed by an elected three-member board. As required by generally accepted accounting principles, the management has considered all potential component units in defining the reporting entity. The District has no component units. b. Basis of Accounting and Presentation The accounting records of the District are maintained in accordance with methods prescribed by the State Auditor under the authority of Chapter RCW. The District uses the full-accrual basis of accounting where revenues are recognized when earned and expenses are recognized when incurred. Capital asset purchases are capitalized and long-term liabilities are accounted for in the appropriate funds. The District distinguishes between operating revenues and expenses from non-operating ones. Operating revenues and expenses result from providing services and producing and delivering goods in connection with a district s principal ongoing operations. The principal operating revenues of the District are charges to customers for water delivery and electric service. The District also recognizes as operating revenue the penalties that occasionally correspond with utility billing, grant income, income from outside consulting and some miscellaneous recycle income. Operating expenses for the District include the cost of sales and services, administrative expenses, planning and business development expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as non-operating revenues and expenses. c. Cash and Cash Equivalents For the purposes of the Statement of Cash Flows, Restricted Bond Reserves, Assessments used to fund debt service and BPA green energy credits are excluded from cash equivalents. Operation, Capital, and Emergency Reserve balances are also excluded from cash equivalents and are reflected in the Investments Short Term Balance. SEE NOTE 2B. d. Utility Plant and Depreciation / Capital Assets: SEE NOTE 3. e. Restricted Funds In accordance with bond resolutions (and certain related agreements) separate restricted funds are required to be established. The assets held in these funds are restricted for specific uses, including construction, debt-service and other special reserve requirements. Restricted funds currently include the following: PUD No. 1 of Whatcom County Audit Report

60 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2011 RESTRICTED RESERVE BALANCES 2011 Bond Reserves 2004 LTGO Series A&B Bond Reserve $ 798, Water Revenue Bond Reserve (Grandview LUD) 249, LTGO Series A&B Bond Reserve 2,249,713 Total Bond Reserves $ 3,296,806 Other Restricted Funds LUD #2 Cash Investments 432,310 BPA CRC Cash Balance 9,041 Project Reserve Fund 60,000 TOTAL RESTRICTED RESERVE BALANCES $ 3,798,157 Assets and liabilities shown as current in the accompanying statement of net position (or balance sheet) exclude current maturities on bonds and accrued interest thereon because debt service funds are provided for their payment. f. Receivables Two customers have proved to be a collection risk. An allowance for bad debt in the amount of $26,421 is allocated to offset this potential loss. g. Inventories Inventories are valued at original cost (when they exist), which approximates the market value. h. Investments: SEE NOTE 2. i. Compensated Absences Compensated absences are absences for which employees will be paid, such as vacation, sick leave, and floaters (in lieu of holidays) is the first year the District reflected accrued compensated absence pay in the financial statements as an expense and liability. All leave is paid at the employee s current rate of pay when used. The General Manager s compensated absences are separately negotiated as part of his employment contract. Vacation pay may be carried over at year-end at a balance not greater than 80 hours plus the annual accrual. Unused vacation is payable upon resignation, retirement, termination without cause, or death. Sick Leave may be accumulated up to a total of 1080 hours for non-union employees and 1136 hours for union employees, and is not convertible. Upon termination of employment, unused sick leave is compensated at 25% of accrued benefit for non-union, 30% for union. Floating Holidays may be used at any time once accrued for leave. Full-time employees earn 12 floaters per year. Unused floaters must be cashed-out at the end of the year and cannot be carried forward to the next fiscal year. j. Unamortized Debt Expenses Costs relating to the sale of bonds are deferred and amortized over the lives of the various bond issues. PUD No. 1 of Whatcom County Audit Report

61 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2011 k. Construction Financing Funds for Capital Asset Construction are budgeted and collected in the Short-term Investments. SEE NOTE 2. l. Purchase Commitments The District currently has a power supply contract with the Bonneville Power Administration ( BPA ) that covers its entire electric load requirements. The contract with BPA runs through September 30, In August 2008, the District approved a new Network Transmission Agreement ( NT Agreement ) with BPA which provides for an extension of the term of the NT Agreement through August 31, 2038 and assures sufficient transmission capacity to accommodate both the District s existing power supply requirements moved over BPA s transmission system and future electric load growth. NOTE 2 DEPOSITS AND INVESTMENTS a. Deposits The District s deposits, and certificates of deposit, are entirely covered by Federal depository insurance (FDIC) or by collateral held in a multiple financial institution collateral pool administered by the Whatcom County Investment Pool (WCIP) pursuant to RCW b. Investments The agent for the District s investments is the Whatcom County Treasurer s Office and all investments are held in the Whatcom County Investment Pool [WCIP]. As of December 31, 2011, the District had the following investments: 2011 Maturities Fair Value INVESTMENTS Short-Term Investments Whatcom County Investment Pool $ 22,348,382 $ 22,348,382 Non-Current Whatcom County Investment Pool 3,798,157 3,798,157 TOTAL INVESTMENTS $ 26,146,540 $ 26,146,540 PUD No. 1 of Whatcom County Audit Report

62 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2011 NOTE 3 - UTILITY PLANT AND DEPRECIATION - CAPITAL ASSETS Capital assets are defined by the District as assets with initial individual cost of more than $400 for computer equipment, and $5,000 for other assets, and an estimated useful life in excess of one year. Major expenses for capital assets, including capital leases and major repairs that increase useful lives, are capitalized. Maintenance, repairs, and minor renewals are accounted for as expenses when incurred. The District has not acquired any assets under a capital lease. Utility Plant in Service and other capital assets are recorded at cost where the historical cost is known. Where historical cost is not known, assets are recorded at estimated cost relative to known historical costs of related components during the same period of construction. Donations by developers and customers are recorded at the known value of the contractor price, donor cost, or appraised value. Utility plant activities for the year ending December 31, 2011 were as follows: PUD No. 1 of Whatcom County Audit Report

63 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, Activity 2011 Beginning Balance Increase Decrease Ending Balance UTILITY PLANT NOT BEING DEPRECIATED LAND Raw Water Utility $ 108,000 $ - $ - $ 108,000 TOTAL LAND 108, ,000 CONSTRUCTION-IN-PROGRESS Raw Water Utility 1,523,084 1,810,498 (966,766) 2,366,816 Grandview Potable Water Utility 6,085 (6,085) - Electric Utility 253,147 1,383,498 (63,710) 1,572,935 General Utility & Office (Internal Services Utility) 269, ,672 (177,497) 404,016 TOTAL CONSTRUCTION-IN-PROGRSS 2,052,158 3,505,668 (1,214,058) 4,343,767 TOTAL UTILITY PLANT NOT BEING DEPRECIATED $ 2,160,158 $ 3,505,668 $ (1,214,058) $ 4,451,767 UTILITY PLANT BEING DEPRECIATED BUILDINGS & STRUCTURES Raw Water Utility $ 6,966,162 $ - $ - $ 6,966,162 Grandview Water Utility 98, ,977 Electric Utility 166, ,880 General Utility & Office (Internal Services Utility) 1,245,296 12,944 1,258,241 TOTAL BUILDINGS & STRUCTURES 8,477,316 12,944-8,490,260 MACHINERY & EQUIPMENT Raw Water Utility 6,687, ,881 (134,114) 7,459,668 Grandview Water Utility 3,082,840 3,082,840 Electric Utility 7,091,048 14,300 7,105,349 General Utility & Office (Internal Services Utility) 358,890 70,483 (11,710) 417,663 TOTAL MACHINERY & EQUIPMENT 17,220, ,664 (145,824) 18,065,520 INTANGIBLE Raw Water Utility 866, ,000 TOTAL INTANGIBLE 866, ,000 TOTAL UTILITY PLANT BEING DEPRECIATED $ 26,563,995 $ 1,003,609 $ (145,824) $ 27,421,780 LESS ACCUMULATED DEPRECIATION FOR: Buildings & Structures $ (4,064,538) $ (133,484) $ (4,198,022) Machinery & Equipment (6,783,530) 59,798 (621,550) (7,345,282) Intangible (173,200) (43,300) (216,500) TOTAL ACCUMULATED DEPRECIATION (11,021,269) 59,798 (798,334) (11,759,804) UTILITY PLANT BEING DEPRECIATED (NET) $ 15,542,727 $ 1,063,407 $ (944,158) $ 15,661,976 TOTAL UTILITY PLANT, NET $ 17,702,884 $ 4,569,075 $ (2,158,216) $ 20,113,743 Capital assets are depreciated using the straight-line method over the following estimated useful lives: PUD No. 1 of Whatcom County Audit Report

64 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2011 ASSET YEARS Buildings & Structures 5-60 Vehicles 3-10 Machinery & Equipment 3-60 Computer Hardware & Software 2-5 Intangible 20 Initial depreciation on utility plant is recorded in the year subsequent to purchase or completion. Preliminary costs incurred for proposed projects are deferred pending construction of the facility. Costs relating to projects ultimately constructed are transferred to utility plant; charges that relate to abandoned projects are expensed. The District expensed $210,000 in CWIP projects in NOTE 4 - CONSTRUCTION IN PROGRESS Construction in progress represents expenses to date on projects whose authorizations total $3,920,994. Of the committed balance of $29,528,430, the district will be required to raise approximately $2.5 million in future financing. Construction in progress represents capital projects for the upgrade or expansion of the District s infrastructure. General improvements for the benefit of all users of a specific utility are financed with reserves, previously collected through rates and/or bonds, or paid for with future rates. Improvements/capital expansion requested by an individual customer(s) for their specific benefit is the direct financial responsibility of that customer(s). Construction work in progress is composed of the following: District Capital Project # Annual Project Authorization Expended Through 12/31/11 Committed Required Future Financing CONSTRUCTION IN PROGRESS Purchase PSE Ferndale Substation E10 $ 259,523 $ 434,391 $ 640,391 None Purchase PSE Enterprise Substation E11 1,001,433 67,691 1,451,897 None Refinery Substation Redesign E14 1,085,088 1,070,854 3,993,396 $ 2,500,000 SCADA System Analysis & Upgrade IS12 528, ,016 1,328,081 None Treatment Plant Capacity Design & Upgrade RW1 888,489 2,232,076 21,424,884 None Distribution System Storage RW20 158,409 88,490 88,490 None Main line valves on Distribution System RW22-45, ,292 None Conoco Phillips Meter Relocation RW None TOTAL CONSTRUCTION IN PROGRESS $ 3,920,994 $ 4,343,767 $ 29,528,430 $ 2,500, NOTE 5 SHORT-TERM DEBT The District had no short-term debt obligations in NOTE 6 - LEASE COMMITMENTS a. Operating Lease(s) The Public Utility District No.1 of Whatcom County is committed to a single lease for a portable office. This lease is considered an operating lease for accounting purposes. Lease expenses for the year ended December 31, 2011 amounted to $20,481 which includes additional fees for the removal of the previous trailer and the installation of the new trailer. Future minimum rental commitments for this lease are as follows: PUD No. 1 of Whatcom County Audit Report

65 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2011 Fiscal Year Ending December 31: 2012 $ 10, , b. Capital Lease(s) Total $ 21,158 The Public Utility District No.1 of Whatcom County has no capital leases and has not acquired any assets through capital leases. NOTE 7 - LONG-TERM DEBT AND LIABILITIES a. Long-Term Debt Schedule 09 which accompanies this report contains a list of the outstanding debt at December 31, The annual requirements to amortize all debts outstanding as of December 31, 2011, including interest, are as follows: 2004 LTGO BONDS 2007 WATER REVENUE BONDS 2010 LTGO BONDS Fiscal Year Ending December 31: PRINCIPAL INTEREST TOTAL PRINCIPAL INTEREST TOTAL PRINCIPAL INTEREST TOTAL , , , , , ,856-1,112,575 1,112, , , , , , ,869 1,135,000 1,112,575 2,247, , , , , , ,506 1,175,000 1,074,338 2,249, , , , , , ,756 1,215,000 1,034,713 2,249, , , , , , ,506 1,255, ,450 2,244, ,600, ,984 3,310, , ,131 1,238,131 6,200,000 4,134,163 10,334, ,255, ,668 1,392, , ,650 1,228,650 6,320,000 2,677,750 8,997, ,000 13, ,513 6,340, ,650 7,193,650 TOTAL $ 6,435,000 $ 2,250,188 $ 8,685,188 $ 2,565,000 $ 1,380,788 $ 3,945,788 $ 23,640,000 $ 12,989,213 $ 36,629,213 There is $3,798,157 in restricted assets of the District. These represent reserve requirements as contained in the various indentures, assessment income to be used for the 2007 bond debt service, a reserve for an upcoming BPA liability, and a project reserve fund required for the work to be done at Conoco Phillips for the development, maintenance, and monitoring of a mitigation site. This project fund is to remain five years, until There are a number of other limitations and restrictions contained in the various bond indentures. The District is in compliance with all significant limitations and restrictions. The has pledged future Grandview assessment revenue to repay $2,845,000 in revenue bonds issued in November, 2007 and payable through Proceeds from the bonds provided financing for the Grandview line extension. The bonds are payable from Grandview LUD #2 Assessment revenues and revenues of the system. Annual principal and interest payments on the bonds are expected to match the assessment revenue. The total principal and interest remaining to be paid on the bonds is $3,945,788. Principal and interest paid for the current year and total Grandview assessment revenue were $244,606 and $211,110 respectively. PUD No. 1 of Whatcom County Audit Report

66 b. Changes in Long-Term Liabilities NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2011 During the year ended December 31, 2011, the following changes occurred in long-term liabilities: LONG TERM LIABILITIES Beginning Balance 01/01/11 Additions Reductions Ending Balance 12/31/11 Due Within One Year Energy Green Credit $ 66,065 $ - $ (57,112) $ 8,953 Bonds Payable: 2004 LTGO Series A&B Bonds 6,885,000 (450,000) 6,435, , Water Revenue Bond (Grandview LUD) 2,665,000 (100,000) 2,565, , LTGO Series A&B Bonds 23,707,111 (3,356) 23,703,755 - Total Bonds Payable: $ 33,257,111 $ - $ (553,356) $ 32,703,755 $ 575,000 TOTAL LONG TERM LIABILITIES $ 33,323,176 $ - $ (610,467) $ 32,712,709 $ 575,000 In 2011 a formatting change was made to move current maturities of bonds, along with the corresponding accrued interest, to the Long Term Liability section from the Current Liability section. The Statement of Net Position (Balance Sheet) reflects this change. The amounts above do not include the accrued interest as of yearend. NOTE 8 RESTRICTED COMPONENT OF NET POSITION The District s statement of net position reports $3,729,117 of restricted component of net position for debt service, of which everything is restricted by enabling legislation. The net position also includes $69,041 of restricted component of net position for miscellaneous reserves for a project mitigation reserve and a reserve to cover the liability for BPA CRC credits. SEE NOTE 11b. NOTE 9 - PENSION PLAN The District s employees do not participate in any of the plans of the Washington State Department of Retirement Systems. In lieu of the state retirement program, the District offers its non-union employees an optional deferred compensation plan in accordance with Internal Revenue Service Code Section 457. This plan was adopted in An Administrative Service Agreement was established with Hartford Life Insurance Company to provide individual investment choices for participants with detailed accounting to both the participants and the District. The District approves a contribution percentage of gross earnings annually to be paid in addition to gross earnings to eligible employees. The 2011 rate of District contribution to the employee is 7.20% of gross earnings. Employees may or may not elect to contribute any portion up to the allowable limit to the Hartford plan. The Plan, available to eligible employees, permits them to defer a portion of their salary until future years. The deferred compensation is not available to employees until termination, retirement, death, or unforeseeable emergency. The District has neither fiduciary responsibility nor liability for the Plan and accordingly no records are reflected on the Districts accounts. All eligible union employees are covered under the negotiated contract with Western Conference Teamsters Welfare Trust. PUD No. 1 of Whatcom County Audit Report

67 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2011 NOTE 10 SEGMENT ACTIVITY The District operated four proprietary segments and an Internal Services Fund in The following changes occurred in the District s segments during 2011: a. RAW WATER UTILITY The District completed several capital improvements, including upgrade of the settling basin flocculators at Water Plant 1; upgrade of the electrical and air blow-off systems at the Water Plant 2 Intake facility; high head pump and motor rebuilds; and replacement of a truck for use by the water operators. b. GRANDVIEW WATER UTILITY The Grandview Potable Water Utility has shown a turn-around in the usage. Potable water consumption has increased by 39% or 1,500,000 gallons from 2010 to Beginning in 2011, the rate structure no longer has a fixed fire component. Fund 411, Grandview Potable, and fund 412, Grandview Fire, were combined into fund 411. c. ELECTRIC UTILITY The District renewed the electric services agreement with its one retail customer, ConocoPhillips in April of The previous contract dated back to The new contract expires in 2028, which is also the termination date of the District s power purchase agreement with the Bonneville Power Administration (BPA). The Electric Utility continues to make electric system improvements designed to assure reliability of electric service to the water treatment plants and to its retail electric customer. The District finalized the purchase of the Ferndale substation which serves the Plant 1 District water system from Puget Sound Energy (PSE) in June of The District is negotiating the purchase of the Enterprise PSE substation serving Plant 2 water system facility and anticipates completing the purchase/sale agreement in The District will complete the final design and begin construction of an upgrade to the secondary voltage side of the Enterprise substation, once it is purchased from PSE. This project supports the Water Plant 2 upgrade. The District will also complete final design and begin construction of an upgrade to its 115 kv substation serving its refinery customer also in d. ALCOA SERVICES FUND The Alcoa Services Fund continues to be a resource of funds for projects outside of the regular operating scope of the District. May 2010 concluded the agreement with Alcoa. No future revenues besides interest income are anticipated. In 2011 the District expended $25,000 for the Northwest Innovation Resource Center for a research project in conservation. As of December 31 st, 2011, the remaining fund balance is $449,900. PUD No. 1 of Whatcom County Audit Report

68 NOTES TO FINANCIAL STATEMENT Statement of Revenues, Expenses and Changes in Fund Net Position For The Year Ended December 31, GRANDVIEW ELECTRIC ALCOA UTILITY UTILITY ESCROW SVCS RAW WATER UTILITY INTERNAL SERVICES FUND DISTRICT TOTAL OPERATING REVENUE Utility Sales and Service Revenues $ 5,154,116 $ 139,106 $ 8,753,162 $ - $ - $ 14,046,385 Other Operating Revenue 81, ,491 TOTAL OPERATING REVENUE $ 5,235,541 $ 139,173 $ 8,753,162 $ - $ - $ 14,127,876 OPERATING EXPENSES Operations: Purchased Power $ 366,935 $ 3,982 $ 6,377,722 $ - $ - $ 6,748,640 Water Purification 137, ,207 Taxes / Process / Delivery Costs , ,031 General Operations 647,811 49, , ,966 Maintenance 747,095 41, , ,043,176 Administration General Administration 1,114,920 84, ,263 26,659-1,686,107 Planning and Development Expenses 101, ,424 Depreciation Expense 460,546 88, , ,334 Utility Tax Expense 243,839 6, , ,679 TOTAL OPERATING EXPENSES $ 3,820,050 $ 274,875 $ 8,007,979 $ 26,659 $ - $ 12,129,564 OPERATING INCOME (LOSS) $ 1,415,491 $ (135,702) $ 745,183 $ (26,659) $ - $ 1,998,313 NONOPERATING REVENUE Lease Income $ 12,630 $ - $ 175 $ - $ - $ 12,805 Assessment Income - 211, ,110 Interest Income 180,626 6,419 62,406 4, ,238 Interest Fees (16,929) (601) (5,869) (446) - (23,845) TOTAL NONOPERATING REVENUE $ 176,326 $ 216,928 $ 56,712 $ 4,342 $ - $ 454,308 NONOPERATING EXPENSE Interest Expense $ 1,199,545 $ 144,175 $ 255,773 $ - $ - $ 1,599,492 Amortization 14,334 8,122 5, ,430 Interfund Expense 96,738 - (96,738) Loss (Gain) on Property Disposal 86, ,026 TOTAL NONOPERATING EXPENSE $ 1,396,643 $ 152,296 $ 165,009 $ - $ - $ 1,713,948 INCOME BEFORE CONTRIBUTIONS, 195,174 $ (71,070) $ 636,886 $ (22,317) $ - $ 738,673 AND EXTRAORDINARY ITEMS Capital Contributions $ 21,037 $ - $ - $ - $ - $ 21,037 Extraordinary Items CHANGE IN NET POSITION $ 216,211 $ (71,070) $ 636,886 $ (22,317) $ - $ 759,709 NET POSITION - JANUARY 1st $ 4,391,958 $ 480,035 $ 6,806,985 $ 669,526 $ 44,067 $ 12,392,571 NET POSITION - DECEMBER 31st $ 4,608,169 $ 408,965 $ 7,443,871 $ 647,209 $ 44,067 $ 13,152,280 PUD No. 1 of Whatcom County Audit Report

69 NOTES TO FINANCIAL STATEMENT Statement of Net Position As of December 31, GRANDVIEW ELECTRIC ALCOA UTILITY UTILITY ESCROW SVC RAW WATER UTILITY INTERNAL SERVICES FUND ELIMINATION DISTRICT TOTAL ASSETS CURRENT ASSETS CASH & CASH EQUIVALENTS $ 6,817 $ 2,469 $ 14,975 $ 856 $ 2,671 $ - $ 27,787 SHORT TERM INVESTMENTS 16,470,672 (111,776) 5,479, ,006 60,516 22,348,382 RECEIVABLES (Net): Customers 432,609 17, , ,209,748 Other 26, ,782 LUD #1 West Smith Road Receivable 5, ,346 Interfund Receivables 180,000-90, (270,000) - Interfund Transfers - Capital 1,129, , ,490 (1,753,038) - Interfund Transfers - Employee (129,303) (16,051) (37,164) - 182,519 - Total Accounts Receivables (Net) 1,644,528 1,213 1,059, ,490 (1,569,764) (270,000) 1,242,876 OTHER CURRENT ASSETS Prepayments ,712 32,712 Other TOTAL CURRENT ASSETS $ 18,122,017 $ (108,095) $ 6,554,348 $ 827,352 $ (1,473,865) $ (270,000) $ 23,651,757 NON-CURRENT ASSETS Construction Contracts & Other Receivables Deferred Charges 237,958 47,123 82,806 - (291) 367,596 NONCURRENT RESTRICTED ASSETS Investments - Bond Reserves 2,434, , , ,296,806 Investments - Assessments - 432, ,310 Investments - Other , ,041 Capital Assets Not Being Depreciated Land 108, ,000 Construction in Progress 2,366,816-1,572, ,016 4,343,767 Capital Assets Being Depreciated: - Buildings & Structures 6,966,162 98, ,880-1,258,241 8,490,260 Machinery & Equipment 7,459,668 3,082,840 7,105, ,663 18,065,520 Intangible 866, ,000 Less Accumulated Depreciation (8,397,280) (713,803) (2,321,840) - (326,882) (11,759,804) Total Capital Assets (Net) 9,369,367 2,468,014 6,523,324-1,753,038 20,113,743 TOTAL NONCURRENT ASSETS $ 12,042,277 $ 3,196,535 $ 7,287,938 $ - $ 1,752,747 $ - $ 24,279,497 TOTAL ASSETS $ 30,164,294 $ 3,088,440 $ 13,842,286 $ 827,352 $ 278,882 $ (270,000) $ 47,931,254 PUD No. 1 of Whatcom County Audit Report

70 NOTES TO FINANCIAL STATEMENT Statement of Net Position As of December 31, RAW WATER UTILITY GRANDVIEW UTILITY ELECTRIC UTILITY ALCOA ESCROW SVC INTERNAL SERVICES FUND ELIMINATION DISTRICT TOTAL LIABILITIES CURRENT LIABILITIES Accounts Payable $ 346,377 $ 248 $ 1,063,030 $ 143 $ 46,567 $ - $ 1,456,365 Accrued Employee Payable , ,249 Accrued Utility Taxes 20, , ,785 Contractor Retainage 30,510-6, ,036 Interfund Payables - 90, ,000 - (270,000) - Payables from Restricted Assets Deposits & Other Payables 3, ,313 TOTAL CURRENT LIABILITIES $ 400,679 $ 90,806 $ 1,286,305 $ 180,143 $ 234,816 $ (270,000) $ 1,922,748 NON-CURRENT LIABILITIES Energy Green Credit $ - $ - $ 8,953 $ - $ - $ - $ 8,953 Payables from Restricted Assets 2004 LTGO Bond Series A&B Principal 3,567,454-2,867, ,435, LTGO Bond Series A&B Interest 15,423-11, , Water Revenue Bond Principal - 2,565, ,565, Water Revenue Bond Interest - 23, , LTGO Bond Series A&B Principal 21,488,623-2,215, ,703, LTGO Bond Series A&B Interest 83,947-8, ,714 TOTAL NONCURRENT LIABILITIES $ 25,155,446 $ 2,588,669 $ 5,112,110 $ - $ - $ - $ 32,856,225 TOTAL LIABILITIES $ 25,556,125 $ 2,679,475 $ 6,398,414 $ 180,143 $ 234,816 $ (270,000) $ 34,778,974 NET POSITION Net Investment in Capital Assets $ 986,709 $ (96,986) $ 3,793,717 $ - $ 1,753,038 $ 6,436,479 Restricted for Debt Service 2,434, , , ,729,117 Restricted for Miscellaneous Reserves , ,041 Unrestricted 1,186,508 (175,447) 2,968, ,209 (1,708,971) 2,917,644 TOTAL NET POSITION $ 4,608,169 $ 408,965 $ 7,443,872 $ 647,209 $ 44,067 $ - $ 13,152,280 TOTAL LIABILITIES & NET POSITION $ 30,164,294 $ 3,088,440 $ 13,842,286 $ 827,352 $ 278,883 $ (270,000) $ 47,931,254 PUD No. 1 of Whatcom County Audit Report

71 NOTES TO FINANCIAL STATEMENT Statement of Cash Flow As of December 31, CASH FLOWS FROM OPERATING ACTIVITIES RAW WATER GRANDVIEW POTABLE GRANDVIEW FIRE ELECTRIC BPA-ALCOA ESCROW INTERNAL SERVICE TOTAL Receipts from Customers $ 5,306,562 $ 135,635 $ 1,014 $ 9,373,316 $ - $ 38,851 $ 14,855,378 Payments to suppliers (2,996,109) (45,105) - (8,502,633) (19,585) (1,287,950) (12,851,382) Payments to employees (Labor only) (1,740,563) (1,740,563) NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ 2,310,453 $ 90,529 $ 1,014 $ 870,683 $ (19,585) $ (2,989,662) $ 263,433 CASH FLOW FROM NONCAPITAL FINANCING ACTIVITIES Transfers from (to) Other Utilities (21,693) 7,052 (3,102) 20,230 (6,932) 4,445 - NET CASH PROVIDED (USED) BY NONCAPITAL FINANCING ACTIVITIES $ (21,693) $ 7,052 $ (3,102) $ 20,230 $ (6,932) $ 4,445 $ - CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Proceeds from Capital Debt 1,442 1,442 Principal paid on Capital Debt (205,328) (100,000) (244,672) (550,000) Interest paid on Capital Debt (1,119,265) (144,606) (248,276) (1,512,148) NET CASH PROVIDED / (USED) BY CAPITAL AND RELATED FINANCING ACTIVITIES $ (1,323,152) $ (244,606) $ - $ (492,948) $ - $ - $ (2,060,706) CASH FLOWS FROM INVESTING ACTIVITIES Investment Transactions (968,600) 149,400 - (384,300) 26,900 2,986,000 1,809,400 - NET CASH PROVIDED / (USED) FROM INVESTING ACTIVITIES $ (968,600) $ 149,400 $ - $ (384,300) $ 26,900 $ 2,986,000 $ 1,809,400 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (2,992) $ 2,375 $ (2,088) $ 13,665 $ 383 $ 783 $ 12,127 BALANCE BEGINNING OF YEAR 9, ,088 1, ,887 15,660 BALANCE END OF PERIOD $ 6,817 $ 2,469 $ - $ 14,975 $ 855 $ 2,670 $ 27,787 PUD No. 1 of Whatcom County Audit Report

72 NOTES TO FINANCIAL STATEMENT Statement of Cash Flow As of December 31, GRANDVIEW GRANDVIEW BPA-ALCOA POTABLE FIRE ELECTRIC ESCROW CHERRY POINT INTERNAL S ERVICE TOTAL RECONCILIATION OF OPERATING INCOME (LOSS) TO NET CASH Operating Income (Loss) $ 1,415,491 $ (135,702) $ - $ 745,183 $ (26,659) $ 0 $ 1,998,313 Adjustments to reconcile operating income to net cash provided (used) by operating activity A Depreciation Expense 384,017 88, , , ,334 Z Miscellaneous - Non-Operating (88,205) (8,122) - (5,974) (101,650) B Decrease (Increase) in Net Accounts Receivable (45,527) (2,759) ,639-5,776 86,009 D Decrease (Increase) in Prepayments (3,677) (3,677) J Decrease (Increase) in Other Deferred Charges 14,357 8,122-5, ,752 K Decrease (Increase) in Net Capital Assets (excluding Depreciation) (1,663,587) (1,544,248) 1,550,333 (1,334,088) - (217,602) (3,209,193) Y Interfund Transfers 2,006,922 1,684,291 (1,550,198) 743,363 6,932 (2,891,310) (0) L Increase (Decrease) in Account Payable 243, , ,984 R Increase (Decrease) in Accrued Employee Payable ,017 11,017 M Increase (Decrease) in Accrued Utility Taxes 2, ,560 - (0) 74,395 N Increase (Decrease) in Contractor Retainage 24, , ,984 S Increase (Decrease) in Deposits & Other Payables (4,760) (4,760) T Increase (Decrease) in Energy Green Credit (57,112) - - (57,112) AA Increase (Decrease) in Contributed Capital 21, ,037 NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,310,453 $ 90,529 $ 1,014 $ 870,683 $ (19,585) $ (2,989,662) $ 263,433 PUD No. 1 of Whatcom County Audit Report

73 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2011 NOTE 11 - DEFERRED DEBITS (CREDITS) In accordance with generally accepted accounting principals for regulated businesses, the District has deferred charges of $367,596 in 2011 which will be amortized using the straight-line method over the life of the bonds (each 20 years). These deferred charges resulted from costs relating to the sale and redemption of the bonds. The District has deferred credits of $8,953 in 2011 which will not be amortized but resolved at the end of the next BPA rate period (see note b below). These charges and revenues would have been included in net income for 2011 in nonregulated business, but for rate-making purposes they are treated as applicable to future periods. Deferred transactions resulted from the following: a. Deferred Charges Unamortized Debt Discount and Expense The District s deferred charges as of December 31, 2011 are $367,596: b. Deferred Credits DEFERRED CHARGES 2011 Unamortized Debt Expenses on 2004 LTGO Bonds 143,145 Unamortized Debt Expenses on 2007 Water Revenue Bond 47,257 Unamortized Debt Expenses on 2010 LTGO Bonds 177,485 Other (291) Total Deferred Charges $ 367,596 Bonneville Power Administration -Conservation and Renewable Discounts [C&RD] Bonneville continues to work with its wholesale customers to promote energy conservation and renewable resource development. The approach that Bonneville and its customers previously agreed to involved the provision by Bonneville of a power discount that allowed utilities and their customers, if the discount was passed through, to pay less for power purchases if the discount savings were spent on qualifying conservation and renewable energy projects. The Conservation & Renewable Energy Discount (C&RD) program was discontinued September 30, To continue the incentive approach to motivate its utility customers to engage in conservation activities, Bonneville has replaced the C&RD program with a conservation budget approach. Rather than provide utility customers with a power rate discount, Bonneville now provides each utility with an annual conservation budget under which Bonneville will reimburse a utility for expenditures on qualifying conservation activities or projects. Bonneville no longer provides incentives for renewable energy development. Under this new approach, the District has more funds available for conservation than previously. During the rate period, the District installed a Variable Frequency Drive ( VFD ) in our Plant 2 structure as a BPA approved energy efficient project. The allowable cost of the project exceeded the Energy Green Credit, which had been accrued. $45,814 in costs was carried into the rate period. The current rate period runs from October 2009 through September The CRC ended September 30, The accruals and disbursements for the rate period are as follows: PUD No. 1 of Whatcom County Audit Report

74 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2011 FOR YEAR STARTING OCTOBER 1, CONSERVATION RATE CREDIT TOTAL CRC Credit Accrued $ 107,244 $ 119,285 $ 226,529 Allowed Premium Paid for Green Power (121,762) (121,762) Administrative Expense Allowed CRC Plant 2 Project Amount (45,814) (50,000) (95,814) ENDING LIABILITY TO BPA $ 61,430 $ (52,477) $ 8,953 The District s CRC liability as of December 31, 2011 is $8,953. NOTE 12 - PROPERTY TAXES The Whatcom County Treasurer acts as an agent to collect property taxes levied in the county for all taxing authorities. Taxes are levied annually on January 1 st on property listed as of the prior May 31 st. Assessed values are established by the County Assessor at 100 percent of fair market value. A revaluation of all property is required every four years. Whatcom County annually publishes the Statement of Assessed Valuations, Tax Rates, and Taxes Levied Within the Various Taxing Districts of Whatcom County. The District s assessed value is equal to the Total Value of Taxable Property of Whatcom County. This information can be found at The tax is due in two equal installments on April 30 th and October 31 st. Collections are distributed monthly to the District by the County Treasurer. The District is permitted by law to levy up to $0.45 per $1,000 of assessed valuation for general District purposes. Washington State Constitution and Washington State Law, RCW , limit the rate. The District may also levy taxes at a lower rate. Special levies approved by the voters are not subject to the above limitations. The District had no tax levies for 2011 or NOTE 13 ACCOUNTING CHANGES The only accounting change in 2011 was a formatting change on the Statement of Net Position. The current maturities of bond principals and corresponding accrued interest were incorporated down in the Non-current Liability section. NOTE 14 JOINT VENTURES PARTICIPATION IN NORTHWEST OPEN ACCESS NETWORK, INC. dba NOANET The District, along with 13 other Washington State Public Utility Districts and Energy Northwest, was a member of NoaNet, a Washington nonprofit mutual corporation. NoaNet was incorporated in February 2000 to provide a broadband communications backbone, over Public Benefit Fibers leased from Bonneville Power Administration, PUD No. 1 of Whatcom County Audit Report

75 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2011 throughout the Pacific Northwest for assisting its members in the efficient management of load, conservation and acquisition of electric energy as well as other purposes. The network began commercial operation in January As a member of NoaNet, the District guaranteed certain portions of NoaNet debt based on its proportionate share. The management of NoaNet anticipates meeting debt obligations through profitable operations; however, there is no assurance NoaNet s plan will be achieved. During the start-up phase, NoaNet assessed its members to cover operating deficits. In 2011, the District expensed $4,050 in assessments to NoaNet. In July 2001, NoaNet issued $27 million in Telecommunications Network Revenue Bonds (taxable) to finance the repayment of the founding members and the costs of initial construction, operations and maintenance. The Bonds are due beginning in December 2003 through December 2016 with interest due semi-annually at rates ranging from 5.05% to 7.09%. Each member of NoaNet entered into a Repayment Agreement to guarantee the debt of NoaNet. Under the Repayment Agreement, each Member acknowledges and agrees that it is a guarantor of the payment of principal and interest on the Bonds and is liable by assessment or otherwise to repay NoaNet for amounts due and owing with respect to such principal and interest up to each Member's Percentage Interest. The District s guarantee is based on its 0.81% interest, or $365,600.66, of a total liability of $45,135, for principal and interest over the life of the bond. There is a provision in the Bond Resolution for a 25% step-up. In other words, if a member doesn t pay its share of the bond obligation, then the rest of the members have to step up to a maximum of 25% of its obligation. The amount of remaining contingent liability to the District at December 31, 2011 is $31, On September 1, 2003, in accordance with Section 19, Article II of NoaNet s Bylaws, the Public Utility District No.1 of Whatcom County presented a written notice to NoaNet withdrawing from the organization. The District maintains a financial liability only for the $27 million dollar bonds and the $5 million dollar line-of-credit. The District has no liability for any contractual debt incurred or to be incurred by NoaNet after September 1, Financial statements for NoaNet may be obtained by writing to: Northwest Open Access Network, 2327 Grand Avenue, East Wenatchee, WA NOTE 15 - RISK MANAGEMENT In January 2002 the Public Utility District No.1 of Whatcom County became a member of the Public Utility Risk Management Services, [PURMS], a joint self-insurance fund. Its membership is comprised of 20 Public Utility Districts and NOANET, a Washington nonprofit mutual corporation providing broadband communications services [See NOTE-14 JOINT VENTURES]. The Public Utility Risk Management Services, Joint Self-Insurance Fund was organized as of December 30, 1976, pursuant to the provisions of the Revised Code of Washington, Chapter and inter-local agreements. The program s general objectives are to formulate, develop, and administer, on behalf of the member public utilities, a program of insurance, to obtain lower costs for that coverage, and to develop a comprehensive loss control program. The District is a member of the Liability and Property Pools. The risks shared by the members are defined in the member s Self-Insurance Agreement. Both pools (liability and property) operate independently of one another. The Fund maintains assets from which liability claims against the member Districts and property losses of member Districts are paid and, through assessments of the members to replenish these assets, the members share joint liability among themselves for losses incurred. The Fund also purchases excess insurance for losses above the $1,000,000 for liability and above $250,000 for property The members, through the Fund, provide liability self-insurance for the first $1 million of individual loss claims. PUD No. 1 of Whatcom County Audit Report

76 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2011 Assessments for the liability pool are based upon a formula whose elements include; basic fees, historic claims experience and workers hours. The assessments include amounts for excess insurance premiums, claims experience, and operating costs. In November 2008, it was decided to raise the Designated Liability Pool Balance from $2 million to $3 million through semi-annual assessments starting in January 2009 and continuing through July Interim assessments are levied whenever the level of the liability program falls below $500,000 of the normal operating balance. Through PURMS, an AEGIS liability policy covers an additional $35 million over the initial $1 million. At the end of 2009, the District decided to also add another $25 million in coverage through an EIM policy over the previous $36 million in coverage. Effective April 1, 1977 the Fund established a self-insurance program for member s property. The property program provides property self-insurance for the first $250,000 of individual loss claims. Assessments for the property pool are based upon a formula whose elements include: basis fees, property values and risk based rates. The assessments include amounts for excess insurance premiums, claims experience, and operating costs. For the property program, member Districts are obligated to replenish to a level of $750,000 through annual assessments. Interim assessments are levied whenever the level of the property program is reduced to an amount less than $500,000. PURMS maintains an Excess Property Insurance for its members in the Property Pool of $150 million. A comprehensive 2010 Annual Report can be obtained by contacting: Public Utility Risk Management Services Administered by Pacific Underwriters PO Box 68787, Seattle, WA Phone; FAX: The District has a separate policy with Marsh USA Inc, through Associated Electric & Gas Insurance Services LTD (AEGIS) for Western Interconnect Electric System (WIES) members for electric blackouts and/or brownouts for our electric customer. As agreed, Marsh (USA) has placed coverage with AEGIS pursuant to the surplus lines laws of Oregon. As an eligible surplus lines insurer, AEGIS is subject to limited state financial solvency regulation. Also, the insurers do not participate in any state insurance guaranty fund which otherwise provide limited claims reimbursement for policyholders of insolvent insurers. Therefore, the placement of coverage with AEGIS could result in financial exposure to the District if the insurer(s) becomes insolvent. Because the insurance policy covers more than one state, premium tax is also due in the other states, which is computed based on the portion of premium allocable to the risks located in each state. Where the state law allows, Marsh has prepared the necessary forms for WIES to file directly with the state. These forms show the allocated premium and tax amount due for each state. Their decision to file these forms will require the appropriate signature and tax payment check in the amount indicated on each form. Marsh suggests that the District consult with our legal or tax advisors with respect to the decision to file in these jurisdictions. In Washington, Idaho, Montana, Nevada, North Dakota and Wyoming the states require that Marsh collect and remit the allocated premium taxes. It should be noted that Marsh has allocated the premium based on their understanding of the applicable insurance laws and regulations in each of the states where the District and/or covered risks are located. It is still possible that one or more US jurisdictions may assert a claim for a portion of the tax that was allocated to another US jurisdiction. Risk pool insurance premiums and pool assessments for the District were as follows for 2011 and 2010: PUD No. 1 of Whatcom County Audit Report

77 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2011 INVOICE DATE CARRIER TYPE KIND PREMIUM / ASSESSMENT DISTRICT COST PURMS 2010 LIABILITY 01/05/2010 AEGIS LIABILITY LIAB $35M EXCESS $1M 1,038, /05/2010 EIM LIABILITY LIAB $25M EXCESS $36M 121, % 18, /11/2010 GENERAL ASSESSMENT LIABILITY LIAB GENRL ASSESS 467, % 7, /11/2010 GENERAL ASSESSMENT LIABILITY RETENTION FUNDING 165, % 2, /23/2010 GENERAL ASSESSMENT LIABILITY LIAB GENRL ASSESS 517, % 8, /09/2010 GENERAL ASSESSMENT LIABILITY RETENTION FUNDING 165, % 2, /16/2010 AEGIS LIABILITY PROF LIAB [E&O] 187, % 2, ,663, % 42, PROPERTY 04/02/2010 NATIONAL UNION PROPERTY FIRE EXCESS POLICY 767, % 25, /12/2010 GENERAL ASSESSMENT PROPERTY PROP GENRL ASSESS 142, % 5, /23/2010 GENERAL ASSESSMENT PROPERTY PROP GENRL ASSESS 255, % 9, ,166, % 40, PURMS 2011 LIABILITY 01/05/2011 AEGIS LIABILITY LIAB $35M EXCESS $1M 983, /05/2011 EIM LIABILITY LIAB $25M EXCESS $36M 145, % 16, /06/2011 GENERAL ASSESSMENT LIABILITY RETENTION FUNDING 165, % 2, /10/2011 GENERAL ASSESSMENT LIABILITY LIAB GENRL ASSESS 414, % 6, /01/2011 AEGIS LIABILITY PROF LIAB [E&O] 178, % 2, /08/2011 GENERAL ASSESSMENT LIABILITY RETENTION FUNDING 175, % 2, /01/2011 GENERAL ASSESSMENT LIABILITY LIAB GENRL ASSESS 547, % 8, ,609, % 40, PROPERTY 01/10/2011 GENERAL ASSESSMENT PROPERTY PROP GENRL ASSESS 291, % 9, /05/2011 NATIONAL UNION and ZURICH PROPERTY EXCESS PROPERTY POLICY 918, % 28, /12/2011 GENERAL ASSESSMENT PROPERTY PROP GENRL ASSESS 250, % 8, ,461, % 47, MARSH 2010 WESTERN INTERCONNECTED BLACK/BROWN-OUT 06/01/2010 ELECTRIC SYSTEMS LIABILITY ANNUAL PREMIUM MARSH 2011 WESTERN INTERCONNECTED BLACK/BROWN-OUT 07/12/2011 ELECTRIC SYSTEMS LIABILITY ANNUAL PREMIUM PUD No. 1 of Whatcom County Audit Report

78 SUPPLEMENTAL SCHEDULES For The Year Ended December 31, 2011 Table of Contents Page Schedule 04/05 Revenues and Expenses Schedule 09 Long-Term Liabilities Schedule 16 State and Local Financial Assistance PUD No. 1 of Whatcom County Audit Report

79 SCHEDULE 04/05 Revenues and Expenses For The Year Ended December 31, 2011 Schedule Number Account Code Account Title Actual Amount Other Utility Operating Revenues Nonoperating Rental Revenues Interest and Dividend Revenues Miscellaneous Nonoperating Revenues Commercial and Industrial Sales Water and Water Power Sales Depreciation Expense Amortization of Property Losses, Unrecovered Plant & Regulatory Study Costs Taxes: State Privilege Tax, State Utility Tax, B&O Tax, Other Excise Taxes Loss on Disposition of Property Interest on Long-Term Debt Amortization of Debt Discount and Expenses Purchased Power Other Expenses Operation Supervision and Engineering Miscellaneous Transmission Expenses Maintenance Supervision and Engineering Maintenance of Miscellaneous Transmission Plant Operation Supervision and Engineering Miscellaneous Distribution Expense Maintenance Supervision and Engineering Maintenance of Miscellaneous Distribution Plant Adverstising Expense Administrative and General Salaries Office Supplies and Expenses Outside Services Employed Property Insurance Employee Pension and Benefits Miscellaneous General Expenses Rents Maintenance of General Plant PUD No. 1 of Whatcom County Audit Report

80 SCHEDULE 09 - Liabilities For The Year Ended December 31, 2011 (1) (2) (3) (4) BARS CODE FOR REDEMPTION ENDING BALANCE DEBT 12/31/2011 MATURITY/ BEGINNING I.D. NO. DESCRIPTION PAYMENT DUE DATE BALANCE 01/01/2010 ADDITIONS REDUCTIONS OF DEBT ONLY (1)+(2)-(3) General Obligation bonds, Series A 12/01/2024 $ 2,250,000 $ 120,000 $ 2,130, General Obligation bonds, Series B 12/01/2024 $ 4,635,000 $ 330,000 $ 4,305, Water Revenue Bonds 11/01/2027 $ 2,665,000 $ 100,000 $ 2,565, General Obligation bonds, Series A 12/01/2030 $ 2,660,000 $ 2,660, General Obligation bonds, Series B 12/01/2030 $ 20,980,000 $ 20,980, General Obligation bond premium 12/01/2030 $ 67,111 $ 3,356 $ 63, Energy Green Credit Various $ 66,065 $ 57,112 $ 8, Accrued Utility Taxes Various $ 163,390 $ 74,395 $ 237, Contractor Retainage Various $ 6,052 $ 30,984 $ 37, Deposits & Other Payables Various $ 8,073 $ 4,760 $ 3,313 PUD No. 1 of Whatcom County Audit Report

81 MCAG NO Schedule 16 SCHEDULE OF STATE AND LOCAL FINANCIAL ASSISTANCE For The Year Ended December 31, Identification Current Year Grantor/Program Title Number Expenditures Department of Ecology In Stream Flow Grant G $ 32,136 Proviso Grant G ,631 Total Department of Ecology $ 60,767 Department of Health Inst Grant - Regional Feasibility N $ 11,533 Total Department of Health $ 11,533 TOTAL STATE ASSISTANCE $ 72,300 PUD No. 1 of Whatcom County Audit Report

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115 Appendix D Audited Annual Financial Statements

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117 Washington State Auditor s Office Financial Statements Audit Report Public Utility District No. 1 of Whatcom County Audit Period January 1, 2009 through December 31, 2010 Report No Issue Date March 5, 2012

118 Washington State Auditor Brian Sonntag March 5, 2012 Board of Commissioners Ferndale, Washington Report on Financial Statements Please find attached our report on s financial statements. We are issuing this report in order to provide information on the District s financial condition. Sincerely, BRIAN SONNTAG, CGFM STATE AUDITOR Insurance Building, P.O. Box Olympia, Washington (360) TDD Relay (800) FAX (360)

119 Table of Contents January 1, 2009 through December 31, 2010 Independent Auditor s Report on Internal Control over Financial Reporting and on Compliance and Other Matters in Accordance with Government Auditing Standards... 1 Independent Auditor s Report on Financial Statements... 3 Financial Section... 5

120 Independent Auditor s Report on Internal Control over Financial Reporting and on Compliance and Other Matters in Accordance with Government Auditing Standards January 1, 2009 through December 31, 2010 Board of Commissioners Ferndale, Washington We have audited the basic financial statements of Public Utility District No. 1 of Whatcom County, Washington, as of and for the years ended December 31, 2010 and 2009, and have issued our report thereon dated February 17, 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. INTERNAL CONTROL OVER FINANCIAL REPORTING In planning and performing our audits, we considered the District s internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the District s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the District s internal control over financial reporting. 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 District's financial statements will not be prevented, or detected and corrected on a timely basis. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and would not necessarily identify all deficiencies in internal control that might be deficiencies, significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above. COMPLIANCE AND OTHER MATTERS As part of obtaining reasonable assurance about whether the District s financial statements are free of material misstatement, we performed tests of the District s compliance with certain Washington State Auditor's Office 1

121 provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of 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. This report is intended for the information and use of management and the Board of Commissioners. However, this report is a matter of public record and its distribution is not limited. It also serves to disseminate information to the public as a reporting tool to help citizens assess government operations. BRIAN SONNTAG, CGFM STATE AUDITOR February 17, 2012 Washington State Auditor's Office 2

122 Independent Auditor s Report on Financial Statements January 1, 2009 through December 31, 2010 Board of Commissioners Ferndale, Washington We have audited the accompanying basic financial statements of Public Utility District No. 1 of Whatcom County, Washington, as of and for the years ended December 31, 2010 and 2009, as listed on page 5. These financial statements are the responsibility of the District s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free 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 that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of, as of December 31, 2010 and 2009, and the changes in financial position and cash flows thereof for the years then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued our report on our consideration of the District s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audits. Accounting principles generally accepted in the United States of America require that the management s discussion and analysis on pages 6 through 12 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards Washington State Auditor's Office 3

123 generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during the audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. BRIAN SONNTAG, CGFM STATE AUDITOR February 17, 2012 Washington State Auditor's Office 4

124 Financial Section January 1, 2009 through December 31, 2010 REQUIRED SUPPLEMENTARY INFORMATION Management s Discussion and Analysis 2010 Management s Discussion and Analysis 2009 BASIC FINANCIAL STATEMENTS Statement of Net Assets 2010 Statement of Net Assets 2009 Statement of Revenues, Expenses and Changes in Net Assets 2010 Statement of Revenues, Expenses and Changes in Net Assets 2009 Statement of Cash Flows 2010 Statement of Cash Flows 2009 Notes to Financial Statements 2010 Notes to Financial Statements 2009 Washington State Auditor's Office 5

125 MANAGEMENT'S DISCUSSION AND ANALYSIS For The Year Ended December 31, 2010 OVERVIEW OF FINANCIAL STATEMENTS The District's Annual Financial Report consists of the following three parts: 1. Management's Discussion and Analysis (MD & A) (this section) 2. Financial statements, including footnotes 3. Required supplemental schedules The financial statements include a statement of net assets, statement of revenues, expenses and changes in net assets, statement of cash flows, and notes to the financial statements. The statement of net assets provides a record of the assets and liabilities of the District at the close of the year. It provides information about the nature and amounts of investments in resources (assets) and obligations to District creditors (liabilities). It provides a basis for evaluating the capital structure of the District and assessing its liquidity and financial flexibility. The statement of revenues, expenses and changes in net assets presents the results of the District's business activities for an annual period of time. The information contained in this statement can be used to determine whether the District is successfully recovering its costs through user fees and other charges, and to evaluate profitability and credit worthiness. The statement of cash flows reports cash receipts, cash payments and net changes in cash resulting from operating, financing, and investing activities for a year s period of time. The notes to the financial statements provide information regarding the District's significant accounting policies and significant account balances and activities. All District funds are operated as individual enterprise funds and collectively represent the financial operation of the District. A condensed comparative Statement of Net Assets is shown below: ASSETS Current Assets $ 25,259,108 $ 6,508,360 Non-Current Assets 4,026,699 2,178,726 Capital Assets (Net) 17,702,884 17,201,756 TOTAL AS S ETS $ 46,988,692 $ 25,888,843 LIABILITIES Current Liabilities $ 1,822,945 $ 2,775,257 Non-Current Liabilities 32,773,176 12,260,997 TOTAL LIABILITIES $ 34,596,121 $ 15,036,254 NET ASSETS Invested in Capital Assets, Net of Related Deb $ 7,277,672 $ 6,566,756 Restricted for Debt Service 3,586,620 1,900,173 Unrestricted 1,528,279 2,385,660 TOTAL NET AS S ETS $ 12,392,571 $ 10,852,589 TOTAL LIABILITIES AND NET AS S ETS $ 46,988,692 $ 25,888,843 Washington State Auditor's Office 6

126 MANAGEMENT'S DISCUSSION AND ANALYSIS For The Year Ended December 31, 2010 A condensed comparative Statement of Revenue, Expenses and Changes in Net Assets for the District is shown below: REVENUES Operating Revenue $ 13,554,103 $ 13,055,318 Nonoperating Revenue 589, ,579 TOTAL REVENUE $ 14,144,040 $ 13,688,898 EXPENSES Operating Expenses 11,891,494 11,539,201 Nonoperating Expenses 712, ,488 TOTAL EXPENSES $ 12,604,058 $ 12,254,689 INCOME (LOSS) BEFORE CONTRIBUTIONS AND SPECIAL ITEMS $ 1,539,982 $ 1,434,209 Capital Contributions - (89,642) Special / Extraordinary Items - - CHANGE IN NET ASSETS $ 1,539,982 $ 1,344,566 BEGINNING NET ASSETS $ 10,852,589 $ 9,508,023 ENDING NET ASSETS $ 12,392,571 $ 10,852,589 FINANCIAL POSITION Analysis of Changes in Total Net Assets from For the twelve months ending December 31, 2010 the total net assets of the District increased by approximately $1,540,000 or 14%. Total assets increased by $21,100,000 and total liabilities increased by $19,560,000 producing a net increase in net assets. The major components contributing to the increase in assets were an increase in Short-Term Investments of $18,874,000 from the proceeds of the 2010 LTGO bond issue, corresponding increases in deferred charges and bond reserves of $118,000 and $1,752,000 respectively, a decrease in net receivables of $120,000 due to the timing of payments, and an increase in total capital assets net of depreciation of $501,000. The major components of the increase in total liabilities included a decrease in Accounts Payables of $730,000 due to timing of payments, and a net increase in the bonds principal and interest payable of $20,213,000 due to issuing the 2010 LTGO bonds. RESULTS OF OPERATIONS Analysis of changes in Revenue, Expenses, and change in Net Assets for Total Net Income (excluding Extraordinary Items and Capital Contributions for 2010 adjustments) increased from $1,434,000 in 2009 to $1,540,000 in 2010 (a $106,000 increase). Operating Revenue increased by $499,000 due to rate increases and was offset by an increase in operating expenses of $352,000. Non-operating Revenue reflected a decrease in Assessment Income of $121,000 from the receipt of Grandview LUD #2 assessments and a decrease in Interest Income of $65,000, but an increase in Service Revenues of $143,000. Non-operating Expenses reflected an Washington State Auditor's Office 7

127 MANAGEMENT'S DISCUSSION AND ANALYSIS For The Year Ended December 31, 2010 overall decrease of just $3,000, resulting from a $17,000 decrease in interest expense and a $14,000 increase in the Loss (Gain) on Property Disposal expense. CAPITAL ASSETS Analysis of Changes in Capital Assets from During 2010, total capital assets increased by $501,000 and were comprised of an overall increase in assets, including construction-work-in-progress for $1,180,000 ($259,000 of construction-work-in-progress were expensed during 2010), the Raw Water Utility (Cherry Point) for ($13,000), the Grandview Potable and Fire Utility for ($7,000), the Electric Utility for $25,000, $92,000 for general utility and office assets accounted for in the Internal Services Fund and an increase in accumulated depreciation of $776,000. SEE NOTE 3. LONG-TERM DEBT Analysis of Changes in Long-Term Debt from During 2010, the District issued $23,640,000 in LTGO bonds. The proceeds from this bond issue went to refund the 1999 Water Revenue bond for $2,660,000 and to fund approximately $17 million in Water Utility capital projects, $2 million in Electric capital projects, and the rest funding closing costs and bond reserves. The bond indebtedness for the 2004 LTGO bond issue was reduced by $430,000, and the District s indebtedness for the 2007 Water Revenue Bond was reduced by $75,000. SEE NOTE 7 and SCHEDULE 09. ADDITIONAL COMMENTS On September 9, 2006, the District signed a Block Power Sales Agreement with Bonneville Power Administration (BPA) and Alcoa Inc. The Agreement consists of the District receiving monetary benefit payments from BPA on behalf of Alcoa Inc. In December 2008, the U.S. Ninth Circuit Court of Appeals issued a decision on BPA s service to the direct-service industries (DSIs), which put an immediate stop to the monthly payments. The December 2008 payment was the final payment between BPA to Alcoa through the District. The District also signed a Services agreement with Alcoa to provide these services on their behalf. The original contract provided that the District would receive fixed monthly payments totaling $18,333 for these services through September 30, An amendment to this agreement was renegotiated in March 2009 stipulating that Alcoa will continue making a fixed monthly payment of $8,333 until such time that they stop producing aluminum at their Ferndale location or the end of the contract, whichever comes sooner. The monthly payment of $10,000 was temporarily suspended from March 2009 through November Starting in December 2009 the monthly payment of $10,000 resumed and was scheduled to be paid through the end of the contract regardless of the operating status of the Ferndale facilities. In April 2010, Alcoa requested terminating the agreement in light of the fact that they renegotiated a new agreement with BPA outside of the District s involvement. A final, one-time payment of $200,000 to the District by Alcoa in May 2010 concluded the Block Power Sales Agreement. SEE NOTE 10 E. REQUEST FOR INFORMATION The basic financial statements, notes and management discussion and analysis are designed to provide a general overview of the District s finances. Questions concerning any of the information provided in this report should be directed to the Director of Finance of the, 1705 Trigg Rd, Ferndale, WA Washington State Auditor's Office 8

128 MANAGEMENT'S DISCUSSION AND ANALYSIS For The Year Ended December 31, 2009 OVERVIEW OF FINANCIAL STATEMENTS The District's Annual Financial Report consists of the following three parts: 1. Management's Discussion and Analysis (MD & A) (this section) 2. Financial statements, including footnotes 3. Required supplemental schedules The financial statements include a statement of net assets, statement of revenues, expenses and changes in net assets, statement of cash flows, and notes to the financial statements. The statement of net assets provides a record of the assets and liabilities of the District at the close of the year. It provides information about the nature and amounts of investments in resources (assets) and obligations to District creditors (liabilities). It provides a basis for evaluating the capital structure of the District and assessing its liquidity and financial flexibility. The statement of revenues, expenses and changes in net assets presents the results of the District's business activities for an annual period of time. The information contained in this statement can be used to determine whether the District is successfully recovering its costs through user fees and other charges, and to evaluate profitability and credit worthiness. The statement of cash flows reports cash receipts, cash payments and net changes in cash resulting from operating, financing, and investing activities for a year s period of time. The notes to the financial statements provide information regarding the District's significant accounting policies and significant account balances and activities. All District funds are operated as individual enterprise funds and collectively represent the financial operation of the District. A condensed comparative Statement of Net Assets is shown below: ASSETS Current Assets $ 6,508,360 $ 5,415,406 Non-Current Assets 2,178,726 2,108,189 Capital Assets (Net) 17,201,756 16,871,944 TOTAL ASSETS $ 25,888,843 $ 24,395,539 LIABILITIES Current Liabilities $ 2,775,257 $ 1,750,219 Non-Current Liabilities 12,260,997 13,137,297 TOTAL LIABILITIES $ 15,036,254 $ 14,887,516 NET ASSETS Invested in Capital Assets, Net of Related Deb $ 6,566,756 $ 5,676,944 Restricted for Debt Service 1,900,173 1,801,187 Unrestricted 2,385,660 2,029,891 TOTAL NET ASSETS $ 10,852,589 $ 9,508,023 TOTAL LIABILITIES AND NET ASSETS $ 25,888,843 $ 24,395,539 Washington State Auditor's Office 9

129 MANAGEMENT'S DISCUSSION AND ANALYSIS For The Year Ended December 31, 2009 A condensed comparative Statement of Revenue, Expenses and Changes in Net Assets for the District is shown below: REVENUES Operating Revenue $ 13,055,318 $ 12,382,281 Nonoperating Revenue 633,579 39,381,959 TOTAL REVENUE $ 13,688,898 $ 51,764,239 EXPENSES Operating Expenses 11,539,201 11,013,217 Nonoperating Expenses 715,488 39,086,080 TOTAL EXPENSES $ 12,254,689 $ 50,099,297 INCOME (LOSS) BEFORE CONTRIBUTIONS AND SPECIAL ITEMS $ 1,434,209 $ 1,664,943 Capital Contributions (89,642) (353,877) Special / Extraordinary Items - 949,466 CHANGE IN NET ASSETS $ 1,344,566 $ 2,260,532 BEGINNING NET ASSETS $ 9,508,023 $ 7,247,491 ENDING NET ASSETS $ 10,852,589 $ 9,508,023 FINANCIAL POSITION Analysis of Changes in Total Net Assets from For the twelve months ending December 31, 2009 the total net assets of the District increased by approximately $1,344,000 or 14%. Total assets increased by $1,493,000 and total liabilities increased by $149,000 producing a net increase in net assets. The major components contributing to the increase in assets were an increase in Short-Term Investments of $890,000 due to the delay in some capital projects, an increase in net receivables of $194,000 due to the timing of payments and the carry forward of Business Services Projects, and an increase in total capital assets net of depreciation of $330,000. The major components of the increase in total liabilities included an increase in Accounts Payables of $837,000 due to timing of payments, an increase in Accrued Employee Payables of $163,000 due to the new liabilities for Accrued Sick Leave and Accrued Vacation, a decrease in Energy Green Credit of $136,000, and a net decrease in the bonds principal and interest payable of $665,000 due to debt payments. RESULTS OF OPERATIONS Analysis of changes in Revenue, Expenses, and change in Net Assets for Total Net Income (excluding Extraordinary Items and Capital Contributions for 2009 adjustments) decreased from $1,665,000 in 2008 to $1,434,000 in 2009 (a $231,000 decrease). Operating Revenue increased by $673,000 due to rate increases and increased consumption and was offset by an increase in operating expenses of $526,000. Non- Washington State Auditor's Office 10

130 MANAGEMENT'S DISCUSSION AND ANALYSIS For The Year Ended December 31, 2009 operating Revenue reflected a decrease in Assessment Income of $139,000 from the receipt of Grandview LUD #2 assessments and a decrease in Interest Income of $109,000. Non-operating Expenses reflected an overall increase of just $37,000, resulting from a $27,000 decrease in interest expense and a $64,000 increase in the Rural Electric expense. Both Non-operating Expenses and Non-operating Revenue also decreased due to the cancellation of the BPA Alcoa transfer of funds in December 2008 ($38 million in 2008), but since the revenue and expense offset, they were excluded from the above analysis. The Capital Contributions totaled ($89,642) in The amount is a combination of $239,916 from the BPA Conservation Rate Credit Program used as a Capital Contribution for the new Variable Frequency Drive project and a Connection Fee refunded to Birch Bay Water & Sewer District of $329,558 for the cancelation of their contract. CAPITAL ASSETS Analysis of Changes in Capital Assets from During 2009, total capital assets increased by $330,000 and were comprised of an increase in assets, including construction-work-in-progress for $84,000, the Raw Water Utility (Cherry Point) for $563,000, the Electric Utility for $151,000, $141,000 for general utility and office assets accounted for in the Internal Services Fund and an increase in accumulated depreciation of $609,000. SEE NOTE 3. LONG-TERM DEBT Analysis of Changes in Long-Term Debt from During 2009, the District s indebtedness for the 1999 revenue bond issue was reduced by $225,000, the bond indebtedness for the 2004 LTGO bond issue was reduced by $420,000, and the District s indebtedness for the 2007 Water Revenue Bond was reduced by $20,000. SEE NOTE 7 and SCHEDULE 09. ADDITIONAL COMMENTS On September 9, 2006, the District signed a Block Power Sales Agreement with Bonneville Power Administration (BPA) and Alcoa Inc. The Agreement consists of the District receiving monetary benefit payments from BPA on behalf of Alcoa Inc. In December 2008, the U.S. Ninth Circuit Court of Appeals issued a decision on BPA s service to the direct-service industries (DSIs), which put an immediate stop to the monthly payments. The December 2008 payment was the final payment between BPA to Alcoa through the District. The District also signed an Escrow services agreement with Alcoa to provide these services on their behalf. The original contract provided that the District would receive fixed monthly payments totaling $18,333 for these services through September 30, An amendment to this agreement was renegotiated in March 2009 stipulating that Alcoa will continue making a fixed monthly payment of $8,333 until such time that they stop producing aluminum at their Ferndale location or the end of the contract, whichever comes sooner. The monthly payment of $10,000 was temporarily suspended from March 2009 through November Starting in December 2009 the monthly payment of $10,000 resumed and will be paid through the end of the contract regardless of the operating status of the Ferndale facilities. SEE NOTE 10 E & F. On January 8, 2010, Horizon Bank was closed by the Washington Department of Financial Institutions and most of their assets and deposits were assumed by Washington Federal. The District maintained credit cards and a revolving checking account at Horizon Bank. On January 19, 2010, the District was notified that Washington Federal would no longer accept public funds. The District transferred the revolving checking account over to Key Bank, who also manages Whatcom County s funds. The credit cards currently remain at Washington Federal. Washington State Auditor's Office 11

131 MANAGEMENT'S DISCUSSION AND ANALYSIS For The Year Ended December 31, 2009 REQUEST FOR INFORMATION The basic financial statements, notes and management discussion and analysis are designed to provide a general overview of the District s finances. Questions concerning any of the information provided in this report should be directed to the Director of Finance of the, 1705 Trigg Rd, Ferndale, WA Washington State Auditor's Office 12

132 STATEMENT OF NET ASSETS As of December 31, 2010 ASSETS CURRENT AS S ETS Cash & Cash Equivalents $ 15,660 Short Term Investments 23,885,528 Receivables (Net): Customers 1,286,151 LUD #1 West Smith Road Receivable 5,346 Other 37,388 Total Accounts Receivables (Net) 1,328,885 Prepayments 29,035 TOTAL CURRENT AS S ETS $ 25,259,108 NON-CURRENT AS S ETS Deferred Charges $ 396,348 Restricted Assets Investments - Bond Reserves 3,298,248 Investments - Assessments 288,372 Investments - BPA Liability 43,731 Capital Assets Not Being Depreciated Land 108,000 Construction in Progress 2,052,158 Capital Assets Being Depreciated: Buildings & Structures 8,477,316 Machinery & Equipment 17,220,679 Intangible 866,000 Less Accumulated Depreciation (11,021,269) Total Capital Assets (Net) 17,702,884 TOTAL NONCURRENT AS S ETS $ 21,729,583 TOTAL ASSETS $ 46,988,692 The notes to financial statements are an integral part of this statement. Washington State Auditor's Office 13

133 STATEMENT OF NET ASSETS (continued) As of December 31, 2010 LIABILITIES CURRENT LIABILITIES Accounts Payable $ 865,381 Accrued Employee Payable 177,232 Accrued Utility Taxes 163,390 Contractor Retainage 6,052 Payables from Restricted Assets 1999 Current Principal Interest Current Principal 450, Interest 28, Current Principal 100, Interest 24,101 Deposits & Other Payables 8,073 Line-of-Credit / Grandview LUD #2 TOTAL CURRENT LIABILITIES $ 1,822,945 NON-CURRENT LIABILTIES Energy Green Credit $ 66,065 Payables from Restricted Assets 1999 Water Revenue Refunding Bonds - Non-current LTGO Series A&B Bonds - Non-current 6,435, Water Revenue Bonds - Non-current 2,565, LTGO Series A&B Bonds - Non-current 23,707,111 TOTAL NON-CURRENT LIABILTIES $ 32,773,176 TOTAL LIABILITIES $ 34,596,121 NET ASSETS Invested in Capital Assets, Net of Related Debt $ 7,277,672 Restricted for Debt Service 3,586,620 Unrestricted 1,528,279 TOTAL NET ASSETS $ 12,392,571 TOTAL LIABILITIES & NET ASSETS $ 46,988,692 The notes to financial statements are an integral part of this statement. Washington State Auditor's Office 14

134 STATEMENT OF NET ASSETS As of December 31, 2009 ASSETS CURRENT ASSETS Cash & Cash Equivalents $ 19,029 Short Term Investments 5,011,929 Receivables (Net): Customers 1,272,110 LUD #1 West Smith Road Receivable 5,346 Other 171,380 Total Accounts Receivables (Net) 1,448,835 Prepayments 28,567 TOTAL CURRENT ASSETS $ 6,508,360 NON-CURRENT ASSETS Deferred Charges $ 278,554 Restricted Assets Investments - Bond Reserves 1,546,636 Investments - Assessments 353,537 Capital Assets Not Being Depreciated Land 108,000 Construction in Progress 872,143 Capital Assets Being Depreciated: Buildings & Structures 8,477,316 Machinery & Equipment 17,123,463 Intangible 866,000 Less Accumulated Depreciation (10,245,166) Total Capital Assets (Net) 17,201,756 TOTAL NONCURRENT ASSETS $ 19,380,482 TOTAL ASSETS $ 25,888,843 The notes to financial statements are an integral part of this statement. Washington State Auditor's Office 15

135 STATEMENT OF NET ASSETS (continued) As of December 31, 2009 LIABILITIES CURRENT LIABILITIES Accounts Payable $ 1,594,946 Accrued Employee Payable 168,809 Accrued Utility Taxes 184,802 Contractor Retainage 1,634 Payables from Restricted Assets 1999 Current Principal 235, Interest 25, Current Principal 430, Interest 31, Current Principal 75, Interest 24,648 Deposits & Other Payables 3,313 Line-of-Credit / Grandview LUD #2 TOTAL CURRENT LIABILITIES $ 2,775,257 NON-CURRENT LIABILTIES Energy Green Credit $ (19,003) Payables from Restricted Assets 1999 Water Revenue Refunding Bonds - Non-current 2,730, LTGO Series A&B Bonds - Non-current 6,885, Water Revenue Bonds - Non-current 2,665,000 TOTAL NON-CURRENT LIABILTIES $ 12,260,997 TOTAL LIABILITIES $ 15,036,254 NET ASSETS Invested in Capital Assets, Net of Related Debt $ 6,566,756 Restricted for Debt Service 1,900,173 Unrestricted 2,385,660 TOTAL NET ASSETS $ 10,852,589 TOTAL LIABILITIES & NET ASSETS $ 25,888,843 The notes to financial statements are an integral part of this statement. Washington State Auditor's Office 16

136 STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS For The Year Ended December 31, 2010 OPERATING REVENUE Utility Sales and Service Revenues $ 13,538,617 Other Operating Revenue 15,486 TOTAL OPERATING REVENUE $ 13,554,103 OPERATING EXPENSES Operations: Purchased Water $ 51,802 Purchased Power 6,692,327 Water Purification 228,901 Taxes / Process / Delivery Costs 424,617 General Operations 918,567 Maintenance 910,991 Administration: General Administration 1,398,593 Planning and Development Expense 209,651 Depreciation Expense 832,809 Utility Tax Expense 223,236 TOTAL OPERATING EXPENSES $ 11,891,494 OPERATING INCOME (LOSS) $ 1,662,609 NONOPERATING REVENUE Lease Income $ 11,820 Assessment Income 205,705 Interest Income 107,299 Interest Fees (8,220) Service Revenues 273,332 TOTAL NONOPERATING REVENUE $ 589,937 NONOPERATING EXPENSE Interest Expense $ 670,181 Amortization 24,443 Loss (Gain) on Property Disposal 17,940 TOTAL NONOPERATING EXPENSE $ 712,565 INCOME BEFORE CONTRIBUTIONS, AND EXTRAORDINARY ITEMS $ 1,539,982 Capital Contributions (Connection Charges) $ - Special / Extraordinary Items - CHANGE IN NET ASSETS $ 1,539,982 NET ASSETS - JANUARY 1st $ 10,852,589 NET ASSETS - DECEMBER 31st $ 12,392,571 The notes to financial statements are an integral part of this statement Washington State Auditor's Office 17

137 STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS For The Year Ended December 31, 2009 OPERATING REVENUE Utility Sales and Service Revenues $ 13,048,056 Other Operating Revenue 7,262 TOTAL OPERATING REVENUE $ 13,055,318 OPERATING EXPENSES Operations: Purchased Water $ 60,638 Purchased Power 6,534,646 Water Purification 341,355 Taxes / Process / Delivery Costs 427,356 General Operations 832,270 Maintenance 720,711 Administration: General Administration 1,425,649 Planning and Development Expense 147,790 Depreciation Expense 709,175 Utility Tax Expense 339,611 TOTAL OPERATING EXPENSES $ 11,539,201 OPERATING INCOME (LOSS) $ 1,516,118 NONOPERATING REVENUE Lease Income $ 11,870 Assessment Income 326,467 Interest Income 172,237 Interest Fees (6,990) Service Revenues 129,996 TOTAL NONOPERATING REVENUE $ 633,579 NONOPERATING EXPENSE Interest Expense $ 687,537 Amortization 24,443 Loss (Gain) on Property Disposal 3,508 TOTAL NONOPERATING EXPENSE $ 715,488 INCOME BEFORE CONTRIBUTIONS, AND EXTRAORDINARY ITEMS $ 1,434,209 Capital Contributions (Connection Charges) $ (89,642) Special / Extraordinary Items - CHANGE IN NET ASSETS $ 1,344,566 NET ASSETS - JANUARY 1st $ 9,508,023 NET ASSETS - DECEMBER 31st $ 10,852,589 The notes to financial statements are an integral part of this statement Washington State Auditor's Office 18

138 STATEMENT OF CASH FLOWS For The Year Ended December 31, 2010 CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers $ 13,968,701 Payments to suppliers (11,530,300) Payments to employees (Labor only) (1,767,277) NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ 671,123 CASH FLOW FROM NONCAPITAL FINANCING ACTIVITIES Alcoa Service Payments $ 273,332 NET CASH PROVIDED (USED) BY NONCAPITAL FINANCING ACTIVITIES $ 273,332 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Proceeds from Capital Debt $ 20,884,830 Principal paid on Capital Debt (740,000) Interest paid on Capital Debt (663,593) NET CASH PROVIDED (USED) BY CAPITAL AND RELATED FINANCING ACTIVITIES $ 19,481,237 CASH FLOWS FROM INVESTING ACTIVITIES Investment Transactions $ (20,429,061) NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES $ (20,429,061) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (3,369) BALANCE BEGINNING OF YEAR $ 19,029 BALANCE END OF YEAR $ 15,660 The notes to financial statements are an integral part of this statement Washington State Auditor's Office 19

139 STATEMENT OF CASH FLOWS (continued) For The Year Ended December 31, 2010 RECONCILIATION OF OPERATING INCOME (LOSS) TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES Operating Income (Loss) $ 1,662,609 Adjustments to reconcile operating income to net cash Cash Provided (Used) by operating activities: Depreciation Expense 832,809 Miscellaneous (30,563) Change in Assets and Liabilities: Decrease (Increase) in Net Accounts Receivable 119,950 Decrease (Increase) in Prepayments (468) Decrease (Increase) in Deferred Charges 69,031 Decrease (Increase) in Net Capital Assets (1,333,938) Increase (Decrease) in Account Payable (729,564) Increase (Decrease) in Accrued Employee Payable 8,422 Increase (Decrease) in Accrued Utility Taxes (21,412) Increase (Decrease) in Contractor Retainage 4,417 Increase (Decrease) in Deposits & Other Payables 4,760 Increase (Decrease) in Energy Green Credit 85,068 NET CASH PROVIDED BY OPERATING ACTIVITIES $ 671,123 The notes to financial statements are an integral part of this statement Washington State Auditor's Office 20

140 STATEMENT OF CASH FLOWS For The Year Ended December 31, 2009 CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers $ 14,330,403 Payments to suppliers (10,966,658) Payments to employees (Labor only) (1,560,773) NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ 1,802,972 CASH FLOW FROM NONCAPITAL FINANCING ACTIVITIES BPA Alcoa Escrow Payments $ 130,121 Transfers from (to) Other Utilities (0) Payments Received for Non-operating work 11,220 NET CASH PROVIDED (USED) BY NONCAPITAL FINANCING ACTIVITIES $ 141,341 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Principal paid on Capital Debt $ (665,000) Interest paid on Capital Debt (690,527) Capital Contributions (89,642) NET CASH PROVIDED (USED) BY CAPITAL AND RELATED FINANCING ACTIVITIES $ (1,445,169) CASH FLOWS FROM INVESTING ACTIVITIES Investment Transactions $ (496,842) NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES $ (496,842) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 2,303 BALANCE BEGINNING OF YEAR $ 16,726 BALANCE END OF YEAR $ 19,029 The notes to financial statements are an integral part of this statement Washington State Auditor's Office 21

141 STATEMENT OF CASH FLOWS (continued) For The Year Ended December 31, 2009 RECONCILIATION OF OPERATING INCOME (LOSS) TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES Operating Income (Loss) $ 1,516,118 Adjustments to reconcile operating income to net cash Cash Provided (Used) by operating activities: Depreciation Expense 709,177 Miscellaneous 275 Change in Assets and Liabilities: Decrease (Increase) in Net Accounts Receivable (194,032) Decrease (Increase) in Prepayments (2,796) Decrease (Increase) in Net Capital Assets (1,042,496) Interfund Xfers (0) Increase (Decrease) in Account Payable 836,975 Increase (Decrease) in Accrued Employee Payable 162,879 Increase (Decrease) in Accrued Utility Taxes (43,009) Increase (Decrease) in Contractor Retainage (291) Increase (Decrease) in Deposits & Other Payables (3,527) Increase (Decrease) in Energy Green Credit (136,300) NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,802,972 The notes to financial statements are an integral part of this statement Washington State Auditor's Office 22

142 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2010 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies of the ( District ) conform to generally accepted accounting principles (GAAP) as applicable to proprietary funds of governments. The District has elected to apply Financial Accounting Standards Board (FASB) guidance issued after November 30, 1989 to the extent that it does not conflict with or contradict guidance of the Governmental Accounting Standards Board (GASB). GASB is the accepted standard setting body for establishing governmental accounting and financial reporting principles. In June 1999, GASB approved Statement 34, Basic Financial Statements and Management Discussion and Analysis for State and Local Governments. This and consecutive statements are reflected in the accompanying financial statements (including notes to financial statements). The following is a summary of the most significant policies (including identification of those policies which result in material departures from generally accepted accounting principles): a. Reporting Entity is a municipal corporation governed by an elected three-member board. As required by generally accepted accounting principles, the management has considered all potential component units in defining the reporting entity. The District has no component units. b. Basis of Accounting and Presentation The accounting records of the District are maintained in accordance with methods prescribed by the State Auditor under the authority of Chapter 43.09RCW. The District uses the full-accrual basis of accounting where revenues are recognized when earned and expenses are recognized when incurred. Capital asset purchases are capitalized and long-term liabilities are accounted for in the appropriate funds. The District distinguishes between operating revenues and expenses from non-operating ones. Operating revenues and expenses result from providing services and producing and delivering goods in connection with a district s principal ongoing operations. The principal operating revenues of the District are charges to customers for water delivery and electric service. The District also recognizes as operating revenue the penalties that occasionally correspond with utility billing and some miscellaneous recycle income. Operating expenses for the District include the cost of sales and services, administrative expenses, planning and business development expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as non-operating revenues and expenses. c. Cash and Cash Equivalents For the purposes of the Statement of Cash Flows, Restricted Bond Reserves, Assessments used to fund debt service and BPA green energy credits are excluded from cash equivalents. Operation, Capital, and Emergency Reserve balances are also excluded from cash equivalents and are reflected in the Investments Short Term Balance. SEE NOTE 2B. d. Utility Plant and Depreciation / Capital Assets: SEE NOTE 3. e. Restricted Funds In accordance with bond resolutions (and certain related agreements) separate restricted funds are required to be established. The assets held in these funds are restricted for specific uses, including construction, debt-service and other special reserve requirements. Restricted funds currently include the following: Washington State Auditor's Office 23

143 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2010 The restricted reserve balances as of December 31, 2010 are entirely invested with the County. RESTRICTED RESERVE BALANCES 2010 Bond Reserves 2004 LTGO Series A&B Bond Reserve $ 798, Water Revenue Bond Reserve (Grandview LUD) 249, LTGO Series A&B Bond Reserve 2,251,154 Total Bond Reserves $ 3,298,248 Other Restricted Funds LUD #2 Cash Investments 288,372 BPA CRC Cash Balance 43,731 TOTAL RESTRICTED RESERVE BALANCES $ 3,630,351 f. Receivables Two customers have proved to be a collection risk. An allowance for bad debt in the amount of $26,444 is allocated to offset this potential loss. g. Inventories Inventories are valued at original cost (when they exist), which approximates the market value. h. Investments: SEE NOTE 2. i. Compensated Absences Compensated absences are absences for which employees will be paid, such as vacation, sick leave, and floaters (in lieu of holidays) is the first year the District reflected accrued compensated absence pay in the financial statements as an expense and liability. All leave is paid at the employee s current rate of pay when used. The General Manager s compensated absences are separately negotiated as part of his employment contract. Vacation pay may be carried over at year-end at a balance not greater than 80 hours plus the annual accrual. Unused vacation is payable upon resignation, retirement, termination without cause, or death. Sick Leave may be accumulated up to a total of 1080 hours for non-union employees and 1136 hours for union employees, and is not convertible. Upon termination of employment, unused sick leave is compensated at 25% of accrued benefit for non-union, 30% for union. Floating Holidays may be used at any time once accrued for leave. Full-time employees earn 12 floaters per year. Unused floaters must be cashed-out at the end of the year and cannot be carried forward to the next fiscal year. j. Unamortized Debt Expenses k. Costs relating to the sale of bonds are deferred and amortized over the lives of the various bond issues. Washington State Auditor's Office 24

144 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2010 Construction Financing Funds for Capital Asset Construction are budgeted and collected in the Short-term Investments. SEE NOTE 2. l. Purchase Commitments The District currently has a power supply contract with the Bonneville Power Administration ( BPA ) that covers its entire electric load requirements. In November 2008, the District approved a new Power Sales Agreement with BPA which will provide the District with a contractually defined amount of federal power at the lowest offer rate ( Tier 1 ) available to BPA s public agency customers. For power requirements greater than the Tier 1 amount, the District can buy from BPA or an alternate provider. The contract with BPA runs through September 30, In August 2008, the District approved a new Network Transmission Agreement ( NT Agreement ) with BPA which provides for an extension of the term of the NT Agreement through August 31, 2038 and assures sufficient transmission capacity to accommodate both the District s existing power supply requirements moved over BPA s transmission system and future electric load growth. NOTE 2 DEPOSITS AND INVESTMENTS a. Deposits The District s deposits, and certificates of deposit, are entirely covered by Federal depository insurance (FDIC) or by collateral held in a multiple financial institution collateral pool administered by the Whatcom County Investment Pool (WCIP) pursuant to RCW b. Investments The agent for the District s investments is the Whatcom County Treasurer s Office and all investments are held in the Whatcom County Investment Pool [WCIP]. As of December 31, 2010, the District had the following investments: 2010 Maturities Fair Value INVESTMENTS Short-Term Investments Whatcom County Investment Pool $ 23,885,528 $ 23,885,528 Non-Current Whatcom County Investment Pool 3,630,351 3,630,351 TOTAL INVESTMENTS $ 27,515,879 $ 27,515,879 NOTE 3 - UTILITY PLANT AND DEPRECIATION - CAPITAL ASSETS Capital assets are defined by the District as assets with initial individual cost of more than $400 for computer equipment, and $5,000 for other assets, and an estimated useful life in excess of one year. Washington State Auditor's Office 25

145 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2010 Major expenses for capital assets, including capital leases and major repairs that increase useful lives, are capitalized. Maintenance, repairs, and minor renewals are accounted for as expenses when incurred. The District has not acquired any assets under a capital lease. Utility Plant in Service and other capital assets are recorded at cost where the historical cost is known. Where historical cost is not known, assets are recorded at estimated cost relative to known historical costs of related components during the same period of construction. Donations by developers and customers are recorded at the known value of the contractor price, donor cost, or appraised value. Utility plant activities for the year ending December 31, 2010 were as follows: Washington State Auditor's Office 26

146 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, Activity 2010 Beginning Balance Increase Decrease Ending Balance UTILITY PLANT NOT BEING DEPRECIATED LAND Cherry Point Water Utility $ 108,000 $ - $ - $ 108,000 TOTAL LAND 108, ,000 CONSTRUCTION-IN-PROGRESS Cherry Point Water Utility 532,872 1,145,759 (155,548) 1,523,084 Grandview Potable Water Utility 25,239 1,910 (21,065) 6,085 Electric Utility 221, ,885 (156,508) 253,147 General Utility & Office (Internal Services Utility) 92, ,287 (93,707) 269,841 TOTAL CONSTRUCTION-IN-PROGRSS 872,143 1,606,842 (426,827) 2,052,158 TOTAL UTILITY PLANT NOT BEING DEPRECIATED $ 980,143 $ 1,606,842 $ (426,827) $ 2,160,158 UTILITY PLANT BEING DEPRECIATED BUILDINGS & STRUCTURES Cherry Point Water Utility $ 6,966,162 $ - $ - $ 6,966,162 Grandview Potable Water Utility 56, ,875 Grandview Fire Utility 42, ,102 Electric Utility 166, ,880 General Utility & Office (Internal Services Utility) 1,245,296 1,245,296 TOTAL BUILDINGS & STRUCTURES 8,477, ,477,316 MACHINERY & EQUIPMENT Cherry Point Water Utility 6,700,469 77,201 (89,769) 6,687,902 Grandview Potable Water Utility 1,187,609 (5,861) 1,181,749 Grandview Fire Utility 1,902,439 (1,348) 1,901,091 Electric Utility 7,066,414 24,635 7,091,048 General Utility & Office (Internal Services Utility) 266, ,593 (10,235) 358,890 TOTAL MACHINERY & EQUIPMENT 17,123, ,428 (107,212) 17,220,679 INTANGIBLE Cherry Point Water Utility 866, ,000 TOTAL INTANGIBLE 866, ,000 TOTAL UTILITY PLANT BEING DEPRECIATED $ 26,466,779 $ 204,428 $ (107,212) $ 26,563,995 LESS ACCUMULATED DEPRECIATION FOR: Buildings & Structures $ (3,891,668) $ (172,870) $ (4,064,538) Machinery & Equipment (6,223,598) 64,637 (624,569) (6,783,530) Intangible (129,900) (43,300) (173,200) TOTAL ACCUMULATED DEPRECIATION (10,245,166) 64,637 (840,740) (11,021,269) UTILITY PLANT BEING DEPRECIATED (NET) $ 16,221,613 $ 269,066 $ (947,952) $ 15,542,727 TOTAL UTILITY PLANT, NET $ 17,201,756 $ 1,875,907 $ (1,374,779) $ 17,702,884 Capital assets are depreciated using the straight-line method over the following estimated useful lives: ASSET YEARS Buildings & Structures 5-60 Vehicles 3-10 Machinery & Equipment 3-60 Computer Hardware & Software 2-5 Intangible 20 Washington State Auditor's Office 27

147 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2010 Initial depreciation on utility plant is recorded in the year subsequent to purchase. Preliminary costs incurred for proposed projects are deferred pending construction of the facility. Costs relating to projects ultimately constructed are transferred to utility plant; charges that relate to abandoned projects are expensed. The District expensed $259,000 in CWIP projects in NOTE 4 - CONSTRUCTION IN PROGRESS Construction in progress represents expenses to date on projects whose authorizations total $3,592,123. Of the committed balance of $28,224,456, the district will be required to raise approximately $2.5 million in future financing. Construction in progress represents capital projects for the upgrade or expansion of the District s infrastructure. General improvements for the benefit of all users of a specific utility are financed with reserves, previously collected through rates and/or bonds, or paid for with future rates. Improvements/capital expansion requested by an individual customer(s) for their specific benefit is the direct financial responsibility of that customer(s). Construction work in progress is composed of the following: District Capital Project # Annual Project Authorization Expended Through 12/31/10 Committed Required Future Financing CONSTRUCTION IN PROGRESS Purchase PSE Ferndale Substation E10 $ 566,465 $ 78,658 $ 883,451 None Purchase PSE Enterprise Substation E11-33,873 1,035,306 None Refinery Substation Redesign E14 416, ,846 3,683,973 $ 2,500,000 Electrical System Upgrades to Plant Power Systems E18 146,886 38,771 38,771 None Grandview Utility System Security Fencing GVP2 11,644 6,085 59,840 None Plant 2 Site Improvements IS3 160,592 89, ,535 None SCADA System Analysis & Upgrade IS12 200, ,211 1,740,640 None Treatment Plant Capacity Design & Upgrade RW1 659, ,167 18,083,501 None Vertical Floc Paddles for Basin 3 & 4 RW3 304, , ,631 None Plant 2 Intake Equipment Upgrade RW10 284, , ,679 None Intake Air Backwash System Upgrade RW17 393, ,522 1,089,243 None Distribution System Storage RW20 301,983 24, ,039 None Main line valves on Distribution System RW22 144,413 45, ,849 None TOTAL CONSTRUCTION IN PROGRESS $ 3,592,123 $ 2,052,158 $ 28,224,456 $ 2,500, NOTE 5 SHORT-TERM DEBT The District had no short-term debt obligations in NOTE 6 - LEASE COMMITMENTS a. Operating Lease(s) The Public Utility District No.1 of Whatcom County had the following operating lease for the period January 1, 2010 to December 31, 2010: Washington State Auditor's Office 28

148 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2010 Type Name Execution Terms Function Cost Portable Office (Trailer) Williams Scotsman 10/07/2005 Month-to-Month Temporary Office Facility Monthly $ incl tax This lease is considered an operating lease for accounting purposes. Lease expenses for the year ended December 31, 2010 amounted to $4,917. In February 2011, a new lease was signed for a larger, more efficient trailer from William Scotsman. In mid-2011, the site will be prepped for the new trailer, the trailer will be installed and the older trailer will be returned to William Scotsman. The monthly amount for the new trailer is $750 excluding tax. The initial term of the new lease is three years with the option to extend depending on the District s needs. b. Capital Lease(s) The Public Utility District No.1 of Whatcom County has no capital leases and has not acquired any assets through capital leases. NOTE 7 - LONG-TERM DEBT AND LIABILITIES a. Long-Term Debt Schedule 09 which accompanies this report contains a list of the outstanding debt at December 31, The annual requirements to amortize all debts outstanding as of December 31, 2010, including interest, are as follows: 2004 LTGO BONDS 2007 WATER REVENUE BONDS 2010 LTGO BONDS YEARS ENDING DECEMBER 31: PRINCIPAL INTEREST TOTAL DEBT SERVICE PRINCIPAL INTEREST TOTAL DEBT SERVICE PRINCIPAL INTEREST TOTAL DEBT SERVICE , , , , , ,606-1,022,951 1,022, , , , , , ,856-1,112,575 1,112, , , , , , ,869 1,135,000 1,112,575 2,247, , , , , , ,506 1,175,000 1,074,338 2,249, , , , , , ,756 1,215,000 1,034,713 2,249, ,790, ,253 3,644, , ,575 1,236,575 6,365,000 4,413,313 10,778, ,630, ,476 1,855, , ,550 1,231,550 6,020,000 2,978,750 8,998, ,000 39, ,675 7,730,000 1,262,950 8,992,950 TOTAL $ 6,885,000 $ 2,594,779 $ 9,479,779 $ 2,665,000 $ 1,525,394 $ 4,190,394 $ 23,640,000 $ 14,012,163 $ 37,652,163 There is $3,630,351 in restricted assets of the District. These represent reserve requirements as contained in the various indentures, assessment income to be used for the 2007 bond debt service, and a reserve for a possible BPA liability. There are a number of other limitations and restrictions contained in the various bond indentures. The District is in compliance with all significant limitations and restrictions. The has pledged future Grandview assessment revenue to repay $2,845,000 in revenue bonds issued in November, Proceeds from the bonds provided financing for the Grandview line extension. The bonds are payable solely from Grandview LUD #2 Assessment revenues and are payable through Annual principal and interest payments on the bonds are expected to match the assessment revenue. The total principal and interest remaining to be paid on the bonds is $4,190,394. Principal and interest paid for the current year and total Grandview assessment revenue were $222,888 and $205,705 respectively. Washington State Auditor's Office 29

149 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2010 The 1999 Water Revenue Bonds were refunded as of December 31, At the time of refunding, $2,730,000 was outstanding on the bond. This advance refunding was undertaken to reduce total debt service payments over the next nine years by $3,501,715 and resulted in an economic gain of $154,034. Debt service on these bonds is met by cash and investments held by the refunding trustee. As of December 31, 2010, the trustee was holding cash and investments of $2,803,775 which are expected to fund debt service fully. These refunded bonds constitute a contingent liability of the District but are excluded from the financial statements. b. Changes in Long-Term Liabilities During the year ended December 31, 2010, the following changes occurred in long-term liabilities: Beginning Ending Balance Balance 01/01/10 Additions Reductions 12/31/10 LONG TERM LIABILITIES Due Within One Year Energy Green Credit $ (19,003) $ 85,068 $ - $ 66,065 Bonds Payable: 1999 Water Revenue Bond 2,965,000 (2,965,000) LTGO Series A&B Bonds 7,315,000 (430,000) 6,885, , Water Revenue Bond (Grandview LUD) 2,740,000 (75,000) 2,665, , LTGO Series A&B Bonds - 23,707,111 23,707,111 - Total Bonds Payable: $ 13,020,000 $ 23,707,111 $ (3,470,000) $ 33,257,111 $ 550,000 TOTAL LONG TERM LIABILITIES $ 13,000,997 $ 23,792,179 $ (3,470,000) $ 33,323,176 $ 550,000 NOTE 8 RESTRICTED NET ASSETS The District s statement of net assets reports $3,586,620 of restricted net assets for debt service, of which everything is restricted by enabling legislation. NOTE 9 - PENSION PLAN The District s employees do not participate in any of the plans of the Washington State Department of Retirement Systems. In lieu of the state retirement program, the District offers its non-union employees a deferred compensation plan in accordance with Internal Revenue Service Code Section 457. This plan was adopted in An Administrative Service Agreement was established with Hartford Life Insurance Company to provide individual investment choices for participants with detailed accounting to both the participants and the District. Employees may or may not elect to participate in the Hartford plan. The 2010 rate of District contribution to the employee is 7.20% of gross earnings. The Plan, available to eligible employees, permits them to defer a portion of their salary until future years. The deferred compensation is not available to employees until termination, retirement, death, or unforeseeable emergency. The District has neither fiduciary responsibility nor liability for the Plan and accordingly no records are reflected on the Districts accounts. All eligible union employees are covered under the negotiated contract with Western Conference Teamsters Welfare Trust. NOTE 10 SEGMENT ACTIVITY The District operated four proprietary segments and an Internal Services Fund in The following changes occurred in the District s segments during 2010: Washington State Auditor's Office 30

150 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2010 a. RAW WATER UTILITY The District completed the preliminary design and is working on final design for upgrading Water Plant 2. Construction will begin in The District completed several capital improvements, including vegetation management, replacing the flocculators at Plant 1 to improve water treatment and upgrading the Plant 2 intake to prevent problems with frazil ice conditions. b. GRANDVIEW POTABLE WATER UTILITY The Grandview Potable Water Utility continues to be effected by the tightening economy. Potable water consumption dropped 7% from and vacancy rates in the light industrial park continue to rise. Government Lot 2 in the Grandview Light Industrial area was converted from 17 individual meters into 3 main meters in December. The Grandview Business Center was added as a wholesale potable water customer. c. GRANDVIEW FIRE UTILITY See Grandview Potable Water Utility. d. ELECTRIC UTILITY The District renewed the electric services agreement with its one retail customer, Conoco-Phillips in April of this year. The previous contract dated back to The new contract expires in 2028, which is also the termination date of the District s power purchase agreement with the Bonneville Power Administration (BPA). The Electric Utility continues to make electric system improvements designed to assure reliability of electric service to its water treatment plants and to its retail electric customer. The District is negotiating the purchase of two Puget Sound Energy (PSE) substations serving its water system facilities and anticipates completing the purchase/sale agreements in The District will complete final design and begin construction of an upgrade to its 115 kv substation serving its refinery customer also in Further, to assure safe operations and compliance with electric safety regulations, the District undertook ARC Flash Hazard studies of its electric system facilities and electric equipment serving its water system plants. Based on findings of the studies, improvements have been implemented. In May 2007, the federal Ninth Circuit Court of Appeals ruled that the Residential Exchange Program (REP) Settlement Agreements between BPA and the Region s Investor Owned Utilities (IOUs) were unlawful resulting in overpayments to the participating IOUs. The ruling resulted in BPA providing credits (rebates) to its public utility power customers in amounts equivalent to the overpayments included in the public utilities power rates. The District received an aggregate amount of credits of $949,466 in 2008 and $699,545 in Under a new tentative settlement agreement that must be ratified by an aggregate of BPA s public utility customers, which represent approximately 91% of the public utility electric load, by April 15, 2011, the REP payments to IOUs will be set through It is calculated that over the period 2011 through 2028 that the District s electric charges assessed by BPA for power supply will be lower than they would be absent the settlement and have a net present value of approximately $3.5 million. e. ALCOA SERVICES FUND The District signed a services agreement in 2006 with Alcoa to facilitate the BPA Block Power Agreement services on their behalf and to provide other services such as working with Alcoa to consider strategies to reduce power supply and delivery costs associated with Intalco under this agreement. The District would receive fixed Washington State Auditor's Office 31

151 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2010 monthly payments totaling $18,333 for these services through September 30, The payments from Alcoa and related expenses are maintained in a separate fund. An amendment to this agreement was negotiated in March Alcoa would continue paying $8,333 until such time that they stopped producing at their Ferndale location or the end of contract. The monthly $10,000 payment was temporarily suspended from March 2009 through November Starting in December 2009 the monthly payment of $10,000 resumed and was scheduled to be paid through the end of the contract regardless of the operating status of the Ferndale facilities. In April 2010, Alcoa requested terminating the agreement in light of the fact that they renegotiated a new agreement with BPA outside of the District s involvement. A final, onetime payment of $200,000 to the District by Alcoa in May 2010 concluded the Services Agreement. Washington State Auditor's Office 32

152 Washington State Auditor's Office 33 NOTES TO FINANCIAL STATEMENT Statement of Revenues, Expenses and Changes in Net Assets For The Year Ended December 31, RAW WATER UTILITY GRANDVIEW POTABLE WATER GRANDVIEW FIRE ELECTRIC UTILITY ALCOA ESCROW SVCS INTERNAL SERVICES FUND DISTRICT TOTAL OPERATING REVENUE Utility Sales and Service Revenues $ 4,769,478 $ 103,129 $ 34,193 $ 8,631,818 $ - $ - $ 13,538,617 Other Operating Revenue 15, ,486 TOTAL OPERATING REVENUE $ 4,784,920 $ 103,164 $ 34,202 $ 8,631,818 $ - $ - $ 13,554,103 OPERATING EXPENSES Operations: Purchased Water $ 51,802 $ - $ - $ - $ - $ - $ 51,802 Purchased Power 434,859 3,235 2,400 6,251, ,692,327 Water Purification 228, ,901 Taxes / Process / Delivery Costs , ,617 General Operations 717,854 63,196 9, , ,567 Maintenance 458,401 47,549 8, , ,991 Administration General Administration 925,480 77,536 16, ,383 6,000 (0) 1,398,593 Planning and Development Expenses 62, , , ,651 Allocated Internal Service Expenses Depreciation Expense 497,696 36,536 53, , ,809 Utility Tax Expense 223,831 4,961 1,702 (11,958) 4, ,236 TOTAL OPERATING EXPENSES $ 3,600,788 $ 233,498 $ 90,783 $ 7,834,309 $ 132,116 $ (0) $ 11,891,494 OPERATING INCOME (LOSS) $ 1,184,132 $ (130,334) $ (56,581) $ 797,509 $ (132,116) $ 0 $ 1,662,609 NONOPERATING REVENUE Lease Income $ 11,634 $ 40 $ 7 $ 138 $ - $ - $ 11,820 Assessment Income - 80, , ,705 Interest Income 31,344 4,512 6,469 60,027 4, ,299 Interest Fees (2,388) (342) (499) (4,587) (404) - (8,220) Service Revenues 273, ,332 TOTAL NONOPERATING REVENUE $ 40,591 $ 84,847 $ 131,046 $ 55,578 $ 277,875 $ - $ 589,937 NONOPERATING EXPENSE Interest Expense $ 363,094 $ 72,411 $ 74,930 $ 159,746 $ - $ - $ 670,181 Amortization 11,309 3,171 4,816 5, ,443 Interfund Expense 87,020 (84,867) (32,665) 30, Loss (Gain) on Property Disposal 17, ,940 BPA Alcoa Transfer - Rural Electric Expense TOTAL NONOPERATING EXPENSE $ 479,364 $ (9,285) $ 47,081 $ 195,405 $ - $ - $ 712,565 INCOME BEFORE CONTRIBUTIONS, 745,359 $ (36,202) $ 27,384 $ 657,682 $ 145,759 $ 0 $ 1,539,982 AND EXTRAORDINARY ITEMS Capital Contributions $ - $ - $ - $ - $ - $ - $ - Extraordinary Items CHANGE IN NET ASSETS $ 745,359 $ (36,202) $ 27,384 $ 657,682 $ 145,759 $ 0 $ 1,539,982 NET ASSETS - JANUARY 1st $ 3,646,599 $ 179,482 $ 309,370 $ 6,149,303 $ 523,767 $ 44,067 $ 10,852,589 NET ASSETS - DECEMBER 31st $ 4,391,958 $ 143,280 $ 336,755 $ 6,806,985 $ 669,526 $ 44,067 $ 12,392,571

153 Washington State Auditor's Office 34 ASSETS RAW WATER UTILITY NOTES TO FINANCIAL STATEMENT Statement of Net Assets As of December 31, GRANDVIEW GRANDVIEW ELECTRIC ALCOA POTABLE WATER FIRE UTILITY UTILITY ESCROW SVC UTILITY INTERNAL SERVICES FUND ELIMINATION DISTRICT TOTAL CURRENT ASSETS CASH & CASH EQUIVALENTS $ 9,809 $ 94 $ 2,088 $ 1,310 $ 472 $ 1,887 - SHORT TERM INVESTMENTS 17,518,838 54,967 44,521 5,739, ,564 56,527 23,885,528 RECEIVABLES (Net): Customers 387,552 14,371 1, , ,286,151 Other 25, ,901-6,532 37,388 LUD #1 West Smith Road Receivable 5, ,346 Interfund Receivables 180, , (270,000) - Interfund Transfers - Capital 1,047, , ,490 (1,640,260) 0 Interfund Transfers - Employee (145,910) (11,493) (1,367) (14,744) - 173,515 - Total Accounts Receivables (Net) 1,500,032 2,877 (354) 1,179, ,490 (1,460,213) (270,000) 1,328,885 OTHER CURRENT ASSETS Prepayments ,035 29,035 Other TOTAL CURRENT ASSETS $ 19,028,678 $ 57,938 $ 46,255 $ 6,919,475 $ 849,526 $ (1,372,764) (270,000) 25,259,108 NON-CURRENT ASSETS Construction Contracts & Other Receivables Deferred Charges 252,315 21,536 33,708 88, ,348 NONCURRENT RESTRICTED ASSETS Investments - Bond Reserves 2,436, , , , ,298,248 Investments - Assessments - 78, , ,372 Invstments - BPA Liability , ,731 Capital Assets Not Being Depreciated Land 108, ,000 Construction in Progress 1,523,084 6, , ,841 2,052,158 Capital Assets Being Depreciated: - Buildings & Structures 6,966,162 56,875 42, ,880-1,245,296 8,477,316 Machinery & Equipment 6,687,902 1,181,749 1,901,091 7,091, ,890 17,220,679 Intangible 866, ,000 Less Accumulated Depreciation (8,061,352) (232,268) (392,860) (2,101,021) - (233,768) (11,021,269) Total Capital Assets (Net) 8,089,796 1,012,440 1,550,333 5,410,055-1,640,260 17,702,884 TOTAL NONCURRENT ASSETS $ 10,778,505 $ 1,244,657 $ 1,910,820 $ 6,155,341 $ - $ 1,640,260 - TOTAL ASSETS $ 29,807,183 $ 1,302,595 $ 1,957,075 $ 13,074,816 $ 849,526 $ 267,496 $ (270,000) $ 46,988,692

154 Washington State Auditor's Office 35 LIABILITIES NOTES TO FINANCIAL STATEMENT Statement of Net Assets As of December 31, GRANDVIEW GRANDVIEW FIRE ELECTRIC ALCOA ESCROW POTABLE UTILITY UTILITY UTILITY SVC RAW WATER UTILITY INTERNAL SERVICES FUND ELIMINATION CURRENT LIABILITIES Accounts Payable $ 102,859 $ 78 $ - $ 716,247 $ - $ 46,198 - Accrued Employee Payable , ,232 Accrued Utility Taxes 17, , ,390 Contractor Retainage 6, ,052 Interfund Payables - 90, ,000 - (270,000) - Payables from Restricted Assets 1999 Water Revenue Bond Principal - Current Portion Interest Payable LTGO Bond Principal Series A&B - Current Portion 205, , , Interest Payable 16, , , Water Revenue Bond Principal - Current Portion - 100, , Interest Payable - 24, ,101 Deposits & Other Payables 8, ,073 TOTAL CURRENT LIABILITIES $ 356,146 $ 214,635 $ 0 $ 1,118,734 $ 180,000 $ 223,429 $ (270,000) $ 1,822,945 NON-CURRENT LIABILITIES Energy Green Credit $ - $ - $ - $ 66,065 $ - $ - - Payables from Restricted Assets 1999 Water Revenue Bond Principal LTGO Bond Principal Series A&B 3,567, ,867, ,435, Water Revenue Bond Principal - 944,680 1,620, ,565, LTGO Bond Principal Series A&B 21,491, ,215, ,707,111 TOTAL NONCURRENT LIABILITIES $ 25,059,079 $ 944,680 $ 1,620,320 $ 5,149,097 $ - $ - - TOTAL LIABILITIES $ 25,415,225 $ 1,159,315 $ 1,620,320 $ 6,267,831 $ 180,000 $ 223,429 $ (270,000) $ 34,596,121 NET ASSETS Invested in Capital Assets, Net of Related Debt $ 2,689,584 $ (32,240) $ (69,987) $ 3,050,055 $ - $ 1,640,260 - Net Assets Restricted for Debt Service 2,436, , , , ,586,620 Unrestricted (734,019) (35,161) 79,963 3,144, ,526 (1,596,193) 1,528,279 TOTAL NET ASSETS $ 4,391,958 $ 143,280 $ 336,755 $ 6,806,985 $ 669,526 $ 44,067 - TOTAL LIABILITIES & FUND BALANCE $ 29,807,183 $ 1,302,595 $ 1,957,075 $ 13,074,816 $ 849,526 $ 267,496 $ (270,000) $ 46,988,692 DISTRICT TOTAL

155 Washington State Auditor's Office 36 NOTES TO FINANCIAL STATEMENT Statement of Cash Flow As of December 31, $ $ GRANDVIEW GRANDVIEW BPA-ALCOA INTERNAL CASH FLOWS FROM OPERATING ACTIVITIES RAW WATER POTABLE FIRE ELECTRIC ESCROW SERVICE TOTAL Receipts from Customers $ 5,111,054 $ 98,112 $ 36,389 $ 8,709,940 $ - $ 13,206 13,968,701 Payments to suppliers (2,742,658) (31,860) (8,449) (7,631,412) (7,936) (1,107,986) (11,530,300) Payments to employees (Labor only) (1,767,277) (1,767,277) NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ 2,368,396 $ 66,252 $ 27,940 $ 1,078,528 $ (7,936) $ (2,862,058) 671,123 CASH FLOW FROM NONCAPITAL FINANCING ACTIVITIES BPA Alcoa Escrow Payments 273, ,332 Transfers from (to) Other Utilities (33,810) (9,874) 2,275 (30,266) 2,961 68,715 - NET CASH PROVIDED (USED) BY NONCAPITAL FINANCING ACTIVITIES $ (33,810) $ (9,874) $ 2,275 $ (30,266) $ 276,293 $ 68, ,332 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES $ Proceeds from Capital Debt 18,686,578 2,198,251 20,884,830 Principal paid on Capital Debt (428,517) (32,815) (46,364) (232,304) (740,000) Interest paid on Capital Debt (350,830) (61,917) (90,798) (160,048) (663,593) NET CASH PROVIDED / (USED) BY CAPITAL AND RELATED FINANCING ACTIVITIES $ 17,907,231 $ (94,732) $ (137,162) $ 1,805,900 $ - $ - 19,481,237 CASH FLOWS FROM INVESTING ACTIVITIES Investment Transactions (20,206,778) 40, ,050 (2,841,782) (267,600) 2,738,800 (20,429,061) NET CASH PROVIDED / (USED) FROM INVESTING $ ACTIVITIES $ (20,206,778) $ 40,250 $ 108,050 $ (2,841,782) $ (267,600) $ 2,738,800 (20,429,061) NET INCREASE (DECREASE) IN CASH AND $ CASH EQUIVALENTS $ 35,039 $ 1,897 $ 1,103 $ 12,379 $ 757 $ (54,543) (3,369) BALANCE BEGINNING OF YEAR $ (25,230) (1,803) 985 (11,069) (285) 56,430 19,029 BALANCE END OF PERIOD $ 9,809 $ 94 $ 2,088 $ 1,310 $ 472 $ 1,887 15,660

156 Washington State Auditor's Office 37 NOTES TO FINANCIAL STATEMENT Statement of Cash Flow As of December 31, GRANDVIEW GRANDVIEW BPA-ALCOA POTABLE FIRE ELECTRIC ESCROW CHERRY POINT INTERNAL SERVICE TOTAL RECONCILIATION OF OPERATING INCOME (LOSS) TO NET CASH $ $ 1,662,609 $ $ Operating Income (Loss) $ 1,184,132 $ (130,334) $ (56,581) $ 797,509 $ (132,116) 0 Adjustments to reconcile operating income to net cash provided (used) by operating activity A Depreciation Expense 439,681 37,708 53, ,893-86, ,809 Z Miscellaneous - Non-Operating (17,930) (3,305) (4,816) (5,112) (30,563) B Decrease (Increase) in Net Accounts Receivable (191,605) 50, (52,731) 127, , ,950 D Decrease (Increase) in Prepayments (468) (468) J Decrease (Increase) in Other Deferred Charges 54,420 5,174 4,816 4, ,031 K Decrease (Increase) in Net Capital Assets (excluding Depreciation) (1,039,017) 22, (46,158) - (272,242) (1,333,938) Y Interfund Xfers 2,036,992 83,826 30, ,849 (2,961) (2,884,904) 0 L Increase (Decrease) in Account Payable (126,835) (741) (171) (617,796) (290) 16,269 (729,564) R Increase (Decrease) in Accrued Employee Payable ,422 8,422 M Increase (Decrease) in Accrued Utility Taxes 17, (39,614) - - (21,412) N Increase (Decrease) in Contractor Retainage 6, (1,634) 4,417 S Increase (Decrease) in Deposits & Other Payables 4, ,760 T Increase (Decrease) in Energy Green Credit , ,068 NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,368,396 $ 66,252 $ 27,940 $ 1,078,528 $ (7,935) (2,862,058) 671,123

157 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2010 NOTE 11 - DEFERRED DEBITS (CREDITS) In accordance with generally accepted accounting principals for regulated businesses, the District has deferred charges of $396,348 in 2010 which will be amortized using the straight-line method over the life of the bonds (each 20 years). These deferred charges resulted from costs relating to the sale and redemption of the bonds. The District has deferred credits of $66,065 in 2010 which will not be amortized but resolved at the end of the next BPA rate period (see note b below). These charges and revenues would have been included in net income for 2010 in nonregulated business, but for rate-making purposes they are treated as applicable to future periods. Deferred transactions resulted from the following: a. Deferred Charges Unamortized Debt Discount and Expense The District s deferred charges as of December 31, 2010 are $396,348: b. Deferred Credits DEFERRED CHARGES 2010 Unamortized Debt Expenses on 2004 LTGO Bonds 154,247 Unamortized Debt Expenses on 2007 Water Revenue Bond 55,244 Unamortized Debt Expenses on 2010 LTGO Bonds 186,826 Other 31 Total Deferred Charges $ 396,348 Energy Green Credit Bonneville Power Administration -Conservation and Renewable Discounts [C&RD] Bonneville is working with its wholesale customers to promote energy conservation and renewable resources. The approach that Bonneville and its customers agreed upon involves a rate discount that allows utilities and direct service customers to spend less on wholesale energy purchases and use those savings to fund local conservation and renewable energy resources. Customers decide locally how to spend these funds by choosing from a range of qualifying activities. SECTION 1 -- Historical Perspective The Regional Technical Forum (RTF) was established to develop standardized protocols for verification and evaluation of energy savings, to track regional progress toward the achievement of the region s conservation and renewable resource goals, and to provide feedback for improving the effectiveness of conservation and renewable resource development programs in the region. The RTF was established in April The idea for a Conservation and Renewables Discount (C&RD) surfaced as part of the BPA subscription process in September A major goal of subscription was to provide market incentives for the development of conservation and renewables. Building the C&RD into the 5-year rate structure protects the credits from the volatility of the budgeting process and gives utility conservation managers the ability to plan consistent programs and hire staff. C&RD was approved In May 2000, and launched in early During the rate period October September 2009, the name was changed to Conservation Rate Credit (CRC). The CRC was designed to create incremental efficiency gains and renewable energy supplies, and to Washington State Auditor's Office 38

158 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2010 provide incentives to continue the region s progress in low-income weatherization programs. CRC also promotes local control and management of conservation and renewable programs. SECTION 2 -- Program Overview The CRC credit is a 0.5 mill discount off the BPA firm power rate. The amount of each customer s CRC discount is determined by multiplying 0.5 mills times the amount of forecasted electric load (KWHs) placed on BPA. Thus, the total annual credit for the District approximates $107,000 with an expected total credit for the 2 year rate period of $214,000. A credit is earned from the installation of conservation measures or by making other qualifying expenditures for renewable energy, qualified research projects, or through donations to qualifying organizations. At the end of the rate period, customers pay BPA for any CRC credits not accounted for. Customer utilities submit annual reports detailing installation of approved conservation measures and/or spending. The credit may be spent at any time during the rate period. The RTF provides a central forum for discussion of technical issues around savings and credits for the CRC. The RTF developed an accessible web-site tracking and calculation system that has been almost universally accepted as a method for reporting CRC conservation credits to BPA. During the rate period, the District installed a Variable Frequency Drive ( VFD ) in our Plant 2 structure as a BPA approved energy efficient project. The allowable cost of the project exceeded the Energy Green Credit which had been accrued. $45,814 in costs was carried into the rate period. Therefore, as of December 31, 2010, the CRC credits along with the $45,814 carry forward resulted in a $66,065 balance. The current credit period runs from October 2009 through September disbursements for the rate period are as follows: The accruals and FOR YEAR STARTING OCTOBER 1, ENERGY GREEN CREDIT TOTAL Energy Green Credit Accrued $ 107,244 $ 26,811 $ 134,055 Allowed Premium Paid for Green Power (22,176) (22,176) Allowed CRC Plant 2 Project Amount (45,814) (45,814) ENDING LIABILITY TO BPA $ 61,430 $ 4,635 $ 66,065 The District s deferred credits, comprising of the Energy Green Credit, as of December 31, 2010 is $66,065. NOTE 12 - PROPERTY TAXES The Whatcom County Treasurer acts as an agent to collect property taxes levied in the county for all taxing authorities. Taxes are levied annually on January 1 st on property listed as of the prior May 31 st. Assessed values are established by the County Assessor at 100 percent of fair market value. A revaluation of all property is required every four years. Taxes are due in two equal installments on April 30 th and October 31 st. Collections are distributed monthly to the Washington State Auditor's Office 39

159 District by the County Treasurer. NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2010 The District is permitted by law to levy up to $0.45 per $1,000 of assessed valuation for general District purposes. Washington State Constitution and Washington State Law, RCW , limit the rate. The District may also levy taxes at a lower rate. Special levies approved by the voters are not subject to the above limitations. Property taxes are recorded as receivables when levied. The District had no tax levies for NOTE 13 ACCOUNTING CHANGES There were no major accounting changes in NOTE 14 JOINT VENTURES PARTICIPATION IN NORTHWEST OPEN ACCESS NETWORK, INC. dba NOANET The District, along with 13 other Washington State Public Utility Districts and Energy Northwest, was a member of NoaNet, a Washington nonprofit mutual corporation. NoaNet was incorporated in February 2000 to provide a broadband communications backbone, over Public Benefit Fibers leased from Bonneville Power Administration, throughout the Pacific Northwest for assisting its members in the efficient management of load, conservation and acquisition of electric energy as well as other purposes. The network began commercial operation in January As a member of NoaNet, the District guaranteed certain portions of NoaNet debt based on its proportionate share. The management of NoaNet anticipates meeting debt obligations through profitable operations; however, there is no assurance NoaNet s plan will be achieved. During the start-up phase, NoaNet assessed its members to cover operating deficits. In 2010, the District expensed $7,464 in assessments to NoaNet. In July 2001, NoaNet issued $27 million in Telecommunications Network Revenue Bonds (taxable) to finance the repayment of the founding members and the costs of initial construction, operations and maintenance. The Bonds are due beginning in December 2003 through December 2016 with interest due semi-annually at rates ranging from 5.05% to 7.09%. Each member of NoaNet entered into a Repayment Agreement to guarantee the debt of NoaNet. Under the Repayment Agreement, each Member acknowledges and agrees that it is a guarantor of the payment of principal and interest on the Bonds and is liable by assessment or otherwise to repay NoaNet for amounts due and owing with respect to such principal and interest up to each Member's Percentage Interest. The District s guarantee is based on its 0.81% interest, or $365,600.66, of a total liability of $45,135, for principal and interest over the life of the bond. There is a provision in the Bond Resolution for a 25% step-up. In other words, if a member doesn t pay its share of the bond obligation, then the rest of the members have to step up to a maximum of 25% of its obligation. The amount of remaining contingent liability to the District at December 31, 2010 is $37, On September 1, 2003, in accordance with Section 19, Article II of NoaNet s Bylaws, the Public Utility District No.1 of Whatcom County presented a written notice to NoaNet withdrawing from the organization. The District maintains a financial liability only for the $27 million dollar bonds and the $5 million dollar line-of-credit. The District has no liability for any contractual debt incurred or to be incurred by NoaNet after September 1, Financial statements for NoaNet may be obtained by writing to: Northwest Open Access Network, 2327 Grand Avenue, East Wenatchee, WA Washington State Auditor's Office 40

160 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2010 NOTE 15 - RISK MANAGEMENT In January 2002 the Public Utility District No.1 of Whatcom County became a member of the Public Utility Risk Management Services, [PURMS], a joint self-insurance fund. Its membership is comprised of 20 Public Utility Districts and NOANET, a Washington nonprofit mutual corporation providing broadband communications services [See NOTE-15 JOINT VENTURES]. The Public Utility Risk Management Services, Joint Self-Insurance Fund was organized as of December 30, 1976, pursuant to the provisions of the Revised Code of Washington, Chapter and inter-local agreements. The program s general objectives are to formulate, develop, and administer, on behalf of the member public utilities, a program of insurance, to obtain lower costs for that coverage, and to develop a comprehensive loss control program. The District is a member of the Liability and Property Pools. The risks shared by the members are defined in the member s Self-Insurance Agreement. Both pools (liability and property) operate independently of one another. The Fund maintains assets from which liability claims against the member Districts and property losses of member Districts are paid and, through assessments of the members to replenish these assets, the members share joint liability among themselves for losses incurred. The Fund also purchases excess insurance for losses above the $1,000,000 for liability and above $250,000 for property The members, through the Fund, provide liability self-insurance for the first $1 million of individual loss claims. Assessments for the liability pool are based upon a formula whose elements include; basic fees, historic claims experience and workers hours. The assessments include amounts for excess insurance premiums, claims experience, and operating costs. In November 2008, it was decided to raise the Designated Liability Pool Balance from $2 million to $3 million through semi-annual assessments starting in January 2009 and continuing through July Interim assessments are levied whenever the level of the liability program falls below $500,000 of the normal operating balance. Through PURMS, an AEGIS liability policy covers an additional $35 million over the initial $1 million. At the end of 2009, the District decided to also add another $25 million in coverage through an EIM policy over the previous $36 million in coverage. Effective April 1, 1977 the Fund established a self-insurance program for member s property. The property program provides property self-insurance for the first $250,000 of individual loss claims. Assessments for the property pool are based upon a formula whose elements include: basis fees, property values and risk based rates. The assessments include amounts for excess insurance premiums, claims experience, and operating costs. For the property program, member Districts are obligated to replenish to a level of $750,000 through annual assessments. Interim assessments are levied whenever the level of the property program is reduced to an amount less than $500,000. PURMS maintains an Excess Property Insurance for its members in the Property Pool of $150 million. A comprehensive 2010 Annual Report can be obtained by contacting: Public Utility Risk Management Services Administered by Pacific Underwriters PO Box 68787, Seattle, WA Phone; FAX: The District has a separate policy with Marsh USA Inc, through Associated Electric & Gas Insurance Services LTD (AEGIS) for Western Interconnect Electric System (WIES) members for electric blackouts and/or brownouts for our electric customer. As agreed, Marsh (USA) has placed coverage with AEGIS pursuant to the surplus lines laws of Oregon. As an eligible surplus lines insurer, AEGIS is subject to limited state financial solvency regulation. Also, the insurers do not participate in any state insurance guaranty fund which otherwise provide limited claims reimbursement for policyholders of insolvent insurers. Therefore, the placement of coverage with AEGIS could result in financial Washington State Auditor's Office 41

161 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2010 exposure to the District if the insurer(s) becomes insolvent. Because the insurance policy covers more than one state, premium tax is also due in the other states, which is computed based on the portion of premium allocable to the risks located in each state. Where the state law allows, Marsh has prepared the necessary forms for WIES to file directly with the state. These forms show the allocated premium and tax amount due for each state. Their decision to file these forms will require the appropriate signature and tax payment check in the amount indicated on each form. Marsh suggests that the District consult with our legal or tax advisors with respect to the decision to file in these jurisdictions. In Washington, Idaho, Montana, Nevada, North Dakota and Wyoming the states require that Marsh collect and remit the allocated premium taxes. It should be noted that Marsh has allocated the premium based on their understanding of the applicable insurance laws and regulations in each of the states where the District and/or covered risks are located. It is still possible that one or more US jurisdictions may assert a claim for a portion of the tax that was allocated to another US jurisdiction. Risk pool insurance premiums and pool assessments for the District were as follows for 2010 and 2009: Washington State Auditor's Office 42

162 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2010 INVOICE DATE CARRIER TYPE KIND PREMIUM / ASSESSMENT DISTRICT COST PURMS 2009 LIABILITY 01/12/2009 AEGIS LIABILITY EXCESS GENRL LIAB 841, /12/2009 AEGIS LIABILITY PROF LIAB [E&O] 55, % 12, /21/2009 GENERAL ASSESSMENT LIABILITY LIAB GENRL ASSESS 453, % 6, /26/2009 GENERAL ASSESSMENT LIABILITY RETENTION FUNDING 165, % 2, /09/2009 GENERAL ASSESSMENT LIABILITY LIAB GENRL ASSESS 979, % 7, /24/2009 GENERAL ASSESSMENT LIABILITY RETENTION FUNDING 165, % 2, ,659, % 31, PROPERTY 03/30/2009 NATIONAL UNION PROPERTY FIRE EXCESS POLICY 811, % 28, /19/2009 GENERAL ASSESSMENT PROPERTY PROP GENRL ASSESS 342, % 10, /31/2009 GENERAL ASSESSMENT PROPERTY PROP GENRL ASSESS 397, % 13, /05/2009 GENERAL ASSESSMENT PROPERTY PROP GENRL ASSESS 289, % 10, ,841, % 63, PURMS 2010 LIABILITY 01/05/2010 AEGIS LIABILITY LIAB $35M EXCESS $1M 1,038, /05/2010 EIM LIABILITY LIAB $25M EXCESS $36M 121, % 18, /11/2010 GENERAL ASSESSMENT LIABILITY LIAB GENRL ASSESS 467, % 7, /11/2010 GENERAL ASSESSMENT LIABILITY RETENTION FUNDING 165, % 2, /23/2010 GENERAL ASSESSMENT LIABILITY LIAB GENRL ASSESS 517, % 8, /09/2010 GENERAL ASSESSMENT LIABILITY RETENTION FUNDING 165, % 2, /16/2010 AEGIS LIABILITY PROF LIAB [E&O] 187, % 2, ,663, % 42, PROPERTY 04/02/2010 NATIONAL UNION PROPERTY FIRE EXCESS POLICY 767, % 25, /12/2010 GENERAL ASSESSMENT PROPERTY PROP GENRL ASSESS 142, % 5, /23/2010 GENERAL ASSESSMENT PROPERTY PROP GENRL ASSESS 255, % 9, ,166, % 40, MARSH 2009 WESTERN INTERCONNECTED BLACK/BROWN-OUT 06/22/2009 ELECTRIC SYSTEMS LIABILITY ANNUAL PREMIUM MARSH 2010 WESTERN INTERCONNECTED BLACK/BROWN-OUT 06/01/2010 ELECTRIC SYSTEMS LIABILITY ANNUAL PREMIUM Washington State Auditor's Office 43

163 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2009 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies of the ( District ) conform to generally accepted accounting principles (GAAP) as applicable to proprietary funds of governments. The District has elected to apply Financial Accounting Standards Board (FASB) guidance issued after November 30, 1989 to the extent that it does not conflict with or contradict guidance of the Governmental Accounting Standards Board (GASB). GASB is the accepted standard setting body for establishing governmental accounting and financial reporting principles. In June 1999, GASB approved Statement 34, Basic Financial Statements and Management Discussion and Analysis for State and Local Governments. This and consecutive statements are reflected in the accompanying financial statements (including notes to financial statements). The following is a summary of the most significant policies (including identification of those policies which result in material departures from generally accepted accounting principles): a. Reporting Entity is a municipal corporation governed by an elected three-member board. As required by generally accepted accounting principles, the management has considered all potential component units in defining the reporting entity. The District has no component units. b. Basis of Accounting and Presentation The accounting records of the District are maintained in accordance with methods prescribed by the State Auditor under the authority of Chapter 43.09RCW. The District uses the full-accrual basis of accounting where revenues are recognized when earned and expenses are recognized when incurred. Capital asset purchases are capitalized and long-term liabilities are accounted for in the appropriate funds. The District distinguishes between operating revenues and expenses from non-operating ones. Operating revenues and expenses result from providing services and producing and delivering goods in connection with a district s principal ongoing operations. The principal operating revenues of the District are charges to customers for water delivery and electric service. The District also recognizes as operating revenue the penalties that occasionally correspond with utility billing and some miscellaneous recycle income. Operating expenses for the District include the cost of sales and services, administrative expenses, planning and business development expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as non-operating revenues and expenses. The District uses two systems of accounts: 1) The Uniform System of Accounts For Class A Water Utilities (1996) as prescribed by the National Association of Regulatory Utility Commissioners (NARUC). 2) The Uniform System of Accounts Prescribed for Public Utilities and Licensees Subject to the Provisions of the Federal Power Act (1996) as prescribed by the Federal Energy Regulatory Commission (FERC). These systems of accounts (NARUC, FERC) allocate expenditures according to specific modes. Modes identify the type of facility where the expense is incurred. Utilities have traditionally used extensive modal detail to classify expenses into categories of Plant in Service. Because modes classify types of facilities, they are closely related to fixed asset categories and in many cases modal expense categories are the same as the facility categories Plant in Service; e.g.: Source of Supply, Transmission, Distribution, General Plant. The Chart of Accounts used is the Budgeting, Accounting and Reporting System (BARS) for Cities and Counties and Other Local Governments (Category 1) as prescribed by the Washington State Auditor s Office for balance sheet accounts and adapted to NARUC & FERC for nominal accounts. Washington State Auditor's Office 44

164 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2009 c. Cash and Cash Equivalents For the purposes of the Statement of Cash Flows, Restricted Bond Reserves are excluded from cash equivalents. Operation, Capital, and Emergency Reserve balances are also excluded from cash equivalents and are reflected in the Investments Short Term Balance. SEE NOTE 2B. d. Utility Plant and Depreciation / Capital Assets: SEE NOTE 3. e. Restricted Funds In accordance with bond resolutions (and certain related agreements) separate restricted funds are required to be established. The assets held in these funds are restricted for specific uses, including construction, debt-service and other special reserve requirements. Restricted funds currently include the following: 1) Bond reserve funds for the 1999 Water Revenue Bonds, the 2004 LTGO Bonds, and the 2007 Water Revenue Bonds make up a portion of the restricted reserve balances. 2) Assessments received from participants in the LUD #2 for the Grandview extension make up the remainder of the restricted funds of the District. These funds are utilized to pay the debt service for the 2007 Water Revenue bond. The restricted reserve balances as of December 31, 2009 are entirely invested with the County. RESTRICTED RESERVE BALANCES 2009 Bond Reserves 1999 Water Revenue Bond Reserve $ 439, LTGO Series A&B Bond Reserve 914, Water Revenue Bond Reserve (Grandview LUD) 192,310 Total Bond Reserves $ 1,546,636 Other Restricted Funds LUD #2 Cash Investments 353,537 TOTAL RESTRICTED RESERVE BALANCES $ 1,900,173 f. Receivables One customer has proved to be a collection risk. An allowance for bad debt in the amount of $20,329 was set up in 2007 to offset this possible loss. g. Inventories Inventories are valued at original cost (when they exist), which approximates the market value. h. Investments: SEE NOTE 2. Washington State Auditor's Office 45

165 i. Compensated Absences NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2009 Compensated absences are absences for which employees will be paid, such as vacation, sick leave, and floaters (in lieu of holidays) is the first year the District reflected accrued compensated absence pay in the financial statements. All leave is paid at the employee s current rate of pay when used. SEE NOTE 13. Vacation pay may be carried over at year-end at a balance not greater than 80 hours plus the annual accrual. Unused vacation is payable upon resignation, retirement, termination without cause, or death. Sick Leave may be accumulated up to a total of 1080 hours for non-union employees and 1136 hours for union employees, and is not convertible. Upon termination of employment, unused sick leave is compensated at 25% of accrued benefit for non-union, 30% for union. Floating Holidays may be used at any time once accrued for leave. Full-time employees earn 12 floaters per year. Unused floaters must be cashed-out at the end of the year and cannot be carried forward to the next fiscal year. j. Unamortized Debt Expenses Costs relating to the sale of bonds are deferred and amortized over the lives of the various bond issues. k. Construction Financing Funds for Capital Asset Construction are budgeting and collected in the Short-term Investments. SEE NOTE 2. l. Purchase Commitments The District currently has a power supply contract with the Bonneville Power Administration ( BPA ) that covers its entire electric load requirements. In November 2008, the District approved a new Power Sales Agreement with BPA which will provide the District with a contractually defined amount of federal power at the lowest offer rate ( Tier 1 ) available to BPA s public agency customers. For power requirements greater than the Tier 1 amount, the District can buy from BPA or an alternate provider. The contract with BPA runs through September 30, In August 2008, the District approved a new Network Transmission Agreement ( NT Agreement ) with BPA which provides for an extension of the term of the NT Agreement through August 31, 2038 and assures sufficient transmission capacity to accommodate both the District s existing power supply requirements moved over BPA s transmission system and future electric load growth. NOTE 2 DEPOSITS AND INVESTMENTS a. Deposits The District s deposits, and certificates of deposit, are entirely covered by Federal depository insurance (FDIC) or by collateral held in a multiple financial institution collateral pool administered by the Whatcom County Investment Pool (WCIP) pursuant to RCW Washington State Auditor's Office 46

166 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2009 b. Investments As required by State law, all investments of the are obligations of the U.S. Government, U.S. agency issues, obligations of the State of Washington, general obligations of Washington State municipalities, the State Treasurer s Investment Pool, bankers acceptances, or certificates of deposit with Washington State Banks and savings and loan institutions. The District s investments are categorized to give an indication of the risk assumed at year-end. Category 1 includes investments that are insured, registered or held by the District or its agent in the District s name. The agent for the District s investments is the Whatcom County Treasurer s Office and investments are held in the Whatcom County Investment Pool [WCIP]. As of December 31, 2009, the District had the following investments: 2009 Book Value Market Value INVESTMENTS Short-Term Operations Investments $ 4,043,201 $ 4,043,201 Operating Reserve Investments 336, ,109 Capital Reserve Investments 282, ,619 Emergency Reserve Investments 350, ,000 $ 5,011,929 $ 5,011,929 Non-Current 1999 Water Revenue Bond Reserve 439, , LTGO Bond Reserve 914, , Water Revenue Bond Reserve 192, ,310 LUD #2 Cash & Investments 353, ,537 $ 1,900,173 $ 1,900,173 TOTAL INVESTMENTS $ 6,912,102 $ 6,912,102 NOTE 3 - UTILITY PLANT AND DEPRECIATION - CAPITAL ASSETS Capital assets are defined by the District as assets with initial individual cost of more than $400 for computer equipment, and $5,000 for other assets, and an estimated useful life in excess of one year. Major expenses for capital assets, including capital leases and major repairs that increase useful lives, are capitalized. Maintenance repairs are accounted for as expenses when incurred. The District has not acquired any assets under a capital lease. Utility Plant in Service and other capital assets are recorded at cost (where the historical cost is known). Where historical cost is not known, assets are recorded at estimated cost relative to known historical costs of related components during the same period of construction. Donations by developers and customers are recorded at the known value of the contractor price, donor cost, or appraised value. The original cost of operating property retired or otherwise deposed of and the cost of installation is removed from the utility plant accounts, accumulated depreciation is charged with the accumulated depreciation related to the property sold, and the net gain or loss on disposition is credited or charged to income. The original cost of operating property retired or otherwise deposed of and the cost of installation, less salvage, is charged to accumulated depreciation. However, in the case of the sale of a significant operating unit or system, the original cost is Washington State Auditor's Office 47

167 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2009 removed from the utility plant accounts, accumulated depreciation is charged with the accumulated depreciation related to the property sold, and the net gain or loss on disposition is credited or charged to income. Utility plant activities for the year ending December 31, 2009 were as follows: Activity 2009 Beginning Balance Increase Decrease Ending Balance UTILITY PLANT NOT BEING DEPRECIATED LAND Cherry Point Water Utility $ 108,000 $ - $ - $ 108,000 TOTAL LAND 108, ,000 CONSTRUCTION-IN-PROGRESS Cherry Point Water Utility 500, ,155 (673,427) 532,872 Grandview Potable Water Utility 16,133 9,106 25,239 Grandview Fire Utility Electric Utility 105, ,991 (150,840) 221,770 General Utility & Office (Internal Services Utility) 166, ,335 (205,396) 92,262 TOTAL CONSTRUCTION-IN-PROGRSS 788,219 1,113,587 (1,029,662) 872,143 TOTAL UTILITY PLANT NOT BEING DEPRECIATED $ 896,219 $ 1,113,587 $ (1,029,662) $ 980,143 UTILITY PLANT BEING DEPRECIATED BUILDINGS & STRUCTURES Cherry Point Water Utility $ 6,966,162 $ - $ - $ 6,966,162 Grandview Potable Water Utility 56, ,875 Grandview Fire Utility 42, ,102 Electric Utility 166, ,880 General Utility & Office (Internal Services Utility) 1,237,104 8,192 1,245,296 TOTAL BUILDINGS & STRUCTURES 8,469,123 8,192-8,477,316 MACHINERY & EQUIPMENT Cherry Point Water Utility 6,137, ,447 (58,123) 6,700,469 Grandview Potable Water Utility 1,187,609 1,187,609 Grandview Fire Utility 1,902,439 1,902,439 Electric Utility 6,915, ,839 7,066,414 General Utility & Office (Internal Services Utility) 133, ,326 (64,547) 266,533 TOTAL MACHINERY & EQUIPMENT 16,276, ,612 (122,670) 17,123,463 INTANGIBLE Cherry Point Water Utility 866, ,000 TOTAL INTANGIBLE 866, ,000 TOTAL UTILITY PLANT BEING DEPRECIATED $ 25,611,644 $ 977,804 $ (122,670) $ 26,466,779 LESS ACCUMULATED DEPRECIATION FOR: Buildings & Structures $ (3,720,411) $ (171,256) $ (3,891,668) Machinery & Equipment (5,828,908) 100,066 (494,757) (6,223,598) Intangible (86,600) (43,300) (129,900) TOTAL ACCUMULATED DEPRECIATION (9,635,919) 100,066 (709,313) (10,245,166) UTILITY PLANT BEING DEPRECIATED (NET) $ 15,975,726 $ 1,077,870 $ (831,983) $ 16,221,613 TOTAL CAPITAL ASSETS (NET) $ 16,871,944 $ 2,191,457 $ (1,861,645) $ 17,201,756 Washington State Auditor's Office 48

168 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2009 Capital assets are depreciated using the straight-line method over the following estimated useful lives: ASSET YEARS Buildings & Structures 5-60 Vehicles 3-10 Machinery & Equipment 3-60 Computer Hardware & Software 2-5 Intangible 20 Initial depreciation on utility plant is recorded in the year subsequent to purchase. Preliminary costs incurred for proposed projects are deferred pending construction of the facility. Costs relating to projects ultimately constructed are transferred to utility plant; charges that relate to abandoned projects are expensed. NOTE 4 - CONSTRUCTION IN PROGRESS Construction in progress represents expenses to date on projects whose authorizations total $2,884,636. Of the committed balance of $40,874,342, the district will be required to raise approximately $25 million in future financing. Construction in progress represents capital projects for the upgrade or expansion of the District s infrastructure. General improvements for the benefit of all users of a specific utility are financed with reserves, previously collected through rates and/or bonds, or paid for with future rates. Improvements/capital expansion requested by an individual customer(s) for their specific benefit is the direct financial responsibility of that customer(s). Construction work in progress is composed of the following: District Capital Project # Annual Project Authorization Expended Through 12/31/09 Committed CONSTRUCTION IN PROGRESS Purchase PSE Ferndale Substation E10 $ 556,264 $ 49,754 $ 686,514 Purchase PSE Enterprise Substation E11 28,198 31, ,198 Grandview Utility / Electrical System Capacity E12 13,811 13, ,761 North County Electric Utility Study E13 80,478 47, ,478 Refinery Substation Redesign E14 1,039,107 79,214 5,447,481 Grandview Utility Potable System Capacity GVP1 40,200 21,065 58,250 Grandview Utility System Security Fencing GVP2 19,053 4,175 26,553 Plant 2 Site Improvements IS3 216,398 45, ,723 SCADA System Analysis & Upgrade IS12 369,506 18, ,912 New Meeting Room & HVAC upgrade IS13 31,933 27, ,934 Treatment Plant Capacity Design & Upgrade RW1 56, ,016 9,795,221 Vertical Floc Paddles RW3 10,749 1, ,677 Cherry Point North County Water RW4 102,109 46, ,985 24" Douglas Line Replacement RW6 104,548 15,973 8,497,096 24" Aldergrove Line Replacement RW7-16,115 12,313,800 Plant 2 Intake Equipment Upgrade RW10-1, ,685 Water Comp Plan Update RW13 149, ,611 Intake Pump Pressure Monitoring RW16 21, ,572 Plant 1 Flash Mixer Upgrade RW18 44, ,891 TOTAL CONSTRUCTION IN PROGRESS $ 2,884,636 $ 872,143 $ 40,874, Washington State Auditor's Office 49

169 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2009 NOTE 5 SHORT-TERM DEBT The District had no short-term debt obligations in NOTE 6 - LEASE COMMITMENTS a. Operating Lease(s) The Public Utility District No.1 of Whatcom County had the following operating lease for the period January 1, 2009 to December 31, 2009: Type Name Execution Terms Function Cost Portable Office (Trailer) Williams Scotsman 10/07/2005 Month-to-Month Temporary Office Facility Monthly $ incl tax This lease is considered an operating lease for accounting purposes. Lease expenses for the year ended December 31, 2009 amounted to $4,917. There are no future minimum commitments for these leases, but the District is expecting to lease the portable office space for part of b. Capital Lease(s) The Public Utility District No.1 of Whatcom County has no capital leases and has not acquired any assets through capital leases. NOTE 7 - LONG-TERM DEBT AND LIABILITIES a. Long-Term Debt Schedule 09 which accompanies this report contains a list of the outstanding debt at December 31, The annual requirements to amortize all debts outstanding as of December 31, 2009, including interest, are as follows: 1999 WATER REVENUE BOND 2004 LTGO BONDS 2007 WATER REVENUE BONDS YEARS ENDING DECEMBER 31: PRINCIPAL INTEREST TOTAL DEBT SERVICE PRINCIPAL INTEREST TOTAL DEBT SERVICE PRINCIPAL INTEREST TOTAL DEBT SERVICE , , , , , ,438 75, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,670, ,783 1,946,783 2,975,000 1,005,334 3,980, , ,469 1,237, ,985, ,402 2,317, , ,175 1,231, ,000 77, ,913 TOTAL $ 2,965,000 $ 925,983 $ 3,890,983 $ 7,315,000 $ 2,956,217 $ 10,271,217 $ 2,740,000 $ 1,673,281 $ 4,413,281 Washington State Auditor's Office 50

170 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2009 There is $1,900,173 in restricted assets of the District. These represent reserve requirements as contained in the various indentures and assessment income to be used for the 2007 bond debt service. There are a number of other limitations and restrictions contained in the various bond indentures. The District is in compliance with all significant limitations and restrictions. The has pledged future Raw Water revenue to repay $4,515,000 in revenue bonds issued in May, Proceeds from the bonds provided financing for improvements in the Raw Water Utility. The bonds are payable solely from Raw Water revenues and are payable through Annual principal and interest payments on the bonds are expected to require less than 83.3% of net revenues. The total principal and interest remaining to be paid on the bonds is $3,890,983. Principal and interest paid for the current year and total Raw Water Operating revenue were $390,068 and $4,319,339 respectively. The District has also pledged future Grandview assessment revenue to repay $2,845,000 in revenue bonds issued in November, Proceeds from the bonds provided financing for the Grandview line extension. The bonds are payable solely from Grandview LUD #2 Assessment revenues and are payable through Annual principal and interest payments on the bonds are expected to match the assessment revenue. The total principal and interest remaining to be paid on the bonds is $4,413,281. Principal and interest paid for the current year and total Grandview assessment revenue were $168,738 and $326,467 respectively. b. Changes in Long-Term Liabilities During the year ended December 31, 2009, the following changes occurred in long-term liabilities: LONG TERM LIABILITIES Beginning Balance 01/01 Additions Reductions Ending Balance 12/31 Due Within One Year Energy Green Credit $ 117,297 $ (136,300) $ (19,003) Bonds Payable: 1999 Water Revenue Bond 3,190,000 (225,000) 2,965, , LTGO Series A&B Bonds 7,735,000 (420,000) 7,315, , Water Revenue Bond (Grandview LUD) 2,760,000 (20,000) 2,740,000 75,000 Total Bonds Payable: $ 13,685,000 $ - $ (665,000) $ 13,020,000 $ 740,000 TOTAL LONG TERM LIABILITIES $ 13,802,297 $ - $ (801,300) $ 13,000,997 $ 740,000 NOTE 8 RESTRICTED NET ASSETS The District s statement of net assets reports $1,900,173 of restricted net assets, of which everything is restricted by enabling legislation. NOTE 9 - PENSION PLAN The District s employees do not participate in any of the plans of the Washington State Department of Retirement Systems. In lieu of the state retirement program, the District offers its non-union employees a deferred compensation plan in accordance with Internal Revenue Service Code Section 457. This plan was adopted in An Administrative Service Agreement was established with Hartford Life Insurance Company to provide individual investment choices for participants with detailed accounting to both the participants and the District. Employees may or may not elect to participate in the Hartford plan. The 2009 rate of District contribution to the employee is 7.20% of gross earnings. The Plan, available to eligible employees, permits them to defer a portion of their salary until future years. The deferred Washington State Auditor's Office 51

171 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2009 compensation is not available to employees until termination, retirement, death, or unforeseeable emergency. The District has neither fiduciary responsibility nor liability for the Plan and accordingly no records are reflected on the Districts accounts. All eligible union employees are covered under the negotiated contract with Western Conference Teamsters Welfare Trust. NOTE 10 SEGMENT ACTIVITY The District operated seven proprietary segments and an Internal Services Fund in The following changes occurred in the District s segments during 2009: a. RAW WATER UTILITY The District completed a comprehensive evaluation and standardization of the Irrigation contracts in All Irrigation contracts are now on an annual term. New, standardized contracts with specific information on location and use were put into place in In 2009, Irrigation contracts were divided into seasonal (April thru October) contracts and Municipal (year round) contracts. The District is continuing the process of a treatment capacity design and upgrade study. The construction to implement the recommendations began in The District completed several capital improvements, including an installation of a Variable Frequency Drive at our plant 2 location. The installation qualified as a conservation project and therefore was able to use funds from the BPA Conservation Rate Credit. b. GRANDVIEW POTABLE WATER UTILITY The Grandview Potable Water Utility continues to be effected by the tightening economy. Potable water sales dropped 12% from and vacancy rates in the light industrial park continue to rise. The District made single-line electrical drawings for both the Grandview Potable and Grandview Fire Utility and installed three new distribution pumps on the potable system. c. GRANDVIEW FIRE UTILITY See Grandview Potable Water Utility. d. ELECTRIC UTILITY During 2009, the Electric Utility added another full-time employee to the staff. The District is also continuing to work on renewing the electric contract with its one customer, Conoco Phillips. The current contract dates back to The Electric Utility continues to improve the reliability of our service through increases in redundancies and system upgrades. The purchase of two substations from PSE is currently being studied as possible additions to our Electric Utility. In May 2007, the Ninth Circuit Court of Appeals ruled that the Residential Exchange Program Settlement Agreements between BPA and Investor Owned Utilities ( IOUs ) customers were unlawful. The result of the ruling required BPA to reimburse to preference (public) customers, the cost of Residential Exchange Program payments included in the power rates charged to preference customers. The District received $949,466 in 2008 and $699,545 in 2009 in settlement payments and Look-back credits related to this ruling. Beginning in November 2008, the District receives a monthly Look-back credit included in the monthly power invoice from BPA. These Look-back credits are scheduled to continue through September Washington State Auditor's Office 52

172 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2009 e. ALCOA BLOCK POWER SALES In December 2008, the U.S. Ninth Circuit Court of Appeals issued a decision on BPA s service to the directservice industries (DSIs) which immediately suspended the monthly payments. The December 2008 payment was the last payment between BPA to Alcoa through the District. f. ALCOA ESCROW SERVICES FUND Besides the Alcoa Block Power Agreement, the District also signed an Escrow services agreement with Alcoa to provide the above services on their behalf and to provide other services such as working with Alcoa to consider strategies to reduce power supply and delivery costs associated with Intalco under this agreement. The District would receive fixed monthly payments totaling $18,333 for these services through September 30, The payments from Alcoa and related expenses are maintained in the ALCOA ESCROW SERVICES FUND. An amendment to this agreement was negotiated in March Alcoa will continue paying $8,333 until such time that they stop producing at their Ferndale location or the end of contract. The monthly $10,000 payment was temporarily suspended from March 2009 through November 2009, but then resumed and will continue through the end of the contract regardless of the operating status of the Ferndale facilities. g. ELECTRIC UTILITY RURAL ECONOMIC DEVELOPMENT REVOLVING FUND In 1999, the Governor signed into law a bill (RCW ), which gives the District authority as a qualifying electric utility to establish a Revolving Fund to be used for the purpose of facilitating economic development in eligible designated rural areas, which include Whatcom County. Funds are to be expended on qualifying projects, which includes those that create or retain jobs, add or upgrade health and safety facilities, facilitate energy and water conservation, or develop renewable sources of energy in the affected rural area. On May 9, 2006, the District passed Resolution 536 establishing an Electric Utility Rural Economic Development Revolving Fund. Amounts disbursed through the Economic Development Fund are eligible for a public utility tax credit for an amount equal to 50 percent of contributions made, with a maximum of $25,000 a year. The District had no qualifying projects during 2009 and this fund was closed out. Washington State Auditor's Office 53

173 Washington State Auditor's Office 54 NOTES TO FINANCIAL STATEMENT Statement of Revenues, Expenses and Changes in Net Assets For The Year Ended December 31, RAW WATER UTILITY GRANDVIEW POTABLE WATER GRANDVIEW FIRE ELECTRIC UTILITY ALCOA BLOCK POWER SALES ALCOA ESCROW SVCS ECONOMIC DEV FUND INTERNAL SERVICES FUND DISTRICT TOTAL OPERATING REVENUE Utility Sales and Service Revenues $ 4,312,076 $ 99,240 $ 35,261 $ 8,601,479 $ - $ - $ - - Other Operating Revenue 7, ,262 TOTAL OPERATING REVENUE $ 4,319,339 $ 99,240 $ 35,261 $ 8,601,479 $ - $ - $ - - OPERATING EXPENSES Operations: Purchased Water $ 60,638 $ - $ - $ - $ - $ - $ - - Purchased Power 463,747 2,003 2,564 6,066, ,534,646 Water Purification 340, ,355 Taxes / Process / Delivery Costs , ,356 General Operations 686,922 44,536 6,386 94, ,270 Maintenance 443,718 23,236 26, , ,711 Administration General Administration 943,733 45,525 15, ,894-13, ,425,649 Planning and Development Expenses 54, , ,790 Allocated Internal Service Expenses Depreciation Expense 393,172 38,644 54, , ,175 Utility Tax Expense 240,126 5,925 1,049 90,558-1, ,611 TOTAL OPERATING EXPENSES $ 3,627,697 $ 160,457 $ 107,245 $ 7,628,247 $ - $ 15,554 $ - - OPERATING INCOME (LOSS) $ 691,641 $ (61,217) $ (71,985) $ 973,232 $ - $ (15,554) $ - $ - $ 1,516,118 NONOPERATING REVENUE Lease Income $ 11,698 $ 28 $ 7 $ 133 $ - $ 4 $ - - Assessment Income - 127, , ,467 Interest Income 60,300 7,738 9,674 87,784 (0) 6, ,237 Interest Fees (2,534) (312) (385) (3,515) 0 (242) (2) - (6,990) Service Revenues - 129, ,996 TOTAL NONOPERATING REVENUE $ 69,464 $ 135,429 $ 207,788 $ 84,402 $ - $ 136,425 $ 72 - NONOPERATING EXPENSE Interest Expense $ 365,414 $ 62,213 $ 91,091 $ 168,819 $ - $ - $ - - Amortization 11,209 3,305 4,816 5, ,443 Interfund Expense 77,366 7,940 - (106,077) 49,237 (28,536) 72-0 Loss (Gain) on Property Disposal 3, ,508 BPA Alcoa Transfer - - Rural Electric Expense TOTAL NONOPERATING EXPENSE $ 457,497 $ 73,458 $ 95,907 $ 67,854 $ 49,237 $ (28,536) $ 72 - INCOME BEFORE CONTRIBUTIONS, $ $ 1,434, ,609 $ 754 $ 39,896 $ 989,779 $ (49,237) $ 149,407 $ - - AND EXTRAORDINARY ITEMS Capital Contributions $ $ $ (89,642) $ - $ - $ - $ - $ - $ - - (89,642) Extraordinary Items CHANGE IN NET ASSETS $ 213,966 $ 754 $ 39,896 $ 989,779 $ (49,237) $ 149,407 $ - $ - $ 1,344,566 NET ASSETS - JANUARY 1st $ 3,432,633 $ 178,728 $ 269,474 $ 5,159,524 $ 49,236 $ 374,360 $ - $ 44,067 $ 9,508,023 NET ASSETS - DECEMBER 31st $ 3,646,599 $ 179,482 $ 309,370 $ 6,149,303 $ (0) $ 523,767 $ - $ 44,067 $ 10,852,589 The notes to financial statements are an integral party of this statement

174 Washington State Auditor's Office 55 ASSETS RAW WATER UTILITY NOTES TO FINANCIAL STATEMENT Statement of Net Assets As of December 31, GRANDVIEW GRANDVIEW ELECTRIC ALCOA BLOCK ALCOA ECONOMIC POTABLE WATER FIRE UTILITY UTILITY POWER SALES ESCROW SVC DEV FUND UTILITY INTERNAL SERVICES FUND ELIMINATION CURRENT ASSETS CASH & CASH EQUIVALENTS $ (25,230) $ (1,803) $ 985 $ (11,069) $ - $ (285) $ - $ 56,430 19,029 SHORT TERM INVESTMENTS 932,916 60,544 44,249 3,795, ,421 - (20,263) 5,011,929 RECEIVABLES (Net): Customers 357,431 9,303 3, , ,272,110 Other 107, , , ,380 LUD #1 West Smith Road Receivable 5, ,346 Interfund Receivables 180, , (270,000) - Interfund Transfers - Capital 790,403 52,567 (1,820) 107, ,368 - (1,454,229) 0 Interfund Transfers - Employee (132,543) (8,195) (1,367) (22,271) - (447) - 164,823 - Total Accounts Receivables (Net) 1,308,427 53, ,126, ,921 - (1,274,525) (270,000) 1,448,835 OTHER CURRENT ASSETS Prepayments ,567 28,567 Other TOTAL CURRENT ASSETS $ 2,216,112 $ 112,417 $ 45,247 $ 4,910,317 $ - $ 704,057 $ - $ (1,209,790) (270,000) NON-CURRENT ASSETS Construction Contracts & Other Receivables Deferred Charges 137,143 26,710 38,525 76, ,554 NONCURRENT RESTRICTED ASSETS Investments - Bond Reserves 933,292 79, , , ,546,636 Investments - Assessments - 138, , ,537 Capital Assets Not Being Depreciated Land 108, ,000 Construction in Progress 532,872 25, , , ,143 Capital Assets Being Depreciated: - Buildings & Structures 6,966,162 56,875 42, , ,245,296 8,477,316 Machinery & Equipment 6,700,469 1,187,609 1,902,439 7,066, ,533 17,123,463 Intangible 866, ,000 Less Accumulated Depreciation (7,683,044) (196,904) (340,082) (1,875,274) (149,862) (10,245,166) Total Capital Assets (Net) 7,490,460 1,072,819 1,604,458 5,579, ,454,229 17,201,756 TOTAL NONCURRENT ASSETS $ 8,560,896 $ 1,317,874 $ 1,976,671 $ 6,070,812 $ - $ - $ - $ 1,454,229 - TOTAL ASSETS $ 10,777,008 $ 1,430,291 $ 2,021,919 $ 10,981,129 $ - $ 704,057 $ - $ 244,439 $ (270,000) $ 25,888,843 DISTRICT TOTAL

175 Washington State Auditor's Office 56 LIABILITIES RAW WATER UTILITY NOTES TO FINANCIAL STATEMENT Statement of Net Assets As of December 31, GRANDVIEW GRANDVIEW FIRE ELECTRIC ALCOA BLOCK ALCOA ESCROW ECONOMIC DEV POTABLE UTILITY UTILITY UTILITY POWER SALES SVC FUND INTERNAL SERVICES FUND ELIMINATION CURRENT LIABILITIES Accounts Payable $ 229,694 $ 820 $ 171 $ 1,334,042 $ - $ 290 $ - $ 29,929 1,594,946 Accrued Employee Payable , ,809 Accrued Utility Taxes , ,802 Contractor Retainage ,634 1,634 Interfund Payables - 90, , (270,000) - Payables from Restricted Assets 1999 Water Revenue Bond Principal - Current Portion 235, , Interest Payable 25, , LTGO Bond Principal Series A&B - Current Portion 185,325 3,501 1, , , Interest Payable 16, , , Water Revenue Bond Principal - Current Portion - 29,400 45, , Interest Payable - 9,662 14, ,648 Deposits & Other Payables 3, ,313 TOTAL CURRENT LIABILITIES $ 695,953 $ 133,722 $ 62,281 $ 1,772,639 $ - $ 180,290 $ - $ 200,373 (270,000) NON-CURRENT LIABILITIES Energy Green Credit $ - $ - $ - $ (19,003) $ - $ - $ - $ - (19,003) Payables from Restricted Assets 1999 Water Revenue Bond Principal 2,730, ,730, LTGO Bond Principal Series A&B 3,704,455 72,407 29,948 3,078, ,885, Water Revenue Bond Principal - 1,044,680 1,620, ,665,000 TOTAL NONCURRENT LIABILITIES $ 6,434,455 $ 1,117,087 $ 1,650,268 $ 3,059,187 $ - $ - $ - $ - - TOTAL LIABILITIES $ 7,130,408 $ 1,250,809 $ 1,712,548 $ 4,831,825 $ - $ 180,290 $ - $ 200,373 $ (270,000) $ 15,036,254 NET ASSETS Invested in Capital Assets, Net of Related Debt $ 2,160,460 $ (1,261) $ (61,462) $ 3,014,789 $ - $ - $ - $ 1,454,229 6,566,756 Net Assets Restricted for Debt Service 933, , , , ,900,173 Unrestricted 552,847 (37,602) 37,144 2,719, ,767 - (1,410,163) 2,385,660 TOTAL NET ASSETS $ 3,646,599 $ 179,482 $ 309,370 $ 6,149,303 $ - $ 523,767 $ - $ 44,067 - TOTAL LIABILITIES & FUND BALANCE $ 10,777,008 $ 1,430,291 $ 2,021,919 $ 10,981,129 $ - $ 704,057 $ - $ 244,439 $ (270,000) $ 25,888,843 DISTRICT TOTAL

176 Washington State Auditor's Office 57 NOTES TO FINANCIAL STATEMENT Statement of Cash Flow As of December 31, TOTAL $ $ 14,330,403 $ $ 1,802, GRANDVIEW GRANDVIEW ALCOA BULK BPA- ALCOA ECONOMIC INTERNAL CASH FLOWS FROM OPERATING ACTIVITIES RAW WATER POTABLE FIRE ELECTRIC POWER SALES ESCROW DEV FUND SERVICE Receipts from Customers $ 4,954,047 $ 102,597 $ 32,217 $ 9,214,606 $ - $ - $ - 26,936 Payments to suppliers (2,962,201) (34,284) (29,514) (7,047,993) (2,153) - (890,511) (10,966,658) Payments to employees (Labor only) (1,560,773) (1,560,773) NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ 1,991,846 $ 68,312 $ 2,703 $ 2,166,613 $ - $ (2,153) $ - (2,424,348) CASH FLOW FROM NONCAPITAL FINANCING ACTIVITIES BPA Alcoa Escrow Payments 130, ,121 Transfers from (to) Other Utilities (171,281) (7,881) (2,442) (58,419) - (1,352) (449) 241,824 (0) Payments Received (Paid) for Non-operating work 11,220 11,220 NONCAPITAL FINANCING ACTIVITIES $ (160,061) $ (7,881) $ (2,442) $ (58,419) $ - $ 128,769 $ (449) 241, ,341 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES $ $ (1,445,169) Principal paid on Capital Debt (407,129) (11,182) (13,542) (233,147) (665,000) Interest paid on Capital Debt (367,988) (62,376) (91,343) (168,819) (690,527) Capital Contributions (89,642) (89,642) NET CASH PROVIDED / (USED) BY CAPITAL AND RELATED FINANCING ACTIVITIES $ (864,759) $ (73,558) $ (104,885) $ (401,967) $ - $ - $ - - CASH FLOWS FROM INVESTING ACTIVITIES Interest Income Investment Transactions (884,802) 17, ,700 (1,698,100) - (126,900) - 2,087,560 (496,842) NET CASH PROVIDED / (USED) FROM INVESTING ACTIVITIES $ (884,802) $ 17,700 $ 107,700 $ (1,698,100) $ - $ (126,900) $ - 2,087,560 (496,842) NET INCREASE (DECREASE) IN CASH AND $ $ 2,303 CASH EQUIVALENTS $ 82,225 $ 4,574 $ 3,075 $ 8,127 $ - $ (285) $ (449) (94,964) BALANCE BEGINNING OF YEAR $ $ (107,455) (6,376) (2,090) (19,196) ,395 16,726 BALANCE END OF PERIOD $ (25,230) $ (1,803) $ 985 $ (11,069) $ - $ (285) $ - 56,430 19,029

177 Washington State Auditor's Office 58 NOTES TO FINANCIAL STATEMENT Statement of Cash Flow As of December 31, GRANDVIEW GRANDVIEW ALCOA BULK BPA-ALCOA ECONOMIC POTABLE FIRE ELECTRIC POWER SALES ESCROW DEV FUND CHERRY POINT INTERNAL SERVICE TOTAL RECONCILIATION OF OPERATING INCOME (LOSS) TO NET CASH $ $ 1,516,118 $ Operating Income (Loss) $ 691,641 $ (61,217) $ (71,985) $ 973,232 $ - $ (15,554) $ - - Adjustments to reconcile operating income to net cash provided (used) by operating activity A Depreciation Expense 363,199 37,708 53, , , ,177 Z Miscellaneous - Non-Operating (1) - - (0) - (125) B Decrease (Increase) in Net Accounts Receivable (98,379) 1,902 (3,200) (97,954) ,599 (194,032) D Decrease (Increase) in Prepayments (2,796) (2,796) K Decrease (Increase) in Net Capital Assets (excluding Depreciation) (654,174) (9,106) (0) (266,992) (112,224) (1,042,496) Y Interfund Xfers 1,600,970 98,836 24, ,932-13,511 - (2,533,649) 0 L Increase (Decrease) in Account Payable 107, , , ,975 R Increase (Decrease) in Accrued Employee Payable , ,879 M Increase (Decrease) in Accrued Utility Taxes (15,271) (528) - (26,931) - (275) - (3) (43,009) N Increase (Decrease) in Contractor Retainage (291) (291) S Increase (Decrease) in Deposits & Other Payables (3,527) (3,527) T Increase (Decrease) in Energy Green Credit (136,300) (136,300) NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,991,846 $ 68,312 $ 2,703 $ 2,166,613 $ - $ (2,153) $ - (2,424,348) $ 1,802,972

178 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2009 NOTE 11 - DEFERRED DEBITS (CREDITS) In accordance with generally accepted accounting principals for regulated businesses, the District has deferred charges of $278,554 in 2009 which will be amortized using the straight-line method over the life of the bonds (each 20 years). These deferred charges resulted from costs relating to the sale and redemption of the bonds. The District has deferred credits of ($19,003) in 2009 which will not be amortized but resolved at the end of the next BPA rate period (see note b below). These charges and revenues would have been included in net income for 2009 in nonregulated business, but for rate-making purposes they are treated as applicable to future periods. Deferred transactions resulted from the following: a. Deferred Charges Unamortized Debt Discount and Expense The District s deferred charges as of December 31, 2009 are $278,554: b. Deferred Credits DEFERRED CHARGES 2009 Unamortized Debt Expenses on 1999 Water Revenue Bond 49,974 Unamortized Debt Expenses on 2004 LTGO Bond 165,348 Unamortized Debt Expenses on 2007 Water Revenue Bond 63,232 Total Deferred Charges $ 278,554 Energy Green Credit Bonneville Power Administration -Conservation and Renewable Discounts [C&RD] Bonneville is working with its wholesale customers to promote energy conservation and renewable resources. The approach that Bonneville and its customers agreed upon involves a rate discount that allows utilities and direct service customers to spend less on wholesale energy purchases and use those savings to fund local conservation and renewable energy resources. Customers decide locally how to spend these funds by choosing from a range of qualifying activities. SECTION 1 -- Historical Perspective The Regional Technical Forum (RTF) was established to develop standardized protocols for verification and evaluation of energy savings, to track regional progress toward the achievement of the region s conservation and renewable resource goals, and to provide feedback for improving the effectiveness of conservation and renewable resource development programs in the region. The RTF was established in April The idea for a Conservation and Renewables Discount (C&RD) surfaced as part of the BPA subscription process in September A major goal of subscription was to provide market incentives for the development of conservation and renewables. Building the C&RD into the 5-year rate structure protects the credits from the volatility of the budgeting process and gives utility conservation managers the ability to plan consistent programs and hire staff. C&RD was approved In May 2000, and launched in early During the rate period October September 2009, the name was changed to Conservation Rate Credit (CRC). The CRC was designed to create incremental efficiency gains and renewable energy supplies, and to provide incentives to continue the region s progress in low-income weatherization programs. CRC also promotes local control and management of conservation and renewable programs. Washington State Auditor's Office 59

179 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2009 SECTION 2 -- Program Overview The CRC credit is a 0.5 mill discount off the BPA firm power rate. The amount of each customer s CRC discount is determined by multiplying 0.5 mills times the amount of forecasted electric load (KWHs) placed on BPA. Thus, the total annual credit for the District approximates $118,000 with an expected total credit for the 3 year rate period of $354,000. A credit is earned from the installation of conservation measures or by making other qualifying expenditures for renewable energy, qualified research projects, or through donations to qualifying organizations. At the end of the rate period, customers pay BPA for any CRC credits not accounted for. Customer utilities submit annual reports detailing installation of approved conservation measures and/or spending. The credit may be spent at any time during the rate period. The RTF provides a central forum for discussion of technical issues around savings and credits for the CRC. The RTF developed an accessible web-site tracking and calculation system that has been almost universally accepted as a method for reporting CRC conservation credits to BPA. During the rate period, the District installed a Variable Frequency Drive ( VFD ) in our Plant 2 structure as a BPA approved energy efficient project. The allowable cost of the project exceeded the Energy Green Credit which had been accrued. $45,814 in costs was carried into the rate period. Therefore, as of December 31, 2009, the existing project cost exceeds the Energy Green Credits accrued resulting in a negative balance. The current credit period runs from October 2009 through September disbursements for both the and rate periods are as follows: The accruals and FOR YEAR STARTING OCTOBER 1, FOR YEAR STARTING OCTOBER 1, ENERGY GREEN CREDIT TOTAL TOTAL Energy Green Credit Accrued $ 117,996 $ 117,996 $ 117,996 $ 353,988 $ 26,811 $ 26,811 Allowed Premium Paid for Green Power (54,360) (42,703) (62,822) (159,886) - Allowed CRC Plant 2 Project Amount (239,916) (239,916) (45,814) (45,814) ENDING LIABILITY TO BPA $ 63,636 $ 75,293 $ (184,742) $ (45,814) $ (19,003) $ - $ (19,003) The District s deferred credits, comprising of the Energy Green Credit, as of December 31, 2009 is ($19,003). NOTE 12 - PROPERTY TAXES The Whatcom County Treasurer acts as an agent to collect property taxes levied in the county for all taxing authorities. Taxes are levied annually on January 1 st on property listed as of the prior May 31 st. Assessed values are established by the County Assessor at 100 percent of fair market value. A revaluation of all property is required every four years. Taxes are due in two equal installments on April 30 th and October 31 st. Collections are distributed monthly to the District by the County Treasurer. The District is permitted by law to levy up to $0.45 per $1,000 of assessed valuation for general District purposes. Washington State Auditor's Office 60

180 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2009 Washington State Constitution and Washington State Law, RCW , limit the rate. The District may also levy taxes at a lower rate. Special levies approved by the voters are not subject to the above limitations. Property taxes are recorded as receivables when levied. The District had no tax levies for NOTE 13 ACCOUNTING CHANGES In 2009, the District decided that the liability represented by the accrued liabilities for accrued vacation and accrued sick time was material enough to represent on the financial statements. Note 1 describes the details of the employee agreements which result in this liability. On December 31, 2009, accrued sick time represented a liability of $113,266 and accrued vacation represented a liability of $51,557. NOTE 14 JOINT VENTURES PARTICIPATION IN NORTHWEST OPEN ACCESS NETWORK, INC. dba NOANET The District, along with 13 other Washington State Public Utility Districts and Energy Northwest, was a member of NoaNet, a Washington nonprofit mutual corporation. NoaNet was incorporated in February 2000 to provide a broadband communications backbone, over Public Benefit Fibers leased from Bonneville Power Administration, throughout the Pacific Northwest for assisting its members in the efficient management of load, conservation and acquisition of electric energy as well as other purposes. The network began commercial operation in January As a member of NoaNet, the District guaranteed certain portions of NoaNet debt based on its proportionate share. The management of NoaNet anticipates meeting debt obligations through profitable operations; however, there is no assurance NoaNet s plan will be achieved. During the start-up phase, NoaNet assessed its members to cover operating deficits. In 2009, the District expensed $12,723 in assessments to NoaNet. In July 2001, NoaNet issued $27 million in Telecommunications Network Revenue Bonds (taxable) to finance the repayment of the founding members and the costs of initial construction, operations and maintenance. The Bonds are due beginning in December 2003 through December 2016 with interest due semi-annually at rates ranging from 5.05% to 7.09%. Each member of NoaNet entered into a Repayment Agreement to guarantee the debt of NoaNet. Under the Repayment Agreement, each Member acknowledges and agrees that it is a guarantor of the payment of principal and interest on the Bonds and is liable by assessment or otherwise to repay NoaNet for amounts due and owing with respect to such principal and interest up to each Member's Percentage Interest. The District s guarantee is based on its 0.81% interest, or $365,600.66, of a total liability of $45,135, for principal and interest over the life of the bond. There is a provision in the Bond Resolution for a 25% step-up. In other words, if a member doesn t pay its share of the bond obligation, then the rest of the members have to step up to a maximum of 25% of its obligation. The amount of remaining contingent liability to the District at December 31, 2009 is $43, On September 1, 2003, in accordance with Section 19, Article II of NoaNet s Bylaws, the Public Utility District No.1 of Whatcom County presented a written notice to NoaNet withdrawing from the organization. The District maintains a financial liability only for the $27 million dollar bonds and the $5 million dollar line-of-credit. The District has no liability for any contractual debt incurred or to be incurred by NoaNet after September 1, Financial statements for NoaNet may be obtained by writing to: Northwest Open Access Network, 2327 Grand Avenue, East Wenatchee, WA Washington State Auditor's Office 61

181 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2009 NOTE 15 - RISK MANAGEMENT In January 2002 the Public Utility District No.1 of Whatcom County became a member of the Public Utility Risk Management Services, [PURMS], a joint self-insurance fund. Its membership is comprised of 20 Public Utility Districts and NOANET, a Washington nonprofit mutual corporation providing broadband communications services [See NOTE-15 JOINT VENTURES]. The Public Utility Risk Management Services, Joint Self-Insurance Fund was organized as of December 30, 1976, pursuant to the provisions of the Revised Code of Washington, Chapter and inter-local agreements. The program s general objectives are to formulate, develop, and administer, on behalf of the member public utilities, a program of insurance, to obtain lower costs for that coverage, and to develop a comprehensive loss control program. The District is a member of the Liability and Property Pools. The risks shared by the members are defined in the member s Self-Insurance Agreement. Both pools (liability and property) operate independently of one another. The Fund maintains assets from which liability claims against the member Districts and property losses of member Districts are paid and, through assessments of the members to replenish these assets, the members share joint liability among themselves for losses incurred. The Fund also purchases excess insurance for losses above the $1,000,000 for liability and above $250,000 for property The members, through the Fund, provide liability self-insurance for the first $1 million of individual loss claims. Assessments for the liability pool are based upon a formula whose elements include; basic fees, historic claims experience and workers hours. The assessments include amounts for excess insurance premiums, claims experience, and operating costs. In November 2008, it was decided to raise the Designated Liability Pool Balance from $2 million to $3 million through semi-annual assessments starting in January 2009 and continuing through July Interim assessments are levied whenever the level of the liability program falls below $500,000 of the normal operating balance. Through PURMS, an AEGIS liability policy covers an additional $35 million over the initial $1 million. At the end of 2009, the District decided to also add another $25 million in coverage through an EIM policy over the previous $36 million in coverage. Effective April 1, 1977 the Fund established a self-insurance program for member s property. The property program provides property self-insurance for the first $250,000 of individual loss claims. Assessments for the property pool are based upon a formula whose elements include: basis fees, property values and risk based rates. The assessments include amounts for excess insurance premiums, claims experience, and operating costs. For the property program, member Districts are obligated to replenish to a level of $750,000 through annual assessments. Interim assessments are levied whenever the level of the property program is reduced to an amount less than $500,000. PURMS maintains an Excess Property Insurance for its members in the Property Pool of $150 million. A comprehensive 2009 Annual Report can be obtained by contacting: Public Utility Risk Management Services Administered by Pacific Underwriters PO Box 68787, Seattle, WA Phone; FAX: The District has a separate policy with Marsh USA Inc, through Associated Electric & Gas Insurance Services LTD (AEGIS) for Western Interconnect Electric System (WIES) members for electric blackouts and/or brownouts for our electric customer. As agreed, Marsh (USA) has placed coverage with AEGIS pursuant to the surplus lines laws of Oregon. As an eligible surplus lines insurer, AEGIS is subject to limited state financial solvency regulation. Also, the insurers do not participate in any state insurance guaranty fund which otherwise provide limited claims reimbursement for policyholders of insolvent insurers. Therefore, the placement of coverage with AEGIS could result in financial exposure to the District if the insurer(s) becomes insolvent. Washington State Auditor's Office 62

182 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2009 Because the insurance policy covers more than one state, premium tax is also due in the other states, which is computed based on the portion of premium allocable to the risks located in each state. Where the state law allows, Marsh has prepared the necessary forms for WIES to file directly with the state. These forms show the allocated premium and tax amount due for each state. Their decision to file these forms will require the appropriate signature and tax payment check in the amount indicated on each form. Marsh suggests that the District consult with our legal or tax advisors with respect to the decision to file in these jurisdictions. In Washington, Idaho, Montana, Nevada, North Dakota and Wyoming the states require that Marsh collect and remit the allocated premium taxes. It should be noted that Marsh has allocated the premium based on their understanding of the applicable insurance laws and regulations in each of the states where the District and/or covered risks are located. It is still possible that one or more US jurisdictions may assert a claim for a portion of the tax that was allocated to another US jurisdiction. Risk pool insurance premiums and pool assessments for the District were as follows for 2009 and 2008: Washington State Auditor's Office 63

183 NOTES TO FINANCIAL STATEMENT For The Year Ended December 31, 2009 INVOICE DATE CARRIER TYPE KIND PREMIUM / ASSESSMENT DISTRICT COST PURMS 2008 LIABILITY 01/08/2008 AEGIS LIABILITY EXCESS GENRL LIAB 712, /08/2008 AEGIS LIABILITY PROF LIAB [E&O] 55, % 11, /22/2008 GENERAL ASSESSMENT LIABILITY LIAB GENRL ASSESS 193, % 2, /29/2008 GENERAL ASSESSMENT LIABILITY LIAB GENRL ASSESS 517, % 7, ,478, % 21, PROPERTY 04/29/2008 NATIONAL UNION PROPERTY FIRE EXCESS POLICY 701, % 25, /22/2008 GENERAL ASSESSMENT PROPERTY PROP GENRL ASSESS 169, % 5, /29/2008 GENERAL ASSESSMENT PROPERTY PROP GENRL ASSESS 271, % 5, ,141, % 36, PURMS 2009 LIABILITY 01/12/2009 AEGIS LIABILITY EXCESS GENRL LIAB 841, /12/2009 AEGIS LIABILITY PROF LIAB [E&O] 55, % 12, /21/2009 GENERAL ASSESSMENT LIABILITY LIAB GENRL ASSESS 453, % 6, /26/2009 GENERAL ASSESSMENT LIABILITY RETENTION FUNDING 165, % 2, /09/2009 GENERAL ASSESSMENT LIABILITY LIAB GENRL ASSESS 979, % 7, /24/2009 GENERAL ASSESSMENT LIABILITY RETENTION FUNDING 165, % 2, ,659, % 31, PROPERTY 03/30/2009 NATIONAL UNION PROPERTY FIRE EXCESS POLICY 811, % 28, /19/2009 GENERAL ASSESSMENT PROPERTY PROP GENRL ASSESS 342, % 10, /31/2009 GENERAL ASSESSMENT PROPERTY PROP GENRL ASSESS 397, % 13, /05/2009 GENERAL ASSESSMENT PROPERTY PROP GENRL ASSESS 289, % 10, ,841, % 63, MARSH 2008 WESTERN INTERCONNECTED BLACK/BROWN-OUT 06/24/2008 ELECTRIC SYSTEMS LIABILITY ANNUAL PREMIUM MARSH 2009 WESTERN INTERCONNECTED BLACK/BROWN-OUT 06/22/2009 ELECTRIC SYSTEMS LIABILITY ANNUAL PREMIUM Washington State Auditor's Office 64

184 ABOUT THE STATE AUDITOR'S OFFICE The State Auditor's Office is established in the state's Constitution and is part of the executive branch of state government. The State Auditor is elected by the citizens of Washington and serves four-year terms. Our mission is to work with our audit clients and citizens as an advocate for government accountability. As an elected agency, the State Auditor's Office has the independence necessary to objectively perform audits and investigations. Our audits are designed to comply with professional standards as well as to satisfy the requirements of federal, state, and local laws. The State Auditor's Office employees are located around the state to deliver services effectively and efficiently. Our audits look at financial information and compliance with state, federal and local laws on the part of all local governments, including schools, and all state agencies, including institutions of higher education. In addition, we conduct performance audits of state agencies and local governments and fraud, whistleblower and citizen hotline investigations. The results of our work are widely distributed through a variety of reports, which are available on our Web site and through our free, electronic subscription service. We take our role as partners in accountability seriously. We provide training and technical assistance to governments and have an extensive quality assurance program. State Auditor Brian Sonntag, CGFM Chief of Staff Ted Rutt Deputy Chief of Staff Doug Cochran Chief Policy Advisor Jerry Pugnetti Director of Audit Chuck Pfeil, CPA Director of Performance Audit Larisa Benson Director of Special Investigations Jim Brittain, CPA Director for Legal Affairs Jan Jutte, CPA, CGFM Director of Quality Assurance Ivan Dansereau Local Government Liaison Mike Murphy Communications Director Mindy Chambers Public Records Officer Mary Leider Main number (360) Toll-free Citizen Hotline (866) Website Subscription Service (SAO FACTS.DOC - Rev. 09/11)