ERIE CITY WATER AUTHORITY

Transcription

1 Financial Statements and Independent Auditor s Report (aka ERIE WATER WORKS)

2 (aka Erie Water Works) Financial Statements and Independent Auditor s Report TABLE OF CONTENTS Page(s) INDEPENDENT AUDITOR'S REPORT 1 MANAGEMENT S DISCUSSION AND ANALYSIS (Unaudited) 3 14 NOTES TO FINANCIAL STATEMENTS FINANCIAL STATEMENTS STATEMENTS OF NET POSITION STATEMENTS REVENUES, EXPENSES AND CHANGES IN NET POSITION 51 STATEMENTS OF CASH FLOWS REQUIRED SUPPLEMENTARY INFORMATION SCHEDULE OF CHANGES IN PENSION PLAN NET PENSION (ASSET) LIABILITY AND RELATED RATIOS Retirement plan for Employees of the Erie City Water Authority 54 SCHEDULE OF PENSION PLAN CONTRIBUTIONS Retirement plan for Employees of the Erie City Water Authority 55 SCHEDULE OF CHANGES IN PENSION PLAN NET PENSION (ASSET) LIABILITY AND RELATED RATIOS City of Erie Officers and Employees Retirement Fund 56 SCHEDULE OF PENSION PLAN CONTRIBUTIONS City of Erie Officers and Employees Retirement Fund 57 OTHER SUPPLEMENTARY INFORMATION DEBT SERVICE COVERAGE RATIO COMPUTATION INDEPENDENT AUDITOR'S REPORT ON COMPLIANCE AND ON INTERNAL CONTROL OVER FINANCIAL REPORTING BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS 60

3 INDEPENDENT AUDITOR'S REPORTS

4 SEAN T. SULLIVAN, CPA, PC Member: American and Pennsylvania Institutes of Certified Public Accountants Chairperson and Members Erie City Water Authority INDEPENDENT AUDITOR'S REPORT Report on the Financial Statements I have audited the accompanying financial statements of the Erie City Water Authority (aka Erie Water Works) (a governmental Authority), as of and for the years ended, and the related notes to the financial statements, which collectively comprise the Authority s financial statements as listed in the table of contents. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility My responsibility is to express an opinion on these financial statements based on my audits. I conducted my audit 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 I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, I express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as Ill as evaluating the overall presentation of the financial statements. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my audit opinion. Opinion In my opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Erie City Water Authority, as of, and the changes CERTIFIED PUBLIC ACCOUNTANT seancpa@seancpa.com Lincoln Avenue Erie, Pennsylvania Telephone: Facsimile:

5 SEAN T. SULLIVAN, CPA, PC in financial position and cash flows thereof for the years then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the Management s Discussion and Analysis on pages 3 through 14 and the Required Supplementary Information on pages 54 through 57 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 (GASB), 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. I have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to my inquiries, the basic financial statements, and other knowledge I obtained during my audit of the basic financial statements. I do not express an opinion or provide any assurance on the information because the limited procedures do not provide me with sufficient evidence to express an opinion or provide any assurance. Other Information My audit was conducted for the purpose of forming opinions on the Erie City Water Authority s financial statements. The other supplementary information is presented for purposes of additional analysis and is not a required part of the basic financial statements. The other supplementary information is the responsibility of management and is derived from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In my opinion, the other supplementary information is fairly stated in all material respects in relation to the basic financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, I have also issued my report dated October 03, 2017, on my consideration of the Erie City Water Authority s internal control over financial reporting and on my 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 my testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Erie City Water Authority s internal control over financial reporting and compliance. October 03, 2017 Erie, Pennsylvania SEAN T. SULLIVAN, CPA, PC 2

6 MANAGEMENT S DISCUSSION AND ANALYSIS

7 Erie City Water Authority (aka Erie Water Works) MANAGEMENT DISCUSSION AND ANALYSIS (Unaudited) INTRODUCTION The Erie City Water Authority (herein, Authority) is pleased to present to the reader of the Authority s financial statements, this narrative discussion, overview and analysis of the financial activities of the Authority for the year ended December 31, The financial statements reflect the assets, liabilities, net position, results of operations, and cash flows of the Erie City Water Authority. We encourage readers to consider the information on pages 3 to 14 in conjunction with the Authority s notes to the financial statements and financial statements (presented on pages 15 to 53 to enhance their understanding of the Authority s financial performance). OVERVIEW OF THE FINANCIAL STATEMENTS These financial statements consist of three sections: Management s Discussion and Analysis [this section]; the Notes to the Financial Statements [see discussion below]; and the Financial Statements [see discussion below]. This report also contains other required supplementary information in addition to the financial statements. Management s discussion and analysis of the Authority s financial performance provides an overview of the Authority s financial activities for the year ended December 31, The purpose of this discussion and overview is to view the Authority s financial performance as a whole and provide an objective and easily readable analysis of the Authority s financial activities based on currently known facts, decisions and conditions. Please read it in conjunction with the Authority s financial statements (beginning on page 49), the Authority s Notes to the Financial Statements (beginning on page 15), the required supplementary information (beginning on page 54), and the other supplementary information (beginning on page 58) to enhance your understanding of the Authority s financial performance. Notes to Financial Statements The Notes to the Financial Statements, located immediately preceding the financial statements, provide background information on the operations of the Authority; specific accounting policies used in the preparation of the financial statements; and additional detailed information of various financial statement items. Required Financial Statements The Authority s required financial statements are designed to provide readers a broad overview of the Authority s financial activities similar to a private sector business. The Statement of Net Position presents information related to the assets plus deferred outflow of resources, and liabilities plus deferred inflows of resources, with the difference between these items being reported as net position (assets plus deferred outflows less liabilities plus deferred inflows previously referred to as net assets ) of the Authority. It also provides the basis for computing the rates of return, evaluating the capital structure of the Authority, and assessing the liquidity and financial flexibility of the Authority. The Statement of Revenues, Expenses and Changes in Net Position reflects the changes in the Authority s net position from one accounting period to another by measuring the Authority s financial results of operations. This statement measures the profitability of the Authority s operations over the 3

8 Erie City Water Authority (aka Erie Water Works) MANAGEMENT DISCUSSION AND ANALYSIS (Unaudited) respective past year and can be used to determine whether the Authority has successfully recovered all of its costs through its user fees and other charges. The Statement of Cash Flows provides an analysis of all sources and uses of the Authority s cash and net changes in cash and cash equivalents. The direct method of cash flows is used reflecting various cash activities operations, non capital financing, capital and related financing, and investing. Finally, the statement provides a reconciliation of operating income to net cash provided by operating activities. PROFILE The Erie City Water Authority is a body corporate and politic created in 1992 by the City of Erie and existing under the laws of the Commonwealth of Pennsylvania pursuant to the Pennsylvania Municipality Authorities Act, being the Act of the Commonwealth of Pennsylvania approved June 18, 2001, Act (53 Pa. Cons. Stat. Ch. 56, 5601 et seq.), as amended (the "Act"). The Authority is duly organized, existing in good standing under the laws of the Commonwealth of Pennsylvania. The Authority's statutory life has been extended periodically during the Authority's existence and has been extended until December 31, The Authority was created to assume the operations of the City of Erie s water department. The enabling legislation provided the Authority with power to acquire, construct, operate, and maintain public water supply and distribution facilities for the benefit of the residents of the City of Erie and surrounding contiguous municipalities. The Authority provides potable drinking water to approximately 61,000 direct customers. Since its inception, the Authority has undertaken a comprehensive capital improvement program to rehabilitate and replace the City of Erie s aging water system. While the Authority was upgrading its infrastructure to meet current standards, the system was also being expanded to provide water service in surrounding municipalities. To accomplish this, a total of fifty five miles of new water main has been installed in conjunction with forty five miles of existing water main that was cleaned and relined with a cement mortar lining. The Authority is governed by a Board of Directors consisting of nine (9) principal members. The Board is composed of six (6) residents of the City of Erie ( City resident ), and three (3) residents of any other municipalities which is within the Authority s water supply distribution service area ( non City resident ). All members of the Board are appointed by the Council of the City of Erie. Four (4) of the six (6) City resident members are appointed directly by the Council of the City of Erie. One (1) of the six (6) City resident members shall be appointed only upon the recommendation of the Mayor of the City. One (1) of the three (3) non City resident members shall be appointed only upon the recommendation of the Mayor of the City and shall be selected from a list of five (5) qualified nominees provided by the governing bodies of municipalities within Authority s water supply distribution service area. The remaining two (2) of three (3) non City resident members shall be appointed by the Council of the City of Erie after consideration of a list of five (5) qualified non binding nominees provided by the governing bodies of municipalities within Authority s water supply distribution service area. The Authority began operations in 1992 providing direct water service to residents of the City of Erie and bulk rate water service to surrounding municipalities. In December 2015, the Authority acquired the Millcreek Township Water Authority (MTWA). The acquisition of MTWA increased the Authority s 4

9 Erie City Water Authority (aka Erie Water Works) MANAGEMENT DISCUSSION AND ANALYSIS (Unaudited) direct customer base by nearly 7,500. The acquisition also provides the Authority an opportunity to take full advantage of the economies of scale afforded the now larger customer base. Through the end of 2016, more than $269 million worth of capital investments had been made to the system. The majority of these funds were used to renovate and modernize existing facilities. In addition to improving the facilities and expanding the water system, the Authority has invested in shoring up its piping infrastructure over the past 23 years. To accomplish this goal, the Authority has undertaken a number of capital programs intended to replace aging, failing, or broken system attributes in order to provide better service to its customers. In 1994 the Authority completed an $11.2 million water main cleaning and relining project. This project addressed large diameter water mains that had demonstrated an unacceptable number of main breaks or system leakage. The Authority continues to replace old valves, hydrants and customer service lines, in order to improve service to its customers. Since initiating these programs in 2000, the Authority has invested nearly $2.7 million replacing valves, more than $4.7 million on replacing old lead service lines, and more than $2.3 million replacing broken or inoperable fire hydrants. In addition to rebuilding and expanding its infrastructure, the Authority has invested in technology aimed at improving its service while making operations more efficient. These projects include the addition of the Supervisory Control and Data Acquisition (SCADA) which was substantially completed in 2008 for $329,000; the business software (HTE/Sunguard) was replaced with a new system in 2005 for $321,000; old meters were replaced with new radio frequency meters; and continue to collect data for the Authority state of the art Geographic Information System (GIS). These capital investments, coupled with other initiatives have resulted in a much more stable and reliable system. In the water industry, system reliability is usually measured in terms of unaccounted for water. Unaccounted for water is the percentage of water treated and pumped into the system, but is never billed to any customer. In 1996, that percentage was estimated at approximately 50%. As a result of the previously mentioned projects and other efforts to seal leaking storage facilities, reduce the number of water main breaks, and replace old, inaccurate water meters, that percentage was maintained at approximately 20% at the end of By maintaining this figure, the Authority was able to control its electricity costs (less power wasted on treatment and pumping), its chemical costs (less chemicals needed for treatment), its labor and materials costs (fewer main breaks resulting in less overtime and materials needed) and its sludge handling costs (less filtration resulting in less sludge sent to the Erie Wastewater Treatment facility). As a result of the increased efficiencies of the system and the loss of a few industrial customers, the Authority was able to migrate to a single treatment plant, thus further reducing the labor, facilities and maintenance costs which has led to even greater efficiencies. And finally, the Authority began utilizing its GIS system to provide mapping used in the design of water main installation projects. The Authority has saved significant costs in the various projects being undertaken in 2013 and expects to continue these savings on future projects as well. Since its creation in 1992, the Authority has transformed the water system of Northwest Pennsylvania into a first class system that provides water service to nearly 200,000 people while meeting or exceeding all Federal, State, and local regulations. The work that continues as well as the work on the horizon will carry on the Authority s tradition of system excellence that began 24 years ago. The Authority collects most of its revenues from fees and metered water sales. The Authority does 5

10 Erie City Water Authority (aka Erie Water Works) MANAGEMENT DISCUSSION AND ANALYSIS (Unaudited) not have the power to levy taxes. The Authority currently produces all of the water that is sold to its customers. Since approximately 60% of the Authority s revenue are residential based, the annual metered water sales are very dependent on the weather during the summer months, as weather determines the need for lawn irrigation. As a result, excessive or limited rainfall can significantly affect revenues from water sales. The Authority utilizes pre depreciation operating surpluses to fund capital improvements, thereby reducing the need to borrow funds for such improvements. By generating pre depreciation operating surpluses, the Authority will be able to complete essential system improvements without the need to adjust customers water rates. Being able to reinvest these funds back into the system pays almost immediate dividends in lower maintenance costs, improved efficiencies, fewer unexpected water main failures, and greatly improved reliability of the water service provided to our customers. In order to finance more significant current and future capital projects, the Authority utilizes the Pennvest (Pennsylvania Infrastructure Investment Authority) program, whenever appropriate. This program offers low interest rate financing for specific capital projects, which makes it the most financially attractive capital funding option. For projects not eligible for Pennvest funding, the Authority raises the necessary capital funds through a combination of direct reinvestment in its system from revenues generated by normal operations, as well as long term water revenue bond issues. The Authority will continue to monitor the bond market, in order to determine the most financially beneficial mix of direct reinvestment and long term debt service. At December 31, 2016, the Authority has a total of $295.4 million in outstanding long term debt $276.7 Water Revenue Bond debt, $9.7 million Pennvest debt, $9 million note payable to Millcreek Township associated with the Authority s acquisition of the MTWA. FINANCIAL HIGHLIGHTS 2016 The Authority completed its first full year of operations including the former operations of the Millcreek Township Water Authority (herein, MTWA). The purchase of the MTWA increased the Authority s direct customer base by nearly 7,500 (14.1% increase) to more than 61,000 direct customers. While the total population served by Authority did not increase, the ability to service those customers directly has allowed the Authority to take full advantage of the economies of scale afforded by the larger customer base. The savings, along with the increased revenues that accompanies direct service, were significant contributors to the level of success experienced by the Authority in The Authority tracked all operating expenses related to the MTWA acquisition, and through the first twelve months of ownership approximately $400,000 of additional operating expenses were attributed to acquisition of the MTWA. Prior to selling their system, MTWA carried approximately $1.5 million in operating expenses. The incremental costs to the EWW to run that system saved more than $1 million in annual operating expenses revenues from direct billings of former MTWA customers were approximately $3.62 million compared to $2.32 million of 2016 bulk rate billings that would have occurred if the MTWA system had not been acquired. The net result of the MTWA acquisition was to add approximately $1 million of net operating revenue to the Authority. The Authority issued $45.7 million of fixed rate Water Revenue Bonds in March Net proceeds from the issue totaled approximately $49.7 million, which included a $4.0 million original issue 6

11 Erie City Water Authority (aka Erie Water Works) MANAGEMENT DISCUSSION AND ANALYSIS (Unaudited) premium and $.45 million in issue costs. $42.9 million of the proceeds were used to defease a portion of the 2008 Water Revenue Bonds; $.75 million of the proceeds were used for the current refund of 2015 Water Revenue Note; and $5.7 million of the proceeds to fund interest payments on the defeased 2008 Water Revenue Bonds, a portion of the June 01, 2016 interest payment due on the Water Revenue Bonds, Series of 2015, and interest due on the $.75 million 2015 Water Revenue Notes. The Authority s net position decreased $2.76 million to a $49.12 million accumulated deficit. The Authority s operating revenues increased $2.2 million [6.3%] to $36.69 million. Approximately $1.3 million of the increase is attributed to the MTWA acquisition, with the remaining increase attributed to anticipated rate increases. The Authority s operating expenses increased $1.2 million [6.5%] to $19.26 million. Approximately $.4 million of the increase is attributed to the acquisition of the MTWA, and $.6 million attributed to increased pension expense. The Authority s net operating income before depreciation increased $1 million [6.2%] to $17.43 million. FINANCIAL HIGHLIGHTS 2015 During 2015, the Authority adopted GASB issued Statement No. 68 Accounting and Financial Reporting for Pensions An Amendment to GASB Statement No. 27, effective for reporting periods beginning on or after June 15, GASB Statement No. 68 established standards of accounting and financial reporting for defined benefit and defined contribution pension plans provided to employees of state and local governmental employers. This statement also requires more extensive note disclosures and required supplementary information, including disclosing descriptive information about the types of benefits provided, how contributions to the pension plan are determined, and assumptions and methods used to calculate the pension liability. As a result of adopting this Statement, in 2015 the Authority recorded a prior period adjustment as required by GASB Statement No. 68, which required the Authority to retroactively recognize deferred outflow and/or inflow for the effect of the net change in the Authority s net pension asset and/or liability and difference during the measurement period between the Authority s contributions and its contributions to the pension system not included in pension expense. Also included in deferred outflows, are the Authority s contributions to the pension system subsequent to the measurement date. During 2015, the Authority completed its negotiations with the Millcreek Township Supervisors regarding the Authority s purchase of the Millcreek Township water system ( MTWS ), and acquired the system assets. As part of the acquisition, a settlement was concluded on arbitration proceedings related to Millcreek Township Water Authority s and Summit Township Water Authority s dispute with the Authority over rate settings. The Authority purchased the Millcreek Township water system for $22 million $12 million paid from existing bond issue construction funds and $10 million paid in the form of a promissory note to Millcreek Township payable over the next ten years. The Authority issued $10 million of fixed rate Water Revenue Bonds in March Net 7

12 Erie City Water Authority (aka Erie Water Works) MANAGEMENT DISCUSSION AND ANALYSIS (Unaudited) proceeds from the issue totaled approximately $9.8 million, which included a $193,421 original issue discount and $149,709 in issue costs. $8.2 million of the proceeds was used to defease a portion of the 2008 Water Revenue Bonds; and $1.4 million of the proceeds to fund the interest payment on the defeased 2008 Water Revenue Bonds. The Authority issued and additional $750,000 of fixed rate Water Revenue Bonds in November Net proceeds from the issue totaled approximately $750,000, which were used to pay a portion of the December 01, 2015 principal payments on the 2001B Water Revenue Bonds. Net Position FINANCIAL ANALYSIS OF THE AUTHORITY The Authority s net position at December 31, 2016 was a ($49.12) million deficit, a $2.76 million (5.96%) increase from December 31, Total assets and outflows increased $.55 million (.21%) to $ million. Total liabilities and inflows increased $4.76 million (1.55%) to $ million. Restricted investments of $20.83 million decreased $14.79 million (41.52%), primarily from funds used for various capital projects. Capital assets (net of depreciation) decreased $4.76 million. Gross capital assets (before depreciation) increased $12.61 million representing capital additions in accordance with the Authority s adopted capital project program. The Authority s net position of ($49.12) million deficit increased $2.76 million during The primary reasons for the increase are discussed in the following Changes in Net Position section. 8

13 Erie City Water Authority (aka Erie Water Works) MANAGEMENT DISCUSSION AND ANALYSIS (Unaudited) STATEMENTS OF FINANCIAL POSITION As of December 31, $ Change % Change ASSETS Current assets $ 13,797,317 $ 14,021,770 ( $ 224,453 )( 1.6% ) Restricted investments 20,831,757 35,617,811 ( 14,786,054 )( 41.5% ) Capital assets, net of accumulated depreciation 182,608, ,027,689 4,580, % Other non current assets 11,274,848 5,828,611 5,446, % Deferred outflows of resources 34,033,475 28,499,260 5,534, % Total Assets and Deferred Outflows $ 262,545,713 $ 261,995,141 $ 550, % As of December 31, $ Change % Change LIABILITIES AND NET ASSETS Current liabilities $ 7,918,630 $ 8,287,796 ( $ 369,166 )( 1.6% ) Long term debt, net of unaccreted discounts 289,960, ,460,670 ( 2,500,450 )( 0.9% ) Other non current liabilities 13,789,922 6,161,766 7,628, % Deferred inflow of resources 1,445,500 ( 1,445,500 )( 100.0% ) Total liabilities and deferred outflow of resources 311,668, ,355,732 3,313, % Net position Invested in capital assets, net of related debt 7,270,325 2,701,394 4,568, % Restricted for capital projects, debt service 13,216,103 7,030,905 6,185, % Unrestricted ( 69,609,487 )( 56,092,890 )( 13,516,597 ) 24.1% Total net position ( 49,123,059 ) ( 46,360,591 ) ( 2,762,468 ) 6.0% Total liabilities and net position $ 262,545,713 $ 261,995,141 $ 550, % Changes in Net Position The Authority s net position decreased by $2.76 million in 2016, compared to a $1.92 million in The 2016 increase in the net position deficit of $.85 million resulted from several factors $1 million increase in net operating revenue $17.4 million in 2016 versus $16.4 million in 2015; $1.1 million increase in depreciation expense [$8.0 million in 2016 versus $6.9 million in 2015] due to the 2016 full year depreciation of the MTWA assets acquired in December 2015; $1 million increase in interest expense $12.7 million in 2016 versus $11.7 million in Total operating revenues for the year ended December 31, 2016 of $36.7 million increased $2.1 million (6.3%) compared to December 31, Approximately $1.3 million of the $2.1 million revenue increase represents the change in revenue from the acquisition of the MTWA. Revenues from 2016 direct billings to former MTWA customers were approximately $3.62 million compared to $2.32 of 2016 bulk rate billings that would have occurred if the MTWA system had not been acquired. Total operating expenses of $19.3 million increased $1.2 million (6.6%). Approximately $.4 million (33.33%) of the 2016 increase in operating expenses are attributable to additional costs related to the 9

14 Erie City Water Authority (aka Erie Water Works) MANAGEMENT DISCUSSION AND ANALYSIS (Unaudited) acquisition of MTWA. In addition, pension expense for 2016 totaled approximately $.8 million, which is a $.7 million increase over Total 2016 expenses of $40.3 million decreased $36.7 million (6.6%) compared to $1.1 million of the increase is attributed to additional depreciation from the December 2015 acquisition of the MTWA and $1.0 million of additional interest expense. STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET POSITION For the year ended December 31, $ Change % Change Operations Operating revenues $ 36,687,234 $ 34,514,263 $ 2,172, % Operating expenses ( 19,261,929 )( 18,077,584 ) 1,184, % Depreciation ( 8,033,694 )( 6,908,180 ) 1,125, % Operating income 9,391,611 9,528,499 ( 136,888 )( 1.4% ) Non operating revenue (expense) Interest expense ( 12,733,444 )( 11,739,768 ) 993, % Other revenues 1,292, , , % Other expenses ( 924,621 )( 889,605 ) 35, % ( 12,365,585 ) ( 11,640,972 ) 724, % Net loss before capital contributions ( 2,973,974 )( 2,112,473 )( 861,501 )( 40.8% ) Capital asset contributions 211, ,797 15, % Change in net position ( $ 2,762,468 ) ( $ 1,916,676 ) ( $ 845,792 ) 44.1% 2016 OPERATING EXPENSES $3,600,000 $5,660, % SALARIES AND WAGES EMPLOYEE BENEFITS SUPPLIES & MATERIALS OTHER SERVICE & CHARGES LEASE CITY OF ERIE $5,963, % $2,925, % $1,112,195 10

15 Erie City Water Authority (aka Erie Water Works) MANAGEMENT DISCUSSION AND ANALYSIS (Unaudited) CAPITAL ASSETS AND DEBT ADMINISTRATION Capital Assets As of December 31, 2016, the Authority had $ million of gross investment in capital assets, with $110.8 million in accumulated depreciation, for a net book value of $182.6 million. This amount represents a 2.6% increase over the prior year. Net capital assets make up 69.6% of the Authority s total assets at December 31, 2016, a 1.5% increase over the prior year. The gross investment in capital assets consist of $32.3 million buildings and improvements, $164.0 million infrastructure and improvements, $3.6 million vehicles, $6.7 million office equipment, $24.7 million fixed and moveable equipment and $49.5 million construction in progress. CAPITAL ASSETS (net of accumulated depreciation) As of December 31, $ Change % Change Buildings and improv $ 32,322,584 $ 32,322,584 $ 0.0% Infrastructure and improv 156,579, ,098,914 2,480, % Vehicles 3,896,150 3,635, , % Office/computer equipment 6,866,206 6,650, , % Fixed/moveable equipment 25,141,203 24,692, , % Contributed infrastructure 10,078,908 9,867, , % Work in progress 58,527,154 49,529,092 8,998, % Total capital assets 293,411, ,797,148 12,614, % Accumulated depreciation ( 110,803,153 )( 102,769,459 )( 8,033,694 ) 7.8% Total capital assets $ 182,608,316 $ 178,027,689 $ 4,580, % A number of significant capital initiatives were completed in The following is a brief description of the more prominent projects Sigsbee Reservoir Liner and Cover Replacement The 33 million gallon (MG) Sigsbee Reservoir was Erie s first ever water storage facility. It was originally constructed in 1873 of earth, brick, and mortar at a time when the population of the City of Erie was 26,037. The approximate dimensions are 545 feet long by 402 feet wide by 27 feet deep. Located along 26 th Street near Sigsbee Street, it still serves as the Authority s largest finished water storage facility. When it was first constructed, it was an uncovered, open reservoir. Changing environmental regulations in the 1960 s and technological advancements eventually led to the installation of a floating cover. The liner and cover were replaced in the early 1990 s and recently in There was a center wall that divided the reservoir into two halves. In order to improve water quality, that wall was removed which effectively increased the reservoir size to 34 MG. The Seaman Corporation manufactured liner and cover is made of a 45 mil thick polyester based geo membrane that is NSF 61 approved for use with potable water. A year service life is to be expected. 11

16 Erie City Water Authority (aka Erie Water Works) MANAGEMENT DISCUSSION AND ANALYSIS (Unaudited) Asbury Tank #1 Exterior Recoating The 1 MG Asbury Tank was constructed by Chicago Bridge & Iron in The 60 feet diameter, 48 feet deep welded steel tank provides water for average and peak day use and emergencies (such as power outages or fires) for the western portion of Millcreek Township. Visitors of Asbury Woods have likely spotted this and a second 1.5 MG tank when frequenting this popular recreation site. It is necessary to maintain and repair tank coatings in order to prevent corrosion of the steel beneath. Failure of the steel could cause significant disruption to our customer s water service. As such, keeping the Authority s tanks in a reliable operational state is critical to our business. Wagner Avenue Water Main Replacement The project was located along Wagner Avenue between Buffalo Road and Pearl Avenue in the City of Erie. The scope included the replacement of 1,400 feet of 1913 vintage 6 inch water main with new 12 inch ductile iron pipe water main. The Authority partnered with FMC Technologies (FMC) on this project to improve fire protection to their facility. FMC is the global leader for the energy industry providing oil service equipment for sophisticated systems and products such as measurement solutions. East Lake Road Water Main Replacement This project replaced 6,600 feet of 12 inch water main from Walbridge Drive to Irvine Drive along East Lake Road in Harborcreek Township. This work was the 3 rd phase of a 4 phase project to replace problematic, break prone 12 inch water main with new 16 inch ductile iron pipe from East Lake Road and Iroquois Avenue all the way to Bartlett Road. The phase 4 construction from Irvine to Bartlett will be constructed in East 38th Street Water Main Replacement In 2003, the Authority replaced a 12 inch water main along East 38 th between State Street and Pine Avenue. Since that time, the water main to the east of Pine has been problematic and main breaks persist along this highly traveled stretch. The construction covered East 38 th Street between Pine Avenue and East Avenue. The 6 inch water mains along Lake Pleasant Road and East Avenue between 38 th and Pine were also replaced with new 8 inch ductile iron pipe. In total, 5,356 feet of new water main was installed along with 5 fire hydrants and 105 water taps to existing Authority customers. Renewing and replacing infrastructure is an important challenge facing public and private utilities across the United States. Wesleyville Water Main Loop Closures The concept of annually looping and eliminating dead end water mains will help the Authority to meet the revisions to the Environmental Protection Agencies (EPA) Total Coliform Rule (TRC) which may result in a requirement to maintain a minimum of 0.3 mg/l chlorine residual at all points in the distribution system. Presently, 0.02 mg/l is required. This change will push utilities to loop dead ends and install more water quality stations that can expel water in order to help maintain acceptable chlorine levels. The Authority leveraged staff expertise and its Water System Master Plan to identify locations in the water distribution system to loop water mains to improve water quality and fire protection. The Authority s Engineering Department designed the closure of 21 dead end mains in Wesleyville Borough. The 12

17 Erie City Water Authority (aka Erie Water Works) MANAGEMENT DISCUSSION AND ANALYSIS (Unaudited) Authority s Distribution Department closed 5 of them in late The remaining areas should be completed in 2017 with the possibility of grant money being utilized. Long Term Debt Administration In order to finance current and future capital projects, the Authority utilizes the Pennvest (Pennsylvania Infrastructure Investment Authority) program, whenever appropriate. This program offers low interest rate financing for specific capital projects, which makes it the most financially attractive capital funding option. For projects not eligible for Pennvest funding, the Authority raises the necessary capital funds through a combination of direct reinvestment in its system from revenues generated by normal operations, as well as long term water revenue bond issues. The Authority will continue to monitor the bond market in order to determine the most financially beneficial mix of direct reinvestment and long term debt service. The Authority also incurred long term debt directly with Millcreek Township in conjunction with its 2015 acquisition of the MTWA. At December 31, 2016, the Authority has a total of $295.4 million in outstanding long term debt, a decrease of $2.6 million (.89%) from December 31, The decrease in debt resulted from current year principal payments exceeding net new borrowings. On January 28, 2016 Standard & Poor s Ratings Service assigned an insured rating of AA to the Authority s Water Revenue Bonds, Series of Additional detailed information on the Authority s long term debt is presented in Note I to the financial statements. Erie City Water Authority Long Term Debt As of December 31, $ Change % Change Water Revenue Bonds $ 282,585,000 $ 285,120,000 ( $ 2,535,000 ) ( 0.9% ) Unaccreted bond discount ( 5,857,763 ) ( 7,406,126 ) 1,548,363 ( 20.9% ) Net Water Revenue Bond debt 276,727, ,713,874 ( 986,637 )( 0.4% ) Pennvest Notes Payable 9,707,132 10,360,262 ( 653,130 )( 6.3% ) Millcreek Township note payable 9,000,000 10,000,000 ( 1,000,000 )( 10.0% ) $ 295,434,369 $ 298,074,136 ( $ 2,639,767 ) ( 0.9% ) BUDGETARY ANALYSIS The Authority has no legally binding budget commitment. However, as an operational management tool the Authority adopts an annual budget. The Authority s appointed officials consider many factors when setting the rates and fees that will be charged for its services. Several of these factors are the economy, the future mix of service customers and anticipated capital improvements to the water system. 13

18 Erie City Water Authority (aka Erie Water Works) MANAGEMENT DISCUSSION AND ANALYSIS (Unaudited) CURRENTLY KNOWN FACTS, DECISIONS, OR CONDITIONS The Authority s Board consider numerous factors when approving its annual operating budget. Water rates are generally established for five year periods. The rates are set so as to ensure servicing of current debt obligations, servicing any additional debt incurred during the rate period, and generate a responsible operating surplus to maintain an efficient and modern water system. CONTACTING THE AUTHORITY S FINANCIAL MANAGEMENT This financial report is designed to provide a general overview of the Authority s finances and to show the Authority s accountability for the money it receives. If you have questions about this report or need additional financial information, contact the Chief Executive Officer at Erie Water Works, 340 West Bayfront Parkway, Erie, Pennsylvania

19 NOTES TO FINANCIAL STATEMENTS

20 NOTES TO FINANCIAL STATEMENTS NOTE A BACKGROUND, OPERATIONS, GOVERNANCE AND REPORTING ENTITY 1. Background The Erie City Water Authority ("Authority") was created by the City of Erie ( City ) and incorporated under the Commonwealth of Pennsylvania Municipal Authorities Act of 1945, Act of May 2, 1945, P.L. 382, as amended and supplemented, and the City of Erie Official Ordinance No , as amended and supplemented. The purpose of the Authority as stated in the Ordinance is "To acquire, hold, construct, improve, maintain and operate, own, lease, either in the capacity of lessor or lessee, all facilities necessary or incidental therefore for the operation of a water works, water supply system and/or water distribution system in the City of Erie and its surrounding environs within the County of Erie, Pennsylvania.". The Authority operates as an independent entity from the City of Erie. The City s Mayor and City Council appoint the Authority s Board of Directors. The Authority has the independent ability to borrow funds and set water rate charges. The Authority s economic relationship to the City is that of lessee lessor and receives no direct funding from the City. The basic operations of the Authority are financed by water usage charges to residents of Erie County. Improvements to the Water System and certain other major operating expenses (i.e., lease payments) are financed through the periodic issuance of water revenue bonds and obtaining Commonwealth of Pennsylvania, Pennsylvania Infrastructure Investment Authority ("Pennvest") preferred rate loans. 2. Operation of Water System Pursuant to a lease agreement ("Lease") dated April 1, 1991, as amended, the Authority agreed to lease and operate the Water System from the City effective January 1, The lease has a term of twenty five years beginning January 1, The lease requires the following commitments by the Authority: (a) payment of certain minimum annual lease payments (Note J); (b) maintenance of annual operating and capital improvement budgets; (c) notification to the City of Water System improvements or repairs exceeding $1,000,000; (d) the assumption of a certain Consent Decree entered by the Commonwealth Court of Pennsylvania, by order dated November 30, 1989; (e) the assumption of certain City debt applicable to the Water System existing at the date of closing; (f) maintenance of certain annual revenue coverage ratios relating to debt service and capital improvements; (g) the assumption of all obligations related to a certain Order entered September 20, 1984, by the Pennsylvania Public Utility Commission relating to certain Water System improvements. During 2008, 2004 and 2001 the Authority and the City negotiated extensions to the original 1991 lease. The agreements extend the original lease through December 31, 2050 (including renewal options). The lease extensions include new provisions relating to the maintenance of rates for limited periods and reductions of certain rates. The extension agreement retains all other provisions of the original lease agreement. Under the terms of the lease, the existing Water System assets at commencement of the lease (January 1, 1992) remained the property of the City and are not included in the Authority's financial statements. Any system improvements or other capital purchases made by the Authority after 15

21 NOTES TO FINANCIAL STATEMENTS NOTE A BACKGROUND, OPERATIONS, GOVERNANCE AND REPORTING ENTITY [continued] 2. Operation of Water System [continued] commencement of the lease (January 01, 1992) are the property of the Authority, and are reflected in these financial statements. The Water System, including all improvements made by the Authority, reverts back to the City at the expiration of the Lease. 3. Governance The Authority is governed by a Board of Directors consisting of nine (9) principal members. The Board is composed of six (6) residents of the City of Erie ( City resident ), and three (3) residents of any other municipalities which is within the Authority s water supply distribution service area ( non City resident ). All members of the Board are appointed by the Council of the City of Erie. Four (4) of the six (6) City resident members are appointed directly by the Council of the City of Erie. One (1) of the six (6) City resident members shall be appointed only upon the recommendation of the Mayor of the City. One (1) of the three (3) non City resident members shall be appointed only upon the recommendation of the Mayor of the City and shall be selected from a list of five (5) qualified nominees provided by the governing bodies of municipalities within Authority s water supply distribution service area. The remaining two (2) of three (3) non City resident members shall be appointed by the Council of the City of Erie after consideration of a list of five (5) qualified non binding nominees provided by the governing bodies of municipalities within Authority s water supply distribution service area. 4. Reporting Entity A financial reporting entity consists of a primary government and its component units. The criteria used to determine whether organizations are to be included as component units within the Authority s reporting entity are as follows: The Authority holds the corporate powers of the organization, and The Authority appoints a voting majority of the organization s board, and The Authority is able to impose its will on the organization, or The organization has the potential to impose a financial burden on, or provide a financial benefit to the Authority, or It would be misleading to exclude the organization from the Authority s financial statements Based on the application of the above criteria the Authority has no component units. Additionally, the Authority is not considered to be a component unit of the City as the City is not able to impose its will on the Authority, and the Authority does not impose a financial burden on or provide a financial benefit to the City. NOTE B SUMMARY OF ACCOUNTING POLICIES A summary of the significant accounting policies consistently applied in the preparation of the accompanying financial statements follows: 16

22 NOTES TO FINANCIAL STATEMENTS NOTE B SUMMARY OF ACCOUNTING POLICIES [continued] 1. Implementation of New Accounting Standards During 2016, the Authority adopted GASB issued Statement No. 72 Fair Value Measurement and Application, and GASB issued Statement No. 76 The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments, effective for reporting periods ending December 31, During 2015, the Authority adopted GASB issued Statement No. 68 Accounting and Financial Reporting for Pensions An Amendment to GASB Statement No. 27, effective for reporting periods beginning on or after June 15, GASB Statement No. 68 established standards of accounting and financial reporting for defined benefit and defined contribution pension plans provided to employees of state and local governmental employers. This statement also requires more extensive note disclosures and required supplementary information, including disclosing descriptive information about the types of benefits provided, how contributions to the pension plan are determined, and assumptions and methods used to calculate the pension liability. As a result of adopting this Statement, in 2015 the Authority recorded a prior period adjustment as required by GASB Statement No. 68, which required the Authority to retroactively recognize deferred outflow and/or inflow for the effect of the net change in the Authority s net pension asset and/or liability and difference during the measurement period between the Authority s contributions and its contributions to the pension system not included in pension expense. Also included in deferred outflows, are the Authority s contributions to the pension system subsequent to the measurement date. The Authority will evaluate all future pronouncements that may have an impact on its financial statements and will implement them as applicable and when material. 2. Budgets and Budgetary Process The Authority adopts annual operating and capital budgets. The Authority utilizes the budget as a management tool to control the overall operations of the Authority. The Authority is under no obligation to adopt a legal budget and, therefore, account level expenditures may exceed budget. The Authority s budget is adopted on the same basis of accounting as used in these financial statements except the Authority does not budget depreciation expense. The Authority budgets depreciation as an amount representing budgeted capital expenditures for the year, and not a provision for depreciation on capital expenditures. 3. Accounting Method The Authority's financial statements are prepared using the accrual basis in accordance with accounting principles generally accepted (GAAP) in the United States of America for public authorities. The Governmental Accounting Standards Board (GASB) is the accepted standard setting body for establishing governmental accounting and financial reporting principles. In accordance with the provisions of GASB Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre November 30, 1989 FASB and AICPA Pronouncements, the Authority will not apply Financial Accounting Standards Board statements and interpretations issued after November 30, The accounting and financial reporting treatment applied to the Authority is determined by its 17