CITY OF FLORENCE, ALABAMA ELECTRICITY, GAS, AND WATER AND WASTEWATER DEPARTMENTS. FINANCIAL STATEMENTS JUNE 30, 2010 and 2009

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1 ELECTRICITY, GAS, AND WATER AND WASTEWATER DEPARTMENTS FINANCIAL STATEMENTS JUNE 30, 2010 and 2009

2 ELECTRICITY, GAS, AND WATER AND WASTEWATER DEPARTMENTS TABLE OF CONTENTS Independent Auditor s Report 1 PAGE Management Discussion and Analysis 2 13 Financial Statements: Electricity Department Balance Sheets 14 Statements of Revenues, Expenses, and Changes in Fund Net Assets 15 Statements of Cash Flows Gas Department Balance Sheets 18 Statements of Revenues, Expenses, and Changes in Fund Net Assets 19 Statements of Cash Flows Water and Wastewater Department Balance Sheets 22 Statements of Revenues, Expenses, and Changes in Fund Net Assets 23 Statements of Cash Flows Notes to Financial Statements Required Supplementary Information: Electricity Department Schedule of Revenues, Expenses, and Changes in Fund Net Assets Budget and Actual (GAAP Budgetary Basis) 47 Gas Department Schedule of Revenues, Expenses, and Changes in Fund Net Assets Budget and Actual (GAAP Budgetary Basis) 48 Water and Wastewater Department Schedule of Revenues, Expenses, and Changes in Fund Net Assets Budget and Actual (GAAP Budgetary Basis) 49 Schedules of Funding Progress 50 Supplementary Schedules: Graphical Representation Source of Funds 51 Use of Funds 52 Electricity Department Schedule of Utility Plant in Service and Accumulated Depreciation 53 Gas Department Schedule of Utility Plant in Service and Accumulated Depreciation 54 Water and Wastewater Department Schedule of Revenues and Expenses Killen System 55 Schedule of Utility Plant in Service and Accumulated Depreciation 56

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4 ELECTRICITY, GAS, AND WATER AND WASTEWATER DEPARTMENTS MANAGEMENT S DISCUSSION AND ANALYSIS FISCAL YEAR 2010 FINANCIAL HIGHLIGHTS The individual enterprise funds experienced the following changes in net assets: Electricity increased $4.1 million or 6%; Gas increased $1.5 million or 4%; Water and Wastewater increased $2.6 million or 4%. The individual enterprise funds experienced the following changes in net utility plant: Electricity decreased $.2 million or.3%; Gas decreased $.2 million or.8%; Water and Wastewater decreased $1.2 million or 1%. The individual enterprise funds experienced the following changes in operating revenues: Electricity decreased $6.8 million or 6%; Gas decreased $2.8 million or 11%; Water and Wastewater increased $36,000 or.2%. The individual enterprise funds experienced the following changes in operating expenses: Electricity decreased $8.2 million or 7%; Gas decreased $3.5 million or 14%; Water and Wastewater decreased $45,000 or.4%. The individual enterprise funds experienced the following changes in nonoperating revenues: Electricity increased about $9,500 or 4%; Gas increased about $3,000 or 2%; Water and Wastewater decreased about $130,000 or 68%. The individual enterprise funds experienced the following changes in nonoperating expenses: Electricity decreased $122,000 or 30%; Gas increased about $54,000 or 31%; Water and Wastewater decreased $2,000 or.1%. OVERVIEW OF THE FINANCIAL STATEMENTS Florence Utilities is accounted for through three separate enterprise funds Electricity, Natural Gas, and Water and Wastewater. This annual report contains the financial statements of each of these funds. This annual report consists of three parts: Management s Discussion and Analysis, Financial Statements, and Supplementary Information. The financial statements also include notes that explain in more detail some of the information in the financial statements. REQUIRED FINANCIAL STATEMENTS The financial statements of Florence Utilities report information about Florence Utilities using accounting methods similar to those used by private sector companies. These statements offer short-term and long-term financial information about its activities. Page 2

5 The Balance Sheet includes all of each fund s assets and liabilities and provides information about the nature and amounts of investments in resources (assets) and the obligations to Florence Utilities creditors (liabilities). It also provides the basis for computing rate of return, evaluating the capital structure of Florence Utilities, and assessing the liquidity and financial flexibility of Florence Utilities. All of the current year s revenues and expenses are accounted for in the Statement of Revenues, Expenses, and Changes in Fund Net Assets. This statement measures the success of Florence Utilities operations over the past year and can be used to determine whether Florence Utilities has successfully recovered all its costs through its user fees and other charges, profitability, and credit worthiness. The other required financial statement is the Statement of Cash Flows. The primary purpose of this statement is to provide information about Florence Utilities cash receipts and cash payments during the reporting period. This statement reports cash receipts, cash payments, and net changes in cash resulting from operations, investing, and financing activities; and provides answers to such questions as where did the cash come from, what was cash used for, and what was the change in cash balance during the reporting period. FINANCIAL ANALYSIS OF FLORENCE UTILITIES One of the most important questions asked about Florence Utilities finances is that Is Florence Utilities, as a whole, better off or worse off as a result of the year s activities? The Balance Sheet and the Statement of Revenues, Expenses, and Changes in Fund Net Assets report information about Florence Utilities activities in a way that will help answer this question. These two statements report the net assets of each fund and the changes in them. You can think of each fund s net assets the difference between assets and liabilities as one way to measure financial health or financial position. Over time, increases or decreases in net assets are one indicator of whether its financial health is improving or deteriorating. However, you will also need to consider other non-financial factors such as the changes in economic conditions, weather, customer growth, and regulatory and legislative mandates. Electricity Department The Electricity Department s net assets increased from last year by $4,085,698 or about 6%. The summaries below focus on the Electricity Department s net assets and changes in net assets during the years presented. Electricity Department Net Assets Increase / (Decrease) FY 2010 FY 2009 Dollars Percent Current Assets $ 29,115,178 $ 24,626,092 $ 4,489, % Capital Assets, Net 69,902,278 70,089,226 (186,948) -0.27% Other Noncurrent Assets 7,516,094 6,425,941 1,090, % Total Assets $ 106,533,550 $ 101,141,259 $ 5,392, % Current Liabilities $ 22,131,529 $ 21,376,576 $ 754, % Noncurrent Liabilities 13,219,387 12,667, , % Total Liabilities $ 35,350,916 $ 34,044,323 $ 1,306, % Invested in Capital Assets, $ 63,196,791 $ 63,149,796 $ 46, % Net of Related Debt Restricted 990,244 1,011,674 (21,430) -2.12% Unrestricted 6,995,599 2,935,466 4,060, % Total Net Assets $ 71,182,634 $ 67,096,936 $ 4,085, % Page 3

6 Changes in the Electricity Department s net assets can be determined by reviewing the following condensed Statement of Revenues, Expenses, and Changes in Fund Net Assets for the years presented. As the table below indicates, operating revenues decreased approximately $6.8 million or about 6% from FY Prior to October 2009, TVA had implemented a quarterly fuel cost adjustment. However, in October 2009, TVA implemented a plan of monthly fuel cost adjustments. At that same time, TVA raised its rates to the distributors. During FY 2010, TVA had ten rate changes to its distributors under its fuel cost adjustment provisions. The effective dates were July 2009, October 2009, November 2009, December 2009, January 2010, February 2010, March 2010, April 2010, May 2010, and the last one effective June Florence Utilities passed these rate changes along to our customers. Our corresponding rate changes were revenue neutral for us. In November 2008, we had a rate increase for our benefit. In FY 2010, we experienced approximately a 3% increase in kwh sold over that for FY The depreciation expense is substantially higher in FY 2010 over what it was in FY In FY 2009, depreciation expense was lower than normal due to a reduction related to the change in the method of accounting for depreciation on General Plant assets. The Electricity Department continues to experience very low interest revenues caused by very low interest rates. The Electricity Department experienced a decrease in nonoperating expenses by $122,386 or about 30%, primarily interest expense. Electricity Department Statements of Revenues, Expenses, and Changes in Fund Net Assets Increase / (Decrease) FY 2010 FY 2009 Dollars Percent Operating Revenues $ 111,296,454 $ 118,087,893 $ (6,791,439) -5.75% Operating Expenses Cost of Sales $ 87,239,996 $ 96,575,631 $ (9,335,635) -9.67% Operations 8,258,922 8,343,588 (84,666) -1.01% Maintenance 4,244,630 4,450,667 (206,037) -4.63% Depreciation 4,342,399 3,022,170 1,320, % Taxes and Tax Equivalents 3,070,324 2,939, , % Total Operating Expenses $ 107,156,271 $ 115,331,251 $ (8,174,980) -7.09% Operating Income $ 4,140,183 $ 2,756,642 $ 1,383, % Nonoperating Revenues (Expenses) Nonoperating Revenues $ 229,698 $ 220,185 $ 9, % Nonoperating Expenses (284,183) (406,569) 122, % Total Nonoperating Revenues (Exp) $ (54,485) $ (186,384) $ 131, % Change in Net Assets $ 4,085,698 $ 2,570,258 $ 1,515, % Total Net Assets - Beginning 67,096,936 64,526,678 2,570, % Total Net Assets - Ending $ 71,182,634 $ 67,096,936 $ 4,085, % Page 4

7 Gas Department The Gas Department s net assets increased from last year by $1,515,355 or about 4%. The summaries below focus on the Gas Department s net assets and changes in net assets during the years presented. Gas Department Net Assets Increase / (Decrease) FY 2010 FY 2009 Dollars Percent Current Assets $ 10,899,434 $ 11,800,984 $ (901,550) -7.64% Capital Assets, Net 31,945,854 32,191,818 (245,964) -0.76% Other Noncurrent Assets ,115 (564,409) % Total Assets $ 42,845,994 $ 44,557,917 $ (1,711,923) -3.84% Current Liabilities $ 1,373,500 $ 1,685,518 $ (312,018) % Noncurrent Liabilities 311,159 3,226,419 (2,915,260) % Total Liabilities $ 1,684,659 $ 4,911,937 $ (3,227,278) % Invested in Capital Assets, $ 31,945,854 $ 28,962,059 $ 2,983, % Net of Related Debt Restricted - 496,632 (496,632) % Unrestricted 9,215,481 10,187,289 (971,808) -9.54% Total Net Assets $ 41,161,335 $ 39,645,980 $ 1,515, % Changes in the Gas Department s net assets can be determined by reviewing the following condensed Statement of Revenues, Expenses, and Changes in Fund Net Assets for the years presented. As the following table indicates, operating revenues decreased approximately $2.8 million or about 11% from FY The Gas Department had two general rate decreases in FY 2010 effective January 2010 and February These rate changes reflected the decreasing costs in the natural gas market. The Gas Department experienced an approximate 9.5% increase in overall sales volume in FY 2010 over FY Cost of sales decreased by $3.4 million or about 20% due to decreased gas prices. The Gas Department experienced an increase in nonoperating revenues of $2,805 or about 2%. The Gas Department experienced an increase in nonoperating expenses of $54,240 or 31%. Page 5

8 Gas Department Statements of Revenues, Expenses, and Changes in Fund Net Assets Increase / (Decrease) FY 2010 FY 2009 Dollars Percent Operating Revenues $ 22,947,041 $ 25,771,240 $ (2,824,199) % Operating Expenses Cost of Sales $ 14,232,153 $ 17,678,749 $ (3,446,596) % Operations 2,727,285 2,690,227 37, % Maintenance 1,520,338 1,502,303 18, % Depreciation and Amortization 1,327,255 1,397,062 (69,807) -5.00% Taxes and Tax Equivalents 1,522,031 1,557,710 (35,679) -2.29% Total Operating Expenses $ 21,329,062 $ 24,826,051 $ (3,496,989) % Operating Income $ 1,617,979 $ 945,189 $ 672, % Nonoperating Revenues (Expenses) Nonoperating Revenues $ 126,176 $ 123,371 $ 2, % Nonoperating Expenses (228,800) (174,560) (54,240) 31.07% Total Nonoperating Revenues (Exp) $ (102,624) $ (51,189) $ (51,435) % Change in Net Assets $ 1,515,355 $ 894,000 $ 621, % Total Net Assets - Beginning 39,645,980 38,751, , % Total Net Assets - Ending $ 41,161,335 $ 39,645,980 $ 1,515, % Page 6

9 Water and Wastewater Department The Water and Wastewater Department s net assets increased from last year by $2,576,236 or about 4%. The summaries below focus on the Water and Wastewater Department s net assets and changes in net assets during the years presented. Water and Wastewater Department Net Assets Increase / (Decrease) FY 2010 FY 2009 Dollars Percent Current Assets $ 8,706,400 $ 9,546,567 $ (840,167) -8.80% Capital Assets, Net 100,469, ,660,947 (1,191,843) -1.17% Other Noncurrent Assets 5,713,456 5,631,471 81, % Total Assets $ 114,888,960 $ 116,838,985 $ (1,950,025) -1.67% Current Liabilities $ 6,277,652 $ 6,390,143 $ (112,491) -1.76% Noncurrent Liabilities 46,298,538 50,712,308 (4,413,770) -8.70% Total Liabilities $ 52,576,190 $ 57,102,451 $ (4,526,261) -7.93% Invested in Capital Assets, $ 49,919,429 $ 46,863,914 $ 3,055, % Net of Related Debt Restricted 5,316,639 5,188, , % Unrestricted 7,076,702 7,683,995 (607,293) -7.90% Total Net Assets $ 62,312,770 $ 59,736,534 $ 2,576, % Changes in the Water and Wastewater Department s net assets can be determined by reviewing the following condensed Statement of Revenues, Expenses, and Changes in Fund Net Assets for the years presented. As the following table indicates, operating revenues increased approximately $36,000 or about.2% from FY 2009 revenues. The small increase in operating revenues, despite a rate increase, was largely due to decreased residential water sales. Operating expenses decreased by $45,000 or about.4% due to close monitoring of expenses. The Water and Wastewater Department experienced a decrease in nonoperating revenues of $129,861 or 68% due to declining interest income. The Water and Wastewater Department experienced a slight decrease in nonoperating expenses of $1,898, or.1%. Page 7

10 Water and Wastewater Department Statements of Revenues, Expenses, and Changes in Fund Net Assets Increase / (Decrease) FY 2010 FY 2009 Dollars Percent Operating Revenues $ 17,096,627 $ 17,060,717 $ 35, % Operating Expenses Water Treatment and Pumping $ 2,431,728 $ 2,500,175 $ (68,447) -2.74% Sewage Disposal 2,085,509 2,163,686 (78,177) -3.61% Transmission and Distribution 1,171,219 1,218,632 (47,413) -3.89% Accounting and Collections 1,094,583 1,044,434 50, % Administrative and General 1,494,688 1,534,849 (40,161) -2.62% Depreciation 2,776,120 2,654, , % Taxes and Tax Equivalents 1,462,860 1,445,953 16, % Total Operating Expenses $ 12,516,707 $ 12,562,255 $ (45,548) -0.36% Operating Income $ 4,579,920 $ 4,498,462 $ 81, % Nonoperating Revenues (Expenses) Nonoperating Revenues $ 60,384 $ 190,245 $ (129,861) % Nonoperating Expenses (2,064,068) (2,065,966) 1, % Total Nonoperating Revenues (Exp) $ (2,003,684) $ (1,875,721) $ (127,963) 6.82% Change in Net Assets $ 2,576,236 $ 2,622,741 $ (46,505) -1.77% Total Net Assets - Beginning 59,736,534 57,113,793 2,622, % Total Net Assets - Ending $ 62,312,770 $ 59,736,534 $ 2,576, % BUDGETARY HIGHLIGHTS As required, the City Council adopts a budget for each enterprise fund comprising the Florence Utilities. The FY 2010 original budgets for the Gas and Water and Wastewater Departments were adopted on September 1, The original budget for the Electricity Department was adopted on September 15, The budgets for the Electricity Department, Gas Department, and the Water and Wastewater Department were amended on July 20, A budget comparison statement is prepared monthly for each department for internal use and is distributed to elected officials and the appropriate management personnel. A budget comparison report is included for the Electricity Department, Gas Department, and the Water and Wastewater Department in the Required Supplementary Information Section of this annual report. Following is a summarized report and brief explanation of highlights. Page 8

11 Electricity Department Electricity Department Schedule of Revenues, Expenses, and Changes in Fund Net Assets Budget and Actual (GAAP Budgetary Basis) For Year Ended June 30, 2010 Final Variance Budget Actual Dollars Percent Operating Revenues $ 110,351,000 $ 111,296,454 $ 945, % Operating Expenses 107,449, ,156, , % Operating Income $ 2,901,100 $ 4,140,183 $ 1,239, % Nonoperating Revenues (Expenses) (74,600) (54,485) 20, % Change in Net Assets $ 2,826,500 $ 4,085,698 $ 1,259, % As the above budget report shows, the Electricity Department exceeded the budgeted Change in Net Assets by $1,259,198. This is approximately 1.1% of budgeted operating revenues. As you can see on the budget schedule in the required supplementary information, the sales of electricity to residential customers accounted for most of the budget variance amount. The remaining total variance is due to smaller variances, both positive and negative, over a large number of accounts. Gas Department Gas Department Schedule of Revenues, Expenses, and Changes in Fund Net Assets Budget and Actual (GAAP Budgetary Basis) For Year Ended June 30, 2010 Final Variance Budget Actual Dollars Percent Operating Revenues $ 22,956,600 $ 22,947,041 $ (9,559) -0.04% Operating Expenses 21,538,400 21,329, , % Operating Income $ 1,418,200 $ 1,617,979 $ 199, % Nonoperating Revenues (Expenses) (131,700) (102,624) 29, % Change in Net Assets $ 1,286,500 $ 1,515,355 $ 228, % The Gas Department exceeded budgeted Change in Net Assets by $228,855, or approximately 1% of budgeted operating revenues. As you can see on the budget schedule in the required supplementary information, the total variance is accounted for by a combination for positive and negative variances and not due to one large variance. Page 9

12 Water and Wastewater Department Water and Wastewater Department Schedule of Revenues, Expenses, and Changes in Fund Net Assets Budget and Actual (GAAP Budgetary Basis) For Year Ended June 30, 2010 Final Variance Budget Actual Dollars Percent Operating Revenues $ 17,110,000 $ 17,096,627 $ (13,373) -0.08% Operating Expenses 12,426,050 12,516,707 (90,657) -0.73% Operating Income $ 4,683,950 $ 4,579,920 $ (104,030) -2.22% Nonoperating Revenues (Expenses) (2,042,564) (2,003,684) 38, % Change in Net Assets $ 2,641,386 $ 2,576,236 $ (65,150) -2.47% The Water and Wastewater Department fell short of the budgeted Change in Net Assets by $65,150. This represents about.4% of final budgeted operating revenues. Depreciation expense exceeded the budget amount more than normal because a significant amount of construction projects were placed in service during the year and depreciation expense on those projects began during the year. CAPITAL ASSETS AND DEBT ADMINISTRATION Capital Assets At the end of FY 2010, capital assets comprised the majority of each fund s assets. The following are summaries highlighting each fund s changes in capital assets. Information that is more detailed is presented for each department in the supplementary schedules section. Electricity Department Electricity Department Capital Assets, Net FY 2010 Increase / (Decrease) FY 2010 FY 2009 Dollars Percent Utility Plant in Service (at Cost) $ 139,892,178 $ 136,783,179 $ 3,108, % Construction in Progress 1,376,323 1,941,365 (565,042) % Less: Accumulated Depreciation (71,366,223) (68,635,318) (2,730,905) 3.98% Net Utility Plant $ 69,902,278 $ 70,089,226 $ (186,948) -0.27% As the above table shows, the Electricity Department experienced a.27% decrease in net utility plant. The department plans to finance capital expenditures in FY 2011 through cash generated from operations. Page 10

13 Gas Department Gas Department Capital Assets, Net FY 2010 Increase / (Decrease) FY 2010 FY 2009 Dollars Percent Utility Plant in Service (at Cost) $ 51,507,281 $ 50,791,714 $ 715, % Acquisition Adjustment (net of amortization) 222, ,769 (10,661) -4.58% Construction in Progress 44, ,382 (141,446) % Less: Accumulated Depreciation (19,828,471) (19,019,047) (809,424) 4.26% Net Utility Plant $ 31,945,854 $ 32,191,818 $ (245,964) -0.76% As the above table shows, the Gas Department decreased net utility plant by.76%. The department plans to finance capital expenditures in FY 2011 through cash generated from operations. Water and Wastewater Department Water and Wastewater Department Capital Assets, Net FY 2010 Increase / (Decrease) FY 2010 FY 2009 Dollars Percent Utility Plant in Service (at Cost) $ 143,132,371 $ 133,045,327 $ 10,087, % Construction in Progress 69,299 8,746,437 (8,677,138) % Less: Accumulated Depreciation (42,732,566) (40,130,817) (2,601,749) 6.48% Net Utility Plant $ 100,469,104 $ 101,660,947 $ (1,191,843) -1.17% As the above table shows, the Water and Wastewater Department decreased net utility plant by 1.17%. In FY 2010, the Department completed a significant amount of construction projects and placed them in service, particularly in the wastewater area. The department plans to finance capital expenditures in FY 2011 with cash generated from operations and the remaining balance of the 2007 SRF Warrants. Page 11

14 Long-term Debt During FY 2010, each department had outstanding revenue warrants. The amount and discussion of these issues are discussed more fully in the notes to financial statements. Electricity Department The Electricity Department has two warrant issues as described in the notes to financial statements, outstanding at year-end. The Electric Revenue Refunding Warrants, Series 2009 interest rates range from 1.50% to 3.65%. It was issued with an underlying A1 and AA- by Moody s and Standard & Poor s, respectively. This issue requires that the Electricity Department s Annual Net Income (as defined in the indenture) be at least 1.25 times the maximum Annual Debt Service Requirement. For FY 2010, the Electricity Department exceeded that requirement at about times. The other issue outstanding is a line of credit warrant with CB&S Bank, the Electric Taxable Revenue Warrant, Series 2008, issued in April At year-end, there was no outstanding balance on it. The Department did not utilize this line of credit during FY This line of credit is available until January This warrant has an interest rate of 4.99%. Gas Department The Gas Department has one outstanding warrant issues at year-end as described in the notes to financial statements. The Department redeemed the Natural Gas Revenue Warrant, Series 1998 early on June 1, The scheduled last payment date for the issue was June 1, The issue outstanding at year-end is a line of credit warrant with CB&S Bank, the Natural Gas Taxable Revenue Warrant, Series 2008, issued April At year-end, there was no outstanding balance on it. The Department did not utilize this line of credit during FY This line of credit is available until July This warrant has an interest rate of 4.99%. Water and Wastewater Department The Water and Wastewater Department has seven warrant issues outstanding at year-end as described in the notes to financial statements. These issues are (1) Water and Sewer Revenue Warrants, Series 1995, interest rates ranging from 3.5% to 5.625%, (2) Water and Sewer Revenue Warrants, SRF Series 1998, interest rate 3.75%, (3) Water and Sewer Revenue Warrants, SRF Series 1999, interest rate 3.5%, (4) Water and Sewer Revenue Warrants, SRF Series 1999B, interest rate 3.5%, (5) Water and Sewer Revenue Warrants, SRF Series 2000, interest rate 3.85%, (6) Water and Sewer Revenue Warrants, SRF Series 2006, interest rate 3.25%, and (7) Water and Sewer Revenue Warrants, SRF Series 2007, interest rate 3.5%. The SRF warrants are issued through a federally funded (EPA) loan program to states for wastewater improvements. In Alabama, this program is administered by ADEM. The SRF series warrants are financing massive renovations of portions of our wastewater system. At year-end, approximately $2.4 million remains available of the 2007 issue. The 1995 Series is insured by AMBAC. The department received an A rating from Moody s at its issue. The 1995 issue requires that the Water and Wastewater Department s Annual Net Income (as defined in the indenture) be at least 1.25 times the maximum Annual Debt Service Requirement. For FY 2010, the Water and Wastewater Department exceeded that requirement at about 1.32 times. Subsequent to year-end, the Department, in connection with the Alabama Water Pollution Control Authority s refinancing of some of its bonds, refinanced the Water and Sewer Revenue Warrants, SRF Series 1998, 1999, 1999B, and 2000 in order to benefit from a lower interest rate. The payment dates and final maturity remained unchanged. The present value at 2.503% of the savings on the Series 1998, 1999, and 1999B refinancing was $805,931. The present value at 3.157% of the savings on the Series 2000 warrant refinancing was $488,696. Page 12

15 ECONOMIC FACTORS AND NEXT YEAR S BUDGET AND RATES The geographic area served by Florence Utilities is facing an improving economic environment. The Florence MSA s unemployment rate for September 2010 was 8.7% as compared to 10.6% for September The State of Alabama s unemployment rates were 9.1% for September 2010, and 10.7% for September In addition to the economic environment, the weather is an important factor in determining utility sales. Although it is impossible to predict the weather in the upcoming year, sales in kwh for FY 2011 through September for electricity have increased from the same number through the same time last year by 12%. Sales in Dth to commercial and industrial natural gas customers for the period from July 2010 through September 2010 as compared to sales for the same period in the previous fiscal year have decreased approximately 6%. FY 2011 sales revenues from water and wastewater operations through September have increased 3% over the same period in FY The City Council adopted the Gas Department s and the Water and Wastewater Department s FY 2011 budgets on June 15, The City Council adopted the Electricity Department s FY 2010 budget on September 7, All three budgets were amended on October 5, The City s power contract with TVA provides for a monthly fuel cost adjustment (FCA) on sales to its distributors. In FY 2011, the FCA has resulted in rate increases to our customers effective July 2010, August 2010, and September Florence Utilities anticipates passing any rate increases or decreases caused by TVA action on to its customers. The Gas Department s rate ordinance allows for gas increases/decreases without further City Council action. The Department implemented a slight rate increase in July 2010 and August The volatility of natural gas makes this ability for quick rate action important for the Department s financial health. The City Council approved a rate ordinance providing for water and wastewater rate increases effective July 2007, July 2008, July 2009, and July 2010 to fund the financing of repairs/improvements to the sewer collection system. The City received this financing from the State Revolving Fund. CONTACTING FLORENCE UTILITIES FINANCIAL MANAGER This financial report is designed to provide the Electricity Department s, Gas Department s, and Water and Wastewater Department s ratepayers and creditors with a general overview of their finances and to demonstrate Florence Utilities accountability for the money it receives. A limited number of prior years audited financial statements are available online at the Florence Utilities website at and the Electronic Municipal Market Access (EMMA) website of the Municipal Securities Rulemaking Board. If you have questions about this report or need additional financial information, contact the Controller of Utilities, Florence Utilities, P.O. Box 877, Florence, AL Page 13

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17 ELECTRICITY DEPARTMENT BALANCE SHEETS JUNE 30, 2010 and 2009 ASSETS Current assets: Cash and cash equivalents $ 9,030,571 $ 5,779,095 Receivables (net) 12,278,805 10,699,254 Inventories 1,577,998 1,649,707 Prepaid expenses 6,227,804 6,498,036 Total current assets $ 29,115,178 $ 24,626,092 Noncurrent assets: Restricted cash and cash equivalents $ 990,244 $ 1,011,674 Capital assets: Utility plant in service (at cost) 139,892, ,783,179 Construction in progress 1,376,323 1,941,365 Less: accumulated depreciation 71,366,223 68,635,318 Receivables from customers for conservation loans 6,155,895 4,929,128 Prepaid purchased power-tva DEU program 258, ,350 Unamortized debt issuance costs 111,205 96,789 Total noncurrent assets $ 77,418,372 $ 76,515,167 Total assets $ 106,533,550 $ 101,141,259

18 LIABILITIES Current liabilities: Accounts payable $ 14,522,651 $ 14,737,372 Customer deposits 6,022,072 5,725,770 Accrued annual and sick leave 543, ,919 Accrued taxes and expenses 322,222 73,703 Deferred interest income-tva DEU program 29,600 29,600 Total current liabilities $ 21,439,967 $ 21,110,364 Liabilities payable from restricted assets: Revenue warrants payable within one year $ 705,000 $ 265,000 Unamortized debt discount (4,660) (4,660) Unamortized deferred loss on early retirement of debt (26,397) (26,397) Accrued interest 17,619 32,269 Total liabilities payable from restricted assets $ 691,562 $ 266,212 Noncurrent liabilities: Revenue warrants payable after one year $ 6,280,000 $ 6,985,000 Unamortized debt discount (37,275) (41,935) Unamortized deferred loss on early retirement of debt (211,181) (237,578) Advances from TVA for conservation loans 6,313,961 5,058,032 Accrued annual and sick leave 815, ,878 Deferred interest income-tva DEU program 58,750 88,350 Total noncurrent liabilities $ 13,219,387 $ 12,667,747 Total liabilities $ 35,350,916 $ 34,044,323 NET ASSETS Invested in capital assets, net of related debt $ 63,196,791 $ 63,149,796 Restricted for debt service 990,244 1,011,674 Unrestricted 6,995,599 2,935,466 Total net assets $ 71,182,634 $ 67,096,936 Total liabilities and net assets $ 106,533,550 $ 101,141,259 The accompanying notes and independent auditor's report are an integral part of these financial statements. Page 14

19 ELECTRICITY DEPARTMENT STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN FUND NET ASSETS FOR THE YEARS ENDED JUNE 30, 2010 and Operating revenues: Electric sales: Residential $ 58,874,931 $ 62,096,112 Small commercial 11,019,013 11,476,260 Large commercial 36,689,892 40,145,131 Public street and highway lighting 2,077,448 2,166,369 Forfeited discounts 992, ,524 Rents from electric property 1,005, ,979 Other operating revenues 637, ,518 Total operating revenues $ 111,296,454 $ 118,087,893 Operating expenses: Costs of sales $ 87,239,996 $ 96,575,631 Operations 8,258,922 8,343,588 Maintenance 4,244,630 4,450,667 Depreciation 4,342,399 3,022,170 Taxes and tax equivalents 3,070,324 2,939,195 Total operating expenses $ 107,156,271 $ 115,331,251 Operating income $ 4,140,183 $ 2,756,642 Nonoperating revenues (expenses): Interest revenues $ 51,317 $ 98,152 Merchandising revenues (net of costs) 153, ,033 Miscellaneous nonoperating income 24,646 Interest expense (240,542) (387,232) Amortization of debt discount and costs (43,641) (19,337) Total nonoperating revenues (expenses) $ (54,485) $ (186,384) Change in net assets $ 4,085,698 $ 2,570,258 Total net assets beginning 67,096,936 64,526,678 Total net assets ending $ 71,182,634 $ 67,096,936 The accompanying notes and independent auditor's report are an integral part of these financial statements. Page 15

20 ELECTRICITY DEPARTMENT STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2010 and Cash flows from operating activities: Receipts from customers and users $ 109,895,284 $ 118,203,618 Receipts from interfund services provided 2,412,589 2,263,142 Payments to suppliers (89,738,423) (98,732,733) Payments to employees for services and benefits exclusive of capitalized costs (9,430,938) (9,658,487) Payments for interfund services used (5,088,635) (4,895,827) Net cash provided by operating activities $ 8,049,877 $ 7,179,713 Cash flows from noncapital financing activities: Increase in receivables from customers for conservation loans $ (1,226,767) $ (737,531) Increase in advances from TVA for conservation loans 1,255, ,649 Deferred TVA DEU program (net) 100, ,000 Net cash provided by noncapital financing activities $ 129,162 $ 132,118 Cash flows from capital and related financing activities: Purchase and construction of capital assets (net) $ (4,239,866) $ (4,536,615) Removal costs of retirements of capital assets (276,370) (338,819) Salvage value of retirements of capital assets 63,118 27,711 Proceeds from capital debt 7,250,000 Principal paid on capital debt (265,000) (7,485,000) Interest paid on capital debt (255,192) (387,232) Payment of debt issuance costs (27,000) (211,879) Net cash used by capital and related financing activities $ (5,000,310) $ (5,681,834) Cash flows from investing activities: Interest on investments $ 51,317 $ 98,152 Net cash provided by investing activities $ 51,317 $ 98,152 Net increase in cash and cash equivalents $ 3,230,046 $ 1,728,149 Balances beginning of the year 6,790,769 5,062,620 Balances end of the year $ 10,020,815 $ 6,790,769 Classified as: Current assets $ 9,030,571 $ 5,779,095 Restricted assets 990,244 1,011,674 Totals $ 10,020,815 $ 6,790,769 The accompanying notes and independent auditor's report are an integral part of these financial statements. Page 16

21 ELECTRICITY DEPARTMENT STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2010 and 2009 (Continued) Reconciliation of operating income to net cash provided (used) by operating activities: Operating income $ 4,140,183 $ 2,756,642 Adjustments to reconcile operating income to net cash provided (used) by operating activities: Depreciation $ 4,640,066 $ 3,267,903 Income from merchandising revenues (net of costs) 153, ,033 Miscellaneous nonoperating income 24,646 Change in assets and liabilities: Receivables (net) (1,579,551) (6,307) Inventories 71, ,126 Prepaid expenses 270,232 (116,298) Accounts and other payables 328,857 1,036,614 Total adjustments $ 3,909,694 $ 4,423,071 Net cash provided by operating activities $ 8,049,877 $ 7,179,713 The accompanying notes and independent auditor's report are an integral part of these financial statements. Page 17

22 GAS DEPARTMENT BALANCE SHEETS JUNE 30, 2010 and 2009 ASSETS Current assets: Cash and cash equivalents $ 8,221,806 $ 9,015,947 Accounts receivable (net) 1,077, ,145 Accrued interest receivable 691 2,024 Inventories 1,589,534 1,796,676 Prepaid expenses 9,465 11,192 Total current assets $ 10,899,434 $ 11,800,984 Noncurrent assets: Restricted cash and cash equivalents $ - $ 496,632 Capital assets: Utility plant in service (at cost) 51,507,281 50,791,714 Acquisition adjustment (net of amortization) 222, ,769 Construction in progress 44, ,382 Less: accumulated depreciation 19,828,471 19,019,047 Unamortized debt issuance costs ,483 Total noncurrent assets $ 31,946,560 $ 32,756,933 Total assets $ 42,845,994 $ 44,557,917

23 LIABILITIES Current liabilities: Accounts payable $ 1,070,195 $ 1,102,450 Accrued annual and sick leave 207, ,327 Accrued taxes and expenses 95,866 76,112 Total current liabilities $ 1,373,500 $ 1,374,889 Liabilities payable from restricted assets: Revenue warrants payable within one year $ - $ 300,000 Unamortized debt discount (2,169) Accrued interest 12,798 Total liabilities payable from restricted assets $ - $ 310,629 Noncurrent liabilities: Revenue warrants payable after one year $ $ 2,950,000 Unamortized debt discount (18,072) Accrued annual and sick leave 311, ,491 Total noncurrent liabilities $ 311,159 $ 3,226,419 Total liabilities $ 1,684,659 $ 4,911,937 NET ASSETS Invested in capital assets, net of related debt $ 31,945,854 $ 28,962,059 Restricted for debt service 496,632 Unrestricted 9,215,481 10,187,289 Total net assets $ 41,161,335 $ 39,645,980 Total liabilities and net assets $ 42,845,994 $ 44,557,917 The accompanying notes and independent auditor's report are an integral part of these financial statements. Page 18

24 GAS DEPARTMENT STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN FUND NET ASSETS FOR THE YEARS ENDED JUNE 30, 2010 and Operating revenues: Gas sales: Residential $ 8,192,798 $ 8,672,231 Commercial 4,935,006 5,510,033 Industrial 7,961,194 9,209,872 Resale and transportation 1,662,409 2,180,852 Service fees 83,121 85,892 Forfeited discounts 101,317 99,304 Other operating revenues 11,196 13,056 Total operating revenues $ 22,947,041 $ 25,771,240 Operating expenses: Costs of sales $ 14,232,153 $ 17,678,749 Operations 2,727,285 2,690,227 Maintenance 1,520,338 1,502,303 Depreciation 1,316,594 1,386,401 Amortization of acquisition adjustment 10,661 10,661 Taxes and tax equivalents 1,522,031 1,557,710 Total operating expenses $ 21,329,062 $ 24,826,051 Operating income $ 1,617,979 $ 945,189 Nonoperating revenues (expenses): Interest revenues $ 18,602 $ 92,438 Gain (loss) on disposition of assets 22,096 Miscellaneous nonoperating income 85,478 30,933 Interest expense (140,782) (164,814) Amortization of debt discount and costs (88,018) (9,746) Total nonoperating revenues (expenses) $ (102,624) $ (51,189) Change in net assets $ 1,515,355 $ 894,000 Total net assets beginning 39,645,980 38,751,980 Total net assets ending $ 41,161,335 $ 39,645,980 The accompanying notes and independent auditor's report are an integral part of these financial statements. Page 19

25 GAS DEPARTMENT STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2010 and Cash flows from operating activities: Receipts from customers and users $ 22,940,138 $ 26,633,611 Receipts from interfund services provided 106, ,051 Payments to suppliers (14,640,758) (19,488,490) Payments to employees for services and benefits exclusive of capitalized costs (2,784,920) (2,757,298) Payments for interfund services used (2,468,548) (2,547,500) Net cash provided by operating activities $ 3,152,067 $ 1,976,374 Cash flows from capital and related financing activities: Purchase and construction of capital assets (net) $ (1,039,317) $ (732,303) Proceeds from disposition of assets 27,025 Removal costs of retirements of capital assets (46,903) (55,390) Principal paid on capital debt (3,250,000) (285,000) Interest paid on capital debt (153,580) (165,836) Net cash used by capital and related financing activities $ (4,462,775) $ (1,238,529) Cash flows from investing activities: Interest on investments $ 19,935 $ 97,165 Net cash provided by investing activities $ 19,935 $ 97,165 Net increase (decrease) in cash and cash equivalents $ (1,290,773) $ 835,010 Balances beginning of the year 9,512,579 8,677,569 Balances end of the year $ 8,221,806 $ 9,512,579 Classified as: Current assets $ 8,221,806 $ 9,015,947 Restricted assets 496,632 Totals $ 8,221,806 $ 9,512,579 The accompanying notes and independent auditor's report are an integral part of these financial statements. Page 20

26 GAS DEPARTMENT STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2010 and 2009 (Continued) Reconciliation of operating income to net cash provided (used) by operating activities: Operating income $ 1,617,979 $ 945,189 Adjustments to reconcile operating income to net cash provided (used) by operating activities: Depreciation $ 1,316,594 $ 1,386,401 Amortization of acquisition adjustment 10,661 10,661 Miscellaneous nonoperating income 85,478 30,933 Change in assets and liabilities: Receivables (net) (102,793) 794,503 Inventories 207,142 (429,146) Prepaid expenses 1, Accounts and other payables 15,279 (762,572) Total adjustments $ 1,534,088 $ 1,031,185 Net cash provided by operating activities $ 3,152,067 $ 1,976,374 The accompanying notes and independent auditor's report are an integral part of these financial statements. Page 21

27 WATER AND WASTEWATER DEPARTMENT BALANCE SHEETS JUNE 30, 2010 and 2009 ASSETS Current assets: Cash and cash equivalents $ 6,044,554 $ 7,296,333 Accounts receivable (net) 1,371,838 1,255,069 Accrued interest receivable 3,542 47,228 Inventories 584, ,193 Prepaid expenses 701, ,744 Total current assets $ 8,706,400 $ 9,546,567 Noncurrent assets: Restricted cash and cash equivalents $ 5,316,639 $ 5,188,625 Capital assets: Utility plant in service (at cost) 143,132, ,045,327 Construction in progress 69,299 8,746,437 Less: accumulated depreciation 42,732,566 40,130,817 Unamortized debt issuance costs 396, ,846 Total noncurrent assets $ 106,182,560 $ 107,292,418 Total assets $ 114,888,960 $ 116,838,985

28 LIABILITIES Current liabilities: Accounts payable $ 467,291 $ 689,016 Retainage payable on construction contracts 6, ,907 Accrued annual and sick leave 221, ,981 Accrued taxes and expenses 298, ,251 Total current liabilities $ 993,708 $ 1,241,155 Liabilities payable from restricted assets: Revenue warrants payable within one year $ 4,595,000 $ 4,410,000 Unamortized debt discount (11,804) (11,804) Accrued interest 700, ,792 Total liabilities payable from restricted assets $ 5,283,944 $ 5,148,988 Noncurrent liabilities: Revenue warrants payable after one year $ 45,971,398 $ 50,415,560 Unamortized debt discount (4,919) (16,723) Accrued annual and sick leave 332, ,471 Total noncurrent liabilities $ 46,298,538 $ 50,712,308 Total liabilities $ 52,576,190 $ 57,102,451 NET ASSETS Invested in capital assets, net of related debt $ 49,919,429 $ 46,863,914 Restricted for debt service 5,316,639 5,188,625 Unrestricted 7,076,702 7,683,995 Total net assets $ 62,312,770 $ 59,736,534 Total liabilities and net assets $ 114,888,960 $ 116,838,985 The accompanying notes and independent auditor's report are an integral part of these financial statements. Page 22

29 WATER AND WASTEWATER DEPARTMENT STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN FUND NET ASSETS FOR THE YEARS ENDED JUNE 30, 2010 and Operating revenues: Water sales: Residential $ 5,458,959 $ 5,694,317 Commercial 3,023,306 2,938,355 Resale 1,576,467 1,642,541 Sewer service sales: Residential 3,410,475 3,270,782 Commercial 3,282,601 3,173,126 Forfeited discounts 133, ,600 Other operating revenues 211, ,996 Total operating revenues $ 17,096,627 $ 17,060,717 Operating expenses: Water treatment and pumping $ 2,431,728 $ 2,500,175 Sewage disposal 2,085,509 2,163,686 Transmission and distribution 1,171,219 1,218,632 Accounting and collections 1,094,583 1,044,434 Administrative and general 1,494,688 1,534,849 Depreciation (see note 2) 2,776,120 2,654,526 Taxes and tax equivalents 1,462,860 1,445,953 Total operating expenses $ 12,516,707 $ 12,562,255 Operating income $ 4,579,920 $ 4,498,462 Nonoperating revenues (expenses): Interest revenues $ 47,805 $ 190,245 Gain (loss) on disposition of assets 12,579 (4,864) Interest expense (2,006,235) (2,003,269) Amortization of debt discount and costs (57,833) (57,833) Total nonoperating revenues (expenses) $ (2,003,684) $ (1,875,721) Change in net assets $ 2,576,236 $ 2,622,741 Total net assets beginning 59,736,534 57,113,793 Total net assets ending $ 62,312,770 $ 59,736,534 The accompanying notes and independent auditor's report are an integral part of these financial statements. Page 23

30 WATER AND WASTEWATER DEPARTMENT STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2010 and Cash flows from operating activities: Receipts from customers and users $ 16,680,987 $ 18,337,849 Receipts from interfund services provided 146, ,427 Payments to suppliers (3,517,013) (3,621,884) Payments to employees for services and benefits exclusive of capitalized costs (3,852,192) (3,737,363) Payments for interfund services used (2,785,941) (2,674,378) Net cash provided by operating activities $ 6,671,883 $ 8,444,651 Cash flows from capital and related financing activities: Purchase and construction of capital assets (net) $ (1,588,203) $ (8,901,647) Proceeds from disposition of assets 16,505 Proceeds from capital debt 150,838 5,802,353 Principal paid on capital debt (4,410,000) (3,835,000) Interest paid on capital debt (2,056,279) (1,931,705) Net cash used for capital and related financing activities $ (7,887,139) $ (8,865,999) Cash flows from investing activities: Interest on investments $ 91,491 $ 186,103 Net cash provided by investing activities $ 91,491 $ 186,103 Net increase (decrease) in cash and cash equivalents $ (1,123,765) $ (335,245) Balances beginning of the year 12,484,958 12,820,203 Balances end of the year $ 11,361,193 $ 12,484,958 Classified as: Current assets $ 6,044,554 $ 7,296,333 Restricted assets 5,316,639 5,188,625 Totals $ 11,361,193 $ 12,484,958 The accompanying notes and independent auditor's report are an integral part of these financial statements. Page 24

31 WATER AND WASTEWATER DEPARTMENT STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2010 and 2009 (Continued) Reconciliation of operating income to net cash provided (used) by operating activities: Operating income $ 4,579,920 $ 4,498,462 Adjustments to reconcile operating income to net cash provided (used) by operating activities: Depreciation $ 2,776,120 $ 2,654,526 Change in assets and liabilities: Receivables (net) (116,769) 1,599,855 Inventories 12,310 (12,345) Prepaid expenses (350,839) 203,557 Accounts and other payables (228,859) (499,404) Total adjustments $ 2,091,963 $ 3,946,189 Net cash provided by operating activities $ 6,671,883 $ 8,444,651 The accompanying notes and independent auditor's report are an integral part of these financial statements. Page 25

32 ELECTRICITY, GAS, AND WATER AND WASTEWATER DEPARTMENTS NOTES TO FINANCIAL STATEMENTS JUNE 30, 2010 and 2009 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Florence Utilities (the Utilities ) are comprised of the Electricity, Gas, and Water and Wastewater Departments of the City of Florence, Alabama. The Utilities provide electricity, natural gas, water and wastewater services to the City of Florence (the City ) and various areas of Lauderdale County. The financial statements of the Utilities have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) as applied to governmental units. The Governmental Accounting Standards Board (GASB) is the accepted standard setting body for establishing governmental accounting and financial reporting principles. Basis of Accounting and Financial Statement Presentation: These three (3) enterprise funds are included as blended component units in the financial statements of the City of Florence, Alabama. The Department managers supervise the daily operations of providing services to citizens and are accountable to the Mayor and City Council. Financial statements are presented for each department. The footnotes are presented separately for each department, where applicable, and jointly for areas where common descriptions exist. The City and all related departments have adopted the provisions of GASB Statement No. 34, Basic Financial Statements and Management s Discussion and Analysis for State and Local Governments. Statement No. 34 established standards for external financial reporting for all state and local governmental entities, which includes a statement of net assets or balance sheet, a statement of revenues, expenses, and changes in fund net assets, and a statement of cash flows. It requires the classification of net assets into three components invested in capital assets, net of related debt, restricted, and unrestricted. These classifications are defined as follows: Invested in capital assets, net of related debt This component of net asset consists of capital assets, including restricted capital assets, net of accumulated depreciation and reduced by the outstanding balances of any bonds, mortgages, notes, or other borrowings that are attributable to the acquisition, construction, or improvements of those assets. If there are significant unspent related debt proceeds at year-end, the portion of the debt attributable to the unspent proceeds are not included in the calculation of invested in capital assets, net of related debt. Rather, that portion of the debt is included in the same net assets component as the unspent proceeds. Restricted net assets This component of net assets consists of constraints placed on net asset use through external constraints imposed by creditors (such as through debt covenants), grantors, contributors, or law or regulations of other governments or constraints imposed by law through constitutional provisions or enabling legislation. Unrestricted net assets This component of net assets consist of net assets that do not meet the definition of restricted or invested in capital assets, net of related debt. In addition, the Statement requires the reporting of capital contributions as a change in net assets, the presentation of the Statement of Cash Flows using the direct method, and the inclusion of Management s Discussion and Analysis (MD&A) that provides an analysis of the Utilities overall financial position and results of operations. Page 26

33 ELECTRICITY, GAS, AND WATER AND WASTEWATER DEPARTMENTS NOTES TO FINANCIAL STATEMENTS JUNE 30, 2010 and 2009 (Continued) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The financial statements of the Utilities are prepared primarily on the accrual basis of accounting, whereby revenues are recognized when earned and expenses are recognized when incurred, with the exception of the accounting for unbilled revenues. The Utilities do not accrue any unbilled revenue from the dates of the most recent meter readings to the balance sheet date. However, revenues are recorded through the complete billing cycle that could include revenues subsequent to the year-end. This policy has been consistently followed and is an accepted accounting treatment followed by public utility systems. The Utilities' proprietary activities apply all applicable GASB pronouncements, as well as all Financial Accounting Standards Board (FASB) Statements and Interpretations, Accounting Principles Board (APB) Opinions, and Accounting Research Bulletins (ARBs) issued on or before November 30, 1989, unless those pronouncements conflict with or contradict GASB pronouncements. Accounts Receivable Trade: The Electricity department acts as billing and collection agent for other City departments and other county utilities. Inventories: Inventories are presented at the lower of average cost or market on a first-in, first-out basis and are expensed when used. Inventories consist primarily of materials and supplies held for consumption or construction projects. Debt Premiums, Discounts, and Issuance Costs: Debt premiums and discounts, as well as issuance costs, are deferred and amortized over the term of the related debt using the straight-line method. Bonds and warrants payable are reported net of the applicable premium or discount. Debt issuance costs are reported as deferred charges. Deferred Loss on Early Retirement of Debt: The loss on early retirement of debt is deferred and amortized, using the straight-line method, over the original remaining life of the old debt or the life of the new debt, whichever is less. Bonds and warrants payable are reported net of the unamortized deferred loss on early retirement of debt. Prepaid Expenses: Payments made to vendors that reflect costs applicable to future accounting periods are recorded as prepaid items using the consumption method by recording a current asset for the prepaid amounts and reflecting the expenses in the year in which they is consumed. Cash and Cash Equivalents: For purposes of the statement of cash flows, the Utilities consider all currency, demand deposits, certificates of deposit, and money market accounts with financial institutions and short-term U. S. Government securities to be cash equivalents. Revenues and Expenses: Operating revenues and expenses consist of those revenues and expenses that result from the ongoing principal operations of the Utilities. Operating revenues consist primarily of charges for services. Nonoperating revenues and expenses consist of those revenues and expenses that are related to financing and investing types of activities and result from nonexchange transactions or ancillary activities. When an expense is incurred for purposes for which there are both restricted and unrestricted net assets available, it is the Utilities policy to apply those expenses to restricted net assets to the extent such are available and then to unrestricted net assets. Page 27