Seacoast Utility authority

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1 Seacoast Utility authority Palm Beach Gardens, Florida COMPREHENSIVE ANNUAL FINANCIAL REPORT For the Fiscal Years Ending September 30, 2016 & 2015

2 PALM BEACH GARDENS, FLORIDA COMPREHENSIVE ANNUAL FINANCIAL REPORT FISCAL YEARS ENDED September 30, 2016 and 2015 Prepared by: Danielá E. Russell, CPA Finance Director

3 COMPREHENSIVE ANNUAL FINANCIAL REPORT For the Fiscal Years Ended September 30, 2016 and 2015 TABLE OF CONTENTS Page INTRODUCTORY SECTION Letter of Transmittal Certificate of Achievement for Excellence in Financial Reporting Organization Chart List of Principal Officials i iv v vi vii FINANCIAL SECTION Independent Auditors Report 1 3 Management s Discussion and Analysis 4 13 Basic Financial Statements Statements of Net Position Statements of Revenues, Expenses, and Changes in Net Position 16 Statements of Cash Flows 17 Notes to Basic Financial Statements Required Supplemental Information Other Post Employment Benefits 38 Supplemental Information Comparative Schedules of Operating Revenues Budget and Actual 39 Comparative Schedules of Operating Expenses Budget and Actual 40 Comparative Schedules of Operating Expenses 41 STATISTICAL SECTION Schedule of Net Position by Component 42 Schedule of Changes in Net Position 43 Schedule of Revenues by Source 44 Total Water Units by Category 45 Total Sewer Units by Category 46 Water Meter Data 47 Sewer Accounts Data 48 Potable Water Sold by Customer Type 49 Schedule of Water and Sewer Rates Largest Customers 52 Schedule of Area Demographics Ratio of Outstanding Debt 55 Schedule of Pledged Revenue Coverage 56 Full-Time Employees by Function 57 Operation Indicators by Function 58 Capital and Infrastructure Statistics by Function 59

4 COMPREHENSIVE ANNUAL FINANCIAL REPORT For the Fiscal Years Ended September 30, 2016 and 2015 TABLE OF CONTENTS (Continued) Page OTHER REPORTS Independent Auditors Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards Independent Auditors Management Letter Required by Chapter , Rules of the State of Florida, Office of the Auditor General Independent Accountants Report on Compliance with Section , Florida Statutes 64

5 I. INTRODUCTORY SECTION Letter of Transmittal Certificate of Achievement for Excellence in Financial Reporting Organizational Chart List of Principal Officials: Authority Board Members and Staff

6 Seacoast Utility Authority Mailing Address: P.O. Box Palm Beach Gardens, FL February 22, 2017 Honorable Chair and Members of the Seacoast Utility Authority Board Seacoast Utility Authority Palm Beach Gardens, Florida It is with pleasure that we submit to you the Comprehensive Annual Financial Report with the Independent Auditor s Report of Seacoast Utility Authority for the fiscal years ended September 30, 2016 and The Finance Department, in accordance with state statutes, the Bond Trust Indenture, and U.S. generally accepted accounting principles for governments, prepared this report. Responsibility for both the accuracy of the presented data, and the completeness and fairness of presentation, including all disclosures, rests with the Authority. To the best of our knowledge and belief, the data, as presented, is accurate in all material respects and is reported in a manner designed to fairly present the financial position and results of operations of the Authority. All disclosures necessary to enable the reader to gain an understanding of the Authority s financial activities have been included. Significant financial information is contained in the notes to the financial statements, and the notes should be considered an integral part of the financial information presented. The financial data, as well as all disclosures, have been prepared in accordance with the standards for financial reporting promulgated by the Governmental Accounting Standards Board. FINANCIAL PERFORMANCE The Authority has adopted the provisions of GASB 34, Basic Financial Statement and Management Discussion and Analysis for State and Local Governments. GASB 34 requires the Management s Discussion and Analysis (MD&A) of the Authority s financial performance to be included as an integral part of the financial statements. The Authority s MD&A can be found immediately following the Independent Auditors Report. THE AUTHORITY Seacoast Utility Authority was created as a separate legal entity pursuant to an Inter-local Agreement entered into, by and among the City of Palm Beach Gardens, Palm Beach County, the Village of North Palm Beach, the Town of Lake Park and the Town of Juno Beach, all in Florida, under and in accordance with the provision of Chapter 163, Florida Statutes. In compliance with the requirements of such chapter, the Interlocal Agreement was filed with the Clerk of the Circuit Court of the Fifteenth Judicial Circuit of Florida, in and for Palm Beach County on August 24, On December 20, 1988, pursuant to the Inter-local Agreement, the Authority acquired, by eminent domain, substantially all the utility assets of Seacoast Utilities, a water and wastewater utility formerly owned and operated as a separate division by the John D. and Catherine T. MacArthur Foundation. The Authority now owns, operates and maintains the utility. i 4200 Hood Road, Palm Beach Gardens, Florida Phone: Customer Service (561) / Executive Office (561) / FAX (561)

7 The governance of the Authority resides in the Authority Board, which is comprised of five (5) members, one member appointed by each of the participating public entities. The members of the Authority Board serve for terms of four (4) years or until replaced by action of the respective members of the participating public entities. Voting by the members of the Authority Board is by weighted percentage as specified in the Interlocal Agreement. SYSTEM DESCRIPTION Seacoast Utility Authority, a regional water and wastewater utility, furnishes potable water service to 48,663 households and 2,894 commercial establishments. Wastewater collection, treatment and disposal services are provided to 45,103 residential dwellings and 1,738 businesses. The Authority s service area, which covers approximately 65 square miles, consists of certain unincorporated areas of Palm Beach County, and the incorporated areas of the City of Palm Beach Gardens, the Village of North Palm Beach and the Town of Lake Park and a portion of the unincorporated areas of the Town of Juno Beach, all in Florida. ECONOMIC CONDITIONS AND OUTLOOK The Authority s economic condition is generally affected less by the local economy than by weather and water use restrictions. Water and sewer service is a public necessity; thus revenue typically remains stable regardless of transient economic conditions. Permanent three-day per week irrigation restrictions enacted by South Florida Water Management District in 2010 continue to moderate water sales, but the Authority s rate structure design provides an effective economic buffer against fluctuating water demand. During its peak growth period ( ), the Authority opened over 1,000 new metered accounts per year. Since then the pace of new connections has significantly declined, with only 145 new meter installations during FY2016. While this continues a multi-year trend of modest annual increases, recent commencement of large scale land development projects signals accelerated system growth over the next few years. The Authority s recent conversion from lime softening to membrane water treatment processes has resulted in operating expenses that are trending higher proportional to increasing energy costs. Anticipating the need to synchronize revenue with rising costs, the Authority enacted an annual rate-indexing ordinance in This ordinance authorizes rate adjustments each October 1, consistent with the U.S. Department of Labor Water and Sewer Maintenance Index, allowing the Authority Board to apply a lesser percentage if it chooses. MAJOR INITIATIVES Slow growth affords the Authority an opportunity to shift its economic and human resources toward asset renewal and replacement. As the water treatment facility replacement project is fundamentally completed, the Authority has begun planning and prioritizing pipeline infrastructure replacement. Working with its general engineering consultant, senior management is developing an asset replacement prioritization schedule. The replacement of at risk pipeline segments, particularly those whose failure would result in significant environmental, public health, safety and convenience consequences, will be budgeted first. Less critical segments will be assigned a lesser priority with useful lives, changing system flow patterns, and future accessibility influencing their replacement schedule. ii

8 The Authority s multi-year easement policing initiative, implemented in 2016, has revealed a number of conflicts between Authority infrastructure and landscape/hardscape improvements. Many conflicts have been resolved, and additional easements granted where inadequate existing easements existed. In several locations, improperly placed trees, sidewalks, pavement and fences impinge upon access to Authority valves, fire hydrants and pipelines. Working with local code enforcement and fire department representatives, Authority staff has begun eliminating such conflicts. This is a long-term multi-jurisdictional cooperative effort to enhance service quality and public safety. Further information on operational trends and economic events can be found in the Management s Discussion and Analysis starting on page 4. LONG-TERM FINANCIAL PLANNING The Authority s annual operating budget includes a five-year projection of revenue, expenses, and capital needs. These estimates incorporate growth projections, inflation, anticipated changes in water, sewer, and reclaimed water flow, board approved multi-year capital improvement programs, targeted renewal and replacement projects, and an allowance for asset renewal and replacement costs not specifically identified. The Authority s current rate structure and cash reserves are poised to generate sufficient revenue to pay routine asset replacement costs as well as the recently advanced refunded debt service costs incurred to fund the Water Treatment Plant replacement. The five-year budget considers the operating costs associated with the new treatment plant, and the essential renewal and replacement of other Authority assets. Planned indexed revenue increases consistent with the Board s direction are also included. Board approved budgets can be accessed via our website at Consistent with good financial management, the Authority s Cash Reserve Policy requires the Authority to maintain a minimum of cash reserves equal to 90 days operating and debt service costs. The Authority s current financial position is poised to achieve this requirement. ACCOUNTING SYSTEM AND BUDGETARY CONTROL As specified in Section of the Bond Trust Indenture, the Authority s financial accounting system is accounted for using an accrual basis. In developing and evaluating the Authority s accounting system, the adequacy of internal accounting controls is paramount. Internal accounting controls are designed to provide reasonable, but not absolute, assurance regarding: (1) the safeguarding of assets against loss from unauthorized use or disposition; and (2) the reliability of financial records for preparing financial statements and maintaining accountability for assets. The concept of reasonable assurance recognizes that: (1) the cost of control should not exceed the benefits likely to achieved, and (2) the evaluation of costs and benefits requires estimates and judgments by management. We believe the Authority s internal accounting controls adequately safeguard assets and provide reasonable assurance of proper recording of financial transactions. The Authority maintains budgetary controls at the department level with line item expenses managed through the issuance of approved purchase orders. The objective of these controls is to help ensure adherence to the legally adopted operating and capital budget approved by the Authority Board. As demonstrated by information provided in the Comprehensive Annual Financial Report, the Authority continues meeting its responsibility for sound financial management. iii

9 The Government Finance Officers Association (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to Seacoast Utility Authority for its comprehensive annual financial report for the fiscal year ended September 30, This was the 12 th consecutive year that Seacoast Utility Authority has achieved this prestigious award. Requirements to receive a Certificate of Achievement include a government publishing an easily readable and efficiently organized comprehensive annual financial report. This report must satisfy both generally accepted accounting principles and applicable legal requirements. A Certificate of Achievement is valid for a period of one year only. We believe that our current comprehensive annual financial report continues to meet the Certificate of Achievement Program s requirements and we are submitting it to the GFOA to determine its eligibility for another certificate. ACKNOWLEDGEMENTS The preparation of the Comprehensive Annual Financial Report on a timely basis could not have been accomplished without the dedicated efforts of the entire Authority staff. Their assistance and cooperation have facilitated the preparation of a report that provides a comprehensive view of the Authority s results of operations and strong financial position. We would like to thank the Authority Board and customers of Seacoast Utility Authority for their continued interest, support and assistance in enabling the Authority to achieve its goal of providing quality water and wastewater service in a cost effective and responsible manner. Respectfully submitted, Rim Bishop Executive Director Daniela E. Russell, CPA Finance Director iv

10 Government Finance Officers Association Certificate of Achievement for Excellence in Financial Reporting Presented to Seacoast Utility Authority Florida For its Comprehensive Annual Financial Report for the Fiscal Year Ended September 30, 2015 Executive Director/CEO v

11 SEACOAST UTILIITY AUTHORITY ORGANIZATIONAL CHART SEACOAST UTILITY AUTHORITY BOARD EXECUTIVE DIRECTOR DIRECTOR OF OPERATIONS FINANCE DIRECTOR CUSTOMER SERVICE/BILLING MANAGER ADMINISTRATIVE SERVICES MANAGER DIRECTOR OF ENGINEERING WATER DEPARTMENT FINANCE/ACCOUNTING CUSTOMER SERVICE ADMINISTRATION CONSTRUCTION/ DEVELOPMENT DEPARTMENT WASTEWATER DEPT. IS DEPARTMENT BILLING PERSONNEL/ HUMAN RESOURCES LABORATORY SERVICES PURCHASING PROGRAMS COORDINATOR UTILITY SERVICES DEPT. vi

12 LIST OF PRINCIPAL OFFICIALS As of September 30, 2016 AUTHORITY BOARD MEMBERS Name Mr. Ron Ferris, Chair Mr. Robert Gebbia, Vice Chair Mr. John D Agostino, President-Pro-Tem Mr. Joseph Lo Bello Mr. Robert Weisman Local Government City of Palm Beach Gardens Village of North Palm Beach Town of Lake Park Town of Juno Beach Palm Beach County AUTHORITY STAFF Name Title Rim Bishop Bruce Gregg, CAO Danielá E. Russell, CPA Jessica Moore Nason, Yeager, Gerson, White & Lioce, P.A. Holtz Consulting Engineers, Inc. Nowlen, Holt & Miner, P.A. Executive Director Director of Operations Finance Director Authority Clerk Authority Counsel Consulting Engineers Independent Auditors vii

13 II. FINANCIAL SECTION Independent Auditors Report Management s Discussion and Analysis Basic Financial Statements o Statements of Net Position o Statements of Revenues, Expenses and Changes in Net Position o Statements of Cash Flows o Notes to Basic Financial Statements Required Supplemental Information o Other Post Employment Benefits Supplemental Information o Comparative Schedules of Operating Revenues Budget and Actual o Comparative Schedules of Operating Expenses Budget and Actual o Comparative Schedules of Operating Expenses

14 INDEPENDENT AUDITORS REPORT To the Board of Directors, Seacoast Utility Authority: Report on the Financial Statements We have audited the accompanying financial statements of Seacoast Utility Authority (the Authority ), as of and for the years ended September 30, 2016 and 2015, and the related notes to the financial statements, which collectively comprise the Authority s basic financial statements as listed in the table of contents. Management s Responsibility for the Financial Statements The Authority s 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. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free 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, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 1

15 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the Authority, as of September 30, 2016 and 2015, and the respective changes 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 and other post-employment benefits information, as listed in the table of contents, be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the Authority s basic financial statements. The introductory section, supplemental information, and statistical section are presented for purposes of additional analysis and are not a required part of the basic financial statements. The supplemental information is the responsibility of management and was derived from and relates 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 our opinion, the information is fairly stated, in all material respects, in relation to the basic financial statements as a whole. The introductory and statistical sections have not been subjected to the auditing procedures applied in the audit of the basic financial statements, and accordingly, we do not express an opinion or provide any assurance on it. 2

16 Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated February 13, 2017 on our consideration of the Authority s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on 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 the Authority s internal control over financial reporting and compliance. West Palm Beach, Florida February 13,

17 MANAGEMENT S DISCUSSION AND ANALYSIS The intent of the Management s Discussion and Analysis (MD&A) is to provide highlights of the Authority s financial activities for the fiscal year ended September 30, 2016 and This information should be read with the accompanying audited financial statements. OVERVIEW OF THE FINANCIAL STATEMENTS Seacoast Utility Authority (the Authority) uses a single enterprise fund to provide water and wastewater services. The Comprehensive Annual Financial Report is presented in four sections: Introductory, Financial, Statistical, and Compliance. The Introductory section includes a Transmittal Letter, List of Principal Officials and Staff, and the Authority s Organizational Chart. The Financial section includes the MD&A, audited basic financial statements and accompanying notes, as well as the report of the independent certified public accountant on the financial statements. The Statistical section includes unaudited financial and demographic information, and the Compliance section includes supplemental auditors reports. The MD&A represents management s examination, analysis, and report on the Authority s financial condition and performance. The financial statements as well as other available operational and financial information, budget, debt statements, etc. were used for this analysis. Again, the MD&A should be used with the audited financial statements and accompanying notes to those statements. REQUIRED FINANCIAL STATEMENTS As an Enterprise Fund, the Authority s financial statements and accounting methods closely resemble those of a business operation. These statements provide short and long-term financial information about its activities. The required financial statements include Statement of Net Position; Statement of Revenues, Expenses and Changes in Net Position; Statement of Cash Flows; and Notes to Basic Financial Statements. The Statement of Net Position includes all of the Authority s assets and liabilities and provides information on the investment in those assets. It presents the financial position on a full accrual cost basis. It can be used for analyses such as liquidity and the structure of the assets and liabilities of the Authority. Over time, increases or decreases are indicators of whether the financial position is improving or not. The Statement of Revenues, Expenses, and Changes in Net Position contains the current year s revenue and expenses. This can be used to evaluate operations during the past year by comparing operating revenue with income as well as showing other income sources and the overall effectiveness of cost recovery. While the Statement of Net Position discussed previously shows a snapshot of balances as of a certain date, the Statement of Revenues, Expenses, and Changes in Net Position focuses on changes in the fiscal operating period. The last required statement is the Statement of Cash Flows. This statement shows cash activity during the fiscal year. Divided into three categories, the statement of cash flows presents cash flows from operating, capital, and investing activities. This statement can answer where the cash came from, how that cash was used and the resulting change in balances from the previous reporting period. Finally, the accompanying Notes to the Financial Statements provide required disclosures and other information pertinent to understanding and explaining the financial statements. The notes contain information such as accounting policies, explanations and descriptions of significant account balances, expanded detail on summarized data in the financial statements, as well as required disclosures about the Authority. 4

18 The analysis below shows the Authority s net position (Table 1) and changes in net position (Table 2) during the year in a condensed format. Table 1 Net Position (Condensed) FY 2016 FY 2015 % FY 2014 % Assets: Current assets $ 86,393,270 $ 75,275, $ 68,632, Non current restricted assets 10,313,017 11,296,765 (8.7) 11,518,453 (1.9) Capital assets (net) 270,772, ,693,084 (0.7) 281,023,171 (3.0) Total assets $ 367,478,906 $ 359,265, $ 361,174,114 (0.5) Deferred Outflows of Resources: Outlfows from interest rate swap $ 567,545 $ 1,000,590 (43.3) $ 1,332,699 (24.9) Deferred loss on bond refundings 68, ,740 (45.4) 198,895 (37.3) Total Deferred Outflows of Resources $ 635,623 $ 1,125,330 (43.5) $ 1,531,594 (26.5) Liabilities: Current liabilities Payable from current assets $ 7,374,654 $ 6,495, $ 6,496,281 (0.0) Payable from restricted funds 8,060,432 7,741, ,423, Other liabilities 2,522,693 2,807,146 (10.1) 3,088,761 (9.1) Bonds payable (net) 92,551, ,036,676 (7.5) 107,175,927 (6.7) Total liabilities $ 110,509,102 $ 117,081,438 (5.6) $ 124,184,464 (5.7) Net Position: Net investment in capital assets $ 166,347,112 $ 161,764, $ 164,414,699 (1.6) Restricted 17,880,928 18,518,182 (3.4) 18,391, Unrestricted 73,377,387 63,027, ,714, Total net position $ 257,605,427 $ 243,309, $ 238,521, An upward trend in system growth continued during Fiscal Year 2016 (FY2016). With its new water treatment plant in full operation and stabilized, the Authority is well positioned to meet these new customers water service needs. Numerous variables contributed to an increasing Net Position, which reached $257,605,427 during FY2016, increasing 7.9% since FY2014 and 5.9% since FY2015. This three-year upward trend is primarily the result of assiduous collection of billed charges and careful attention to cost control. Total assets were up 1.80% from FY2014 to FY2016, increasing 2.3% following a.50% decrease the year before that. This is primarily attributable to recent investment in short-lived, highly depreciable water treatment assets. The Authority expects this trend to continue. Deferred Outflows of Resources represents the accumulated decrease in the fair market value of the Authority s interest rate swap and the deferred loss on bond refundings associated with the 2005 and 2006 Revenue Bonds. Further information on this can be found in Notes 1(d) and 5 of the Financial Statements. Deferred Outflows from FY2014 to FY2016 continue to decline due to rising interest rates in the financial markets, causing the value of the interest rate swap liability to decrease. 5

19 Net Bonds Payable continue to decline as the Authority continues to pay down its outstanding bonds, approximately $7 million annually, with bonds payable-net, resulting in a 7.5% decrease in FY2016 and a 6.7% decrease in FY2015. Table 2 Statement of Revenues, Expenses, and Changes in Net Position (Condensed). Table 2 Statement of Revenues, Expenses, and Change in Net Position (Condensed) FY 2016 FY 2015 % Change FY 2014 % Change Operating revenues: Charges for services $ 51,238,445 $ 48,337, $ 45,934, Miscellaneous 171, , , Total operating revenues 51,410,353 48,504, ,088, Operating expenses: Plant operation and maintenance 16,116,589 15,758, ,530,982 (4.7) General and administrative 6,183,057 6,061, ,128,660 (1.1) Depreciation 17,727,911 17,233, ,411, Total operating expenses 40,027,557 39,053, ,071, Nonoperating revenues: Interest income 1,122, , , Net increase (decrease) in FMV 419, , , Other revenue 108,188 81, , Bond rebate 1,392,355 1,384, ,385,635 (0.1) Total nonoperating revenues 3,042,948 2,605, ,184, Nonoperating expenses: Interest expense 5,584,067 6,029,897 (7.4) 1,202, Amortization 139, ,322 (10.9) 161,285 (3.1) Other expense 1,309,422 3,817,089 (65.7) 2,637, Total nonoperating expenses 7,032,709 10,003,308 (29.7) 4,001, Income (loss) before capital contributions 7,393,035 2,053, ,201,220 (77.7) Capital contributions: Developer and other contribution 6,902,652 2,735, ,548, Change in net position $ 14,295,687 $ 4,788, $ 10,750,134 (55.5) A summarized comparative analysis follows: FY2016 operating revenue increased by 6.0% up from a 5.2% increase in FY2015. Presented comparative fiscal years include revenue increases due to board approved rate increases of 3% in FY2016 and 3.5% in FY2015. In addition, increased capacity reservation revenue for new land development projects, accelerated replacement of aging meters and changes in reclaimed water agreements all attributed to a robust revenue stream. 6

20 Land development activity drives donated infrastructure and connection fee revenue. Consequently, capital contributions can fluctuate from one fiscal year to the next. In FY2016, a major development continued constructing, providing approximately $6.9 million dollars in developer fees and infrastructure, an increase of $4.2 million over FY2015. Anticipation of an impending Federal Reserve interest rate hike resulted in a slight increase in investment yields. To mitigate any losses related to a potentially rising interest rate environment, maturing or called investments over the last 24 months were re-invested into shorter maturities to avoid locking into lower rates. This strategy proved successful, allowing the Authority to access higher yielding investments. Applying this approach to the Authority s increasing reserve account balances increased interest earnings by 36.6% in FY2016 and 37.3% in FY2015. As required by generally accepted governmental accounting standards, the Authority adjusts the value of its portfolio to reflect any unrealized losses or gains. The Authority s prudent strategic bias toward short-term investments mitigated the negative earnings impact that otherwise would have been experienced. The net result was an unrealized gain of $419,896, which is approximately $100,000 greater than FY2015. The federal government has continued sequestration, which reduced the annual Build America Bond rebate revenue by more than $100,000 in FY2016, FY2015 & FY2014. The annual federal sequestration vary, resulting in moderate increases and decreases each fiscal year. FY2016 operating expenses, including depreciation, increased by 2.5% over FY2015, as compared to an 11.4% increase for FY2015 over FY2014. Although operating expenses have slightly, certain costs are unavoidable and inflation is a factor. Operations staff continue to do their best to control chemical, electricity & maintenance costs through the optimization of the water treatment equipment and their ever learning of our state of the art water treatment process. Continued learning and improvements in efficiency will assist to stabilize any potential spikes in operating costs. As expected, FY2016 and FY2015 depreciation expense remained relatively constant, still significantly affected by the placing of $110 million dollars of completed construction projects in service in late FY2014. The increase in that fiscal year only had the impact of 1 month s depreciation. As required by generally accepted accounting principles, a portion of the Authority s annual bond interest expense, approximately $476,000 in FY2016 & $403,000 in FY2015, was capitalized to the construction in progress. These amounts are significantly less than FY2014 where the construction in progress balance included $110 million of construction projects in progress, thus capitalized interest was significantly greater. As the Authority continues to reduce its outstanding bond debt, total interest expense is expected to fall. Consequently, FY2016 overall interest expense of approximately $5.5 million was less than FY2015 overall interest expense of $6.0 million. Again, FY2014 s interest expense was reduced due to a large capitalized interest adjustment. The Authority continues to renew and replace its aging infrastructure. Write-off of replaced or disposed assets, with net book value, result in accounting losses. FY2014 & FY2015 write-offs were substantially higher than the FY2016 year due to retirement of lime softening water treatment plant and related assets. 7

21 FINANCIAL HIGHLIGHTS/ANALYSIS Operating Revenues The following chart depicts the Operating Revenues for the Authority for the fiscal years ending September 30, 2016 and OPERATING REVENUE COMPARISONS $25,000,000 $2,500,000 $250,000 Water Wastewater Reclaimed Highlights of the comparisons presented in the above chart: Capacity Reservation Water Sales Increased primarily due to rate increases of 3% in FY2016 and 3.5% in FY2015, new customers, and more precise consumption reports. Wastewater Service Charges - Increased primarily due to rate increases of 3% in FY2016 and 3.5% in FY2015. Reclaimed/Effluent Sales Decreased from FY2015 to FY2016 due to greater than average rainfall and the resulting decrease in irrigation demand. Capacity Reservation Charges Based upon on land development, these fees will vary from year to year. FY2016 represents an average of 1992 water and sewer reserved Equivalent Residential Connections, which is an increase of 30 units over FY2015 average of Other Charges - Derived from a relatively small group of customers, these fees will vary from year to year. They consist of fire line protection, administrative fees and other miscellaneous operating revenues. Other 2016 $29,946,464 $18,465,129 $1,145,038 $1,024,180 $829, $27,874,720 $17,766,994 $1,194,037 $902,696 $765,827 %age Change 7.43% 3.93% -4.10% 13.46% 8.32% 8

22 Operating Expenses The charts below depict the costs of the various functions of the Authority s Operating Expense for the comparative years ending September 30, 2016 and Operating Expense Categories $6,886,900, 17.21% $17,727,911, 44.29% $1,715,807, 4.29% $9,032,653, 22.57% $4,664,286, 11.65% Administration Water Wastewater Shared Depreciation 2015 Operating Expense Categories $6,765,668, 17.32% $17,233,272, 44.13% $8,800,521, 22.53% Adminisration Water Wastewater Shared Depreciation $1,683,427, 4.31% $4,570,398, 11.70% Highlights of the Changes presented in the Operating Expense Charts depicted above are as follows: Operating expenses from FY2015 to FY2016 have increased 2.5% Depreciation is the largest component of the Authority s operating expenses, representing the noncash cost recovery of capital expenses over their estimated useful life. 9

23 Cash/Investments and Related Income Cash/Investments Balances $80,250,000 $70,250,000 $60,250,000 $50,250,000 $40,250,000 $30,250,000 $20,250,000 $10,250,000 $250, Unrestricted $70,545,824 $60,815,893 $54,960,988 $49,054,497 $50,354,660 Restricted $18,373,449 $19,038,757 $18,941,948 $18,766,920 $18,494,367 Realized Investment Earnings $1,122,509 $821,557 $598,500 $458,167 $512,414 Axis Title $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $- Earnings Unrestricted Restricted Realized Investment Earnings The Authority s conservative investment policy along with its strong fiscal cost containment has enabled the Authority to preserve and increase its cash/investment balances. Market yields have remained relatively the same over the last five years, with some uptick in achieved yield due to strategies taken. Note 2 to the Financial Statements presents more in depth details to the investment options, balances, sectors and market values of the Authority s cash and investments. Capital Assets CAPITAL ASSETS Non-Depreciable Assets Depreciable Assets, Net Total Net Book Value $270,772,619 $272,693,084 $281,023,171 $282,404,599 $273,422,677 $260,585,499 $266,375,604 $275,930,876 $174,921,226 $176,539,231 $10,187,120 $6,317,480 $5,092,295 $107,483,373 $96,883,446 Total Net Book Value Depreciable Assets, Net Non-Depreciable Assets In accordance with the Authority s capitalization policy, all disbursements of less than $1,000 are operating expenses. Recorded capital assets include both purchased and donated assets and are comprised of land, 10

24 easements and rights of ways, structures, and improvements; transmission, collection, distribution mains and accessories; and plant and equipment. Despite the Authority s continued commitment to renewal and replacement, spending in excess of $10 million annually, the sustained impact of depreciating $110 million dollars of fixed assets placed in service in FY2014, remains to be a significant effect on the net book value of the Authority s capital assets. Presented in Note 4 to the financial statements are additional details of the Authority s Capital Assets. Long Term Debt, Debt Service and Debt Management End of Fiscal Year Debt Outstanding $5,000, $25,000, $45,000, $65,000, B Bonds 2009A Bonds 2006 Bonds 2005 Bonds 1989 Bonds Debt service payments follow fixed schedules that were established when the bonds commenced. The following chart shows principal and interest paid on the debt during the comparative fiscal years: Debt Issuance 2016 Principal Paid 2015 Principal Paid Increase (Decrease) 2016 Interest Paid 2015 Interest Paid Increase (Decrease) 1989 $ 3,215,000 $ 5,670,000 $ (2,455,000) $ 681,588 $ 925,925 $ (244,337) 2005 $ 2,037,164 $ 617,884 $ 1,419,280 $ 304,243 $ 355,477 $ (51,234) 2006 $ 1,914,253 $ 585,445 $ 1,328,808 $ 276,863 $ 323,631 $ (46,768) 2009A $ 55,000 $ $ 55,000 $ 553,600 $ 554,700 $ (1,100) 2009B $ $ $ $ 4,266,502 $ 4,266,502 $ Total $ 7,221,417 $ 6,873,329 $ 348,088 $ 6,082,796 $ 6,426,235 $ (343,439) Debt Subsidy payments of approximately $1.4 million annually, related to the 2009B (Build America Bonds), were recorded as other income rather than netted against the interest paid. Note 5 to the Financial Statements presents further details on the Authority s Bonds. 11

25 EVENTS, ECONOMIC FACTORS AND TRENDS Authority s Bond Financial Rating The Authority continues to maintain a strong upward credit rating. A recent refunding of our 2009A and 2009B Bonds triggered all three rating agencies to review the Authority s strong financial position, resulting in upward credit ratings. The results are as follows: Moody s upgrading the Authority s bond rating to Aa1 from Aa2 Standard and Poors double upgrading to AA+ from AA-, and Fitch upgrading to AA, positive from AA. All three credit rating agencies sited similar strengths as follows: Drastically Improving Debt Profile Financial Flexibility noting a solid financial position, with continued increases in liquidity stabilizing the Authority s financial position Diverse Service Area noting a strong economic base of service area that is very stable as well as characterized by high wealth levels. Advanced treatment facilities and renewed water use permits ensuring sufficient availability to meet the demands of the Authority s customers. Prudent Management providing conservative budgeting and multi-year projections. Bond Restructuring On December 5, 2016, the Authority closed on a bond refunding of its 2009A and 2009B Bonds. After careful evaluation, the Authority supplemented this refunding by investing $13 million of reserve funds. The outcome was a total Net Present Value saving of approximately $29 million dollars, with $16 million resulting directly from interest rate savings and a slightly more aggressive repayment schedule. Furthermore, the revised structure accelerates full payment of Authority debt by 15 years, retiring all debt by the year Other Operational Trends Automated Meter Reading Committing some $7 million to a 5-year plan, the Authority dramatically accelerated its automated meter reading ( AMR ) conversion program in By the year 2021, all Authority water meters will be replaced with new meters capable of sending hourly meter readings, which will allow Authority staff and the customer to detect and respond to unusual consumption patterns, including plumbing leaks, almost immediately. The acceleration project was authorized in January 2016, at which time approximately 1/3 of Authority meters were AMR equipped. In addition to the obvious customer service benefit, installation of newer meters offer superior flow detection, resulting in increased Authority revenue. Water Supply Development The Authority s water supply wellfield renovation initiative that is, the refurbishment of 35 surficial aquifer wells to membrane system supply wells is approximately 70% complete. In addition, the Authority expanded its brackish Floridan aquifer wellfield by adding well no. F-5 in 2016 and securing expanded easements allowing future replacement of existing surficial and Floridan wells. Reclaimed Water SUA s reclaimed water system continues to operate at full capacity and in compliance with all regulatory requirements. During FY2016, SUA delivered an average of 7.8 million gallons per day (MGD) to 12

26 reclaimed water customers a 7.1% decrease from the previous year. The decline is attributable to greater than average rainfall and the resulting decrease in irrigation demand. Preparing for a return to drier weather, Authority staff initiated system improvements that will increase supplemental reclaimed water availability by approximately 1.5 million gallons per day in Looking to the Future Economic and regulatory forces beyond local control, general inflation and customer demands will always be a factor that may influence revenues and expenses from year to year. Nevertheless, management is confident that the Authority s robust reserve accounts, cost containment measures, hardening of infrastructure, etc. will provide management with the wherewithal to provide quality water and sewer services to our customers CONTACTING THE AUTHORITY S FINANCIAL MANAGEMENT TEAM This financial report is by designed to provide the Seacoast Utility Authority Board, customers, investors, creditors, and employees with a general overview of the Authority s finances and accountability. Direct questions concerning this report to the Authority s Finance Department at 4200 Hood Road, Palm Beach Gardens, Florida,

27 STATEMENTS OF NET POSITION September 30, 2016 and 2015 ASSETS Current assets: Cash, cash equivalents and investments-unrestricted $ 70,545,824 $ 60,815,893 Cash, cash equivalents and investments-restricted 8,060,432 7,741,992 Accounts receivable, net 5,126,582 4,721,258 Interest receivable 389, ,779 Other receivables 292, ,615 Inventories 1,921,856 1,352,460 Prepaid expenses 56,891 89,002 Total current assets 86,393,270 75,275,999 Non-current assets: Cash, cash equivalents and investments-restricted 10,313,017 11,296,765 Capital assets: Nondepreciable: Land 323, ,799 Easements and right of ways 2,375,099 1,124,226 Construction in progress 7,488,222 4,869,455 Depreciable: Buildings 34,389,682 33,866,575 Utility plants and pipelines 323,959, ,944,181 Equipment 67,442,066 66,113,676 Accumulated depreciation (165,206,226) (148,548,828) Capital assets, net 270,772, ,693,084 Total non-current assets 281,085, ,989,849 Total Assets $ 367,478,906 $ 359,265,848 DEFERRED OUTFLOWS OF RESOURCES Accumulated decrease in fair value of interest rate swap $ 567,545 $ 1,000,590 Deferred loss on bond refundings 68, ,740 Total Deferred Outflows of Resources $ 635,623 $ 1,125,330 The accompanying notes to financial statements are an integral part of these statements. 14

28 STATEMENTS OF NET POSITION September 30, 2016 and 2015 LIABILITIES Current liabilities: Accounts payable $ 1,532,023 $ 1,573,247 Accrued liabilities 442, ,566 Retainage payable 3,740,844 2,968,330 Customer deposits 1,602,835 1,566,422 Compensated absences 56,714 49,059 Liabilities payable from restricted assets: Interest payable 492, ,575 Current portion of bonds payable 7,567,911 7,221,417 Total current liabilities 15,435,086 14,237,616 Non-current liabilities: Compensated absences 1,060,551 1,022,065 Other post employment benefits 332, ,268 Unearned revenue 562, ,223 Interest rate swap 567,545 1,000,590 Non-current portion of bonds payable, net 92,551, ,036,676 Total non-current liabilities 95,074, ,843,822 Total Liabilities $ 110,509,102 $ 117,081,438 NET POSITION Net investment in capital assets $ 166,347,112 $ 161,764,222 Restricted for: Debt service 4,850,465 4,212,968 Debt reserve 11,030,463 12,305,214 Renewal and replacement 2,000,000 2,000,000 Unrestricted 73,377,387 63,027,336 Total Net Position $ 257,605,427 $ 243,309,740 The accompanying notes to financial statements are an integral part of these financial statements. 15

29 STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION For the Fiscal Years Ended September 30, 2016 and Operating revenues: Charges for services $ 51,238,445 $ 48,337,424 Miscellaneous 171, ,850 Total operating revenues 51,410,353 48,504,274 Operating expenses: Plant operation and maintenance 16,116,589 15,758,025 General and administrative 6,183,057 6,061,989 Depreciation and amortization 17,727,911 17,233,272 Total operating expenses 40,027,557 39,053,286 Operating income 11,382,796 9,450,988 Nonoperating revenues (expenses): Investment income: Interest income 1,122, ,557 Net increase (decrease) in the fair value of investments 419, ,981 Interest expense (5,584,067) (6,029,897) Amortization of bond costs (139,220) (156,322) Build America bond rebate 1,392,355 1,384,267 Other revenue 108,188 81,998 Other expense (1,309,422) (3,817,089) Total nonoperating revenues (expenses) (3,989,761) (7,397,505) Income before capital contributions 7,393,035 2,053,483 Capital contributions: Developer and other contributions 6,902,652 2,735,013 Increase in net position 14,295,687 4,788,496 Net position, beginning of year 243,309, ,521,244 Net position, end of year $ 257,605,427 $ 243,309,740 The accompanying notes to financial statements are an integral part of these statements. 16

30 STATEMENTS OF CASH FLOWS For the Fiscal Years Ended September 30, 2016 and Cash flows from operating activities: Cash received from customers $ 51,219,822 $ 48,419,774 Cash paid to suppliers for goods and services (11,015,979) (10,497,895) Cash paid to or for the benefit of employees (11,489,771) (11,652,174) Net cash provided by operating activities 28,714,072 26,269,705 Cash flows from capital and related financing activities: Principal paid on bonds (7,221,417) (6,873,329) Interest paid on bonds (6,082,796) (6,426,235) Payments to acquire and construct plant property (11,410,689) (10,905,744) Capital contributions 2,129,539 1,669,411 Build America bond rebate 1,392,355 1,384,267 Proceeds from the sale of capital assets 122,462 31,711 Net cash (used) in capital and related financing activities (21,070,546) (21,119,919) Cash flows from investing activities: Purchase of investments (25,904,530) (27,817,829) Redemption of investments 30,178,900 19,882,978 Interest received 1,001, ,655 Net cash provided by (used) in investing activities 5,275,571 (7,158,196) Net increase (decrease) in cash and cash equivalents 12,919,097 (2,008,410) Cash and cash equivalents, beginning of year 17,061,912 19,070,322 Cash and cash equivalents, end of year $ 29,981,009 $ 17,061,912 Cash and cash equivalents: Cash, cash equivalents and investments - unrestricted $ 70,545,824 $ 60,815,893 Cash, cash equivalents and investments - current restricted 8,060,432 7,741,992 Cash, cash equivalents and investments - noncurrent restricted 10,313,017 11,296,765 Less: Investments not considered cash equivalents (58,938,264) (62,792,738) $ 29,981,009 $ 17,061,912 Reconciliation of operating income to net cash provided by operating activities: Operating income $ 11,382,796 $ 9,450,988 Adjustments to reconcile operating income to net cash provided by operating activities: Other revenue 108,188 81,998 Depreciation and amortization expense 17,727,911 17,233,272 Changes in assets and liabilities: (Increase) decrease in assets: Accounts and other receivables (410,307) (228,849) Inventories (569,396) 65,788 Prepaid expenses 32,111 (39,267) Increase (decrease) in liabilities: Accounts payable and other accrued expenses 325,171 (319,961) Customer deposits payable 36,413 (13,824) Unearned revenue 81,185 39,560 Total adjustments 17,331,276 16,818,717 Net cash provided by operating activities $ 28,714,072 $ 26,269,705 Supplemental schedule of noncash investing, capital, and financing activities Change in fair value of investments $ 419,896 $ 317,981 Developer contributions of transmission & collection mains and lift stations $ 4,773,113 $ 1,065,602 The accompanying notes to financial statements are an integral part of these statements. 17