SFO Fuel Company LLC. Financial Statements and Independent Auditor's Report. December 31, 2016 and 2015

Transcription

1 Financial Statements and Independent Auditor's Report

2 Index Page Independent Auditor's Report 2 Financial Statements Balance Sheets 3 Statements of Income 4 Statements of Members' Equity 5 Statements of Cash Flows 6 Notes to Financial Statements 7 1

3 Independent Auditor's Report To the Fuel Committee SFO Fuel Company LLC We have audited the accompanying financial statements of SFO Fuel Company LLC (a Delaware limited liability company), which comprise the balance sheets as of, the related statements of income, members' equity and cash flows for the years then ended, and the related notes to the financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility 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. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit 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 principles 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. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SFO Fuel Company LLC as of, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Tysons, Virginia April 17,

4 Balance Sheets Assets Current assets Cash and cash equivalents $ 10,537,556 $ 10,842,428 Accounts receivable, members 45, ,328 Accounts receivable, nonmembers 293, ,961 Due from members, environmental costs 57, ,000 Prepaid expenses and other current assets 942, ,263 Total current assets 11,876,771 12,617,980 Property and equipment, net 16,138,169 13,540,644 Due from members, environmental costs 65, ,000 Liabilities and Members' Equity $ 28,079,940 $ 26,263,624 Current liabilities Accounts payable $ 792,587 $ 835,752 Accrued expenses 583, ,219 Accrued construction costs 173, ,469 Advance billings 4,948,304 4,282,926 Accrued environmental costs 57, ,000 Due to members 2,907,419 2,494,071 Current portion of notes payable, members - 2,780,808 Total current liabilities 9,462,711 11,663,245 Long-term liabilities Reserve deposits 3,960,629 4,104,779 Accrued environmental costs 65, ,000 Notes payable, members 14,465,600 10,265,600 Deferred tax liability 14,000 14,000 Total liabilities 27,967,940 26,152,624 Members' equity 112, ,000 $ 28,079,940 $ 26,263,624 See Notes to Financial Statements. 3

5 Statements of Income Years Ended Revenues Members $ 21,475,717 $ 20,808,923 Nonmembers 1,968,290 1,717,945 Total revenues 23,444,007 22,526,868 Operating expenses Pipeline facilities and land rental 4,870,283 4,148,061 Special facilities lease 9,009,840 9,008,889 General and administrative 1,218,375 1,204,054 Management fee 258, ,000 Ground rental of land and easements 1,430,301 1,393,840 Depreciation and amortization 1,729,872 1,444,111 Operator salaries, wages and benefits 2,238,870 2,147,174 Utilities 522, ,797 Property tax 388, ,068 Repairs, maintenance and supplies 1,313,533 1,435,471 Environmental remediation expenses 119, ,500 Total operating expenses 23,099,347 22,088,965 Income from operations 344, ,903 Other income (expense) Interest income Interest expense (392,660) (472,875) Waste fuel income 47,898 34,872 (343,781) (437,103) Income before income taxes Income tax expense Net income $ - $ - See Notes to Financial Statements. 4

6 Statements of Members' Equity Years Ended Balance, January 1, 2015 $ 97,000 Net income - Member contributions 14,000 Balance, December 31, ,000 Net income - Member contributions 1,000 Balance, December 31, 2016 $ 112,000 See Notes to Financial Statements. 5

7 Statements of Cash Flows Years Ended Cash flows from operating activities Net income $ - $ - Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization expense 1,729,872 1,444,111 Bad debt expense 94,369 37,382 Change in Accounts receivable 269,037 (264,520) Prepaid expenses and other assets 19,931 18,070 Accounts payable and accrued expenses (111,733) (76,328) Advance billings 665, ,855 Reserve deposits (144,150) (3,324) Accrued environmental costs (93,000) 35,000 Due to members 506,348 (1,189,721) Net cash provided by operating activities 2,936, ,525 Cash flows used in investing activities Purchase of property and equipment (4,661,116) (2,624,311) Cash flows from financing activities Proceeds from issuance of notes payable to members 4,200,000 3,600,000 Payment of notes payable to members (2,780,808) (2,761,712) Proceeds from members' contributed capital 1,000 14,000 Net cash provided by financing activities 1,420, ,288 Net decrease in cash and cash equivalents (304,872) (1,542,498) Cash and cash equivalents, beginning of year 10,842,428 12,384,926 Cash and cash equivalents, end of year $ 10,537,556 $ 10,842,428 Supplemental disclosures of cash flow information Cash paid during the year for: Interest expense $ 392,660 $ 472,875 Income taxes $ 879 $ 800 See Notes to Financial Statements. 6

8 Notes to Financial Statements Note 1 - Summary of significant accounting policies Organization and business SFO Fuel Company LLC (the "Company") was organized on May 28, 1997 as a limited liability company under the laws of the state of Delaware for the purpose of leasing, constructing and operating the fuel systems at the San Francisco International Airport ("Airport"). The Airport Commission of the City and County of San Francisco, California (the "Airport Commission") issued Special Facilities Lease Revenue Bonds (the "Bonds") on October 7, 1997 and May 1, The Bonds were issued in three separate series consisting of Series A in the aggregate principal amount of $93,400,000, Series B in the aggregate amount of $12,300,000, and Series 2000A in the aggregate amount of $19,390,000. The Bonds were issued specifically to finance the costs of acquisition, construction, modification, expansion and installation of certain additions, replacements and improvements to the jet fuel receipt, storage and distribution system currently serving the Airport, certain diesel and gasoline storage, and delivery facilities for ground service equipment users at the Airport and related environmental costs. Proceeds of the Bonds, which were placed into the custody of an appointed trustee, were also used to finance the first-year operating expenses of the Company. The Company has contracted with Aircraft Service International, Inc. ("ASII") for the operation and administration of the fuel system. The Company is governed by a Fuel Committee that is composed of one representative appointed by each airline that is a member of the company pursuant to its Limited Liability Company agreement, and is a party to an interline agreement ("Interline Agreement") among the member airlines and the Company. Such airlines are referred to herein as "Contracting Airlines" or "Member Airlines." Airlines that use the Company's services without becoming a member or a party to the Interline Agreement are referred to herein as "Noncontracting Airlines" or "Nonmember Airlines." Use of estimates Management uses estimates and assumptions in preparing these financial statements in accordance with accounting principles generally accepted in the United States of America. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were used. Cash and cash equivalents Cash and cash equivalents includes cash and money market funds. The Company maintains balances at financial institutions in excess of federally insured amounts. The amount in excess of federally insured limits approximates $10,289,000 as of December 31, Accounts receivable and revenue recognition Member revenue includes maintenance and operating expenses charged to Member Airlines, after reduction for amounts received from Nonmember Airlines. Net costs are allocated to member airlines based primarily on gallons of throughput. Nonmember Airline users are charged a fee based on gallonage used on a monthly basis. Customer account balances with invoices dated over 90 days old are considered past due. The Company pre-bills expenses and requires deposits from both Member and Nonmember Airlines to minimize bad debt losses. When bad debt losses occur, they are billed as an expense to the Member Airlines. Bad debt expense amounted to $94,369 and $37,382 for 2016 and 2015, respectively. The allowance for bad debts was $94,369 and $37,382 at December 31, 2016 and 2015, respectively. 7

9 Notes to Financial Statements Reserve deposits and member contributions Pursuant to the Interline Agreement, each Contracting Airline is required to deposit and maintain with the Company an operating reserve account equal to twice such Contracting Airline's estimated average monthly share of the total fuel system charge for the previous 12 months. In the event of a default on amounts due to the Company, the Company will draw on the defaulting Contracting Airline's reserves. The Company requires similar deposits from its Noncontracting Airlines. Each airline who elects to become a Member of the Company makes an initial capital contribution of $1,000. Airlines that normally operate out of the Airport and that have elected to become a member and enter into the Interline Agreement, subsequent to the initial 90-day entry period of the issuance of the Bonds, will pay an entry fee of $10,000. Airlines withdrawing from the Company are liable for a withdrawal fee based on their share of certain expenses for the 24 prior months. As of December 31, 2016, the Company had 41 Contracting Airlines. Property and equipment Property and equipment is stated at cost. Depreciation and amortization are provided on straightline and accelerated methods over the estimated useful lives of the related assets. Expenditures for maintenance and repairs are charged to operations as incurred. The estimated useful lives of property and equipment are as follows: Leasehold improvements Tank farm Boarding Area A&G improvements Boarding Area D improvements Computer and office equipment Other parts and equipment 3 to 24 years 19 years 17 to 22 years 13 years 3 to 7 years 3 to 16 years Environmental liabilities Accruals for environmental remediation costs are recorded when it is probable that a liability has been or anticipated to be incurred and the amount of loss can be reasonably estimated. The measurement of environmental liabilities is based on an evaluation of currently available facts with respect to each individual site and considers factors such as existing technology, presently enacted laws and regulations, and prior experience in remediation of contaminated sites. Legal costs associated with environmental liabilities are expensed as incurred. Income taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. New accounting pronouncements In February 2016, the FASB issued ASU , "Leases (Topic 842)." This update requires an entity to recognize lease assets and lease liabilities on the balance sheet and to disclose key information about the entity's leasing arrangements. ASU is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2018, with early application 8

10 Notes to Financial Statements permitted. A modified retrospective approach is required. The Company is currently evaluating the impact of the adoption of ASU on the Company's financial statements. Reclassification Certain amounts in the 2015 financial statements have been reclassified to conform with the 2016 presentation. There was no effect on previously reported net income. Subsequent events The Company has evaluated subsequent events through April 17, 2017, the date which the financial statements were issued. Note 2 - Management fees The Company has contracted with ASII as the operator of the fuel system and pays a management fee and reimburses salaries and other directly related expenses. The Company also pays interest expense to ASII for expenses paid on the Company's behalf. Following is a summary of amounts paid to ASII for the years ended : Management fees $ 258,000 $ 258,000 Reimbursement of expenses 8,308,520 8,765,317 Interest expense 16,920 13,097 $ 8,583,440 $ 9,036,414 The Company owed ASII $792,587 and $835,112 as of, respectively. Note 3 - Property and equipment Property and equipment as of consists of: Leasehold improvements $ 12,020,152 $ 7,730,250 Tank farm 5,697,835 5,697,835 Boarding Area A&G improvements 2,847,531 2,847,531 Boarding Area D improvements 270, ,000 Computer and office equipment 37,233 37,233 Other parts and equipment 1,787,100 1,536,509 22,659,851 18,119,358 Less accumulated depreciation and amortization (7,919,836) (6,189,964) Construction in progress 1,398,154 1,611,250 Property and equipment, net $ 16,138,169 $ 13,540,644 9

11 Notes to Financial Statements Note 4 - Notes payable On December 31, 2005, the Company issued $2,800,000 in notes payable to members, due December 31, 2015, in exchange for funds received to finance special capital projects. The notes accrued interest at 4.79 percent, which the Company paid annually. The balance remaining on the notes was $2,761,712. As of December 31, 2015, the Company offset the 2005 note balances against member receivables and credited 2016 billings until paid in full. The Company paid amounts due on the notes to former members and others upon their request in January Related balances due of $2,637,024 were included in due to members at December 31, The Company recorded interest expense related to the 2005 notes payable of $132,286 for the year ended December 31, On December 31, 2006, the Company issued $2,800,000 in notes payable to members, due December 31, 2016, in exchange for funds received to finance special capital projects. The notes accrued interest at 4.90 percent, which the Company paid annually. The balance remaining on these notes was $2,780,808. As of December 31, 2016, the Company offset the 2006 note balances against member receivables and will credit 2017 billings until paid in full. The Company paid amounts due on the notes to former members and others upon their request in January Related balances due of $2,766,655 are included in due to members at December 31, The Company recorded interest expense related to the 2006 notes payable of $136,260 for the years ended. On December 31, 2010, the Company issued $700,000 in notes payable to members in exchange for funds received to finance special capital projects. The notes bear interest at 3.53 percent, payable annually beginning on December 31, 2011, and are due in full on December 31, The Company recorded interest expense related to the 2010 notes payable of $24,710 for the years ended. On December 31, 2011, the Company issued $500,000 in notes payable to members in exchange for funds received to finance special capital projects. The notes bear interest at 2.80 percent, payable annually beginning on December 31, 2012, and are due in full on December 31, The Company recorded interest expense related to the 2011 notes payable of $14,000 for the years ended. On December 31, 2012, the Company issued $1,100,000 of notes payable to members in exchange for funds received to finance special capital projects. The notes bear interest at 2.40 percent, payable annually beginning on December 31, 2013, and are due in full on December 31, The Company recorded interest expense related to the 2012 notes payable of $26,400 for the years ended. On December 31, 2013, the Company issued $1,121,600 of notes payable to members in exchange for funds received to finance special capital projects. The notes bear interest at 3.32 percent, payable annually beginning on December 31, 2014, and are due in full on December 31, The Company recorded interest expense related to the 2013 notes payable of $37,237 for the years ended. On December 31, 2014, the Company issued $3,244,000 of notes payable to members in exchange for funds received to finance special capital projects. The notes bear interest at 2.74 percent, payable annually beginning on December 31, 2015, and are due in full on December 31, The Company recorded interest expense related to the 2014 notes payable of $88,886 for the years ended. 10

12 Notes to Financial Statements On December 31, 2015, the Company issued $3,600,000 of notes payable to members in exchange for funds received to finance special capital projects. The notes bear interest at 2.61 percent, payable annually beginning on December 31, 2016, and are due in full on December 31, The Company recorded interest expense related to the 2015 notes payable of $93,960 for the year ended December 31, On December 31, 2016, the Company issued $4,200,000 of notes payable to members in exchange for funds received to finance special capital projects. The notes bear interest at 2.26 percent, payable annually beginning on December 31, 2017, and are due in full on December 31, Capitalized interest for 2016 was $45,712. There was no capitalized interest for Note 5 - Income taxes The Company is a limited liability company that has elected to be taxed as a corporation for federal and state income tax purposes. The provision for income tax expense for year ended December 31, 2016 consists of federal alternative minimum taxes of $79 and $800 of California minimum taxes. The provision for income tax expense for year ended December 31, 2015 consists of California minimum taxes of $800 The tax effects of temporary differences that give rise to significant portions of the deferred tax asset and deferred tax liability at are presented below: Deferred tax assets Net operating loss carryforward $ 77,000 $ 145,000 Deferred tax liability Excess tax depreciation and amortization (91,000) (159,000) Net deferred tax liability $ (14,000) $ (14,000) The Company has net operating loss carryforwards of approximately $515,000 available to offset future taxable income, which will begin to expire in The Company is no longer subject to federal or California income tax examinations by tax authorities for years prior to Note 6 - Environmental remediation liabilities With respect to the Boarding Area D site (former Pier D), the Company anticipated that it would incur environmental costs to remediate certain areas of contaminated soil and groundwater. The Company has been incurring related costs and expects to incur ongoing environmental remediation costs related to the Boarding Area D site. As of December 31, 2016, the future environmental remediation expenditures for Boarding Area D, estimated by a third party, approximate $112,000, which the Company estimates will be expended through The estimate is based on continued site monitoring and remediation. The locations where fuel remains in the groundwater are well defined, stable, limited in extent, and only deminimis amounts of fuel is accessible for recovery. While the Company plans to seek approval from regulatory agencies to cease remedial action at Boarding Area D, it is reasonably possible that the expenses, particularly as related to long-term 11

13 Notes to Financial Statements groundwater monitoring, may continue past 2018, and future amounts are uncertain. The Company has accrued environmental costs of $112,000 on an undiscounted basis at December 31, 2016 for the estimated expenses of Boarding Area D through The Company has also recorded a corresponding receivable as such costs will be billed to Member Airlines as expended in future periods. During 2015, the Company identified a potential release of fuel entering into a below grade valve box identified as JAL-VB-1. The Company anticipates that it will incur environmental costs to remediate certain areas of contaminated soil and groundwater. As of December 31, 2016, the future environmental remediation expenditures for JAL-VB-1, estimated by a third party, approximates $10,000, which the Company estimates will be expended through The estimate is based on leak detection tests and field observations of conditions in soil and groundwater samples from pothole excavations performed by the third party. It is reasonably possible that the expenses may continue past 2017, and future amounts are uncertain. The Company has accrued environmental costs of $10,000 on an undiscounted basis at December 31, 2016 for the estimated expenses of JAL-VB-1 through The Company has also recorded a corresponding receivable, as such costs will be billed to Member Airlines as expended in future periods. Future information and developments require the Company to reassess the expected impact of these environmental matters, and it is reasonably possible that a change in the estimates will occur in the future. The Company evaluates its total environmental exposure, based on currently available data, and believes it is compliant with all applicable laws and regulations. Note 7 - Commitments and contingencies Bond guaranty and security agreements Pursuant to the Guaranty Agreement dated September 1, 1997 between the Company and the Trustee, the Company has guaranteed payment of the principal, interest and premiums, if any, on the 1997 Bonds. In June 2000, the Airport Commission issued the Series 2000A bonds as part of the 1997 Special Facilities Lease Revenue Bonds. These bonds are covered by the guarantee also. In connection with the Guaranty Agreement, the Company executed a Security Agreement whereby the Company has assigned, pledged and granted to the Trustee an exclusive interest in all rights, title and interest of the Company, whether now owned or subsequently acquired, and certain contractual rights and intangible assets of the Company. In addition, the Company has agreed to enforce the payment of all amounts due under the Interline Agreement discussed in Note 1, and to require the Contracting Airlines to perform their respective obligations under the Interline Agreement. The total original amount of the bonds issued was $125,000,000. Litigation In the normal course of business, the Company is subject to various claims and assessments. While it is not feasible to predict the outcome of these matters, the Company does not expect that any sum it may be required to pay in connection with these matters would have a material effect on its financial position. Operating leases The Company leases a fuel facility from the Airport Commission of the City and County of San Francisco ("Airport Commission") under a 30-year lease expiring in June The lease provides for ground rental of certain parcels of land and easements, as well as the payment of debt service on bonds issued by the Airport Commission to finance facility improvements. 12

14 Notes to Financial Statements Annual ground rental payments are currently established at $1,437,612, subject to annual CPI increases, and are adjusted to market rate every five years based on reappraisal. Ground rent expenses amounted to $1,430,301 and $1,393,840 for 2016 and 2015, respectively. The Company is also obligated to pay the debt service on the bonds issued by the Airport Commission. Debt service expense amounted to $9,009,940 and $9,008,889 for 2016 and 2015, respectively, and is classified as special facilities lease on the accompanying financial statements. The Company entered into an off-airport terminalling agreement with Shell Aviation, effective March 1, 2007, to lease additional fuel storage and distribution capabilities. The lease requires annual payments of approximately $4,185,000 through February Payments are subject to annual price adjustments based on the percentage increase in the Implicit Price Deflator - Gross Domestic Product index. The Company's expense under this agreement amounted to $4,065,532 and $3,694,401 for 2016 and 2015, respectively. The Company entered into an off-airport terminalling agreement with SFPP, L.P., effective May 20, 2015, to lease additional fuel storage and distribution capabilities. The lease requires annual payments of approximately $405,000 through May The lease also provides for additional storage space and excess thru-put fees. The Company's expense under this agreement amounted to $804,751 and $411,780 for 2016 and 2015, respectively. Payments required under the above agreements are as follows: Airport Commission Fuel Total Year ending Ground Bond debt storage lease December 31, rent service facility commitments 2017 $ 1,465,844 $ 9,012,681 $ 1,563,687 $ 12,042, ,465,844 9,010,319-10,476, ,465,844 9,007,569-10,473, ,465,844 9,008,644-10,474, ,465,844 9,012,163-10,478,007 Thereafter 9,408,873 44,865,631-54,274,504 Total $ 16,738,093 $ 89,917,007 $ 1,563,687 $ 108,218,787 Note 8 - Concentration of revenue During 2016, United Airlines accounted for approximately $7,900,000 of the Company's revenue. 13

15