n a o y Annual Report

Transcription

1 d Fort Erie Public Bridge Auth n a o orit al y Buff 2006 Annual Report

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3 B O A R D O F D I R E C T O R S B O A R D O F D I R E C T O R S (Pictured from left to right) Mary S. Martino, Dr. Patricia K. Teal, Kenneth A. Schoetz, Peter J. Caperchione, Patricia M. Anzovino, Paul J. Koessler, Gerald J. Lewandowski, John A. Lopinski, Deanna Di Martile, Thomas J. Madison, Jr. 1

4 C H A I R M A N S R E P O R T was a special year for the Buffalo and Fort Erie Public Bridge Authority. After 79 years of being headquartered in Buffalo, the Authority moved its administrative and toll functions across the Niagara River to Fort Erie. This move resulted in consolidation of Authority functions and freed up valuable plaza and office space on the U.S. plaza allowing the expansion of facilities for Customs and Border Protection. Also, opening on the Canadian plaza in 2006 was the new Refugee Processing Facility operated by the Canada Border Services Agency and the Peace Bridge Newcomer Centre. C H A I R M A N S R E P O R T Work continued throughout the year on the Border Infrastructure Fund (BIF) Project and on a total bridge joint replacement project with no disruption to traffic. Overall traffic volumes were down 1.12% for cars while truck volumes were up 1.01%. The auto volume decreases are attributable to a stronger Canadian dollar, uncertainty in crossing times due to Canada Customs labour issues, higher fuel prices, and confusion over the passport proposal known as the Western Hemisphere Travel Initiative (WHTI). A new four year collective agreement was negotiated with Teamsters Local 375 (U.S.) which fundamentally altered the long term cost structure for the Authority. This agreement will provide cost containment allowing greater flexibility to finance the Authority s long term capital plan. The Authority continued to be frustrated by the continued inability of the governments of Canada and the U.S. to reach agreement on Shared Border Management implementation which would relocate the U.S. Customs functions from Buffalo to Fort Erie. Since December 2004 this has adversely impacted the schedule of the Capacity Expansion project and means a Record of Decision from the Federal Highway Administration will likely not be attainable in Paul Koessler Chairman 2

5 I N D E P E N D E N T A U D I T O R S R E P O R T The Board of Directors Buffalo and Fort Erie Public Bridge Authority Buffalo, New York We have audited the accompanying balance sheets of Buffalo and Fort Erie Public Bridge Authority (the Authority) as of December 31, 2006 and 2005, and the related statements of revenues, expenses, and changes in net assets, and cash flows for the years then ended. These basic financial statements are the responsibility of the Authority s management. Our responsibility is to express an opinion on these basic 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 basic financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the basic financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the basic financial statements referred to above present fairly, in all material respects, the financial position of the Authority as of December 31, 2006 and 2005, and the changes in its net assets and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued our report dated February 20, 2007 on our consideration of the Authority s internal control over financial reporting and our test of its compliance with certain provisions of laws, regulations, contracts, grant agreements, and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. I N D E P E N D E N T A U D I T O R S R E P O R T Management s Discussion and Analysis (MD & A), preceding the basic financial statements, is not a required part of the basic financial statements but is supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the supplementary information. However, we did not audit the information and express no opinion on it. February 20,

6 M A N A G E M E N T S D I S C U S S I O N A N D A N A L Y S I S For the Years ended December 31, 2006 and 2005 (Unaudited) The management of the Buffalo & Fort Erie Public Bridge Authority (hereinafter referred to as the Authority) offers the following overview and analysis of the Authority s financial activities for the years ended December 31, 2006 and 2005, which should be read in conjunction with the Authority s basic financial statements and notes to the basic financial statements. OVERVIEW OF THE BASIC FINANCIAL STATEMENTS M A N A G E M E N T S D I S C U S S I O N A N D A N A LY S I S This discussion and analysis is intended to serve as an introduction to the Authority s basic financial statements. It begins by presenting and explaining the basic financial statements. These statements have been prepared according to accounting principles generally accepted in the United States of America (GAAP). Revenues and expenses are recorded using the accrual basis of accounting, meaning that they are recorded and recognized by the Authority as earned/incurred, regardless of when cash is received or paid. The balance sheet presents information on all of the Authority s assets and liabilities, with the difference between the two reported as net assets. Increases or decreases in net assets serve as a relative indicator as to the whether the Authority s financial position is strengthening or weakening over time. The statement of revenues, expenses, and changes in net assets shows the results of the Authority s operations during the year and reflects both operating and nonoperating activities. Changes in net assets reflect the operational impact of the current year s activities on the financial position of the Authority. The statement of cash flows provides an analysis of the sources and uses of cash. The cash flow statement shows net cash provided or used in operating, financing and investing activities. The notes to the basic financial statements include additional information needed to provide a further understanding of the basic financial statements. 4

7 M A N A G E M E N T S D I S C U S S I O N A N D A N A L Y S I S FINANCIAL STATEMENT ANALYSIS Comparative Balance Sheets as of December 31: U.S. $, in thousands ASSETS Current assets $ 28,225 $ 27,881 Restricted assets 7,695 8,048 Capital assets, net 143, ,889 Other assets Total assets $ 180,108 $ 164,323 LIABILITIES AND NET ASSETS Current liabilities $ 5,337 $ 5,900 Bonds payable 42,284 42,003 Total liabilities 47,621 47,903 NET ASSETS Invested in capital assets, net of related debt 99,497 83,469 Restricted 7,495 7,848 Unrestricted 25,495 25,103 Total net assets 132, ,420 Total liabilities and net assets $ 180,108 $ 164,323 As noted earlier, net assets serves as an indicator of the Authority s overall financial position. The Authority s net assets increased by approximately $16.1 million during 2006 as a result of net income earned through all Authority activities. Restricted net assets are reserved for debt service, governmental payments and operating reserves, as required by the Authority s bond indenture. Substantially all unrestricted net assets have been designated by the Board of Directors for acquisition or construction of capital projects and/or major repairs and replacements. M A N A G E M E N T S D I S C U S S I O N A N D A N A LY S I S The increase in net assets invested in capital assets, net of related debt reflects the Authority s continued investment in infrastructure improvements associated with maximizing the efficiency of the existing plazas. Restricted assets and restricted net assets have declined, reflecting a decrease in the operating reserve requirement due to the timing of cash receipts and cash disbursements. 5

8 M A N A G E M E N T S D I S C U S S I O N A N D A N A L Y S I S ( C O N T ) STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS FOR THE YEARS ENDED DECEMBER 31: M A N A G E M E N T S D I S C U S S I O N A N D A N A LY S I S U.S. $, in thousands December 31, OPERATING REVENUE Toll revenues $ 18,973 $ 19,090 Other revenues 8,251 7,427 Total operating revenues 27,224 26,517 OPERATING EXPENSES Toll collection and traffic control 3,876 3,992 Maintenance of bridge and facilities 4,452 4,357 Administration 2,952 3,289 Depreciation 4,378 4,231 Contributions to pension plans 1,845 1,629 Other expenses 945 1,058 Total operating expenses 18,448 18,556 Operating Income 8,776 7,961 NON-OPERATING REVENUES (EXPENSES) Interest income 1, Interest expense & amortization of deferred financing costs (1,734) (2,409) Currency remeasurement Special investment depreciation and loss on asset valuation (1,756) (4,628) Total non-operating net expense (1,945) (6,239) Capital contributions 9,236 7,015 Increase in net assets 16,067 8,737 Net assets, beginning of year 116, ,683 Net assets, end of year $ 132,487 $ 116,420 As a bi-national toll bridge operator, the Authority earns revenue and incurs expenses in both U.S. and Canadian dollars. All Canadian revenue and expenses are converted to U.S. dollars at the average rate of exchange for the year. The Canadian dollar strengthened against the U.S. dollar during 2006, resulting in an increase in the remeasured value of both the revenue earned and expenses incurred in Canadian dollars. Toll revenues remained relatively stable in 2006 compared to 2005, as traffic vehicle volume decreased by.7% overall and toll rates remained unchanged. Other revenues, consisting primarily of rental income, were favorably impacted by increases in contingent rental income from the dutyfree stores and increases in rental rates associated with enhanced service levels and leased square footage. 6

9 M A N A G E M E N T S D I S C U S S I O N A N D A N A L Y S I S ( C O N T ) Operating expenses decreased by approximately $108,000 or.6%. This decrease is primarily attributable to a reduction in legal expenditures, property, general liability and excess liability premiums, and property taxes and equalization payments. These decreases were partially offset by the continued strengthening of the Canadian dollar, resulting in an increase of $360,000 in Canadian expenses remeasured to U.S. dollars. Total non-operating net expenses decreased significantly in 2006, as an asset valuation loss was recognized in 2005 totaling $2.8 million, representing the undepreciated value of assets associated with removing toll collection from the U.S. plaza. The associated assets were demolished when the toll collection function moved to the Canadian plaza and the U.S. plaza was reconfigured to accommodate increased federal inspection facilities. During each of the years 2006 and 2005, $1.8 million in additional depreciation expense was recognized, associated with a reduction in the estimated useful life of certain structures that have been or will need to be demolished in order to finalize the Authority s Canadian plaza reconfiguration plan. As of December 31, 2006 depreciation expense has been fully recognized for all assets demolished as a result of the plaza reconfiguration. In addition, as noted below, the Authority refinanced its bonds during 2005, resulting in a decrease in interest expense. CAPITAL ASSETS AND LONG TERM DEBT The Authority s investment in capital assets as of December 31, 2006 approximated $144 million, representing 80% of the Authority s total assets. Capital assets consist of land, the Peace Bridge, buildings and plaza improvements, equipment and construction-in-progress. During 2006, the Authority invested $22 million in capital assets, primarily related to maximizing the efficiency of the existing plazas, including (i) relocating the administrative functions of the Authority from the physically constrained U.S. side to the Canadian bridge plaza; (ii) construction of buildings to accommodate Canadian Customs Border Services Agency functions, including refugee processing on the Canadian side and (iii) relocation of Canadian auto primary inspection facilities to increase queuing capacity. In addition, capital assets included on-going expenditures associated with the Bi-National Integrated Environmental Review Process whereby bridge and plaza expansion are being studied as a single action. These infrastructure improvements were partially funded through Canadian & U.S. federal government grants, with the remainder funded through net revenue generated through operations. M A N A G E M E N T S D I S C U S S I O N A N D A N A LY S I S In August 2005, the Authority issued $44,120,000 in variable rate Toll Bridge System Revenue Refunding Bonds to currently refund $43,915,000 of outstanding 1995 Series bonds with interest rates ranging from 5.125% to 6%. The proceeds of 2005 Series Bonds were used to refund the original bonds and establish the Series 2005 debt reserves. The principal of, purchase or redemption price of, and interest on, the Series 2005 Bonds are payable from funds drawn under an irrevocable, direct-pay letter of credit issued by the New York Agency of Scotiabank. Moody s Investors Service, Inc., Standard & Poor s Rating Services, Inc., and Fitch Ratings have assigned ratings of Aa3 / VMIG-1, AA- / A-1+, and AA- / F1+ to the 2005 Series Bonds. 7

10 M A N A G E M E N T S D I S C U S S I O N A N D A N A L Y S I S ( C O N T ) The Authority completed the current refunding to reduce its anticipated debt service payments over the next 20 years by an estimated $9.4 million, and to obtain an estimated economic gain of approximately $7.8 million. However, due to the variable rate debt fluctuation risks involved, as well as the broad range of options available to the Authority in re-tendering this debt in July 2007 and beyond, the anticipated reduction in debt service payments and the estimated economic gain are uncertain and subject to changing market conditions over time. FACTS THAT WILL IMPACT FINANCIAL POSITION M A N A G E M E N T S D I S C U S S I O N A N D A N A LY S I S The Authority has two defined benefit pension plans covering substantially all employees in the United States and Canada. Due to declines in the market value of investments and long-term interest rates used to value pension liabilities, the plans are under funded by $1.4 million as of December 31, The Authority intends to eliminate the plans deficiencies over a fifteen-year period. Design and construction of a capacity expansion project resulting from the Bi-National Integrated Environmental Review Process is expected to require a future bond offering or other debt financing. The Authority may not have sufficient financial capability to fund the entire cost of construction and maintenance of this project, although it does expect to contribute materially to such cost. A draft finance plan has been developed to consider enhancement of the current financial capacity of the Authority to undertake the project and to determine the availability of other funding sources. Various factors may affect the timing and costs ultimately required to implement certain provisions of the capacity expansion project, which remains in the environmental assessment phase. Consequently, it is not currently possible to accurately predict the timing of the issuance or the amount of any financing that may be required to implement the capacity expansion project. Among other factors, the upgrading of the plaza at the U.S. terminus of the Peace Bridge may be significantly affected by events such as the implementation of Shared Border Management, whereby U.S. Customs and Border Protection operations would be relocated from the U.S. plaza to the Canadian plaza. During 2005, the Authority applied for and received a commitment to receive $25 million for planning, design, and construction of certain capacity expansion project components under the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users or SAFETEA-LU. This funding will be analyzed in conjunction with the overall finance plan and will be used to establish the financial threshold for evaluating project alternatives and the selection of a preferred alternative. CONTACT FOR AUTHORITY S FINANCIAL MANAGEMENT This report is designed to provide a general overview of the finances of the Authority for interested parties. Questions concerning any information within this report or requests for additional information should be addressed to Lynne M. Bogdan, Finance Manager, 100 Queen Street, Fort Erie, ON L2A 3S6. 8

11 December 31, ASSETS Current assets: Cash $ 123,705 $ 211,648 Accounts receivable, net 2,609,730 2,084,260 Grants receivable 1,471,111 1,701,911 Prepaid expenses and other assets 174, ,897 Investments 23,845,779 23,686,995 28,224,938 27,880,711 B A L A N C E S H E E T S Noncurrent assets: Restricted assets: Cash 1,864,466 1,464,870 Investments 5,830,762 6,582,847 7,695,228 8,047,717 Capital assets, net 143,709, ,889,419 Deferred financing costs 478, , ,188, ,394,926 Total assets $ 180,108,267 $ 164,323,354 LIABILITIES Current liabilities: Accounts payable and accrued liabilities $ 2,482,357 $ 2,681,730 Accrued interest payable 661, ,000 Deferred revenue 1,011,046 1,017,797 Accrued compensation and benefits 981, ,716 Due to other governments 200, ,000 Note payable - 489,976 5,336,585 5,900,219 B A L A N C E S H E E T S Noncurrent liabilities: Bonds payable 42,284,313 42,003,546 Total liabilities 47,620,898 47,903,765 Net Assets: Invested in capital assets, net of related debt 99,497,359 83,469,352 Restricted 7,495,228 7,847,717 Unrestricted 25,494,782 25,102,520 Total net assets 132,487, ,419,589 Total liabilities and net assets $ 180,108,267 $ 164,323,354 9

12 STATEMENTS OF REVENUES, EXPENSES & CHANGES IN NET ASSETS For the years ended December 31, Operating revenues: Commercial tolls $ 12,533,485 $ 12,678,111 Passenger tolls 6,439,352 6,411,437 Rentals 8,004,053 7,216,189 Other 247, ,105 Total operating revenues 27,224,437 26,516,842 REVENUES, EXPENSES & CHANGES IN NET ASSETS Operating expenses: Toll collection and traffic control 3,875,575 3,992,097 Maintenance of bridge, buildings, plazas and equipment 4,452,216 4,356,517 Administration 2,952,433 3,288,747 Contributions to pension plans 1,844,726 1,629,176 Canadian property taxes and U.S. equalization payments 744, ,486 Payments to New York State 200, ,000 Depreciation 4,378,065 4,230,608 Total operating expenses 18,447,644 18,555,631 Operating income 8,776,793 7,961,211 Non-operating revenues (expenses): Interest income 1,356, ,130 Interest expense (1,707,048) (2,369,457) Amortization of deferred financing costs (26,606) (39,616) Currency remeasurement 188,581 95,500 Special investment depreciation (1,785,380) (1,785,380) Gain on asset disposal 29,000 - Loss on asset valuation - (2,842,851) Total non-operating net expense (1,945,439) (6,238,674) Increase in net assets before grant contributions 6,831,354 1,722,537 Capital contributions from grants 9,236,426 7,014,602 Increase in net assets 16,067,780 8,737,139 Net assets - beginning of year 116,419, ,682,450 Net assets - end of year $132,487,369 $116,419,589 10

13 STATEMENTS OF C ASH FLOWS 2006 For the years ended December 31, Cash flows from operating activities: Toll revenue $ 18,684,132 $ 19,440,534 Payments to suppliers (5,138,816) (5,288,876) Payments for wages and employee benefits (9,071,774) (8,795,792) Other revenues 8,103,112 7,394,047 Net cash provided from operating activities 12,576,654 12,749,913 Cash used for capital financing activities: Acquisition and construction of capital assets (22,078,043) (15,003,585) Capital contributions from grants 9,466,772 10,151,697 Repayments on note payable (489,808) (569,792) Payments on long-term debt, including redemption premium - (45,519,150) Proceeds from long term debt issued - 44,120,000 Payment of financing fees - (513,334) Interest paid on debt (1,330,480) (2,950,288) Proceeds on asset disposal 29,000 - Net cash used for capital financing activities (14,402,559) (10,284,452) Cash flows from investing activities: Net deposits (to) from investments 592,120 (2,896,492) Interest income 1,356, ,130 Net cash provided from (used for) investing activities 1,948,134 (2,193,362) Effect of exchange rate changes 189,424 (20,946) Net increase in cash 311, ,153 Cash, beginning of year 1,676,518 1,425,365 Cash, end of year $ 1,988,171 $ 1,676,518 STATEMENTS OF C ASH FLOWS Reconciliation of operating income to net cash used in operating activities: Operating income $ 8,776,793 $ 7,961,211 Adjustments to reconcile operating income to net cash used in operating activities: Depreciation 4,378,065 4,230,608 Allowance for unredeemed tokens and deferred toll revenue (6,673) 103,365 Changes in assets and liabilities: Accounts receivable (525,538) 165,465 Prepaid expense and other assets 21,239 22,654 Accounts payable and accrued liabilities (162,250) 217,701 Deferred revenue 95,018 48,909 $ 12,576,654 $ 12,749,913 11

14 N O T E S T O B A S I C F I N A N C I A L S TAT E M E N T S 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Reporting Entity The Buffalo and Fort Erie Public Bridge Authority (the Authority) was established through a legislative act as a public benefit corporation to own and operate an international toll bridge connecting the United States and Canada. The Enabling Act, under which the Authority was created, provides that on July 1, 2020 or when all bonds issued by the Authority have been discharged (current bonds final maturity date is January 1, 2025), whichever shall be later, the Authority s functions shall cease. NOTES TO BASIC FINANCIAL STATEMENTS Basis of Presentation The financial statements of the Authority are prepared in conformity with U.S. generally accepted accounting principles (GAAP) as applied to government units. The Authority applies all Governmental Accounting Standards Board (GASB) pronouncements as well as applicable Financial Accounting Standards Board (FASB) pronouncements issued on or before November 30, Measurement Focus The Authority reports as a special purpose government engaged in business-type activities, as defined by GASB Statement No. 34. Business-type activities are those that are financed in whole or in part by fees charged to external parties for goods or services. The Authority s financial statements are reported using the economic resources measurement focus and the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded when a liability is incurred. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been satisfied. The Authority s policy for defining operating activities in the statements of revenues, expenses and changes in net assets are those that generally result from exchange transactions such as payments received for services and payments made to purchase those goods or services. Certain other transactions are reported as non-operating activities and include investment income, interest paid on capital debt and the net effect of currency re-measurement. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash At various times, cash in financial institutions may exceed insured limits and subject the Authority to concentrations of credit risk. Investments Investments consist of a bank term investment and government obligations, stated at cost or amortized cost, which approximate fair value. Restricted Assets The Authority established the following accounts in order to comply with bond resolution requirements: Bond - trustee accounts established to receive amounts necessary to meet current principal and interest payments and to maintain a sufficient balance in a debt service reserve fund. Government payments - holds amounts necessary to fund payments to the State of New York as required under current legislation. Operating expense reserve - holds amounts necessary to pay current year operating expenses as defined, plus an operating reserve equal to one-sixth of the operating expenses of the Authority for the preceeding year. 12

15 N O T E S T O B A S I C F I N A N C I A L S T A T E M E N T S ( C O N T ) Capital Assets Capital assets are reported at actual historical cost. For assets being depreciated, expense is calculated over estimated useful lives using the straight-line method. Maintenance and repairs are expensed as incurred, significant improvements are capitalized. Capitalization thresholds for determining which asset purchases are added to capital accounts and the estimated useful lives of capital assets are: Capitalization Estimated Policy Useful Life Bridge infrastructure $5, years Buildings and improvements $5, years Equipment - general $1, years Equipment - toll system $1,000 7 years The Authority capitalizes costs related to a capital expansion project. Capitalized project expenses are evaluated annually, and if the assets are no longer determined to have future value to the current project, they are written off to expense at that time. Currency Translation Due to its bi-national operations, the Authority maintains accounts within its accounting records in either United States or Canadian dollars. The Authority translates all Canadian asset and liability accounts at the year-end exchange rate, except for property and equipment accounts, which are translated at historical rates in effect in the year of acquisition. The statement of revenues and expenses is converted at the average rate of exchange for the year. Translation gains and losses are included as a component of non-operating revenues (expenses) as a currency re-measurement and as a part of net assets. Compensated Absences The Authority provides for vacation, sick and compensatory time that is attributable to services already rendered. The liabilities are recorded based on employees rates of pay as of the end of the fiscal year, and include all payroll related liabilities. Net Assets Invested in capital assets, net of related debt consists of net capital assets reduced by outstanding balances of any related debt obligations attributable to the acquisition, construction, or improvement of the assets. Restricted net assets consists of net assets subject to externally imposed restrictions by creditors (such as through debt covenants), federal or state laws or enabling legislation. Unrestricted consists of all other net assets that do not meet the definition of the above restrictions and are available for general use of the Authority. The Authority has adopted a policy of using restricted funds, when available, prior to unrestricted funds. N O T E S T O B A S I C F I N A N C I A L S TAT E M E N T S 2. DEPOSITS AND INVESTMENTS: The Authority s policy is to obtain collateral for its cash deposits from U.S. financial institutions. Cash deposits maintained in banks within the United States are covered by U.S. Federal Deposit Insurance and by collateral held by custodial banks in the Authority s name based upon the average daily funds available as determined by the banks. Canada Deposit Insurance covers cash deposits up to $85,734 ($100,000 Cdn$) maintained in banks within Canada. Custodial credit risk is the risk that in the event of a bank failure, the Authority s deposits may not be returned to it. At December 31, 2006 the Authority s bank deposits of $27,880,800, including a bank term investment totaling $25,144,856 were exposed to custodial credit risk as follows: 13

16 N O T E S T O B A S I C F I N A N C I A L S T A T E M E N T S ( C O N T ) Collateral held by pledging institution not in Authority s name $ 246,105 Uninsured and uncollateralized 1,304,774 $ 1,550,879 The Authority s exposure to foreign currency risk derives from its deposits in Canadian denominated deposits totaling $1,477,262 (US$). The Authority manages its investments pursuant to the bond resolution, which defines the nature and maturity of allowable investments. In general, the Authority invests conservatively in short-term U.S. and Canadian government securities and certificates of deposit. NOTES TO BASIC FINANCIAL STATEMENTS 3. ACCOUNTS RECEIVABLE, NET: Accounts receivable $ 2,615,730 $ 2,085,860 Less allowance for doubtful accounts 6,000 1,600 $ 2,609,730 $ 2,084, INVESTMENTS: Unrestricted: Bank term investment $ 23,845,779 $ 3,442,513 U.S. Treasury notes - 20,244,482 $ 23,845,779 $ 23,686,995 Restricted: U.S. Treasury notes $ 4,508,255 $ 6,548,639 Bank term investment 1,299,077 - Accrued interest receivable 23,430 34,208 $ 5,830,762 $ 6,582, CAPITAL ASSETS: January 1, Reclassifications December 31, 2006 Additions and Disposals 2006 Capital assets not being depreciated: Land $ 22,478,160 $ - $ - $ 22,478,160 Construction-in-progress 23,223,510 21,256,835 (14,948,338) 29,532,007 45,701,670 21,256,835 (14,948,338) 52,010,167 Capital assets being depreciated: Bridge 53,104, ,543 53,820,695 Buildings & Plazas 58,894,402-11,963,103 70,857,505 Equipment - general 3,592, ,696 (108,515) 4,147,312 Equipment - toll 4,447,756 61,387-4,509,143 Total depreciated assets 120,038, ,083 12,571, ,334,655 Less accumulated depreciation: Bridge (17,504,078) (1,720,221) - (19,224,299) Buildings (15,509,139) (3,551,682) 1,275,500 (17,785,321) Equipment - general (2,811,738) (230,755) 1,101,707 (1,940,786) Equipment - toll (2,025,737) (659,480) - (2,685,217) Total accumulated depreciation (37,850,692) (6,162,138) 2,377,207 (41,635,623) Total depreciated assets, net 82,187,749 (5,437,055) 14,948,338 91,699,032 Total capital assets, net $ 127,889,419 $ 15,819,780 $ - $ 143,709,199 14

17 N O T E S T O B A S I C F I N A N C I A L S T A T E M E N T S ( C O N T ) 5. CAPITAL ASSETS (CONTINUED): January 1, Reclassifications December 31, 2005 Additions and Disposals 2005 Capital assets not being depreciated: Land $ 22,399,165 $ - $ 78,995 $ 22,478,160 Construction-in-progress 21,519,556 13,341,847 (11,637,893) 23,223,510 43,918,721 13,341,847 (11,558,898) 45,701,670 Capital assets being depreciated: Bridge 53,078,552-25,600 53,104,152 Buildings & Plazas 51,491,812-7,402,590 58,894,402 Equipment - general 3,417,483 65, ,063 3,592,131 Equipment - toll 5,106,210 40,571 (699,025) 4,447,756 Total depreciated assets 113,094, ,156 6,838, ,038,441 Less accumulated depreciation: Bridge (15,785,673) (1,719,452) 1,047 (17,504,078) Buildings (13,075,216) (3,406,280) 972,357 (15,509,139) Equipment - general (2,648,709) (194,295) 31,266 (2,811,738) Equipment - toll (2,202,924) (695,961) 873,148 (2,025,737) Total accumulated depreciation (33,712,522) (6,015,988) 1,877,818 (37,850,692) Total depreciated assets, net 79,381,535 (5,909,832) 8,716,046 82,187,749 Total capital assets, net $ 123,300,256 $ 7,432,015 $ (2,842,852) $ 127,889,419 Certain structures, totaling $5.7 million that were constructed during the 1990s were originally estimated to have a 40 year useful life. During 2005, management determined that these structures would need to be demolished in accordance with the Authority s Canadian plaza reconfiguration plan. Accordingly, the Authority revised the estimated useful lives of the structures to 24 months at January 1, This change in estimate resulted in an additional $1,785,380 of depreciation expense for the years ended December 31, 2006 and This additional depreciation expense is reported as special investment depreciation, a non-operating expense, in the Statement of Revenues, Expenses, and Changes in Net Assets. During 2005, the Authority recognized asset valuation losses of approximately $2.8 million representing the undepreciated value of assets that were demolished as part of the plaza reconfiguration. 6. CANADIAN DUTY-FREE BUILDING AND RELATED NOTE PAYABLE: During 1998, the Authority entered into an agreement with a Canadian duty-free enterprise ( duty-free ) to construct a new duty-free building. Construction costs incurred by the Authority were approximately $3,075,000. The agreement required the duty-free to remit monthly rental payments to the Authority over an eight-year period ending in October The monthly payment of approximately $55,000 made through October 2006 provided the Authority a full return of all construction costs, an interest component to provide the Authority a return for financing the construction and an administrative component to cover costs of administering the arrangement. N O T E S T O B A S I C F I N A N C I A L S TAT E M E N T S In connection with the above transaction, the Authority obtained a $2.9 million demand installment loan, with interest at 5.7%, which was fully repaid at December 31,

18 N O T E S T O B A S I C F I N A N C I A L S T A T E M E N T S ( C O N T ) 7. BOND INDEBTEDNESS: January 1, December 31, Due Within 2006 Increases Decreases 2006 One Year Serial bonds $44,120,000 $ - $ - $44,120,000 $ - January 1, December 31, Due Within 2005 Increases Decreases 2005 One Year Serial bonds $45,080,000 44,120,000 $45,080,000 $44,120,000 $ - NOTES TO BASIC FINANCIAL STATEMENTS In August 2005, the Authority issued $44,120,000 in variable rate Toll Bridge System Revenue Refunding Bonds to currently refund $43,915,000 of outstanding 1995 Series bonds with interest rates ranging from 5.125% to 6.0%. The net proceeds of $43,639,394 (after payment of $480,606 for underwriting fees and other issuance costs) plus $4,788,824 in Series 1995 bond reserve monies were used to refund the original bonds and establish the Series 2005 debt reserves. The current refunding resulted in a difference between the reacquisition price and the net carrying amount of the old debt of $2,242,465. This difference, reported in the accompanying financial statements as a deduction from bonds payable, is being charged to operations through the year 2024 using the effective interest method. The net difference is $1,835,687 and $2,116,454 at December 31, 2006 and The Series 2005 bonds, which are special revenue obligations of the Authority, were issued as variable rate obligations. They bear an initial term rate interest of 3.0% until July 1, 2007, payable semi-annually on July 1 and January 1, beginning January 1, On July 1, 2007, the bonds will be subject to mandatory tender without a bondholder right to retain, at which time the bonds will be subject to alternate methods of determining interest rates from time to time and conversion to a fixed rate of interest to maturity. Under an irrevocable letter of credit issued by a bank, the trustee is entitled to draw an amount sufficient to pay the principal of the bonds when due, the purchase price of the bonds tendered by the holders and not remarketed, and up to 199 days interest. This letter of credit has an initial stated amount of $46,558,856 and accrues interest on the stated amount at.195% per annum. It will expire on August 4, 2008 unless earlier terminated or extended. The Authority completed the current refunding to reduce its anticipated net debt service payments over the next 20 years by an estimated $9.4 million, and to obtain an estimated net economic gain (difference between the present values of the old and new debt service payments) of approximately $7.8 million. However, due to the variable rate debt fluctuation risks involved, as well as the broad range of options available to the Authority in re-tendering this debt in July 2007 and beyond, the anticipated reduction in debt service payments and the estimated economic gain are uncertain and subject to changing market conditions over time. Debt service requirements based on the 3.0% rate in effect at year end are as follows: Years ending December 31, Principal Interest 2007 $ - $ 1,323, ,323, ,323, ,380,000 1,282, ,185,000 1,216, ,205,000 5,011, ,610,000 2,969, ,740, ,050 $ 44,120,000 $ 15,087,600 16

19 N O T E S T O B A S I C F I N A N C I A L S T A T E M E N T S ( C O N T ) 8. PENSION PLANS: Plan Description The Authority has two defined benefit pension plans covering all full-time and part-time employees in the United States and Canada. The Authority has valuations performed no less frequently than every other year. The most recent valuations were prepared as of January 1, 2006, for the Canadian and U.S. plans. Funding Policy The Authority s policy is to expense the amount funded. The payroll covered under these plans totaled approximately $4.7 million and $4.6 million in 2006 and 2005, respectively. Due to the under funded status of the plans, the Authority contributed approximately $1.8 million and $1.6 million in 2006 and 2005, respectively, which is intended to eliminate the plans deficiency over a fifteen year period. The discount rate used in determining the actuarial present values of the liabilities is 6% and 5.5% for the U.S. and Canadian plans, respectively. As of December 31, 2006, total accrued benefits exceeded plan assets by approximately $1,434,000. The table of estimated actuarially computed benefit obligations and actual net assets for the Authority s pension plans is presented below as of December 31, 2006 and Plan assets are stated at fair value and are primarily comprised of bonds, fixed rate securities and equity investments. Actuarial present value of benefit obligations: Active participants $17,771,000 $17,803,000 Retired participants 12,423,000 11,476,000 Total accumulated benefit 30,194,000 29,279,000 Plan net assets at fair value 28,760,000 25,000,000 Deficiency of plan assets over benefit obligations $(1,434,000) $(4,279,000) Separate financial statements are not required, nor have they been prepared for either pension plan. 9. RENTALS: The Authority, as lessor, has entered into noncancelable operating leases with a U.S. duty-free enterprise and a Canadian duty-free enterprise. The Authority recognized approximately $5.5 million and $4.9 million in rental income in 2006 and 2005, respectively, from the duty-free enterprises. This amount included approximately $2.3 million and $1.9 million of additional contingent rental payments based upon the sales levels of the lessees in 2006 and 2005, respectively. N O T E S T O B A S I C F I N A N C I A L S TAT E M E N T S The Authority maintains a twelve-year lease, subject to optional renewal, with the Canadian duty-free enterprise. Based upon the agreement, the minimum rental payments to be received by the Authority are approximately $1.7 million for 2007; subsequent years minimum rental is based on 75% of the immediately preceding year s minimum and contingent rental payments. The Authority maintains a five-year lease, subject to optional renewals, with the U.S. duty-free enterprise. Based upon the agreement, the minimum rental payments to be received by the Authority are approximately $1.5 million for 2007; subsequent years minimum rental is based on 50% of the immediately preceding year s minimum and contingent rental payments. The Authority also leases certain real property space under cancelable operating leases to commercial enterprises and governmental agencies. These leases are generally maintained on a month-to-month basis. 17

20 N O T E S T O B A S I C F I N A N C I A L S T A T E M E N T S ( C O N T ) 10. POST-EMPLOYMENT BENEFITS: The Authority provides certain health, dental and life insurance benefits to all retired employees. Substantially all of the Authority s employees may become eligible for these benefits if they reach the normal retirement age while working for the Authority. As of December 31, 2006, 54 employees were receiving these benefits. The Authority has elected to account for the post-employment benefits on a pay as you go basis. The Authority s expense for post-employment benefits in 2006 and 2005 was approximately $496,000 and $443,000, respectively. 11. DEFERRED COMPENSATION PLAN: NOTES TO BASIC FINANCIAL STATEMENTS All employees of the Authority in the United States are offered participation in a deferred compensation plan (the plan ) created in accordance with Internal Revenue Code Section 457. The plan permits eligible participants to defer a portion of their salary until future years. Under the plan, amounts deferred are not available to employees until separation, retirement, death or unforeseen emergency. All amounts deferred under the plan, all property and rights purchased with those amounts, and all income attributable to those amounts, property or rights are held in trust, until paid or made available to the employee or other beneficiary. 12. COMMITMENTS AND CONTINGENCIES: Risk Management The Authority purchases commercial insurance for various risks of loss due to torts, theft, damage, errors and omissions, injuries to employees and natural disasters. Losses resulting from acts of terrorism have been excluded from property and excess liability policies. The Terrorism Risk Insurance Act of 2002 of the United States governs coverage for acts of terrorism under the general liability policy. Grants The Authority receives financial assistance from federal and state agencies in the form of grants. The expenditure of funds received under these programs generally requires compliance with the terms and conditions specified in the grant agreements and are subject to audit by the grantor agencies. Any disallowed claims resulting from such audits could become a liability of the Authority. Based on prior experience, the Authority expects any such amounts to be immaterial. The Authority is a party to a funding agreement whereby the U.S. Federal Government has agreed to fund the bi-national integrated environmental process, up to a maximum of $17.6 million. The terms and conditions of the agreement specify that if the Authority suspends or delays work on the aforementioned process, or takes other actions resulting in the loss of federal participation, the Authority must repay all amounts received under the funding agreement. Potential recoveries under this agreement as of December 31, 2006 approximate $14.6 million. The Authority has no plans to suspend or delay work on the project and completion is expected in Capacity expansion costs continue to be recorded as constructionin-progress at December 31, In the event that the expansion project is suspended or delayed for an extended period, the future benefit of expenditures may be unpaid and subject to write-off. Operating Lease Commitments In October 2005, a new duty-free store opened on the U.S. plaza and the old store was demolished. The new store, constructed at a cost of $2.8 million and financed by the operator, is expected to be temporary in nature, as completion of the Authority s capacity expansion project may require the reconfiguration or relocation of the U.S. plaza. In the event that relocation of the temporary store is required prior to 2015, the Authority s lease with the duty free operator requires partial reimbursement, on a descending scale ranging from 25% to 5%, for the cost of construction of such temporary store. 18

21 N O T E S T O B A S I C F I N A N C I A L S T A T E M E N T S ( C O N T ) Contractual Commitments As of December 31, 2006 the Authority had contractual commitments of approximately $7.4 million, primarily related to on-going capital construction projects. Litigation The Authority is involved in various legal proceedings, which, in the opinion of management, will not have a material adverse effect upon the financial position of the Authority. 13. NET ASSETS: Unrestricted Designated Net Assets The Board of Directors has designated available unrestricted net assets for acquisition or construction of capital projects and maintenance. Restricted Net Assets Debt service funds: Debt service fund $ 670,389 $ 543,920 Debt service reserve fund 3,861,773 3,828,689 Operating expense reserve account 2,963,066 3,475,108 Total restricted assets $ 7,495,228 $ 7,847,717 N O T E S T O B A S I C F I N A N C I A L S TAT E M E N T S 19

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23 Peace Bridge Facts of Interest The Peace Bridge opened to traffic in 1927 connecting Buffalo, New York, to Fort Erie, Ontario, across the Niagara River. The bridge is a 5,800 foot long steel bridge with three lanes; including a reversible centre lane allowing two-lane operation in one direction. All tolls are collected one way traveling into Canada on the Canadian plaza after clearing Canadian Customs. In addition to cash transactions the Peace Bridge is the only international crossing utilizing the E-ZPass electronic toll collection system. The Peace Bridge is operated by the Buffalo & Fort Erie Public Bridge Authority, a bi-national compact entity. The Authority is governed by a ten-member Board of Directors of which five members represent New York State: two are appointed by the Governor and three are the Chairman of the Niagara Frontier Transportation Authority, the Commissioner of Transportation, and the Attorney General. Five members represent Canada appointed by the Governor in Council upon recommendation of the Transport Minister. The Peace Bridge is self funded through tolls and rental revenue; no public funds. Operates without share capital; all current and future surpluses are committed to capital projects and repayment of any outstanding bonds. The Peace Bridge is the second busiest crossing between the United States and Canada. In 2006, 5.5 million cars and 1.3 million trucks crossed the bridge. $40 billion in trade crosses the Peace Bridge annually. The Peace Bridge s prime location as a center point of East-West and North-South trade has made it a major transportation hub, linking Midwestern, Eastern U.S., and Canadian markets. About 55 percent of the U.S. population and 62 percent of the Canadian population reside within 500 miles.

24 Buffalo and Fort Erie Public Bridge Authority 1 Peace Bridge Plaza, Buffalo, NY Queen Street, Fort Erie, ON L2A 3S