COMBINED UTILITY SYSTEM OF EASLEY Easley, South Carolina

Transcription

1 COMBINED UTILITY SYSTEM OF EASLEY Easley, South Carolina COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE FISCAL YEARS ENDED MARCH 31, 2017 AND 2016 Prepared by the Finance Department

2 INTRODUCTORY SECTION

3 COMBINED UTILITY SYSTEM OF EASLEY TABLE OF CONTENTS Page INTRODUCTORY SECTION Table of Contents Letter of Transmittal Certificate of Achievement List of Principal Officials Organizational Chart i iii vi vii viii FINANCIAL SECTION Page AUDITOR S REPORT Independent Auditor s Report 1-2 Independent Auditor s 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 3-4 MANAGEMENT S DISCUSSION AND ANALYSIS 5-21 BASIC FINANCIAL STATEMENTS Statements of Net Position 22 Statements of Revenues, Expenses, and Changes in Net Position 23 Statements of Cash Flows 24 Notes to Basic Financial Statements REQUIRED SUPPLEMENTARY INFORMATION Schedule of Funding Progress - Other Post-Employment Benefits 48 Schedule of Employer Contributions - Other Post-Employment Benefits 49 Schedule of Employer s Proportionate Share of the Net Pension Liability 50 Schedule of Employer Contributions Pension Plan 51 STATISTICAL SECTION Page FINANCIAL TRENDS Net Position by Component 52 Changes in Net Position 53 Schedule of Revenues by Source 54 Schedule of Expenses by Unit by Activity 55 i

4 COMBINED UTILITY SYSTEM OF EASLEY TABLE OF CONTENTS - Continued REVENUE ANALYSIS Electric System (Current Rate Structure, Historical Connections and Demand, Ten Largest Customers, and Purchased Power History) Water System (Current Rate Structure, Historical Connection and Consumption, and Ten Largest Customers) Sewer System (Current Rate Structure, Historical Connection, and Ten Largest Customers) DEBT ANALYSIS Ratios of Bonded Debt Outstanding 67 Historical Statements of Revenues, Expenses, Debt Service and Debt Service Coverage 68 DEMOGRAPHIC AND ECONOMIC INFORMATION Pickens County Demographic Data 69 Principal Employers of Pickens County 70 OPERATING INFORMATION Number of Employees by Identifiable Activity 71 Operating and Capital Indicators 72 Page ii

5 EASLEY COMBINED UTILITIES A Community Tradition Letter of Transmittal August 14, 2017 To the Commissioners and Customers of the Combined Utility System of Easley We are pleased to present the Comprehensive Annual Financial Report (CAFR) for the Combined Utility System of Easley (the Utility ) for the fiscal year ended March 31, The Utility is responsible for the accuracy and completeness of the presentation, including all necessary disclosures, of the CAFR. The CAFR is designed to provide the reader with a comprehensive understanding of the Utility s financial activities. The enclosed information has been presented to the best of our knowledge and belief. The Utility s management has established a system of internal controls designed to provide reasonable, but not absolute, assurance for the safeguarding of assets and financial statements in conformity with generally accepted accounting principles. The concept of reasonable assurance recognizes that the cost of internal controls should not exceed the benefits. The Utility is required by state law to publish an annual financial report audited by a certified public accountant. This CAFR fulfills that requirement. Elliott Davis Decosimo, LLC conducted the independent audit of the Utility s financial statements. The objective of the audit was to obtain reasonable assurance that the financial statements are free of material misstatements. The audit was conducted in accordance with generally accepted auditing standards and the standards applicable to financial audits contained in Government Auditing Standards. Elliott Davis Decosimo, LLC has issued an unmodified opinion that the Utility s financial statements are fairly presented, in all material respects, in conformity with generally accepted accounting principles. The Independent Auditor s Reports are presented as the first component of the financial section of this report. Following the Independent Auditor s Reports, in the financial section of this report, is Management s Discussion and Analysis (MD&A). The MD&A provides an overview and analysis of the Utility s financial statements. This Letter of Transmittal is intended to complement the MD&A and should be read in conjunction with it. Profile of the Utility The Utility was originally established in 1911 to supply water and electricity to the City of Easley. In 1959, wastewater service was added. The Utility is operated and managed by the Commission of Public Works (the Commission ). The Commission is comprised of 3 representatives that are elected to six-year staggered terms. iii P.O. Box 619 Easley, South Carolina Phone (864) Fax (864)

6 The electric system maintained by the Utility services approximately 51 square miles in, and around, the City of Easley. The power is supplied by Piedmont Municipal Power Agency (PMPA), a joint action agency, of which Easley and nine other upstate cities are members, and its allocation of hydro-power from the Southeastern Power Administration (SEPA). PMPA owns 25% of Unit Two at the Catawba Nuclear Plant in York, South Carolina. PMPA secures for the Utility supplemental power and energy, above its allocation from Catawba, from Santee Cooper. As of March 31, 2017, the Utility had 14,183 electric accounts. The Utility has 1 water treatment plant (Don L. Moore Water Treatment Plan), located on the Saluda Lake. The Utility provides water on a wholesale basis to water districts including: Powdersville Water District, Southside Water District, Easley Central Water District, and Dacusville-Cedar Rock Water District. These water districts accounted for over half of the total water sales (by volume) in The water system services approximately 40 square miles in Pickens County. As of March 31, 2017, the Utility had 13,427 water accounts. The Utility maintains 3 wastewater treatment plants (Middle Branch, Georges Creek, and Golden Creek). The wastewater system serves approximately 40 square miles in and around Pickens County (Middle Branch is located in, and services some customers in, Anderson County). As of March 31, 2017, the Utility had 10,475 wastewater accounts. Financial Profile of the Utility The Utility adopts an annual operating budget for management and financial planning purposes. During adoption of the budget, the Commission reviews and assesses future financial plans (minimum of 5 years) including: capital improvement plans, rate-setting projections, and debt service needs. The Commission adopts the annual operating budget before the fiscal year begins (April 1) and sets the rates to meet operating and financial objectives. In long-range planning, the Commission utilizes numerous benchmarking tools to determine necessary steps in maintaining a reliable, efficient and affordable utility system. One financial benchmark that the Commission strives to maintain is a favorable debt service ratio. For the fiscal year 2017, the debt coverage ratio, based on revenue bond covenant definition, was a strong 206%. Also, the Utility reviews other local comparable rates, in the region, to determine if rates are reasonably set. Customer rates for the year compare favorably with those in the region. For the year ending March 31, 2017, the Utility s net position was $58,546,307, a 1.94% increase (a net increase of $1,112,644) from the 2016 fiscal year. The positive change in net position for the current period can be attributed to a slight customer base increase, lower interest expense from refunding the 2005 bond issue, efficient spending in operations, and capital grant income. The Utility incurred a great deal of capital expenditures in the fiscal year (discussed in more detail in our attached MD&A), as we have taken aggressive measures in assuring reliability in all three systems. We have positioned the Utility in a strong financial position to continue operating the Utility in an efficient manner, without sacrificing reliability. Long-Term Financial Planning The Utility prepares a ten year facility plan for each utility department. The long range plans make recommendations on improvements in each department over the ten year period for growth and reliability. The recommendation of the facility plans are incorporated into the Utility s capital plan, which is updated on an annual basis. The capital plan includes the projected cost of projects, the timing of the projects, and a projected source of funds. The Utility also prepares a five year pro-forma financial forecast that incorporates information from the capital plan. These tools allow the Utility to formulate and maintain the Utility s financial stability. iv

7 Acknowledgements We appreciate the dedication and hard work displayed by the commissioners and employees of the Utility in continuing our mission in providing a reliable supply of water, wastewater, and electrical service at the best possible value to the customers of Easley, South Carolina and surrounding areas. Respectfully submitted, Joel D. Ledbetter General Manager v

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9 COMBINED UTILITY SYSTEM OF EASLEY LIST OF PRINCIPAL OFFICIALS Commission of Public Works- Manager Form of Government COMMISSION OF PUBLIC WORKS MR. ERIC D. GOODWIN MR. JAMES N. CALDWELL MR. JEFF R. FOGLE Commissioner Commissioner - Chairman Commissioner UTILITY ADMINISTRATION MR. JOEL D. LEDBETTER General Manager vii

10 COMBINED UTILITY SYSTEM OF EASLEY ORGANIZATIONAL CHART MR. ERIC D. GOODWIN Commissioner COMMISSION OF PUBLIC WORKS MR. JAMES N. CALDWELL Commissioner - Chairman MR. JEFF R. FOGLE Commissioner MANAGEMENT MR. JOEL D. LEDBETTER General Manager viii

11 FINANCIAL SECTION

12 INDEPENDENT AUDITOR S REPORT The Commission of Public Works Combined Utility System of Easley Easley, South Carolina Report on the Financial Statements We have audited the accompanying financial statements of the Combined Utility System of Easley (the Utility ), as of and for the years ended March 31, 2017 and 2016, and the related notes to the financial statements, which collectively comprise the Utility s basic financial statements as listed in the accompanying table of contents. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that 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. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Utility as of March 31, 2017 and 2016, and the respective changes in its financial position, and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

13 Required Supplementary Information Accounting principles generally accepted in the United States of America require that management s discussion and analysis, schedule of funding progress other post-employment benefits, schedule of employer contributions other-post employment benefits, schedule of employer s proportionate share of the net pension liability, and the schedule of employer contributions pension plan as noted on the preceding 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 an opinion on the financial statements that collectively comprise the Utility s basic financial statements. The introductory section and the statistical section as noted on the preceding table of contents are presented for purposes of additional analysis and are not a required part of the basic financial statements. Such information has 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 them. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated August 14, 2017 on our consideration of the Utility s internal control over financial reporting and our tests 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 in considering the Utility s internal control over financial reporting and compliance. Greenville, South Carolina August 14,

14 INDEPENDENT AUDITOR S 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 The Commission of Public Works Combined Utility System of Easley Easley, South Carolina We have audited, in accordance with the 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, the basic financial statements of the Combined Utility System of Easley (the Utility ), as of and for the year ended March 31, 2017, and the related notes to the financial statements, and have issued our report thereon dated August 14, Internal Control over Financial Reporting In planning and performing our audit of the financial statements, we considered the Utility's internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Utility's internal control. Accordingly, we do not express an opinion on the effectiveness of the Utility's internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. Compliance and Other Matters As part of obtaining reasonable assurance about whether the Utility's financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards.

15 Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity's internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity's internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Greenville, South Carolina August 14,

16 COMBINED UTILITY SYSTEM OF EASLEY EASLEY, SOUTH CAROLINA MANAGEMENT S DISCUSSION AND ANALYSIS The management of the Combined Utility System of Easley (the Utility, Easley Combined Utilities, or ECU ) offers the users of the Utility s financial statements this overview and analysis of the Utility s financial performance for the fiscal years ending March 31, 2017, 2016, and Please read this overview in conjunction with the Utility s audited financial statements, which follow this section. FINANCIAL HIGHLIGHTS Net position increased by $1,112,644, or 1.9%. Operating revenues of $51.7 million for FY 2017 increased $1,692,000, or 3.4% over FY Operating expenses before depreciation and amortization for FY 2017 increased $1,618,000, or 3.8% over FY Operating income before depreciation and amortization of $7,529,000 FY 2017 was $73,000 more than that of FY 2016, or an increase of 1.0 %. OVERVIEW OF THE FINANCIAL STATEMENTS Our annual report includes this management s discussion and analysis, our independent certified public accountant s report, and the basic financial statements and notes of Easley Combined Utilities. Management s discussion and analysis (MD&A) serves as management s discussion of the Utility s financial condition and performance. It is intended to supplement the financial statements. The statements of net position represent the Utility s financial position on an accrual historical cost basis and provide information about the Utility s assets, liabilities, and deferred inflows/outflows of resources, with the difference being net position. The statements of revenues, expenses, and changes in net position report the results from business activities during the respective fiscal year and present the Utility s ability to recover its costs from operations and provide for reinvestment into the Utility. The statements of cash flows report the increase or decrease in cash and cash equivalents through operating, investing, and financing activities and present cash disbursements and receipts information resulting in the net change in cash position. The notes to basic financial statements provide additional information required for understanding the basic financial statements. Disclosures about material risks, accounting policies, debt obligations, and significant balances are presented here

17 SUMMARY OF THE ORGANIZATION AND BUSINESS The Commission of Public Works (the "Commission") operates and manages the Utility which provides water, wastewater and electrical services in the City of Easley and surrounding areas. The Commission is the policy-making body of the Utility and approves all major operating procedures, expenditures, capital improvements and rates and charges. All charges imposed upon customers for services rendered are set by the Commission and require no approval by any state or local agency. The Commission makes recommendations to the City Council for the issuance of bonds to finance improvements to the Utility, but is otherwise authorized under State law to have full control and management of the Utility. The Commission appoints the General Manager, the Utility s chief executive officer. As a matter of policy, the Commission periodically reviews management s recommendations relating to capital improvements, service obligations and projections along with revenue requirements to meet these needs. The Commission consists of three members elected by the electorate of the City to six-year staggered terms, with one seat up for election every two years. The members of the Commission, as of March 31, 2017, and the number of years of continuous service as Commission members are as follows: Number of Name Years Served James N. Caldwell (Chairman) 5 Jeff R. Fogle 6 Eric D. Goodwin 3 The Utility is a combined utility system which provides water, wastewater and electrical service within the City and its surrounding areas. The Utility was established in 1911 as the Easley Water and Light Plant and placed under the control of the Commission. In 1953, the water and electric systems were combined and the existing wastewater system of the City was added in The combined utility is governed by the Commission. FINANCIAL ANALYSIS The Utility s financial condition remained strong at year-end. Reliable utility plant and equipment, adequate liquidity, and appropriate rate structures are in place to continue to provide reliable, quality utility services to the citizens of Easley and the surrounding community. The following financial statements and other information serve as key indicators and data for planning and managing the Utility. Overall revenue from operations increased in 2017 by $1,692,000 or 3.4% over 2016, and $3,015,000 or 6.2% over Operating expenses of $44,133,000 represent an increase of $1,618,000 or 3.8%, from 2016 expenses and an increase of $2,953,000 or 7.2% from 2015 expenses. Operating expenses for the electric department increased by $538,000, or 1.6%, over 2016 expenses, which was primarily due to an increase in wholesale power costs. Operating expenses for the water department were $2,000 less in FY 2017 than FY 2016, or a.1% decrease. Wastewater expenses in FY 2017 were $48,000 less than FY 2016, or a 2.1% decrease. Customer service and administration expenses were $1,130,000 higher in FY 2017 than in FY 2016, or a 23.7% increase which was primarily due to an increase in retirement expenses, health insurance claims, and OPEB expenses and administrative labor allocation adjustments

18 FINANCIAL CONDITION Total assets decreased by $1,299,000 in FY This net decrease is primarily attributable to a decrease in cash and cash equivalents of $1,213,000 in FY Current liabilities decreased by $797,000 in the current year primarily due to the following factors: the decreases in accounts payable ($878,000 decrease), retainage payable ($26,000), and accrued interest ($14,000) were offset by the increases of accrued expenses ($64,000 increase), customer deposits ($16,000), and the current portion of long term liabilities ($42,000). Long-term liabilities decreased by approximately $1,252,000 from FY 2017 levels due to the following factors: the decrease ($2,237,000) from the scheduled payment of bonds (see Note 7 of the notes to basic financial statements) was offset by the increase in the net pension liability ($985,000) recorded in 2017 (see Notes 9 and 13 of the notes to the basic financial statements). The Utility implemented Governmental Accounting Standards Board (GASB) Statement 68, Accounting and Financial Reporting for Pensions (an amendment of GASB Statement No. 27), in the fiscal year ended March 31, The implementation of the statement required the Utility to record beginning net pension liability and the effects on unrestricted net position of contributions made by the Utility during the measurement period (fiscal year ended June 30, 2015). To the extent practical, in the first period that this Statement is applied, changes made to comply with this Statement should be reported as an adjustment of prior periods, and financial statements presented for the periods affected should be restated. If restatement of all prior periods presented is not practical, the cumulative effect of applying this Statement, if any, should be reported as a restatement of beginning net position for the earliest period restated. In such circumstances, beginning balances for deferred inflows of resources and deferred outflows of resources related to pensions should not be reported. Since the information for the restatement of beginning balances of deferred inflows of resources or deferred outflows of resources is not available for the earliest period presented, the cumulative effect of the Statement implementation will be shown as restatement to beginning net position as of April 1, As a result, ending unrestricted net position for the Utility as of April 1, 2015 decreased by $7,724,108. This decrease resulted in the cumulative restatement of unrestricted net position to a balance of $11,910,174 as of April 1,

19 COMBINED UTILITY SYSTEM OF EASLEY CONDENSED STATEMENTS OF NET POSITION MARCH 31 Variance (2017 vs. 2016) Dollars % Current assets, restricted assets, and investments $ 26,804,042 $ 28,465,523 $ 28,200,205 $ (1,661,481) -5.8% Capital assets: Capital assets, net 88,798,527 85,607,781 86,748,222 3,190, % Construction in progress 598,672 3,427,193 1,603,548 (2,828,521) -82.5% Total assets 116,201, ,500, ,551,975 (1,299,256) -1.1% Costs on advance refunding of debt, net 3,387,264 3,650,667 4,194,684 (263,403) -7.2% Deferred outflows from pension 1,407, , , % Total deferred outflows of resources 4,794,565 4,368,032 4,194, , % Total assets and deferred outflows of resources $ 120,995,806 $ 121,868,529 $ 120,746,659 $ (872,723) -0.7% Current liabilities $ 7,813,759 $ 8,610,286 $ 7,379,911 $ (796,527) -9.3% Long-term liabilities 54,556,835 55,809,165 49,457,139 (1,252,330) -2.2% Total liabilities 62,370,594 64,419,451 56,837,050 (2,048,857) -3.2% Deferred inflows from pension 78,905 15,415-63, % Total deferred inflows of resources 78,905 15,415-63,490 Net position: Invested in capital assets 45,591,037 44,355,135 43,103,635 1,235, % Restricted 1,177,966 1,185,563 1,171,692 (7,597) -0.6% Unrestricted 11,777,304 11,892,965 19,634,282 (115,661) -1.0% Total net position 58,546,307 57,433,663 63,909,609 1,112, % Total liabilities, net position and deferred inflows of resources $ 120,995,806 $ 121,868,529 $ 120,746,659 $ (872,723) -0.7% - 8 -

20 COMBINED UTILITY SYSTEM OF EASLEY CONDENSED STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION (AMOUNTS IN THOUSANDS) March 31 Variance (2017 vs 2016) Variance (2017 vs 2015) Dollars % Dollars % Operating revenues: Electric service revenue $ 37,112 $ 36,245 $ 35,486 $ % $ 1, % Water service revenue 9,082 8,485 8, % % Wastewater service revenue 5,033 4,816 4, % % Finance charges % % Other non-utility income % % Total operating revenues 51,662 49,970 48,647 1, % 3, % Operating expenses: Electric operations 33,168 32,630 31, % 1, % Water operations 2,775 2,777 2,668 (2) -0.1% % Wastewater operations 2,290 2,338 2,306 (48) -2.1% (16) -0.7% Customer service & administration 5,900 4,770 4,664 1, % 1, % Total operating expense 44,133 42,515 41,180 1, % 2, % Operating income before depreciation & amortization 7,529 7,455 7, % % Depreciation & amortization 5,317 5,243 5, % % Net non-operating income (1,432) (1,244) (2,083) (188) 15.1% % Change in net position, before contributions in aid of construction (188) -19.4% % Contributions in aid of construction Water taps % (130) -39.2% Sewer taps % % Total contributions in aid of construction % (102) -23.5% Change in net position $ 1,112 $ 1,248 $ 660 $ (136) -10.9% $ % Net position, beginning of year 57,434 63,910 63,250 Restatement - (7,724) - Net position, end of year $ 58,546 $ 57,434 $ 63,

21 RESULTS FROM OPERATIONS Electric System The Commission has operated the electric system since The electric system consists of five delivery points which serve 21 distribution feeder circuits of 7,200/12,470 volts. The electric system services over 51 square miles. The electric system operates primarily within the City limits, but also serves the community of Dacusville located approximately eight miles north of the City limits. Extension of the electrical system outside the City limits and into newly annexed areas of the City is regulated by the South Carolina Public Service Commission which must approve any reassignment of power suppliers. The Utility is a member of the American Public Power Association and the South Carolina Association of Municipal Power Systems, a mutual aid agreement with 20 other members which provides for mutual assistance in case of extreme emergencies such as ice storms, tornadoes and hurricanes. The Commission signed an all requirements power supply contract with the Piedmont Municipal Power Agency ( PMPA ) in 1980 for PMPA to be the electric system s sole power supply provider. This contract is in effect until the outstanding debt owed by PMPA is retired, currently in the year 2034, but neither termination nor expiration of the Power Sales Agreement shall affect any accrued liability or obligation thereunder, including, without limitation, the cost of decommissioning the Catawba Project. During the fiscal year ending March 31, 2017, Easley Combined Utilities paid $30,041,877 to PMPA. Beginning January 1, 2014, PMPA began receiving its supplemental power and energy requirements from Santee Cooper. Should PMPA s peak resource demand be greater than the Catawba output of 277 Megawatts ("MW"), Santee Cooper must supply all supplemental demand requirements. The original contract is twelve years, with provisions for extensions beyond the original term. Termination of the supplemental contract with Santee Cooper requires a ten year notice. Also beginning on January 1, 2014 is a contract between PMPA and Duke Energy whereby Duke Energy provides all backstand requirements for PMPA s share of Catawba. The Commission also purchases power from the Southeastern Power Administration ("SEPA"), an agency of the U.S. Department of Energy and paid $759,583 to SEPA during FY 2017 for power and energy. In 1993, the Commission constructed a peak shaving generation facility that allows the electric system to provide for a portion of its load during times of its peak. The capacity of the peak shaving facility is 6,400 kilowatts ("kw"). In 2008, the Utility added a 4.5 MW generator for emergency back-up and peak shaving. Beginning in January 2014, with the start of the Santee Cooper supplemental power contract with PMPA, the peak shaving generation is dispatched and operated based on the requirements of Santee Cooper. In return for this generation being available for dispatch, the Utility receives a monthly capacity credit. During FY 2017 the Utility received a reduction of $602,006 in power supply costs for having this generation available

22 For fiscal year ending March 31, 2017 electric system revenues increased $868,000 over FY 2016 revenues, an increase of 2.4%. Purchased power increased in 2017 by $523,000, or 1.7%, over 2016 power costs. PMPA did not implement a rate increase during the fiscal year. Furthermore, PMPA has stated that it plans minimal annual increases for the foreseeable future, with rate increases to be based on the economic and market environment at that time. The 2.4% increase in revenues in FY 2017 is partially attributable to a 1.0% increase in electric rates in April Operating revenues in excess of operating expenses were sufficient to support the electrical portion of debt service and capital reinvestment. Electric revenues account for approximately 72% of total operating revenues. Almost 93% of the electric system operating expenses, excluding depreciation and interest, is wholesale power costs

23 RESULTS FROM OPERATIONS - ELECTRIC SYSTEM (Amounts in thousands) 2017 % of Sales 2016 Variance % Revenues Electric system sales $ 37, % $ 36,245 $ % Other electric sales & fees % % Total electric revenues 37, % 36, % Operating & maintenance expense Power production 30, % 30, % Distribution 2, % 2,310 (5) -0.2% Subtotal 33, % 32, % Customer service % % Direct administrative % % Indirect administrative 2, % 1, % Depreciation 1, % 1, % Interest % 165 (36) -21.8% Total O&M expense 36, % 35, % Electric system income (loss) $ % $ 425 $ (105) -24.7% ELECTRIC SALES $20,000,000 $18,000,000 $16,000,000 $14,000,000 $12,000,000 $10,000,000 $8,000,000 $6,000,000 $4,000,000 $2,000,000 $- Residential Commercial Security & Street Lights Fiscal Year HISTORICAL ELECTRIC STATISTICS Total Customer Accounts Annual % Growth Total Energy Sales (kwh) Annual % Growth , % 296,298, % , % 296,667, % , % 293,682, % , % 304,269, % , % 299,043, % , % 290,306, % , % 291,308, % , % 299,504, % , % 299,375, % , % 299,081, %

24 Water System The Commission operates the Don L. Moore Water Treatment Plant located on Saluda Lake, which is approximately 8 miles east of the City of Easley. This plant is a state-of-the-art conventional water treatment facility that can treat a maximum of 18.0 million gallons per day ( MGD ). Included with the treatment facilities are a 5 million gallon ( MG ) finished water clear well and finished water pump station with a capacity to pump 24 MGD. The plant, storage tank, and pump station that provided 12 MGD of production capacity were completed in An expansion that included the addition of sludge handling facilities and plate settlers was completed in This expansion increased production capacity to 18 MGD. A 30-inch water main connects the water treatment facilities with the water distribution system which includes 406 miles of water mains, 4.78 million gallons of elevated storage and 6.0 million gallons of ground storage. A parallel 36 secondary supply transmission water main was completed in 2014 that stretches from the Don L Moore Water Treatment Plant to the remote clear well and high service pump station located within the City. To provide an emergency water supply, ECU has an agreement with the Greenville Water System to supply water in emergency situations with the prior consent of Greenville Water System. The Commission has a 24-inch connection on the 72-inch water line running from the Greenville Water System's Lake Keowee water treatment plant through the Commission's service area to Greenville, South Carolina. The average daily water usage for the system was 8.2 MGD in fiscal year The average daily water usage for the system through March 31, 2016 was 7.5 MGD. The peak daily usage for the System for the year ending March 31, 2017 was 14.0 MGD. The water system is under the jurisdiction of DHEC with regard to the quality of water sold to customers. The State requires that water systems of the Utility s size maintain a certified laboratory and perform system analysis checks throughout the month, with monthly reports forwarded to DHEC. The existing water treatment facilities have a State certified lab and have met all requirements for State reporting in the past. The water system serves an area of approximately 40 square miles in Pickens County. Total area of the County is square miles. For the fiscal year ending March 31, 2017, the water system served 13,427 metered customers, 1,082 fire hydrants, and 12 master meters serving four rural water districts with partial water requirements. For the fiscal year ending March 31, 2017, these water districts accounted for over 58% of total water sales by volume. The Commission currently has contracts to supply water to four wholesale customers. Powdersville Water Company, Southside Water Company, Dacusville-Cedar Rock Water Company and Easley-Central Water District each signed a wholesale water contract for a term of 20 years (expiring in August 2020)

25 For the year ending March 31, 2017, water system revenues increased 7.0% or $596,000 from fiscal year For the year ending March 31, 2017 water system expenses were $2,000 lower than FY Operating revenues exceeded operating expenses by $6,306,000, and were sufficient to support its portion of debt service and capital reinvestment. Water rates were increased by 2.0% in April 2016 for residential and commercial customers. In FY 2016 the water treatment plant produced 2,738,977 gallons and in FY 2017 the water treatment plant produced 2,987,772 gallons

26 RESULTS FROM OPERATIONS - WATER SYSTEM (Amounts in thousands) 2017 % of Sales 2016 Variance % Revenues Water system sales $ 9, % $ 8,485 $ % Other water sales & fees % % Total water revenues 9, % 8, % Operating & maintenance expense Raw water % % Water treatment 1, % 1, % Transmission & distribution 1, % 1,279 (106) -8.3% Subtotal 2, % 2,777 (2) -0.1% Customer service % 91 (10) -11.0% Direct administrative % % Indirect administrative 2, % 1, % Depreciation 2, % 2, % Interest 1, % 1,677 (249) -14.8% Total O&M expense 9, % $ 9, % Water system income (loss) $ % $ (278) $ % WATER SALES $4,500, $5,000, $4,000, $4,500, $4,000, $3,500, $3,500, $3,000, $3,000, $2,500, $2,500, $2,000, $2,000, $1,500, $1,500, $1,000, $1,000, $500, $- Residential Commercial Water Districts HISTORICAL WATER STATISTICS Total Customer Accounts Annual % Growth Total Cubic Feet Sold Annual % Growth Fiscal Year , % 352,981, % , % 333,289, % , % 305,999, % , % 325,992, % , % 308,677, % , % 302,650, % , % 307,959, % , % 333,831, % , % 332,389, % , % 360,083, %

27 Wastewater System The Commission is responsible for collection and treatment of wastewater from the City and the neighboring community of Arial. The sewer system consists of three wastewater treatment plants with a total available capacity of 5.15 MGD of treatment. The sewer system also includes 26 lift stations, 200 miles of gravity sewer lines, and 21 miles of force main. The Commission assumed control of the sanitary sewer system from the City in In 1959 the Commission constructed six oxidation ponds in order to improve the ability to treat sanitary waste within the City. These oxidation ponds continued in operation until 1987, when three new wastewater treatment plants were constructed, and the oxidation ponds ceased operation. The largest of the Utility s wastewater treatment plants is the Middle Branch Wastewater Treatment Plant. This plant is located in Anderson County, south of the City. Middle Branch has a capacity of 3.75 MGD, with an average loading of 2.08 MGD. Located to the east of the City is the Georges Creek Wastewater Treatment Plant, with a capacity of 820,000 gallons per day ("GPD"). Georges Creek Wastewater Treatment Plant has an average loading of 381,000 GPD. The Golden Creek Wastewater Treatment Plant is located to the west of the City and has a capacity of 580,000 GPD and an average loading of 113,000 GPD. Both the Middle Branch and the Golden Creek plants have industrial customers discharging into their waste stream, and the Commission therefore has a pre-treatment program for each plant. The pre-treatment programs are administered by the chief wastewater operator, who has authority over all three plants. A laboratory technician is responsible for the operation of the laboratory located at the Middle Branch plant. This laboratory performs the majority of all tests which are required by DHEC and the Environmental Protection Agency. Tests which cannot be performed in house are contracted to private laboratories. Currently all plants are operating within the limits placed upon them by DHEC. The sewer system serves an area of approximately 40 square miles. Of all of the sewer system's, 88 percent are residential and 85 percent live or operate a business within the City limits. For the fiscal year ending March 31, 2017, the sewer system served 10,475 customers. Operating revenues exceeded operating expenses before depreciation, sufficiently to support its portion of debt service and capital reinvestment. The Utility continues to make efforts to ensure that each utility revenue stream is adequate to support its operations, debt service and capital reinvestment. In order to meet this objective, wastewater rates for customers of ECU were increased by 2.0% on April 1,

28 RESULTS FROM OPERATIONS - WASTEWATER SYSTEM (AMOUNTS IN THOUSANDS) 2017 % of Sales 2016 Variance % Revenues Wastewater system sales $ 5, % $ 4,816 $ % Other wastewater sales & fees % % Capital grant income % 957 (544) -56.8% Total wastewater revenues 5, % 5,967 (305) -5.1% Operating & maintenance expense Collection % 531 (17) -3.2% Pumping % % Wastewater treatment 1, % 1,574 (38) -2.4% Subtotal 2, % 2,338 (48) -2.1% Customer service 1 0.0% % Direct administrative % % Indirect administrative 1, % 1, % Depreciation 1, % % Interest % 204 (22) -10.8% Total O&M Expense 5, % 4, % Wastewater system income (loss) $ % $ 1,101 $ (579) 52.6% WASTEWATER SALES $4,000,000 $3,500,000 $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $- Residential Commercial Fiscal Year HISTORICAL WASTEWATER STATISTICS Total Customer Accounts Annual % Growth Total Treated Volumes Billed (cf) Annual % Growth , % 108,583, % , % 103,871, % , % 97,371, % , % 99,950, % , % 97,133, % , % 91,884, % , % 85,794, % , % 91,817, % , % 91,798, % , % 96,695, %

29 MUNICIPAL FEE On April 1, 2013 Easley Combined Utilities and the City of Easley entered into a new inter-government agreement that supersedes the agreement signed in October The new agreement increases the fee the City receives to 5% of all inside city revenues. The new agreement dictates that the fee is to be placed as a line item on the customer s utility bill. The 2013 Inter-Governmental Agreement also provides that the System will only send to the City the amount of the municipal fee that it collects and that any municipal fee amount that are not collected will not be owed to the City by the System. Under the previous agreement the fee was an expense item in ECU s budget and was not presented on the customer s utility bill. Since inception, Easley Combined Utilities has paid the City of Easley $19,243,000 in Municipal fees. Fees paid to the City increased 2.1% from $1,819,028 in 2016 to $1,856,664 in FY Summary of Municipal Fees (1) $2,000,000 $1,600,000 $1,200,000 $800,000 $400,000 $ (1) Fees collected for the fiscal year ended March 31, 2013 (and prior fiscal years) were subject to the 1998 Inter-Governmental Agreement and were excluded from the definition of Expenses of Operating and Maintaining the System (as defined in the Ordinance). For the fiscal year ended March 31, 2014 and subsequent fiscal years, the fees are collected by the Commission, but do not represent obligations of the System to the City, subject to the provisions of the 2013 Inter- Governmental Agreement. CAPITAL PROJECTS AND DEBT ADMINISTRATION Easley Combined Utilities currently has three revenue bonds outstanding. In December 2015, ECU issued $14,080,000 in revenue bonds in order to refund the remaining balance of the 2005 Bond Issue. Currently, the balance of the 2015 Bond Issue as of March 31, 2017, is $12,285,000. In February of 2011, ECU issued $10,205,000 in revenue bonds in order to refund the remaining balance of variable rate bonds issued in 2007 and terminate the 2007 interest rate swap. Currently, the balance of the 2011 Bond Issue as of March 31, 2017, is $9,900,

30 In February of 2010, ECU issued $25 million in revenue bonds in order to refund $22,590,000 of variable rate bonds issued in The refunding was undertaken in order to remove remarketing uncertainty and decrease credit risk associated with $32,590,000 of outstanding variable rate debt. In December 2007, ECU issued revenue bonds in the amount of $32,925,000. A total of $29,685,000 of the 2007 issue was used to advance refund a portion of the 2002 and 2005 Bond Issues for savings. The principal amounts refunded of the 2002 and 2005 Issues were $8,870,000 and $18,670,000 respectively. Of the proceeds from the 2007 Bond Issue, $3,240,000 was used to construct the Hamilton Creek Outfall sewer line. After the regularly scheduled payment of principal in FY 2011, the refunding of $22,590,000 in February 2010, and the refunding of $9,950,000 in February 2011, the balance of the 2007 Bond Issue has been paid off. The balance of the 2010 Bond Issue as of March 31, 2017, is $23,280,000. The 2005 Bond Issue proceeds of $18.5 million were used in part for the expansion of the Don L. Moore facility to 18 MGD, the construction of a 1 MG elevated water storage tank, the construction of a 5 MG ground level water storage tank, and the dredging of Saluda Lake. In addition, several water distribution lines are planned for construction using proceeds from this issue. After the regularly scheduled payment of principal, the advanced refunding of $18,670,000 in December 2007, and the advanced refunding of $13,880,000 in December 2015, the 2005 Bond Issue was paid in full as of March 31, The 2005 Bond Issue provided $18.5 million to invest in capital infrastructure, with the balance of the proceeds, $18.76 million, being used to advance refund portions of the 1999 and 2002 Bond Issue. The 1999 Revenue Bond Issue was an $8 million revenue bond issued in June After the advance refunding of $5,655,000 of outstanding principal in April 2005 and the payment of regularly scheduled principal on December 1, 2009, the 1999 Bond Issue has been paid off. In July of 2002, Easley Combined Utilities issued Revenue Bond Series 2002 for approximately $27.8 million. The proceeds from these issues were used primarily for the construction of the 12 MGD Don L. Moore Water Treatment Plant, high service pump station, finished water clear well, and finished water pump station. After advanced refunding $12,320,000 of the outstanding principal in April 2005 and $8,870,000 in December 2007, and the payment of regularly scheduled principal during 2013, the 2002 Bond Issue was paid in full as of March 31, In March of 2011, Easley Combined Utilities entered into a loan agreement with the State Revolving Fund for an amount not to exceed $2,519,014. The proceeds of the loan were used for the planning, design and construction of a portion of the secondary supply transmission main beginning at the water treatment plant. The balance of the loan as of March 31, 2017, is $1,797,023. The Commission utilizes independent engineering firms from time to time to develop capital improvement master plans for each component of the System. The most recently prepared studies (the "System Studies") each evaluated the applicable system condition and capacity and anticipated demand growth over a 20-year planning period and set forth recommendations of capital proceeds to address system needs and growth. The Commission utilizes the System Studies in its long-term planning and budgetary efforts. See Note 7 in the accompanying notes to basic financial statements for additional discussion of longterm debt activity