Public Utility District No. 1 of Kitsap County

Financial Statements and Federal Single Audit Report Public Utility District No. 1 of Kitsap County For the period January 1, 2013 through December 31, 2013 Published September 25, 2014 Report No. 1012668

Washington State Auditor Troy Kelley September 25, 2014 Board of Commissioners Public Utility District No. 1 of Kitsap County Poulsbo, Washington Report on Financial Statements and Federal Single Audit Please find attached our report on Public Utility District No. 1 of Kitsap County s financial statements and compliance with federal laws and regulations. We are issuing this report in order to provide information on the District s financial condition. Sincerely, TROY KELLEY STATE AUDITOR

Table of Contents Public Utility District No. 1 of Kitsap County January 1, 2013 through December 31, 2013 Federal Summary... 4 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... 6 Independent Auditor s Report On Compliance For Each Major Federal Program And On Internal Control Over Compliance In Accordance With OMB Circular A-133... 8 Independent Auditor s Report On Financial Statements... 11 Financial Section... 14 About The State Auditor s Office... 51 Page 3

Federal Summary Public Utility District No. 1 of Kitsap County January 1, 2013 through December 31, 2013 The results of our audit of Public Utility District No. 1 of Kitsap County are summarized below in accordance with U.S. Office of Management and Budget Circular A-133. FINANCIAL STATEMENTS An unmodified opinion was issued on the basic financial statements. Internal Control Over Financial Reporting: Significant Deficiencies: We reported no deficiencies in the design or operation of internal control over financial reporting that we consider to be significant deficiencies. Material Weaknesses: We identified no deficiencies that we consider to be material weaknesses. We noted no instances of noncompliance that were material to the financial statements of the District. FEDERAL AWARDS Internal Control Over Major Programs: Significant Deficiencies: We reported no deficiencies in the design or operation of internal control over major federal programs that we consider to be significant deficiencies. Material Weaknesses: We identified no deficiencies that we consider to be material weaknesses. We issued an unmodified opinion on the District s compliance with requirements applicable to each of its major federal programs. We reported no findings that are required to be disclosed under section 510(a) of OMB Circular A-133. Page 4

Identification of Major Programs: The following were major programs during the period under audit: CFDA No. Program Title 11.557 ARRA - Broadband Technology Opportunities Program (Recovery Act) 66.468 Capitalization Grants for Drinking Water State Revolving Funds The dollar threshold used to distinguish between Type A and Type B programs, as prescribed by OMB Circular A-133, was $300,000. The District did not qualify as a low-risk auditee under OMB Circular A-133. Page 5

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 Public Utility District No. 1 of Kitsap County January 1, 2013 through December 31, 2013 Board of Commissioners Public Utility District No. 1 of Kitsap County Poulsbo, Washington We have audited, 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, the financial statements of Public Utility District No. 1 of Kitsap County, Washington, as of and for the years ended December 31, 2013 and 2012, and the related notes to the financial statements, which collectively comprise the District s basic financial statements, and have issued our report thereon dated September 22, 2014. As discussed in Note 1 to the financial statements, during the year ended December 31, 2013, the District implemented Governmental Accounting Standards Board Statement No. 65, Items Previously Reported as Assets and Liabilities. INTERNAL CONTROL OVER FINANCIAL REPORTING In planning and performing our audits of the financial statements, we considered the District 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 District s internal control. Accordingly, we do not express an opinion on the effectiveness of the District 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 District'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 Page 6

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 District s financial statements are free from material misstatement, we performed tests of the District s 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. 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 District 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 District s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. However, this report is a matter of public record and its distribution is not limited. It also serves to disseminate information to the public as a reporting tool to help citizens assess government operations. TROY KELLEY STATE AUDITOR September 22, 2014 Page 7

Independent Auditor s Report on Compliance for Each Major Federal Program and on Internal Control over Compliance in Accordance with OMB Circular A-133 Public Utility District No. 1 of Kitsap County January 1, 2013 through December 31, 2013 Board of Commissioners Public Utility District No. 1 of Kitsap County Poulsbo, Washington REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM We have audited the compliance of Public Utility District No. 1 of Kitsap County, Washington, with the types of compliance requirements described in the U.S. Office of Management and Budget (OMB) Circular A-133 Compliance Supplement that could have a direct and material effect on each of its major federal programs for the year ended December 31, 2013. The District s major federal programs are identified in the accompanying Federal Summary. Management s Responsibility Management is responsible for compliance with the requirements of laws, regulations, contracts and grants applicable to its federal programs. Auditor s Responsibility Our responsibility is to express an opinion on compliance for each of the District s major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the District s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. Our audit does not provide a legal determination on the District s compliance. Page 8

Opinion on Each Major Federal Program In our opinion, the District complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended December 31, 2013. REPORT ON INTERNAL CONTROL OVER COMPLIANCE Management of the District is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered the District s internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program in order to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with OMB Circular A-133, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the District's internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance 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. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. PURPOSE OF THIS REPORT The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of OMB Circular A-133. Accordingly, this report is not suitable for any other purpose. However, this report is a matter of public record and its distribution is not limited. It Page 9

also serves to disseminate information to the public as a reporting tool to help citizens assess government operations. TROY KELLEY STATE AUDITOR September 22, 2014 Page 10

Independent Auditor s Report on Financial Statements Public Utility District No. 1 of Kitsap County January 1, 2013 through December 31, 2013 Board of Commissioners Public Utility District No. 1 of Kitsap County Poulsbo, Washington REPORT ON THE FINANCIAL STATEMENTS We have audited the accompanying financial statements of Public Utility District No. 1 of Kitsap County, Washington, as of and for the years ended December 31, 2013 and 2012, and the related notes to the financial statements, which collectively comprise the District s basic financial statements as listed on page 14. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America 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 District 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 District 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. Page 11

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 Public Utility District No. 1 of Kitsap County, as of December 31, 2013 and 2012, and the changes in financial position and cash flows thereof for the years then ended in accordance with accounting principles generally accepted in the United States of America. Matters of Emphasis As discussed in Note 1 to the financial statements, in 2013, the District adopted new accounting guidance, Governmental Accounting Standards Board Statement No. 65, Items Previously Reported as Assets and Liabilities. Our opinion is not modified with respect to this matter. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management s discussion and analysis on pages 15 through 19 and information on postemployment benefits other than pensions on page 48 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. Supplementary and Other Information Our audits were conducted for the purpose of forming an opinion on the financial statements that collectively comprise the District s basic financial statements. The accompanying Schedule of Expenditures of Federal Awards is presented for purposes of additional analysis as required by U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. This schedule is not a required part of the basic financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. The information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United Page 12

States of America. In our opinion, the information is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole. OTHER REPORTING REQUIRED BY GOVERNMENT AUDITING STANDARDS In accordance with Government Auditing Standards, we have also issued our report dated September 22, 2014 on our consideration of the District s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the District s internal control over financial reporting and compliance. TROY KELLEY STATE AUDITOR September 22, 2014 Page 13

Financial Section Public Utility District No. 1 of Kitsap County January 1, 2013 through December 31, 2013 REQUIRED SUPPLEMENTARY INFORMATION Management s Discussion and Analysis 2013 and 2012 BASIC FINANCIAL STATEMENTS Statement of Net Position 2013 and 2012 Statement of Revenues, Expenses and Changes in Net Position 2013 and 2012 Statement of Cash Flows 2013 and 2012 Notes to Financial Statements 2013 and 2012 REQUIRED SUPPLEMENTARY INFORMATION PEBB Retiree Medical Benefits Schedule of Funding Progress 2013 and 2012 SUPPLEMENTARY AND OTHER INFORMATION Schedule of Expenditures of Federal Awards 2013 Notes to the Schedule of Expenditures of Federal Awards 2013 Page 14

PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY 1431 FINN HILL ROAD - P.O. BOX 1989 - POULSBO, WA 98370 (360) 779-7656 * Fax (360) 779-3284 COMMISSIONERS JOHN ARMSTRONG LLOYD S. BERG JIM CIVILLA ~ MANAGER DAVID R. SIBURG Management s Discussion and Analysis This section provides an overview and analysis of key data presented in the basic financial statements for the years ended December 31, 2013 and 2012, with additional comparative data for 2011. Information within this section should be used in conjunction with the basic financial statements and accompanying notes. Overview of the Financial Statements Public Utility District No. 1 of Kitsap County (KPUD or District) accounts for financial activities within its Proprietary Fund for its Utility System. The Utility System provides wholesale water and telecommunications service, as well as retail water service and regional water resource activities, to support the System. In accordance with requirements set forth by the Governmental Accounting Standards Board, the District s financial statements employ the accrual basis of accounting in recognizing increases and decreases in economic resources. Accrual accounting recognizes all revenues and expenses during the year, regardless of when cash is received or paid. The basic financial statements, presented on a comparative format for the years ended December 31, 2013 and 2012, are comprised of: Statements of Net Position: The District presents its statement of position using the balance sheet format. The Statements of Net Position reflect the assets, liabilities and net position (equity) of the District at year-end. The net position sections of the Statements of Net Position are separated into three categories: net position invested in capital assets, net of related debt; restricted net position; and unrestricted net position. The District had $759,916 and $238,388 in restricted net position as of December 31, 2013 and 2012. Statements of Revenues, Expenses, and Changes in Fund Net Position: These statements reflect the transactions and events that have increased or decreased the District s total economic resources during the period. Revenues are presented net of allowances and are summarized by major source. Revenues and expenses are classified as operating or non-operating based on the nature of the transaction. Page 15

PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY 1431 FINN HILL ROAD - P.O. BOX 1989 - POULSBO, WA 98370 (360) 779-7656 * Fax (360) 779-3284 Management s Discussion and Analysis (continued) Statements of Cash Flows: The Statements of Cash Flows reflect the sources and uses of cash separated into four categories of activities: operating, non-capital financing activities, capital and related financing, and investing. The notes to the financial statements, presented at the end of the basic financial statements, are considered an integral part of the District s presentation of financial position, results of operations, and changes in cash flows. Financial Analysis The poor state of the economy affected almost all sectors and jurisdictions in 2013. The District was no exception. That said, the District's overall financial position and results of operations continued to be positive. The District s net position increased by $1,983,038 in 2013. Provided below is a year-over-year analysis of the change in net position by major component of income, with a primary focus on changes between 2013 and 2012. Operating Revenues From 2012 to 2013, total operating revenues increased by $ 403,340 (6.56%). From 2011 to 2012, total operating revenues increased $394,111 (6.85%). Operating Expenses From 2012 to 2013, District operating expenses increased by $ 543,606 (7.96%). From 2011 to 2012, District operating expenses decreased by $433,176 (5.96%). Depreciation and amortization expense accounted for 23.69% of total operating expenses in 2013. This figure was 25.20% in 2012 and 22.88% in 2011. Depreciation and amortization increased by 1.47% from 2012 to 2013 after an increase of 3.58% from 2011 to 2012. Other Income & Expense During 2013, property tax revenue increased $17,610. Interest income decreased due to decreasing cash and investment balances. Interest expense also decreased due to the refunding bonds issued in late 2010. Page 16

PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY 1431 FINN HILL ROAD - P.O. BOX 1989 - POULSBO, WA 98370 (360) 779-7656 * Fax (360) 779-3284 Management s Discussion and Analysis (continued) Capital Contributions During 2013, Capital Contributions were $1,778,455, an increase of $990,661 from the $787,794 in 2012. Capital Contributions in 2011 were $841,396. Summary of Financial Position The overall financial position of the District remained reasonably strong during 2013 with an increase in net position of $1,983,038. The increase in net position follows an increase of $1,163,219 in 2012. District management s financial policies require that financial plans be developed to maintain minimum cash and investment balances contained within unrestricted accounts sufficient to: 1) provide funding for 45 days of operating expenses based on the planned year s operating budget, and 2) provide funding for unanticipated infrastructure replacement based on 1% of total net plant. The District s unrestricted cash and cash equivalents totaled $8.7 million and $4.9 million at December 31, 2013 and 2012, respectively. Actual balances exceeded the minimum required level for each year. In accordance with District financial policies and covenants established within the District s bond resolutions, the District is required to maintain and collect rates and charges sufficient to provide Net Revenues (defined as net income less depreciation, amortization, and interest expense) in each fiscal year in an amount at least equal to 1.25 the Annual Debt Service. For the years ended 2013, 2012 and 2011, the District s debt service coverage was 2.31, 1.78 and 1.76, respectively. Capital Asset and Long Term Debt Activity The District continues to have a strong rating in the market. Moody s Investor Services has assigned an underlying rating of A1 to the District on its 2010 and 2013 bond issues. The District issued approximately $7.2 million in debt in 2013. The new debt was used to retire old debt and make improvements to the District's infrastructure assets. The District s 2004 and 2005 revenue bonds were rated by Standard & Poors and were assigned an underlying rating of A+. The District does not anticipate going to the market in the near future. The District continues to develop regional infrastructure for both wholesale water supply and wholesale telecommunications service. In August 2010, PUD was awarded $3.1 million in grants from the Broadband Technology Opportunities Program. This 3-year program includes various service obligations and projects with an estimated cost of $8.5 million. The district incurred $939,237 of costs related to the federal project in 2013 and received $352,555 in reimbursements for these costs in 2013. Debt service payments totaled $3.9 million and $2.1 million in 2013 and 2012, respectively. Page 17

PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY 1431 FINN HILL ROAD - P.O. BOX 1989 - POULSBO, WA 98370 (360) 779-7656 * Fax (360) 779-3284 Management s Discussion and Analysis (continued) Additional information about the District s capital assets and long-term debt is presented in the following report and notes. Condensed Comparative Financial Information Condensed Assets, Liabilities and Net Position Dec. 31, Dec. 31, Dec. 31, $ Change % Change 2013 2012 2011 13-12 13-12 Assets Current assets $10,011,910 $ 6,307,100 $ 7,570,976 $ 3,704,810 58.74% Utility plant 65,670,551 62,135,653 58,955,093 3,534,898 5.69% Accumulated depreciation (25,557,136) (24,143,974) (22,631,489) (1,413,162) 5.85% Noncurrent assets 1,557,935 881,322 1,380,007 676,613 76.77% Total assets 51,683,260 45,180,101 45,274,587 6,503,159 14.39% Deferred Outflows of Resources Deferred loss on refunding 104,366 101,916 113,453 2,450 2.40% Total assets and deferred outflows of resources $51,787,626 $45,282,017 $45,388,040 $ 6,505,609 14.37% Liabilities Current liabilities 2,064,652 1,913,855 2,054,902 150,797 7.88% Long-term liabilities 18,486,019 14,114,245 15,242,436 4,371,774 30.97% Total liabilities 20,550,671 16,028,100 17,297,338 4,522,571 28.22% Net Position Invested in capital assets, net of related debt 21,372,293 23,382,040 20,848,485 (2,009,747) -8.60% Restricted 759,916 238,388 238,388 521,528 218.77% Unrestricted 9,104,746 5,633,489 7,003,825 3,471,257 61.62% Total net position 31,236,955 29,253,917 28,090,698 1,983,038 6.78% Total liabilities and net position $51,787,626 $45,282,017 $45,388,036 $ 6,505,609 14.37% Page 18

PUBLIC UTILITY DISTRICT #1 OF KITSAP COUNTY 1431 FINN HILL ROAD - P.O. BOX 1989 - POULSBO, WA 98370 (360) 779-7656 * Fax (360) 779-3284 Management s Discussion and Analysis (continued) Condensed Revenues, Expenses and Changes in Net Position $ Change % Change 2013 2012 2011 13-12 13-12 Operating Revenue Water Sales $ 5,040,329 $ 4,629,929 $ 4,406,849 $ 410,400 8.86% Telecom Sales 1,175,222 1,164,128 1,023,458 11,094 0.95% Other 334,819 352,973 322,612 (18,154) -5.14% Total Operating Revenue 6,550,370 6,147,030 5,752,919 403,340 6.56% Nonoperating Revenue Property tax income 2,141,614 2,124,004 2,096,334 17,610 0.83% Other income 1,016,676 948,129 558,407 68,547 7.23% Total Nonoperating Revenue 3,158,290 3,072,133 2,654,741 86,157 2.80% Total Revenue 9,708,660 9,219,163 8,407,660 489,497 5.31% Operating Expenses (7,374,634) (6,831,028) (7,264,204) (543,606) 7.96% Nonoperating Expenses (2,129,443) (2,012,710) (1,346,561) (116,733) 5.80% Total Expenses (9,504,077) (8,843,738) (8,610,765) (660,339) 7.47% Income (Loss) Before Contributions 204,583 375,425 (203,105) (170,842) -45.51% Capital Contributions 1,778,455 787,794 841,396 990,661 125.75% Change in net position 1,983,038 1,163,219 638,291 819,819 Net position, beginning 29,253,917 28,090,698 27,452,407 Net position, ending $31,236,955 $ 29,253,917 $ 28,090,698 Page 19

STATEMENT OF NET POSITION DECEMBER 31, 2013 AND 2012 ASSETS AND DEFERRED OUTFLOWS OF RESOURCES DECEMBER 31, 2013 2012 CURRENT ASSETS Cash and cash equivalents $ 8,663,157 $ 4,952,125 Accounts receivable 946,755 921,067 Property taxes receivable 105,601 114,182 Inventory materials and supplies 67,546 76,208 Short-term assessments receivable 182,476 211,058 Other current assets 46,375 32,460 Total current assets 10,011,910 6,307,100 NONCURRENT ASSETS Restricted cash and cash equivalents 759,916 238,388 Long-term notes and assessments receivable 798,019 642,934 Capital Assets Not Being Depreciated Land 1,468,268 1,180,127 Construction work in progress 2,434,064 1,551,936 Capital Assets Being Depreciated Utility plant in service 61,768,219 59,154,544 Utility plant acquisition adjustment - 249,046 Accumulated depreciation and amortization (25,557,136) (24,143,974) Net utility plant 40,113,415 37,991,679 Total noncurrent assets 41,671,350 38,873,001 Total Assets 51,683,260 45,180,101 DEFERRED OUTFLOWS OF RESOURCES Deferred loss on refunding 104,366 101,916 TOTAL ASSETS AND DEFERRED OUTFLOWS OF RESOURCES $ 51,787,626 $ 45,282,017 See accompanying notes to the financial statements. Page 20

STATEMENT OF NET POSITION DECEMBER 31, 2013 AND 2012 LIABILITIES AND NET POSITION DECEMBER 31, 2013 2012 CURRENT LIABILITIES Accounts payable $ 526,449 $ 331,615 Taxes payable 39,383 32,634 Interest payable 38,844 48,798 Retainage payable 31,793 24,811 Current portion of long-term debt 1,428,183 1,475,997 Total current liabilities 2,064,652 1,913,855 NONCURRENT LIABILITIES Revenue bonds 12,373,769 9,729,346 General obligation bonds 6,164,408 4,579,074 Other noncurrent debt 307,311 403,134 Accrued compensated absences 429,552 358,598 Other post employment benefits liability 639,162 520,090 Less: current portion (1,428,183) (1,475,997) Total noncurrent liabilities, net of current portion 18,486,019 14,114,245 Total liabilities 20,550,671 16,028,100 NET POSITION Net Investment in capital assets 21,372,293 23,382,040 Restricted for debt service 759,916 238,388 Unrestricted 9,104,746 5,633,489 Total net position 31,236,955 29,253,917 TOTAL LIABILITIES AND NET POSITION $ 51,787,626 $ 45,282,017 See accompanying notes to the financial statements. Page 21

STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET POSITION FOR YEARS ENDED DECEMBER 31, 2013 AND 2012 FOR YEARS ENDED DECEMBER 31, 2013 2012 OPERATING REVENUE Metered water sales $ 5,028,027 $ 4,623,862 Wholesale water sales 12,302 6,067 Wholesale telecom sales 1,175,222 1,164,128 Street light revenue 51,620 51,715 Miscellaneous operating revenues 283,199 301,258 Total operating revenue 6,550,370 6,147,030 OPERATING EXPENSES Operations and maintenance 4,974,678 4,611,123 Administration 339,584 234,083 Depreciation and amortization 1,746,731 1,721,427 Business taxes 313,641 264,395 Total operating expenses 7,374,634 6,831,028 OPERATING LOSS (824,264) (683,998) NONOPERATING REVENUES (EXPENSES) Property taxes 2,141,614 2,124,004 Grant income 754,907 460,544 Interest income 74,349 88,397 Gain (loss) on disposal of assets (14,411) (7,530) Interest expense (566,356) (608,132) Nonoperating program expenses (1,548,676) (1,397,048) Contract revenue 187,420 399,188 Total nonoperating revenues (expenses) 1,028,847 1,059,423 INCOME (LOSS) BEFORE CONTRIBUTIONS 204,583 375,425 CAPITAL CONTRIBUTIONS 1,778,455 787,794 CHANGE IN NET POSITION 1,983,038 1,163,219 TOTAL NET POSITION, BEGINNING OF YEAR $ 29,253,917 $ 28,090,698 TOTAL NET POSITION, END OF YEAR $ 31,236,955 $ 29,253,917 See accompanying notes to the financial statements. Page 22

STATEMENT OF CASH FLOWS FOR YEARS ENDED DECEMBER 31, 2013 AND 2012 FOR YEARS ENDED DECEMBER 31, 2013 2012 CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers $ 6,524,682 $ 6,083,701 Payments to contractors, suppliers and employees (4,934,659) (4,617,006) Taxes paid (306,892) (251,481) Net cash provided by (used in) operating activities 1,283,131 1,215,214 CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Contract revenue 187,420 399,188 Property taxes received 2,150,195 2,133,005 Other receipts (payments) for nonoperating program expenses (1,548,672) (1,366,117) Net cash provided by (used in) noncapital financing activities 788,943 1,166,076 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Additions to utility plant and construction work in progress (3,153,063) (2,785,237) Proceeds from disposition of assets - 4,278 Proceeds from grants 754,907 460,544 Proceeds from new debt 7,473,941 - Principal paid on debt (3,339,873) (1,528,688) Interest paid on debt (578,895) (613,954) Cash received from notes and assessments 165,703 27,190 Capital contributions 763,417 583,409 Net cash provided by (used in) capital and related financing activities 2,086,137 (3,852,458) CASH FLOWS FROM INVESTING ACTIVITIES Interest income on investments 74,349 88,397 Net cash provided by (used in) investing activities 74,349 88,397 Net increase (decrease) in cash and cash equivalents 4,232,560 (1,382,771) Cash and cash equivalents, beginning of year $ 5,190,513 $ 6,573,284 Cash and cash equivalents, end of year $ 9,423,073 $ 5,190,513 NONCASH INVESTING, CAPITAL, AND FINANCING ACTIVITIES: During 2013 and 2012 the District received non-cash capital contributions of $722,832 and $204,385 respectively. During 2013 the District recorded $292,206 of non-cash income with respect to a new LUD #13. See accompanying notes to the financial statements. Page 23

STATEMENT OF CASH FLOWS FOR YEARS ENDED DECEMBER 31, 2013 AND 2012 FOR YEARS ENDED DECEMBER 31, RECONCILIATION OF OPERATING INCOME (LOSS) TO 2013 2012 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Operating loss $ (824,264) $ (683,998) Adjustments to reconcile operating loss to net cash provided by (used in) operating activities: Depreciation and amortization expense 1,746,731 1,721,427 Change in assets and liabilities: Decrease (increase) in accounts receivable (25,688) (93,798) Decrease (increase) in inventory materials and supplies 8,662 12,618 Decrease (increase) in other current assets (13,915) (9,402) (Decrease) increase in taxes payable 6,749 14,946 (Decrease) increase in accounts payable 194,836 154,035 (Decrease) increase in other accrueds 190,020 99,386 Net cash provided by (used in) operating activities $ 1,283,131 $ 1,215,214 See accompanying notes to the financial statements. Page 24

NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2013 & 2012 NOTE 1 - SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES Kitsap Public Utility District (KPUD or District) is a municipal corporation in Washington State with incorporated boundaries the same as Kitsap County. The District is governed by an elected board of commissioners. Its purpose is to preserve and protect the water resources of Kitsap County for the benefit of the people, and to supply public utility service. KPUD has broad authority and responsibility under Chapter 54, Revised Code of Washington. KPUD was formed at the general election of 1940 by a vote of the county's electorate to explore providing electrical service as a public special purpose District instead of a private company. U.S. entry into World War II and rapid growth in and around the naval shipyard at Bremerton initially delayed and eventually precluded assumption of electric service in Kitsap County by KPUD. In 1959, the District initiated several actions to study regional water resources in Kitsap County. In 1963, KPUD's Board recognized the necessity for long-range water supply plans to avert future shortages. Regional resource plans, studies, and assessments have taken on increasing importance. Kitsap Public Utility District strives to provide quality water and wholesale telecommunication utility services to citizens of Kitsap County. KPUD provides safe, reliable drinking water to approximately 13,500 customers throughout Kitsap County. The wholesale telecommunication service expands communication choices for Kitsap County residents, businesses and public agencies from Port Orchard to Bainbridge Island. The accounting policies of Public Utility District #1 of Kitsap County, Washington conform to generally accepted accounting principles as applicable to proprietary funds of governments. GASB is the accepted standard setting body for establishing governmental accounting and financial reporting principles. In June 1999, GASB approved Statement 34, Basic Financial Statements and Management Discussion and Analysis for State and Local Governments. This, and consecutive statements, are reflected in the accompanying financial statements (including notes to financial statements). The following is a summary of the more significant policies: Reporting entity The District is a municipal corporation governed by an elected three-member board. As required by generally accepted accounting principles, management has considered all potential component units in defining the reporting entity. The District has no component units. Basis of accounting and presentation The accounting records of the District are maintained in accordance with methods prescribed by the State Auditor under the authority of Chapter 43.09 RCW. The District uses the Uniform System of Accounts for Class A Water Utilities. The District uses the full-accrual basis of accounting where revenues are recognized when earned and expenses are recognized when incurred. Capital asset purchases are capitalized and long-term liabilities are accounted for in the appropriate funds. Page 25

NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2013 & 2012 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Unbilled District utility service receivables are recorded at year-end. The District distinguishes operating revenues and expenses from non-operating ones. Operating revenues and expenses result from providing services and producing and delivering goods in connection with the District s principal ongoing operations. The principal operating revenues of the District are charges to customers for water and telecom services. The District also recognizes as operating revenue street light revenues and other miscellaneous operating revenues. Operating expenses for the District include costs to operate and maintain the water and telecom systems, customer service, marketing, administration, depreciation and business taxes. All revenues and expenses not meeting this definition are reported as non-operating revenues and expense. Cash and Cash Equivalents For the purpose of the statement of cash flows, the District considers all highly liquid investments (including restricted assets), with a maturity of three months or less when purchased, to be cash equivalents. Utility Plant and Depreciation Capital assets are defined by the District as assets with initial individual cost of more than $500 and an estimated useful life in excess of 1 year. Major expenses for capital assets, including capital leases and major repairs that increase useful lives, are capitalized. Maintenance, repairs, and minor renewals are accounted for as expenses when incurred. Utility plant in service and other capital assets are recorded at cost. Donations by developers and customers are recorded at the contract price and donor cost. The original cost of operating property retired or otherwise disposed of and the cost of installation, less salvage, is charged to income. Depreciation is computed on the straight-line method with the following useful lives: Buildings and improvements Water storage, transportation and treatment Transportation equipment General equipment 40-50 years 25-100 years 5-7 years 5-10 years See Note 3 for a detailed schedule of assets and depreciation. Restricted funds In accordance with bond resolutions (and certain related agreements) separate restricted funds are required to be established for the water system revenue bonds. The assets held in these funds are restricted for specific uses, including debt service and other special reserve requirements. Restricted funds include $759,916 and $238,388 in cash as of December 31, 2013 and 2012, respectively. Page 26

NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2013 & 2012 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Receivables - Receivables are written off in the year that they are deemed to be uncollectible. Inventories - Inventories are valued at cost, which approximates the market value. The District uses specific identification to determine inventory costs. Investments All investments of the District s funds are obligations of the U.S. Government, the Kitsap County Treasurer s Investment Pool, banker s acceptances, or deposits with Washington State banks and savings and loan institutions pursuant to the requirements of Chapter 39.58 RCW. Compensated absences Compensated absences are absences for which employees will be paid, such as vacation and sick leave. The District records unpaid leave for compensated absences as an expense and liability when incurred. Bond issuance costs Costs relating to the sale of bonds are expensed in the period incurred. Deferred Inflows & Outflows of Resources The difference between the cost to defease outstanding debt and the carrying value of bonds defeased by refunding bonds is deferred and amortized over the shorter of the remaining term of the refunded bonds or the term of the refunding bonds, using the straight-line or effective interest method. Capital Contributions Capital contributions for the District consist mainly of connection fees and developer extensions. Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates. Accounting changes and reclassifications GASB Statement No. 63 Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position (GASB 63) standardizes the presentation of deferred inflows and outflows of resources and their effect on net position. The District adopted GASB 63 effective January 1, 2012. Other than changes in presentation, there was no impact to the financial statements. Page 27

NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2013 & 2012 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) GASB Statement No. 65 Items Previously Reported as Assets and Liabilities reclassifies certain items formerly being reported as assets and liabilities as deferred outflows of resources and deferred inflows of resources. The District adopted GASB 65 effective January 1, 2012. As a result of this implementation, the District s beginning net position as of January 1, 2011, which was $27,890,423, was reclassified to $27,452,407 to reflect the write-off of $444,916 in unamortized debt issuance costs and the recording of $6,900 of prepaid insurance costs. Certain 2012 balances have been reclassified to conform to 2013 presentation. NOTE 2 - DEPOSITS AND INVESTMENTS As required by state law, all investments of the District s funds are obligations of the U.S. Government, the Kitsap County Treasurer s Investment Pool, banker s acceptances, or deposits with Washington State banks and savings and loan institutions. The District does not have a formally adopted investment policy at this time. Investments As of December 31, 2013, the district had the following investments: Investment type Maturities Fair Value Kitsap County Treasurer s Investment Pool 50 days Avg $ 8,394,880 As of December 31, 2012, the district had the following investments: Investment type Maturities Fair Value Kitsap County Treasurer s Investment Pool 50 days Avg $ 4,063,717 All investments are listed at cost and approximate fair market value. Management intends to hold the time deposits and securities until maturity; therefore, temporary declines in market value are not reflected in the financial statements. The District s investments were all held with the Kitsap County Treasurer s Investment Pool, and are therefore not subject to risk categorization. The investment pool is administered by the Kitsap County Treasurer. Custodial credit risk Deposits. For a deposit, this is the risk that in the event of a bank failure, the District s deposits may not be returned to it. The District s deposits are entirely covered by the Federal Deposit Insurance Corporation (FDIC) or by collateral held in a multiple financial institution collateral pool administered by the Public Deposit Protection Commission (PDPC). Under state law, public depositories under the PDPC may be assessed on a prorated basis if the pool s collateral is insufficient to cover a loss. As a result, deposits covered by collateral held in the multiple financial institution collateral pool are considered to be insured. State law requires that deposits may be made only with institutions that are approved by the PDPC. Page 28

NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2013 & 2012 NOTE 3 UTILITY PLANT AND DEPRECIATION Capital assets not being depreciated Capital assets being depreciated Depreciation and amortization Page 29

NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2013 & 2012 NOTE 3 UTILITY PLANT AND DEPRECIATION (continued) Utility plant activity for the years ended December 31, 2012 was as follows: 12/31/2011 Increase Decrease 12/31/2012 Capital assets not being depreciated Land and land rights $ 1,148,698 $ 31,429 $ - $ 1,180,127 Construction work in progress 862,477 689,459 1,551,936 Total capital assets not being depreciated 2,011,175 720,888-2,732,063 Capital assets being depreciated Wells 5,664,326 108,917 5,773,243 Supply mains 21,783,111 912,674 22,695,785 Water treatment equipment 674,412-674,412 Pumping plant 4,276,216 370,265 4,646,481 Water storage 5,632,298 43,004 5,675,302 Water system comprehensive plan 741,177 1,230 742,407 Services 4,253,377 62,006 4,315,383 Hydrants 1,254,235 58,082 1,312,317 Communication equipment 70,400 95,116 20,924 144,592 Office building 988,618 26,520 1,015,138 Databases 2,299 26,173 28,472 Plant buildings 71,077-71,077 Office furniture and equipment 173,881 605 9,669 164,817 Vehicles 686,301 19,831 36,778 669,354 Utility equipment 467,876 7,191 61,207 413,860 Computer equipment 170,027 13,096 9,777 173,346 Telemetry equipment 320,227 5,446 4,757 320,916 Computer software 125,830 8,101 9,152 124,779 Leasehold improvements 31,247-31,247 Maintenance building and improv 993,201 8,623 1,001,824 Utility plant adjustment account 249,046-249,046 Electronic equipment - telecom 1,156,606 75,518 61,428 1,170,696 Poles, towers & fixtures - telecom 109,422 38,197 1,761 145,858 Fiber systems - telecom 6,752,800 341,759 7,094,559 Services - telecom 346,807 49,440 3,568 392,679 Plant building - telecom 249,053-249,053 Communication equipment - telecom 69,190-745 68,445 Computers - telecom 34,108 5,377 983 38,502 Total capital assets being depreciated 57,347,168 2,277,171 220,749 59,403,590 Depreciation and amortization Accumulated depreciation 22,382,720 1,721,151 208,943 23,894,928 Accumulated amortization (UPAA) 248,769 277 249,046 Total accum. depreciation and amort. 22,631,489 1,721,428 208,943 24,143,974 Total utility plant being depreciated, net 34,715,679 35,259,616 Net Utility Plant $ 36,726,854 $ 37,991,679 Page 30