2011 Comprehensive Annual Financial Report (cafr)

Transcript

Comprehensive Annual Financial Report Port of Tacoma Tacoma, Washington For year end December 31, 2011 PORT OF TACOMA COMPREHENSIVE ANNUAL FINANCIAL REPORT For the Year Ended December 31, 2011 TABLE OF CONTENTS Page INTRODUCTORY SECTION - FINANCE AND ADMINISTRATION Chief Financial Officer’s Transmittal Letter ...................................................................................................... 3-7 Certificate of Achievement for Excellence in Financial Reporting ....................................................................... 8 Port of Tacoma Leadership ................................................................................................................................. 9 Organization Chart ............................................................................................................................................ 10 List of Principal Officials .................................................................................................................................... 11 FINANCIAL SECTION Independent Auditor’s Report ........................................................................................................................... 13 Management’s Discussion and Analysis ...................................................................................................... 14-20 Enterprise Fund Statements of Net Assets .................................................................................................. 22-23 Enterprise Fund Statements of Revenues, Expenses and Changes in Net Assets .......................................... 24 Enterprise Fund Statements of Cash Flows ................................................................................................. 25-26 Post-Employment Health Care Benefits Trust Fund Statements of Net Assets ................................................ 27 Post-Employment Health Care Benefits Trust Fund Statements of Revenues, Expenses and Changes in Net Assets ............................................................................................................................................................... 28 Notes to Financial Statements ..................................................................................................................... 29-55 STATISTICAL SECTION (unaudited) Net Assets by Component - Last Ten Fiscal Years........................................................................................... 58 Changes in Net Assets - Last Ten Fiscal Years ................................................................................................ 59 Assessed and Estimated Actual Value of Taxable Property - Last Ten Fiscal Years ....................................... 60 Property Tax Rates - Direct and Overlapping Governments - Last Ten Fiscal Years ....................................... 61 Principal Property Tax Payers........................................................................................................................... 62 Property Tax Levies and Collections - Last Ten Fiscal Years ........................................................................... 63 Ratios of Outstanding Debt by Type - Last Ten Fiscal Years ........................................................................... 64 Ratios of General Obligation Bonds - Last Ten Fiscal Years ............................................................................ 65 Computation of Direct and Overlapping General Obligation Debt ..................................................................... 66 Computation of Legal Debt Margin - Last Ten Fiscal Years .............................................................................. 67 Revenue Bonds Coverage by Type - Last Ten Fiscal Years ............................................................................ 68 Demographic Statistics - Last Ten Fiscal Years................................................................................................ 69 Pierce County Major Employers ........................................................................................................................ 70 Number of Port Employees by Function - Last Ten Fiscal Years ...................................................................... 71 Marine Terminal Tonnage and Statistics - Last Ten Fiscal Years ..................................................................... 72 Marine Terminal Description ............................................................................................................................. 73 Prepared by the Finance Department, Port of Tacoma 3 4 5 6 7 8 Port of Tacoma Leadership The five-member Port of Tacoma Commission is the governing body of the Port of Tacoma. The Commission sets policy and authorizes major expenditures. The Commission appoints a Chief Executive Officer, who is responsible for the executive leadership of the Port. Voters of Pierce County, Washington elect commissioners to four-year terms. The Commission holds regular public meetings at the Fabulich Center, 3600 Port of Tacoma Road. Meeting dates, times and agendas are available at www.portoftacoma.com. Commissioner Constance T. Bacon Connie Bacon was elected to the Port Commission in 1997. A graduate of Syracuse University, she later received a master’s degree in public administration from The Evergreen State College. Bacon is a former Executive Director of the World Trade Center Tacoma and served eight years as Special Assistant to former Washington Governor Booth Gardner. She serves on the Board of Directors for numerous organizations, including the Tacoma-Pierce County Chamber of Commerce, the Asia Pacific Cultural Center, the Regional Access Mobility Project (RAMP), and the Tideflats Rail Oversight Committee. She also serves on Washington Governor Gregoire’s Economic Development Commission and is a Senior Fellow of the American Leadership Forum. Commissioner Don Johnson Don Johnson retired as Vice President and General Manager of Simpson Tacoma Kraft, a leading Tacoma pulp and paper producer, in 2007 – the same year he was elected to the Port Commission. Johnson holds a bachelor’s degree in mechanical engineering from the University of Washington. In addition to his professional accomplishments, Johnson serves on the board of Goodwill, the Goodwill industries Foundation and MultiCare Health Care Foundation. He also serves on Milgard School of Business Advisory Board at the University of Washington Tacoma. Johnson is past Chair of the Tacoma-Pierce County Chamber of Commerce and past Board Chair of the United Way of Pierce County. Commissioner Richard P. Marzano Dick Marzano was elected to the Port Commission in 1995. A Tacoma longshore worker for more than 36 years, he served as president of the International Longshore and Warehouse Union Local 23 from 1989 to 1995. Marzano is a former member of the Freight Mobility Strategic Investment Board, appointed by both Washington Governor Gary Locke and Washington Governor Chris Gregoire. He serves on the six-member executive committee of the Washington Public Ports Association and is past president of that committee. He also is a member of the Puget Sound Regional Council, the Tacoma Chapter of the Propeller Club of the United States, and a former board member of the Foss Waterway Development Authority. Commissioner Don Meyer Don Meyer is the former executive director of the Foss Waterway Development Authority and a former deputy executive director of the Port. He was voted onto the Port of Tacoma Commission in November 2009, and took office in January 2010. Meyer, born and raised on a farm in South Dakota, has an undergraduate degree in business from Pacific Lutheran University in Tacoma and a master’s degree in business administration from the University of South Dakota. He currently serves on the Pierce College board of trustees, the Pacific Lutheran University School of Business Executive Advisory Board, the Tacoma Waterfront Association, the Metropolitan Development Council, and the board of the LeMay Car Museum. Commissioner Clare Petrich A Port Commissioner since 1995, Clare Petrich is a graduate of Manhattanville College, New York, and received a master’s degree from the University of Virginia. A small business owner, Petrich serves on the Boards of the Greater Seattle Trade Development Alliance, the Tacoma-Pierce County Convention and Visitors Bureau, Washington Council for International Trade and the Foundation for Russian American Economic Cooperation. She also serves on the board for the Central Puget Sound Economic Development District, and the Economic Development Board for Tacoma-Pierce County. A co-founder of the Commencement Bay Maritime Fest, Petrich served as Chair for Tall Ships Tacoma 2005 and 2008. Chief Executive Officer John Wolfe John Wolfe was named the Port’s chief executive officer in June 2010. Before being named CEO, Wolfe had served as the deputy executive director of the port since June 2005. Prior to joining the Port of Tacoma, he served for two years as the executive director at the Port of Olympia, and before that as Olympia’s director of operations and marine terminal manager. Wolfe also spent 10 years with Maersk Sealand/APM Terminals in Tacoma, most recently as the terminal’s operations manager. A native of Puyallup, Washington, Wolfe earned a bachelor’s degree in business administration from Pacific Lutheran University in 1987. 9 PORT OF TACOMA Organizational Chart As of December 31, 2011 COMMISSIONERS Chief Executive Officer General Counsel Deputy Executive/Chief Operating Officer Chief Commercial Officer Chief Financial & Administrative Officer Chief External Affairs Officer Chief Facilities Development Officer Chief Human Resources Officer 10 11 FINANCIAL SECTION 12 Independent Auditor’s Report The Board of Commissioners Port of Tacoma Tacoma, Washington We have audited the accompanying financial statements of the Enterprise Fund and Post Employment Health Care Benefits Trust Fund of Port of Tacoma (the Port) as of December 31, 2011 and 2010, and for the years then ended, which collectively comprise the Port’s basic financial statements. These financial statements are the responsibility of the Port's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position, of the Enterprise Fund and the Post Employment Health Care Benefits Trust Fund of the Port of Tacoma as of December 31, 2011 and 2010, and its changes in financial position and its cash flows for the Enterprise Fund for the years then ended, and the changes in net assets for the Post Employment Health Care Benefits Trust Fund for the years ended December 31, 2011 and 2010, in conformity with accounting principles generally accepted in the United States of America. The accompanying management’s discussion and analysis on pages 14 through 20 is not a required part of the basic financial statements but is supplementary information required by the accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted primarily of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. Our audits were made for the purposes of forming an opinion on the basic financial statements taken as a whole. The introductory and statistical sections are presented for purposes of additional analysis and are not a required part of the basic financial statements. The introductory and statistical sections have not been subjected to the auditing procedures applied in the audits of the basic financial statements and, accordingly, we express no opinion on them. Tacoma, Washington March 16, 2012 13 Port of Tacoma MANAGEMENT’S DISCUSSION AND ANALYSIS YEARS ENDED DECEMBER 31, 2011 AND 2010 INTRODUCTION The Port of Tacoma‟s (the Port) Management Discussion and Analysis (MD&A) of financial activities and performance introduces the Port‟s 2011 and 2010 financial statements which includes the Enterprise Fund as well as the Post Employment Health Care Benefits Trust Fund. Port management prepared this MD&A and readers should consider it in conjunction with the financial statements and the notes thereto. The Enterprise Fund accounts for all activities and operations of the Port except for the activities included within the Post Employment Health Care Benefits Trust Fund. The notes are essential to a full understanding of the data contained in the financial statements. This report also presents certain required supplementary information regarding capital assets and long-term debt activity, including commitments made for capital expenditures. OVERVIEW OF THE FINANCIAL STATEMENTS The financial section of this annual report consists of three parts: MD&A, the basic financial statements, and the notes to the financial statements. The financial statements include: the statements of net assets, the statements of revenues, expenses, and changes in net assets, and the statements of cash flows of the Enterprise Fund. The report also includes the following two basic financial statements for the Post Employment Health Care Benefits Trust Fund: statements of net assets and statements of changes in net assets. The statements of net assets and the statements of revenues, expenses and changes in net assets illustrate whether the Port‟s financial position has improved as a result of the year‟s activities. The statements of net assets present information on all of the Port‟s assets and liabilities, with the difference between the two reported as net assets. Over time, increases or decreases in net assets may serve as an indicator of whether the financial position of the Port is improving or deteriorating. The statements of revenues, expenses and changes in net assets show how the Port‟s net assets changed during the year. These changes are reported in the period the underlying event occurs, regardless of the timing of related cash flows. Fund Financial Statements. A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The Port uses two funds, an enterprise fund, which is a type of proprietary fund and the Post Employment Health Care Benefits Trust Fund. An enterprise fund reports business type activities. 14 MANAGEMENT’S DISCUSSION AND ANALYSIS (continued) Financial Position Summary The statements of net assets present the financial position of the Enterprise Fund of the Port. The statements include all of the Port„s assets and liabilities of the Enterprise Fund. Net assets serve as an indicator of the Port‟s financial position. The Port‟s current assets consist primarily of cash, investments and accounts receivable. A summarized comparison of the Port‟s Enterprise Fund assets, liabilities and net assets at the close of calendar year-end follows: PORT OF TACOMA Statements of Net Assets (dollars in thousands) 2011 Current assets Capital assets, net Restricted investments, bond funds Forward-starting payment agreement deferred inflows Other assets Total assets Current liabilities Long-term debt Net bond premium Forward-starting payment agreement deferred outflows Long-term debt, net Other long-term liabilities Total liabilities Invested in capital assets, net of related debt Restricted Unrestricted Total net assets $ 152,726 978,978 16,788 95,428 34,638 $1,278,558 $ 52,392 621,350 6,580 95,428 723,358 20,639 $ 796,389 $ 320,429 16,788 144,952 $ 482,169 2010 $ 141,254 1,000,407 15,801 42,637 32,109 $1,232,208 $ 53,177 630,160 6,842 42,637 679,639 38,299 $ 771,115 $ 339,792 16,170 105,131 $ 461,093 2009 $ 154,130 999,705 15,268 20,998 6,034 $1,196,135 $ 59,042 638,605 7,103 20,998 666,706 30,949 $ 756,697 $ 364,951 15,638 58,849 $ 439,438 15 MANAGEMENT’S DISCUSSION AND ANALYSIS (continued) The Port‟s assets exceeded its liabilities by $482.2 million at December 31, 2011. Of this amount, $320.4 million is invested in capital assets, net of related debt, and another $16.8 million is restricted for bond reserves and $145 million is unrestricted. Net assets were $461.1 million at December 31, 2010, with $339.8 million invested in capital assets, net of related debt, of which $16.2 million was restricted and $105.1 million was unrestricted. The Port‟s investment in capital assets, net of related debt, represents infrastruture and capital assets for terminal customers and tenants. In 2011, the investment in capital assets, net of related debt, decreased by $19.4 million due primarily to annual depreciation of $30.2 million, and a reduction in capital asset spending, offset by debt principal payments on debt of $8.4 million. In 2010, the investment in capital assets, net of related debt, decreased by $25.2 million due to a reduction in the remaining unspent proceeds from the 2008 General Obligation bonds of $32.0 million, offset by debt, principal payments on debt of $6.1 million. Net increase in net assets for 2010 was $21.6 million compared to net decrease in net assets before special item for 2009 was $0.9 million. Restricted net assets at December 31, 2011, 2010 and 2009 of $16.8, $16.2, $15.6, respectively, are required reserves for the 2001, 2004 and 2005 revenue bond issuances. In addition, the Port had several restricted investments which were unspent bond proceeds of $6.4 and $38.4 million at December 31, 2010 and 2009, respectively. There were no remaining unspent bond proceeds at December 31, 2011. Total restricted investments at December 31, 2011, 2010 and 2009, are $16.8, $15.8 and $15.3 million, respectively. 16 MANAGEMENT’S DISCUSSION AND ANALYSIS (continued) The change in net assets is an indicator of whether the overall fiscal condition of the Enterprise Fund has improved or worsened during the year. The following summary compares operating results for 2011, 2010 and 2009. PORT OF TACOMA Statements of Revenues, Expenses and Changes in Net Assets (dollars in thousands) 2011 $114,095 89,827 24,268 14,592 (9,661) 4,931 2,733 892 (15,810) (4,111) (11,365) 12,903 8,173 21,076 -21,076 461,093 $482,169 1,489 2010 $103,350 86,365 16,985 16,196 (9,718) 6,478 2,632 534 (15,643) (5,626) (11,625) 5,360 16,295 21,655 -21,655 439,438 $461,093 1,455 2009 $ 90,140 78,700 11,440 16,871 (9,838) 7,033 2,307 (220) (15,008) (18,355) (24,243) (12,803) 11,937 (866) (22,299) (23,165) 462,603 $439,438 1,546 Operating Income Operating revenues Operating expenses Total operating income Non-Operating Revenues (Expenses) Ad valorem tax revenues Interest on general obligation bonds Net ad valorem tax revenues Interest income Net increase (decrease) in the fair value of investments Interest expense Other non-operating expense, net Total non-operating expenses, net Increase in net assets before capital contribution Capital contribution Increase in net assets, before special items Special Items Increase (decrease) in net assets Net assets, beginning of year Net assets at end of year Container Volume (TEUs in thousands) 17 MANAGEMENT’S DISCUSSION AND ANALYSIS (continued) Revenues: Port revenue in 2011 of $114.1 million increased by $10.7 million and 10.4% over 2010 due to increased cargo volume in the Port‟s container and non-container businesses. Significant fluctuations include the following in the non-containerized cargo business, breakbulk accounted for a $3.7 million increase as a result of a 68.2% increase in tonnage from industrial and agricultural equipment; the auto business revenue increased by $1.1 million on increased volume of 34.2% units, reflecting the growing strength of auto sales in the U.S. Container terminal revenue increased $2.0 million due to container volume increase of 2.3% over the prior year primarily from increases in exports of agriculture cargoes. The corresponding Intermodal revenue increased by $2.6 million, on volume increase of 13.4% in the Port‟s intermodal yard and a 0.3% overall volume increase. Revenue in 2010 of $103.4 million increased by $13.3 million and 14.8% over 2009, primarily, due to container and intermodal revenue increases. Intermodal revenue increased by $6.8 million due to an increase in intermodal lift volume of 19% and the expansion of the domestic rail business. Container customer incentives decreased by $5.5 million over the prior year, container equipment rental revenue increased by $1.8 million due to container volume increase of 58.2% over the prior year at a container terminal and contract security services increased by $1.2 million. Offsetting these increases was a decrease in non-container auto storage revenue of $2.3 million Expenses: The 2011 operating expense of $89.8 million increased by $3.4 million and 4.0% over 2010. Revenue and volume related operating expenses increased by $2.5 million in the Breakbulk, Auto, Container, and Intermodal lines of business. Environmental expense increased by $0.7 million due to environmental cap repairs, and increased environmental monitoring costs. The 2010 operating expense of $86.4 million increased by $7.7 million and 9.8%. The revenue related intermodal lift volume increase of 19% drove intermodal expense up by $2.3 million and crane and strad equipment maintenance increased by $0.4 million due to the container volume increase of 58.2%. Contract security expense increased by $1.1 million to support the increase in contract security revenue. Maintenance expense increased by $2.6 million primarily due to terminal pavement repairs in the container and intermodal yards of $1.2 million and wharf & pier maintenance increased by $0.8 million. Administrative expenses increased by $0.9 million primarily due to increase in outside services of $0.6 million and $0.4 milllion respectively. As a result of the above, the 2011 operating income of $24.3 million increased by $7.3 million and 42.9% from 2010, and the 2010 operating income increased by $5.6 million and 49.1% over 2009. Non-Operating Expenses: The 2011 net non-operating expense of $11.4 million was $0.3 million and 2.2% below the prior year. Other non-operating expenses totaling $4.1 million for 2011 include an impairment charge on certain capital assets totaling $8.7 million. This expense was partially offset by contrbution of property from the Base Realignment and Closure (BRAC) process of $8.1 million. Ad valorem tax revenue, net of interest on governmental bond interest expense, was down $1.6 million. The 2010 net non-operating expense of $11.6 million was $12.6 million and 52.1% below the prior year primarily due to the prior year‟s loss on disposal of assets of $6.3 million for the write-down of property. Noncapital project expenses were down $6.0 million and ad valorem tax revenues decreased by $0.7 million, offset by interest on general obligation bonds down $0.1 million. Capital Contribution: The 2011 capital contribution of $8.2 million decreased by $8.1 million over the prior year primarily due to the completion of a prior year road infrastructure project that contribued $14.1 million, which was $8.3 million more than the current year. The 2010 capital contribution of $16.3 million increased by $4.4 million over the prior year primarily from an increase in road infrastructure grants of $6.0 million. 18 MANAGEMENT’S DISCUSSION AND ANALYSIS (continued) Post Employment Health Care Benefits Trust Fund: The Post Employment Health Care Benefits Trust Fund (the Trust) accounts for the assets of the employee benefit plan held by the Port in a trustee capacity. A summarized comparison of the assets, liabilities and net assets of the Trust as of December 31, 2011, 2010 and 2009, and changes in net assets for the years ended December 31, 2011, 2010 and 2009 (in thousands) are as follows: 2011 Total assets Total liabilities Total net assets Total additions Total deductions Decrease in net assets Net assets - beginning of year Net assets - end of year $7,074 -$7,074 $ 175 (454) (279) 7,353 $7,074 2010 $7,353 -$7,353 $ 248 (464) (216) 7,569 $7,353 2009 $7,456 -$7,456 $ 131 (18) 113 7,456 $7,569 Capital Assets: The Port‟s investment in capital assets, net of depreciation, for its business activities as of December 31, 2011, amounted to $979 million. This investment in capital assets includes land, buildings, improvements, machinery and equipment, and construction in process. The Port‟s investment in capital assets decreased by $21.4 million over December 31, 2010. The decrease in capital assets is primarily due to depreciation of $30.2 million, an asset impairment write-down at a terminal for $8.7 million, offset by capial asset additions for a berth extension of $10.9 million, and property acquired through the BRAC process of $8.1 million. The Port‟s investment in capital assets, net of depreciation, for its business activities as of December 31, 2010, amounted to $1,000.4 million, an increase of $0.7 million over December 31, 2009. There were three major projects in process reflected in Capital Assets – Construction in Process at December 31, 2010: road infrastructure project, a berth extension and an environmental mitigation project of $14.8, $14.3 and $9.6, respectively. In April 2010, the Port sold property in Thurston County which was originally acquired in 2006 for the development of a rail logistics center. The sale reduced land by $13.9 million in 2010 and was written down by $6.9 million in 2009 due to the pending sale. Debt Administration Long-Term Debt: At December 31, 2011, the Port‟s total long-term debt, including current portion, outstanding was $630.1 million. Of this amount, general obligation bonds outstanding were $200.1 million; revenue bonds outstanding were $430.0 million. At December 31, 2010, the Port‟s total long-term debt, including current portion, outstanding was $638.6 million. Of this amount, general obligation bonds outstanding were $201.8 million; revenue bonds outstanding were $436.8 million (see Note 5). At December 31, 2009, the Port‟s total long-term debt, including current portion, outstanding was $644.7 million. Of this amount, general obligation bonds outstanding were $203.3 million; revenue bonds outstanding were $441.4 million (see Note 5). The Port utilizes derivative payment agreements to manage interest rate risk. The swap agreements synthetically fix or “lock-in” interest rates on variable revenue bond debt by providing cash flows that are intended to offset the variable rate bond payments, leaving the Port with the fixed payment identified in each swap agreement. The Port does not hold or issue derivative financial instruments for trading purposes. These instruments are designated as cash-flow hedges on the trade date and are recognized on the statements of net assets at their fair value. 19 MANAGEMENT’S DISCUSSION AND ANALYSIS (concluded) In December, 2010, the Port amended the 2007 forward-starting payment agreement with a counterparty holding the 2011 and 2012 interest rate swaps of $80.0 million and $130.0 million, respectively. The 2007 payment agreement required the Port to deliver insured bonds from an insurer that is no longer licensed to issue new insurance policies in Washington State. Further, market conditions have significantly reduced availability of bond insurance and significantly increased the cost. The terms of the amended forward-starting payment agreement removes the bond insurance requirement and increases the fixed payment agreement rate by 0.06%. The Port estimates that annual interest expense will increase by $126,000. In July, 2011, the $80.0 million forward-starting payment agreement became active. As required by state law, forward-starting payment agreements must be matched to an underlying variable rate debt. Instead of issuing new debt, the Port matched the $80.0 million forward-starting payment agreement to $80.0 million of the 2008 $133.0 million subordinate lien variable rate bonds at the swap rate of 4.15%. Additional information on the Port‟s long-term debt activity may be found in Note 5 of this report and in the supplementary section “Information for Bondholders.” The Port requests bond ratings prior to issuing debt. Moody‟s and Standard & Poor‟s rated the Port‟s debt as follows: DESCRIPTION General Obligation (Senior Lien) Revenue Bonds (Senior Lien) Revenue Bonds (Subordinate) MOODY’S Aa3 Aa3 A1 STANDARD & POORS AAAAA+ REQUEST FOR INFORMATION The Port of Tacoma designed this financial report to provide our citizens, customers, investors and creditors with an overview of the Port‟s finances. If you have questions or need additional information please visit our website at www.portoftacoma.com or contact: Chief Financial Officer, P.O. Box 1837, 1 Sitcum Way, Tacoma, Washington 98401-1837, Telephone 253.383.5841, Fax 253.597.7573. 20 Financial Statements 21 PORT OF TACOMA ENTERPRISE FUND STATEMENTS OF NET ASSETS December 31, 2011 and 2010 ASSETS (dollars in thousands) 2011 CURRENT ASSETS Cash and cash equivalents Investments, at fair value Restricted investments, at fair value Trade accounts receivable, net of allowance for doubtful accounts ($465 and $471, respectively) Grants receivable Taxes receivable Prepayments and other current assets Total current assets NON-CURRENT ASSETS BOND FUNDS, FAIR VALUE CAPITAL ASSETS Land Buildings Improvements Machinery and equipment Construction in process Total cost Less accumulated depreciation Net property and equipment OTHER ASSETS Forward-starting payment agreement deferred inflows Other Total other assets Total non-current assets Total assets 16,788 513,863 119,017 601,496 107,357 53,434 1,395,167 416,189 978,978 95,428 34,638 130,066 1,125,832 $1,278,558 15,801 487,415 116,337 584,813 106,195 91,885 1,386,645 386,238 1,000,407 42,637 32,109 74,746 1,090,954 $1,232,208 $ 4,057 130,268 -8,692 586 1,690 7,433 152,726 $ 2010 2,858 108,094 6,776 6,346 1,645 1,075 14,460 141,254 See notes to financial statements. 22 PORT OF TACOMA ENTERPRISE FUND STATEMENTS OF NET ASSETS December 31, 2011 and 2010 LIABILITIES (dollars in thousands) 2011 CURRENT LIABILITIES Accounts payable and accrued liabilities Payroll and taxes payable Accrued interest Commercial paper Current portion of long-term debt Total current liabilities NON-CURRENT LIABILITIES LONG-TERM DEBT General obligation bonds Revenue bonds Total long-term debt Net bond premium Net long-term debt OTHER LONG-TERM LIABILITIES Forward-starting payment agreement deferred outflows Other Other long-term liabilities Total non-current liabilities Total liabilities NET ASSETS Invested in capital assets, net related debt Restricted Unrestricted Total net assets 198,445 422,905 621,350 6,580 627,930 95,428 20,639 116,067 743,997 $796,389 200,140 430,020 630,160 6,842 637,002 42,637 38,299 80,936 717,938 $771,115 $ 8,671 5,024 2,887 27,000 8,810 52,392 2010 $ 10,013 5,136 2,583 27,000 8,445 53,177 $320,429 16,788 144,952 $482,169 $339,792 16,170 105,131 $461,093 See notes to financial statements. 23 PORT OF TACOMA ENTERPRISE FUND STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS Years Ended December 31, 2011 and 2010 (dollars in thousands) 2011 OPERATING REVENUES Property rentals Terminal services Total operating revenues OPERATING EXPENSES Operations Maintenance Administration Security Environmental Total before depreciation Depreciation Total operating expenses Operating income NON-OPERATING REVENUS (EXPENSES) Ad valorem tax revenue Interest on general obligation bonds Net ad valorem tax revenues Interest income Net increase in the fair value of investments Interest expense Other non-operating expenses, net Total non-operating expenses, net Increase in net assets, before capital contribution CAPITAL CONTRIBUTIONS Increase in net assets NET ASSETS Beginning of year End of year $ 88,172 25,923 114,095 26,084 13,137 13,812 3,782 2,783 59,598 30,229 89,827 24,268 14,592 (9,661) 4,931 2,733 892 (15,810) (4,111) (11,365) 12,903 8,173 21,076 461,093 $ 482,169 2010 $ 83,025 20,325 103,350 23,610 13,420 13,381 3,574 2,077 56,062 30,303 86,365 16,985 16,196 (9,718) 6,478 2,632 534 (15,643) (5,626) (11,625) 5,360 16,295 21,655 439,438 $ 461,093 See notes to financial statements. 24 PORT OF TACOMA ENTERPRISE FUND STATEMENTS OF CASH FLOWS Years Ended December 31, 2011 and 2010 (dollars in thousands) 2011 CASH FLOWS FROM OPERATING ACTIVITIES Cash received from customers Cash paid to suppliers for goods and services Cash paid to longshore labor and employees Net cash provided by operating activities CASH FLOWS FROM NON-CAPITAL FINANCING ACTIVITIES Cash paid for non-operating expense CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Borrowings on commercial paper Repayments on commercial paper Acquisition and construction of capital assets Interest paid on general obligation and revenue bonds and other debt Principal payments on general obligation, revenue bonds and other debt Cash received from property taxes for general obligation bonds Cash received from federal and state grants Proceed from sales of property, plant and equipment Net cash used in capital and related financing activities CASH FLOWS FROM INVESTING ACTIVITIES Purchases of investments Proceeds from sales and maturities of investment securities Interest received on investments Net cash provided by (used in) investing activities Net increase (decrease) in cash and cash equivalents CASH AND CASH EQUIVALENTS Beginning of year End of year $ $111,826 (26,355) (25,828) 59,643 (7,939) 108,000 (108,000) (27,108) (26,115) (8,445) 13,977 9,233 1,925 (36,533) (50,982) 35,421 1,589 (13,972) 1,199 2,858 4,057 $ 2010 $108,990 (39,974) (23,712) 45,304 (6,443) 81,000 (81,000) (48,442) (25,583) (6,100) 16,159 20,159 662 (43,145) (80,640) 82,765 1,832 3,957 (327) 3,185 2,858 See notes to financial statements. 25 PORT OF TACOMA ENTERPRISE FUND STATEMENTS OF CASH FLOWS Years Ended December 31, 2011 and 2010 (dollars in thousands) 2011 RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Operating income Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation Increase in employee benefit reserves Increase in environmental reserves Changes in assets and liabilities: (Increase) decrease in accounts receivable Decrease in prepayments Decrease in deferred assets Increase (decrease) in accounts payable and accrued liabilities Increase (decrease) in payroll and taxes payable Increase in long-term liabilities Total adjustments and changes Net cash provided by operating activities NON-CASH INVESTING AND FINANCING ACTIVITIES Capital asset additions and other purchases financed with accounts payable and deferred liabilities Increase in fair value of investments 2010 $24,268 30,229 83 239 (2,346) 7,027 76 1,351 (112) (1,172) 35,375 $59,643 $16,985 30,303 11 -5,640 119 -(7,803) 49 -28,319 $45,304 $11,037 802 $3,530 534 See notes to financial statements. 26 PORT OF TACOMA POST EMPLOYMENT HEALTH CARE BENEFITS TRUST FUND STATEMENTS OF NET ASSETS December 31, 2011 and 2010 (dollars in thousands) 2011 ASSETS Investments, at fair value: Money market fund Fixed income securities Total investments and total assets PLAN LIABILITIES Net assets held in trust for pension benefits and other purposes 2010 $ 529 6,545 7,074 -$7,074 $ 266 7,087 7,353 -$7,353 See notes to financial statements. 27 PORT OF TACOMA POST EMPLOYMENT HEALTH CARE BENEFITS TRUST FUND STATEMENTS OF CHANGES IN NET ASSETS Years Ended December 31, 2011 and 2010 (dollars in thousands) 2011 ADDITIONS Employer contributions Net increase in fair value of investments Interest Total additions DEDUCTIONS Benefit payments Administrative expenses Total deductions Change in net assets NET ASSETS HELD IN TRUST FOR PENSION BENEFITS AND OTHER PURPOSES Beginning of year End of year $ -141 34 175 437 17 454 (279) 2010 $ -178 70 248 446 18 464 (216) 7,353 $7,074 7,569 $7,353 See notes to financial statements. 28 PORT OF TACOMA NOTES TO FINANCIAL STATEMENTS December 31, 2011 and 2010 NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Reporting Entity The Port of Tacoma (the Port) is a municipal corporation of the State of Washington created in 1918 under provisions of the Revised Code of Washington (RCW) 53.04.010 et seq. The Port has geographic boundaries coextensive with Pierce County, Washington, and is situated on Commencement Bay in Puget Sound. The Port is independent from Pierce County government and is administered by a five-member Board of Commissioners elected by Pierce County voters. The Commission delegates administrative authority to a Chief Executive Officer and administrative staff to conduct operations of the Port. The County levies and collects taxes on behalf of the Port. Pierce County provides no funding to the Port. Additionally, Pierce County does not hold title to any of the Port‟s assets, nor does it have any right to the Port‟s surpluses. The Port reports the following funds: the Enterprise Fund accounts for all activities and operations of the Port except for the activities included with the Post Employment Health Care Benefits Trust Fund. Nature of Business The Enterprise Fund is used to account for the general operations of the Port as more fully described below. The Port is authorized by Washington law to provide and charge rentals, tariffs and other fees for docks, wharves and similar harbor facilities, including associated storage and traffic handling facilities, for waterborne commerce. The Port may also provide freight and passenger terminals and transfer and storage facilities for other modes of transportation, including air, rail and motor vehicles. The Port may acquire and improve lands for sale or lease for industrial or commercial purposes and may create industrial development districts. The Post Employment Health Care Benefits Trust Fund accounts for the assets of the employee benefit plan held by the Port in its trustee capacity (see Note 9). Basis of Accounting and Presentation The financial statements of the Port have been prepared in conformity with accounting principles generally accepted in the United States of America as applied to government units and the Port is accounted for as a proprietary fund. The Governmental Accounting Standards Board (GASB) is the accepted standard-setting body for establishing governmental accounting and financial reporting principles. The Port has chosen continue to follow accounting standards applicable to private sector entities when those standards do not conflict with applicable GASB standards. The Port is accounted for on a flow of economic resources measurement focus. The accounting records of the Port are maintained in accordance with methods prescribed by the State Auditor under the authority of Chapter 43.09, Revised Code of Washington. The Port also follows the Uniform System of Accounts for Port Districts in the State of Washington. The Port uses the full-accrual basis of accounting where revenues are recognized when earned and expenses are recognized when incurred, regardless of the timing of the related cash flows. 29 NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements. Significant estimates also affect the reported amounts of revenues and expenses during the reporting period. Significant estimates made by the Port include depreciation and environmental liabilities. Actual results could differ from those estimates. Significant Risks and Uncertainties The Port is subject to certain business risks that could have a material impact on future operations and financial performance. These risks include economic conditions, collective bargaining disputes, federal, state and local government regulations, and changes in law. Cash and Cash Equivalents Cash and cash equivalents represent cash and demand deposits. The Port maintains its cash in bank deposit accounts, which are covered by the Public Deposit Protection Commission of the State of Washington. Trade Accounts Receivable Trade accounts receivable are carried at original invoice amount less an estimate made for doubtful accounts based on a review of all outstanding amounts. Management determines the allowance for doubtful accounts by identifying delinquent accounts and by using historical experience applied to an aging of accounts. Trade accounts receivable are written off when deemed uncollectible. Recoveries of receivables previously written off are recorded when received. The allowance for doubtful accounts was $465,000 at December 31, 2011, and $471,000 at December 31, 2010. Additionally, in 2011, the Port collected on a receivable due from a customer that totaled $9,213,000 at December 31, 2010. The receivable was not related to trade receivables and was included in prepayments and other current assets on the accompanying statements of net assets. Investments Investments, unrestricted and restricted, are stated at fair value, based on quoted market prices, plus accrued interest. The Port also has investments in the State Local Government Investment Pool (LGIP). The LGIP is similar to a money market fund recognized by the Securities and Exchange Commission. The investments are limited to high-quality obligations with limited maximum and average maturities. These investments are valued at amortized cost. Interest income on investments is recognized in non-operating revenues as earned. Changes in the fair value of investments are recognized in the statements of revenues, expenses and changes in net assets. The Port‟s general policy is to not hold more than 20% of its holdings in any one investment. Restricted Investments Restricted investments - bond funds are set aside as restricted assets, for bond reserves and unspent bond proceeds and are not available for current expenses when constraints placed on their use are legally enforceable due either to: 1) externally imposed requirements by creditors; 2) laws or regulations of other governments; 3) constitutional provisions or enabling legislation. Prepayments and Other Current Assets Maintenance supply inventories of $4,287,000 and $3,883,000 at December 31, 2011 and 2010, respectively, are included in prepayments and other current assets and are valued at net realizable value, which approximates cost using the weighted-average method. 30 NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Capital Assets and Depreciation Capital assets are recorded at cost. Donated assets are recorded at fair market value on the date donated. The Port‟s policy is to capitalize all asset additions greater than $5,000 and with an estimated life of more than three years. Depreciation is computed on the straight-line method. Amortization expense on assets acquired under capital lease obligations is included with depreciation expense. The following lives are used: Buildings and improvements Machinery and equipment 20-75 years 5-25 years Preliminary costs incurred for proposed projects are deferred pending construction of the facility. Annually, a review is completed and costs relating to projects ultimately constructed are transferred to the appropriate capital asset account; charges that relate to abandoned projects are expensed when the project is abandoned. Capitalized Interest The Port follows the policy of capitalizing interest as a component of the cost of capital assets constructed for projects greater than $300,000 that are not funded by grant revenues. Interest incurred on funds used during construction, less interest earned on related interest-bearing investments is capitalized as part of the cost of construction. This process is intended to remove the cost of financing construction activity from the statements of revenues, expenses and changes in net assets and to treat such cost in the same manner as construction labor and material costs. During 2011, total interest incurred, excluding interest on general obligation bonds was $16,888,000, of which $15,810,000 was charged to non-operating expenses and $1,078,000 was capitalized. During 2010, total interest incurred, excluding interest on general obligations bonds was $16,016,000, of which $15,643,000 was charged to non-operating expenses and $373,000 was capitalized. Net Assets Net assets consist of net assets invested in capital assets, net of related debt, restricted and unrestricted net assets. Net assets invested in capital assets, net of related debt, consists of capital assets, net of accumulated depreciation, reduced by the outstanding balances of any borrowings used for the acquisition, construction or improvement of those assets. This calculation excludes unspent debt proceeds, if any. Restricted net assets represent amounts that are appropriated or are legally segregated for a specific purpose. The Port‟s net assets are reported as restricted when there are limitations imposed on their use either through the enabling legislation adopted by the Port or through external restrictions imposed by creditors, grantors, laws or regulations of other governments. Net assets invested in capital assets, net of related debt, consist of the following at December 31: 2011 Invested in capital assets, net Add unamortized bond costs Bond proceeds restricted for construction Less: Premium costs Long-term debt Commercial paper Invested in capital assets, net of related debt, end of year $978,978 5,191 -6,580 630,160 27,000 $320,429 2010 $1,000,407 5,425 6,407 6,842 638,605 27,000 $ 339,792 Restricted net assets total $16,788,000 and $16,170,000 at December 31, 2011 and 2010, respectively, and consist primarily of bond reserves, as required per certain bond agreements. 31 NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Retentions Payable The Port enters into construction contracts that may include retention provisions such that a certain percentage of the contract amount is held for payment until completion of the contract and acceptance by the Port. The Port‟s policy is to pay the retention due only after completion and acceptance have occurred. Federal and State Grants The Port may receive federal and state grants as reimbursement for construction of facilities and other capital projects. These grants are included in capital contributions on the accompanying statements of revenues, expenses and changes in net assets. Unamortized Debt Expense Costs relating to the sale of bonds are included in other assets. The costs are deferred and amortized over the lives of the various bond issues. Commercial Paper and Current Portion of Long-Term Debt Commercial paper and current portion of long-term debt include borrowings with original maturities of less than one year and the portion of long-term debt payable within 12 months. Forward-Starting Payment Agreements The Port accounts for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) on the statements of net assets at fair value. The payment instruments were designated as highly effective cash flow hedges at December 31, 2011 and 2010 (see Note 5). Refunds of Debt Proceeds from bond defeasance are deposited in an irrevocable trust, with an escrow agent to service the debt on the refunded bonds. Accordingly, the defeased bonds are not recorded on the Port‟s financial statements. The difference between the reacquisition price and the carrying amount of defeased debt is amortized over the life of the new debt or old debt, whichever is shorter (see Note 5). Employee Benefits The Port accrues unpaid vacation and sick leave benefit amounts as earned and payable upon termination. These benefits are accrued at current rates of compensation. Accrued vacation and sick leave included in payroll and taxes payable amounted to $1,297,000 and $1,076,000, respectively, at December 31, 2011, and $1,310,000 and $1,064,000, respectively, at December 31, 2010. Vacation and sick leave paid in 2011 was $1,246,000 and $578,000, respectively, and $1,195,000 and $573,000, respectively in 2010. The estimated total amount of vacation and sick leave expected to be paid in 2011 is $1,271,000 and $589,000, respectively. The Port also provides post-employment health care benefits for retired employees. These benefits cover retired employees ages 60 to 69.The Port also has a trust for the post-employment defined benefit plan (see Note 10). The Port also participates in the Washington Department of Retirement Systems (the Plan), under a cost-sharing multiple-employer defined benefit public employee retirement systems. This plan covers substantially all of the Port‟s full-time and qualifying part-time employees. The Port‟s contribution rates are determined by the Plan each year and are based on covered payroll of the qualifying participants (see Note 8). 32 NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded) Environmental Remediation Costs The Port environmental remediation policy requires accrual of pollution remediation obligation amounts when: (a) one of the following specific obligating events is met and (b) the amount can be reasonably estimated. Obligating events include: imminent endangerment to the public; permit violation; Port named as party responsible for sharing costs; Port named in a lawsuit to compel participation in pollution remediation; or commenced or legally obligated to commence pollution remediation. Potential cost recoveries such as insurance proceeds, if any, are evaluated separately from the Port‟s pollution remediation obligation. Costs incurred for pollution remediation obligation are typically recorded as nonoperating environmental expenses unless the expenditures relate to the Port‟s principal ongoing operations, in which case they are recorded as operating expenses. Costs incurred for pollution remediation obligation can be capitalized if they meet specific criteria. Capitalization criteria include: preparation of property in anticipation of a sale; preparation of property for use if the property was acquired with known or suspected pollution that was expected to be remediated; performance of pollution remediation that restores a pollution-caused decline in service utility that was recognized as an asset impairment; or acquisition of property, plant and equipment that have a future alternative use not associated with pollution remediation efforts. Operating and Non-Operating Revenues and Expenses Terminal services and property rental revenues are charges for use of the Port‟s facilities and are reported as operating revenue. Ad valorem tax levy revenues and other revenues generated from non-operating sources are classified as non-operating. Operating expenses are costs primarily related to the terminal services and property rental activities. Interest expense and other expenses incurred not related to the operations of the Port‟s terminal and property rental activities are classified as non-operating. Recent Accounting Pronouncements In June 2011, GASB issued Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position. The objective of this statement is to standardize the presentation of deferred outflows of resources and deferred inflows of resources and their effects on a government‟s net position. The provisions of the guidance will change where the deferred outflows and deferred inflows are presented on the statements of net assets. The guidance is effective for years beginning after December 15, 2011. The Port has not adopted this guidance and is currently evaluating the impact on the statements. In June 2011, GASB issued Derivative Instruments: Application of Hedge Accounting Termination Provisions. The objective of this statement is to clarify whether an effective hedging transaction continues after the replacement of a swap counterparty or a swap counterparty‟s credit provider. The guidance is effective for years beginning after December 15, 2011. The Port adopted this guidance with no impact to the financial statements and related disclosures. Reclassifications Certain reclassifications have been made to prior year amounts to conform to the current presentation. These reclassifications have no effect on previously reported changes in net assets. 33 NOTE 2 – DEPOSITS AND INVESTMENTS Discretionary Deposits The Port‟s cash and cash equivalents of $4,057,000 and $2,858,000 as of December 31, 2011 and 2010, respectively, were deposited in qualified depositories as required by state statute. Deposits in excess of federal depository insurance coverage are covered by the Public Deposit Protection Commission of the State of Washington (PDPC). The PDPC is a statutory authority under chapter 39.58 RCW. Currently, all public depositories with the state fully collateralize uninsured public deposits at 100%. Investments State of Washington statutes authorize the Port to invest in direct obligations of the U.S. Government, certificates of deposit, bankers‟ acceptances, repurchase agreements, commercial paper, and certain municipal bonds. These investments must be placed with or through qualified public depositories of the State of Washington. Risks Interest Rate Risk – Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. The Port‟s investment guideline is to maximize investment return while preserving liquidity. To the extent possible, the Port will attempt to match its investments with anticipated cash flow requirements using the specific-identification method. Credit Risk – Credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical rating organization. The Washington State Local Government Investment Pool is an unrated 2a-7 like pool, as defined by Government Accounting Standard Board No. 31. Custodial Credit Risk – Custodial credit risk is the risk that, in the event of the failure of the counterparty, the Port will not be able to recover the value of its investments or collateral securities that are in the possession of the outside party. To minimize this risk, the Port‟s policy requires that all security transactions are settled “delivery versus payment.” This means that payment is made simultaneously with the receipt of the security. These securities are delivered to the Port‟s safekeeping bank. 34 NOTE 2 – DEPOSITS AND INVESTMENTS (continued) The tables below identify the type of investments, concentration of investments in any one issuer, and maturities of the Port Investment portfolio as of December 31, 2011 and 2010 (dollars in thousands): 2011 Investment Type Certificate of Deposit Federal Farm Credit Banks Federal Home Loan Bank Federal Home Loan Mortgage Corporation Federal National Mortgage Association Municipal Bonds State Local Investment Pool United States Treasury Bonds Total investments Percentage of Total Portfolio Fair Value $ 325 9,456 19,913 6,531 14,594 12,050 76,775 7,412 $147,056 Maturities (in Years) Less than 1 $ 325 3,512 12,138 -8,059 1,021 76,775 -$101,830 69.2% $ 1-3 -2,133 4,142 5,007 3,010 1,126 --$15,418 10.5% More than 3 $ -3,811 3,633 1,524 3,525 9,903 -7,412 $29,808 20.3% Percentage of Total Portfolio 0.2% 6.4 13.6 4.5 9.9 8.2 52.2 5.0 100.0% 100.0% 2010 Investment Type Certificate of Deposit Federal Farm Credit Banks Federal Home Loan Bank Federal Home Loan Mortgage Corporation Federal National Mortgage Association Municipal Bonds State Local Investment Pool United States Treasury Bonds Total investments Percentage of Total Portfolio Fair Value $ 325 4,227 32,500 3,079 17,223 10,420 56,145 6,752 $130,671 Maturities (in Years) Less than 1 $ 325 1,002 9,307 1,060 1,008 -56,145 -$68,847 53.7% $ 1-3 -2,025 19,301 2,019 13,160 1,068 --$37,573 28.8% More than 3 $ -1,200 3,892 -3,055 9,352 -6,752 $24,251 18.5% Percentage of Total Portfolio 0.2% 3.2 24.9 2.4 13.2 8.0 43.0 5.1 100% 100% 35 NOTE 2 – DEPOSITS AND INVESTMENTS (concluded) The table below identifies the credit risk of the Port‟s Investment porfolio as of December 31, 2011 (dollars in thousands). Fair Value $ 325 9,456 19,913 6,531 14,594 12,050 76,775 7,412 $147,056 Moody’s Equivalent Credit Ratings A2 $325 -------$325 $ A1 -----3,444 --$3,444 Aa3 $ -----3,131 --$3,131 Aa2 $ -----2,290 --$2,290 Aa1 $ -----3,185 --$3,185 $ Aaa -9,456 19,913 6,531 14,594 --7,412 $57,906 2a7 Pool* $ ------76,775 -$76,775 Investment Type Certificate of Deposit Federal Farm Credit Banks Federal Home Loan Bank Federal Home Loan Mortgage Corporation Federal National Mortgage Association Municipal Bonds State Local Investment Pool United States Treasury Bonds Total * Investments in Washington State Local Investment Pool. The fair value of the invesments is the same as the value of the pool shares. NOTE 3 – CAPITAL ASSETS The following activity took place in capital assets during 2011 and 2010 (dollars in thousands): 2011 Capital assets not being depreciated: Land Construction in process Total capital assets not being depreciated Capital assets being depreciated: Buildings Improvements Machinery and equipment Total capital assets being depreciated Total capital assets Less accumulated depreciation: Buildings Improvements Machinery and equipment Total accumulated depreciation Net, capital assets being depreciated Net, capital assets Beginning of Year $ 487,415 91,885 579,300 116,337 584,813 106,195 807,345 1,386,645 (71,977) (243,605) (70,656) (386,238) 421,107 $1,000,407 Additions $ 204 34,903 35,107 --49 49 35,156 (3,765) (20,887) (5,577) (30,229) (30,180) $ 4,927 $ Transfers $27,220 (57,463) (30,243) 2,761 26,103 1,379 30,243 -----30,243 -Retirements and Other ($ 976) (15,891) (16,867) (81) (9,420) (266) (9,767) (26,634) 38 50 190 278 (9,489) ($26,356) End of Year $ 513,863 53,434 567,297 119,017 601,496 107,357 827,870 1,395,167 (75,704) (264,442) (76,043) (416,189) 411,681 $ 978,978 36 NOTE 3 – CAPITAL ASSETS (continued) Beginning of Year $ 498,439 55,280 553,719 115,544 583,806 102,979 802,329 1,356,048 (67,906) (222,948) (65,489) (356,343) 445,986 $ 999,705 Retirement s and Other End of Year 2010 Capital assets not being depreciated: Land Construction in process Total capital assets not being depreciated Capital assets being depreciated: Buildings Improvements Machinery and equipment Total capital assets being depreciated Total capital assets Less accumulated depreciation: Buildings Improvements Machinery and equipment Total accumulated depreciation Net, capital assets being depreciated Net, capital assets NOTE 4 – COMMERCIAL PAPER Additions $ 340 49,431 49,771 --44 44 49,815 (4,071) (20,657) (5,576) (30,304) (30,260) $19,511 Transfers $ 2,509 (7,943) (5,434) 1,159 1,007 3,268 5,434 -----5,434 $ -- ($13,873) $ 487,415 (4,883) 91,885 (18,756) (366) -(96) (462) (19,218) --409 409 (53) 579,300 116,337 584,813 106,195 807,345 1,386,645 (71,977) (243,605) (70,656) (386,238) 421,107 ($18,809) $1,000,407 The Port is authorized to use Subordinate Lien Revenue Notes (commercial paper) in an amount not to exceed $100 million. Commercial paper can be issued to provide unsecured interim financing for capital asset projects of at least $20 million up to $100 million. The draws are secured by a bank letter of credit with a five-year term that will expire in December 2012. The term of the commercial paper ranges from 1 to 270 days and the interest rate on the amount outstanding at December 31, 2011, was 0.27%. At December 31, 2010, the interest rate on the amount outstanding was 0.40%. Commercial paper advances outstanding totaled $27.0 million at December 31, 2011 and 2010. Commercial paper activity during 2011 and 2010 is as follows (dollars in thousands): Beginning balance, January 1, 2010 Advances Repayments Ending December 31, 2010 Advances Repayments Ending December 31, 2011 $ 27,000 81,000 (81,000) 27,000 108,000 (108,000) $ 27,000 37 NOTE 5 – LONG-TERM DEBT Long-term debt activity during 2011 and 2010 consists of the following (dollars in thousands): 2011 Description and Date of Issue Original Interest Rate Earliest Year of Last Year of December 31, Call Maturity 2010 December 31, 2011 Issuance Repayments GENERAL OBLIGATION BONDS 08/05/03 5.00% 2013 12/20/06 4.00-5.50% 2016 01/17/08 A 5.00% 2018 01/17/08 B 4.75-4.875% 2018 Less current portion Total long-term general obligation bonds, net of current portion 2020 2033 2038 2038 $ 7,550 62,935 109,535 21,740 201,760 1,620 $- ----- $ -(1,620) $ (1,620) 7,550 61,315 109,535 21,740 200,140 1,695 $200,140 $198,445 REVENUE BONDS 04/21/04 A 5.25% 04/21/04 B 3.30-5.125% 08/30/05 5.00% 12/20/06 4.00-4.45% 03/07/08 Variable Rate 07/15/09** Variable Rate Less current portion 2014 2014 2015 2016 * * 2021 2034 2035 2034 2036 2044 $ 8,505 59,495 76,840 45,875 113,130 133,000 436,845 6,825 $- ------- $ -(760) (1,675) (125) (4,265) -(6,825) $ 8,505 58,735 75,165 45,750 108,865 133,000 430,020 7,115 Total long-term revenue bonds, net of current portion $430,020 $422,905 38 NOTE 5 – LONG-TERM DEBT (continued) 2010 Description and Date of Issue Original Interest Rate Earliest Year of Call Last Year of Maturity December 31, 2009 December 31, 2010 Issuance Repayments GENERAL OBLIGATION BONDS 08/05/03 5.00% 2013 12/20/06 4.00-5.50% 2016 01/17/08 A 5.00% 2018 01/17/08 B 4.75-4.875% 2018 Less current portion Total long-term general obligation bonds, net of current portion 2020 2033 2038 2038 $ 7,550 64,490 109,535 21,740 203,315 1,555 $- ----- $ -(1,555) $ (1,555) 7,550 62,935 109,535 21,740 201,760 1,620 $201,760 $200,140 REVENUE BONDS 04/21/04 A 5.25% 04/21/04 B 3.30-5.125% 08/30/05 5.00% 12/20/06 4.00-4.45% 03/07/08 Variable Rate 07/15/09** Variable Rate 2014 2014 2015 2016 * * 2021 2034 2035 2034 2036 2044 $ Less current portion Total long-term revenue bonds, net of current portion 8,505 60,225 78,450 46,000 115,210 133,000 441,390 4,545 $- ------- $ -(730) (1,610) (125) (2,080) -(4,545) $ 8,505 59,495 76,840 45,875 113,130 133,000 436,845 6,825 $436,845 $430,020 * Currently callable by the Port but intent is to payoff in accordance with stated maturity dates; therefore, not shown as a current liability. ** This bond issue was originally issued as 2008B and during 2009 the bonds were reissued to secure a better rate. The new bond issue is still referred to as 2008B in all official documents. GENERAL OBLIGATION BONDS The Port uses ad valorem tax revenues to pay the general obligation bond principal and the related interest. Ad valorem tax revenues may not be used to pay revenue bond debt. 39 NOTE 5 – LONG-TERM DEBT (continued) REVENUE BONDS The revenue bonds are secured by a pledge of the Port‟s gross operating revenues. Revenue bond proceeds finance acquisition, expansion, improvement and equipping Port terminal and industrial development facilities. The Port has pledged a portion of future operating revenues to repay $673.8 million in bond principal and interest through 2044. For the current year, revenue bond principal and interest paid and total operating revenues were $22.4 million and $114.1 million, respectively. The revenue bonds contain coverage requirements related to maintaining adequate net revenues to support debt service. Interest Rate Swaps The Port has five swaps outstanding so that it may mitigate interest rate risk. The payment agreements, pay-fixed swaps synthetically fix or “lock-in” interest rates on variable revenue bond debt by providing cash flows that are intended to offset the variable rate bond payments, leaving the Port with the fixed payment identified in each swap agreement. In July 2011, the $80.0 million forward-starting payment agreement became active. As required by state law, forward-starting payment agreements must be matched to an underlying variable rate debt. Instead of issuing new debt, the Port matched the $80.0 million forward-starting payment agreement to $80.0 million of the 2009 $133.0 million subordinate lien variable rate bonds at the swap rate of 4.15%. In December 2010, the Port amended the 2007 forward-starting payment agreement with a counterparty holding the 2011 and 2012 swaps of $80.0 million and $130.0 million, respectively. The 2007 payment agreement required the Port to deliver insured bonds from an insurer that is no longer licensed to issue new insurance policies in the State of Washington due to its poor financial condition. Market conditions have also significantly reduced availability of bond insurance and significantly increased the cost. The terms of the amended forwardstarting payment agreement removes the bond insurance requirement and increases the fixed payment agreement rate by 0.06%, resulting in an annual interest expense increase of $126,000. The Port‟s existing swap contracts are detailed below. No cash was paid from the Port to the counterparty when the swaps were created (dollars in thousands). SWAP Reference 1 Cash Flow of Bond Issue Hedged 2008 variable rate bonds 2008 variable rate bonds 2009 variable rate bonds 2009 variable rate bonds or commercial paper Commercial paper Notional Amount $70,000 Contract Start Date 8/3/05 Effective Date 8/3/06 Maturity Date 12/1/36 Type Pay-fixed interest rate swap Pay-fixed interest rate swap Pay-fixed interest rate swap Forward-starting pay-fixed interest rate swap Forward-starting pay-fixed interest rate swap Options (1) Terms Pay 3.795%, receive 70% of LIBOR (2) Pay 3.320%, receive 70% of LIBOR (2) Pay 4.155%, receive 70% of LIBOR (2) Pay 4.200%, receive 70% of LIBOR (2) Pay 4.184%, receive 70% of LIBOR (2) 2 $30,000 None 9/25/08 9/25/08 12/1/36 3 $80,000 None 9/20/07 7/28/11 12/1/40 4 $130,000 None 9/20/07 7/26/12 12/1/41 5 $20,000 None 9/20/07 7/25/13 12/1/42 (1) Cancellable - Port may call at par 8/3/2016 (2) One-month London Interbank Offered Rate 40 NOTE 5 – LONG-TERM DEBT (continued) The following summarizes the change in fair value of Port‟s pay-fixed, receive variable interest rate hedges at December 31, 2011 (dollars in thousands). SWAP Reference 1 2 3 4 5 Total 2011 Changes in Fair Value Classification Deferred outflow Deferred outflow Deferred outflow Deferred outflow Deferred outflow Amount ($ 2,122) (3,598) (15,471) (27,426) (4,174) ($52,791) Fair Value at 12/31/11 Classification Debt Debt Debt Debt Debt Amount ($ 8,073) (6,044) (29,048) (45,841) (6,422) ($95,428) Notional Amount $ 70,000 30,000 80,000 130,000 20,000 $330,000 The following summarizes the change in fair value of Port‟s pay-fixed, receive variable interest rate hedges at December 31, 2010 (dollars in thousands). 2010 Changes in Fair Value SWAP Reference 1 2 3 4 5 Total Classification Deferred outflow Deferred outflow Deferred outflow Deferred outflow Deferred outflow Amount ($ 2,492) (1,209) (7,122) (9,746) (1,071) ($21,640) Fair Value at 12/31/10 Classification Debt Debt Debt Debt Debt Amount ($ 5,951) (2,446) (13,577) (18,415) (2,248) ($42,637) Notional Amount $ 70,000 30,000 80,000 130,000 20,000 $330,000 Risks The Port mitigates swap-related risk by following its Payment Agreement Guidelines. These guidelines are published in the Port‟s Annual Budget document within its Debt Guidelines. The guidelines manage each of the risks below. Counterparty or Credit Risk The Port‟s derivative instruments are held by four separate counterparties. By agreement, the Port requires posting of collateral when the counterparty owes to the Port on the swap termination value (market value). The credit ratings for each of the counterparties are as follows (dollars in thousands): Notional SWAP Reference 1 2 3 4 5 Total Amount $ 70,000 30,000 80,000 130,000 20,000 $330,000 Bank Counterparty Morgan Stanley Goldman Sachs Dexia Dexia Merrill Lynch Credit Worthiness* Moody's A2 Aa3 Baa1 Baa1 Baa1 S&P AABBB+ BBB+ ATermination Value ($ 8,073) (6,044) (29,048) (45,841) (6,422) ($95,428) * The credit worthiness of certain counterparties was downgraded during 2011 from a upper-medium grade and low credit risk to medium grade, with some speculative elements and moderate credit risk. Management is monitoring the impact of these changes to the relationships. 41 NOTE 5 – LONG-TERM DEBT (continued) Termination Risk The Port or its counterparties may terminate a derivative instrument if the other party fails to perform under the terms of the contract. If the swap counterparty‟s credit rating deteriorates below A3/A- (Moody‟s/Standard & Poors), the Port may terminate the swap at market value; however, the Port may, at its option, continue in the swap. The Port requires the posting of collateral and works with financially strong counterparties to help mitigate this risk. Basis Risk The Port pays a daily interest rate to its bondholders and receives 70% of one-month London Interbank Offered Rate (LIBOR) from its swap counterparties. In exchange for the fixed swap rates associated with using the LIBOR index, the Port bears the risk that it could incur a shortfall between the variable rate paid on the bonds and the variable rate received on the swaps. Rollover Risk The Port matched the term of its existing swap contracts to the term of the underlying debt so that it minimizes its exposure to rollover risk. Foreign Currency Risk The Ports‟ derivative instruments are denominated in U.S. dollars. Contingencies If the Port‟s credit rating falls below A3/A- (Moody‟s/Standard & Poors) for the swap with Goldman Sachs or below Baa2/BBB (Moody‟s/Standard & Poors) for the other swaps, the Port bears the risk that its counterparties may terminate the agreement. The Port is prohibited by RCW 39.96 from posting collateral. The Port‟s subordinate lien credit rating is A1/A+ (Moody‟s/Standard & Poors) at December 31, 2011. Debt Service for Fixed Rate Bonds The debt service requirements for fixed rate general obligation and revenue bonds outstanding as of December 31, 2011, are as follows (dollars in thousands): Principal 2012 2013 2014 2015 2016 2017-2021 2022-2026 2027-2031 2032-2036 2037-2038 Total $ 4,355 4,565 7,545 7,915 8,290 61,880 82,255 103,620 90,605 17,265 Interest $ 18,694 18,485 18,257 17,879 17,490 80,045 62,919 41,574 15,463 1,300 $292,106 Total $ 23,049 23,050 25,802 25,794 25,780 141,925 145,174 145,194 106,068 18,565 $680,401 $388,295 42 NOTE 5 – LONG-TERM DEBT (concluded) Variable Rate, Derivative Instrument Payments and Hedged Debt Assuming that the reimbursement agreements and letters of credit agreements are renewed throughout the life of the bonds, the debt service requirements for the 2009 revenue bonds, with a balance of $133 million and 2008B Subordinate-Lien Variable-Rate Revenue Bonds with a balance of $108.9 million, and active swaps with Goldman Sachs, Morgan Stanley and Dexia outstanding as of December 31, 2011, are as follows (dollars in thousands): Year 2012 2013 2014 2015 2016 2017-2021 2022-2026 2027-2031 2032-2036 2037-2041 2042-2044 Total Principal Payment $ 4,455 4,660 6,575 6,865 7,180 28,025 30,630 37,285 45,375 17,815 53,000 $241,865 Variable Interest $ 322 314 303 292 280 1,246 1,029 772 459 263 138 $5,418 Interest Rate Swap, Net (1) $ 6,342 6,260 6,109 5,952 5,787 26,240 21,037 14,702 6,993 1,094 -$100,516 Total $ 11,119 11,234 12,987 13,109 13,247 55,511 52,696 52,759 52,827 19,172 53,138 $347,799 (1) This amount represents the cash that is due to the counterparty based on the terms of the pay-fixed interest rate swap. The amounts for the subsequent years are based on the assumption that interest rate conditions that existed during 2011 will remain the same over the term of the derivative contract. During 2011, the existing Reimbursement Agreements for the 2008 and 2008B bonds expired. The Port renewed the letter of credit with Bank of America for the 2008B bonds for a period of three years. The Port entered into a three-year agreement with Wells Fargo for a direct purchase of the 2008 bonds. When both of these agreements expire in 2014, the Port can renew them with the existing banks, replace these agreements with similar letters of credit, or direct purchases, or convert the debt to fixed long-term debt among other options. If new reimbursement agreements are not able to be reached in 2014, the 2008 and 2008B bonds will continue to be held by the banks, but the Port would be required to pay off the loans over a five-year amortization schedule (until new agreements are reached). Each of the variable rate bond issues also have remarketing agreements associated with the issue. The agreements allow for the remarketing of the bonds as deemed necessary. The term of the agreements continue until the bonds are converted to long-term bonds or if the agreement is canceled by the Port. Fees paid, as defined by the underlying agreements, vary for each bond. General Obligation Bonds Revised Code of Washington (RCW) Chapter 53.36 provides that non-voted general obligation bond debt cannot be incurred in excess of 0.25% of the assessed value of the taxable property in the Port district. At December 31, 2011, the assessed value of the taxable property was $75,697,858,000, which will serve as the basis for the 2012 tax levy. The Port is in compliance with this limitation. RCW Chapter 53.36 also provides that additional general obligation bond debt can be incurred upon approval by the voters of the Port district. 43 The paying agent for bonded debt is: The Bank of New York Fiscal Agencies – 7 East 101 Barclay Street New York, NY 10286 NOTE 6 – RISK MANAGEMENT The Port is exposed to various risks of loss related to torts; damage to, theft of and destruction of assets or cargo; natural disasters; and employee injuries. To limit its exposure, the Port purchases a variety of insurance policies. For general liability, the Port purchases $151 million in coverage, subject to a $500,000 self-insured retention deductible. All risk property insurance is purchased on a replacement value basis for most properties, subject to a limit of $500 million and a per occurrence deductible of $150,000. For earthquake/flood and business interruption losses, sublimits of $75 million and $100 million apply respectively. Insurance coverage for earthquake and flood damage is subject to a deductible defined as 5 percent of the value of the damaged property, with a minimum of $100,000. With the exception of losses which may arise from employee injuries, earthquakes and/or floods, no deductible exceeds $500,000. The self-insured retention for workers‟ compensation coverage is $1,000,000. Insurance coverage for the past three years has been sufficient to cover all claim settlements. The Port is self-insured for its regular medical coverage. The liability for unpaid medical claims totaling $1,224,000 at December 31, 2011, is included in payroll and taxes payable on the accompanying statements of net assets and is expected to be paid in 2012. Liability for unpaid claims at December 31, 2010, was $1,330,000. Excess loss coverage has been purchased through an outside provider to limit individual loss to $110,000. Total expense charged to this plan during 2011 and 2010 was $4,171,000 and $4,242,000, respectively. The Port maintains a self-insurance program for workers‟ compensation. The estimated liability for workers‟ compensation is included in payroll and taxes payable on the accompanying statements of net assets. At December 31, 2011, the estimated self-insurance liability for workers‟ compensation was $304,000 and this amount is expected to be paid in 2012. At December 31, 2010, the estimated self-insurance liability for workers‟ compensation was $330,000. The liability for unpaid claims represents the estimated future indemnity, medical, rehabilitation and legal costs for all open claims. Workers‟ compensation claim activity for December 31, 2011 and 2010, are as follows (dollars in thousands): 2011 $330 195 171 (392) $304 2010 $298 113 448 (529) $330 Claims liability, beginning of year Claims incurred during the year Changes in estimate for prior year claims Payments on claims Claims liability, end of year At December 31, 2011 and 2010, cash reserves for workers‟ compensation were $325,000 and are included in restricted investments on the statements of net assets. 44 NOTE 7 – LEASE COMMITMENTS The Port leases land, office space and other equipment under operating leases that expire through 2037. Minimum future lease payments under noncancellable operating leases are as follows (dollars in thousands): Year 2012 2013 2014 2015 2016 Thereafter Total minimum payments required $ 563 551 373 16 16 327 $1,846 Total rent expense for the years ended December 31, 2011 and 2010, was $778,000 and $837,000, respectively. The Port, as a lessor, leases land and facilities under terms of one to fifty years. In addition, some properties are rented on a month-to-month basis. The Port currently has over 60 noncancellable lease arrangements that range in monthly payments between $1 and $1,000. Minimum future rental receivable under noncancellable operating leases and subleases are as follows (dollars in thousands): Year 2012 2013 2014 2015 2016 Thereafter Total minimum future rentals receivable $ 58,155 57,434 56,077 49,151 43,216 409,562 $673,595 Assets held for rental and leasing purposes as of December 31 are as follows (dollars in thousands): 2011 Land Buildings, improvements and equipment, net Total, net of accumulated depreciation $340,499 470,788 $811,287 2010 $315,624 477,550 $793,174 45 NOTE 8 – PENSION PLANS The Port‟s full-time and qualifying part-time employees participate in one of the following statewide local government retirement systems administered by the Washington State Department of Retirement Systems, under cost-sharing multiple-employer public employee defined benefit retirement plans. Historical trend and other information regarding each plan are presented in the Washington State Department of Retirement Systems comprehensive annual financial report. A copy of this report may be obtained at: Department of Retirement Systems Communications Unit P. O. Box 48380 Olympia, WA 98504-8380 Internet Address: www.drs.wa.gov Public Employees’ Retirement System (PERS) Plans 1, 2 and 3 The State Legislature established PERS in 1947 under Chapter 41.40 RCW. PERS is a cost-sharing multipleemployer defined benefit system. Membership in the system includes: elected officials; state employees; employees of the Supreme, Appeals and Superior courts (other than Judges); employees of legislative committees; community and technical colleges, college and university employees not participating in national higher education retirement programs; judges of district and municipal courts; and employees of local governments. PERS contains three plans. As used in this context, the term plans refers to tiers within PERS. The actual plan is PERS. Participants who joined the system by September 30, 1977, are Plan 1 members. Those joining thereafter are enrolled in Plan 2 or Plan 3. Plan 3 is a defined benefit/defined contribution plan. Retirement benefits are financed from employee and employer contributions and investment earnings. Retirement benefits in all three plans are vested after completion of five years of eligible service. Plan 1 members are eligible for retirement after 30 years of service, or at the age of 60, with five years of service, or at the age of 55, with 25 years of service. The annual pension is 2% of the final average salary per year of service, capped at 60%. Plan 2 members eligible for retirement at the age of 65, with five years of service or the age of 55, with 20 years of service. The annual pension is 2% per year of service of the final average salary. Plan 3 members may retire at the age of 65, with ten years of service, or five years including 12 months that were earned after the age of 44, or five years earned in Plan 2 before June 1, 2003. The annual pension is 1% per year of service of the final average salary. Both plans 2 and 3 retirements prior to the age of 65 are actuarially reduced. There is no cap on years of service credit and a cost-of-living allowance is granted, capped at 3% annually. Each biennium the state Pension Funding Council adopts Plan 1 employer contribution rates, Plan 2 employer and employee contribution rates and Plan 3 employer contribution rates. Employee contribution rates for Plan 1 are established by legislative statute and do not vary from year to year. The employer and employee contribution rates for plans 2 and 3 are developed by the Office of State Actuary to fully fund the system. All employers are required to contribute at the level established by the Legislature. The methods used to determine the contribution requirements were established under state statute. 46 NOTE 8 – PENSION PLANS (concluded) The required contribution rates, expressed as a percentage of covered payrolls, as of December 31, 2011, were: PERS Plan 1 Employer* Employee 7.25% 6.00% PERS Plan 2 7.25% 4.64% PERS Plan 3 7.25%** *** The required contribution rates, expressed as a percentage of covered payrolls, as of December 31, 2010, were: PERS Plan 1 Employer* Employee * 5.31% 6.00% PERS Plan 2 5.31% 3.90% PERS Plan 3 5.31%** *** The employer rates include the employer administrative expense fee of 0.16% for 2011 and 2010. ** Plan 3 defined benefit portion only. *** Rate selected by PERS 3 members, 5% minimum to 15% maximum. Both the Port and the employees made the required contributions. The Port‟s required contributions for the years ended December 31 are as follows (dollars in thousands): Year 2011 2010 2009 PERS Plan 1 $34 30 49 PERS Plan 2 $ 1,126 945 1,265 PERS Plan 3 $130 110 169 Total $1,290 1,085 1,483 NOTE 9 – POST EMPLOYMENT HEALTH CARE BENEFITS The Port provides health care benefits for eligible retired employees through two plans: the Post-Employment Defined Benefit Plan (DB Plan) that was established in 1975 and the Post-Employment Defined Contribution Plan (DC Plan) that was established in 2007. Post-Employment Defined Contribution Health Care Benefits Effective May 1, 2007, the Commission approved a Post-Employment Defined Contribution Plan (DC Plan). The DC Plan requires the Port to contribute $197 per month in 2011 and 2010 to the VEBA accounts of eligible employees. Employees hired after May 1, 2007, are eligible for the DC plan and are subject to a five-year vesting period. The Port contributed $437,000 and $473,000 to eligible employee VEBA accounts in 2011 and 2010, respectively. NOTE 10 – POST EMPLOYMENT HEALTH CARE BENEFITS TRUST FUND The Port provides major medical coverage for eligible retired employees through the Post-Employment Defined Benefit Plan (DB Plan) that was established in 1975. In 2007, the Port established a DC Plan (see Note 9) and closed the DB Plan to new employees. The existing employees were allowed to make a one-time election to transfer from the DB Plan to the DC Plan. Approximately 77% of employees elected to transfer to the DC Plan. The Port is the sole administrator and fiduciary of the Post Employement Health Care Benefits Trust Fund. 47 NOTE 10 – POST EMPLOYMENT HEALTH CARE BENEFITS TRUST FUND (continued) Summary of Accounting Policies The financial statements are prepared using the accrual basis of accounting. Medical benefits that are in accordance with the DB Plan are recognized when due and payable. Contributions to the DB Plan are recognized in the period that the contributions are made. Investment Policy As of December 31, 2011 and 2010, the Plan‟s investments were deposited in qualified depositories as required by state statute. Those statutes authorize the Port to invest in direct obligations of the U.S. Government, certificates of deposit, bankers‟ acceptances, repurchase agreements, commercial paper, and certain municipal bonds. Investments are valued at fair value. The DB Plan does not limit the amount invested in any one issuer. At December 31, 2011 and 2010, the DB Plan had the following investments: Investment Type Money Market Fund Fixed Income Securities $ 2011 529 6,545 2010 $ 266 7,087 $7,353 $7,074 Plan Description The Plan provides major medical coverage, subject to a deductible, and a maximum benefit limit of $2,000,000 per person. The Port is the fiduciary of this plan and the trust is held by Wells Fargo. The DB Plan is a singleemployer cost-sharing defined benefit plan. The DB Plan was closed to new employees in 2007. The Port will fund the DB Plan as necessary to enable the DB Plan to pay vested accrued benefits to particpants as they become due and payable. Retirees and their spouses are eligible for Port-paid, post-employment medical benefits upon attainment of the age of 60 through the age of 69, provided they have completed a minimum of 15 years of service and are eligible to retire under PERS. Employees retiring before the age of 60 are eligible for Port-paid, post-employment medical for up to ten years, provided they have completed 20 years of service and are eligible to retire under PERS. The Port‟s annual other post-employment benefit (OPEB) cost (expense) is calculated based on the annual required contribution of the employer (ARC), an amount actuarially determined in accordance with the parameters of the authoritative guidance. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed 30 years. The contribution policy of the plan is established by the commission. Actuarial Methods and Assumptions Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the health care cost trend. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and the plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the employer and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations. The actuarial present value of accumulated plan benefits is determined by an independent actuary. 48 NOTE 10 – POST EMPLOYMENT HEALTH CARE BENEFITS TRUST FUND (continued) As of January 1, 2009, 2010 and 2011, the entry age normal valuation method was used. The actuarial assumptions included a 4% investment rate of return (net of investment expenses), which is a blended rate of the expected long-term investment returns on plan assets. The expected long-term investment return on plan assets is developed by netting the investment earnings at the assumed valuation investment return rate to the prior year valuation asset value, expenses, benefit payments and assets expected from future contributions. The health care cost trend rate assumptions are 9.0% graded uniformly to 5% over 8 years. The health care cost trend at December 31, 2010: 9.5%, graded to 5% over 9 years. The health care cost trend at December 31, 2009: 10%, graded to 5% over 10 years. The actuarial value of assets was determined using market value. The actuarial accrued liability is fully funded at December 31, 2011, 2010 and 2009, in an external trust. Annual Pension Cost The following table shows the components of the Port‟s annual OPEB cost for the year, the amount actually contributed to the plan, and changes in the Port‟s OPEB obligation for the years ended December 31, 2009, 2010 and 2011 (dollars in thousands): Annual required contribution 2009 Interest on net OPEB obligation Annual OPEB expense Claims paid End OPEB liability Annual required contribution 2010 Interest on net OPEB obligation Annual OPEB expense Claims paid End OPEB liability Annual required contribution 2011 Interest on net OPEB obligation Annual OPEB expense Claims paid End OPEB liability Employer Contributions The Port‟s annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and the net OPEB obligation for the years ended December 31, 2008, 2009, 2010 and 2011, are as follows (dollars in thousands): Percentage of Annual OPEB Cost Contributed to a Trust Fund 100% 100 100 100 Net OPEB Obligation/ (Asset) $----$375 -375 (375) $ -$415 -415 (415) $ -$298 -298 (298) $ -- Year Ended 12/31/08 12/31/09 12/31/10 12/31/11 Annual OPEB Cost $196 375 415 298 49 NOTE 10 – POST EMPLOYMENT HEALTH CARE BENEFITS TRUST FUND (concluded) Schedule of Funding The following schedule summarizes the funding progress at December 31, (dollars in thousands): Actuarial Value of Assets (a) $ -7,340 7,353 7,074 Actuarial Accrued Liability (AAL) Entry Age (b) $7,121 5,252 5,148 4,326 Unfunded AAL (UAAL) (b-a) $7,121 - -* - -* - -* Funded Ratio (a/b) - -% 139.8 142.8 163.5 UAAL as a Covered Percentage of Payroll Covered Payroll (c) ((b-a) / c) $3,300 2,902 2,601 2,535 215.8% ---- Plan Year 2008** 2009** 2010 2011 * There is no unfunded AAL at December 31, 2011, 2011 and 2009 as the value of the plan assets exceeds the AAL. ** Unaudited NOTE 11 – DEFERRED COMPENSATION PLANS The Port offers its employees a deferred compensation plan created in accordance with Internal Revenue Code Section 457. The plan, available to all Port employees, permits them to defer a portion of their salary until future years. In accordance with GASB authoritative guidance, accounting and reporting for Internal Revenue Code Section 457 deferred compensation plans, employee assets are not reflected in the Port‟s financial statements. The Port established a profit sharing plan for nonrepresented employees in accordance with Internal Revenue Code Section 401. The plan provides for an annual contribution to each eligible employee‟s 401 account based on the Port meeting financial targets. The minimum contribution of $100 or a maximum contribution of 4% of total salaries of eligible employees will be made annually to the 401 accounts. In addition to the employer contribution, eligible employees may defer a portion of their salary until future years. The Port did not contribute to the plan in 2011 and 2010. Both plans are fully funded and held in outside trusts. The fund is not available to employees until termination, retirement, death and unforeseeable emergency. NOTE 12 – PROPERTY TAXES The County Treasurer acts as an agent to collect property taxes levied in the county for all taxing authorities. Taxes are levied annually on January 1, on property values listed as of the prior May 31. The lien date is January 1. Assessed values are established by the County Assessor at 100% of fair market value. A revaluation of all property is required every six years. Taxes are due in two equal installments on April 30 and October 31. Collections are distributed monthly to the Port by the County Treasurer. The Port is permitted by law to levy up to 45 cents per $1,000 of assessed valuation for general Port purposes. The rate may be adjusted for either of the following reasons: (a) Washington State law in Revised Code of Washington (RCW) 84.55 limits the growth of regular property taxes, but it allows additional amounts for new construction. The Port is allowed to raise revenues in excess of the limit if approved by a majority of the voters as provided in RCW 84.55.050. (b) The Port may voluntarily levy taxes at a lower rate. Special levies approved by the voters are not subject to the above limitations. In 2011, the Port‟s regular tax levy was $0.182 per $1,000 on a total assessed valuation of $81,262,532,000, for a total regular levy amount of $14,779,000. In 2010, the regular tax levy was $0.184 per $1,000 on a total assessed valuation of $88,468,118,000, for a total regular levy of amount of $16,277,000. 50 NOTE 13 – PORT OPERATIONS BY INDUSTRY The Port operates principally in two industries: terminal services and property rentals. Terminal services involve marine-oriented services and include dockage, cargo handling, storage, and related activities. Properties rented include facilities and land used primarily for container terminals, industrial activities and storage. Revenues and income from operations for the years ended December 31, 2011 and 2010, and identifiable assets by industry segment are presented below (dollars in thousands): 2011 $ 88,172 25,923 $114,095 $ 9,679 37,562 47,241 (13,812) (2,595) (3,783) (2,783) 24,268 (11,365) 12,903 8,173 $21,076 2010 $ 83,025 20,325 $103,350 $ 5,064 33,315 38,379 (13,381) (2,362) (3,574) (2,077) 16,985 (11,625) 5,360 16,295 $21,655 OPERATING REVENUES Property rentals Terminal services Total operating revenues INCOME FROM OPERATIONS Terminal services Property rentals Administration expenses Depreciation expense allocated to administration Security expenses Environmental expenses Operating income NON-OPERATING EXPENSES – NET Increase in net assets, before capital contribution CAPITAL CONTRIBUTION Increase in net assets IDENTIFIABLE ASSETS Capital assets – net: Terminal services Property rentals Current assets: Terminal services Property rentals Total identifiable assets GENERAL PORT ASSETS – NET Total assets CAPITAL ASSET ADDITIONS Terminal services Property rentals Total capital asset additions $ 121,395 811,287 6,951 1,741 941,374 337,184 $ 100,762 793,174 2,110 3,451 899,497 332,711 $1,278,558 $ 109 26,999 $27,108 $1,232,208 $ 26 48,416 $48,442 General Port assets are principally cash, temporary investments, construction in process, Port offices, taxes receivable, and deferred and other assets. 51 NOTE 14 – COMMITMENTS The Port has entered into contractual agreements for terminal maintenance, infrastructure improvements, environmental projects and professional services. At December 31, 2011, these commitments are as follows (dollars in thousands): Project Terminal Projects Infrastructure Environmental Other (including professional services) Total commitments NOTE 15 – ENVIRONMENTAL LIABILTIES The Port monitors remediation obligations, which are obligations to address the current or potential detrimental effects of existing pollution by participating in pollution remediation activities such as site assessments and cleanups. Future expenditures for environmental remediation obligations using the expected cash flow technique were $11.0 million at December 31, 2011, and $10.5 million at December 31, 2010. Recoveries of environmental remediation costs from other parties are recorded as a reduction of the related costs using the expected cash flow technique. The Port‟s remedial obligations are summarized in the following table (dollars in thousands). 2011 Remediation/Monitoring Activities Remediation Capitalized Remediation Expensed Total $ 3,675 5,439 1,902 $11,016 2010 $ 3,178 5,439 1,902 $10,519 Remaining Commitments $ 818 12,104 3,774 11,632 $28,328 The Port‟s monitoring activities of $3.7 million at December 31, 2011, and $3.2 million at December 31, 2010, are monitoring obligations required by regulatory agencies and estimated monitoring obligations for active remedial activities. The monitoring expenses are presented as operating expense on the statements of revenues, expenses and changes in net assets. The Port acquired property in March 2003 that required remediation for marine terminal development. The terms of the acquisition obligated the Port to remedial action that was approved by federal and state regulators as part of the purchase price. The remaining obligation is estimated at the current value of $3.0 million in 2011 and 2010. The estimated liability does not include future cost recoveries. The Port transferred land to the Puyallup Tribe of Indians in 1988 under the 1988 Puyallup Land Settlement Agreement. The terms of the agreement obligated the Port to remediate the property in the event of future development. In April 2008, the parties also entered into a land swap agreement for several of the same parcels for the development of marine terminals. As a result of the land swap transaction, $2.4 million of the obligation was capitalized and $1.9 million of the obligation was recorded as environmental remediation expense. The obligation assumes grant recoveries of $3.4 million. At December 31, 2011, the estimated cost of the environmental remediation projects expected to be capitalized in future periods is approximately $13.8 million. 52 NOTE 16 – CONTINGENCIES The Port owns land within the boundaries of the Commencement Bay near the Shore Tideflats Superfund Site, for which a Remedial Investigation and a Feasibility Study have been performed by the U.S. Environmental Protection Agency and the Washington State Department of Ecology, pursuant to the Federal Comprehensive Environmental Response Compensation and Liability Act and the Model Toxics Control Act. Remedial actions are currently underway or complete at all known sites. The Port will continue to have liability exposure until the cleanup is complete. In 2008, the United States Department of Army, Corps of Engineers issued a notice of violation to the Port claiming that the Port filled and graded certain wetlands without the required Army, Corps of Engineers permits. The United States Department of Ecology (Ecology) assumed jurisdiction in 2009 and issued a Request for Information, pursuant to 308(a) of the Clean Water Act, 33 U.S.C. 51318(a), and subsequently filed suit claiming that the Port partially filled sensitive wetland without proper permits. The Port and Ecology are currently engaged in reviewing the Port‟s conceptual restoration plans. The Port is named as a defendant in various other lawsuits incidental to carrying out its function. The Port believes its ultimate liability, if any, will not be material to the financial statements. NOTE 17 – MAJOR CUSTOMERS Operating revenues for the year ended December 31, 2011, of $114.1 million included $88.6 million, or 78% of total revenue from ten customers. Operating revenues for the year ended December 31, 2010, of $103.4 million included $83.7 million, or 81% of total revenues from ten customers. Receivables from those customers totaled $7.7 million or 79% of total trade receivables, and $6.1 million or 61% of total trade receivables at December 31, 2011 and 2010, respectively. NOTE 18 – RELATED-PARTY TRANSACTIONS The commissioners of the Port, the Chief Executive Officer and the Deputy Executive Officer also serve as officers and directors of other private and public agencies. The Revised Code of Washington Section 53 authorizes the Port District to cooperate and invest with such agencies including trade centers, economic development and other municipal entities. The Port supports such agencies in its normal course of business. 53 NOTE 19 – FAIR VALUE MEASUREMENTS The estimated carrying and fair values of the Port‟s financial instruments are as follows (dollars in thousands): 2011 Carrying Estimated Value Fair Value $ 4,057 147,056 $ 4,057 147,056 2010 Carrying Estimated Value Fair Value $ 2,075 130,670 $ 2,075 130,670 Financial Assets Cash and cash equivalents Investments Financial Liabilities Commercial paper Interest rate swaps Long-term debt $ 27,000 95,428 630,160 $ 27,000 95,428 594,630 $ 27,000 42,637 638,605 $ 27,000 42,637 613,149 The Port has five swaps outstanding so that it may mitigate interest rate risk. The swaps synthetically fix or “lockin” interest rates on variable revenue bond debt by providing cash flows that are intended to offset the variable rate bond payments, leaving the Port with the fixed payment identified in each swap agreement. The fair value of the interest rate swap agreement (used for purposes other than trading) is the estimated amounts the Port would pay to terminate the swap agreement at the reporting date, taking into account current interest rates for the swap agreement and the creditworthiness of the swap counterparty and the third-party bond insurer. The Port adopted FASB authoritative guidance on fair values on January 1, 2008. The guidance applies to all assets and liabilities that are being measured and reported on a fair value basis. The guidance requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements. This guidance enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. The guidance requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories: Level 1: Quoted market prices in active markets for identical assets or liabilities. Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data. Level 3: Unobservable inputs that are not corroborated by market data. In determining the appropriate levels, the Port performs a detailed analysis of the assets and liabilities that are subject to the guidance. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3. 54 NOTE 19 – FAIR VALUE MEASUREMENTS (concluded) The table below presents the balances of liabilities measured at fair value by level within the hierarchy at December 31, 2011 and 2010 (dollars in thousands): Assets at Fair Value as of December 31, 2011 Level 1 Investments Interest rate swaps $94,480 -Level 2 $52,576 95,428 Level 3 $- -Total $147,056 95,428 Assets at Fair Value as of December 31, 2010 Level 1 Investments Interest rate swaps $77,382 -Level 2 $53,289 42,637 Level 3 $- -Total $130,671 42,637 The Port‟s interest rate swap is a pay-fixed, receive variable based on 70% London Interbank Offered Rate (LIBOR) from its counterparties. The LIBOR is observable at commonly quoted intervals for the full term of the swaps and, therefore, is considered a Level 2 item. For an interest rate swap in an asset position, the credit standing of the counterparty is analyzed and factored into the fair value measurement of the asset. The guidance states that the fair value measurement of a liability must reflect the nonperformance risk of the entity. Therefore, the impact of the Port‟s creditworthiness has been factored into the fair value measurement of the interest rate swap in a liability position. NOTE 20 – NOTES RECEIVABLE In April 2010, the Port entered into a note receivable in the amount of $16,000,000, with an interest rate of 7.0% related to the sale of real property. In August 2011, the payment schedule was amended, resulting in a revised effective interest rate of 7.19%. Principal and interest are payable in quarterly installments, with the first payment of $527,000 due October 1, 2012. At December 31, 2011, accrued interest on the note totaled $2,066,000. This note receivable is included in other assets on the accompanying statements of net assets. The outstanding balance at December 31, 2011, was $18.1 million, with the balance rising to $18.7 million, with additional interest before payments start. Future maturities as follows (dollars in thousands): Year 2012 2013 2014 2015 2016 Thereafter Total minimum payments required $ 191 766 766 766 766 15,449 $18,704 During 2011, the viability of the special use permit to allow mining of the underlying property was challenged with Thurston County. Thurston County ruled that the special use permit was valid as issued. NOTE 21 – SUBSEQUENT EVENTS Events that occurred subsequent to December 31, 2011, have been evaluated by the Port‟s management through March 16, 2012, which is the date of the financial statements were availalble to be issued. 55 56 PORT OF TACOMA STATISTICAL SECTION (unaudited) For the Year Ended December 31, 2011 TABLE OF CONTENTS Page FINANCIAL TRENDS These schedules contain trend information to assess how the Port’s financial performance and well-being have changed over time. Net Assets by Component - Last Ten Fiscal Years .......................................................................................... 58 Changes in Net Assets - Last Ten Fiscal Years................................................................................................ 59 REVENUE CAPACITY These schedules contain information on the Port’s revenue sources and their fluctuations over time. Assessed and Estimated Actual Value of Taxable Property - Last Ten Fiscal Years ....................................... 60 Property Tax Rates - Direct and Overlapping Governments - Last Ten Fiscal Years ....................................... 61 Principal Property Tax Payers .......................................................................................................................... 62 Property Tax Levies and Collections - Last Ten Fiscal Years ........................................................................... 63 DEBT CAPACITY These schedules present information to assist the reader in assessing the affordability of the Port’s current level of outstanding debt and the ability to issue aditional debt in the future. Ratios of Outstanding Debt by Type - Last Ten Fiscal Years ........................................................................... 64 Ratios of General Obligation Bonds - Last Ten Fiscal Years ............................................................................ 65 Computation of Direct and Overlapping General Obligation Debt..................................................................... 66 Computation of Legal Debt Margin - Last Ten Fiscal Years ............................................................................. 67 Revenue Bonds Coverage by Type - Last Ten Fiscal Years ............................................................................ 68 DEMOGRAPHIC INFORMATION These schedules offer demographic and economic indicators regarding the environment within which the Port’s financial activities take place. Demographic Statistics - Last Ten Fiscal Years ............................................................................................... 69 Pierce County Major Employers ....................................................................................................................... 70 OPERATION INFORMATION These schedules contain information about services the Port provides and the activities it performs. Number of Port Employees by Function - Last Ten Fiscal Years...................................................................... 71 Marine Terminal Tonnage and Statistics - Last Ten Fiscal Years ..................................................................... 72 Marine Terminal Description ............................................................................................................................. 73 Prepared by the Finance Department, Port of Tacoma 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73