Louisville Water 2017 ANNUAL REPORT QUALITY WATER…QUALITY OF LIFE Every day, nearly a million people depend on Louisville Water Company to provide safe, high-quality drinking water. We’re proud to deliver. Louisville Water has a 157-year history of quality, innovation, value and service. The company began operations in 1860 as Kentucky’s first public water provider and today sup- plies water and fire protection to communities in Louisville Metro and parts of Bullitt, Hardin, Nelson, Oldham, Shelby and Spencer counties. LOUISVILLE WATER MISSION Provide safe, high-quality water and related services that deliver an exceptional value to our customers, shareholder and community. LOUISVILLE WATER VISION CONTENTS Be the water supplier of choice throughout the Louisville 1...President’s Message region by: 2...2017 Company Highlights • Providing best-of-class quality, customer service, innovation and value 23...Financial Performance • Expanding the geographic area we serve 28...Independent Auditor’s Report • Creating new lines of water-related businesses that build on existing competencies 30...Management’s Discussion and Analysis 38...Financial Statements 66...Supplementary Information 73...Corporate Information PRESIDENT’S MESSAGE Spencer Bruce, President/CEO I’m pleased to provide you with Louisville Water Company’s 2017 “liquid assets” across the United States. This effort along with an Annual Report. In 2017, our customers enjoyed outstanding water emphasis on new lines of business accounted for $16.8 million quality; the community saw the results of engineering projects of our 2017 revenue. Regionalization and economic development to improve our infrastructure; and, our owner, Louisville Metro opportunities allow us to offset the trend of overall declining received a solid return on its investment. water consumption to maintain affordable water rates. Louisville Water customers enjoy some of the lowest rates in the region, with Producing and delivering a reliable, high-quality supply of drink- the average residential monthly bill of $24.60 for 5,000 gallons of ing water is at the core of our business and in 2017, we made great water. Our owner, Louisville Metro, continues to reap the benefits strides to continue our rich tradition. We maintained funding to from our sound management with a total contribution of $36.4 repair and replace our distribution water mains and assessed the million in 2017 for water, fire service and a dividend. structural integrity of 16 miles of large diameter mains. Along Eastern Parkway, we successfully completed the first phase of a Our employees deserve much of the credit for our success in 2017, three-year project to replace one of our largest and oldest water and I’m extremely proud that we recorded another great safe- mains. And with the national focus on reducing the risk of lead ty performance. Safety is paramount at Louisville Water and the in drinking water, our engineering team accelerated its work to company-wide focus is evident at the treatment plants, on the job replace our remaining known lead service lines by 2020. At the sites and in the office. same time, we launched an assistance program for customers to Louisville Water has always considered itself as more than a replace private lead service lines. This work, along with contin- water utility. We are a community asset. In 2017, our education ued research to enhance our corrosion control program, will min- and outreach efforts touched more than one million people and imize the risk of lead entering our water. thousands of guests toured the WaterWorks Museum and the Louisville Water continues to have two of only 16 treatment Crescent Hill Reservoir. Highlighting the value of water is key plants in the United States designated with the Phase IV Excel- and so is contributing to the communities where we work. Our lence Award for water quality. We not only produce a superior employees volunteered at over 100 organizations and donated product; with the Ohio River as the source, we have an abundant $159,000 to four company-supported charities. supply. In 2017, we welcomed two new wholesale partners, Har- Louisville Water began operations in 1860 and the quality of our din County Water District 1 and Hardin County Water District water is forever connected to the quality of life in this region. No. 2. We also broke ground on a project to deliver water to the I am proud to share the story of how in 2017 we continued this Shelbyville Municipal Water and Sewer Commission. We have in- 157-year tradition. tensified our focus on regionalization and economic development with a team of employees focused on sharing the story of our President/CEO 1 2017 AT A GLANCE AVERAGE DAILY DELIVERY million 4,200TOTAL 117 gallons MILES OF PIPE At the River Quick response and technical expertise helped Louisville Water manage a dangerous spill on the Ohio River. When a barge acci- dent on December 19, 2017 dumped 467,000 gallons (5.1 million pounds) of a liquid fertilizer called urea ammonium nitrate in the Ohio River near Cincinnati, Louisville Water employees sprang into action without hesitation. Scientists, plant operators, and engineers determined a plan of action to keep the water safe, which included a never-before extended shutdown of approxi- mately 11 hours of the intake pumps at Zorn Pumping Station and a slight adjustment to the water treatment strategy. This spill was unique in that we couldn’t see it on the river; scientists had to sample the water downstream from the spill to determine the length of the plume. Using the river’s flow rate and continuous sampling, we mapped a projected travel time to our water intakes. Several employees worked around the clock, even on Christ- mas Eve and Christmas Day, to ensure the safety of our drinking water. As the plume began passing by our Zorn Pumping Station on Christmas Day, we were able to close the intakes since the holiday is one of the lowest pumping days of the year. At the treatment plant, we monitored levels and maintained the high water quality our customers expect. That commitment to quality is a 24/7 focus. Louisville Water con- tinues to produce some of the highest quality water in the United States. We maintained the Phase IV Partnership for Safe Water, Scientists Chris Bobay and Mark Campbell work in a mobile lab and on the Ohio River to track the spill. 2 2017 AT A GLANCE 24,125 FIRE 53,374 VALVES HYDRANTS a distinction that only 16 of the nation’s approximately 55,000 water utilities have earned. Both of our treatment plants have the Phase IV status which puts Louisville Water in an elite class of utilities. In the Field Louisville Water employees working in the field met high stan- dards for quality, safety and efficiency throughout 2017. We completed Phase 1 and started Phase 2A of a three-year, $25 million project to replace a 1930 cast iron main along Eastern Parkway. This project—the largest replacement project in our history—uses a slip-lining technique, which involves installing a 42-inch outer diameter steel pipe inside the original 48-inch pipe. Slip-lining significantly minimizes environmental impacts and neighborhood disruptions while increasing the lifespan of this critical main. Customers along the route do not lose water service during the construction. In addition to the engineering aspect, the project has included a significant communication effort. From social media, neighbor- hood meetings, and construction signage to website updates and emails, Louisville Water continuously sent information on the project to more than two dozen stakeholder groups and thou- sands of commuters and residents. Crews dig pits and push a new pipe inside the original 1930 pipe on By the end of 2017, we had completed sidewalk and landscape Eastern Parkway. restoration from the first phase. Louisville Water also donated funds to neighborhood associations and Louisville Metro Parks to purchase and plant trees in the neighborhood. 3 2017 AT A GLANCE WATER MAIN NUMBER OF BREAKS 12.7 MAIN BREAKS 536 PER 100 MILES OF PIPE When complete, Louisville Water will have slip-lined 6.4 miles of the water main. Replacing Lead Lines Louisville Water has made significant progress in replacing its remaining lead service lines. In 2017, crews and contractors re- placed an average of four lead service lines daily, which puts the company on track to eliminate our remaining lead lines by 2020. Louisville Water has budgeted roughly $23.6 million to complete the work. Lead is not a public health concern for Louisville’s drinking water. There is no lead in the water when it leaves the treat- Louisville Water replaced 1,900 of its lead service lines in 2017. ment plants, but there’s a potential risk for lead to leach into the water through pipes and plumbing materials. Managing the risk LEAD SERVICE LINES in the distribution system begins at the plant with scientists bal- ancing the water chemistry, but it’s also important to eliminate 75,000 74,000 the primary risk posed by the lead service lines. (It was common to use lead for the line that connects to the customer’s property until 1950.) We began an aggressive strategy in 1991 to replace the remain- 50,000 ing lead service lines and at that time, we estimated there were 36,000 lines in service. By the end of 2017, approximately 4,500 remained, representing just 1.6% of our total service lines. 25,000 Of the 1,900 lead service lines we replaced in 2017, Louisville NUMBER OF LINES Water found that 47 of the private service lines were also made of lead. Because Louisville Water is only responsible for the lines 6,500 4,500 ELIMINATE that connect to the property, the company started a pilot program KNOWN LINES to help customers pay for the replacement of their private lead 1,000 1937 2016 2017 2020 lines.