Comprehensive Annual Financial Report Fiscal Year Ended June 30, 2012

Transcription

1 Comprehensive Annual Financial Report Fiscal Year Ended June 30, 2012 UPPER SAN GABRIEL VALLEY MUNICIPAL WATER DISTRICT 602 E. Huntington Drive, Suite B Monrovia, California Prepared by: Finance and Administration Department

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3 Table of Contents INTRODUCTORY SECTION (Unaudited) Letter of Transmittal GFOA Certificate of Achievement Organizational Chart PAGE i ix x FINANCIAL SECTION Independent Auditors Report 1 Management s Discussion and Analysis (Unaudited) 3 BASIC FINANCIAL STATEMENTS Statements of Net Assets 8 Statements of Revenues, Expenses and Changes in Net Assets 9 Statements of Cash Flows 10 Notes to the Financial Statements 12 REQUIRED SUPPLEMENTARY INFORMATION Schedule of Funding Progress CalPERS and OPEB 27 STATISTICAL SECTION (Unaudited) Statistical Section Table of Contents 28 Changes in Net Assets 29 Net Assets by Component 30 Operating Revenues by Major Source 31 Operating Expenses by Activity 32 Imported Water Deliveries 33 Imported Water Rates and Charges 34 Water Rates per Acre-Foot 35 Treated Water Sales by Customer 36 Demographics and Economic Statistics Los Angeles County 37 Ten Largest Employers in Los Angeles County 38 Operating Indicators General 39 Operating Indicators Water Conservation 40 Ultra-Low Flush and High-Efficiency Toilets Distributed 41

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5 Introductory Section

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7 February 22, 2013 Board of Directors: Anthony R. Fellow, Ph.D., Division 1 Charles M. Treviño, Division 2 Ed Chavez, Division 3 Michael Touhey, Division 4 Bryan Urias, Division 5 The Honorable Board of Directors The (Upper District) staff is pleased to present the Upper District s Comprehensive Annual Financial Report for the fiscal year ended June 30, This report is prepared in accordance with the guidelines set forth by the Governmental Accounting Standards Board (GASB). Management assumes full responsibility for the completeness and reliability of the information contained in this report, based upon a comprehensive framework of internal control established for this purpose. The cost of internal control should not exceed anticipated benefits. Its objective is to provide reasonable, rather than absolute, assurance that the financial statements are free of any material misstatements. Vasquez & Company LLP, Certified Public Accountants, have issued an unqualified ( clean ) opinion on the financial statements for the year ended June 30, The independent auditors report is located at the front of the financial section of this report. Management s discussion and analysis (MD&A) immediately follows the independent auditors report and provides a narrative introduction, overview and analysis of the basic financial statements. The MD&A complements this letter of transmittal and should be read in conjunction with it. Profile of the Upper District History The Upper District, formed by voters in the San Gabriel Valley on December 8, 1959 to help solve water problems in the rapidly developing San Gabriel Valley, was incorporated on January 7, On March 12, 1963, residents of the District voted to annex to the Metropolitan Water District of Southern California (MWD), to provide supplemental water, first from the Colorado River and later the State Water Project, to replenish local groundwater supplies. The Upper District played a vital role in determining water rights within the Main San Gabriel Basin by acting as plaintiff in the 1973 court case of, Plaintiff, v. City of Alhambra, et al, Defendants. This case brought about the creation of the Main San Gabriel Basin Watermaster, ordered by the court to administer and enforce provisions of the Judgment.

8 The appearance of volatile organic compounds (VOCs) in many water wells in the District was first discovered in local water supply wells in Since approximately 90 percent of the annual water consumption in the San Gabriel Basin is supplied by groundwater, water purveyors have either removed those contaminated wells from service, blended contaminated water with water from other sources, or installed treatment systems to meet health standards and to protect public users. Upper District has also engaged in a water-quality monitoring program involving chemical and physical constituents in the local domestic water supplies. Mission Upper District aims to provide: A reliable supply of high quality drinking water at the lowest possible cost; A drought-proof and economical supply of recycled water for industrial and irrigation uses; and Projects that aggressively advance water use efficiency throughout the San Gabriel Valley. It is our goal to pursue this mission in a manner that is responsive to our public while protective of our environment. Service Area Five elected Directors, each serving a 4-year term and representing a designated geographic area within the Upper District's boundaries, govern Upper District. Additionally, as a member agency of the MWD, the Upper District appoints one representative to sit on the MWD Board of Directors. The Upper District also has representation on the San Gabriel Basin Water Quality Authority and the Main San Gabriel Basin Watermaster Boards. ii

9 Upper District Board of Directors Division 1 Director Anthony R. Fellow, Ph.D. Representing all or parts of Arcadia, Bradbury, El Monte, Monrovia, Rosemead and Temple City Division 2 Director Charles M. Treviño Representing all or parts of Arcadia, Rosemead, San Gabriel, South Pasadena, South San Gabriel and Temple City Division 3 Director Ed Chavez Representing all or parts of Avocado Heights, Bassett, City of Industry, Hacienda Heights, La Puente, North Whittier, Spy Glass Hill, South El Monte, Valinda and West Covina Division 4 Director Michael Touhey Representing all or parts of Azusa, Covina, Glendora, Irwindale and West Covina Division 5 Director Bryan Urias Representing all or parts of Baldwin Park, Duarte, El Monte and Irwindale Local Economy California s economy was severely impacted by the deep recession that began in Most industries have since registered modest employment gains mainly from information, education and administration, and support services. iii

10 The Los Angeles County s economy is expected to improve slowly. As gradual improvement in the national economy occurs, trade gains and increases in jobs within the County are anticipated. In the San Gabriel Valley, modest growth is anticipated. Between 2000 and 2011, the Valley s population grew by less than 1%, compared with 3% in the Los Angeles County and 10% in California. Employment in the San Gabriel Valley increased by 0.9% from about $598,000 in 2010 to about 603,000 in San Gabriel Valley regional payrolls increased $640 million or 2.2% from 2010, the largest growth recorded since 2007, due mostly to increases in job counts. Because of its demographic advantage, San Gabriel Valley continues to be the main destination of Asian investments into the Los Angeles County. Major Initiatives Consistent with its mission, Upper District strives to help local retail water providers manage their water supply safely and cost-effectively by improving water quality and increasing supply reliability. This is a challenging goal because factors such as climate, legislation, regulations, government policy, economics, population and market demand change and, thus, affect the Upper District's planning and operations. Upper District's primary function has been to provide supplemental water to its retail water providers, sourced from the State Water Project, the Colorado River, and more recently, in the form of recycled water. Due to increasing regulatory constraints and prolonged drought on imported water supplies, Upper District is planning and implementing new initiatives to improve long-term water supply reliability. Integrated Resources Plan (IRP) In May 2011, the Board authorized the preparation of the San Gabriel Valley s first Integrated Resources Plan (IRP). The IRP defines a long term strategy for investments in a balanced portfolio of water supplies that are reliable and affordable in the long term. Recycled Water Program Recycled water is a key part of the Upper District's overall strategy of supplementing local water supplies. Recycled water is being used throughout California to irrigate golf courses, parks, freeway landscaping and crops. It is also being used to replenish groundwater basins, to serve as a barrier to seawater intrusion and by industry for cooling processes and other purposes. Recycled water directly offsets the need to import increasingly expensive water that is pumped from the sensitive Bay-Delta ecosystem. Upper District s success in proactively advancing water recycling is largely attributable to the support of its partners: the United States Bureau of Reclamation; State Water Resources Control Board; MWD; Sanitation Districts of Los Angeles County; Watermaster and the local retail water providers and many others who have contributed to the successful development of recycled water water in the San Gabriel Valley. Indirect Reuse Action Plan (IRAP) On December 6, 2011, the Board adopted an Indirect Reuse Action Plan (IRAP) which set forth specific tasks to advance a major project that involves use of highly treated recycled water for groundwater recharge. Immediate work tasks were identified for implementation. These tasks include: research to identify the most appropriate treatment technology; pipeline right-of-way study; Title XVI feasibility analysis; financing plan. Once complete the Indirect Potable Reuse project will provide 10,000 acre-feet or more of highly treated recycled water for groundwater replenishment annually. iv

11 Direct Reuse The Direct Reuse Program includes the phased construction of a recycled water distribution system used to provide water for irrigation purposes. Over $47 million was invested since 2007 to construct a direct reuse recycled water distribution system consisting of more than 24 miles of distribution pipeline. The major components of the direct reuse system are summarized below. All components of the system are in service with the exception of the last two phases of the City of Industry project which will be complete in Whittier Narrows The Upper District's Whittier Narrows Water Recycling Project supplies the 2,500 acre Whittier Narrows Recreation Area with about 400 million gallons of recycled water each year. The recycled water provides irrigation for a large public park, soccer, baseball and softball fields as well as the 18-hole Whittier Narrows Golf Course. South El Monte High School The Upper District converted South El Monte High School to recycled water for irrigating campus green areas and athletic fields. Recycled water used at the high school will conserve nearly 17 million gallons of drinking water each year, enough to supply about 100 households. Rose Hills Memorial Park In early 2006, Upper District converted Rose Hills Memorial Park to recycled water for irrigation purposes. Prior to using recycled water, Rose Hills used approximately 194 million gallons per year or about 500,000 gallons per day of drinking water for irrigation. By using recycled water, they are saving enough drinking water to supply about 1,200 homes. As part of this project, Rio Hondo College, Mill Elementary School and Gateway Pointe Industrial Park are also provided with recycled water for irrigation purposes. Rosemead Extension The San Gabriel Valley Water Recycling Project Phase IIA - Rosemead Extension consists of recycled water pipelines extending north and west from the Whittier Narrows Recreation Area to supply recycled water to Rice Elementary School, Southern California Edison corporate headquarters and Panda Express corporate headquarters, among others. City of Industry Upon completion, Upper District's City of Industry Water Recycling Project will provide recycled water for irrigation purposes by extending an existing recycled water pipeline, which stretches from the City of Industry through Hacienda Heights, to West Covina. The project will supply more than 450 million gallons of recycled water per year for irrigation in the San Gabriel Valley. Water Use Efficiency In August 2012, the Board of Directors adopted a Water Use Efficiency (WUE) Master Plan. The WUE provides a goal-oriented, performance-based and cost-effective strategy for a practical, longterm approach to design and implement water use efficiency measures. Water Conservation and Education Water conservation is an important and low-cost method of preserving our water supply and is a critical part of an effective water supply program. In California and the San Gabriel Valley, cities, v

12 water companies, utilities and water districts are deeply involved in conservation efforts and public education that promote water conservation. Informing residents and employers about water-use efficiency is the top priority of the Upper District's public education program. Residential Programs High Efficiency Toilet (HET) Retrofit Program - The HET Retrofit Program allows any qualifying resident within the Upper District boundaries to obtain up to two free HETs for their home. The program is open to both single-family and multi-family residents, whether they own or rent. For fiscal year ended June 30, 2012, Upper District distributed about 2,000 HETs providing estimated lifetime water savings of approximately 555 million gallons, bringing the total estimated program lifetime water savings to more than 7.8 billion gallons. Residential Rebate Program - The Upper District offers residential rebates for retrofitting a variety of high water-use fixtures/equipment with water efficient devices. Rebates are currently offered on High Efficiency Clothes Washers (HECW), Weather Based Irrigation Controllers (WBIC) and rotating nozzles. As of June 30, 2012, rebates have been paid for water-efficient devices that provide lifetime water savings of almost 900 million gallons. Commercial, Industrial and Institutional (CII) Programs CII Rebate Program - Through the Save Water, Save A Buck Program, Southern California businesses are eligible for rebates to help encourage water use efficiency and conservation. This program offers cash rebates on a wide variety of water-saving technologies including High-Efficiency Toilets and Urinals, WBICs for outdoor landscaping, as well as many industry-specific water conserving devices. As of June 30, 2012, rebates have been paid for water-efficient devices that provide total lifetime water savings of approximately 3.5 billion gallons. Landscape Programs Turf Removal Program - Through this program, Upper District provides funding assistance to businesses, agencies, and other entities to remove turf from large landscaped nonresidential sites. The Upper District awards grants of $1 per square foot, up to a maximum of $100,000, per applicant. For the fiscal year ended June 30, 2012, three grants were awarded to remove about 186,000 square feet of turf, providing a lifetime water savings estimate of about 68 million gallons, bringing total program lifetime water savings to approximately 300 million gallons as of June 30, Large Landscape Survey and Retrofit Program - The program offers free irrigation assessments to large landscaped CII sites in the Upper District s service area aimed at increasing large landscape irrigation efficiency at these sites. As part of the program, the Upper District offers some funding to pay for implementing the survey recommendations. During the fiscal year ended June 30, 2012, 36 surveys were conducted that involved recommendations for 245 acres of irrigated landscape. Education and Community Outreach Programs Watershed Restoration Program - This program is a cooperative partnership between the Upper District and the U.S. Forest Service that incorporates volunteers into efforts to protect and maintain the local watershed. The program seeks to improve areas negatively impacted by fire, heavy rains and flooding, plant disease, insects, non-native vegetation and heavy vi

13 recreational use. Since the program began in 1991, about 131,000 saplings and thousands of acres of chaparral have been planted. Over 20 tons of trash has also been removed. Water Efficient Landscape Classes - Throughout the year, a number of water efficient landscaping and gardening courses are offered, free of charge, to the public. Courses have been offered in both Spanish and English. As of June 30, 2012, over 1,000 people have participated in these classes since its inception in Residential Water Survey Training Workshops This is a two-day workshop covering the basics of conducting residential water surveys, geared toward staff and/or representatives of water purveyors and includes a hands-on indoor and outdoor survey conducted at a residential site. Solar Cup - A youth program hosted by MWD, Solar Cup provides high school teams an opportunity to build and prepare a solar powered boat. This three-day event is the culmination of several months of planning and building that provides students with a handson opportunity to work with alternative energy sources. The Upper District has sponsored 31 teams since the program began in Water Awareness Art Contest - Each year, the Upper District sponsors an annual art contest for students from schools within the Upper District boundaries. The art contest encourages youth to express the value of water through their artwork. Water Education Grant Program - This program offers funding of up to $1,000 for classroom or school projects, from K-12 th grade, that further a better understanding of water as a vital resource and the important role it plays in Southern California. The program began in 2004 and to date, 47 applicants have been awarded approximately $43,000 grant monies. Speakers Bureau Presentations - Upper District Board members and management make numerous presentations to City Councils, Chambers of Commerce and other community organizations. These presentations provide stakeholders with information about the history of the Upper District, local water issues and challenges, recycled water projects, water-related legislation and water conservation programs. Relevant Financial Policies Internal Control Structure Management is responsible for establishing and maintaining an internal control structure that ensures that assets are protected from loss, theft, or misuse. The internal control structure also ensures that adequate accounting data are compiled to allow for the preparation of financial statements in conformity with generally accepted accounting principles. The internal control structure is designed to provide reasonable assurance that these objectives are met. The concept of reasonable assurance recognizes that (a) the cost of a control should not exceed the benefits likely to be derived, and (b) the valuation of costs and benefits requires estimates and judgments by management. Investment Policy Annually, the Board of Directors adopts an investment policy consistent with the requirements of the California Government Code. In order of priority, three fundamental criteria are followed by Upper District in the investment program: vii

14 (a) (b) (c) Safety of Principal - Investments shall be undertaken in a manner that first seeks to ensure the preservation of principal in the portfolio. Each investment transaction shall be entered into after taking into consideration the quality of the issuer, the underlying security or collateral, and diversification of the portfolio. Liquidity - Investments shall be made so that the maturity date is compatible with cash flow needs and safety of principal. Return on Investment - Investments shall be undertaken to produce an acceptable rate of return after first considering safety of principal and liquidity and the prudent investor standard. Budget Process and Controls Upper District utilizes and adopts an annual budget as a management tool. As part of its budget process, the Upper District conducts budget workshops to encourage stakeholder participation and input prior to adoption of the final budget. Monthly financial statements showing budget-to-actual comparison and analysis are presented to the Board of Directors. Water Rates Pursuant to Water Code Section et seq., Upper District establishes water rates and charges through a resolution by the Board of Directors. Prior to adoption of the water rates and charges, workshops are held to solicit input from the Board, the groundwater producers as well as other stakeholders. Awards and Acknowledgements The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the Upper District for its comprehensive annual financial report (CAFR) for the fiscal year ended June 30, 2011, the first year that the Upper District has participated for this prestigious award. In order to be awarded a Certificate of Achievement, the Upper District had to publish an easily readable and efficiently organized CAFR that satisfied both generally accepted accounting principles and applicable program requirements. A Certificate of Achievement for Excellence in Financial Reporting is valid for a period of one year only. However, we believe that our current CAFR continues to meet the Certificate of Achievement for Excellence in Financial Reporting Program s requirements, and we are submitting it to the GFOA to determine its eligibility for another certificate. The preparation of this report was accomplished by the combined efforts of Upper District staff. We appreciate the dedicated efforts and professionalism that our staff members bring to the Upper District. We would also like to thank the members of the Board of Directors for their continued support in the planning and implementation of the Upper District s fiscal policies. Respectfully submitted, Shane Chapman General Manager Evelyn M. Rodriguez Chief Financial Officer viii

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16 Organizational Chart x

17 Financial Section

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19 Independent Auditors Report The Honorable Members of the Board We have audited the accompanying financial statements of the Upper San Gabriel Valley Municipal Water District (the Upper District) as of and for the years ended June 30, 2012 and 2011, which collectively comprise the Upper District's basic financial statements as listed in the table of contents. These basic financial statements are the responsibility of the Upper District's management. Our responsibility is to express an opinion on these basic financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America, the State Controller s Minimum Audit Requirements for California Special Districts, and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free 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 the significant estimates made by management, as well as evaluating the overall basic financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the basic financial statements referred to above present fairly, in all material respects, the financial position of the as of June 30, 2012 and 2011 and the respective changes in its net assets and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued a report dated February 22, 2013, on our consideration of the Upper District's internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit.

20 Accounting principles generally accepted in the United States of America require that the management s discussion and analysis on pages three through seven be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Our audits were conducted for the purpose of forming an opinion on the financial statements that collectively comprise the Upper District s financial statements as a whole. The Schedule of funding progress, the introductory and statistical sections are presented for purposes of additional analysis and are not a required part of the financial statements. The Schedule of funding progress information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements taken as a whole. 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 do not express an opinion or provide any assurance on them. Los Angeles, California February 22, 2013

21 Management s Discussion and Analysis June 30, 2012 and 2011 The following Management's Discussion and Analysis (MD&A) provides an overview of the financial performance and activities of the (Upper District) for the fiscal years ended June 30, 2012 and We encourage readers to consider the information presented here in conjunction with the transmittal letter in the Introductory Section and with the basic financial statements and related notes, which follow this section. Required Financial Statements The Upper District is a wholesale water utility enterprise and presents its financial statements using the economic resources measurement focus and the full accrual basis of accounting. As an enterprise fund, the Upper District's basic financial statements include the statements of net assets, statements of revenues, expenses and changes in net assets and statements of cash flows. The financial statements also include notes that explain some of the information in the financial statements and provide more detailed data. The statement of net assets presents information on all of the Upper District'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 a useful indicator of whether the financial position of the Upper District is improving or deteriorating. The statement of revenues, expenses and changes in net assets presents information showing how the Upper District's net assets changed during the most recent fiscal year. All changes in net assets are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses are recognized on the accrual basis. The statement of cash flows is related to the other financial statements by the way it links changes in assets and liabilities to the effect on cash and cash equivalents over the course of the fiscal year. The notes to the financial statements provide useful information regarding the Upper District's significant accounting policies, and they explain significant account balances and activities, certain material risks, obligations, commitments, contingencies and subsequent events, if any. Financial Highlights The statement of revenues, expenses and changes in net assets shows a decrease of $0.60 million in net assets for the fiscal year ended June 30, 2012 attributable to the following: Operating revenues decreased by 41%, or about $10.74 million, primarily due to lower sales of imported water for groundwater recharge. Negative impact of this decline in water sales was partially offset by a corresponding decrease in cost of water purchases from Metropolitan Water District of Southern California (MWD). Contributions received for capital construction projects, mostly federal and state grant funding, decreased by $1.92 million from last fiscal year s $3.57 million. Construction activities for the San Gabriel Valley Water Recycling Program Phase IIB City of Industry Recycled Water Project (City of Industry Project), partially funded by State Revolving Fund and American Recovery and Reinvestment Act monies, continued during fiscal year

22 Management s Discussion and Analysis June 30, 2012 and 2011 More information on the financial statement variances is covered in the next sections. Financial Analysis of the Upper District The statements of net assets and the statements of revenues, expenses and changes in net assets report provide an indication of Upper District s financial health. The following tables summarize the Upper District s financial condition and the changes in its net assets for the past three years. Statements of Net Assets Condensed Statements of Net Assets Change June / / Dollar Dollar Assets (in thousands) (in thousands) (in thousands) (in thousands) Percentage (in thousands) Percentage Current assets $ 18,555 $ 25,557 $ 25,345 $ (7,002) -27.4% $ % Capital assets, net 41,032 35,975 26,625 5, % 9, % Total assets 59,587 61,532 51,970 (1,945) -3.2% 9, % Liabilities Current liabilities 2,515 6,310 2,941 (3,795) -60.1% 3, % Noncurrent liabilities 4,274 1, , % 1,409 N/A Total liabilities 6,789 8,134 3,356 (1,345) -16.5% 4, % Net Assets Invested in capital assets 37,582 34,780 26,625 2, % 8, % Unrestricted 15,216 18,618 21,989 (3,402) -18.3% (3,371) -15.3% Total net assets $ 52,798 $ 53,398 $ 48,614 $ (600) -1.1% $ 4, % As shown above, Upper District's total assets exceeded liabilities by $52.80 million, $53.40 million and $48.61 million as of June 30, 2012, 2011 and 2010, respectively, or a decrease in net assets of $0.60 million between 2012 and 2011 and an increase in net assets of $4.78 million between 2011 and Assets As of June 30, 2012, Upper District s current assets decreased by $7 million from prior year mainly due to: lower water sales; construction activities for the City of Industry Project partially funded by Upper District reserve funds; higher program expenses related to conservation, water recycling and water quality and supply. For fiscal years ended June 30, 2012 and 2011, Upper District s capital assets increased by $5.06 and $9.35 million, respectively, from prior years as construction activities for the City of Industry Project continued. Liabilities As of June 30, 2012, Upper District s current liabilities decreased by $3.80 million from prior year primarily due to lower water purchases from MWD. On the other hand, the increase in current liabilities of about $3.37 million between 2011 and 2010 is attributable to a significantly higher amount due to MWD as of June 30, 2011 for imported water purchases which included more than 7,000 acre-feet (AF) of replenishment water not available in prior years. 4

23 Management s Discussion and Analysis June 30, 2012 and 2011 For the fiscal years ended June 30, 2012 and 2011, Upper District s noncurrent liabilities increased by $2.45 million and $1.41 million, respectively, from prior year mainly due to additional loan funds received from the State Water Resources Control Board. Net Assets A large portion of Upper District s net assets consists of investment in capital assets, net of accumulated depreciation and related outstanding debt used to acquire these assets. Capital assets are used by Upper District to provide services to its customers and are, therefore, not available for spending. Consequently, as Upper District continued to invest in its recycled water program to improve water supply reliability, unrestricted net assets decreased by $3.40 million between 2012 and 2011 and 3.37 million between 2011 and Statements of Revenues, Expenses and Changes in Net Assets The statements of revenues, expenses and changes in net assets provide information on the nature and sources of these changes. For the fiscal year ended June 30, 2012, Upper District s net assets decreased by $0.60 million. For the fiscal year ended June 30, 2011, Upper District s net assets increased by $4.78 million. Condensed Statements of Revenues, Expenses and Changes in Net Assets Change Years ended June / / Dollar Dollar (in thousands) (in thousands) (in thousands) (in thousands) Percentage (in thousands) Percentage Total operating revenues $ 15,316 $ 26,057 $ 14,487 $ (10,741) -41.2% $ 11, % Total operating expenses 19,233 28,670 20,228 (9,437) -32.9% 8, % Operating income (loss) (3,917) (2,613) (5,741) (1,304) 49.9% 3, % Non-operating revenues 1,672 3,831 4,035 (2,159) -56.4% (204) -5.1% Capital contributions 1,645 3,566 1,805 (1,921) -53.9% 1, % Increase (decrease) in net assets (600) 4, (5,384) % 4, % Beginning net assets 53,398 48,614 48,515 4, % % Ending net assets $ 52,798 $ 53,398 $ 48,614 $ (600) -1.1% $ 4, % Operating Revenues The temporary ability of Upper District s customers to lease groundwater from the cities of Alhambra, Monterey Park and Azusa rather than purchase replacement water available from the Metropolitan Water District and Upper District as per the Judgment and Watermaster s Rules and Regulations, resulted in significantly lower than anticipated sale of imported water for groundwater recharge during the fiscal year ended June 30, Consequently, water revenues fell by 43% or about $11.10 million compared to prior year. 5

24 Management s Discussion and Analysis June 30, 2012 and 2011 Operating revenues increased by about 80% or $11.57 million in This increase can be attributed primarily to the combined effect of the increase in imported water sales and increase in water rates during the year. For fiscal year ended June 30, 2011, Upper District sold 28,000 AF of full service untreated water, an increase of 12,000 AF from the prior fiscal year s 16,000 AF. The Upper District also sold 7,000 AF of replenishment water, not available in the prior year. During the year, Upper District s average water rates increased by 17%.. Nonoperating Revenues/Expenses and Capital Contributions Nonoperating revenues, consisting of standby charges, investment earnings and taxes, showed a slight decrease between fiscal years ended June 30, 2012 and 2011, and June 30, 2011 and 2010, as interest income continued to decline due to historically low market rates. Nonperating program expenses increased by about $2.13 million in During the fiscal year, Upper District started the development of a Water Use Efficiency Master Plan (WUE), an Integrated Resources Plan (IRP) and the Indirect Reuse Action Plan (IRAP). Upper District also disbursed $0.64 million in grant funds for Sunny Slope Water Company s Liquid Phase Granular Activated Carbon Treatment Project. Operating Expenses Upper District purchases imported water from MWD and sets its rates based on MWD s prevailing rates. For the year ended June 30, 2012, purchased water cost decreased by $10.39 million due to lower than anticipated sale of imported water for groundwater recharge. Upper District sold 16,000 AF more imported water in 2011 than This, along with increases in MWD s water rates in 2011 which ranged from 6% to 12% among different classes of water, resulted in a significant increase in purchased water cost and consequently, overall operating expenses. Upper District s average cost of purchased water from MWD increased by $91 per AF in Capital Asset Administration At June 30, 2012, 2011 and 2010, Upper District s investments in capital assets net of accumulated depreciation amounted to $41.03 million, $35.98 million and $26.62 million, respectively. The following is a summary of capital assets: Change June / / Dollar Dollar (in thousands) (in thousands) (in thousands) (in thousands) Percentage (in thousands) Percentage Land $ 81 $ 81 $ 81 $ - 0.0% $ - 0.0% Construction in progress 27,191 21,943 12,305 5, % 9, % Building and improvements % - 0.0% Intangible utility plant % - 0.0% Water recycling 15,203 15,203 15, % - 0.0% Source of supply % - 0.0% Office furniture and equipment % % 44,243 38,808 29,119 5, % 9, % Less accumulated depreciation (3,211) (2,833) (2,494) (378) 13.3% (339) 13.6% Net capital assets $ 41,032 $ 35,975 $ 26,625 $ 5, % $ 9, % 6

25 Management s Discussion and Analysis June 30, 2012 and 2011 A significant portion of the construction in progress as of June 30, 2012 and 2011 is attributable to construction activities related to Upper District s recycled water projects. For more information regarding the Upper District s capital assets, please refer to Note 3 of the notes to financial statements. Long-term Debt Construction activities for the City of Industry Project were partially funded by State Revolving Fund (SRF) loan from the State Water Resources Control Board (SWRCB) which, as of June 30, 2012 and 2011, amounted to $3,450,210 and $1,195,270, respectively. Detailed information on Upper District s long-term debt is presented under Note 5 in the Notes to Financial Statements. Water Rates and Other Charges On December 20, 2011, the Board of Directors approved an increase in imported water rates for the different classes of water, effective on January 1, Please refer to page 34 of the statistical section for Upper District s water rates for the last ten fiscal years. On June 5, 2012, the Board of Directors approved the adoption of a water standby or availability of service charge at rates equal to prior year s, $8.00 per acre of land or $8.00 for each parcel of land less than an acre within the Upper District s service area. This charge generates approximately $1.68 million in revenues. Conditions Affecting Current Financial Position The current practice of groundwater basin management is not well suited for the level of risk and uncertainty in the imported water system. The Basin operating safe yield needs to be set at a moderate and constant level to build and sustain storage in the Basin over the long-term. Such a practice will result in more consistent sales of imported water for groundwater recharge, stabilizing Upper District s financial condition and improving the ability to finance much needed investments in water supply reliability identified in the IRP. Requests for Information This financial report is designed to provide the Upper District's funding sources, customers, stakeholders and other interested parties with an overview of the Upper District's financial operations and overall financial condition. Should the reader have questions regarding the information included in this report or wish to request additional financial information, please contact the Upper District's Chief Financial Officer at 602 E. Huntington Drive, Suite B, Monrovia, California

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27 Basic Financial Statements

28 Statements of Net Assets June 30 ASSETS Current assets Cash and cash equivalents $ 16,591,883 $ 20,900,867 Receivables Water sales 833,957 4,020,913 Grants 901, ,840 Other 183, ,673 Prepaid items 43, ,020 Total current assets 18,554,776 25,557,313 Capital assets Land and construction-in-progress 27,272,108 22,023,991 Depreciable capital assets, net 13,760,116 13,951,237 Net capital assets 41,032,224 35,975,228 Total assets 59,587,000 61,532,541 LIABILITIES Current liabilities Accounts payable Metropolitan Water District 489,224 3,581,360 Other 1,692,227 2,590,662 Accrued liabilities 68, ,422 Unearned revenue 265,482 6,300 Total current liabilities 2,515,064 6,309,744 Noncurrent liabilities Due to State Water Resources Control Board 3,450,210 1,195,270 Other postemployment benefits 791, ,660 Compensated absences, net of current portion 32,625 28,474 Total noncurrent liabilities 4,274,000 1,824,404 Total liabilities 6,789,064 8,134,148 NET ASSETS Invested in capital assets, net of related debt 37,582,014 34,779,958 Unrestricted 15,215,922 18,618,435 Total net assets $ 52,797,936 $ 53,398,393 See notes to the financial statements. 8

29 Statements of Revenues, Expenses and Changes in Net Assets Years ended June Operating revenues Water revenue $ 14,714,480 $ 25,811,492 Water conservation 332, ,655 Other 268, ,077 Total operating revenues 15,315,651 26,057,224 Operating expenses Sources of supply 12,729,702 23,118,800 Water quality and supply program 1,619,326 1,361,589 Recycling costs 639, ,566 Conservation 1,781,566 1,273,762 Depreciation 377, ,288 General and administrative 2,085,287 2,029,381 Total operating expenses 19,232,529 28,670,386 Operating loss (3,916,878) (2,613,162) Nonoperating revenues (expenses) Standby charges 3,575,604 3,572,568 Nonoperating program expenses (2,306,154) (174,060) Investment earnings 65,196 98,795 Taxes 336, ,450 Net nonoperating revenues 1,671,438 3,830,753 (Loss) income before contributions (2,245,440) 1,217,591 Contributions for capital acquisition/construction 1,644,983 3,566,579 Change in net assets (600,457) 4,784,170 Net assets at beginning of year 53,398,393 48,614,223 Net assets at end of year $ 52,797,936 $ 53,398,393 See notes to the financial statements. 9

30 Statements of Cash Flows Years ended June Cash flows from operating activities Cash received from customers $ 18,205,749 $ 23,241,511 Cash payments to suppliers for goods and services (21,332,054) (24,012,101) Cash payments to employees for services (1,312,793) (837,898) Net cash used in operating activities (4,439,098) (1,608,488) Cash flows from noncapital financing activities Cash received for property taxes 336, ,450 Cash paid for nonoperating program expenses (2,306,154) (174,060) Cash received for standby charges 3,558,619 3,587,928 Cash provided by noncapital financing activities 1,589,257 3,747,318 Cash flows from capital and related financing activities Acquisition and construction of capital assets (5,434,408) (9,689,730) Capital contributions 3,899,923 4,761,849 Net cash used in capital and related financing activities (1,534,485) (4,927,881) Cash flows from investing activities Net employee (loans) repayments 1,093 3,679 Investment earnings 74, ,750 Net cash provided by investing activities 75, ,429 Change in cash and cash equivalents (4,308,984) (2,679,622) Cash and cash equivalents at beginning of year 20,900,867 23,580,489 Cash and cash equivalents at end of year $ 16,591,883 $ 20,900,867 See notes to the financial statements. 10

31 Statements of Cash Flows (continued) Years ended June Reconciliation of operating loss to net cash used in operating activities Operating loss $ (3,916,878) $ (2,613,162) Adjustments to reconcile operating loss to net cash used in operating activities: Depreciation expense 377, ,288 Changes in operating assets and liabilities: Accounts receivable 2,630,916 (2,815,713) Prepaid items 69,477 (101,653) Accounts payable and accrued expenses (3,859,206) 3,582,752 Unearned revenue 259,182 - Net adjustments (522,220) 1,004,674 Net cash used in operating activities $ (4,439,098) $ (1,608,488) See notes to the financial statements. 11

32 Notes to Financial Statements Years ended June 30, 2012 and 2011 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of the Entity (the Upper District), which comprises an area of approximately 144 square miles, was incorporated on January 7, 1960 under the provisions of the Municipal Water District Law of 1911, as amended, (now cited as The Municipal Water District Law of 1911, Division 20, California Water Code) as a result of a special election held on December 8, On March 12, 1963, the voters of the Upper District elected to join the Metropolitan Water District of Southern California and, on November 2, 1965, the citizens of West Covina voted to join the Upper District. Adjudication proceedings, which established the legal determination of water rights of individual pumpers in the area in relation to the safe yield of the total water basin, were completed on December 29, The decree established a Watermaster, the Main San Gabriel Basin Watermaster, who took over the function of levying and collecting the assessments that had previously been levied and collected by the through its reimbursement contract and replenishment funds. The Upper District s missions are: 1) to provide a reliable supply of high quality drinking water at the lowest possible cost; 2) to provide a drought-proof and economical supply of recycled water for industrial and irrigation uses; and, 3) to provide and complete projects that aggressively advance water use efficiency throughout the San Gabriel Valley. Basis of Accounting and Measurement Focus The Upper District is considered an enterprise fund for financial reporting purposes. The accompanying financial statements have been prepared using the economic measurement focus and the accrual basis of accounting. Under this basis of accounting and measurement focus, revenues are recognized when they are earned and expenses are recognized when they are incurred. The Upper District has elected not to apply the option allowed in Paragraph 7 of Government Accounting Standards Board (GASB) Statement No. 20, Accounting and Financial Reporting for Proprietary Activities, that is to apply all FASB Statements and Interpretations issued after November 30, 1989, except those that conflict with or contradict GASB pronouncements. The Upper District s financial statements are presented in accordance with the provisions of GASB Statement No. 34 Basic Financial Statements and Management s Discussion and Analysis for State and Local Governments. Statement No. 34 established standards for external financial reporting for all state and local governmental entities. It requires the classification of net assets into three components invested in capital assets, net of related debt; restricted; and unrestricted. These classifications are defined as follows: 12

33 Notes to Financial Statements Years ended June 30, 2012 and 2011 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Invested in capital assets, net of related debt This component of net assets consists of capital assets, including restricted capital assets, net of accumulated depreciation reduced by the outstanding balances of any bonds, mortgages, notes or other borrowings that are attributable to the acquisition, construction, or improvement of those assets. If there are significant unspent related debt proceeds at year-end, the portion of the debt attributable to the unspent proceeds are not included in the calculation of invested in capital assets, net of related debt. Rather, that portion of the debt is included in the same net assets component as the unspent proceeds. Restricted This component of net assets consists of constraints placed on net asset use through external constraints imposed by creditors (such as through debt covenants), grantors, contributors, or laws or regulations of other governments or constraints imposed by law through constitutional provisions or enabling legislation. Unrestricted This component of net assets consists of net assets that do not meet the definition of restricted or invested in capital assets, net of related debt. The Upper District distinguishes operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with an entity s ongoing operations. The Upper District defines operating revenues as those realized by the Upper District in exchange for providing its primary services for water sales and water programs including conservation and recycled water. Nonoperating revenues are those derived from the investment of cash reserves and from entities other than customers and other ancillary sources. 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 changes therein, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Risk Management The Upper District is a member of the Association of California Water Agencies Joint Powers Insurance Authority (Insurance Authority). The Insurance Authority is a riskpooling, self-insurance authority, created under the provisions of California Government Code Sections 6500 et. seq. The purpose of the Insurance Authority is to arrange and administer programs of insurance for the pooling of self-insured losses and to purchase excess insurance coverage. 13