East Orange County Water District

Transcription

1 Orange, California Annual Financial Report For the Years Ended June 30, 2016 and 2015

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3 Our Mission Statement To provide the most cost effective, reliable, and highest quality water services for the present as well as the future by operating in the most cost efficient manner possible, keeping the cost of water to our customers affordable and provide a safe working environment for our employees. Serve the community in an open manner and, at all times, communicate and deliberate in public meetings where open discussions are promoted. Board of Directors as of June 30, 2016 Elected / Current Name Title Appointed Term Douglass S. Davert President Elected 12/12-12/16 Richard B. Bell Vice President Elected 12/14-12/18 John Dulebohn Director Elected 12/14-12/18 Seymour Everett III Director Elected 12/14-12/18 John L. Sears Director Appointed 1/16-12/16 Lisa Ohlund, General Manager East Orange County Water District 185 North McPherson Road Orange, California (714) lohlund@eocwd.com

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5 Annual Financial Report For the Years Ended June 30, 2016 and 2015 Table of Contents Table of Contents... i INTRODUCTORY SECTION (Unaudited): Letter of Transmittal FINANCIAL SECTION Independent Auditors' Report on the Financial Statements... 9 Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards Management s Discussion and Analysis Required Supplementary Information (Unaudited) Basic Financial Statements: Balance Sheets Statements of Revenues, Expenses, and Change in Net Position Statements of Cash Flows Notes to the Basic Financial Statements Required Supplementary Information (Unaudited): Schedule of the District's Proportionate Share of the Plan's Net Pension Liability Schedule of the District's Contributions to the Pension Plan Supplementary Information: Combining Schedules of Balance Sheets Combining Schedules of Revenues, Expenses, and Change in Net Position Page i

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7 INTRODUCTORY SECTION

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9 December 31, 2016 Board of Directors East Orange County Water District Orange, California DIRECTORS Richard B. Bell Douglass Davert John Dulebohn Seymour B. Everett III William Vanderwerff Lisa Ohlund General Manager 185 N McPherson Road Orange, CA Phone: (714) Fax: (714) It is our pleasure to submit the Annual Financial Report for the East Orange County Water District (District) for the fiscal year ended June 30, District staff and our consultants, following guidelines set forth by the Governmental Accounting Standards Board, prepared this financial report. The District is ultimately responsible for both the accuracy of the data and the completeness and the fairness of presentation, including all disclosures in this financial report. We believe that the data presented is accurate in all material respects. This report is designed in a manner that we believe is necessary in order to enhance your understanding of the District s financial position and activities. This report is organized into two sections: (1) Introductory and (2) Financial. The Introductory section provides general information about the District s organization and activities, and provides information useful in assessing the District s financial condition. The Financial section includes the Independent Auditors Report, Management s Discussion and Analysis of the District s basic financial statements, and the District s audited basic financial statements with accompanying notes. Generally Accepted Accounting Principles (GAAP) requires that management provide a narrative introduction, overview, and analysis to accompany the financial statements in the form of a Management s Discussion and Analysis (MD&A) section. This letter of transmittal is designed to complement the MD&A and should be read in conjunction with it. The District s MD&A can be found immediately following the Independent Auditors Report. District Background The East Orange County Water District was formed in December of 1961 and is operating under County Water District Law, which is contained in Division 12 of the California Water Code, Sections The District is an independent special district governed by its Board of Directors; the Board is elected by the voters within the District s service area. Initially the District was formed to provide an agency which would furnish imported (wholesale) water to the area within its boundaries. In July of 1985, the District assumed the retail water operations of the County of Orange s Water District No. 8; it was renamed the Retail Zone to distinguish it from the District s historic Wholesale Zone and to establish separate internal accounting systems for it. In the Wholesale Zone, the District delivers water to five sub-agencies within its boundaries consisting of the City of Tustin, Golden State Water Company, City of City of Orange, Irvine Ranch Water District and East Orange County Water District s own Retail Zone; these agencies then serve the imported water to an estimated population of 100,000. The supplemental water supplied by the District from the Allen McCulloch Pipeline and the East Orange County Feeder No.2 supplements the sub-agencies local groundwater supplies as groundwater is inadequate to supply 100% of the water needs within the District s service area. In the Retail Zone (generally the Vista Panorama/Panorama View unincorporated area of East Orange), the District delivers local groundwater and imported Wholesale Zone water directly to the Retail Zone s 1,210 customers representing a population of approximately 3,500.

10 Board of Directors December 31, 2016 Page 2 The District encompasses an area of approximately 10,000 acres and is a member of the Municipal Water District of Orange County (MWDOC), which is a member of the Metropolitan Water District of Southern California (MET) and therefore is entitled to receive Colorado River and Northern California imported water through the distribution facilities of the MET system. Industry Outlook California s water supply continues to pose many new and complex challenges for water suppliers in the state, particularly for water delivered through Northern California s Delta. In 2016, California experienced the fifth year of drought, and not only was Southern California s allocation from the State Water Project initially limited to 15% of a full allocation, on February 3, 2016, Governor Brown reauthorized the State Water Resources Control Board s (Water Board s) mandatory restrictions on residential water use for all urban water use. The Water Board s mandatory restrictions required that the District reduce its Retail Zone residential water use by 36% over the corresponding 2013 residential water use. The District successfully met its 36% reduction for the required nine-month period from June 2015 through February Under the reauthorization, and in recognition of improved statewide water supply, the District s mandatory requirement was reduced to 28%. A significant bright spot in the past five years, and particularly in 2016, was the performance of MET s Colorado River Aqueduct (CRA). For two years, the CRA provided in excess of 95% of the imported water that MET supplied its member agencies. This almost 90-year old system functioned flawlessly and highlighted the reliability provided to the Southland by MET and the redundant sources of supply they provide. Looking forward however, the CRA and MET s Colorado River water supplies are, as would be expected, very low. The extended demand for this single supply source, combined with a decade of drought on the Colorado River, may affect the CRA s reliability in the near future. This fact was part of the contributory information used by the EOCWD Board as they considered our near- and long-term reliability in view of new Water Board requirements. On May 18, 2016, the Water Board adopted a statewide water conservation approach that replaced the percentage reduction-based standard with a localized stress test approach that mandated that urban water agencies ensure that they have at least a three-year supply of water under drought conditions. After an extensive examination of both imported and local groundwater supplied, the District certified to the State that it has the required three-year supply, however, due to a structural water deficit in the state, the Board of Directors approved a mandatory 15% reduction requirement for our retail customers. The District has consistently been an active participant in working with its customers to achieve efficient water use. Through coordination and planning with other local and regional water suppliers, as well as the Board s and staff s participation in local and statewide associations, the District continues to engage in developing long-term solutions to the various underlying water supply challenges. The Water Board continues to examine regulatory measures that may require the District to take further actions to sustain, on a permanent basis, retail water use reductions at levels of 25-30% below 2013 water use levels. The District has also identified the cost of water as a continuing challenge. Both our regional water supplier, MWDOC/MET and our local groundwater management agency, Orange County Water District (OCWD), are experiencing significant cost pressures due to water scarcity, as well as due to lack of water sales during the drought. We expect that these pressures will result in a continuing trend of significant cost increases for water, and in MET s case, significant increases in their fixed rate charges also. Internal Control Structure District management is responsible for the establishment and maintenance of the internal control structure that ensures that the assets of the District 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 District s internal control

11 Board of Directors December 31, 2016 Page 3 structure is designed to provide reasonable assurance that these objectives are met. The concept of reasonable assurance recognizes that (1) the cost of a control should not exceed the benefits likely to be derived, and (2) the valuation of costs and benefits requires estimates and judgments by management. The General Manager, in concert with the District Treasurer and Accountant, annually reviews the internal controls for accuracy, adequacy and effectiveness. Budgetary Control The District s Board of Directors annually adopts a balanced operating and capital budget prior to each new fiscal year. The budget authorizes and provides the basis for reporting and control of financial operations foundation for this commitment is based in the District s 2015 Wholesale Zone and Retail Zone Master Plan Updates and the June 2016 Financial Plan. As part of the Master Plan Updates, a condition assessment of the District s facilities was conducted and a 25-year Capital Improvement Program ( ) was developed. The 25-year CIP provides prioritization of capital project for both zones and was incorporated into the update of the District s Financial Plan. The District s Financial Plan was updated in recognition of reduced revenues caused by drought-reduced water sales. As a result of the findings of the Financial Plan, the District embarked upon a Proposition 218 water rate study as well as an analysis of Wholesale Zone and Retail Zone Connection Charges as well as the adequacy of the Wholesale Zone fees. These studies resulted in the development of a 5-Year rate user fee rate increase for the Retail Zone as well as increases to the Connection Fee Charges and Wholesale Zone Readiness-to-Serve Charge and Capital Facilities Fee. The Financial Plan also includes the examination of reserve funds in accordance with the District s reserve practices. Reserve funds are set to ensure the continued orderly operation of the District s water systems, the providing of services to residents at established levels, and the continued stability of the District s rate structure. The purpose and structure of these funds are further discussed in the Management s Discussion and Analysis. Water Rates and District Revenues The District s policy objective is that all revenues from user charges generated from District customers must support all District operations including capital project funding. Water rates and fees are user charges imposed on customers for services and are the primary component of the District s revenue. Water rates and fees are composed of a commodity (usage) charge, and a fixed meter and a standby service fee. The following charts reflect the District s operating revenue mix for the year ending June 30, 2016, and resulted in revenues exceeding expenses by $865,177. This excess of revenue was primarily due to three factors: 1) reimbursement of over $300,000 of sewer acquisition costs to the Wholesale Zone, 2) capital fee revenue of over $200,000 for the Wholesale Zone and, 3) capital fee revenue of over $300,000 for the Retail Zone.

12 Board of Directors December 31, 2016 Page 4 Investment Policy The Board of Directors annually reviews and adopts an investment policy that conforms to California State law, District ordinance and resolutions, prudent money management, and the prudent person standards. The objectives of the Investment Policy are safety, liquidity, and yield. District funds are normally invested in the State Treasurer s Local Agency Investment Fund (LAIF), certificates-of-deposit, Government Agency Obligations or other specifically authorized investments. For FY 2014/15, the District s investments were held at LAIF and in certificates-of-deposit. Audit and Financial Reporting State law requires that the District to obtain an annual audit of its financial statements by an independent certified public accountant to provide reasonable assurance about whether the financial statements present fairly the financial position of the District. An accountancy firm, The Pun Group, has conducted this audit of the District s financial statements. Their unmodified Independent Auditor s Report appears in the Financial Section. This audited Financial Report has been prepared by the District, working with our independent auditors, the Pun Group, in conformance with the principles and standards for financial reporting set forth by the Governmental Accounting Standards Board (GASB). This year, adjustments were made to the financial statements to incorporate the District s net pension liability as of measurement date of June 30, 2015, as required by GASB 68 and 71. GASB Statement No. 68 and 71 Implementation The Governmental Accounting Standards Board (GASB) is an independent, nonprofit, non-governmental regulatory body charged with setting accounting and financial reporting standards for state and local governments. Beginning with Fiscal Year , GASB Statements No. 68 and 71 require agencies to report their net pension liability in accrual-based financial statements. This is distinctly different than in that this obligation was relayed to the District in an annual report provided by CalPERS the State agency that provides our pension program, but it was not placed in our financial documents. Please note that these standards only impact the accounting and financial reporting of pension obligations for governmental employers; pension contribution rates and funding requirements are not impacted by GASB No. 68 or 71. The District s employees are covered by two CalPERS pension plans. For employees hired prior to January 1, 2013, the District annually pays % of salaries towards the PERS Classic Plan s (2%@60) costs, and the employees pay the 3% remaining cost [Note: as of July 1, 2016 the employees pay 4% of their salary]. For employees hired after January 1, 2013 (and that were never a member of PERS), the District pays 6.5% of salaries and the employee pays 6.5% of their salaries toward this pension plan s (2%@62) annual costs. In total, the GASB No. 68 and 71 requirements show a net pension liability of $341,116. Additionally, CalPERS is estimating that there is another $142,141 (difference between the deferred outflows of resources $42,743 and deferred inflows of resources $184,124) in unearned credits related to the net pension liability. The total of these two amounts totals $483,257 and reduces the District s net position (reserves) by this amount. Our unrestricted net position (reserves) are sufficient to absorb this $483,257 liability, thus our pension liability is full funded. If desired, the Board could set up a dedicated pension reserve fund or could pay these funds directly to CalPERS, however, we are not legally bound to pay off this balance, nor is it material to our financial position. It should be noted that this amount is a reduction from last year s liability of $518,455.

13 Board of Directors December 31, 2016 Page 5 Notes 4 and 5 of the Audit Report addresses the GASB No. 68 and 71 requirements in substantially greater detail. Water Conservation Programs For many years, the District has been implementing conservation management practices within district operations and distributing information to and encouraging conservation from its customers. In 2016, the District continued an intensive DroughtReach program to advise customers about the mandatory water reductions. In addition to providing extensive printed materials, the hallmark of DroughtReach is personalized outreach. Staff focused on providing personalized customer outreach, assisting them with irrigation timer settings, recommendations on landscaping choices, leak detection inspections, and providing instructions on how to read their water meter and track their water use. Additionally, staff focused attention on the following conservation programs through its affiliation with the Municipal Water District of Orange County: Transparency o o o o Residential/Commercial Reimbursement for Turf Replacement Residential Appliance Rebate Program Residential Drought-tolerant Landscape Classes Residential/Commercial Reimbursement Program for Smart Watering Timers The District maintains a web site ( that includes easy access to important district information, including current and historical audited financial statements, current and historical operating and capital improvement budgets, board agendas and minutes, water rate setting studies, water conservation assistance, water quality information and employee and board member compensation. The web site is updated regularly to ensure timely information is available. Other References More information is contained in Management s Discussion and Analysis and the Notes to the Basic Financial Statements found in the Financial Section of the report. Respectfully submitted, Lisa Ohlund General Manager

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15 FINANCIAL SECTION 7

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17 To the Board of Directors of the East Orange County Water District Orange, California Report on the Financial Statements INDEPENDENT AUDITORS REPORT We have audited the accompanying basic financial statements of the East Orange County Water District (District), which comprise of the balance sheet as of June 30, 2016 and 2015, and the related statements of revenues, expenses and change in net position, cash flows for the years then ended, and the related notes to the financial statements, which collectively comprise the District s basic financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the District, as of June 30, 2016 and 2015, and the respective changes in financial position and cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. 200 East Sandpointe Avenue, Suite 600, Santa Ana, California Tel: Toll Free: Fax:

18 To the Board of Directors of the East Orange County Water District Orange, California Page 2 Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the Management s Discussion and Analysis on pages 15 through 21 and Schedule of the District's Proportionate Share of the Plan's Net Pension Liability and Schedule of the District's Contributions to the Pension Plan, on pages 55 and 56 respectfully, be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by Government Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the District s basic financial statements. The introductory section, Combining Schedule of Net Position and Combining Schedule of Revenues, Expenses, and Change in Net Position are presented for purposes of additional analysis and are not a required part of the basic financial statements. The Combining Schedules of Balance Sheets and Combining Schedules of Revenues, Expenses, and Change in Net Position are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the combining and individual fund financial statements are fairly stated, in all material respects, in relation to the basic financial statements as a whole. The introductory section has not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we do not express an opinion or provide any assurance on it. 10

19 To the Board of Directors of the East Orange County Water District Orange, California Page 3 Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated December 31, 2016, on our consideration of the District s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the District s internal control over financial reporting and compliance. Santa Ana, California December 31,

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21 REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS To the Board of Directors of the East Orange County Water District Orange, California Independent Auditors Report We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the balance sheets as of June 30, 2016 and 2015, and the related statements of revenues, expenses and changes in net position, cash flows for the years then ended, and the related notes to the financial statements, which collectively comprises the District s basic financial statements, and have issued our report thereon dated December 31, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered District s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of District s internal control. Accordingly, we do not express an opinion on the effectiveness of District s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or, significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. Compliance and Other Matters As part of obtaining reasonable assurance about whether the District s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. 200 East Sandpointe Avenue, Suite 600, Santa Ana, California Tel: Toll Free: Fax:

22 To the Board of Directors of the East Orange County Water District Orange, California Page 2 Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Santa Ana, California December 31,

23 Management s Discussion and Analysis (Unaudited) For the Years Ended June 30, 2016 and 2015 The following Management s Discussion and Analysis (MD&A) of activities and financial performance of the East Orange County Water District (District) provides an introduction to the financial statements of the District for the year ended June 30, 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. Financial Highlights In 2016, the District s net position increased by 4.64%, or $865,177 to $19,506,309. In 2015, the District s net position increased by 2.89%, or $538,663 to $18,641,132. In 2016, the District s operating revenues decreased 23.0%, or $1,537,312 to $5,140,142, from the prior year, due primarily to a decrease in wholesale water sales. In 2015, the District s operating revenues decreased 21.7%, or $1,852,852 to $6,677,454, from the prior year, due primarily to a decrease in wholesale water sales. In 2016, the District s operating expenses decreased by 26.1%, or $1,802,489 to $5,096,863, from the prior year, due primarily to a decrease in wholesale water purchases. In 2015, the District s operating expenses decreased by 18.4%, or $1,556,242 to $6,899,352, from the prior year, due primarily to a decrease in wholesale water purchases. Implementation of new pension standards increased liability of $399,219 for the year ended June 30, Overview of the Financial Statements This discussion and analysis is intended to serve as an introduction to the District s financial statements. The financial statements are comprised of two components: 1) financial statements and, 2) notes to financial statements. This report also contains other supplementary information in addition to the financial statements themselves. The financial statements are designed to provide readers with a broad overview of the District s finances, in a manner similar to a private-sector business. The balance sheet presents information on all of the District s assets, deferred outflow of resources, liabilities, and deferred inflow of resources with the difference between the four reported as net position. Over time, increases or decreases in net position may serve as a useful indicator of whether the financial position of the District is improving or deteriorating. The statement of revenues, expenses and changes in net position presents information showing how net position changed during the most recent fiscal year. All changes in net position 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 reported in this statement for some items that will only result in cash flows in future fiscal periods (e.g., earned but unused vacation leave). The statement of cash flows presents information showing the sources and uses of cash related to operating activities, noncapital financing activities, capital and related financing activities and investing activities. In addition, the statement provides information about significant non-cash investing, capital and financing activities. 15

24 Management s Discussion and Analysis (Unaudited) (Continued) For the Years Ended June 30, 2016 and 2015 Notes to the Basic Financial Statements The notes provide additional information that is essential to a full understanding of the data provided in the basic financial statements. The notes to the basic financial statements can be found on pages 29 through 51. Financial Analysis of the District One of the most important questions asked about the District s finances is, Is the District better off or worse off as a result of this year s activities? The Balance Sheet and the Statement of Revenues, Expenses, and Changes in Net Position report information about the District in a way that helps answer this question. These statements include all assets and liabilities using the accrual basis of accounting, which is similar to the accounting used by most private sector companies. All of the current year s revenues and expenses are taken into account regardless of when the cash is received or paid. These two statements report the District s net position and changes in them. One can think of the District s net position the difference between assets and liabilities as a way to measure the District s financial health, or financial position. Over time, increases or decreases in the District s net position are one indicator of whether its financial health is improving or deteriorating. However, one will need to consider other non-financial factors such as changes in economic conditions, population growth, natural disasters, zoning and new or changed government legislation, such as changes in Federal and State water quality standards. Condensed Balance Sheets June 30, 2016 June 30, 2015 Change June 30, 2014 Change Assets: Current assets $ 10,435,608 $ 10,090,457 $ 345,151 $ 9,991,076 $ 99,381 Capital assets, net 10,469,620 10,267, ,373 10,347,952 (80,705) Total assets 20,905,228 20,357, ,524 20,339,028 18,676 Deferred outflows of resources 42,743 33,913 8,830-33,913 Total assets and deferred outflows of resources $ 20,947,971 $ 20,391,617 $ 556,354 $ 20,339,028 $ 52,589 Liabilities: Current liabilities $ 916,422 $ 1,195,916 $ (279,494) $ 1,718,104 $ (522,188) Noncurrent liabilities 341, ,219 (58,103) - 399,219 Total liabilities 1,257,538 1,595,135 (337,597) 1,718,104 (122,969) Deferred inflows of resources 184, ,350 28, ,350 Net position: Net investment in capital assets 10,469,620 10,267, ,373 10,347,952 (80,705) Unrestricted 9,036,689 8,373, ,804 8,272, ,913 Total net position 19,506,309 18,641, ,177 18,620,924 20,208 Total liabilities, deferred inflows and net position $ 20,947,971 $ 20,391,617 $ 556,354 $ 20,339,028 $ 52,589 As noted earlier, net position may serve over time as a useful indicator of a government s financial position. In the case of the District, assets and deferred outflows of resources of the District exceeded liabilities and deferred inflows of resources by $19,506,309 and $18,641,132, as of June 30, 2016 and 2015, respectively. As of July 1, 2014, the District s beginning net position has been restated to $18,102,469 as fully disclosed in Note 4. 16

25 Management s Discussion and Analysis (Unaudited) (Continued) For the Years Ended June 30, 2016 and 2015 By far the largest portion of the District s net position (54% at June 30, 2016 and 55% at June 30, 2015) reflects its investment in capital assets (net of accumulated depreciation) less any related debt used to acquire those assets that is still outstanding. The District uses these capital assets to provide services to customers within the District s service area; consequently, these assets are not available for future spending. At the end of fiscal year 2016 and 2015, the District shows a positive balance in its unrestricted net position of $9,036,689 and $8,373,885, respectively, that may be utilized in future years. The Board of Directors has taken action to reserve aspects of the unrestricted net position for specified purposes such as asset replacement, rate stabilization, growth accommodation and emergency reserves. The District has committed to the following internal funds and objectives: 1. Operating Fund Funds are maintained to capture all operating and maintenance revenues and expenditures separately for the Wholesale and Retail Zone operations. Excess revenues over expenditures are routinely transferred to the Replacement and Capital Improvements funds. 2. Replacement and Capital Improvement Funds Separate replacement and capital improvement funds are maintained for the Wholesale District and Retail Zone. 3. Emergency Reserve Fund This fund is earmarked by the Board of Directors for unforeseen Wholesale District emergencies or contingency expenditures. Condensed Statements of Revenues, Expenses, and Changes in Net Position June 30, 2016 June 30, 2015 Change June 30, 2014 Change Revenues: Operating revenues $ 5,140,142 $ 6,677,454 $ (1,537,312) $ 8,530,306 $ (1,852,852) Non-operating revenues 1,338,064 1,258,023 80,041 1,167,277 90,746 Total revenues 6,478,206 7,935,477 (1,457,271) 9,697,583 (1,762,106) Expenses: Operating expenses 5,096,863 6,899,352 (1,802,489) 8,455,894 (1,556,542) Depreciation 516, ,462 18, ,978 (21,516) Total expenses 5,613,029 7,396,814 (1,783,785) 8,974,872 (1,578,058) Change in net position 865, , , ,711 (184,048) Net position: Beginning of year 18,641,132 18,620,924 20,208 17,898, ,711 Prior period adjustments - (518,455) 518,455 - (518,455) End of year $ 19,506,309 $ 18,641,132 $ 865,177 $ 18,620,924 $ 20,208 The Statement of Revenues, Expenses, and Changes in Net Position show how the District s net position changes during the fiscal year. In the case of the District, net position increased by $865,177 and $538,663 as of June 30, 2016 and 2015, respectively. 17

26 Management s Discussion and Analysis (Unaudited) (Continued) For the Years Ended June 30, 2016 and 2015 Revenues Operating revenues: June 30, 2016 June 30, 2015 Change June 30, 2014 Change Water sales: Wholesale $ 2,382,793 $ 4,208,276 $ (1,825,483) $ 6,029,784 $ (1,821,508) Retail 978,948 1,253,430 (274,482) 1,106, ,443 Meter and standby service charges 560, ,224 29, ,646 1,578 Capacity and connection fees 863, , , ,927 (166,108) Other connection fees 21,449 17,213 4,236 17, Other service charges 332,915 28, ,423 41,871 (13,379) Total operating revenues 5,140,142 6,677,454 (1,537,312) 8,530,306 (1,852,852) Non-operating revenues: Property taxes 1,160,319 1,085,641 74,678 1,028,676 56,965 Rental income cellular antennas 99, ,679 (33,929) 100,066 33,613 Investment earnings 49,234 34,551 14,683 31,243 3,308 Change in fair-value 20,865 (1,487) 22,352 10,924 (12,411) Other, net 7,896 5,639 2,257 (3,632) 9,271 Total non-operating revenues 1,338,064 1,258,023 80,041 1,167,277 90,746 Total revenue $ 6,478,206 $ 7,935,477 $ (1,457,271) $ 9,697,583 $ (1,762,106) Fiscal Year 2016 Operating Revenues (Chart 1) 2016 District Operating Revenues Wholesale Retail Meter & Standby Connection Other Total Operating Revenues decreased in total due to a decrease in Wholesale customers purchasing less water due to conservation which was partially offset by an increase in Other Service Charges due to costs for Sewer. Total Non-operating Revenues increased slightly from the prior year due to an increase in secured and redevelopment agency taxes received. 18

27 Management s Discussion and Analysis (Unaudited) (Continued) For the Years Ended June 30, 2016 and 2015 Fiscal Year 2015 Operating Revenues (Chart 2) 2015 District Operating Revenues Wholesale Retail Meter & Standby Connection Other Total Operating Revenues decreased in total due to a decrease in Wholesale and Retail customers purchasing less water due to conservation. Total Non-operating Revenues increased slightly from the prior year due to an increase in secured and agency taxes and rental income received. Expenses Operating expenses: June 30, 2016 June 30, 2015 Change June 30, 2014 Change Source of supply $ 3,353,855 $ 5,205,082 $ (1,851,227) $ 6,968,465 $ (1,763,383) Pipeline capacity lease - 53,000 (53,000) 15,000 38,000 Pumping 77, ,169 (42,944) 89,119 31,050 Treatment, transmission and distribution 909, ,250 (12,127) 801, ,807 General and administrative 756, , , ,867 17,984 Total operating expenses 5,096,863 6,899,352 (1,802,489) 8,455,894 (1,556,542) Depreciation 516, ,462 18, ,978 (21,516) Total expenses $ 5,613,029 $ 7,396,814 $ (1,783,785) $ 8,974,872 $ (1,578,058) 19

28 Management s Discussion and Analysis (Unaudited) (Continued) For the Years Ended June 30, 2016 and 2015 Fiscal Year 2016 Operating Expenses 2016 District Operating Expenses Source of Supply Capacity Lease Pumping T&D G&A Total Operating Expenses decreased in 2016 due to a decrease in source of supply costs which was due to a less water sold to wholesale customers. This decrease was partially offset by General and Administrative costs increasing in 2016 due to the acquisition of sewers. Fiscal Year 2015 Operating Expenses 2015 District Operating Expenses Source of Supply Capacity Lease Pumping T&D G&A Total Operating Expenses decreased in 2015 due to a decrease in source of supply costs which was due to a less water sold to wholesale and retail customers. 20

29 Management s Discussion and Analysis (Unaudited) (Continued) For the Years Ended June 30, 2016 and 2015 Capital Asset Administration Capital assets as of June 30 th are as follows: Description June 30, 2016 June 30, 2015 June 30, 2014 Non-depreciable assets $ 906,413 $ 543,998 $ 315,120 Depreciable assets 21,550,916 21,253,523 21,080,800 Accumulated depreciation (11,987,709) (11,530,274) (11,047,968) Total capital assets, net $ 10,469,620 $ 10,267,247 $ 10,347,952 Fiscal Year 2016 Capital Asset Additions Non-depreciable assets increased in 2016 due to work on the better and replacement plan for the wholesale and retail zones. Depreciable assets increased primarily due to the capitalization of a drainage ditch at the Peters Canyon Reservoir. The capital asset activities of the District are summarized above and in Note 3 to the basic financial statements. Economic and Other Factors Effecting Next Year s Operations and Budget Sewer Transfer The Orange County Sanitation District (OCSD) has owned and operated a handful of community sewer systems in north and central Orange County since inheriting them from the County of Orange in In 2006, OCSD adopted a Strategic Plan that included divesting itself of local system ownership so it can focus exclusively on its core mission of providing effective wastewater collection, treatment, and recycling at the regional level. In 2013, OCSD proposed a transfer of ownership and operation of the local sewer system (Sewer Area 7) to the District. On May 11, 2016, after an extensive review and approval process, the Orange County Local Agency Formation Commission approved the transfer of sewers to the District effective August 1, The sewer system was transferred to the District as Improvement District 1 (ID1). It is comprised of 175 miles of primarily vitrified clay pipe sewers and approximately 3,700 manholes, both of which were largely installed in the 1960s. Annual sewer system revenues of approximately $2.9 million per year are collected via the County tax rolls; annual system expenses are estimated at $800,000 the balance will be used to further build ID1 s reserve funds which currently total approximately $35 million. The District will be conducting both a Master Plan study and a financial plan and rate study over the next year to assess the condition and financial viability of ID1 and ensure that it is maintained in excellent condition and is sustainably financed. Contacting the District s Financial Management Team This financial report is designed to provide the District s funding sources, customers, stakeholders and other interested parties with an overview of the District s financial operations and financial condition. Should the reader have questions regarding the information included in this report or wish to request additional financial information, please contact the District s General Manager, Lisa Ohlund, at (714)

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31 BASIC FINANCIAL STATEMENTS 23

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33 Balance Sheet June 30, 2016 and 2015 ASSETS Current assets: Cash and cash equivalents (Note 2) $ 8,911,836 $ 8,916,352 Accrued interest receivable 8,826 4,570 Accounts receivable water sales and services: Wholesale 1,096, ,204 Retail 270, ,497 Property taxes receivable 8,736 10,176 Prepaid items 56,571 53,098 Water-in-storage inventory 36,644 40,764 Materials and supplies inventory 46,683 35,796 Total current assets 10,435,608 10,090,457 Noncurrent assets: Capital assets, net (Note 3) 10,469,620 10,267,247 Total noncurrent assets 10,469,620 10,267,247 Total assets 20,905,228 20,357,704 DEFERRED OUTFLOWS OF RESOURCES Pension contributions made after measurement date (Note 4) 40,547 33,913 Differences between expected and actual experience (Note 4) 2,196 - Total deferred outflows of resources 42,743 33,913 Total assets and deferred outflows of resources $ 20,947,971 $ 20,391,617 LIABILITIES Current liabilities: Accounts payable and accrued expenses $ 689,155 $ 1,025,685 Accrued salaries and compensated absences 109,867 72,335 Deposits and unearned revenue 117,400 97,896 Total current liabilities 916,422 1,195,916 Noncurrent liabilities: Net pension liability (Note 4) 341, ,219 Total noncurrent liabilities 341, ,219 Total liabilities 1,257,538 1,595,135 DEFERRED INFLOWS OF RESOURCES Differences between projected and actual earnings on pension plan investments (Note 4) 10, ,156 Differences between actual and proportionate share of employer contributions (Note 4) 39,639 19,005 Adjustment due to differences in proportions (Note 4) 113,287 2,189 Changes in assumptions (Note 4) 20,779 - Total deferred inflows of resources 184, ,350 NET POSITION Net investment in capital assets 10,469,620 10,267,247 Unrestricted 9,036,689 8,373,885 Total net position 19,506,309 18,641,132 Total liabilities, deferred inflows of resources and net position $ 20,947,971 $ 20,391,617 See accompanying Notes to the Basic Financial Statements. 25

34 Statement of Revenues, Expenses, and Changes in Net Position For the Years Ending June 30, 2016 and Operating revenues: Water sales: Wholesale $ 2,382,793 $ 4,208,276 Retail 978,948 1,253,430 Meter and standby service charges 560, ,224 Capacity and connection fees 863, ,819 Other connection fees 21,449 17,213 Other service charges 332,915 28,492 Total operating revenues 5,140,142 6,677,454 Operating expenses: Source of supply 3,353,855 5,205,082 Pipeline capacity lease - 53,000 Pumping 77, ,169 Treatment, transmission and distribution 909, ,250 General and administrative 756, ,851 Total operating expenses 5,096,863 6,899,352 Operating income(loss) before depreciation 43,279 (221,898) Depreciation expense (516,166) (497,462) Operating (loss) (472,887) (719,360) Non-operating revenues(expenses): Property taxes 1,160,319 1,085,641 Rental income cellular antennas 99, ,679 Investment earnings 49,234 34,551 Change in fair-value of cash and investments 20,865 (1,487) Other, net 7,896 5,639 Total non-operating revenues, net 1,338,064 1,258,023 Change in net position 865, ,663 Net position: Beginning of year 18,641,132 18,620,924 Prior period adjustments (Note 5) - (518,455) End of year $ 19,506,309 $ 18,641,132 See accompanying Notes to the Basic Financial Statements. 26

35 Statement of Cash Flows For the Years Ending June 30, 2016 and Cash flows from operating activities: Cash receipts from customers for water sales and services $ 4,830,931 $ 7,481,646 Cash paid to employees for salaries and wages (468,114) (499,612) Cash paid to vendors and suppliers for materials and services (4,976,146) (6,852,647) Net cash provided by (used in) operating activities (613,329) 129,387 Cash flows from non-capital financing activities: Proceeds from property taxes 1,161,759 1,086,729 Proceeds from rental income cellular antennas 99, ,679 Net cash provided by non-capital financing activities 1,261,509 1,220,408 Cash flows from capital and related financing activities: Acquisition and construction of capital assets (718,539) (416,757) Net cash (used in) capital and related financing activities (718,539) (416,757) Cash flows from investing activities: Proceeds from interest and investment earnings 65,843 31,685 Net cash provided by investing activities 65,843 31,685 Net increase (decrease) in cash and cash equivalents (4,516) 964,723 Cash and cash equivalents: Beginning of year 8,916,352 7,951,629 End of year $ 8,911,836 $ 8,916,352 See accompanying Notes to the Basic Financial Statements. 27