UPPER OCCOQUAN SEWAGE AUTHORITY

Transcription

1 Regional Water Reclamation System Centreville, Virginia UPPER OCCOQUAN SEWAGE AUTHORITY Comprehensive Annual Financial Report For the Fiscal Year Ended June 30, 2007

2 T H I S P A G E I N T E N T I O N A L L Y L E F T B L A N K

3 Regional Water Reclamation System Centreville, Virginia UPPER OCCOQUAN SEWAGE AUTHORITY Comprehensive Annual Financial Report Prepared by the Finance Department For the Fiscal Year Ended June 30, 2007

4 In 1971, following extensive studies and public debate, the Virginia Water Control Board, with the counsel and recommendations of the Virginia Department of Health, adopted a bold and innovative policy to protect a critical water supply, the Occoquan Reservoir. The Occoquan Policy mandated the creation of a regional agency, the Upper Occoquan Sewage Authority (UOSA), to provide state-of-the-art treatment for wastewater generated in the Occoquan Watershed and an independent organization, the Occoquan Watershed Monitoring Laboratory, to continuously monitor the Watershed and provide advice on protective measures for the Reservoir. Water quality in the Occoquan Reservoir has steadily improved, and knowledge of the Reservoir characteristics and wastewater reclamation at UOSA has increased dramatically. However, continued success requires perpetual vigilance and innovation. Knowledge gained during the past 36 years will be used to meet the challenge of this rapidly developing Watershed and provides a solid foundation for future growth.

5 TABLE OF CONTENTS INTRODUCTORY SECTION FINANCIAL SECTION UPPER OCCOQUAN SEWAGE AUTHORITY COMPREHENSIVE ANNUAL FINANCIAL REPORT FISCAL YEAR ENDED JUNE 30, 2007 PAGE Letter of Transmittal Certificate of Achievement for Excellence in Financial Reporting... 7 Organizational Chart... 9 Directory of Officials Independent Auditors' Report Management's Discussion and Analysis Financial Statements Statements of Net Assets Statements of Revenues, Expenses and Changes in Net Assets Statements of Cash Flows Notes to the Financial Statements REQUIRED SUPPLEMENTARY INFORMATION Schedule of Funding Progress - Virginia Retirement System STATISTICAL SECTION (Unaudited) Financial Trends Schedule 1: Net Assets by Component Schedule 2: Changes in Net Assets Schedule 3: Operating Expenses Schedule 4: Nonoperating Revenues and Expenses Schedule 5: Expenses by Function Revenue Capacity Schedule 6: Operating Revenues by Source Schedule 7: Source of Wastewater Flow Schedule 8: Annual Capital Contributions by Source Debt Capacity Schedule 9: Revenue Bond Coverage Demographic and Economic Information Schedule 10: Principal Employers Schedule 11: Demographic Statistics Operating Information Schedule 12: Authorized Full-Time Schedule 13: Operating and Capital Indicators COMPLIANCE SECTION 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

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7 Introductory Section

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9 14631 COMPTON ROAD, CENTREVILLE, VIRGINIA (703) Charles P. Boepple Executive Director Michael D. Reach Deputy Executive Director November 15, 2007 Board of Directors Upper Occoquan Sewage Authority Compton Road Centreville, Virginia Dear Members of the Board: The Comprehensive Annual Financial Report (CAFR) of the Upper Occoquan Sewage Authority (UOSA) for the fiscal year ended June 30, 2007, is submitted herewith. This CAFR has been prepared by UOSA's Finance Department in accordance with accounting principles generally accepted in the United States of America and conforms with the requirements of the Governmental Accounting Standards Board (GASB). Responsibility for both the accuracy of the presented data and the completeness and fairness of the presentation, including all disclosures, rests with UOSA. We believe the data, as presented, are accurate in all material respects; that the data are presented in a manner designed to fairly set forth the financial position and results of the operations of UOSA as measured by the financial activity of its various accounts; and that all disclosures necessary to enable the reader to gain the maximum understanding of UOSA's financial affairs have been included. This letter of transmittal is designed to compliment the Management s Discussion and Analysis (MD&A) and should be read in conjunction with it. The Authority s MD&A can be found immediately following the independent auditor s report. A brief history of UOSA, its fiscal operations, and selected accomplishments are presented below. Organization and Function UOSA was formed on March 3, 1971, by concurrent resolution of the governing bodies of Fairfax and Prince William Counties and the Towns (now Cities) of Manassas and Manassas Park. UOSA's discharge flows via Bull Run to the Occoquan Reservoir, a major water supply source for over 1.3 million people served by the Fairfax County Water Authority (FCWA). Principal areas served by the FCWA are Fairfax County, the City of Alexandria, and Prince William County. Studies in concluded that inadequately treated sewage discharged by eleven secondary treatment plants in the Occoquan Watershed was largely responsible for the serious water quality problems in the Occoquan Reservoir. To remedy the problems, the Virginia State Water Control Board (SWCB) (now the Department of FAIRFAX COUNTY / PRINCE WILLIAM COUNTY / CITY OF MANASSAS / CITY OF MANASSAS PARK 1

10 Environmental Quality) in 1971 adopted a comprehensive policy for the Occoquan Watershed (Occoquan Policy). A principal requirement of the Occoquan Policy was the construction of a regional water reclamation facility to replace the eleven existing treatment plants. UOSA was created to address this mandate. UOSA was created under the provisions of the Virginia Water and Waste Authorities Act (Chapter 51, Title 15.2, Code of Virginia of 1950 as amended) to construct, finance and operate the regional water reclamation facility mandated by the Occoquan Policy. The first of nine construction contracts was awarded in early 1974 and UOSA began operation of the treatment facility on June 26, The National Pollutant Discharge Elimination System (NPDES) permit issued to UOSA by the SWCB and the United States Environmental Protection Agency (EPA) contained some of the most stringent discharge limits in the United States. UOSA has consistently met these limits and, as a result, eliminated wastewater as a source of pollution in the Occoquan Watershed. Further, the water reclaimed by UOSA contributes significantly to the water supply of Northern Virginia. Tenacious pursuit of an enhanced environment is a continuous activity for UOSA. UOSA is a public body politic, corporate, and an instrumentality of the Commonwealth of Virginia. The governing body of UOSA is an eight-person Board of Directors consisting of two members appointed for four-year terms by the governing body of each member Political Subdivision. The UOSA Executive Director is responsible to the Board of Directors for the day-to-day operations of UOSA. The organization is comprised of four Divisions: Finance, Operations and Maintenance, Treatment Process and Technical Services. Reporting Entity This CAFR includes all funds and accounts of UOSA. As described above, UOSA provides wastewater treatment and water reclamation services to four Political Subdivisions on a wholesale basis. In accordance with accounting principles generally accepted in the United States of America for governmental entities, there are no component units to be included in the reporting entity. Economic Condition and Outlook UOSA's service area is located in the Washington D.C. metropolitan area, a region with a highly educated and trained workforce, low unemployment rates, and a diverse, dynamic economy. In addition, the area has the highest median household income among the nation s major metropolitan areas. With the proximity to Washington, D.C., UOSA s service area is host to government contractors, retail firms, major aerospace companies, and corporate and regional headquarters. The majority of the businesses in the four Political Subdivisions are in the major groupings of Technology, Engineering, Research and Development, Technical Services, Communications, Computers and Corporate Headquarters. Leaders in industry located within the Political Subdivisions include Booz Allen Hamilton, Northrop Grumman, SAIC, Sprint/Nextel, Micron Technology, Lockheed Martin and ExxonMobil Corporation. These industry leaders are expected to continue to provide a stimulus to the local and national economies. The Washington D.C. metropolitan area has an unemployment rate that is well below the national average. In addition to a large private industry employment base, the U.S. government is a significant employer and customer of services that contributes to a recession-resistant economic base. Federal government spending is expected to continue to increase, but at a slower pace than recent years. There are several significant projects planned for the region that will represent approximately $15 billion of investment in transportation and community development, including a $4 billion upgrade and expansion of the Washington Dulles International Airport to accommodate a 67 percent increase in aircraft operations by

11 UOSA, with its expansion to 54 million gallons per day of capacity, continues to supply essential water reclamation services to the four Political Subdivisions as the service area and commercial operations expand. Major Initiatives To meet future needs resulting from increases in population and associated wastewater flows in its service area, UOSA developed an expansion program, Project 54, which included a variety of major additions and improvements to its wastewater treatment and delivery system. Project 54, which provided an additional treatment capacity of 27 million gallons per day (mgd), was implemented in two major phases. Construction of the first phase, Contract 32, began in January 1993 and was partially completed in 1995 providing an increase in capacity to 32 mgd. UOSA received permission to process 32 million gallons of wastewater a day beginning April 14, The remaining contract items were completed in The second phase, Contract 54, expanded the treatment plant capacity to 54 mgd. Several process modifications were incorporated into Contract 54 that reflected improved technology and provided facilities that are easier to maintain and operate. UOSA received an operating permit to process 54 million gallons of wastewater a day beginning February 1, UOSA s 2007 Capital Improvement Plan (CIP) identifies additional projects programmed over the next seven years. Primary project categories include the expansion of UOSA s delivery system, a nutrient reduction project to be able to comply with regulations designed to protect and restore the Chesapeake Bay and miscellaneous plant and hydraulic improvements including a renewal and replacement project to address original plant infrastructure. Financial Controls The Director of Finance is responsible for establishing and maintaining an adequate internal control structure. In fulfilling this responsibility, estimates and judgements are required to assess the expected benefits and related costs of control procedures. The objectives of the control system are to provide UOSA with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition and are recorded properly to permit the preparation of financial statements in accordance with accounting principles generally accepted in the United States of America. All internal control evaluations occur within this framework. UOSA's internal control structure adequately safeguards assets and provides reasonable assurance of proper recording of financial transactions. UOSA's accounting records are maintained on the accrual basis. Revenues are recognized in the accounting period in which they are earned and become measurable; expenses are recognized in the period incurred, if measurable. The accounting and reporting policies conform with accounting principles generally accepted in the United States of America and reflect practices appropriate for a governmental enterprise. The UOSA Board of Directors adopts an annual operating budget based on projected wastewater flows as required by the Restated Service Agreement between UOSA and the four member Political Subdivisions and the Restated Agreement of Trust, as supplemented, administered by U.S. Bank National Association, as Trustee. The two documents provide the basis for debt service payments. Budgetary control is maintained at the budget sub-function level by a review of revenues and expenses at the staff management level. A review of the sub-function revenues and expenses compared to budget is conducted with the Board of Directors on a quarterly basis. Appropriations lapse at year end and may not be carried forward to the next year, except for funds appropriated for multi-year construction projects. After adoption, increases or decreases in the budget may be made only upon Board approval. The budget for fiscal year 2007 is as originally adopted and was not amended during the year. 3

12 Debt Administration Total bonds payable on June 30, 2007 were $331,634,334, of which $8,205,000 in principal was due on July 1, The $8,205,000 was provided for in the Revenue Bond Account balance as well as the $7,305,092 in interest payments due on July 1, The outstanding revenue bonds consist of Regional Sewerage System Revenue Bond Series of 1995A in the original amount of $288,600,000, Regional Sewerage System Revenue Refunding Bond Series of 1995B in the original amount of $42,260,000, Regional Sewerage System Revenue Refunding Bond Series of 2003 in the original amount of $58,150,000, Regional Sewerage System Revenue Refunding Bond Series of 2004 in the original amount of $49,395,000, Regional Sewerage Revenue Refunding Bond Series of 2005 in the original amount of $82,465,000 and Regional Sewerage System Revenue Refunding Bond Series of 2007A in the original amount of $90,315,000. The 1995A, 1995B, 2003, 2004, 2005 and 2007A Series bonds were rated Aaa by Moody's and AAA by Standard & Poor's conditioned upon bond insurance. As part of the 2004 Series bond issuance, UOSA received a major upgrade in its bond rating by Standard and Poor s with the current underlying ratings as follows: Moody s Investors Service Standard & Poor s Revenue Bonds A1 AA+ Each of the four Political Subdivisions is required by the Restated Service Agreement to pay its share of the debt service. Debt Service shares and capacity allocations for each Political Subdivision are provided for in UOSA s Service Agreement. Any participating Political Subdivision may reallocate any portion of its allocated plant capacity to any other participating Political Subdivision on such terms as may be mutually agreeable, subject to certain approvals. Completion of the second phase of the Project 54 expansion program (Contract 54) provided an increase in capacity from 32 mgd to 54 mgd. Allocation of the 54 mgd capacity, which was effective February 1, 2005, is shown in Table 1 below. Table 1 Total Percentage Of Political Subdivision Capacity Allocation Total Capacity Fairfax County mgd % Prince William County mgd % City of Manassas mgd % City of Manassas Park mgd % Total mgd % Cash Management UOSA's objective in cash management is to minimize risk and to ensure the availability of cash to meet expenses, while generating revenue from the use of funds which might otherwise remain idle. In keeping with this policy, UOSA invests funds only in allowable, safe securities and structures the maturity of the investment portfolio to assure liquidity. Cash committed to current liabilities is temporarily invested in time deposits (principally certificates of deposit and repurchase agreements) typically ranging from 30 to 90 days to maturity. These investments generated earnings of 4

13 $2,907,462 for FY 2007, a decrease of 18.12% from FY With the drawdown of the Construction Fund, the average amount of funds invested was 29.03% less than last year. The average return for all invested funds at June 30, 2007 was 4.67% compared to 4.73% a year earlier. Independent Audit The Restated Service Agreement requires an annual independent audit of UOSA's financial records and transactions by an independent certified public accountant selected by the Board of Directors. This requirement has been met and the report of the independent auditors is included in the Financial Section of this Report. Certificate of Achievement The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to UOSA for its Comprehensive Annual Financial Report (CAFR) for the fiscal year ended June 30, The Certificate of Achievement is the highest form of recognition for excellence in state and local government financial reporting. To be awarded a Certificate of Achievement, UOSA published an easily readable and efficiently organized CAFR, whose contents conform to program standards. This report satisfied both accounting principles generally accepted in the United States of America and applicable legal requirements. A Certificate of Achievement is valid for a period of one year only. We believe this FY 2007 report continues to conform to the Certificate of Achievement program requirements and is being submitted to the GFOA to determine its eligibility for a certificate. Acknowledgements The preparation of this Comprehensive Annual Financial Report for FY 2007 was accomplished by the staff of the Finance Department of the Finance Division. We would like to express our appreciation to all members of the Finance Department who assisted and contributed to its preparation. Respectfully Submitted, Charles P. Boepple Executive Director Paulette E. Myers Director of Finance 5

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17 UPPER OCCOQUAN SEWAGE AUTHORITY Organizational Chart June 30, 2007 Board of Directors Office of the Executive Director Human Resources Regulatory Affairs Safety Finance Division Operations & Maintenance Division Technical Services Division Treatment Process Division Administration Delivery Systems Engineering/ Construction Process Operations Finance Electrical Systems Laboratory Operations Support Purchasing Facilities Maintenance Technical Support Liquid Processing Industrial Controls Solids Processing Mechanical Systems Support Systems 9

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19 UPPER OCCOQUAN SEWAGE AUTHORITY Directory of Board Members and Officials June 30, 2007 Board of Directors and Officers Position Political Subdivision/Affiliation Frederick G. Tate Chairman Prince William County John M. Weber Vice-Chairman City of Manassas John W. di Zerega Treasurer Fairfax County John Alvarez Secretary City of Manassas Park Dean E. Dickey Member Prince William County Jimmie D. Jenkins Member Fairfax County Kathleen R. Gammell Member City of Manassas Park William C. Boyce, Jr. Member City of Manassas Paulette E. Myers Assistant Treasurer UOSA Staff Diane L. Kipp Assistant Secretary UOSA Staff Officials Charles P. Boepple Michael D. Reach Executive Director Deputy Executive Director 11

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21 Financial Section

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23 Independent Auditors Report

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27 Management s Discussion and Analysis

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29 UPPER OCCOQUAN SEWAGE AUTHORITY MANAGEMENT'S DISCUSSION AND ANALYSIS (Unaudited) The following discussion provides an overview of the financial activities of the Upper Occoquan Sewage Authority (UOSA) for the fiscal years ended June 30, 2007 and This information should be read in conjunction with the letter of transmittal and financial statements. Financial Highlights Assets exceeded liabilities by $117,473,180 at June 30, 2007 and $124,466,319 at June 30, Net Assets decreased by $6,993,139 for fiscal year 2007 and increased by $4,087,595 for fiscal year The decrease in net assets for the current year is primarily attributable to a $5,607,111 decrease in capital assets, net of related debt, and a $4,298,036 decrease in unrestricted net assets, that was partially offset by a $2,912,008 increase in restricted net assets. Operating revenues increased by 14.0% to $23,815,408, and operating expenses increased by 13.9% to $45,981,365. The increase in operating expenses is primarily attributable to a $3,576,428 increase in depreciation expense due to the expansion of the wastewater treatment plant and delivery system improvements. Capital contributions from the Political Subdivisions were $8,105,152 and $7,655,376 for fiscal years 2007 and 2006, respectively. Overview of the Financial Statements UOSA is a single enterprise fund that uses proprietary fund accounting. The Comprehensive Annual Financial Report is presented in four sections: Introductory, Financial, Statistical and Compliance. As required by GASB 34, this discussion and analysis is provided to serve as an introduction to UOSA's basic financial statements: Statements of Net Assets, Statements of Revenues, Expenses and Changes in Net Assets, Statements of Cash Flows and the accompanying notes to the financial statements. The Statements of Cash Flows is currently prepared using the direct method, in accordance with requirements of GASB

30 UPPER OCCOQUAN SEWAGE AUTHORITY MANAGEMENT'S DISCUSSION AND ANALYSIS (Unaudited) Financial Analysis of UOSA s Financial Position and Results of Operations The tables presented below provide a summary of UOSA's financial position and operations for FY 2007 and FY Condensed Statements of Net Assets June 30, Change Amount % Assets Current & other assets $ 71,080,792 $ 83,326,208 $ (12,245,416) -14.7% Capital assets, net 395,772, ,661,319 (5,888,596) -1.5% Total assets 466,853, ,987,527 (18,134,012) -3.7% Liabilities Current liabilities 19,210,589 22,598,544 (3,387,955) -15.0% Noncurrent liabilities 330,169, ,922,664 (7,752,918) -2.3% Total liabilities 349,380, ,521,208 (11,140,873) -3.1% Net assets Capital assets, net of related debt 103,148, ,755,924 (5,607,111) -5.2% Restricted net assets 16,376,536 13,464,528 2,912, % Unrestricted net assets (2,052,169) 2,245,867 (4,298,036) % Total net assets $ 117,473,180 $ 124,466,319 $ (6,993,139) -5.6% During 2007, net assets decreased by $6,993,139; significant factors attributable to the decrease were as follows: Capital assets (net of accumulated depreciation) decreased by $5,888,596. During FY07 assets were transferred from construction-in-progress, placed into service and depreciation commenced, resulting in a corresponding increase in accumulated depreciation. Restricted cash and cash equivalents decreased by $9,731,266 as the result of payments made for expansion related projects. A decrease in bonds payable equal to $7,216,498, the net result of principal payments totaling $7,755,000, a $130,000 increase in liability due to the partial defeasance of the 1995A Series Bonds and issuance of the 2007A Series Bonds that resulted in a $408,502 increase in deferred costs and bond premiums. 22

31 UPPER OCCOQUAN SEWAGE AUTHORITY MANAGEMENT'S DISCUSSION AND ANALYSIS (Unaudited) The tables presented below provide a summary of UOSA's financial position and operations for FY 2006 and FY Condensed Statements of Net Assets June 30, Change Amount % Assets Current & other assets $ 83,326,208 $ 107,327,057 $ (24,000,849) -22.4% Capital assets, net 401,661, ,636,759 4,024, % Total assets 484,987, ,963,816 (19,976,289) -4.0% Liabilities Current liabilities 22,598,544 25,273,847 (2,675,303) -10.6% Noncurrent liabilities 337,922, ,311,245 (21,388,581) -6.0% Total liabilities 360,521, ,585,092 (24,063,884) -6.3% Net assets Capital assets, net of related debt 108,755, ,407,754 (15,651,830) -12.6% Restricted net assets 13,464,528 1,894,112 11,570, % Unrestricted net assets 2,245,867 ( 5,923,142) 8,169, % Total net assets $ 124,466,319 $ 120,378,724 $ 4,087, % During 2006, net assets increased by $4,087,595 due to favorable operating results. Other significant changes were as follows: Capital assets (net of accumulated depreciation) increased by $4,024,560, primarily due to the expansion of the wastewater treatment plant and improvements to the delivery systems. Commitments and contingencies decreased by $15,332,659, as an award for damages was paid relating to a suit brought by the contractor who was engaged to expand UOSA s treatment facility. (See note 13) Restricted cash and cash equivalents decreased by $19,488,154 as the result of payments made for expansion related projects. A decrease in bonds payable equal to $6,335,452, the net result of principal payments totaling $7,330,000, a $2,960,000 reduction in liability due to the partial defeasance of the 1995A Series Bonds and issuance of the 2005 Series Bonds that resulted in a $3,954,548 increase in deferred costs and bond premiums. 23

32 UPPER OCCOQUAN SEWAGE AUTHORITY MANAGEMENT'S DISCUSSION AND ANALYSIS (Unaudited) The table that follows summarizes the changes in revenues and expenses for UOSA between FY 2007 and FY Condensed Statements of Revenues, Expenses and Change in Net Assets For the years ended June 30, Change Amount % Operating Revenue $ 23,815,408 $ 20,892,701 $ 2,922, % Operating Expenses Operations 24,180,004 22,145,000 2,035, % Depreciation 21,801,361 18,224,933 3,576, % Total operating expenses 45,981,365 40,369,933 5,611, % Operating loss (22,165,957) (19,477,232) (2,688,725) 13.8% Nonoperating revenues 7,067,666 15,909,451 (8,841,785) -55.6% Capital contributions 8,105,152 7,655, , % Change in net assets (6,993,139) 4,087,595 (11,080,734) % Total net assets, beginning of year 124,466, ,378,724 4,087, % Total net assets, end of year $ 117,473,180 $ 124,466,319 $ (6,993,139) -5.6% Operating revenue is derived primarily from billings to the Political Subdivisions for treatment of sewage. The billings to the four member Political Subdivisions are based on the budget and monthly flows. Operating expenses reflect the cost of services associated with the operation of the treatment plant and delivery systems. For the fiscal year ended June 30, 2007: Compared to 2006, operating revenue increased by $2,922,707, net of a $35,728 credit to the political subdivisions for the FY 2006 Operations and Maintenance budget surplus. The increase was due primarily to increased billings to the subdivisions for projected increases in flows and associated increases in operating costs, predominantly for labor and electrical power. Operations expenses increased by $2,035,004 compared to The increase was primarily due to higher labor and energy costs. Nonoperating revenues decreased by $8,841,785 in FY07, primarily as a result of significant capital assets placed into service that were associated with the treatment plant expansion. Accordingly there was an 85.8% increase in bond interest expense and a corresponding decrease in the amount of interest capitalized. 24

33 UPPER OCCOQUAN SEWAGE AUTHORITY MANAGEMENT'S DISCUSSION AND ANALYSIS (Unaudited) The table that follows summarizes the changes in revenues and expenses for UOSA between FY 2006 and FY 2005 Condensed Statements of Revenues, Expenses and Change in Net Assets For the years ended June 30, Change Amount % Operating Revenue $ 20,892,701 $ 19,490,853 $ 1,401, % Operating Expenses Operations 22,145,000 19,345,047 2,799, % Depreciation 18,224,933 10,766,941 7,457, % Total operating expenses 40,369,933 30,111,988 10,257, % Operating loss (19,477,232) (10,621,135) (8,856,097) 83.4% Nonoperating revenues 15,909,451 15,384, , % Capital contributions 7,655,376 7,222, , % Change in net assets 4,087,595 11,984,934 (7,897,339) -65.9% Total net assets, beginning of year 120,378, ,393,790 11,984, % Total net assets, end of year $ 124,466,319 $ 120,378,724 $ 4,087, % Operating revenue is derived primarily from billings to the Political Subdivisions for treatment of sewage. The billings to the four member Political Subdivisions are based on the budget and monthly flows. Operating expenses reflect the cost of services associated with the operation of the treatment plant and delivery systems. For the fiscal year ended June 30, 2006: Compared to 2005, operating revenue increased by $1,401,848, net of a $1,066,142 credit to the political subdivisions for the FY 2005 Operations and Maintenance budget surplus. The increase was due primarily to increased billings to the subdivisions for projected increases in flows and associated increases in operating costs, predominantly for labor, electrical power and facilities operations. Operations expenses increased by $2,799,953 compared to The increase was primarily due to higher labor and energy costs. 25

34 UPPER OCCOQUAN SEWAGE AUTHORITY MANAGEMENT'S DISCUSSION AND ANALYSIS (Unaudited) Capital Assets At the close of FY 2007, UOSA had $395,772,723 invested in capital assets. This amount represents a net decrease of $5,888,596, or -1.5%, over Capital Assets at June 30, (net of accumulated depreciation) Change Amount % Land $ 7,203,612 $ 7,203,612 $ - 0.0% Treatment Plant and Reservoir 352,631, ,492,592 31,138, % Interceptor Sewers 9,677,703 8,839, , % Pumping Stations 19,134,814 13,352,201 5,782, % Mobile Equipment 436, ,032 (150,335) -25.6% Office Furniture and Equipment 1,855,678 2,034,984 (179,306) -8.8% Vehicles 263, ,407 73, % Construction in Progress 4,569,711 47,961,834 (43,392,123) -90.5% Totals $ 395,772,723 $ 401,661,319 $ (5,888,596) -1.5% Major additions in FY 2007, at cost, included: Construction in Progress: Plant expansion and delivery system improvements $ 12,855,187 Treatment Plant and Reservoir: Assets placed in service (removed from Construction in Progress) 50,283,428 Furniture and Equipment: Hardware Platform, Software Platform, JDE Upgrade 521,479 Pumping Stations: Cub Run Pump Station (removed from Construction in Progress) 6,783,964 Interceptor Sewers: Cub Run Force Main, Flat Branch Interceptor (removed from Construction in Progress) 1,586,796 Mobile Equipment: Hydraulic Forks, Snow Plow 24,827 Vehicles: Fleet Vehicles 102,212 26

35 UPPER OCCOQUAN SEWAGE AUTHORITY MANAGEMENT'S DISCUSSION AND ANALYSIS (Unaudited) At the close of FY 2006, UOSA had $401,661,319 invested in capital assets. This amount represents a net increase of $4,024,560, or 1.0%, over Capital Assets at June 30, (net of accumulated depreciation) Change Amount % Land $ 7,203,612 $ 7,203,612 $ - 0.0% Treatment Plant and Reservoir 321,492, ,421,698 91,070, % Interceptor Sewers 8,839,657 7,370,363 1,469, % Pumping Stations 13,352,201 5,944,159 7,408, % Mobile Equipment 587, , , % Office Furniture and Equipment 2,034,984 2,417,744 (382,760) -15.8% Vehicles 189, ,599 (58,192) -23.5% Construction in Progress 47,961, ,569,874 (95,608,040) -66.6% Totals $ 401,661,319 $ 397,636,759 $ 4,024, % Major additions in FY 2006, at cost, included: Construction in Progress: Plant expansion and delivery system improvements $ 18,078,960 Treatment Plant and Reservoir: Assets placed in service (removed from Construction in Progress) 105,421,517 Furniture and Equipment: Hardware Platform, Software Platform, GIS 478,635 Pumping Stations: Cub Run Pump Station (removed from Construction in Progress) 7,841,093 Interceptor Sewers: Cub Run Force Main (removed from Construction in Progress) 1,598,087 Mobile Equipment: Alban Tractor 211,326 Vehicles: Fleet Vehicles 24,017 Refer to notes 4 and 9 to the audited financial statements for additional information on capital assets. 27

36 UPPER OCCOQUAN SEWAGE AUTHORITY MANAGEMENT'S DISCUSSION AND ANALYSIS (Unaudited) Debt Administration At June 30, 2007, the total principal balance due on UOSA's bonds outstanding was $337,055,000 compared to $344,680,000 at June 30, The decrease from 2006 reflects debt retirements in FY 2007 equal to $7,755,000. In addition, on March 14, 2007, a portion of the 1995A Series Bonds were defeased and UOSA issued 2007A Series Bonds, resulting in a net increase of bonds payable equal to $130,000. Bonds Payable at June 30, Serial Bonds A Series $ - $ 2,955,000 Term Bonds A Series 47,215, ,400,000 Serial Bonds B Series 10,215,000 14,660,000 Serial Bonds Series 57,455,000 57,805,000 Serial Bonds Series 49,390,000 49,395,000 Serial Bonds Series 82,465,000 82,465,000 Serial Bonds A Series 43,215,000 - Term Bonds A Series 47,100,000 - Total Bonds Payable $ 337,055,000 $ 344,680,000 At June 30, 2006, the total principal balance due on UOSA's bonds outstanding was $344,680,000 compared to $354,970,000 at June 30, The decrease from 2005 reflects debt retirements in FY 2006 equal to $7,330,000. In addition, on July 14, 2005, a portion of the 1995A Series Bonds were defeased and UOSA issued 2005 Series Bonds, resulting in a net reduction of bonds payable equal to $2,960,000. Bonds Payable at June 30, Serial Bonds A Series $ 2,955,000 $ 5,740,000 Term Bonds A Series 137,400, ,825,000 Serial Bonds B Series 14,660,000 18,860,000 Serial Bonds Series 57,805,000 58,150,000 Serial Bonds Series 49,395,000 49,395,000 Serial Bonds Series 82,465,000 - Total Bonds Payable $ 344,680,000 $ 354,970,000 This information should be read in conjunction with the transmittal letter and note 5 to the audited financial statements in order to obtain more detailed information on UOSA's long-term debt. Contacting UOSA's Financial Management This financial report is designed to provide a general overview of UOSA's finances to all interested parties. If you have questions about this report, or need additional financial information, contact UOSA's Director of Finance at the Upper Occoquan Sewage Authority, Compton Road, Centreville, VA or by telephone at (703)

37 Financial Statements

38 UPPER OCCOQUAN SEWAGE AUTHORITY STATEMENTS OF NET ASSETS AS OF JUNE 30, 2007 AND 2006 ASSETS ASSETS CURRENT ASSETS Cash and cash equivalents (Note 1) $ 3,087,398 $ 3,243,654 Accounts receivable (Notes 1 and 2) 672, ,180 Due from restricted accounts - 2,189,891 Accrued interest receivable 2,371 - Inventory - Chemicals 215, ,856 Inventory - Fuels 109, ,717 Inventory - Maintenance parts 2,570,845 2,521,469 Prepaid expenses - 148,667 Restricted assets (Notes 1 and 3): Cash and cash equivalents (Note 1) 44,654,480 54,385,746 Short-term investments (Note 1) 13,239,344 13,999,349 Reserve maintenance receivable 1,979,320 1,800,225 Accrued interest receivable 1,075, ,519 Total Current Restricted Assets 60,948,232 71,134,839 Total Current Assets 67,606,243 80,147,273 NONCURRENT ASSETS Restricted assets (Notes 1 and 3): Arbitrage rebate receivable (Note 11) 1,366,374 1,238,965 Total Noncurrent Restricted Assets 1,366,374 1,238,965 Capital assets (Notes 1 and 4): Non-depreciable: Land 7,203,612 7,203,612 Construction-in-progress (Note 9) 4,569,711 47,961,834 Depreciable: Utility plant and equipment 574,520, ,929,115 Other 8,194,459 7,722,835 Total Capital Assets 594,488, ,817,396 Accumulated depreciation (Note 1) (198,715,468) (177,156,077) Total Capital Assets, Net 395,772, ,661,319 Bond issuance costs, net 2,108,175 1,939,970 Total Noncurrent Assets 399,247, ,840,254 TOTAL ASSETS $ 466,853,515 $ 484,987,527 The accompanying notes are an integral part of these statements. 30

39 UPPER OCCOQUAN SEWAGE AUTHORITY STATEMENTS OF NET ASSETS AS OF JUNE 30, 2007 AND 2006 LIABILITIES AND NET ASSETS LIABILITIES CURRENT LIABILITIES Accounts payable $ 3,700,497 $ 4,082,210 Payable from restricted assets - Income received in advance - 106,750 Due to operating account - 2,189,891 Interest payable 7,305,092 8,464,693 Current maturities of long-term debt 8,205,000 7,755,000 Total Payable from Restricted Assets 15,510,092 18,516,334 Total Current Liabilities 19,210,589 22,598,544 NONCURRENT LIABILITIES Payable from restricted assets - Retainage payable 345, ,504 Landfill closure expenses payable (Note 10) 5,009,683 4,624,328 Bonds payable (Note 5) 323,429, ,095,832 Commitments and contingencies (Note 12) 1,385,000 1,385,000 Total Noncurrent Liabilities 330,169, ,922,664 Total Liabilities 349,380, ,521,208 NET ASSETS Capital assets, net of related debt 103,148, ,755,924 Restricted net assets: Capital projects 2,322,811 2,071,115 Repairs and replacement 5,741,915 3,654,069 Debt service 8,311,810 7,739,344 Unrestricted net assets (deficit) (2,052,169) 2,245,867 TOTAL NET ASSETS $ 117,473,180 $ 124,466,319 The accompanying notes are an integral part of these statements. 31

40 UPPER OCCOQUAN SEWAGE AUTHORITY STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS FOR THE YEARS ENDED JUNE 30, 2007 AND OPERATING REVENUES (Notes 1 and 6) $ 23,815,408 $ 20,892,701 OPERATING EXPENSES (Notes 1 and 7) Operations expenses 24,180,004 22,145,000 Depreciation expense 21,801,361 18,224,933 Total Operating Expenses 45,981,365 40,369,933 Operating Loss (22,165,957) (19,477,232) NONOPERATING REVENUES (EXPENSES) Interest income 287, ,291 Amortization of bond issuance costs (227,518) (201,410) Gain on sale of assets 255 1,232 Other 1,320 1,793 Revenue in excess of expenses from restricted accounts (Note 8) 7,005,779 15,878,545 Total Nonoperating Revenues, Net 7,067,666 15,909,451 NET LOSS BEFORE CAPITAL CONTRIBUTIONS (15,098,291) (3,567,781) CAPITAL CONTRIBUTIONS (Note 8) 8,105,152 7,655,376 CHANGE IN NET ASSETS (6,993,139) 4,087,595 TOTAL NET ASSETS, beginning of year 124,466, ,378,724 TOTAL NET ASSETS, end of year $ 117,473,180 $ 124,466,319 The accompanying notes are an integral part of these statements. 32

41 UPPER OCCOQUAN SEWAGE AUTHORITY STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2007 AND 2006 CASH FLOWS FROM OPERATING ACTIVITIES Cash received from localities $ 27,293,546 $ 25,335,360 Cash paid to employees (13,488,440) (12,248,307) Cash paid to vendors (11,034,175) (11,399,392) Net Cash Provided by Operating Activities 2,770,931 1,687,661 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Bond issuance proceeds 91,014,694 89,288,975 Defeasance of long-term debt (91,003,672) (91,358,416) Payments of bond issuance cost (725,400) (670,612) Collections for debt service 24,141,008 24,203,480 Payments of bond interest (16,703,811) (18,863,843) Principal payments on long-term debt (7,755,000) (7,330,000) Acquisition & construction of capital assets (15,169,507) (24,517,386) Proceeds from sale of assets 255 1,232 Net Cash Used by Capital and Related Financing Activities (16,201,433) (29,246,570) CASH FLOWS FROM INVESTING ACTIVITIES Proceeds of short-term investments 760,005 3,621,205 Interest on investments 2,782,975 4,693,429 Net Cash Provided by Investing Activities 3,542,980 8,314,634 NET DECREASE IN CASH AND CASH EQUIVALENTS (9,887,522) (19,244,275) CASH AND CASH EQUIVALENTS, beginning of year 57,629,400 76,873,675 CASH AND CASH EQUIVALENTS, end of year $ 47,741,878 $ 57,629,400 Reconciliation of Operating Loss to Net Cash Provided by Operating Activities Operating loss $ (22,165,957) $ (19,477,232) Adjustments to reconcile operating loss to net cash provided by operating activities: Depreciation 21,801,361 18,224,933 Change in assets and liabilities Net change in accounts receivable, accounts payable, prepaid expenses and inventory (371,066) (1,502,699) (Decrease) increase in income received in advance (106,750) 106,060 Collections for reserve maintenance 4,029,335 4,650,685 Payments for reserve maintenance costs (415,992) (314,086) Net Cash Provided by Operating Activities $ 2,770,931 $ 1,687,661 Noncash Investing, Capital, and Financing Activities: Increase in landfill closure and postclosure care liability $ 385,355 $ 359,761 Increase in arbitrage rebate receivable 127, ,258 Amortization of bond issuance costs 227, ,410 Defeasance of unamortized bond issuance costs 329, ,374 Defeasance of unamortized bond discount 2,362,080 2,410,062 The accompanying notes are an integral part of these statements. 33

42 UPPER OCCOQUAN SEWAGE AUTHORITY NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2007 AND SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES: (a) Reporting Entity: The Upper Occoquan Sewage Authority (UOSA) is a tax-exempt organization whose principal purpose is the reclamation of wastewater to protect Northern Virginia's Occoquan Reservoir as a potable water supply source. UOSA is a joint venture formed on March 3, 1971 by a concurrent resolution of the governing bodies of Fairfax and Prince William Counties and the Towns (now Cities) of Manassas and Manassas Park (the Political Subdivisions). UOSA is a public body politic, corporate, and an instrumentality of the Commonwealth of Virginia. The governing body of UOSA is an eight-person Board of Directors consisting of two members appointed for four-year terms by the governing body of each member Political Subdivision. The obligations of UOSA and its member Political Subdivisions are set forth in a Restated Service Agreement. Under the Restated Service Agreement, UOSA is obligated to process all wastewater delivered to it by the member Political Subdivisions up to their allotted capacities. The Political Subdivisions are obligated to pay charges for the wastewater processing. These charges include Operations and Maintenance, Reserve Maintenance (the cost of replacements and necessary improvements, which do not increase the system capacity), and Debt Service on the bonds issued to finance construction of the UOSA facilities. As required by accounting principles generally accepted in the United States of America for governmental entities, the financial statements of the reporting entity include all the funds and accounts of UOSA (the primary government). There are no component units to be included in the reporting entity. (b) Basis of Accounting: The accounting records for UOSA are maintained on the accrual basis with revenue recorded when earned and expenses recorded when incurred. The accounting and reporting policies conform with accounting principles generally accepted in the United States of America. UOSA applies all applicable Governmental Accounting Standards Board (GASB) pronouncements as well as Financial Accounting Standards Board (FASB) pronouncements issued on or before November 30, 1989, unless the latter conflict with or contradict GASB pronouncements. (c) Budget and Budgetary Accounting: The Board of Directors adopts an annual budget for operations and maintenance as required by the Restated Agreement of Trust administered by the Trustee, U.S. Bank National Associations. The budget is based on a projected wastewater flow and may be amended during the year, as determined necessary, by the Board of Directors. Additionally, after adoption, increases or decreases in the budget may be made only upon Board approval. The charges to the four member Political Subdivisions, based on the budget and monthly flow, are adjusted upon completion of the annual audit for any deficit or available surplus in the Operating Account. The budget is prepared on the accrual basis of accounting. Budgetary control is maintained at the sub-function level. A review of revenues and expenses compared to the budget is conducted with the Board of Directors on a quarterly basis. Unexpended budgeted amounts for the Operating Account lapse at year-end and may not be carried forward to the next year. Design and construction budgets and related funds are multi-year and do not lapse annually. (d) Cash and Cash Equivalents: For reporting cash flows, UOSA considers all investments with an original maturity of three months or less to be cash equivalents. (e) Deposits and Investments: Certain investments are reported at their fair value, with the change in fair value being reported as revenue. Fair values are based on quoted market prices, with the exception of certain money market investments (including short-term U.S. Government and agency obligation, commercial paper, and bankers acceptances) which are reported at amortized cost. As of June 30, 2007, the carrying value of the Authority s deposits and investments, with their respective credit ratings, was as follows: Investment Type Fair Value Credit Rating Demand time deposits $ 1,969,308 NA Certificate of deposit 5,020,000 Money market mutual funds 1,162,091 AAA Repurchase agreements 52,828,973 AAA Total deposits and investments $ 60,980,372 34

43 (1) Credit Risk of Debt Securities: UPPER OCCOQUAN SEWAGE AUTHORITY NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2007 AND 2006 The Authority s Investment Policy (Policy) authorizes UOSA to invest in (1) obligations of the United States, the Commonwealth of Virginia, the Federal National Mortgage Association, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation, Federal Land Banks, Federal Intermediate Credit Banks, Federal Banks for Cooperatives, Financing Corporation (FICO), and Student Loan Marketing Association, (2) commercial paper with a maturity of 270 days or less rated prime 1 by Moody's Investors Service, Inc. or A-1 by Standard & Poor's Corporation, and (3) repurchase agreements. (2) Concentration of Credit Risk: The Authority s investment policy places no limit on the amount the Authority may invest in any one issuer. The Authority had investments at June 30, 2007, with more than 5% of the total in repurchase agreements with securities of Federal National Mortgage Association held by the counterparty. These investments represented 90% of total investments. (3) Interest Rate Risk: The Policy limits the investment of funds in the operating and restricted asset accounts in obligations of the following maturities: Operating Account - Not to exceed date needed for payment of operating expenses. Restricted Asset Accounts: Construction 95A - Not to exceed date needed for payment of construction costs Reserve Maintenance - Not to exceed seven years Revenue Bond - Not to exceed date needed for payment of principal and interest Investment Type Fair Value Maturity (years) Certificate of deposit $ 5,020,000 <1 Money market mutual funds 1,162,091 1 day Repurchase agreements - Underlying: U.S. Agency Securities 52,828,973 <1 Total investments $ 59,011,064 (4) Custodial Credit Risk (Deposits and Investments): At June 30, 2007 and 2006, the carrying value and bank balance of UOSA's deposits with banks was $23,661,491 and $24,157,441 respectively, all of which was covered by Federal deposit insurance or collateralized in accordance with the Virginia Security for Public Deposits Act (the Act). Under the Act, banks holding public deposits in excess of the amounts insured by Federal deposit insurance must pledge collateral in the amount of 50% of excess deposits to a collateral pool in the name of the State Treasury Board. If any member bank fails, the entire collateral pool becomes available to satisfy the claims of the governmental entities. With the ability to make additional assessments, the multiple bank collateral pool functions similar to Federal deposit insurance. Savings institutions are required to collateralize 100% of deposits in excess of Federal deposit insurance limits. The Policy requires execution of a third-party custodial safekeeping agreement for all purchased securities, and requires that securities be held in the Authority s name. As of June 30, 2007, all of the Authority s investments are held in a bank s trust department in the Authority s name. (f) Accounts Receivable: Management expects all receivables to be fully collectible; therefore, no allowance for bad debts is maintained. Receivables relate to reserve maintenance, septage facility usage and selected meter stations and pump stations, the latter two of which are operated on behalf of others. (g) Inventories: Inventories consist of chemicals, fuels and maintenance parts. Inventories are carried at the lower of cost or market. Cost is determined on an average cost basis for chemicals, fuels and maintenance parts. 35

44 UPPER OCCOQUAN SEWAGE AUTHORITY NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2007 AND 2006 (h) Capital Assets: Capital assets consist of the water reclamation system, vehicles, furniture and equipment valued at historical cost. In addition to property and equipment, other direct acquisition costs, construction period net interest costs, and certain administrative costs during the construction period have been capitalized. When appropriate, costs are reduced by interest earned on construction funds. The capitalization threshold for capital assets is $5,000. The assets are depreciated using the straight-line method. The useful lives for depreciation purposes are as follows: Water Reclamation System Other Assets years 3 10 years (i) Retirement System: (1) Plan Summary: UOSA contributes to a defined benefit pension plan administered by the Virginia Retirement System (VRS), an agent multipleemployer public employee retirement system that acts as a common investment and administrative agent for Political Subdivisions in the Commonwealth of Virginia. Title 51.1 of the Code of Virginia (1950), as amended, assigns the authority to establish and amend benefit provisions of the plan to the State Legislature. All full-time, salaried permanent UOSA employees must participate in VRS. Benefits vest after five years of service. Employees are eligible for an unreduced retirement benefit at age 65 with 5 years of service and at age 50 with 30 years of service. Employees can retire with a reduced benefit at age 55 with at least five years of credited service, and an optional reduced retirement benefit is also available as early as age 50 with 10 years of credited service. Annual retirement benefits are payable monthly for life in an amount equal to 1.7 percent of an employee s average final salary (AFS) for each year of credited service. AFS is defined as the highest consecutive 36 months of salary. Benefits are actuarially reduced for retirees who retire prior to becoming eligible for full retirement benefits. Retirees qualify for annual cost-of-living increases beginning in their second year of retirement. VRS also provides death and disability benefits. VRS issues a publicly available comprehensive annual financial report that includes financial statements and required supplementary information for the VRS. A copy of that report may be obtained by writing to the Virginia Retirement System at P.O. Box 2500, Richmond, VA (2) Funding Policy: Plan members are required to contribute 5% of their annual salary to VRS. In addition, UOSA is required to contribute the remaining amounts necessary to fund its participation in the VRS using the actuarial basis specified by the statute and approved by the VRS Board of Trustees. UOSA's contribution rate was 7.09% of annual covered payroll for UOSA contributes both the employee and employer portions. The contribution requirements of the plan members and UOSA are established by Title 51.1 of the Code of Virginia (1950), as amended. (3) Annual Pension Cost: For 2007, UOSA's annual pension cost of $1,247,939 was equal to UOSA's required and actual contributions. The required contribution was determined as part of the June 30, 2005 actuarial valuation using the Entry Age Normal actuarial cost method. The amortization method used was level percentage of projected payroll. The amortization period was for 20 years and is on an open basis. The actuarial assumptions included: (a) 7.50% investment rate of return, (b) projected salary increases ranging from 3.75% to 5.60% per year, and (c) 2.5% per year cost-of-living adjustments. Both (a) and (b) included an inflation component of 2.50%. The actuarial value of the plan s assets was determined by the modified market method. Three-Year Trend Information Annual Pension Percentage of Net Pension Fiscal Year Cost (APC) APC Contributed Obligation 2005 $ 565, % , ,247,

45 UPPER OCCOQUAN SEWAGE AUTHORITY NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2007 AND 2006 (j) Deferred Compensation Plan: UOSA offers its employees a deferred compensation plan in accordance with Internal Revenue Code, Section 457. The funds are held in a trust and managed by a third party and therefore are not reported on the statement of net assets. The deferred compensation amounts as of June 30, 2007 and 2006 were $7,411,522 and $5,654,985 respectively. (k) Vacation and Sick Leave: UOSA's employee benefits program provides for the earning and accumulation of vacation and sick leave. The accumulation of vacation leave is limited to 240 hours for employees with less than 10 years of service and 320 hours for 10 or more years. Accumulated vacation hours in excess of the limit are transferred to sick leave. Accrued vacation leave balances are paid to employees who terminate employment. The liability for accrued vacation leave as of June 30, 2007 and 2006, included in accounts payable on the statement of net assets, was $867,438 and $789,267 respectively. Sick leave may be accumulated without limit, but only a portion is paid upon termination. The portion paid is based on years of service and does not exceed 25% of the total accumulated balance. As of June 30, 2007 and 2006 the liability for accrued sick leave included in accounts payable on the statement of net assets was $573,255 and $503,916 respectively. (l) Risk Management: UOSA is exposed to various risks of loss related to torts; thefts of, damage to, and destruction of assets; errors and omissions; injuries to employees; and natural disasters. UOSA purchases insurance coverage for risks including workers compensation, automobiles, boiler/machinery use, land use, public officials liability, crime, general liability, and earthquake. UOSA has not incurred any environmental losses through June 30, 2007 and in the past three years there were no insurance settlements that exceeded insurance coverage. Costs resulting from non-insured losses will be charged to operations when incurred. (m) Post-Employment Benefits: In addition to providing pension benefits, the Authority provides post-employment health care benefits to retirees who have attained age 55 with at least ten years of continuous service and have been enrolled in UOSA s, or another, group medical plan for a minimum of one year immediately prior to retirement. For retirees, age 55-65, UOSA contributes two percent towards the cost of coverage for every year of the eligible employee s accrued service. At age 65, UOSA pays each participating retiree five dollars per month per year of service, up to a maximum of $150 per month, to help offset any expenses not covered by Medicare. The plan is financed on a pay-as-you-go basis and as of June 30, 2007, thirteen eligible retirees received benefits for a total annual contribution by UOSA of $20,952. As of June 30, 2006, thirteen eligible retirees received benefits for a total annual contribution by UOSA of $19,483. (n) Revenues and Expenses Classification: Revenues from billings to the Political Subdivisions for treatment of sewage are reported as operating revenues. All other transactions are reported as nonoperating revenues. All expenses related to operating UOSA are reported as operating expenses. Interest expense and financing costs are reported as nonoperating expenses. (o) Reclassifications: Certain reclassifications have been made to the 2006 and 2005 financial statements to conform to the presentation adopted for the 2007 financial statements. 37

46 UPPER OCCOQUAN SEWAGE AUTHORITY NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2007 AND ACCOUNTS RECEIVABLE: Accounts receivable consists of the following at June 30, 2007 and 2006: Fairfax County $ 251,331 $ 279,616 Prince William County 348, ,305 City of Manassas 31,967 2,998 Other 40,909 16,261 Total $ 672,634 $ 644, RESTRICTED ASSET ACCOUNTS: UOSA's restricted assets are accounted for within the Enterprise Fund accounts rather than through separate fund entities. Therefore, in accordance with the Restated Agreement of Trust and Supplements administered by the Trustee, UOSA had the following restricted asset accounts in operation at June 30, 2007: Reserve Maintenance - This account receives all revenue derived by UOSA to pay the cost of replacements and necessary improvements that do not increase the system capacity or scope. In accordance with Section 606 of the Restated Agreement of Trust, UOSA charges and collects from the Political Subdivisions amounts sufficient to make the current balance in the Reserve Maintenance account equal to the greater of (1) $2,000,000, (2) the estimated cost of replacements and necessary improvements which do not increase the system capacity or scope as set forth in the current fiscal year budget, or (3) the amount certified by UOSA's consulting engineer, provided, however, that if such amount certified by the consulting engineer is greater, UOSA may charge and collect the amount over a period not to exceed five fiscal years, so long as the amount on deposit at all times during the year is at least equal to the amount required to pay the cost of replacements and improvements which do not increase the system capacity or scope. Revenue Bonds - These accounts receive all revenue derived by UOSA to pay the principal and interest on the bonds. At all times, there is on deposit in the Revenue Bond Interest Accounts the amount of interest on the bonds accrued to the last day of the current month. At all times, there is on deposit in the Revenue Bond Principal Accounts the amount of principal due on the outstanding bonds during the next succeeding twelve months accrued to the last day of the current month. At all times, there is on deposit in the Revenue Bond Sinking Fund Accounts the amount of any sinking fund installment due within the next succeeding twelve months accrued to the last day of the current month with respect to any Bonds that are subject to redemption, in accordance with Section 607 of the Restated Agreement of Trust and the First Supplemental Restated Agreement of Trust. Bond Debt Reserve - This account contains at all times an amount deposited from the proceeds of UOSA's bonds sufficient to cover the maximum amount payable on account of principal and interest in any fiscal year (the Required Reserve) in accordance with the Restated Agreement of Trust, Section 608. According to Section 608, in lieu of the Required Reserve or any portion of it, the account may contain on deposit a surety bond or an insurance policy payable to the Trustee for the benefit of the bondholders, in an aggregate amount equal to the difference between the Required Reserve and the amount on deposit in the Debt Reserve Account. Upon issuance of the 1995 Series Bonds on January 9, 1996, UOSA purchased and deposited in the Bond Debt Reserve account a Debt Service Reserve Surety Bond in the amount of $25,287,659 payable to the Trustee, U.S. Bank National Association (successor to SunTrust Bank), for the benefit of the bondholders. A Reserve Fund Surety Policy from FSA, in the amount of $5,515,500, satisfies the Required Reserve for the Series 2003 Bonds, a Reserve Fund Surety Policy from MBIA, in the amount of $5,375,163, satisfies the Required Reserve for the Series 2004 Bonds, a Reserve Fund Surety Policy from FSA, in the amount of $7,310,837, satisfies the Required Reserve for the Series 2005 Bonds and a Reserve Fund Surety Policy from FSA, in the amount of $9,031,500, satisfies the Required Reserve for the Series 2007A Bonds. In each case the amount of the Surety Policy is equal to maximum annual debt service on the bonds. Construction 95A - This account receives proceeds from the 1995A Series bonds and is used to pay for construction of the project in accordance with the Restated Agreement of Trust, as supplemented, Section

47 UPPER OCCOQUAN SEWAGE AUTHORITY NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2007 AND 2006 As of June 30, 2007 and 2006, the Restricted Asset Accounts are summarized below: 2007 Construction Reserve Revenue 95A Maintenance Bonds Total Cash and Cash Equivalents $ 38,632,978 $ 48,044 $ 5,973,458 $ 44,654,480 Short-term Investments - 3,680,000 9,559,344 13,239,344 Arbitrage Rebate Receivable 1,366, ,366,374 Reserve Maintenance Receivable - 1,979,320-1,979,320 Accrued Interest Receivable 956,437 34,551 84,100 1,075,088 Total $ 40,955,789 $ 5,741,915 $ 15,616,902 $ 62,314, Construction Reserve Revenue 95A Maintenance Bonds Total Cash and Cash Equivalents $ 48,138,122 $ 39,132 $ 6,208,492 $ 54,385,746 Short-term Investments 625,000 3,360,000 10,014,349 13,999,349 Arbitrage Rebate Receivable 1,238, ,238,965 Reserve Maintenance Receivable - 1,800,225-1,800,225 Accrued Interest Receivable 832,150 29,422 87, ,519 Total $ 50,834,237 $ 5,228,779 $ 16,310,788 $ 72,373, CAPITAL ASSETS: (a) Changes in capital assets for the years ended June 30, 2007 and 2006 follow: 2007 Balance Balance June 30, 2006 Additions Retirements June 30, 2007 Non-depreciable Capital Assets Land $ 7,203,612 $ - $ - $ 7,203,612 Construction-in-progress 47,961,834 12,855,187 56,247,310 4,569,711 Depreciable Capital Assets Utility Plant and Equipment: Treatment Plant and Reservoir 465,970,360 50,283,428 9, ,244,043 Interceptor Sewers 24,433,590 1,586,796-26,020,386 Pumping Stations 23,818,438 6,783,963-30,602,401 Mobile Equipment 1,706,727 24,827 77,975 1,653,579 Other: Office Furniture and Equipment 6,582, ,661 82,907 7,023,666 Vehicles 1,139, ,212 71,342 1,170,793 Total Capital Assets $ 578,817,396 $ 72,160,074 $ 56,489,279 $ 594,488,191 39

48 UPPER OCCOQUAN SEWAGE AUTHORITY NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2007 AND Balance Balance June 30, 2005 Additions Retirements June 30, 2006 Non-depreciable Capital Assets Land $ 7,203,612 $ - $ - $ 7,203,612 Construction-in-progress 143,569,874 19,252, ,860,697 47,961,834 Depreciable Capital Assets Utility Plant and Equipment: Treatment Plant and Reservoir 358,962, ,007, ,970,360 Interceptor Sewers 22,298,217 2,163,194 27,821 24,433,590 Pumping Stations 15,815,872 8,002,566-23,818,438 Mobile Equipment 1,495, ,326-1,706,727 Other: Office Furniture and Equipment 6,155, ,453 49,027 6,582,912 Vehicles 1,115,905 24,018-1,139,923 Total Capital Assets $ 556,616,929 $ 137,138,012 $ 114,937,545 $ 578,817,396 (b) Changes in accumulated depreciation for the years ended June 30, 2007 and 2006 follow: 2007 Balance Balance June 30, 2006 Additions Retirements June 30, 2007 Depreciable Capital Assets Utility Plant and Equipment: Treatment Plant and Reservoir $ 144,477,768 $ 19,144,512 $ 9,745 $ 163,612,535 Interceptor Sewers 15,593, ,750-16,342,683 Pumping Stations 10,466,237 1,001,350-11,467,587 Mobile Equipment 1,119,695 97,187-1,216,882 Other: Office Furniture and Equipment 4,547, ,967 82,907 5,167,988 Vehicles 950, , , ,793 Total Accumulated Depreciation $ 177,156,077 $ 21,801,360 $ 241,969 $ 198,715, Balance Balance June 30, 2005 Additions Retirements June 30, 2006 Depreciable Capital Assets Utility Plant and Equipment: Treatment Plant and Reservoir $ 128,540,864 $ 15,936,904 $ - $ 144,477,768 Interceptor Sewers 14,927, ,079-15,593,933 Pumping Stations 9,871, ,524-10,466,237 Mobile Equipment 1,033,691 86,004-1,119,695 Other: Office Furniture and Equipment 3,737, ,213 49,027 4,547,928 Vehicles 868,306 82, ,516 Total Accumulated Depreciation $ 158,980,170 $ 18,224,934 $ 49,027 $ 177,156,077 Changes in construction-in-progress are reported in Note 9. 40

49 UPPER OCCOQUAN SEWAGE AUTHORITY NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2007 AND BONDS PAYABLE: The following is a summary of changes in bonds payable for the years ended June 30, 2007 and 2006: 2007 Balance Balance June 30, 2006 Issued Retired Defeased June 30, 2007 Serial Bonds A Series $ 2,955,000 $ - $ 2,955,000 $ - $ - Term Bonds A Series 137,400, ,185,000 47,215,000 Serial Bonds B Series 14,660,000-4,445,000-10,215,000 Serial Bonds Series 57,805, ,000-57,455,000 Serial Bonds Series 49,395,000-5,000-49,390,000 Serial Bonds Series 82,465, ,465,000 Serial Bonds A Series - 43,215,000-43,215,000 Term Bonds A Series - 47,100,000-47,100,000 $ 344,680,000 $ 90,315,000 $ 7,755,000 $ 90,185,000 $ 337,055,000 Less: Current Maturities of Long-Term Debt (8,205,000) Less: Deferred Amount of Refundings (16,067,632) Less: Unamortized Bond Premium 10,646,966 Total Bonds Payable $ 323,429, Balance Balance June 30, 2005 Issued Retired Defeased June 30, 2006 Serial Bonds A Series $ 5,740,000 $ - $ 2,785,000 $ - $ 2,955,000 Term Bonds A Series 222,825, ,425, ,400,000 Serial Bonds B Series 18,860,000-4,200,000-14,660,000 Serial Bonds Series 58,150, ,000-57,805,000 Serial Bonds Series 49,395, ,395,000 Serial Bonds Series - 82,465, ,465,000 $ 354,970,000 $ 82,465,000 $ 7,330,000 $ 85,425,000 $ 344,680,000 Less: Current Maturities of Long-Term Debt (7,755,000) Less: Deferred Amount of Refundings (14,614,330) Less: Unamortized Bond Premium 8,785,162 Total Bonds Payable $ 331,095,832 41

50 UPPER OCCOQUAN SEWAGE AUTHORITY NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2007 and 2006 Bonds payable as of June 30, 2007, consist of the following: (a) Series of 1995A: Regional Sewerage System Revenue Bonds - Series of 1995A in the original amount of $288,600,000 consisting of $28,885,000 Serial bonds with interest rates ranging from 4.30% to 6.00% maturing July 1, 2010, $36,890,000 Term bonds with an interest rate of 5.00% maturing July 1, 2015, $47,215,000 Term bonds with an interest rate of 5.15% maturing July 1, 2020, $85,425,000 Term bonds with an interest rate of 5.00% maturing July 1, 2025, and $90,185,000 Term bonds with an interest rate of 4.75% maturing July 1, Principal is payable on July 1 and interest is payable on January 1 and July 1. Debt service requirements for principal and interest by calendar year are as follows: Calendar Year Principal Interest Total 2007 $ - $ 1,215,786 $ 1,215, ,431,573 2,431, ,431,573 2,431, ,431,573 2,431, ,431,573 2,431, ,520,000 12,157,863 20,677, ,695,000 5,106,742 43,801,742 $ 47,215,000 $ 28,206,683 $ 75,421,683 (b) Series of 1995B: Regional Sewerage System Revenue Refunding Bonds - Series of 1995B in the original amount of $42,260,000 in Serial bonds with interest rates ranging from 3.95% to 6.00% maturing July 1, Principal is payable on July 1 and interest is payable on January 1 and July 1. Debt service requirements for principal and interest by calendar year are as follows: Calendar Year Principal Interest Total 2007 $ 2,370,000 $ 507,788 $ 2,877, ,490, ,250 2,882, ,610, ,750 2,877, ,745, ,250 2,882,250 $ 10,215,000 $ 1,305,038 $ 11,520,038 (c) Series of 2003: Regional Sewerage System Revenue Refunding Bonds - Series of 2003 in the original amount of $58,150,000 in Serial bonds with interest rates ranging from 2.00% to 5.25% maturing July 1, Principal is payable on July 1 and interest is payable on January 1 and July 1. Debt service requirements for principal and interest by calendar year are as follows: Calendar Year Principal Interest Total 2007 $ 2,705,000 $ 2,809,900 $ 5,514, ,835,000 2,674,650 5,509, ,965,000 2,548,500 5,513, ,110,000 2,400,250 5,510, ,245,000 2,264,750 5,509, ,730,000 8,831,063 27,561, ,865,000 3,695,500 27,560,500 $ 57,455,000 $ 25,224,613 $ 82,679,613 42

51 UPPER OCCOQUAN SEWAGE AUTHORITY NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2007 and 2006 (d) Series of 2004: Regional Sewerage System Revenue Refunding Bonds - Series of 2004 in the original amount of $49,395,000 in Serial bonds with interest rates ranging from 3.00% to 5.00% maturing July 1, Principal is payable on July 1 and interest is payable on January 1 and July 1. Debt service requirements for principal and interest by calendar year are as follows: Calendar Year Principal Interest Total 2007 $ 3,130,000 $ 2,321,938 $ 5,451, ,235,000 2,220,213 5,455, ,340,000 2,115,075 5,455, ,505,000 1,948,075 5,453, ,565,000 1,772,825 8,337, ,615,000 3,715,900 33,330,900 $ 49,390,000 $ 14,094,026 $ 63,484,026 (e) Series of 2005: Regional Sewerage System Revenue Refunding Bonds - Series of 2005 in the original amount of $82,465,000 in Serial bonds with interest rates of 5.00% maturing July 1, Principal is payable on July 1 and interest is payable on January 1 and July 1. Debt service requirements for principal and interest by calendar year are as follows: Calendar Year Principal Interest Total 2007 $ - $ 4,123,250 $ 4,123, ,123,250 4,123, ,123,250 4,123, ,123,250 4,123, ,123,250 4,123, ,616,250 20,616, ,420,000 20,616,250 31,036, ,045,000 9,225,250 81,270,250 $ 82,465,000 $ 71,074,000 $ 153,539,000 (f) Series of 2007A: Regional Sewerage System Revenue Refunding Bonds - Series of 2007 in the original amount of $90,315,000 consisting of $43,215,000 in Serial bonds with interest rates ranging from 4.125% to 4.500% maturing July 1, 2027 and $47,100,000 in Term bonds with an interest rate of 4.500% maturing July 1, Principal is payable on July 1 and interest is payable on January 1 and July 1. Debt service requirements for principal and interest by calendar year are as follows: Calendar Year Principal Interest Total 2007 $ - $ 1,207,868 $ 1,207, ,063,856 4,063, ,063,856 4,063, ,063,856 4,063, ,063,856 4,063, ,319,280 20,319, ,319,280 20,319, ,175,000 20,315,774 41,490, ,140,000 6,313,950 75,453,950 $ 90,315,000 $ 84,731,576 $ 175,046,576 43

52 UPPER OCCOQUAN SEWAGE AUTHORITY NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2007 AND 2006 The following is a summary of bond refundings that have taken place in the current and prior years. Current Year Refunding: On March 14, 2007, UOSA issued $90,315,000 in Regional Sewage System Refunding Bonds consisting of $43,215,000 in Serial bonds with interest rates ranging from 4.125% to 4.500% maturing July 1, 2027 and $47,100,000 in Term bonds with an interest rate of 4.500% maturing July 1, 2029 to refund $90,185,000 in outstanding 1995A Series bonds with an interest rate of 4.750%. A total of $91,003,673 from the proceeds of the bonds, were used to purchase U.S. Government securities. These securities were deposited in an irrevocable trust with an escrow agent to provide for all future debt service payments on the 1995A Series bonds. Accordingly, the trust account assets and the liabilities of the defeased bonds are not included in UOSA s financial statements. On June 30, 2007, $90,185,000 of bonds outstanding is considered defeased. The refunding resulted in a difference of $3,510, between the reacquisition price and the net carrying amount of the old debt. This difference, reported in accompanying financial statements as a deduction from bonds payable, is being charged to operations through the year 2015 using the bonds-outstanding method. UOSA completed the refunding to reduce its total debt service payments over 20 years by $4,634, and to obtain an economic gain (difference between the present values of the old and new debt service payments) of $3,060, Prior Year Refundings: In FY-06, UOSA defeased a portion of the 1995A Series bonds by placing the proceeds of the 2005 Series bonds in an irrevocable trust to provide for all future debt service payments on the old bonds. Accordingly, the trust account assets and the liabilities of the defeased bonds are not included in UOSA s financial statements. On June 30, 2007, $85,425,000 of bonds outstanding is considered defeased. In FY-05, UOSA defeased a portion of the 1995A Series bonds by placing the proceeds of the 2004 Series bonds in an irrevocable trust to provide for all future debt service payments on the old bonds. Accordingly, the trust account assets and the liabilities of the defeased bonds are not included in UOSA s financial statements. On June 30, 2007, $50,355,000 of bonds outstanding is considered defeased. In FY-04, UOSA defeased the remaining portions of the 1993 Series bonds by placing the proceeds of the 2003 Series bonds in an irrevocable trust to provide for all future debt service payments on the old bonds. Accordingly, the trust account assets and the liabilities of the defeased bonds are not included in UOSA s financial statements. On June 30, 2007, the 1993 bonds are fully retired. 6. OPERATING REVENUES: Operating revenues consist of billings to the Political Subdivisions for treatment of sewage. Revenues earned for the fiscal year ended June 30, 2007 and 2006 were as follows: Fairfax County $ 9,946,958 $ 8,520,428 Prince William County 7,855,280 7,049,212 City of Manassas 4,531,232 3,683,281 City of Manassas Park 891, ,566 Other 590, ,214 $ 23,815,408 $ 20,892,701 44

53 UPPER OCCOQUAN SEWAGE AUTHORITY NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2007 AND OPERATING EXPENSES: Operating expenses include reimbursable septage receiving facility and pump station/meter station charges. Operating expenses for the fiscal year ended June 30, 2007 and 2006 were as follows: Personnel Services $ 13,488,440 $ 12,248,307 Electrical Power 3,492,057 3,013,802 Chemicals 1,650,892 1,448,503 Facilities Operations 945,241 1,060,375 Facilities Maintenance 1,751,978 1,487,064 Contract Services 1,686,548 1,928,752 Administration 378, ,251 Insurance 525, ,598 Miscellaneous 260, ,348 Depreciation 21,801,361 18,224,933 $ 45,981,365 $ 40,369, REVENUES AND EXPENSES FROM RESTRICTED ASSET ACCOUNTS: The following is a schedule for the fiscal years ended June 30, 2007 and 2006: Revenues Bond interest billings $ 16,035,856 $ 16,548,104 Bond principal billings 8,105,152 7,655,376 Interest earned 2,312, ,789 Reserve maintenance billings 4,208,430 3,730,742 Other 2,133-30,663,575 28,254,011 Expenses - Restricted Assets Accounts Bond interest 14,751,297 4,046,243 Reserve maintenance 415, ,086 Landfill closure and postclosure expense 385, ,761 15,552,644 4,720,090 Revenues in Excess of Expenses From Restricted Asset Accounts $ 15,110,931 $ 23,533,921 Financial Statement Presentation: Revenue from restricted accounts $ 7,005,779 $ 15,878,545 Capital contributions 8,105,152 7,655,376 For the year ending June 30, 2007 and 2006 respectively, the total cost of interest on tax-exempt borrowings was $16,401,366 and $17,423,416, of which $1,215,033 and $8,553,080 was capitalized, net of investment earnings of $435,036 and $3,567,028. UOSA capitalized 14.77% of interest expense associated with Project 54 in FY07, as Contract 54 was completed in FY07. 45

54 UPPER OCCOQUAN SEWAGE AUTHORITY NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2007 AND CONSTRUCTION COMMITMENTS: The design for the expansion from 27 mgd to 54 mgd ("Project 54") began in the spring of 1988 and was substantially completed in In November 1992, UOSA awarded the contract for the initial construction increment to Pizzagalli Construction Company at a price of $35,220,000, which was subsequently amended with a resulting contract price of $37,187,966. Construction began in January 1993 with various contract items being completed during FY 1995, providing an increase in capacity to 32 mgd in March The cost of this expansion was transferred from construction-in-progress and depreciation commenced in Remaining contract items of Contract 32 were substantially completed in 1996 and fully completed in In January 1997, UOSA awarded the contract for the second construction increment to Blake Construction Co./Poole and Kent, a Joint Venture, at a price of $198,477,000. This system expansion, which includes expansion of the plant, pump stations, force mains, and interceptors, was substantially completed in 2004 except for those delivery system enhancements tied to later capacity maturation requirements. Fixed-rate revenue bonds are used to finance the expansion. The first revenue bonds were issued in February 1991, and additional bonds were issued in January Following is a summary of construction-in-progress expenses for the years ended June 30, 2007 and 2006: 2007 Construction-in-progress June 30, 2006 $ 47,961,834 Current year cost (includes interest cost capitalized of $1,215,033, interest income of $435,036) 12,855,187 60,817,021 Cost of Plant and Equipment Placed in Service (56,247,310) Construction-in-progress June 30, 2007 $ 4,569, Construction-in-progress June 30, 2005 $ 143,569,874 Current year cost (includes interest cost capitalized of $8,553,080, interest income of $3,567,028) 19,252, ,822,531 Cost of Plant and Equipment Placed in Service (114,860,697) Construction-in-progress June 30, 2006 $ 47,961, LANDFILL CLOSURE AND POSTCLOSURE COST: State and Federal laws and regulations require UOSA to place a final cover on its landfill when it stops accepting waste and to perform certain maintenance and monitoring functions at the site for ten years after closure. Although closure and post closure care costs will be paid only near or after the date that the landfill stops accepting waste, UOSA reports a portion of these closure and post closure care costs as an expense chargeable to restricted asset accounts in each period based on landfill capacity used as of each balance sheet date. The $5,009,683 and $4,624,328 reported as landfill closure and post closure care liability at June 30, 2007 and June 30, 2006, respectively, represents the cumulative amount reported to date based on the use of 46% and 44%, respectively, of the estimated capacity of Phase I of the landfill. UOSA will recognize the remaining estimated cost of closure and post closure care of $5,897,891 for Phase I as the remaining estimated capacity is filled. These amounts are based on what it would cost to perform all closure and post closure care in UOSA expects to close Phase I of the landfill in the year Actual cost may be higher due to inflation, changes in technology, or changes in regulations. The subsequent phases of the landfill will be constructed as required in the future. 46

55 UPPER OCCOQUAN SEWAGE AUTHORITY NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2007 AND ARBITRAGE REBATE: The U.S. Treasury has issued regulations on calculating the rebate due the Federal Government on arbitrage earnings and determining compliance with the arbitrage rebate provisions of the Tax Reform Act of Arbitrage earnings arise when UOSA temporarily invests the proceeds of tax exempt debt in securities with yields higher than the arbitrage rate. The estimated rebate receivable increases interest income from restricted assets and is recorded as an asset on the Statement of Net Assets. Pursuant to Section 148 of the Internal Revenue Code of 1986, UOSA was required to make an interim rebate payment, if a liability existed, within 60 days of the end of its fifth bond year. Accordingly, UOSA issued a rebate payment in the amount of $1,800,000 in August 2000 in order to satisfy minimum requirements to reduce its rebate liability. Effective March 2001, bond proceeds were invested in securities with yields lower than the arbitrage rate. As a result, a rebate receivable of $1,366,374 and $1,238,965 has been recorded for the years ended June 30, 2007 and June 30, 2006, respectively. 12. COMMITMENTS AND CONTINGENCIES: In 1996, the Authority awarded Blake Construction Co Inc./Poole and Kent, A Joint Venture, a construction contract to expand the Authority s treatment facility. Because the Virginia Procurement Act requires a contractor to file suit within 6 months of an Owner s denial of a claim, the Contractor has appealed numerous Authority decisions denying additional compensation and contract time extensions by filing numerous lawsuits in Fairfax County Virginia Circuit Court. In addition, because the Authority has withheld liquidated damages for the Contractor s delay in completing the job, in the approximate amount of $16,900,000, the Contractor claimed that the Authority materially breached the contract and that the Contractor should be excused from further performance and awarded damages as the Court may determine. Following multiple trials and appeals, the Authority has paid the Contractor $16,613, Claimed interest in the approximate amount of $1,385, is in dispute and subject to further litigation. Additional lawsuits are still pending, the legal sufficiency of which has not been litigated. It should be noted that the Authority s management disputes and disagrees with the Contractor factually and legally on its claims. The Authority also continues to believe that the Contractor s remaining claims are without merit and barred by the prior litigation. The Authority intends to vigorously contest these remaining claims. In February 2003 the Authority obtained a line of credit in the amount of $5,500,000 to provide an additional source of funds to pay the costs of replacements and improvements to the System. As of the report date there was no activity involving the above-mentioned line of credit. As of June 30, 2007, the Authority had letters of credit outstanding in the amount of $16,717,659 for Blake Litigation and $4,624,328 for landfill closure. 47

56 T H I S P A G E I N T E N T I O N A L L Y L E F T B L A N K

57 Required Supplementary Information

58 T H I S P A G E I N T E N T I O N A L L Y L E F T B L A N K

59 UPPER OCCOQUAN SEWAGE AUTHORITY REQUIRED SUPPLEMENTARY INFORMATION JUNE 30, 2007 AND 2006 A schedule of funding progress for the Virginia Retirement System is provided below: Schedule of Funding Progress (Unaudited) Actuarial Unfunded Actuarial Accrued Actuarial Annual UAAL as Actuarial Value of Liability Accrued Liability Funded Covered % of Valuation Assets Entry Age (UAAL) Ratio Payroll Payroll Date (1) (2) (2-1) (1/2) (3) [(2-1)/3] June 30, 2004 $ 19,600,833 $ 18,570,657 $ (1,030,176) 105.5% $ 8,046,059 (12.8)% June 30, ,481,386 23,985,774 3,504, ,264, June 30, ,088,973 25,958,463 3,869, ,725,

60 T H I S P A G E I N T E N T I O N A L L Y L E F T B L A N K

61 Statistical Section

62 T H I S P A G E I N T E N T I O N A L L Y L E F T B L A N K

63 UPPER OCCOQUAN SEWAGE AUTHORITY This section of the Authority s CAFR presents detailed information as a context for understanding what the information in the financial statements, note disclosures, and required supplementary information say about the Authority s overall financial health. This information has not been audited by the independent auditor Financial Trends These schedules contain trend information to help the reader understand how the Authority s financial performance and well-being changed over time. SCHEDULE 1 NET ASSETS BY COMPONENT LAST 5 FISCAL YEARS Primary Government For the Fiscal Years Ended June Invested in capital assets, net of related debt $ 92,781,999 $ 109,753,339 $ 124,407,754 $ 108,755,924 $ 103,148,813 Restricted 1,120,786 1,521,012 1,894,112 13,464,528 16,376,536 Unrestricted 4,359,751 (2,880,561) (5,923,142) 2,245,867 (2,052,169) Total primary government net assets $ 98,262,536 $ 108,393,790 $ 120,378,724 $ 124,466,319 $ 117,473,180 Note: UOSA implemented GASB Statement 34 in SCHEDULE 2 CHANGES IN NET ASSETS LAST 5 FISCAL YEARS Total Nonoperating Income/(Loss) Change Fiscal Operating Operating Operating Revenues/ before Capital Capital in Net Year Revenue Expenses Income/(Loss) (Expenses) Contributions Contributions Assets 2003 $ 17,460,575 $ 29,307,593 $ (11,847,018) $ 13,881,598 $ 2,034,580 $ 6,496,405 $ 8,530, ,354,818 30,368,330 (12,013,512) 15,266,107 3,252,595 6,878,659 10,131, ,490,853 30,111,988 (10,621,135) 15,384,045 4,762,910 7,222,024 11,984, ,892,701 40,369,933 (19,477,232) 15,909,451 (3,567,781) 7,655,376 4,087, ,815,408 45,981,365 (22,165,957) 7,067,666 (15,098,291) 8,105,152 (6,993,139) Note: UOSA implemented GASB Statement 34 in

64 UPPER OCCOQUAN SEWAGE AUTHORITY SCHEDULE 3 OPERATING EXPENSES LAST 10 FISCAL YEARS For the Fiscal Years Ended June Personnel Services $ 13,488,440 $ 12,248,307 $ 10,657,152 $ 9,591,492 $ 8,971,715 Electrical Power 3,492,057 3,013,802 2,491,466 2,404,580 2,134,135 Other Utilities (A) ,130 Chemicals 1,650,892 1,448,503 1,410,680 1,431,717 1,431,654 Facilities Operations 945,241 1,060, , , ,971 Facilities Maintenance 1,751,978 1,487,064 1,366,202 1,321,280 1,199,617 Contract Services 1,686,548 1,928,752 1,900,903 1,804,874 3,252,247 Administration 378, , , , ,550 Insurance 525, , , , ,970 Miscellaneous 260, ,348 62, , ,843 Subtotal 24,180,004 22,145,000 19,345,047 18,049,301 18,180,832 Depreciation 21,801,361 18,224,933 10,766,941 12,319,029 11,126,761 Total Operating Expenses $ 45,981,365 $ 40,369,933 $ 30,111,988 $ 30,368,330 $ 29,307,593 For the Fiscal Years Ended June Personnel Services $ 8,513,056 $ 7,515,137 $ 6,918,404 $ 6,439,372 $ 6,430,850 Electrical Power 2,032,813 1,893,508 1,484,885 1,364,339 1,511,725 Other Utilities 64,915 56,939 57,291 54,777 59,949 Chemicals 1,062,905 1,304,511 1,077, , ,407 Facilities Operations 309, , , , ,286 Facilities Maintenance 1,156, , , , ,643 Contract Services 1,546,846 1,068, , , ,215 Administration 262, , , , ,272 Insurance 263, , , , ,488 Miscellaneous 261, , , , ,438 Subtotal 15,473,367 14,008,621 12,068,776 11,217,489 11,430,273 Depreciation 10,674,278 9,783,086 9,192,165 9,080,506 9,058,010 Total Operating Expenses $ 26,147,645 $ 23,791,707 $ 21,260,941 $ 20,297,995 $ 20,488,283 (A) Other Utilities included in Facilities Operations beginning FY

65 UPPER OCCOQUAN SEWAGE AUTHORITY SCHEDULE 4 NONOPERATING REVENUES AND EXPENSES LAST 10 FISCAL YEARS Revenue in excess Amortization Gain (Loss) of expenses Fiscal Interest of bond on sale from restricted Year income issuance costs of assets accounts Other Total 1998 $ 355,869 $ (132,784) $ (123,164) $ 9,843,041 $ 1,765 $ 9,944, ,991 (126,292) 24,182 10,452, ,710, ,841 (125,535) ,355,498-13,644, ,621 (122,150) 4,069 16,699,434-17,024, ,660 (118,625) (3,868) 14,243,407 1,249 14,292, ,330 (114,887) (3,472) 13,886, ,881, ,239 (156,939) 3,465 15,374, ,266, ,792 (191,978) 6,225 15,437, ,384, ,291 (201,410) 1,232 15,878,545 1,793 15,909, ,830 (227,518) 255 7,005,779 1,320 7,067,666 SCHEDULE 5 (A) (B) EXPENSES BY FUNCTION LAST 10 FISCAL YEARS Fiscal Operating Reserve Expansion Debt Year Expenses (C) Maintenance Related Service (D) Total 1998 $ 11,430,273 $ 505,470 $ 880,679 $ 6,954,294 $ 19,770, ,217, , ,946 9,539,569 22,042, ,068, , ,676 10,083,576 23,488, ,008, , ,975 9,795,563 24,886, ,473, , ,834 11,940,784 28,755, ,180, , ,426 11,859,038 31,031, ,049, , ,667 11,700,059 30,366, ,345, , ,429 12,302,373 32,167, ,145, ,086-11,376,243 33,835, ,180, ,992-22,506,297 47,102,293 (A) Includes general operations and restricted assets activity. (B) Excludes landfill closure expense. (C) Excludes depreciation expense. (D) Includes bond principal expense and bond interest less capitalized interest portion. 57

66 UPPER OCCOQUAN SEWAGE AUTHORITY Revenue Capacity These schedules contain information to help the reader assess the Authority s significant local operating revenues. SCHEDULE 6 OPERATING REVENUES BY SOURCE (A) LAST 10 FISCAL YEARS Fiscal Prince Manassas Year Fairfax William Manassas Park Other Total 1998 $ 5,248,499 $ 2,879,034 $ 2,609,845 $ 474,885 $ 205,411 $ 11,417, ,612,844 3,145,837 2,541, , ,026 12,180, ,134,484 3,107,993 2,494, , ,345 11,420, ,001,102 3,714,782 2,844, , ,811 13,477, ,889,751 4,735,029 3,195, , ,545 16,332, ,629,155 4,907,541 2,928, ,159 2,338,407 17,460, ,161,964 5,983,587 3,597, , ,734 18,354, ,274,327 6,368,962 3,376, , ,866 19,490, ,520,428 7,049,212 3,683, , ,214 20,892, ,946,958 7,855,280 4,531, , ,529 23,815,408 (A) Includes operating revenues and unrestricted interest income. SCHEDULE 7 SOURCE OF WASTEWATER FLOW (MGD) (B) AVERAGE DAILY FLOW (ADF) (A) LAST 10 FISCAL YEARS City of Total Fiscal Fairfax City of Manassas Total ADF (A) Operating Year County PWCSA Manassas Park (MGD) (B) Expenses (C) $ 11,430, ,217, ,068, ,008, ,473, ,180, ,049, ,345, ,145, ,180,004 (A) ADF = Average Daily Flow (B) (MGD) = Million gallons per day (C) = Excludes depreciation expense 58

67 UPPER OCCOQUAN SEWAGE AUTHORITY SCHEDULE 8 ANNUAL CAPITAL CONTRIBUTIONS BY SOURCE LAST 10 FISCAL YEARS Fiscal Fairfax City of City of Year County PWCSA Manassas Manassas Park Total 1998 $ 1,214,254 $ 818,233 $ 384,527 $ 281,104 $ 2,698, ,491,217 1,004, , ,222 3,313, ,551,511 1,045, , ,221 3,447, ,034,316 1,671, , ,928 5,783, ,158,608 1,744, , ,828 6,031, ,400,758 1,878, , ,331 6,496, ,600,348 1,989, , ,773 6,878, ,776,562 2,089, , ,022 7,222, ,002,623 2,214, , ,758 7,655, ,708,162 2,255, , ,317 8,105,152 59

68 UPPER OCCOQUAN SEWAGE AUTHORITY Debt Capacity These schedules present information to help the reader assess the affordability of the Authority s current levels of outstanding debt, and the Authority s ability to issue additional debt in the future. SCHEDULE 9 REVENUE BOND COVERAGE LAST 10 FISCAL YEARS Capitalized Net Revenue Total Debt Fiscal Gross Operating Interest Available for Service Debt Year Revenue (A) Expenses (B) Available Debt Service Requirements Coverage 1998 $ 30,133,086 $ 11,430,273 $ 5,300,000 $ 24,002,813 $ 19,741, ,023,772 11,217,489 2,250,000 25,056,283 22,417, ,822,826 12,068, ,754,050 22,975, ,731,862 14,008, ,723,241 22,967, ,154,781 15,473, ,681,414 25,156, ,862,827 18,180, ,681,995 25,100, ,701,224 18,049, ,651,923 25,088, ,483,593 19,345, ,138,546 23,714, ,379,028 22,145, ,234,028 24,784, ,768,388 24,180, ,588,384 24,458, (A) Gross revenues includes operating, non-operating, and restricted revenue, except Project 54 revenue. (B) Operating expenses includes Operations and Maintenance expenses, except depreciation. 60

69 UPPER OCCOQUAN SEWAGE AUTHORITY Economic and Demographic Information These schedules offer economic and demographic indicators to help the reader understand the environment within which the Authority s financial activities take place. SCHEDULE 10 PRINCIPAL EMPLOYERS CURRENT YEAR AND NINE YEARS AGO Fiscal Year 2007 (1) Fiscal Year 1998 Percentage of Percentage of Number of Total County Number of Total County Employer Employees (2) Rank Employment (3) Employees (2) Rank Employment (3) Fairfax County Public Schools 22, % 17, % Federal Government 13, , Fairfax County Government 11, , INOVA Health System 7,000-10, ,000-10, BoozAllen Hamilton 7,000-10, ,000-3, Northrop Grumman 7,000-10, Science Application International Corp. (SAIC) 4,000-6, ,000-4, Federal Home Loan Mortgage 4,000-6, ,000-3, Lockheed Martin 4,000-6, Sprint 4,000-6, Electronic Data Systems (EDS) ,000-4, AT&T ,000-3, BDM International ,000-3, Totals 16.34% 13.90% Source: Fairfax County Economic Development Authority (using Virginia Employment Commission data); Fairfax County Public Schools; Fairfax County Department of Management and Budget. Notes: (1) Employment information for fiscal year 2007, excluding data for Fairfax County Government and Fairfax County Public Schools, is from the 4th quarter of calendar year 2006, which represents the most recent data available. Employment information for fiscal year 1998 is from third quarter 1997 through second quarter 1998, corresponding to the actual County fiscal year. (2) Employment estimates for separate facilities of the same firm have been combined to create company totals. Employment ranges for the private sector are given to ensure confidentiality. (3) Percentages are based on the midpoint of the employment range. Average total County employment for fiscal year 2007 is estimated at 581,053. Average total County employment for fiscal year 1998 is estimated at 468,

70 UPPER OCCOQUAN SEWAGE AUTHORITY SCHEDULE 11 DEMOGRAPHIC STATISTICS UOSA SERVICE AREA POPULATION (A) LAST 10 YEARS Fairfax (B) Prince William County (B) Calendar Per Capita Average Calendar Per Capita Average Year Population Income Unemployment(%) Year Population Income Unemployment(%) ,037,311 $ 63, % ,221 * 2.4% ,033,646 60, ,178 * ,022,298 57, ,383 * ,012,090 53, ,820 $ 35, ,004,435 52, ,570 32, ,366 51, ,351 32, ,749 50, ,798 31, ,371 47, ,813 31, ,452 43, ,359 28, ,126 40, ,894 26, City of Manassas (C) City of Manassas Park (C) Fiscal Per Capita Average Fiscal Per Capita Average Year Population Income Unemployment(%) Year Population Income Unemployment(%) 2007 * * * ,910 $ 30, % ,066 * 2.9% ,100 29, ,000 * ,900 28, ,500 * ,700 27, ,300 $ 23, ,300 26, ,900 22, ,900 25, ,500 22, ,200 28, ,135 21, ,290 27, ,800 20, ,300 24, ,500 19, ,500 23, (A) A current population of approximately 277,500 is being served by UOSA's existing water reclamation system. (B) Represents the entire population of the Counties. UOSA serves only a portion of the population. (C) Represents the entire population of the Cities. UOSA serves the entire population. * Not available Source: Political Subdivisions 62

71 UPPER OCCOQUAN SEWAGE AUTHORITY Operating Information These schedules contain service and infrastructure data to help the reader understand how the information in the Authority s financial report relates to the services the Authority provides and the activities it performs. SCHEDULE 12 AUTHORIZED FULL-TIME EQUIVALENTS BY FUNCTION LAST 10 FISCAL YEARS Treatment Process Finance Operations & Maintenance Executive Technical Services Totals SCHEDULE 13 OPERATING AND CAPITAL INDICATORS LAST 10 FISCAL YEARS Wastewater Treatment Miles of sewers Number of treatment plants Number of pumping stations Treatment capacity (MGD) Engineering plant capacity (MGD) Annual engineering maximum plant capacity (millions of gallons) 8,359 8,359 8,359 8,359 8,359 8,359 8,359 15,330 15,330 15,330 Amount treated annually (millions of gallons) 8,719 8,150 8,745 8,763 8,530 10,668 10,538 10,297 10,446 10,993 Unused capacity (millions of gallons) (360) 209 (386) (404) (171) (2,309) (2,179) 5,033 4,884 4,337 Percentage of capacity utilized % 97.50% % % % % % 67.17% 68.14% % 63

72 T H I S P A G E I N T E N T I O N A L L Y L E F T B L A N K

73 Compliance Section

74 T H I S P A G E I N T E N T I O N A L L Y L E F T B L A N K

75 67

76 Compliance and Other Matters 68

77 69

78 Upper Occoquan Sewage Authority Compton Road Centreville, Virginia Phone (703) Fax (703)