Look to the Future. Edwards Aquifer Authority. Comprehensive Annual Financial Report. San Antonio, Texas December 31, 2002

Look to the Future. Comprehensive Annual Financial Report Edwards Aquifer Authority San Antonio, Texas December 31, 2002

It has been my privilege to serve as chairman of the Edwards Aquifer Authority Board of Directors since the very first day we came into existence, August 10, 1995. Our job is an important one preserving and protecting the Edwards Aquifer. We have worked hard to build the consensus we need to work together as a regional body. And I look forward to continuing this work as we strive to achieve the goals set out by the Texas legislature when they created the Authority. Comprehensive Annual Financial Report Edwards Aquifer Authority December 31, 2002 Prepared by Administration Team and Public Affairs Team This agency has reached many milestones since we began in 1996 including issuing groundwater withdrawal permits and adopting rules for underground storage tanks and drought management/critical period management. We still have much to accomplish and we will continue to dedicate many hours of service to fulfilling the mission of the Authority. The success we have is a direct reflection of a very dedicated board and staff, and we look forward to meeting future challenges head on as we continue to manage this very important resource. Michael D. Beldon Chairman of the Board

Certificate of Achievement for Excellence in Financial Reporting Presented to Edwards Aquifer Authority, Texas For its Comprehensive Annual Financial Report for the Fiscal Year Ended December 31, 2001 A Certificate of Achievement for Excellence in Financial Reporting is presented by the Government Finance Officers Association of the United States and Canada to government units and public employee retirement systems whose comprehensive annual financial reports (CAFRs) achieve the highest standards in government accounting and financial reporting. President As we close 2002, the Authority can be proud of the fact that we have had a very productive year. The Authority continued to issue groundwater withdrawal permits and also took action to protect the aquifer from leaking storage tanks. The first contested cases were completed and brought to the board for final resolution. Most of the remaining permit protests were settled through negotiations. In October, the Edwards Aquifer Authority Board of Directors approved tighter restrictions for storage tanks located on the Edwards Aquifer Recharge Zone. These rules were the Authority s first step to protect water quality in the Edwards Aquifer. The Authority also addressed the issue of Demand Management/Critical Period Management and on November 12, 2002, Authority directors adopted rules creating staged reductions for aquifer withdrawals during periods of low aquifer conditions. While we can be proud of what was accomplished, there is still a lot to do. The Authority is working hard to complete the Habitat Conservation Plan along with a variety of studies outlined in the Edwards Aquifer Optimization Program. I am also proud of the accomplished and professional staff that I have the privilege to work with as we complete this very important work. 2002 was indeed an important year, but as we look to 2003 we know the work has just begun. Executive Director Gregory M. Ellis General Manager

TABLE OF CONTENTS INTRODUCTORY Message from the Chairman Inside Cover CAFR Award Certificate i Message from the General Manager ii Mission Statement and Edwards Aquifer Act 1 Edwards Aquifer Authority Goals 2 Transmittal Letter 3 Board of Directors, Management Team, and Regional Map 15 Organizational Team Structure 16 PROGRAMMATIC Authority Revises Director Single-Member District Lines 18 Water Quality Program 19 Demand Management/Critical Period Management Rules 20 Authority Permitting/Transfer Process 20 Habitat Conservation Plan 23 Precipitation Enhancement Program 27 Edwards Aquifer Optimization Program 29 Data Collection Programs Active in 2002 33 FINANCIAL 36 Independent Auditor s Report 37 General Purpose Financial Statements Combined Balance Sheet - Government Fund Types and Account Groups 38 Combined Statement of Revenues, Expenditures, and Changes in Fund Balances - All Governmental Fund Types 39 Combined Statement of Revenues, Expenditures, and Changes in Fund Balances - Budget (GAAP Basis) and Actual - General and Special Revenue Fund Types 40 Notes to Financial Statement 41 (These notes are an integral part of the General Purpose Financial Statements) Supplemental Information Schedule of General Fund Expenditures - Budget and Actual 47 STATISTICAL 48 General Governmental Expenditures by Function 49 General Governmental Revenues by Function 49 Principal Aquifer Management Fee Payers 50 Miscellaneous Statistics 50 Demographic Statistics 51

MISSION STATEMENT The Edwards Aquifer Authority is committed to manage and protect the Edwards Aquifer system and work with others to ensure the entire region of a sustainable, adequate, high quality and cost effective supply of water, now and in the future. EDWARDS AQUIFER AUTHORITY ACT The Edwards Aquifer Authority was created by the Texas Legislature to preserve and protect this unique groundwater resource. The Edwards Aquifer Authority Act passed in 1993. However, legal challenges prevented the Authority from operating until June 1996. The Act created a 17-member board of directors that sets policy to manage, conserve, preserve and protect the aquifer, and works to increase recharge and prevent waste or pollution of the aquifer. The board has 15 elected members from the region and two non-voting appointed members to carry out the duties set out in the Act. The Act also established the South Central Texas Water Advisory Committee (SCTWAC), made up of representatives from downstream counties to interact with the Authority when issues related to downstream water rights are discussed. EDWARDS AQUIFER AUTHORITY GOALS The Authority board established a specific set of eight goals. Each of these goals works together to achieve the mission of the agency to: Fully implement the requirements of the Edwards Aquifer Authority Act Develop an effective, comprehensive management plan based on sound, consensus-based scientific research and technical data Maintain continuous springflow Protect and ensure the quality of ground to surface water in the Authority s jurisdiction Forge solutions that ensure public trust Promote healthy economies in all parts of the region Research and develop additional sources of water Provide strong, professional management for the Authority 1 2002 Annual Report The Edwards Aquifer Authority 2

June 1, 2003 To the citizens of the Edwards Aquifer Authority: We are pleased to present the comprehensive annual financial report of the Edwards Aquifer Authority (the Authority) for the fiscal year ending December 31, 2002. The Authority is responsible for the accuracy and completeness of the information included in this report. To the best of our knowledge, all information in this report is accurate in all respects and is presented in a manner designed to enable the reader to gain an understanding of the Authority s financial and operational activities. The comprehensive financial annual report is presented in four sections: introductory, programmatic, financial, and statistical. The introductory section includes this transmittal letter, the Authority s organizational chart, and a list of the board of directors. The programmatic section highlights the Authority s primary accomplishments of 2002. These accomplishments include: redistricting of director precincts prior to the 2002 election, the historic adoption of water quality and demand management and critical period rules, and continuation of the Authority s permitting program, habitat conservation plan development, precipitation enhancement program, optimization technical studies, and data collection programs. The financial section includes the general purpose financial statements, the combining and individual fund and account group financial statements and schedules, as well as the auditor s report on the financial statements and schedules. In this report, the firm of Padgett, Stratemann & Co., L.P., expresses their unqualified opinion the financial statements are presented fairly and in conformity with generally accepted accounting principles. The statistical section includes selected financial and demographic information. This information is presented in both single-year and multi-year formats. Multi-year information dates back to 1996, the first year of Authority operations. 1615 N. St. Mary s Street San Antonio, Texas 78215-1415 (210) 222-2204 (800) 292-1047

HISTORY OF THE EDWARDS AQUIFER AUTHORITY The southern portion of the Edwards Aquifer is one of the world s unique groundwater resources, spanning about 180 miles of south central Texas. It is the sole source of water for a unique system of aquatic life, including several threatened and endangered species. Cities, towns, rural communities, and farm and ranch lands all depend on the aquifer s water for household, agricultural, industrial, and recreational purposes. The diversity of uses illustrates the importance of the aquifer to the lives and livelihoods of residents in the Edwards Aquifer region. The Edwards Aquifer Authority was created by the Texas Legislature in 1993, to preserve and protect this unique groundwater resource. However, legal challenges prevented the Authority from operating until June 1996. The Act created a 17-member board of directors that sets policy to manage, conserve, preserve, and protect the aquifer and works to increase recharge and prevent waste or pollution of the aquifer. The board has fifteen elected members from the region and two non-voting appointed members to carry out the duties set out in the Edwards Aquifer Authority Act (the Act). ECONOMIC CONDITION The Authority s jurisdiction includes all or portions of eight counties in south central Texas Atascosa, Bexar, Caldwell, Comal, Guadalupe, Hays, Medina, and Uvalde. As is evident in the table below, these counties experienced significant growth between 1990 and 2000. County 2000 % Change 2000 % Change Population from 1990 Population from 1990 (Total) (Total) (Jurisdiction) (Jurisdiction) Atascosa 38,628 26.5% 2,544 13.1% Bexar 1,392,931 17.5% 1,392,931 17.5% Caldwell 32,194 22.0% 20,300 9.6% Comal 78,021 50.5% 48,315 34.1% Guadalupe 89,023 37.2% 55,446 54.5% Hays 97,589 48.7% 53,965 33.1% Medina 39,304 43.9% 39,304 43.9% Uvalde 25,926 11.1% 25,926 11.1% In terms of actual population, Bexar County experienced the most significant growth, gaining about 200,000 residents since 1990. San Antonio, the county seat of Bexar County and home to about 1.1 million people, is the nation s ninth largest city. Comal, Guadalupe, and Hays counties also experienced significant population increases in the last decade. These counties are located between San Antonio and Austin. Medina County s growth is primarily associated with the metropolitan expansion of San Antonio. Bexar County, representing about 85% of the total population of the Authority s region, was the source of 82% of the Authority s aquifer management fee revenue in 2002. The average unemployment in Bexar County for 2002 was 5.3%; up from 4.1% in 2001. These rates were slightly below the respective state-wide averages for Texas of 6.3% and 4.8%. A significant portion of San Antonio s economy depends on tourism. According to the Greater San Antonio Chamber of Commerce, the number of convention delegates in 2002 was up 16.1% over 2001, making 2002 the best year ever in terms of delegate attendance. The city s total non-farm employment also increased 0.7% in 2002. Growth in the construction (8.2%), government (2.8%), and services (1.3%) sectors, offset a 5% decline in the Transportation/Utilities/Communications sector. San Antonio also experienced a 6.9% decrease in single-family home construction and a 1% decrease in sales of existing homes. The Edwards Aquifer Authority plays a critical role in the continued viability of the entire region as a home for citizens and businesses. As the primary source of water for all uses, the amount and the quality of the water provided by the Edwards Aquifer are vital to continued economic growth. 5 2002 Annual Report The Edwards Aquifer Authority 6

MAJOR INITIATIVES The Authority made significant progress or completed a number of studies vital to its mission in 2002. The following is an overview of some of these accomplishments and a look to the future of these projects. These accomplishments will be addressed later in this annual report. Precinct Redistricting In 2002, the Authority analyzed the census data gathered from the 2000 U.S. Census and worked with representatives with each county within the Authority s jurisdiction to keep single-member district lines in each county the same as those district lines previously approved by the board, while not splitting any new county election precincts other than those precincts divided by the Authority s jurisdictional boundaries. Authority staff and consultants placed emphasis on maintaining existing general district population and minority apportionment percentages. Water Quality Rules In 2002, the Authority implemented its first set of rules designed to protect the generally excellent water quality of the Edwards Aquifer. The rules, which became effective on October 18, 2002, prohibit the installation of new aboveground storage tanks and new underground storage tanks on the Edwards Aquifer Recharge Zone within the Authority s jurisdictional area. Other water quality rules regulating water well construction and additional recharge zone protection are expected to be adopted in 2003. Demand Management/Critical Period Rules The Authority adopted rules in 2002 aimed at addressing groundwater use during dry periods. These rules were historic in that they were the first such rules adopted after years of regional negotiation and compromise. Permitting In 2002, the Authority continued the process of issuing initial regular permits authorizing the withdrawal of groundwater from the Edwards Aquifer. These permits serve as important tools in the Authority s efforts to manage the groundwater supply and demand. Habitat Conservation Plan The Authority is mandated to protect environmental resources while also protecting domestic and municipal water supplies, existing industries, and economic development of the state. In 1999, the Authority began development of a Habitat Conservation Plan (HCP) for Comal Springs, San Marcos Springs and associated habitats. The HCP is an integral part of an Incidental Take Permit. An Incidental Take Permit authorizes taking endangered or threatened species if the taking is incidental to otherwise lawful activities. The HCP must include measures that would adequately minimize and mitigate the effects of any incidental taking. The Authority completed the first complete draft of the HCP in November 2002. The entire HCP process is scheduled to be completed in 2004. Precipitation Enhancement The Authority continued its precipitation enhancement program in 2002. An assessment of the benefits of this program, also referred to as cloud-seeding is due in 2003. Optimization Technical Studies Several Optimization Technical Studies (OTS) were completed in 2002. The OTS are designed to evaluate potential technical options for increasing the amount of water stored in the Edwards Aquifer and to identify effective methods for optimizing the amount of water available for withdrawal. Data and information obtained from the OTS will provide aquifer managers with the tools necessary to make scientifically sound decisions. Two additional OTS concerning the movement of groundwater through the Edwards Aquifer are scheduled to be completed in 2003. Data Collection The Authority monitors and studies the aquifer through extensive data collection efforts. This data collection is designed to provide information for the calculation of recharge and discharge from the Edwards Aquifer as well as monitor water quality in the aquifer. 7 2002 Annual Report The Edwards Aquifer Authority 8

FINANCIAL INFORMATION Authority management is responsible for administering the internal control structure designed to protect the Authority s assets from loss, theft, or misuse, and to ensure that adequate accounting data are compiled to allow for the preparation of financial statements conforming with generally accepted accounting principles. The Authority s accounting system and purchasing process serve to safeguard assets and provide reasonable assurance that financial transactions are executed properly and efficiently. Budgeting Controls The Authority bylaws adopted by the board of directors require the general manager to prepare an annual budget prior to the start of each fiscal year. The budget includes estimated funds available from all sources and includes appropriations of expenses anticipated in that year to conduct the activities of the Authority. The general manager is authorized to expend funds in amounts up to, but not exceeding, the amounts included in the budget adopted by the board. In addition, the bylaws require board approval of any individual Authority expenditure exceeding $15,000. The board receives regular monthly reports comparing the Authority s actual expenses to the budget. General Government Functions Funding for all Authority general government programs comes primarily from an aquifer management fee charged to agricultural and non-agricultural users of Edwards Aquifer groundwater. The aquifer management fee for non-agricultural users is assessed on groundwater authorized to be used for the year. Fees for agricultural users are charged on groundwater actually used during the preceding year. The revenue collected from agricultural users in 2002 is based on the aquifer management fee rate assessed in 2001. Below is a summary of aquifer management fee rates for the last five years: Aquifer Management Fee History (dollars per acre-foot) 1998 1999 2000 2001 2002 Non-Agricultural $17.00 $18.50 $18.50 $23.00 $25.00 Agricultural (Base)* N/A N/A N/A $ 3.00 N/A Agricultural (Unrestricted) $ 3.40 $ 3.60 $ 3.70 $ 4.60 $ 2.00 *Prior to 2001, the Authority assessed only one agricultural aquifer management fee. The Texas Legislature amended the Edwards Aquifer Authority Act to limit the aquifer management fee rate for agricultural groundwater use to $2.00 per acre-foot and expanded the definition of agricultural use. These amendments went into effect September 1, 2001. Groundwater used before that date was assessed the fees described above. The fee for groundwater used for agricultural purposes after September 1, 2001 was limited to $2.00 per acre-foot. The Edwards Aquifer Authority 10

The following information, depicted in table and graphic form, summarizes combined general fund and special revenue fund revenue for the fiscal year-ended December 31, 2002, and the amount and percentage of changes from prior year revenue. Increase Percent of Percent of (Decrease) Increase Revenue Amount Total from 2001 (Decrease) Ad Valorem Taxes $ 12,179 0.12% $ 667 5.79% Aquifer Management Fees 9,378,306 96.09% 1,044,809 12.54% Grant Revenue 27,693 0.28% (188,146) (87.17%) Interest 182,504 1.87% (96,350) (34.55%) Miscellaneous 159,151 1.63% 59,478 59.67% Total $ 9,759,833 100.00% $ 820,458 9.18% The following information, also depicted in table and graphic form, summarizes combined general fund and special revenue fund expenditures for the fiscal year-ended December 31, 2002, and the amount and percentage of changes from prior year expenditures. Increase Percent of Percent of (Decrease) Increase Expenditures Amount Total from 2001 (Decrease) Personnel $ 2,731,155 23.41% $ 298,274 12.26% Commodities 1,927,814 16.52% 1,149,876 147.81% Contractual Services 5,820,109 49.89% 1,182,850 25.51% Capital Outlay 202,864 1.74% (114,156) (36.01%) Debt Service 985,055 8.44% 531,193 117.04% Total $11,666,997 100.00% $ 3,048,037 35.36% 2002 Combined Expenditures (by Category) In 2002, aquifer management fee revenue represented 96% of total revenue. The 13% increase in revenue from this source over the prior year is primarily the result of an increase in the non-agricultural aquifer management fee rate from $23.00 per acre-foot in 2001, to $25.00 in 2002. Interest revenue decreased by about 35% from the prior year due to average lower interest rates that decreased from 3.6% in 2001, to 1.79% in 2002. The Authority does not assess ad valorem taxes. However, the Authority does collect delinquent tax revenue owed to the Authority s predecessor agency, the Edwards Underground Water District. Revenue from this source increased from $11,512 in 2001 to $12,179 in 2002, an increase of 6%. In 2001, the Authority funded a precipitation enhancement program and received partial reimbursement of its expenses in the form of a grant from the Texas Natural Resource Conservation Commission (TNRCC). Under new agreements with two regional associations to administer the Authority s program in 2002, the Authority was not eligible for reimbursement for these expenses in 2002. The Authority did receive about $28,000 in 2002 from the state in reimbursement for 2001 expenses representing about an 87% decrease in revenue from the prior year. Miscellaneous revenue increased from $98,923 in 2001 to $158,401 in 2002, an increase of 60%. This increase was due primarily to the release of accrued 2001 expenses. The 12% increase in the Authority s 2002 personnel expenditures over 2001 is the result of a combination of factors. These factors include the addition of seven new positions in 2002, a lower employee turnover rate as compared to 2001, and increased funding for employee health insurance benefits due to increased medical insurance premiums. The Authority experienced a 148% increase in commodities expense over 2001. The majority of this increase is attributed to an allowance for doubtful receivable accounts recorded as a commodities expense in 2002. Expenses associated with education supplies and public/legal notices also contributed to the large increase in 2002. Contractual services expenses in 2002 were about 25% higher than in the prior year. This increase was primarily due to an increase in contractual professional services for technical studies, rules development, and legal expenses associated with contested permits. The Authority purchased a number of capital items such as notebook computers for directors and managers, office renovation, and water well meter installations in 2001. Because the Authority s need for new and replacement capital equipment in 2002 was less than in 2001, the Authority spent about 36% less in this category in 2002. 11 2002 Annual Report The Edwards Aquifer Authority 12

The Authority has never issued any bonds. However, the Authority borrowed $3,000,000 in 1998 and $500,000 in 2001 from the Texas Water Development Board (TWDB) to fund the Agricultural Water Conservation Loan Program. The funds borrowed by the Authority are used to issue subsequent loans to irrigators to install high efficiency irrigation equipment. Irrigators are required to repay these collateralized loans at interest rates slightly higher than the interest rate the Authority pays the TWDB. The Authority uses this additional interest to help defray the cost of administering the program. In 2002, the Authority repaid $678,338 in un-loaned principle and interest as well as interest on the $500,000 borrowed in 2001. These expenses led to an increase of 117% in 2002. GENERAL FUND BALANCE The balance of the Authority s general fund decreased 36% in 2002. This fund balance decrease is due to decreased revenue and increased expenses. SPECIAL REVENUE FUND BALANCE The Authority s balance of the special revenue fund increased 14.7%. EMPLOYEE RETIREMENT PROGRAM The Authority s full-time employees participate in two retirement programs. Employees participating in these programs contribute a total of 7% of their gross earnings. The Authority matches a total of 7%. The Texas Counties and Districts Retirement System (TCDRS) is a non-traditional defined benefit program governed by state law. The TCDRS contribution rate for employees is 4% of gross earnings. The Authority contributed 2.99% of employee salaries to TCDRS in 2002. The Authority also participates in a defined contribution retirement plan sponsored by the International City Management Association (ICMA) Retirement Corporation. Under the terms of this program, employees contribute 3% of their gross earnings. For 2002, the Authority contributed 4.01% to ICMA on behalf of employees. CASH MANAGEMENT The Authority, in compliance with the State of Texas Public Funds Investment Act, has adopted and reviews annually its Investment Policy and Investment Strategy Statement. This statement, which is a section of the Authority s Bylaws, identifies the organization s investment objectives. In priority order, these objectives are: the preservation and safety of the principal; liquidity; investment diversification; reasonable yield; appropriate maturity dates; and enhanced quality and capability of investment management. Cash temporarily idle during 2002 was invested in demand deposit accounts, money market accounts, certificates of deposit, and U.S. Treasury Bills. Demand deposit and money market accounts are fully collateralized by the Authority s central depository. Certificates of deposit were purchased in a number of regional banks in $100,000 increments. These certificates are insured by the Federal Deposit Insurance Corporation. The Authority s treasury bills are guaranteed by the full faith and credit of the United States government. The Authority earned $182,504 in interest revenue during 2002 through an average yield on investments of 1.79%. At December 31, 2002, the total cash balances of the Authority were $61,238, and the investment balances were $4,396,869, representing an investment of 98.6% of all available cash. RISK MANAGEMENT The Authority finances its risks of loss through the purchase of commercial property and casualty, and workers compensation insurance. In addition, the Authority maintains directors and officers liability and employee dishonesty insurance coverage. OTHER INFORMATION INDEPENDENT AUDIT Section 49.191 of the Texas Water Code requires an annual audit to be conducted by an independent certified public accountant or an auditor licensed by the Texas Board of Public Accountancy within 120 days after the fiscal year-end. The board of directors selected the accounting firm of Padgett, Stratemann & Co., LLP. The auditor s report on the general purpose financial statements is included in the financial section of this report. AWARDS The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the Edwards Aquifer Authority for its Comprehensive Annual Financial Report for the fiscal year ended December 31, 2001. In order to be awarded a certificate of achievement, a government must publish an easily readable and efficiently organized comprehensive annual financial report. This report must satisfy both generally accepted accounting principles and applicable legal requirements. A certificate of achievement is valid for a period of one year only. We believe that our current comprehensive annual financial report continues to meet the certificate of achievement program s requirements and we are submitting it to the GFOA to determine its eligibility for another certificate. Acknowledgments This report was produced by the Authority s Administration and Public Affairs teams. In particular, we would like to thank Ms. Lupita Hernandez, Accounting Coordinator, and Ms. Deana Watson, Accounting Clerk, for their contributions made in preparing this report. In closing, we would like to thank the Edwards Aquifer Authority Board of Directors, without whose leadership and support, this report would not have been possible. Sincerely, Gregory M. Ellis General Manager Brock J. Curry Program Manager Administration 13 2002 Annual Report The Edwards Aquifer Authority 14

THE EDWARDS AQUIFER 2002 BOARD OF DIRECTORS EXECUTIVE OFFICE General Manager Deputy General Manager Chief Technical Officer Administrative Assistant Executive Assistant Carol Patterson Bexar County District 1 Levi Jackson, III, Ph.D. Bexar County District 2 Gil Coronado Bexar County District 3 Michael D. Beldon Chairman Bexar County District 4 Rafael Zendejas Bexar County District 5 Susan K. Hughes Secretary Bexar County District 6 Program Manager AQUIFER SCIENCE Senior Hydrogeologist (2) Gauging Systems Specialist Gauging Systems Technician (3) Modeling/Data Analyst Environmental Science Technician (4) Hydrogeologist Environmental Coordinator (2) Jerry Green Bexar County District 7 Gary Henry Comal County District 8 Doug Miller Treasurer Comal/Guadalupe counties District 9 W. Kenneth Barnes Hays County District 10 W. Bailey Barton Vice Chairman Hays/Caldwell counties District 11 Hunter Schuehle Medina County District 12 Program Manager P ERMITTING Permits/Enforcement Coordinator (2) Regulatory Programs Coordinator Field Representative (4) Docket Clerk Program Associate Secretary Water Well Meter Specialist Luana Buckner Medina/Atascosa counties District 13 Rogelio Muñoz Uvalde County District 14 Bruce Gilleland Uvalde County District 15 PLANNING & CONSERVATION Program Manager Water Resources Coordinator (2) Research Coordinator Conservation Specialist Secretary Bob Keith South Central Texas Water Advisory Committee (SCTWAC) Representative Maurice Rimkus Medina/Uvalde counties Representative THE EDWARDS AQUIFER AUTHORITY MANAGEMENT TEAM PUBLIC AFFAIRS Program Manager Education Coordinator Public Information Assistant Public Service Assistant ADMINISTRATION Gregory M. Ellis General Manager Velma R. Danielson Deputy General Manager Geary Schindel Chief Technical Officer Brock J. Curry Administrative Program Manager Margaret Garcia Public Affairs Program Manager Program Manager Accounting Coordinator Records Assistant Human Resources Coordinator Information Systems Coordinator Information Systems Technician Procurement Coordinator Facilities Associate GIS Analyst Accounting Clerk Records Clerk Receptionist (Part-time - 2) Secretary John Hoyt Aquifer Science Program Manager Rick Illgner Planning & Conservation Program Manager Steve Walthour Permitting & Enforcement Program Manager EDWARDS AQUIFER AUTHORITY 2002 ORGANIZATIONAL TEAM STRUCTURE

AUTHORITY REVISES DIRECTOR SINGLE-MEMBER DISTRICT LINES With the completion of the 2000 U. S. Census, Authority staff and consultants continued work in 2002 to analyze the new census data compared to the Authority s fifteen existing director single-member district lines. The goal of this effort was to keep, insofar as possible, the director single-member district lines in each county the same as those district lines previously approved by the board, while not splitting any new county election precincts other than those precincts divided by the Authority s jurisdictional boundaries. Additionally, Authority staff and consultants placed emphasis on maintaining existing general district population and minority apportionment percentages. Authority staff and consultants then prepared recommendations for each of the proposed districts demographic compositions. The board of directors approved these new director district lines on March 12, 2002. In addition, on August 12, 2002, the U.S. Department of Justice precleared these new lines for use in Authority director elections. These new lines will help ease administration of the Authority s elections, and help minimize voter confusion regarding whether voters are eligible to vote in a given director district race. In addition to changes to the director single-member district lines, 2002 was an election year. Authority directors in each odd-numbered district were up for re-election, along with directors for District 2 (Bexar County) and District 8 (Comal County). Directors in Districts 2 and 8 were required to seek election in 2002 because they were appointed to fill unexpired terms for vacancies on the board since that occurred since the 2000 election. Fifteen candidates applied for a place on the ballot for the Tuesday, November 5, 2002 election to the Edwards Aquifer Authority Board of Directors. Districts 3, 5, and 7 in Bexar County, District 8 in Comal County, and District 13 in Medina & Atascosa counties had contested races. The winners in the races by county are: Bexar County, District 1 Carol Patterson, District 2 Dr. Levi Jackson, District 3 George Rice, District 5 Rafael Zendejas, and District 7 Johnny Rodriguez; Comal County, District 8 Cheryl Gilpin; Comal & Guadalupe counties, District 9 Doug Miller; Hays County, District 11 W. Bailey Barton; Medina & Atascosa counties, District 13 Luana Buckner; and in Uvalde County, District 15 Bruce Gilleland. New members to the board are Mr. George Rice, Mr. Johnny Rodriguez, and Mrs. Cheryl Gilpin. The Edwards Aquifer Authority 18

WATER QUALITY PROGRAM The Authority s water quality program consists of water quality monitoring activities, the promulgation and water quality protection rules, and the implementation of programs to administer the rules. In 2002, the Authority implemented its first set of rules designed to protect the generally excellent water quality of the Edwards Aquifer. In October 2002, the board passed EDWARDS AQUIFER AUTHORITY RULES, ch. 713 (Water Quality), subch. G (Recharge Zone Protection Aboveground and Underground Storage Tanks). The rules became effective on October 18, 2002, and prohibit the All existing ASTs on the recharge zone must be upgraded to incorporate a method of tertiary containment no later than 15 years after the effective date of the rules or be removed. All existing USTs on the recharge zone must be upgraded to incorporate a method of tertiary containment no later than 30 years after the date that the tanks were installed or be removed. Except as otherwise indicated by these rules, tank owners or operators must operate their AST or UST systems in accordance with Texas Commission on Environmental Quality (TCEQ) rules. DEMAND MANAGEMENT/CRITICAL PERIOD MANAGEMENT RULES In November 2002, Authority Directors adopted permanent Demand Management/Critical Period Management (DM/CPM) rules. The DM/CPM rules became effective on November 22, 2002. The new regulations require municipal and industrial users to submit a quarterly pumping allocation schedule to the Authority by January 1, 2003. Irrigators must submit schedules by February 1, 2003. DM/CPM reductions will only occur if aquifer trigger levels are reached. Reductions of 5%, 10%, and 15%, and 23% of a pumper s authorized use are required in Stage I, II, III, and IV, respectively. Reductions for irrigators will only occur under Stage III and Stage IV conditions and municipal and industrial users are responsible for determining how they achieve the required reductions. This is the first time permanent DM/CPM rules have been implemented on a regional basis. Prior to the implementation of permanent DM/CPM rules, Emergency Drought Management Rules were imposed in May 2000, when aquifer levels declined below 650 feet mean sea level (msl). Aquifer conditions remained low until September of 2000. Before passage of the permanent DM/CPM rules in November, the Authority s Board of Directors were considering the need to impose Emergency rules in early July as aquifer levels again declined to 650 feet msl. However, an extreme rainfall event in early July resulted in aquifer levels rising over 40 feet in the following months and reaching near record highs. Aquifer levels are expected to remain above DM/CPM levels for 2003. installation of new aboveground storage tanks (ASTs) and new underground storage tanks (USTs) on the Edwards Aquifer Recharge Zone within the Authority s jurisdictional area. In addition to the prohibition of new ASTs and USTs that contain a regulated substance, the rules include the following: Most ASTs used for storing a motor fuel that have a combined capacity of 600 gallons or less are exempt from the prohibition. All ASTs with a combined capacity of 110 gallons or less are exempt from the prohibition. Any existing AST or UST system located on the recharge zone that undergoes a major modification must incorporate a method of tertiary containment. Any UST system located on the recharge zone that is determined to be leaking must incorporate a method of tertiary containment or be removed. In 2002, the development of additional water quality protection rules was initiated. These additional rules include the regulation of water well construction, operation, maintenance, and closure and the regulation of recharge zone development. The well construction rules will be codified as EDWARDS AQUIFER AUTHORITY RULES ch. 713 (Water Quality), subchs. A (Definitions), C (Well Construction, Operation, and Maintenance), and D (Abandoned Wells; Well Closures). The recharge zone protection rules will be codified as EDWARDS AQUIFER AUTHORITY RULES ch. 713 (Water Quality), subch. H (Recharge Zone Protection). These rules are expected to be considered by the board in the last six months of 2003. AUTHORITY PERMITTING/TRANSFER PROCESS The Edwards Aquifer is one of the most permeable and productive aquifers in the United States. There are three major components of the Edwards Aquifer system: the drainage zone, the recharge zone, and artesian zone. Streams carry rainfall runoff from the drainage area to the recharge zone where it penetrates the ground to begin its journey inside the aquifer, generally from west to east. Groundwater flows through the artesian zone under pressure, moving through fractures, conduits, and caves. Groundwater is then discharged through natural spring openings or wells. For the period of record from 1934 to 2002, average annual recharge to the Edwards Aquifer was 698,900 acrefeet and the average discharge by wells and springs was 676,400 acre-feet. In 2002, recharge totaled 1,665,200 acre-feet and the estimated total discharge from the aquifer by wells and springs totaled 977,100 acre-feet. The need to manage this resource is continuous. The Edwards Aquifer Authority Act (the Act) established a means to share the water, limiting regular permits to a total of 450,000 acre-feet per year, and allowing 200,000 acre-feet per year to springflow. In addition, the Edwards Aquifer Authority (the Authority) is mandated to manage the southern portion of the Edwards Aquifer to protect important environmental resources while also protecting domestic and municipal water supplies, existing industries, and economic development of the state. The Act also directed the Authority to reduce annual permitted withdrawals from the aquifer 19 2002 Annual Report The Edwards Aquifer Authority 20

from 450,000 acre-feet to 400,000 acre-feet by 2008, unless the board of directors determines that additional aquifer supplies are available. Further, by the end of 2012, the Authority is required to implement and enforce water management procedures to ensure that continuous minimum springflows at Comal and San Marcos springs are maintained to protect endangered and threatened species, to the extent that federal law requires protection. Permitting groundwater use is a complex mix of economic, political, social, and hydrogeological elements. Permits play a vital role in conserving water, protecting water quality, monitoring, measuring water availability, usage, and managing supply and demand in an effective, efficient, and equitable way. All municipal, industrial, and irrigation users of the Edwards Aquifer were required to file a declaration of historical use and application for initial regular permit based on the period from June 1, 1972, through May 31, 1993. Declarations had to be filed by December 30, 1996. On November 9, 2000, Authority staff proposed Initial Regular Permits to 822 of the 1,085 applicants based on historical use. Of the original 1,085 applications evaluated, 632 were classified as irrigation, 161 as municipal, 211 as industrial, and 81 were considered to be domestic/livestock. Of the 822 applications Authority staff proposed the board grant, 530 were for irrigation use, 150 were for industrial use, and 142 were for municipal use. Applicants originally filed protests and requests for contested case hearings on 389 applications. The State Office of Administrative Hearings (SOAH) and administrative law judges retained by the Authority conducted contested case hearings in 2002 and continue to conduct hearings in 2003. From January 2001 to December 31, 2002, final board orders were issued on 158 applications that were contested. These contested cases were settled through withdrawal of the protest or completed SOAH hearing process. Through 2002, the board took final action on 813 applications, issuing initial regular permits to 641 applicants, and denying 172 applications. The Authority s enabling act required that all users receive their maximum historical use from 1972-1993, providing total permitted amounts did not exceed the 450,000 acre-foot cap. Because the aggregate in proposed permits does exceed that cap, the total is proportionately reduced until the cap is reached. However, the legislature also added guaranteed minimums for each qualified applicant, requiring the Authority to step each permit amount back up to that minimum. The total anticipated maximum historical use from 1972-1993 is approximately 655,100 acre-feet with anticipated aggregate IRP amounts totaling 563,200 acre-feet after the maximum historical use is proportionately reduced and the guaranteed minimum for each qualified applicant is honored by the Authority. According to Edwards Aquifer Hydrologic Report for 2002, irrigation use of Edwards Aquifer water from 1955 to 2002 averaged 107,800 acre-feet per year with a maximum recorded use of 203,100 acre-feet in 1985. Since 1993, average irrigation use is 105,400 acre-feet annually with the maximum use reported in 1996 at 181,300 acrefeet. Though the maximum aggregate groundwater withdrawal amount for irrigation during any one year occurred in 1985, the maximum aggregate permitted withdrawal amount for irrigation is 260,900 acre-feet. The Authority s enabling act required that all irrigators receive at least two acre-feet of water for each acre they irrigated in any one year during the historical period. Staff anticipates issuing 255,700 acre-feet of groundwater withdrawal rights to irrigators, 74,400 acre-feet more than has ever been used in one year. The non-irrigation applicants did not fare as well. Municipal and industrial uses of Edwards Aquifer groundwater averaged 230,000 acre-feet per year from 1955 to 2002. Municipal pumpers recorded their maximum annual withdrawals of 287,200 acre-feet in 1984, and industrial pumpers reached their maximum annual withdrawal of 67,500 acre-feet in 1991, primarily caused by a single catfish farm that used almost 35,000 acre-feet that year. Since 1993, municipal and industrial users have withdrawn groundwater an average of 290,700 acre-feet per year with maximum use totaling 340,800 acre-feet. The maximum aggregate withdrawals for municipal and industrial users were approximately 394,200 acre-feet during the historical period. All municipal and industrial users were to receive permits of at least their historical average. Staff anticipates municipal and industrial pumpers will be issued 307,500 acre-feet of groundwater withdrawal rights. Municipal and industrial pumpers average use has grown since 1993. In 2002, one of the wettest years on record, municipal and industrial pumpers withdrew 259,100 acre-feet of groundwater from the Edwards Aquifer. Authority staff believes that the future maximum irrigation requirement for the region will decline to near 100,000 acre-feet per year, providing surplus groundwater for withdrawals elsewhere in the Edwards Aquifer region. The transfer program is the mechanism to move surplus groundwater withdrawal rights to aquifer users that require additional supplies. A transfer can change all or part of a groundwater withdrawal permit s purpose of use (municipal, industrial, or irrigation), place of use, point of withdrawal, or withdrawal amount. The Authority allows permit holders to transfer groundwater rights to other aquifer users and uses throughout the region. Two primary exceptions to transfers are that only one-half of the initial regular permit issued for irrigation groundwater can be transferred, and all transfers that cross Cibolo Creek in northeastern Bexar County from west to east may be subject to a hearing to prove that the transfer will not harm Comal Springs or San Marcos Springs. Since the inception of the Authority s program, the Authority completed 719 transfers representing 130,300 acre-feet of groundwater withdrawal rights, though many of the transfers represent temporary leases. These transfers included 30 transfers representing 2,680 acre-feet from west of Cibolo Creek to points east of the creek. In considering a transfer request, Authority staff determines if the transferor has the available groundwater withdrawal rights for transfer, has paid all applicable aquifer management fees, and is not under an enforcement action. For temporary transfers, or leases, a notice is issued to the transferor and transferee that the transfer is complete. Permanent transfers require the staff to issue a new permit to the transferee and an amended permit to the transferor. Permanent transfer is not complete until the permits are filed with the county clerk and a copy of the filing is provided to the Authority. The gap between the municipal and industrial permitted rights and their current needs will have to be filled through transfers from irrigators. But the Authority also has to retire enough groundwater withdrawal rights to reach the 450,000 acre-foot cap. As proposed, 563,200 acre-feet of groundwater withdrawal rights have been proposed by staff or issued by the board. The total proposed or issued permits exceed the cap by approximately 113,200 acre-feet. Fortunately, the irrigators will receive almost 155,700 acre-feet in excess of their current demand. The solution the legislature crafted for the Edwards Aquifer was truly unique. The combination of a cap on water rights, permits based on historical use, and free market transfers has never been tried in Texas. Even though the Authority had to create this system from whole cloth, and there have been a few snags along the way, the overall permitting program is a success. There are still a few challenges ahead as the contested cases are tried, but those challenges will be met head on. The board of directors has already demonstrated the willingness and determination to prevail in any and all litigation that may arise. The Authority s purpose is to implement this unique regulatory scheme and effectively protect the unique resource of the Edwards Aquifer. 21 2002 Annual Report The Edwards Aquifer Authority 22

HABITAT CONSERVATION PLAN DOCUMENT DEVELOPMENT In November 2002, the Authority completed the first draft of the completed Habitat Conservation Plan (HCP). The document contains more than 650 pages, 11 chapters, and 5 management alternatives. Each management alternative, with one exception, contains sufficient protective measures to provide adequate long-term protection for the endangered species. The management alternatives contain the following elements: Plan Regular Withdrawals Maximum Reduction (%) & Mitigation Funding (acre-feet) Withdrawal Amount During Most Measures Severe Drought (acre-feet) ALT -1 450,000 to 2007 15% reduction None None (No Action)* 400,000 after 2008 340,000 after 2008 2 450,000 to 2007 15% reduction to 2007 Lowest $100,000 for 175,000 after 2008 none beginning in 2008 years 1-5 3 450,000 to 2007 15% reduction High $400,000 for 400,000 after 2008 340,000 after 2008 years 1-5, $200,000 for years 5-50 4 500,000 30% reduction High $1 million 350,000 endowment $750,000 for years 1-5 $275,000 for years 6-50 5 550,000 30% reduction Highest $1 million 385,000 endowment $1,250,000 for years 1-5, $500,000 for years 6-50 *No Action: Indicates that no action was taken on the part of the U. S. Fish & Wildlife Service to issue an Incidental Take Permit. Permit is only issued if a HCP, a specific set of management protections that will protect endangered species, is developed and approved by the Service. On December 8, 1998, the board authorized staff to prepare a request for proposals in order to secure a consultant to assist with the preparation of a HCP for the protection of the species that are listed, or may become listed, at Comal and San Marcos springs. The Authority has addressed this power by opting to pursue development of a HCP. In July of 1999, the Authority selected firms to develop an HCP to provide for the long-term protection of aquatic species at Comal and San Marcos springs. The Authority s effort to develop an HCP was modified by passage of State legislation in 1999. SB 1272 requires the formation of a Citizens Advisory Committee (CAC) to provide input on development of the HCP. A CAC that includes 26 persons and/or organizations was formed in November 1999. The effort to complete the HCP is divided into two phases: Phase 1 is Data Collection and Analysis; Phase 2 is Development of the Habitat Conservation Plan and Environmental Impact Statement. Phase 1 was concluded in April 2000 and Phase 2 will be completed in 2004. Also in November, the Authority was notified that the agency was the recipient of a $328,000 grant from the U. S. Fish & Wildlife Service (Service). Annually, the Service provides pass through grants to state environmental agencies that can be awarded to specific endangered species-related projects or activities. In November 2002, the Service notified Texas Parks & Wildlife (TPW) it would be receiving a grant for developing the Authority s Regional Habitat Conservation Plan. In order to complete the grant process, the Authority and TPW entered into an Interlocal Agreement, effective January 1, 2003 through December 31, 2004, to disperse these funds to the Authority. The Edwards Aquifer Authority Act provides the Authority with the ability to hold permits under the Endangered Species Act. The common permit issued related to endangered species is a Take Permit. A Take 23 2002 Annual Report The Edwards Aquifer Authority 24

BIO-MONITORING AND RESEARCH In 2000, the Authority initiated a biologic monitoring program at the Comal and San Marcos springs ecosystems. The goal of the monitoring is to assess the impacts of unusually low and unusually high flows on the threatened and endangered species in these environments. Baseline data are collected during quarterly comprehensive monitoring events, and data regarding the impacts of unusual flow (flows that are significantly higher or lower that normal) regimes are collected during critical period monitoring events. The monitoring events generally include: Water quality sampling and analysis and flow measurements Vegetation mapping Invertebrate sampling Parasite loading analysis Salamander, fountain darter, and exotic/predator fish sampling Aquatic habitat evaluation (plant species and condition) In 2002, two quarterly, one high flow and one modified quarterly (water quality sampling omitted), sampling events occurred. The Authority concluded four research efforts in 2002; one investigation on a species of concern (Cagle s Map Turtle) and three studies on endangered species. All of the research efforts provided supplemental information for the development of the HCP. A brief summary of the investigations follows: Assessment of Instream Flow and Habitat Requirements for Cagle s Map Turtle This study concluded the turtle requires very little water velocity for optimum production. Man-made instream obstructions, such as dams, pose problems for the turtle by splitting their territory, isolating the populations, and exposing them to predation if they try to navigate around the obstruction. Hydroelectric dams create additional problems by creating water surges that interfere with egg laying and hatching. Finally, effluent from wastewater treatment plants on the Guadalupe River appears to present water quality problems for the turtle. Comal Springs Riffle Beetle (Riffle Beetle) Habitat and Population Evaluation This study was conducted to determine if the Comal Springs Riffle Beetle had greater habitat diversity than previously mapped. Earlier studies had found the Riffle Beetle only in a limited area in the upper spring runs. Research efforts of this study located the Riffle Beetle in abundance along shoreline springs of Landa Lake and in an upwelling in a deep portion of Landa Lake. Comal Springs Riffle Beetle Laboratory Study: Evaluation Under Variable Flow Conditions This study was conducted to examine the Riffle Beetle s response to simulated low flow or drought conditions. Research is important because there was no data collected on them during the 1950s drought when Comal Springs went dry; and a previous study suggests that, because of their habitat in the upper reaches of Comal Springs, their flow requirements are greater than other species in the springs. Under the simulated drought conditions in the laboratory, the Riffle Beetle displayed tendencies to move towards higher current vertically and horizontally. While these results are not statistically significant, they may explain how the Riffle Beetle endured Comal Springs drying up for six months. Fountain Darter Laboratory Study: Reproductive Response to Parasites and Temperature Fluctuations This study was conducted to examine how temperature affects Fountain Darter reproduction. Previous studies on thermal effects in the laboratory held the temperatures constant and compared results between different temperatures. To better simulate in situ conditions, this effort incorporated a 2 C daily variation that simulated more natural conditions. While the results were encouraging, there was no direct benefit attributed from the 2 C daily variation. Laboratory reproduction of the Fountain Darter was impaired by high temperature; however, field data indicates that the elevated temperatures are not as limiting as the lab studies. The Edwards Aquifer Authority 26

PRECIPITATION ENHANCEMENT PROGRAM RESEARCH Research initiated by the Authority in 2001 on the effectiveness of the PEP 1999-2001 was concluded in 2002. Woodley Weather Consultants, Inc. evaluated all of the data from the PEP program from 1999-2001 and concluded an additional 179,000 acre-feet of rainfall was created by the program (approximately 60,000 acre-feet annually). The Authority s real time rain gauge network provided significant data and insights to the analysis. OPERATIONS The Edwards Aquifer provides drinking water to 1.7 million people in south central Texas and is the backbone of the region s agriculture industry. The Edwards Aquifer Authority s Precipitation Enhancement Program (PEP) began in 1999 and was developed to increase precipitation, increase recharge, and reduce demand on the aquifer. Significant benefits are attained with increased precipitation. Agricultural benefits include increased crop yield, improved grazing conditions for livestock, reduced irrigation costs, and improved water quality. Social benefits include increased rainfall runoff into reservoirs used for drinking water supplies and recreation. Precipitation enhancement, also called weather modification, involves introducing artificial seeds of silver iodide crystals, which have a crystalline structure that resembles natural ice in the atmosphere, or burning flares to alter the microphysical characteristics of a cloud to extend its life span and increase the amount of precipitation it generates. In 2002, the Authority made two significant alterations to its PEP. First, the Authority contracted with two selffunded precipitation enhancement programs in the area South Texas Weather Modification Association (STWMA), with the operations in Pleasanton, and the Southwest Texas Rain Enhancement Association (SWTREA), with operations in Cotulla and Laredo. The new arrangement saved the Authority money and administrative responsibilities. An additional benefit of the new arrangement was the availability of more aircraft for seeding operations (seven aircraft in 2002 vs. two aircraft in 1999-2001). Second, the PEP s target area was reduced from 12 counties and 6.3 million acres in 1999-2002 to 4 counties and 3.1 million acres in 2002. In 2002, seeding operations took place in Bandera, Bexar, Medina, and Uvalde counties. This smaller target area maximized the opportunity to concentrate seeding operations in a smaller area in order to increase recharge and reduce demands. The 2002 season ran from May through September 2002. Weather extremes during the months of May and June provided few seeding opportunities. However, July set a record for rainfall. July 2002 brought with it the second most rainfall ever recorded in a month in San Antonio (only October 1998 was greater). Rains continued throughout the summer; therefore, little seeding was conducted because of wet conditions and the concerns for flooding. 27 2002 Annual Report The Edwards Aquifer Authority 28

EDWARDS AQUIFER OPTIMIZATION PROGRAM The Authority has undertaken the Edwards Aquifer Optimization Program (EAOP), a comprehensive program for the study and management of the Edwards Aquifer. The EAOP consists of numerous interrelated, mission-directed biologic and hydrogeologic research studies known as the Optimization Technical Studies (OTS). The OTS are designed to evaluate potential technical options for increasing the amount of water stored in the Edwards Aquifer and to identify effective methods for optimizing the amount of water available for withdrawal. Data and information obtained from the OTS will provide aquifer managers with the tools necessary to make scientifically sound decisions. The studies will benefit aquifer users and preserve the environment supported by the aquifer, including the Comal and San Marcos springs, and downstream aquatic habitats. In 2002, the following OTS were completed: Assessment of Instream Flow and Habitat Requirements for Cagle s Map Turtle. The Cagle s Map Turtle is indigenous to the Guadalupe River system. This study investigated the instream flow requirements and basic habitat characteristics of the turtle, which is a candidate for inclusion on the federal endangered species list. Understanding its flow and habitat requirements is important as regional water management strategies are being considered. The study was completed in April 2002 by North Texas A&M University through a Joint Funding Agreement (JFA) with the Authority. The study concluded that the turtle s population appears to be steady (declining in one area); however, the turtle does appear to be impacted by physical obstructions in the river (low water crossings and dams) more than varying flow regimes. Recharge Methodology Pilot Study (Nueces and Blanco River basins). This study, which was completed in June 2002 by HDR Engineering, Inc. (HDR), was performed to assess a new method of calculating recharge to the Edwards Aquifer in the Nueces and Blanco river basins. The objective of the pilot study was to determine if the Hydrologic Simulation Program Fortran (HSPF) computer model will retain the strengths and overcome the weaknesses of traditional recharge calculation methods while providing a versatile tool sufficiently accurate for both regulatory and research purposes. The pilot models produced recharge volumes similar to the traditional method used by the United States Geological Survey (USGS) in the Nueces Basin and similar to the HDR traditional method in the Blanco Basin. The study results indicated that HSPF is an accurate and versatile tool and should be applied to the remaining basins that flow across the Edwards Aquifer Recharge Zone in the Authority region. Aquifer Parameter Estimation for Computer Model Input Data Sets. Measurements of hydraulic conductivity from pumping tests and other sources were statistically analyzed to create the data input files for the Edwards Aquifer model. A statistical technique was used to upscale measurements from individual wells to generate a representative value for the model grid cell in which the wells are located. The statistical distribution was then evaluated with respect to geologic conditions to create the final input file. The work was completed by Southwest Research Institute (SWRI) in May 2002 through a JFA between the Authority and the U.S. Army Corps of Engineers Planning Assistance to States Program. The parameter estimation data sets are now being used by the USGS in the construction of a computer model of the aquifer using MODFLOW software. In 2002, the following OTS were in progress: Texas Wild-rice Reproduction. The purpose of this study is to assess the reproduction requirements for Texas wild-rice, which will assist in the evaluation of potential impacts from aquifer optimization strategies. The study includes both laboratory and field analyses to identify factors that influence sexual and asexual reproduction in Texas wild-rice. The work is being performed by the U.S. Fish and Wildlife Service San Marcos National Fish Hatchery and Technology Center through a JFA with the Authority. 29 2002 Annual Report

Development of an Edwards Aquifer Computerized Groundwater Model. A state-of-the-art computer model is being developed using MODFLOW software. Once a scientifically correct model is constructed, the model can be used to simulate various management scenarios for the aquifer. The model is being developed by the USGS and the University of Texas Bureau of Economic Geology through a JFA with the Authority. The U.S. Department of Defense also provides funding for the project. By the end of 2002, the model project had progressed to the transient calibration phase and is scheduled to be finalized by June 2004. In 2002, as a quality assurance measure, the Authority initiated a project to professionally survey the location and elevation of the wells used for model calibration. Edwards Aquifer Freshwater/Saline Water Interface Studies. This project is being conducted to assess the possibility of movement of saline water into the freshwater portion of the Edwards Aquifer, especially during drought conditions. Studies were initiated by the USGS in 1985, conducted by the Edwards Underground Water District (EUWD) from 1989 to 1993, and are currently being performed by San Antonio Water System (SAWS) and the Texas Water Development Board (TWDB) in cooperation with the Authority. Monitor well transect installations and sampling at existing study wells continued in 2002. Hydrologic Budgets of Medina Lake and Diversion Lake in Support of North Medina County Flowpath Studies. These lakes are located in northeastern Medina County on the Medina River. The study will refine the estimates of water recharged to the Edwards Aquifer from the two lakes and will provide information to be used in the ongoing North Medina County Flow Path Study. The work is being performed by the USGS through a JFA with the Authority and is scheduled to be completed by March 2004. Electromagnetic Survey in the Vicinity of Seco Creek Sinkhole in Support of North Medina County Flowpath Studies. In April 2002, the board approved a JFA with the USGS for an airborne electromagnetic survey of northern Medina County in the vicinity of the Seco Creek Sinkhole. The purpose of the study is to map subsurface electrical conductivity and correlate the data to known stratigraphy and geologic structure. Once a correlation is established, the data can be interpreted to reflect previously unknown geologic structure and potential groundwater flowpaths. The study is scheduled for completion, May 2003. Analysis of Structural Controls on the Edwards Aquifer/Trinity Aquifer in Northern Bexar County in Support of Focused Flowpath Studies. In March 2002, the board approved a JFA with the U.S. Army Corps of Engineers Planning Assistance to States Program for this study. The purpose of this project is to generate a three-dimensional computer model and predictions of localized fault-related deformation in the Edwards Aquifer and Trinity Aquifer in the Camp Bullis area. A second major objective for this study is to analyze potential communication across the interface between the Edwards Aquifer and the Trinity Aquifer, taking into account fault-related deformation and juxtaposition across key faults. The study is scheduled to be complete in June 2003. Comal and San Marcos Springs Tracer Testing in Support of Focused Flowpath Studies. In March and April 2002, Authority staff, cooperating agencies, and volunteers completed a tracer test in the Edwards Aquifer area of Comal Springs. The test was a cooperative effort between the Authority, New Braunfels Utilities, City of New Braunfels Parks and Recreation Department, USGS, University of Minnesota, University of Texas at Austin, University of Texas at San Antonio, Texas A&M, and others. The test showed discrete groundwater flowpaths to each of the major springs in the Landa Park area. The study was highly successful in that dye was traced from wells in the water table and deep artesian portions of the aquifer to major spring openings in the vicinity of Landa Lake. The Comal Springs area tracer test results indicate groundwater velocities in the water table portion of the aquifer of 6,000 feet per day and groundwater velocities in the artesian portion of the aquifer of 2,000 feet per day. The Edwards Aquifer Authority 32

In September 2002, Authority staff injected dye in two Edwards Aquifer caves located approximately two miles southwest of San Marcos. Dye from one of the caves was not detected in any area wells or springs. Dye from the second cave was detected at several area wells and from San Marcos Springs 11 days after injection. The San Marcos area tracer test results indicated groundwater velocities of 1,000 feet per day. A final report regarding the results of the Comal and San Marcos springs tracer tests will be available in 2004. Recharge Methodology HSPF Modeling for Seven Basins. In October 2002, the board approved a contract between the Authority and LBG-Guyton Associates for this study. The study is a continuation of the HSPF modeling pilot study completed in June 2002 for the Nueces and Blanco river basins. The pilot study was performed to assess a methodology to improve aquifer recharge calculations. Seven drainage basins that flow across the Edwards Aquifer Recharge Zone will be modeled under this contract including the drainage basin areas upstream of the recharge zone. Modeling the drainage basin areas upstream of the recharge zone was a project improvement recommendation of the pilot model project. The HSPF modeling project is expected to be completed, April 2004. Evaluation of Augmentation Methodologies in Support of In-Situ Refugia at Comal and San Marcos Springs. In November 2002, the board approved a contract between the Authority and LBG-Guyton Associates for this study. The purpose of the project is to assess the feasibility of introducing water directly to habitat areas of Comal and San Marcos springs to extend the viability of the habitat when water supplies are low. Augmentation in the context of this project is an attempt to create insitu refugia for the species. In addition to evaluating methodologies for introducing water into the spring environments, the contractor will also evaluate costs for supplying up to 150 cubic feet per second (cfs) to the Comal Springs system and up to 100 cfs to the San Marcos Springs system. The project is expected to be complete December 2003. Fracture/Conduit Study. The purpose of this study is to investigate the influence of faults and conduits on groundwater flow paths in both the recharge and artesian zones of the Edwards Aquifer. Investigators are assessing the locations of conduits with respect to fracture zones, faults, streams, and specific stratigraphic horizons within the Edwards Group. The work is being performed by the University of Texas Bureau of Economic Geology though a JFA with the Authority and is expected to be complete, June 2003. Range Management of Woody Species. This study is being performed to evaluate best management practices for woody species that may enhance water quality and increase aquifer recharge in rangeland watersheds. Two pilot projects are being performed in the San Antonio area at the Honey Creek State Natural Area and the Government Canyon State Natural Area. The work being performed by the U.S. Department of Agriculture Natural Resource Conservation Service (NRCS) and the USGS is in cooperation with the SAWS and the Authority. The project is scheduled to be complete in 2006. included 11 of the 30 monitoring wells installed in the Edwards Aquifer Recharge Zone in northern Bexar County by the United States Geological Survey (USGS) National Water Quality Assessment Study to investigate the effect of urban land use on groundwater quality. Recharge Dam Gauging. The Authority operates four dams in Medina County that are designed to increase recharge to the Edwards Aquifer. Recharge is measured at each site and reported to the Texas Commission on Environmental Quality (TCEQ) every three months. Real Time Precipitation Gauging System. The Authority operates 64 rain gauges that transmit data to the Authority office every 6 minutes. The gauges are generally located over the Edwards Aquifer Recharge Zone and drainage area. Acquired data are used in precipitation enhancement program evaluations, aquifer recharge estimates, and a variety of research projects. Annual Hydrologic Data and Edwards Aquifer Bibliography Reports. These reports are prepared to aid managers, researchers, and outside agencies by compiling information into readily available reference sources. Synoptic Water Level Measuring Program. This program is designed to collect water level measurements throughout the Edwards Aquifer region over a short period of time. Measurements are collected from approximately 250 wells 3 times each year to collect data during periods of high and low aquifer water levels. Data from the measurement events are used to interpret aquifer responses and groundwater flow conditions. The project is conducted in cooperation with the USGS, Texas Water Development Board (TWDB), and San Antonio Water System (SAWS). JFA between the Authority and the USGS for Data Collection. This joint funding agreement (JFA) is primarily for the gauging of surface water streams that cross the Edwards Aquifer Recharge Zone and the gauging of discharge from major Edwards Aquifer springs. The JFA also includes annual aquifer recharge calculations and stormwater runoff sampling at two sites. DATA COLLECTION PROGRAMS ACTIVE IN 2002 Authority data collection programs are designed to provide information for the calculation of recharge and discharge from the Edwards Aquifer, as well as monitor water quality in the aquifer. The data collection programs also support the Optimization Technical Studies being performed in the Edwards Aquifer region. The following data collection programs were active in 2002: Ongoing Collection of Water Level and Water Quality Data by Authority Personnel from Wells and Streams Throughout the Edwards Aquifer Region. In 2002, the Authority operated continuous water level recorders in 40 wells and collected periodic measurements in an additional 16 wells. Water quality samples were collected from 77 wells, 8 springs, and 9 streams. Water quality sampling 33 2002 Annual Report The Edwards Aquifer Authority 34

Financial Report December 31, 2002

Edwards Aquifer Authority Combined Balance Sheet Governmental Fund Types and Account Groups December 31, 2002 Independent Auditors Report To the Board of Directors Edwards Aquifer Authority San Antonio, Texas We have audited the general purpose financial statements, as listed in the table of contents herein, of Edwards Aquifer Authority (the Authority ) as of December 31, 2002, and for the year then ended. These general purpose financial statements are the responsibility of the Authority s management. Our responsibility is to express an opinion on these general purpose financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the general purpose financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the general purpose financial statements referred to above present fairly, in all material respects, the financial position of the Authority as of December 31, 2002, and the results of its operations for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Our audit was made for the purpose of forming an opinion on the general purpose financial statements taken as a whole of the Authority as of and for the year ended December 31, 2002. The supplemental information listed in the table of contents is presented for purposes of additional analysis and is not a required part of the general purpose financial statements. Such information has been subjected to the audit procedures applied in the audit of the general purpose financial statements and, in our opinion, is fairly stated in all material respects in relation to the general purpose financial statements taken as a whole. The statistical data, as listed in the table of contents, has been summarized from the Authority's records and was not subjected to the audit procedures applied in the audit of the general purpose financial statements. Accordingly, we do not express an opinion on such additional statistical data. Certified Public Accountants February 24, 2003 Governmental Fund Types Account Groups General General Special Fixed Long-Term Totals General Revenue Assets Debt (Memo Only) ASSETS AND OTHER DEBITS Cash $ 61,238 $ - $ - $ - $ 61,238 Investments 3,269,004 1,127,865 - - 4,396,869 $ 3,330,242 $ 1,127,865 $ 4,458,107 Receivables: Delinquent ad valorem taxes net of allowance for uncollectibles of $28,838 75,806 - - - 75,806 Interest - 55,544 - - 55,544 Aquifer management fees net of allowance for uncollectibles of $1,042,623 86,653 - - - 86,653 Long-term agriculture loans net of allowance for uncollectibles of $80,000-1,650,132 - - 1,650,132 Prepaids 2,920 - - - 2,920 Due to/from Special Revenue Fund 156,716 - - - 156,716 Fixed assets - - 5,405,525-5,405,525 Amount to be provided for retirement of general long-term debt - - - 1,630,610 1,630,610 Total assets and other debits $ 3,652,337 $ 2,833,541 $ 5,405,525 $ 1,630,610 $13,522,013 LIABILITIES Accounts payable $ 776,961 $ 55,950 $ - $ - $ 832,911 Accrued salaries and other payroll liabilities 75,685 - - - 75,685 Due to/from General Fund - 156,716 - - 156,716 Deferred revenue for delinquent ad valorem taxes 75,806 - - - 75,806 Compensated absences 99,238 - - 29,610 128,848 Long-term loan payable - - - 1,601,000 1,601,000 Total liabilities 1,027,690 212,666-1,630,610 2,870,966 EQUITY AND OTHER CREDITS Investment in general fixed assets - - 5,405,525-5,405,525 Fund balance: Reserved for long-term agriculture loans receivable - 1,650,132 - - 1,650,132 Reserved for current portion of long-term debt - 336,992 - - 336,992 Unreserved 2,624,647 633,751 - - 3,258,398 Total equity and other credits 2,624,647 2,620,875 5,405,525-10,651,047 Total liabilities and equity and other credits $ 3,652,337 $ 2,833,541 $ 5,405,525 $ 1,630,610 $13,522,013 The accompanying notes are an integral part of this statement. 37 2002 Annual Report The Edwards Aquifer Authority 38

Edwards Aquifer Authority Combined Statement of Revenues, Expenditures, and Changes in Fund Balances All Governmental Fund Types Year Ended December 31, 2002 Edwards Aquifer Authority Combined Statement of Revenues, Expenditures, and Changes in Fund Balances Budget (GAAP Basis) and Actual General and Special Revenue Fund Types Year Ended December 31, 2002 Governmental Fund Types General Fund Special Revenue Fund Special Totals General Revenue (Memo Only) Variance Variance Favorable Favorable Budget Actual (Unfavorable) Budget Actual (Unfavorable) REVENUES: Aquifer management fees net of discount $ 9,378,306 $ - $ 9,378,306 Interest 82,525 99,979 182,504 Ad valorem taxes 12,179-12,179 Grant revenue 27,693-27,693 Miscellaneous 158,401 750 159,151 Total revenues 9,659,104 100,729 9,759,833 EXPENDITURES: Personnel 2,731,155-2,731,155 Commodities 1,925,947 1,867 1,927,814 Contractual services 5,596,309 223,800 5,820,109 Capital outlay 202,864-202,864 Debt service: Principal - 893,500 893,500 Interest - 91,555 91,555 Total expenditures 10,456,275 1,210,722 11,666,997 Excess (deficiency) of revenues over (under) expenditures (797,171 ) (1,109,993 ) (1,907,164 ) OTHER FINANCING SOURCES (USES): Operating transfer in - 660,000 660,000 Operating transfer out (660,000 ) - (660,000 ) Total other financing sources (uses) (660,000 ) 660,000 - Excess (deficiency) of revenues and other financing sources over (under) expenditures and other financing uses (1,457,171 ) (449,993 ) (1,907,164 ) Fund balances at January 1, 2002 4,081,818 3,070,868 7,152,686 Fund balances at December 31, 2002 $ 2,624,647 $ 2,620,875 $ 5,245,522 The accompanying notes are an integral part of this statement. REVENUES: Aquifer management fees net of discount $ 8,655,324 $ 9,378,306 $ 722,982 $ - $ - $ - Interest 175,000 82,525 (92,475 ) 114,000 99,979 (14,021 ) Ad valorem taxes 9,500 12,179 2,679 - - - Grant revenue - 27,693 27,693 - - - Interlocal contracts 85,000 - (85,000 ) - - - Miscellaneous 20,000 158,401 138,401 155,750 750 (155,000 ) Total revenues 8,944,824 9,659,104 714,280 269,750 100,729 (169,021 ) EXPENDITURES: Personnel 2,916,032 2,731,155 184,877 - - - Commodities 1,195,019 1,925,947 (730,928 ) 6,000 1,867 4,133 Contractual services 6,775,384 5,596,309 1,179,075 1,043,800 223,800 820,000 Capital outlay 280,419 202,864 77,555 - - - Contingency 1,029,788-1,029,788 - - - Debt service: Principal - - - 365,500 893,500 (528,000 ) Interest - - - 88,357 91,555 (3,198 ) Total expenditures 12,196,642 10,456,275 1,740,367 1,503,657 1,210,722 292,935 Excess (deficiency) of revenues over (under) expenditures (3,251,818 ) (797,171 ) 2,454,647 (1,233,907 ) (1,109,993 ) 123,914 OTHER FINANCING SOURCES (USES): Operating transfer in - - - 830,000 660,000 (170,000 ) Operating transfer out (830,000 ) (660,000 ) 170,000 - - - Total other financing sources (uses) (830,000 ) (660,000 ) 170,000 830,000 660,000 (170,000 ) Excess (deficiency) of revenues and other financing sources over (under) expenditures and other financing uses $(4,081,818 ) (1,457,171 ) $ 2,624,647 $ (403,907 ) (449,993 ) $ (46,086) Fund balances at January 1, 2002 4,081,818 3,070,868 Fund balances at December 31, 2002 $ 2,624,647 $ 2,620,875 The accompanying notes are an integral part of this statement. 39 2002 Annual Report The Edwards Aquifer Authority 40

Edwards Aquifer Authority Notes to General Purpose Financial Statements December 31, 2002 Edwards Aquifer Authority Notes to General Purpose Financial Statements December 31, 2002 NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of Edwards Aquifer Authority s (the Authority) significant accounting policies consistently applied in the preparation of the accompanying general purpose financial statements follows: 1. The Reporting Entity The Authority is governed by a 17-member Board, with 15 voting members elected and 2 nonvoting members appointed by other governmental entities. The reporting entity consists of the primary government, organizations for which the primary government is financially accountable, and other organizations for which the primary government is not accountable, but for which the nature and significance of their relationship with the primary government are such that exclusion would cause the reporting entity s financial statements to be misleading or incomplete. Financial accountability exists if a primary government appoints a voting majority of an organization s governing Board and is either able to impose its will on that organization or there is a potential for the organization to provide specific financial benefits to, or impose specific financial burdens on, the primary government. A primary government may also be financially accountable for governmental organizations with a separately elected governing Board, a governing Board appointed by another government, or a jointly appointed Board that is fiscally dependent on the primary government. In accordance with Governmental Accounting Standards Board ( GASB ) requirements, the Authority has reviewed other entities and activities for possible inclusion in the reporting entity and has determined that there are none. However, certain expenditures of the South Central Texas Water Advisory Committee (SCTWAC) are included in the Authority s financial statements. SCTWAC was also created under the Edwards Aquifer Authority Act (the Act), which also created the Authority. SCTWAC advises the Authority s Board on downstream water rights and issues. SCTWAC members appointed under this Section are not entitled to compensation by the Authority, but are entitled to reimbursement by the Authority for actual and necessary expenditures incurred in performing their duties. Accordingly, the Authority budgeted $3,000 and expended $1,398 for the year ended December 31, 2002. 2. Fund Accounting The Authority s accounts are organized on the basis of funds or account groups, each of which is considered to be a separate accounting entity. The operations of each fund are accounted for by providing a separate set of self-balancing accounts which are comprised of each fund s assets, liabilities, fund equity, revenues, and expenditures. The 41 2002 Annual Report following is a description of the fund types and account groups used by the Authority in the accompanying general purpose financial statements: GOVERNMENTAL FUND TYPES General Fund The General Fund accounts for the resources used to finance the fundamental operations of the Authority. It is the basic fund of the Authority and covers all activities for which a separate fund has not been established. Special Revenue Fund The Special Revenue Fund accounts for projects and programs related to the permanent retirement of the Authority s groundwater rights, and leasing of groundwater rights to interested parties. It also accounts for loans from the Texas Water Development Board (TWDB) Agricultural Water Conservation Loan program. ACCOUNT GROUPS General Fixed Assets This account group is established to account for the fixed assets owned by the Authority. Expenditure transactions to acquire general fixed assets occur in the General and Special Revenue Funds. General Long-Term Debt This account group records the long-term portion of accrued vacation pay and the long-term loan payable to TWDB and is offset by the amount to be provided in future years. 3. Memorandum Only Total Columns Total columns on the general purpose financial statements are captioned memo only to indicate that they are presented only to facilitate financial analysis. Data in these columns do not present financial position, results of operations, or changes in financial position in conformity with accounting principles generally accepted in the United States of America. Neither are such data comparable to a consolidation. Interfund eliminations have not been made in the aggregation of this data. 4. Basis of Accounting The accompanying general purpose financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America as prescribed by GASB. The Authority employs the modified accrual basis of accounting in all funds. The modified accrual basis recognizes revenues that are susceptible to accrual when measurable and available and recognizes expenditures when incurred except for unmatured interest on general long-term debt. Property tax revenue is susceptible to accrual and is considered available to the extent of delinquent taxes collected within sixty (60) days after the fiscal year-end. Aquifer management fees are also susceptible to accrual. The Authority s major source of revenue is from the collection of aquifer management fees. Collection of these fees is granted under Sections 1.29(b) and (e) of the Edwards Aquifer Act of May 30, 1993, 73rd Leg., R.S. ch. 626, 1993 Tex. Gen. Laws 2350, as amended. The fees are set each year by the Board of Directors. Municipal and industrial users are assessed aquifer management fees on the amount of groundwater a permit holder is authorized to withdraw under the permit. Agricultural users pay fees based on the volume of groundwater withdrawn. The Act sets the aquifer management fee for agricultural users at $2.00 per acre-foot of groundwater used. All Authority funds are accounted for on a spending financial flow measurement focus. This means that only current assets and current liabilities are generally included on their balance sheets. Their reported fund balance (net current assets) is considered a measure of available spendable resources. Governmental fund operating statements present increases (revenues and other financing sources) and decreases (expenditures and other financing uses) in net current assets. Accordingly, they are said to present a summary of sources and uses of available spendable resources during a period. Property, plant, and equipment used in the Authority s operations are accounted for in the General Fixed Assets Account Group, rather than in Authority funds. Long-term debt is accounted for in the General Long-Term Debt Account Group rather than in Authority funds. 5. Budgets General Fund Special Revenue Fund Original budget $12,814,780 $ 1,503,657 Amendments increase 211,862 - Final amended budget $13,026,642 $ 1,503,657 The General Manager prepares and distributes to the board of directors a proposed annual budget for all funds for the forthcoming fiscal year in September. The Finance/Administrative Committee, chaired by the Treasurer, reviews the proposed budget and submits any recommended revisions to the board. The Authority holds public meetings to receive comments on the proposed budget and aquifer management fees. The board must adopt an annual budget for the forthcoming fiscal year no later than December 31. The appropriated budget is prepared by fund, function and team, and is adopted on the same basis of accounting as described in Note A4. Budgets should not be exceeded at the fund total level. Unused appropriations lapse at the end of each fiscal year. The General Manager may administratively amend the budget as needed. Such amendments may not exceed $15,000, and may not involve budget transfers to or from the Personnel or Contingency functions. All administrative amendments are reported to the Finance/ Administrative Committee quarterly. Amendments in excess of $15,000, requiring budget transfers to or from the Personnel or Contingency functions, and increasing the appropriated budget require the approval of the board. The final amended budget for the year ended December 31, 2002, is used in this report. 6. Investments Investments consist of certificates of deposit, interest-bearing money market accounts, and U.S. Treasury Bills valued at amortized cost, which approximates fair value. 7. Accounts Receivable The allowance for doubtful accounts is established as losses are estimated to have occurred through a provision for bad debts charged to earnings. Losses are charged against the allowance when management believes the uncollectibility of a receivable is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for doubtful accounts is evaluated on a regular basis by management and is based on historical experience and specifically identified questionable receivables. The evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. 8. Delinquent Taxes Receivable Effective July 28, 1996, certain legislation abolished any taxing power of the Authority. However, delinquent taxes from prior years have been reported in the financial statements net of the allowance for uncollectible taxes. Tax revenues are recognized as they become available. Accordingly, an amount equal to taxes not yet available (not collectible within sixty (60) days after year-end) has been reported as deferred revenue. 9. General Fixed Assets General fixed assets are recorded at original cost or, if donated, are recorded at fair market value on the date donated. Costs incurred for the purchase or construction of general fixed assets are recorded as capital outlay expenditures in the General and Special Revenue Funds. All such costs are capitalized in the General Fixed Assets Account Group. 10. Compensated Absences Vested or accumulated vacation leave that is expected to be liquidated with expendable available financial resources is reported as an expenditure and a fund liability of the governmental fund that will pay it. Amounts of vested or accumulated vacation leave that are not expected to be liquidated with expendable available resources are reported in the General Long-Term Debt Account Group. At December 31, 2002, accumulated vacation leave amounts to $128,848. The current portion of vacation leave payable, $99,238, is recorded in the General Fund, and the long-term portion, $29,610, is recorded in the General Long-Term Debt Account Group. In accordance with the provisions of GASB Statement No. 16, Accounting for Compensated Absences, no liability is recorded for the accumulation of sick pay benefits since such benefits are not vested. The Edwards Aquifer Authority 42

Edwards Aquifer Authority Notes to General Purpose Financial Statements December 31, 2002 Edwards Aquifer Authority Notes to General Purpose Financial Statements December 31, 2002 NOTE B CASH AND INVESTMENTS All cash, certificates of deposit, and money market accounts are held in various financial institutions and are carried at cost plus accrued interest, which approximates fair value. U.S. Treasury Bills are held in one financial institution and are carried at amortized cost, as the time between purchase and maturity dates is less than one year. Cash and investments shown on the balance sheet at December 31, 2002, are comprised of: Special General Revenue Fund Fund Total Checking account $ 61,009 $ - $ 61,009 Money market accounts 552,361 1,127,865 1,680,226 Certificates of deposit 1,217,326-1,217,326 Total in financial institutions 1,830,696 1,127,865 2,958,561 U.S. Treasury Bills 1,499,317-1,499,317 Petty cash 229-229 Total cash and investments $ 3,330,242 $ 1,127,865 $ 4,458,107 Deposits held at financial institutions can be categorized according to three levels of risk. These three levels of risk are as follows: Category 1: Deposits which are insured or collateralized with securities held by the Authority or by its agent in the Authority s name. Category 2: Deposits which are collateralized with securities held by the pledging financial institution s trust department or agent in the Authority s name. Category 3: Deposits which are not collateralized. Based on these three levels of risk, all of the Authority s deposits are classified as Category 1. The Authority may legally invest in, at a minimum, obligations of the United States Government, obligations of the state of Texas, other states, cities, and counties with an A rating, common trust funds held in banks in Texas, certificates of deposit, money market accounts, and repurchase agreements. Similar to cash deposits, investments held at a financial institution can be categorized according to three levels of risk. These three levels of risk are as follows: Category 1: Investments which are insured, registered, or held by the Authority or by its agent in the Authority s name. Category 2: Investments which are uninsured and unregistered held by the counterparty s trust department, or agent in the Authority s name. Category 3: Uninsured and unregistered investments held by the counterparty, its trust department, or its agent, but not in the Authority s name. Category Carrying Fair 1 2 3 Amount Value U.S. Treasury Bills $ 1,499,317 $ - $ - $ 1,499,317 $ 1,499,317 Money market accounts 1,680,226 - - 1,680,226 1,680,226 Certificates of deposit 1,217,326 - - 1,217,326 1,217,326 $ 4,396,869 $ - $ - $ 4,396,869 $ 4,396,869 NOTE C AGRICULTURE LOANS RECEIVABLE The Authority has loan borrowings from TWDB (see Note F). The proceeds from these loans are used to provide loans to third parties for eligible agricultural water conservation projects and equipment. The agriculture loans receivable are secured by the water conservation projects and related equipment. Changes in the agriculture loans receivable during the year ended December 31, 2002 are as follows: Balance at Balance at December 31, December 31, 2001 Additions Deletions 2002 Agriculture loans $ 1,808,491 $ 215,836 $ 294,195 $ 1,730,132 Less allowance for uncollectibles 80,000 Payments on the agriculture loans carry interest rates of 4.93% and 4.35% and are made to the Authority annually through fiscal year 2009 as follows: Year ending December 31, 2003 $ 336,992 2004 353,506 2005 370,831 2006 389,006 2007 182,306 Thereafter 97,491 $ 1,730,132 NOTE D GENERAL FIXED ASSETS The following is a summary of changes in general fixed assets: Balance at Balance at December 31, December 31, 2001 Additions Deletions 2002 Land $ 625,244 $ - $ - $ 625,244 Buildings and improvements 1,786,880 19,783 24,388 1,782,275 Furniture, fixtures, and equipment 2,665,783 145,141 16,765 2,794,159 Vehicles 194,359 37,940 28,452 203,847 $ 5,272,266 $ 202,864 $ 69,605 $ 5,405,525 NOTE E RETIREMENT PLANS Texas County and District Retirement System PLAN DESCRIPTION The Authority provides retirement, disability, and death benefits for all of its full-time employees through a nontraditional defined benefit pension plan in the statewide Texas County and District Retirement System (TCDRS). The Board of Trustees of TCDRS is responsible for the administration of the statewide agent multiple-employer public employee retirement system consisting of 517 nontraditional defined benefit pension plans. TCDRS, in the aggregate, issues a comprehensive annual financial report (CAFR) on a calendar year basis. The CAFR is available upon written request from the TCDRS Board of Trustees at P.O. Box 2034, Austin, Texas 78768-2034. The plan provisions are adopted by the governing body of the Authority, within the options available in the Texas state statutes governing TCDRS (TCDRS Act). Members can retire at ages 60 and above with 8 or more years of service, with 30 years of service regardless of age, or when the sum of their age and years of service equals 75 or more. Members are vested after 8 years of service but must leave their accumulated contributions in the plan to receive any employerfinanced benefit. Members who withdraw their personal contributions in a lump sum are not entitled to any amounts contributed by their employer. Benefit amounts are determined by the sum of the employee s contributions to the plan, with interest, and employer-financed monetary credits. The level of these monetary credits is adopted by the governing body of the employer within the actuarial constraints imposed by the TCDRS Act so that the resulting benefits can be expected to be adequately financed by the employer s commitment to contribute. At retirement, death, or disability, the benefit is calculated by converting the sum of the employee s accumulated contributions and the employer-financed monetary credits to a monthly annuity using annuity purchase rates prescribed by the TCDRS Act. FUNDING POLICY The Authority has elected the annually determined contribution rate plan provisions of the TCDRS Act. The plan is funded by monthly contributions from both employee members and the employer based on the covered payroll of employee members. Under the TCDRS Act, the contribution rate of the employer is actuarially determined annually. It was 2.99% for calendar year 2002. The contribution rate payable by the employee members is the rate of 4.00% as adopted by the governing body of the Authority. The employee contribution rate and the employer contribution rate may be changed by the governing body of the employer within the options available in the TCDRS Act. ANNUAL PENSION COST For the Authority s accounting year ended December 31, 2002, the annual pension cost for the TCDRS plan for its employees was $61,244, and the actual contributions were $61,244. The annual required contributions were actuarially determined as a percent of the covered payroll of the participating employees and were in compliance with GASB Statement No. 27 parameters based on the actuarial valuation as of December 31, 1998, the basis for determining the contribution rate for calendar year 2002. The December 31, 2001, actuarial valuation is the most recent valuation. 43 2002 Annual Report $ 1,650,132 The Edwards Aquifer Authority 44

Edwards Aquifer Authority Notes to General Purpose Financial Statements December 31, 2002 Edwards Aquifer Authority Notes to General Purpose Financial Statements December 31, 2002 ACTUARIAL VALUATION INFORMATION Actuarial valuation date December 31, 2001 December 31, 2000 December 31, 1999 Actuarial cost method Entry age Entry age Entry age Amortization method Level percentage of Level percentage of Level percentage of payroll, open payroll, open payroll, open Amortization period in years 30 30 30 Asset valuation method Long-term appreciation Long-term appreciation Long-term appreciation with adjustment with adjustment with adjustment Actuarial assumptions: Investment return* 8.0% 8.0% 8.0% Projected salary increases* 5.5% 5.9% 5.9% Inflation 3.5% 4.0% 4.0% Cost-of-living adjustments - - - *Includes inflation at the stated rate. TREND INFORMATION FOR THE RETIREMENT PLAN FOR THE EMPLOYEES OF EDWARDS AQUIFER AUTHORITY Annual Pension Percentage of Contribution in Accounting Year-End Cost ( APC ) APC Contributed Excess of APC December 31, 2002 $ 61,244 100.0% - December 31, 2001 $ 53,244 100.0% - December 31, 2000 $ 43,471 100.0% - SCHEDULE OF FUNDING PROGRESS FOR THE RETIREMENT PLAN FOR THE EMPLOYEES OF EDWARDS AQUIFER AUTHORITY Actuarial UAAL as a Actuarial Accrued Unfunded Annual Percentage Actuarial Value of Liability AAL Funded Covered of Covered Valuation Assets ( AAL ) ( UAAL ) Ratio Payroll Payroll Date (a) (b) (b-a) (a/b) (c) ((b-a)/c) 12/31/01 $ 3,043,085 $ 2,996,219 ($46,866) 101.56% $ 1,943,282 (2.41% ) 12/31/00 $ 2,728,015 $ 2,592,527 ($135,488) 105.23% $ 1,732,443 (7.82% ) 12/31/99 $ 2,442,181 $ 2,297,726 ($144,455) 106.29% $ 1,310,776 (11.02% ) DEFINED CONTRIBUTION PLAN Effective January 1, 2000, the Authority established a defined contribution retirement plan, known as the Edwards Aquifer Authority Retirement Plan (the Plan), to provide benefits at retirement to all full-time employees. The International City Management Association (ICMA) Retirement Corporation is the administrator of the Plan. Employees are eligible to participate upon employment. Employees hired after December 31, 2001, that have enrolled as Plan members are required to contribute 7.00% of covered salary. Employees hired prior to the end of 2001 are required to contribute 3.00% of covered salary. For the calendar year 2002, the Authority was required to contribute 7% of covered salary for employees hired after the December 31, 2001, year-end and 4.01% for employees who were enrolled prior to the December 31, 2001 year-end. Plan provisions and contribution requirements are established annually and may be amended by the Authority s Board of Directors. For the year ended December 31, 2002, actual contributions made by the employees were $73,404 and actual contributions made by the Authority were $93,763. NOTE F LONG-TERM DEBT Changes in long-term debt during the year ended December 31, 2002 are as follows: Balance at Balance at December 31, December 31, 2001 Additions Deletions 2002 Compensated absences $ 48,060 $ 80,788 $ 99,238 $ 29,610 Long-term loan payable 2,494,500-893,500 1,601,000 $ 2,542,560 $ 80,788 $ 992,738 $ 1,630,610 In 1998, the Authority obtained a $3,000,000 loan from TWDB for an agricultural loan program. In 2001, the Authority obtained another $1,000,000 loan from TWDB of which only $500,000 has been drawn. No additional draws from this loan occurred during the fiscal year 2002. This program is designed to allow the Authority to provide loans to third parties for eligible agricultural water conservation projects and equipment. The Authority has granted TWDB a parity first lien interest in all conservation loans entered into between the Authority and any borrowers. The loans carry an interest rate ranging from 4.41%-4.70% with principal payments due annually through 2007 as follows: Year ending December 31, 2003 $ 336,000 2004 351,000 2005 366,000 2006 382,000 2007 166,000 NOTE G RISK MANAGEMENT $ 1,601,000 The Authority is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; and natural disasters for which the Authority carries commercial insurance. There have been no significant reductions in insurance coverage for these risks of loss since the prior year and there have been no settlements in excess of the insurance coverage for any of the past three fiscal years. The Authority contracts with the Texas Municipal League (TML) to provide workers compensation insurance. This multiple-employer account provides for a combination of modified self-insurance and stop-loss coverage. Contributions are set annually by TML. Liability by the Authority is generally limited to the contributed amounts. NOTE H COMMITMENTS The legislation creating the Authority required the Authority to assume all liabilities and commitments of its predecessor, the Edwards Underground Water District. An interlocal agreement with the City of San Marcos, executed in 1992, requires funding for the purchase of surface water. Funding for the term of this agreement is approximately $1,119,000 over five years beginning in the year 2001. During fiscal year 2002, the Authority paid $223,800 ($223,800 during fiscal year 2001) on this commitment. As of December 31, 2002, the unpaid commitment is approximately $671,400. Additional significant unpaid commitments at December 31, 2002, approximate $1,310,000 and are scheduled to be paid through 2005. NOTE I MAJOR CUSTOMER Approximately $5,092,500 of the Authority s management fee revenue, which accounts for approximately 50% of the total General Fund revenue, was derived from billings rendered to a single customer with which the Authority has a recurring business relationship. 45 2002 Annual Report The Edwards Aquifer Authority 46

Edwards Aquifer Authority Schedule of General Fund Expenditures Budget and Actual Year Ended December 31, 2002 Variance Favorable Budget Actual (Unfavorable) Variance Favorable Budget Actual (Unfavorable) Personnel: Salaries and benefits $ 2,848,032 $ 2,684,884 $ 163,148 Allowances 21,000 21,000 - Overtime 27,500 20,036 7,464 Temporary services 12,000 2,019 9,981 Tuition reimbursement 7,500 3,216 4,284 2,916,032 2,731,155 184,877 Commodities: Clothing 4,500 3,760 740 Computer supplies 70,914 65,651 5,263 Conferences, seminars, and training 128,504 92,720 35,784 Education supplies 289,112 266,665 22,447 Field supplies 12,100 10,649 1,451 Supplies 71,853 43,761 28,092 Fuel 15,000 10,598 4,402 Kitchen and janitorial 4,500 4,121 379 Meeting expense 66,050 47,968 18,082 Membership 18,800 14,702 4,098 Postage 50,000 48,128 1,872 Printing 135,100 90,083 45,017 Public and legal notices 215,200 143,405 71,795 Subscriptions 13,012 9,183 3,829 Property and casualty 52,000 49,907 2,093 Provision for allowance for doubtful receivable accounts - 986,123 (986,123) Furniture and equipment 48,374 38,523 9,851 1,195,019 1,925,947 (730,928) Contractual Services: Contractual professional services 3,902,859 3,112,854 790,005 General counsel 810,000 783,415 26,585 Special counsel 1,052,500 813,107 239,393 Other legal services 4,500 188 4,312 Electrical 25,000 18,148 6,852 Educational displays 7,600-7,600 Equipment maintenance 92,495 85,067 7,428 Equipment rental 46,000 42,087 3,913 Facilities maintenance 86,580 51,869 34,711 Facilities rental 79,100 66,000 13,100 Land acquisition 500,000 500,000 - Event sponsorship 20,500 12,240 8,260 Pest control 1,200 1,042 158 Pre-employment services 2,450 1,710 740 Rain gauge observers 1,000 630 370 Record services 20,000 17,682 2,318 Security and fire 3,500 1,567 1,933 Telecommunications services 97,900 75,038 22,862 Vehicles maintenance 17,000 9,201 7,799 Waste disposal 1,400 1,330 70 Water and sewage 3,800 3,134 666 6,775,384 5,596,309 1,179,075 Capital Outlay: Vehicles 45,000 37,940 7,060 Software 26,745 11,540 15,205 Hardware upgrade 39,391 35,471 3,920 Office equipment 14,783 13,235 1,548 Building improvements 43,500 19,783 23,717 Water sampling and monitoring equipment 54,255 50,619 3,636 Water meters 50,000 32,251 17,749 Well logging 2,025 2,025 - Meter testing 4,720-4,720 280,419 202,864 77,555 Contingency 1,029,788-1,029,788 Total expenditures $12,196,642 $10,456,275 $ 1,740,367 Statistical Section December 31, 2002 47 2002 Annual Report