WATER UTILITY ENTERPRISE FUND OF THE Santa Clara Valley Water District San Jose, California Basic Financial Statements For the Fiscal Year Ended June 30, 2011 This page intentionally left blank WATER UTILITY ENTERPRISE FUND OF THE SANTA CLARA VALLEY WATER DISTRICT Basic Financial Statements For the Year Ended June 30, 2011 Table of Contents Independent Auditor’s Report ............................................................................. 1 Management’s Discussion and Analysis ............................................................ 3 Basic Financial Statements: Statement of Net Assets ................................................................................. 15 Statement of Revenues, Expenditures and Changes in Net Assets .............................................................................................. 16 Statement of Cash Flows ................................................................................ 17 Notes to Basic Financial Statements .............................................................. 19 Required Supplemental Information Schedule of Funding Progress – Other Post Employment Benefit Plan .......... 52 Other Information Independent Auditor’s Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed In Accordance with Government Auditing Standards ................................. 55 Independent Auditor’s Report on Applying Agreed-Upon Procedures ...................................................................... 57 Schedule of Revenues and Expenses – Budgetary Basis............................... 59 i This page intentionally left blank INDEPENDENT AUDITOR’S REPORT To the Honorable Members of the Board of Directors Santa Clara Valley Water District San Jose, California We have audited the accompanying financial statements of the Water Utility Enterprise Fund of the Santa Clara Valley Water District (the District) as of and for the year ended June 30, 2011, as listed in the table of contents. These financial statements are the responsibility of the District’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and 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. As discussed in Note 1, the financial statements present only the Water Utility Enterprise Fund and do not purport to, and do not, present fairly the financial position of the Santa Clara Valley Water District, as of June 30, 2011, and the changes in its financial position, or, where applicable, its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Water Utility Enterprise Fund of the Santa Clara Valley Water District, as of June 30, 2011, and the changes in financial position and cash flows thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America. Accounting principles generally accepted in the United States of America require that management’s discussion and analysis and the Schedule of Funding Progress on Other Post-Retirement Benefit Plan as listed in the table of contents be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. 1 Our audit was conducted for the purpose of forming an opinion on the financial statements that collectively comprise the Water Utility Enterprise Fund’s financial statements. The Schedule of Revenues and Expenses – Budgetary Basis, as listed in the table of contents, is presented for purposes of additional analysis and is not a required part of the financial statements. The Schedule of Revenues and Expenses – Budgetary Basis is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements taken as a whole. In accordance with Government Auditing Standards, we have also issued our report dated May 30, 2012, on our consideration of the District’s internal control over financial reporting as it relates to the Water Utility Enterprise Fund and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. BROWN ARMSTRONG ACCOUNTANCY CORPORATION Bakersfield, California May 30, 2012 2 WATER UTILITY ENTERPRISE FUND OF THE SANTA CLARA VALLEY WATER DISTRICT Management’s Discussion and Analysis Our discussion and analysis of the Santa Clara Valley Water District’s Water Utility Enterprise Fund (the “Fund”) financial performance provides an overview of the Water Utility Enterprise Fund financial activities for the fiscal year ended June 30, 2011. This information is presented in conjunction with the audited financial statements that follow this section. The Fund manages and supplies wholesale treated water, groundwater, recycled water and surface water for the residents of Santa Clara County. The Fund is a separate enterprise fund of the Santa Clara Valley Water District (District) that was established to account for the water utility transactions of the District. The Fund is comprised of two funds – Water Enterprise Fund and State Water Project Fund. The Water Enterprise Fund accounts for ongoing water utility operations and with revenues comprised primarily of charges to the District’s groundwater and treated water customers. The State Water Project Fund accounts specifically for state water project tax revenue and state water project contractual costs. Because service needs are different in the northern and southern portions of the county, operations and expenditures are tracked based on the relative benefit to North County and South County zones. Likewise, the District’s water charges between the two zones are set separately. The District engaged Brown Armstrong Accountancy Corporation to conduct an audit of the District’s Water Utility Enterprise Fund for the fiscal year ended June 30, 2011. The purpose of the audit was to analyze the reasonableness of the allocations of cost and revenue between the two groundwater charge zones within the Water Utility Enterprise Fund, the North County zone and the South County zone. Overview of the Financial Statements The accounting policies of the Fund of the Santa Clara Valley Water District conform to accounting principles generally accepted in the United States of America as prescribed by the Governmental Accounting Standards Board (GASB) and the American Institute of Certified Public Accountants. The financial statements include the financial activity of the Water Enterprise Fund only. The Fund was established to account for the revenues and expenses of the Fund. These financial statements are not intended to present the financial position and results of operations of the Santa Clara Valley Water District as a whole, in conformity with accounting principles generally accepted in the United States of America. The Fund is accounted for as a Proprietary Fund. When the District charges users for the services it provides, these services are generally reported in proprietary funds. The following are the statements of the Fund: 3 WATER UTILITY ENTERPRISE FUND OF THE SANTA CLARA VALLEY WATER DISTRICT Management Discussion and Analysis The Statement of Net Assets presents information on all of the Fund’s assets and liabilities, with the difference between the two reported as net assets. Over time, increases or decreases in net assets may serve as a useful indicator of whether the financial position of the Fund is improving or deteriorating. The Statement of Revenues, Expenses and Changes in Net Assets provides information about the Fund’s revenues and expenses on an accrual basis. The Statement of Cash Flows provides relevant information of the Fund’s cash receipts and cash payments during the period. This statement presents changes in the Fund’s cash and cash equivalents resulting from operating, noncapital financing, capital and related financing, and investing activities. Notes to Basic Financial Statements. The notes provide additional information that is essential to a full understanding of the data provided in the Fund’s financial statements. The Fund accounts for operations in a manner similar to a private business enterprise. Operations are accounted for in such a manner as to show net income or loss and the Fund is intended to be entirely or predominantly self supported from user charges. Financial Highlights Water Utility Enterprise Fund's Net Assets (Dollars in Thousands) 2011 2010 (Restated)1 Current and other assets $ 165,312 $ 192,992 Capital assets 736,627 706,608 Total assets 901,939 899,600 Current liabilities 22,460 23,881 Litigation - claim 6,414 6,090 Long-term liabilities outstanding 224,935 227,965 Total liabilities 253,809 257,936 Net assets: Investment in capital assets, net of related debt 524,557 518,237 Restricted 26,824 22,944 Unrestricted Committed 29,540 56,877 Assigned 67,209 43,606 Total unrestricted 96,749 100,483 Total net assets $ 648,130 $ 641,664 1 Fiscal year 2009-10 net assets were restated to align with the FY2010-11 implementation of Governmental Accounting Standards Board Statement Number 54. 4 WATER UTILITY ENTERPRISE FUND OF THE SANTA CLARA VALLEY WATER DISTRICT Management Discussion and Analysis The total net assets of the Fund exceeded its liabilities by $648.1 million. Of this amount, $96.7 million (committed and assigned net assets) may be used to meet the Fund’s ongoing obligations to citizens and creditors. The largest portion of the Fund’s net assets (80.9 percent) reflects its investment in capital assets (e.g., land, buildings, infrastructure, machinery, equipment, and contract water rights) less any related debt used to acquire those assets still outstanding. These capital assets are used to provide services to citizens and consumers; consequently, these assets are not available for future spending. Although the Fund’s investment in its capital assets is reported net of related debts, it should be noted that the resources needed to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities. The net increase in the investment in capital assets, net of related debt was $6.3 million. Major projects contributing to this increase, less reimbursement from construction bank account – which was classified as part of the investment in capital assets, included South Bay Advanced Recycled Water Treatment Plant of $11.7 million and the ongoing major improvements to the water treatment plants. 5 WATER UTILITY ENTERPRISE FUND OF THE SANTA CLARA VALLEY WATER DISTRICT Management Discussion and Analysis Water Utility Enterprise Fund's Changes in Net Assets (Dollars in Thousands) 2011 2010 Revenues: Ground water charges $ 50,384 $ 55,189 Treated water charges 70,135 64,157 Surface and recycled water charges 828 918 Operating grants 1,458 1,696 Capital grants and contributions 10,443 1,602 Property taxes 23,181 24,241 Investment income 1,779 3,787 Miscellaneous 1,575 5,447 Total revenues 159,783 157,037 Expenses: Operating expenses 147,338 145,537 Nonoperating and other expenses 8,790 9,027 Total expenses 156,128 154,564 Increase in net assets before transfers 3,655 2,473 Transfers 2,811 (269) Increase in net assets 6,466 2,204 Net assets, beginning 641,66 4 639,46 0 Net assets, ending $ 648,130 $ 641,664 The net assets of the Fund increased by $6.5 million. Compared to the previous fiscal year, key elements of the changes are as follows: a. Revenues from ground water charges decreased by $4.8 million or 8.7 percent due to the reduction in the total acre feet of ground water usage. Compared to prior fiscal year 2010, the total acre feet of ground water usage of major customers decreased by approximately 8.1 thousands or 7.2 percent. b. Receipts of treated water charges were higher by $6.0 million or 9.3 percent primarily due to increase in acre feet deliveries of treated water. The total acre feet deliveries of treated water were up by approximately 9.9 thousand or approximately 9.6 percent, if compared to prior fiscal year 2010. c. Operating grants decreased by $238 thousand or 14.0 percent. The decrease was caused by lower operating grants received from the City San Jose and from the County of Alameda for the Residential Water Conservation Program. 6