WATER UTILITY ENTERPRISE FUNDS OF THE Santa Clara Valley Water District San Jose, California Annual Financial Report For the Fiscal Year Ended June 30, 2014 This page intentionally left blank WATER UTILITY ENTERPRISE FUNDS OF THE SANTA CLARA VALLEY WATER DISTRICT Annual Financial Report For the Year Ended June 30, 2014 Table of Contents Independent Auditor’s Report .............................................................................. 1 Management’s Discussion and Analysis ............................................................ 3 Basic Financial Statements: Statement of Net Position................................................................................ 14 Statement of Revenues, Expenses and Changes in Net Position ...................................................................................... 15 Statement of Cash Flows ................................................................................. 16 Notes to Basic Financial Statements .......................................................... 17 Required Supplemental Information Schedule of Funding Progress – Other Post Employment Benefit Plan .......... 54 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. ................................. 57 Independent Accountant’s Report on Applying Agreed-Upon Procedures. ....................................................................... 59 Schedule of Revenues and Expenses – Budgetary Basis ............................... 61 i This page intentionally left blank INDEPENDENT AUDITOR’S REPORT The Board of Directors Santa Clara Valley Water District San Jose, California Report on the Financial Statements We have audited the accompanying financial statements of the Water Enterprise Funds (Funds) of the Santa Clara Valley Water District (District) as of and for the year ended June 30, 2014, and the related notes to the financial statements, which collectively comprise the Funds’ basic financial statements as listed in the table of contents. Management's Responsibility for the Financial Statements Management is responsible for the preparation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error Auditor's Responsibility Our responsibility is to express opinions 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 from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Funds’ preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Funds’ internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the Funds, as of June 30, 2014, and the respective changes in financial position and cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. 260 Sheridan Avenue, Suite 440, Palo Alto, CA 94306 Tel: 650.462.0400 Fax: 650.462.0500 www.vtdcpa.com FRESNO  LAGUNA  PALO ALTO  PLEASANTON  SACRAMENTO RIVERSIDE  RANCHO CUCAMONGA  1 Emphasis of Matter Individual Funds Financial Statements As discussed in Note 1, the financial statements present only the Funds and do not purport to, and do not, present fairly the financial position of the District, as of June 30, 2014, and the changes in its financial position, for the year then ended in conformity with accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis and other postemployment schedule of funding progress 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. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the Funds’ basic financial statements. The other supplementary information as listed in the table of contents, are presented for purposes of additional analysis and are not a required part of the basic financial statements. The supplemental information has not been subjected to the auditing procedures applied in the audit of the basic financial statements, and accordingly, we do not express an opinion or provide any assurance on them. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated April 24, 2015, on our consideration of the Funds’ internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Funds’ internal control over financial reporting and compliance. Palo Alto, California April 24, 2015 2 WATER UTILITY ENTERPRISE FUNDS 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 Funds (the “Funds”) financial performance provide an overview of the Water Utility Enterprise Funds financial activities for the fiscal year ended June 30, 2014. This information is presented in conjunction with the audited financial statements that follow this section. The Funds account for the management and supply of wholesale treated water, groundwater, recycled water and surface water for the residents of Santa Clara County. The Funds are separate enterprise funds of the Santa Clara Valley Water District (District) that were established to account for the water utility transactions of the District. The Funds are comprised of two funds – Water Enterprise Fund and State Water Project Fund. The Water Enterprise Fund accounts for ongoing water utility operations, 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 Vavrinek, Trine, Day & Co., LLP to conduct an audit of the District’s Funds for the fiscal year ended June 30, 2014. 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 Funds, the North County zone and the South County zone. Overview of the Financial Statements The accounting policies of the Funds 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). The Funds were established to account solely for the financial transactions related to the Water Enterprise Funds activities. The financial statements presented here are not intended to show the financial position and results of operations of the Santa Clara Valley Water District as a whole. The Funds are accounted for as Proprietary Funds. When the District charges users for the services it provides, these services are generally reported in proprietary funds. 3 Management Discussion and Analysis (continued) ________________________________________________________________ The following are the statements of the Funds: The Statement of Net Position presents information on all of the Funds’ assets and liabilities, with the difference between the two reported as net position. Over time, increases or decreases in net position may serve as a useful indicator of whether the financial position of the Funds are improving or deteriorating. The Statement of Revenues, Expenses and Changes in Net Position provides information about the Funds’ revenues and expenses on an accrual basis. The Statement of Cash Flows provides relevant information of the Funds’ cash receipts and cash payments during the period. This statement presents changes in the Funds’ cash and cash equivalents resulting from operating, noncapital financing, capital and related financing, and investing activities. The Notes to Basic Financial Statements provide additional information that is essential to a full understanding of the data provided in the Funds’ financial statements. The Funds account for operations in a manner similar to a private business enterprise. Operations are accounted for to show net income or loss. The Funds are intended to be entirely or predominantly self supported from user charges. Financial Highlights Water Utility Enterprise Funds Net Position (Dollars in Thousands) 2014 2013 Current and other assets $ 190,993 $ 174,636 Capital assets 848,116 811,932 Other non current assets 7,483 - Total assets 1,046,592 986,568 Deferred Outflow of Resources Deferred amount on refunding 2,074 - Current liabilities 98,295 62,945 Litigation - claim 7,386 7,062 Long-term liabilities outstanding 207,135 208,838 Total liabilities 312,816 278,845 Net position: Net investment in capital assets 573,410 575,683 Restricted 30,019 30,131 Unrestricted 132,421 101,909 Total net position $ 735,850 $ 707,723 4 Management Discussion and Analysis (continued) ________________________________________________________________  The total net position of the Funds exceeded their liabilities by $735.9 million. The largest portion of the Funds’ net position (77.9%) reflects investment in capital assets (e.g., land, buildings, infrastructure, machinery, equipment, and contract water rights) less any related debt outstanding used to acquire the capital assets. These capital assets are used to provide services to citizens and consumers; consequently, these assets are not available for future spending. Although the Funds’ 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.  Investment in capital assets, net of related debt, for the Funds went down slightly by 0.4% or $2.3 million from the previous fiscal year. The increase in capital spending for the fiscal year was more than offset by the increase in related debt outstanding.  Current fiscal year major additions to capital assets for the Funds include the following projects (in millions): Rinconada Water Treatment Plant Reliability Improvement - $8.6, Silicon Valley Advanced Water Purification Center - $5.8, Santa Teresa Water Treatment Plant Incompatible Materials - $4.5, 5-year Pipeline Rehabilitation - $4.4, Anderson Dam Seismic Retrofit - $ 4.3, Rinconada Water Treatment Plant Facility Renewal Program Residual Management Modifications - $4.3, Water Protection Project - $3.2, Rinconada Water Treatment Plant Facility Renewal Program Chemical Structure and Pump Valves Upgrades - $2.7, South County Recycled Water Plant Pipeline - $1.9, Kirk Diversion Dam and Fish Screen Improvements - $1.8, Infrastructure Reliability Program – Seismic Study Retrofit Water Treatment Plant - $ 1.9, Calero-Guadalupe Dams Seismic Retrofits - $1.7, Microwave Telecommunications - $1.2, and Water Banking Project - $1.1.  Current fiscal year unrestricted net position of $132.4 million may be used to meet the Funds’ ongoing obligations to citizens and creditors. The District’s unrestricted net position increased by $30.5 million or 29.9 percent, during the current fiscal year. 5 Management Discussion and Analysis (continued) ________________________________________________________________ Water Utility Enterprise Funds Change in Net Position (Dollars in Thousands) 2014 2013 Revenues: Ground water charges $ 84,308 $ 62,084 Treated water charges 86,386 92,359 Surface and recycled water charges 1,680 1,275 Operating grants 1,232 980 Capital grants and contributions 3,532 4,610 Property taxes 26,989 24,200 Investment income 1,624 1,163 Miscellaneous 3,283 5,561 Total revenues 209,034 192,232 Expenses: Operating expenses 165,042 151,987 Nonoperating and other expenses 8,450 8,878 Total expenses 173,492 160,865 Change in net position before transfers 35,542 31,367 Transfers (272) 3,729 Change in net position 35,270 35,096 Net position, beginning 707,723 672,627 Prior period adjustment (7,143) - Net position, ending $ 735,850 $ 707,723 The net position of the Funds increased by $28.1 million during the fiscal year. Revenues from water services of $172.3 million were offset by $173.5 million of expenses. The remaining revenue receipts came from property taxes ($27.0 million), capital and operating grants ($4.8 million), investment earning ($1.6 million) and miscellaneous ($3.3 million). The implementation of GASB 65 required a $7.1 million downward adjustment to net position to write off bond issuance cost previously being amortized. Compared to the prior fiscal year, revenues increased $16.8 million while expenses increased $12.6 million. Key elements of the changes in revenues and expenses from those of the prior year are as follows:  Ground water revenue posted the biggest revenue increase for the fiscal year at $22.2 million or 36%. The increase was due to the rise in volume of ground water deliveries by 35.8 %, as well as the 9% average increase in the ground water and treated water rates. The rise in volume of water sales can be attributed to dry weather experienced during the fiscal year. 6