WATER UTILITY ENTERPRISE FUNDS OF THE Santa Clara Valley Water District San Jose, California Annual Financial Report For the Fiscal Year Ended June 30, 2017 WATER UTILITY ENTERPRISE FUNDS OF THE SANTA CLARA VALLEY WATER DISTRICT Annual Financial Report For the Year Ended June 30, 2017 Table of Contents Independent Auditor’s Report ............................................................................. 1 Management’s Discussion and Analysis ........................................................... 3 Basic Financial Statements: Statement of Net Position .............................................................................. 16 Statement of Revenues, Expenses and Changes in Net Position ...................................................................................... 17 Statement of Cash Flows ................................................................................ 18 Notes to Basic Financial Statements .......................................................... 19 Required Supplemental Information Schedule of Changes in Net Pension Liability and Related Ratios .................. 65 Schedule of Employer Pension Contributions ................................................. 66 Schedule of Funding Progress – Other Post Employment Benefit Plan .......... 67 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. ................................ 69 Schedule of Revenues and Expenses – Budgetary Basis ............................... 71 i This page intentionally left blank ii 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 Fund and the State Water Projects Fund (Funds) of the Santa Clara Valley Water District (District) as of and for the year ended June 30, 2017, 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 and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express 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 entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the Funds, as of June 30, 2017, 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. 1 260 Sheridan Ave., Suite 440, Palo Alto, CA 94306 P 650.462.0400 F 650.462.0400 W vtdcpa.com Emphasis of Matter As described in Note 2, 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, 2017, 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, schedule of changes in net pension liability and related ratios, schedule of employer pension contributions 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 District's basic financial statements. The Schedule of Revenues and Expenses by Zone, as listed in the table of contents, is presented for purposes of additional analysis and is not a required part of the basic financial statements. The Schedule of Revenues and Expenses by Zone is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the Schedule of Revenues and Expenses by Zone is fairly stated, in all material respects, in relation to the basic financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated November 27, 2017, on our consideration of the District's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the District's internal control over financial reporting and compliance. Palo Alto, California June 30, 2018 2 WATER UTILITY ENTERPRISE FUNDS OF THE SANTA CLARA VALLEY WATER DISTRICT Management’s Discussion and Analysis Our discussion and analysis of the financial performance of the Santa Clara Valley Water District’s Water Utility Enterprise Funds (the “Funds”) provide an overview of the Funds financial activities for the fiscal year ended June 30, 2017. 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 is used to record ongoing water utility operations, with revenues comprised primarily of charges to the District’s groundwater and treated water customers. The State Water Project Fund is used to account 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 separately based on the relative benefit to the North County and South County zones. Likewise, the District’s water charges between the two zones are set independently. The District engaged Vavrinek, Trine, Day & Co., LLP to conduct the audit of the District’s Funds for the fiscal year ended June 30, 2017. 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 financial statements of the Funds, as presented here, are for the District’s Water Enterprise Funds activities only and do not reflect the financial position of the Santa Clara Valley Water District as a whole. The Funds are accounted for as proprietary-type funds, where the cost of providing goods and services to the general public are financed and recovered primarily through user charges. 3 Management Discussion and Analysis (continued) ________________________________________________________________ The following items comprise the statements of the Funds: • The Statement of Net Position presents information on the Funds’ assets, deferred outflow, deferred inflow and liabilities, with the difference 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 is 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 on 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 better understanding of the data provided in the Funds’ financial statements. The Funds record the financial transactions in a manner similar to a private business enterprise. Operations are recorded at full accrual and accounted for to show net income or loss. The Funds are intended to be entirely or predominantly self-supported by user charges. 4 Management Discussion and Analysis (continued) ________________________________________________________________ Financial Highlights Water Utility Enterprise Funds Net Position (Dollars in Thousands) 2017 2016 Current and other assets $ 200,240 $ 178,367 Capital assets 1,061,689 962,392 Other non current assets 24,722 78,461 Total assets 1,286,651 1,219,220 Deferred outflow of resources Deferred amount on refunding 498 2,355 Pension activities 20,404 7,288 20,902 9,643 Current liabilities 71,652 38,704 Litigation - claim - 7,386 Long-term liabilities outstanding 521,676 523,370 Total liabilities 593,328 569,460 Deferred inflow of resources 3,575 5,891 Net position: Net investment in capital assets 623,828 598,075 Restricted 52,118 24,552 Unrestricted 34,704 30,885 Total net position $ 710,650 $ 653,512 The total net position of the Funds amounted to $710.7 million at June 30, 2017. The largest portion of the Funds’ net position (87.8% or $623.8 million) 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, increased by 4.3% or $25.8 million from the previous fiscal year. 5 Management Discussion and Analysis (continued) ________________________________________________________________ Current fiscal year major additions to capital assets for business type activities include the following (in millions): • $41.8 – Rinconada Water Treatment Plant Reliability Improvement • $15.3 – Penitencia Force Main Seismic Retrofit • $10.3 – Wolfe Road Recycled Water Facility • $7.6 – Penitencia Del Main Seismic Retrofit • $6.8 – Fluoridation at Water Treatment Plants • $5.8 – Indirect Potable Reuse-Plan C • $4.7 – Anderson Dam Seismic Retrofit • $4.2 – Penitencia Water Treatment Plant Clearwall Recoat and Repair • $4.1 – Infrastructure Reliability Program Water Treatment Plant Buildings Seismic Retrofit • $3.2 – South County Recycled Water • $2.8 – Rinconada Water Treatment Plant Facility Renewal Program Residual Management Modifications • $2.5 – Guadalupe Dam Seismic Retrofit Design and Construction • $2.1 – Calero Dam Seismic Retrofit Design and Construction • $1.8 – 5-year Pipeline Rehabilitation • $1.1 – Dam Safety Seismic Stability • $1.1 – South County Recycled Water Pipeline • $1.0 – Almaden Dam Improvements Net position categorized as “unrestricted” may be used to meet ongoing obligations to citizens, customers, and creditors. The Funds’ unrestricted net position of $34.7 million represents an increase of $3.8 million or 12.4% when compared to the prior fiscal year. 6