(WATER SYSTEM)
Water System Revenue Bonds, 2001 Series A
Water System Variable Rate Demand Revenue Bonds, 2001 Series B Water System Revenue Bonds, 2003 Series A
Water System Revenue Bonds, 2003 Series B Water System Revenue Bonds, 2004 Series C Water System Revenue Bonds, 2006 Subseries A-1 Water System Revenue Bonds, 2006 Subseries A-2 Water System Revenue Bonds, 2007 Subseries A-1 Water System Revenue Bonds, 2007 Subseries A-2
Water System Revenue Bonds, 2009 Series A Water System Revenue Bonds, 2009 Series B Water System Revenue Bonds, 2009 Series C Water System Revenue Bonds, 2010 Series A
CUSIP NUMBERS*
Water System Revenue Bonds, 2001 Series A
544525CL0 544525CR7 544525CV8
544525CM8 544525CS5 544525CW6
544525CN6 544525CT3 544525CX4
544525CP1 544525CU0 544525CY2
544525CQ9
Water System Variable Rate Demand Revenue Bonds, 2001 Series B 544525DA3
544525DB1 544525DC9 544525DD7
Water System Revenue Bonds, 2003 Series A 544525DQ8
544525DR6 544525DS4 544525DT2 544525DU9
Water System Revenue Bonds, 2003 Series B
544525ED6 544525EK0 544525ER5
544525EE4 544525EL8 544525ES3
544525EF1 544525EM6 544525ET1
544525EG9 544525EN4 544525EU8
544525EH7 544525EP9 544525EV6
544525EJ3 544525EQ7
Water System Revenue Bonds, 2004 Series C
544525FD5 544525FL7 544525FT0 544525FE3 544525FM5 544525FU7 544525FF0 544525FN3 544525FV5 544525FG8 544525FP8 544525FW3 544525FH6 544525FQ6 544525FX1 544525FJ2 544525FR4 544525FK9 544525FS2
Water System Revenue Bonds, 2006 Subseries A-1
544525GK8 544525GP7 544525GT9
544525GL6 544525GQ5 544525GU6
544525GM4 544525GR3 544525GV4
544525GN2 544525GS1 544525GW2
*
CUSIP is a registered trademark of American Bankers Association. CUSIP data herein is set forth for convenience of reference only. The Department assumes no responsibility for the accuracy of such data.
Water System Revenue Bonds, 2007 Subseries A-1 544525JE9 544525JP4 544525JY5 544525JF6 544525JQ2 544525JZ2 544525JG4 544525JR0 544525KA5 544525JH2 544525JS8 544525KB3 544525JJ8 544525JT6 544525KC1 544525JK5 544525JU3 544525KD9 544525JL3 544525JV1 544525KE7 544525JM1 544525JW9 544525KF4 544525JN9 544525JX7
Water System Revenue Bonds, 2007 Subseries A-2 544525KG2
544525KH0
Water System Revenue Bonds, 2009 Series A
544525LU0 544525MD7 544525MN5 544525LV8 544525ME5 544525MP0 544525LW6 544525MF2 544525MQ8 544525LX4 544525MG0 544525MR6 544525LY2 544525MH8 544525MS4 544525LZ9 544525MJ4 544525MT2 544525MA3 544525MK1 544525MU9 544525MB1 544525ML9 544525MV7 544525MC9 544525MM7 544525MW5
Water System Revenue Bonds, 2009 Series B
544525NB0 544525NH7 544525NP9 544525NC8 544525NJ3 544525NQ7 544525ND6 544525NK0 544525NR5 544525NE4 544525NL8 544525NS3 544525NF1 544525NM6 544525NT1 544525NG9 544525NN4 544525NU8
Water System Revenue Bonds, 2009 Series C
544525NV6 544525NX2 544525NZ7
544525NW4 544525NY0
Water System Revenue Bonds, 2010 Series A 544495WB6
TABLE OF CONTENTS Page iii INTRODUCTION ...1 DISCLAIMERS ...1 FURTHER INFORMATION ...2
FINANCIAL AND OPERATING INFORMATION...3
Table – Water System Selected Operating Information ...3
Table – Water System Summary of Revenues, Expenses and Debt Service Coverage...4
Table – Water System Long-Term Debt and Utility Plant ...5
AUDITED FINANCIAL STATEMENTS ...6 CERTIFICATION ... S-1 APPENDIX A LOS ANGELES DEPARTMENT OF WATER AND POWER (WATER SYSTEM)
FINANCIAL STATEMENTS AND REQUIRED SUPPLEMENTARY
INFORMATION FOR THE FISCAL YEARS ENDED JUNE 30, 2010 AND 2009 (WITH INDEPENDENT AUDITORS’ REPORT THEREON)
Water System Revenue Bonds, 2001 Series A (the “2001 A Bonds”);
Water System Variable Rate Demand Revenue Bonds, 2001 Series B (the “2001 B Bonds,” and together with the 2001 A Bonds, the “2001 Bonds”);
Water System Revenue Bonds, 2003 Series A (the “2003 A Bonds”);
Water System Revenue Bonds, 2003 Series B (the “2003 B Bonds,” and together with the 2003 A Bonds, the “2003 Bonds”);
Water System Revenue Bonds, 2004 Series C (the “2004 Bonds”);
Water System Revenue Bonds, 2006 Subseries A-1 (the “2006 A-1 Bonds”);
Water System Revenue Bonds, 2006 Subseries A-2 (the “2006 A-2 Bonds,” and together with the 2006 A-1 Bonds, the “2006 Bonds”);
Water System Revenue Bonds, 2007 Subseries A-1 (the “2007 A-1 Bonds”);
Water System Revenue Bonds, 2007 Subseries A-2 (the “2007 A-2 Bonds,” and together with the 2007 A-1 Bonds, the “2007 Bonds”);
Water System Revenue Bonds, 2009 Series A (the “2009 A Bonds”); Water System Revenue Bonds, 2009 Series B (the “2009 B Bonds”);
Water System Revenue Bonds, 2009 Series C (the “2009 C Bonds,” and together with the 2009 A Bonds and 2009 B Bonds, the “2009 Bonds”); and
Water System Revenue Bonds, 2010 Series A (the “2010 A Bonds”);
The 2001 Bonds, the 2003 Bonds, the 2004 Bonds, the 2006 Bonds, the 2007 Bonds, the 2009 Bonds and the 2010 A Bonds are referred to herein as the “Bonds.”
This Report is provided pursuant to covenants made by the Department in connection with the issuance of: (i) the 2001 A Bonds pursuant to that certain Continuing Disclosure Certificate of the Department dated February 28, 2001; (ii) the 2001 B Bonds pursuant to that certain Continuing Disclosure Certificate of the Department dated March 1, 2001; (iii) the 2003 A Bonds pursuant to that certain Continuing Disclosure Certificate of the Department dated January 1, 2003; (iv) the 2003 B Bonds pursuant to that certain Continuing Disclosure Certificate of the Department dated March 6, 2003; (v) the 2004 Bonds pursuant to that certain Continuing Disclosure Certificate of the Department dated July 29, 2004; (vi) the 2006 Bonds pursuant to that certain Continuing Disclosure Certificate of the Department dated February 16, 2006; (vii) the 2007 Bonds pursuant to that certain Continuing Disclosure Certificate
2
Disclosure Certificate of the Department dated February 4, 2009; (ix) the 2009 B Bonds and 2009 C Bonds pursuant to that certain Continuing Disclosure Certificate of the Department dated December 3, 2009; and (x) the 2010 A Bonds pursuant to that certain Continuing Disclosure Certificate of the Department dated December 14, 2010 (collectively, the “Continuing Disclosure Certificates”).
DISCLAIMERS
To the extent the Department provides information herein that the Department is not obligated to present or update, the Department is not obligated to present or update such information in future annual reports. Except as set forth herein, the Department has not updated any information contained in the Prior Reports.
By providing the information herein, the Department does not imply or represent (a) that all information provided herein is material to investors’ decisions regarding investment in the Bonds, (b) that no changes, circumstances or events have occurred since June 30, 2010 (other than as contained herein) or (c) that no other information exists which may have a bearing on the Department’s financial condition, the security for the Bonds or an investor’s decision to buy, sell or hold the Bonds.
Statements contained in this Report which involve estimates, forecasts or other matters of opinion, whether or not expressly so described herein, are intended solely as such and are not to be construed as representations of fact. Further, expressions of opinion contained herein or incorporated hereby are subject to change without notice and the delivery of this Report will not, under any circumstances, create any implication that there has been no change in the affairs of the Department.
No statement contained herein should be construed as a prediction or representation about future financial performance of the Department. Historical results presented herein may not be indicative of future operating results.
FURTHER INFORMATION
For further information regarding this Report, please address your questions to: Mr. Mario C. Ignacio, CFA
Chief Accounting Employee
Department of Water and Power of the City of Los Angeles 111 North Hope Street, Room 465
Los Angeles, California 90012 (213) 367-0690
Operating Statistics:
Water Supply (Millions of Billing Units of 100 cu. Ft.):
Local Underground Supply 33.6 26.8 31.9 40.5 22.1
Los Angeles Aqueduct 87.0 47.1 66.5 121.1 158.7
Deliveries From Metropolitan 114.4 190.0 183.7 128.8 91.1
Recycled Water 3.0 3.4 – – –
Total Supply 238.0 267.3 282.1 290.4 271.9
Less:
Diversions To (From) Storage 0.6 0.9 0.5 0.1 1.1
System Uses and Losses 13.9 13.8 15.3 11.5 10.3
Total Water Sold 223.5 252.5 265.3 277.0 259.5
Water Sales (Millions of Billing Units of 100 cu. Ft.):
Single-family Residential 85.3 101.0 108.5 114.5 103.4
Multiple Dwelling Units 72.4 76.2 79.6 82.4 80.7
Commercial and Industrial 50.4 57.0 58.1 59.7 57.2
Other 14.1 18.3 19.1 20.4 18.2
Total 222.2 252.5 265.3 277.0 259.5
Average Number of Customers (In Thousands):
Residential 467 473 473 473 475
Multiple Dwelling Units 121 122 122 122 123
Commercial and Industrial 63 64 64 65 65
Other 8 8 7 7 7
Total 659 667 666 667 670
Operating Revenues (In Thousands)1:
Single-family Residential $315,422 $310,649 $299,536 $274,814 $235,091 Multiple Dwelling Units 253,019 232,530 216,210 188,639 175,826 Commercial and Industrial 193,320 186,218 170,959 145,495 128,783
Other 50,599 54,567 57,331 59,553 58,925
Total $812,360 $783,964 $744,036 $668,501 $598,625
Average Revenue Per Hundred Cubic Feet Sold:
Single-family Residential 3.610 3.076 2.761 2.400 2.274
Multiple Dwelling Units 3.411 3.052 2.716 2.289 2.179
Commercial and Industrial 3.744 3.267 2.942 2.437 2.251
Other 3.517 2.981 3.002 2.919 3.240
Average Metered Consumption Per
Person Per Day (Gallons) 114 126 134 141 133
Average Metered Consumption
Through the System Per Day (Million
Gallons) 455 517.4 543.8 567.6 532.8
1
The annual financial information has been derived from the annual audited financial statements of the Department’s Water System and should be read in conjunction with the Los Angeles Department of Water and Power (Water System) Financial Statements and Required Supplementary Information for the Fiscal Years Ended June 30, 2010 and 2009 attached hereto as Appendix A.
4
WATER SYSTEM
SUMMARY OF REVENUES, EXPENSES AND DEBT SERVICE COVERAGE1 Fiscal Years Ended June 30, 2006 through 2010
(Dollars in Thousands)
2010 2009 2008 2007 2006
Operating Revenues:
Single-family Residential $315,422 $310,649 $299,536 $274,814 $235,091
Multiple Dwelling Units 253,019 232,530 216,210 188,639 175,826
Commercial and Industrial 193,320 186,218 170,959 145,495 128,783
Other 50,599 54,567 57,331 59,553 58,925
Total Operating Revenues $812,360 $783,964 $744,036 $668,501 $598,625 Operating Expenses:
Purchased Water $163,248 $215,864 $188,750 $123,925 $ 95,041
Maintenance and Other Operating
Expenses 421,134 365,723 334,907 319,037 299,502
Total Operating Expenses Excluding
Depreciation $584,382 $581,587 $523,657 $442,962 $394,543
Operating Income Before Depreciation $227,978 $202,377 $220,379 $225,539 $204,082 Allowance for Funds Used During
Construction 5,521 2,008 2,482 4,687 1,773
Nonoperating Revenues, Net 16,221 8,593 27,573 25,987 11,699
Capital Contributions 24,099 30,603 25,615 17,970 13,898
Change in Fund Net Assets Before Depreciation, Interest and Transfer to
the City $273,819 $243,581 $276,049 $274,183 $231,452
Debt Service
Interest2 $108,017 $ 92,032 $ 97,067 $ 88,742 $ 72,233
Principal 26,089 23,994 36,287 34,186 23,448
Total Debt Service on Bonds $134,106 $116,026 $133,354 $122,928 $ 95,681 Depreciation and Amortization $ 97,034 $ 83,141 $ 76,329 $ 71,378 $ 70,654
Debt Service Coverage3 2.04 2.10 2.07 2.23 2.42
1 The annual financial information has been derived from the annual audited financial statements of the Department’s Water System and should be read in conjunction with the Los Angeles Department of Water and Power (Water System) Financial Statements and Required Supplementary Information for the Fiscal Years Ended June 30, 2010 and 2009 attached hereto as Appendix A.
2
Excludes amortization of debt expenses. 3
Total change in Fund Net Assets before Depreciation, Interest and Transfer to the City divided by Total Debt Service on Bonds. Source: Department of Water and Power of the City of Los Angeles.
1950 $ 57,711 $ 220,762 $ 162,195 35.60% 1955 82,841 301,196 223,200 37.10 1960 109,487 385,164 278,998 39.20 1965 147,072 479,413 338,784 43.40 1970 236,480 669,684 480,404 49.20 1975 278,826 817,435 565,950 49.30 1980 262,955 983,129 656,515 40.30 1985 309,242 1,331,757 902,247 34.30 1990 367,477 1,859,767 1,282,089 28.70 1991 430,313 2,042,582 1,426,081 30.25 1992 566,806 2,225,223 1,566,347 36.20 1993 622,106 2,339,745 1,631,645 38.10 1994 608,391 2,471,799 1,709,660 35.60 1995 693,904 2,611,848 1,794,950 38.70 1996 682,351 2,765,327 1,890,032 36.10 1997 668,409 2,941,031 1,999,972 33.40 1998 652,641 3,099,127 2,087,651 31.30 1999 629,012 3,256,282 2,177,542 28.90 2000 709,498 3,470,435 2,314,700 30.70 2001 1,043,733 3,697,397 2,454,660 42.50 2002 1,000,414 4,022,915 2,694,858 37.10 2003 1,297,190 4,234,393 2,848,867 45.50 2004 1,212,113 4,453,856 2,993,021 40.50 2005 1,395,025 4,728,288 3,198,834 43.60 2006 1,868,494 5,029,186 3,448,893 54.18 2007 2,119,942 5,324,793 3,668,710 57.78 2008 2,097,721 5,548,461 3,825,975 54.83 2009 2,193,338 5,914,227 4,097,770 53.53 2010 2,708,150 6,360,694 4,448,636 60.88 1
6
AUDITED FINANCIAL STATEMENTS
The Los Angeles Department of Water and Power (Water System) Financial Statements and Required Supplementary Information for the Fiscal Years Ended June 30, 2010 and 2009 (with Independent Auditors’ Report Thereon dated December 20, 2010) are attached hereto as APPENDIX A.
2. The execution and delivery of this Report to the Municipal Securities Rulemaking Board have been duly authorized by the Department.
3. This certification is being provided in connection with this Report being delivered by the Department pursuant to the Continuing Disclosure Certificates.
4. The statements and information contained in this Report are true, correct, and complete in all material respects and, as of the date hereof, this Report does not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.
DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES
By: /s/ Ann M. Santilli
APPENDIX A
LOS ANGELES DEPARTMENT OF WATER AND POWER (WATER SYSTEM)
FINANCIAL STATEMENTS AND REQUIRED SUPPLEMENTARY INFORMATION FOR THE FISCAL YEARS ENDED JUNE 30, 2010 AND 2009
LOS ANGELES DEPARTMENT OF WATER AND POWER WATER SYSTEM
Table of Contents
Page(s)
Independent Auditors’ Report 1 – 2
Management’s Discussion and Analysis 3 – 12
Financial Statements:
Balance Sheets 13 – 14
Statements of Revenues, Expenses, and Changes in Fund Net Assets 15
Statements of Cash Flows 16 – 17
Notes to Financial Statements 18 – 50
The following discussion and analysis of the financial performance of the City of Los Angeles’ (the City) Department of Water and Power’s (the Department) Water Revenue Fund (Water System) provides an overview of the financial activities for the fiscal years ended June 30, 2010 and 2009. Descriptions and other details pertaining to the Water System are included in the notes to the financial statements. This discussion and analysis should be read in conjunction with the Water System’s financial statements, which begin on page 13.
Using This Financial Report
This annual financial report consists of the Water System’s financial statements and required supplementary information and reflects the self-supporting activities of the Water System that are funded primarily through the sale of water to the public it serves.
Balance Sheets, Statements of Revenues, Expenses, and Changes in Fund Net Assets, and Statements of Cash Flows
The financial statements provide an indication of the Water System’s financial health. The balance sheets include all of the Water System’s assets and liabilities using the accrual basis of accounting, as well as an indication about which assets can be utilized for general purposes, and which assets are restricted as a result of bond covenants and other commitments. The statements of revenues, expenses, and changes in fund net assets report all of the revenues and expenses during the time periods indicated. The statements of cash flows report the cash provided and used by operating activities, as well as other cash sources and uses such as investment income and cash payments for bond principal and capital additions and betterments.
LOS ANGELES DEPARTMENT OF WATER AND POWER WATER SYSTEM
Management’s Discussion and Analysis June 30, 2010 and 2009
4 (Continued)
The following table summarizes the financial condition and changes in fund net assets of the Water System as of and for the fiscal years ended June 30, 2010, 2009, and 2008:
Table 1 – Condensed Schedule of Assets, Liabilities, and Fund Net Assets
(Amounts in millions)
As of June 30
Assets 2010 2009 2008
Utility plant, net $ 4,449 4,098 3,826
Investments 33 33 37
Other noncurrent assets 297 258 220
Current assets 655 447 556
$ 5,434 4,836 4,639
Liabilities and Fund Net Assets
Long-term debt, net of current portion $ 2,708 2,193 2,098
Other long-term liabilities 19 14 14
Current liabilities 371 361 388
3,098 2,568 2,500
Fund net assets:
Invested in capital assets, net of related deb t 1,824 1,893 1,831
Restricted 351 309 268
Unrestricted 161 66 40
Total fund net assets 2,336 2,268 2,139
Table 2 – Condensed Schedule of Revenues, Expenses, and Changes in Fund Net Assets
(Amounts in millions)
Year ended June 30
2010 2009 2008
Operating revenues:
Residential $ 315 311 300
Multiple-dwelling units 253 232 216
Commercial and industrial 193 186 171
Other 51 55 57
Total operating revenues 812 784 744
Operating expenses:
Purchased water (163) (216) (189)
Maintenance and other (421) (366) (335)
Depreciation and amortization (97) (83) (76)
Total operating expenses (681) (665) (600)
Operating income 131 119 144
Nonoperating revenues (expense):
Investment income 12 10 27
Other nonoperating revenue and expenses, net 5 (1) —
Debt expense (104) (92) (99)
Total nonoperating expense (87) (83) (72)
Income before capital contributions,
and transfers 44 36 72
Capital contributions 24 30 26
Transfers from (to) the reserve fund of the
City of Los Angeles — 63 (33)
Increase in fund net assets 68 129 65
Beginning balance of fund net assets 2,268 2,139 2,074
Ending balance of fund net assets $ 2,336 2,268 2,139
Assets Utility Plant
During fiscal years 2010 and 2009, the Water System placed in service asset additions and betterments in the amount of $506 million and $362 million, respectively. In 2010, $176 million, or 35%, was capitalized for source of water supply primarily due to the additions and betterments in the Owens Lake Dust Control Project and improvements to canals and conduits. The value of assets in distribution utility plant, such as structures, mains,
LOS ANGELES DEPARTMENT OF WATER AND POWER WATER SYSTEM
Management’s Discussion and Analysis June 30, 2010 and 2009
6 (Continued)
services, meters, and fire hydrants increased by $148 million. The remaining $182 million, or 36%, additions included assets in the pumping stations, purification stations, and general plant facilities.
In 2009, $193 million, or 53%, was placed in service for distribution utility plant assets, such as structures, mains, services, meters, and fire hydrants. The value of assets in the source of water supply increased by $79 million, or 22%, primarily due to the additions and betterments in the Owens Lake Dust Control Project and improvements to canals and conduits. The remaining $90 million, or 25%, additions included assets in the pumping stations, purification stations, and general plant facilities.
The Water System utility plant assets fall into five major categories: source of water supply, pumping, purification, distribution, and general. Each category of assets is important to providing water services and has a specific purpose. Source of water supply assets are the assets that the Department has constructed and/or purchased to help ensure an adequate supply of water. The Department has four major sources of water. These include:
" Los Angeles Aqueduct and Second Los Angeles Aqueduct supply imported water from the Owens Valley and the Mono Basin;
" Local groundwater supply (with pumping rights in the San Fernando, Sylmar, and Central and West Coast Basins);
" Purchased supply from Metropolitan Water District; and
" Recycled water.
All sources of water, except for recycled water, are supplied for potable use; that is, the water from these sources is of drinkable quality. Table 3 below shows the percentage of potable water delivered from the major sources.
Table 3 – Sources of Potable Water Supplied During Fiscal Years 2010 and 2009
Fiscal year 2010 Fiscal year 2009
Millions of Millions of
gallons Percentage gallons Percentage
Source:
Aqueduct 65,017 38% 35,221 18%
Wells 21,966 13 19,987 10
Purchases 85,551 49 142,136 72
172,534 100% 197,344 100%
Water storage during low demand, cold, or wet periods is essential for conservation to supply the extra water needed during warm weather or emergency situations.
The Water System’s 108 tanks and reservoirs, ranging in size from 10 thousand to 60 billion gallons, have a current capacity of approximately 315,765 acre-feet, or 102.89 billion gallons. Eight aqueduct reservoirs provide 95% of the Water System’s storage capacity; major and minor distribution reservoirs provide the remaining 5%.
Further information regarding the Water System’s utility plant can be found in note 3 to the accompanying financial statements.
Liabilities and Fund Net Assets Long-Term Debt
As of June 30, 2010, Water System’s total outstanding long-term debt balance was approximately $2.77 billion. This is an increase of $519.3 million over the prior year, resulting from the sale of $487.3 million in Water System revenue bonds and $43.5 million in loans from the California Department of Water Resources (CDWR), offset by scheduled maturities of $27.1 million.
As of June 30, 2009, Water System’s total outstanding long-term debt balance was approximately $2.25 billion. This is an increase of $92 million over the prior year, resulting from the sale of $150 million in Water System revenue bonds, offset by scheduled maturities of $23.3 million and the current refunding of $34.4 million of Water System taxable bonds.
Outstanding principal, plus scheduled interest and amortization as of June 30, 2010, is shown in the chart below:
Chart: Debt Service Requirements
In November 2010, Standard & Poor’s Rating Services, Moody’s Investors Service, and Fitch Ratings affirmed the Water System’s bond rating of AA, Aa2, and AA+, respectively. Additional information regarding the Water System’s long-term debt can be found in note 6.
$-$100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $700,000 $800,000 $900,000 2015 2020 2025 2030 2035 2040 2045 In $ 0 0 0 s
LOS ANGELES DEPARTMENT OF WATER AND POWER WATER SYSTEM
Management’s Discussion and Analysis June 30, 2010 and 2009
8 (Continued)
Changes in Fund Net Assets Revenues
The operating revenues of the Water System are generated from selling water to its customers. The current water rate has two types of components, a base rate and adjustable rates, which are referred to as pass-through rates. The pass-through rates are in place to recover the cost of specific expenses. These specific expenses include purchased water, water quality, reclaimed water, demand-side management (or conservation expense), water security, Owens Valley regulatory, and low-income subsidy credits. As a result of the inclusion of pass-through rates in the water rates, revenue can increase or decrease from one year to the next based on the Water System incurring greater or smaller expenses in these categories.
The Water System has five major customer categories. These categories include residential, multiple-dwelling units, commercial, industrial, and other. Table 4 summarizes the percentage contribution of revenues from each customer category during fiscal years 2010 and 2009:
Table 4 – Revenue and Percentage of Revenue by Customer Class
(Amounts in thousands)
Fiscal year 2010 Fiscal year 2009
Revenue Percentage Revenue Percentage
Type of customer: Residential $ 315,422 39% $ 310,649 40% Multiple-dwelling units 253,019 31 232,530 30 Commercial 160,931 20 151,574 19 Industrial 32,389 4 34,644 4 Other 50,599 6 54,567 7 $ 812,360 100% $ 783,964 100%
Residential customers provided approximately 40% of the Water System’s 2010 and 2009 revenue representing the largest class of customers. As of June 30, 2010, the Water System had approximately 659,000 customers. As shown in Table 5, 467,000, or 71%, of total customers were in the residential customer class as of June 30, 2010.
Table 5 – Number of Customers and Percentage of Customers by Customer Class
(Numbers in thousands)
Fiscal year 2010 Fiscal year 2009
Number Percentage Number Percentage
Type of customer: Residential 467 71% 473 71% Multiple-dwelling units 121 18 122 18 Commercial 57 9 58 9 Industrial 6 1 6 1 Other 8 1 7 1 659 100% 666 100%
During fiscal year 2010, operating revenues increased by $28.4 million, or 3.6%, from fiscal year 2009 revenues while sales of water decreased by 33.6 million hundred cubic feet. The decrease in sales is due to greater conservation requirements imposed on customers. The increase in revenue is primarily due to the shortage year rates applied to Tier 2 usage, changes in other pass-through factor revenues, and the recording of the base revenue shortfall declared for fiscal year 2009 and 2010.
During fiscal year 2009, operating revenues increased by $40 million, or 5%, from fiscal year 2008 revenues while sales of water decreased by 9.2 million hundred cubic feet. The decrease in sales is due to greater conservation requirements imposed on customers. The increase in revenue is primarily due to an increase in purchased water expense of $33.6 million. The remaining $6.4 million increase was due to various smaller changes in the base rate revenue offset by changes in other pass-through factor revenues.
LOS ANGELES DEPARTMENT OF WATER AND POWER WATER SYSTEM
Management’s Discussion and Analysis June 30, 2010 and 2009
10 (Continued)
Operating Expenses
Purchased water expense is the single largest expense that the Water System incurs each fiscal year. Purchased water expense represents the cost of buying water, primarily from the Metropolitan Water District (MWD). For fiscal years 2010 and 2009, 49% and 72%, respectively, of the potable water supplied to the Water System’s customers was purchased water. Table 6 summarizes the Water System’s operating expenses for fiscal years 2010 and 2009:
Table 6 – Operating Expenses and Percentage of Expense by Type of Expense
(Amounts in thousands)
Fiscal year 2010 Fiscal year 2009
Expenses Percentage Expense Percentage
Type of expense:
Purchased water $ 163,248 24% $ 215,864 33%
Other operating expenses 303,913 45 244,280 36
Maintenance 117,221 17 121,443 18
Depreciation and amortization 97,034 14 83,141 13
$ 681,416 100% $ 664,728 100%
Fiscal Year 2010
Fiscal year 2010 operating expenses were $17 million higher as compared to the prior year. The increase was due to an increase in other operating costs of $59.6 million and an increase in depreciation expense of $14 million, offset by a $57 million decrease in purchased water costs and maintenance expenses. The increase in other operating expenses was attributed to higher demand side management, miscellaneous general expenses and employees’ benefit costs. The decrease in purchase water costs was due to lower demand for water from customers and an 85% increase in the water supplied by the L.A. Aqueduct.
Fiscal Year 2009
Fiscal year 2009 operating expenses were $65 million higher as compared to the prior year. The increase was due to increased purchased water costs of $27 million, an increase in other operating costs of $12 million, an increase in maintenance costs of $19 million, and an increase in depreciation expense of $7 million.
The Water System purchased 5.0 billion more gallons of water during 2009. The increase was due to drier than normal weather conditions, resulting in increased demand for purchased water. These additional purchases caused purchased water costs to increase by $27 million over fiscal year 2008.
Overall maintenance expense increase of $18 million mostly related to maintenance of mains, dams, reservoirs, wells, canals, and conduits.
Nonoperating Revenue and Expenses and Transfers
Fiscal Year 2010
Fiscal year 2010 nonoperating revenues were $4.0 million higher as compared to the prior year while nonoperating expenses were $3.7 million lower as compared to the prior year. The higher nonoperating revenues can be attributed to the federal government interest payment subsidy for the Water System Revenue Bonds, 2009 Series C, Build America Bonds. The lower nonoperating expenses are attributed to lower interest credited to customers for deposits held by the Water System. The interest rate used to credit customer deposits was changed from 4.12% to 1.00%.
Debt expenses increased $12.0 million, and capital contributions decreased $6.6 million.
The increase in debt expense is attributed to the $15.3 million increase in interest expense related to the issuance of $487.3 million Water System Revenue Bonds during fiscal year 2010 offset by a $3.5 million increase in allowance for funds used during construction.
The $6.6 million decrease in capital contributions from fiscal year 2009 is due to the slowdown in economic activities and new business developments.
Fiscal Year 2009
The major nonoperating activities of the Water System for fiscal year 2009 included reversing the 2008 and 2007 transfers of $33.4 million and $29.9 million, respectively, to the reserve fund of the City of Los Angeles, $92.0 million in debt expenses, net of allowance for funds used during construction of $2 million, and capital contributions of $30.6 million.
The 2008 transfer of $33.4 million was rescinded by the Board of Commissioners in May 2009 based on the financial position of the Water System and the 2007 transfer was deemed illegal by the courts in July 2009. See further discussion in note 10(a) to the financial statements.
The decrease in debt expense is due to the defeasance of $34.4 million in variable rate debt during the year offset by the issuance of $150 million in new debt issued in February 2009. The variable rate bonds’ daily and weekly rate range decreased from 1.60% to 2.60% as of June 30, 2008 to 0.23% to 0.30% as of June 30, 2009.
LOS ANGELES DEPARTMENT OF WATER AND POWER WATER SYSTEM
Management’s Discussion and Analysis June 30, 2010 and 2009
12
Currently Known Facts, Decisions, or Conditions
The July 1, 2010 actuarial study for the Water and Power Employees’ Retirement, Disability, and Death Benefit Insurance Plan (the Plan) noted the market value of the Plan’s assets were approximately $6.27 billion and the unfunded actuarial accrued liability was approximately $1.6 billion. The Plan had unrecognized investment losses of $1.0 billion as of June 30, 2010. The Plan employs a five-year smoothing technique to value assets in order to reduce the volatility in contribution rates. The impact of this will result in “smoothed” assets that are lower or higher than the market value of the assets depending upon whether the remaining amount to be smoothed is either a net gain or a net loss. If the unrecognized investment losses were recognized immediately, required contributions to the Plan would increase from approximately 38.45% of covered payroll to 51.93% of covered payroll. Additionally, if the unrecognized investment losses were recognized immediately in the actuarial value of assets, the funded ratio of the Plan would decrease from 81% to 70%.
Assets 2010 2009
Noncurrent assets: Utility plant:
Source of water supply $ 1,126,461 950,808
Pumping 244,219 236,492 Purification 474,219 341,783 Distribution 3,413,047 3,270,387 General 500,958 463,219 5,758,904 5,262,689 Accumulated depreciation (1,912,058) (1,816,457) 3,846,846 3,446,232
Construction work in progress 601,790 651,538
4,448,636 4,097,770
Investments 32,680 32,678
Net pension asset 50,935 48,407
Net postemployment asset 246,286 209,737
Total noncurrent assets 4,778,537 4,388,592
Current assets:
Cash and cash equivalents – unrestricted 170,685 120,375
Cash and cash equivalents – restricted 260,790 143,334
Cash collateral received from securities lending transactions 5,027 — Customer and other accounts receivable, net of $5,500 and $5,000
allowance for losses for 2010 and 2009, respectively 104,208 79,727
Under recovered costs — 11,707
Accrued unbilled revenue 64,049 52,726
Materials and supplies 21,470 18,293
Prepayments and other current assets 29,073 20,918
Total current assets 655,302 447,080
Total assets $ 5,433,839 4,835,672
LOS ANGELES DEPARTMENT OF WATER AND POWER WATER SYSTEM
Balance Sheets June 30, 2010 and 2009 (Amounts in thousands)
Fund Net Assets and Liabilities 2010 2009
Fund net assets:
Invested in capital asset, net of related debt $ 1,824,212 1,892,944 Restricted:
Debt service 31,220 30,012
Other postemployment benefits 246,286 209,737
Pension benefits 50,935 48,407
Other purposes 22,167 21,169
Unrestricted 160,831 66,080
Total fund net assets 2,335,651 2,268,349
Long-term debt, net of current portion 2,708,150 2,193,338
Other noncurrent liabilities:
Accrued workers’ compensation claims 18,916 13,474
Total other noncurrent liabilities 18,916 13,474
Current liabilities:
Current portion of long-term debt 63,018 58,512
Accounts payable and accrued expenses 107,895 132,822
Due to Power System 7,276 9,903
Accrued employee expenses 43,822 39,752
Accrued interest 60,595 45,065
Obligations under securities lending transactions 5,027 —
Over recovered costs 15,946 —
Customer deposits 67,543 74,457
Total current liabilities 371,122 360,511
Total liabilities 3,098,188 2,567,323
Total fund net assets and liabilities $ 5,433,839 4,835,672
See accompanying notes to financial statements.
2010 2009
Operating revenues:
Residential $ 315,422 310,649
Multiple dwelling units 253,019 232,530
Commercial and industrial 193,320 186,218
Other 56,571 59,520
Uncollectible accounts (5,972) (4,953)
812,360 783,964
Operating expenses:
Purchased water 163,248 215,864
Maintenance and other operating expenses 421,134 365,723
Depreciation and amortization 97,034 83,141
681,416 664,728
Operating income 130,944 119,236
Nonoperating revenues (expenses):
Investment income 11,848 9,657
Other nonoperating income 6,831 5,043
18,679 14,700
Other nonoperating expenses (2,458) (6,107)
16,221 8,593
Debt expenses:
Interest on debt 109,483 93,975
Allowance for funds used during construction (5,521) (2,008)
103,962 91,967
Income before capital contributions and transfers 43,203 35,862
Capital contributions 24,099 30,603
Transfer from the reserve fund of the City of Los Angeles — 63,356
Increase in fund net assets 67,302 129,821
Fund net assets:
Beginning of period 2,268,349 2,138,528
End of period $ 2,335,651 2,268,349
LOS ANGELES DEPARTMENT OF WATER AND POWER WATER SYSTEM
Statements of Cash Flows Years ended June 30, 2010 and 2009
(Amounts in thousands)
2010 2009
Cash flows from operating activities: Cash receipts:
Cash receipts from customers $ 830,160 785,372
Cash receipts from customers for other agency services 472,190 476,868
Cash receipts from interfund services provided 353,531 342,015
Other cash receipts — 4,633
Cash disbursements:
Cash payment to employees (247,862) (233,591)
Cash payment to suppliers (367,568) (365,248)
Cash payment for interfund services used (410,893) (343,272)
Cash payment to other agencies for fees collected (473,539) (477,059)
Other cash payments (3,975) —
Total cash flows provided by operating activities 152,044 189,718 Cash flows from capital and related financing activities:
Additions to plant and equipment (442,087) (301,738)
Capital contributions 23,807 17,897
Principal payments and maturities on long-term debt (25,281) (57,630)
Proceeds from issuance of bonds 500,002 150,676
Proceeds from California Department of Water Resources loan 43,471 — Payment of California Department of Water Resources loan (802) (784)
Debt interest payments (94,388) (90,353)
Total cash flows used for capital and related
financing activities 4,722 (281,932)
Cash flows from investing activities:
Purchases of investment securities (143,330) (73,913)
Sale of investment securities 143,330 77,804
Investment income 11,000 13,265
Total cash flows provided by investing activities 11,000 17,156 Net increase (decrease) in cash and cash equivalents 167,766 (75,058) Cash and cash equivalents:
Cash and cash equivalents at July 1 (including $143,334
and $252,231 reported in restricted accounts, respectively) 263,709 338,767 Cash and cash equivalents at June 30 (including $260,790
and $143,334 reported in restricted accounts, respectively) $ 431,475 263,709
2010 2009
Reconciliation of operating income to net cash provided by operating activities:
Operating income $ 130,944 119,236
Adjustments to reconcile operating income to net cash provided by operating activities:
Depreciation and amortization 97,034 83,141
Provision for losses on customer and other receivables 5,972 4,953 Changes in assets and liabilities:
Customer and other accounts receivable (29,606) (8,536)
Accrued unbilled revenue (11,323) 8,947
Overrecovered costs 11,707 (11,707)
Due from Power System — 18,450
Due to Power System (2,627) 9,903
Materials and supplies (3,177) (3,346)
Net pension asset (2,528) (2,576)
Accounts payable and accrued expenses for operating (24,927) 15,912
Prepayment and other current assets (5,794) —
Net postemployment asset (36,549) (34,985)
Accrued employee expenses 4,070 6,131
Under-over recovered costs 15,946 (15,528)
Accrued workers’ compensation claims and other 2,902 (277)
Net cash provided by operating activities $ 152,044 189,718 Supplemental disclosure of noncash capital and related financing
activity:
Capital contributions $ (292) (12,112)
LOS ANGELES DEPARTMENT OF WATER AND POWER WATER SYSTEM
Notes to the Financial Statements June 30, 2010 and 2009
18 (Continued)
(1) Summary of Significant Accounting Policies
The Department of Water and Power of the City of Los Angeles (the Department) exists as a separate proprietary department of the City of Los Angeles (the City) under and by virtue of the City Charter enacted in 1925 and as revised effective July 2000. The Department’s Water Revenue Fund (Water System) is responsible for the procurement, quality, and distribution of water for sale in the City. The Water System is operated as an enterprise fund of the City.
(a) Method of Accounting
The accounting records of the Water System are maintained in accordance with U.S. generally accepted accounting principles (GAAP) for governmental entities. The financial statements have been prepared using the economic resources measurement focus and the accrual basis of accounting. The Water System is accounted for as an enterprise fund and applies all applicable Governmental Accounting Standards Board (GASB) pronouncements in its accounting and reporting. In addition, the Water System follows Financial Accounting Standards Board pronouncements issued on or before November 30, 1989, unless those pronouncements conflict with or contradict GASB pronouncements.
The Department’s rates are determined by the Board of Water and Power Commissioners (the Board) and are subject to review and approval by the City Council. As a regulated enterprise, the Department utilizes Statement of Financial Accounting Standards (SFAS) No. 71,Accounting for the Effects of Certain Types of Regulation (SFAS No. 71), which requires that the effects of the rate-making process be recorded in the financial statements. Such effects primarily concern the time at which various items enter into the determination of changes in fund net assets. Accordingly, the Water System records various regulatory assets and liabilities to reflect the Board’s actions. Management believes that the Water System meets the criteria for continued application of SFAS No. 71, but will continue to evaluate its applicability based on changes in the regulatory and competitive environment.
(b) Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(c) Utility Plant
The costs of additions to utility plant and replacements of retired units of property are capitalized. Costs include labor, materials, an allowance for funds used during construction (AFUDC), and allocated indirect charges such as engineering, supervision, transportation and construction equipment, retirement plan contributions, healthcare costs, and certain administrative and general expenses. The costs of maintenance, repairs, and minor replacements are charged to the appropriate operations and maintenance expense accounts.
(d) Impairment of Long-Lived Assets
The Department follows GASB No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries(GASB No. 42). Governments are required to evaluate prominent events or changes in circumstances affecting capital assets to determine whether impairment of a capital asset has occurred. A capital asset is considered impaired when its service utility has declined significantly and unexpectedly. Under GASB No. 42, impaired capital assets that will no longer be used by the government should be reported at the lower of carrying value or fair value. Impairment losses on capital assets that will continue to be used by the government should be measured using the method that best reflects the diminished service utility of the capital asset.
(e) Depreciation and Amortization
Depreciation expense is computed using the straight-line method based on service lives. The Department uses the composite method of depreciation and, therefore, groups assets into composite groups for purposes of calculating depreciation expense. Estimated service lives range from 5 to 70 years. Amortization expense for computer software is computed using the straight-line method over 5 years. Depreciation and amortization expense as a percentage of average depreciable utility plant in service was 1.8% and 1.7% for fiscal years ended June 30, 2010 and 2009, respectively.
(f) Cash and Cash Equivalents
As provided for by the State of California Government Code (the Code), the Water System’s cash is deposited with the City Treasurer in the City’s general investment pool for the purpose of maximizing interest earnings through pooled investment activities. Cash and cash equivalents in the City’s general investment pool are reported at fair value, and changes in unrealized gains and losses are recorded in the statements of revenues, expenses, and changes in fund net assets. Interest earned on such pooled investments is allocated to the participating funds based on each fund’s average daily cash balance during the allocation period. The City Treasurer invests available funds of the City and its independent operating departments on a combined basis. The Water System classifies all cash and cash equivalents that are restricted either by creditors, the Board, or by law as restricted cash and cash equivalents on the balance sheets. The Water System considers its portion of pooled investments in the City’s pool to be cash and cash equivalents.
At June 30, 2010 and 2009, restricted cash and cash equivalents include the following (amounts in thousands):
June 30
2010 2009
Bond redemption and interest funds $ 91,879 75,142
Construction funds 146,744 47,024
Self-insurance fund 22,167 21,168
LOS ANGELES DEPARTMENT OF WATER AND POWER WATER SYSTEM
Notes to the Financial Statements June 30, 2010 and 2009
20 (Continued)
(g) Materials and Supplies
Materials and supplies are recorded at average cost.
(h) Investments
The Water System’s investments consist of investments held in the Water Expense Stabilization Fund to stabilize water rates. Such investments include U.S. government and governmental agency securities. Investments are reported at fair value, and changes in unrealized gains and losses are recorded in the statement of revenues, expenses, and changes in fund net assets. The stated fair value of investments is generally based on published market prices or quotations from major investment dealers.
(i) Accrued Employee Expenses
Accrued employee expenses include accrued payroll and an estimated liability for vacation leave, sick leave, and compensatory time, which is accrued when employees earn the rights to the benefits. Below is a schedule of accrued employee expenses as of June 30, 2010 and 2009:
June 30
2010 2009
Type of expense:
Accrued payroll $ 9,868 7,816
Accrued vacation 23,170 21,771
Accrued sick time 5,772 5,401
Compensatory time 5,012 4,764
Total $ 43,822 39,752
(j) Debt Expenses
Debt premium, discount, and issue expenses are deferred and amortized to debt expense using the effective-interest method over the lives of the related debt issues. Gains and losses on refundings related to bonds redeemed by proceeds from the issuance of new bonds are amortized to debt expense using the effective-interest method over the shorter of the life of the new bonds or the remaining term of the bonds refunded.
(k) Accrued Workers’ Compensation Claims
Liabilities for unpaid workers’ compensation claims are recorded at their net present value.
(l) Accrued Unbilled Revenue
Accrued unbilled revenue is the receivable for estimated water sales during the period at the base rate for which the customer has not been billed.
(m) Customer Deposits
Customer deposits represent deposits collected from customers upon opening new accounts. These deposits are obtained when the customer does not have a previously established credit history with the Department. Original deposits plus interest are paid to the customer once a satisfactory payment history is maintained, generally after one to three years.
The Water System is responsible for collection, maintenance, and refunding of these deposits for all Department customers, including those of the Power System. As such, the Water System’s balance sheets include a deposit liability of $68 million and $74 million as of June 30, 2010 and 2009, respectively, for all customer deposits collected.
(n) Revenues
The Water System’s rates are established by a rate ordinance, which is approved by the City Council. The Water System sells water to other City departments at rates provided in the ordinance. The Water System recognizes water costs in the period incurred and accrues for estimated water sold but not yet billed.
Revenues consist of billings to customers for water consumption at rates specified in the water rate ordinance. These rates include a cost adjustment factor that provides the Water System with full recovery of purchased water costs. The Water System is also authorized to collect approved demand-side management, water reclamation, a portion of the operation and maintenance costs related to the pumping of in-City groundwater, water quality improvement expenditures, and water security costs. Management estimates these costs to establish the cost recovery component of customer billings and any difference between billed and actual costs is adjusted in subsequent billings. This difference is reflected as $15.9 million of over recovered costs on the balance sheet as of June 30, 2010, and $11.7 million of under recovered costs on the balance sheet as of June 30, 2009.
During fiscal years 2010 and 2009, the Water System also incurred costs of $181 million and $117 million, respectively, related to water quality improvement projects in excess of billing limits. Since the rates charged to customers are insufficient to recover all of these specific costs, the capital portion of these costs has not been recorded as underrecovered costs and is funded through the issuance of debt.
(o) Current Rate Ordinance
A conservation-based water rate ordinance has been in effect since February 16, 1993 with periodic amendments approved by the City Council. The last amendment was approved in April 2008 and was effective July 1, 2008. The ordinance incorporates marginal cost pricing through a two-tiered rate structure.
The upper block rate is established at the estimated marginal cost for water. The lower block rate is established to generate the revenue required for efficient operations. As a result of concerns expressed about the rate structure’s impact on larger volume single-family residential customers, the first-tier allowances were revised effective June 1, 1995. The revisions established five lot size
LOS ANGELES DEPARTMENT OF WATER AND POWER WATER SYSTEM
Notes to the Financial Statements June 30, 2010 and 2009
22 (Continued)
categories and three temperature zones (as the basis for the first-tier usage blocks for each category). Extra units (one unit equals 100 cubic feet or 748 gallons) at the first-tier rate are available based on household sizes. The rates also reflect equity considerations for water-intensive businesses, large turf customers, and other customers having high seasonal variation in their water usage. Fixed monthly service availability charges apply only to private fire service.
The Water System’s rate ordinance contains a water procurement adjustment factor, a water quality improvement adjustment factor, a water security adjustment factor, an Owens Valley regulatory adjustment factor, and a low-income subsidy adjustment factor. The water procurement adjustment factor under which the cost of purchased water, including water purchased from the Metropolitan Water District (MWD), demand-side management programs, reclaimed water projects, and the operation and maintenance costs required to operate the in-City groundwater and booster pumping, is recovered by direct adjustments to customers’ bills. The water quality improvement adjustment factor recovers expenditures to upgrade and equalize water quality throughout the City and to construct facilities to meet state and federal water quality standards, including the payment of debt service on bonds issued for such purposes. The water security adjustment factor recovers expenditures to secure and protect the water supply, storage, conveyance infrastructure, and related facilities. The Owens Valley regulatory adjustment factor recovers expenditures to operate and maintain infrastructure and related facilities for the Owens Lake Dust Mitigation Project and the Lower Owens River Project. The low-income subsidy adjustment factor recovers the cost of credits provided to lifeline and low-income customers.
The ordinance currently limits to $0.50 per billing unit the recovery of combined expenditures for the demand-side management and water reclamation components of the water procurement factor, water quality improvement, and water security.
The Water System’s rate ordinance also contains a revenue adjustment mechanism in the form of a surcharge that is designed to assure a minimum level of base rate revenue each fiscal year. The annual revenue target for years since June 30, 2002 was $294 million. This amount is adjusted annually for increases in interest expense and shall not exceed $325 million per fiscal year; provided, however, the annual revenue target limit of $325 million shall be increased in proportion to any increases in the commodity charge. The revenue adjustment factor becomes effective upon a determination by the Board that the surcharge is needed. The rate ordinance limits the surcharge to $0.18 per billing unit, unless a higher amount is approved by the Board and the City Council.
Due to drought conditions in California over the past several years and cutbacks in the allocation of water supply to municipalities by the Metropolitan Water Districts, the Department found that water conservation was urgently needed. As a result, the Board approved a resolution declaring a 15% shortage year. Effective June 1, 2009, shortage year rates were applied to all Department customers. Under the shortage year rates, the amount of water LADWP customers are able to purchase at the Tier 1 rate was reduced by 15%. Shortage year rates will remain in effect until the Board determines they are no longer necessary.
Operating revenues are revenues generally derived from activities that are billable in accordance with the water rate ordinance established by the City Council. Other types of revenues are generally considered nonoperating.
(p) Capital Contributions
Capital contributions and other grants received by the Department for constructing utility plant and other activities are recognized as nonoperating revenues when all applicable eligibility requirements, including time requirements, are met.
(q) Allowance for Funds Used during Construction
Allowance for funds used during construction represents the cost of borrowed funds used for the construction of utility plant. Capitalized AFUDC is included as part of the cost of utility plant and as a reduction of debt expenses. The average AFUDC rates used by the Water System were 4.3% and 3.8% for fiscal years 2010 and 2009, respectively.
(r) Use of Restricted and Unrestricted Resources
The Water System’s policy is to use unrestricted resources prior to restricted resources to meet expenses to the extent that it is prudent from an operational perspective. Once it is not prudent, restricted resources will be utilized to meet intended obligations.
(2) Recent Accounting Pronouncements (a) GASB Statement No. 49
In fiscal year 2009, the Department adopted GASB Statement No. 49, Accounting and Financial Reporting for Pollution and Remediation Obligations (GASB No. 49). This statement addresses accounting and financial reporting standards for pollution (including contamination) remediation obligations, which are obligations to address the current or potential detrimental effects of existing pollution by participating in pollution remediation activities such as site assessments and cleanups. The scope of the statement excludes pollution prevention or control obligations with respect to current operations, and future pollution remediation activities that are required upon retirement of an asset, such as landfill closure and postclosure care and nuclear power plant decommissioning. Prior to adopting this statement, the Department followed Statement of Position 96-1, Environmental Remediation Liabilities. The Water System has identified underground storage tanks that require remediation work and is working with the Los Angeles Regional Water Quality Control Board, and the Lahontan Regional Quality Control Board which have jurisdiction over these sites. The Water System’s estimated liability for these sites is approximately $3 million and includes remediation and ongoing operation and maintenance costs where estimable. There are no estimated recoveries. This liability is recorded as part of the Water System’s accrued expenses. There was no impact to net assets as of July 1, 2009 as a result of implementation of this pronouncement.
LOS ANGELES DEPARTMENT OF WATER AND POWER WATER SYSTEM
Notes to the Financial Statements June 30, 2010 and 2009
24 (Continued)
(b) GASB Statement No. 51
In June 2007, the GASB issued Statement No. 51, Accounting and Financial Reporting for Intangible Assets (GASB No. 51). This statement establishes accounting and financial reporting standards for intangible assets. Intangible assets include, but are not limited to, easements, water rights, timber rights, patents, trademarks, and computer software. The Department adopted GASB No. 51 effective July 1, 2009. There was no impact to net assets as of July 1, 2009 as a result of implementation of this pronouncement.
(c) GASB Statement No. 53
In June 2008, the GASB issued Statement No. 53, Accounting and Financial Reporting for Derivative Instruments(GASB No. 53). This statement addresses the recognition, measurement, and disclosure of information regarding derivative instruments entered into by state and local governments. This statement is effective for the Department beginning fiscal year 2010. The Water System does not have any derivative instruments, and therefore, there was no financial statement impact from the adoption of this new statement.
(3) Utility Plant
The Water System had the following activity in utility plant during fiscal year 2010 (amounts in thousands):
Balance, Retirements Balance,
July 1, 2009 Additions and disposals Transfers June 30, 2010 Nondepreciable utility plant:
Land and land rights $ 109,317 472 — — 109,789
Construction work in progress 651,538 330,677 — (380,425) 601,790
Total
nondepreciable
utility plant 760,855 331,149 — (380,425) 711,579
Depreciable utility plant:
Source of water supply 863,577 491 — 175,163 1,039,231
Pumping 234,394 5,121 — 2,605 242,120 Purification 340,879 13,214 — 118,752 472,845 Distribution 3,255,985 72,584 (5,544) 75,619 3,398,644 General 458,536 34,088 (4,635) 8,286 496,275 Total depreciable utility plant 5,153,371 125,498 (10,179) 380,425 5,649,115 Accumulated depreciation:
Source of water supply (179,574) (21,664) — — (201,238)
Pumping (96,004) (4,321) — — (100,325) Purification (133,587) (8,829) — — (142,416) Distribution (1,166,387) (52,105) 5,544 — (1,212,948) General (240,904) (18,862) 4,635 — (255,131) Total accumulated depreciation (1,816,456) (105,781) 10,179 — (1,912,058)
Total utility plant,
net $ 4,097,770 350,866 — — 4,448,636
Depreciation and amortization expense during fiscal year 2010 was $97.0 million.
LOS ANGELES DEPARTMENT OF WATER AND POWER WATER SYSTEM
Notes to the Financial Statements June 30, 2010 and 2009
26 (Continued)
The Water System had the following activity in utility plant during fiscal year 2009 (amounts in thousands):
Balance, Retirements Balance,
July 1, 2008 Additions and disposals Transfers June 30, 2009 Nondepreciable utility plant:
Land and land rights $ 108,344 973 — — 109,317
Construction work in progress 636,620 183,407 — (168,489) 651,538
Total
nondepreciable
utility plant 744,964 184,380 — (168,489) 760,855
Depreciable utility plant:
Source of water supply 784,846 14,034 — 64,697 863,577
Pumping 204,210 21,721 — 8,463 234,394 Purification 308,064 26,593 — 6,222 340,879 Distribution 3,075,107 115,691 (11,740) 76,927 3,255,985 General 431,270 15,813 (727) 12,180 458,536 Total depreciable utility plant 4,803,497 193,852 (12,467) 168,489 5,153,371 Accumulated depreciation:
Source of water supply (163,784) (15,790) — — (179,574)
Pumping (92,188) (3,816) — — (96,004) Purification (126,444) (7,143) — — (133,587) Distribution (1,114,731) (63,396) 11,740 — (1,166,387) General (225,339) (16,292) 727 — (240,904) Total accumulated depreciation (1,722,486) (106,437) 12,467 — (1,816,456)
Total utility plant,
net $ 3,825,975 271,795 — — 4,097,770
Depreciation and amortization expense during fiscal year 2009 was $83.1 million.
(4) Cash, Cash Equivalents, and Investments (a) Investments
A summary of the Water System’s investments is as follows (amounts in thousands):
June 30
Description 2010 2009
Investments:
Water Expense Stabilization Fund $ 32,680 32,678
Total $ 32,680 32,678
All investments are to be used for a designated purpose as follows:
i. Water Expense Stabilization Fund
The Water Expense Stabilization Fund was established under the Master Bond Resolution and can be withdrawn upon and applied to any lawful purpose in connection with the Water System.
As of June 30, 2010, the Water System’s investments and their maturities are as follows (amounts in thousands):
Investment maturities
1 to 30 31 to 60 61 to 365 365 da ys to Type of investments Fair value da ys days days 5 years U.S. government
agencies $ 23,637 — — — 23,637
Commercial paper 5,498 2,999 1,000 1,499 —
Negotiable CDs 2,040 — 2,040 — —
Bankers’ acceptances 1,499 — 1,000 499 —
Money market funds 6 6 — — —
LOS ANGELES DEPARTMENT OF WATER AND POWER WATER SYSTEM
Notes to the Financial Statements June 30, 2010 and 2009
28 (Continued)
As of June 30, 2009, the Water System’s investments and their maturities are as follows (amounts in thousands):
Investment maturities
1 to 30 31 to 60 61 to 365
Type of investments Fair value da ys days days
U.S. government agencies $ 23,997 11,000 9,998 2,999
Commercial paper 2,999 2,000 — 999
Negotiable CDs 3,000 2,000 — 1,000
Money market funds 2,682 2,682 — —
$ 32,678 17,682 9,998 4,998
ii. Interest Rate Risk
The Department’s investment policy limits the maturity of its investments to a maximum of 30 years for U.S. government agency securities; 270 days for commercial paper; 397 days for negotiable certificates of deposit; and 180 days for bankers’ acceptances.
iii. Credit Risk
Under its investment policy and the Code, the Department is subject to the prudent investor standard of care in managing all aspects of its portfolios. The prudent investor standard requires that the Department “shall act with care, skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to, the general economic conditions and the anticipated needs of the agency, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the agency.”
The U.S. government agency securities in the portfolio consist of securities issued by government-sponsored enterprises, which are not explicitly guaranteed by the U.S. government. As of June 30, 2010 and 2009, the U.S. government agency securities in the portfolio carried the highest possible credit ratings by the Nationally Recognized Statistical Rating Organizations (NRSROs) that rated them.
The Department’s investment policy specifies that commercial paper must be of the highest ranking or of the highest letter and number rating as provided for by at least two NRSROs. As of June 30, 2010 and 2009, all of the Water System’s investments in commercial paper were rated with at least the highest letter and number rating as provided by at least two NRSROs. The Department’s investment policy specifies that municipal obligations, which may include commercial paper, issued by California local agencies must be rated in a rating category of “A” or its equivalent or better by a NRSRO. As of June 30, 2010, all of the Water System’s investments in municipal commercial paper were rated with at least the highest letter and number rating as provided by at least two NRSROs.
The Department’s investment policy specifies that negotiable certificates of deposit must be of the highest ranking or letter and number rating as provided for by at least two NRSROs. As of June 30, 2010 and 2009, all of the Water System’s investments in negotiable certificates of deposit were rated with at least the highest letter and number rating as provided by at least two NRSROs.
The Department’s investment policy specifies that bankers’ acceptances must be of the highest ranking or letter and number rating as provided for by at least two NRSROs. As of June 30, 2010, all of the Water System’s investments in bankers’ acceptances were rated with the highest letter and number rating as provided by three NRSROs.
The Department’s investment policy specifies that money market funds may be purchased as allowed under the Code, which requires that the fund must have either 1) attained the highest ranking or highest letter and numerical rating provided by not less than two NRSROs or 2) retained an investment advisor registered or exempt from registration with the Securities and Exchange Commission with not less than five years experience managing money market mutual funds with assets under management in excess of five hundred million dollars. As of June 30, 2010 and 2009, the money market fund in the portfolio had attained the highest possible ratings by three NRSROs, specifically AAAm by Standard and Poor’s (S&P), Aaa by Moody’s Investors Service (Moody’s), and AAA by Fitch Ratings.
iv. Concentration of Credit Risk
The Department’s investment policy specifies that there is no percentage limitation on the amount that can be invested in U.S. government agency securities, except that a maximum of 30% of the cost value of the portfolio may be invested in the securities of any single U.S. government agency issuer.
Of the Water System’s total investments as of June 30, 2010, $8,040,099 (25%) was invested in securities issued by the Federal Home Loan Mortgage Corporation; $8,004,515 (24%) was invested in securities issued by the Federal National Mortgage Association; and $7,592,281 (23%) was invested in securities issued by the Federal Home Loan Bank.
Of the Water System’s total investments as of June 30, 2009, $8,000,000 (24%) was invested in securities issued by the Federal Home Loan Bank; $7,999,000 (24%) was invested in securities issued by the Federal National Mortgage Association; and $7,998,100 (24%) was invested in securities issued by the Federal Home Loan Mortgage Corporation.
(b) Pooled Investments
The Water System’s cash, cash equivalents, and its collateral value of the City’s securities lending program (SLP) are included within the City Treasury’s general and special investment pool (the Pool). As of June 30, 2010 and 2009, the Water System’s share of the City’s general and special investment pool was $436,502,000 and $263,709,000, which represents approximately 5.9% and 4.7% of the Pool, respectively.
