(WATER SYSTEM)
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 Water System Revenue Bonds, 2011 Series A
Dated as of: December 20, 2011
Water System Revenue Bonds, 2003 Series A
544525DQ8 544525DS4 544525DU9
544525DR6 544525DT2
Water System Revenue Bonds, 2003 Series B
544525EE4 544525EL8 544525ER5
544525EF1 544525EM6 544525ES3
544525EG9 544525EN4 544525ET1
544525EH7 544525EP9 544525EU8
544525EJ3 544525EQ7 544525EV6
544525EK0
Water System Revenue Bonds, 2004 Series C
544525FD5 544525FP8 544525FU7
544525FH6 544525FQ6 544525FV5
544525FK9 544525FR4 544525FW3
544525FM5 544525FS2 544525FX1
544525FN3 544525FT0
Water System Revenue Bonds, 2006 Subseries A-1
544525GL6 544525GQ5 544525GU6
544525GM4 544525GR3 544525GV4
544525GN2 544525GS1 544525GW2
544525GP7 544525GT9
Water System Revenue Bonds, 2006 Subseries A-2
544525FY9 544525GB8 544525GZ5
544525FZ6 544525GC6 544525GD4
544525GA0
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
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
544495WA8
Water System Revenue Bonds, 2011 Series A
544525PB8 544525PJ1 544525PR3 544525PC6 544525PK8 544525PS1 544525PD4 544525PL6 544525PT9 544525PE2 544525PM4 544525PU6 544525PF9 544525PN2 544525PV4 544525PG7 544525PP7 544525PW2 544525PH5 544525PQ5
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
AUDITED FINANCIAL STATEMENTS ...5
CERTIFICATION ...6 APPENDIX A LOS ANGELES DEPARTMENT OF WATER AND POWER (WATER SYSTEM)
FINANCIAL STATEMENTS AND REQUIRED SUPPLEMENTARY
INFORMATION FOR THE FISCAL YEARS ENDED JUNE 30, 2011 AND 2010 (WITH INDEPENDENT AUDITORS’ REPORT THEREON)
Water System Variable Rate Demand Revenue Bonds, 2001 Series B (the “2001 B 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”);
Water System Revenue Bonds, 2010 Series A (the “2010 A Bonds”); and Water System Revenue Bonds, 2011 Series A (the “2011 A Bonds”);
The 2001 B Bonds, 2003 Bonds, the 2004 Bonds, the 2006 Bonds, the 2007 Bonds, the 2009 Bonds, the 2010 A Bonds and the 2011 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 B Bonds pursuant to that certain Continuing Disclosure Certificate of the Department dated March 1, 2001; (ii) the 2003 A Bonds pursuant to that certain Continuing Disclosure Certificate of the Department dated January 1, 2003; (iii) the 2003 B Bonds pursuant to that certain Continuing Disclosure Certificate of the Department dated March 6, 2003; (iv) the 2004 Bonds pursuant to that certain Continuing Disclosure Certificate of the Department dated July 29, 2004; (v) the 2006 Bonds pursuant to that certain Continuing Disclosure Certificate of the Department dated February 16, 2006; (vi) the 2007 Bonds pursuant to that certain Continuing Disclosure Certificate of the Department
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, 2011 (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
Assistant Chief Financial Officer and Treasurer
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 21.5 33.6 26.8 31.9 40.5
Los Angeles Aqueduct 134.0 87.0 47.1 66.5 121.1
Deliveries From Metropolitan 74.6 114.4 190.0 183.7 128.8
Recycled Water 3.4 3.0 3.4 – –
Total Supply 233.5 238.0 267.3 282.1 290.4
Less:
Diversions To (From) Storage (0.5) 0.6 0.9 0.5 0.1
System Uses and Losses 8.8 13.9 13.8 15.3 11.5
Total Water Sold 225.2 223.5 252.5 265.3 277.0
Water Sales (Millions of Billing Units of 100 cu. Ft.):
Single-family Residential 86.0 85.3 101.0 108.5 114.5
Multiple Dwelling Units 71.8 72.4 76.2 79.6 82.4
Commercial and Industrial 51.9 50.4 57.0 58.1 59.7
Other 15.5 14.1 18.3 19.1 20.4
Total 225.3 222.2 252.5 265.3 277.0
Average Number of Customers (In Thousands):
Residential 474 467 473 473 473
Multiple Dwelling Units 122 121 122 122 122
Commercial and Industrial 63 63 64 64 65
Other 7 8 8 7 7
Total 667 659 667 666 667
Operating Revenues (In Thousands)1:
Single-family Residential $293,629 $315,422 $310,649 $299,536 $274,814
Multiple Dwelling Units 233,881 253,019 232,530 216,210 188,639
Commercial and Industrial 179,132 193,320 186,218 170,959 145,495
Other 49,963 50,599 54,567 57,331 59,553
Total $756,605 $812,360 $783,964 $744,036 $668,501
Average Revenue Per Hundred Cubic Feet Sold:
Single-family Residential $3.412 $3.698 $3.076 $2.761 $2.400
Multiple Dwelling Units 3.255 3.495 3.052 2.716 2.289
Commercial and Industrial 3.453 3.836 3.267 2.942 2.437
Other 3.219 3.589 2.981 3.002 2.919
Average Metered Consumption Per
Person Per Day (Gallons)2 123 126 142 152 157
Average Metered Consumption
Through the System Per Day (Million
Gallons)2 473 481 542 576 594
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, 2011 and 2010 attached hereto as
Single-family Residential $293,629 $315,422 $310,649 $299,536 $274,814
Multiple Dwelling Units 233,881 253,019 232,530 216,210 188,639
Commercial and Industrial 179,132 193,320 186,218 170,959 145,495
Other 49,963 50,599 54,567 57,331 59,553
Total Operating Revenues $756,605 $812,360 $783,964 $744,036 $668,501
Operating Expenses:
Purchased Water $125,301 $163,248 $215,864 $188,750 $123,925
Maintenance and Other Operating
Expenses 414,740 421,134 365,723 334,907 319,037
Total Operating Expenses Excluding
Depreciation $540,041 $584,382 $581,587 $523,657 $442,962
Operating Income Before Depreciation $216,564 $227,978 $202,377 $220,379 $225,539 Allowance for Funds Used During
Construction 1,808 5,521 2,008 2,482 4,687
Nonoperating Revenues, Net 24,411 16,221 8,593 27,573 25,987
Capital Contributions 48,946 24,099 30,603 25,615 17,970
Change in Fund Net Assets Before Depreciation, Interest and Transfer to
the City $291,729 $273,819 $243,581 $276,049 $274,183
Debt Service
Interest2 $136,846 $108,017 $ 92,032 $ 97,067 $ 88,742
Principal 30,525 26,089 23,994 36,287 34,186
Total Debt Service on Bonds $167,371 $134,106 $116,026 $133,354 $122,928
Depreciation and Amortization $115,027 $ 97,034 $ 83,141 $ 76,329 $ 71,378
Debt Service Coverage3 1.74x 2.04x 2.10x 2.07x 2.23x
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, 2011 and 2010 attached hereto as Appendix A.
2
Excludes amortization of debt expenses. 3
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.
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
Page(s)
Independent Auditors’ Report 1 – 2
Management’s Discussion and Analysis 3 – 11
Financial Statements:
Balance Sheets 12 – 13
Statements of Revenues, Expenses, and Changes in Fund Net Assets 14
Statements of Cash Flows 15 – 16
Notes to Financial Statements 17 – 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, 2011 and 2010. 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 12.
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.
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, 2011, 2010, and 2009:
Table 1 – Condensed Schedule of Assets, Liabilities, and Fund Net Assets (Amounts in millions)
June 30
Assets 2011 2010 2009
Utility plant, net $ 4,759 4,449 4,098
Investments 33 33 33
Other noncurrent assets 657 444 305
Current assets 622 508 400
$ 6,071 5,434 4,836
Liabilities and Fund Net Assets
Long-term debt, net of current portion $ 3,172 2,708 2,193
Other long-term liabilities 18 19 14
Current liabilities 504 371 361
3,694 3,098 2,568
Fund net assets:
Invested in capital assets, net of related debt 1,872 1,824 1,893
Restricted 364 351 309
Unrestricted 141 161 66
Total fund net assets 2,377 2,336 2,268
Table 2 – Condensed Schedule of Revenues, Expenses, and Changes in Fund Net Assets (Amounts in millions)
Year ended June 30
2011 2010 2009
Operating revenues:
Residential $ 294 315 311
Multiple-dwelling units 234 253 232
Commercial and industrial 179 193 186
Other 50 51 55
Total operating revenues 757 812 784
Operating expenses:
Purchased water (125) (163) (216)
Maintenance and other (415) (421) (366)
Depreciation and amortization (115) (97) (83)
Total operating expenses (655) (681) (665)
Operating income 102 131 119
Nonoperating revenues (expense):
Investment income 6 8 10
Federal bond subsidies 13 4 —
Other nonoperating revenue and expenses, net 5 5 (1)
Debt expense (134) (104) (92)
Total nonoperating expense (110) (87) (83)
Income (loss) before capital
contributions, and transfers (8) 44 36
Capital contributions 49 24 30
Transfers from the reserve fund of the
City of Los Angeles — — 63
Increase in fund net assets 41 68 129
Beginning balance of fund net assets 2,336 2,268 2,139
Ending balance of fund net assets $ 2,377 2,336 2,268
__________
Assets Utility Plant
During fiscal years 2011 and 2010, the Water System placed in service asset additions and betterments in the amount of $302 million and $506 million, respectively. Of the $302 million capitalized, $207 million, or 69%, is related to distribution plant assets including mains, meters, and services. Also, major additions included upgrades to the Los Angeles Water System-Data Acquisition Control (LAWS-DAC) and the supervisory control and data acquisition (SCADA) systems. The value of assets in source of water supply was increased by $46 million, or 15%, which comprised additions and betterments in the Owens Lake Dust Control Project, Lower Owens River Project, and Los Angeles Aqueduct facilities. General plant assets also added $36 million, or 12%, in improvements to software, office structure, communication equipment, transportation equipment, and management information services. The remaining $13 million, or 4%, additions included assets in the pumping stations and purification stations.
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, services, meters, and fire hydrants increased by $148 million. The remaining additions of $182 million, or 36%, 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 for 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 2011 and 2010
Fiscal year 2011 Fiscal year 2010 Millions of Millions of
gallons Percentage gallons Percentage Source: Aqueduct 99,427 58% 65,017 37% Wells 15,313 9 21,966 13 Purchases 54,372 32 85,551 49 Recycled Water 2,741 1 2,226 1 171,853 100% 174,760 100%
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, 2011, Water System’s total outstanding long-term debt balance was approximately $3.23 billion. This is an increase of $462 million over the prior year, resulting from the sale of $492.71 million in Water System revenue bonds and $1.60 million in loans from the California Department of Water Resources (CDWR), offset by scheduled maturities of $32.3 million.
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 CDWR, offset by scheduled maturities of $27.1 million.
Outstanding principal, plus scheduled interest and amortization as of June 30, 2011, is shown in the chart below: Chart: Debt Service Requirements
In August 2011, 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 6.6.
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 2011 and 2010:
Table 4 – Revenue and Percentage of Revenue by Customer Class (Amounts in thousands)
Fiscal year 2011 Fiscal year 2010 Revenue Percentage Revenue Percentage Type of customer: Residential $ 293,629 39% $ 315,422 39% Multiple-dwelling units 233,881 31 253,019 31 Commercial 150,632 20 160,931 20 Industrial 28,500 4 32,389 4 Other 49,963 6 50,599 6 $ 756,605 100% $ 812,360 100%
Residential customers provided approximately 39% of the Water System’s 2011 and 2010 revenue representing the largest class of customers. As of June 30, 2011, the Water System had approximately 666,000 customers. As shown in Table 5, 474,000, or 71%, of total customers were in the residential customer class as of June 30, 2011.
Table 5 – Number of Customers and Percentage of Customers by Customer Class (Numbers in thousands)
Fiscal year 2011 Fiscal year 2010 Number Percentage Number Percentage Type of customer: Residential 474 71% 467 71% Multiple-dwelling units 122 18 121 18 Commercial 57 9 57 9 Industrial 6 1 6 1 Other 7 1 8 1 666 100% 659 100%
During fiscal year 2011, operating revenues decreased by $56.0 million, or 6.9%, from fiscal year 2010 while sales of water increased by 1.8 million hundred cubic feet. The decrease in revenue is primarily due to lower recoverable pass-through costs which resulted in an collection of pass-through revenues. The over-collection reduced the amount of revenue recognized in the current year and will be deferred until the related costs are recovered in future periods.
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.
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. For fiscal years 2011 and 2010, 32% and 49%, 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 2011 and 2010:
Table 6 – Operating Expenses and Percentage of Expense by Type of Expense (Amounts in thousands)
Fiscal year 2011 Fiscal year 2010 Expenses Percentage Expenses Percentage Type of expense:
Purchased water $ 125,301 19% $ 163,248 24%
Other operating expenses 294,843 45 303,913 45
Maintenance 119,897 18 117,221 17
Depreciation and amortization 115,027 18 97,034 14
$ 655,068 100% $ 681,416 100%
Fiscal Year 2011
Fiscal year 2011 operating expenses were $26 million lower as compared to the prior year. This was due to the decreases in other operating and purchased water costs of $9 million and $38 million, respectively, offset by increases in depreciation and maintenance expenses of $18 million and $3 million, respectively. The decrease in other operating expenses was attributed to an increase in source of supply and purification expenses offset by a decrease in miscellaneous administrative general expenses and customer accounting expenses. The decrease in purchase water costs was due to a 53% increase in the water supplied by the L.A. Aqueduct.
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
Nonoperating Revenue and Expenses and Transfers Fiscal Year 2011
Fiscal year 2011 nonoperating revenues were $7.8 million higher as compared to the prior year while nonoperating expenses were $0.4 million lower as compared to the prior year. The higher nonoperating revenues can be attributed to a $9.3 million increase in federal bond subsidies, offset by a $1.9 million decrease in interest income resulting from declining market interest rates.
Debt expenses increased by $30.0 million, and capital contributions increased by $24.9 million.
The increase in debt expense is primarily attributed to the $29.2 million increase in interest expense related to the issuance of $492.7 million Water System Revenue Bonds during fiscal year 2011 and the 2009 Series Water System Revenue bonds issued in fiscal year 2010.
The increase in capital contributions is primarily attributed to a $25.0 million federal grant earned through the American Recovery and Reinvestment Act (ARRA) for expenditures relating to safe drinking water.
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.
Assets 2011 2010 Noncurrent assets:
Utility plant:
Source of water supply $ 1,176,817 1,126,461
Pumping 248,567 244,219 Purification 482,739 474,219 Distribution 3,616,034 3,413,047 General 531,372 500,958 6,055,529 5,758,904 Accumulated depreciation (2,026,368) (1,912,058) 4,029,161 3,846,846
Construction work in progress 729,785 601,790
4,758,946 4,448,636
Investments 32,915 32,680
Cash and cash equivalents – restricted 346,221 146,744
Net pension asset 37,716 50,935
Net postemployment asset 273,198 246,286
Total noncurrent assets 5,448,996 4,925,281
Current assets:
Cash and cash equivalents – unrestricted 207,631 170,685
Cash and cash equivalents – restricted 128,906 114,046
Cash collateral received from securities lending transactions 22,936 5,027 Customer and other accounts receivable, net of $7,000 and $5,500
allowance for losses for 2011 and 2010, respectively 126,753 104,208
Accrued unbilled revenue 64,182 64,049
Materials and supplies 22,371 21,470
Prepayments and other current assets 49,179 29,073
Total current assets 621,958 508,558
Fund Net Assets and Liabilities 2011 2010 Fund net assets:
Invested in capital asset, net of related debt $ 1,871,994 1,824,212 Restricted:
Debt service 29,658 31,220
Other postemployment benefits 273,198 246,286
Pension benefits 37,716 50,935
Other purposes 23,167 22,167
Unrestricted 140,871 160,831
Total fund net assets 2,376,604 2,335,651
Long-term debt, net of current portion 3,171,562 2,708,150
Other noncurrent liabilities:
Accrued workers’ compensation claims 18,732 18,916
Total other noncurrent liabilities 18,732 18,916
Current liabilities:
Current portion of long-term debt 61,612 63,018
Accounts payable and accrued expenses 91,052 107,895
Due to Power System 3,267 7,276
Accrued employee expenses 45,991 43,822
Accrued interest 76,016 60,595
Obligations under securities lending transactions 22,936 5,027
Overrecovered costs 126,162 15,946
Customer deposits 77,020 67,543
Total current liabilities 504,056 371,122
Total liabilities 3,694,350 3,098,188
Total fund net assets and liabilities $ 6,070,954 5,433,839
2011 2010 Operating revenues:
Residential $ 293,629 315,422
Multiple-dwelling units 233,881 253,019
Commercial and industrial 179,132 193,320
Other 58,966 56,571
Uncollectible accounts (9,003) (5,972)
756,605 812,360
Operating expenses:
Purchased water 125,301 163,248
Maintenance and other operating expenses 414,740 421,134
Depreciation and amortization 115,027 97,034
655,068 681,416
Operating income 101,537 130,944
Nonoperating revenues (expenses):
Investment income 5,974 7,802
Federal bond subsidies 13,311 4,046
Gain on sale of land 738 —
Other nonoperating income 6,428 6,831
26,451 18,679
Other nonoperating expenses (2,040) (2,458)
24,411 16,221
Debt expenses:
Interest on debt 135,749 109,483
Allowance for funds used during construction (1,808) (5,521)
133,941 103,962
Income (loss) before capital contributions and transfers (7,993) 43,203
Capital contributions 48,946 24,099
Increase in fund net assets 40,953 67,302
Fund net assets:
Beginning of period 2,335,651 2,268,349
(Amounts in thousands)
2011 2010
Cash flows from operating activities: Cash receipts:
Cash receipts from customers $ 893,046 830,160
Cash receipts from customers for other agency services 475,047 472,190
Cash receipts from interfund services provided 358,917 353,531
Cash disbursements:
Cash payment to employees (256,674) (247,862)
Cash payment to suppliers (228,283) (367,568)
Cash payment for interfund services used (456,507) (410,893)
Cash payment to other agencies for fees collected (472,267) (473,539)
Other cash payments (23,073) (3,975)
290,206 152,044
Cash flows from capital and related financing activities:
Additions to plant and equipment (421,115) (442,087)
Capital contributions 23,781 23,807
Principal payments and maturities on long-term debt (25,827) (25,281)
Proceeds from issuance of bonds 489,779 500,002
Proceeds from California Department of Water Resources loan 1,603 43,471 Payment of California Department of Water Resources loan (4,698) (802)
Debt interest payments (121,426) (94,388)
Federal bond subsidies 13,311 4,046
(44,592) 8,768
Cash flows from investing activities:
Purchases of investment securities (139,589) (143,330)
Sale of investment securities 141,638 143,330
Investment income 3,620 6,954
5,669 6,954
Net increase in cash and cash equivalents 251,283 167,766
Cash and cash equivalents:
Cash and cash equivalents at July 1 (including $260,790
and $143,334 reported in restricted accounts, respectively) 431,475 263,709 Cash and cash equivalents at June 30 (including $475,127
(Amounts in thousands)
2011 2010
Reconciliation of operating income to net cash provided by operating activities:
Operating income $ 101,537 130,944
Adjustments to reconcile operating income to net cash provided by operating activities:
Depreciation and amortization 115,027 97,034
Provision for losses on customer and other receivables 9,003 5,972 Changes in assets and liabilities:
Customer and other accounts receivable (6,477) (29,606)
Accrued unbilled revenue (133) (11,323)
Underrecovered costs — 11,707
Due to Power System (4,009) (2,627)
Materials and supplies (901) (3,177)
Net pension asset 13,219 (2,528)
Accounts payable and accrued expenses for operating (19,091) (24,927)
Prepayment and other current assets (17,860) (5,794)
Net postemployment asset (26,913) (36,549)
Customer deposits 9,477 —
Accrued employee expenses 2,169 4,070
Overrecovered costs 110,216 15,946
Accrued workers’ compensation claims and other 4,942 2,902
Net cash provided by operating activities $ 290,206 152,044 Supplemental disclosure of noncash capital and related financing
activities:
Capital contributions $ 166 292
(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 (FASB) pronouncements issued on or before November 30, 1989, unless those pronouncements conflict with or contradict GASB pronouncements.
The financial statements of the Water System are intended to present the financial position, and the changes in financial position and cash flows of only that portion of the business-type activities and each major fund of the City of Los Angeles, California that is attributable to the transactions of the Water System. They do not purport to, and do not, present fairly the financial position of the City of Los Angeles, California as of June 30, 2011 and 2010, the changes in its financial position or, where applicable, its cash flows for the years then ended, in conformity with GAAP.
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 Los Angeles City Council (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
(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) Intangibles
The Department follows GASB No. 51, Accounting and Financial Reporting for Intangible Assets
(GASB No. 51), which requires that an intangible asset be recognized in the balance sheet only if it is considered identifiable. Additionally, it establishes a specified-conditions approach to recognize intangible assets that are internally generated. Effectively, outlays associated with the development of such assets are capitalized until certain criteria are met. Outlays incurred prior to meeting these criteria are expensed as incurred. The Water System capitalized internally generated software costs in 2011 and 2010. The capitalized amounts are included in construction work in progress on the balance sheets.
(e) 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 cause of the diminished service utility of the capital asset.
(f) 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 five years. Depreciation and amortization expense as a percentage of average depreciable utility plant in service was 2.0% and 1.8% for fiscal years ended June 30, 2011 and 2010, respectively.
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 and the unspent construction funds as long-term restricted cash as cash equivalents.
At June 30, 2011 and 2010, restricted cash and cash equivalents include the following (amounts in thousands):
June 30
2011 2010
Bond redemption and interest funds $ 105,739 91,879
Self-insurance fund 23,167 22,167
Cash and cash equivalents – current
portion 128,906 114,046
Construction funds – classified as long-term
restricted cash 346,221 146,744
Total restricted cash and cash equivalents $ 475,127 260,790
(h) Materials and Supplies
Materials and supplies are recorded at average cost.
(i) Accrued Unbilled Revenue
Accrued unbilled revenue is the receivable for estimated water sales during the period at the base rate for which service has been provided but the customer has not been billed.
(j) 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 statements 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.
(k) 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, 2011 and 2010:
June 30
2011 2010
Type of expense:
Accrued payroll $ 10,847 9,868
Accrued vacation 23,818 23,170
Accrued sick time 5,910 5,772
Compensatory time 5,416 5,012
Total $ 45,991 43,822
(l) 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 interest expense using the effective-interest method over the shorter of the life of the new bonds or the remaining term of the bonds refunded.
(m) Accrued Workers’ Compensation Claims
Liabilities for unpaid workers’ compensation claims are recorded at their net present value.
(n) 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 Department’s Power Revenue Fund (Power System). As such, the Water System’s balance sheets include a deposit liability of $77 million and $68 million as of June 30, 2011 and 2010, respectively, for all customer deposits collected.
(o) Revenues
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 $126.2 million and $15.9 million of overrecovered costs on the balance sheets as of June 30, 2011 and 2010, respectively.
During fiscal years 2011 and 2010, the Water System also incurred costs of $189.2 million and $181 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.
(p) 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 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, 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
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.
(q) Capital Contributions
Capital contributions and other grants received by the Department for constructing utility plant and other activities are recognized when all applicable eligibility requirements, including time requirements, are met.
(r) Allowance for Funds Used during Construction
An AFUDC charge 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. As of June 30, 2011 and 2010 the average AFUDC rates used by the Water System were 4.2% and 4.3%, respectively.
(t) Reclassifications
Certain prior year amounts have been reclassified to conform with the current year’s presentation. (2) Recent Accounting Pronouncements
(a) GASB Statement No. 59
In fiscal year 2011, the Department adopted GASB Statement No. 59, Financial Instruments
Omnibus (GASB No. 59). This statement updates and improves existing standards regarding
financial reporting and disclosure requirements of certain financial instruments and external investment pools for which significant issues have been identified in practice. The provisions of this Statement are effective for financial statements for periods beginning after June 15, 2010. There was no impact to net assets as of July 1, 2010 as a result of implementation of this pronouncement.
(b) GASB Statement No. 62
In December 2010, the GASB issued Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements
(GASB No. 62). The requirements in this Statement will improve financial reporting by contributing to the GASB’s efforts to codify all sources of generally accepted accounting principles for state and local governments so that they derive from a single source. The requirements of this Statement are effective for financial statements for periods beginning after December 15, 2011, with retroactive application for all periods presented. The Water System has determined there will be no material impact of this pronouncement on the financial statements.
(c) GASB Statement No. 63
In June 2011, the GASB issued Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position (GASB No. 63). The requirements of this Statement will improve financial reporting by standardizing the presentation of deferred outflows of resources and deferred inflows of resources and their effects on a government’s net position. It alleviates uncertainty about reporting those financial statement elements by providing guidance where none previously existed. The provisions of this Statement are effective for financial statements for periods beginning after December 15, 2011. The Water System does not have any deferred inflows or outflows on its balance sheets, and therefore, there will be no financial statement impact from the issuance of this new pronouncement.
(d) GASB Statement No. 64
In June 2011, the GASB issued Statement No. 64, Derivative Instruments: Application of Hedge Accounting Termination Provisions – an amendment of GASB Statement No. 53(GASB No. 64). The objective of this Statement is to clarify whether an effective hedging relationship continues after the replacement of a swap counterparty or a swap counterparty’s credit support provider. This Statement
derivative instruments, and therefore, there will be no financial statement impact from the issuance of this new pronouncement.
(3) Utility Plant
The Water System had the following activity in utility plant during fiscal year 2011 (amounts in thousands):
Balance, Retirements Balance,
July 1, 2010 Additions and disposals Transfers June 30, 2011 Nondepreciable utility plant:
Land and land rights $ 109,789 5,346 — — 115,135
Construction work in progress 601,790 281,167 — (153,172) 729,785
Total
nondepreciable
utility plant 711,579 286,513 — (153,172) 844,920
Depreciable utility plant:
Source of water supply 1,039,231 19,446 — 26,849 1,085,526
Pumping 242,120 4,329 — 21 246,470 Purification 472,845 1,480 — 7,018 481,343 Distribution 3,398,644 99,914 (4,086) 106,791 3,601,263 General 496,275 23,318 (6,294) 12,493 525,792 Total depreciable utility plant 5,649,115 148,487 (10,380) 153,172 5,940,394 Accumulated depreciation:
Source of water supply (201,238) (29,412) — — (230,650)
Pumping (100,325) (4,721) — — (105,046) Purification (142,416) (10,755) — — (153,171) Distribution (1,212,948) (58,324) 4,086 — (1,267,186) General (255,131) (21,478) 6,294 — (270,315) Total accumulated depreciation (1,912,058) (124,690) 10,380 — (2,026,368)
Total utility plant,
net $ 4,448,636 310,310 — — 4,758,946
Depreciation and amortization expense during fiscal year 2011 was $115.0 million.
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.
(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 2011 2010
Water Expense Stabilization Fund $ 32,915 32,680
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, 2011, 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 days to
Type of investments Fair value days days days 5 years
U.S. government agencies $ 14,373 — — — 14,373 Medium-term notes 3,066 — — 3,066 — Commercial paper 7,934 1,000 3,435 3,499 — Negotiable CDs 3,000 1,000 — 2,000 — Municipal commercial paper 1,000 — 1,000 — — Bankers’ acceptances 999 — — 999 —
Money market funds 2,543 2,543 — — —
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 days to
Type of investments Fair value days 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 — — —
$ 32,680 3,005 4,040 1,998 23,637
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; 5 years for medium-term corporate notes; 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, 2011 and 2010, 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 medium-term corporate notes must be rated in a rating category of “A” or its equivalent or better by a NRSRO. As of June 30, 2011, all of the Water System’s investments in corporate notes were rated in the category of AA by at least one NRSRO.
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, 2011 and 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, 2011 and 2010, 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, 2011 and 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 $500 million. As of June 30, 2011 and 2010, 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, 2011, $5,336,801 (16%) was invested in securities issued by the Federal Home Loan Mortgage Corporation; $5,020,654 (15%) was invested in securities issued by the Federal Home Loan Bank; and $4,015,797 (12%) was invested in securities issued by the Federal National Mortgage Association.
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
The Department’s investment policy provides that up to 20% of the portfolio may be invested in a single money market fund. Of the Water System’s total investments as of June 30, 2011, $2,542,531 (8%) was invested in the Federated Government Obligations Fund.
(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, 2011 and 2010, the Water System’s share of the City’s general and special investment pool was $705,694,000 and $436,502,000, which represents approximately 8.2% and 5.9% of the Pool, respectively.
The cash balances of substantially all funds on deposit in the City Treasury are pooled and invested by the City Treasurer for the purpose of maximizing interest earnings through pooled investment activities but safety and liquidity still take precedence over return. Interest earned on pooled investments is allocated to the participating funds based on each fund’s average daily deposit balance during the allocation period with all remaining interest allocated to the General Fund. Investments in the City Treasury are stated at fair value based on quoted market prices except for commercial paper and money market investments that have remaining maturities of one year or less at time of purchase, which are reported at amortized cost.
Pursuant to California Government Code Section 53607 and the Los Angeles City Council File No. 94-2160, the City Treasury shall render to the City Council a statement of investment policy (the Policy) annually. City Council File No. 09-3050 was adopted on January 27, 2010 as the City’s investment policy. This Policy shall remain in effect until the Los Angeles City Council and the Mayor approve a subsequent revision. The Policy governs the City’s pooled investment practices. The Policy addresses soundness of financial institutions in which the City Treasurer will deposit funds and types of investment instruments permitted by California Government Code Sections 53600-53635 and 16429.1.
Examples of investments permitted by the Policy are obligations of the U.S. Treasury and government agencies, commercial paper notes, certificates of deposit (CD) placement service, bankers’ acceptances, medium-term notes, mutual funds, money market mutual funds, and the State of California Local Agency Investment Fund.
At June 30, 2011, the investments held in the City Treasury’s General and Special Investment Pool Programs and their maturities are as follows (in thousands):
Investment maturities
1 to 30 31 to 60 61 to 365 366 Days Over
Type of investments Amount Days Days Days to 5 years 5 years
U.S. Treasury notes $ 3,541,794 — — 38,482 3,490,201 13,111
U.S. Treasury bills 92,789 5,984 15,864 70,941 — —
U.S. Sponsored Agency Issues 2,563,178 455,933 110,660 782,630 1,212,938 1,017
Medium-term notes 1,126,648 — — 148,980 977,668 —
Commercial paper 607,177 388,945 130,749 87,483 — —
Certificates of deposit 8,000 — — 8,000 — —
Short-term investment funds 22,425 22,425 — — —
Securities Lending Cash Collateral:
U.S. Treasury notes 406,157 — — — 406,157 —
U.S. Sponsored Agency Issues 259,335 — — — 259,335 —
Total general and
special pools $ 8,627,503 873,287 257,273 1,136,516 6,346,299 14,128
Interest Rate Risk. The Policy limits the maturity of its investments to five years for the U.S. Treasury and government agency securities, medium-term notes, CD placement service, collateralized bank deposits, mortgage pass-through securities, and bank/time deposits; one year for repurchase agreements; 270 days for commercial paper; 180 days for bankers’ acceptances, and 92 days for reverse repurchase agreements. The Policy also allows City funds with longer-term investments horizons, to be invested in securities that at the time of the investment have a term remaining to maturity in excess of five years, but with a maximum final maturity of thirty years.
Credit Risk. The Policy establishes minimum credit ratings requirements for investments. There is no credit quality requirement for local agency bonds, U.S. Treasury Obligations, State of California Obligations, California Local Agency Obligations, and U.S. Sponsored Agencies (U.S. government sponsored enterprises) securities. The City’s $2.6 billion investments in U.S. government sponsored enterprises consist of securities issued by the Federal Home Loan Bank – $866.0 million, Federal National Mortgage Association – $748.1 million, Federal Home Loan Mortgage Corporation – $738.9 million, Federal Farm Credit Bank – $164.4 million, Tennessee Valley Authority – $37.9 million, and Federal Agricultural Mortgage Corporation – $7.8 million. Of the City’s $2.6 billion investments in U.S. Sponsored Agencies securities, $1,733.9 million are rated “AAA” by S&P and “Aaa” by Moody’s; $821.5 million are not rated individually by S&P nor Moody’s (issuers of these securities are rated “A-1+” by S&P and “P-1” by Moody’s); and $7.8 million are not rated. In August 2011, Standard & Poor’s lowered the long-term U.S. debt credit rating from “AAA” to “AA+.” This downgrade affects the credit risk associated with the City’s investments in certain U.S. Sponsored Agencies securities.
Commercial paper issues must have a minimum of “A-1” or equivalent rating. If the issuer has issued long-term debt, it must be rated “A” without regard to modifiers. Issuing corporation must be organized and operating within the United States and have assets in excess of $500.0 million.
The City’s $607.2 million investments in commercial paper comply with these requirements and were rated “A-1+/A-1” by S&P and “P-1” by Moody’s.
The issuers of the certificates of deposit were not rated.
Concentration of Credit Risk. The Policy does not allow more than 40% of its investment portfolio be invested in commercial paper and bankers’ acceptances, 30% in certificates of deposit and medium-term notes, 20% in mutual funds, money market mutual funds, and mortgage pass-through securities. The Policy further provides for a maximum concentration limit of 10% in any one issuer of commercial paper as well as in any one mutual fund, and 30% in bankers’ acceptances of any one commercial bank. There is no percentage limitation on the amount that can be invested in the U.S. government agencies. The City’s pooled investments comply with these requirements. GAAP requires disclosure of certain investments in any one issuer that represent 5% or more of total investments. Of the City’s total pooled investments as of June 30, 2011, $866.0 million (10%) was invested in securities issued by the Federal Home Loan Bank, $738.9 million (9%) was invested in securities issued by Federal Home Loan Mortgage Corporation, and $748.1 million (9%) was invested in securities issued by Federal National Mortgage Association.
At June 30, 2010, the investments held in the City Treasury’s general and special investment Pool programs and their maturities are as follows (in thousands):
Investment maturities
1 to 30 31 to 60 61 to 365 366 Days
Type of Investments Amount Days Days Days to 6 years
U.S. Treasury notes $ 1,977,346 — — — 1,977,346
U.S. Treasury bills 1,002,601 474,965 288,831 238,805 —
U.S. Sponsored Agency Issues 2,830,258 474,135 590,834 693,595 1,071,694
Medium–term notes 735,133 — — 20,036 715,097
Commercial paper 594,181 322,519 117,918 153,744 —
Certificates of deposit 9,000 — — 9,000 —
Short–term investment funds 41,770 41,770 — — —
Securities Lending Cash Collateral:
U.S. Treasury notes 54,031 — — — 54,031
U.S. Sponsored Agency Issues 111,068 — — — 111,068
Total general and
special pools $ 7,355,388 1,313,389 997,583 1,115,180 3,929,236
