Document Anaheim_doc_39bc5c0b55

CITY OF ANAHEIM WATER UTILITY FUND Financial Statements June 30, 2014 and 2013 (With Independent Auditors’ Report Thereon) ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Table of Contents Page Independent Auditors’ Report 1 Management’s Discussion and Analysis (Unaudited) 3 Financial Statements: Statements of Net Position 18 Statements of Revenues, Expenses, and Changes in Net Position 20 Statements of Cash Flows 21 Notes to Financial Statements 23 ---PAGE BREAK--- Independent Auditors’ Report The Honorable City Council City of Anaheim, California: We have audited the accompanying financial statements of the Water Utility Fund of the City of Anaheim, California (the Fund), as of and for the years ended June 30, 2014 and 2013, and the related notes to the financial statements, which collectively comprise the Funds' basic financial statements as listed in the table of contents. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. KPMG LLP Suite 700 20 Pacifica Irvine, CA 92618-3391 KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative (“KPMG International”), a Swiss entity. ---PAGE BREAK--- 2 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Water Utility Fund of the City of Anaheim, California, as of June 30, 2014 and 2013, and the changes in its financial position and its cash flows for the years then ended in accordance with U.S. generally accepted accounting principles. Emphasis of Matter As discussed in note 1 to the financial statements, the financial statements present only the Water Utility Fund of the City of Anaheim, California, and do not purport to, and do not, present fairly the financial position of the City of Anaheim, California (the City) as of June 30, 2014 and 2013, and the changes in its financial position and its cash flows, where applicable, for the years then ended in conformity with U.S. generally accepted accounting principles. Our opinion is not modified with respect to this matter. Other Matter Required Supplementary Information U.S. generally accepted accounting principles require that management’s discussion and analysis on pages 3 through 17 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated December 10, 2014 on our consideration of the City’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the City’s internal control over financial reporting and compliance. December 10, 2014 ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Management’s Discussion and Analysis June 30, 2014 and 2013 (Unaudited) (In thousands) 3 (Continued) As management of Anaheim Public Utilities, a department of the City of Anaheim, California (City), we offer the readers of the City of Anaheim Water Utility Fund (Water Utility) financial statements a narrative overview and analysis of the financial statements for the fiscal years ended June 30, 2014 and 2013. We encourage readers to consider the information presented here in conjunction with the accompanying financial statements. All amounts, unless otherwise indicated, are expressed in thousands of dollars. Financial Highlights  The net position for fiscal years 2014 and 2013 was $238,540 and $234,093 respectively. Of this amount, $8,684 and $7,117 represents unrestricted net position, which, if necessary, would cover 14.6% and 13.2% of annual operating expenses, respectively.  Retail sales, net of uncollectible accounts were $65,182 and $60,145 for the years ended June 30, 2014 and 2013, respectively. The 8.4% increase in sales was primarily due to a June 1, 2013 water rate increase coupled with continuing dry weather conditions causing an increase in customer demands.  Net additions to capital assets (before depreciation) were $17,531, an increase of 4.1%. Major capital projects completed during the year include the following: o The new Water Sustainability Campus, which includes Southern California’s first decentralized small-scale water recycling plant built in an urban environment. o The Linda Vista Complex, which includes a pump station and a new four million gallon water storage facility. o The Hidden Canyon Pump Station Expansion Project, which includes refurbishment of the existing pump station building and nearby water storage tank. Overview of the Financial Statements This discussion and analysis is intended to serve as an introduction to the Water Utility’s financial statements. Because the Water Utility is a business-type activity of the City, an enterprise fund is used to account for its operations. These financial statements include only the activities of the Water Utility and provide comparative information for the last two fiscal years. Information on citywide financial results is available in the City’s Comprehensive Annual Financial Report as of June 30, 2014. The Water Utility’s financial statements comprise two components: 1) financial statements and 2) notes to the financial statements. Included as part of the financial statements are three separate statements, which taken together indicate the overall financial condition of the Water Utility. The statements of net position present total assets and deferred outflows of resources and total liabilities and deferred inflows of resources with the difference between the two totals reported as net ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Management’s Discussion and Analysis June 30, 2014 and 2013 (Unaudited) (In thousands) 4 (Continued) position. Over time, increases or decreases in net position may serve as a useful indicator of whether the financial condition of the Water Utility is improving or deteriorating. The statements of revenues, expenses, and changes in net position report the Water Utility’s revenues and expenses on an accrual basis for the two most recent fiscal years. These statements provide information showing how and why the Water Utility’s net position changed. The statements of cash flows present the flows of cash and cash equivalents provided by and used for operating activities during the last two fiscal years. Other cash sources (such as investment income and debt financing), as well as other cash uses (such as payments for bond principal and capital additions) made during the last two fiscal years are also included in this statement. The notes to financial statements provide additional information that is essential to the full understanding of the data provided in the financial statements. The notes can be found in this report immediately following the three financial statements previously described. Financial Analysis The Water Utility’s condensed statements of net position at June 30 are as follows: Condensed statements of net position 2014 2013 2012* Current and other assets $ 44,285 36,905 53,595 Net utility plant 319,010 309,508 293,993 Deferred outflows of resources 118 168 231 Total assets and deferred outflows of resources 363,413 346,581 347,819 Long-term liabilities, net of current portion 89,787 91,820 94,258 Current liabilities 28,878 14,634 15,994 Deferred inflows of resources 6,208 6,034 6,010 Total liabilities and deferred inflows of resources 124,873 112,488 116,262 Net investment in capital assets 225,520 223,032 215,335 Restricted 4,336 3,944 4,012 Unrestricted 8,684 7,117 12,210 Total net position $ 238,540 234,093 231,557 * Restatement due to implementation of Governmental Accounting Standards Board (GASB) Statement No 65. ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Management’s Discussion and Analysis June 30, 2014 and 2013 (Unaudited) (In thousands) 5 (Continued) As of June 30, 2014 Assets and Deferred Outflows of Resources Total assets and deferred outflows of resources as of June 30, 2014 were $363,413, reflecting an increase of $16,832 which was primarily due to the following:  Current and other assets, comprising restricted and unrestricted assets, had a net increase of $7,380 o Unrestricted assets increased by $6,767 (27.1%) primarily due to increases in cash and cash equivalents resulting from positive operating results. o Restricted assets had an increase of $613 due to required increases in restricted assets for debt service and renewal and replacements.  Net Utility Plant increased $9,502 due to additions and upgrades of storage facilities at Linda Vista and Hidden Canyon, the completion of the Water Sustainability Campus for recycling water as well as ongoing projects to remove and replace water transmission and distribution mains throughout the City. The capital infrastructure building program for additional storage facilities, wells, and distribution facilities was adopted by the Water Utility in order to ensure that the water supply continues to be safe, reliable, and sufficient to meet future demands. For the year ended June 30, 2014, the Water Utility was in the top national quartile for infrastructure reliability as measured by the number of main breaks per 100 miles of distribution piping.  Deferred outflows of resources, consisting of deferred charge on refunding bonds, decreased by $50 due to annual amortization. Liabilities and Deferred Inflows of Resources Total liabilities and deferred inflows of resources as of June 30, 2014 were $124,873, which was an increase of $12,385 (11.0%) over the prior year. Primary reasons for this increase were:  Current liabilities increased by $14,244 (97.3%) mostly because the Water Utility drew down $9,100 of its $14,000 Revolving Credit Agreement in order to provide funds to build the capital improvements mentioned above. The $9,100 balance is expected to be paid in full during fiscal year 2015 with the issuance of new bond financing. In addition, accounts payable and accrued expenses increased $5,002 as a result of greater amounts accrued for the cost of water pumped during the six months ended June 30, 2014.  Long-term liabilities, net of current portion decreased by $2,033 due to the payments of principal on long-term debt. ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Management’s Discussion and Analysis June 30, 2014 and 2013 (Unaudited) (In thousands) 6 (Continued)  Deferred inflows of resources, consisting of regulatory credits for water rate stabilization purposes, increased by $174 due to various miscellaneous credits and refunds received during the fiscal year ended June 30, 2014. Net Position The Water Utility’s net position, which represents the difference between the Utility’s total assets and deferred outflows of resources less total liabilities and deferred inflows of resources, may serve over time as a useful indicator of the Water Utility’s financial position. The Water Utility’s net position at June 30, 2014 totaled $238,540, an increase of $4,447 primarily due to the following:  A major portion, $225,520 of the Water Utility’s net position at June 30, 2014, represents the Water Utility’s investment in capital assets, less any related outstanding debt used to acquire those assets. This portion increased by $2,488 during fiscal year 2014. The Water Utility uses these capital assets to provide reliable and efficient services to customers, which, therefore, are not available for future spending. Resources needed to repay the related outstanding debt must come from other sources such as operations.  An additional portion of the Water Utility’s net position, amounting to $4,336 as of June 30, 2014, represents resources that are subject to internal and external restrictions on how they may be used. These restricted amounts consist of $1,308 for debt service repayments and $3,028 for the Water Utility’s required renewal and replacement reserve.  The unrestricted portion of the Water Utility’s net position, amounting to $8,684 as of June 30, 2014, increased by $1,567 (22.0%) primarily as a result of positive operating results. The unrestricted portion of net position may be used to meet the Water Utility’s ongoing obligations to creditors and customers. ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Management’s Discussion and Analysis June 30, 2014 and 2013 (In thousands) 7 (Continued) As of June 30, 2013 Assets Total assets as of June 30, 2013 and 2012 were $346,413 and $347,588, respectively. The $1,175 decrease in total assets is primarily due to a $6,429 decrease in current assets offset by a $5,254 increase in noncurrent assets. Noncurrent assets increased 1.7% primarily because the Water Utility continued to build additional capital infrastructure, thus, increasing net utility plant by $15,515. The Utility used the remainder of the bond proceeds received from the issuance of the 2010 Water Revenue Bonds for this building program and so decreased its restricted assets by $10,243. Once the bond proceeds were depleted, the Water Utility next used its current assets to fund the infrastructure building program, decreasing cash and cash equivalents, and investments by $7,278. The capital infrastructure building program for additional storage facilities, wells, and distribution facilities was adopted by the Water Utility in order to ensure that the water supply continues to be safe, reliable, and sufficient to meet future demands. Deferred Outflows of Resources Deferred outflows of resources, consisting of deferred charge on refunding bonds, decreased by $63 due to annual amortization. Liabilities Total liabilities as of June 30, 2013 and 2012 were $106,454 and $110,252, respectively. The $3,798 decrease in total liabilities is primarily due to a $2,438 decrease in long-term liabilities, and a $1,360 decrease in current liabilities (restricted and unrestricted). Long-term liabilities decreased 2.6% primarily as a result of payments of principal on long-term debt. Deferred Inflows of Resources Deferred inflows of resources, consisting of regulatory credits for water rate stabilization purposes, increased by $24 due to miscellaneous credits and refunds received during the fiscal year ended June 30, 2013. Net Position Total net position as of June 30, 2013 and 2012 was $234,093 and $231,557, respectively. Total net position increased by $2,536 during fiscal year 2013. Net investment in capital assets increased $7,697 primarily because of the construction additions to the water supply and transmission and distribution infrastructure. Unrestricted net position decreased $5,093 (41.7%) because these resources were used to carry out the infrastructure building program. ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Management’s Discussion and Analysis June 30, 2014 and 2013 (In thousands) 8 (Continued) The Water Utility’s statements of revenues, expenses, and changes in net position for the years ended June 30 are summarized as follows: Condensed statements of revenues, expenses, and changes in net position 2014 2013 2012 Revenues: Sale of water, net $ 65,182 60,145 57,041 Other operating revenues 764 640 707 Interest income 988 788 1,119 Grants 45 276 463 Capital contributions 3,531 754 1,799 Total revenues 70,510 62,603 61,129 Expenses: Purchased water 28,769 27,729 28,088 Treatment and pumping 8,433 6,896 5,739 Operations, maintenance, and administration 11,942 9,357 10,788 Depreciation 10,534 9,742 9,739 Interest expense 3,167 3,031 3,753 Total expenses 62,845 56,755 58,107 Transfers: Transfer from the General Fund of the City 600 — — Transfer to the General Fund of the City (2,619) (2,408) (2,374) Transfer of right-of-way fee to the City (902) (855) (823) Net transfers to other funds of the City (297) (49) (67) Total transfers (3,218) (3,312) (3,264) Changes in net position 4,447 2,536 (242) Net position at beginning of year, as restated 234,093 231,557 231,799 Net position at end of year $ 238,540 234,093 231,557 ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Management’s Discussion and Analysis June 30, 2014 and 2013 (In thousands) 9 (Continued) Revenues Year ended June 30, 2014 Total revenues for the fiscal year ended June 30, 2014 were $70,510, which was an increase of $7,907 (12.6%) over the prior year. Primary reasons for this increase are:  Revenues from the sale of water Increased by $5,037 Water sales to retail customers continue to be the primary revenue source for the Water Utility, accounting for 92.4% of total revenues. The increase in this category of revenue is partly due to a 1.3% increase in customer demands during the year. In addition, the Water System Reliability Adjustment (WSRA) portion and the Water Commodity Adjustment (WCA) portion of the water rates increased by $0.075 and $0.09 per hundred cubic feet (HCF), respectively, effective June 1, 2013 for a total increase of $0.165 per HCF. The WSRA is used to recover projected capital costs, including rehabilitation and construction of water and reclaimed water system infrastructure along with the related debt service payments. The WCA is a rate mechanism that increases or decreases with water supply, treatment, and pumping costs. In 2014, the Water Utility experienced increases to its wholesale water supply costs and to its treatment costs.  Capital contributions (5.0% of total revenues) increased by $2,777 over the prior year. Most of the increase is due to the completion of the state route 91 widening project at Tustin Avenue, which was funded by the California Department of Transportation per a 2012 Utility Agreement. Year ended June 30, 2013 Total revenues for the fiscal year ended June 30, 2013 were $62,603 as compared with $61,129 in fiscal year 2012, an increase of $1,474. This increase was primarily due to a $3,104 increase in revenues from the sale of water, which was partially offset by a $1,045 reduction in capital contributions. Revenues from the sale of water increased 5.4% primarily because of increased customer demands. During the fiscal year ended June 30, 2013, the Water Utility sold 62,804 acre-feet of water as compared to 60,371 acre-feet in fiscal year 2012, representing a 4.0% increase. Commercial and industrial sales increased 6.3% during this period, while residential sales increased by 2.8%. ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Management’s Discussion and Analysis June 30, 2014 and 2013 (In thousands) 10 (Continued) Revenues by Source Grants 1% Capital Contributions 5% Water Sales 92% Other Operating Revenues 1% Interest Income 1% Year ended June 30, 2014 Grants 1% Capital Contributions 1% Water Sales 96% Other Operating Revenues 1% Interest Income 1% Year ended June 30, 2013 ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Management’s Discussion and Analysis June 30, 2014 and 2013 (In thousands) 11 (Continued) Expenses Year ended June 30, 2014 Total expenses for the fiscal year ended June 30, 2014 were $62,845, which was a $6,090 (10.7%) increase over the prior fiscal year. Contributing factors of this increase were:  Purchased water costs, which account for 45.8% of total expenses, increased by $1,040 during the fiscal year, primarily as a result of increased commodity costs charged by the Water Utility’s two sources of water supply, the Metropolitan Water District (MWD) and the Orange County Water District (OCWD). In addition, the total amount of water purchased and/or pumped increased about 2.3% in order to meet increased customer demand.  Treatment and pumping costs increased $1,537 (22.3%) directly as a result of pumping more water from OCWD. Pumped water accounted for 76.0% of the total water supply as compared to 68.1% in the prior year. The greater OCWD production volume increased the required pump power (electricity) costs as well as requiring additional chemical treatment costs.  Operations, maintenance, and administration costs (OM&A) increased by $2,585 with most of the increase ($2,009) coming from administrative costs. These costs increased mainly because the amount of overhead capitalized during the year decreased as a result of the declining balance in the Construction in Progress (CIP) account. The Water Utility’s CIP account decreased by $26,377 primarily because several major capital projects were completed and placed in service during the year. Year ended June 30, 2013 Total expenses for the fiscal year ended June 30, 2013 were $56,755 as compared with $58,107 in fiscal year 2012. This $1,352 decrease in total expenses is primarily due to a $1,431 decrease OM&A costs and a $722 decrease in interest expense, which was partially offset by a $1,157 increase in the treatment and pumping costs of purchased water. OM&A costs decreased 13.3% from fiscal year 2012. Operating costs decreased by $183 maintenance costs decreased by $149 and administrative costs decreased by $1,099 (157.9%), as compared to the prior year. The reduction in administrative costs resulted primarily from the large increase in the amount of administrative overhead costs eligible for capitalization. During fiscal year 2013, the CIP account increased by $19,688 (86%) because of the Utility’s ongoing infrastructure building program. Treatment and pumping costs increased 20.2% compared to fiscal year 2012. These costs were more because the Water Utility increased the amount of water pumped from OCWD to 68.2% of its supply. ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Management’s Discussion and Analysis June 30, 2014 and 2013 (In thousands) 12 (Continued) Transfers Year ended June 30, 2014  Transfers to the City’s General Fund, as defined by City Charter, are equal to a maximum of 4% of total operating revenues. The transfer to the City’s General Fund was $2,619 for fiscal year 2014. It is based on the current year’s total operating revenues, with true-up adjustments from prior year’s total operating revenues. The City uses these funds to help provide needed public services to the residents of the City, including police, fire, parks, and libraries.  The right-of-way fee transferred to the City’s General Fund equal to 1.5% of net revenues of the prior fiscal year. Net revenues are defined as revenues from sale of water less uncollectible accounts. The right-of-way fee transferred to the City amounted to $902 for fiscal year 2014.  Upon completion of several joint capital projects, the Water Utility transferred ownership of its share of these projects, valued at $297, to the Electric Utility. Year ended June 30, 2013 Transfers to the City’s General Fund, as defined by City Charter, are equal to a maximum of 4.0% of total operating revenues. Transfers to the City’s General Fund were $2,408 and $2,374 for fiscal years 2013 and 2012, respectively. In addition, a right-of-way fee is transferred to the City’s General Fund and is equal to 1.5% of net revenues of the prior fiscal year. Net revenues are defined as revenues from sale of water less uncollectible accounts. The right-of-way fee transferred to the City amounted to $855 for fiscal year 2013 and $823 for fiscal year 2012. There were no significant changes in the amount of right-of-way fee transferred to the City during fiscal year 2013 when compared with fiscal year 2012. Upon completion of several joint capital projects, the Water Utility transferred ownership of its share of these projects, valued at $65, to the Electric Utility. ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Management’s Discussion and Analysis June 30, 2014 and 2013 (In thousands) 13 (Continued) Expenses and Transfers Purchased Water 43% Treatment and Pumping 13% OM&A 18% Depreciation 16% Interest Expense 5% Transfers 5% Year ended June 30, 2014 Purchased Water 46% Treatment and Pumping 12% OM&A 16% Depreciation 16% Interest Expense 5% Transfers 5% Year ended June 30, 2013 ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Management’s Discussion and Analysis June 30, 2014 and 2013 (In thousands) 14 (Continued) Capital Assets and Debt Administration Capital Assets The Water Utility’s net investment in capital assets includes land, production wells and treatment plant, transmission and distribution facilities, CIP and general plant items such as office equipment, furniture, etc. The Water Utility’s investments in capital assets as of June 30 are as follows: 2014 2013 2012 Source of water supply $ 44,142 43,350 43,350 Pumping plant 75,236 50,003 50,008 Transmission and distribution 301,791 283,984 280,609 General plant 8,061 7,985 7,030 Land 2,339 2,339 2,339 Construction in progress 16,162 42,539 22,871 Total utility plant 447,731 430,200 406,207 Less accumulated depreciation (128,721) (120,692) (112,214) Net utility plant $ 319,010 309,508 293,993 Additional information on the Water Utility’s capital assets can be found in note 3 of the accompanying financial statements. As of June 30, 2014 The Water Utility’s investment in capital assets net of accumulated depreciation was $319,010, an increase of $9,502 The change resulted primarily from the following significant capital items plus current year depreciation:  Pumping plant increase of $25,233 (50.5%) resulting from the completion of the following capital projects: o $14,736 for the Water Sustainability Campus (Water Recycling Demonstration Plant). This project includes the first decentralized small-scale water recycling plant built in an urban environment in Southern California. And, it showcases other important water management strategies: a water-wise garden, rainwater capture for irrigation, and porous pavement. All of these elements are presented in a way to educate visitors about innovative water solutions that can help address the region's challenges in maintaining sufficient water supplies and reducing dependence on imported water. o $4,446 for the Hidden Canyon Pump Station Expansion. The work included the refurbishment of existing pump station building, replacement of pumps and motors, and replacement of electrical and instrumentation systems. The project increases water supply capacities in east Anaheim, increases overall system reliability, and beautifies the pump station site. ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Management’s Discussion and Analysis June 30, 2014 and 2013 (In thousands) 15 (Continued) o $5,922 for the Linda Vista Pump Station. The pump station serves groundwater to West, Central, and East Anaheim and is capable of supplying about one-third of the City’s water supply to customers each day.  Transmission and Distribution capital asset increase of $17,807 resulting from the completion of the following capital projects: o $8,173 for the Linda Vista Reservoir and distribution system. The Linda Vista Complex includes a new four million gallon water storage facility and related transmission and distribution mains. This project improves system reliability for this important water source by replacing its aging infrastructure. o $1,212 for the Peridot Place, Twin Peak Circle and Coral Circle Water Mains Replacement Project, which replaced approximately 2,800 linear feet of 8-inch and 12-inch iron pipes with polyvinyl chloride (PVC) pipes. These improvements will increase the service reliability and reduce maintenance expenses of the water system. o $878 for the Olive Street 16-inch Water Main Replacement Project, which replaced an existing 10-inch cast iron pipe with a 16-inch ductile iron water main pipe. The project will meet current and future water demand for industrial uses in the area. o $2,306 for the replacement of various transmission and distribution water mains throughout the City. These various projects increase the water system reliability by replacing aging infrastructure to minimize the risk of system failures and also to improve fire flow requirements.  CIP decrease of $26,377 resulting from the completion of the numerous large projects described above. As of June 30, 2013 The Water Utility showed a net increase of $15,515 in the investment in capital assets (net utility plant) this fiscal year, due mainly to ongoing projects to expand and refurbish the water transmission and distribution infrastructure, pumping plant, and source of supply. The Water Utility capital program continues its focus on improving the water infrastructure reliability by rehabilitating and replacing its aging infrastructure, improving service levels and delivery capabilities, and extending and diversifying its water supply portfolio. ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Management’s Discussion and Analysis June 30, 2014 and 2013 (In thousands) 16 (Continued) Long-Term Debt The Water Utility’s outstanding long-term debt as of June 30 is as follows: 2014 2013 2012 Water revenue bonds $ 83,870 84,790 85,740 Notes payable and advances 7,486 8,442 9,372 Total long-term debt outstanding 91,356 93,232 95,112 Less: Current portion (1,943) (1,876) (1,412) Unamortized bond premium 374 464 558 Total noncurrent long-term debt outstanding $ 89,787 91,820 94,258 As of June 30, 2014  The Water Utility’s bond indentures require a minimum debt service coverage ratio of 1.0. The Water Utility’s debt service coverage ratio was 2.7 as of June 30, 2014.  The Water Utility maintains an AAA credit rating from both Standard & Poor’s and Fitch Ratings. These ratings reflect the Water Utility’s strong financial performance, favorable rate structure, and the Water Utility’s favorable supply mix along with its stable customer base.  Total long-term debt decreased by $2,033 primarily due to principal payments and amortization of premiums. The revenues of the Water Utility have been pledged to pay the outstanding long-term debt. Additional information on the Water Utility’s long-term debt can be found in note 6 of the accompanying financial statements. As of June 30, 2013 Long-term debt decreased $2,438 primarily due to the repayments of principal on outstanding bonds and notes payable in accordance with the applicable payment terms. The revenues of the Water Utility have been pledged to pay the outstanding long-term debt. ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Management’s Discussion and Analysis June 30, 2014 and 2013 (In thousands) 17 Economic Factors and Rates For fiscal year 2015, OCWD set the Basin Production Percentage (BPP) for all cities and water districts they serve (including Anaheim) at 72.0%, up from the 70.0% fiscal year 2014 limit. Consequently, the Water Utility will be able to pump 2.0% more ground water from OCWD without incurring a penalty and purchase 2.0% less from MWD in order to fulfill its water supply requirements. Water purchased from MWD is priced higher than ground water pumped from OCWD, so increasing the BPP lessens the impacts of MWD cost increases. The Water Utility’s Water Rates, Rules, and Regulations provide for an automatic adjustment of its commodity adjustment when OCWD and MWD increase or decrease the cost per acre foot of water. As approved on March 18, 2008, the Water Utility instituted a charge to all customers for a WSRA. The WSRA is set to $0.300 per 100 cubic foot, effective June 1, 2013. The purpose of this charge is to recover projected capital costs, including rehabilitation and construction of water and reclaimed water system infrastructure and the related debt service payments. Requests for Information This financial report is designed to provide a general overview of the Water Utility’s finances. Questions concerning any information provided in this report or requests for additional financial information should be addressed to the Assistant General Manager – Finance and Administration, Anaheim Public Utilities, 201 South Anaheim Boulevard, Suite 1101, Anaheim, CA 92805. ---PAGE BREAK--- 18 (Continued) CITY OF ANAHEIM WATER UTILITY FUND Statements of Net Position June 30, 2014 and 2013 (In thousands) 2014 2013 Assets: Utility plant: Source of water supply $ 44,142 43,350 Pumping plant 75,236 50,003 Transmission and distribution 301,791 283,984 General plant 8,061 7,985 Total depreciable utility plant 429,230 385,322 Less accumulated depreciation (128,721) (120,692) Net depreciable utility plant 300,509 264,630 Land 2,339 2,339 Construction in progress 16,162 42,539 Net utility plant 319,010 309,508 Restricted assets: Cash and cash equivalents 2,093 1,860 Investments 7,501 7,175 Total restricted assets 9,594 9,035 Other assets: Metropolitan Water District Orange County pipeline receivable 20 84 Unamortized prepaid bond insurance 1 1 Total other assets 21 85 Total noncurrent assets 328,625 318,628 Current assets: Cash and cash equivalents 5,807 5,073 Investments 16,566 10,515 Restricted cash and cash equivalents 1,399 1,632 Restricted investments 1,599 1,312 Accounts receivable, net 7,420 7,422 Accrued interest receivable 88 75 Materials and supplies inventory 576 602 Purchased water in storage 1,215 1,154 Total current assets 34,670 27,785 Total assets 363,295 346,413 Deferred outflows of resources: Deferred charge on refunding bonds 118 168 Total deferred outflows of resources 118 168 Total assets and deferred outflows of resources $ 363,413 346,581 ---PAGE BREAK--- 19 CITY OF ANAHEIM WATER UTILITY FUND Statements of Net Position June 30, 2014 and 2013 (In thousands) 2014 2013 Liabilities: Long-term liabilities: Long-term debt obligations, less current portion $ 89,787 91,820 Total long-term liabilities 89,787 91,820 Current liabilities (payable from restricted assets): Current portion of long-term debt 1,943 1,876 Arbitrage rebate liability 6 9 Accrued interest payable 1,049 1,059 Total current liabilities (payable from restricted assets) 2,998 2,944 Current liabilities (payable from unrestricted current assets): Accounts payable and accrued expenses 15,759 10,757 Wages payable 212 183 Line-of-credit payable 9,100 — Customer deposits 809 750 Total current liabilities (payable from unrestricted current assets) 25,880 11,690 Total liabilities 118,665 106,454 Deferred inflows of resources: Regulatory credits 6,208 6,034 Total deferred inflows of resources 6,208 6,034 Net position: Net investment in capital assets 225,520 223,032 Restricted for: Debt service 1,308 1,274 Renewal and replacement 3,028 2,670 Unrestricted 8,684 7,117 Total net position 238,540 234,093 Total liabilities, deferred inflows of resources, and net position $ 363,413 346,581 See accompanying notes to financial statements. ---PAGE BREAK--- 20 CITY OF ANAHEIM WATER UTILITY FUND Statements of Revenues, Expenses, and Changes in Net Position Years ended June 30, 2014 and 2013 (In thousands) 2014 2013 Operating revenues: Sales of water, net $ 65,182 60,145 Other operating revenues 764 640 Total operating revenues 65,946 60,785 Operating expenses: Purchased water 28,769 27,729 Treatment and pumping 8,433 6,896 Operations, maintenance, and administration 11,942 9,357 Depreciation 10,534 9,742 Total operating expenses 59,678 53,724 Operating income 6,268 7,061 Nonoperating revenues (expenses): Interest income 988 788 Interest expense (3,167) (3,031) Grants 45 276 Total net nonoperating expenses (2,134) (1,967) Income before capital contributions and transfers 4,134 5,094 Capital contributions 3,531 754 Transfer from the General Fund of the City 600 — Transfer to the General Fund of the City (2,619) (2,408) Transfer of right-of-way fee to the City (902) (855) Transfers from other funds of the City — 16 Transfers to other funds of the City (297) (65) Change in net position 4,447 2,536 Net position at beginning of year 234,093 231,557 Net position at end of year $ 238,540 234,093 See accompanying notes to financial statements. ---PAGE BREAK--- 21 (Continued) CITY OF ANAHEIM WATER UTILITY FUND Statements of Cash Flows Years ended June 30, 2014 and 2013 (In thousands) 2014 2013 Cash flows from operating activities: Receipts from customers and users $ 65,840 59,728 Receipts from services provided to other funds of the City 341 330 Payments to suppliers (26,204) (28,616) Payments to employees (13,441) (13,028) Payments for services provided by other funds of the City (4,503) (4,324) Net cash provided by operating activities 22,033 14,090 Cash flows from noncapital financing activities: Transfers to the General Fund and other funds of the City (3,521) (3,263) Transfers from the General Fund and other funds of the City 600 16 Receipts from grants 45 298 Net cash used for noncapital financing activities (2,876) (2,949) Cash flows from capital and related financing activities: Proceeds from short-term borrowings from line of credit 9,100 — Capital purchases, net capitalized interest (17,919) (23,355) Principal payments on long-term debt (1,876) (1,880) Interest paid (4,556) (4,532) Transfers to other funds of the City for capital purposes (32) (65) Capital contributions 2,485 318 Net cash used for capital and related financing activities (12,798) (29,514) Cash flows from investing activities: Purchases of investment securities (12,846) (5,897) Proceeds from sale and maturity of investment securities 6,223 5,793 Collection of pipeline receivable 64 17 Interest income received 934 1,090 Net cash provided by (used for) investing activities (5,625) 1,003 Increase (decrease) in cash and cash equivalents 734 (17,370) Cash and cash equivalents at beginning of year 8,565 25,935 Cash and cash equivalents at end of year $ 9,299 8,565 ---PAGE BREAK--- 22 CITY OF ANAHEIM WATER UTILITY FUND Statements of Cash Flows Years ended June 30, 2014 and 2013 (In thousands) 2014 2013 Reconciliation of operating income to net cash provided by operating activities: Operating income $ 6,268 7,061 Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation 10,534 9,742 Changes in assets, liabilities and deferred inflows of resources that provided by (used for) cash: Accounts receivable, net 2 (743) Materials and supplies inventory 26 (35) Purchased water in storage (61) (140) Accounts payable and accrued expenses 5,002 (1,810) Wages payable 29 Customer deposits 59 Regulatory credits 174 24 Total adjustments 15,765 7,029 Net cash provided by operating activities $ 22,033 14,090 Schedule of noncash investing, capital, and financing activities: Capital contributions $ 1,046 436 Increase (decrease) in fair value of investments 41 (255) Reconciliation of cash and cash equivalents: Cash and cash equivalents $ 5,807 5,073 Restricted cash and cash equivalents, current portion 1,399 1,632 Restricted cash and cash equivalents, noncurrent portion 2,093 1,860 Total cash and cash equivalents $ 9,299 8,565 See accompanying notes to financial statements. ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) 23 Summary of Significant Accounting Policies Basis of Accounting The Water Utility Fund (Water Utility) of the City of Anaheim, California (City) was established on June 30, 1971, at which time the portion of the City’s General Fund net position related to water system operations was transferred to Water Utility net position. The financial statements of the Water Utility, an enterprise fund, are presented on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles and accounting principles and methods prescribed by the California Public Utilities Commission (CPUC). The Water Utility is not subject to the regulations of the CPUC. New Accounting Pronouncements; Changes in Accounting Principles and Restatements On July 1, 2013, the Water Utility adopted the following new accounting pronouncements issued by the Governmental Accounting Standards Board (GASB):  GASB Statement No. 66, Technical Corrections–2012–an Amendment of GASB Statement No. 10 and No. 62. The requirements of this Statement are effective for financial statements for periods beginning after December 15, 2012.  GASB Statement No. 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees. This Statement establishes accounting and financial reporting standards for situations where a state or local government, as a guarantor, agrees to indemnify a third-party obligation holder under specified conditions nonexchange financial guarantees). The issuer of the guaranteed obligation can be a legally separate entity or individual, including a blended or discretely presented component unit. Guidance is provided for situations where a state or local government extends or receives a nonexchange financial guarantee. The requirements of this Statement are effective for financial statements for reporting periods beginning after June 15, 2013. Implementation of these pronouncements has no material effect on amounts reported in the Water Utility’s financial statements for the fiscal year ended June 30, 2014. The Water Utility is currently reviewing its accounting practices to determine the potential impacts on the financial statements for the following GASB Statements:  GASB Statement No. 68, Accounting and Financial Reporting for Pensions–an amendment of GASB Statement No. 27. This Statement replaces the requirements of Statement No. 27 and No. 50 related to pension plans that are administered through trusts or equivalent arrangements. The requirements of Statements No. 27 and No. 50 remain applicable for pensions that are not administered as trusts or equivalent arrangements. The requirements of this Statement are effective for financial statements for fiscal years beginning after June 15, 2014. ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) 24  GASB Statement No. 69, Government Combinations and Disposals of Government Operations. This Statement establishes accounting and financial reporting standards for mergers, acquisitions, and transfers of operations government combinations). The Statement also provides guidance on how to determine the gain or loss on a disposal of government operations. This Statement applies to all state and local governmental entities. The requirements of this Statement should be applied prospectively and are effective for government combinations and disposals of government operations occurring in financial reporting periods beginning after December 15, 2013.  GASB Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date–an amendment of GASB Statement No. 68. This Statement should be applied simultaneously with GASB Statement No. 68. Utility Plant and Depreciation The costs of additions to utility plant and replacement of retired units are capitalized. Utility plant is recorded at cost, including capitalized interest, or in the case of contributed plant at fair market value at the date of the contribution, except those assets acquired prior to July 1, 1977, which are recorded at historical cost. Cost includes labor, materials, allocated indirect charges such as engineering, supervision, construction and transportation equipment, retirement plan contributions and other fringe benefits, and certain administrative and general expenses. The cost of minor replacements is included in maintenance expense. The net book value of assets retired or disposed of, related salvage value proceeds, and the costs of removal are recorded in accumulated depreciation. Depreciation of utility plant is provided by the straight-line method based on the following estimated service lives of the properties: Source of water supply 15 to 75 years Pumping plant 10 to 75 years Transmission and distribution 20 to 75 years General plant 5 to 50 years Pooled Cash and Investments The City pools available cash from all funds for the purpose of enhancing investment income through investment activities. Investments in U.S. Treasury obligations, U.S. agency securities, and corporate notes are carried at fair value based on quoted market prices. Participating guaranteed investment contracts and flexible repurchase agreements are carried at fair value. Money market mutual funds are carried at fair value based on the fund’s share price. The City’s investment in the State of California Local Agency Investment Fund (LAIF) is carried at fair value based on the value of each participating dollar as provided by LAIF. LAIF is authorized by California Government Code (Government Code) Section 16429 under the oversight of the Treasurer of the State of California. Commercial paper, nonparticipating guaranteed investment contracts, and ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) 25 negotiable certificates of deposit are carried at amortized cost (which approximates fair value). Investment income, which includes changes in fair value, is allocated to all funds on the basis of average daily cash and investment balances. The Water Utility’s cash and investments pooled with the City Treasurer (Treasurer) are carried at fair value based on the value of each participating dollar. See note 2 for further discussion. For the purpose of the statements of cash flows, the Water Utility considers cash equivalents to be highly liquid short-term investments that are readily convertible to known amounts of cash and mature within three months from the date they are acquired. Cash and cash equivalents are included in the City’s cash and investments pool and in accounts held by fiscal agents. Restricted Assets Certain proceeds of the Water Utility’s bonds, as well as certain resources set aside for their repayments, are classified as restricted on the statement of net position, because they are maintained in separate bank accounts and their use is limited by applicable debt covenants. Generally, the Water Utility would first apply restricted resources when expenses incurred for which both restricted and unrestricted resources are available. Deferred Outflows of Resources Deferred outflows of resources represent consumptions of net position that apply to future periods and so will not be recognized as an outflow of resources (expense) until then. In the statements of net position as of June 30, 2014 and 2013, the Water Utility reported deferred charges on refunding bonds in this category of $118 and $168, respectively. A deferred charge on refunding bonds results from the difference in the carrying value of debt and its reacquisition price. This amount is deferred and amortized over the shorter of the life of the refunded or refunding debt. Deferred Inflows of Resources Deferred inflows of resources represent acquisitions of net position that apply to future periods and so will not be recognized as an inflow of resources (revenue) until that time. The Utility included its regulatory credits in this category. Regulatory credits represent amounts accumulated from collections, which provide recovery in the current period for costs to be incurred in future periods. At June 30, 2014 and 2013, the amounts recorded for regulatory credits totaled $6,208 and $6,034, respectively. See note 9 for further discussion of regulatory credits. Operating Revenues Operating revenues are revenues generally derived from activities that are billable in accordance with the Water Utility’s Rates, Rules, and Regulations. The City Council must be notified for all changes in base water rates. Rates have been structured to recover the Water Utility’s costs for providing water services. The Water ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) 26 Utility’s Rates, Rules, and Regulations include a Water Commodity Adjustment formula by which billings to customers are subject to adjustment, up or down, to reflect variations in the cost of water production and water quality measures to the Water Utility. Revenue is recorded in the period earned. The Water Utility accrues estimated unbilled revenues for water sold but not billed at the end of a fiscal period, which amounted to approximately $5,096 and $4,327 for fiscal years 2014 and 2013, respectively. Residential and smaller commercial accounts are billed and all other customers are billed Revenues are reported net of uncollectible amounts. Total uncollectible amounts written off are $94 and $72 for the fiscal years ended June 30, 2014 and 2013, respectively. The applicable allowances for uncollectible amounts are $88 and $40 at June 30, 2014 and 2013, respectively. See note 6 for discussion of pledged revenue. Operating Expenses Purchased water includes all purchases of water from the Metropolitan Water District (MWD) of Southern California and ground water basin pumping charges from the Orange County Water District (OCWD). Treatment and pumping charges include all costs associated with the Water Utility’s Lenain Filtration Plant and all costs associated with pumping the water throughout the Water Utility’s water distribution system. This includes the energy costs associated with the pumps. Operation, maintenance, and administration expenses (OM&A) include all costs associated with the distribution of water, administration, operating, and maintaining the water facilities, and customer service. Debt Issuance Costs Debt issuance costs, with the exception of prepaid insurance costs, are recognized as an expense in the period when the debt is issued. Prepaid insurance costs are capitalized and amortized over the lives of the related bond issues on a basis that approximates the effective-interest method. Bond Refunding Costs Bond refunding costs are deferred and amortized over the life of the new bond or over the life of the old bond, whichever is shorter, on a basis that approximates the effective-interest method. These costs are shown as a deferred outflow of resources on the accompanying financial statements. ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) 27 Vacation and Sick Pay Vacation and sick pay for all City employees are paid by the General Benefits and Insurance Fund of the City. The General Benefits and Insurance Fund is reimbursed through payroll charges to the Water Utility based on estimates of benefits to be earned during the year. Vested vacation and sick pay benefits are accrued in the General Benefits and Insurance Fund and amounted to $634 and $647 for the Water Utility at June 30, 2014 and 2013, respectively. Transfers (to) from Other Funds of the City The City Charter provides that transfers to the General Fund of the City shall not exceed 4% of total revenue. Such transfers are not in lieu of taxes and amounted to $2,619 and $2,408 for the fiscal years ended June 30, 2014 and 2013, respectively. The transfer of right-of-way fees to the City represents the City Council approved transfer of 1.5% of net water revenues of the prior fiscal year to the General Fund of the City. Net revenues are defined as revenues from the sale of water, less uncollectible amounts. Bond disclosure requirements designate that this transfer must be recognized as an expense in the calculation of bond coverage. The transfer of right-of-way fee to the City amounted to $902 and $855 for the fiscal years ended June 30, 2014 and 2013, respectively. Transfers from other funds of the City are either cash transfers or capital asset transfers between City funds. During the fiscal years ended June 30, 2014 and 2013, the Water Utility participated in several joint projects with the Electric Utility. The Water Utility was responsible for its share of the costs while the projects were ongoing. Upon completion, the Water Utility transferred ownership of its share of the projects to the Electric Utility, valued at $297 and $65 for fiscal years 2014 and 2013, respectively. During the fiscal year ended June 30, 2014, $600 was transferred from the City’s general fund to the Water Utility pursuant to a Water Transfer settlement. See note 11 of the notes to the financial statement for additional information regarding the Water Transfer settlement. 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 certain assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. As such, actual results could differ from those estimates. ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) 28 Deposits and Investments The City maintains a cash and investment pool, which includes the cash balances of all City funds, and is invested by the Treasurer to enhance interest earnings. The pooled interest earned, net of administrative fees, is reallocated to each fund based on their respective average daily cash balances. The City’s pooled investment fund has been reviewed by Standard and Poor’s Corporation (S&P) and received a credit rating of AAf/S1 in August 2012. The City’s investment policy further limits the permitted investments in Government Code Sections 53600 et al, 16429.1, and 53684 to the following: obligations of the U.S. government, federal agencies, and government-sponsored enterprises; medium-term corporate notes; certificates of deposit; bankers’ acceptances; commercial paper; LAIF; repurchase agreements; reverse repurchase agreements; and money market mutual funds. The Water Utility maintains cash equivalents and investments at June 30 with the following carrying amounts: 2014 2013 Cash equivalents and investments pooled with the Treasurer $ 27,764 20,600 Cash equivalents and investments held with trustee 7,201 6,967 $ 34,965 27,567 At June 30, the Water Utility’s cash equivalents and investments are recorded as follows: 2014 2013 Restricted assets – cash equivalents and investments $ 12,592 11,979 Unrestricted assets – cash equivalents and investments 22,373 15,588 $ 34,965 27,567 Investments The Treasurer prepares an investment policy statement annually, which is presented to the Budget, Investment and Technology Commission for review and the City Council for approval. The approved investment policy statement is submitted to the California Debt and Investment Advisory Committee in accordance with Government Code. The policy provides the basis for the management of a prudent, conservative investment program. Public funds are invested for the maximum security of principal and to meet daily cash flow needs, while providing a return. All investments are made in accordance with the ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) 29 Government Code, and in general, the Treasurer’s policy is more restrictive than Government Code. Investments Authorized by the Government Code and the City’s Investment Policy The following table identifies the investment types that are authorized for the City by its investment policy. The table also identifies certain provisions of the City’s investment policy that address interest rate risk, credit risk, and concentration of credit risk. This table does not address investments of debt proceeds held by bond trustees that are governed by the provisions of debt agreements of the City, rather than the general provisions of the Government Code or the City’s investment policy: Minimum Rating Maximum Maximum (S&P/ Authorized investment Maximum percentage investment in Moody’s/ type maturity of portfolio* one issuer Fitch) U.S. Treasury obligations 5 years 100% 100% None U.S. agency securities 5 years 100% 40% None Bankers’ acceptances 180 days 40% 5% None Commercial paper 270 days 25% 5% A-1/P-1/F-1 Negotiable certificates of deposit 360 days 25% 5% None Repurchase agreements 1 year 30% None None Reverse repurchase agreements 90 days 20% None None Medium-term corporate notes 5 years 30% 5% A/A/A Money market mutual funds N/A 20% 10% None $50 million $50 million LAIF (2 accounts) N/A per account per account None Time certificates of deposit (TCD) 1 year 20% 5% None * Excluding amounts held by bond trustees that are not subject to Government Code restrictions ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) 30 The City’s pooled investments comply with the requirements of the investment policy. GAAP requires disclosure of certain investments in any one issuer that exceeds five percent concentration of the total investments. At June 30, the following investments represent five percent or more of the City’s total investments: 2014 2013 Investment Issuer type Fair value Percentage Fair value Percentage Federal National Mortgage U.S. agency Association securities $ 101,816 24% $ 113,988 26% LAIF LAIF 61,290 14% 60,256 14% Federal Home Loan Bank U.S. agency securities 44,701 10% 26,161 6% Federal Home Loan U.S. agency Mortgage Corporation securities 38,443 9% 29,760 7% Federal Farm Credit Bank U.S. agency securities 34,142 8% 55,981 13% Investments Authorized by Debt Agreements Investment of debt proceeds held by bond trustees is governed by provisions of the debt agreements, rather than the general provisions of the Government Code or the City’s investment policy. The table below identifies the investment types that are authorized for investments held by bond trustees. The table also identifies certain provisions of these debt agreements that address interest rate risk, credit risk, and concentration of credit risk: Maximum Maximum Maximum percentage investment Authorized investment type maturity of portfolio in one issuer U.S. Treasury obligations None None None U.S. agency securities None None None Guaranteed investment contracts None None None Collateralized investment contracts None None None Flexible repurchase agreements None None None Money market mutual funds None None None LAIF None None None City of Anaheim Treasurer’s investment portfolio None None None ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) 31 At June 30, the following investments represent five percent or more of the City’s total investments controlled by bond trustees: 2014 2013 Investment Issuer type Fair value Percentage Fair value Percentage Federal National Mortgage U.S. agency Association securities $ 61,682 19% $ 35,926 9% Morgan Stanley Flexible repurchase agreement 42,000 13% 32,257 8% Federal Home Loan Bank U.S. agency securities 31,712 10% 51,620 13% LAIF LAIF 31,230 9% 45,352 11% Dreyfus Treas 521 Money market mutual fund 24,471 7% 23,029 6% Federal Home Loan U.S. agency Mortgage Corporation securities 17,712 5% — Federal Farm Credit Bank U.S. agency securities 17,059 5% 23,382 6% U.S. Bank Money Market Money market mutual fund 17,037 5% 21,342 5% Bank of America Investment guarantee contract 16,645 5% — Blackrock #61 Money market mutual fund — 54,904 14% All guaranteed investment contracts have downgrade language that requires collateral should credit ratings drop below certain levels. Custodial Credit Risk Custodial credit risk for investments is the risk that the City will not be able to recover the value of investment securities that are in the possession of an outside party. All securities owned by the City with the exception of LAIF and money market mutual funds are deposited in trust for safekeeping with a custodial bank different from the City’s primary bank. Securities are not held in broker accounts. Funds held by LAIF and money market mutual funds are held in the City’s name. Custodial credit risk for investments held by the bond trustee is the risk that the City will not be able to recover the value of investment securities that are in the possession of an outside party. All securities held by the bond trustee are in the name of the bond issue in trust for safekeeping with the bond trustee, which is different from the City’s primary bank. Interest Rate Risk Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. The Treasurer mitigates this risk by investing in long-term securities only with funds that are not needed for current cash flow purposes and holding these securities to maturity. The Treasurer uses the segmented-time distribution method to identify and ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) 32 manage interest rate risk. In accordance with the City’s investment policy, the Treasurer monitors the segmented time distribution of its investment portfolio and analysis of cash flow demand. Investments held by bond trustees are typically long-term securities, which are not adversely affected by interest rate changes. Investment contracts for construction funds are usually limited to three years or less. Information about the sensitivity of the fair values of the Water Utility’s investments (including investments held by bond trustees) to market interest rate fluctuations is provided by the table on the following page. ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) 33 The distribution of the Water Utility’s proportionate share of cash and investments by maturity at June 30, 2014 and 2013 is as follows: Credit rating Fair value, (S&P/ June 30, 12 months 13 to 24 25 to 36 37 to 60 More than Investments Moody’s) 2014 or less months months months 60 months Treasurer’s pooled investments: U.S. agency securities AA+/Aaa $ 14,277 2,166 1,157 2,928 8,026 — Medium-term corporate notes AAA/Aaa 1,674 — 1,204 326 144 — Medium-term corporate notes AA+/Aaa 326 — — 326 — — Medium-term corporate notes A+/A1 1,003 329 330 344 — — Medium-term corporate notes AA-/Aa3 197 — 197 — — — Medium-term corporate notes AA/Aa2 196 — 196 — — — Medium-term corporate notes AA/Aa1 736 — 131 408 197 — Medium-term corporate notes A+/A2 391 66 — — 325 — Medium-term corporate notes A+/A1 196 — — — 196 — Medium-term corporate notes A-/Baa1 340 — 340 — — — Medium-term corporate notes A-/A3 457 — 457 — — — Medium-term corporate notes A/A3 725 398 327 — — — Commercial paper A-1/P-1 2,827 2,827 — — — — Money market mutual funds AAA/Aaa 425 425 — — — — LAIF Unrated 3,994 3,994 — — — — Total investments controlled by City Treasurer 27,764 10,205 4,339 4,332 8,888 — Investments controlled by bond trustees: Guaranteed investment agreements Unrated 3,897 — — — — 3,897 Collateralized investment contracts Unrated 1,211 — 1,211 — — — Money market mutual funds AAA/Aaa 2,093 2,093 — — — — Total investments controlled by bond trustees 7,201 2,093 1,211 — — 3,897 Total investments $ 34,965 12,298 5,550 4,332 8,888 3,897 ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) 34 Credit rating Fair value, (S&P/ June 30, 12 months 13 to 24 25 to 36 37 to 60 More than Investments Moody’s) 2013 or less months months months 60 months Treasurer’s pooled investments: U.S. agency securities AA+/Aaa $ 10,557 1,818 2,044 2,255 4,440 — Medium-term corporate notes A-/A3 244 — — 244 — — Medium-term corporate notes A/A2 523 — 291 232 — — Medium-term corporate notes A+/A1 138 — — — 138 — Medium-term corporate notes A+/A2 275 — 47 — 228 — Medium-term corporate notes AA/Aa1 232 — — 94 138 — Medium-term corporate notes AA/Aa2 141 — — 141 — — Medium-term corporate notes AA+/A1 721 — 475 — 246 — Medium-term corporate notes AA-/Aa3 139 — — 139 — — Medium-term corporate notes AAA/Aaa 1,009 141 — 868 — — Commercial paper A-1/P-1 2,650 2,650 — — — — Money market mutual funds AAA/Aaa 1,154 1,154 — — — — LAIF Unrated 2,817 2,817 — — — — Total investments controlled by City Treasurer 20,600 8,580 2,857 3,973 5,190 — Investments controlled by bond trustees: Guaranteed investment agreements Unrated 3,897 — — — — 3,897 Collateralized investment contracts Unrated 1,210 — — 1,210 — — Money market mutual funds AAA/Aaa 1,860 1,860 — — — — Total investments controlled by bond trustees 6,967 1,860 — 1,210 — 3,897 Total investments $ 27,567 10,440 2,857 5,183 5,190 3,897 ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) 35 Water Utility Plant The following is a summary of changes in capital assets: Balance as Balance as Balance as of June 30, of June 30, of June 30, 2012 Additions Deletions 2013 Additions Deletions 2014 Source of water supply $ 43,350 — — 43,350 798 44,142 Pumping plant 50,008 — 50,003 25,313 (80) 75,236 Transmission and distribution 280,609 4,313 (938) 283,984 20,226 (2,419) 301,791 General plant 7,030 1,031 (76) 7,985 76 — 8,061 Depreciable utility plant 380,997 5,344 (1,019) 385,322 46,413 (2,505) 429,230 Less accumulated depreciation (112,214) (9,742) 1,264 (120,692) (10,534) 2,505 (128,721) Net depreciable utility plant 268,783 (4,398) 245 264,630 35,879 — 300,509 Land 2,339 — — 2,339 — — 2,339 Construction in progress 22,871 24,576 (4,908) 42,539 17,978 (44,355) 16,162 Nondepreciable utility plant 25,210 24,576 (4,908) 44,878 17,978 (44,355) 18,501 Net utility plant $ 293,993 20,178 (4,663) 309,508 53,857 (44,355) 319,010 Operating Expenses Total operating expenses shared with the City’s Electric Utility amounted to $29,679 and $28,788 for the fiscal years ended June 30, 2014 and 2013, respectively, of which $7,123 and $6,909, respectively, of shared operating expenses were allocated to the Water Utility. The shared expenses allocated to each utility are based on estimates of the benefits each utility derives from those common expenses. Short-term Borrowings On March 1, 2013, the Utility entered into a Revolving Credit Agreement with Wells Fargo Bank, National Association for a maximum loan amount not to exceed $100,000, of which $86,000 is designated for the Electric Utility and $14,000 for the Water Utility. The loans under this agreement have a three-year term at variable interest rates based on the LIBOR Daily Index Rate and a spread. The annual commitment fee is 0.175% of the total note amount of $100,000. For the Water Utility, the purpose of this agreement is to provide temporary financing for the costs of acquisition and construction of additions to and improvements of the Utility’s water system, which qualify for reimbursement under the City Council’s Resolution No. 2012-111 “Official Intent to Reimburse Certain Water Utility Fund Expenditures from the Proceeds of Bonds or Other Obligations.” During fiscal year 2014, the Utility made three draws totaling $9,100 for ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) 36 such qualifying capital expenditures. The $9,100 balance is expected to be paid in full during fiscal year 2015 with the issuance of new bond financing. Long-Term Liabilities The following is a summary of changes in long-term liabilities: Beginning Due within June 30, 2014 of year Additions Retirements End of year one year Water revenue bonds $ 84,790 — (920) 83,870 960 Notes payable 8,442 — (956) 7,486 983 93,232 — (1,876) 91,356 $ 1,943 Less current portion (1,876) (1,943) 1,876 (1,943) Add unamortized bond premium 464 — (90) 374 Total long-term liabilities $ 91,820 (1,943) (90) 89,787 Beginning Due within June 30, 2013 of year Additions Retirements End of year one year Water revenue bonds $ 85,740 — (950) 84,790 920 Notes payable 9,372 — (930) 8,442 956 95,112 — (1,880) 93,232 $ 1,876 Less current portion (1,412) (1,876) 1,412 (1,876) Add unamortized bond premium 558 — (94) 464 Total long-term liabilities $ 94,258 (1,876) (562) 91,820 ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) 37 Long-term debt consists of the following at June 30: 2014 2013 Water Revenue Bonds, 2010 Series, true interest cost (TIC) 3.5361%, dated and sold on October 28, 2010, in the amount of $34,525, of which: $4,835 was issued as serial bonds at rates ranging from 2.0000% to 4.7500%, maturing from October 1, 2013 through 2021 in annual principal installments ranging from $120 to $815; $1,690 was issued as term bonds at a rate of 4.3460%, maturing on October 1, 2022 and 2023 in annual principal installments of $840 and $850, respectively; $1,750 was issued as term bonds at a rate of 4.8660%, maturing on October 1, 2024 and 2025 in annual principal installments of $865 and $885, respectively; $9,925 was issued as term bonds at a rate of 5.5250% maturing from October 1, 2026 through 2034 in annual principal installments ranging from $910 to $1,245; and $16,625 was issued as term bonds at a rate of 5.6850%, maturing from October 1, 2035 through 2040 in annual principal installments ranging from $1,300 to $5,645. The total debt service is $69,536 to maturity $ 34,405 34,525 Water Revenue Bonds, 2008 Series, TIC 4.8594%, dated July 1, 2008, sold on July 9, 2008 in the amount of $48,580, maturing serially beginning October 1, 2013 through October 1, 2038. The annual principal installments range from $260 to $3,750 at rates ranging from 4.0000% to 5.0000%. Total remaining debt service is $87,575 to maturity 48,320 48,580 Water Revenue Bonds, 2004 Series, TIC 3.5629%, dated May 1, 2004, sold on May 26, 2004 in the amount of $12,105, maturing serially through October 1, 2016. The annual principal installments range from $5 to $950 at rates ranging from 4.0000% to 4.50000%. Total remaining debt service is $1,195 to maturity 1,145 1,685 Total water revenue bonds $ 83,870 84,790 ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) 38 2014 2013 Note payable to State of California Revolving Fund, interest rate of 2.8%, issued June 12, 2001, in the amount of $18,063, semiannual principal and interest payments of $592 through July 31, 2021; total remaining debt service is $8,294 to maturity $ 7,486 8,442 Total notes payable $ 7,486 8,442 Annual debt service requirements for the Water Utility’s revenue bonds and notes payable at June 30, 2014 to maturity are as follows: Principal Interest Total Fiscal year(s) ending June 30: 2015 $ 1,943 4,380 6,323 2016 2,010 4,310 6,320 2017 2,083 4,238 6,321 2018 2,158 4,166 6,324 2019 2,233 4,091 6,324 2020–2024 11,839 19,159 30,998 2025–2029 15,195 16,083 31,278 2030–2034 18,975 11,821 30,796 2035–2039 23,835 6,360 30,195 2040–2043 11,085 636 11,721 $ 91,356 75,244 166,600 Interest costs of $1,335 and $1,466 have been capitalized for the fiscal years ended June 30, 2014 and 2013, respectively. In accordance with the bond resolutions, a reserve for maximum annual debt service has been established and a reserve for renewal and replacement is being accumulated in an amount equal to a maximum of 1% of the depreciated book value of the utility plant in service. The bond resolutions for the Water Revenue Bonds, the 2008 Series and the 2004 Series, require the establishment of a bond service account accumulating one-sixth of the interest, which will become due and payable on the outstanding bonds within the next 6 months, and by one-twelfth of the principal amount, which will mature and be payable on the outstanding bonds within the next 12 months. Those amounts have been recorded as restricted for debt service on the accompanying statement of net position. There are various limitations and restrictions contained in the Water Utility’s bonds and notes. The Water Utility’s management believes it is in compliance with all limitations and restrictions. ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) 39 The Water Utility has pledged future revenues to repay a total of $158,306 and $163,443 of outstanding long-term obligations, principal, and interest for the years ended June 30, 2014 and 2013, respectively. Proceeds from bonds provide financing for various capital improvements, primarily distribution assets. The Water Utility’s bonds are payable solely from water net revenues and are payable through fiscal year 2041. As of June 30, 2014 and 2013, the annual principal and interest payments on the bonds are 28.8% and 29.1% of net revenues, respectively. Debt service paid and total net revenues were $5,137 and $17,835, and $5,205 and $17,867 for the years ended June 30, 2014 and 2013, respectively. Restricted cash and investments include reserve provisions as well as undisbursed bond proceeds at June 30 as follows: 2014 2013 Held by fiscal agent: Bond reserve fund $ 7,201 6,967 Held by Treasurer: Bond service account 2,363 2,342 Renewal and replacement account 3,028 2,670 $ 12,592 11,979 The Water Utility’s interest and other finance charges, excluding capitalized interest, for the fiscal years ended June 30, 2014 and 2013 were $3,167 and $3,031, respectively. Pension Plan The City contributes to the State of California Public Employees’ Retirement System (PERS), an agent multiple-employer public employee retirement system that acts as a common investment and administrative agent for California cities that participate in this retirement plan. For both fiscal years ended June 30, 2014 and 2013, as a condition of participation, employees are required to contribute 8% of their annual covered salary to PERS. The City pays 7% of the employees’ required contributions and the employees pay the remaining For management employees hired after January 10, 2012, the entire 8% is paid by the employees. Management and I.B.E.W. employees who are hired on or after January 1, 2013 and who have no prior membership in any California public retirement system, are required to contribute employee rate of 6.75% of their annual covered salary to PERS. The entire 6.75% is paid by employees. The City is required to contribute the remaining amounts necessary to fund PERS, using the actuarial basis recommended by the PERS actuaries and actuarial consultants and adopted by the PERS Board of Administration. The Water Utility is allocated their portion of the City’s required contribution, as determined by PERS actuaries. This allocation is based on eligible employee wages. ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) 40 The Water Utility contributed $2,262, $2,243, and $2,116, to PERS for the fiscal years ended June 30, 2014, 2013, and 2012, respectively, which represented 100% of its required contributions. Information is not available separately for the Water Utility as to the cost of benefits funded, the actuarially computed present value of vested and nonvested accumulated plan benefits, the related assumed rates of return used, and the actuarially computed value of vested benefits over the related pension fund assets. Refer to the City’s Comprehensive Annual Financial Report as of June 30, 2014 for further information. Self-Insurance Program The Water Utility participates in the City’s self-insured workers’ compensation and general liability program. The liability for such claims, including claims incurred but not reported, is transferred to the City in consideration of self-insurance premiums paid by the Water Utility. Premiums for workers’ compensation and general liability programs are charged to the Water Utility by the City based on various allocation methods that include actual cost, claims experience, exposure base, and number of participants. Premiums charged and paid were $551 and $561 for the fiscal years ended June 30, 2014 and 2013, respectively. At June 30, 2014, the City was fully funded for self-insured workers’ compensation and general liability claims (self-insured retention levels of $750 per occurrence for workers’ compensation claims and $1,000 per occurrence for general liability claims). Above these self-insured retention levels, the City’s potential liability is covered through various commercial insurance and intergovernmental risk pooling programs. Settled claims have not exceeded total insurance coverage in any of the past three years, nor does management believe that there are any claims pending that will exceed total insurance coverage. Regulatory Credits The Water Utility’s Rates, Rules, and Regulations provide for a water regulatory credits account to reflect variations in the cost of water to the Water Utility and provide more stable retail water rates to the customers of the City’s Water Utility. This rate stabilization account (RSA) provides increased flexibility by allowing the Water Utility to maintain financial performance indicators and goals specified in bond covenants. The account is funded through expense reimbursements such as water supply cost refunds received from the MWD and OCWD and other miscellaneous credits and revenue. As permitted by GASB Statements No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements and No. 65, Items Previously Reported as Assets and Liabilities, and as approved by the City Council, revenues from amounts collected are deferred and recorded as regulatory credits under deferred inflows of resources in the statements of net position. At June 30, 2014 and 2013, the amounts recorded for regulatory credits totaled $6,208 and $6,034, respectively. In fiscal years 2014 and 2013, the Water Utility funded this account through a variety of miscellaneous credits. During fiscal years 2014 and 2013, no RSA revenue was recognized. ---PAGE BREAK--- CITY OF ANAHEIM WATER UTILITY FUND Notes to Financial Statements June 30, 2014 and 2013 (In thousands) 41 (10) Commitments and Contingencies Litigation A number of claims and suits are pending against the City for alleged damages to persons and property and for other alleged liabilities arising out of matters usually incidental to the operation of a utility such as the water system of the City. In the opinion of management, the exposure under these claims and suits would not materially affect the financial position of the Water Utility as of June 30, 2014 and 2013. Construction Commitments At June 30, 2014, the Water Utility had the following commitments with respect to unfinished capital projects: Estimated Construction completion Capital project commitment date Water Main Relocation – Tustin Avenue $ 267 2014 Pressure Regulating Stations Rehabilitation 392 2015 Well #58 at Anaheim Lake – Equipping 1,432 2015 $ 2,091 At June 30, 2013, the Water Utility had construction commitments totaling $4,481. (11) Subsequent Events On December 9, 2014, the Anaheim City Council certified the official results of the California General Election held on November 4, 2014. Measure N, Anaheim Local Services Measure, which among other things, was to ratify and amend subdivision of Charter Section 1221 to clarify the City of Anaheim’s (City) authority to transfer up to 4% of the “operating revenue” earned by the Water and Electric Utilities to the City’s General Fund instead of the “gross revenue” was not approved by a majority of voters so it did not pass. The Measure N election results coupled with settled litigation require the Water Utility to cease making the up to 4% transfer to the City’s General Fund and the City to reimburse the Water Utility $3 million plus the transferred funds held by the City for fiscal years ending June 30, 2013 and 2014, in equal installments of no less than $600 beginning January 1, 2014 and by June 30th of each fiscal end for approximately nine years or sooner depending upon when the funds have been fully reimbursed.