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Home My WebLink About02-08-12 Regular Meeting of the La Porte Area Water AuthoritySTATE OF TEXAS X COUNTY OF HARRIS X CITY OF LA PORTE X LA PORTE AREA WATER AUTHORITY AGENDA NOTICE IS HEREBY GIVEN OF A REGULAR MEETING OF THE LA PORTE AREA WATER AUTHORITY TO BE HELD WEDNESDAY, FEBRUARY 8, 2012 IN THE DOWNSTAIRS CONFERENCE ROOM OF THE PUBLIC WORKS SERVICE CENTER, 2963 NORTH 23RD STREET, LA PORTE, TEXAS, BEGINNING AT 6:00 PM. 1. CALL TO ORDER. 2. ELECTION OF OFFICERS. 3. CONSIDER APPROVAL OF MINUTES FROM AUGUST 1, 2011 MEETING. f 4. RECEIVE LA PORTE AREA WATER AUTHORITY ANNUAL FINANCIAL REPORT FOR FISCAL YEAR ENDING SEPTEMBER 30, 2011. S. STATUS UPDATE - CITY OF HOUSTON 2007 - 2010 TRUE UP, AND SOUTHEAST HOUSTON WATER PURIFICATION PLANT MANAGER AND OPERATOR CONTRACT PLAN. BOARD TO PROVIDE DIRECTION TO THE GENERAL MANAGER. 6. GENERAL MANAGER'S REPORT. 7. BOARD COMMENTS. A. MATTERS APPEARING ON AGENDA. B. INQUIRY OF STAFF REQUIRING A STATEMENT OF SPECIFIC FACTUAL INFORMATION OR A RECITATION OF EXISTING POLICY. 8. ADJOURNMENT. THIS FACILITY HAS DISABILITY ACCOMODATIONS AVAILABLE. REQUESTS FOR ACCOMODATIONS OR INTERPRETIVE SERVICES AT MEETINGS SHOULD BE MADE 48 HOURS PRIOR TO THIS MEETING. PLEASE CONTACT THE CITY SECRETARY'S OFFICE AT 281-471-5020 OR TDD LINE 281-471-5030 FOR FURTHER INFORMATION. THERE MAY BE A QUORUM OF CITY COUNCIL MEMBERS PRESENT AT THE MEETING. COUNCIL WILL TAKE NO ACTION BUT MAY PARTICIPATE IN DISCUSSIONS. .{ Patrice Fogarty, TRMC, MMC City Secretary Date posted STATE OF TEXAS X COUNTY OF HARRIS X CITY OF LA PORTE X LA PORTE AREA WATER AUTHORITY AGENDA NOTICE IS HEREBY GIVEN OF A REGULAR MEETING OF THE LA PORTE AREA WATER AUTHORITY TO BE HELD WEDNESDAY, FEBRUARY 8, 2012 IN THE DOWNSTAIRS CONFERENCE ROOM OF THE PUBLIC WORKS SERVICE CENTER, 2963 NORTH 23RD STREET, LA PORTE, TEXAS, BEGINNING AT 6:00 PM. 1. CALL TO ORDER. 2. ELECTION OF OFFICERS. 3. CONSIDER APPROVAL OF MINUTES FROM AUGUST 1, 2011 MEETING. 4. RECEIVE LA PORTE AREA WATER AUTHORITY ANNUAL FINANCIAL REPORT FOR FISCAL YEAR ENDING SEPTEMBER 30, 2011. 5. STATUS UPDATE - CITY OF HOUSTON 2007 - 2010 TRUE UP, AND SOUTHEAST HOUSTON WATER PURIFICATION PLANT MANAGER AND OPERATOR CONTRACT PLAN. BOARD TO PROVIDE DIRECTION TO THE GENERAL MANAGER. 6. GENERAL MANAGER'S REPORT. 7. BOARD COMMENTS. A. MATTERS APPEARING ON AGENDA. B. INQUIRY OF STAFF REQUIRING A STATEMENT OF SPECIFIC FACTUAL INFORMATION OR A RECITATION OF EXISTING POLICY. 8. ADJOURNMENT. THIS FACILITY HAS DISABILITY ACCOMODATIONS AVAILABLE. REQUESTS FOR ACCOMODATIONS OR INTERPRETIVE SERVICES AT MEETINGS SHOULD BE MADE 48 HOURS PRIOR TO THIS MEETING. PLEASE CONTACT THE CITY SECRETARY'S OFFICE AT 281-471-5020 OR TDD LINE 281-471-5030 FOR FURTHER INFORMATION. THERE MAY BE A QUORUM OF CITY COUNCIL MEMBERS PRESENT AT THE MEETING. COUNCIL WILL TAKE NO ACTION BUT MAY PARTICIPATE IN DISCUSSIONS. Patrice Fogarty, TRMC, MMC City Secretary Date posted LA PORTE AREA WATER AUTHORITY MINUTES AUGUST 1, 2011 The meeting was called to order at 6:00 PM by President David Janda. Members Present: President David Janda, Vice President Kenneth Schlather, Secretary Steve Valerius, Members Dennis Steger, Randy Woodard (6:15) Members Absent: None Others Present: General Manager Ron Bottoms (6:07), Public Works Director David Mick, Asst. Public Works Director Don Pennell, Director of Finance Michael Dolby, City Controller Phyllis Rinehart, and Morgan's Point Asst. City Administrator Brian Schneider (6:02). 2. The minutes from the meeting held February 2, 2011 were reviewed. Motion by Steve Valerius to approve minutes with corrections as noted, second by Dennis Steger motion was unanimous. 3. Consider approval of the Operator's Agreement between the City of La Porte and the La Porte Area Water. It was noted by David Mick that the current rate was based on the 2008 agreement with CPI-U calculations added for the next three years. Motion by Steve Valerius, second by Kenneth Schlather to approve Operator's agreement. Motion was unanimous. 4. Request was made by David Mick to skip Item number 4 on the agenda and return to it after review of items 5, 6, and 7 on the agenda. All members agreed. 5. Overview of items 5 and 6, City of Houston true up payment for 2009 and 2010 was presented by David Mick. After some discussion as to would it be better for the Water Authority to pay or not pay the request by the City of Houston and question as to if the "loser" would pay all of the legal fees if the outcome was decided in court, what court this dispute would be heard in, there was a request by Kenneth Schlather to explore the possibilities of the legal outcome. 6. David Mick presented agenda item 7, the Inter -local Agency Agreement as proposed by the City of Pasadena for reimbursement to the City of Pasadena for expenses related to the potential change in the SE Houston Water Plant Operator, Manager, and legal expenses related to true up charges with recommendation by the City of La Porte Asst. City Attorney. Approximate costs associated with Operations and management is $395,000 for an engineering firm to assist with new contracts for plant operator and manager. $10,000 for and independent audit. Other associated fees. La Porte Area Water Authority cost would be 8 percent of the total amount. Motion was made by Steve Valerius to approve the agreement with an added provision that the associated legal and engineering expenses not exceed either 10 percent prorated share or $50,000 and the LPAWA to be represented on the internal co -participant committee reviewing the true up cost, operational and management changes, second by Dennis Steger. Motion was unanimous. 7. General Manager Ron Bottoms and Michael Dolby presented highlights of agenda item 4 the proposed 2011-2012 LPAWA operating budget and recommendation to add $50,000 in legal expenses and cost associated with potential change in SE Houston Water Plant operation and/or manager. Motion by Steve Valerius to approve budget with noted changes, second by Kenneth Schlather motion was unanimous. 8. Agenda item 8, General Managers Report, Ron Bottoms had no other comments. Board comments none 10. There being no further business, the meeting adjourned at 7:00 PM Secretary PASSED AND APPROVED ON THIS DAY President LA PORTE AREA WATER AUTHORITY HARRIS COUNTY, TEXAS FINANCIAL REPORT September 30, 2011 LA PORTE AREA WATER AUTHORITY TABLE OF CONTENTS Exhibit Page Independent Auditors' Report 1 Management's Discussion and Analysis 4 FINANCIAL STATEMENTS Basic Financial Statements Statement of Net Assets B-1 10 Statement of Revenues, Expenses and Changes in Fund Net Assets B-2 11 Statement of Cash Flows B-3 12 Notes to Financial Statements B-4 13-19 SUPPLEMENTAL INFORMATION Schedules Supplemental Schedules Included within this Report 22 Schedule of Service and Rates E 23 Schedule of Enterprise Fund Expenses F 24 Schedule of Temporary Investments G 25 Schedule of Changes in Capital Assets I 26 Long -Term Debt Service Requirements by Years 1 27 Analysis of Changes in Long -Term Debt K 28 Statement of Revenues and Expenses — Five years L 30-31 Insurance Coverage M 32 Board Members, Key Personnel and Consultants N 33-34 Statement of Revenues, Expenses and Changes in Working Capital — Budget and Actual, Non-GAAP Presentation O 35 (This page intentionally left blank) /.'Lff1tTIuFEDP B CACCOJPftAt�S Independent Auditors' Report To the Board of Directors of The La Porte Area Water Authority La Porte, Texas We have audited the accompanying basic financial statements of the La Porte Area Water Authority (the "Authority"), a component unit of the City of La Porte, Texas as of and for the year ended September 30, 2011, which collectively comprise the Authority's basic financial statements as listed in the table of contents. These financial statements are the responsibility of the Authority's management. Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the the business -type activities of the Authority, as of September 30, 2011, and the respective changes in financial position and, where applicable, cash flows thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America. Accounting principles generally accepted in the United States of America require that the management's discussion and analysis and budgetary comparison information on pages 4 through 7 and on page 35 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. 2000 Loop 197 North I Suite 2001 Texas City, TX 77590 1 (P) 409.948.4406 1 (F) 409.948.0364 ww"v.null-lairsonxom 1 To the Board of Directors of The La Porte Area Water Authority La Porte, Texas Our audit was conducted for the purpose of forming an opinion on the financial statements that collectively comprise the Authority's financial statements as a whole. The supplementary information is presented for the purposes of additional analysis and is not a required part of the financial statements. The supplementary information is the responsibility of management and was derived from and relate directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole. Texas City, Texas February 2012 Management's Discussion and Analysis La Porte Area Water Authority .4 Management's Discussion and Analysis As management of the La Porte Area Water Authority, we offer readers of the Water Authority's financial statements this narrative overview and analysis of the financial activities of the Water Authority for the fiscal year ended September 30, 2011. FINANCIAL HIGHLIGHTS • The assets of the La Porte Area Water Authority exceeded its liabilities at the close of the most recent fiscal year by $7,020,950 (net assets). Of this amount, $2,480,389, unrestricted net assets, may be used to meet the government's ongoing obligations to citizens and creditors in accordance with the Water Authority's fund designation and fund policies. • The government's total net assets increased by . • The Water Authority's total bonded debt decreased by $585,000 during the current fiscal year. OVERVIEW OF THE FINANCIAL STATEMENTS This discussion and analysis is intended to serve as an introduction of the Water Authority's basic financial statements. The La Porte Area Water Authority is considered a component unit of the City of La Porte, Texas since the Water Authority provides approximately 86% of its services for the exclusive benefit of the City of La �. Porte. The Water Authority's basic financial statements are comprised of the fund financial statements and notes to the financial statements. This report also contains other supplementary information in addition to the basic financial statements themselves. Fund financial statements — The operations of the Water Authority are recorded in a proprietary (enterprise) fund. A fund is a grouping of related accounts that is used to maintain control over resources that have been segregated for specific activities or objectives. The Water Authority, like other state and local governments, uses fund accounting to ensure and demonstrate compliance with finance -related legal requirements. The statement of net assets presents information on all the Water Authority's assets and liabilities, with the difference between the two reported as net assets. Over time, increases or decreases in net assets may serve as a useful indicator of whether the financial position of the Water Authority is improving or deteriorating. The statement of revenues, expenses and changes in fund net assets presents information showing how the government's net assets changed during the fiscal year. All changes in net assets are reported when the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses are reported in this statement for some items that will only result in cash flows in future fiscal periods (e.g., uncollected receivables and accounts payable due to suppliers). The fund financial statements can be found on pages 10-12 of this report. 4 La Porte Area Water Authority Management's Discussion and Analysis Notes to the Financial Statements — The notes provide additional information that is essential to a full understanding of the data provided in the fund financial statements. The notes to the financial statements can be found on pages 13-19 of this report. Other Information — In addition to the basic financial statements and accompanying notes, this report also presents certain supplementary information concerning the Water Authority's operations. Required supplementary information can be found on pages 22-35 of this report. FINANCIAL ANALYSIS OF THE GOVERNMENT'S FUNDS As noted earlier, net assets may serve over time as a useful indicator of a government's financial position. In the case of the La Porte Area Water Authority, assets exceeded liabilities by $7,020,950 at the close of the fiscal year. The largest portion of the Water Authority's net assets (59%) reflects its investment in capital assets (e.g., water production and distribution system), less any related debt used to acquire those assets that are still outstanding. The City uses these capital assets to provide water services to the participants; consequently, these assets are not available for future spending. Although the Water Authority's investment in its capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from other sources, since the capital assets themselves cannot be used to liquidate these liabilities. LA PORTE AREA WATER AUTHORITY'S NET ASSETS Business -Type Activities 2011 2010 Current and other assets $ 2,942,301 Capital assets 7,737,763 Total Assets 10,680,064 Current liabilities 658,412 Noncurrent liabilities 3,000,702 Total Liabilities 3,659,114 Net Assets: Invested in capital assets, net 4,132,061 of related debt Restricted 408,500 Unrestricted 2,480,389 Total Net Assets $ 7,020,950 $ 2,744,898 8,198,640 10,943,538 693,796 3,625,058 4,318,854 3,988,582 680,049 1,956,053 $ 6,624,684 An additional portion of the City's net assets (6%) represents resources that are subject to external restrictions for debt service. The remaining balance of unrestricted net assets ($2,480,389) represents funds available to meet other ongoing obligations to participants and/or creditors. Analysis of the Water Authority's Operations — the following table provides a summary of the Water Authority's operations for the year ended September 30, 2011. La Porte Area Water Authority --- Management's Discussion and Analysis LA PORTE AREA WATER AUTHORITY'S CHANGE IN NET ASSETS Operating revenues: Charges for Services Total operating revenues Operating expenses: Supplies Purchased water Services and charges Depreciation Total operating expenses Operating income (loss) Nonoperating revenues (expenses) Income (loss) before contributions and transfers Capital contributions Change in net assets Total net assets - beginning Total net assets - ending Business -Type Activities 2011 2010 $ 1,246,186 $ 929,497 1,246,186 929,497 5,343 14,761 1,006,229 813,405 81,360 151,592 460,877 461,171 1,553,809 1,440,929 (307,623) (511,432) (87,546) (131,684) (395,169) 791,435 396,266 (643,116) 860,304 217,188 6,624,684 6,407,496 $ 7,020,950 $ 6,624,684 Total fund net assets increased by in 2011. The actual water revenue and capital recovery fees for fiscal year ended September 30, 2011 of $1,347,825 were 1,205,511 higher than the amount budgeted of $1,205,511 due to an increase in consumption as a result of decreased rainfall. Interest earned on investments remained flat. The Water Authority has not made any revisions to the original appropriations approved by the City Council for the 2010-2011 budget. 6 La Porte Area Water Authority Management's Discussion and Analysis CAPITAL ASSETS AND DEBT ADMINISTRATION Capital Assets - The La Porte Area Water Authority's investment in capital assets as of September 30, 2011 amounts to $4,132,061 (net of accumulated depreciation). There were not any additions or retirements of capital assets during the current fiscal year. The only activity is current year depreciation in the amount of $460,877. Capital assets at year end consisted of the following: Ending Balance Water, sewer and drainage facilities Water production and distribution system $ 7,737,763 $ 7,737,763 Additional information of the La Porte Area Water Authority's capital assets can be found in Note 5 on page 16 of this report. Debt Administration — At the end of the fiscal year, the La Porte Area Water Authority had bonded debt payable of secured solely by water and sewer revenues. The revenue bonds have been rated "AA" by Standard & Poor's, Fitch and Moody's rating agencies. Additional information on the Water Authority's long-term debt can be found in Note 7 on page 17-18 of this report. ECONOMIC FACTS AND NEXT YEAR'S BUDGETS AND RATES The Water Authority has benefited from a strong and expanding economy from the past several years, but in this coming fiscal year, the Water Authority's budget may be increased to cover the Southeast Plant true -up cost. REQUEST FOR INFORMATION This financial report is designed to provide a general overview of the La Porte Area Water Authority's finances for all those with an interest in the government's finances. Questions concerning any of the information provided in this report of requests for additional information should be addressed to the Director of Finance, 604 West Fairmont Parkway, La Porte, Texas, 77571. (This page intentionally left blank) BASIC FINANCIAL STATEMENTS LA PORTE AREA WATER AUTHORITY EXHIBIT B-1 STATEMENT OF NET ASSETS September 30, 2011 ASSETS Current assets: Cash $ 622,948 Investments 1,352,469 Accounts receivable, net of allowance for doubtful accounts 217,108 Accrued interest receivable 556 Prepaid expenses 60,058 Restricted assets Restricted cash 689,162 Total current assets 2,942,301 Non -current assets: Water production and distribution system 15,435,810 Less: accumulated depreciation (7,698,047) Total non -current assets 7,737,763 Total Assets 10,680,064 LIABILITIES Current liabilities: Accounts payable 49,424 Current liabilities (payable from restricted assets): Current portion of revenue bonds 605,000 Accrued interest 3,988 Total current liabilities 658,412 Noncurrent liabilities Revenue bond, net of current portion 3,000,702 Total Liabilities 3,659,114 NET ASSETS Invested in capital assets, net of related debt 4,132,061 Restricted for debt service 408,500 Unrestricted 2,480,3 89 Total net assets $ 7,020,950 10 LA PORTE AREA WATER AUTHORITY EXHIBIT B-2 STATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND NET ASSETS Year Ended September 30, 2011 OPERATING REVENUES Charges for services $ 1,246,186 Total operating revenues 1,246,186 OPERATING EXPENSES Supplies 5,343 Purchased water 1,006,229 Other services and charges 81,360 Depreciation 460,877 Total operating expenses 1,553,809 Operating income (loss) (307,623) NONOPERATING REVENUES (EXPENSES) Interest income 25,167 Interest expense and fiscal charges (112,713) Total nonoperating revenue (expenses) (87,546) Income (loss) before contributions and transfers (395,169) Capital contributions 791,435 Change in net assets 396,266 Total net assets —beginning 6,624,684 Total net assets —ending $ 7,020,950 See Notes to Financial Statements. 11 LA PORTE AREA WATER AUTHORITY EXHIBIT B-3 STATEMENT OF CASHFLOWS Year Ended September 30, 2011 CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers $ 1,196,894 Payments to suppliers (1,136,584) Net cash provided by operating activities 60,310 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITES Payments received from participants for debt service 689,796 Payments received from participants for capital recovery 101,639 Principal payments on revenue bonds (604,356) Interest paid on capital debt (113,444) Net cash provided by capital and related financing activites 73,635 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales and maturities of investments Sale of investments (108,199) Interest and dividends 24,876 Net cash provided by investing activities (83,323) Net (decrease) in cash and cash equivalents 50,622 Balances —beginning of the year 1,261,488 Balances —end of the year $ 1,312,110 Reconciliation of operating income (loss) to net cash provided (used) by operating activities: Operating income (loss) $ (307,623) Adjustments to reconcile operating income to net cash provided (used) by operating activities: Depreciation expense 460,877 Change in assets and liabilities: Receivables, net (49,001) Prepaid expenses 11,001 Accounts payable (54,653) Net Cash provided by operating activities $ 60,601 (291) Reconciliation of total cash and cash investments: Current Assets - cash and cash equivalents $ 622,948 Restricted Assets - cash and cash equivalents 689,162 Total cash and cash equivalents $ 1,312,110 See Notes to Financial Statements. 12 LA PORTE AREA WATER AUTHORITY NOTES TO FINANCIAL STATEMENTS NOTE 1 - CREATION OF AUTHORITY EXHIBIT B-4 The La Porte Area Water Authority (the "Authority") was created on May 30, 1981 by Chapter 729, Page 2678, Acts of the 67th Legislature of the State of Texas. This bill authorizes the Authority to purchase, construct or otherwise acquire waterworks systems, sanitary sewer systems, storm sewer systems and drainage facilities or parts of such systems of facilities and to operate and maintain such facilities. The Authority is authorized to set rates for services related to the aforementioned systems and facilities, and issue revenue bonds for the purpose of acquiring and maintaining such systems. The Authority comprises approximately 20,600 acres in Harris County, Texas. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies of the Authority conform with generally accepted accounting principles. The following is a summary of the most significant policies: A. Reporting Entity Generally accepted accounting principles for local governments include those principles prescribed by the Governmental Accounting Standards Board (GASB), the American Institute of Certified Public Accountants in the publication entitled Audits of State and Local Governmental Units and by the Financial Accounting Standards Board (when applicable). As allowed in Section P80 of GASB's Codification of Governmental Accounting and Financial Reporting Standards, the Authority has elected not to apply to its propriety activities Financial Accounting Standards Board Statements and Interpretations, Accounting Principles Board Opinions and Accounting Research Bulletins of the Committee of Accounting Procedure issued after November 30, 1989. The more significant accounting policies of the Authority are described below. Consideration regarding the potential for inclusion of other entities, organizations or functions in the Authority's financial reporting entity is based on criteria prescribed by generally accepted accounting principles. These same criteria are evaluated in considering whether the Authority is a part of any other governmental or other type of reporting entity. Criteria for determining component unit status under generally accepted accounting principles included considerations pertaining to organizations for which the primary government is financially accountable and considerations pertaining to other organizations for which the nature and significance of their relationship with the primary government are such that exclusion would cause the reporting entity's financial statements to be misleading or incomplete. The La Porte Area Water Authority is considered a component unit of the City of La Porte, Texas by virtue of meeting the criteria noted above. The primary factor in determining component unit status is that the Authority provides approximately 86% of its services for the exclusive benefit of the City of La Porte. The Authority's financial operations are included as an Enterprise Fund in the City's Comprehensive Annual Financial Report as a blended component unit. The City of La Porte is referred to as "Primary Government" throughout the authority's financial statements. 13 LA PORTE AREA WATER AUTHORITY EXHIBIT B-4 NOTES TO FINANCIAL STATEMENTS NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) B. Fund Accounting The operations of the Authority are recorded in an enterprise fund. Enterprise funds are used to account for operations (a) that are financed primarily through user charges or (b) where the governing body has decided that determination of net income is appropriate. The enterprise fund is a proprietary fund type. C. Basis of Accounting Enterprise Funds are accounted for on a flow of economic resources measurement focus. With this measurement focus, all assets and all liabilities associated with the operation of these funds are presented on the statement of net assets in a classified format to distinguish between current and long-term assets and liabilities. Net assets are presented in three components: invested in capital assets, net of related debt; restricted; and unrestricted. Enterprise fund operating statements present increases (e.g., revenues), decreases (e.g., expenses) and changes in net total assets. Enterprise funds are accounted for using the accrual basis of accounting. Revenues are recognized when they are earned and expenses are recognized at the time liabilities are incurred. D. Cash Equivalents For purposes of the statement of cash flows, the Authority considers cash held in demand accounts and all short- term investments with a maturity at date of purchase of three months or less to be cash equivalents. E. Physical Facilities and Depreciation Fixed assets, which consist of a water production and distribution system, are shown at original cost. Interest paid during construction of facilities, if any, is also included in this cost. Depreciation has been provided for the Authority's water production and distribution system using the straight-line method over a 30-year estimated useful life. NOTE 3 — CASH AND CASH EQUIVALENTS Cash and cash equivalents represent the Authority's equity interest in the City's consolidated cash and cash equivalents account consisting of demand accounts and short-term investments with a maturity at date of purchase of three months or less. State statutes require that all funds in depository institutions be covered by federal depository insurance and/or be secured in the manner provided by law for security of funds. Cash and cash equivalent balances held by the City were entirely covered by federal depository insurance or security as required at September 30, 2011. 14 LA PORTE AREA WATER AUTHORITY NOTES TO FINANCIAL STATEMENTS NOTE 4 - TEMPORARY INVESTMENTS EXHIBIT B-4 Temporary investments represent the Authority's equity interest in the City's investment pool. At year end a portion of the Authority's temporary investments were restricted as follow: Restricted for retirement of current debt service liablities and reserve requirements per bond covenents $ 689,162 Total Restricted Temporary Investments $ 689,162 The carrying amount for temporary investments, at September 30, 2011 was $1,352,469 , which is fair value. This represents 7.46% of the City's total portfolio. Pooled investments with the City consist of obligations of the United States and its agencies, certificates of deposit and investment pools in accordance with state statutes and the City's investment policies. Securities are registered and held by their agent in the City's name. The Authority's portion of the investment pool is 3.72%. Interest earnings are allocated on the same pro-rata basis. The investment pool is not registered with the SEC or subject to any regulatory oversight. The fair value of the position in the pool is the same as the value of pool shares. The City has adopted GASB Statement No. 31, which establishes accounting and reporting standards for all of the City's investments. In accordance with Statement No. 31, the City reports all investments at fair value, except for "money market investments" and "20-like pools". Money market investments, which are short-term highly liquid debt instruments that may include U.S. Treasury and agency obligations, are reported at amortized costs. Investment positions in external investment pools that are operated in a manner consistent with the SEC's Rule 2a7 of the Investment Company Act of 1940, such as TexPool and TexStar, are reported using the pools' share price. Interest Rate Risk The Authority's investment policy specifies that the maximum stated maturity, from the date of purchase, for any individual investment may not exceed 5 years and the maximum dollar -weighted average maturity may not exceed 2 years. At year end, the Authority's dollar -weighted average maturity of the investment portfolio was as follows: Weighted Average Investment Type Maturity (Days) Federal Home Loan Mortgage Corporation (FHLMC) Federal National Mortgage Association (FNMA) Federal Home Loan Bank (FHLB) Portfolio Weighted Average Maturity 15 110 27 14 33 LA PORTE AREA WATER AUTHORITY NOTES TO FINANCIAL STATEMENTS NOTE 4 - TEMPORARY INVESTMENTS (continued) Concentration of Credit Risk EXHIBIT B-4 The Authority's investment policy places no limit on the amount the government may invest in any one issuer. At September 30, 2011, the Authority's investment portfolio consisted of the following investments: Investment Type Federal Home Loan Mortgage Corporation (FHLMC) Federal National Mortgage Association (FNMA) Federal Home Loan Bank (FHLB) Credit Risk Percentage of Total Portfolio 10% 74% 16% 100.00% At year end balances in TexPool, a privately managed public funds investment pool was rated AAAm by Standard & Poor's, balances in TexSTAR, a privately managed public funds investment pool was rated AAAm by Standard & Poor's, and balances in LOGIC, a privately managed public funds investment pool was rated Aaa/MRI+ by Standard & Poor's. Federal Home Loan Mortgage Corporation notes, Federal Home Loan Banks bonds and Federal National Mortgage Association notes were rated AA+ by Standard & Poor's. All credit ratings met acceptable levels required by legal guidelines prescribed in both the PFIA and the Authority's investment policy. NOTE 5 — CAPITAL ASSETS An analysis of changes in physical facilities for the year ended September 30, 2011 follows: Beginning Retirements & Ending Balance Additions Adjustments Balance Capital assets not being depreciated Construction in progress $ 123,680 $ (123,680) $ Total capital assets not being depreciated 123,680 - (123,680) Capital assets being depreciated Water production and distribution system 15,312,130 123,680 15,435,810 Less accumulated depreciation for Water production and distribution system (7,237,170) (460,877) 0 (7,698,047) Total capital assets being depreciated, net 8,074,960 (460,877) 123,680 7,737,763 Investment in capital assets from: Contributions by participants $ 8,198,640 $ (460,877) $ - $ 7,737,763 *Depreciation expense of $460,877 charged to water services function/program. 16 LA PORTE AREA WATER AUTHORITY EXHIBIT B-4 NOTES TO FINANCIAL STATEMENTS NOTE 6 - SOUTHEAST WATER PURIFICATION PLANT The Authority and the City of Houston, Texas have entered into a Cost Sharing Water Project Contract (the "Contract") wherein the Authority, the Cities of La Porte, Morgan's Point and Shoreacres agree to jointly finance the construction and operation of the Southeast Water Purification Plant (Southeast Plant). Under the terms of the Contract, the Authority purchased 4.2 million gallons per day production and 5.25 million gallons per day pumping capacity. The Cities of LaPorte, Morgan's Point and Shoreacres have agreed to demand and pumping allocations of the Authority's purchase of water from the Southeast Plant. The required funds for the undivided interest in the Southeast Plant and the construction of a transmission and distribution system to transport water from the Southeast Plant were provided by issuance of $9.8 million revenue bonds. The water rate to be set by the Authority will not be less than an amount sufficient to provide for payment of all expenses in producing, treating and pu nping the water in connection with transmission and distribution systems and to provide payment for the interest and principal of all bonds when the bonds become due and payable. NOTE 7 - CONTRACT REVENUE BONDS PAYABLE, DEBT SERVICE REQUIREMENTS AND BOND RESOLUTION REQUIREMENTS On May 13, 2010, the La Porte Area Water Authority issued $4.085 million in Contract Revenue Refunding Bonds, Series 2010, with an average interest rate of 2.773% to purchase U.S. Government State and Local Government Series securities that were place in an irrevocable trust for the purpose of generating resources for all future debt service payments of $4.085 million of unlimited tax bonds. As a result, the refunded bonds are considered to be defeased and the liability has been removed from the statement of net assets. The bonds are payable from the net revenue of the Authority. The bonds are in $5,000 denominations. Interest is payable on March 15 and September 15 of each year to maturity. The Authority is in compliance with all significant requirements and restrictions contained in the bond resolution. Bonds payable at September 30, 2011 are comprised of the following issue. Interest Amount Interest Maturity Payment Outstanding Rate Date Date $ 3,500,000 2.25-4.00% March 15, 2017 March 151 September 15 Bonds payable activity for the year ended September 30, 2011 was as follows: Amounts Beginning Retirements & Ending Due Within Bonds and Notes Payable Balance Additions Adjustments Balance One Year Contract Revenue Refunding Premium on bonds Deferred amount on refunding $ 4,085,000 $ 111,846 13,212 $ 4,210,058 $ 17 $ (585,000) $ 3,500,000 $ 605,000 (17,312) 94,534 17,312 (2,044) 11,168 2,044 $ (604,356) $ 3,605,702 $ 624,356 LA PORTE AREA WATER AUTHORITY EXHIBIT B-4 NOTES TO FINANCIAL STATEMENTS NOTE 7 - CONTRACT REVENUE BONDS PAYABLE, DEBT SERVICE REQUIREMENTS AND BOND RESOLUTION REQUIREMENTS (continued) As of September 30, 2011, the debt service requirements on contract revenue bonds outstanding for the next five fiscal years and thereafter through 2017 are as follows: Due During Fiscal Year Annual Reauirement for All Bond Series Ending Total Total Total 9/30 Principal Interest Requirements 2012 $ 605,000 $ 88,150 $ 693,150 2013 625,000 73,556 698,556 2014 630,000 58,650 688,650 2015 650,000 41,838 691,838 2016 670,000 22,850 692,850 2017 320,000 6,400 326,400 $ 3,500,000 $ 291,444 $ 3,791,444 NOTE 8 - FUND NET ASSETS The Authority provides surface water to the City of La Porte, Texas (the "City") and the Cities of Shoreacres and Morgan's Point in order for these entities to comply with certain requirements imposed by the Harris County Subsidence District. The City retains the rights to approximately 86% of the water capacity of the Authority with the Cities of Shoreacres and Morgan's Point retaining the rights to the remaining 14%. The City, Shoreacres and Morgan's Point have agreed to service the debt on the Authority's contract revenue bonds and to fund operations of the Authority in relation to their capacity rights and to purchase water based on actual consumption. As part of the debt service requirements, the participants are billed to build a reserve for future debt service requirements as set forth in the contract revenue bonds of the Authority. During the year, the Authority's billings were applied as follows: Water Supplied and Operating costs( User fees) $ 1,246,186 Debt Service Billings/ Charges 689,796 Capital recovery billings 101,639 Total Billings $ 1,935,982 NOTE 9 — RISK MANAGEMENT The Authority is exposed to various risks of loss related to torts; theft of, damage to and destruction of assets; errors and omissions; and natural disasters for which the Authority participates (through an endorsement on the City of La Porte's contract) along with other entities in the Texas Municipal League's Intergovernmental Risk Pool. The pool purchases commercial insurance at group rates for participants in the pool. Neither the Authority nor the City has additional risk or responsibility to the pool, outside of payment of insurance premiums. Neither the Authority nor the City had significantly reduced insurance coverage or had settlements that exceeded coverage amounts for the past three fiscal years. 18 LA PORTE AREA WATER AUTHORITY NOTES TO FINANCIAL STATEMENTS NOTE 10 — ECONOMIC DEPENDENCY EXHIBIT B-4 The Authority receives all of its support from three municipalities, with the City of La Porte being the largest contributor at approximately 86%. In addition, the Authority contracts with the City of La Porte to provide administrative oversight and operate the Authority's transmissions system. 19 SUPPLEMENTARY INFORMATION 20 21 LA PORTE AREA WATER AUTHORITY SUPPLEMENTAL SCHEDULES INCLUDED WITHIN THIS REPORT September 30, 2011 (Schedules included are checked or explanatory notes provided for omitted schedules.) ® D. Notes Required by the Water District Accounting Manual See "Notes to Financial Statements," Pages 5-11 ® E. Schedule of Services and Rates ® F. Schedule of Enterprise Fund Expenses ® G. Schedule of Temporary Investments ❑ H. Analysis of Taxes Levied and Receivable (No tax levy) ® I. Schedule of Changes in Fixed Assets ® J. Long -Term Debt Service Requirements, by Years ® K. Analysis of Changes in Long -Term Debt ® L. Statement of Revenues and Expenses, Enterprise Fund — Five Years ® M. Insurance Coverage ® N. Board Members, Key Personnel and Consultants ® O. Statement of Revenues, Expenses and Changes in Fund Net Assets —Budget and Actual, Non- GAAP Presentation 22 LA PORTE AREA WATER AUTHORITY SCHEDULE OF SERVICE AND RATES Year ended September 30, 2011 1. Services provided by the District: Retail Water X Wholesale Water Drainage Retail Sewer Wholesale Sewer Irrigation Parks/Recreation Fire Protection Security Solid Waste/Garbage Flood Control _ _Roads Participates in joint venture, regional system, and and/or wastewater service (other than emergency interconnect) Other SCHEDULE F 2. Total Water Consumption during the Fiscal Year: (You may omit this information if your district does not provide water) Gallons pumped into system: 1,749,010,000 Water Accountability Ratio: (Gallons billed/Gallons pumped) Gallons billed to customers: 1,667,494,000 95.3% 3. Standby fees: Does the District assess standby fees? Yes No X 4. Location of District: County in which the District is located: Harris County Is the District located entirely within one county? Yes X No Is the District located within a City? Entirely Partly X Not at all City in which District is located Morgan's Point, Shoreacres and La Porte Is the Authority located within a city's extra territorial jurisdiction (ETJ)? Entirely Partly X Not at all City in which Authority is located Morgan's Point, Shoreacres and La Porte Is the general membership of the Board appointed by an office outside the Authority? Yes X No If yes, by Whom? La Porte City Council 23 LA PORTE AREA WATER AUTHORITY SCHEDULE OF ENTERPRISE FUND EXPENSES September 30, 2011 PROFESSIONAL FEES Auditing Legal Other PURCHASED SERVICE FOR RESALE Bulk water purchase CONTRACTED SERVICES Management/operation (primary government) ADMINISTRATIVE EXPENSES Supplies Other administrative OTHER EXPENSES Depreciation TOTAL EXPENSES Number of persons employed by the District 24 $ 6,500 305 0 1,006,229 62,924 5,343 11,631 460,877 $1,553,809 0 SCHEDULE G LA PORTE AREA WATER AUTHORITY SCHEDULE OF TEMPORARYINVESTMENTS Year ended September 30, 2011 Equity interest in City of La Porte's investment pool Interest Maturity Rate* Date 0.93% Demand SCHEDULE I Accrued Face Interest Amount Receivable 1,352,469 $ 556 Pooled investments with the City of La Porte consist of obligations of the United States and its agencies and investment pools in accordance with state statutes and the City of La Porte's investment policies. *Approximate return for September 2011. 25 LA PORTE AREA WATER AUTHORITY SCHEDULE OF CHANGES IN CAPITAL ASSETS Year ended September 30, 2011 Capital assets not being depreciated Construction in progress Total capital assets not being depreciated Capital assets being depreciated Beginning SCHEDULE I Retirements & Additions Adjustments $ 123,680 $ (123,680) $ 123,680 - (123,680) Ending Balance Water production and distribution system 15,312,130 123,680 15,435,810 Less accumulated depreciation for: Water production and distribution system (7,237,170) (460,877) 0 (7,698,047) Total capital assets being depreciated, net 8,074,960 (460,877) 123,680 7,737,763 Investment in capital assets from: Contributions by participants $ 8,198,640 $ (460,877) $ - $ 7,737,763 See Accompanying Auditor's Report. of LA PORTE AREA WATER AUTHORITY LONG-TERM DEBT SERVICE REQUIREMENTS BY YEARS September 30, 2011 Due During Fiscal Year Annual Requirement for All Bond Series Ending Total Total Total 9/30 Principal Interest Requirements 2012 $ 605,000 $ 88,150 $ 693,150 2013 625,000 73,556 698,556 2014 630,000 58,650 688,650 2015 650,000 41,838 691,838 2016 670,000 22,850 692,850 2017 320,000 6,400 326,400 $ 3,500,000 $ 291,444 $ 3,791,444 See Accompanying Auditor's Report. 27 SCHED ULE J LA PORTE AREA WATER AUTHORITY "^ ANALYSIS OF CHANGES INLONG-TERMDEBT Year ended September 30, 2011 Interest rate Date interest payable Maturity dates Bonds outstanding at beginning of year Retirements Refunded Issued Bonds outstanding at end of year Interest paid Series 2010 Total 2.25% to 4.0% 03/15;09/15 03/15/11-03/15/17 4,085,000 $4,085,000 (585,000) (585,000) 0 0 0 0 $ 3,500,000 $3,500,000 $ 104,488 $ 104,488 SCHEDULE K Paying Aaent/Reaistrar Refunding Bonds Series 2010 The Bank of New York Mellon Trust Company, N.A. — Dallas, Texas Contract Tax Revenue Refunding Bond Authority Bonds* Bonds Bonds Amount authorized by voters $ - N/A N/A Amount issued - - 4,085,000 Remaining to be issued $ - $ - $ - X Includes all bonds secured with tax revenues. Bonds in this category may also be secured with other revenues in combination with taxes. Cash and temporary investment balances as of September 30, 2011 $ 2,664,579 Average annual debt service payment (principal and interest) for remaining term of all debt $ 631,907 28 (This page intentionally left blank) 29 LA PORTE AREA WATER AUTHORITY STATEMENT OFREVENUESAND EXPENSES -FIVE YEARS September 30, 2011 AMOUNTS 2011 2010 2009 2008 2007 Operating Revenues User fees $ 1,246,186 $ 929,497 962,843 $ 985,972 $ 1,035,062 Operating Expenses Supplies 5,343 14,761 7,050 46 213 Purchased water 1,006,229 813,405 818,482 745,775 700,831 Services and charges 81,360 151,592 89,202 85,459 80,344 Depreciation 460,877 461,171 461,465 451,689 441,913 Total Operating Expenses 1,553,809 1,440,929 1,376,199 1,282,969 1,223,301 Operating Loss (307,623) (511,432) (413,356) (296,997) (188,239) Non -operating Revenues (Expenses) Interest income 25,167 25,187 29,957 77,870 110,364 Interest expense (112,713) (156,871) (243,859) (272,369) (299,598) Net non -operating Revenues (87,546) (131,684) (213,902) (194,499) (189,234) Income (loss) Before Contributions and Operating Transfers (395,169) (643,116) (627,258) (491,496) (377,473) Contributions 791,435 860,304 860,304 860,388 780,288 Net Income (Loss) $ 396,266 $ 217,188 $ 233,046 $ 368,892 $ 402,815 See Accompanying Auditor's Report. 30 SCHED ULE L PERCENT OF TOTAL REVENUES 2011 2010 2009 2008 2007 100.00% 100.00% 100.00% 100.00% 100.00% 0.43% 1.59% 0.73% 0.00% 0.02% 80.74% 87.51% 85.01% 75.64% 67.71% 6.53% 16.31% 9.26% 8.67% 7.76% 36.98% 49.62% 47.93% 45.81% 42.69% 124.68% 155.02% 142.93% 130.12% 118.19% -24.68%-55.02%-42.93%-30.12%-18.19% 2.02% 2.71% 3.11% 7.90% 10.66% -9.04%-16.88%-25.33%-27.62%-28.94% -7.04%-14.17%-22.22%-19.73%-18.29% -31.71%-69.19%-65.15%-49.85%-36.47% 63.51% 92.56% 89.35% 87.26% 75.39% 31.80% 23.37% 24.20% 37.40% 38.92% 31 LA PORTE AREA WATER AUTHORITY INSURANCE COVERAGE September 30, 2011 Amount of Type of Coverage From/To Coverage Comprehensive General 10/01/10 $ - and Contractual Liability 10/01/11 Bodily Injury and Property Damage: 2,000,000 Per occurrence 4,000,000 Aggregate 5,000 Deductible Pollution Liability 10/01/10 2,000,000 10/01/11 Errors and Omissions** 10/01/10 10/01/11 Per act 3,000,000 Aggregate 6,000,000 Deductible 5,000 Automobile Liability 10/01/10 10/01/11 Each occurrence 1,000,000 Each person 25,000 Deductible 1,000 **Directors are covered under the errors and omission policy. See Accompanying Auditor's Report. 32 Insurer Name Texas Municipal League Intergovernmental Risk Pool* Texas Municipal League Intergovernmental Risk Pool* Texas Municipal League Intergovernmental Risk Pool* Texas Municipal League Intergovernmental Risk Pool* SCHEDULE M Policy Clause Insurance None None None None LA PORTE AREA WATER AUTHORITY BOARD MEMBERS, KEY PERSONNEL AND CONSULTANTS September 30, 2011 SCHEDULE N Page I of 2 Authority's Mailing Address: City of La Porte Michael Dolby P.O. Box 1115 LaPorte, Texas 77572 Authority's Business Telephone Number: (281) 471-5020 Term of Office Appointed Expense Title at Resident of Name and Address and Expires Reimbursements Year End Authority Board Members Steve Valerius 08/31/11 President Yes 140 Hazel 08/31/13 Position 3 LaPorte, Texas 77571 Randy Woodard 08/31/11 Member Yes 2601 S. Broadway 08/31/13 Position 1 LaPorte, Texas 77571 David Janda 08/31/10 Secretary Yes 412 Spencer Landing West 08/31/12 Position 4 LaPorte, Texas 77571 Ken Schlather 08/31/10 Vice President Yes 9811 Catlett 08/31/12 Position 5 LaPorte, Texas 77571 Dennis H. Steger 08/31/11 Member Yes 3201 Bayshore Dr. 08/31/13 Position 2 LaPorte, Texas 77571 Key Administrative Personnel Steve Gillett General Manager Yes Michael Dolby Director of Finance Note: No director has any business or family relationship (as defined by the Texas Water Code) with major landowners in the Authority or with any of the Authority's consultants. See Accompanying Auditor's Report. 33 LA PORTE AREA WATER AUTHORITY BOARD MEMBERS, KEY PERSONNEL AND CONSULTANTS September 30, 2011 Name and Address Date Hired Consultants Fees and Expense Reimbursements SCHEDULE N Page 2 of 2 Title City of La Porte 604 W. Fairmont Parkway 1981 $61,619 Management/Operator LaPorte, Texas 775771 Null Lairson, PC 3411 Richmond Avenue Suite 500 2011 Auditor Houston, Texas 77046 The Bank of New York Global Corporate Trust 1999 $800 Paying agent 2001 Bryan Street, I& Floor Dallas, Texas 75201 See Accompanying Auditor's Report. 34 LA PORTE AREA WATER AUTHORITY STATEMENT OF REVENUES, EXPENDITURESAND CHANGES IN WORKING CAPITAL BUDGET AND ACTUAL - NON-GAAP PRESENTATION Year ended September 30, 2011 Revenues: Water revenue billing Debt billing Capital recovery billing Interest earnings Total Revenues Expenditures: Current Supplies Other services and charges Water Admin transfer to Primary government Debt Service Total Expenses Revenues Over/Under Expenditures Working Capital — beginning Working Capital — ending See Accompanying Auditor's Report. 35 SCHEDULE O Variance Favorable Budget Actual (Unfavorable) $ 1,103,835 1,246,186 $ 142,351 0 689,796 689,796 101,676 101,639 (37) 13,500 25,167 11,667 1,219,011 2,062,788 843,777 5,360 5,343 17 54,089 18,436 35,653 918,547 1,006,229 (87,682) 62,924 62,924 0 132,713 (132,713) 1,040,920 1,225,645 (184,725) 178,091 837,143 659,052 2,279,969 2,029,857 (250,112) $ 2,458,060 $ 2,867,000 $ 408,940 10V R11leJ To: La Porte Area Water Authority Board From: David Mick, Public Works Director C: Steve Gillett, Don Pennell, Michael Dolby Date: Feb 1, 2012 Re: Background Information for February 8, 2012 Agenda Item #5 LPAWA Board: Thank you for your time and consideration of the items on this agenda. Agenda Item #'s 1 — 3 are straight- forward. Michael Dolby, City Financial Officer, will present Item #4 at the meeting. The purpose of this memo is to address Item #5: Status Update of the City of Houston 2007 — 2010 True Up and the Southeast Houston Water Purification Plant (SEWPP) Manager/Operator Contract Study. Staff's July 21, 2011 memo to the board provided background information that is also relevant to this item. A copy of the memo text is attached for your convenience. During your August 1, 2011 meeting, the board agreed to financially participate with the City of Pasadena professional services contracts for engineering, accounting and legal assistance necessary to protest the City of Houston (COH) true up invoices and to investigate alternatives for changing the operations and management structures for SEWPP. TRUE UP UPDATE: At the January 12, 2012 operator's meeting, COH staff distributed a draft settlement agreement for the 2007 — 2010 True Ups that they are claiming are owned to COH. However, this was not a formal request from which COH is anticipating a response. The preliminary draft indicates that COH will waive the 2009 invoice to LPAWA in the amount of $274,018 if LPAWA agrees to pay the FY 2010 True Up invoice of $138,898. Note that COH has not presented invoices for 2007 and 2008. Considerations for the board are: COH has not submitted the 2010 True Up within the timeframe provided in the contract, COH has not submitted a 2010 financial report that meets the generally accepted standards for an audited report as required by the contract, COH has not provided an accounting for "allocated" costs that on the surface appear to be contrary to the contract, and finally, if accepted by the co -participants, the concern that the COH method for calculating the 2010 True Up would then become the new baseline for distributing cost to the co -participants in subsequent years. Action Item: Discuss the board's leanings on this issue and discuss desired procedure iFwhen the official settlement agreement is received by staff. PLANT MANAGER AND OPERATOR CONTRACT STUDY UPDATE: Subsequent to your August 1 authorization, the co -participants contracted with Freese and Nichols Inc. (FNI) for a study of the SEWPP management and operations. Phase 1 of the study is nearly complete. There were two primary goals of the Phase 1 study: 1) Determine if there is sufficient interest from private companies to operate and/or manager the plant (there is), 2) Determine if private contractors can perform these functions more economically than COH (likely on the management side, perhaps not on the operations side). If desired by the co -participants, Phase 2 will include a rewrite of the existing contracts and procurement of a private contractor for certain management and operations activities. COH can be replaced as manager and/or operator with a two-thirds majority (by head count) of the co -participants if it can be shown that the new manager/operator can provide the same or better service at lesser cost. FNI presented their draft Phase 1 report to the co -participants January 26th. FNI's PowerPoint slides for the presentation are attached. Major points from the draft report and presentation include: • COH provides plant operations at or below a private contractor rate. SEWPP water quality, pressures, and delivery is good. The COH procurement side is very good • COH management cost is perhaps competitive, but there are possible management deficiencies with: o Annual inspection of critical equipment. o Operating the plant within contract efficiency standards (quantities chemicals uses, electric consumptions, etc.). COH not providing efficiency -related audits as required by the contract. o Repair/replacement of equipment without determining cause of failure. • COH "allocation" costs are not competitive o Some of the allocated costs include testing, engineering services, etc. that would be routinely provided by contract operators as part of their normal business activities. o The "allocation" costs are new and are the primary cause of the consternation of the co - participants. o COH uses very general assumptions to distribute their allocation costs. For example: COH executive management cost is distributed 57% water, 43% sanitary. The water portion of the expense of the executive management cost is then distributed to all of the COH water plants and prorated by volume of water produced. This is a fatal flaw in the opinion of La Porte staff. COH appears to be distributing their costs to run a retail utility to a wholesale entity. For instance costs to supervise COH personnel maintaining their retail system might be distributed to LPAWA in their current proposal. COH is not forthcoming with their accounting so it is difficult to come to any definitive conclusions. • FNI recommendations: o Co -participants should be more proactive with capital improvement planning, monitoring plant efficiency standards, performing equipment audits and consider assigning or hiring a person to do this full-time. (These are activities now assigned by contract to the managing participant (COH).) o Co -participants must decide to either work with COH to restructure existing contracts or contract some or all of the management and operations duties. The contractors who have expressed interest will not entertain a "managed competition" process where they would be competing against COH. o See the attached PowerPoint slide titled "Strategy Implementation Plan." Action Item: Receive Board comments, questions, and direction. • Page 2 {End memo) N 0 N 9LO a 3 w WJ tAp W= WV I= ONV PM in V v � u 0 z c N v� Vi N O •- /I^^ W M• T ` 5 � O O �.L. 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L- O U ra uo w 4-1 E U O rl N m 'Cr W� WV CM W( PM CA /W W c p O Q O t/) • -J •� V) • - O .-J U cU '— S — v NE to N E .� U EF- cn Ov E .� `-' ci E i Cl-U > 0 C6 Ln U 0-0 Ln .� O O m 4-J V U u qA O o w WJ WO W= WV W ENV FMI WJ Vf p W= WV U6ONH FM City I of La Po4o Public Works Memo To: La Porte Area Water Authority Board From: David Mick, Public Works Director CC: Ron Bottoms, Don Pennell, Michael Dolby Date: July 21, 2011 Re: Background Information for August 1, 2011 Agenda Items LPAWA Board: Thank you for your time and consideration of the items on the August 1 agenda. We have a lot to discuss at this next meeting. Please don't hesitate to forward any comments or questions as they come up when you review this packet. Agenda Item 3: Consider approval of an operator's agreement between the City of La Porte and the LPAWA. The current agreement expired July 1. The new agreement is attached (Appendix A). There are no changes to the agreement other than the dates and cost adjusted for the cpi-u as provided in the prior agreement(s). Agenda Item 4: Consider approval of FY 2011-2012 LPAWA Operating Budget. The City of Houston (COH) submitted a budget rate of $0.6354/1000-gallons for the upcoming fiscal year (Appendix B). This new rate is 29% higher than the budget rate provided by COH two -years ago. The proposed budget for the three member cities is provided in (Appendix C) for FYI 1-12. FYI 0-11 is also provided for comparison. While the COH budget rate increase is significant, it was largely offset this year by a decrease in both the projected O&M cost and the capital recovery fee. The City of La Porte's cost is projected to increases 3 % this next fiscal year. The cost to Morgan's Point will decrease slightly due to an expected decrease in water usage. The Shoreacreas cost is estimated to increase 22% this next year to accommodate a new concrete plant. Agenda Items 5 and 6: Discuss City of Houston 2009 and 2010 True Up Payment Request and provide the General Manager with Direction. In January of this year, COH provided a preliminary accounting of their proposed "true up" billings for the Fiscal Years 2007, 2008, 2009, and 2010. After some discussion at their February 2 meeting, the LPAWA Board directed the General Manager to work through the co -owners committee and to follow the lead of the City of Pasadena as the largest water consumer other than COH. The co -owners committee minus COH has met a 1 - number of times since the February 2 meeting. Information gathering by the committee included meetings with a local attorney, also a litigating attorney from Dallas, and an independent accountant. The co -owners group also heard presentations from two engineering firms that submitted proposals to prepare new agreements that would govern the plant operator and the plant manager moving forward. A recap of the particularly relevant items follows for the Board's consideration: • The SE Houston Plant owned by area governmental agencies. THIS IS NOT A CITY OF HOUSTON PLANT. • The City of Houston is: a) operator by contract with the ownership group (since 2005) and b) plant manager (since at least 2001). They are paid $600,000 + annual cpi-u adjustments for plant manager and reimbursed O&M costs per the operator's agreement. • The City of Houston lobbied for and received a contract as plant operator in 2005 claiming that they could run the plant more economically than the contract operator at the time. The contract with the previous operator was terminated. The rates have increased 40% since. • The operator (COH) is governed by a manager/operator's agreement. Several pages from the operators agreement is attached (Appendix D). Key sections to note: o 4.2.3 — the operator must submit their final accounting of the O&M costs within 180-days of the managing member's fiscal year (June 30 in this case). [The 2009 true -up was submitted one-year beyond 180-days (Appendix E). 2010 submitted several months beyond the 180- days (Appendix F). Also these submittals did not qualify as an audited report required by the operator's agreement.] o 4.2.2 — the managing member is to submit quarterly reports to keep the co -owners apprised of costs in relation to the budget. [Clearly the introduction of 30% "true -up" charges several months or several years after the close of the fiscal year accounting period is contrary to the spirit of this provision.] o 4.2.3, 4.2.4, 4.2.5 — these sections discuss the need for audited accounting of each year's billings to the co -owners. [An audited report must accompany the annual true up invoices. The report submitted by the City of Houston as the independent audit included this statement provided by the accounting firm: "We we not engaged to, and did not conduct an audit, the objective of which would be the expression of an opinion on the accounting records."] o 4.4 — the managing member can hold a contingency but it SHALL NOT exceed $1,000,000. COH currently holds approximately $2,000,000 set aside as contingency and continues to add a 2.5% surcharge to their invoices to the co -owners adding to the contingency balance. 0 Page 2 • The City of Houston advised the co -owners that if they do not contest the 2009 and 2010 true -up invoices, COH will not bill 2007 and 2008. • The attorneys advising the co -owners suggest that the owners are on solid ground in refusing to pay the 2009 true -up invoice and reasonably solid ground for the 2010 true -up. • Potential worst -case exposure for the co -owners (combined): a) 10% annual interest for unpaid balances, b) $300,000 - $500,000 attorney fees, c) double attorney fees if determined that the co - owners are to by COH legal fees, d) attorneys suggest no chance we lose our water rights and no chance they shut off water — a judge wouldn't allow it. • On May 12, 2011 the co -owners, after consulting with their attorneys, advised the City of Houston that the owners will look for another operator and manager for the SE Plant. • The LPAWA response to the COH 2O09 and 2010 true -up invoices are included in Appendices E and F respectively. With regard to the 2009 invoice, COH's reply to the LPAWA response is also included with Appendix E. Agenda Item 7: Consider Approval of an Interlocal Agency Agreement with the City of Pasadena for Reimbursement to the City of Pasadena for Expenses Related to a Potential Change in both the Manager and Operator of the SE Houston Water Purification Plant. The costs associated with contesting the City of Houston invoices includes legal, accounting, and engineering. The City of Pasadena will enter into professional services contracts as needed for the completion of this work. Pasadena will be billed directly and in turn invoice each co-owner for their prorated share of the expense based on the co -owner's annual water consumption. Before executing the agreement, the Board will need to know if any of the other owners are declining to share in the cost which would increase the LPAWA share. The draft agreement is included in (Appendix G). Costs that might be anticipated include $395,000 for an engineering firm to prepare a scope of services and new contracts for the plant operator and plant manager, roughly estimate $10,000 for independent audit, perhaps $300,000 - $500,000 in legal fees assuming litigation and a trial. If all owners participate, the LPAWA share of the expenses (8%) would be in the range of $56,000 to $72,000. One engineering firm indicated that they would be able to manage the plant for considerably less money than the owners now pay to the City of Houston. As much as $350,000 a year less. Accepting this to be the case, the LPAWA share of the savings would be $28,000/year, and the break-even point is less than 3-years out. The required time to break-even is accelerated if there is any savings at all on the O&M side which seems likely. {end memo) 0 Page 3