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Stormwater Segment 2012 Final Report THE METROPOLITAN ST. LOUIS SEWER DISTRICT STORMWATER SEGMENT FINANCIAL STATEMENTS JUNE 30, 2012 AND 2011 Contents Page Independent Auditors’ Report ..................................................... 1 - 2 Management’s Discussion And Analysis .................................. 3 - 10 Financial Statements Statements Of Net Position ........................................................ 11 - 12 Statements Of Revenues, Expense And Changes In Net Position ................................................................ 13 Statements Of Cash Flows ......................................................... 14 - 15 Notes To Financial Statements .................................................. 16 - 29 Independent Auditors’ Report Board of Trustees The Metropolitan St. Louis Sewer District We have audited the accompanying financial statements of The Metropolitan St. Louis Sewer District - Stormwater Segment (the Stormwater Segment) as of and for the year ended June 30, 2012. These financial statements are the responsibility of the Stormwater Segment’s management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of the Stormwater Segment, as of and for the year ended June 30, 2011, were audited by other auditors, whose report dated November 8, 2011, expressed an unqualified opinion on those statements. 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Stormwater Segment’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 opinion. As discussed in Note 1, the basic financial statements of the Stormwater Segment are intended to present the financial position, and the changes in financial position and cash flows of only that portion of The Metropolitan St. Louis Sewer District (the District) that is attributable to the Stormwater Segment. They do not purport to, and do not, present fairly the financial position of the District as of June 30, 2012, and its changes in its financial position and cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Board of Trustees The Metropolitan St. Louis Sewer District Page 2 In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the Stormwater Segment as of June 30, 2012, and the respective changes in financial position and cash flows thereof for the year then ended, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the financial statements, the Stormwater Segment adopted the provisions of GASB Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position, in 2012. Accounting principles generally accepted in the United States of America require that the Management’s Discussion and Analysis as listed in the table of contents, be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. January 8, 2013 THE METROPOLITAN ST. LOUIS SEWER DISTRICT STORMWATER SEGMENT Page 3 MANAGEMENT’S DISCUSSION AND ANALYSIS For The Years Ended June 30, 2012 And 2011 The annual report of The Metropolitan St. Louis Sewer District - Stormwater Segment (the Stormwater Segment) includes the independent auditors’ report, management’s discussion and analysis (MD&A), and the financial statements accompanied by notes essential to the user’s understanding of the financial statements. Management of The Metropolitan St. Louis Sewer District (the District) has provided this MD&A to be used in combination with the Stormwater Segment’s financial statements. This narrative is intended to provide the reader with more insight into management’s knowledge of the transactions, events, and conditions reflected in the accompanying financial statements and the fiscal policies that govern the District’s operations. 2011 was the first year the District presented Stormwater Segment financial statements. 2012 Financial Highlights  The Stormwater Segment placed $24.1 million of capital assets into service during fiscal year 2012. These capitalized assets include: Collection and pumping plant $ 21.6 million General plant and equipment $ 1.8 million Land $ 0.7 million In conjunction with this capitalization of assets, the Stormwater Segment had depreciation expense of $10.3 million. 2011 Financial Highlight  The District placed $15.1 million of capital assets into service during fiscal year 2011. These capitalized assets include: Collection and pumping plant $ 10.2 million General Plant and equipment $ 2.5 million Land $ 2.4 million In conjunction with this capitalization of assets, the District had depreciation expense of $10.4 million. THE METROPOLITAN ST. LOUIS SEWER DISTRICT STORMWATER SEGMENT Management’s Discussion And Analysis (Continued) Page 4 Required Financial Statements The financial statements presented by the management of the Stormwater Segment include the Statements of Net Position; Statements of Revenues, Expenses, and Changes in Net Position; and Statements of Cash Flows. These statements are prepared using the accrual basis of accounting. This method of accounting recognizes revenue at the time it is earned and expense when the related liability occurs. As a result of using this method of accounting, the Stormwater Segment’s performance over the time period being reported is more easily determinable. The Statements of Net Position provide a report of the Stormwater Segment’s current, restricted, and other noncurrent assets such as cash, investments, receivables, and property. Also, the Statements of Net Position provide a summary of the Stormwater Segment’s current, restricted, and noncurrent liabilities, including contracts and accounts payable, deposits and accrued expenses, and bond and notes payable. The final section of the Statements of Net Position, the net position section, contains earnings retained for use by the Stormwater Segment. Increases or decreases in the net position section may be indicative of an improving or declining financial position. This statement provides the basis for computing rate of return, evaluating the capital structure of the Stormwater Segment, and assessing the liquidity and financial flexibility of the Stormwater Segment. The Statements of Revenues, Expenses, and Changes in Net Position summarize the year’s revenue and expense. These statements indicate how successful the Stormwater Segment was at maintaining expense below the level of revenue earned. The Statements of Cash Flows accounts for the net change in cash and cash equivalents by summarizing cash receipts and cash disbursements resulting from operating activities, noncapital financing activities, capital and related financing activities, and investing activities. These statements assists the user in determining the sources of cash coming into the Stormwater Segment, the items for which cash was expended, and the beginning and ending cash balance. THE METROPOLITAN ST. LOUIS SEWER DISTRICT STORMWATER SEGMENT Management’s Discussion And Analysis (Continued) Page 5 Condensed Financial Statements and Analysis Increase 2011 (Decrease) 2012 (As Restated) 2012-2011 Assets: Current, restricted, and other assets 62,929$ 62,461$ 468$ Capital assets (net of accumulated depreciation) 478,274 474,884 3,390 Total Assets 541,203 537,345 3,858 Liabilities: Current liabilities 7,264 5,769 1,495 Net Position: Net investment in capital assets 478,273 474,884 3,389 Restricted 53,620 48,975 4,645 Unrestricted 2,046 7,717 (5,671) Total Net Position $ 533,939 $ 531,576 2,363$ Condensed Statements of Net Position (000s) 2012 Analysis Current restricted and other assets increased by $0.5 million or 0.7%. Capital assets net of accumulated depreciation increased by $3.4 million or 0.7% as the Stormwater Segment continued construction and acquisition of capital assets. Current liabilities increased by $1.5 million or 25.9%, as the result of increases in contracts and accounts payable from the prior year water back-up claims payables and stormwater litigation costs paid in 2011. THE METROPOLITAN ST. LOUIS SEWER DISTRICT STORMWATER SEGMENT Management’s Discussion And Analysis (Continued) Page 6 Increase 2011 (Decrease) 2012 (As Restated) 2012-2011 Operating Revenues: Sewer service charges $ 1,349 $ 4,807 $ (3,458) Provision for doubtful sewer service charge accounts (231) — (231) Provision for uncollected stormwater charge accounts — (2,374) 2,374 Total Operating Revenues 1,118 2,433 (1,315) Non-operating Revenues: Property taxes levied by the district 24,587 27,120 (2,533) Investment income 349 645 (296) Total Non-operating Revenues 24,936 27,765 (2,829) Total Revenues 26,054 30,198 (4,144) Operating Expenses: Collection system maintenance 7,286 10,054 (2,768) Engineering 6,122 6,121 1 Depreciation 10,282 10,451 (169) Asset management 926 902 24 Total Operating Expenses 24,616 27,528 (2,912) Non-operating Expenses: Net gain on disposal and sale of capital assets 282 112 170 Non-recurring projects and studies 4,864 2,110 2,754 Legal claims 5 4,829 (4,824) Total Non-operating Expenses 5,151 7,051 (1,900) Total Expenses 29,767 34,579 (4,812) Income Before Capital Contributions (3,713) (4,381) 668 Capital Grants And Contributions 6,076 4,756 1,320 Change in Net Position 2,363 375 1,988 Net Position - Beginning of Year, As Previously Stated 531,576 522,388 9,188 Prior Period Adjustments — 8,813 (8,813) Net Position - Beginning of Year, As Restated 531,576 531,201 375 Net Position - End of Year $ 533,939 $ 531,576 $ 2,363 The Metropolitan St. Louis Sewer District Statements of Revenues, Expenses, and Changes in Net Position (000s) THE METROPOLITAN ST. LOUIS SEWER DISTRICT STORMWATER SEGMENT Management’s Discussion And Analysis (Continued) Page 7 2012 Analysis Net position increased by $2.4 million or 0.4% over the prior year. While revenue decreased from the prior year, this was partially offset by a decrease in expenses. Total revenue decreased by $4.1 million or 13.7%. Sewer service charges decreased by $3.5 million and the provision for uncollected stormwater charges was eliminated as part of the discontinuation of the stormwater impervious fee, resulting in a decrease of operating revenue by $1.3 million. At the same time, property taxes decreased by $2.5 million from decreases in property valuation. Total expenses decreased by $4.8 million or 13.9%. Operating expenses decreased by $2.9 million. Collection system maintenance expenses decreased by $2.8 million as costs were eliminated. Non-operating expenses increased by $1.9 million. Non- recurring projects and studies increased by $2.8 million due to a rise in bank stabilization projects. Legal claims decreased by $4.8 million from the prior year stormwater user charge legal claim. Increase (Decrease) 2012 2011 2012-2011 Cash flows from operating activities $ (11,601) $ (7,706) $ (3,895) Cash flows from non-capital financing activities 24,587 27,119 (2,532) Cash flows from capital and related financing (12,814) (10,613) (2,201) Cash flows from investing activities 4,719 (8,800) 13,519 Net increase in cash and cash equivalents 4,891 — 4,891 Cash and cash equivalents at beginning of year — — — Cash and cash equivalents at end of year 4,891$ —$ 4,891$ Condensed Statements of Cash Flows (000s) THE METROPOLITAN ST. LOUIS SEWER DISTRICT STORMWATER SEGMENT Management’s Discussion And Analysis (Continued) Page 8 2012 Analysis The Stormwater Segment ended the year with $4.9 million in cash and cash equivalents or $4.9 million more than the prior year. Cash flows from operating activities decreased by $3.9 million as a result of the reduction in collection system maintenance noted above. Cash flows from non-capital financing activities decreased by $2.5 million or 9.3% due to the decrease in property taxes collected. Cash flows from capital and related financing activities decreased by $2.2 million due to a reduction in payments for capital assets. Cash flows from investing activities increased by $13.5 million or 153.6%. Capital Assets Condensed Statements of Capital Assets Net of Depreciation (000s) Increase (Decrease) 2012 2011 2012-2011 Land 5,358$ 4,678$ 680$ Construction in progress 13,056 22,454 (9,398) Collection and pumping plant 449,011 437,415 11,596 General plant and equipment 10,849 10,336 513 Total 478,274$ 474,883$ 3,391$ 2012 Analysis Total capital assets, net of depreciation, increased by $3.4 million over the prior year. Collection and pumping plant contained the majority of the increase with $11.6 million coming on-line this fiscal year. Construction in progress decreased by $9.4 million as constructed assets were moved into service. Land increased $0.7 million while general plant and equipment increased $0.5 million. THE METROPOLITAN ST. LOUIS SEWER DISTRICT STORMWATER SEGMENT Management’s Discussion And Analysis (Continued) Page 9 Decisions Impacting the Future On July 7, 2011, the District entered into a Consent Decree (CD) with the U.S. Environment Protection Agency and the Coalition for the Environment settling a lawsuit for alleged violations of the Clean Water Act. Along with providing a schedule for implementation of various system improvements and programs, the Consent Decree also addressed all allegations made by the Plaintiffs in this action. The public comment period ended October 10, 2011. The Court extended the stay of litigation until November 18, 2011, with a joint status report due on November 25, 2011. The CD did not become final until it was entered by the Federal Court on April 27, 2012. See note 6 for additional information regarding this litigation. The District implemented an impervious area based stormwater rate in March 2008. In conjunction, the District elected to discontinue the assessment of approximately $24.4 million per year in property taxes and flat fees previously used for stormwater funding. The impervious stormwater rate structure in place throughout the 2010 fiscal year generated $90.9 million in revenue for stormwater services across the St. Louis region. On July 9, 2010, the Circuit Court of St. Louis County of Missouri ruled the impervious rate unconstitutional. As a result, the District’s Board of Trustees rescinded the impervious based rate effective August 1, 2010. The elimination of the rate resulted in an estimated $48.3 million loss in revenue anticipated to address stormwater issues throughout the St. Louis region. The District reinstated the property taxes and flat fees previously discontinued in order to provide a base level of stormwater services as required by the District’s Charter. Stormwater services were drastically reduced in fiscal year 2011 and continued at reduced levels in fiscal year 2012. On May 29, 2012, the District filed its Application directly to the Missouri Supreme Court requesting a transfer. On June 1, 2012, the National Association of Clean Water Agencies was allowed to file suggestions in support of the Application for Transfer. On October 30, 2012, the Missouri Supreme Court accepted transfer of the case. The Supreme Court will accept written briefs and hear oral arguments from the parties. A final decision is expected to be rendered in 9 to 12 months. The potential reinstatement of the stormwater impervious based rate is contingent upon the District’s current appeal. THE METROPOLITAN ST. LOUIS SEWER DISTRICT STORMWATER SEGMENT Management’s Discussion And Analysis (Continued) Page 10 Requests for Information This financial report is designed to provide a general overview of the Stormwater Segment’s finances for all those with an interest in the Stormwater Segment’s finances. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed or e-mailed to: Janice M. Zimmerman, Director of Finance The Metropolitan St. Louis Sewer District 2350 Market Street St. Louis, MO 63103-2555 314-768-6200 jzimmer@stlmsd.com THE METROPOLITAN ST. LOUIS SEWER DISTRICT STORMWATER SEGMENT See the accompanying notes to the financial statements. Page 11 STATEMENTS OF NET POSITION 2011 2012 (As Restated) Current Assets Pooled cash and investments                          3,312,920$ 7,392,514$ Sewer service charges receivable, less allowance of $21,500 in 2012 and $66,520 in 2011 209,226 372,862 Unbilled sewer service charges receivable, less allowance of $2,218 in 2012 and $2,203 in 2011 110,943 — Accrued income on investments                        357 — Total current assets                            3,633,446 7,765,376        Noncurrent Assets Restricted Assets Cash                                                 4,890,889 — Pooled cash and investments                          54,291,857 54,485,349 Accrued income on investments                        113,660 210,504                                                             59,296,406 54,695,853        Capital Assets Depreciable: Collection and pumping plant                         593,438,779 572,722,328 General plant and equipment                          16,122,060 14,788,596                                                             609,560,839 587,510,924 Less:  Accumulated depreciation                      149,701,689 139,759,957 Net depreciable assets       459,859,150 447,750,967        Nondepreciable: Land                                                 5,357,795 4,678,520 Construction in progress                             13,056,543 22,454,162 Net capital assets                                478,273,488 474,883,649        Total Noncurrent Assets                         537,569,894 529,579,502        Total Assets                               541,203,340 537,344,878 June 30, Assets THE METROPOLITAN ST. LOUIS SEWER DISTRICT STORMWATER SEGMENT See the accompanying notes to the financial statements. Page 12 STATEMENTS OF NET POSITION (Continued) Liabilities 2011 2012 (As Restated)        Current Liabilities Contracts and accounts payable                       1,587,412$ 47,844$ Retainage payable                                    — 350                                                             1,587,412 48,194 Current Liabilities-Payable From Restricted Assets Contracts and accounts payable                       5,393,354 5,578,299 Retainage                                            283,053 142,323                                                             5,676,407 5,720,622 Total Liabilities                     7,263,819 5,768,816 Net Position Net investment in capital assets 478,273,488 474,883,649 Restricted for: Subdistrict construction and improvement           53,619,999 48,975,231 Unrestricted                                         2,046,034 7,717,182 Total Net Position                     533,939,521$ 531,576,062$   Net Position June 30, THE METROPOLITAN ST. LOUIS SEWER DISTRICT STORMWATER SEGMENT See the accompanying notes to the financial statements. Page 13 STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET POSITION For The Years Ended June 30, 2011 2012 (As Restated) Operating Revenues Sewer service charges                                   1,349,371$ 4,806,628$ Provision for doubtful sewer service charge accounts (231,737) — Provision for uncollected stormwater charge accounts — (2,373,731) Total Operating Revenues                              1,117,634 2,432,897        Operating Expenses Collection system maintenance                           7,286,484 10,054,129 Engineering                                             6,120,800 6,120,800 Depreciation                                            10,281,956 10,450,974 Asset management 926,315 901,760 Total Operating Expenses                             24,615,555 27,527,663          Operating Income                                          (23,497,921) (25,094,766)        Non-Operating Revenues Property taxes levied by the District                   24,586,886 27,119,617 Investment income                                       349,185 645,105 Total Non-Operating Revenues                          24,936,071 27,764,722        Non-Operating Expenses Net loss on disposal and sale of capital assets         281,224 111,957 Non-recurring projects and studies                       4,863,891 2,110,397 Legal claims 5,000 4,828,828 Total Non-Operating Expenses                          5,150,115 7,051,182        Income (Loss) Before Capital Contributions                       (3,711,965) (4,381,226)        Capital Contributions Utility plant contributed                               6,075,424 4,515,984 Grant revenue                                           — 240,013 Total Capital Contributions                          6,075,424 4,755,997        Change In Net Position                                     2,363,459 374,771 Net Position-Beginning Of Year, As Previously Stated 531,576,062 522,388,214 Prior Period Adjustments — 8,813,077 Net Position-Beginning Of Year, As Restated         531,576,062 531,201,291        Net Position-End Of Year                                    533,939,521$ 531,576,062$ THE METROPOLITAN ST. LOUIS SEWER DISTRICT STORMWATER SEGMENT See the accompanying notes to the financial statements. Page 14 STATEMENTS OF CASH FLOWS Ended June 30, 2012 2011 Cash Flows From Operating Activities Received from customers 1,170,326$ 9,458,508$ Paid to suppliers for goods and services (12,771,139) (17,165,507) Net Cash Used In Operating Activities (11,600,813) (7,706,999) Cash Flows Provided By Non-Capital Financing Activities Taxes levied and collected 24,586,886 27,119,618 Cash Flows From Capital And Related Financing Activities Proceeds from capital grants — 240,013 Payments for capital assets (12,813,944) (10,852,787) Net Cash Used In Capital And Related Financing Activities (12,813,944) (10,612,774) Cash Flows From Investing Activities Purchase of investments (74,601,949) (143,991,571) Proceeds from sale and maturity of investments 78,875,036 134,575,474 Investment income 445,673 616,252 Net Cash Provided By (Used In) Investing Activities 4,718,760 (8,799,845) Net Increase In Cash And Cash Equivalents 4,890,889 — Cash And Cash Equivalents At Beginning Of Year — — Cash And Cash Equivalents At End Of Year 4,890,889$ —$ Noncash Capital And Investing Activities: Capital asset additions included in accounts payable 2,479,098$ 17,378,981$ Portion of utility plant contributed represented by: Utility plant contributed by other governments and developers 6,075,424 4,515,984 Fair value investment adjustment (201,098) 139,124 For The Years THE METROPOLITAN ST. LOUIS SEWER DISTRICT STORMWATER SEGMENT See the accompanying notes to the financial statements. Page 15 STATEMENT OF CASH FLOWS (Continued) Ended June 30, 2012 2011 Reconciliation Of Operating Income To Net Cash Flows Used In Operating Activities Operating loss (23,497,921)$ (25,094,766)$ Adjustments to reconcile operating loss to net cash used in operating activities: Depreciation 10,281,956 10,450,974 Decrease in billed and unbilled sewer service charges receivable 52,693 7,025,611 (Increase) decrease in contracts and accounts payable 1,562,459 (88,818) Net Cash Used In Operating Activities (11,600,813)$ (7,706,999)$ For The Years THE METROPOLITAN ST. LOUIS SEWER DISTRICT STORMWATER SEGMENT Page 16 NOTES TO FINANCIAL STATEMENTS June 30, 2012 And 2011 1. Organization And Summary Of Significant Accounting Policies Organization The Metropolitan St. Louis Sewer District (the District) was authorized by the voters, established and chartered under the provisions of the Constitution of Missouri, as a municipal corporation and a political subdivision of the State of Missouri. Upon creation in 1954, the District assumed responsibilities to provide for the construction, operation, and maintenance of the sewer facilities within its defined boundaries. The District’s service area now comprises all of the City of St. Louis and most of St. Louis County. Subdistricts within the District’s total service area represent separate geographic areas within which specific taxes are levied for the retirement of indebtedness issued to finance construction of sanitary or stormwater facilities within the area or to operate, maintain, or construct improvements within the subdistrict. The District also maintains all of the publicly owned stormwater sewers within its original boundaries and is continuing to accept maintenance of the stormwater sewers in the remainder of its service area. The District is segmented into two distinct accounting segments: Wastewater and Stormwater. Each are clearly defined by assets, liabilities, and net position, as well as designated revenues and expenses. For the purposes of the financial statements accompanied by this set of notes, The Metropolitan St. Louis Sewer District - Stormwater Segment’s (the Stormwater Segment) operations are illustrated individually. The purpose of these segmented statements is to give detailed additional information in order to facilitate future financings for operating and capital activities. Pursuant to provisions of its charter and subject to limitations imposed by the Constitution of Missouri, all powers of the District are vested in a six-member Board of Trustees (the Board), three of whom are appointed by the Mayor of the City of St. Louis and three of whom are appointed by the County Executive of St. Louis County. Reporting Entity The Stormwater Segment includes all stormwater and combined sewer funds that are established under the authority of the District’s Charter. The Stormwater Segment has adopted the accounting policies and procedures of the District as a whole, and has followed generally accepted accounting principles in preparation of these statements. THE METROPOLITAN ST. LOUIS SEWER DISTRICT STORMWATER SEGMENT Notes To Financial Statements (Continued) Page 17 Measurement Focus, Basis Of Accounting, And Financial Statement Presentation Throughout the year, the Stormwater Segment maintains its detailed accounting records on the modified accrual basis of accounting. In order to account for the transactions related to certain subdistricts and restricted resources, separate fund accounting records are maintained. For financial reporting purposes, the Stormwater Segment reports its operations as a single enterprise fund. Accordingly, the accounting records are converted to the accrual basis of accounting and all interfund transactions are eliminated. Under the accrual basis of accounting, revenues are recognized when earned and expenses are recognized when the related liability is incurred. The Stormwater Segment’s measurement focus is on the flow of economic resources. Unbilled sewer service charge revenues are accrued by the Stormwater Segment based on estimated billings for services provided through the end of the current fiscal year. Revenues and expenses are divided into operating and non-operating items. Operating revenues generally result from providing services in connection with the Stormwater Segment’s principal ongoing operations. The principal operating revenues of the Stormwater Segment are user fees stormwater treatment services. Operating expenses include the costs associated with the maintenance of stormwater assets, engineering expenses, and depreciation on capital assets. All revenues and expenses not meeting these definitions are reported as non- operating revenues and expenses. The Stormwater Segment follows GASB Statement No. 33, Accounting and Financial Reporting for Non-Exchange Transactions (GASB 33), which establishes accounting and financial reporting standards for non-exchange transactions involving financial or capital resources. GASB 33 groups non-exchange transactions into the following four classes, based upon their principal characteristics: derived tax revenues, imposed non-exchange revenues, government mandated non-exchange transactions, and voluntary non- exchange transactions. The Stormwater Segment recognizes assets from imposed non-exchange revenue transactions in the period when an enforceable legal claim to the assets arises or when the resources are received, whichever occurs first. Revenues are recognized in the period when the resources are required to be used for the first period that use is permitted. The Stormwater Segment recognizes revenues from property taxes, net of estimated refunds and estimated uncollectible amounts, in the period for which the taxes are levied. THE METROPOLITAN ST. LOUIS SEWER DISTRICT STORMWATER SEGMENT Notes To Financial Statements (Continued) Page 18 Intergovernmental revenues, representing grants and assistance received from other governmental units, are generally recognized as revenues in the period when all eligibility requirements, as defined by GASB 33, have been met. Any resources received before eligibility requirements are met are reported as unearned revenues. When both restricted and unrestricted resources are available for use, it is the Stormwater Segment’s policy to use restricted resources first, and then unrestricted resources as they are needed. The Stormwater Segment follows all Governmental Accounting Standards Board (GASB) pronouncements as well as all Financial Accounting Standards Board (FASB) Statements and Interpretations, Accounting Principle Board Opinions, and Accounting Research Bulletins issued on or before November 30, 1989, unless those pronouncements conflict with or contradict GASB pronouncements. In addition, the Stormwater Segment also applies all FASB Statements and Interpretations issued after November 30, 1989, except for those that conflict with or contradict GASB pronouncements. The Stormwater Segment early adopted GASB Statement No. 63, Financial Reporting of Deferred Outlaws of Resources, Deferred Inflows of Resources, and Net Position during fiscal year 2012. Cash And Cash Equivalents And Investments For purposes of the Statements of Cash Flows, the Stormwater Segment’s “cash and cash equivalents” consist of all highly liquid investments (including restricted assets) with maturity dates of 89 days or less from the date acquired by the Stormwater Segment. “Investments” consist of those investments with maturity dates 90 days or greater at the time of purchase by the Stormwater Segment. Investments are stated at fair value based upon quoted market prices. Investments are reported at fair value, which is the amount at which an investment could be exchanged in a current transaction between willing parties. Fair value is determined based on quoted market prices. Adjustments necessary to record investments at fair value are recorded in the statements of revenues, expense, and changes in net position as increases or decreases in investment income. Accounts Receivable Accounts receivable is composed primarily of charges to customers for stormwater services. Receivables are reported at their gross values net of an allowance for uncollectible amounts. THE METROPOLITAN ST. LOUIS SEWER DISTRICT STORMWATER SEGMENT Notes To Financial Statements (Continued) Page 19 Restricted Assets Mandatory segregations of assets are presented as restricted assets. Such segregations are required by bond agreements and other external parties. Current liabilities payable from these restricted assets are so classified. Capital Assets Capital assets are valued at historical cost or estimated historical cost based in part upon a study performed in 1981. Donated capital assets are recorded at fair value at the time of the contribution to the Stormwater Segment. Depreciation is calculated on a straight-line basis over the following estimated useful lives: Collection and pumping plant 10 to 100 years General plant and equipment 3 to 50 years When designing user charge rates, the Stormwater Segment includes funding for replacement cost of assets, which may differ from depreciation expense recorded for financial reporting purposes. Normal maintenance and repairs that do not add to the value of the asset or materially extend asset lives are not capitalized. Betterments are capitalized and depreciated over the remaining useful lives of the related assets, as applicable. Previously, the Stormwater Segment defined capital assets as assets with an initial, individual cost of more than $1,000 and an estimated useful life in excess of three years. In April of 2010 the Stormwater Segment updated this policy and as a result, an asset must now have an individual cost of more than $5,000 to be considered a capital asset. This change in policy does not have a retroactive effect on capital assets put in place before April 2010. Net Position The Stormwater Segment’s net position is calculated as follows: the net investment in capital assets component of net position consists of capital assets, including restricted capital assets, net of accumulated depreciation. The restricted component of net position consists of constraints placed on net position through external constraints imposed by creditors, grantors, contributors, laws, or regulations of other governments or constraints imposed by law through constitutional provisions or enabling legislation. Property taxes levied by the various subdistricts and other revenues received for construction in those sub-districts have also been restricted for that use. Sewer extension and connection fees, grants, and other revenues received for construction within certain sub-districts have been restricted for that use. THE METROPOLITAN ST. LOUIS SEWER DISTRICT STORMWATER SEGMENT Notes To Financial Statements (Continued) Page 20 The unrestricted net position component of net position consists of net position that does not meet the definition of restricted or net investment in capital assets. Capital Contributions Capital contributions to the Stormwater Segment represent government grants and other aid used to fund capital projects. In accordance with GASB 33, capital contributions are recognized as revenue when the expenditure is made and the amount becomes subject to claim for reimbursement. Use Of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the financial statements. Actual results could differ from those estimates. Reclassification Certain amounts in prior year financial statements have been reclassified for comparative purposes to conform with the presentation in the current year financial statements. 2. Deposits And Investments Deposits At June 30, 2012 and 2011 the reported amount of the Stormwater Segment’s deposits was $11,220,598 and $11,075,093, respectively. Custodial credit risk for deposits is the risk that, in the event of bank failure, the Stormwater Segment’s deposits may not be returned to the Stormwater Segment. The Stormwater Segment’s investment policy complies with the provisions of state laws and requires collateralization on repurchase agreements, time certificates of deposit and deposits with banking institutions with a market value of 103 percent. THE METROPOLITAN ST. LOUIS SEWER DISTRICT STORMWATER SEGMENT Notes To Financial Statements (Continued) Page 21 Deposits in each bank are insured by the Federal Deposit Insurance Corporation (FDIC) in the amount of $250,000 for interest bearing accounts and unlimited coverage for noninterest bearing accounts. The FDIC created the Temporary Liquidity Guarantee Program. One element of that program provides for an unlimited guarantee by the FDIC of funds held in an insured depository institution in non-interest-bearing transaction deposit accounts through December 31, 2012. This guarantee is over and above the $250,000 coverage on all interest bearing deposit accounts. Investments With the approval of the District’s Board of Trustees, the Secretary-Treasurer is authorized to invest excess cash in any investment authorized by the District’s charter. The District’s investment policy conforms to the investment policy guidelines for the State of Missouri. The District’s investment policy authorizes the Stormwater Segment to invest in the following instruments: U.S. Treasury obligations, certificates of deposit, obligations of any agency or instrumentality of the U.S., repurchase agreements, bankers’ acceptances, and commercial paper rated in the three highest classifications, for terms specified in the policy. At June 30, 2012 and 2011, all of the Stormwater Segment’s investments were in compliance with the District’s investment policy and charter. A summary of deposits and investments as of June 30, 2012 and 2011 is as follows: Investment Type Cost Fair Value Cost Fair Value Deposits 11,220,598$ 11,220,598$ 11,075,093$ 11,075,093$ Money Market Mutual Funds 4,851,168 4,851,168 — — Certificates of deposit 215,111 215,111 204,417 204,417 U.S. Treasury and agency obligations 30,042,412 30,316,002 40,324,342 40,782,337 Commercial paper 15,883,177 15,892,787 9,080,697 9,082,722 Bankers’ acceptance notes — — 732,827 733,294 Total 62,212,466$ 62,495,666$ 61,417,376$ 61,877,863$ 2012 2011 THE METROPOLITAN ST. LOUIS SEWER DISTRICT STORMWATER SEGMENT Notes To Financial Statements (Continued) Page 22 Reconciliation to the financial statements: 2012 2011 Cash Restricted 4,890,889$ —$ Pooled cash and investments Unrestricted 3,312,920 7,392,514 Restricted 54,291,857 54,485,349 62,495,666$ 61,877,863$ Interest Rate Risk As of June 30, 2012 and 2011, the Stormwater Segment had the following investments and maturities: Weighted Average Weighted Average Investment Type Fair Value Maturity (Years)Fair Value Maturity (Years) Certificates of deposit 215,111$ 1.11 204,417$ 0.60 U.S. Treasury obligations 6,939,191 0.80 4,801,648 0.64 U.S. agency obligations 23,376,811 1.92 35,980,689 2.19 Commercial paper 15,892,787 0.08 9,082,722 0.11 Bankers’ acceptance notes — 0.00 733,294 0.10 Total 46,423,900$ 1.12 50,802,770$ 1.61 2012 2011 In accordance with the District’s investment policy, the Stormwater Segment will minimize the risk that the fair value of debt securities in the portfolio will fall due to increases in general interest rates by: 1. Structuring the investment portfolio so that securities mature to meet cash requirements for ongoing operations, thereby avoiding the need to sell securities on the open market prior to maturity. 2. Investing operating funds primarily in short-term securities. 3. State law limits the maximum stated maturities to five years on any investment from the date of purchase. THE METROPOLITAN ST. LOUIS SEWER DISTRICT STORMWATER SEGMENT Notes To Financial Statements (Continued) Page 23 Custodial/Credit Risk The Stormwater Segment will minimize credit risk for investments, the risk of loss due to failure of the security issuer or backer, by: 1. Prequalifying the financial institutions, broker/dealers, intermediaries, and advisors with which the Stormwater Segment will do business. 2. Diversifying the portfolio so that potential losses on individual securities will be minimized. In accordance with its investment policy, the Stormwater Segment limits its investments in these investment types to the top rating issued by Nationally Recognized Statistical Rating Organizations. As of June 30, 2012 and 2011, the Stormwater Segment’s investments in commercial paper were rated A1 by Standard & Poor’s and P-1 by Moody’s Investors Service. The Stormwater Segment’s investments in repurchase agreements carry the explicit guarantee of the U.S. Government. The Stormwater Segment’s investments in U.S. agency obligations that do not carry the explicit guarantee of the U.S. Government all carry a rating assigned by Standard & Poor’s of “AA+.” Concentration Of Credit Risk The District’s policy places no limit on the amount the Stormwater Segment may invest in any one issuer with respect to U.S. Treasury obligations and collateralized time and demand deposits. U.S. agency obligations and government-sponsored enterprises are limited to 60% of the portfolio; and collateralized repurchase agreements are limited to 50% of the portfolio. U.S. agency obligations are limited to 30% of the portfolio, and commercial paper and bankers’ acceptances are limited to 25% each. The following table lists investments in issuers that represent 5% or more of total investments at June 30, 2012 and 2011: Issuer 2012 2011 Federal National Mortgage Association 25.8 21.5 Federal Home Loan Bank 9.7 20.4 Federal Home Loan Mortgage Corporation 7.7 12.8 Percent Of Total Investments THE METROPOLITAN ST. LOUIS SEWER DISTRICT STORMWATER SEGMENT Notes To Financial Statements (Continued) Page 24 3. Capital Assets The following is a summary of capital assets changes for the fiscal years ended June 30, 2012 and 2011: Balance Balance June 30, 2011 Additions Reclass Deletions June 30, 2012 Capital assets not being depreciated: Land 4,678,520$ 679,275$ —$ —$ 5,357,795$ Construction in progress 22,454,162 6,374,257 — 15,771,876 13,056,543 Total capital assets not being depreciated 27,132,682 7,053,532 — 15,771,876 18,414,338 Capital assets being depreciated: Collection and pumping plant 572,722,328 21,618,250 — 901,799 593,438,779 General plant and equipment 14,788,596 1,819,663 — 486,199 16,122,060 Total capital assets being depreciated 587,510,924 23,437,913 — 1,387,998 609,560,839 Less: Accumulated depreciation: Collection and pumping plant (135,307,060) (9,241,358) — (120,091) (144,428,327) General plant and equipment (4,452,897) (1,040,598) — (220,133) (5,273,362) Total accumulated depreciation (139,759,957) (10,281,956) — (340,224) (149,701,689) Total capital assets being depreciated, net 447,750,967 13,155,957 — 1,047,774 459,859,150 Total Capital Assets 474,883,649$ 20,209,489$ —$ 16,819,650$ 478,273,488$ Balance Balance June 30, 2010 Additions Reclass Deletions June 30, 2011 Capital assets not being depreciated: Land 2,840,999$ 2,381,936$ —$ 544,415$ 4,678,520$ Construction in progress 17,118,063 15,528,657 — 10,192,558 22,454,162 Total capital assets not being depreciated 19,959,062 17,910,593 — 10,736,973 27,132,682 Capital assets being depreciated: Collection and pumping plant 566,658,376 10,210,509 — 4,146,557 572,722,328 General plant and equipment 10,734,854 2,497,005 — (1,556,737) 14,788,596 Total capital assets being depreciated 577,393,230 12,707,514 — 2,589,820 587,510,924 Less: Accumulated depreciation: Collection and pumping plant (127,702,248) (8,775,908) — (1,171,096) (135,307,060) General plant and equipment (3,868,672) (1,675,066) — (1,090,841) (4,452,897) Total accumulated depreciation (131,570,920) (10,450,974) — (2,261,937) (139,759,957) Total capital assets being depreciated, net 445,822,310 2,256,540 — 327,883 447,750,967 Total Capital Assets 465,781,372$ 20,167,133$ —$ 11,064,856$ 474,883,649$ THE METROPOLITAN ST. LOUIS SEWER DISTRICT STORMWATER SEGMENT Notes To Financial Statements (Continued) Page 25 4. Property Tax On or before October 1 of each year, the District levies ad valorem taxes on all taxable tangible property, real and personal, within its boundaries based on assessed valuations established by the City of St. Louis and St. Louis County Assessors. Tax rates vary by sub-district and purpose. Taxes levied are used for operations and maintenance and construction. Taxes are recorded as non- operating revenues. Property tax bills are mailed in October. They become delinquent and represent a lien on the related property if not paid by December 31. All property taxes are billed and collected by the City of St. Louis and St. Louis County Collectors’ of Revenue and are distributed to the Stormwater Segment monthly. 5. Prior Period Adjustments In 2011, the construction in progress account was segmented based on the information that was available at the time. In 2012, more accurate information became available regarding the segmentation of the projects in the construction in progress account. The result of this is a $7,286,877 reallocation of net capital assets for fiscal year 2011 from the Wastewater Segment to the Stormwater Segment. Unrestricted pooled cash has also been restated due to a variation in segmenting procedures. The result of this is a $1,526,200 reallocation of total current assets from the Wastewater Segment to the Stormwater Segment. These restatements resulted in an $8,813,077 increase in 2011 Net Position - Beginning Of Year. THE METROPOLITAN ST. LOUIS SEWER DISTRICT STORMWATER SEGMENT Notes To Financial Statements (Continued) Page 26 6. Commitments And Contingencies United States And State Of Missouri V. Metropolitan St. Louis Sewer District; In The US District Court For The Eastern District Of Missouri; Case No. 07-1120 A lawsuit was filed in June 2007 by the Department of Justice on behalf of the United States Environmental Protection Agency (“EPA”) for various alleged violations of the Clean Water Act. The suit is based on violations of the Clean Water Act as a result of overflows in the combined and sanitary sewer systems causing pollutants to reach waters of the United States. There are other counts involving violations of permit conditions. The District has been the subject of several investigatory actions by EPA since June 2007. Negotiations have been ongoing with the EPA and the Department of Natural Resources (“DNR”) regarding the sewer collection system, both the combined system and the sanitary system, for several years. The Missouri Coalition for the Environment (“MCE”) gave Notice of Intent to Sue the District under the citizen suit provisions of the Clean Water Act. EPA and the DNR then brought the suit in June 2007, and MCE moved to intervene. Intervention was granted in August 2007. In October 2007, the Court granted the District’s motion to dismiss all of the plaintiffs’ claims for civil penalties attributable to any and all of the District’s alleged violations of the Clean Water Act that occurred before June 11, 2002. Also, the suit alleges that the District does not have an approved Long-Term Control Program (“LTCP”) for the combined system. The District has been working on these issues for several decades and has asked voters to approve bonds and rate increases to rehabilitate and maintain the collection system. As required by its Charter, the District has increased rates which will continue to fund the improvements sought by the EPA and the DNR. In September 2008, the Judge put in place a Stay while the parties mediated the issues. Pursuant to MSD Ordinance No. 13277, the Stormwater Segment executed the Consent Decree (“CD”) on July 15, 2011. The CD was lodged with the court on August 4, 2011. An extended public comment period ended October 10, 2011. THE METROPOLITAN ST. LOUIS SEWER DISTRICT STORMWATER SEGMENT Notes To Financial Statements (Continued) Page 27 On January 23, 2011, the Plaintiff’s, excluding the State of Missouri, filed a Motion to Enter the Proposed Consent Decree. That same day the State of Missouri filed a Motion to Dismiss their Claims without Prejudice. On January 17, 2012, the District filed a Motion to Support the State of Missouri’s Motion only if conditions were imposed. On February 9, 2012, the State filed a Motion opposing the conditions proposed by the District. On April 27, 2012, the Court entered the decree, thus concluding the litigation of this lawsuit. On that same day the Court entered a Memorandum and Order regarding the State of Missouri’s Motion to Dismiss its Claims. The Court realigned the State of Missouri as a defendant and reaffirmed the August 3, 2009, decision by the Eighth Circuit Court of Appeals that the State had waived its sovereign immunity. Although this litigation matter has concluded, the District is working diligently to implement the Consent Decree. The Consent Decree requires the District to spend approximately $4.7 billion, in 2011 dollars, over a 23-year implementation period. Throughout this period improvements will be made to the District’s separate sewer system, combined sewer system and wastewater treatment plants. The District’s first report was submitted on May 24, 2012. On June 1, 2011, the State of Missouri approved Chapter 11, Chapter 12, and Appendix Q of the District’s Combined Sewer Overflow Long-Term Control Plan Updated Report, dated February 2011. William Zweig et al. v. Metropolitan Sewer District This case was filed on July 18, 2008 and, as amended, contends that the Metropolitan Sewer District Ordinances No. 12560 and No. 12789, which enacted increases in the District’s stormwater user charge based on the amount of impervious area on the customer’s property, are unconstitutional. The lawsuit claims the ordinances violate the so-called Hancock Amendment, Mo. Const. art. X, § 22(a), because the stormwater user charge is in reality a tax that requires voter approval. The District’s Board of Trustees passed the ordinances in December 2007 and December 2008, respectively, without submitting them to the voters. The District contends the stormwater user charge is not a tax and, thus, not subject to voter approval. The original plaintiff is a Stormwater Segment customer who seeks to represent a class of all the Stormwater Segment customers. In July 2009, two more plaintiff class representatives were added to the lawsuit. The lawsuit seeks (1) a declaration that the stormwater user charge is unconstitutional, (2) a refund of all stormwater user charges collected, and (3) payment of the plaintiffs’ costs, including attorneys’ fees. THE METROPOLITAN ST. LOUIS SEWER DISTRICT STORMWATER SEGMENT Notes To Financial Statements (Continued) Page 28 Trial was held April 13, 2010 through April 16, 2010. On July 9, 2010, the court handed down Findings of Fact, Conclusions of Law, Judgment and Decree in the first phase of the bifurcated trial. The Court declared the Stormwater User Charge is a tax under the Hancock Amendment. The second phase of the trial was heard on October 6, 2010, to determine the amount, if any, to be refunded. The amount of a full refund would be approximately $87 million; a partial refund for the additional amount collected under the user charge would amount to approximately $35 million. The judge ruled on November 29, 2010, that no refund would be issued by the Stormwater Segment. The third phase, to determine the amount of Plaintiffs’ counsel’s attorneys’ fees, to be paid by the District, was heard on January 18, 2011. On February 4, 2011, the judge awarded Plaintiff’s counsel $4.8 million in attorney’s fees and expenses. The record on appeal was filed July 20, 2011, with the Court of Appeals, Eastern District of Missouri. The attorney’s fees and expenses were paid into escrow on September 9, 2011, and will remain in escrow pending finality of the litigation. The Court of Appeals heard oral argument on March 6, 2012. On March 27, 2012, the Appellate Court Ruling upheld the Trial Court’s decision that the stormwater fee is a tax and that no refund was due, and reversed the application of a multiplier on attorney’s fees. On April 11, 2012, the District filed a Motion for Rehearing by the Appellate Court and an Application for Transfer to the Missouri Supreme Court. The Appellate Court denied both. On May 29, 2012, the District filed its Application directly to the Missouri Supreme Court requesting a transfer. On June 1, 2012, the National Association of Clean Water Agencies was allowed to file suggestions in support of our Application for Transfer. On October 30, 2012, the Missouri Supreme Court accepted transfer of the case. The Supreme Court will accept written briefs and hear oral arguments from the parties. A final decision is expected to be rendered in 9 to 12 months. THE METROPOLITAN ST. LOUIS SEWER DISTRICT STORMWATER SEGMENT Notes To Financial Statements (Continued) Page 29 Flooding Cases The Stormwater Segment is the defendant in five (5) different flooding cases related to the September 14, 2008, rain event precipitating from remnants of Hurricane Ike. These cases consist of three (3) property damage cases and two (2) wrongful death cases. The defense costs associated with these cases are expected to be covered by the District’s insurance carrier. Of the five (5) cases, one (1) involves flooding of Maline Creek and the others involve flooding of the River Des Peres. These cases are in various stages of discovery. The estimated possible loss varies for each case and is dependent upon the value of the property. The property value losses have not been determined at this time and no written demands have been received at this time for the wrongful death cases. The first trial setting is scheduled for October 2012. Contingencies The Stormwater Segment has entered into construction and other contracts amounting to $8,492,788 and $13,148,848 at June 30, 2012 and 2011, respectively. The District is a defendant in various other matters of litigation. Of these matters, management and the District’s legal counsel do not anticipate any material effect on the June 30, 2012 and 2011 financial statements. 7. Restricted Net Position The Stormwater Segment Statements of Net Position reports $53,619,999 and $48,975,231 of net assets restricted due to enabling legislation at June 30, 2012 and 2011, respectively.