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HomeMy Public PortalAboutExhibit MSD 21 - 2010 CAFRCOMPREHENSIVE ANNUAL FINANCIAL REPORT For Fiscal Year Ending June 30, 2010 Metropolitan St. Louis Sewer District Exhibit MSD 21 THE METROPOLITAN ST. LOUIS SEWER DISTRICT St. Louis, Missouri COMPREHENSIVE ANNUAL FINANCIAL REPORT For The Year Ended June 30, 2010 Report prepared and submitted by the Department of Finance Janice M. Zimmerman Director of Finance THE METROPOLITAN ST. LOUIS SEWER DISTRICT Table of Contents Page Introductory Section: Letter of Transmittal…………………………………………………………………………………………… 1 Organization Chart……………………………………………………………………………………………..10 Certificate of Achievement for Excellence in Financial Reporting……………………………………………11 Financial Section: Independent Auditors’ Report…………………………………………………………………………………. 13 Management’s Discussion and Analysis………………………………………………………………………. 15 Basic Financial Statements Statements of Net Assets…………………………………………………………………………………. 28 Statements of Revenues, Expenses and Changes in Net Assets………………………………………….. 30 Statements of Cash Flows………………………………………………………………………………… 31 Notes to Financial Statements……………………………………………………………………………. 33 Statistical Section: Statistical Section Overview……..…………………………………………………………………………… 65 Net Assets by Component………………………………………………………………………..……………. 66 Changes in Net Assets……..………………………………………………………………………………….. 67 Operating Revenues by Source………………………………..………………………………………………. 68 Operating Expenses …………………………..……………………………………………………………..... 69 Nonoperating Revenues and Expenses………………………………………………………………………... 70 User Charge Rates…………….……………………………………………………………………………….. 71 Sewer User Charges (Composite--Annual)……………………………………………………………………..72 Number of Customers by Type……………………………..……………………………………………….… 73 Ten Largest Customers……………………………………..…………………………………………………. 74 Ratios of Outstanding Debt by Type…..……………………………………………………………………… 75 Computation of Overlapping Debt…………………………………………………………………………….. 76 Pledged Revenue Coverage……..…………………………………………………………………………….. 77 Demographic and Economic Statistics…..……………………………………………………………………. 78 Principal Employers (St. Louis Metropolitan Area)….……………………………………………………….. 79 Employment Level…………………………………………………………………………………………..… 80 Average Flow ……………..…………………………………………………………………………………... 81 Operating and Capital Indicators……………………………………………………………………………….82 Introductory Section 0Citan tan Our Vision'14(11111.111 Quality Service Always Our Mission To responsibly provide sewer service and 114411111 stormwater management to protect the public's health and safety Our Values Quality Cif) Customer satisfaction Trust, respect and integrity Continuous improvement and innovation Teamwork Each Employee A safe, productive, and rewarding work environment Diversity Our water environment Community partnerships ?4r DiSt Metropolitan St. Louis Sewer District 2350 Market Street St. Louis MO 63103-2555 (314) 768-6200 November 9, 2010 The Board of Trustees The Metropolitan St. Louis Sewer District The Comprehensive Annual Financial Report (CAFR) of The Metropolitan St. Louis Sewer District (MSD or the District) for the fiscal year ended June 30, 2010, is submitted herewith. The District’s Finance Department prepared this report. The District is responsible for the accuracy of the data and the completeness and fairness of the presentation of the financial statements and other information presented herein. We believe the presentation is accurate in all material respects and includes all disclosures necessary to enable the reader to gain a reasonable understanding of the District's financial activities. In the CAFR, the District's financial activities are measured on a single enterprise fund basis where all funds of the District and its subdistricts are consolidated. The District's CAFR includes an Introductory Section, a Financial Section, and a Statistical Section. The Introductory Section includes this transmittal letter, lists of the District's Board of Trustees, members of the Civil Service Commission, management staff, and an organization chart as of June 30, 2010. The Financial Section includes the independent auditors' report, management’s discussion and analysis, and the District's basic financial statements. The Statistical Section includes financial, economic, and demographic information, generally presented on a multi-year basis. The CAFR includes all funds of the District. The operations of these funds, as reflected in the financial statements, are under the control of the District's governing body. The District has determined there were no other agencies or entities that met the established criteria for inclusion in the reporting entity. ORGANIZATION MSD was created in 1954 to provide a metropolitan-wide sewer system to serve the City of St. Louis and most of the more heavily populated areas of St. Louis County. Before MSD's creation, the City of St. Louis, various municipalities, and private sewer companies provided sewer service that primarily included only collecting and transporting sewage from small geographic areas to nearby rivers and streams with little or no treatment. Most of the municipalities or private sewer companies serving the area did not have the jurisdictional authority or financial resources needed to eliminate health hazards from untreated sewage. When the District began operations, it took over the publicly owned wastewater and stormwater drainage facilities within its jurisdiction and began the construction of an extensive system of collector and interceptor sewers and treatment facilities. In 1977, voters approved the District's annexation of a 270 square mile area of the lower Missouri River and lower Meramec River watersheds. The District purchased the Fee Fee Trunk Sewer Company and the Missouri Bottoms Sewer Company in 1978. MSD has since acquired other investor-owned or municipally operated systems. The District's service area now encompasses 525 square miles including all 62 square miles of the City of St. Louis and 462 square miles of St. Louis County. The current population served by the District is approximately 1.3 million. MSD is organized pursuant to Article VI, Section 30 of the Missouri State Constitution that empowers the people of St. Louis County and the City of St. Louis "to establish a metropolitan district for functional administration of services common to the area". MSD is the only district established pursuant to that section of the Missouri State Constitution. The Proposed Plan of MSD (the Plan), approved by voters in 1954 and amended in 2000, established the District. The Plan describes the District as "a body corporate, a municipal corporation, and a political subdivision of the state." As a political subdivision of the state, MSD is comparable to a county or city, such as St. Louis County or the City of St. Louis. The Plan established the governing body of the District as a six-member Board of Trustees (the Board) with three members appointed by the Mayor of St. Louis and three members appointed by the St. Louis County Executive. No more than two trustees from each area can be of the same political affiliation. Unlike a corporation's board of directors that is responsible solely to the stockholders who choose to invest in the corporation, MSD's Board members are trustees of public property and public funds. They are responsible to all citizens within the District. According to the Plan, the Board enacts District ordinances, determines policies, and appoints the Executive Director, the Secretary-Treasurer, and the Internal Auditor. The Executive Director appoints all other District officials. Among its duties, the Board makes all appropriations, approves contracts for improvements, and engages an accounting firm to perform the annual independent audit of the District. 2 The Plan prescribes other duties of the Board and grants numerous broad powers, subject to federal and state laws, to the District and the Board of Trustees. Among other things, the Plan outlines the following requirements or provisions: • Requires that MSD operate with a balanced budget; • Details how MSD can tax property and requires an annual public hearing on all taxes levied by the District; • Details how MSD can establish user charges; • Requires MSD to establish civil service rules and regulations governed by a Civil Service Commission; • Provides how the original boundaries of the District may be extended to include any area in St. Louis County; and • Requires MSD to approve all plans and designs for proposed construction, alteration, or reconstruction of sewer or drainage facilities within the District's boundaries. The District is also governed by the Missouri State Constitution and various federal and state laws that among other requirements mandate the following: • MSD must hold permits for all sanitary discharges. These permits require a minimum of secondary treatment. • MSD must provide wastewater treatment in an area-wide manner to qualify for federal and state grants. • MSD must operate, maintain, and replace facilities to provide proper wastewater treatment or be subject to penalties and fines. • MSD must set user charge rates in compliance with the Federal Clean Water Act. These rates must be approved by the Missouri Department of Natural Resources to receive future construction grants and to avoid the possibility of refunding past grants. During fiscal 2010, the primary source of funding for the operation and maintenance of MSD's sewerage system was a user charge that is typically $354.72 per year or $29.56 per month for a single-family residence. The District's charges for residential wastewater service are tied to the amount of measured water usage during a winter quarter. For residential properties without water meters, the charges are based on housing attributes (such as the number of rooms, baths, and toilets) that correlate to water usage. That methodology is the same billing methodology used by the City of St. Louis Water Division for their non- metered properties. Multi-family residential and nonresidential rates are proportionate to the single-family charge and are based on water consumption and the strength of the discharge. Beginning in March 2008, the District implemented a new stormwater user charge of 12¢ per 100 square feet of impervious area. A second increase was implemented effective January 1, 2009. This increase resulted in a user charge of 14¢ per 100 square feet resulting in an average residential stormwater bill of $3.50 per month or $42 per year. The impervious area based stormwater service charge replaces the 24¢ flat fee and property tax assessment previously charged for stormwater services. In July 2010 a judge ruled impervious based stormwater billing unconstitutional. With that the District plans to suspend that method of billing and re-implement the assessment of property taxes in fiscal year 2011, along with flat fee billing of 24¢ for residential and commercial properties and 18¢ cents per unit for multi-unit properties. 3 These revenues will fund subdistrict debt, construction and a portion of the District’s stormwater operating expenses. MSD also receives some federal, state, and local grants to help defray the cost of constructing sewage treatment and drainage facilities and improvements. The District also charges fees for plan review, permits, construction inspection of new system development, and special discharges. The District charges a uniform connection fee in all service areas. The District, itself, may issue general obligation bonds and revenue bonds to finance the cost of improvements and extensions to the sewer system. The District also may issue, on behalf of each of its subdistricts, general obligation bonds, revenue bonds, or special assessment bonds. The outstanding bond indebtedness of the District cannot exceed five percent of the assessed valuation of the area benefited. OPERATIONS The Executive Director and his staff administer the operation and maintenance of the District's collection and treatment systems. The District's sanitary, stormwater, and combined sewer collection system includes more than 9,900 miles of pipe and channel and grows larger every year due to new development. The District's responsibilities for stormwater drainage range from cleaning and maintaining street inlets to operating and maintaining the floodwall pump stations along the Mississippi River. MSD currently operates 7 wastewater treatment facilities. These facilities treated an average flow of 395.5 million gallons per day (MGD) in fiscal 2010 compared to 394.7 MGD in fiscal 2009. The design capacity and average flow, by watershed, in MGD was as follows in fiscal 2010: MAJOR WATERSHED LEVEL OF TREATMENT NUMBER OF FACILITIES DESIGN CAPACITY AVERAGE FLOW FISCAL 2010 Mississippi River Secondary Two 317 298.5 Missouri River Secondary Two 68 61.7 Meramec River Secondary Three 42.75 35.3 Total Seven 427.75 395.5 In addition to construction initiated by the District to protect the public's health and property from raw sewage and flooding, the District also provides various engineering-related design review and inspection services for the construction of sanitary and stormwater sewers by individuals, businesses, and municipalities in the community. ECONOMIC CONDITIONS IN THE ST. LOUIS METROPOLITAN AREA As a rule, the District's major revenue sources do not fluctuate with the local and national economy as much as local governments that depend on sales or income taxes for their major sources of revenue. The employment level in the City of St. Louis and St. Louis County was 613,266 in June 2010. The combined unemployment rate for the City of St. Louis and St. Louis County was 10.1 percent in June 2010 and that is higher than the national unemployment rate of 9.6 percent for the same time period. 4 MSD has its own internal barometers for measuring economic development within the District. These are listed below for fiscal 2010 and 2009: 2010 2009 Sewer Plan Reviews: Number of Plans Approved 458 565 Number of Miles of Sewers 22 28 Sewer Construction Permits: Number of Permits Issued 2,406 2,434 Number of Miles of Sewers 28 31 Customer Connections: Number of Connection Permits Issued 763 848 Connection Fee Revenue (in millions) $1.2 $1.7 Value of Sewers Dedicated to MSD by Developers (in millions) $18.5 $26.3 Over the years, the St. Louis economy has undergone a transformation from reliance on traditional manufacturing industries to those industries based on advanced technology and services. The St. Louis area is a center for health care, biotechnology, banking, finance, transportation, tourism, and education and has a strong and diverse manufacturing economy. The area has an abundance of energy, water, and sewerage facilities and can sustain future economic growth. FINANCIAL INFORMATION Proprietary Operations. The current financial condition of MSD remains stable. The District achieved net income from operations of $17.8 million compared to a net operating income of $37.5 million the prior year. The decrease is explained by a boost in operational spending as well as an increase in outstanding sewer service receivables. The management discussion and analysis section that appears later in this report provides a more in depth analysis of the District’s financial position and the magnitude of the capital improvement and replacement program (CIRP). Budgetary Controls. The District's Plan requires MSD to maintain budgetary controls and to adopt a balanced budget. The objective of these budgetary controls is to ensure compliance with legal provisions embodied in the appropriation process approved by the Board. The annual appropriated budget includes activities of the District's operating and Debt Service Funds. The Board adopts ordinances to appropriate funds for capital improvement expenditures at the time of the contract award and acceptance of any grant offers. Budgetary control is by division and major expenditure category within the General Fund, each Debt Service Fund, and each capital improvement contract. The District maintains an encumbrance accounting system as one technique of accomplishing budgetary control. Certain encumbrances carry over from one year to the next. 5 Interim and year-end financial reports are prepared in accordance with U.S. generally accepted accounting principles for Enterprise Funds. Adjustments are made to the accounting records, where necessary, to reflect the full accrual method of accounting. Under the full accrual method of accounting, revenues are recognized when earned and expenses are recorded as liabilities when incurred. Encumbrances and unearned capital and operating grants are eliminated under the full accrual method of accounting. These amounts are disclosed as commitments in the footnotes to the financial statements. Cash Management. In compliance with its Plan, the District invests temporarily idle funds in cash equivalents and investments such as collateralized certificates of deposit, collateralized repurchase agreements, and United States Treasury bills and notes. The District utilizes competitive bidding for investment purchases and monitors market conditions daily. MSD receives interest on certificates of deposit monthly and reinvests it to improve yields. Risk Management. In-house staff and consultants jointly conduct risk management activities. MSD has a risk management program and retains certain risks related to officers’ and directors’ liability. The District maintains replacement cost property and casualty insurance on certain facilities and equipment that have an estimated replacement cost of $1.25 billion. The District assumes the risk of loss (including payment of water backup claims to its customers) on the majority of its underground pumping facilities and collection system. MSD is one of two sewer districts in the country known to provide water backup claim coverage to its customers. The underground pumping facility and collection system assets have an estimated replacement cost of $9.9 billion. To minimize exposure to loss, the District inspects its facilities regularly, performs preventative maintenance, and maintains excess liability coverage for sewage backup damage to property. MSD maintains automobile and general liability insurance on specific facilities. The District is self-insured for workers' compensation and funds those costs through annual appropriations from the District's general fund. The District maintains reinsurance for workers' compensation liabilities in excess of specified limits up to the statutory limit. Risk control activities include using a third-party claims administrator, maintaining a computerized claim tracking system, and reevaluating medical care provided to injured employees. The District also has programs to promote safety in the workplace. The District provides group medical coverage for its employees and offers dependent medical coverage on a contributory basis through a self-insured plan. At January 31, 2010, the District maintained stop loss coverage for specific claims exceeding $125,000 per year and for total annual claims greater than 125 percent of the annual claims estimate. As of February 1, 2010, the District increased this limit to $150,000. The District provides its employees with contributory group dental insurance coverage and non-contributory life insurance and contributory optional life insurance coverage. The District also contributes $100 annually to a vision care program for employees. The District reevaluates insurance coverage and providers annually. For most construction projects, insurance is obtained by the individual contractor and included in the contract price. 6 Internal Controls. District management is responsible for designing, establishing, and maintaining an internal control system that protects District assets from loss, theft, or misuse and ensures that adequate accounting data is compiled to prepare financial statements in conformity with U.S. generally accepted accounting principles. Internal control systems are designed to provide reasonable, but not absolute, assurance that these objectives are met. The concept of reasonable assurance recognizes that the cost of a control should not exceed the benefits likely to be derived and that the evaluation of costs and benefits requires estimates and judgments by management. The District's internal control system is subject to periodic evaluation by management, the internal audit department, and the District's independent accountants. For additional information regarding the districts financials, please refer to the Management’s Discussion and Analysis section. MAJOR INITIATIVES AFFECTING THE FINANCIAL RESOURCES OF THE DISTRICT The District’s Board of Trustees implemented an impervious based stormwater rate on March 1, 2008 replacing its prior funding mechanism of property taxes and user fees. The impervious based stormwater rate was again increased on January 1, 2009. On July 9, 2010, a circuit court of St. Louis County found this impervious rate to be unconstitutional under Missouri law. In response to this ruling, the Board suspended the impervious based stormwater rate and reinstituted the District’s stormwater property taxes and user fees previously rolled back on a voluntary basis as part of the stormwater rate plan. The court decision resulted in the loss of $45 million in stormwater revenue expected in fiscal year 2011 to support stormwater services and improvements to related infrastructure. As of the date of this audit, there was the potential the District would be required to refund all stormwater revenue collected and spent since the inception of the impervious based rate. Since then, a court decision regarding a potential refund was received and indicated the District will not have to refund any monies collected under the impervious based rate. The court decision to stop the impervious based stormwater funding negates the culmination of a 20-year effort to adequately fund much needed stormwater services for District ratepayers. The impact of this court decision will result in a dramatic reduction in stormwater services across the District with many customers receiving little or no stormwater services until an alternative funding source is identified. The District continues its use of debt to fund its multi-billion dollar, multi-decade wastewater capital improvement program. In February 2004, St. Louis voters approved a $500 million authorization allowing the District to issue wastewater revenue bonds. Beginning in fiscal year 2004, the District issued $336 million in bonds. An additional $124 million was issued during fiscal year 2005 through 2007 with the remaining $40 million issued in fiscal year 2009. On August 5, 2008, St. Louis voters authorized, by a margin of 3 to 1, the issuance of an additional $275 million in wastewater revenue bonds. $30 million of these bonds were issued in fiscal year 2009 and $116 million in 2010. Issuance of the remaining $129 million bond authorization is planned through fiscal year 2012. Funding of the long term wastewater capital improvement program continues to be expected through a combination of additional bonds and wastewater rate increases. 7 As part of this funding effort, the District submitted a proposal to its Rate Commission on March 1, 2007. The Rate Commission delivered its final Recommendation Report to the Board on April 1, 2008 in accordance with Charter. Based on the Rate Commission recommendation, the Board approved a 5-year wastewater rate plan and a 7-year impervious based stormwater rate plan. The initial wastewater rate increase took effect January 1, 2008. Since that time subsequent wastewater rate increases have been implemented each July 1st for 2009 and 2010. Per the Board’s approved plan, the last wastewater increase is scheduled to take effect July 1, 2011. The District expects to submit a wastewater rate increase proposal to the Rate Commission in February 2011. This proposal is designed to provide funding to continue the District’s comprehensive wastewater capital improvement program. The Board also implemented a 7-year stormwater rate plan with increases effective March 1, 2008 and January 1, 2009. The stormwater rate increase originally scheduled for January 1, 2010 was deferred due to adequate funding to the support the District’s fiscal year 2010 stormwater program. The remaining 4 years of anticipated increases have been suspended due to the court decision previously discussed. In addition to these major funding initiatives, the District is in the process of implementing a comprehensive plan to increase the collection of outstanding sewer charge delinquencies. The implementation of this plan is expected to be completed by April 2011. The District continues its comprehensive sewer cleaning program initiated in June 2008. This initial effort addressed 17 million feet of sewer pipe and inspection of 80,000 manholes. The sewer cleaning program is on target to clean 5 million feet of pipe and inspect 15,000 manholes each year. This effort continues to reduce basement backups and overland funding throughout the St. Louis metropolitan region. During 2010, the District continued in litigation with the U.S. Environmental Protection Agency and the State of Missouri concerning alleged Clean Water Act violations. The District is in the final phase of the implementation of a comprehensive multi-year, multi-million dollar strategic technology plan. This plan is designed to dramatically improve connectivity and interaction between District Departments, increase overall District efficiency and enhance customer service for all District ratepayers. To date, this implementation is under budget with scheduled completion expected by the summer of 2012. 8 OTHER INFORMATION Audit Requirements. The District's Plan requires an annual audit by independent certified public accountants. The District's CAFR includes a report on the District's financial statements by the accounting firm of Schmersahl Treloar & Co. Besides meeting the requirements set forth in the Plan, the annual audit is also designed to meet the requirements of the 1996 amendments to the Federal Single Audit Act and the U.S. Office of Management and Budget (OMB) Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. A Single Audit Report was issued as of June 30, 2010. The financial statements of the Metropolitan St. Louis Sewer District's Employees' Pension Plan and the District’s Deferred Compensation Plan are also audited annually. Those audited financial statements are also available to interested parties upon request. Awards. The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to MSD for its CAFR for the fiscal year ended June 30, 2009. The Certificate of Achievement is a prestigious national award that recognizes conformance with the highest standards for preparation of state and local government financial reports. To be awarded the Certificate of Achievement, a government unit must publish an easily readable and efficiently organized CAFR, the contents of which conform to program standards. The CAFR must satisfy both U.S generally accepted accounting principles and applicable legal requirements. A Certificate of Achievement is valid for one year only. The District has received a Certificate of Achievement for the last twenty-two consecutive years. We believe our current CAFR continues to conform to the Certificate of Achievement program requirements, and we are submitting it to the GFOA again this year. The District also received the GFOA's Distinguished Budget Presentation award for its fiscal 2009 annual budget. The District has received this award for twenty-three consecutive years. The District's fiscal budget document for 2009 was judged proficient in several categories including policy documentation, financial planning, and organization. Acknowledgments. I wish to express my tha nks and appreciation to the members of the Finance Department who diligently and faithfully contributed to the preparation of this report. Janice M. Zimmerman Director of Finance 9 ORGANIZATION (As of June 30, 2010) BOARD OF TRUSTEES John H. Goffstein, Chair; Bob Berry, Vice Chair; James H. Buford; David Visintainer; Gerald Feldhaus; Eddie Ross, Jr. OFFICE OF INTERNAL AUDITOR Gene F. Rhodes Audit Administrator RATE COMMISSION Leonard P. Toenjes, Chair OFFICE OF SECRETARY TREASURER Karl J. Tyminski Secretary/Treasurer CIVIL SERVICE COMMISSION Joseph F. Krispin, Chair; Valerie F. Patton, Vice-Chair; William C. Duffe EXECUTIVE DIRECTOR Jeffrey L. Theerman FINANCE Janice M. Zimmerman Director OFFICE OF GENERAL COUNSEL Randy E. Hayman General Counsel OPERATIONS Jonathon C. Sprague Director ENGINEERING Brian L. Hoelscher Director OFFICE OF HUMAN RESOURCES Vicki L. Taylor Edwards Director INFORMATION SYSTEMS Barbara E. Mohn Director 10 11 12 Financial Section METROPOLITAN ST. LOUIS SEWER ❑ISTRICT SERVICE AREAS �r. COLAkNATER GREET( Independent Auditors’ Report To the Board of Trustees of the Metropolitan St. Louis Sewer District We have audited the accompanying financial statements of the Metropolitan St. Louis Sewer District (the “District”) as of and for the year ended June 30, 2010, as listed in the table of contents. These financial statements are the responsibility of the District’s management. Our responsibility is to express an opinion 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 and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free 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 the 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. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the District as of June 30, 2010, and the respective changes in financial position and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued our report dated November 9, 2010, on our consideration of the District’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. 13 (314) 966-2727 · fax (314) 966-6464 · 10805 Sunset Office Dr., Suite 400 · St. Louis, MO 63127 · e-mail: stcpa@stcpa.com The management’s discussion and analysis on pages 3 through 12 is not a required part of the basic financial statements but is supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. November 9, 2010 St. Louis, Missouri 14 THE METROPOLITAN ST. LOUIS SEWER DISTRICT Management’s Discussion and Analysis for the years ended June 30, 2010 and 2009 15 The annual report of The Metropolitan St. Louis Sewer District (the “District”) 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 District has provided this MD&A to be used in combination with the District’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. 2010 Financial Highlights ¾ The District placed $56.4 million of capital assets into service during fiscal year 2010. This continued high level of expansion and updating of the District’s plant and system is related to the Capital Improvement and Replacement Program (CIRP) required by regulations. o Collection and pumping plant $ 43.7 million o General plant and equipment $ 7.1 million o Treatment and disposal plant and equipment $ 4.4 million o Land $ 1.1 million ¾ Interest expense increased $4.1 million compared to the prior year. This can be attributed to additional bond issues in fiscal years 2009 and 2010. ¾ Investment income decreased $6.6 million as a result of a reduction in short term interest rates as well as a decrease in investment balances. ¾ The continued high level of expansion and updating of the District’s plant and system is the reason for a $6.6 million increase in depreciation expense. ¾ The District has determined that a material restatement of $25.7 million is required for prior year financials due to management decisions regarding a number of construction in progress projects. Since prior to 2004 and through 2009, $25.7 million in expenses related to a number of construction in progress projects were capitalized. In 2010, management determined that the scope of these projects was planning in nature and they were noncapital in nature. All expenses prior to 2010 would be recognized in the years they were incurred. This results in a restatement of the financials for the following years with the following amounts: 2009 $ 7.2 million 2008 $ 7.7 million 2007 $ 1.2 million 2006 $ 2.2 million 2005 $ 4.5 million 2004 and prior $ 2.9 million THE METROPOLITAN ST. LOUIS SEWER DISTRICT Management’s Discussion and Analysis for the years ended June 30, 2010 and 2009 16 2009 Financial Highlights (As Restated) ¾ The District placed $98.4 million of capital assets into service during fiscal year 2009. This continued high level of expansion and updating of the District’s plant and system is related to the Capital improvement and Replacement Program (CIRP) required by regulations. o Collection and pumping plant $54.4 million o Treatment and disposal plant and equipment $35.2 million o General plant and equipment $ 8.8 million ¾ In addition to these capital asset additions, the District has also shown an increase of $136.0 million in construction in progress due to the large capital improvement and replacement program currently underway. ¾ Cash and cash equivalents decreased by $36.9 million. This can be partially attributed to the significant capital expenditures reflected by the increase in net capital assets. Investments also increased by $20.4 million displaying a shift of assets from cash and cash equivalents to investments. ¾ Both total revenue and expense remained in line with prior year amounts causing similar results of $34.7 million in 2009 compared to $34.0 million in 2008 for income before capital contributions. ¾ The District had a stormwater rate increase in January 2009 from 12¢ to 14¢ per hundred square feet of impervious area. This is expected to generate a total of $36.8 million to date for funding of stormwater projects. Required Financial Statements The financial statements presented by the management of the District include the Statements of Net Assets; Statements of Revenues, Expenses, and Changes in Net Assets; 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 District’s performance over the time period being reported is more easily determinable. The Statements of Net Assets provide a report of the District’s current, restricted, and other noncurrent assets such as cash, investments, receivables, and property. Also, the Statements of Net Assets provide a summary of the District’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 Assets, the net assets section, contains earnings retained for use by the District. Increases or decreases in the net assets 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 District, and assessing the liquidity and financial flexibility of the District. The Statements of Revenues, Expenses, and Changes in Net Assets summarize all of the years’ revenue and expense. This statement indicates how successful the District was at maintaining expense below the level of revenue earned. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Management’s Discussion and Analysis for the years ended June 30, 2010 and 2009 17 The Statements of Cash Flows account 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. This statement assists the user in determining the sources of cash coming into the District, the items for which cash was expended, and the beginning and ending cash balance. Financial Analysis The District’s financial position improved in the current year, as evidenced by the increase in net assets of $20.0 million. The District continues capacity expansion and updating of the District’s plant and system. Plans for maintaining the District’s ability to meet future spending needs are discussed in greater detail in the section of the MD&A entitled “Decisions Impacting the Future.” THE METROPOLITAN ST. LOUIS SEWER DISTRICT Management’s Discussion and Analysis for the years ended June 30, 2010 and 2009 18 Condensed Financial Statements and Analysis The Metropolitan St. Louis Sewer District Condensed Statements of Net Assets (000s) Increase Increase 2009 (Decrease) 2008 (Decrease) 2010 As Restated 2010-2009 As Restated 2009-2008 Assets: Current, restricted, and other assets $ 469,003 $ 469,124 $ (121) $ 531,030 $ (61,906) Capital assets (net of accumulated depreciation) 2,411,877 2,292,596 119,281 2,107,907 184,689 Total Assets 2,880,880 2,761,720 119,160 2,638,937 122,783 Liabilities: Current liabilities 75,512 82,961 (7,449) 77,031 5,930 Noncurrent liabilities 597,718 491,142 106,576 435,944 55,198 Total Liabilities 673,230 574,103 99,127 512,975 61,128 Net Assets: Invested in capital assets, net of related debt 1,868,974 1,798,914 70,060 1,704,322 94,592 Restricted 80,782 94,769 (13,987) 97,422 (2,653) Unrestricted 257,894 293,934 (36,040) 324,218 (30,284) Total Net Assets $2,207,650 $2,187,617 $ 20,033 $2,125,962 $ 61,655 2010 Analysis Total net assets increased $20.0 million, or 0.9%, above prior year. This change is principally the result of utility plant contributions of $18.5 million, and results in an increase in total assets of $119.2 million countered by an increase in liabilities of $99.1 million. Current, restricted, and other assets decreased by $0.1 million, while capital assets, net of accumulated depreciation, increased by $119.3 million. The increase in capital assets can be attributed to an increase in construction in progress of $120.1 million, collection and pumping plant of $22.4 million, general plant and equipment of $3.4 million, and land of $1.1 million. This was offset by a decrease in treatment and disposal plant and equipment of $27.6 million. The slight decrease in current, restricted, and other assets is attributable to the offsetting increase in current assets and the decrease in restricted assets. The change in total liabilities breaks down to a decrease in current liabilities of $7.4 million and an increase in noncurrent liabilities of $106.6 million. The increase in noncurrent liabilities is due to a substantial increase in bonds and notes payable. The District issued new long-term debt in the amount of $122.1 million during the 2010 fiscal year. Current liabilities are down due in part to a decrease in contracts and accounts payable of $10.4 million. These were partially offset by an increase in the balance of deposits and accrued expenses and the current portion of bonds and notes payable of $4.6 million and $0.8 million, respectively. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Management’s Discussion and Analysis for the years ended June 30, 2010 and 2009 19 2009 Analysis Total net assets increased $61.7 million, or 2.9%, over prior year. This change is due to an increase in total assets of $122.8 million countered by an increase in liabilities of $61.1 million. Current, restricted, and other assets decreased by $61.9 million, while capital assets increased by $184.7 million. The increase in capital assets can be attributed to an increase in construction in progress of $136.0 million, collection and pumping plant of $22.9 million, treatment and disposal plant and equipment of $20.3 million, and general plant and equipment of $5.5 million. The decrease in current, restricted, and other assets is mostly attributable to the net decrease in cash equivalents of $36.9 million as a result of increased spending in the capital improvement and replacement program. The change in total liabilities breaks down to an increase in current liabilities of $5.9 million and an increase in noncurrent liabilities of $55.2 million. The increase in noncurrent liabilities is due to a substantial increase in bonds and notes payable. The District issued new long-term debt in the amount of $74.1 million during the 2009 fiscal year. Current liabilities are up due to increases in contracts and accounts payable and current portion of bonds and notes payable of $2.7 million and $4.9 million, respectively. These were partially offset by a decrease in the balance of deposits and accrued expenses and retainage payable of $1.4 million and $0.3 million, respectively. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Management’s Discussion and Analysis for the years ended June 30, 2010 and 2009 20 The Metropolitan St. Louis Sewer District Statements of Revenues, Expenses, and Changes in Net Assets (000s) Increase Increase 2009 (Decrease)2008 (Decrease) 2010 As Restated 2010-2009 As Restated 2009-2008 Operating Revenues: Sewer service charges $ 251,683 $ 254,378 $ (2,695) $ 221,780 $ 32,598 Provision for doubtful sewer service charge accounts (10,188) (9,678) (510) (5,162) (4,516) Licenses, permits, and other fees 3,085 3,475 (390) 4,346 (871) Other 2,007 1,550 457 961 589 Total operating revenues 246,587 249,725 (3,138) 221,925 27,800 Nonoperating Revenues: Property taxes levied by the District 1,401 2,129 (728) 27,512 (25,383) Investment income 6,554 13,116 (6,562) 17,477 (4,361) Rent and other income 265 215 50 529 (314) Total nonoperating revenues 8,220 15,460 (7,240) 45,518 (30,058) Total revenues 254,807 265,185 (10,378) 267,443 (2,258) Operating Expenses: Pumping and treatment 47,266 44,746 2,520 44,531 215 Collection system maintenance 36,082 32,918 3,164 30,807 2,111 Engineering 15,773 13,736 2,037 9,973 3,763 General and administrative 39,237 37,922 1,315 39,827 (1,905) Water backup claims 3,951 6,817 (2,866) 7,439 (622) Depreciation 54,012 47,370 6,642 54,934 (7.564) Other 32,458 28,669 3,789 37,634 (8,965) Total operating expenses 228,779 212,178 16,601 225,145 (12,967) Nonoperating Expenses: Net loss on disposal and sale of capital assets 2,719 2,162 557 686 1,476 Nonrecurring projects and studies 9,872 7,104 2,768 3,259 3,845 Interest expense 13,189 9,079 4,110 4,314 4,765 Total nonoperating expenses 25,780 18,345 7,435 8,259 10,086 Total expenses 254,559 230,523 24,036 233,404 (2,881) Income Before Capital Contributions 248 34,662 (34,414) 34,039 623 Capital Contributions 19,785 26,993 (7,208) 45,610 (18,617) Change in Net Assets 20,033 61,655 (41,622) 79,649 (17,994) Net Assets-Beginning of Year 2,187,617 2,125,962 61,655 2,064,313 79,649 Net Assets-End of Year $ 2,207,650 $ 2,187,617 $ 20,033 $ 2,125,962 $ 61,655 THE METROPOLITAN ST. LOUIS SEWER DISTRICT Management’s Discussion and Analysis for the years ended June 30, 2010 and 2009 21 2010 Analysis Net assets increased $20.0 million or $41.6 million less than in the prior year. While revenue saw a significant decrease, expense grew at a faster pace. Total revenue decreased by $10.4 million largely due in part to a reduction in investment income and sewer service charges of $6.6 million and $2.7 million, respectively. Property tax revenue continued to decrease by $0.7 million as a result of reduction of the tax rate to 0.0% in 2007. The provision for doubtful sewer service charge accounts increased $0.5 million while licenses, permits, and other fees were decreased by $0.4 million. Other operating revenues amounted to a $0.5 million increase when compared to prior year. Total expense ended the year up $24.0 million compared to 2009 due to increases in both operating and nonoperating expense. Total operating expense for 2010 increased $16.6 million. Increases in pumping and treatment, collection system maintenance, engineering, and general and administrative expenses totaled $9.0 million. Depreciation expense increased by $6.6 million, mostly due to additional assets that were placed in service. Other operating expense increased by $3.8 million. This was offset by water backup claims decreasing by $2.9 million. Nonoperating expenses experienced increases in the costs of net loss on disposal and sale of capital assets, nonrecurring projects as well as interest expense totaling $7.4 million. 2009 Analysis Net assets increased $61.7 million or $18.0 million less than in the prior year. While total revenues were slightly lower compared prior year, this was offset by the reduction of net expenses. Total revenue decreased by $2.3 million due to offsetting changes in operating and nonoperating revenue. There was an increase in sewer service charges of $32.6 million following a sanitary rate increase and a stormwater rate change in 2008. Other revenues contributed an additional $0.6 million. All of this was largely offset by the final property tax being levied by the District in December 2007. This loss in revenue has been partially offset by a newly implemented stormwater rate charge. As a result, property tax revenue decreased by $25.4 million. The provision for doubtful sewer service charge accounts increased $4.5 million while investment income decreased by $4.4 million. Rounding out the offset were decreases in licenses, permits, and other fees as well as rent and other income of $0.9 million and $0.3 million, respectively. Total expense ended the year down $2.9 million compared to 2008 due to offsetting balances in operating and nonoperating expense. Total operating expense for 2009 was reduced $13.0 million due overwhelmingly to a decrease in other operating expense. Other operating expense decreased by $9.0 million, mostly due to extensive watershed facility planning that took place in 2008 and was not continued in 2009. Depreciation expense decreased by $7.5 million, general and administrative cost was reduced by $1.9 million, and water backup claims decreased by $0.6 million. These were offset by a combined increase of $6.1 million for pumping and treatment, collection system maintenance, and engineering. Nonoperating expense experienced increases in the costs of net loss on sale of utility plant, nonrecurring projects as well as interest expense totaling $10.1 million. There were also increases in engineering costs and collection system maintenance expenses of $3.8 million and $2.1 million, respectively. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Management’s Discussion and Analysis for the years ended June 30, 2010 and 2009 22 The Metropolitan St. Louis Sewer District Condensed Statements of Cash Flows (000s) Increase Increase 2009 (Decrease) 2008 (Decrease) 2010 As Restated 2010-2009 As Restated 2009-2008 Cash flows from operating activities $ 67,916 $ 84,222 $ (16,306) $ 44,857 $ 39,365 Cash flows from noncapital financing activities 1,401 2,129 (728) 27,512 (25,383) Cash flows from capital and related financing activities (81,406) (163,367) 81,961 (164,494) 1,127 Cash flows from investing activities 17,399 40,070 (22,671) 120,352 (80,282) Net increase (decrease) in cash and cash equivalents 5,310 (36,946) 42,256 28,227 (65,173) Cash and cash equivalents at beginning of year 6,457 43,403 (36,946) 15,176 28,227 Cash and Cash Equivalents at End of Year $ 11,767 $ 6,457 $5,310 $ 43,403 $(36,946) 2010 Analysis The District ended the year with $11.8 million in cash and cash equivalents or $5.3 million higher than the prior year. This was due primarily to cash flow from operating activities contributing a positive $67.9 million, which is a $16.3 million decrease from 2009. Cash flow from investing activities contributed a positive $17.4 million or a $22.7 million decrease from the previous year. This change is due in part to the District purchasing $287.4 million in investments compared to $297.6 million in proceeds from sale and maturity of investments. Cash flow from noncapital financing activities contributed $1.4 million or a decrease from the prior year due to the District suspending the collection of property taxes in 2007. All of this was offset by cash outflow from capital and related financing activities of $81.4 million or $82.0 million less than fiscal year 2009. 2009 Analysis The District ended the year with $6.5 million in cash and cash equivalents or $36.9 million lower than the prior year. Cash outflow from capital and related financing activities was $163.4 million or $1.1 million less than in the previous year. Cash flow from operating activities contributed $84.2 million, which is a $39.4 million increase from 2008. Cash flow from investing activities contributed $40.1 million or an $80.3 million decrease from the previous year. This change is due in part to the District purchasing $329.4 million in investments compared to $359.1 million in proceeds from sale and maturity of investments. Cash flow from noncapital financing activities contributed $2.1 million which was $25.4 million less in 2009 than 2008 due to the District suspending the collection of various taxes. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Management’s Discussion and Analysis for the years ended June 30, 2010 and 2009 23 Capital Assets The Metropolitan St. Louis Sewer District Capital Assets Net of Depreciation (000s) Increase Increase 2009 (Decrease) 2008 (Decrease) 2010 As Restated 2010-2009 As Restated 2009-2008 Land $ 28,129 $ 27,070 $ 1,059 $ 27,070 $ -- Construction in progress 570,602 450,540 120,062 314,605 135,935 Treatment and disposal plant and equipment 394,826 422,413 (27,587) 402,088 20,325 Collection and pumping plant 1,393,152 1,370,782 22,370 1,347,861 22,921 General plant and equipment 25,168 21,790 3,377 16,318 5,472 Total $ 2,411,877 $ 2,292,595 $ 119,281 $ 2,107,942 $ 184,653 2010 Analysis Total capital assets, net of depreciation, increased $119.3 million over prior year. Construction in progress increased $120.1 million due primarily to the large capital improvement and replacement program currently underway. Increases in collection and pumping of $22.4 million and general plant and equipment of $3.4 million are consistent with the increases seen in 2009. Land also contributed an additional $1.1 million to the increase. All of this was offset by treatment and disposal decreasing $27.6 million. This is primarily due to $16.3 million in deletions and reclassifications, only partially offset by additions of $4.4 million. 2010 also recorded a net increase in accumulated depreciation of $15.6 million as 2010 realized a full year of depreciation on $35.3 million in additions placed into service in 2009. 2009 Analysis Total capital assets, net of depreciation, increased $184.7 million over prior year. Construction in progress increased $135.9 million due to the large capital improvement and replacement program currently underway. Collection and pumping along with treatment and disposal increased $22.9 million and $20.3 million, respectively. These increases can also be attributed to the high level of expansion and updating of the District’s plant and system. General plant and equipment saw $5.5 million in net additions while land remained unchanged in 2009. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Management’s Discussion and Analysis for the years ended June 30, 2010 and 2009 24 Long-Term Debt The Metropolitan St. Louis Sewer District Long-Term Debt (000s) Increase Increase (Decrease) (Decrease) 2010 2009 2010-2009 2008 2009-2008 Revenue Bonds: Series 2004A $ 167,370 $ 168,965 $ (1,595) $ 170,485 $ (1,520) Series 2004B 130,110 136,795 (6,685) 143,563 (6,768) Series 2005A 5,665 5,955 (290) 6,240 (285) Series 2006A 38,420 40,480 (2,060) 42,515 (2,035) Series 2006B 12,935 13,575 (640) 14,205 (630) Series 2006C 60,000 60,000 -- 60,000 -- Series 2008A 30,000 30,000 -- -- 30,000 SRF 2008AB 37,375 39,128 (1,753) -- 39,128 SRF 2009A 23,000 -- 23,000 -- -- SRF 2010A 7,981 -- 7,981 -- -- Series 2010B 85,000 -- 85,000 -- -- West Watson and Nanell -- 100 (100) 130 (30) Ozark and Tablerock -- 68 (68) 81 (13) Energy Loan Program 37 48 (11) 58 (10) Oracle/Blue Heron 7,264 4,130 3,134 -- 4,130 $ 605,157 $ 499,244 $ 105,913 $ 437,277 $ 61,967 2010 Analysis The District ended fiscal year 2010 with $605.2 million in long-term debt outstanding, consisting mainly of revenue bonds. The District had three bond additions this year (SRF 2009A, SRF 2010A, and Series 2010B) resulting in the substantial increase in long-term debt. 2009 Analysis The District ended fiscal year 2009 with $499.2 million in long-term debt outstanding, consisting mainly of revenue bonds. The District had two bond additions and a capital lease this year (Series 2008A, SRF 2008AB, and Oracle/Blue Heron) resulting in the substantial increase in long-term debt. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Management’s Discussion and Analysis for the years ended June 30, 2010 and 2009 25 Decisions Impacting the Future The District continues to implement the second phase of its multi decade wastewater capital improvement program utilizing the proceeds a $275.0 million bond authorization granted by St. Louis voters in August 2008. This phase of the program includes the design and construction of $662.0 million of capital improvements through 2012. To date, $415.0 million of this capital program phase has been completed or underway. These regulatory required projects include completion of the Lemay Treatment Plant expansion, pump station improvements, and sewage collection system replacement and rehabilitation. 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. This stormwater rate structure was in place throughout the 2010 fiscal year generating $90.9 million for stormwater projects across the St. Louis region. On July 9, 2010, the Circuit Court of St. Louis, 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 this rate will result 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. These services will be drastically reduced in Fiscal Year 2011 and subsequent future years due to the loss the impervious rate revenue. The stormwater impervious based rate remains in litigation pending the District’s Board of Trustees decision on pursuing an appeal of the July 9, 2010 court decision. The District intends to submit a rate change proposal to the District’s Rate Commission in February 2012. This Rate Commission is defined and authorized in the District’s Charter and is required to review all proposed rate changes prior to the adoption by the District’s Board of Trustees. The Rate Commission is comprised of 15 members representing various commercial and residential customers. Members in the past have also represented local environmental interests. The District is also engaged in litigation with the U.S. Environmental Protection Agency and the Missouri Department of Natural Resources to address issues related to the Clean Water Act of 1972. See note 13 for additional information regarding this litigation. The District’s implementation of a new enterprise-wide technology system continued throughout Fiscal Year 2010 and is anticipated to be completed in the next fiscal year. This new technology impacts all aspects of District operations and replaces antiquated and inefficiency systems used for the past several decades. Streamlined processes and increased efficiencies are expected as a result of this implementation, saving ratepayers money and improving response time to customer issues. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Management’s Discussion and Analysis for the years ended June 30, 2010 and 2009 26 Requests for Information This financial report is designed to provide a general overview of the District’s finances for all those with an interest in the District’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 or jzimmer@stlmsd.com 27 THE METROPOLITAN ST. LOUIS SEWER DISTRICT 28 See the accompanying notes to the financial statements. Statements of Net Assets June 30, 2010 and 2009 ASSETS June 30, 2010 2009 (As Restated) Current Assets: Cash $ 11,438,945 $ 5,913,696 Pooled cash and investments 228,974,712 274,316,863 Investments 58,240,728 9,661,493 Sewer service charges receivable, less allowance of $4,055,258 in 2010 and $4,166,398 in 2009 35,333,663 36,963,828 Unbilled sewer service charges receivable, less allowance of $421,210 in 2010 and $423,000 in 2009 20,379,759 20,146,052 Accrued income on investments 1,206,821 1,437,214 Other receivables, less allowance of $851 in 2010 and $20,908 in 2009 8,818,269 1,235,357 Supplies inventory 6,832,502 7,155,997 Total current assets 371,225,399 356,830,500 Noncurrent Assets: Restricted Assets: Cash 327,864 544,430 Pooled cash and investments 51,363,267 67,890,803 Investments 30,363,923 27,208,257 Accrued income on investments 403,372 618,013 82,458,426 96,261,503 Other Assets: Note receivable 15,319,087 16,032,069 Capital Assets: Depreciable: Treatment and disposal plant and equipment 750,240,748 762,219,595 Collection and pumping plant 1,914,386,404 1,861,695,362 General plant and equipment 64,195,139 60,326,121 2,728,822,291 2,684,241,078 Less: Accumulated depreciation 915,676,211 869,255,067 1,813,146,080 1,814,986,011 Nondepreciable: Land 28,128,701 27,070,041 Construction in progress 570,602,108 450,539,975 Net capital assets 2,411,876,889 2,292,596,027 Total noncurrent assets 2,509,654,402 2,404,889,599 Total Assets 2,880,879,801 2,761,720,099 THE METROPOLITAN ST. LOUIS SEWER DISTRICT See the accompanying notes to the financial statements. 29 Statements of Net Assets June 30, 2010 and 2009 (Continued) LIABILITIES June 30, 2010 2009 (As Restated) Current Liabilities: Contracts and accounts payable 25,962,579 36,351,578 Deposits and accrued expenses 23,418,377 21,436,863 Retainage payable 8,263,134 8,278,238 Current portion of bonds and notes payable 16,192,133 15,402,057 73,836,223 81,468,736 Current Liabilities--Payable From Restricted Assets: Contracts and accounts payable 1,341,043 1,266,826 Retainage payable 334,577 226,107 1,675,620 1,492,933 Total current liabilities 75,511,843 82,961,669 Noncurrent Liabilities: Deposits and accrued expenses 7,295,729 4,659,607 Bonds and notes payable 590,421,835 486,482,071 597,717,564 491,141,678 Total Liabilities 673,229,407 574,103,347 NET ASSETS Net Assets: Invested in capital assets, net of related debt 1,868,973,772 1,798,913,796 Restricted for: Debt service 29,946,469 33,971,107 Subdistrict construction and improvement 50,836,337 60,797,463 Unrestricted 257,893,816 293,934,386 Total Net Assets $2,207,650,394 $2,187,616,752 THE METROPOLITAN ST. LOUIS SEWER DISTRICT 30 See the accompanying notes to the financial statements. Statements of Revenues, Expenses, and Changes in Net Assets for the years ended June 30, 2010 and 2009 Years Ended June 30, 2010 2009 (As Restated) Operating Revenues: Sewer service charges $ 251,682,865 $ 254,378,459 Provision for doubtful sewer service charge accounts (10,187,508) (9,678,495) Licenses, permits, and other fees 3,084,552 3,475,283 Other 2,007,265 1,550,111 Total operating revenues 246,587,174 249,725,358 Operating Expenses: Pumping and treatment 47,266,420 44,746,325 Collection system maintenance 36,081,992 32,917,464 Engineering 15,772,981 13,735,952 General and administrative 39,237,319 37,921,976 Water backup claims 3,950,797 6,816,722 Depreciation 54,011,776 47,370,379 Other 32,457,589 28,668,961 Total operating expenses 228,778,874 212,177,779 Operating Income 17,808,300 37,547,579 Nonoperating Revenues: Property taxes levied by the District 1,401,100 2,129,475 Investment income 6,553,760 13,115,519 Rent and other income 265,004 214,674 Total nonoperating revenues 8,219,864 15,459,668 Nonoperating Expenses: Net loss on disposal and sale of capital assets 2,719,163 2,162,189 Nonrecurring projects and studies 9,872,088 7,104,169 Interest expense 13,189,283 9,079,269 Total nonoperating expenses 25,780,534 18,345,627 Income Before Capital Contributions 247,630 34,661,620 Capital Contributions: Utility plant contributed 18,544,232 26,302,897 Grant revenue 1,241,780 690,488 Total capital contributions 19,786,012 26,993,385 Change in Net Assets 20,033,642 61,655,005 Net Assets-Beginning of Year (Note 16) 2,187,616,752 2,125,961,747 Net Assets-End of Year $2,207,650,394 $2,187,616,752 THE METROPOLITAN ST. LOUIS SEWER DISTRICT See the accompanying notes to the financial statements. 31 Statements of Cash Flows for the years ended June 30, 2010 and 2009 Years Ended June 30, 2010 2009 (As Restated) Cash flows from operating activities: Received from customers $248,973,260 $246,543,742 Paid to employees for services (80,987,401) (70,669,904) Paid to suppliers for goods and services (100,069,468) (91,651,592) Net cash provided by operating activities 67,916,392 84,222,246 Cash flows provided from noncapital financing activities: Taxes levied 1,401,100 2,129,476 Cash flows from capital and related financing activities: Proceeds from capital grants 1,228,764 842,734 Proceeds from issuance of debt 112,193,376 77,982,515 Interest received on bond proceeds to be used for capital improvements 1,569,661 1,673,210 Principal paid on debt (16,178,124) (17,163,509) Interest and fees paid on debt (21,986,608) (17,542,583) Payments for capital assets (158,560,144) (209,315,523) Proceeds from sale of capital assets 325,682 156,023 Net cash used in capital and related financing activities (81,407,393) (163,367,133) Cash flows from investing activities: Purchase of investments (287,432,264) (329,356,041) Proceeds from sale and maturity of investments 297,567,050 359,071,774 Investment income 6,998,794 10,139,852 Proceeds from rents 265,004 214,674 Net cash provided by investing activities 17,398,584 40,070,259 Net Increase (Decrease) in Cash and Cash Equivalents 5,308,683 (36,945,152) Cash at Beginning of Year 6,458,126 43,403,278 Cash at End of Year $ 11,766,809 $ 6,458,126 Noncash capital and investing activities: Portion of utility plant contributed represented by: Utility plant contributed by other governments and developers $ 18,544,232 $ 26,302,897 Fair value investment adjustment gain (loss) $ 109,316 $ (89,291) THE METROPOLITAN ST. LOUIS SEWER DISTRICT 32 See the accompanying notes to the financial statements. Statements of Cash Flows for the years ended June 30, 2010 and 2009 (Continued) Years Ended June 30, 2010 2009 (As Restated) Reconciliation of operating income to net cash flows provided by operating activities: Operating income $ 17,808,300 $ 37,547,579 Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation 54,011,776 47,370,379 Change in operating assets and liabilities: Decrease (increase) in billed and unbilled sewer service charges receivable 1,396,458 (2,935,372) Decrease in other receivables 410,805 173,792 Decrease in supplies inventory 323,495 327,869 (Decrease) increase in contracts and accounts payable (10,388,998) 2,748,721 Increase (decrease) in deposits and accrued expenses 4,354,556 (1,010,722) Net Cash Provided by Operating Activities $ 67,916,392 $ 84,222,246 THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2010 and 2009 33 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. 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 District defines its financial reporting entity to include all component units for which the District’s governing body is financially accountable. To be considered financially accountable, the component unit must be fiscally dependent on the District and the District must either 1) be able to impose its will on the component unit or 2) the relationship must have the potential for creating a financial benefit or imposing a financial burden on the District. Based on the foregoing, the District’s financial statements include all funds that are established under the authority of the District’s charter. There are no agencies, boards, commissions, or authorities that are controlled by or dependent on the District. Measurement Focus, Basis of Accounting, and Financial Statement Presentation Throughout the year, the District 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 District 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 District’s measurement focus is on the flow of economic resources. Unbilled sewer service charge revenues are accrued by the District based on estimated billings for services provided through the end of the current fiscal year. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2010 and 2009 34 1. Organization and Summary of Significant Accounting Policies (Continued) Measurement Focus, Basis of Accounting, and Financial Statement Presentation (Continued) Revenues and expenses are divided into operating and nonoperating items. Operating revenues generally result from providing services in connection with the District’s principal ongoing operations. The principal operating revenues of the District are user fees, licenses, and permits for wastewater treatment services. Operating expenses include the costs associated with the conveyance and treatment of wastewater, stormwater, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting these definitions are reported as nonoperating revenues and expenses. The District 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 District 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 or the first period that use is permitted. The District recognizes revenues from property taxes, net of estimated refunds and estimated uncollectible amounts, in the period for which the taxes are levied. Imposed non-exchange revenues also include licenses, permits, and other fees. 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 deferred revenues. When both restricted and unrestricted resources are available for use, it is the District’s policy to use restricted resources first, and then unrestricted resources as they are needed. The District 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 District also applies all FASB Statements and Interpretations issued after November 30, 1989, except for those that conflict with or contradict GASB pronouncements. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2010 and 2009 35 1. Organization and Summary of Significant Accounting Policies (Continued) Cash and Cash Equivalents and Investments The District'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 District. "Investments" consist of those investments with maturity dates 90 days or greater at the time of purchase by the District. Investments are stated at fair value based upon quoted market prices. The District’s investment disclosures follow GASB Statement No. 40, Deposit and Investment Risk Disclosures, an Amendment of GASB Statement No. 3 (GASB 40). This standard’s disclosure requirements address custodial credit risk, concentrations of credit risk, interest rate risk, and foreign currency risk. Capital Assets Capital assets are valued at historical cost or estimated historical cost based in part upon a study performed in 1981. Interest cost is capitalized as part of the historical cost of acquiring certain assets when the effect of such capitalization is material to the financial statements. Interest is not capitalized on assets constructed with contributions from other governmental sources. Depreciation is calculated on a straight-line basis over the following estimated useful lives: Treatment and disposal plant and equipment 10 to 50 years Collection and pumping plant 10 to 100 years General plant and equipment 3 to 50 years When designing user charge rates, the District 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 District 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 District 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. It is important to note that this change in policy does not have a retroactive effect on capital assets put in place before April 2010. Capitalization of Interest Interest costs are capitalized as part of the costs of capital assets during the period of construction based on the related weighted average net borrowing costs incurred. Interest earned on temporary investments acquired with the proceeds of such borrowed funds from the date of the borrowing until the assets are ready for their intended use is used to reduce the interest costs capitalized on the constructed assets. Interest is not capitalized for outlays financed by capital grants (or other outside parties) externally restricted for the acquisition of specified assets. In 2010 and 2009, the District capitalized $8,203,731 and $6,776,034 of net interest expense, respectively. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2010 and 2009 36 1. Organization and Summary of Significant Accounting Policies (Continued) Supplies Inventory Supplies inventory consists of parts and supplies to be used to operate and maintain treatment facilities and various treatment-related equipment at the District. This inventory is stated at the lower of cost or market, determined on the average cost method. Expenses are recognized when the inventory is consumed. Net Assets Invested in capital assets, net of related debt: This component of net assets consists of capital assets, including restricted capital assets, net of accumulated depreciation and reduced by the outstanding debt that is attributable to the acquisition, construction, or improvement of those assets. Restricted: This component of net assets consists of constraints placed on net asset use 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 subdistricts have also been restricted for that use. Clean water capital improvement surcharges, sewer extension and connection fees, grants, and other revenues received for construction within certain subdistricts have been restricted for that use. In addition, a portion of sanitary sewer charges have been restricted for the payment of principal and interest on certain debt of the District. Unrestricted net assets: This component of net assets consists of net assets that do not meet the definition of restricted or invested in capital assets, net of related debt. Capital Contributions Capital contributions to the District 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. Bond Issuance Costs/Bond Premiums and Discounts Bond issuance costs incurred, as well as bond premiums and discounts, and paid from the proceeds of revenue bond issues are deferred and amortized using the straight-line method over the term of the bonds. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2010 and 2009 37 1. Organization and Summary of Significant Accounting Policies (Continued) Compensated Absences Vacation Under the terms of the District's personnel policies, employees are allowed to carry a maximum of 30 to 45 days of vacation (depending on length of service) from one calendar year to the next. Since vacation accrued at year-end is expected to be used by the employee during the following fiscal year, the accrual is reported as a component of current deposits and accrued expenses payable. Sick Leave Employees earn sick pay benefits at accrual rates ranging from 10 days per year to 12 days per year (depending on length of service). Unused sick leave can be carried over at year-end without limitation. An employee retiring from the District with five or more years of service, who has unused accrued sick leave remaining, will be compensated for that portion of unused accrued sick leave at the rate of 1-1/4% for each year of District service. The District has recorded a liability, which has been actuarially determined to be equal to the accumulated expense charge that will amortize the employees' benefits over their period of District service. The liability, included in current deposits and accrued expenses payable, includes vested accumulated rights to receive sick leave benefits estimated to be paid within one year. The portion of sick leave expected to be paid after one year is recorded as a component of noncurrent deposits and accrued expenses payable. 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. Board Designated Funds The Board has designated certain amounts for construction and improvement of the sewerage and drainage collection systems and treatment facilities, and for real property improvement and alterations. These amounts are included with unrestricted cash and investments. At June 30, 2010 and 2009, designated funds were $277,997,841 and $266,680,363 respectively. Subsequent Events In preparing these financial statements, the District has evaluated events and transactions for potential recognition or disclosure through November 9, 2010, the date the financial statements were available to be issued. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2010 and 2009 38 2. Deposits and 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 District 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, 2010 and 2009, all of the District’s investments were in compliance with the District’s investment policy and charter. In accordance with the District’s investment policy, the District also invests in mortgage-backed securities such as collateralized mortgage obligations. These securities are reported at fair value and are based on the cash flow from interest payments by the underlying mortgages. As a result, they are sensitive to prepayments by mortgagees, which may result from a decline in interest rates. For example, if interest rates decline and homeowners refinance mortgages, thereby prepaying the mortgages underlying these securities, the cash flow from interest payments is reduced and the value of these securities declines. Likewise, if homeowners pay on mortgages longer than anticipated, the cash flow is greater and the return on the initial investment would be higher than anticipated. A summary of deposits and investments as of June 30, 2010 and 2009, is as follows: 2010 2009 Cost Fair Value Cost Fair Value Deposits $ 38,622,130 $ 38,622,130 $ 55,884,662 $ 55,884,662 Repurchase agreements (collateralized) -- -- 1,662,000 1,662,000 U.S. Treasury and agency obligations 246,273,740 248,904,033 271,258,321 273,727,585 Commercial paper 73,440,879 73,463,049 54,226,147 54,261,295 Bankers’ acceptance notes 19,712,541 19,720,227 -- -- $378,049,290 $380,709,439 $383,031,130 $385,535,542 THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2010 and 2009 39 2. Deposits and Investments (Continued) Interest Rate Risk As of June 30, 2010 and 2009, the District had the following investments and maturities: 2010 2009 Weighted Weighted Average Average Maturity Maturity Investment Type Fair Value (Years) Fair Value (Years) Repurchase agreements (collateralized) $ -- 0.00 $ 1,662,000 0.00 Certificates of deposit 2,100,000 0.58 12,200,000 0.75 U.S. Treasury obligations 55,119,909 1.24 46,874,765 1.13 U.S. agency obligations 193,784,124 1.56 226,852,820 2.10 Commercial paper 73,463,049 0.12 54,261,295 0.14 Bankers’ acceptance notes 19,720,227 0.11 -- -- Total $344,187,309 1.11 $341,850,880 1.60 In accordance with the District’s investment policy, the District 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. Custodial/Credit Risk The District will minimize credit risk, 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 District will do business. 2. Diversifying the portfolio so that potential losses on individual securities will be minimized. In accordance with its investment policy, the District limits its investments in these investment types to the top rating issued by NRSROs. As of June 30, 2010 and 2009, the District’s investments in commercial paper were rated A1 by Standard & Poor’s and P-1 by Moody’s Investors Service. The District’s investments in repurchase agreements carry the explicit guarantee of the U.S. Government. The District’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 “AAA”. All cash deposits of the District were fully collateralized with securities held by a third party financial institution in the District’s name. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2010 and 2009 40 2. Deposits and Investments (Continued) Concentration of Credit Risk The District places no limit on the amount the District 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, commercial paper, and bankers’ acceptances are limited to 30% of the portfolio, each. The following table lists investments in issuers that represent 5% or more of total investments at June 30, 2010 and 2009: Percent of Total Investments Issuer 2009 2009 Federal Home Loan Bank 20.1% 15.7% Federal National Mortgage Association 15.5 21.5 Federal Home Loan Mortgage Corporation 8.5 18.5 3. Note Receivable The District has a note receivable with the City of Arnold, Missouri (the “City”) for its portion of the capital costs related to the Lower Meramec wastewater treatment plant. The City also pays reasonable fees for operation and maintenance costs. The note receivable will be paid over 30 years. At June 30, 2010, future payments are as follows: For the Years Ending June 30 2011 $ 1,100,500 2012 1,100,500 2013 1,100,500 2014 1,100,500 2015 1,100,500 2016 – 2020 5,502,500 2021 – 2025 5,502,500 2026 – 2030 5,502,500 2031 – 2032 2,751,225 24,761,225 Less: Amount representing interest 9,030,225 $15,731,000 Classification in Statement of Net Assets: Current $ 411,913 Noncurrent 15,319,087 $15,731,000 THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2010 and 2009 41 4. Change in Capital Assets The following is a summary of capital assets changes for the fiscal years ended June 30, 2010 and 2009: For the Year Ended June 30, 2010 Balance June 30, 2009 (As Restated) Additions Reclass Deletions Balance June 30, 2010 Capital assets not being depreciated: Land $ 27,070,041 $ 1,058,660 $ -- $ -- $ 28,128,701 Construction in progress 450,539,975 153,818,974 -- 33,756,841 570,602,108 Total capital assets not being depreciated 477,610,016 154,877,634 -- 33,756,841 598,730,809 Capital assets being depreciated: Treatment and disposal plant and equipment 762,219,595 4,360,055 (9,625,867) 6,713,035 750,240,748 Collection and pumping plant 1,861,695,362 43,669,661 9,625,867 604,486 1,914,386,404 General plant and equipment 60,326,121 7,186,774 -- 3,317,756 64,195,139 Total capital assets being depreciated 2,684,241,078 55,216,490 -- 10,635,277 2,728,822,291 Less: Accumulated depreciation: Treatment and disposal plant and equipment (339,806,176) (27,019,845) 7,315,692 (4,095,514) (355,414,815) Collection and pumping plant (490,913,350) (23,256,637) (7,315,692) (251,707) (521,233,972) General plant and equipment (38,535,541) (3,735,294) -- (3,243,411) (39,027,424) Total accumulated depreciation (869,255,067) (54,011,776) -- (7,590,632) (915,676,211) Total capital assets being depreciated, net 1,814,986,011 1,204,714 -- 3,044,645 1,813,146,080 Total Capital Assets $2,292,596,027 $156,082,348 $ -- $ 36,801,486 $2,411,876,889 For the Year Ended June 30, 2009 (As Restated) Balance Balance June 30, 2008 Additions Deletions June 30, 2009 Capital assets not being depreciated: Land $ 27,070,041 $ --$ -- $ 27,070,041 Construction in progress 314,569,981 199,075,923 63,105,929 450,539,975 Total capital assets not being depreciated 341,640,022 199,075,923 63,105,929 477,610,016 Capital assets being depreciated: Treatment and disposal plant and equipment 728,496,863 35,254,503 1,531,771 762,219,595 Collection and pumping plant 1,810,225,223 54,361,302 2,891,163 1,861,695,362 General plant and equipment 53,759,969 8,791,873 2,225,721 60,326,121 Total capital assets being depreciated 2,592,482,055 98,407,678 6,648,655 2,684,241,078 Less: Accumulated depreciation: Treatment and disposal plant and equipment (326,409,264)(14,274,098)(877,186) (339,806,176) Collection and pumping plant (462,363,787)(29,794,996)(1,245,433) (490,913,350) General plant and equipment (37,442,080)(3,301,285)(2,207,824) (38,535,541) Total accumulated depreciation (826,215,131)(47,370,379)(4,330,443) (869,255,067) Total capital assets being depreciated, net 1,766,266,924 51,037,299 2,318,212 1,814,986,011 Total Capital Assets $2,107,906,946 $250,113,222 $65,424,141 $2,292,596,027 THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2010 and 2009 42 4. Change in Capital Assets (Continued) In fiscal year 2007, the District created a treatment and disposal plant asset in order to represent a portion of the Lower Meramec wastewater treatment plant. This was created in order to begin recording depreciation expense for the assets that had been put into service. In fiscal year 2010, a portion of these assets totaling $9,625,867 was reclassified from treatment and disposal to collection and pumping as a result of more detailed information becoming available. This also resulted in a $7,315,692 reclassification of accumulated depreciation. 5. Property Tax On or before May 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 subdistrict and purpose. Taxes levied are used for operations and stormwater maintenance, debt service, and construction. Taxes are recorded as nonoperating 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 District monthly. On June 12, 2008, pursuant to Ordinance 12661, the District set the property tax rate at zero and began charging a stormwater service charge on March 1, 2008 based on the property’s impervious area. The District has collected $1,401,100 and $2,129,475 in delinquent property taxes in fiscal year 2010 and 2009, respectively. 6. Short-Term Debt In August 2008, the District issued Tax and Revenue Anticipation Notes, Series 2008A, in the amount of $5,000,000. This debt was issued for financing of the construction of a storage facility and to undertake storm water projects within the District. On October 21, 2008, the District repaid the note plus $29,580 of interest at a rate of 2.2%. No additional short-term debt was issued in fiscal year 2010. The following is a summary of changes in short-term debt for the year ended June 30, 2009: Balance Balance June 30, June 30, 2008 Additions Deletions 2009 Tax revenue anticipation note $ -- $ 5,000,000 $ 5,000,000 $ -- THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2010 and 2009 43 7. Long-Term Liabilities The following is a summary of changes in the District’s long-term liabilities for the year ended June 30, 2010: Original Balance Balance Issuance June 30, June 30,Current Amounts 2009 Additions Retirements 2010 Portion Bonds and notes payable: Senior revenue bonds: Series 2004A $175,000,000 $168,965,000 $ --$ 1,595,000 $167,370,000 $ 1,780,000 Series 2006C 60,000,000 60,000,000 ---- 60,000,000 -- Series 2008A 30,000,000 30,000,000 ---- 30,000,000 -- Series 2010B 85,000,000 --85,000,000 -- 85,000,000 -- Subordinate revenue bonds: Series 2004B 161,280,000 136,795,000 --6,685,000 130,110,000 6,465,000 Series 2005A 6,800,000 5,955,000 --290,000 5,665,000 270,417 Series 2006A 42,715,000 40,480,000 --2,060,000 38,420,000 1,911,250 Series 2006B 14,205,000 13,575,000 --640,000 12,935,000 595,833 Series 2008A/B 40,000,000 39,127,500 --1,752,500 37,375,000 1,760,000 Missouri Department of Natural Resources: West Watson and Nanell 535,600 99,880 -- 99,880 ---- Ozark and Table Rock 374,680 68,170 -- 68,170 ---- Energy Loan Program 98,595 47,740 -- 11,069 36,671 11,420 Series 2009A 23,000,000 --23,000,000 -- 23,000,000 470,700 Series 2010A 7,980,700 --7,980,700 -- 7,980,700 -- Capital Lease: Oracle/Blue Heron 12,000,000 4,130,000 6,110,193 2,976,506 7,263,687 2,927,513 $658,989,575 $499,243,290 $122,090,893 $16,178,125 605,156,058 $16,192,133 Add: Unamortized premium, net 9,199,891 Less: Bond issue costs, net (7,741,981) $606,613,968 Deposits and accrued expenses: Landfill closure and postclosure costs $ 622,365 $ 39,651 $ -- $ 662,016 $ -- Compensated absences 5,824,509 840,300 385,407 6,279,402 1,569,851 Net OPEB obligation 1,014,724 2,115,538 1,206,100 1,924,162 -- $ 7,461,598 $ 2,995,489 $ 1,591,507 $ 8,865,580 $ 1,569,851 THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2010 and 2009 44 7. Long-Term Liabilities (Continued) Wastewater System Revenue Bonds Payable In August 2008, the District received voter authorization for an additional $275,000,000 of revenue bonds. These funds were sought to enable the District to comply with federal and state clean water requirements. In January 2010, the District issued $85,000,000 of Wastewater System Revenue Bonds Series 2010B (Series 2010B). These bonds were issued pursuant to the August 2008 authorization; in this case for the purpose of constructing, repairing, replacing, and equipping new and existing District wastewater facilities. These senior bonds have an interest rate of 5.9% and are payable in semiannual installments at varying amounts through May 1, 2039. The revenue bonds do not constitute a legal debt or liability for the District, the State of Missouri, or for any political subdivision thereof and do not constitute indebtedness within the meaning of any constitutional or statutory debt limitation or restriction. In November 2008, the District issued $30,000,000 of Wastewater System Revenue Bonds Series 2008A (Series 2008A) from the authorization for the purpose of providing funds to finance the capital improvements and replacement program. These senior bonds have interest rates ranging from 5.1% to 5.3% and are payable in semiannual installments at varying amounts through May 1, 2038. The revenue bonds do not constitute a legal debt or liability for the District, the State of Missouri, or for any political subdivision thereof and do not constitute indebtedness within the meaning of any constitutional or statutory debt limitation or restriction. In November 2006, the District authorized and issued $60,000,000 of Wastewater System Revenue Bonds Series 2006C (Series 2006C) for the purpose of providing funds to finance the initial phase of its capital improvements and replacement program, including constructing, repairing, and replacing new wastewater facilities. These senior bonds have interest rates ranging from 4.1% to 5.0% and are payable in semiannual installments at varying amounts through May 1, 2036. The revenue bonds do not constitute a legal debt or liability for the District, the State of Missouri, or for any political subdivision thereof and do not constitute indebtedness within the meaning of any constitutional or statutory debt limitation or restriction. In May 2004, the District authorized and issued $175,000,000 of Wastewater System Revenue Bonds Series 2004A (Series 2004A) for the purpose of providing funds to finance the initial phase of its capital improvements and replacement program, including constructing, repairing, and replacing new wastewater facilities. These senior bonds have interest rates ranging from 2.0% to 5.0% and are payable in semiannual installments at varying amounts through May 1, 2034. The revenue bonds do not constitute a legal debt or liability for the District, the State of Missouri, or for any political subdivision thereof and do not constitute indebtedness within the meaning of any constitutional or statutory debt limitation or restriction. The issuance of the revenue bonds does not obligate the District to levy any form of taxation therefore or to make any appropriation for their payments in any fiscal year. The principal and interest on the bonds are expected to be paid from future wastewater revenues. The scheduled payment of the principal of and interest on the Series 2006C and 2004A Bonds are guaranteed under a financial guaranty insurance policy. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2010 and 2009 45 7. Long-Term Liabilities (Continued) Water Pollution Control and Drinking Water Revenue Bonds Payable In October 2008, the State Environmental Improvement and Energy Resources Authority (the Authority) authorized and issued $69,435,000 of Water Pollution Control and Drinking Water Revenue Bonds (State Revolving Funds Programs) Series 2008A (Series 2008A). The Series 2008A bonds provided funds to make loans to fourteen Missouri political subdivisions that will be used to finance water pollution control and drinking water projects. A portion of the proceeds of the Series 2008A/B bonds issued by the Authority were used to purchase subordinate Participant Revenue Bonds (Participant Bonds) authorized and issued by the District in the aggregate principal amount of $40,000,000, the proceeds of which will be used for constructing, repairing, and equipping new and existing wastewater facilities. The District’s Participant Bonds have interest rates ranging from 4.0% to 5.7% and are payable in semiannual installments at varying amounts through January 1, 2029. In November 2006, the Authority authorized and issued $22,105,000 of State Revolving Funds Programs Series 2006B (Series 2006B). The Series 2006B bonds provided funds to make loans to seven Missouri political subdivisions that will be used to finance water pollution control and drinking water projects. A portion of the proceeds of the Series 2006B bonds issued by the Authority were used to purchase Participant Bonds authorized and issued by the District in the aggregate principal amount of $14,205,000, the proceeds of which will be used for constructing, repairing, and equipping new and existing wastewater facilities. The District’s Participant Bonds have interest rates ranging from 4.0% to 5.0% and are payable in semiannual installments at varying amounts through July 1, 2027. In May 2006, the Authority authorized and issued $87,505,000 of State Revolving Funds Programs Series 2006A (Series 2006A). The Series 2006A bonds provided funds to make loans to thirteen Missouri political subdivisions that will be used to finance water pollution control and drinking water projects. A portion of the proceeds of the Series 2006A bonds issued by the Authority were used to purchase subordinate Participant Bonds authorized and issued by the District in the aggregate principal amount of $42,715,000, the proceeds of which will be used for constructing, repairing, and equipping new and existing wastewater facilities. The District’s Participant Bonds have interest rates ranging from 3.5% to 4.5% and are payable in semiannual installments at varying amounts through July 1, 2026. In May 2005, the Authority authorized and issued $53,060,000 of State Revolving Funds Programs Series 2005A (Series 2005A). The Series 2005A bonds provided funds to make loans to ten Missouri political subdivisions and one Missouri nonprofit corporation that will be used to finance water pollution control and drinking water projects. A portion of the proceeds of the Series 2005A bonds issued by the Authority were used to purchase subordinate Participant Bonds authorized and issued by the District in the aggregate principal amount of $6,800,000, the proceeds of which will be used for constructing, repairing, and equipping new and existing wastewater facilities. The District’s Participant Bonds have interest rates ranging from 3.0% to 5.0% and are payable in semiannual installments at varying amounts through July 1, 2026. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2010 and 2009 46 7. Long-Term Liabilities (Continued) Water Pollution Control and Drinking Water Revenue Bonds Payable (Continued) In May 2004, the Authority authorized and issued $179,780,000 of State Revolving Funds Programs Series 2004B (Series 2004B). The Series 2004B bonds provided funds to make loans to seven Missouri political subdivisions that will be used to finance water pollution control projects. A portion of the proceeds of the Series 2004B bonds issued by the Authority were used to purchase subordinate Participant Bonds authorized and issued by the District in the aggregate principal amount of $161,280,000, the proceeds of which will be used to finance the District’s three water pollution control construction projects outlined in the agreement. The District’s Participant Bonds have interest rates ranging from 2.0% to 5.3% and are payable in semiannual installments at varying amounts through January 1, 2027. The Series 2004B, 2005A, 2006A, 2006B, and 2008A/B bonds and the Series 2009A and 2010A direct loans do not constitute a legal debt or liability for the District, the State of Missouri, or for any political subdivision thereof and do not constitute indebtedness within the meaning of any constitutional or statutory debt limitation or restriction. The issuance of the Series 2004B, 2005A, 2006A, 2006B bonds and the Series 2009A and 2010A direct loans do not obligate the District to levy any form of taxation therefore or to make any appropriation for their payments in any fiscal year. The principal and interest on the bonds are expected to be paid from future wastewater revenues. In connection with the District’s issuance of the Participant Bonds, which were purchased with the proceeds of the Series 2004B, 2005A, 2006A, 2006B, 2008A/B bonds and 2009A and 2010A direct loans issued by the Authority, the District participates in the State Revolving Loan Program established by the Missouri Department of Natural Resources (the DNR). Monies from federal capitalization grants and state matching funds are used to fund a reserve account for each participant. As the District incurs approved capital expenses, the DNR reimburses the District for the expenses from the bond proceeds account and deposits in a bond reserve fund in the District’s name an additional 60% of the expenditure amount for the Series 2004B bonds or 70% for the Series 2005A, 2006A, 2006B bonds or 100% for the Series 2008A/B bonds. Interest earned from this reserve fund can be used by the District to fund interest payments on the bonds. On the date of each payment of the principal amount of the District’s Participant Bonds, the trustee transfers from this reserve account to the master trustee an amount equal to 60% of the principal payment for the Series 2004B bonds or 70% for the Series 2005A, 2006A, 2006B bonds or 100% for the series 2008A/B bonds. The costs of operation and maintenance of the wastewater treatment and sewerage facilities and the debt service is payable from wastewater revenues. In accordance with the Series 2004A, 2004B, 2005A, 2006A, 2006B, 2008A/B bond and 2009A and 2010A direct loans, the District’s annual net operating revenues from wastewater activities, as defined in the agreement, coupled with investments earnings must be at least 125% of the current portion of principal and interest due on all senior bonds and at least 115% of the current portion of principal and interest due on all bonds. At June 30, 2010 and 2009, the District was in compliance with this covenant. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2010 and 2009 47 7. Long-Term Liabilities (Continued) Principal and Interest Requirements on Revenue Bonds Payable The annual principal and interest requirements to maturity on revenue bonds payable outstanding as of June 30, 2010 are as follows: Wastewater System Revenue Bonds Payable/ Water Pollution Control and Drinking Water Revenue Bonds Payable Years ending June 30, Principal Interest Total 2011 $ 12,782,500 $ 25,088,029 $ 37,870,529 2012 13,907,500 28,177,610 42,085,110 2013 14,235,833 27,575,271 41,811,105 2014 14,746,667 26,956,056 41,702,723 2015 15,158,750 26,302,786 41,461,536 2016-2020 86,267,500 119,917,800 206,185,300 2021-2025 103,705,000 96,762,614 200,467,614 2026-2030 95,906,250 70,719,488 166,625,738 2031-2035 115,285,000 45,920,953 161,205,953 2036-2039 94,880,000 13,348,830 108,228,830 Total $566,875,000 $480,769,437 $1,047,644,438 West Watson and Nanell Loan Agreement During fiscal year 2005, the DNR loaned $535,600 to the District. The West Watson and Nanell Loan bears interest at a rate of 1.5% and is payable through November 1, 2014. The purpose of this note is to finance the planning, acquisition, construction, improvement, repair, rehabilitation, and extension of the sewer system of a certain regional subdistrict. This note is classified as special assessment debt by the District; therefore, the principal and interest on this note will be repaid from additional tax assessments on property values within the subdistrict. In April 2010, an additional payment was made to bring the principal balance to zero. Ozark and Table Rock Loan Agreement During fiscal year 2004, the DNR loaned $374,680 to the District. The Ozark and Table Rock Loan bears interest at a rate of 1.5% and is payable through November 1, 2013. The purpose of this note is to finance the planning, acquisition, construction, improvement, repair, rehabilitation, and extension of the sewer system of a certain regional subdistrict. This note is classified as special assessment debt by the District; therefore, the principal and interest on this note will be repaid from additional tax assessments on property values within the subdistrict. In April 2010, an additional payment was made to bring the principal balance to zero. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2010 and 2009 48 7. Long-Term Liabilities (Continued) Energy Efficiency Leveraged Note Payable In April 2004, the DNR loaned $98,595 to the District. The Energy Efficiency Leveraged Note Payable bears interest at a rate of 3.2% per annum and is payable through August 1, 2013. The purpose of this note is to finance the design, acquisition, installation, and implementation of energy conservation measures. The principal and interest on this note is paid from wastewater revenues. Principal and Interest Requirements on Energy Efficiency Leveraged Note Payable The annual principal and interest requirements to maturity on the Energy Efficiency Leveraged Note Payable outstanding as of June 30, 2010 are as follows: Energy Efficiency Leveraged Note Payable Years ending June 30, Principal Interest Total 2011 $ 11,420 $ 1,066 $ 12,486 2012 11,783 703 12,486 2013 12,156 329 12,485 2014 1,312 21 1,333 Total $ 36,671 $ 2,119 $ 38,790 State of Missouri Direct Loan Series 2009A In October 2009, the DNR loaned $23,000,000 to the District. The State of Missouri Direct Loan Series 2009A bears interest at a rate of 1.5% per annum and is payable through January 1, 2030. The purpose of this note is to finance the designing, constructing, improving, renovating, repairing, replacing and equipping new and existing sewer facilities within the District. The principal and interest on the bonds are expected to be paid from future wastewater revenues. Principal and Interest Requirements on State of Missouri Direct Loan Series 2009A The annual principal and interest requirements to maturity on the State of Missouri Direct Loan Series 2009A outstanding as of June 30, 2010 are as follows: State of Missouri Direct Loan Series 2009A Years ending June 30, Principal Interest Total 2011 $ 470,700 $ 401,094 $ 871,794 2012 957,700 325,452 1,283,152 2013 979,800 311,390 1,291,190 2014 1,002,500 297,002 1,299,502 2015 1,025,700 282,282 1,307,982 2016-2020 5,495,400 1,178,370 6,673,770 2021-2025 6,161,000 755,831 6,916,831 2026-2030 6,907,200 282,079 7,189,279 Total $23,000,000 $3,833,500 $26,833,500 THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2010 and 2009 49 7. Long-Term Liabilities (Continued) State of Missouri Direct Loan Series 2010A In January 2010, the State of Missouri’s Direct Loan Program – ARRA issued to the District an amount totaling $7,980,700 for the construction, improvement, renovation, repair, replacement and equipping of its wastewater system, under the authority of and in full compliance with the District’s Charter (Plan). The District’s interest rate is 1.5% and is payable in semiannual installments at varying amounts through July 1, 2031. Principal and Interest Requirements on State of Missouri Direct Loan Series 2010A The annual principal and interest requirements to maturity on the State of Missouri Direct Loan Series 2010A outstanding as of June 30, 2010 are as follows: State of Missouri Direct Loan Series 2010A Years ending June 30, Principal Interest Total 2011 $ -- $ 109,912 $ 109,912 2012 -- 118,114 118,114 2013 337,700 116,871 454,571 2014 344,500 111,848 456,348 2015 351,500 106,724 458,224 2016-2020 1,867,500 453,036 2,320,536 2021-2025 2,065,200 308,380 2,373,580 2026-2030 2,283,300 148,424 2,431,724 2031-2035 731,000 10,856 741,856 Total $7,980,700 $1,484,165 $9,464,865 Master Equipment Lease / Purchase Agreement In June 2009, the District entered into a lease purchase agreement in which the District will receive proceeds in the total amount of $12,000,000 in monthly installments over the next nineteen months. These proceeds will be used to lease technology related to the District’s upgrade to a new enterprise system. The lease bears interest at a rate of 3.2% and is payable through June 19, 2013 at which time the District has the option to purchase the leased equipment. Principal and Interest Requirements on Master Equipment Lease/Purchase Agreement Master Equipment Lease / Purchase Agreement Years ending June 30, Principal Interest Total 2011 $2,927,513 $221,942 $3,149,455 2012 2,999,842 149,613 3,149,455 2013 3,096,139 53,316 3,149,455 Total payments remaining 9,023,494 424,871 9,448,365 Remaining available draws 1,759,807 -- 1,759,807 Total $7,263,687 $424,871 $7,688,558 THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2010 and 2009 50 7. Long-Term Liabilities (Continued) Restricted Cash and Investments The following trustee held accounts have been established in accordance with bond ordinances and financing agreements that require receipts generated from operations be segregated and certain reserve accounts be established: Revenue Fund The Revenue Fund will be used for the purpose of depositing wastewater operating revenues, providing funds to pay for expenses related to the operation and maintenance of the District, and fulfilling Sinking Fund requirements in accordance with the bond ordinances. Sinking Fund The bond ordinances provide for deposits to and the use of monies in the Sinking Fund to be used for the sole purpose of principal and interest payments on the bonds. Sufficient monies shall be paid in periodic installments from the Revenue Fund. Debt Service Fund The Debt Service Fund shall be used by the Trustee for the sole purpose of paying the principal and interest on the bonds, as and when the same become due. Debt Service Reserve Fund After initial deposit of the amount required pursuant to the bond ordinances and financing agreements of the Series 2004A, 2006C, 2008A and 2010B bonds, monies in the Debt Service Reserve Fund shall be disbursed and expensed by the District solely for the payment of the principal and interest on the bonds and notes to the extent of any deficiency in the Debt Service Fund for such purpose. The District may disburse and expend monies from the Debt Service Reserve Fund for such purpose immediately. As of June 30, 2010 and 2009, cash and investments in the Debt Service Reserve Fund totaled $30,691,786 and $27,752,687, respectively. Special Participant Bond Reserve Account For the Series 2004B, 2005A, 2006A, 2006B, 2008A/B, 2009A and 2010A bonds, the District shall deposit into the Special Participant Bond Reserve Account amounts in accordance with the bond ordinance, if any, which shall be disbursed and expensed by the District solely for the payment of the principal and interest on the Participant Bonds to the extent of any deficiency in the Sinking Fund for such purpose. At June 30, 2010 and 2009, cash and investments in the Special Participant Bond Reserve Account held on behalf of the District totaled $153,013,769 and $161,344,007, respectively. Monies in this account are not considered to be District funds. However, interest earnings on this account may be used by the District to reduce interest payments on the bonds outstanding. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2010 and 2009 51 7. Long-Term Liabilities (Continued) Restricted Cash and Investments (Continued) Renewal and Extension Fund All sums accumulated and retained in the Renewal and Extension Fund shall be first used to prevent default in the payment of principal and interest on the bonds when due and shall then be applied by the District for purposes pursuant to the trust indenture. No monies have been deposited into this account at June 30, 2010 and 2009. Project Fund The Project Fund for all bond issuances outstanding will be used for the purpose of providing monies to pay project costs. The proceeds from the bonds and notes, after a deposit into the Debt Service Reserve Fund for the amounts required pursuant to the bond ordinances and note agreements of Series 2004A, 2006C and 2008A bonds, shall be deposited into the Project Fund. At June 30, 2010 and 2009, cash and investments in the Project Fund totaled $63,710,851 and $8,021,897, respectively. Rebate Fund The bond ordinances provide for the creation of a Rebate Fund into which shall be deposited such amounts as are required to be deposited therein pursuant to the arbitrage instructions regarding the calculation and payment of rebate amounts due. The District does not have any rights in or claims to such money; provided, however, any funds remaining in the Rebate Fund after redemption and payment of all bonds and payment of any rebatable arbitrage amount, or provision having been made therefore, shall be remitted to the District. At June 30, 2010 and 2009, cash and investments in the Rebate Fund totaled $237,585 and $571,477, respectively. Administrative Fee Fund The Administrative Fee Fund will be used for the payment of the Trustee’s fees and other administrative fees pursuant to the note agreement. The Trustee shall immediately withdraw the fee amounts when due. Monies held in this account shall not be invested. Fair Value of Financial Instruments The value of the District’s long-term debt is estimated based on the current rates offered to the District for debt of the same remaining maturities. The carrying amount and estimated fair value of the District’s long-term debt as of June 30, 2010 was $605,156,058 and $631,821,339, respectively. The carrying amount and estimated fair value of the District’s long-term debt as of June 30, 2009 was $501,884,128 and $526,658,421, respectively. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2010 and 2009 52 8. Defined Benefit Pension Plan Plan Description The Metropolitan St. Louis Sewer District Employees’ Pension Plan (the Plan) is a noncontributory single employer defined benefit plan providing retirement benefits as well as death and disability benefits to members. As a condition of employment, all full-time employees of the District are covered by the Plan. The financial statements for the Plan are produced using the accrual basis of accounting. Under the accrual basis of accounting, revenues are recognized when earned and expenses are recognized when the related liability is incurred. The Plan issues a publicly available financial report that includes financial statements and required supplementary information. That report may be obtained by writing: The Metropolitan St. Louis Sewer District, 2350 Market Street, St. Louis, MO 63103-2555. The Plan, established on November 1, 1967, is amended from time to time by the District’s Board of Trustees, primarily to improve benefits to members. A Pension Committee consisting of two members of the District’s Board of Trustees, two elected employee members, and four members of the District’s management staff administer the Plan. A committee of the District’s Board of Trustees, with the aid of an investment advisor, reviews and evaluates the Plan’s investments and the related rates of return on a periodic basis. The Plan is exempt from the requirements of the Employee Retirement Income Security Act of 1974 (the “Act”) and, as such, is not subject to the Act’s reporting requirements. All benefits vest after five years of credited service. Members retiring at or after age 65 with five or more years credited service are entitled to a pension benefit. The Plan permits early retirement with reduced benefits beginning at age 55 if the member has completed 60 months of employment. A member whose combined age and term of service is equal to 75 may retire early with unreduced benefits. The annual benefit accrued by a member is equal to 1.5% of final average earnings plus 0.4% of final average earnings that are in excess of covered earnings multiplied by the period of years and months of credited service not to exceed 35 years. A survivor’s benefit for vested members who have not yet reached their normal retirement date or earned 75 points is provided for. The survivor’s benefit is equal to the greater of 50.0% of the member’s monthly-accrued retirement benefit as of the date of death, or 15.0% of the monthly earnings and the member’s monthly-accrued retirement benefit actuarially reduced under the 100.0% joint and survivor annuity option. Members are also able to select a Contingent Annuity Pop-Up option. This option allows the member to elect a survivor annuity for life, with the provision that if the beneficiary should predecease the member, the benefit shall increase to the amount payable had the survivor option not been selected. Ordinance Number 10872, effective January 1, 2001, further amended the Plan to extend the cost of living increases for retirees from a maximum of 30.0% to 45.0% of the original benefit. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2010 and 2009 53 8. Defined Benefit Pension Plan (Continued) Plan Description (Continued) Effective August 1, 2004, Ordinance No. 11781 amended the Plan to change the benefit formula to 1.7% of final average earnings plus 0.4% of final average earnings that are in excess of covered earnings multiplied by the period of years and months of credited service not to exceed 35 years without including accrued sick leave. Effective July 1, 2007, Ordinance No. 12395 amended the Plan for members whose annual retirement benefit , as of July 1, 2007, is determined to be higher under the formula using the definition of “Final Average Earnings” in effect prior to August 1, 2004. Under the interim rule, if such a member retires on his normal retirement date of or after July 1, 2007 and/or before June 1, 2009 (the “window period”), he may elect to have his benefit determined using the 1.5%/0.4% of final average earnings formula including accrued sick leave or the 1.7%/0.4% of final average earnings formula without using accrued sick leave. The interim rule will not apply if at any time during the window period a member’s benefit is determined to be higher under the 1.7%/0.4% formula. Sick leave is paid out at 1.3% per year of service times the amount of leave accrued not to exceed $50,000 unless the employee accrued an amount greater than $50,000 as of July 1, 2004, and retires or dies while in active service prior to July 1, 2007. Also, the Plan was amended to provide the retiring member with a 10% partial lump sum payment option. The balance of the distribution will be paid in accordance with any one of the other payment options available under the Plan. The retirement benefit payable to a member who retires after his or her normal retirement date is the greater of a) the benefit that would have been payable on the normal retirement date plus a special annual retirement benefit provided by the accumulated value, at 4.0% per annum interest, of the monthly benefit that would have been received prior to the postponed retirement date or b) the benefit determined as of the postponed retirement date under the normal formula. Funding Policy The District’s employees do not contribute to the Plan. Ordinances establishing the Plan provide for actuarially determined annual contributions, paid solely by the District, that are sufficient to pay benefits when due. The Entry Age Normal actuarial funding method is used to determine contributions. Annual Pension Cost Contributions of $8,859,535 and $7,425,602, excluding certain professional fees paid by the District, were made to the Plan during the Plan’s calendar years ended December 31, 2009 and 2008, respectively. These contributions were made in accordance with actuarially determined contribution requirements based on actuarial valuations performed at January 1, 2009 and 2008, respectively, and for 2010 consisted of a) $5,651,150 normal cost plus b) $2,590,278 amortization of the actuarial accrued assets in excess of the actuarial accrued liability and prior changes c) multiplied by an interest factor of 1.075. The District provides certain professional fees, office space, utilities, and other services to the Plan at no cost. Other costs of administering the Plan are financed from plan net assets. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2010 and 2009 54 8. Defined Benefit Pension Plan (Continued) Annual Pension Cost (Continued) Significant actuarial assumptions used in the valuations are as follows: Latest valuation date January 1, 2010 Actuarial cost method Entry Age Normal Amortization method Level dollar closed Amortization period 20-year period Asset valuation method Three-year average of adjusted market values Post-retirement benefit increases CPI or 3.0% of current benefit, or $50 maximum, if less Investment rate of return 7.5% per annum (1) Projected salary increases 4.5% - 10.0% per annum (1) Social Security wage base 4.0% per annum increase (1) (1) Includes inflation component of 3.0% Three-Year Trend Information Historical trend information about the District’s participation in the Plan is presented below to help readers assess the Plan’s funding status on a going-concern basis and assess progress being made in accumulating assets to pay benefits when due. Annual Percentage Calendar Pension of APC Net Pension Year Cost (APC) Contributed Obligation 2009 $ 8,859,535 100.0% -- 2008 7,425,602 100.0% -- 2007 7,673,240 100.0% -- Required Supplementary Information Schedule of Funding Progress (dollars in thousands) Unfunded Entry Age Actuarial UAAL as a Actuarial Actuarial Accrued Annual Percentage Actuarial Value Accrued Liability Funded Covered of Covered Valuation of Assets Liability (UAAL) Ratio Payroll Payroll Date (1) (2) (1)-(2) (1)/(2) (3) (1-2)/(3) 01/01/2010 $ 185,753 $ 223,063 $ (37,310) 83.3% $ 52,267 71.4% 01/01/2009 183,679 212,066 (28,387) 86.6 48,077 59.0 01/01/2008 185,356 195,834 (10,478) 94.6 43,640 24.0 THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2010 and 2009 55 9. Deferred Compensation Plan The District offers its employees a Deferred Compensation Plan created in accordance with Internal Revenue Code Section 457. The Deferred Compensation Plan, available to all District employees, permits them to defer a portion of their salary until future years. The deferred compensation is not available to employees until termination, retirement, death, disability, or due to financial hardship as defined by the Deferred Compensation Plan. The Deferred Compensation Plan was amended and restated to comply with the Economic Growth and Tax Relief Reconciliation Act of 2001 (the Act). The Act made significant changes to Section 457(b) of the Internal Revenue Code of 1986, as previously amended. The Deferred Compensation Plan assets are held in trust for the exclusive benefit of participants and their beneficiaries under Section 1448 of the Small Business Job Protection Act of 1996. As a result, the assets and liabilities of the Deferred Compensation Plan are not included in the accompanying financial statements. The Deferred Compensation Plan issues a publicly available financial report that includes financial statements and required supplementary information. That report may be obtained by writing: The Metropolitan St. Louis Sewer District, 2350 Market Street, St. Louis, MO 63103-2555. 10. Post-Employment Benefits Other than Pensions Plan Description As part of a total compensation package, the District provides a single-employer defined benefit health care plan to employees who retire from the District on or after age 62 and five years of service or whose age plus years of service equal 75 points (“Rule of 75”). The District pays the monthly group health insurance premium for the individual until the retiree becomes eligible for Medicare at age 65. In addition, there is a closed group of disabled former employees who receive life insurance coverage from the District. The District’s annual other post-employment benefit (OPEB) cost (expense) is calculated based on the annual required contribution (ARC) of the employer, an amount actuarially determined in accordance with the parameters of GASB 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and to amortize any unfunded actuarial liabilities. The District’s annual OPEB cost for the current year and the related information are as follows: Amortization of past service cost $ 813,700 Normal cost 1,199,400 Interest to end of fiscal year 90,600 ARC 2,103,700 Interest on net OPEB obligation 45,600 Adjustment to annual required contribution (33,800) Annual OPEB cost 2,115,500 Contributions made (1,206,100) Increase in net OPEB obligation 909,400 Net OPEB obligation-beginning of year 1,014,700 Net OPEB obligation-end of year $ 1,924,100 THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2010 and 2009 56 10. Post-Employment Benefits Other than Pensions (Continued) Plan Description (Continued) The Plan was established by District Ordinance, which assigned the authority to establish and amend plan benefit provisions to the District. The contribution requirements of the District and plan members are established and may be amended by the District. Three-Year Trend Information Annual Percentage Fiscal Required of ARC Net OPEB Year Cont. (ARC) Contributed Obligation 2010 $ 2,103,700 57.0% $ 1,924,100 2009 1,744,700 69.0% 1,014,700 2008 1,709,700 73.0% 466,900 Required Supplemental Information Schedule of Funding Progress (dollars in thousands) Unfunded Actuarial UAAL as a Actuarial Actuarial Accrued Percentage Actuarial Value Accrued Liability Funded Covered of Covered Valuation of Assets Liability (UAAL) Ratio Payroll Payroll Date (1) (2) (1)-(2) (1)/(2) (3) (1-2)/(3) 07/01/2007 $ -- $ 21,938 $ 21,938 --% $ 43,640 50.3% 07/01/2009 -- 24,412 24,412 -- 50,230 48.6 THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2010 and 2009 57 10. Post-Employment Benefits Other than Pensions (Continued) Pan Description (Continued) Significant actuarial assumptions used in the valuation are as follows: Latest valuation date January 1, 2010 Discount rate 4.5% per annum Amortization period 30-year period Medical trend: Year Medical Year Medical 2009 8.4% 2035 5.0% 2010 7.5 2040 4.8 2011 6.4 2045 4.7 2012 5.7 2050 4.6 2013 5.7 2055 4.5 2014 5.6 2060 4.5 2015 5.6 2065 4.4 2016 5.6 2070 4.4 2020 5.5 2075 4.4 2025 5.4 2080+ 4.4 2030 5.3 The healthcare trends used in this valuation are based on long term healthcare trends generated by the Getzen Model. The Getzen Model is the result of research sponsored by the Society of Actuaries and completed by a committee of economists and actuaries. This model is the current industry standard for projecting long term medical trends. Inputs to the model are consistent with the assumptions used in deriving the discount rate used in the valuation. Payroll inflation 4.5% per annum Mortality 1983 Group Annuity Mortality Table, male rates, set back 6 years for females Terminations of Employment: Select Rates based on service, Ultimate Rates based on attained age, Ultimate Rates are from the Sarason T-1 Table: Employees Select Rates (0 to 4 years of service) Ultimate Rates (after 4 years of service) Years of Service Rate Attained Age Rate 0 20.0% 20 5.5% 1 12.0 30 3.7 2 7.5 40 1.1 50+ 0.0 THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2010 and 2009 58 10. Post-Employment Benefits Other than Pensions (Continued) Pan Description (Continued) Retirement – Rates vary by age Age Before 75 Points After 75 Points 55 1.0% 10.0% 56 2.0 10.0 57 2.0 10.0 58 2.0 10.0 59 3.0 10.0 60 4.0 15.0 61 5.0 15.0 62 20.0 35.0 63 10.0 25.0 64 20.0 25.0 65 100.0 100.0 Disability Percent Becoming Age Disabled 20 0.056% 30 0.064 40 0.102 50 0.311 Future Retiree Coverage 90.0% of employees retiring prior to age 65 are assumed to elect medical coverage Future Dependent Care 25.0% elect spouse coverage 0.0% dependent children coverage THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2010 and 2009 59 11. Self-Insurance Programs The District is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; injuries to employees; and natural disasters. The District has established a risk management program and retains the risk related to its obligation to provide workers' compensation and medical and hospitalization benefits to its employees; and to pay water backup claims to its customers. The estimated liabilities for payment of incurred (both reported and unreported) but unpaid claims relating to these matters are included as a component of current deposits and accrued expenses, and as such are expected to be paid within one year of the date of the statement of net assets. At June 30, 2010 and 2009, these liabilities amounted to $4,713,013 and $2,246,526, respectively. The claims liabilities reported are based on the requirements of GASB Statement No. 10, which requires that a liability for claims be reported if information obtained prior to the issuance of the financial statements indicates it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Changes in the balance of claims liabilities during fiscal 2010 and 2009 were as follows: 2010 2009 Liability, beginning of year $ 2,246,526 $ 5,056,208 Current year claims and changes in estimates 12,018,566 15,027,843 Claim payments (9,552,079) (17,837,525) Liability, end of year $ 4,713,013 $ 2,246,526 The District obtains periodic funding valuations from the third-party administrators managing the self- insurance programs and adjusts the charges as required to maintain the appropriate level of estimated claims liability. The District also maintains excess liability insurance coverage for workers' compensation and medical and hospitalization claims; general liability; and water backup damage to customers’ property. The District purchases commercial insurance for all other risks of loss. Settled claims have not exceeded this commercial coverage in any of the past three years. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2009 and 2008 60 12. Closure and Postclosure Care Costs State and federal laws and regulations require the District to place a final cover on its Prospect Hill Reclamation Project landfill site when it stops accepting waste and to perform certain maintenance and monitoring functions at the site for 30 years after closure. Although closure and postclosure care costs will be paid only near or after the date that the landfill stops accepting waste, the District reports a portion of these closure and postclosure care costs as an operating expense in each period based on landfill capacity used as of the end of the fiscal year. The $662,018 and $622,365 reported as landfill closure and postclosure care liabilities at June 30, 2010 and 2009, respectively, represent the cumulative amounts reported at fiscal year-end based on the use of 89.0% and 80.0% of the estimated capacity of the landfill for fiscal years ended 2010 and 2009, respectively. The District will recognize the remaining estimated cost of closure and postclosure care of $79,303 at June 30, 2010 as the remaining estimated capacity is filled. These amounts are based on what it would cost to perform all closure and postclosure care in 2010. The District expects to close the landfill in the year 2012. Actual cost may be higher due to inflation, changes in technology, or changes in regulations. The District is required to demonstrate that it has the financial capability to close the landfill to the State of Missouri through the use of a financial test as specified in 10 CSR 80-2.030(4)(D)6 of the Missouri Solid Waste Management Rules. The District has complied with the State’s requirement. The District recognizes that estimates of closure costs may change as a result of inflation, deflation, and/or changes in technology and applicable laws and regulations. If closure cost estimates change, the liability currently reported on the balance sheet will be adjusted accordingly. 13. Commitments and Contingencies US 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 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 District has been the subject of several investigatory actions by EPA over the past several years. Negotiations have been ongoing with EPA and the 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 from this litigation. 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. 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 EPA and the DNR. In September 2008, the Judge put in place a Stay while the parties mediate the issues. The parties have been in mediation over the past two years. A status report on the Stay is due in December 2010. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2010 and 2009 61 13. Commitments and Contingencies (Continued) William Zweig et al. v. Metropolitan Sewer District. This case was filed on July 18, 2008 and, as amended, contends that 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 District stormwater customer who seeks to represent a class of all the District stormwater 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. 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 judge has not yet issued a ruling on the second phase of the case. The District cannot predict with any certainty at this time whether, or in what amount, the District may be required to make a refund. The third phase will determine the amount of plaintiffs’ attorneys’ fees, to be paid by the District out of any refund awarded. Once the judge rules on phases 2 and 3, the case will be appealable. The District has collected approximately $90,872,000 since it implemented the impervious charge in March 2008 until it suspended collection of the impervious charge in August 2010. The District has resumed the collection of real and personal property taxes for stormwater purposes along with a 24¢ per month per customer charge that was previously voted on in 1988. This is consistent with how the District funded stormwater operations prior to implementing the impervious stormwater user charge and is consistent with the court ruling dated July 7, 2010. The District is a defendant in various other matters of litigation. Of these matters, management and District’s legal counsel do no anticipate any material effect on the June 30, 2010 and 2009 financial statements. The District has entered into construction and other contracts amounting to approximately $206,441,182 and $226,105,854 at June 30, 2010 and 2009, respectively. Grants to be received from various governmental agencies and entities to partially offset the cost of the contract commitments amounted to approximately $2,693,317 and $399,000 at June 30, 2010 and 2009, respectively. As of June 30, 2010, the District had $245,000,000 in bonds authorized by the voters in August 2008, but unissued. These bonds will fund the second phase of a multi decade wastewater capital improvement program. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2010 and 2009 62 14. Restricted Net Assets The government-wide Statements of Net Assets reports $80,782,806 and $94,768,570 of restricted net assets at June 30, 2010 and 2009, respectively, of which $50,836,337 and $60,797,463 are restricted by enabling legislation as of June 30, 2010 and 2009, respectively. 15. Segment Information The District issued wastewater revenue bonds to finance wastewater infrastructure projects. The District accounts for both wastewater and stormwater activities in a single enterprise fund, but investors in those bonds rely solely on the revenue generated by the wastewater activities for repayment. Summary financial information for each business line is presented below. Wastewater Stormwater Condensed Statement of Net Assets Total current assets $ 305,863,378 $ 65,362,021 Total restricted assets 60,261,049 22,197,377 Total other assets 15,319,087 -- Net capital assets 1,881,263,973 530,612,916 Total assets 2,262,707,487 618,172,314 Total current liabilities 66,369,981 10,052,419 Total current restricted liabilities 1,395,959 279,661 Total long-term liabilities 594,345,364 786,023 Total liabilities 662,111,304 11,118,103 Invested in capital assets, net of related debt 1,338,360,856 530,612,916 Restricted net assets 58,865,090 21,917,716 Unrestricted net assets 203,370,237 54,523,579 Total net assets $1,600,596,183 $607,054,211 Condensed Statement of Revenues, Expenses, and Changes in Net Assets Operating revenues $ 204,697,930 $ 41,889,244 Depreciation expense (42,129,185) (11,882,591) Other operating expenses (145,598,505) (29,168,593) Operating income 16,970,240 838,060 Total nonoperating revenues 5,557,107 2,662,757 Total nonoperating expenses (25,083,597) (696,937) Nonoperating income (19,256,490) 1,965,820 Capital contributions 10,611,024 9,174,988 Change in net assets 8,054,774 11,978,868 Beginning net assets 1,592,541,409 595,075,343 Ending net assets $1,600,596,183 $607,054,211 THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2010 and 2009 63 15. Segment Information (Continued) Condensed Statement of Cash Flows Operating activities $ 28,953,319 $ 38,963,073 Noncapital financing activities -- 1,401,100 Capital and related financing activities (38,972,995) (42,434,396) Investing 14,225,082 3,173,502 Increase in cash 4,205,406 1,103,279 Cash beginning 5,415,139 1,042,987 Cash Ending $ 9,620,545 $ 2,146,266 16. Prior Period Adjustment An internal review of the District’s CIRP during 2010 in conjunction with the implementation of the new ERP system, the District discovered that prior year operating and nonoperating expenses totaling $25,696,026 were incorrectly recorded to CIRP in the enterprise wide financial statements. Accordingly, the District restated its financial statements for the years ended June 30, 2009 and June 30, 2008. The effect of the restatement was to decrease the change in net assets for fiscal years 2004 through 2009. To correct this error, the beginning prior year net assets of $2,144,497,330, as originally reported, have been decreased to $2,125,961,747. The ending prior year net assets of $2,213,312,778, as originally reported, have been decreased to $2,187,616,752. The annual effect for each year is as follows: Years Reduction in Increase in Increase in Ending Construction Other Operating Non Recurring June 30, in Progress Expense Projects and Studies 2009 $7,160,443 $4,835,151 $2,325,292 2008 7,664,659 5,422,825 2,241,834 2007 1,229,060 1,229,060 2006 2,188,112 2,188,112 2005 4,545,658 4,545,658 2004 and prior 2,908,094 2,908,094 Total $25,696,026 $10,257,976 $15,438,050 17. Subsequent Events Only July 9, 2010, the court declared that the stormwater user charge is in reality a tax that requires voter approval under the Hancock Amendment I. The District has since ceased charging customers for stormwater usage and has reenacted the property tax that was previously charged. It is estimated that the combination of taxes along with the stormwater charge will generate approximately $27.0 million in revenue annually. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Notes to Financial Statements June 30, 2010 and 2009 64 18. Future Accounting Pronouncement GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions (GASB 54), establishes fund balance classifications that comprise a hierarchy based primarily on the extent to which a government is bound to observe constraints imposed upon the use of the resources reported in government funds. The additional classifications provided are restricted, committed, assigned, and unassigned based on the relative strength of the constraints that control how specific amounts can be spent. GASB 54 will be effective for the District for the fiscal year ending June 30, 2011. The District; however, has not yet completed its assessment of the statement or the potential impact of the statement on its financial position Statistical Section r ow you -rtvow., that there are 9,900 miles of sewers and storm channels under the area within the boundaries of Metropolitan St. Louis Sewer DiStrict? That is enough to go across the United States more than 21' times! THE METROPOLITAN ST. LOUIS SEWER DISTRICT 65 Statistical Section This part of the District’s comprehensive annual financial report presents detailed information as a context for understanding what the information in the financial statements, note disclosures, and required supplementary information says about the District’s overall financial health. Contents Page Financial Trends 66 These schedules contain trend information to help the reader understand how the District’s financial performance and well-being have changed over time. Revenue Capacity 68 These schedules contain information to help the reader assess the District’s most significant local revenue source, the user charge. Debt Capacity 75 These schedules present information to help the reader assess the affordability of the District’s current levels of outstanding debt and the District’s ability to issue additional debt in the future. Demographic and Economic Information 78 These schedules offer demographic and economic indicators to help the reader understand the environment within which the District’s financial activities take place. Operating Information 81 These schedules contain service and infrastructure data to help the reader understand how the information in the District’s financial report relates to the services the District provides and the activities it performs. THE METROPOLITAN ST. LOUIS SEWER DISTRICT 66 2004 2005 2006 2003 As Restated As Restated As Restated Net Assets Invested in capital assets, net of related debt 1,548,524$ 1,586,704$ 1,618,219$ 1,651,792$ Restricted 34,723 44,329 47,584 66,973 Unrestricted 158,573 171,858 190,971 247,958 Total Net Assets 1,741,820$ 1,802,891$ 1,856,774$ 1,966,723$ 2007 2008 2009 As Restated As Restated As Restated 2010 Net Assets Invested in capital assets, net of related debt 1,682,063$ 1,704,322$ 1,798,914$ 1,868,974$ Restricted 85,447 97,422 94,769 80,782 Unrestricted 278,803 324,218 293,934 257,894 Total Net Assets 2,046,313$ 2,125,962$ 2,187,617$ 2,207,650$ Notes: GASB Statement 34 was implemented in 2002. Fiscal Year Fiscal Year Net Assets by Component Last Eight Fiscal Years (000's) THE METROPOLITAN ST. LOUIS SEWER DISTRICT 67 Income/(Loss)Change Fiscal Operating Operating Operating Nonoperating before Capital Capital in Net Year Revenues Expenses Income/(Loss) Income/(Loss) Contributions Contributions Assets 2003 129,469,562 144,277,411 (14,807,849) 28,392,581 13,584,732 28,410,813 41,995,545 2004 As Restated 157,970,382 150,592,370 7,378,012 18,445,656 25,823,668 35,246,721 61,070,389 2005 As Restated 188,993,673 162,373,895 26,619,778 4,678,347 31,298,125 22,585,702 53,883,827 2006 As Restated 206,803,022 175,889,536 30,913,486 25,966,334 56,879,820 53,069,364 109,949,184 2007 As Restated 202,205,532 183,810,507 18,395,025 36,885,268 55,280,293 24,309,430 79,589,723 2008 As Restated 221,925,048 225,145,882 (3,220,834) 37,259,517 34,038,683 45,609,805 79,648,488 2009 As Restated 249,725,358 212,177,779 37,547,579 (2,885,959) 34,661,620 26,993,385 61,655,005 2010 246,587,174 228,778,874 17,808,300 (17,560,670) 247,630 19,786,012 20,033,642 Notes: GASB Statement 34 was implemented in 2002. Changes in Net Assets Last Eight Fiscal Years THE METROPOLITAN ST. LOUIS SEWER DISTRICT 68 Total Fiscal Sewer Service Licenses, Permits,Operating Year Charges, Net and Other Fees Other Revenues 2001 123,985,768 6,049,589 1,739,921 131,775,278 2002 120,500,816 5,706,843 2,232,268 128,439,927 2003 120,994,703 5,435,878 3,038,981 129,469,562 2004 150,903,248 6,297,166 769,968 157,970,382 2005 181,966,427 6,549,221 478,025 188,993,673 2006 200,719,348 5,210,321 873,353 206,803,022 2007 194,798,878 6,030,583 1,376,071 202,205,532 2008 216,618,417 4,345,961 960,670 221,925,048 2009 244,699,964 3,475,283 1,550,111 249,725,358 2010 241,495,357 3,084,552 2,007,265 246,587,174 Operating Revenues by Source Last Ten Fiscal Years THE METROPOLITAN ST. LOUIS SEWER DISTRICT 69 Fiscal Employment Materials and Contracted Chemical Year Costs Utilities Supplies Services Supplies 2001 50,191,757 11,242,361 9,679,471 16,986,941 941,970 2002 51,765,551 10,025,931 9,851,643 20,956,310 759,712 2003 52,536,992 10,341,674 9,686,572 20,841,068 919,906 2004 54,259,559 10,321,708 9,453,919 21,148,553 843,259 2005 52,656,509 11,244,255 7,231,297 30,424,935 946,182 2006 56,817,238 11,963,002 11,602,773 38,472,414 1,089,564 2007 58,731,260 11,362,805 12,335,366 40,879,286 1,260,789 2008 As Restated 60,787,548 12,837,998 14,081,785 64,192,143 1,387,122 2009 As Restated 70,475,293 12,587,699 14,855,989 48,783,447 1,589,650 2010 85,030,456 12,355,232 13,297,892 39,561,050 1,478,605 Subtotal, Expenses Total Fiscal before Operating Year Insurance Other Depreciation Depreciation Expenses 2001 1,425,360 4,654,794 95,122,654 41,946,627 137,069,281 2002 1,581,623 5,510,335 100,451,105 41,940,987 142,392,092 2003 2,689,408 5,349,920 102,365,540 41,911,871 144,277,411 2004 2,837,587 9,135,915 108,000,500 42,591,870 150,592,370 2005 2,968,245 12,459,569 117,930,992 44,442,903 162,373,895 2006 2,816,795 9,147,931 131,909,717 43,979,819 175,889,536 2007 2,915,236 10,604,787 138,089,529 45,720,978 183,810,507 2008 As Restated 2,939,390 13,986,037 170,212,023 54,933,859 225,145,882 2009 As Restated 2,746,119 13,769,203 164,807,399 47,370,379 212,177,779 2010 3,062,439 19,981,424 174,767,098 54,011,776 228,778,874 Operating Expenses Last Ten Fiscal Years THE METROPOLITAN ST. LOUIS SEWER DISTRICT 70 2004 2005 2001 2002 2003 As Restated As Restated Nonoperating revenues Property taxes levied by the District 22,557,934$ 23,451,036$ 21,101,265$ 21,743,767$ 22,015,870$ Investment income 13,867,375 9,622,027 6,790,455 2,060,259 5,501,708 Recovery of doubtful Clean Water Improvement Surcharge accounts 204,452 233,006 139,675 115,763 - Rent and other income 3,408,668 3,319,269 1,124,569 1,010,125 1,038,074 Total nonoperating revenues 40,038,429$ 36,625,338$ 29,155,964$ 24,929,914$ 28,555,652$ Nonoperating expenses Interest expense 331,343$ 213,376 - - - Clean Water Capital Improvement refund - - - - 5,667,330 Net (gain) loss on disposal and sale of capital assets 884,654 299,720 (3,565,868) 548,133 3,138,531 Nonrecurring projects and studies 6,383,723 2,997,263 4,328,951 6,935,332 8,837,532 Other 24,832 42,116 - 183,773 - Total nonoperating expenses 7,624,552$ 3,552,475$ 763,083$ 7,667,238$ 17,643,393$ Net nonoperating revenue (expense)32,413,877$ 33,072,863$ 28,392,881$ 17,262,676$ 10,912,259$ 2006 2007 2008 2009 As Restated As Restated As Restated As Restated 2010 Nonoperating revenues Property taxes levied by the District 23,210,982$ 24,401,167$ 27,512,070$ 2,129,475 1,401,100 Investment income 7,610,461 16,946,145 17,476,621 13,115,519 6,553,760 Recovery of doubtful Clean Water Improvement Surcharge accounts - - - - - Rent and other income 1,026,547 878,319 529,983 214,674 265,004 Total nonoperating revenues 31,847,990$ 42,225,631$ 45,518,674$ 15,459,668 8,219,864 Nonoperating expenses Interest expense - - 4,313,973 9,079,269 13,189,283 Clean Water Capital Improvement refund 95,372 15,000 - - - Net (gain) loss on disposal and sale of capital assets 95,064 96,630 686,459 2,161,862 2,719,163 Nonrecurring projects and studies 5,563,301 5,228,733 3,258,725 7,104,496 9,872,088 Other - - - - - Total nonoperating expenses 5,753,737$ 5,340,363$ 8,259,157$ 18,345,627 25,780,534 Net nonoperating revenue (expense)26,094,253$ 36,885,268$ 37,259,517$ (2,885,959) (17,560,670) Fiscal Year Fiscal Year Nonoperating Revenues and Expense s Last Ten Fiscal Years THE METROPOLITAN ST. LOUIS SEWER DISTRICT 71 Type of Monthly Charge Unmetered c Residential c Non-Residential Wastewater User Charge Base Charge 10.90 10.90 10.90 Compliance Charge a - - 29.65 Volume Charges per Ccf b - 1.92 1.92 per room 1.25 - - per water closet 4.69 - - per bath 3.91 - - per separate shower 3.91 - - Extra Strength Surcharges a SS over 300 ppm per ton - - 218.90 BOD over 300 ppm per ton - - 551.52 COD over 600 ppm per ton - - 275.76 Stormwater Service Charge per 100 square feet of impervious property 0.14 0.14 0.14 Notes: a Applicable only to non-residential customers. b Ccf = Hundred cubic feet. c User charges for certain low income residential users will be 50 percent of the regular user charge. Source: Finance Department Metered User Charge Rates As of June 30, 2010 THE METROPOLITAN ST. LOUIS SEWER DISTRICT 72 2001 2002 2003 2004 b 2005 c Residential: Single Family/Unit a 170.52$ 170.52$ 170.52$ 205.32$ 249.84$ Multi-Family/Unit a 145.32 145.32 145.32 173.16 210.00 Commercial/Industrial: Service Charge/Unit 172.44 172.44 172.44 218.28 236.28 Usage Charge/Ccf 1.05 1.05 1.05 1.34 1.66 Storm Sewer Usage Charge/100 sq. feet of impervious area - - - - - Extra Strength Surcharges: Suspended Solids over 300 parts per million/ton 87.20 87.20 87.20 162.88 200.15 Biological Oxygen Demand (BOD's) over 300 parts per million/ton 217.90 217.90 217.90 319.24 412.58 Chemical Oxygen Demand (COD's) over 600 parts per million/ton 108.95 108.95 108.95 159.62 206.29 2006 d 2007 2008 e 2009 2010 f Residential: Single Family/Unit a 271.44$ 271.44$ 344.88$ 344.88$ 351.12$ Multi-Family/Unit a 228.00 228.00 299.76 299.76 305.04 Commercial/Industrial: Service Charge/Unit 248.28 248.28 457.20 457.20 486.60 Sanitary Sewer Usage Charge/Ccf 1.81 1.81 1.88 1.88 1.92 Storm Sewer Usage Charge/100 sq. feet of impervious area - - 0.12 0.12 0.14 Extra Strength Surcharges: Suspended Solids over 300 parts per million/ton 218.90 218.90 218.90 218.90 218.90 Biological Oxygen Demand (BOD's) over 300 parts per million/ton 461.44 461.44 529.90 529.56 551.52 Chemical Oxygen Demand (COD's) over 600 parts per million/ton 230.72 230.72 264.85 264.78 275.76 Notes: a The above rates are based on actual rates and budgeted units. b Ordinance 11553, effective August 1, 2003, changed all rates. It also changed the level of suspended solids and chemical oxygen demand at which extra strength surcharges are incurred from 350 to 300 and 300 to 600 parts per million/ton, respectively. c Ordinance 11692, effective July 1, 2004, changed wastewater rates. d Ordinance 12019, effective July 1, 2005, changed wastewater rates. e Ordinance 12561, effective January 1, 2008, changed wastewater rates. Ordinance 12560, effective March 1, 2008, changed stormwater rates. f Ordinance 12754, effective July 1, 2009, changed wastewater rates. Source: Finance Department Fiscal Year Fiscal Year Sewer User Charges (Composite--Annual) Last Ten Fiscal Years THE METROPOLITAN ST. LOUIS SEWER DISTRICT 73 Single Multi- Fiscal Family Family Non-Total Year Residential Residential Residential Accounts 2001 352,656 45,074 25,779 423,509 2002 353,166 44,581 25,664 423,411 2003 353,935 44,632 25,672 424,239 2004 356,069 44,969 25,806 426,844 2005 360,104 44,506 25,758 430,368 2006 362,043 44,700 25,700 432,443 2007 362,569 44,875 25,647 433,091 2008 391,181 54,862 32,336 478,379 2009 388,791 51,441 32,161 472,393 2010 387,670 50,867 31,939 470,476 Source: Finance Department a Due to the implementation of the impervious area charge in 2008, approximately 46,000 additional stormwater only accounts are billed each month. This charge was challenged and a court decision was entered on 7/9/10. Based on that decision the 46,000 accounts will not be billed an impervious charge in FY '11. Number of Customers by Type Last Ten Fiscal Years THE METROPOLITAN ST. LOUIS SEWER DISTRICT 74 Customer Amount % Anheuser-Busch 5,518,959$ 2.29% Washington University 1,309,287 0.54% City of St. Louis 1,266,572 0.52% Mallinckrodt Inc 1,250,530 0.52% Boeing Co 667,443 0.28% Zoological Gardens 597,152 0.25% Sigma-Aldrich 512,958 0.21% BJC Health System 512,642 0.21% Sensient Colors Inc 462,261 0.19% Cott Beverages Inc 438,501 0.18% Subtotal (10 largest)12,536,305$ 5.19% Balance from other customers 228,959,052$ 94.81% Grand totals 241,495,357$ 100.00% Customer Amount % Anheuser-Busch 5,300,796$ 4.28% Solutia Inc.1,124,951 0.91% DaimlerChrysler Group 741,458 0.60% Boeing Company 589,641 0.48% Washington University 521,511 0.42% BJC Health Systems 507,949 0.41% Coca-Cola Bottling Co.354,226 0.29% Laporte Pigments 321,067 0.26% City of St. Louis, Comptroller 286,875 0.23% Monsanto Company 284,969 0.23% Subtotal (10 largest)10,033,443$ 8.09% Balance from other customers 113,952,325$ 91.91% Grand totals 123,985,768$ 100.00% Source: Finance Department Fiscal Year 2000 User Charges Ten Largest Customers Current Year and Ten Years Ago User Charges Fiscal Year 2010 THE METROPOLITAN ST. LOUIS SEWER DISTRICT 75 General As a Share Fiscal Obligation Direct of Personal Year Bonds Senior Subordinate Loans Amount Per Capita Income 2001 2,205,000 - - - 2,205,000 2 - 2002 - - - - - - - 2003 - - - - - - - 2004 - 175,000,000 161,280,000 473,275 336,753,275 248 0.35 2005 - 175,000,000 166,952,500 771,099 342,723,599 253 0.35 2006 - 173,500,000 205,760,000 680,538 379,940,538 282 0.37 2007 - 231,995,000 213,652,500 337,730 445,985,230 330 0.42 2008 - 230,485,000 206,522,500 269,299 437,276,799 324 0.67 2009 - 258,965,000 235,932,500 4,345,790 499,243,290 373 0.81 2010 - 342,370,000 224,505,000 38,281,058 605,156,058 450 0.97 Notes: Calculation of "Per Capita" for 2010 is based on estimated population levels. Calculation of "As a Share of Personal Income" for 2010 is based on estimated income levels. Sources: Regional Economic Information System, Bureau of Economic Analysis, U.S. Department of Commerce, and the U.S. Census Bureau Total Revenue Bonds Ratios of Outstanding Debt by Type Last Ten Fiscal Years THE METROPOLITAN ST. LOUIS SEWER DISTRICT 76 Amount of Debt Percentage of Debt Governmental Unit Debt Outstanding within District Boundary within District Boundary City of St. Louis 46,300,000$ 46,300,000$ 100.0% St. Louis County 37,990,000 37,686,080 99.2 Municipalities 105,954,505 105,864,505 99.9 City of St. Louis School District 238,329,040 238,329,040 100.0 St. Louis County School Districts 1,133,426,820 1,113,302,980 98.2 Fire Districts 86,041,416 82,072,469 95.4 1,648,041,781$ 1,623,555,074$ 98.5% Sources: City of St. Louis, Office of Comptroller St. Louis County, Department of Revenue Missouri Department of Education, School Finance Polled Governments Computation of Overlapping Debt As of June 30, 2010 THE METROPOLITAN ST. LOUIS SEWER DISTRICT 77 Less:Less: Operating Non-Operating Non-Expenses Expenses Net Fiscal Operating operating Gross (excluding (excluding net Available Year Revenues Revenues Revenues depreciation) loss disposals) Revenues 2001 130,549,862 12,059,786 142,609,648 95,122,654 6,408,555 41,078,439 2002 127,213,259 7,948,275 135,161,534 100,451,107 3,039,379 31,671,048 2003 128,243,045 5,657,225 133,900,270 102,570,323 4,328,951 27,000,996 2004 As Restated 156,739,527 1,745,978 158,485,505 108,000,500 7,119,105 43,365,900 2005 As Restated 187,759,272 4,356,643 192,115,915 117,930,992 14,504,862 59,680,061 2006 As Restated 205,554,460 6,135,347 211,689,807 131,909,717 5,658,673 74,121,417 2007 As Restated 200,963,085 13,501,751 214,464,836 138,089,529 5,243,733 71,131,574 2008 As Restated 208,981,377 13,281,919 222,263,296 142,725,186 1,016,891 78,521,219 2009 As Restated 209,972,662 10,283,104 220,255,766 138,971,881 6,656,919 74,626,966 2010 204,697,929 5,358,354 210,056,283 145,598,505 9,773,367 54,684,411 Fiscal Coverage Year Principal Interest Total Ratio 2001 N/A N/A N/A N/A 2002 N/A N/A N/A N/A 2003 N/A N/A N/A N/A 2004 N/A 924,164 924,164 46.9 2005 1,127,500 14,799,402 15,926,902 3.7 2006 5,407,500 13,835,332 19,242,832 3.9 2007 7,817,500 16,512,429 24,329,929 2.9 2008 8,640,000 17,694,791 26,334,791 3.0 2009 12,110,000 17,503,891 29,613,891 2.5 2010 15,999,006 20,810,158 36,809,164 1.5 Debt Service Pledged Revenue Coverage Last Ten Fiscal Years Notes: This schedule complies with the procedures associated with the continuing disclosure requirements of the 2004 through 2010 revenue bonds and, therefore, does not include all the revenues and expenses of the District. THE METROPOLITAN ST. LOUIS SEWER DISTRICT Per Personal Capita Total Fiscal Income Personal Labor Number of Year Populations (millions) Income City County State Force Households (1) 2001 1,365,241 49,653 36,369 7.0 4.2 4.7 741,504 551,388 2002 1,363,245 51,465 37,752 9.0 5.4 5.8 740,371 551,388 2003 1,359,820 53,070 39,027 10.0 6.0 6.4 732,905 551,388 2004 1,358,428 54,886 40,404 9.6 5.9 6.3 728,014 551,388 2005 1,354,830 55,841 41,216 8.8 5.5 5.7 726,390 551,388 2006 1,347,691 57,660 42,784 7.5 5.1 5.0 723,627 551,388 2007 1,349,778 59,200 43,859 7.5 5.1 5.0 723,627 551,388 2008 1,348,462 62,135 46,079 7.9 5.9 6.0 690,006 551,388 2009 1,339,011 61,947 46,263 11.5 9.7 9.5 681,801 551,388 2010 1,344,146 62,190 46,267 12.3 9.4 9.3 682,165 551,388 Notes: (1) The number of households was taken from http://quickfacts.census.gov/qfd/states/29000.html. It is based on the 2000 census. Information for other years is unavailable, and therefore the 2000 census information is used for every year in this table. Sources: Regional Economic Information System, Bureau of Economic Analysis, U.S. Department of Commerce, and Missouri Economic Resource and Information Center (MERIC) Footnotes--http://www.bea.gov/regional/reis/scb.cfm http://www.missourieconomy.org/indicators/LAUS/default.aspx Unemployment Rate Saint Louis Demographic and Economic Statistics Last Ten Fiscal Years 78 THE METROPOLITAN ST. LOUIS SEWER DISTRICT 79 Percentage Percentage Employer Employees (1)of Total Rank Employees (1 )of Total Rank BJC HealthCare 23,592 4% 1 22,694 3% 1 Boeing, Integrated Defense Systems 16,000 3% 2 21,000 3% 2 Washington University in St. Louis 13,167 2% 3 9,667 1% 5 SSM Healthcare 12,367 2% 4 Scott Air Force Base 11,242 2% 5 9,298 1% 7 Wal-Mart Stores Inc.10,800 2% 6 8,600 1% 9 Schnuck Markets, Inc.10,700 2% 7 13,051 2% 4 United States Postal Service 10,249 2% 8 St. John's Mercy Health Care 9,793 2% 9 McDonald's 9,000 1% 10 9,500 1% 6 Unity Health System 14,174 2% 3 City of St. Louis 8,328 1% 10 Trans World Airlines, Inc.8,765 1% 8 126,910 22%125,077 16% Notes: (1) Employees are for the St. Louis area which includes several counties not served by the District. Sources: St. Louis Business Journal's Book of Lists 2010 St. Louis Business Journal's Book of Lists 2000 Fiscal Year 2000Fiscal Year 2010 Principal Employers (St. Louis Metropolitan Area) Current Year and Ten Years Ago THE METROPOLITAN ST. LOUIS SEWER DISTRICT 80 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Administrative 148 140 155 111 122 118 125 131 133 131 Office/Clerical 97 84 108 81 76 88 86 92 94 89 Plant Operation & Laboratory 233 234 221 231 231 233 234 239 237 249 Engineering & Technical 131 110 115 117 114 119 122 133 144 151 Sewer Construction & Maintenance 257 273 302 259 258 258 271 276 301 315 Total Employees 866 841 901 799 801 816 838 871 909 935 Source: Human Resources Department Full-time-Equivalent Employees as of June 30, Employment Level Last Ten Fiscal Years THE METROPOLITAN ST. LOUIS SEWER DISTRICT 81 Average Sewage Fiscal Treatment in Millions Year of Gallons per Day 2001 304.1 2002 319.8 2003 302.8 2004 342.3 2005 348.7 2006 291.3 2007 313.4 2008 363.7 2009 394.7 2010 395.5 Source: Operations Department Average Flow Last Ten Fiscal Years THE METROPOLITAN ST. LOUIS SEWER DISTRICT 82 2001 2002 2003 2004 2005 Miles of sewers 8,800 8,800 8,959 9,200 9,568 Number of treatment plants 10 9 8 8 8 Treatment capacity (MGD) a 413 413 413 413 413 Annual engineering maximum plant capacity (millions of gallons)150,745 150,745 150,745 150,745 150,745 Amount treated annually (millions of gallons)110,997 116,727 116,800 124,940 127,276 Unused capacity (millions of gallons)39,748 34,018 33,945 25,805 23,469 Percentage of capacity utilized 74%77%77%83%84% 2006 2007 2008 2009 2010 Miles of sewers 9,630 9,764 9,723 9,812 9,900 Number of treatment plants 8 8 7 7 7 Treatment capacity (MGD) a 413 426 428 423 423 Annual engineering maximum plant capacity (millions of gallons)150,745 155,490 154,395 154,395 154,395 Amount treated annually (millions of gallons)106,339 114,391 132,751 144,066 144,358 Unused capacity (millions of gallons)44,406 41,099 21,644 10,329 10,037 Percentage of capacity utilized 71%74%86%93%93% Sources: Operations Department and Engineering Department Note: a Million gallons per day. Fiscal Year Fiscal Year Operating and Capital Indicators Last Ten Fiscal Years METROPOLITAN ST. LOUIS SEWER DISTRICT2350 Market Street, St. Louis, Missouri 63103-2555