Favorable Financial Audit Report Accepted and Filed by EID
During the June 24, 2013 Board meeting, EID Accounting Manager Tony Pasquarello reported that independent auditing and accounting firm Richardson & Company conducted the 2012 financial audit of EID and issued an unqualified “clean” opinion, meaning there were no material findings, and this is the highest level of assurance an auditor can have. The purpose of the annual audit is to review and test accounting data to ensure that internal controls, practices, and procedures are properly followed and to assure financial statements represent fairly the financial position of the District with no material discrepancies. “There were no difficulties encountered in performing the audit—no disagreements and no major issues discussed with management,” said Brian Nash, CPA, and Audit Director of Richardson & Company. “It’s a very clean audit.”
As a part of the financial presentation, Pasquarello also reported that in 2012, Standard & Poor’s, a bond credit rating agency, raised its underlying rating from an A to an A+ on the District’s previously issued Refunding Revenue bonds. He further stated that total long-term debt outstanding decreased $10.6 million, which included a $3.0 million prepayment on bond issues due in 2013. “By paying off debt early, we can then focus on more pay-as-you-go capital improvement projects,” said EID General Manager Jim Abercrombie.
In 2012, the District’s operating revenues were $53.2 million, with operating expenses at $41.5 million, not including depreciation and amortization, which was $21.4 million. Net operating income, before depreciation and amortization was $11.7 million.
Pasquarello reported that although there is a net loss of $10.8 million presented on the financial statement, it includes the previously mentioned $21.4 million of depreciation and amortization expense which is a non-cash charge, as well as an expense that is not budgeted annually. According to Pasquarello, “the best indicator of the District’s financial performance is the operating income before depreciation and amortization (OIBDA) number. OIBDA is a common metric used in business to provide a better sense of how efficiently a company operates purely based on its ability to sell a product or provide a service. Therefore, as mentioned earlier, in 2012, the District’s operating revenues less operating expenses—excluding the non-cash depreciation and amortization expense—was an $11.7 million net gain. Because we have met and exceeded our debt service coverage ratios that are required by the bond covenants, that puts us in a strong financial position.”
“The OIBDA indicator is really what tells you about the strength of the District,” said Abercrombie. “It’s what allows us to meet our debt service coverage. It’s why Standard & Poor’s increased our rating, and it’s just a very solid position in our operating income.”
Nash went on to say that despite the net loss, which shows on the statement of revenues, expenses and changes in net position largely due to non-cash depreciation, the $70 million in the District’s unrestricted net position on the balance sheet is pretty solid and would fully fund the non-depreciation expenses.
According to Nash, “one of the things that water districts have that’s an advantage over other government agencies is that typically they do have a debt service coverage ratio requirement which is 125%, meaning that their net operating revenue has to be 125% higher than expenses. Because of this, it creates inflexibility on the rate setting side and you have to make sure you cover it. But it also provides financial strength for water districts, more than for other government entities who don’t have that rate covenant.”
Pasquarello also reported that the District made a $6 million contribution payment to partially fund its other post employment benefits liabilities through the California Employee Retirement Benefits Trust (CERBT) fund.
Later in the presentation, General Manager Abercrombie asked Auditor Nash whether or not he agreed that if one looked at EID’s OIBDA indicator, it would suggest that EID is in pretty strong financial position and Nash agreed. EID Board President George Osborne followed up with another question of Nash asking “if EID were ‘bleeding red ink’ as some have suggested, would it be a fair assessment that bond agencies would not raise EID’s credit rating?” Nash stated “yes, I would have to say that’s a safe assumption.”
The Board voted unanimously to receive and file the 2012 Annual Audit Report.