BAWA Annual Financial Report 2011 by Patti Jett

ANNUAL FINANCIAL REPORT of the

BAYTOWN AREA

WATER AUTHORITY (A Component Unit of the City of Baytown, Texas) For the Year Ended September 30, 2011

Prepared by the

CITY OF BAYTOWN, TEXAS FINANCE DEPARTMENT

GENERAL MANAGER Robert D. Leiper

PLANT MANAGER Darryl Fourte

DIRECTOR OF FINANCE Louise Richman, CPA

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SAYTOWN AREA WATER AUTHORITY TABLE OF CONTENTS September 30, 2011

Transmittal Letter Independent Auditors' Report

Report on Internal Control Over Financial Reporting and On Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards

Management's Discussion and Analysis (MD&A)

BASIC FINANCIAL STATEMENTS Statements of Net Assets - Proprietary Fund Statements of Revenues, Expenses, and Changes in Fund Net Assets - Proprietary Fund Statements of Cash Flows - Proprietary Fund

15 17

Notes to Financial Statements

REQUIRED SUPPLEMENTARY INFORMATION 29

Budgetary to Actual (Budget Basis) Comparison

TEXAS SUPPLEMENTARY INFORMATION Services and Rates Schedule of Operating Expenses Schedule of Temporary Investments Analysis of Taxes Levied and Receivable Long-Term Debt Service Requirements by Years (All Bonded Debt Services) Changes in Long-Term Bonded Debt Comparative Schedule of Revenues and Expenses Board Members and Administrative Personnel

Schedules TSI-l TSI-2 TSI-3 N/A

33 34 35

TSI-5 TSI-6 TSI-7 TSI-8

36 40 42 45

OTHER SUPPLEMENTARY INFORMATION Analysis of Changes in Property, Plant, and Equipment Revenue Bond Coverage

48 49

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BAYTOWN AREA WATER AUTHORITY 7425 Thompson Road, Baytown. Texas 77521-1056

(281) 426-3517

FAX (281) 426-3519

Transmittal Letter

January 6, 2012 To the President and Members of the Baytown Area Water Authority Board, Baytown Area Water Authority, and Citizens of Baytown, Texas: The financial statements of the Baytown Area Water Authority (the "Authority") for the year ended September 30,2011, are hereby submitted. The Authority is presented as a discrete component unit of the City of Baytown (the "City") in the City's Comprehensive Annual Financial R~port. Responsibility for both the accuracy of the presented data and the completeness and fail11ess of the presentation, including all disclosures, rests with management. We believe the info1nlation, as presented, is accurate in all material respects. It is presented in a manner designed to set forth fairly, in all material respects, the financial position and results of operations of the Authority as measured and reported by its financial activity. All disclosures necessary to enable the reader to gain an adequate understanding of the Authority's financial affairs have been included. Belt Harris Pechacek, LLLP has audited the [mancial records of the Authority for the fiscal year ended September 30, 2011, and their opinion is included in this report. The financial statements are the responsibility of the Authority. The responsibility of the independent public accountant is to express an opinion on the Authority's financial statements based on their audit. An audit is conducted in accordance with generally accepted auditing standards. Those standards require that the audit be plaruled and perfolnled in a manner to obtain reasonable assurance as to wheUler the financial statements are free of material misstatements. The timely preparation of this report could not have been accomplished without the efforts and dedication of the staff. We would like to express our appreciation to our staff and other persOlUlel who assisted in its preparation. In additioll, we would like to thank the Board of Directors for Ulcir interest and support in planning and conducting the financial operations of Ule Aufuority in a responsible and progressive manner. Respectfully submitted,

Louise Riclm18n, CPA Director of Finance

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INDEPENDENT AUDITORS' REPORT To the Board of Directors ofthe Baytown Area Water Authority ofthe City of Baytown, Texas: We have audited the accompanying financial statements of the business-type activities of the Baytown Area Water Authority (the "Authority"), a component unit of the City of Baytown, Texas, as of and for the years ended September 30, 2011 and 2010, which collectively comprise the Authority's basic fmancial statements as listed in the table of contents. These fmancial statements are the responsibility of the Authority's management. Our responsibility is to express opinions ori these fmancial 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 fmancial statements are free of material lnisstatement. An audit includes exalnining, on a test basis, evidence supporting the amounts and disclosures in the fmancial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall fmancial statement presentation. We believe that our audit provides a reasonable basis for our opinions. In our opinion, the fmancial statements referred to above present fairly, in all material respects, the fmancial position of the business-type activities of the Authority as of September 30,2011 and 2010, and the respective changes in fmancial position and cash flows thereof for the years then ended, in conformity with generally accepted accounting principles in the United States of America. In accordance with Government Auditing Standards, we have also issued our report dated January 6, 2012, on our consideration of the Authority'S intemal 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 intemal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the intemal control over fmancial 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. Generally accepted accounting principles in the United States of America require that the Management's Discussion and Analysis and budgetary comparison information be presented to supplement the basic financial statements. Such information, although not a part of the basic fmancial statements, is required by the Govemmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain lilnited procedures to the Required Supplementary Information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information 1 Partners Robert Belt, CPA Stephanie E. Harris, CPA Nathan Krupke, CPA

Houston 3210 Bingle Rd., Ste. 300 Houston, TX 77055 713.263.1123

Bellville 6100 Wind), Hill Lane Bellville, TX 77418 979.865.3169

Austin 100 Congress Ave., Ste. 2000 Austin, TX 78701路 512.381.0222

All Offices www.texasauditors.com

info@txauditors.com 713.263.1550 fax

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Governmental Audit Quality Center

for consistency with management's responses to our inquiries, the basic fmancial statements, and other knowledge we obtained during our audit of the basic fmancial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the Authority's basic financial statements. The transmittal letter, Texas Supplementary Information, and other supplementary infonnation are presented for purposes of additional analysis and are not a required part of the basic fmancial statements and have not been subj ected to auditing procedures applied in the audit of the basic fmancial statements and, accordingly, we express no opinion on them. CilJELT

~hRRI5 ~CHACEK, LLLP !

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Belt Harris Pechacek, LLLP Certified Public Accountants Houston, Texas . January 6, 2012

REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Al\l]) ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STA1VDARlJS

To the Board of Directors of the Baytown Area Water Authority of the City of Baytown, Texas: We have audited the accompanying fmancial statements of the business-type activities of the Baytown Area Water Authority (the "Authority"), a component unit of the City of Baytown, Texas, as of September 30, 2011 and 2010, and for the years then ended, as listed in the table of contents. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control Over Financial Reporting

In planning and performing our audit, we considered the Authority's internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinions on the fmancial statements, but not for the purpose of expressing an opinion on the effectiveness of the Authority's internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the Authority's internal control over fmancial reporting. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or combination of deficiencies, in internal control such there is a reasonable possibility that a material misstatement of the entity's fmancial statements will not be prevented, or detected and corrected on a timely basis. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internaL control over fmancial reporting that might be deficiencies, significant deficiencies, or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above. Compliance and Other Matters

As part of obtaining reasonable assurance about whether the Authority's financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of fmancial statement amounts.

3 Partners Robert Belt, CPA Stephanie E. Harris, CPA Nathan Krupke, CPA

Houston 3210 Bingle Rd., Ste. 300 Houston, TX 77055 713.263.1123

Bellville 6100 Wind), Hill Lane Bellville,TX 77418 979.865.3169

Austin 100 Congress Ave., Ste. 2000 Austin, TX 78701 512.381.0222

All Offices www.texasauditors.com info@txauditors.com

713.263.1550 fax

Governmental _ Audit Quality Center QDl

However, providing an opinion on compliance with those provisions was not an objective of our audit, and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. This report is intended solely for the information and use of management and Board of Directors and is not intended to be and should not be used by anyone other than these specified parties.

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17J-'ELT (fif,l , ARRIS '\":dr ECHACEK, LLLP '-..J

Belt Harris Pechacek, LLLP Certified Public Accountants Houston, Texas January 6,2012

MANAGEMENT'S DISCUSSION AND ANALYSIS

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BAYTOWN AREA WATER AUTHORITY MANA GEMENT'S DISCUSSION AND ANALYSIS For the Year Ended September 30, 2011

The purpose of the Management's Discussion and Analysis (the "MD&A") is to give the readers an objective and easily readable analysis ofthe Baytown Area Water Authority's (the "Authority") fmancial activities for the year. The analysis is based on currently known facts, decisions, or economic conditions. It presents short and longterm analysis of the Authority's activities, compares current year results with those of the prior year, and discusses the positive and negative aspects of that comparison. Governmental Accounting Standards Board (GASB) Statement No. 34 establishes the content of the minimum requirements for the MD&A. Please read the MD&A in conjunction with the Authority's fmancial statements, which follow tlus MD&A.

THE STRUCTURE OF OUR ANNUAL REPORT Components of the Financial Section

Management's Discussion and Analysis

Basic Financial Statements

Required Supplementary Information ........

... ,......

.. ......................................................................... r---'""'-------,.

Independent Auditors' Report

Statement of Net Assets

Statement of Revenues, Expenses, and Changes in Net Assets

Statement of Cash Flows

Notes to the Financial Statements

Detail

Summary

The annual fmancial report is presented as compliant with the fmancial reporting model in effect pursuant to GASB Statement No. 3,4. The fmancial reporting model requires governments to present certain basic financial statements as well as a MD&A and certain other Required Supplementary Information (RSI). The basic financial statements include a statement of net assets; statement of revenues, expenses, and changes in net assets; statement of cash flows; and notes to the financial statements.

Basic Financial Statements The basic fmancial statements report information for the Authority as a whole. These statements include transactions and balances relating to all assets, including infrastructure capital assets. These statements are designed to provide information about cost of services, operating results, and financial position of the Authority as an economic entity. The statement of net assets and the statement of revenues, expenses, and changes in net assets, which appear first in the Authority's fmancial statements, report infOlmation on the Authority's activities that enable the reader to understand the fmancial condition of the Authority. These statements are prepared using the accrual basis of accounting, which is similar to the accounting used by most private-sector companies. All of the current year's revenues and expenses are taken into account even if cash has not yet changed hands. The statement of net assets presents information on all of the Authority'S assets and liabilities. The difference between the two is reported as net assets. Over time, increases or decreases in net assets may serve as a useful indicator of whether the fmancial position of the Authority is improving or deteriorating. Other nonfinancial factors, such as the Authority's customer base and the condition of the Authority's infrastructure, need to be considered to assess the overall health of the Authority. 7

SAYTOWN AREA WATER AUTHORITY MANA GEMENT'S DISCUSSION AND ANALYSIS (Continued) For the Year Ended September 30,2011

The statement of revenues, expenses, and changes in net assets presents information showing how the Authority's net assets changed during the most recent year. All changes in the net assets are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows - the accrual method. The statement of cash flows presents infonnation about the Authority's cash receipts and cash payments during the reporting period. The statement reports cash receipts, cash payments, and net changes in cash resulting from operations, investing, and fmancing activities and provides answers to such questions as where did cash come from, what was cash used for, and what was the change in the cash balance during the reporting period. The notes to the financial statements provide additional infonnation that is essential to a full understanding of the data provided in the fmandal statements. The basic fmandal statements can be found after the MD&A within this report. Other Information In addition to the fmandal statements, this MD&A, and accompanying notes, this report also presents certain RSI. The RSI that GASB Statement No. 34 requires includes a budgetary comparison schedule for the Authority. The RSI can be found after the notes to the fmandal statements within this report.

FINANCIAL ANALYSIS OF THE AUTHORITY

As noted earlier, net assets may serve over time as a useful indicator of the Authority's fmandal position. The Authority's total net assets increased from $18,779,877 to $22,017,702 (17.20%). Key elements of this increase are as follows: â&#x20AC;˘

Operating revenues increased $2,588,858 or 35.29 percent due to an increase in water usage from a drought.

â&#x20AC;˘

Operating expenses increased by $576,378 or 11.93 percent primarily due to an increase in expenses due to an increase in water usage.

Unrestricted net assets increased by $963,863 from a balance of $1,046,173 to $2,010,036 (92.13%) at the end of this year. Unrestricted net assets are assets that can be used to finance day-to-day operations without constraints established by debt covenants and enabling legislation.

BAYTOWN AREA WATER AUTHORITY MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) For the Year Ended September 30, 2011 Condensed Statement of Net Assets:

2011 Current and other assets Restricted assets Capital assets, net Total Assets

Current liabilities Current liabilities - restricted assets Noncurrent liabilities Total Liabilities Invested in capital assets, net of related debt Restricted for: Capital projects Debt service Unrestricted Total Net Assets

Dollar Change

2010

2,175,221 4,026,157 32,159,949 38,361,327

1,660,343 3,197,522 32,228,445 37,086,310

514,878 . 828,635 (68,496) 1,275,017

Percent Change 31.0% 25.9% (0.2%) . 3.44%

293,876 1,713,610 14,336,139 16,343,625

761,245 1,734,693 15,810,495 18,306,433

(467,369) (21,083) (1,474,356) (1,962,808)

16,220,763

14,861,519

1,359,244

9.2%

2,405,081 1,381,822 2,010,036 22,017,702

1,663,849 1,208,336 1,046,173 18,779,877

741,232 173,486 963,863 3,237,825

44.5% 14.4% 92.1% 17.2%

61.4% 1.2% 9.3% 10.72%

Condensed Statement of Revenues, Expenses, and Changes in Net Assets:

2011 Operating revenues Nonoperating revenues Total Revenues

9,925,548 191,029 10,116,577

7,336,690 78,143 7,414,833

Depreciation expense Operating expenses Nonoperating expenses Total Expenses

870,012 5,408,095 600,645 6,878,752

845,503 4,831,717 690,917 6,368,137

. Change in net assets Beginning net assets Ending Net Assets

3,237,825 18,779,877 22,017,702

1,046,696 17,733,181 18,779,877

Dollar Change

2010

2,588,858 112,886 2,701,744 (24,509) (576,378) 90,272 (510,615)

2,191,129 1,046,696 3,237,825

Percent Change 35.3% 144.5% 36.4% (2.9%) (11.9%) 13.1% (8.0%) 209.3% 5.9% 17.2%

SAYTOWN AREA WATER AUTHORITY MANAGEMENT'S DISCUSSION A1VD ANALYSIS (Continued) For the Year Ended September 30,2011

BUDGETARY IDGELIGHTS

â&#x20AC;˘

Operating revenues were $1,326,951 over the budget estimate due to greater than expected water sales.

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Other operating expenses were $179,251 under budget due primarily to less than anticipated costs for supplies.

CAPITAL ASSETS

The Authority's plant operates at an average of 12.3 million gallons per day (MGD). The average capacity of the plant is 22 MGD and the peak capacity is 26 MGD. During the past 29 years, there has not been an intelTuption in service. The Authority is in compliance with all rules and regulations of the Environmental Protection Agency (EPA), Texas Commission on Environmental Quality (TCEQ), and Texas Department of State Health Services applicable to surface water treatment, analysis and operations. In the CUlTent year, the plant underwent an engineering assessment to identify potential areas that need rehabilitation, replacement, of repair. This assessment, conducted by the consulting engineering finn, Malcolm Pirnie, identified several areas requiring significant investment including the electrical system, the chlorine system, filter systems and pump stations. Of the total $618,794 allocated for this study, $306,759 has been spent dming the CUlTent fiscal year. At year end, the Authority had invested in $32,159,949 in capital assets net of accumulated depreciation. More detailed infonnation about the Authority'S capital assets is presented in the notes to the [mancial statements. LONG-TERM DEBT

The Authority has sufficient reserves established for debt service requirements. The Authority'S revenue bonds carry the rating of "A2" with Moody's Investors Service and "A" with Standard & Poor's. At year end, the Authority had $15,920,000 in revenue bonds outstanding versus $17,345,000 last year. More detailed infom1ation about the Authority'S long-tenn liabilities is presented in the notes to the [mancial statements. . ECONOMIC FACTORS

The 2010-2011 budget projected sales of $8,598,597 for 12 MGD based upon an average rainfall year. Fluctuations to average rainfall can significantly impact actual sales. The CUlTent rate structure is $1.96 per 1000 gallons for the City of Baytown and $1.99 per 1000 gallons for the customers outside the City to cover the increased cost of operations including the purchase of untreated water. Since inception of the Authority'S plant in 1981, there have been rate increases in 1988, 1993, 1999,2007,2009, and 2010. The Authority received a notice of a 1.9 percent increase from 0.56470 to 0.57540 effective April 1, 2011. The City of Houston adjusts its rates by the amount of the Producers Price Index (PPI) for the prior year with the new rates taking effect April 1 of each year. In addition, a surcharge for additional water purchased over 15.8 MGD average ofthe month is five percent. CONTACTING THE AUTHORITY'S FINANCIAL MANAGEMENT

TIns [mancial report is designed to provide citizens, taxpayers, customers, investors, and creditors with a general overview of the Authority'S finances and to show the Authority'S accountability for the money it receives. If you have questions about this report or need additional [mancial infonnation, contact the City of Baytown Finance Department, 2401 Market Street, Baytown, Texas 77520. A copy of the budget is available to the public at the Sterling Municipal Library and at the City of Baytown's city clerk office.

BASIC FINANCIAL STATEMENTS

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BAYTOWN AREA WATER AUTHORITY STATEMENTS OF NET ASSETS PROPRIETARY FUND September 30, 2011 Business-Type Activities Enterprise Fund 2011 2010 Assets Current Assets Cash and cash equivalents Receivables

$ Total Current Assets

1,997,417 177,804 2,175,221

Restricted Assets Cash and cash equivalents - debt service Cash and cash equivalents - capital improvements Total Restricted Assets

1,621,076 2,405,081 4,026,157

1,5l3,870 1,683,652 3,197,522

128,691

147,075

264,321 1,342,625

264,321 760,389

Noncurrent Assets Deferred charges Nondepreciable capital assets: Land Construction in progress Depreciable capital assets: Plant and equipment Less accumulated depreciation Total Capital Assets, Net of Depreciation Total Noncurrent Assets Total Assets

44,885,979 (14,461,667) 32,031,258 32,159,949 38,361,327

Liabilities Current Liabilities Accounts payable - unrestricted Due to primary government Total Current Liabilities Payable From Unrestricted Assets Current Liabilities Payable from Restricted Assets Accrued interest payable Accounts payable - restricted Bonds payable due within one year Total Current Liabilities Payable From Restricted Assets Total Current Liabilities Noncurrent Liabilities Bonds payable due in more than one year Total Liabilities Net Assets Invested in capital assets, net of related debt Restricted for: Capital projects Debt service Unrestricted Total Net Assets See Notes to Financial Statements

1,550,657 109,686 1,660,343

44,698,629 (13 ,641 ,969) 31,056,660 32,228,445 37,086,310

88,223 205,653 293,876

456,740 304,505 761,245

239,254 1,474,356 1,7l3,610 2,007,486

305,534 19,803 1,409,356 1,734,693 2,495,938

14,336,l39 16,343,625

15,810,495 18,306,433

16,220,763

14,861,519

2,405,081 1,381,822 2,010,036 22,017,702

1,663,849 1,208,336 1,046,173 18,779,877

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BAYTOWN AREA WATER AUTHORITY STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN FUND NET ASSETS PROPRIETARY FUND For the Year Ended September 30,2011

Business-Type Activities Enterprise Fund 2011 2010 OQerating Revenues Sale of treated water: City of Baytown Municipal utility districts

Total Operating Revenues

8,808,195 1,117,353 9,925,548

Total Operating Expenses

2,737,234 930,510 582,039 324,734 833,578 870,012 6,278,107

2,278,941 789,820 564,723 328,495 869,738 845,503 5,677,220

Operating Income

3,647,441

1,659,470

OQerating EXQenses Raw water purchases Contract personnel costs Supplies Maintenance Services Depreciation

Non-oQerating Revenues (ExQenses} Interest income Interest expense and fiscal agent fees Rents and royalties Intergovernmental Miscellaneous Total Non-operating (Expenses)

5,366 (600,645) 11,354 116,209 58,100 (409,616)

Change in Net Assets Beginning net assets Ending Net Assets See Notes to Financial Statements

6,516,980 819,710 7,336,690

8,131 (690,917) 2,012 68,000 (612,774)

3,237,825

1,046,696

18,779,877

17,733,181

22,017,702

18,779,877

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BAYTOWN AREA WATER AUTHORITY STATEMENTS OF CASH FLOWS PROPRIETARY FUND For the Year Ended September 30, 2011 Business-Type Activities Enterprise Fund 2011 2010 Cash Flows from OQerating Activities Cash received from customers for sale of treated water Cash payments to suppliers for goods and services Cash payments to contract personnel for services Net Cash Provided by Operating Activities

9,758,578 (4,865,905) (930,510) 3,962,163

Cash Flows from NoncaQital Financing Activities Rents and royalties received Intergovernmental revenues Miscellaneous revenues received Net Cash Provided by Noncapital Financing Activities

11,354 116,209 58,100 185,663

Cash Flows from CaQital and Related Financing Activities Construction of capital assets Disposal of capital assets Principal paid on capital debt Interest and fiscal agent fees paid Net Cash (Used) by Capital and Related Financing Activities

(826,236) 6,336 (1,425,000) (632,897) (2,877 ,797)

Cash Flows from Investing Activities Interest received

2,012 68,000 70,012

(777,389) (1,375,000) (679,566) (2,831,955)

5,366

Net Increase (Decrease) in Cash and Cash Equivalents Beginning cash and cash equivalents Ending Cash and Cash Equivalents Unrestricted cash and cash equivalents Restricted cash and cash equivalents Ending Cash and Cash Equivalents Reconciliation of Operating Income to Net Cash Provided by Operating Activities Operating income Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation Changes in Operating Assets and Liabilities: (Increase) in: Receivables, net Increase (Decrease) in: Accounts payable Restricted payables Due to primary government Net Cash Provided by Operating Activities See Notes to Financial Statements

8,131

1,275,395

$ $

4,748,179 6,023,574

6,310,124 (3,812,710) (789,820) 1,707,594

(1,046,218)

1,997,417 4,026,157 6,023,574

1,550,657 3,197,522 4,748,119

3,647,441

1,659,470

5,794,397 4,748,179

870,012

845,503

(68,118)

(16,516)

(368,517) (19,803) (98,852) 3,962,163

224,306 4,881 (1,010,050) 1,707,594

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BAYTOWN AREA WATER AUTHORITY NOTES TO FINANCIAL STATEMENTS For the Year Ended September 30, 2011

NOTE 1 - CREATION OF AUTHORITY

The Baytown Area Water Authority ("the Authority") was created by House Bill No. 967 of the Texas Legislature on June 15, 1973. The Authority was created to purchase and distribute surface and/or underground water supplies to persons, corporations, municipal corporations, political subdivisions, and others. The boundaries of the Authority include all of Baytown, Texas, and most of Baytown's extraterritorial jurisdiction in East Harris County, Texas. Presently, the Authority provides water to eight municipal entities which in tum service a total population area of 81,000 people. Administration of the Authority is vested in the Board of Directors, which held its fIrst meeting on September 20, 1973. The Board of Directors is appointed by the City Council. The fIrst Authority bonds were sold in May 1977. The water treatment plant and a portion of the water transmission lines were completed in 1981 and actual operations and sale of treated water began in April 19 81. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying fmancial statements and accounting policies of the Authority are prepared in confornnty with generally accepted accounting principles for local governmental units as prescribed by the Governmental Accounting Standards Board (GASB), wInch is the accepted standard-setting body for establishing governmental accounting and fmancial reporting principles. The Authority's signifIcant accounting policies are described below. A. Reporting Entity

The City of Baytown, Texas ("the City") exercises signifIcant influence over the operations of the Authority and, as a result, the Authority is a discretely presented component unit of the City. The Authority's fInancial statements are included as a discrete component unit in the government-wide fmancial statements ofthe City. The Authority has no component units and is presented on a standalone basis. The accounting policies of the Authority conform to generally accepted accounting principles as applicable to governmental entities and are presented as a proprietary fund type. The Authority has no employees. Personnel employed by the City are responsible for the physical operation and maintenance of the water treatment plant. The City's persoIDlel perfornl the purchasing and accounting functions of the Authority. The Authority reimburses the City for payroll costs and related fringe benefIts of personnel assigned to the water treatment plant operations andfor goods and services purchased on its behalf. B. Basis of Accounting

The Authority is a proprietary fund accounted for on an accmal basis, wInch is a flow of econonnc resources measurement focus. Revenues and expenses are recognized in the accounting period in which they are earned and incurred, respectively, and in which net income is determined. Proprietary Fund Types

Proprietary funds are used to account for activities that are sinnlar to those often found in the private sector. All assets, liabilities, equities, revenues, expenses, and transfers relating to the government's business activities are accounted for'through proprietary funds. The measurement focus is on determination of net income, fInancial position, and cash flows. Proprietary funds distinguish operating revenues and expenses from non-operating items.

BAYTOWN AREA WATER AUTHORITY SCHEDULE OF FINDINGS AND RESPONSES (Continued) For the year ended September 30, 2011

Operating revenues include charges for services. Operating expenses include costs of materials, contracts, personnel, and depreciation. All revenues and expenses not meeting this deftnition are reported as non-operating revenues and expenses. Proprietary fund types follow GAAP prescribed by the GASB and all Financial Accounting Standards Board's standards issued prior to November 30, 1989. Subsequent to tllis date, the Authority accounts for its enterprise funds as presented by GASB. The proprietary fund types used by the Authority include the following: Enterprise Fund

The enterprise fund is used to account for water operations. The services are fmanced and operated in a manner similar to private business enterprises where the intent of the governing body is that the costs (expenses including depreciation) of providing goods or services to the general public on a continuing basis will be fmanced or recovered primarily through user charges. The enterprise fund is considered a major fund for reporting purposes. C. Budget

The general manager for the Authority fornlUlates a budget for the Authority's ftscal year beginning on October 1 and ending on September 30. Both the Authority Board and the City Council approve the annual budget. D. Deposits and Investments

The Authority's cash and cash equivalents are considered to be cash on hand, demand deposits, and short-tenn investments with original maturities of three months or less from the date of acquisition. For the purpose of the statement of cash flows, the proprietary fund types consider temporary investments with maturity of three months or less when purchased to be cash equivalents. In accordance with GASB Statement No. 31, Accounting and Reporting for Certain Investments and External Investment Pools, the Authority reports all investments at fair value, except for "money market investments" and "2a7-like pools." Money market investments, which are shorttenn, highly liquid debt instruments that may include U.S. Treasury and agency obligations, are repOlied at amortized costs. Investment positions in external investment pools that are operated in a manner consistent with the SEC's Rule 2a7 of the Investment Company Act of 1940, such as TexPool, are reported using the pools' share price. The Authority has adopted a written investment policy regarding the investment of its funds as defmed in the Public Funds Investment Act, Chapter 2256, Texas Govennnental Code. In summary, the Authority is authorized to invest in the following: Direct obligations ofthe U.S. govennnent Fully collateralized certiftcates of deposit Mutual funds of speciftc type Statewide investment pools

BAYTOWN AREA WATER AUTHORITY SCHEDULE OF FINDINGS AND RESPONSES (Continued) For the year ended September 30, 2011

Comparative Data Comparative total data for the prior year have been presented in selected sections of the accompanying financial statements in order to provide an understanding of the changes in the Authority's fmancial position and operations.

Receivables and Pavables All receivables are shown at full value and are expected to be 100 percent collected. The Authority reports payables as obligations that are expected to be fmanced with current available financial resources.

G. Capital Assets Capital assets, which include property, plant, equipment, and infrastructure assets (e.g., water lines) have been recorded at cost. Such assets are recorded at historical cost or estimated historical cost if purchased or constiucted. Donated capital assets are recorded at estimated fair market value at the date of donation. Major outlays for capital assets and improvements are capitalized as projects are constructed. The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend assets' lives are not capitalized. Property, plant, and equipment of the Authority are depreciated using the straight-line method over the following estimated useful years:

Asset Description Buildings, plant, and equipment Vehicles and office furniture

Estimated Useful Life 20 to 50 years 3 to 10 years

H. Long-Term Obligations The Authority reports long-term debt as a liability on the statement of net assets. Bond premiums and discounts are amortized over the life of the bonds. Bonds payable are reported net of the applicable bond premium or discount.

Estimates The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenditures/expenses during the reporting period. Actual results could differ from those estimates.

NOTE 3 - DEPOSITS AND INVESTMENTS Deposits - State statutes require that all deposits in financial institutions be fully collateralized by U.S. government obligations or its agencies and instrumentalities or direct obligations of Texas or its agencies and instrumentalities that have a market value of not less than the principal amount of the deposits. The Authority'S deposits were fully insured or collateralized as required by the state statutes at year end. The Authority also has $733,666 within the City's pooled bank account. The 21

BAYTOWN AREA WATER AUTHORITY SCHEDULE OF FINDINGS AND RESPONSES (Continued) For the year ended September 30, 2011

City consolidates cash to maximize investment earnings and streamline operations. The City's deposits were fully insured or collateralized as required by state statutes at year end. Investments - The Authority's Board has adopted a written investment policy regarding the investment of its funds as defmed by the Public Funds Investment Act (Chapter 2256 of the Texas Government Code). The investments of the Authority are in compliance with the Board's investment policy. The Authority is authorized to invest in U.S. government obligations and govemment pools.

Investment Type

Fair Value

Government Pool (TexPoo1)

5,166,407

Weighted Average (Days)

N/A

Credit Risk AAAm

Investment Policies

Interest Rate Risk - In compliance with the Authority's investment policy, as of year-end, the Authority minimized the interest rate risk related to the decline in market value of securities due to rising interest rates in the portfolio by: linliting the weighted average of maturity not to exceed five years; structuring the investment portfolio so that securities matured to meet cash requirements for ongoing operations, thereby avoiding the need to sell securities on the secondary market prior to maturity; monitoring credit ratings of portfolio positions to ensure compliance with rating requirements imposed by the Public Funds Investment Act; and investing operating funds primarily in shorter term securities or similar government investment pools. Credit Risk - As of yearend and in compliance with the Authority's investment policy, the Authority minimized credit risk losses due to default of a security issuer or backer by: limiting investments to the safest types of securities; prequalifying the fmancial institutions, brokers/dealers, intermediaries, and advisers with which the Authority will do business; and diversifying the investment pOlifolio so that potential losses on individual securities were n'linimized. Investments

The Authority invests in TexPool. TexPool was established as a trust company with the Treasurer of the State of Texas as trustee, segregated from all other trustees, investments, and activities of the trust company. The State Comptroller of Public Accounts exercises oversight responsibility over TexPool. Oversight includes the ability to significantly influence operations, designation of management, and accountability for fiscal matters. Additionally, the State Comptroller has established an advisory board composed of both participants in TexPool and other persons who do not have a business relationship with TexPool. The advisory board members review the investment policy and management fee structure. Finally, Standard & Poor's rate TexPool AAAm. As a requirement to maintain the rating, weekly portfolio infomlation must be submitted to Standard & Poor's, as well as to the office of the Comptroller of Public Accounts, for review. TexPooloperates in a manner consistent with the SEC's rule 2a7 of the Investment Company Act of 1940. TexPool uses amortized cost rather than market value to report net assets to compute share prices.

BAYTOWN AREA WATER AUTHORITY SCHEDULE OF FINDINGS AND RESPONSES (Continued) For the year ended September 30, 2011

NOTE 4 - RESTRICTED CASH AND CASH EQUIVALENTS Restricted cash and cash equivalents include proceeds from the sale of bonds issued for construction and reserves held to satisfY the debt service reserve requirements ofthe Authority's bond ordinances. The restricted cash and cash equivalents at yearend are as follows: $

2,405,081 1,621,076 $ 4,026,157

Bond construction funds Bond reserve funds

NOTE 5 - CAPITAL ASSETS A summary of changes in capital assets for the year ended is as follows: Beginning Balance Capital assets, not being depreciated: Land Construction in progress

Total Capital Assets Not Being Depreciated Capital assets, being depreciated: Buildings Improvements other than buildings Machinery and equipment

Less accumulated depreciation for: Buildings Improvements other than buildings Machinery and equipment

32,081,370

582,236 582,236

264,321 1,342,625 1,606,946

244,000 826,236

(5,862) (50,789) (56,651) (56,651)

1,021,268 39,981,806 3,882,905 44,885,979 46,492,925

(23,640) (832,132) (14,240) (870,012) (626,012)

1,916 48,399 50,315 (6,336)

(550,263) (10,612,174) (3,299,230) (14,461,667) 30,424,312

(43,776)

=$==::bi(6=,3=36::f,)

244,000

(526,623) (9,781,958) (3,333,389) (13;641,970) 32;081,370

Total Accumulated Depreciation Total Capital Assets Being Depreciated, Net

1,021,268 39,743,668 3,933,694 44,698,630 45,723,340

Total Capital Assets Being Depreciated Total Capital Assets

Total Capital Assets, Net

264,321 760,389 1,024,710

Ending Balance

(Decreases)

Increases

32,031,258

NOTE 6-REVENUEBONDS PAYABLE Outstanding bonds are payable using revenues generated from the sale of treated water to the City and other entities. The City also guarantees payment of bonds and such bonds may be redeemed prior to their scheduled maturity. The Authority is in compliance with all bond resolutions. The resolutions provide that reserves are sufficient to pay the current portion of the principal and interest payment. Redemption Provisions: 1999 Series Baytown Area Water Authority Water Supply Contract Revenue Bonds issued for $9,095,000. The Authority reserves the right, at its option, to redeem bonds having stated maturities on or after May 1, 2010, in whole or in part, in principal amounts of $5,000 or any integral multiple thereof, on May 1, 2009, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption. .

BAYTOWN AREA WATER AUTHORITY SCHEDULE OF FINDINGS AND RESPONSES (Continued) For the year ended September 30, 2011 2002 Series Baytown Area Water Authority Water Supply Contract Revenue Bonds issued for $3,800,000. The Authority reserves the right, at its option, to redeem bonds having stated maturities on or after May 1, 2012, in whole or in part, in principal amounts of $5,000 or any integral multiple thereof, on May 1, 2011, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption. 2006 Series Baytown Area Water Authority Water Supply Contract Revenue Bonds issued for $13,290,000. Of that amount, $9,975,000 has been drawn. The Authority reserves the right, at its option, to redeem bonds having stated maturities on or after May 1, 2017, in whole or in part, in principal amounts of $5,000 or any integral multiple thereof, on May 1, 2016, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption. 2007 Series Baytown Area Water Authority Water Supply Contract Revenue Refunding Bonds issued for $6,505,000. The Authority reserves the right, at its option, to redeem bonds having stated maturities on or after May 1, 2016, in whole or in part, in principal amounts of $5,000 or any integral multiple thereof, on May 1,2015, or any date thereafter, at the par value thereof plus accrued interest to the date of redemption. The following is a summary of changes in bonds payable for the year ended:

Beginning Balance

Additions

Amounts Due within One Year

Ending Balance

Reductions

Series $

1999 2002 2006 2007

Total Bonds Less refunding difference Less discount Total Long-Term Debt

610,000 2,595,000 7,760,000 6,380,000 17,345,000 (122,728) (2,421)

17,219,851

(610,000) (205,000) (565,000) (45,000) (1,425,000) 15,341 303

(1,409,356)

15,810,495

14,336,139

Long term debt payable in more than one year

2,390,000 7,195,000 6,335,000 15,920,000 (107,387) (2,118)

215,000 580,000 695,000 1,490,000 (15,341) (303)

1,474,356

* Debt related to capital assets As of year end, the debt service requirements on bonds outstanding for the next five years and thereafter through 2022 are as follows: Year

Interest

Princieal

2012 2013 2014 2015 2016 2017-2020 2021-2022

Total

1,490,000 1,535,000 1,590,000 1,645,000 1,710,000 7,260,000 690,000 15,920,000

574,208 522,384 467,994 410,704 350,772 783,766 20,354 3,130,182

Total $

2,064,208 2,057,384 2,057,994 2,055,704 2,060,772 8,043,766 710,354 19,050,182

BAYTOWN AREA WATER AUTHORITY SCHEDULE OF FINDINGS AND RESPONSES (Continued) For the year ended September 30, 2011 NOTE 7 - NET ASSETS The Authority's net assets have been reported net of related outstanding debt and unspent bond proceeds. The four components of net assets: invested in capital assets, net of related debt; restricted net assets for capital projects; restricted net assets for debt service; and unrestricted net assets, are detailed below:

Net assets invested in capital assets, net of related debt: Capital assets, net of accumulated depreciation Outstanding debt that applies to capital assets Invested in Capital Assets, Net of Related Debt

2011

2010

$ 32,031,258 ~15,81 0,495) 16,220,763

$ 32,081,370 (17,219,851) 14,861,519

Restricted for capital projects: Capital projects restricted assets Current liabilities from capital projects Restricted Net Assets for Capital Projects

2,405,081

Restricted for debt service: Debt service restricted assets Accrued interest Restricted Net Assets for Debt Service Unrestricted net assets Current assets Noncurrent assets Current liabilities Unrestricted Net Assets Total Net Assets

2,405,081

1,683,652 (19,803) 1,663,849

1,621,076 (239,254) 1,381,822

1,513,870 (305,534) 1,208,336

2,175,221 128,691 (293,876) 2,010,036 22,017,702

1,660,343 147,075 (761,245) 1,046,173 18,779,877

NOTE 8 - RISK MANAGEMENT The Authority is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; and natural disasters for which the Authority cooperatively purchases commercial insurance and participates in a public entity risk pool with the City of Baytown. The Authority and the City participate along with 2,596 other entities in the Texas Municipal League's Intergovennnental Risk Pool (the "Pool"). The Pool purchases commercial insurance at group rates for participants in the Pool. The Authority has no additional risk or responsibility to the Pool, outside of the payment of insurance premiums. The Authority has not significantly reduced insurance coverage or had settlements that exceeded coverage amounts for the past three fiscal years. NOTE 9 - CONTINGENT LIABILITIES The Tax Reform Act of 1986 instituted certain arbitrage restrictions consisting of complex regulations with respect to issuance of tax-exempt bonds after August 31, 1986. Arbitrage regulations deal with the investment of tax-exempt bond proceeds at an interest yield greater than the interest yield paid to bondholders. Generally, all interest paid to bondholders can be retroactively rendered taxable if applicable rebates are not reported and paid to the Internal Revenue Service at least every five years for applicable bond issues.

BAYTOWN AREA WATER AUTHORITY SCHEDULE OF FINDINGS AND RESPONSES (Continued) For the year ended September 30, 2011

NOTE 10....:. COMMITMENTS AND CONTIGENCIES

On October 24, 1994, the Authority entered into a 26-year agreement with the City of Houston to purchase raw water for treatment. The agreement was amended in January 2005 to increase the maximum obligation of the City of Houston to provide water from 11.9 MGD to 15.8 MGD and to extend the termination date to December 31, 2040. The Authority may reserve additional monthly quantities of untreated water by giving 30 days notice to the City of Houston. Should the consumption exceed the contract quantity by ten percent, a five percent surcharge shall be charged against that portion of the consumption that exceeds the contract quantity. The Authority is contractually obligated to provide treated water to the City of Baytown. As with the City of Houston contract, the Authority increased the maximum obligation to provide treated water to the City of Baytown from 10.71 MGD to 14.22 MGD and extended the telm of the contract through calendar year 2040. The Authority is also obligated to provide 1.58 MGD to other municipal entities making the total obligation 15.8 MGD. NOTE 11- RELATED PARTIES, CONCENTRATIONS, AND ECONOMIC DEPENDENCY

The Authority is a discretely presented component unit of the City. In addition, approxinlately 90 percent of the Authority's operating revenues are attributable to the sale of treated water to the City.

REQUIRED SUPPLEMENTARY INFORMATION

(This page intentionally left blank.) 28

BAYTOWN AREA WATER AUTHORITY BUDGET TO ACTUAL (BUDGET BASIS) COMPARISON For the Year Ended September 30,2011

Original Budget Operating Revenues Sale of treated water: City of Baytown Municipal utility districts Total Operating Revenues

Operating Expenses Raw water purchases Contract personnel costs Supplies Maintenance Services Total Operating Expenses Nonoperating Revenue (Expenses) Interest income Interest expense and other expenses Rents and royalties Intergovernmental Miscellaneous income Total Nonoperating Revenue (Expenses) Changes in Net Assets - Budgetary Basis

Final Budget

7,683,396 915,201 8,598,597

8,808,195 1,117,353 9,925,548

2,686,0l3 905,220 711,200 276,765 849,973 5,429,171

2,686,0l3 905,220 750,524 282,540 894,021 5,518,318

2,737,234 930,510 582,039 299,754 789,530 5,339,067

4,630 (2,163,281 )

7,030 (2,163,281)

58,100 (2,100,551)

58,100 (2,098,151)

3,544 (2,288,991) 11,354 116,209 58,100 (2,099,784)

1,068,875

982,128

(870,012) 1,425,000 1,822 (69,028) 263,346 3,237,825

* Interest income does not include restricted interest income on bond funds. Notes to Required Supplementary InfoIDlation . l. Annual budget is adopted on a basis consistent with generally accepted accounting principles (GAAP) with the exception of reconciling items noted above.

1,124,799 202,152 1,326,951

(51,221) (25,290) 168,485 (17,214) 104,491 179,251

2,486,697

Reconciliation of Budget Basis to GAAP Depreciation Principal payments Interest income from restricted bonds Adjustment for encumbrances Capital purchases Change in Net Assets

Variance Positive (Negative)

2011 (Budget Basis)

(3,486) (125,710) 11,354 116,209 (1,633) $

1,504,569

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TEXAS SUPPLEMENTARY INFORMATION

(This page intentionally left blank.) 32

SAYTOWN AREA WATER AUTHORITY TSI-2 SCHEDULE OF OPERATING EXPENSES For the Year Ended September 30,2011

Professional Fees: Auditing

11,483 179,936

Other services:

2,737,234

Purchases of Raw Water Contracted Personnel Services

923,691

Utilities

642,160

Repairs and Maintenance

324,734

Chemicals

500,107 88,750

Administrative Expenses Depreciation Total Expenses

870,012 6,278,107

The Authority has no employees; however, fourteen (14) full-time City of Baytown employees are contracted to the Authority.

SAYTOWN AREA WATER AUTHORITY TSI-3 SCHEDULE OF TEMPORARY INVESTMENTS For the Year Ended September 30, 2011

Identification or Certificate Number JPMorganChase TexPool Pooled cash and investments

Checking Acct N/A N/A

Interest Rate

Maturity Date

Balance at End of Year

0.00% N/A 0.21% N/A 0.30% N/A Total Cash and Investments

10,000 5,166,407 847,167 6,023,574

Accrued Interest Receivable at End of Year

N/A N/A N/A

BAYTOWN AREA WATER AUTHORITY TSI-5 LONG-TERM DEBT SERVICE REQUIREMENTS BY YEARS (ALL BONDED DEBT SERVICES) For the Year Ended September 30, 2011

Due During Fiscal Year Ending

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Annual Requirements for All Series Interest Interest Due 5/01 Due 11101

Principal Due 5/01

1,490,000 1,535,000 1,590,000 1,645,000 1,710,000 1,765,000 1,830,000 1,900,000 1,030,000 735,000 690,000 15,920,000

287,104 261,192 233,997 205,352 175,386 144,022 111,441 76,215 39,370 20,835 10,177 1,565,091

Total

2,064,208 2,057,384 2,057,994 2,055,704 2,060,772 2,053,044 2,052,882 2,052,430 1,108,740 776,670 710,354 19,050,182

BAYTOWN AREA WATER AUTHORITY TSI-5 LONG-TERM DEBT SERVICE REQUIREMENTS BY YEARS (ALL BONDED DEBT SERVICES) - BY YEARS For the Year Ended September 30, 2011

Due During Fiscal Year Ending 2012 2013 2014 2015 2016 2017 2018 2019 2020

Due During Fiscal Year Ending 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Series 2002 Interest Interest Due 5/01 Due 11/01

Principal Due 5/01 215,000 230,000 240,000 250,000 265,000 275,000 290,000 305,000 320,000 2,390,000

580,000 590,000 605,000 620,000 640,000 655,000 675,000 695,000 710,000 735,000 690,000 7,195,000

59,653 54,601 49,081 43,201 36,951 30,326 23,451 16,056 8,240 321,560

Series 2006 Interest Interest Due 5/01 Due 11/01

Principal Due 5/01 $

59,653 54,601 49,081 43,201 36,951 30,326 23,451 16,056 8,240 321,560

Total

98,545 91,585 84,210 76,345 68,129 59,490 50,:484 41,034 31,130 . 20,835 10,177 631,964

98,545 91;585 84,210 76,345 68,129 59,490 50,484 41,034 31,130 20,835 10,177 631,964

334,306 339,202 338,162 336,402 338,902 335,652 336,902 337,112 336,480 3,033,120

Total $

777,090 773,170 773,420 772,690 776,258 773,980 775,968 777,068 772,260 776,670 710,354 8,458,928

BAYTOWN AREA WATER AUTHORITY TSI-5 LONG-TERM DEBT SERVICE REQUIREMENTS BY YEARS (ALL BONDED DEBT SERVICES) - BY YEARS (Continued) For the Year Ended September

2012 2013 2014 2015 2016 2017 2018 2019

695,000 715,000 745,000 775,000 805,000 835,000 865,000 900,000 6,335,000

2011

Series 2007 Interest Interest Due 5/01 Due 11101

Principal Due 5/01

Due During Fiscal Year Ending

30~

128,906 115,006 100,706 85,806 70,306 54,206 37,506 19,125 611,567

Total

952,812 945,012 946,412 946,612 945,612 943,412 940,012 938,250 7,558,134

(This page intentionally left blank.) 39

BAYTOWN AREA WATER AUTHORITY TSI-6 CHANGES IN LONG-TERM BONDED DEBT For the Year Ended September 30,2011 Requirements Fiscal Year 2010-2011 Principal Due Interest Due 05/01 05/01 $ 610,000 $ 15,555

Revenue Bonds Series 1999

Interest Rate 5.000 - 7.000%

Amount of Issue $ 9,095,000

Bonds Outstanding October 2010 $ 610,000

Series 2002

4.700 - 5.500%

$ 3,800,000

2,595,000

205,000

65,137

2.250 - 2.900%

$ 13,290,000

7,760,000

565,000

105,184

4.000 - 4.250%

$ 6,505,000

6,380,000 $ 17,345,000

Series 2006 Series 2007

Additionsl Refunding $

45,000 $ 1,425,000

129,806 315,682

*As of September 30,2011, $9,975,000 of the authorized total of$13,290,000 has been drawn. Paying Agent's Name & City: Series 1999 Bank of New York Trust Company, Houston Texas Bank of New York Trust Company, Houston Texas Series 2002 Series 2006 Bank of New York Trust Company, Houston Texas Bank of New York Trust Company, Houston Texas Series 2007

Debt service cash and investment balances as of September 30, 2011

$ 1,621,076

Average annual debt service payment (principal & interest) for remaining term of all debt

$ 1,731,835

Outstanding bond authorization as of September 30, 2011

$ 3,315,000

Requirements Fiscal Year 2010-2011 Interest Due 11101 Total $ 15,555 641,110 $

Bonds Outstanding September 2011

65,137

335,274

2,390,000

105,184

775,368

7,195,000

129,806 315,682

304,612 2,056,364 $

6,335,000 . $ 15,920,000

BAYTOWN AREA WATER AUTHORITY TSI-7 COMPARATIVE SCHEDULE OF REVENUES AND EXPENSES For the Year Ended September 30,2011

2011

2010

2009

2008

2007

Operating Revenues: Sale of Treated Water: City ofBaytoWll Municipal utility districts Total Operating Revenues

$ 8,808,195 1,117,353 9,925,548

$ 6,516,980 819,710 7,336,690

$ 6,022,370 717,160 6,739,530

$ 5,345,177 697,865 6,043,042

$ 4,644,450 639,768 5,284,218

Operating Expenses: Raw water purchases Contract personnel costs Supplies Maintenance Services Depreciation Total Operating Expenses

2,737,234 930,510 582,039 324,734 833,578 870,012 6,278,107

2,278,941 789,820 564,723 328,495 869,738 845,503 5,677,220

1,970,760 826,575 947,266 498,449 777,094 717,467 5,737,611

1,891,750 930,559 569,345 286,475 734,125 574,132 4,986,386

1,725,825 952,900 509,009 227,453 687,183 571,180 4,673,550

Nonoperating Revenues (Expenses): Interest income Interest expense and fiscal agent fees Mineral royalties Intergovernmental Miscellaneous Total Nonoperating Revenues (Expenses)

5,366 (600,645) 11,354 116,209 58,100

8,131 (690,917) 2,012

133,440 (745,640) 13,797

275,820 (729,088) 13,747

68,000

53,098 (753,846) 410 53,079 68,000

68,000

90,776

(409,616)

(612,774)

(579,259)

(530,403)

(348,745)

Change in Net Assets

$ 3,237,825

$ 1,046,696

Total Active Wholesale ViTater Connections

422,660 8

526,253 8

261,923 8

2011

2010

2009

2008

2007

88.7% 11.3% 100.0%

89.4% 10.6% 100.0%

88.5% 11.5% 100.0%

87.9% 12.1% 100.0%

90.1% 9.9% 100.0%

27.6% 9.4% 5.9% 3.3% 8.4% 8.8% 63.3%

29.2% 12.3% 14.1% 7.4% 11.6% 10.6% 85.1%

31.3% 15.4% 9.4% 4.7% 12.2% 9.5% 82.5%

32.7% 18.0% 9.6% 4.3% 13.1% 10.8% 88.4%

34.0% 16.8% 8.7% 5.1% 13.1% 10.6% 88.2%

0.1% (6.1%) 0.1% 1.2% 0.6%

0.8% (11.2%) 0.0% 0.8% 1.1%

2.2% (12.3%) 0.2% 0.0% 1.2%

5.2% (13.8%) 0.3% 0.0% 1.8%

4.9% (13.3%) 2.9% 0.0% 1.3%

(4.1%)

(8.6%)

(8.8%)

(6.6%)

(3.2%)

32.6%

6.3%

8.7%

5.0%

8.4%

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BAYTOWN AREA WATER AUTHORITY TSI-8 BOARD MEMBERS AND ADMINISTRATIVE PERSONNEL For the Year Ended September 30,2011 Complete Authority Mailing Address:

2401 Market Street, Baytown, Texas, 77520

Authority Business Telephone Number:

(281) 426-3517

Submission Date of the Most Recent Authority Registration Form (TWC Sections 36.054 and 49.054):

Not Applicable

----~------------------------------

Limit on Fees of Office that a Director May Receive During a Yeal Not Applicable

----~------------------------------

Term of Office or Date Hired

Elected/ Appointed

Fees of Office Paid 09/30/11

Expenses Reimbursed 09/30/11

Brenda Bradley-Smith

9/1/10-8/31/12

Appointed

N/A

President

Dan M. Mundinger

9/1/11-8/31/13

Appointed

N/A

Vice President

Wayne Baldwin

9/1/11-8/31/13

Appointed

N/A

Secretary

John R. Sandhop

9/1/10-8/31112

Appointed

N/A

Member

9/1/11-8/31/13

Appointed

N/A

Member

Names:

Title at Year End

Board Members:

Mike Wilson

Note: No Board member is disqualified from serving on this Board under the Texas Water Code. The Board members do not receive any form of compensation for their services. Key administration (contracted through the City): Robert Leiper

02112/99

N/A

(JeneralManager

Darryl Fourte

02/09/09

N/A

Plant Manager

Steve Fife

12/07/09

N/A

Plant Superintendent

Ignacio Ramirez, Sr.

OS/24/91

N/A

City Attorney

Louise Richman, CPA

04/01/11

N/A

Director of Finance

Belt Harris Pechacek, LLLP

10/01/04

N/A

11,483

Auditor

Malcolm Pirnie

05/04/04

N/A

$ 306,759

Consulting Engineer

CONSULTANTS:

(This page intentionally left blank.) 46

OTHER SUPPLEMENTARY INFORMATION

BAYTOWN AREA WATER AUTHORITY ANALYSIS OF CHANGES IN PROPERTY, PLANT, AND EQUIPMENT For the Year Ended September 30, 2011

Beginning Balances Physical Facilities: Land Building Basins Pump station Mixing chamber Distribution system Office furniture and equipment Machinery and implements Motor vehicles Radio and testing equipment Other Total Physical Facilities

Amounts Provided By: Revenue bond proceeds Revenues Grants Total Amounts Provided

Ending Balances

(5,862)

244,000

(50,789)

(56,651)

244,000

1,624,145

Capitalized interest Construction in progress Total Property, Plant, and Equipment

264,321 1,021,268 3,273,380 1,866,987 915,630 31,097,354 602,809 3,244,659 84,296 1,930 966,172 43,338,806

Additions

Deletions and Reclassifications

1,624,145

760,389

582,236

1,342,625

45,723,340

826,236

41,466,515 4,226,425 30,400 45,723,340

582,236 244,000

826,236

264,321 1,021,268 3,273,380 1,866,987 915,630 31,335,492 602,809 3,193,870 84,296 1,930 966,172 43,526,155

(56,651)

46,492,925

42,048,751 4,413,774 30,400 46,492,925

(56,651) (56,651)

BAYTOWN AREA WATER AUTHORITY REVENUE BOND COVERAGE . For the Last Ten Years

Fiscal Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Gross Revenues $ 5,734,161 5,779,654 5,982,695 6,240,064 5,939,840 5,664,561 6,258,279 6,861,038 7,414,833 10,116,577

Operating Expenses (1) $ 3,406,130 3,334,310 3,528,325 3,765,808 4,228,035 4,102,370 4,412,254 5,020,144 4,831,717 5,408,095

Available for Debt Service $ 2,328,031 2,445,344 2,454,370 2,474,256 1,711,805 1,562,191 1,846,025 1,840,894 2,583,116 4,708,482

Principal $ 1,250,000 1,015,000 565,000 595,000 630,000 1,255,000 1,270,000 1,320,000 1,375,000 1,425,000

(1) Total operating expenses do not include depreciation expense.

Interest $ 813,938 794,052 744,224 723,032 689,190 540,741 732,358 717,467 678,930 631,364

Total $ 2,063,938 1,809,052 1,309,224 1,318,032 1,319,190 1,795,741 2,002,358 2,037,467 2,053,930 2,056,364

Coverage 1.13 1.35 1.87 1.88 1.30 0.87 0.92 0.90 1.26 2.29

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