Party Notice: IN RE: SAN DIEGO COUNTY WATER AUTHORITY

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                                Bingham McCutchen LLP OX EMPT E 7
JAMES J. DRAGNA (SBN 91492) TCONERN MET CE RRONICALLY
COLIN C. WEST (SBN 184095) [Gove ¥ePLED
THOMAS S. HIXSON (SBN 193033) Superior Court of California,
Three Embarcadero Center County of San Francisco
San Francisco, California 94111-4067
Telephone: 415.393.2000 MAR 19 2013
Facsimile: 415.393.2286 BY: VANESSA WU

Deputy Clerk
Morrison & Foerster LLP
JAMES J. BROSNAHAN (SBN 34555)
SOMNATH RAJ CHATTERJEE (SBN 177019)
425 Market Street
San Francisco, CA 94105-2482
Telephone: 415.268.7000
Facsimile: 415.268.7522

MARCIA SCULLY (SBN 80648)

SYDNEY B. BENNION (SBN 106749)

HEATHER C. BEATTY (SBN 161907)

The Metropolitan Water District Of Southern California
700 North Alameda Street

Los Angeles, California 90012-2944

Telephone: 213.217.6000

Facsimile: 213.217.6980,

Attorneys for Respondent and Defendant
Metropolitan Water District of Southern California

SUPERIOR COURT OF THE STATE OF CALIFORNIA
COUNTY OF SAN FRANCISCO

SAN DIEGO COUNTY WATER AUTHORITY, No, CPF-§2-512466

Petitioner and Plaintiff, NOTICE OF METROPOLITAN
WATER DISTRICT OF SOUTHERN
v. CALIFORNIA’S FILENG OF THE
ADMINISTRATIVE RECORD (VOL.
METROPOLITAN WATER DISTRICT OF 61 OF 61)

SOUTHERN CALIFORNIA; ALL PERSONS
INTERESTED IN THE VALIDITY OF THE
RATES ADOPTED BY THE METROPOLITAN | Dept: 304

WATER DISTRICT OF SOUTHERN Judge: Hon. Curtis E. A. Karnow
CALIFORNIA ON APRIL 13, 2010 TO BE
EFFECTIVE JANUARY 2011; and DOES 1-10,

Respondents and Defendants.

NOTICE OF MWD’S FILING OF THE ADMINISTRATIVE RECORDBIENNIAL BUDGET

Fiscal Years 2012/13 and 2013/14

MWDRECORD2012_017164MEMBER
AGENCIES

Sas

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Central Basin

Manisa! Water Dsuiee

San Diego County

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9, & West Basin DISTRICT

Municipal Water District

MWDRECORD2012_017165ef

GOVERNMENT FINANCE OFFICERS ASSOCIATION
Distinguished
Budget Presentation
Award

PRESENTED TO
Metropolitan Water District of Southern California
California

Special Performance Measures Recognition

For the Fiscal Year Beginning

July 1, 2004

Executive Director

President

This is the eighth consecutive year Metropolitan has received this award.

MWDRECORD2012_017166MWD AT A GLANCE

ORGANIZATION

Authority: The Metropolitan Water District Act of
California Legislature 1927

Incorporated: Dec. 6, 1928

First Board Meeting: Dec. 29, 1928

Mission: To provide Metropolitan’s service area with
adequate and reliable supplies of high-quality water to
meet present and future needs in an environmentally and
economically responsible way

Water Sources: Colorado River and California State
Water Project

Service Area: About 5,200 square miles in Los Angeles,
Orange, San Diego, Riverside, San Bernardino and
Ventura counties

Population Served: Approximately 19 million

Member Agencies: 26

Founding Cities (December 1928): Anaheim, Beverly
Hills, Burbank, Colton*, Glendale, Los Angeles,
Pasadena, San Bernardino*, San Marino, Santa Ana and
Santa Monica

* Withdrew in 1931]

Subsequent Member Agency Cities: Cities of Fullerton
Goined 1931), Long Beach (1931), Torrance (1931),
Compton (1931), and San Fernando (1971)

Municipal Water Districts: West Basin (1948), Inland
Empire Utilities Agency (1950), Three Valleys (1950),
Eastern (1951), Orange County (1951), Foothill (1953),
Central Basin (1954), Western (1954), Calleguas (1960),
Las Virgenes (1960), and Upper San Gabriel (1963)
County Water Authority: San Diego (1946)
GOVERNANCE

Board of Directors: 37, Each member agency is entitled
to at least one director; additional directors are based on
the agency’s assessed valuation. Board meetings are
generally beld on the second Tuesday of each month,

Check wewanwdh2o.cam for meeting times and agendas.

FACILITIES

Colorado River Aqueduct: 242 miles from Lake Havasu
to Lake Mathews, Riverside

Construction: Began 1933, completed 1939; CRA and
regional distribution system operational 1941

Capacity: 1.3 million acre-feet* annually

Pumping Plants (east to west): Whitsett Intake (lift

291 ft.); Gene (303 ft.); fron Mountain (144 ft.);

Eagle Mountain (438 ft.); Julian Hinds (441 ft.);

Total lift 1,617 feet

Siphons: 144, totaling 29 miles

* Acre-foot = 325,851.4 gallons

Tunnels: 29, totaling 92 miles

Canals: 63 miles

Conduit and Pipeline: 58 miles

Design Capacity: |,605 cubic feet per second

Water Treatment Plants: Joseph Jensen, Granada Hills
(capacity 750 million gallons per day); Robert A. Skinner,
Winchester (630 mgd); F.E. Weymouth, La Verne

(520 mgd}; Robert B. Diemer, Yorba Linda (520 mgd);
and Henry J. Mills, Riverside (160 mgd)

Reservoirs: Diamond Valley Lake, Hemet, capacity
810,000 acre-feet (AF); Lake Mathews, Riverside,
182,000 AF; Lake Skinner, Winchester, 44,000 AF;
Copper Basin, Gene, 24,200 AF; Gene Wash, Gene,
6,300 AF; Live Oak, La Verne, 2,500 AF; Garvey,
Monterey Park, 1,600 AF; Palos Verdes, Rolling Hills,
1,100 AF; and Orange County, Brea, 212 AF

Total Reservoir Storage Capacity: t,072,000 AF
Distribution System: 839 miles of pipelines and tunnels;
about 400 connections to member agencies
Hydroelectric Plants: 16; capacity 122 megawatts

SUPPLY, DELIVERIES AND SALES
Record Daily Delivery: 9,872 AF on June 28, 1994
Record Annual Sales: 2.5 million AF in 1990

Unit Price: Under the two-tier rate structure the full
service rates will be $794 to $920 per AF for treated
water, and $560 to $686 per AF for untreated water.
Effective Jan. 1, 2012, full-service rates will be $847 to
$997 per AF for treated water, and $593 to $743 per AF
for untreated water. Effective Jan. 1, 2013, full-service
rates will be $890 to $1,032 per AF for treated water, and
$593 to $735 per AF for untreated water.

Projected Sales: 1.7 MAF for FY 2012/13 and 2013/14

FINANCE AND ADMINISTRATION

Water Revenue Bond Ratings: Standard & Poor’s AAA;
Moody’s Aal; Fitch AA+
Budget: July 1, 2012 ~ June 30, 2013: $1.496 billion
July 1, 2013 — June 30, 2014: $1.57! billion
Capital Projects: $257.3 million; 294.6 million
Employees: | ,898 authorized regular employees
Fund Sources: Water rates and charges, 77%; bond
proceeds, 10%; taxes and annexations, 5%; fund
withdrawals, 5%; hydroelectric sales and miscellaneous
income, 2%; interest income, 1%
Uses af Funds: State Water project payments, 33%;
operations & maintenance, 21%; debt service, 19%;
construction, 15%; fund deposits, 6%; demand
management programs, 3%; supply programs, 2%; and
Colorado River power, 2%

MWDRECORD2012_017167nate

Table of Contents and Understanding the Layout of the Budget...
General Manager’s Transmittal Letter
Genera! Manager’s Business Plan ...

Summary Section
Budget Summary
Sources of Fund:
Uses of Funds.
Operations and
Labor....... soe
Annual Capital Investment Plan
Fund Balances and Reserve Levels.

Five-Year Financial Forecast
Rates and Charges
Sales Forecast ..
Sources of Fund:
Uses of Funds...
Fund Balances and Reserves.
Financial Ratios

Financial Policies
Budget Process.
Financial Powers (MWD Act).
Long Range Financial Plan
Rate Structure Overview

Background and Service Area Economy
Service Area Map ...

Performance Measures

Departmental Section
Group Budgets
Office of the General Manager
Water System Operations ..
Water Resource Management!
Engineering Services
Business Technology
Human Resources ...
Real Property Development & Management
Office of the Chief Financial Officer.
External Affairs
General Counsel Department
General Auditor Department.
Ethics Office .
Genera! District Requiremen
Staffing Summary by Group
Staffing Summaries:
Office of the General Manager
Waiter System Operations
Water Resource Managemert......

BOLTS and 2013/14 Biennial Budget i Table of Contenis

MWDRECORD2012_017168Engineering Services
Business Technology
Human Resources...
Real Property Development & Management
Office of the Chief Financial Officer.
External Affairs
General Counsel Department.
General Auditor Department ..
Ethics Office

Capital Investment Plan Section
Introduction... oe woe
Capital Investment Plan Development.
Major Objectives for FY 2612/13 and 2013/14.
How to Use This Document...
Guidelines for Project Proposal
Three-Year Outlook
Index — Alphabetically by Program Title
Individual Program Summary

GIOSSALY ooo eeseceeccseseeseeseeseeueeenecesceseceeceussucnsensucsuenessecatersastvenmenessseueensesesiteccueisersereesseseusetenreee 345

Fable of Contents ii 2022/13 and 2013/14 Biennial Budget

MWDRECORD2012_017169DEPARTMENTAL/GROUP BUDGET

The Departmental Section provides detailed
information about the Operations and
Maintenance (O&M) budget of each group and
department and consists of the following:

Mission, Roles, and Responsibilities:
Describes, at a high level, the scope of the
organization’s functions, provides a summary
organizational chart, and a high level O&M,
capital, and personnel budget summary.

Budget Issues and Constraints: Identifies key
challenges and potential constraints the group
faces in meeting the budget objectives as
identified by the General Manager.

Accomplishments: Explains the major
accomplishments of the organization for the
current year as a measure of its performance.

Expense Category

Salaries and Benefits

Professional Services

The extent to which the organization
accomplished current year objectives is more a
qualitative rather than a quantitative measure.

Objectives: Summarizes the objectives each
organization proposes to accomplish in the
upcoming fiscal years.

Performance Measures: Identifies the key
measures the organization uses to monitor
progress toward achievement of significant
priorities supporting the business plan.

Financial Summary: [ach organization's
financial summary combines the O&M and
capital expenditure plans by expense category.
The personnel information is shown for regular
and temporary employees.

Labor costs and fringe benefits for Metropolitan’s regular, district
temporary, and agency temporary employees.

All costs associated with work performed by outside contractors and

consultants.

Property Acquisition Costs associated with right-of-way and land purchases, including easements,
appraisals, and escrow fees.

Construction Cost of construction contracts.

Operating Equipment Costs associated with the purchase of capitalized portable equipment,
including automobiles, trucks, servers, and other applicable portable
equipment.

Other Cost of purchasing chemicals, materials and supplies, reprographics, travel,

telephone, and other necessary items for effective operation of Metropolitan.
A breakdown has been provided to itemize those expense categories that are
five percent or more of the “other” category.

O&M Expenditure Pian: Provides a summary
of the organization’s O&M budgets. For

FY 2012/13 and FY 2013/14, O&M
expenditures are identified by organization and
by salaries and benefits, professional services,
and “other” expenditures and incorporate the
group objectives,

Capital Financial Summary: Provides an
overview of the resources each group will be
dedicating to work on capital projects that are in

the Capital Investment Plan described later in
this book.

Reasons for Changes: Explains significant
variances between various budget years.
Reference is made to a 1.8 million acre-feet
(MAF) budget for 2011/12 as the Board revised
that year’s budget in April 2011 from what it
had approved in August 2010, based upon

2.0 MAF of water sales.

2010/13 and 213014 Bienvial Budget it

Understanding the Budget Layout

MWDRECORD2012_017170Operating Equipment: Lists capitalized
portable equipment costing more than $5,000
requested by the group for the upcoming and
following budget years summarized by section.

Staffing Summary: Presents a personnel
summary by organization for the prior fiscal
year, current year, and the following budget
years. The intent is to show, at a glance, the
personnel trend at Metropolitan as a whole as
well as af the organization level. This is
followed by a comparative breakdown of each
organization’s labor budget by categories of

labor including regular payroll, overtime, district
temporary, agency temporary, and fringe
benefits for those years.

Capital Investment Plan (CIP): Provides
information on all capital programs that are
scheduled to begin or will be underway during
the biennial budget period. The scope,
accomplishments, objectives, and financial
projections are described for each program in the
CIP. This information is contained in a separate
section of this budget book.

Understunding the Budget Layout

2OI2Q/13 and 2013/14 Biewial Budget

MWDRECORD2012_017174July 2012

The FY 2012/13 and FY 2013/14 biennial budget marks Metropolitan’s final transition to a formal
biennial budget, providing the Board and staff with the means to address budgetary planning over a
longer horizon than the traditional annual budget process. The budget process provides an
opportunity to align objectives and actions in each department and group level business plans to
Metropolitan's longer-term mission, values, and priorities and the needs of our member agencies.
Each department is required to identify the extent to which its budget supports the strategic priorities
as outlined in the General Manager’s Business Plan.

The biennial budget reflects input from and participation by the Board, member agencies, and the
public over a four-month period. The Board, Finance and Insurance (F&I) Committee, and member
agencies reviewed and evaluated Metropolitan’s biennial budget and the required rates necessary to
support the budget beginning with a presentation at the F&I Committee meeting on January 9, 2012.
Subsequently, the Board held two board workshops on January 23 and February 13, as well as
discussed the budget and rates and charges options at the February 28 Executive Committee. Finally,
a public hearing on proposed rates and charges was held on March 12, 2012, where member agencies
and members of the public addressed the P&I Committee and provided comments. The budget and
water rates and charges,to be effective on January 1, 2013 and January 1, 2014, were adopted by the
Board on April 10, 2012 and provide for the following priorities:

* Funding for the Capital Investment Plan (CIP) of $257 million in FY 2012/13 and $295 million in
FY 2013/14. The CIP is carefully prioritized to fund projects that primarily focus on necessary
Refurbishment and Replacement (R&R) of aging infrastructure that are critical to maintaining
water quality, reliability, and worker safety and continues to reflect the deferral of facility
expansion and other projects that neither enhance reliability nor provide an adequate return on
investment.

* Funding for Metropolitan to continue rebuilding storage reserves utilizing storage agreements in
the region, the Central Valley, and the Colorado River system if current year supplies exceed
demands. This reduces the likelihood that Metropolitan will need to declare a Water Supply
Allocation in coming years.

* Full funding of conservation programs at $20 million annually to help ensure that our member
agencies and retail water agencies meet the 20 percent by 2020 goal of reduced per capita water
consumption.

« Full funding of incentives for existing Local Resources Program and Groundwater Recovery
Program projects. By FY 2016/17, it is anticipated that additional projects, which are eligible for
incentives based on project cost, will come on-line to meet the 2010 Integrated Resources Plan
goals for local resource development.

* Continued focus on the Sacramento and San Joaquin Bay-Delta with increased funding to
aggressively pursue near-term and long-term Bay-Delta solutions that will help ensure a greater
degree of water supply reliability for Metropolitan's State Water Project supplies. Funding is
directed at technical evaluations and science modeling habitat restoration surveys and studies, and
environmental documentation activities to support the Bay Delta Conservation Plan and the Delta
Habitat Conservation and Conveyance Program.

» Initiate funding of Other Post-Employment Benefits (OPEB) by setting aside $5 million in
FY 2012/13, and increasing that to $10 million in FY 2013/14. Increases of $5 million each year
through PY 2016/17 are proposed to reach full funding of the actuarial required contribution for
OPEB.

2UL23 and 2013/14 Biennial Budget 4 Genera Manager's Tromsmitial Letter

MWDRECORD2012_017172* O&M expenditures were reduced in cach fiscal year by eliminating 19 positions, eliminating the
funding for up to 28 additional positions, and reducing debt administration costs, primarily due to
reduced liquidity costs. Reserves are anticipated to stay close to the minimum level throughout
the five-year planning horizon and projected rate increases in later years are expected to be in the
3 percent to 5 percent range.

Additional detail regarding these and other priorities is contained in the General Manager’s Business
Plan summary in this budget book following this transmittal letter.

SUMMARY OF BUDGETED EXPENDITURES

With water sales trending below historic averages, the budget reflects water sales of 1.7 million acre-
feet, about 300 thousand acre-feet below what is forecast in Metropolitan’s Integrated Resources Plan
(IRP). The FY 2012/13 budget expenditures shown in Table | total $1.68 billion, including operating
expenditures, capital expenditures, and debt service, an increase of $4.3 million (0.3 percent) as
compared to the FY 2011/12 Revised 1.8 MAF Budget. Similarly, the FY 2013/14 budget
expenditures total $1.71 billion, an increase of $23.1 million (1.4 percent) as compared to the

FY 2012/13 budget. This reflects a careful prioritization of expenditures and programs in light of
these reduced water sales projections.

‘Table 1. Biennial Budget Summary ~ Total Expenditures (Dollars in Millions)

2012/13 2013/14
Budget vs. Budget vs.

201412 2012/13 20T1A2

2010/14 Revised1.8 2014/12 Provisional 2012/3 2013/14 Revised 1.8 OUNE
Actual MAFBudget Projected Budget Sudget_ Sudget_ MAF Budget 8
“Expenditures ~ T eer —_— ~ Co
State Water Contract [8 aa19 $ ie 6038 Is see0) (8350/8 aay
Supply Programs (1018 363! 37.0)
Colorado River Power 488 | 36.2 248
Debt Service , 3140 a4i2) 3434)
Demand Management | 48.2 53.2 | 53.8 |
Departmental O8M | 296.7 3124) 328.3 |
Treatment Chemicals, Solids & Power | 23.2 26.5 | 2645
Other 08M. 1 10.7 . 29.21 37.5 |
Sub-total Expenditures 1,333.4 1,398.5 | 18274) 1,413.3
Capital Investment Plan ls 250.4 281.8 | 267.3} 294.6 |
_TOTAL Expenditures | $4583.5)$ 1680.5 | $1,5589 5 $1,684.71 $170791$ 4,

‘Fotals may not foot due to rounding,

Significant factors driving the budget include:

a. State Water Contract (SWC) Costs — State Water Project (SWP) costs are forecasted to
stabilize and largely reflect anticipated changes in water allocations. The SWC is a “take-or-
pay” contract, which obligates Metropolitan to pay the capital and operating costs even if no
water is delivered. Deliveries on the SWP are expected to total 1.26 million acre-feet in the
FY 2012/13, of which 111 thousand acre-feet are received via exchange, dropping to
1.14 million acre-feet in FY 2013/14, of which 101 thousand acre-feet are received via
exchange. Mirroring those deliveries, Metropolitan’s SWC costs are estimated to be

20E2

General Manags

MWDRECORD2012_017173fi

$593.5 million in FY 2012/13 dropping to $564.0 million in FY 2013/14. The primary driver
of the $28.5 million decrease in FY 2013/14 as compared to FY 2012/13 is a $40.4 million
decrease in SWC power costs are due primarily to lower SWP deliveries and an overall
reduction in the total unit cost of SWC power of $15 per acre-foot to about $221 per acre-foot
in FY 2013/14.

b. Water Supply Programs —The estimated cost of water supply programs is expected to
average $37 million per year. These programs include between $12 million and $14 million
each for the IID/MWD conservation agreement and Colorado River programs and about
$5 million each for Central Valley Storage Programs and the PVED Land Management
Program in each of the two fiscal years.

c. Colorado River Power — CRA power costs are projected to be $36.2 million and
$24.9 million based on pumping 728 TAF and 890 TAF at Whitsett Intake Pumping Plant
respectively in FY 2012/13 and FY 2013/14. The $11.2 million decrease in 2013/14 despite
the increase in pumping is a result of the expected use of exchange energy in FY 2013/14.

d. Debt Service - As Metropolitan continues to fund its ongoing Capital Investment Plan (CIP),
debt service will rise modestly during the biennium. It is projected that debt service will be
$341.2 million in FY 2012/13 and $343.4 million in FY 2013/14.

e. Demand Management — Metropolitan financial assistance to its member agencies for the
development of local water recycling and groundwater is budgeted at $33.2 million in
FY 2012/13 and $33.6 million in FY 2013/14, and is expected to produce local water supplies
of about 220 thousand acre-feet in FY 2012/13 and 231 thousand acre-feet in 2013/14.
Conservation program budgets are maintained at $20 million in each fiscal year.

f. Operations and Maintenance (O&M) Costs —- O&M costs total $367.1 million in
FY 2012/13, $10.8 million higher than the FY 2011/12 Revised 1.8 MAF budget. The
primary drivers for this increase are $5 million to begin funding other post-employment
benefits (OPEB), a $2.7 million increase in variable treatment costs related primarily to higher
chemical commodity prices and higher electricity rates, and $1.4 million for initiation of the
Personal Computer Replacement Program. O&M costs for FY 2013/14 total $390.3 million,
$23.2 million higher than the FY 2012/13 budget. The primary drivers for this increase are
$13.2 million in merit increases for eligible employees, a $5 million increase for funding of
other post-employment benefits (OPEB), a $2.1 million increase to complete the PC
Replacement Program, and a $0.9 million increase in variable treatment costs due to modest
inflationary pressure on chemical commodity prices and electricity rates. Neither the
FY 2012/13 nor the FY 2013/14 budget includes any base salary cost-of-living increases
(COLA). The budgets for both FY 2012/13 and FY 2013/14 do assume, however, that over
100 regular positions will be held vacant te offset these merit increases. The result is that no
more than 1,780 regular employee positions will be filled during the biennium.

CIP Expenditures — The CIP is estimated to be $257.3 million in FY 2012/13 and

$294.6 million in FY 2013/14. The CIP was carefully prioritized to fund projects that
primarily focus on necessary refurbishment and replacement of aging infrastructure that are
critical to maintaining water quality, reliability, and worker safety and continues to reflect the
deferral of facility expansion and other projects that neither enhance reliability nor provide an
adequate return on investment. As a result, capital expenditure projections were reduced by
$165 million over the biennial budget period. Over the five-year period from FY 2011/12
through PY 2015/16, capital expenditure projections have been reduced by $182 million.

os

201293 and 2013/14 Biennial Budget 3 Genera Manager's Tromsmitial Letter

MWDRECORD2012_017174suet

Driving these reductions are the rescheduling and reassessment of a number of demand and
capacity-related projects including the Mills Capacity Upgrade, the Jensen Solids Handling
Facilities, the Weymouth Oxidation Retrofit Program, San Diego Pipeline No. 6, the Central
Pool Augmentation Program, and the final tunnel connection on the Perris Valley Pipeline
South Reach.

Additional detail regarding Metropolitan’s budget is contained in the Budget Summary section of this
budget book.

SUMMARY OF BUDGETED RECEIPTS

As shown in Table 2, the FY 2012/13 budgeted receipts are expected to total $1.66 billion. This
includes water sales receipts of $1.18 billion accounting for 71 percent of receipts. Budgeted receipts
for FY 2013/14 are expected to total $1.72 billion, of which $1.24 billion, or about 72 percent, come
from water sales revenues. Receipts for both fiscal years are based on projected water sales of

1.7 million acre-feet and include an increase in base rates and charges averaging 5 percent, effective
January |, 2013 and January 1, 2014.

Table 2. Biennial Budget Summary ~ Total Receipts (Dollars in Millions)
2042/13 2013/14

207442 204243 2041/12
204014 i 2044142 20123 2013/44 2012/13
‘Actual Narada Projected rae Budget Budget Nar mtaee Budget
“Revenues ™~ | et 7
Taxes S$ s73/5 809 8 800 § 816 $ 16 § (1.5)
Annexations 06} 10} 40: 1.0 - -
Interest Income. : 20.6 18.05 1825 18.7 (4.3) 63
Hydro Power aad 215) 26.0 20.5 24) (2.6)
Fixed Charges (RTS & Capacity Charge), 153.5 170.2; 170.2 4869 44 78
Water Sales Revenue i 995.6 1155.4 | 1,069.5 ; 4,483.7 | 1,240.7 28.3 57.0
Miscellaneous Revenue i 68.2 18.2 5 i 36.9 6.0) 61 {12.2} O41
Bond Proceeds and Reimbursements | 288.2 268.0 | i 20.0 88.7)! 06)
L

(88. !
47324 |$44208 |$ 1,655.7 |$4,6633 $1,7237 $  (20)$ 604

TOTAL Receipts

Totals may not foot due to rounding

£51,638.6 | §.

Water sales for the last three years have been trending below historic averages. Therefore, the
biennial budget has adopted a more conservative water sales projection of 1.7 million acre-feet for
both fiseal years. In order to mitigate for the rate impact of these lower water sales projections,
expenditures in the FY 2012/13 budget were reduced $90.8 million as compared to the FY 2012/13
provisional budget previously approved by the Board (refer to Table 1).

Other revenues include readiness-to-serve charge revenues of $144 million and $154 million,
revenues from the capacity charge of $30.4 million and $28.1 million, and tax and annexation
revenues of $82.6 million and $81.1 million in FY 2012/13 and FY 2013/14, respectively. Interest
earnings are expected to be $13.7 million and $14.1 million, respectively, based on an average
interest rate of about 1.5 percent.

To meet the ongoing funding requirements of the CIP, Metropolitan plans to issue $180 million of
commercial paper in FY 2012/13 and an additional $20 million in FY 2013/14. In addition,
Metropolitan plans to issue $160 million of fixed rate bonds in 2013/14. Any remaining CTP funding
requirements will be met from current operating funds (i.e., PAYGO from the R&R and General
Fund).

Sand 201314

MWDRECORD2012_017175The revenue bond debt service coverage ratio is forecast to be about 1.6 times in FY 2012/13
increasing to 1.9 times coverage in FY 2013/14. This compares favorably to a low of 1.4 times in
FY 2010/11. Metropolitan’s fixed charge coverage is expected to be about 1.2 times in FY 2012/13
and 1.3 times in FY 2013/14, which meets the board-adopted objective of 1.2 times coverage,
increasing from 0.9 times in 2010/11.

BUDGET TREND

To provide a longer term picture of Metropolitan’s costs, Figure 1 shows the major expenditure
categories (excluding bond-funded CIP) over a five-year period from FY 2009/10 actual through the
FY 2013/14 budget. From FY 2009/10 through FY 2013/14, expenditures are forecasted to increase
by about $208 million, or about 3.7 percent annually. The primary cost drivers during this period are
a $138 million increase in debt service and PAYGO expenditures, an $82 million increase in power
costs, and a $55 million increase in departmental O&M partially offset by an $85 million decrease in
supply program costs.

1,806 ” Power
1,600 -
41,400 ~ oDemand
% 1,200 Management
2 4,000 _ S Supply Programs
2 a00 ~ 2O&M
& 600
= 400 so eon a fe .. BS SWP iwio power)
200 He — ~

: : : @ Debt Service &
. PAYGO
2010 2041 2042 2013 2014
Actual Actual Est. Budget Budget

Fiscal Year Ending

Additional detail regarding Metropolitan’s five-year budget projections is contained in the Five-Year
Financial Forecast section of this budget book.

201293 and 2013/14 Biennial Budget 5 General Manager's Troosmittal Leder

MWDRECORD2012_017176RESERVES

Based on projected receipts and expenditures, the total balance in the Water Rate Stabilization,
Revenue Remainder, the Treatment Surcharge Stabilization Fund, and Water Stewardship funds on
June 30, 2013 is estimated to be about $220.8 million, about $22.8 million over the minimum target.
Similarly, the total balance of these funds on June 30, 2014 is estimated to be about $204.6 million,
about $2.5 million over the minimum target. Total restricted and unrestricted reserves are estimated
to be $965.8 million on June 30, 2013 and $981.7 million on June 30, 2014.

Bréaux.
Financial Officer

2012/13 and 2013"

miltol Letter

MWDRECORD2012_017177The following is an outline of the FY 2012/13 General Manager’s Business Plan and provides the key
strategic priorities that the Office of the General Manger will be focused on for the period covered by the
biennial budget. Metropolitan is committed to implement these priorities, and the objectives that support
them, to ensure meeting the mission of providing the service area with adequate and reliable supplies of
high quality water to meet present and future needs in an environmentally and economically responsible
way. With dedicated effort and collaboration, Metropolitan will continue to meet long-term challenges of
a growing population within the service area, increased competition for low-cost water supplies, variable
weather conditions, and increased environmental regulations through the Integrated Resources Plan
completed during FY 2010/11. An update and any revisions to these strategic priorities will be provided
at the close of the 2012/13 fiseal year.

Strategic Priorities

Strategic Priority #1: Complete the Bay-Delta Conservation Plan (BDCP) and the associated
Environmental Impact Report/Environmental Impact Statement

Metropolitan staff will continue to provide leadership in the BDCP process to restore the reliability of the
State Water Project (SWP), with the goal to complete the public draft and final BDCP and associated
Environmental Impact Report/Environmental Impact Statement (including Record of Decision and Notice
of Determination) and the project finance and cost allocation plans by the end of this period.

In addition, staff will continue to aggressively pursue near-term Bay-Delta actions that will ensure a
greater degree of water supply reliability for Metropolitan’s State Water Project supplies. These actions
will include identifying and developing early-action habitat projects that will satisfy current regulatory
obligations and contribute toward the BDCP. Completion of the environmental review and planning
process in the upcoming year is targeted for the Yolo Ranch Project that would provide both delta smelt
and salmon habitat.

Efforts will also be targeted toward finalization of the State Department of Water Resources” Delta Flood
Emergency Preparedness, Response and Recovery Plan by December 2012 which has been coordinated
with Metropolitan. This plan is expected to include measures to support resumption of State Water
Project operations in the Delta at an earlier point in time in the event of catastrophic failure of Delta
levees.

Finally, staff will continue to support furthering the scientific understanding of the Sacramento-San
Joaquin Bay Delta system, through technical studies and published scientific reports, in order to help
support solutions to environmental protection and water supply reliability challenges.

Strategic Priority #2: Conclude Rate Refinement process

Metropolitan’s current rate structure relies heavily on volumetric water charges, and as a result
approximately 82% of revenues are variable while close to 80% of all costs are fixed. This mismatch
between revenues and costs has resulted in declining financial reserves, lower debt coverage ratios that do
not meet our financial policies and significant rate hikes due to lower water sales. The variability in
revenues has also been a concern raised by the bond rating agencies and investors. Also, 24 of our
customers entered into ten-year purchase orders with Metropolitan in 2002 that will expire at the end of
calendar year 2012, and a decision will need to be made on their continued use in the future.

FRAP oo 30 eral Manager ’s Business Plan

4 Blesnicl Brcies

MWDRECORD2012_017178To address these concerns staff will look at the current rate structure and purchase order process with the
following goals:

* Improve revenue stability and certainty;

* Determine how best to meet water management objectives through the rate structure;

Determine when Tier 2 rates will apply;

Establish a rate and program for replenishment sales when waier is available; and

Develop additional fixed revenues with particular emphasis on the water treatment surcharge and
fixing the ad valorem tax rate at its current rate.

Meetings will be held with the member agencies to review alternatives and receive their input. In
addition, throughout the precess the Pinance and Insurance Committee will receive regular updates and
workshops will be held, as needed, to receive direction and input from the Board.

A presentation on recommended changes to the rate structure and rate administration will be presented to
the Finance and Insurance Committee by October 2012.

Strategic Priority #3: Employee Development

Metropolitan’s reliability depends on the knowledge and skills of a dedicated workforce. Strategic
initiatives will focus on both management and employee development to meet the changes in the
workplace resulting from increased retirements and changing skills requirements. We will continue
preparing new employees and managers to work effectively in their new roles, and will focus on
preparing the organization to address future workforce needs by: (a) assessing current talent and potential
retirement gaps and implementing effective succession planning tools to address them; and

(b) aggressively cross train staff so they are capable of stepping into vacancies and meeting ever-changing
work and compliance requirements.

Plans are underway to complete the comprehensive succession planning effort for all groups during this
period. HR will develop better tools and processes to strategically align management and the workforce
with the business plan priorities and to the changing needs of Metropolitan during the upcoming fiscal
year. Expanded opportunities for learning and expanded internship and apprenticeship programs will
build specialized internal staff capabilities.

Finally, expanding knowledge-capture processes for key technical and management positions will be
implemented to help staff record the experience of those that came before them.

Strategic Priority #4: Infrastructure Reliability

Metropolitan’s infrastructure system includes the Colorado River Aqueduct, over 800 miles pipelines
with diameters up to 20 feet, five water treatment plants with a total capacity of 2.5 billion gallons per
day, sixteen hydropower plants, and nine reservoirs, including Diamond Valley Lake. These assets have
a teplacement value of approximately $15 billion dollars, not including environmental mitigation and
right-of-way acquisition,

Metropolitan staff will continue to maintain a reliable infrastructure system for the delivery of high-
quality water to meet the current and future needs of its service area. Our water delivery and treatment
system is critical in providing public health protection, water supply reliability, economic development,
and a high quality of life for consumers. With the majority of Metropolitan’s infrastructure greater than
50 years old, it is critical that the necessary capital investments be made to extend the reliable service life

4 Biennial Budget

MWDRECORD2012_017179over the next 50 years to ensure Metropolitan continues to maintain full capability to deliver water under
normal and emergency conditions.

Under the Capital Investment Plan, Metropolitan has budgeted more than $350 million over the next two
fiscal years to enhance reliability of the conveyance and distribution system and all five water treatment
plants. The aging conveyance and distribution system requires field investigations, facility repair and
replacement, and site improvements to comply with current operational, seismic, safety and regulatory
requirements, The treatment plants require upgrades so that they may continue to operate efficiently and
provide Metropolitan’s customers with high water quality that meets increasingly stringent regulatory
standards. In addition, Metropolitan is proactively supporting the operations and maintenance of the State
Water Project with fabrication and coating services and engineering and operations support to expedite
repairs and upgrades in the most cost-effective manner, Finally, key investments will be made to
improve security protection and emergency response capability at all facility sites.

MWDRECORD2012_017180THIS PAGE INTENTIONALLY LEFT BLANK

MWDRECORD2012_017184Figure 2. Sources of Funds

The biennial budget includes a discussion of
sources and uses of funds. The budget is
developed and monitored on a modified
accrual basis. This means that revenues and
expenses are recognized in the period they are
earned and incurred regardless of whether
cash has been received or disbursed.
Differences between the basis of budgeting
and the financial statements are minimal.

Depreciation and amortization will not be
recorded and payments of debt service will be
recorded when due and payable. The
modified-accrual basis of accounting is in
accordance with Generally Accepted
Accounting Principles (GAAP) and provides a
better match of revenues and expenses for
budgeting and reporting.

R&R & General Fund

OBond Proceeds &
Reserves

@ Other Revenue

O Taxes & Annexation

Fees

O Fixed Charges

@ Water Sales

2011/12 2012/13
Revised 1.8 Budget
MAF Budget

‘SOURCES OF FUNDS

Estimated revenues from water sales, fixed
charges (readiness-to-serve charge and capacity
charge), taxes and annexation fees, and other
miscellaneous income (interest income, power
recovery, etc.) are projected to be $1.48 billion
for fiscal year 2012/13 and $1.55 billion for
fiscal year 2013/14. For 2012/13, this is

$19.7 million more than the 2011/12 revised
budget and for 2013/14, this is $61.1 million
more than 2012/13. The increase in revenues is
due to increases in water rates and charges in
2012, 2013 and 2014. Figure 2 shows the major
sources of funds. Summaries of sources and
uses of funds are shown in Tables 8, 9 and 10 at
the end of this section. A description of each
revenue source is included in the Glossary of
Terms.

2013/14
Budget

Water Sales

Revenues from water sales are budgeted at
$1,183.7 million in 2012/13 and

$1,240.7 million in 2013/14 and are based
on rates and charges adopted by the Board
for January 1, 2012, January 1, 2013, and
January 1, 2014.

Water sales for both 2012/13 and 2013/14 are

estimated to be 1.70 million acre-feet (MAF)
during the July through June fiscal year period.

201M E344 Biennial Budget 11

Bierniot Budget Summary

MWDRECORD2012_017182Figure 3. Water Sales Trend

2
2 : :

1.0 4-H at] =| ao a
s : Le
= 05 4 een feed bene fame fm fovea ie

0.0

Actual Actual Actual Actual Proj. Rev. Budget Budget
2008 2009 2010 2011 2012 Budget 2013 2014
2013

Fiscal Year Ending

The 2012/13 fiscal year water sales include
1.52 MAF of firm sales, zero replenishment
sales, zero agricultural sales, and 185 thousand
acre-feet (TAF) of exchange sales. Treated
sales are estimated to be 973 TAF or

57 percent of total sales in 2012/13. The
2013/14 fiscal year water sales include

1.50 MAF of firm sales, zero replenishment
sales, zero agricultural sales, and 198 TAF of
exchange sales. Treated sales are estimated to
be 973 TAF or 57 percent of total sales in
2013/14. Figure 3 shows the trend of water
sales.

Taxes and Annexation Fees

Revenues from taxes and annexation fees,
which will be used to pay voter-approved debt
service on general obligation bonds and a
portion of the capital costs of the State Water
Contract (SWC) are estimated to be

$82.6 million in 2012/13 and $81.1 million in
2013/14.

Fixed Charges

The fixed charges are comprised of the
Capacity Charge and Readiness-to-Serve
Charge. In 2012/13, these charges are
estimated to generate $30.4 million and
$144.0 million, respectively. In 2013/14,
these charges are estimated to generate

$28.1 million and $154.0 million, respectively.
{n total this represents a $4.1 million increase
from the 2011/12 to the 2012/13 anda

$7.8 million increase from the 2012/13 to the
2013/14 budget.

Other Revenue

Interest earnings are estimated to total

$13.7 million and $14.1 million for 2012/13
and 2013/14 respectively (including trust
accounts and construction funds).

Receipts from hydroelectric and Colorado
River Aqueduct (CRA) power sales are
estimated to be $23.6 million for 2012/13 and
$20.9 million for 2013/14.

Bicsnial Budget Summary 12

2OI2Q/13 and 2013/14 Biewial Budget

MWDRECORD2012_017183Other Sources

To meet the ongoing funding requirements of
the CTP, Metropolitan plans to issue

$180 million of commercial paper in 2012/13
and roll an additional $20 million in 2013/14.
In addition, a $160 million fixed rate bonds is
budgeted for 2013/14. These bonds are
expected to generate $351.8 million in bond
proceeds, after about $2.1 million to cover the

Figure 4. Uses of Furds

cost of issuance and $6.1 million to fund
reserves, The remaining CIP funding
requirements will be met from current
operating funds (i.c., PAYGO from the R&R
and General Fund). In 2012/13, a total of
$1.75 billion will be available for expenditures
and other obligations and in 2013/14 this
figure will increase to $1.87 billion.

2,000 OCRA Power
9,800 4g —
1 .. Demand Management
1,400 ~~ -~ OSupply Programs
£1,200 +- | p
3 1000 4-4 0 fend feed |. Construction Fund,
Q” WSF & Trust Deposits
800 pf =PAYGO
= 600
= 5
= 400 Debt Service
200 4-7 - — -- CO&M
0
20112 =. 20123201344 Construction
Revised 1.8 Budget Budget ®SWP
MAF Budget

USES OF FUNDS

Total uses of funds are $1.75 billion for
2012/13 and $1.87 billion for 2013/14.

Figure 4 shows the breakdown of expenditures
and other obligations that make up the Uses of
Funds for 2012/13 and 2013/14.

Colorado River Aqueduct Power

CRA power costs are projected to be

$36.2 million and $24.9 million based on
pumping 727 TAF and 890 TAF at Whitsett
Intake Pumping Plant respectively in 2012/13
and 2013/14. 2013/14 is $11.2 million lower
despite the increase in pumping as a result of
the expected use of exchange energy in
2013/14.

State Water Contract

State Water Contract (SWC) expenditures are
budgeted at $593.5 million for 2012/13 and
$564.0 million in 2013/14. This is based on
total deliveries of 1.26 MAF for 2012/13, of
which 11 { TAF are received via exchange,
and 1.14 MAF for 2013/14, of which 101 TAP
are received via exchange.

SWC power costs are expected to be

$270.7 million for 2012/13 and $230.3 miflion
for 2013/14 and include the cost of pumping
1.15 MAF and 1.04 MAF, respectively.

For 2012/13, the average total unit cost of
SWC power is expected to be about $236 per
acre-foot, which includes $61 per acre-foot for
fixed power costs and $175 per acre-foot for

201M E344 Biennial Budget 13

Bierniot Budget Summary

MWDRECORD2012_017184variable pumping costs. For 2013/14, the
average total unit cost of SWC power is
expected to be about $221 per acre-foot,
which includes $29 per acre-foot for fixed
power costs and $192 per acre-foot for
variable pumping costs.

SWC minimum operations, maintenance,
power, and replacement charges are estimated
to increase $5.1 million to $184.6 million in
2013/14. Capital charges are expected to
increase $5.9 million to $149.2 million in
2013/14.

Demand Management Costs

Metropolitan provides financial assistance to
its member agencies for the development of
focal water recycling and groundwater
recovery projects through the Local Resource
Program (LRP). Metropolitan also provides
financial assistance for the development of
conservation programs through the
Conservation Credits Program (CCP).

As part of the LRP, Metropolitan has entered
into agreements to provide financial assistance
to water-recycling projecis. Recycling
projects that receive Metropolitan
contributions are expected to produce

162 TAF of recycled water, principally for
landscape irrigation, groundwater recharge,
and industrial uses in 2012/13 and 169 TAF in
2013/14. Metropolitan is expected to spend
$24.7 million in 2012/13 and $24.9 million on
these efforts in 2013/14,

Metropolitan has also entered into agreements
to provide financial assistance to projects to
recover contaminated groundwater. These
groundwater recovery projects are expected to
produce about 58 TAF in 2012/13 at a cost to
Metropolitan of $8.5 million. In 2013/14,
groundwater recovery projects are expected to
produce about 62 TAF at a cost to
Metropolitan of $8.7 million.

The CCP provides financial assistance to
customers in Metropolitan’s service area for
water conservation programs. The budget for
CCP provides rebate funding for residential,
commercial, industrial, and landscape
conservation activities. The 2012/13 and
2013/14 funding for CCP has been budgeted at
$20.0 million per year.

OPERATIONS AND MAINTENANCE

The 2012/13 operations and maintenance
(O&M) budget, including operating equipment
purchases, is estimated to be $367.1 million.
This is $10.8 million higher than the 2011/12
Revised 1.8 MAF budget of $356.3 million
presented to the Board in April 2011. The
2013/14 O&M budget is $390.2 million, an
increase of $23.1 million as compared to the
2012/13 budget. Table 3 summarizes the
O&M budget by expenditure type. A more
detailed discussion of significant factors
impacting the O&M budgets follows Table 3.

Table 3. 2032/13 Operations & Maintenance Annual Budget (dollars) by Expenditure Type

2012/13
Provisional 2012/13
201442 2012/13 Budget vs. Budget
Revised 1.8 Provisional 2012/13 2013/14 2012/13 vs, 2013/14
gee egee __MAF Budget Budget Budget Budget —-—sBudget_ = Budget
Salaries & Benefits * ("226,554,800 | 229,248,400) 223,482,200” 235,964,300] (5,766,200): 12,482,100
Chemicals, Solids, and Power ** | 22,801,400 | 24,281,700 25,612,700 26,408,500 4,231,000 | 896,800
Outside Services | 40,418,700 38,868,200 43,028,200. 42,828,400 4,159,900 (199,700)
Materials & Supplies *** | 22,278,961; 48,106,900 22,598,950 24,263,112 | (25,507,950) 1,664,162
Cargill & OPEB ! 500,000 | +! 5,000,000, 40,009,000} 5,000,000: 5,000,000
Other | 37,470,539 20,187,400 40,408,450. 43,828,188 i 20,221,050 3,219,738
Operating Equipment 7,489,400! 7,344,700 7,041,800 7,124,600} (303,100), 83,000
Total 256,303,800 | 368,037,300 367,072,000 38 [(965,300), 23,146,100
i 9% 90

* Includes Overhead Credit for Constraction
** Costs associated with teatment plants only.
#0 Without chemicals associated with treatment plants.

Bigsnial Budget Summary

14 2OI2Q/13 and 2013/14 Biewial Budget

MWDRECORD2012_0171852012/13 Revised O&M Budget

The 2012/13 O&M budget includes $367.1
million for labor and benefits, water treatment
chemicals, power, and solids handling, materials
and supplies, professional services, and
operating equipment purchases. This is

$10.8 million higher than the 2011/12 Revised
1.8 MAF budget of $356,3 million reviewed by
the Board in April 2011 due primarily to
initial funding of Metropolitan's Other Post-
Employment Benefits (OPEB) obligation;
variable treatment costs; initiation of the PC
Replacement Program; promotion of key
initiatives and legal costs related to the Bay-
Delta; and increased litigation costs related to
water quality, employment, and water rates.

The 2012/13 budget is $1.0 million lower than
the provisional 2012/13 budget of

$368.0 million approved by the Board in April
2011 due primarily to the elimination of 15
positions and the unfunding of 28 positions.

Salaries and Benefits — Labor costs, not
including those charged to construction, are
$223.5 million, The 2012/13 budget assumes
no across-the-board salary increases,
consistent with the bargaining unit contracts
approved by the Board, overall O&M labor is
$2.1 million lower than the Revised 1.8 MAF
2011/12 budget. This decrease reflects an
effort by management at reducing positions as
well as closely monitoring future vacancies for
potential elimination. The O&M budget also
reflects $1.6 million for merit increases for
eligible employces and a $0.9 million increase
in overtime for planned shutdown support and
an increase in the construction overhead
applied as a credit reducing O&M labor by
$4.8 million.

The total personnel complement for 2012/13 is
1,908 positions, including 25 agency and
district temporary full-time equivalents
(FTEs), and reflects a decrease of 15 positions
from the 2011/12 budget. Total regular
employee positions are 138 positions below
the 2008/09 budget. The 2012/13 budget
assumes a vacancy rate of

approximately 4.0 percent. This is more than
the 3.2 percent assumed for the 20] 1/12
budget, reflecting the elimination of funding
for 18 regular employee positions. Finally, an
additional 10 specific positions were unfunded
in licu of an increased vacancy rate. The
value of these 10 positions has the effect of
increasing the overall vacancy rate to about
4.6 percent.

Other O&M — As a result of reduced
revenues from water sales, initial funding of
Metropolitan's OPEB obligation to its current
and future retirees was climinated from the
Revised 1.8 MAF 2011/12 budget. The
2012/13 budget includes $5 million to renew
that commitment. Consistent with
Metropolitan's IT Strategic Plan, the 2012/13
budget includes $1.4 million to initiate
replacement of outdated desktop workstations
that are at the end of their anticipated useful
life as part of the two-year PC Replacement
Program. This program was deferred one year
beyond the planned refresh cycle to mitigate
budget increases, but now needs te proceed as
many computers will be approximately

six years old by the tim