Annual Report

PUBLIC UTILITY DISTRICT NO. 1

OF THURSTON COUNTY

MCAG No. 1803

Submitted pursuant to RCW 43.09.230

To the
STATE AUDITOR’S OFFICE

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007

Certified correct this 3rd day of July 2008 to the best of my knowledge and belief:

Name: Julia Parker

Title: Chief Financial Officer
Prepared by: Julia Parker
Telephone: (360)357-8783
Facsimile: (360)357-1172
Email Address: julieparker@thurstonpud.com
Home page address: http://www.thurstonpud.com/index.htm
Management’s Discussion and Analysis

The financial management of the Public Utility District No. 1 of Thurston County
(District) offers readers of these financial statements this overview and summary analysis
of the financial activities of the District for the year ended December 31, 2007 with
additional comparative data for 2006 and 2005. This analysis is intended to supplement
and be used in conjunction with the basic financial statements and accompanying notes,
which follow this section, and to assist the reader in focusing on significant financial
activities.

Overview of the Financial Statements

The District uses fund accounting to account for its financial activities in accordance with
the standards of the Governmental Accounting Standards Board (GASB). The District is
considered an Enterprise Fund and the fund type used to account for its financial
activities is called a Proprietary Fund. The District provides retail water service and
regional water resource activities to support its water systems.

In accordance with requirements set forth by GASB, the District’s financial statements
are developed using the accrual method of accounting to recognize changes in District
resources. Accrual accounting recognizes revenues and expenses when earned or
incurred without regard for when cash is actually received or disbursed. The financial
statements presented in the following pages of this document are presented on a
comparative basis for the years ended December 31, 2007 and 2006, and are comprised
of:

• Balance Sheet: The District presents its statement of position using the balance sheet
format. The balance sheet reflects the assets, liabilities and net assets (equity) of the
District as of the end of the fiscal year which, for the purposes of this report, is December
31, 2007. The net assets section of the balance sheet is separated into three categories:
ƒ net assets invested in capital assets net of related debt
ƒ restricted net assets
ƒ unrestricted net assets

• Statement of Revenues, Expenses, and Changes in Net Assets: This statement

reflects the transactions and events that have increased or decreased the District’s total
resources during the period. Revenues are presented net of allowances and are
summarized by major source. Revenues and expenses are classified as operating or non-
operating based on the nature of the transaction.

• Statement of Cash Flow: The statement of cash flow reflects the sources and uses of
cash separated into three categories of activities: operating, capital and related financing,
and investing. The District does not include cash equivalents within its definition of cash.

• Notes to the Financial Statements: The notes to the financial statements, presented at
the end of the basic financial statements, are considered an integral part of the District’s
presentation of financial position, results of operations, and changes in cash flows and
should be considered as part of the whole presentation. These notes are necessary to
develop a full understanding of the figures provided in the basic financial statements.

1
The following table provides a summary of the financial data discussed in the next few
pages of this report:

Public Utility District No. 1 of Thurston County, Washington

Condensed Financial Information for December 31, 2007, 2006 and 2005
Increase %
As of December 31 (Decrease) Change
Balance Sheet 2007 2006 2005 2007 - 2006 2007 - 2006
Current Assets $ 625,037 $ 783,449 $ 703,093 $ (158,411) -20.22%
Other Non-Current Assets 3,122,163 3,238,494 3,257,998 (116,331) -3.59%
Total Assets $ 3,747,201 $ 4,021,943 $ 3,961,091 $ (274,742) -6.83%

Current Liabilities $ 245,811 $ 326,392 $ 174,190 $ (80,581) -24.69%

Other Liabilities 70,488 52,574 26,040 17,914 34.07%
Long-Term Liabilities 2,852,205 2,984,737 3,162,368 (132,532) -4.44%
Total Liabilities $ 3,168,504 $ 3,363,703 $ 3,362,599 $ (195,199) -5.80%

Invested in Capital Assets Net of Related Debt $ (354,310) $ (348,878) $ (552,030) $ (5,431) 1.56%
Total Restricted funds 371,148 550,062 621,619 (178,914) -32.53%
Net Unrestricted funds 561,858 457,057 528,903 104,801 22.93%
Total Net Assets $ 578,697 $ 658,240 $ 598,492 $ (79,544) -12.08%

Total Liabilities and Net Assets $ 3,747,201 $ 4,021,943 $ 3,961,091 $ (274,742) -6.83%

Public Utility District No. 1 of Thurston County, Washington

Condensed Financial Information for December 31, 2007, 2006 and 2005
Combined Total Increase %
As of December 31 (Decrease) Change
STATEMENT OF CHANGES IN NET ASSETS 2007 2006 2005 2007 - 2006 2007 - 2006
Operating Revenues $ 1,403,911 $ 1,402,228 $ 914,929 $ 1,682 0.12%
Non-Operating Revenues 258,395 234,458 226,936 23,937 10.21%
Total Revenues $ 1,662,306 $ 1,636,686 $ 1,141,865 $ 25,620 1.57%
Operating Expenses $ 1,645,460 $ 1,439,598 $ 1,068,140 $ 205,862 14.30%
Non-Operating Expenses 96,390 137,340 49,012 (40,950) -29.82%
Total Expenses $ 1,741,849 $ 1,576,938 $ 1,117,152 $ 164,911 10.46%

Change in Net Assets $ (79,544) $ 59,748 $ 24,713 $ (139,292) -233.13%

Net Assets
Balance, beginning of year $ 658,240 $ 598,492 $ 535,024 $ 59,748 9.98%
Current Year Change in Net Assets (79,544) 59,748 24,713 (139,292) -233.13%
Prior Period Adjustment - - 38,756 - 0.00%
Balance, end of year $ 578,697 $ 658,241 $ 598,492 $ (79,544) -12.08%

Management’s Discussion & Analysis 2

Financial Analysis

Operating Revenues
The year 2007, the District’s second full year of operations providing and billing for
direct retail water utility service, offered some challenges to the District. In April the
customers of certain water systems saw a reduction in their monthly bill due to the
expiration of a surcharge intended to finance improvements made by the previous owner
of those systems. A subsequent analysis of revenues performed mid-year projected a
significant revenue shortfall to which the District responded by implementing a rate
increase in October to balance revenue and expenses. The final result of these changes
was that the 2007 operating revenue of $1,403,911 saw no significant change from 2006.

Operating Expenses
In 2007, the expenses of the District increased $205,862 or 14.3%. The primary reason
for this was the renegotiated purchase water contract with the City of Olympia that went
into effect June 1, 2007, resulting in a metered charge which increased costs in 2007 by
$103,239 or 65% over 2006 expenses. The second largest increase in expenses was in
Salaries and Benefits which increased $59,081 or 11.1%

Non-Operating Revenues & Expenses

The District, like all public utility districts organized in the State of Washington, has
taxing authority. The District exercises this authority at a minimum level, collecting
$211,070 in property tax assessments in 2007. The 2006 tax assessments amounted to
$193,590, demonstrating a 9% increase from 2006 to 2007. Property tax revenues are
used by the District to support in part General District operations which can be tied to a
benefit to taxpayers, rather than ratepayers of the District.

The District was granted a low interest loan through the Public Works Board in 2004.
2007 was the third year of this note and the interest on the note was $4,736. The District
also issued bonds in April of 2005, and again the terms of the bonds called for the
payments to be interest only until April 2007. The interest paid on the bonds in 2007 was
$91,653, which resulted in a total Interest on Long Term Debt of $96,390 for 2006.
Interest expense in 2006 was $99,137.

Net Revenues & Expenses

The year 2007 ended with a net deficit of <$79,544>. This figure is drop from the net
revenue amount of $59,748 reported at the end of 2006.

Assets
The District’s total net assets decreased by $79,544 or <12.1%>. The change in Net
Assets was related directly to the net deficit experienced by the District during the year.

Summary of Financial Position

The overall financial position of the District deteriorated in 2007 over the financial
position in 2006. This was due to many factors, including a very large increase in the
cost of purchased water and the rise in salaries and benefits. To bring the District back

Management’s Discussion & Analysis 3

out of this state of deterioration, a general rate increase of approximately 28% was
implemented in October 2007, with an additional increase planned in June 2008 to
coincide with a planned increase in purchase water costs. The District has developed a
systematic plan to grow the service area and increase revenues while spreading overhead
over more customers. To implement this strategy, the District hired John Weidenfeller as
the new general manager in December 2007 to lead the District in this plan.

In late 2007 the District experienced its first financial statement and accountability audit
by the Washington State Auditor’s Office which we felt to be a very valuable experience.
Several areas were identified as needing improvement and management has made efforts
to correct each identified item.

Contacting the District’s Financial Management

The financial report is designed to provide interested parties with a general overview of
the District’s finances and to demonstrate District accountability for the money it
receives. If you have questions about this report, or require additional or clarifying
financial information, contact the Public Utility District No. 1 of Thurston County, 921
Lakeridge Way SW, Suite 201, Olympia, WA 98502.

Julie Parker
Chief Financial Officer

Management’s Discussion & Analysis 4

MCAG No. 1803
Public Utility District No. 1 of Thurston County, Washington
BALANCE SHEET -
Water General Total As of December 31, (Note 1)
As of December 31, 2007 Operations Operations 2007 2006
ASSETS
Current Assets
Cash and cash equivalents
General Fund - 168,057 168,057 138,507
Capital Improvement Fund 158,593 24,036 182,629 179,786
Water Revenue Fund 115,431 - 115,431 321,449
Receivables
Customer Accounts Receivable 134,883 - 134,883 125,417
Property Tax Receivable - 7,028 7,028 5,794
Other Receivables 315 - 315 4,971
Prepaid Expenses 15,523 1,171 16,694 7,524
Total Current Assets $ 424,745 $ 200,292 $ 625,037 $ 783,449
Non-Current Assets
Special Funds
Bond Reserve Fund 226,633 - 226,633 387,313
PUD Project Reserve Fund 144,515 - 144,515 162,749
Total Special Funds $ 371,148 $ - $ 371,148 $ 550,062
Other Non-Current Assets
Unamortized Debt Discount & Expense 9,045 - 9,045 9,783
Total Other Non-Current Assets $ 9,045 $ - $ 9,045 $ 9,783
Utility Plant In Service
Land and Land Rights 20,404 - 20,404 20,404
Water Plant 2,845,446 - 2,845,446 2,685,529
Office Furniture & Equipment 126,756 15,353 142,109 70,582
Vehicles & Equipment 156,226 - 156,226 151,697
Other Utility Plant 479,897 - 479,897 468,883
Total cost 3,628,729 15,353 3,644,081 3,397,096
Less Accumulated Depreciation (894,330) (7,781) (902,111) (718,447)
Net Utility Plant $ 2,734,399 $ 7,572 $ 2,741,971 $ 2,678,650
Total Non-Current Assets $ 3,114,591 $ 7,572 $ 3,122,163 $ 3,238,494
Total Assets $ 3,539,336 $ 207,864 $ 3,747,201 $ 4,021,943
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable 50,911 1,714 52,625 92,037
Accrued wages - - - 20,331
Accrued vacation liability 17,848 408 18,257 26,599
Accrued taxes (7,515) (188) (7,703) 9,794
Current Portion of Long-Term Debt 182,632 - 182,632 177,632
Total Current Liabilities $ 243,876 $ 1,934 $ 245,811 $ 326,392
Other Liabilities
Contributions In Aid of Construction 70,488 - 70,488 52,574
Total Other Liabilities $ 70,488 $ - $ 70,488 $ 52,574
Long-Term Liabilities
Bonds Payable 1,960,000 - 1,960,000 2,090,000
PWTF Note - Preconstruction 05 842,105 - 842,105 894,737
Contract Payable - Springbrook Software 50,100 - 50,100 -
Total Long-Term Liabilities $ 2,852,205 $ - $ 2,852,205 $ 2,984,737
Net Assets
Invested in Capital Assets Net of Related Debt (361,882) 7,572 (354,310) (348,878)
Net Assets Restricted for:
Capital Projects 144,515 - 144,515 162,749
Debt Service 226,633 - 226,633 387,313
Total Restricted funds $ 371,148 $ - $ 371,148 $ 550,062
Net Unrestricted funds 363,500 198,358 561,858 457,057
Total Net Assets $ 372,767 $ 205,930 $ 578,697 $ 658,240
Total Liabilities and Net Assets $ 3,539,336 $ 207,864 $ 3,747,201 $ 4,021,943

The accompanying notes are an integral part of these financial statements.

MCAG No. 1803

Public Utility District No. 1 of Thurston County, Washington

COMBINED STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS
Combined Total
Water General As of December 31, (Note 1)
For the Year Ended December 31, 2007 Operations Operations 2007 2006
Operating Revenues
Unmetered Water Revenue $ 68,033 $ - $ 68,033 $ 151,952
Metered Water Revenue 1,224,581 - 1,224,581 1,089,328
Sales to Irrigation 26,027 - 26,027 15,387
Miscellaneous Service Revenue 61,447 - 61,447 58,349
Other Water Revenue 23,823 - 23,823 87,212
Total Operating Revenue $ 1,403,911 $ - $ 1,403,911 $ 1,402,228
Operating Expenses
Salaries & Benefits Employees $ 534,517 $ 38,744 $ 573,261 $ 515,998
Salaries Commissioners - 19,458 19,458 17,640
Purchased Water 261,469 - 261,469 158,230
Purchased Power 49,212 - 49,212 54,152
Chemicals 17,993 - 17,993 18,786
System Repairs & Maintenance 86,612 - 86,612 76,330
Contract Engineering 8,669 147 8,816 4,145
Contract Accounting - - - 27,030
Contract Legal 15,944 6,500 22,444 18,660
Contract Testing 26,423 - 26,423 29,850
Contract State Auditor 6,347 6,347 12,694 314
Contract Other 325 35,570 35,895 27,341
Rent and Janitorial 47,753 5,400 53,154 52,686
Transportation 33,259 25 33,284 30,322
Insurance 21,639 2,006 23,646 16,188
Advertising 594 1,463 2,057 490
Bad Debt Expense 13,843 - 13,843 50
Office Expense 22,013 4,225 26,238 19,460
Meeting Costs Commissioners - 2,569 2,569 5,119
Meeting Costs Staff 1,549 - 1,549 1,579
Dues & Subscriptions 3,336 1,937 5,273 4,342
Telephone 7,067 5,596 12,663 12,341
Staff Training 14,070 1,114 15,185 10,331
Postage 20,198 226 20,424 31,577
Printing 8,686 671 9,357 4,547
Miscellaneous 9,408 639 10,047 23,477
Taxes 112,793 4,700 117,493 112,661
Depreciation/Amortization 182,596 1,806 184,402 165,952
Total Operating Expenses $ 1,506,316 $ 139,143 $ 1,645,460 $ 1,439,598
Net Operating Income $ (102,406) $ (139,143) $ (241,549) $ (37,370)

Non-Operating Revenues (Expenses)

Interest Income $ 40,060 $ 7,266 $ 47,326 $ 40,868
Property Taxes 211,070 211,070 193,590
Interest on Long Term Debt (96,390) - (96,390) (99,137)
Election costs - - (38,204)
Other, net - - - 1
Total Non-Operating Revenues (Expenses) $ (56,330) $ 218,335 $ 162,005 $ 97,118
Net Revenue (Expenses) $ (158,735) $ 79,192 $ (79,544) $ 59,748

Net Assets
Balance, beginning of year $ 531,502 $ 126,738 $ 658,241 $ 598,492
Prior Period Adjustment - - - -
Balance, end of year $ 372,767 $ 205,930 $ 578,697 $ 658,241

The accompanying notes are an integral part of these combined financial statements.
MCAG No. 1803
Public Utility District No. 1 of Thurston County, Washington
STATEMENT OF CASH FLOWS

Water General Combined

Operations Operations Total
Cash Flows from Operating Activities

Net Operating Income $ (102,406) $ (139,143) $ (241,549)

Adjustments to reconcile operating Income to net
cash provided by operating activities:
Depreciation/Amortization $ 182,596 $ 1,806 $ 184,402
Customer Accounts Receivable $ (9,465) $ - $ (9,465)
Other Accounts Receivable $ 4,657 $ - $ 4,657
Prepaid Expenses $ (8,000) $ (1,171) $ (9,171)
Accounts Payable $ 161 $ (39,573) $ (39,412)
Payroll Tax Liabilities $ (15,840) $ (1,656) $ (17,497)
Wages Payable $ (17,224) $ (3,107) $ (20,331)
Accrued Vacation Liabilities $ (4,745) $ (3,597) $ (8,342)
Current Portion of Long-Term Debt $ 5,000 $ - $ 5,000
Total Adjustments $ 137,139 $ (47,298) $ 89,842

Net Cash Provided by Operating Activities $ 34,734 $ (186,441) $ (151,707)

Cash received from customers $ 1,399,102 $ - $ 1,399,102

Cash payments to supplies and employees $ (1,235,735) $ (180,084) $ (1,415,819)
Taxes paid $ (128,633) $ (6,357) $ (134,990)

Net Cash Provided by Operating Activities $ 34,734 $ (186,441) $ (151,707)

Cash Flows from Non-Capital Financing Activities

Property Tax Income $ - $ 211,070 $ 211,070
Property Tax Receivable $ - $ (1,234) $ (1,234)

Net Cash Provided by Non-Capital Financing Activities $ - $ 209,835 $ 209,835

Cash Flows from Capital Financing Activities

Payments to 2005 Bond Issue $ (130,000) $ - $ (130,000)
Payments to Public Works Trust Fund Loan $ (52,632) $ - $ (52,632)
Proceeds from Contract Payable $ 50,100 $ - $ 50,100
Receipts from Capital Facilities Charges $ 17,914 $ - $ 17,914
Acquisition and construction of capital assets $ (246,985) $ - $ (246,985)
Interest paid on long term debt $ (96,390) $ - $ (96,390)

Net cash from Capital Financing Activities $ (457,993) $ - $ (457,993)

Cash Flows from Investing Activities

Interest received on cash on deposit $ 40,060 $ 7,266 $ 47,326

Net Increase (Decrease) in Cash $ (383,199) $ 30,660 $ (352,539)

Beginning of Year $ 1,028,371 $ 161,433 $ 1,189,804

End of Year $ 645,172 $ 192,093 $ 837,265

The accompanying notes are an integral part of these combined financial statements.
MCAG No. 1803

Public Utility District No. 1 of Thurston County, Washington

Supplemental Information

Date of organization 1938

Nature of business A municipal corporation supplying public utility

services in Thurston County and surrounding areas.

Board of Commissioners:
President Alan Corwin, District 2
Vice President Gary Cooper, District 3
Secretary Paul Pickett, District 1

Key District Management

General Manager John Weidenfeller

Corporate Office 921 Lakeridge Way SW, Suite 201

Olympia, WA 98502
(360) 357-8783 Telephone
(360) 357-1172 Facsimile
www.thurstonpud.com

As of December 31, 2007:

Number of Employees (total) 10
Number of operational employees 5
Number of administrative employees 5

Total number systems owned by Thurston PUD 153

Number class A systems 22
Number class B systems 131

Number of managed systems 2

Number of Customers
Metered 2,736
Unmetered 264
Total District customers 3,000

Annual Average Consumption per Residential Connection 958

Wholesale water purchased (gallons)

2007 247,866,000
2006 249,313,000
2005 135,169,000

Number of wells/sources 159

Counties of Operation with Number Customers Served 1,917 Thurston

262 Lewis
761 Pierce
22 Mason
38 Grays Harbor
PUBLIC UTILITY DISTRICT NO. 1 OF THURSTON COUNTY
NOTES TO FINANCIAL STATEMENTS
January 1, 2007 through December 31, 2007

These notes are an integral part of the accompanying financial statements.

NOTE 1 – NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES

The accounting policies of Public Utility District No. 1 of Thurston County, Washington
(Thurston PUD or the District) conform to generally accepted accounting principles (GAAP) as
applicable to proprietary funds of governments. Thurston PUD has elected to apply Financial
Accounting Standards Board (FASB) guidance issued after November 30, 1989 to the extent that
it does not conflict with or contradict guidance of the Governmental Accounting Standards
Board (GASB). GASB is the accepted standard setting body for establishing governmental
accounting and financial reporting principles. In June 1999, GASB approved Statement 34,
Basic Financial Statements – and Management Discussion and Analysis – for State and Local
Governments. This and consecutive statements are reflected in the accompanying financial
statements (including notes to financial statements).

The following is a summary of the most significant policies (including identification of those
policies which result in material departures from generally accepted accounting principles:

Reporting Entity
Thurston PUD or the District is a municipal corporation governed by an elected three-person
Commission, authorized under Title 54 RCW. As required by generally accepted accounting
principles, management has considered all potential component units in defining the reporting
entity. Thurston PUD has no component units.

Nature of Activities
Thurston PUD owns and operates 155 water systems serving approximately 3000 active
connections in 5 counties (Thurston, Lewis, Pierce, Grays Harbor and Mason Counties).
Thurston PUD also manages 2 systems under contract as a Satellite Management Agency
(SMA). The District employs 10 full time employees.

Basis of Accounting
The accounting records of the District are maintained in accordance with methods prescribed by
the State Auditor under the authority of Chapter 43.09 RCW. The full accrual basis of
accounting is used, where revenues are recognized when earned and expenses are recognized
when incurred. Capital asset purchases are capitalized and long-term liabilities are accounted for
in the appropriate funds. The Uniform System of Accounts for Class A Water Utilities 1996,
published by the National Association of Regulatory Utility Commissioners, is the foundation
for the accounting policies of the District. This accounting system includes instructions
regarding the capitalization of fixed assets and the methods of accounting for and reporting
contributions in aid of construction.

Footnotes Page 1
PUBLIC UTILITY DISTRICT NO. 1 OF THURSTON COUNTY
NOTES TO FINANCIAL STATEMENTS
January 1, 2007 through December 31, 2007

The District’s financial statements include the financial position and results of operations of its
two reporting units, general and water operations. In accordance with governmental accounting
principles all Thurston PUD funds are considered proprietary.

The District distinguishes between operating revenues and expenses from nonoperating ones.
Operating revenues and expenses result from providing services and producing and delivering
goods in connection with the district’s principal ongoing operations. The principal operating
revenues of the District are charges to customers relating to the provision of retail water utility
services, as well as special charges relating to the administration of customer accounts.
Operating expenses for the District include the cost of providing water utility services,
administrative expenses, and depreciation on capital assets. All revenues and expenses not
meeting this definition are reported as nonoperating revenues & expenses.

Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities. Estimates
may be included in the disclosure of contingent assets and liabilities at the date of the financial
statements, and in the reported amounts of revenues and expenses during the reported period.
Actual results could differ from those estimates.

Revenue Recognition
Revenue is recognized as billed based on rates established by Thurston PUD’s Board of
Commissioners. Customer meters are read monthly during the second and third weeks of the
month, and billed at month end. Unbilled utility service receivables are considered to be the
revenue of the following month and are not accrued which is a departure from GAAP.

Gains and losses from the disposal of utility plant and other non-core activities are excluded
from operating income.

Cash and Cash Equivalents

For purposes of the statement of cash flows, the District considers all highly liquid investments
(including restricted assets) with a maturity of three months or less when purchased to be cash
equivalents. All investments are held in trust with the Thurston County Treasurer’s Office who
acts as the Treasurer of the District.

Utility Plant and Depreciation

See Note 4 – Capital Assets

Contribution in Aid of Construction

Contributions in Aid of Construction are District-mandated customer connection charges used to
fund construction of system properties necessary to extend service to a new customer. The
District treats the contributions as nonexchange transactions under GASB Statement No. 33. The
payments are recorded as liabilities, then reclassified to non-operating revenue (contributed
capital) when the associated facilities are constructed or acquired.

Footnotes Page 2
PUBLIC UTILITY DISTRICT NO. 1 OF THURSTON COUNTY
NOTES TO FINANCIAL STATEMENTS
January 1, 2007 through December 31, 2007

Restricted Funds
In accordance with bond resolutions and other agreements, separate funds have been established
for restricted or limited-use funds. The assets held in these funds are limited as to their use,
including debt service, dedicated capital project funds, and other reserve requirements. At year-
end there are restricted funds of Thurston PUD in the amount of $371,148; PUD Project Fund
$144,515, and Bond Reserve $226,633.

Receivables
All utility customers are billed monthly in arrears for water service. Customer accounts
receivable consist of amounts owed from private individuals or organizations for water services
rendered. Management has reviewed customer accounts receivable at year-end to determine if
any receivables will potentially be uncollectible, and to establish the provision for uncollectible
customer accounts. For the current year, an estimate based on a percentage of water revenue
billed during the year was used to establish this provision. Actual losses are then charged against
the provision as they are identified. Management believes that the provision for uncollectible
accounts as of year-end was adequate. The financial statements reflect customer accounts
receivable net of the provision for uncollectible accounts.

Taxes receivable consists of property taxes and related interest and penalties (see Note 2 –
Property Taxes).

Unamortized Debt Expenses

In accordance with GAAP, Thurston PUD has deferred the costs resulting from discounts related
to the 2005 bond issue. These deferred costs will be amortized on the straight line method over
the expected life of the bond issue.

Compensated Absences
Employees accrue vacation leave in accordance with years of service. The balance of vacation
may be carried forward from year-to-year to a maximum accumulation of 240 hours. Upon
termination or resignation any accrued vacation through the last date of employment is cashed-
out at the current equivalent salary or hourly wage of the employee. Thurston PUD records the
cost of vacation leave as earned with a liability representing leave balances earned but not taken.

Sick leave is accrued by employees on a monthly basis at the rate of one day of sick leave per
month. There is no cap to the amount of sick leave that can be accumulated. Any accrued sick
leave at the time of separation of service may be converted to cash, deferred compensation, or a
VEBA account at the rate of 25% of the value of the sick leave determined based on the
employees last rate of pay. Because of the uncertainty of the future expenditure Thurston PUD
records sick leave as taken and no liability is recorded.

Income Tax Status

Thurston PUD is a municipal corporation and is exempt from federal income taxes.

Footnotes Page 3
PUBLIC UTILITY DISTRICT NO. 1 OF THURSTON COUNTY
NOTES TO FINANCIAL STATEMENTS
January 1, 2007 through December 31, 2007

Statement of Cash Flows

For purposes of the statement of cash flows, all highly liquid debt instruments purchased with a
maturity of three months or less are considered to be cash equivalents.

Changes in Accounting
There are no changes in accounting presented in these 2007 financial statements.

NOTE 2 – PROPERTY TAXES

The county treasurer acts as an agent to collect property taxes levied in the county for all taxing
authorities.
Property Tax Calendar
January 1 Taxes are levied and become an enforceable lien against properties.

February 14 Tax bills are mailed.

April 30 First of two equal installment payments are due.

May 31 Assessed value of property established for next year's levy at 100
percent of market value.
October 31 Second installment is due

Property taxes are recorded as receivable and revenue when levied. Property taxes collected in
advance of the fiscal year to which they apply are recorded as deferred revenue and recognized
as revenue of the period to which they apply. No allowance for uncollectible taxes is established
because delinquent taxes are considered fully collectible. Prior year tax levies were recorded
using the same principal, and delinquent taxes are evaluated annually.

The District’s regular levy for 2007 was $0.008700529421 per $1,000 on an assessed valuation
of $28.8 (billion) for a total regular levy of $206,982. Washington State Constitution and
Washington State law, RCW 84.55.010, limit the rate.

NOTE 3 – DEPOSITS AND INVESTMENTS

The District utilizes the services of the Thurston County Treasurer (County Treasurer) to invest
and disburse all District cash.

Deposits
All receipts received by the District are deposited into qualified bank depositaries as directed by
the County Treasurer and specified by the Washington Public Deposit Protection Commission

Footnotes Page 4
PUBLIC UTILITY DISTRICT NO. 1 OF THURSTON COUNTY
NOTES TO FINANCIAL STATEMENTS
January 1, 2007 through December 31, 2007

(PDPC). All deposits, including money markets and certificates of deposits are entirely covered
by federal depositary insurance (FDIC) or by collateral held in a multiple financial institution
collateral pool administered by the Washington PDPC. The PDPC is a statutory authority
established under Chapter 39.58 of the Revised Code of Washington. PDPC coverage is of the
nature of insurance pursuant to the Governmental Accounting Standards Board Statement No. 3.
All deposits held at December 31, 2007 and throughout the year were classified as category 1,
insured or collateralized with securities held by the County Treasurer or by their agent in the
County Treasurer’s name.

Investments
In 2007, Thurston PUD held no other investments than the deposits with the County Treasurer.
Investments are governed by State statute and county investment policy. All investment
instruments are those allowed by statute, which include U.S. Treasury Notes, Federal Agencies,
bankers’ acceptances, short-term commercial paper, money market account and the State
Treasurer’s Local Government Investment Pool (LGIP). There is no statutory regulatory
oversight of the LGIP other than annual audits through the Washington State Auditor’s Office.
The fair value of County shares in the LGIP is dollar for dollar equal to the value of pool shares.

The investment policy of the County Treasurer dictates that all investment instruments be
transacted on the delivery vs. payment basis. Union Bank of California acts as safekeeping agent
for the Thurston County Treasurer.

NOTE 4 – CAPITAL ASSETS

Capital assets are defined by the District as assets with initial individual cost of more than $500
and an estimated useful life in excess of three years. Major expenses for capital assets and major
repairs, in excess of $500, that increase useful lives are capitalized. Maintenance, repairs and
minor renewals are accounted for as expenses when the cost is incurred.

Utility plant in service and other capital assets are recorded at cost (where the historical cost is
known). Where historical cost is not known, assets are recorded at the estimated cost to
construct the plant, discounted to the year the plant was originally dedicated to public service.
Contributions by developers and customers are recorded, at cost, as contributions in aid of
construction. The District amortizes as depreciation those assets acquired by contributions.

Footnotes Page 5
PUBLIC UTILITY DISTRICT NO. 1 OF THURSTON COUNTY
NOTES TO FINANCIAL STATEMENTS
January 1, 2007 through December 31, 2007

Utility plant activity for the year ended December 31, 2007 was as follows:
Beginning Ending
Balance Increase Decrease Balance
Utility plant not being depreciated:
Land and Land Rights 20,404 - - 20,404
Total utility plant not being depreciated $ 20,404 $ - $ - $ 20,404

Utility plant being depreciated

Structures & Improvements 227,679 21,667 - 249,346
Wells and Springs 135,162 - - 135,162
Power Generation Equipment 1,443 - - 1,443
Pumping Equipment 228,047 13,157 - 241,204
Water Treatment Equipment 652,556 75,997 - 728,554
Distribution Reservior & Standpipe 97,817 3,974 - 101,790
Transmission & Distribution Mains 1,117,175 - - 1,117,175
Services 10,264 3,394 - 13,658
Meters & Meter Installations 192,582 38,407 - 230,989
Hydrants 11,227 - - 11,227
Other Plant & Miscellaneous Equipment 11,577 3,321 - 14,898
Office Furniture & Equipment 70,582 71,526 - 142,109
Transportation Equipment 124,121 - - 124,121
Tools, Shop, & Garage Equipment 3,211 19 - 3,230
Power Operated Equipment - 542 - 542
Communication Equipment 7,913 708 - 8,621
Miscellaneous Equipment 16,452 3,260 - 19,713
Other Tangible Plant 468,883 11,013 - 479,897
Total utility plant being depreciated $ 3,376,692 $ 246,985 $ - $ 3,623,677
Accumulated Depreciation 718,447 183,664 - 902,111
Total Utility Plant, Net $ 2,678,650 $ 63,321 $ - $ 2,741,971

Depreciation is computed using the straight line method over their estimated useful lives of 3 to
50 years. Initial depreciation on utility plant is recorded on a pro-rata basis in the year it is
placed in service. When operating property is retired or otherwise disposed of, the original cost
is removed from the utility plant accounts and from accumulated depre–ciation. Accumulated
depreciation is charged or credited with gain or loss on disposition. This policy is in accordance
with the Uniform System of Accounts for Class A Water Utilities, 1996; and is a departure from
generally accepted accounting principles.

Footnotes Page 6
PUBLIC UTILITY DISTRICT NO. 1 OF THURSTON COUNTY
NOTES TO FINANCIAL STATEMENTS
January 1, 2007 through December 31, 2007

Thurston PUD has active construction projects as of December 31, 2007. The pending projects
are as follows:
Remaining
IA Number Project Description Spent to date Commitment
05-0009 Iron & Manganese Treatment - Pleasant Valley $ 5,615 $ 38,412
05-0010 Iron & Manganese Treatment - Elk Heights 4,501 58,211
05-0011 Iron & Manganese Treatment - Evergreen Vista 5,196 69,526
06-0012 Corrosion Control - Aust 6,513 2,337
07-0001 Covington Arsenic Mitigation 6,873 43,000
Total Pending Projects $ 211,486

NOTE 5 – RETIREMENT BENEFIT PLAN

Pension Plan
All full-time District employees participate in the statewide Public Employees Retirement
System (PERS) administered by the Washington State Department of Retirement Systems
(DRS). The DRS, a department within the primary government of the State of Washington,
issues a publicly available comprehensive annual financial report (CAFR) that includes financial
statements and required supplementary information for each plan. This report may be obtained
by writing to Washington State Department of Retirement Systems, PO Box 48380, Olympia,
Washington, 98504-8380, or by calling 1-800-547-6657. The DRS website is located at
www.drs.wa.gov. The following disclosures are made pursuant to GASB Statement No. 27,
Accounting for Pensions by State and Local Government Employers.

PERS is a cost-sharing multiple employer retirement system comprised of three separate plans
for membership purposes: Plans 1 and 2 are defined benefit plans and Plan 3 is a combination
defined benefit/defined contribution plan. PERS participants who joined the system by
September 30, 1977 are Plan 1 members. Participants who joined on or after October 1, 1977
and by August 31, 2002 are Plan 2 members unless they exercise an option to transfer their
membership to Plan 3. Participants joining the system on or after September 1, 2002 have the
irrevocable option of choosing membership in either PERS Plan 2 or PERS Plan 3. The option
must be exercised within 90 days of employment. An employee is reported in Plan 2 until a
choice is made. Employees who fail to choose within 90 days default to PERS Plan 3.

PERS defined benefit retirement benefits are financed from a combination of investment
earnings and employer and employee contributions. PERS retirement benefit provisions are
established in statute and may only be amended by the state legislature.

Plan 1 retirement benefits are vested after an employee completes five years of eligible service.
Plan 1 members are eligible for retirement after 30 years of service, at age 60 with five years of
service or at age 55 with 25 years of service. The annual pension is two percent of the average
final compensation per year of service, capped at 60 percent. The average final compensation is

Footnotes Page 7
PUBLIC UTILITY DISTRICT NO. 1 OF THURSTON COUNTY
NOTES TO FINANCIAL STATEMENTS
January 1, 2007 through December 31, 2007

based on the greatest compensation during any 24 eligible consecutive compensation months. If
qualified, after reaching age 66 a cost of living allowance is granted based on years of service
credit and is capped at 3 percent annually.

Plan 2 retirement benefits are vested after an employee completes five years of eligible service.
Plan 2 members may retire at the age of 65 with five years of service, at the age of 55 with 20
years of service, with an allowance of 2 percent of the average final compensation per year of
service. The average final compensation is based on the greatest compensation during any
eligible consecutive 60-month period. Plan 2 retirements prior to age 65 receive reduce benefits.
If retirement is at age 55 with 30 years of service, a three percent per year reduction applies;
otherwise an actuarial reduction will apply. There is no cap on years of service credit; and a cost
of living allowance is granted (indexed to the Seattle Consumer Price Index), capped at three
percent annually.

Plan 3 has a dual benefit structure. Employer contributions finance a defined benefit component
and member contributions finance a defined contribution component. The defined benefit
portion provides a benefit calculated at 1 percent of the average final compensation per year of
service. The average final compensation is based on the greatest compensation during any
eligible consecutive 60-month period. Plan 3 members become eligible for retirement if they
have: at least ten years of service; five years including twelve months that were earned after age
54; or five service credit years earned in Plan 2 prior to June 1, 2003. Plan 3 retirements prior to
the age of 65 receive reduced benefits. If retirement is at age 55 or older with at least 30 years of
service, a 3 percent per year reduction applies; otherwise an actuarial reduction will apply.
There is no cap on years of service credit, and Plan 3 provides the same cost of living allowance
as Plan 2. The defined contribution portion can be distributed in accordance with an option
selected by the member, either as a lump sum or pursuant to other options authorized by the
Employee Retirement Benefits Board.

Each biennium, the State Pension Funding Council adopts employer contribution rates for all
three plans and employee contribution rates for Plan 2. Plan 1 employee contribution rates are
set at 6% by State statute and do not vary. The employer and employee contribution rates for
Plan 2 and the employer contribution rate for Plan 3 are developed by the Office of the State
Actuary to fully fund Plan 2 and the defined benefit portion of Plan 3. All employers are
required to contribute at the level established by the legislature. PERS Plan 3 defined
contribution is a non-contributing plan for employers. Employees who participate in the defined
contribution portion of PERS Plan 3 do not contribute to the defined benefit portion of PERS
Plan 3. The Employee Retirement Benefits Board sets Plan 3 employee contribution rates. Six
rate options are available ranging from 5 to 15 percent; two of the options are graduated rates
dependent on the employee’s age. The methods used to determine the contribution requirements
are established under state statute in accordance with chapters 41.40 and 41.45 RCW.

Footnotes Page 8
PUBLIC UTILITY DISTRICT NO. 1 OF THURSTON COUNTY
NOTES TO FINANCIAL STATEMENTS
January 1, 2007 through December 31, 2007

The required contribution rates expressed as a percentage of current-year covered payroll as of

December 31, 2007, were as follows:
PERS Plan 1 PERS Plan 2 PERS Plan 3
Employer* 6.13% 6.13% 6.13%
Employee 6% 4.15% ***

* The employer rates include the employer administrative expense fee currently set at 0.16%.
** Plan 3 defined benefit portion only.
*** Variable from 5.0% minimum to 15.0% maximum based on a rate selected by the PERS 3 member.
Both Thurston PUD and its employees made the required contributions during the year.
Thurston PUD’s portion of the required contributions for the year ended December 31, 2007 was
as follows:
PERS Plan 1 PERS Plan 2 PERS Plan 3
2007 $0.00 $25,838.89 $0.00
2006 $18,048.86 $12,685.57 $0.00
2005 $614.88 $5,883.94 $0.00

NOTE 6 – INSURANCE / RISK MANAGEMENT

Liability Coverage
Thurston PUD and seventeen other public utility districts and one non-profit organization in the
State of Washington participate in a joint self-insurance pool (the Pool) in affiliation with Public
Utilities Risk Management Services (“PURMS”). The Pool has a self-insured retention of
$1,000,000 per occurrence and maintains operating capital and reserves between $1.5 million
and $2 million. The Pool also maintains excess liability insurance in the amount of $35 million
and is financed through assessment of its members. Assessments are levied at the beginning of
each calendar year to replenish the Pool to $2 million and at any time during the year that the
actual Pool balance becomes less than $1.5 million. Public Officials’ Liability, Errors and
Omissions insurance has a self-insured retention of $500,000. PURMS also purchases excess
insurance for losses above $1 million liability and $500,000 Public Officials Errors and
Omissions.

The Pool purchases excess liability insurance from AEGIS for general liability and professional
liability. The general liability limit is $35,000,000; the professional liability limit is
$10,000,000. Additionally, each Pool member is provided the option of purchasing various
types of insurance and limits of coverage during the year with a subgroup. Following are the
subgroup policies:

Excess General Liability: $25,000,000 excess $35,000,000

Directors and Officers: $10,000,000 occurrence excess $500,000
$35,000,000 aggregate

Assessments for the liability pool are based on a formula whose elements include basic fees,
historic claims experience and workers’ hours.

Footnotes Page 9
PUBLIC UTILITY DISTRICT NO. 1 OF THURSTON COUNTY
NOTES TO FINANCIAL STATEMENTS
January 1, 2007 through December 31, 2007

Members that withdraw continue to receive coverage from the Pool for occurrences that
happened while they were a member. Withdrawn members continue to be responsible for their
share of assessments for occurrences that happen to all members while they were a member.

NOTE 7 – SHORT-TERM DEBT

Thurston PUD has no short-term debt as of December 31, 2007.

NOTE 8 – LONG-TERM DEBT

In March 2005 Thurston PUD issued a water system revenue bond in the principle amount of
$2,215,000, for the purpose of paying the costs of acquiring water systems, as well as fixing the
form, terms and covenants of the bonds. The bonds were issued with an interest rate of 5% and a
term of 15 years.

In 2004, Thurston PUD received a preconstruction loan from the Washington State Public Works
Board. In March 2005, Thurston executed the loan agreement for the purpose of supporting the
acquisition of additional water systems and to make the immediate repairs on said systems,
which converted the 2004 preconstruction note to a loan agreement for a $1,000,000 loan to be
repaid over 20 years at ½% interest.

During the year ended December 31, 2007, the following changes occurred in long-term debt:
Beginning
Balance Principal Ending Balance Due Within
Purpose 1/1/2007 Additions Payments 12/31/2007 One Year
2005 Revenue Bond, bearing
interest at 5% $ 2,090,000 $ - $ 125,000 $ 1,965,000 $ 130,000
2004 PWTF, bearing interest
at 0.5% $ 894,737 $ - $ 52,632 $ 842,105 $ 52,632
Contract Payable, bearing no
interest $ - $ 66,800 $ 16,700 $ 50,100 $ 16,700
Totals $ 2,984,737 $ 66,800 $ 194,332 $ 2,857,205 $ 199,332

Footnotes Page 10
PUBLIC UTILITY DISTRICT NO. 1 OF THURSTON COUNTY
NOTES TO FINANCIAL STATEMENTS
January 1, 2007 through December 31, 2007

Principal and interest payments due on Revenue Bonds and Other debt are as follows:
Year Ending
December 31 Principal Interest
2008 $ 199,332 $ 92,986
2009 $ 199,332 $ 89,486
2010 $ 204,332 $ 85,379
2011 $ 187,632 $ 80,990
2012 $ 197,632 $ 70,656
2013-2017 $ 1,083,158 $ 260,452
2018-2022 $ 858,158 $ 51,954
2023-2027 $ 105,263 $ 789
Total $ 3,034,837 $ 732,692

NOTE 9 – LEASES

In 2006 Thurston PUD entered into a five-year lease for the office space and parking stalls at 921
Lakeridge Way SW, Olympia WA 98502. In 2007, the cost for the lease was $4260 monthly
commencing May 1, 2007, with increases annually at the rate of 4% per year beginning on the
first day of May each year. At the end of the 5 year lease period Thurston PUD has the option to
extend the lease for two additional three year terms at a re-negotiated rental rate.

NOTE 10 – COMMITMENTS AND CONTINGENCIES

Purchase Water Agreement

In 2007 Thurston PUD entered into a new wholesale water purchase contract with the City of
Olympia to purchase water for the Tanglewilde system. In the new contract Thurston PUD
receives water from Olympia through a master meter for a fixed annual charge of $56,811 plus
volume charges of $0.55 per hundred cubic feet (CCF) November through June, and $1.08 per
CCF July through October. The contract includes an annual increase tied to the published Seattle
Consumer Price Index. The City of Olympia is expecting to perform a cost of service study to
adjust rates again in 2009.

Footnotes Page 11
PUBLIC UTILITY DISTRICT NO. 1 OF THURSTON COUNTY
NOTES TO FINANCIAL STATEMENTS
January 1, 2007 through December 31, 2007

NOTE 11 – POSTEMPLOYEMENT BENEFITS OTHER THAN PENSION

Thurston PUD provides certain health care benefits for retired full-time compensated employees.
Under current employment policy, eligible employees who retire from the district, and their
dependents, will have the opportunity to continue the same medical/vision/dental coverage as
regular employees from the time of retirement until they become eligible for Medicare coverage.
All of the District’s employees may become eligible for those benefits when they reach normal
retirement age. In 2007 the District had no retirees receiving benefits under this policy. As of
December 31, 2007 there were 10 employees with an average age of 46, all of whom may
become eligible for those benefits when they reach normal retirement age.

Footnotes Page 12