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5.1. ERMUSR 04-12-2011
~/ Elk River Municipal Utilities 13069 Orono Parkway • P.O. Box 430 Elk River, MN 55330-0430 UTILITIES COMMISSION MEETING y.r Phone: 763.441.2020 Pax: 763.441.8099 TO: Elk River Municipal Utilities Commission FROM: Theresa Slominski -Finance Director John Dietz, Chair Daryl Thompson, Vice Chair Allan Nadeau, Trustee MEETING DATE: AGENDA ITEM NUMBER: A ril 12, 2011 5.1 SUBJECT: Review and Receive 2010 Audit BACKGROUND: Audit fieldwork was completed March 2"d through March 4`h by our auditors, Abdo, Eick & Meyers. DISCUSSION: Mr. Andrew Berg of Abdo, Eick & Meyers will be at our meeting to present the 2010 audit and answer questions you may have. A copy is enclosed for your review prior to the commission meeting. ACTION REQUESTED: Accept 2010 Audit. ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA MANAGEMENT LETTER YEAR ENDED DECEMBER 31, 2010 ~ ;.: ~.~."~ ia~.,-3, ~~~ ...:'f: .1'~.,~,j ~~IJLILd 1 ~I.f,P Certifud Pa6lic Accoartants & Consultants ~' 'ABDO w~t;EICK&DC ®I ~, _ ~~1 t,J LhP Cert~ed Public AecnunFants S Consultants April 4, 2011 5201 F.dv Acanua S~ile 250 Gdina, MN 5543( Management and Public Utilities Commission Ells River Municipal Utilities Ells River, Minnesota We have audited the statements of net assets of the Ells River Municipal Utilities (the Utilities) of the City of Ells River, Minnesota, (the City) for yeazs ended December 31, 2010 and 2009, and the related statements of revenues, expenses and changes in net assets and cash flows for the yeazs then ended and have issued our report thereon April 4, 2011. Professional standards require that we provide you with the following information related to our audits. Our Responsibility Under Auditing Standards Generally Accepted in the United States As stated in our engagement letter, our responsibility, as described by professional standards, is to express an opinion about whether the fmancial statements prepared by management with your oversight aze fairly presented, in all material respects, in conformity with accounting principles generally accepted in the United States. Our audit of the fmancial statements does not relieve you or management of your responsibilities. Our responsibility is to plan and perform the audit to obtain reasonable, but not absolute, assurance that the fmancial statements aze free of material misstatement. As part of our audit, we considered the internal control over fmancial reporting of the Utilities. Such considerations were solely for the purpose of determining our audit procedures and not to provide any assurance concerning such internal control We are responsible for communicating significant matters related to the audit that aze, in our professional judgment, relevant to your responsibilities in overseeing the fmancial reporting process. However, we aze not required to design procedures specifically to identify such matters. Significant Audit Findings A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the City's fmancial statements will not be prevented, or detected and corrected on a timely basis. Our consideration of internal control over fmancial reporting was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control over fmancial reporting that might be significant deficiencies or material weaknesses and therefore, there can be no assurance that all deficiencies, significant deficiencies, or material weaknesses have been identified. We did not identify any deficiencies in internal control over fmancial reporting that we consider to be material weaknesses, as defined above. 95?.B:i5.9U9U • tax 2S?.635.9''?Gl wu~w.aemcpac.cum Elk River Municipal Utilities ~, ~ Apri14, 2011 Page 2 -I 1~.~' Compliance As part of obtaining reasonable assurance about whether the fmancial statements aze free of material misstatement, we performed tests of compliance with certain provisions of laws, regulations, contracts and grants, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit. The results of our tests disclosed no instances of noncompliance or other matters that aze required to be reported under statutes set forth by the State of Minnesota. Planned Scope and Timing of the Audit We performed the audit according to the planned scope and timing. Qualitative Aspects of Accounting Practices Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used by the Utilities are described in Note 1 to the fmancial statements. No new accounting policies were adopted and the application of existing policies was not changed during the year. We noted no transactions entered into by the governmental unit during the yeaz for which there is a lack of authoritative guidance or consensus. All significant transactions have been recognized in the fmancial statements in the proper period. Accounting estimates aze an integral part of the fmancial statements prepared by management and are based on management's knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particulazly sensitive because of their significance to the fmancial statements and because of the possibility that future events affecting them may differ significantly from those expected. The most sensitive estimates affecting the fmancial statements were capital asset basis, depreciation, compensated absences and other postemployment benefits. We evaluated the key factors and assumptions used to develop these accounting estimates in determining that it is reasonable in relation to the fmancial statements taken as a whole. The disclosures in the fmancial statements are neutral, consistent, and clear. Certain fmancial statement disclosures aze particulazly sensitive because of their significance to fmancial statement users. Difficulties Encountered in Performing the Audit We encountered no significant difficulties in dealing with management in performing and completing our audit. Corrected and Uncorrected Misstatements Professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that are trivial, and communicate them to the appropriate level of management. Management has corrected all such misstatements. In addition, none of the misstatements detected as a result of audit procedures and corrected by management were material, either individually or in the aggregate, to each opinion unit's fmancial statements taken as a whole. Disagreements with Management For purposes of this letter, professional standards define a disagreement with management as a fmancial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be significant to the fmancial statements or the auditor's report. We are pleased to report that no such disagreements arose during the course of our audit. 9.12.8359090 Fax 9i?.835.8261 www.acnu•.pas.enm Elk River Municipal Utilities April 4, 2011 Page 3 Management Representations We have requested certain representations from management that are included in the management representation letter dated Apri14, 2011. Management Consultations with Other Independent Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a "second opinion" on certain situations. If a consultation involves application of an accounting principle to the governmental unit's financial statements or a determination of the type of auditor's opinion that maybe expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. Other Audit Findings or Issues We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to retention as the Utilities' auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to ow retention. 9i?.835.9890 F'ax 9.i2.83.i.??61 wwwsemcpus.aam Elk River Municipal Utilities April 4, 2011 Page 4 Electric Fund The results of the Electric fund aze as follows: Operating revenues Operating expenses Operating income Nonoperating revenues (expenses) Income before transfers Transfers from City Transfers to City Change in net assets Cash and temporary investments Restricted cash Bonds and notes payable, net of premium $30,000,000 $25,000,000 $20,000,000 $15,000,000 $10,000,000 $5,000,000 $- Electric Operations Summary 2008 2009 2010 Total Percent Total Percent Total Percent $ 22,941,903 100 % $ 24,227,743 100 % $ 26,727,801 100 604 910 21 94 22,926,759 95 25,162,191 94 , , 1,336,993 6 1,300,984 5 1,565,610 6 249,022 1 (146,352) (1) (90,195) - 1,586,015 7 1,154,632 4 1,475,415 6 _ _ _ _ 53,741 - 636) (540 (2) (585,141) (2) (657,086) (2) , $ 1,045,379 5 % $ 569.491 2 % $ 872.070 4 $ 3,908,552 $ 724.500 $ 5,366,820 $ 724.500 $ 6,587.017 $ 724.500 $ 10,555,744 $ 10,049.646 $ 9.457,118 9.i?.Ri5.9090 • tas 952.a:1.i.3?41 \\'11'\P YCII1C.~l:1F.f°III 2008 2009 2010 ^Operatingrevenues ^Operatingexpenses ©Cash ^Bonds ®Changeinnetassets Elk River Municipal Utilities ~, ~ Apri14, 2011 Page 5 11 ~• The following table gives an indication of the sources and uses of cash for the past five yeazs: Cash Provided (Used) By Year Beginning Operating Non-capital Capital Investing Ending Cash 2010 $ 6,091,320 $ 3,596,829 $ (534,339) $ (1,957,215) $ 114,922 $ 7,311,517 2009 4,633,052 4,001,073 (604,905) (2,027,224) 89,324 6,091,320 2008 3,539,677 4,394,357 (513,536) (2,933,272) ]45,826 4,633,052 2007 2,041,306 4,083,884 (485,851) (2,238,249) 138,587 3,539,677 2006 2,016,433 3,046,671 (378,560) (2,804,163) 160,925 2,041,306 Cash Flow Summary 2006 - 2010 $s,ooo,ooo $4,000,000 $3,000,000 $2,000,000 $1,000,000 $(1,000,000) $(2,000,000) $(3,000,000) $(4,000,000) $- tOperatingActivities f-Non-capital Financing Activities °~:=CapitalFinancingActivities •~~InvestingActivities 2006 2007 2008 2009 2010 The cash provided by operating activities has remained strong and was sufficient to cover the amount of capital and debt needs in 2010. The summary above highlights the significant amount of cash needed each yeaz for the capital activities of the Utilities. 'the operations have been able to fmance the capital activities for most of the last five yeazs. We recommend that the Utilities continue to closely monitor future cash flow with the use of projections and the capital improvement plan. This will ensure that any permanent decline in cash flow is addressed quickly. 9.i?.8ai9090 Far 952.8:35.3?GI x~,~ ~,.arnupas.vom Elk River Municipal Utilities Apri14, 2011 Page 6 Water Fuud The results of the Water fund are as follows: Water Operations Summary 2008 2009 2010 Total Percent Total Percent Total Percent Operating revenues $ 2,130,124 100 % $ 2,206,429 100 % $ 1,896,086 100 Operating expenses 2,160,261 IOI 2,059,430 93 1,945,059 103 Operating income (loss) (30,137) (1) 146,999 7 (48,973) (3) Nonoperating revenues (expenses) 4,875 (61,060) (3) 97,738 5 Income (loss) before contributions and transfers (25,262) (1) 85,939 4 48,765 2 Contributions from developers - - - - 304,775 16 Transfers from City - - - - 17,914 1 Transfers to City (20,000) (1) (20,000) (1) (25,000) (1) i t ssets Ch 262) (2) % $ (45 $ 65.939 3 % $ 346.454 18 n ne a ange . Cash and investments $ 1,935.458 $ 2.500,960 $ 2,793,142 Bonds payable, net ofpremium $ 5,031,250 * $ 4,605,000 * $ 4,112,950 * Net of $2,575,000 advance refunding of 2001A bonds $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 $- $(1,000,000) 2008 2009 2010 ^Operatingrevenues sOperatingexpenses oCash ^Bonds oChangeinnetassets 9.i?.a:i.i9n90 F.a 95?.&ii.:i'?G] n ~cir.:~emapa s.,~.,m ~ j ~ Elk River Munic~lpal gti2iteiei Page 7 ~~' The following table gives an indication of the sources and uses of cash for the past five years: Cash Provided (Used) By Year Beginning Operating Non-capital Capital Investing Ending Cash 2010 $ 2,500,960 $ 1,145,373 $ (8,546) $ (917,749) $ 73,104 $ 2,793,142 2009 1,935,458 1,389,746 (23,168) (918,227) 117,151 2,500,960 2008 2,394,387 1,086,937 (17,068) (1,609,835) 81,037 1,935,458 2007 2,519,224 1,487,526 (259,864) (1,392,434) 39,935 2,394,387 2006 1,754,023 1,861,466 80,102 (1,238,717) 62,350 2,519,224 Cash Flow Summary 2006 - 2010 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $- $(500,000) $(1,000,000) $(1,500,000) $(2,000,000) -+-Operating Activities -FNon-capital FinancingActivitie, =~=Capital Financing Activities -~FInvestingActivities 2006 2007 2008 2009 2010 The cash balance has increased for the second consecutive year. As mentioned in the analysis of the Electric fund it is important to continue to monitor future cash need with the use of a projection and capital improvement plan. 9:i?.8ai.9090 • Fac 9.12.835.8261 \Y\V\\'AC'lIIP'lll+.CUlll . ~ ~ Elk River Municipal Utilities wpra a, zo 11 Page 8 ~w~, .~..~ This report is intended solely for the information and use of the Public Utilities Commission, City Council, management, and the Minnesota Office of the State Auditor and is not intended to be and should not be used by anyone other than these specified parties. Ow audit would not necessarily disclose all weaknesses in the system because it was based on selected tests of the accounting records and related data. The comments and recommendations in the report aze pwely constructive in nature, and should be read in this context. If you have any questions or wish to discuss any of the items contained in this letter, please feel free to contact us at yow convenience. We wish to thank you for the opportunity to be of service and for the courtesy and cooperation extended to us by yow staff. April 4, 2011 Mianeapolis, Minnesota ABDQ EICK & MEYERS, LLP Certified Public Accountants 952.835.9090 Fnx 952.8353361 www.aemcpus.ann ELK RNER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA ANNUAL FINANCIAL REPORT YEARS ENDED DECEMBER 31, 2010 AND 2009 THIS PAGE IS LEFT BLANK INTENTIONALLY ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA TABLE OF CONTENTS DECEMBER 31, 2010 Page No. I. INTRODUCTORY SECTION Public Utilities Commission and Administration 5 II. FINANCIAL SECTION Independent Auditor's Report 9 13 Management's Discussion and Analysis Financial Statements 2~ Statements of Net Assets 24 Statements of Revenues, Expenses and Changes in Net Assets ~~ Statements of Cash Flows 31 Notes to Financial Statements III. REQUIRED SUPPLEMENTARY INFORMATION Schedule of Funding Progress for the Retiree Health Plan 55 IV. SUPPLEMENTAL INFORMATION Schedules of Operating Revenues and Expenses 58 Electric Fund 62 Summary of Operations and Unaudited Statistics Water Fund 64 Summary of Operations and Unaudited Statistics V. OTHER REPORT Report on Minnesota Legal Compliance 69 _I. THIS PAGE IS LEFT BLANK INTENTIONALLY -z- INTRODUCTORY SECTION ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA YEAR ENDED DECEMBER 31, 2010 3- THIS PAGE IS LEFT BLANK INTENTIONALLY -4- ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA PUBLIC UTILITIES COMMISSION AND ADMINISTRATION DECEMBER 31, 2070 PUBLIC UTILITIES COMMISSION Name John Dietz Jerry Gumphrey Daryl Thompson Title Chairperson Vice-Chairperson Trustee ADMINISTRATION Name Troy Adams Theresa Slominski David Berg Mark Fuchs Wade Lovelette Judy McSpadden Title Director of Operations Finance Director/Office Manager Water Superintendent Line Superintendent Technical Services Superintendent Recording Clerk -5- THIS PAGE IS LEFT BLANK INTENTIONALLY -6- FINANCIAL SECTION ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA YEARS ENDED DECEMBER 31, 2010 AND 2009 -~- THIS PAGE IS LEFT BLANK INTENTIONALLY -$- ~' ~ABDO IVY ;;~EICK & ,a~•~'~MEYER.S ~ ~ ~~ ,,~ l;rrll~'i~-d 1'uLlir Irnnulhwl,. R' Cun.~u6nnr. ~`ul I Jui A~.nuc „n:; ]~a INDEPENDENT AUDITOR'S REPORT Public Utilities Commission Elk River Municipal Utilities Elk River, Minnesota We have audited the accompanying statements of net assets of the Elk River Municipal Utilities (the Utilities) of the City of Elk River, Minnesota (the City), as of December 31, 2010 and 2009 and the related statements of revenues, expenses and changes in net assets and cash flows for the years then ended. These financial statements are the responsibility of the Utilities' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standazds generally accepted in the United States of America. Those standards require that we plan and perform [he audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinions. As discussed in Note 1 B, the financial statements present only the Electric and Water enterprise funds and are not intended to present fairly the financial position of the City and the results of its operations and cash flows of its proprietary fund types in conformity with accounting principles generally accepted in the United States of America. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Electric and Water enterprise funds of the City as of December 31, 2010 and 2009 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Accounting principles generally accepted in the United Stales of America require that the Management's Discussion and Analysis on pages 13 through 18 and Schedule of Funding Progress on page 55, be presented [o supplement the financial statements. Such information, although not a part of the financial statements, is required by the Government Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do no[ provide us with sufficient evidence to express an opinion or provide any assurance. ~~sits:6; nn~ul Fl,. n:~_;~a;au~l -9- THIS PAGE IS LEFT BLANK INTENTIONALLY -io- ~~ . ~" G'~• Our audits were conducted for the purpose of forming opinions on the financial statements that collectively comprise the Utilities' financial statements as a whole. The introductory section and supplemental information listed in the table of contents are presented for the purpose of additional analysis and are not a required part of the tnancial statements of [he Utilities. The supplemental information, except for the portion marked "unaudited" on which we express no opinion, has been subjected to the auditing procedures applied in the audits of the financial statements and, in our opinion, is fairly stated in all material respects in relation to the financial statements taken as a whole. The introductory section has not been subjected to the auditing procedures applied in the audit of [he financial statements and, accordingly, we do no[ express an opinion or provide any assurance on them. ~ ~, ~m~.v~o, ll,~° April 4, 2011 Minneapolis, Minnesota ABDQ, ELCK & MEYERS, LLP Certified Public Accountants ~~: rl.t:a,;Pnnu F... n;,~1;3.;.: L'~~I _ll_ ,,,, u.,n~uv~n ~..w THIS PAGE IS LEFT BLANK INTENTIONALLY 12- Management's Discussion and Analysis This section of the Elk River Municipal Utilities (the Utilities) annual financial report presents our analysis of the Utilities' tnancial performance during the fiscal year that ended December 31, 2010. Please read it in conjunction with the financial statements, which follow this section. FINANCIAL HIGHLIGHTS • The assets of the Utilities exceeded its liabilities at the close of the most recent fiscal year by $47,583,084 (net assets). Ne[ Assets increased by $1,218,524 or 3 peroent. • The Utilities' cash balance a[ the close of the current fiscal year was $ I Q, 104,659. • The economy affected us much less than we anticipated this year as electric usage increased, although it was projected to remain flat. With a warmer summer in 2010, weather certainly contributed to this; however we experienced increased usage throughout the year. • Electric usage was up an average of 7 percent. Residential usage was up 5 percent, Commercial usage was up 10 percent, and Industrial usage was up 9 percent. • Water usage, however was down an average of 11 percent. Residential usage was down 12 percent, and Commercial usage was down 10 percent. OVERVIEW OF THE FINANCIAL STATEMENTS This annual report consists of three parts; Management's Discussion and Analysis, Financial Statements, and Supplementary Information. The Financial Statements also include notes that explain in more detail some of the information in the financial statements. REQUIRED FINANCIAL STATEMENTS The financial statements of the Utilities report information about the Utilities using accounting methods similar to those used by private sector companies. These statements offer short- and long-term financial information about its activities. The Statements of Net Assets includes all of the Utilities' assets and liabilities and provides information about the nature and amounts of investments in resources (assets) and the obligations [o Utilities' creditors (liabilities). It also provides the basis for computing rate of return, evaluating the capital structure of the Utilities and assessing the liquidity and financial flexibility of the Utilities. All of the current year's revenues and expenses are accounted for in the Statements of Revenues, Expenses and Changes in Net Assets. This statement measures the success of the Utilities' operations over the past year and can be used to determine whether the Utilities' has successfully recovered all its costs through its user fees and other charges, profitability, and credit worthiness. The final required financial statement is the Statements of Cash Flows. The primary purpose of this statement is [o provide information about the Utilities' cash receipts and cash payments during [he reporting period. The statement reports cash receipts, cash payments and net changes in cash resulting from operations, investing and financing activities and provides answers to such questions as where did cash come from, what was cash used for and what was the change in cash balance during the reporting period. FINANCIAL ANALYSIS OF THE UTILITIES Our analysis of the Utilities begins on page 20 in [he Financial Section. One of [he most important questions asked about the Utilities' finances is "Is the Utilities as a whole better off or worse off as a result of this year's activities?" The Statements of Ne[ Asset, and the Statements of Revenues, Expenses and Changes in Net Assets report information about the Utilities' activities in a way that will help answer this question. These two statements report the net assets of the Utilities and changes in these net assets. You can think of [he Utilities' net assets (the difference between assets and liabilities) as one way to measure financial health or financial position. Over time, increases or decreases in the Utilities' net assets are one indicator of whether its financial health is improving or deteriorating. However, you will need to consider other non-financial factors such as changes in economic conditions, population growth, zoning, and new or changed government legislation. l3- NET ASSETS To begin our analysis, a summary of the Utilities' Statements of Net Assets is presented in Table A-l . As can be seen from the Table, net assets increased $1,218,524 to $47,583,084 in fiscal 2010 up from $46,364,560 in fisca12009. TABU A-1 Condensed Statement of Net Assets Increase 2010 2009 (Decrease) Assets Current and other Capital $ 14,346,202 $ 14,948,372 $ (602,170) 50,095,964 51,626,923 (1,530,959) Total assets Liabilities Current Non-current Total liabilities Net assets Invested in capital assets, net of related debt Restricted for debt service Unrestricted Total net assets 64,442,166 66,575,295 (2,133,129) 4,331,274 6,547,087 (2,215,813) 12,527,808 13,663,648 (1,135,840) 16,859,082 20,210,735 (3,351,653) 36,525,596 724,500 10 332,688 34,397,277 724,500 11,242,783 2,128,619 (910,095) $ 47,583,084 $ 46.364,560 $ 1,218,524 Looking at Table A-l, you can see that most of [he change in net assets was realized in the current liabilities, which decreased $2,215,813 in fiscal 2010. The decrease in current liabilities is a result of the 2001 A bond refunding. This bond was refunded the prior year, but could not be called until 2010 and so remained in escrow and, therefore, a liability on our books until Feb 2010. It should be noted that while current assets in total decreased, the cash balances increased. The Utility has a Reserve goal that it is working towards for the long term financial health of the organization and the increase in cash brings us to that goal. However, our reserve balances goal does not include a component to cover purchased power costs, which is our largest expense. If we were to fully fund this component in our reserves, we would have to significantly increase our reserves, by 2 to 5 million dollars at a minimum Instead, we have chosen to allocate reserve overages to working capital, which allows us to absorb the variations m purchased power (most notably from fluctuating Power Cos[ Adjustments, PCAs) that are typically passed along from our power supplier to our customers. With this mechanism in place, as long as we have sufficient reserve balances, we can refrain from passing these PCAs on to our customers. Water and Electric Rates Electric -The latest increase in the Utilities' electric rates was effective January 2011. The monthly base charges are based upon the type of service. The monthly charges are $9.00 for residential, $16.00 for commercial, and $50.00 for industrial. In addition to the base charges the residential rate is $.l 165/KWh for May-September usage, and $.1040/KWh for October-April usage; the commercial rate is $.I 120/KWh for May-September usage, and $0.0929/KWh for October-April usage; the industrial rate is $.0558/KWh energy charge year round with a demand charge of $15.59/KW May-September, and $11.27/KW for October-April. -14- Water and Electric Rates -Continued Water -The Utilities' latest increase in residential and commercial rates was effective January 2009. The rates did not change for 2010, or 2011, per a rate study review. The monthly base charge for residential is $7.50 per month. In addition to the base charge, the Utilities currently charges its residential customers $1.50 per 1,000 gallons up to 9,000 gallons, $3.50 per 1,000 gallons between 9,000 gallons and 15,000 gallons, and $4.00 per 1,000 gallons for usage above 15,000 gallons. Commercial customer's base charges are based upon meter size, from $9.00 to $95.00. An irrigation meter is $40.00 for every month the meter is utilized. There is also a charge per thousand gallons, [he same tiers as the residential rate, except [he change from the lower rate to the higher rate is calculated based on previous consumption. Certain other rates may be offered for conservation incentive purposes. The Utilities' offer a Senior Citizen rate as well. The Utilities requires payment of all utility bills to be paid by the due date stated on the monthly bill. A ten percent penalty is assessed for payments not received by the due date. The Utility may discontinue service of a customer not complying with the disconnect policy of the Utility after receiving a written disconnect notice. Residential and Commercial/Industrial single phase Customers that have [heir service discontinued will be charged a minimum of $50.00 [o have [heir service reconnected. Commercial/Industrial three phase customers that have their service discontinued will be charged a minimum of $150.00 to have their service reconnected. Effective ]anuary 1, 2010, there are no reconnections after 3:30pm. Additionally, payments for reconnection are no longer accepted at the property site; customers must come in to the office between the hours of 8:OOam and 3:30pm to make the payment before service will be restored. The Utilities abides by the Cold Weather Rules. Deposit Policy In 2007 the Utilities started collecting social security numbers from new accounts and also implemented a new deposit policy as a proactive measure to try and reduce uncollectible accounts. A number of years ago deposits were collected from all new accounts but it became very difficult to manage and so was discontinued. In implementing [his policy it was decided to collect deposits from new aceounts that did not supply a social security number or were identified as a credit risk. To determine potential credit risk an assessment tool called "Online Utility Exchange" was implemented. This tool was recommended by the APPA (American Public Power Association.) The amount of the deposit required will depend on the risk identified with the customer. For residential customers, if there is a 68 percent or higher probability of non default and no negative history (no disconnection for non-payment or late payments two or more times within 12 months) [here is no deposit required. If there is a lower than 68 percent probability of non default, a deposit oft times the estimated average monthly bill will be required before utility service will be extended. For commercial and industrial customers, a service agreement would need [o be signed that identifies the guarantor of their business and the guarantor's social security number. A deposit of 2 times the estimated monthly bill will be required. The deposit shall be in the form of a cash deposit, personal payment guarantee, or an irrevocable letter of credit. The irrevocable letter of credit will be renewed as required and failure to do so will result in a charge equal [o the amount of the letter of credit applied to the monthly utility bill. Deposits will be retained until the account is closed. The deposit will be returned to the customer within 45 days of termination of service, provided that the customer has paid in full all amounts due on [he account. The appropriate interest will be applied to the account per state statutes. 15- STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS While the Statements of Net Assets shows the change in financial position of net assets, the Statements of Revenues, Expenses and Changes in Net Assets, provides answers as to the nature and source of these changes. As can be seen in Table A-2, the increase in "Operating Revenues" was the main source of the increase in net assets of $1,218,524 in fiscal 2010. A closer examination of the individual categories affecting the source of changes in net assets is discussed below: TABLE A-2 Condensed Statements of Revenues, Expenses and Changes in Net Assets Revenues Operating Nonoperating Total revenues Expenses Operating Nonoperating Total expenses Income before contributions and operating transfers Contributions from developers Transfers from other City funds Transfers to other City funds Increase 2010 2009 (Decrease) $ 28,623,887 $ 26,434,172 $ 2,189,715 456,361 424,659 31,702 29,080,248 26,858,831 2,221,417 27,107,250 24,986,189 2,121,061 448,818 632,071 (183,253) 27,556,068 25,618,260 1,937,808 1,524,180 1,240,571 283,609 304,775 - 304,775 71,655 - 71,655 (682,086) (605,141) (76,945) Change in net assets Ne[ assets, January 1 Ne[ assets, December 31 Reveuues 1,218,524 46,364,560 635,430 45,729,130 583,094 635,430 $ 47,583,084 $ 46,364,560 $ 1,218,524 Table A-2 shows that operating revenue increased by 8 percent in 2010 for the Water and Electric Departments combined. This increase was a result of increased usage across all electric categories and warmer summer weather in 2010, as discussed previously. The increase in electric revenues offsets the water revenues being down approximately 6 percent from people decreasing their lawn watering in the summer, and some general usage decreases throughout the rest of the year. Nonoperating revenue increased 7 percent as a result of transmission rebate revenue in the Electric Department, and water tower lease revenue in the Water Department In 2007 the Electric Utility partnered with Midwest Municipal Transmission Group (MMTG) in order to have our transmission assets recognized in the Midwest Independent Transmission System Operator (MISO) market. In doing so, our transmission assets generate a revenue rebate, which in turn allows us to help keep our rates down. Our rebated revenue received in 2010 is a result of the 2008 filing, and began mid-year for a total of approximately $50,000. In 201 I, we will receive rebates from our 2009 things of approximately $5,000 per month. The Water Department is receiving lease revenue from Sprint for antennas on the water towers. In 2010 this amount was approximately $36,000, and will continue for the duration of the multi-year contract. Between the two departments, Connection Fees increased $76,509; Electric decreased $13,000 and Water increased $90,000 (the water increase is a result of a new apartment building coming on line.) 16- Total Expenses In reviewing total expenses in Table A-2 you will notice that there was an increase of 7.6 percent overall. Expenses are increased most notably for Purchased Power, representing a $2,200,000 increase over the prior year. Other expense categories are pretty consistent with the prior year in total, although there is fluctuation within the categories, some being up and some being down. Expense categories that had increased are landfill project, insurances, compliance and conservation programs, and salaries fallowing a I.5 percent increase awarded in 2010 after a 0 percent increase in 2009. Expense categories that had decreased are meter reading, maintenance expenses, uncollectible aceounts, dues and subscriptions, consulting, and supplies and expense. CAPITAL ASSETS The Utilities' investment in capital assets for its business-type activities as of December 31, 2010, amounts to $50,095,964 (net of accumulated depreciation). This investment in capital assets includes land, buildings and improvements and equipment. A table summarizing the balances by fund follows: Increase 2010 2009 (Decrease) Land $ 281,775 $ 287,775 $ - Candimprovements 21,424 23,949 (2,525) Buildings 2,289,154 2,401,664 (112,510) Equipment and machinery 1,027,943 1,159,559 (131,616) Infrastructure 46,056,683 47,675,328 Q,6L8,645) Construction in progress 418,985 84,648 334,337 Total $ 50,095.964 $ 51,626.923 $ (1,530,959) The total decrease in the Utilities' investment in capital assets for the current fiscal year was 3.0 percent. Major capital asset events during the current fiscal year included the following: Again this year, the depreciation increase for this year offset the smaller increase in assets, resulting in an actual decrease in capital assets. The decrease in construction resulted in fewer assets being added, only $1.3 million. Accumulated depreciation for the year, however, increased $3 million. Additional information on the Utilities' capital assets can be found in Note 2B start on page 39 of this report. LONGTERM DEBT At year end, the Utilities had $13,895,894 in long-term debt down from $17,485,814 in fiscal 2009. More detailed information about the Utilities' long-term liabilities is presented in the Notes to the Financial Statements on pages 41 - 44 and below: Increase 2010 2009 (Decrease) G.O. revenue bonds $ 5,115,000 $ 8,185,000 $ (3,070,000) Revenue bonds 6,060,000 6,520,000 (460,000) Unamortized premium on bonds 49,750 - 49,750 Promissory note 2,345,318 2,524,646 (179,328) Compensated absences payable 295,730 235,925 59,805 OPEB liability 30,096 20,243 9,853 Total $ L3,895.894 $ 17,485,874 $ (3,589,9201 _I7_ ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS AND RATES The increased emphasis toward renewable energy and away from coal-based energy, the challenge to reduce energy and water consumption while still maintaining the existing infrastructure, and the smart grid developments are all factors that point to potential increased cost in the coming years. We don't want to have to rely on increasing rates to meet those increases and continue to look for ways to increase efficiencies and reduce costs. Our mission is to provide safe, cost-effective, reliable utilities, and that will be a challenge in [he coming years but it is a challenge we are ready to embrace. CONTACTING THE UTILITIES FINANCIAL MANAGER This financial report is designed to provide our citizens, customers, investors and creditors with a general overview of the Utilities' finances and to demonstrate the Utilities' accountability for the money it receives. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to Theresa Slominski, Elk River Municipal Utilities, PO Box 430, Elk River, Minnesota 55330-0430 or stop by at 13069 Orono Parkway in Elk River, MN. -18- FINANCIAL STATEMENTS ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA YEARS ENDED DECEMBER 31, 2010 AND 2009 -19- ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA STATEMENTS OF NET ASSETS DECEMBER 31, 2010 AND 2009 ASSETS CURRENT ASSETS Cash and temporary investments Cash with escrow agent Receivables Accmed interest Accounts, net of allowance Special assessments Other receivables Due from other City fund Due from other governments TnvenWries Prepaid expenses TOTAL CURRENT ASSETS Electric 2010 2009 $ 6,587,017 $ 5,366,820 1,116 26,090 2,403,096 2,037,796 52,635 23,827 9,881 4,913 1,627 37,124 1,018,092 1,034,829 140,116 75,288 LQ,213,580 8,606,687 CAPITAL ASSETS 200,236 200,236 Land 63,147 63,147 Land improvements 2,735,797 2,735,797 Buildings 3,759,663 3,724,669 Equipment and machinery 44,492,422 43,926,545 InfrastmcNre 407,475 84,648 Construction in progress CAPITAL ASSETS, COST S 1,658,740 50,735,042 LESS ACCUMULATED DEPRECIATION (23,869,917) (21,864,361) TOTAL CAPITAL ASSETS, NET 27,788,823 28,870,681 OTHER ASSETS Restricted cash Deferred chazges TOTAL OTHER ASSETS TOTAL ASSETS The notes to the financial statements are an integral par[ of [his statement. 724,500 724,500 194,978 117,724 919,478 842,224 38,921,881 38,319,592 -20- Water To[al 2010 2009 2010 2009 $ 2,793,142 $ 2,500,960 $ 9,380,159 $ 7,867,780 - 2,588,901 - 2,588,901 279 27,684 1,395 53,774 97,248 87,125 2,500,344 2,124,921 13,00 l 10,235 13,001 10,235 3,444 4,178 56,079 28,005 128,850 125,850 138,731 133,763 _ - 1,627 37,124 3g,94g 28,722 1,056,840 1,063,551 422 18 12,184 158,538 87,472 , 134 093 3 388,839 5 13,306,714 13,995,526 , , , 81,539 81,539 281,775 281,775 _ - 63,147 63,147 770,828 770,828 3,506,625 3,506,625 321,225 319,309 4,080,888 4,043,978 31,091,224 30,598,428 75,583,646 74,524,973 11 510 - 418,985 84,648 , 32,276,326 31,770,104 83,935,066 82,505,146 (9,969,185) (9,013,862) (33,839,102) (30,878,223) 22,307,14] 22,756,242 50,095,964 51,626,923 _ - 724,500 724,500 120,010 110,622 314,988 228,346 120,010 110,622 1,039,488 952,846 25,520,285 28,255,703 64,442,166 66,575,295 -2 L ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA STATEMENTS OF NET ASSETS -CONTINUED DECEMBER 31, 2010 AND 2009 CURRENT LIABILITIES Accounts payable Salaries and benefits payable Accrued interest payable Due to other City funds Due to other governments Customer deposits payable Unearned revenue Compensated absences -current portion Notes payable -current portion Bonds payable -current portion TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES Net other postemployment benefits liability Compensated absences -less current portion Notes payable -less current portion Bonds payablem, net -less current portion TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS Invested in capital assets, net of related debt Restricted for debt service Unrestricted TOTAL NET ASSETS The notes to the financial statements are an integral part of this statement. Electric 2010 $ 1,864,669 71,655 111,260 382,538 122,278 273,537 113,845 182,436 548,000 2009 $ 1,773,388 60,809 124,284 308,564 107,997 185,600 79,840 179,328 S 12,500 3,670,2]8 3,332,310 30,096 100,788 2,162,882 6,563,800 20,243 87,194 2,345,318 7,012,500 8,857,566 12,527,784 18,331,705 724,500 7,337,892 $ 26,394,097 9,46S,2SS 12,797,S6S 18,821,035 724,500 5,976,492 $ 2S,S22,027 _22_ Wa[er Total 20]0 2009 2010 2009 $ 39,361 $ 22,318 $ 1,904,030 $ 1,795,706 4,295 S,SlS 75,950 66,324 54,765 114,136 166,025 238,420 13,350 14,810 395,888 323,374 2 - 122,250 107,997 6,311 7,500 279,848 193,100 19,167 - 19,167 - 46,805 37,998 160,650 117,838 _ - 182,436 179,328 000 477 3,012,500 1,025,000 3,525,000 , 056 661 214,777 3 4,331,274 6,547,087 , , _ - 30,096 20,243 34,292 30,893 135,080 118,087 _ - 2,162,882 2,345,318 950 635 3 167,500 4 10,199,750 11,180,000 , , , 242 67Q 3 4,198,393 12,527,808 13,663,648 , , 298 331 4 413,170 7 16,859,082 20,210,735 , , , 15,194,191 15,576,242 36,525,896 34,397,277 - - 724,500 724,500 796 2 994 291 5 266 10,332,688 1],242,783 , , , , $ 21,188,987 $ 20,842,533 $ 47,583.084 $ 46,364,560 -23- ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN FUND NET ASSETS YEARS ENDED DECEMBER 31, 2010 AND 2009 OPERATING REVENUES Charges for services Security systems LFG project Generation credit Customer penalties TOTAL OPERATING REVENUES Electric 2010 2009 $ 25,056,960 $ 22,581,803 256,647 254,773 ],003,341 1,009,682 173,534 172,427 237,319 209,064 26,727,801 24,227,743 OPERATING EXPENSES 18,373,386 16,161,444 Purchased power 919,638 862,345 Production 972,574 1,074,751 Distribution 2,062,942 2,126,794 Depreciation 692,703 797,482 Customer accounts 2,140,948 1,903,943 General and administrative TOTAL OPERATING EXPENSES 25,162,191 22,926,759 OPERATING INCOME (LOSS) 1,565,610 1,300,984 NONOPERATING REVENUES (EXPENSES) Interest income Connection charges Miscellaneous revenue Interest expense Amortization of deferred charges Loss on sale of capital assets 89,948 64,761 48,421 (272,897) (8,819) (11,609) 87,857 78,208 30,377 (299,452) (11,169) (32,173) TOTAL NONOPERATING REVENUES (EXPENSES) INCOME BEFORE CONTRIBUTIONS AND TRANSFERS CONTRIBUTIONS FROM DEVELOPERS TRANSFERS FROM OTHER CITY FUNDS TRANSFERS TO OTHER CITY FUNDS CHANGE IN NET ASSETS NET ASSETS, JANUARY l NET ASSETS, DECEMBER 31 The notes to [he financial statements are an integral part of this statement. (90,195) 1,475,415 (146,352) 1,154,632 53,741 - (657,086) (585,141) 872,070 569,491 25,522,027 24,952,536 $ 26,394,097 $ 25,522,027 _2q_ Water Total 2010 2009 2010 2009 $ 1,876,363 $ 2,182,110 $ 26,933,323 $ 24,763,913 _ - 256,647 254,773 - - 1,003,341 1,009,682 _ - 173,534 172,421 19,723 24,319 257,042 233,383 896,086 1 2,206,429 28,623,887 26,434,172 , - - 18,373,386 16,161,444 346,960 374,417 1,266,598 1,236,762 151,495 169,447 1,124,069 1,244,198 955,323 956,993 3,018,265 3,083,787 46,684 61,405 739,387 858,887 444,597 497,]68 2,585,545 2,401,111 1,945,059 2,059,430 27,107,250 24,986,189 (48,973) 146,999 1,516,637 1,447,983 31,798 132,452 121,746 220,309 173,334 83,378 238,095 161,586 48,099 12,387 96,520 42,764 (143,361) (274,958) (416,258) (574,410) (12,132) (14,319) (20,951) (25,488) _ - (11,609) (32,173) 97,738 (61,060) 7,543 (207,412) 48,765 85,939 7,524,180 1,240,571 304,775 - 304,775 - 17,914 - 71,655 - (25,000) (20,000) (682,086) (605,141) 346,454 65,939 1,218,524 635,430 20,842,533 20,776,594 46,364,560 45,729,130 $ 21,188,987 $ 20.842,533 $ 47,583,084 $ 46,364,560 -25- ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 3l, 2010 AND 2009 CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers and users Other operating cash receipts Payments to suppliers Payments to employees NET CASH PROVIDED BY OPERATING ACTIVITIES CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Transfers from City Transfers to City Increase (decrease) in due to other City funds NET CASH USED BY NONCAPITAL FINANCING ACTIVITIES CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Acquisition of capital assets Proceeds from sale of capital assets Principal payments on revenue bonds Proceeds of refunding bonds issued, net of issuance costs and premium on bonds Withdrawal from escrow fund Payment to refunded bond escrow agent Interest paid on revenue bonds Principal payments on promissory note NET CASH USED BY CAPITAL AND RELATED FINANCING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES Interest on investments NET INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, JANUARY 1 CASH AND CASH EQUIVALENTS, DECEMBER 31 RECONCILIATION OF CASH AND CASH EQUIVALENTS TO THE STATEMENT OF NET ASSETS Cash and temporary investments Restricted cash TOTAL CASH AND CASH EQUIVALENTS The notes to the financial statements are an integral part of this statement. Electric 2010 2009 $ 26,414,254 $ 24,114,123 55,110 12,506 (21,426,298) (18,793,418) (1,446,237) (1,332,138) 3,596,829 4,001,073 53,741 - (657,08~ (585,141) 69,006 (19,764) (534,339) (604,905) (998,645) 5,952 (512,500) 1,105,905 (1,099,671) (278,928) (179,328) (1,214,469) (328,750) (306,657) (177,348) (1,957,215) (2,027,224) 114,922 89,324 1,220,197 1,458,268 6,091,320 4,633,052 7,311,517 6,091320 6,587,017 5,366,820 724,500 724,500 $ 7311,517 $ 6.091,320 -26- Water Total 2010 2009 2010 2009 $ 2,053,663 $ 2,419,649 $ 28,467,917 $ 26,533,772 68,000 65,563 123,110 78,069 (650,962) (718,04 (22,077,260) (19,511,464) (325,328) (377,420) (1,771,565) (1,709,558) 1,145,373 1,389,746 4,742,202 5,390,819 17,914 - 71,655 - (25,000) (20,000) (682,08 (605,141) (1,460) (3,168) 67,546 (22,932) (8,546) (23,168) (542,885) (628,073) (201,447) (211,199) (1,200,092) (1,425,668) _ - 5,952 - (3,012,500) (426,250) (3,525,000) (755,000) 201,506 - 1,307,411 - 2,575,000 - 2,575,000 - (279,39~ - (1,379,067) - (20Q,912) (280,778) (479,840) (587,435) _ (179,328) (177,348) (917,749) (918,227) (2,874,964) (2,945,451) 73,104 117,151 188,026 206,475 292,182 565,502 1,512,379 2,023,770 2,500,960 1,935,458 8,592,280 6,568,510 2,793,142 2,500,960 10,104,659 8,592,280 2,793,142 2,500,960 9,380,159 7,867,780 _ 724,500 724,500 $ 2,793,142 $ 2,500,960 $ 10,104,659 $ 8.592,280 _27_ ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA STATEMENTS OF CASH FLOWS -CONTINUED YEARS ENDED DECEMBER 31, 2010 AND 2009 Electric 2010 2009 RECONCILIATION OF OPERATING INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES Operating income (loss) $ 1,565,610 $ 1,30Q,984 Adjustments to reconcile operating income (loss) to net cash provided by operating activities: 182 113 108,585 Other revenue related to operations , 100,945 182,931 Bad debt expense 2,062,942 2,126,794 Depreciation (Increase) decrease in assets: (466,245) (237,458) Accounts receivable (28,808) 16,092 Other receivables Special assessments 35,497 (33,963) Due from other governments 16,737 294,630 Inventories (64,828) (13,660) Prepaid expenses Increase (decrease) in liabilities: 281 91 200,933 Accounts payable , 846 10 21,086 Salaries and benefits payable , 9 853 10,030 Net other postemploymeut benefits liability , Unearned revenue 599 47 (31,789) Compensated absences , 14'281 10'248 Due to other governments 937 87 45,630 Customer deposits payable , NET CASH PROVIDED $ 829 596 3 $ 4,001,073 BY OPERATING ACTIVITIES , , NONCASH CAPITAL AND RELATED FINANCING ACTIVITIES $ 8 819 $ 1],169 Amortization of deferred charges and bond premium di f $ 6,993 $ - un ng Amortization of deferred charges on re t i l $ (11,609) $ (32,1731 asse s ta Loss on disposal of cap rs l d f $ - $ eve ope rom Contribution of capital assets Interest payment on revenue bonds from escrow cash $ $ The notes to the financial statements are an integral part of this statement. _Zg_ Water Total 2010 2009 2010 2009 $ (48,973) $ 146,999 $ 1,516,637 $ 1,447,983 221,433 95,765 334,615 204,350 1,679 4,252 102,624 187,183 955,323 956,993 3,018,265 3,083,787 (11,802) 139,059 (478,047) (98,399) 734 53,176 (28,074) 69,268 (2,766) (9,217) (2,766) (9,277) _ - 35,497 (33,963) (10,026) 2,889 6,711 297,519 (6,238) (3,497) (71,066) (17,157) U,043 1,781 108,324 202,714 (1,220) 757 9,626 21,843 _ _ 9,853 10,030 19,167 - 19,167 - 12,206 789 59,805 (31,000) 2 _ 14,283 10,248 (1 189) 86,748 45,630 , $ 145 373 1 $ 1,389,746 $ 4,742,202 $ 5,390,819 , . $ 132 12 $ 14,319 $ 20,951 $ 25.488 . $ 1 820 $ - $ 8,813 $ - , $ $ - $ (11,6091 $ (32,173) $ 304 775 $ - $ 304,775 $ - , $ $ 84,834 $ - $ 84.834 -29- THiS PAGE IS LEFT BLANK INTENTIONALLY -30- ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO FINANCIAL STATEMENTS DECEMBER 37, 2010 AND 2009 Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Nature of the business The Elk River Municipal Utilities (the Utilities) is a municipal utility established by action of the City of Elk River (the City) pursuant to Minnesota statute 412.321 and consequently it's Electric and Water funds are enterprise funds of the City. The Public Utilities Commission (the Commission) members are appointed by [he City Council. The Commission determines all matters of policy. The Commission appoints personnel responsible for the proper administration of all affairs relating to the Utilities. The Utilities distributes electricity and water to the residents of Elk River, Dayton, Big Lake and Otsego, Minnesota. The Utilities has considered all potential units for which it is financially accountable, and other organizations for which the nature and significance of their relationship with the Utilities are such [hat exclusion would cause the Utilities' financial statements to be misleading or incomplete. The Governmental Accounting Standards Board (GASB) has set forth criteria to be considered in determining financial accountability. These criteria include appointing a voting majority of an organization's governing body, and (1) the ability of the primary govemment to impose its will on that organization or (2) the potential for the organization to provide specific benefits [o, or impose specific financial burdens on the primary government. There are no component units. B. Measurement focus, basis of accounting and basis of presentation The accounts of the Utilities are organized and operated on the basis of funds. A fund is an independent fiscal and accounting entity with aself-balancing set of aceounts. Fund accounting segregates funds according to their intended purpose and is used to aid management in demonstrating compliance with finance-related legal and contractual provisions. The minimum number of funds is maintained consistently with legal and managerial requirements. Revenue resulting from exchange transactions, in which each party gives and receives essentially equal value, is recorded on the accrual basis when the exchange takes place. Non-exchange transactions, in which the Utilities receives value without directly giving equal value in return, include property [axes, grants, entitlements and donations. Revenue from property taxes is recognized in the year for which [he tax is levied. Revenue from grants, entitlements and donations is recognized in [he year in which all eligibility requirements have been satisfied. Eligibility requirements include timing requirements, which specify [he year when the resources are required to be used or the year when use is first permitted, matching requirements, in which [he Utilities must provide local resources to be used for a specified purpose, and expenditure requirements, in which the resources are provided to the Utilities on a reimbursement basis. Grants and entitlements received before eligibility requirements are met are also recorded as unearned revenue. The preparation of the financial statements in conformity with accounting principles generally accepted in the United Slates of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from [hose estimates. -31- ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009 Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -CONTINUED Proprietary funds are accounted for on the flow of economic resources measurement focus and use the accrual basis of accounting. Under this method, revenues are recorded when earned and expenses are recorded at the time liabilities are incurred. In accordance with the provisions of the GASB Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and other Governmental Entities that use Proprietary Fund Account, [he Utilities applies all applicable GASB pronouncements plus all Financial Accounting Standards Board (FASB) Statements and Interpretations, Accounting Principles Board opinions, and Accounting Research Bulletins issued on or before November 3Q 1989, except for those that conflict with or contradict GASB pronouncements. The Utilities has elected not to apply FASB Statements and Interpretations issued after November 30, 1989. Proprietary funds include the following fund type: Enterprise funds account for those operations [hat are financed and operated in a manner similar [o private business or where the Utilities has decided that the determination of revenues earned, costs incurred and/or net income is necessary for management accountability. Proprietary funds distinguish operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund's principal ongoing operations. The principal operating revenues of the Water and Electric enterprise funds are charges to customers for sales and service. Operating expenses for enterprise funds include the cost of sales and services, administrative expenses and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses. The Utilities reports the following major proprietary funds: The Electric fund accounts for the electric distribution operations. The Water fund accounts for [he water distribution system. When both restricted and unrestricted resources are available for use, it is the Utilities' policy to use restricted resources first, then unrestricted resources as they are needed. C. Assets, liabilities and net assets Cask and cash equivalents The Utilities' cash and cash equivalents are considered [o be cash on hand, demand deposits and short-term investments with original maturities of three months or less from the date of acquisition. Cash balances from all funds are pooled and invested, to the extent available, in certificates of deposit and other authorized investments. Earnings from such investments are allocated on the basis of applicable participation by each of the funds. -32- ELK RIVER MUNICIPAL UTILlT1ES ELK RIVER, MINNESOTA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009 Note l: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -CONTINUED The Utilities may also invest idle funds as authorized by Minnesota statutes, as follows: I . Direct obligations or obligations guaranteed by the United States or its agencies. 2. Shares of investment companies registered under the Federal Investment Company Act of 1940 and received the highest credit rating, rated in one of the two highest rating categories by a statistical rating agency, and have a final maturity of thirteen months or less. 3. General obligations of a state or local government with taxing powers rated "A" or better; revenue obligations rated "AA" or better. 4. General obligations of the Minnesota Housing Finance Agency rated "A" or better. 5. Bankers' acceptances of United States banks eligible for purchase by [he Federal Reserve System. 6. Commercial paper issued by United States banks corporations or [heir Canadian subsidiaries, of highest quality category by at least two nationally recognized rating agencies, and maturing in 270 days or less. 7. Repurchase or reverse repurchase agreements and securities lending agreements with financial institutions qualified as a "depository" by the government entity, with banks that are members of the Federal Reserve System with capitalization exceeding $10,000,000, a primary reporting dealer in U.S. govemment securities to the Federal Reserve Bank of New York, or certain Minnesota securities broker-dealers. 8. Guaranteed investment contracts (GIC's) issued or guaranteed by a United States commercial bank, a domestic branch of a foreign bank, a United States insurance company, or its Canadian subsidiary, whose similar debt obligations were rated in one of the top two rating categories by a nationally recognized rating agency. Investments for the Utilities are reported at fair value. Accounts receivable Accounts receivable include amounts billed for services provided before year end. The Utilities has established a reserve for uncollectible accounts which is adjusted annually based on the receivable activity. No substantial losses from present receivable balances are anticipated. A summary of the uncollectible account balances at December 31, 2010 and December 31, 2009 is as follows: Electric Water Total Increase 2010 2009 (Decrease) $ 78,750 $ 78,750 26,250 26,250 $ 105,000 $ 105,000 $ - -33- ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009 Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -CONTINUED In[erfund receivables and payables Transactions between funds that are representative of lending borrowing arrangements outstanding at the end of the fiscal year are referred to as either "interfund receivables/payables" (i.e., the current portion of interfund loans) or "advances to/from other funds" (i.e., the non-current portion of interfund loans). All other outstanding balances between funds are reported as "due to/from other firnds". Inventories Inventories are stated at lower of average cost or market on the firs[-in, first-out (FIFO) method. Prepaid items Certain payments to vendors reflect costs applicable to future accounting periods and are recorded as prepaid items. Restricted assets The amounts in the restricted cash account are se[ aside in accordance with the issuing resolution for specific bond issues. They will be used for future debt service. Capital assets Capital assets are stated at cost. Capital assets are defined by the Utilities as assets with an initial individual cost of more than $5,000 and an estimated useful life in excess of two years. Expenditures for maintenance and repairs are charged to operations and expenditures that extend the useful life of the asset are capitalized and depreciated. When assets are retired or sold, the related cost and accumulated depreciation are removed from the accounts and any gain or loss on disposition is included in operations. Major expenditures for improvements or capital asset projects are capitalized as projects are constructed. In[ewst incurred during the construction phase is reflected in [he capitalized value of the asset constructed, net of interest earned on the invested proceeds over the same period. Interest incurred during the construction phase of capital assets of business-type activities is included as part of the capitalized value of the assets constructed. The Utilities follow the policy of providing depreciation on the straight-line method over the estimated useful lives of the assets, which are as follows: Description Lives in Years Electric Water Production Transmission Distribution General Long-term obligations 4-20 25-50 30 - 10-33 25-50 10-50 10-50 Long-term debt is retected as a liability in the fund issuing the obligation. Bond premiums and discounts, as well as issuance costs, are deferred and amortized over the life of the bonds using [he straight-line method. Bond issuance costs are reported as deferred charges and amortized over the term of the related deb[. -34- ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2070 AND 2009 Note l: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -CONTINUED Compensated absences All vacation benefits can be carried over from year to year and will be payable upon termination. Sick leave can be accumulated to a maximum of 960 hours from year to year. Upon termination or retirement, employees will have 50 percent of unused sick leave, up to a maximum of 800 hours, converted [o cash and deposited into their Post Health Care Savings account. The liability for vacation and sick pay is reported as a liability in [he respective funds at year end. Postemplayment Benefits Other Than Pensions Under Minnesota statute 471.61, subdivision 2b., public employers must allow retirees and their dependents to continue coverage indefinitely in an employer-sponsored health care plan, under the following conditions: 1) Retirees must be receiving (or eligible to receive) an annuity from a Minnesota public pension plan, 2) Coverage must continue in group plan until age 65, and retirees must pay no more than the group premium, and 3) Retirees may obtain dependent coverage immediately before retirement. All premiums are funded on apay-as-you-go basis. The liability was actuarially determined, in accordance with GASB Statement 45, at December 31, 2008. Net assets Net assets represent the difference between assets and liabilities. Net assets are displayed in three components: a. Invested in capital assets, net of related debt -Consists of capital assets, net of accumulated depreciation reduced by any outstanding debt attributable to acquire capital assets. b. Restricted net assets -Consist of net assets restricted when there are limitations imposed on their use through external restrictions imposed by creditors, grantors, laws or regulations of other governments. c. Unrestricted net assets -All other net assets that do not meet the definition of"restricted" or "invested in capital assets, net of related debt". Comparatdve data and reclassifications Comparative total data for the prior year have been presented in the selected sections of the accompanying financial statements in order to provide an understanding of changes in the Utilities' financial position and operations. Also, certain amounts presented in [he prior year data have been reclassified in order to be consistent with the current year's presentation. -35- ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO FINANCIAL STATEMENTS DECEMBER 31.2010 AND 2009 Note 2: DETAILED NOTES ON ALL FUNDS A. Deposits and investments Custodial credit risk for deposits and investments is the risk that in [he event of a bank failure, the Utilities' deposits and investments may no[ be returned or the Utility will no[ be able to recover collateral securities in the possession of an outside party. In accordance with Minnesota statutes and as authorized by [he Commission, the Utility maintains deposits at those depository banks, all of which are members of the Federal Reserve System. Minnesota statutes require that all Utility deposits be protected by insurance, surety bond or collateral. The market value of collateral pledged must equal l l0 percent of the deposits not covered by insurance or bonds. Authorized collateral in lieu of a corporate surety bond includes: • United States government Treasury bills, Treasury notes, Treasury bonds; • Issues of United States government agencies and instrumentalities as quoted by a recognized industry quotation service available to the government entity; • General obligation securities of any state or local govemment with taxing powers which is rate "A" or better by a national bond rating service, or revenue obligation securities of any state or local government with taxing powers which is rated "AA" or better by a national bond rating service; • General obligation securities of a local govemment with taxing powers may be pledged as collateral against funds deposited by that same local government entity; • Irrevocable standby letters of credit issued by Federal Home Loan Banks [o a municipality accompanied by written evidence that the bank's public debt is rated "AA" or better by Moody's Investors Service, Inc., or Standard & Poor's Corporation; and • Time deposits that are fully insured by any federal agency. Minnesota statutes require that all collateral shall be placed in safekeeping in a restricted account at a Federal Reserve Bank, or in an account at a trust department of a commercial bank or other financial institution [hat is not owned or controlled by the financial institution famishing [he collateral. The selection should be approved by the government entity. At December 31, 2010, the Utilities' carrying amount of deposits was $7,109,382 and [he bank balance was $8,422,731. Of the bank balance $250,000 was covered by federal depository insurance, and the remaining balance was covered by collateral held by the pledging financial institution's agent in the Utilities' name. At December 31, 2009, the Utilities' carrying amount of deposits was $5,993,647 and the bank balance was $6,999,949. Of the bank balance $5,738,393 was covered by federal depository insurance, and the remaining balance was covered by collateral held by the pledging financial institution's agent in the Utilities' name. -36- ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO FINANCIAL STATEMENTS DECEMBER 31.2010 AND 2009 Note 2: DETAILED NOTES ON ALL FUNDS -CONTINUED Investments The Utilities' investment balances were as follows for December 31, 2010: of Investments Pooled investments Broker Money Markets Non-pooled investments U.S. Govemment Agency Securities Brokered CD's Brokered CD's Brokered CD's Total non-pooled investments Total investments Credit Segmented Quality/ Time Ratings (1) Distribution (2) Fair Value and Carrying N/A less than 6 months $ 20,193 AAA I [0 3 years AAA more than 3 years N/A less than 6 months N/A 6 months to 1 year N/A 1 to 3 years l . Rating were provided by Moody's 2. Interest rate risk is disclosed using the segmented time distribution method. N/A Indicates not applicable or available The Utilities' investment balances were as follows for December 3l, 2009: 401,513 479,759 55,000 786,456 1,251,956 2,974,684 $ 2,994,877 Fair Value Credit Segmented and Quality/ Time Carrying Types of Investments Ratings (1) Distribution (2) Amount Pooled investments Broker Money Markets N/A less than 6 months $ 1,053,828 Non-oooled investments U.S. Treasuries N/A less than 6 months 2,588,901 U.S. Government Agency Securities AAA 1 to 3 years 405,109 Brokered CD's N/A less than 6 months 64,000 Brokered CD's N/A 6 months to 1 year 42,000 Brokered CD's N/A 1 to 3 years 1,033,296 Total non-pooled investments 4,133,306 Total investments $ 5,187,134 l . Ratings were provided by Moody's 2. Interest rate risk is disclosed using the segmented time distribution method N/A Indicates not applicable or available. -37- ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009 Note 2: DETAILED NOTES ON ALL FUNDS -CONTINUED A reconciliation of cash and temporary investments as shown in the financial statements for the Utilities follows: 2010 Deposits Investments Cash on hand Total Cash and investments Unrestricted Cash with escrow agent Restricted Total The investments of the Utility are subject to [he following risks: $ 7,109,382 2,994,877 400 2009 $ 5,993,647 5,187,134 400 $ 1Q,104,659 $ 11,181,181 $ 9,380,159 $ 7,867,780 - 2,588,901 724,500 724,500 $ 10,104,659 $ 11,181,181 • Credit Risk. Is [he risk that an issuer or other counterparty to an investment will not fulfill its obligations. Ratings are provided by various credit rating agencies and where applicable, indicate associated credit risk. Minnesota Statutes and the Utilities' investment policy limit the Utilities' investments to the list on page 31 of the notes. • Custodial Credit Risk. The custodial credit risk for investments is the risk that, in the event of the failure of the counterparty to a transaction, a government will not be able to recover the value of investment or collateral securities that are in the possession of an outside party. According to [heir investment policy the Utilities' portfolio maturities shall be staggered to avoid undue concentration of assets with one broker- dealer or financial institution. • Concentration of Credit Risk. Is the risk of loss attributed to the magnitude of a government's investment in a single issuer. According to their investment policy the Utilities' portfolio maturities shall be staggered to avoid undue concentration of assets in any one type of instrument. • /nterest rate risk. Is the risk that changes in interest rates will adversely affect the fair value of an investment According to their investment policy the Utilities' will stagger maturities to avoid undue concentration of assets at a specific maturity sector. -38- ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009 Note 2: DETAILED NOTES ON ALL FUNDS -CONTINUED B. Capital assets Electric and W a[er fund capital asset activity for the year ended December 3l, 2010 was as follows: Beginning Ending Balance Increases Decreases Balance Capital assets not being depreciated Land $ 281,775 $ - $ - $ 281,775 Construction in progress 84,648 985,062 (650,725) 418,985 Total capital assets depreciated not bein 366 423 985,062 (650,725) 700,760 g , Capital assets being depreciated Land improvements 63,147 - - 63,147 Buildings 3,506,625 - - 3,506,625 Machinery and equipment 4,043,978 111,857 (74,947) 4,080,888 Infrastructure 524 973 74 1,058,673 - 75,583,646 , , Total capital assets reciated de bein 138 723 82 1,170,530 (74,947) 83,234,306 p g , , Less accumulated depreciation for Land improvements (39,198) (2,525) - (41,723) Buildings (1,104,961) (112,510) - (1,217,471) Machinery and equipment (2,884,419) (225,912) 57,386 (3,052,945) Infrastructure (26,849,645) (2,677,318) - (29,526,963) Total accumulated depreciation (30,878,223) (3,018,265) 57,386 (33,839,102) Total capital assets net reciated bein de 260 500 51 (1,847,735) (17,567) 49,395,204 , g p , , Business-type activities capital assets, net $ 51.626,923 $ (862.673) $ (668,286) $ 50.095,964 -39- ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO FINANCIAL STATEMENTS DECEMBER 37, 2010 AND 2009 Note 2: DETAILED NOTES ON ALL FUNDS -CONTINUED Electric and Water fund capital asset activity for [he year ended December 31, 2009 was as follows: Capital assets not being depreciated Land Construction in progress Total capital assets not being depreciated Capital assets being depreciated Land improvements Buildings Machinery and equipment Infrastructure Total capital assets being depreciated Less accumulated depreciation for Land improvements Buildings Machinery and equipment Infrastructure Total accumulated depreciation Total capital assets being depreciated, net Business-type activities capital assets, net Beginning Ending Balance Increases Decreases Balance $ 281,775 $ - $ - $ 281,775 195,605 1,306,708 (1,417,665) 84,648 477,380 1,306,708 (1,417,665) 366,423 63,147 - - 63,147 3,463,486 43,139 - 3,506,625 4,118,344 192,331 (266,697) 4,043,978 73,274,840 1,250,133 - 74,524,973 80,919,817 1,485,603 (266,697) 82,138,723 (36,672) (2,526) - (39,198) (994,556) (110,405) - (1,104,961) (2,879,523) (271,593) 266,697 (2,884,419) (24,150,382) (2,699,263) - (26,849,645) (28,061,133) (3,083,787) 266,697 (30,878,223) 52,858,684 (1,598,184) - 51,260,500 $ 53,336,064 $ (291,476) $ (1,417,665) $ 51,626,923 Depreciation expense was charged to functions/programs of the Utilities as follows: 2010 2009 Business-type Activities Water Electric Total depreciation expense -business-type activities $ 955,323 $ 956,993 2,062,942 2,126,794 $ 3,018,265 $ 3,083.787 -40- ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009 Note 2: DETAILED NOTES ON ALL FUNDS -CONTINUED C. Long-term debt G.O. revenue and refunding bonds The City of Elk River issues general obligation bonds to provide funds for the acquisition and construction of major capital facilities. The following bonds are to be paid out of Utilities' revenues and are backed by the full faith and credit of the City. Authorized Interest Issue Maturity December 3l, Description and Issued Rate Date Date 2010 2009 G. O. Water Revenue Refunding Bouds of2008 $ 3,085,000 2.50-3.65 % 02/20/08 02/01/22 $ 2,955,000 $ 3,02Q,000 G. O Water Revenue Bonds of 2001A 3,590,000 4.55-5.40 10/01/01 02/01/22 - 2,730,000 G. O. City Hall Expansion Bonds of2002B 1,695,000 3.75-5.00 09101/02 02/01/23 - 1,340,000 G. O. Water Revenue Bonds of 2003B 1,995,000 3.25-3.70 12/09/03 02/01/14 895,000 1,095,000 G. O. Capital Improvement Plan Bands of 20IOA 1,265,000 2.00-4.00 04/21/10 08/0123 1265,000 - Total G.O. Revenue and Refunding Bonds $ 5,115,000 $ 8,185,000 The annual requirements to amortize the general obligation revenue bonds as of December 31, 2010 are as follows Year Ending December 3 L, 2011 2012 2013 2014 2015 2016-2020 2021-2023 Total Principal Interest Total $ 545,000 $ 155,763 $ 700,763 555,000 140,331 695,331 585,000 123,768 708,768 595,000 106,007 701,007 300,000 92,840 392,840 1,655,000 314,618 1,969,618 880,000 40,998 920,998 $ S,L15,000 S 974,325 $ 6,089,325 -41- ELK R[VER MUNLCLPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009 Note 2: DETAILED NOTES ON ALL FUNDS -CONTINUED Revenue bonds The following bonds were issued to finance capital improvements in the Electric fund. They will be retired from net revenues of the fund. Authorized Inlctest Issue Maturity December 3l, Description and Issued Ra[e Date Date 2010 2009 Electric Revenue Bonds, Series 2004A $ 940,000 4.00-4.25 % 08/01/04 02/01/15 $ 525,000 $ 615,000 Electric Revenue Bonds, Seriu'S 2006A 3,595,000 335-4.00 03/02/06 08/01/21 2,R3Q,000 3,030,000 Electric Revenue Bonds, Series 2007A 2,875,000 4.00 03/28/07 02/01 /22 2,705,000 2 875,000 Total Revenue Bonds $ 6,060,000 $ 6,520,000 The annual requirements to amortize the revenue bonds as of December 31, 2010 are as follows Year Ending December 31, Principal Interest Total 2011 $ 480,000 $ 229,785 $ 709,785 2012 495,000 211,435 706,435 2013 520,000 192,358 712,358 2014 545,000 172,221 717,221 2015 570,000 150,924 720,924 2016-2020 2,575,000 463,793 3,038,793 2021-2022 875,000 35,200 910,200 Total $ 6,060,000 $ 1,455,716 $ 7,515,716 -42- ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO FINANCIAL STATEMENTS DECEMBER 31.2010 AND 2009 Note 2: DETAILED NOTES ON ALL FUNDS -CONTINUED Promissory note The Utilities has issued a promissory note to provide for construction of a landfill gas generator. The note is to be paid from revenue of the system and is secured by the facility. Description Landfil I Authorized Interest and Issued Rate $ 8,185,000 $ 1,265,000 $ (4,335,000) $ 5,!15,000 $ 545,000 6,520,000 - (460,000) 6,060,000 480,000 - 53,550 (3,800) 49,750 14,705,000 1,265,000 (4,795,000) 11,175,000 1,025,000 2,524,646 - (179,328) 2,345,318 182,436 Generator Note $ 3,521,000 - % 03/19/02 02/19/22 $ 2,345,31R $ 2,524,646 The annual requirements [o amortize the generator note as of December 31, 2010 are as follows: Year Ending December 31, Principal Interest Total 2011 $ 182,436 $ - $ 182,436 2012 183,444 - 183,444 2013 186,588 - 186,588 2014 189,348 - 189,348 2015 191,508 - 191,508 2016-2020 992,628 - 992,628 2021-2022 419,366 - 419,366 Total $ 2,345,318 $ - $ 2,345,318 Cbanges in Long-term Liabilities Long-term liability activity for [he year ended December 31, 2010 was as follows Business-type activities Bonds payable General obligation revenue bonds Revenue bonds Unamortized premium on bonds Total bonds payable, net Notes payable Unamortized premium on bonds Compensated absences payable OPEB liability Business-type activity long-term liabilities Beginning Ending Due Within Balance Increases Decreases Balance One Year Issue Date S3,SS0 235,925 264,296 20,243 9 853 Maturity December 31, Date 2010 2009 (3,800) 49,750 (204,491) 295,730 160,650 30,096 $ 17,485,8]4 $ 1,592,699 $ (5.182,619) $ 13,895,894 $ 1,368.086 _q3_ ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009 Note 2: DETAILED NOTES ON ALL FUNDS -CONTINUED Advance Refunding On April 21, 2010 the Utilities issued $1,265,000 of G.O. Capital Improvement Plan Bonds, Series 2010A, bearing an average coupon rate of 3.58 percent, to provide resources for the advance refunding of $1,270,000 of [he outstanding principal of the City Hall Expansion Revenue Bonds, 20026 on February 1, 2013. The proceeds of the Series 2010A Bonds were deposited into an Escrow Account which shall pay issuance costs and purchase securities bearing interest to provide sufficient funds to pay the principal and interest on the 20026 bonds due April 21, 2010 through February 1, 2013 and pay the $1,125,000 called Revenue Bonds of 20026 on February 1, 2013. As a result of the refunding issue, [he 20026 bonds were defeased and [he Utilities will save $97,000 in debt service payments and achieve an economic gain ([he present value of the difference between the old and the new debt service) of $90,824. D. Interfund receivables, payables and transfers The composition of interfund balances at December 31, 2010 is as follows: Receivable Fund Payable Fund Amount Purpose Electric City -General fund $ 7,163 Electric sales tax paid by City Electric City - Nonmajor 101 Electric sales tax paid by City Electric City -Sewer 357 City share of project costs Electric City -Garbage 2,260 City share of project costs Total Electric fund receivable from City 9,881 Water City -Capital projects fund ]28,850 TIF 22 Water Access Charge Total receivable fr om City $ 138,731 City - Ceneral fund Electric $ 49,417 Shared building maim. costs City -multiple funds Electric 50,820 December transfer of 3% of revenue City -General fund Electric 46,410 Electric share of insurance City -General fund Electric 9,060 Electric share of vehicle main[. City-Sewer Electric 118,231 Billed sewer on behalf of City City -Garbage Electric 108,600 Billed garbage on behalf of City Total Electric fund payable to City 382,538 City -General fund Water 12,354 Shared building main[. costs City -General fund Water 996 Water share of vehicle main[. Total Water fund payable to City 13,350 Total payable to City $ 395,888 _qq_ ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO FINANCIAL STATEMENTS DECEMBER 3l, 2010 AND 2009 Note 2: DETAILED NOTES ON ALL FUNDS -CONTINUED The composition of interfund balances at December 31, 2009 is as follows: Receivable Fund Payable Fund Amount Purpose Electric City -General fund $ 1,426 Electric sales tax paid by City Electric City - Nonmajor 155 Electric sales tax paid by City Electric City -Sewer 713 Ciry share of project costs Electric City -Garbage 2,619 City share of project costs Total Electric fun d receivable from City 4,913 Water City -Capital projects food 128,850 TIF 22 Water Access Charge Total receivable from City $ 133,763 City -General fund Electric $ 43,494 Shared building main[. costs City -multiple funds Electric 44,031 December transfer of 3% of revenue City -General food Electric 1,455 Electric share of insurance Ciry -General fund Electric 999 Electric share of vehicle maint. City -Sewer Electric 120,135 Billed sewer on behalf of City City -Garbage Electric 98,450 Billed garbage on behalf of City Total Electric fund payable to City 308,564 City -General fund Water 14,498 Shared building main[. costs City -General fund Water 312 Water share of iusurance Total Water fund payable to City I4,8I0 Total payable to City $ 323,374 -45- ELK RIVER MUNICIPAL UTIL[TIES ELK RIVER, MINNESOTA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009 Note 2: DETAILED NOTES ON ALL FUNDS -CONTINUED Interfund transfers completed in 2010 are detailed as follows: Transfer out: Electric Water Transfer from Other City Funds Total transfers out Transfer to Other Electric Water City Funds $ - $ - $ 657,086 - - 25,000 53,741 17,914 - $ 53.741 $ 17.914 $ 682,086 The transfer out of [he Electric fund was the annually transfer of 3 percent of 2010 revenues to City funds. The transfer out of the Water fund was for its share of bonding. The transfers in to Electric and Water was for bond payments related [o the refunding of the 20026 bonds. Interfund transfers completed in 2009 are detailed as follows: Transfer out: Electric Water Total transfers out Transfer to Other City Funds $ 585,141 20,000 $ 605,141 The transfer out of the Electric fund was [he annually transfer of 3% of 2009 revenues to City funds. The transfer out of the Water fund was for its share of bonding. Note 3: DEFINED BENEFIT PENSION PLANS -STATEWIDE A. Plan description All full-time and certain part-time employees of the Utilities are covered by defined benefit plans administered by the Public Employees Retirement Association of Minnesota (PERA). PERA administers [he General Employees Retirement Fund (GERF), which is acost-sharing, multiple-employer retirement plan. This plan is established and administered in accordance with Minnesota statutes, chapters 353 and 356. GERF members belong to either the Coordinated Plan or the Basic Plan. Coordinated Plan members are covered by Social Security and Basic Plan members are not. All new members must participate in the Coordinated Plan. PERA provides retirement benefits as well as disability benefits to members, and benefits [o survivors upon death of eligible members. Benefits are established by Minnesota statute, and vest after three years of credited service. The defined retirement benefits are based on a member's highest average salary for any five successive years of allowable service, age and years of credit at termination of service. -46- ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009 Note 3: DEFINED BENEFIT PENSION PLANS -STATEWIDE -CONTINUED Two methods are used to compute benefits for PERA's Coordinated and Basic Plan members. The retiring member receives the higher ofstep-rate benefit accrual formula (Method I) or a level accrual formula (Method 2). Under Method 1, the annuity accrual rate for a Basic Plan member is 2.2 percent of average salary for each of the first 10 years of service and 2.7 percent for each remaining year. The annuity accrual rate for a Coordinated Plan member is 1.2 percent of average salary for each of the first 10 years and 1.7 percent for each remaining year. Under Method 2, [he annuity accrual rate is 2.7 percent of average salary for Basic Plan members and 1.7 percent for Coordinated Plan members for each yeaz of service. For all GERF members hired prior to July 1, 1989 whose annuity is calculated using Method 1, a full annuity is available when age plus years of service equal 90. Normal retirement age is 65 for Basic and Coordinated members hired prior to July 1, 1989. Normal retirement age is the age for unreduced Social Security benefits capped at 66 for Coordinated members hired on or after July 1, 1989. A reduced retirement annuity is also available to eligible members seeking early retirement. There are different Types of annuities available to members upon retirement. Asingle-life annuity is a lifetime annuity that ceases upon death of the retiree--no survivor annuity is payable. There are also various types ofjoint and survivor annuity options available which will be payable over joint lives. Members may also leave [heir contributions in the fund upon termination of public service, in order to qualify for a deferred annuity at retirement age. Refunds of contributions are available a[ any time to members who leave public service, but before retirement benefits begin. The benefit provisions stated in the previous paragraphs of this section are current provisions and apply to active plan participants. Vested, terminated employees who are entitled to benefits but are no[ receiving them ye[, are bound by the provisions in effect at the time they last terminated their public service. PERA issues a publicly available financial report that includes financial statements and required supplementary information for GERF. That report may be obtained on the Internet at www.mnpera.org, by writing to PERA, 60 Empire Drive #200, St. Paul, Minnesota, 55103-2088 or by calling (651) 296-7460 or 1-800-652-9026. B. Funding policy Minnesota statutes, chapter 353 sets the rates for employer and employee contributions. These statutes are established and amended by the State legislature. The Utilities makes annual contributions to the pension plans equal to the amount required by Minnesota statutes. GERF Basic Plan members and Coordinated Plan members were required to contribute 9.l percent and 6.0 percent, respectively, of [heir annual covered salary in 2010. In 2010, the Utilities was required to contribute the following percentages of annual covered payroll: 1 1.78 percent for Basic Plan GERF members and 7.00 percent for Coordinated Plan GERF members. The Utilities' contributions [o the General Employees Retirement Fund for the yeazs ending December 3I, 2010, 2009 and 2008 were $141,571, $148,592, and $I S 1,416, respectively. The Utilities' contributions were equal to the contractually required contributions for each year as set by Minnesota statute. -47- ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO FINANCIAL STATEMENTS DECEMBER 37, 20L0 AND 2009 Note 4: OTHER INFORMATION A. Territorial acquisition agreement The Utilities has entered into an agreement [o transfer ownership of electric plant and electric service to customers in certain areas curzently receiving electric service from Anoka Electric Cooperative, Inc. (AEC). The cost of property purchased from AEC will be net book value. The Utilities will also pay AEC for loss of revenue for each area acquired based on a formula outlined in the agreement. In addition, the Utilities will compensate AEC for the loss of revenue from the future sale of electricity to electric customers in the areas acquired from AEC for a period of [en years from the date of sale of each individual area. During 2010 and 2009, the Utilities paid $110,662 and $9,469, respectively, under [his agreement, including $8,107 and $9,489 in 2010 and 2009, respectively, for loss of revenues. All amounts paid are included in property and equipment. B. Risk management The Utilities is exposed to various risks of loss related to torts; theft of, damage to and destruction of assets; errors and omissions; injuries to employees; and natural disasters for which [he Utilities carries commercial insurance. The Utilities obtains insurance through participation in the League of Minnesota Cities Insurance Trust (LMCIT), which is a risk sharing pool with approximately 800 other govemmen[al units. The Utilities pays an annual premium to LMCIT for its workers compensation and property and casualty insurance. The LMCIT is self-sustaining through member premiums and will reinsure for claims above a prescribed dollar amount for each insurance event. Settled claims have not exceeded the Utilities' coverage in any of the past three fiscal years. Liabilities are reported when it is probable that a loss has occurred and the amount of [he loss can be reasonably estimated. Liabilities, if any, include an amount for claims that have been incurred but not reported QBNRs). The Utilities' management is not aware of any incurred but not reported claims. C. Commitments The Utilities has received notice from their power supplier regarding the existing all requirements power contract exercising their right to give ten years notice to cancel the contract. The cancellation date would be effective September 30, 2018. The process has begun to renegotiate [he existing contract, or contract with another power supplier. -48- ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009 Note 5: POSTEMPLOYMENT BENEFITS OTHER THAN PENSION Plan Description. Elk River Municipal Utilities (the Utilities) administers amulti-employer defined benefit healthcare plan (`the Retiree Health Plad'). The plan provides lifetime healthcare insurance for eligible retirees and their spouses through the Utilities group health insurance plan, which covers both active and retired members. Benefit provisions are reviewed intermittently through the relationship with the Utilities' insurance broker. The Retiree Health Plan does not issue a publicly available financial report. Funding Policy. Contribution requirements also are reviewed a[ the time changes are made to the plan. The Utility contributes none of the cost of current-year premiums for eligible retired plan members and their spouses. For fiscal year 2010, [he Utility contributed $0 to the plan Plan members receiving benefits contribute 100 percent of [heir premium costs. In fiscal year 2010, total member contributions were $0. Annual OPEB Cos[ and Net OPEB Obligation. The Utilities' annual other postemployment benefit (OPEB) cost (expense) is calculated based on the annual required contribution of the employer (ARC). The Utility has elected to calculate the ARC and related information using the alternative measurement method permitted by GASB Statement 45 for employers in plans with fewer than one hundred total plan members. The ARC represents a level of funding that, if paid on an ongoing basis, is projected [o cover normal cost each year and to amortize any unfunded actuarial liabilities (or funding excess) over a period no[ to exceed thirty years. The following table shows the components of the Utilities annual OPEB cost for the year, the amount actually contributed to the plan, and changes in the Utilities' net OPEB obligation to the Retiree Health Plan: Annual required contribution Interest on net OPEB obligation Adjustment to annual required contribution Annual OPEB Cost (expense) Contributions made Increase in net OPEB obligation Ne[ OPEB obligation- beginning of year Net OPEB obligation- end of year $ 1Q,213 810 (1,171) 9,852 9,853 20,243 $ 30,096 -49- ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009 Note 5: POSTEMPLOYMENT BENEFITS OTHER THAN PENSION -CONTINUED The Utilities' annual OPEB cos[, [he percentage of annual OPEB cos[ contributed to the plan, and the net OPEB obligation for December 31, 2010 and the preceding fiscal year was as follows: Three Year Trend Information Percentage Year Annual Annual OPEB Net OPEB Ending OPEB Cos[ Contributed Obligation 12/31/2010 $ 9,853 - % $ 30,096 12/3 V2009 10,030 - % 20,243 12/31/2008 10,213 - 10,213 Funded Status and Funding Progress. As of December 31, 2010, the actuarial accrued liability for benefits was $56,892, all of which was unfunded. The covered payroll (annual payroll of active employees covered by the plan) was $2,300,000 and the ratio of the unfunded actuarial accrued liability to [he covered payroll was 2.47 percent. The projection of future benefit payments for an ongoing plan involves estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding [he funded status of [he plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented as required supplementary information following the notes to the financial statements, presents multi-year trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits. Methods and Assumptions. Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and plan members) and include the Types of benefits provided at [he time of each valuation and the historical pattern of sharing of benefit costs between the employer and plan members to that point. The methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations. The following simplifying assumptions were made Retirement age jor active employees -Based on the historical average retirement age for the covered group, active plan members were assumed [o retire at age 62, or at [he first subsequent year in which the member would qualify for benefits. Participation Rate - f[ is assumed that 10 percent of active participants continue coverage until age 65. Participants are assumed to continue in [heir current coverage type (single or family). It is assumed that 100 percent of retirees will continue their current coverage until age 65. Life Expectancy -Life expectancies were based on mortality tables from [he National Center for Health Statistics. The 2000 United States Life Tables for Males and for Females were used. Turnover -Non-group-specific age-based turnover data from GASB Statement 45 were used as the basis for assigning active members a probability of remaining employed until the assumed retirement age and for developing an expected future working lifetime assumption for purposes of allocating to periods the present value of total benefits to be paid. Healthcare cost trend rate -The expected rate of increase in healthcare insurance premiums was based on projections of the Office of the Actuary at the Centers for Medicare & Medicaid Services. A rate of 10.0 percent initially, reduced to an ultimate rate of 5.0 percent after ten years, was used. -50- ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2010 AND 2009 Note 5: POSTEMPLOYMENT BENEFITS OTHER THAN PENSION -CONTINUED Nealth insurance premiums - 2008 health insurance premiums for retirees were used as the basis for calculation of [he present value of total benefits to be paid. Withdrawal -The probability that an employee will remain employed until the assumed retirement age was determined using non-group specific age-based turnover data provided in Table 1 in Paragraph 356 of GASB 45. Disability -None Actuarial Method -Projected Unit Credit with 30-year amortization of the unfunded liability. Faluation date -January 1, 2008 Based on [he historical and expected returns of the Utilities' short-term investment portfolio, a discount rate of 4.0 percent was used. In addition, a simplified version of the entry age actuarial cost method was used. The unfunded actuarial accrued liability is being amortized as a level dollar amount over an open basis. The remaining amortization period at December 31, 2010, was thirty years. -51- THIS PAGE IS LEFT BLANK INTENTIONALLY -sz- REQUIRED SUPPLEMENTARY INFORMATION ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA YEAR ENDED DECEMBER 31, 2010 -53- THIS PAGE IS LEFT BLANK INTENTIONALLY -54- ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA REQUIRED SUPPLEMENTARY INFORMATION DECEMBER 3l, 2010 AND 2009 Schedule of Funding Progress for the Retiree Health Plan Actuarial Valuation Date I2/31Y2008 Unfunded Actuarial Actuarial Actuarial Accrued Value of Accrued Liability Assets Liability (UAAL) $ - $ 56,892 $ 56,892 UAAL asa Percentage Funded Covered of Covered Ratio Payroll Payroll - % $ 2,300,000 2.47 -55- THIS PAGE IS LEFT BLANK INTENTIONALLY -56- SUPPLEMENTAL INFORMATION ELK RNER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA YEAR ENDED DECEMBER 31, 2010 -5~- ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA SUPPLEMENTAL INFORMATION SCHEDULES OF OPERATING REVENUES AND EXPENSES YEARS ENDED DECEMBER 31, 2010 AND 2009 OPERATING REVENUES Charges for services Elk River Otsego Big Lake Dayton Security systems LFG Project Generation credit Customer penalties Electric 2010 2009 $ 22,388,262 2,152,770 286,163 229,765 256,647 1,003,341 173,534 237,319 TOTAL OPERATING REVENUES OPERATING EXPENSES Purchased power Production Supervision and labor Natural gas Supplies and power for pumping Landfill gas expense Maintenance of structures Maintenance of equipment Maintenance of plant Total Transmission and distribution Supervision and labor Maintenance of overhead lines Maintenance of underground lines Maintenance of station equipment Transportation Maintenance of customer service Maintenance of customer meters Miscellaneous Total Services to Ciry Depreciation Customer accounts expense Meter reading Billing and collection Bad debts . Total $ 20,155,349 1,956,109 266,128 204,217 254,773 1,009,682 172,421 209,064 26,727,801 24,227,743 18,373,386 16,161,444 66,386 62,831 27,573 26,540 58,459 59,984 718,966 662,289 17,125 30,617 12,931 10,329 18,198 9,755 919,638 862,345 29,667 29,307 228,839 286,805 126,806 156,004 34,488 46,560 121,467 120,460 7,515 7,202 78,255 74,2!0 345,537 354,203 972,574 1,074,75 I 434,415 428,508 2,062,942 2,126,794 59,289 95,450 98,054 90,593 100,945 182,931 258,288 368,974 -58- Water To[al 2010 2009 2010 2009 $ 1,876,363 $ 2,182,110 $ 24,264,625 $ 22,337,459 - - 2,152,770 !,956,109 - - 286,163 266,128 - - 229,765 204,217 - - 256,647 254,773 - - 1,003,341 1,009,682 - - 173,534 172,421 19,723 24,319 257,042 233,383 1,896,086 2,206,429 28,623,887 26,434,172 - - 15,373,386 16,161,444 8,368 14,631 74,754 77,462 - - 27,573 26,540 270,279 265,109 328,738 325,093 - - 718,966 662,289 7,975 17,643 25,100 48,260 60,338 77,034 73,269 87,363 - - 18,198 9,755 346,960 374,417 1,266,598 1,236,762 14,979 19,643 44,646 48,950 - - 228,839 286,805 - - 126,806 156,004 - - 34,488 46,560 1!,064 10,318 132,531 130,778 65,573 92,032 73,088 99,234 59,879 47,454 138,134 121,664 - - 345,537 354,203 151,495 169,447 1,124,069 1,244,198 - - 434,415 428,508 955,323 956,993 3,018,265 3,083,787 17,597 29,8 L8 76,886 125,268 27,408 27,335 125,462 117,928 1,679 4,252 102,624 187,183 46,684 61,405 304,972 430,379 -59- ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA SUPPLEMENTAL INFORMATION SCHEDULES OF OPERATING REVENUE AND EXPENSES -CONTINUED YEARS ENDED DECEMBER 31, 2010 AND 2009 OPERATING EXPENSES -CONTINUED General and administrative Salaries Employee pensions and benetits Dues Office supplies and billing expense Office utilities and maintenance Consulting fees Legal and audit Environmental compliance Conservation improvement project Insurance Telephone Advertising Education and meetings Miscellaneous Total TOTAL OPERATING EXPENSES OPERATING INCOME (LOSS) NONOPERATING REVENUES (EXPENSES) Interest income Connection charges Miscellaneous revenue Interest expense Amortization of deferred charges Loss on sale of capital assets TOTALNONOPERATING REVENUES (EXPENSES) INCOME BEFORE CONTRIBUTIONS AND TRANSFERS CONTRIBUTIONS FROM DEVELOPERS TRANSFERS FROM OTHER CITY FUNDS TRANSFERS TO OTHER CITY FUNDS CHANGE IN NET ASSETS NET ASSETS, JANUARY 1 NET ASSETS, DECEMBER 31 Electric 2010 2009 $ 423,735 $ 351,782 994,747 887,545 108,900 141,386 57,840 73,363 17,982 !7,077 1,345 5,182 61,947 60,680 24,130 14,005 167,583 104,653 137,683 129,164 17,230 14,180 4,800 1,212 116,706 101,944 6,320 1,770 2,140,948 1,903,943 25,162,191 22,926,759 1,565,610 1,300,984 89,948 87,857 64,761 78,208 48,421 30,377 (272,897) (299,452) (8,819) (11,169) (1],609) (32,173) (90,195) (146,352) 1,495,415 1,154,632 53,741 - (657,086) (585,141) 872,070 569,491 25,522,027 24,952,536 $ 26,394,097 $ 25.522,027 -60- Water Total 2010 2009 2010 2009 $ 106,261 $ 119,154 $ 529,996 $ 470,936 206,706 225,538 1,201,453 1,113,083 30,869 36,572 139,769 177,958 25,574 26,669 83,414 100,032 5,954 6,671 23,936 23,748 967 9,061 2,312 14,243 13,569 16,176 75,516 76,856 - - 24,130 14,005 3,611 1,670 171,194 106,323 23,673 29,824 161,356 158,988 4,299 4,671 21,529 18,851 415 290 5,215 1,502 13,948 19,L91 130,654 121,135 8,751 1,681 15,071 3,451 444,597 497,168 2,585,545 2,401,111 1,945,059 2,059,430 27,107,250 24,986,189 (48,973) 146,999 1,516,637 1,447,983 31,798 132,452 121,746 220,309 173,334 83,378 238,095 16!,586 48,099 12,387 96,520 42,764 (143,361) (274,958) (416,258) (574,410) (12,132) (14,319) (20,951) (25,488) - - (11,609) (32,173) 97,738 (61,060) 7,543 (207,412) 48,765 85,939 1,524,180 1,240,571 304,775 - 304,775 - U,914 - 71,655 - (25,000) (20,000) (682,086) (605,!41) 346,454 65,939 1,2(8,524 635,430 20,842,533 20,776,594 46,364,560 45,729,130 $ 2L1S8,987 $ 20,842,533 $ 47,583,084 $ 46,364,560 -61- ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA SUPPLEMENTAL INFORMATION ELECTRIC FUND SUMMARY OF OPERATIONS AND UNAUDITED STATISTICS FOR THE YEARS ENDED DECEMBER 31, 2002 THROUGH DECEMBER 31, 2010 SUMMARY OF OPERATIONS 2002 2003 2004 OPERATING REVENUES Sales of electricity $ 1Q,783,277 $ 12,697,258 $ 13,775,332 Other operating revenues 343,087 299,695 268,140 TOTAL OPERATING REVENUES ] 1,126,364 12,996,953 14,043,472 OPERATING EXPENSES Purchased power 6,849,629 7,786,921 8,563,298 Distribution 667,038 829,051 1,390,414 Services to the City 238,372 265,234 294,698 Depreciation 969,913 L,067,063 1,427,091 Other operating expenses 1,477,574 1,915,081 1,567,309 TOTAL OPERATING EXPENSES 10,202,526 11,863,350 13,242,810 OPERATING INCOME 923,838 1,133,603 800,662 TRANSFERS FROM OTHER CITY FUNDS 50,000 - - TRANSFERS TO OTHER CITY FUNDS (289,264) (317,918) (340,564) NONOPERATING REVENUES 917,373 766,285 651,934 NET INCOME $ L601,947 $ 1,581,970 $ !,112,032 PERCENT OF CHANGE Sales of electricity 12.294% 17.750% 8.491 Purchased power 13.481% 13.684% 9.970% PERCENT OF REVENUES Purchased power 61.562% 59.913% 60.977% UNAUDITED STATISTICS MISCELLANEOUS 2002 2003 2004 KWh's purchased 157,594,270 170,092,937 176,730,416 KWh's sold 149,787,670 161,852,054 165,595,414 Line loss 7,806,600 8,240,883 11,135,002 Percent of line loss 4.954% 4.845% 6.301% REVENUES PER KWh SOLD $ 0.0720 $ 0.0784 $ 0.0832 COST PER KWh PURCHASED $ 0.0435 $ 0.0458 $ 0.0485 NUMBER OF CUSTOMERS 7,002 7,376 7,907 TOTAL CONTRIBUTION/TRANSFERS TO CITY $ 527,636 $ 583,152 $ 340,564 -62- 2005 2006 2007 2008 2009 2010 $ 15,276,987 $ 16,495,049 $ 19,164,797 $ 22,303,994 $ 23,591,485 $ 26,060,301 444,579 482,668 SO L,746 637,909 636,258 667,500 15,721,566 16,977 717 19,666,543 22,941 903 24 227 743 26 727 801 , , , , 9,625,519 10,101,458 12,176,034 14,778,270 16,161,444 18,373,386 1,528,057 1,942,577 1,829,971 2, 162,797 1,937,096 I ,892,212 331,644 328,148 358,029 409,222 428,508 434,415 1,553,663 1,561,096 1,920,798 2,057,851 2,126,794 2,062,942 1,731,317 1,936,275 1,977,973 2,196,770 2,272,917 2,399,236 14,77Q,200 15,869554 18,262,805 21,604,910 22,926,759 25,162,191 951,366 1,108,163 1,403,738 1,336,993 1,300,984 1,565,610 - - - - - 53,741 (388,927) (420,000) (483,000) (540,636) (585,141) (657,086) 70Q,592 887,803 710,858 249,022 (146,352) (90,195) $ 1,263.031 $ 1,575,966 $ 1.631,596 $ 1,045.379 $ 569,491 $ 872,070 10.901°/a 7.973°/a 16.185% 16.380% 5.772% 10.465% 12.404% 4.945% 20.537% 21.372% 9.360% 13.687% 61.225% 59.498% 61.912% 64.416% 66.706% 68.743% 2005 2006 2007 2008 2009 2010 193,700,298 205,645,631 225,973,086 241,837,173 247,595,137 264,642,834 182,515,644 194,975,530 21!,298,886 224,226,048 232,772,722 250,711,834 1 I, 184,654 10,670,101 14,674,200 17,61 1, 125 14,822,415 13,931,000 5.774% 5.189% 6.494% 7.282% 5.987% 5.264% $ 0.0837 $ 0.0846 $ 0.0907 $ 0.0995 $ 0.1013 $ 0.1039 $ 0.0497 $ 0.0491 $ 0.0539 $ 0.061 ! $ 0.0653 $ 0.0694 8,306 8,562 8,945 9,203 9,170 9,207 $ 388,927 $ 420,000 $ 483,000 $ 540,636 $ 585,141 $ 657,086 -63- ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA SUPPLEMENTAL MFORMATION WATER FUND SUMMARY OF OPERATIONS AND UNAUDITED STATISTICS FOR THE YEARS ENDED DECEMBER 31, 2002 THROUGH DECEMBER 3I, 20]0 SUMMARY OF OPERATIONS 2002 2003 2004 OPERATING REVENUES Sales of water $ 834,562 $ 1,047,561 $ 1,167,955 OPERATING EXPENSES Operating expenses less depreciation Depreciation TOTAL OPERATING EXPENSES TOTAL OPERATING INCOME (LOSS) PERCENT OF CHANGE Sales of water WATER PUMPED (gallons) WATER SOLD (gallons) Percent of line loss Revenues per 1,000 gallons pumped Revenues per 1,000 gallons sold Number of customers 561,039 849,677 806,831 292,559 585,354 720,044 853,598 1,435,031 1,526,875 $ (19,036) $ (387,4701 $ (358,920) (1.23%) 25.52% 11.49% UNAUDITED STATISTICS MISCELLANEOUS UNUSUAL LINE LOSS 2002 641,675,000 527,780,000 17.75% 1.29 2003 706,804,000 634,994,000 10.16% $ 1.47 1.58 $ 1.65 3,207 3,513 2004 651,000,000 642,019,000 1.38% $ 1.78 $ 1.82 3,824 Gallons Flushing hydrants Back washing Fire department use New water main disinfectant and flushing Flushing seasonal well Meter inaccuracy Eastern end maintenance Frozen pipes bursting in abandoned homes Unusual line loss 2002 2003 2004 11,500,000 1 1,500,000 I I ,500,000 8,880,000 8,880,000 8,900,000 5,000,000 5,000,000 4,000,000 5,000,000 5,000,000 4,000,000 4,000,000 4,000,000 - I5,000,000 15,000,000 - 49,380.000 49.380.000 28,400,000 -64- 2005 2006 2007 2008 2009 2010 $ 1,347,542 $ 1,749,932 $ 2,113,166 $ 2,130,124 $ 2 206 429 $ 1 896 086 , , , , 1,038,035 1,069,988 1,191,346 1,185,413 1,102,437 989,736 79Q,4S4 790,45] 921,450 974,848 956,993 955 323 , 1,828,489 1,860,439 2,112,796 2,160,261 2,059,430 1 945 059 , , $ (480,947) $ (110,507) $ 370 $ (30.137) $ 146.999 $ (48,9731 15.38% 29.86% 20.76% 0.80% 3.58% (14.07%) 2005 705,746,000 632,256,000 10.41% $ 1.90 $ 2.13 4,074 2006 2007 2008 _ 812,560,000 873,742,000 854,133,000 726,169,000 783,948,000 727,029,000 10.63% 1028% 14.88% $ 2.14 $ 2.41 $ 2.48 $ $ 2.41 $ 2.70 $ 2.93 $ 4,317 4,413 4,508 2009 2010 782,951,000 686,289,000 708,286,000 627,209,000 9.54% 8.61 2.81 $ 2.76 3.12 $ 3.02 4,467 4,511 Gallons 2005 2006 2007 2008 2009 2010 25,000,000 25,000,000 27,000,000 30,000,000 33,000,000 35,000,000 8,400,000 9,000,000 8,400,000 8,400,000 8,400,000 9,000,000 1,000,000 1,000,000 1,000,000 5,000,000 1,000,000 3,000,000 5,000,000 6,500,000 1,000,000 2,000,000 2,000,000 3,000,000 - - - - - 4,000,000 3,100,000 3,000,000 - - 1,300,000 - - - - 25,000,000 27,000,000 5,000,000 42,500.000 44,500.000 37,400,000 70,400,000 72,700.000 59,000,000 -65- THIS PAGE IS LEFT BLANK INTENTIONALLY _66_ OTHER REQUIRED REPORTS ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA YEAR ENDED DECEMBER 31, 2010 -67- THIS PAGE IS LEFT BLANK INTENTIONALLY -68- ABDO EICK & r •~ y 1VIFYERS l l l~ L~•rllji~-d PuLlir I~~nuuuurnv .C~ t~~~n.ultrnaa S'ul I Jcn-Arum ~uV. 3u Ldin.~ ]IA »:~. REPORT ON MINNESOTA LEGAL COMPLIANCE Public Utilities Commission Elk River Municipal Utilities Elk River, Minnesota We have audited [he financial statements of the Elk River Municipal Utilities (the Utilities) as of and for the years ended December 31, 2010 and 2009, and have issued our report thereon dated April 4, 201 I. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the provisions of the Minnesota Lega! Compliance Audi! Guide for Local Government, promulgated by the Minnesota Office of the State Auditor pursuant to Minnesota statute, section 6.65. Accordingly, the audit included such tests of the accounting records and such other auditing procedures, as we considered necessary in the circumstances. The Minnesota Legal Compliance Audit Guide for Local Government covers six main categories of compliance to be tested: contracting and bidding, deposits and investments, conflicts of interest, public indebtedness, claims and disbursements, and miscellaneous provisions. Our study included all ofthe listed categories. The results of our tests indicate that for the items tested, the Utilities complied with the material terms and conditions of applicable legal provisions. This report is intended solely for the information and use of the Public Utilities Commission, City Council, management and the Office of the State Auditor and is not intended to be and should not be used by anyone other than these specified parties. ~, ~ri1¢~, tC~ April 4, 201 I Minneapolis, Minnesota ABDQ EICK & MEYERS, LLP Cer[ifeed Public Accountants eun.:u ~nu~pu .~~nni -69-