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5.1. ERMUSR 04-08-2014 >1*Elk River Municipal Utilities UTILITIES COMMISSION MEETING TO: FROM: Elk River Municipal Utilities Commission Theresa Slominski— Finance and Office John Dietz, Chair Manager Al Nadeau, Vice Chair Daryl Thompson, Trustee MEETING DATE: AGENDA ITEM NUMBER: April 8, 2014 5.1 SUBJECT: 2013 Financial Audit BACKGROUND: Audit fieldwork was completed February 27th and 28th by our auditors, Abdo, Eick& Meyers (AEM). ERMU staff worked with AEM staff to complete and compiled the enclosed audit report this year. AEM staff has reviewed for approval and issuance of opinion letter. DISCUSSION: Mr. Andrew Berg of AEM will be at our meeting to present the 2013 audit and answer questions you may have. ACTION REQUESTED: Accept 2013 Annual Financial Report ATTACHMENTS: • ERMU Annual Financial Report Years Ended December 31, 2013 and 2012 a! IAIEAEO • r Page 1 of I INATUREI Reliable Public Power Provider POWERED To Seav[ 38 . 5 4 4 ' 3 5 4 4 ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA MANAGEMENT LETTER 1 FOR THE YEAR ENDED DECEMBER 31, 2013 2 • 2 4 54 4 1 5 4 4 4 ABDO EICK & 5 4 1�YE LLP 4 Certified Public Accountants & Consultants l• 39 ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA MANAGEMENT LETTER FOR THE YEAR ENDED DECEMBER 31, 2013 40 ' ABDO IP?IEICK &DC ® nap LIT Certified Public!IC toil nWn(.r R Cnn.ndtru,la March 27,2014 Management and Public Utilities Commission Elk River Municipal Utilities Elk River,Minnesota We have audited the financial statements of the business-type activities and each major fund of the Elk River Municipal Utilities(the Utilities)of the City of Elk River,Minnesota,(the City)for years ended December 31,2013 and 2012. Professional standards require that we provide you with information about our responsibilities under generally accepted auditing standards as well as certain information related to the planned scope and timing of our audit.We have communicated such information in our letter dated December 19,2013. Professional standards require that we provide you with the following information related to our audit. Our Responsibility Under Auditing Standards Generally Accepted in the United States of America As stated in our engagement letter,our responsibility,as described by professional standards,is to express an opinion about whether the financial statements prepared by management with your oversight are fairly presented,in all material respects,in conformity with accounting principles generally accepted in the United States. Our audit of the financial 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 financial statements are free of material misstatement. As part of our audit,we considered the internal control over financial 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 are, in our professional judgment, relevant to your responsibilities in overseeing the financial reporting process. However,we are not required to design procedures specifically to identify such matters. Significant Audit Findings In planning and performing our audit of the financial statements,we considered the Utilities internal control over financial reporting (internal control)to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements,but not for the purpose of expressing an opinion on the effectiveness of the Utilities internal control. Accordingly,we do not express an opinion on the effectiveness of the Utilities intemal control. 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 a combination of deficiencies,in internal control,such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented,or detected and corrected on a timely basis. A significant deficiency is a deficiency,or a combination of deficiencies,in internal control that is less severe than a material weakness,yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies.Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses.However,material weaknesses may exist that have not been identified. 5201 Eden Avenue,Suite 250 Edina,MN 55436 952.835.9090 I Fax 952.835.3261 41 Compliance As part of obtaining reasonable assurance about whether the financial statements are 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 are 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 financial statements. We noted no transactions entered into by the Utilities during the year for which there is a lack of authoritative guidance or consensus. All significant transactions have been recognized in the financial statements in the proper period. Accounting estimates are an integral part of the financial 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 particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The most sensitive estimates affecting the financial 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 financial statements taken as a whole. The disclosures in the financial statements are neutral,consistent,and clear. Certain financial statement disclosures are particularly sensitive because of their significance to financial 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 financial statements taken as a whole. Disagreements with Management For purposes of this letter,professional standards define a disagreement with management as a financial accounting,reporting,or auditing matter,whether or not resolved to our satisfaction,that could be significant to the financial statements or the auditor's report. We are pleased to report that no such disagreements arose during the course of our audit. I I'l'OCCSS. GoilNr l CVt111tliI, VWllber 42 Management Representations We have requested certain representations from management that are included in the management representation letter dated March 27,2014. 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 may be 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 our retention. Other Matters With respect to the supplementary information accompanying the financial statements,we made certain inquiries of management and evaluated the form,content,and methods of preparing the information to determine that the information complies with accounting principles generally accepted in the United States of America,the method of preparing it has not changed from the prior period,and the information is appropriate and complete in relation to our audit of the financial statements. We compared and reconciled the supplementary information to the underlying accounting records used to prepare the financial statements or to the financial statements themselves. People +Process, 13t•\[md me \utitllers 43 Future Accounting Standard Changes The following Governmental Accounting Standards Board(GASB) Statements have been issued and may have an impact on future Utility financial statements: of GASB Statement No.67-The Financial Reporting for Pension Plans-an Amendment to GASB Statement No. 25 Summary The objective of this Statement is to improve financial reporting by state and local governmental pension plans.This Statement results from a comprehensive review of the effectiveness of existing standards of accounting and financial reporting for pensions with regard to providing decision-useful information,supporting assessments of accountability and interperiod equity,and creating additional transparency. This Statement replaces the requirements of Statements No.25,Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans,and No. 50,Pension Disclosures,as they relate to pension plans that are administered through trusts or equivalent arrangements(hereafter jointly referred to as trusts)that meet certain criteria. The requirements of Statements No. 25 and No. 50 remain applicable to pension plans that are not administered through trusts covered by the scope of this Statement and to defined contribution plans that provide postemployment benefits other than pensions. This Statement is effective for financial statements for fiscal years beginning after June 15,2013. Earlier application is encouraged. How the Changes in This Statement Will Improve Financial Reporting The requirements of this Statement will improve financial reporting primarily through enhanced note disclosures and schedules of required supplementary information that will be presented by the pension plans that are within its scope.The new information will enhance the decision-usefulness of the financial reports of these pension plans,their value for assessing accountability,and their transparency by providing information about measures of net pension liabilities and explanations of how and why those liabilities changed from year to year.The net pension liability information,including ratios,will offer an up-to-date indication of the extent to which the total pension liability is covered by the fiduciary net position of the pension plan. The comparability of the reported information for similar types of pension plans will be improved by the changes related to the attribution method used to determine the total pension liability. The contribution schedule will provide measures to evaluate decisions related to the assessment of contribution rates in comparison to actuarially determined rates,when such rates are determined. In that circumstance,it also will provide information about whether employers and nonemployer contributing entities, if applicable,are keeping pace with actuarially determined contribution measures. In addition,new information about rates of retum on pension plan investments will inform financial report users about the effects of market conditions on the pension plan's assets over time and provide information for users to assess the relative success of the pension plan's investment strategy and the relative contribution that investment earnings provide to the pension plan's ability to pay benefits to plan members when they come due. People +I'rotrSS. Going I;('\11110'lip \wither-, 48 Future Accounting Standard Changes-Continued GASB Statement No.68- The Accounting and Financial Reporting of Pensions-an Amendment of GASB Statement No. 27 The primary objective of this Statement is to improve accounting and financial reporting by state and local governments for pensions. It also improves information provided by state and local governmental employers about financial support for pensions that is provided by other entities.This Statement results from a comprehensive review of the effectiveness of existing standards of accounting and financial reporting for pensions with regard to providing decision-useful information,supporting assessments of accountability and interperiod equity,and creating additional transparency. This Statement replaces the requirements of Statement No.27,Accounting for Pensions by State and Local Governmental Employers,as well as the requirements of Statement No. 50,Pension Disclosures,as they relate to pensions that are provided through pension plans administered as trusts or equivalent arrangements(hereafter jointly referred to as trusts)that meet certain criteria.The requirements of Statements 27 and 50 remain applicable for pensions that are not covered by the scope of this Statement. This Statement is effective for fiscal years beginning after June 15,2014.Earlier application is encouraged. How the Changes in This Statement Will Improve Financial Reporting The requirements of this Statement will improve the decision-usefulness of information in employer and governmental nonemployer contributing entity financial reports and will enhance its value for assessing accountability and interperiod equity by requiring recognition of the entire net pension liability and a more comprehensive measure of pension expense.Decision- usefulness and accountability also will be enhanced through new note disclosures and required supplementary information. GASB Statement No.69-Government Combinations and Disposals of Government Operations Summary This Statement establishes accounting and financial reporting standards related to government combinations and disposals of government operations.As used in this Statement,the term government combinations include a variety of transactions referred to as mergers,acquisitions,and transfers of operations. The distinction between a government merger and a government acquisition is based upon whether an exchange of significant consideration is present within the combination transaction.Government mergers include combinations of legally separate entities without the exchange of significant consideration.This Statement requires the use of carrying values to measure the assets and liabilities in a government merger.Conversely,government acquisitions are transactions in which a government acquires another entity,or its operations,in exchange for significant consideration.This Statement requires measurements of assets acquired and liabilities assumed generally to be based upon their acquisition values.This Statement also provides guidance for transfers of operations that do not constitute entire legally separate entities and in which no significant consideration is exchanged.This Statement defines the term operations for purposes of determining the applicability of this Statement and requires the use of carrying values to measure the assets and liabilities in a transfer of operations. A disposal of a government's operations results in the removal of specific activities of a government.This Statement provides accounting and financial reporting guidance for disposals of government operations that have been transferred or sold. This Statement requires disclosures to be made about government combinations and disposals of government operations to enable financial statement users to evaluate the nature and financial effects of those transactions. The requirements of this Statement are effective for government combinations and disposals of government operations occurring in financial reporting periods beginning after December 15,2013,and should be applied on a prospective basis.Earlier application is encouraged. How the Changes in This Statement Will Improve Financial Reporting Until now,governments have accounted for mergers,acquisitions,and transfers of operations by analogizing to accounting and financial reporting guidance intended for the business environment,generally APB Opinion No. 16,Business Combinations.This Statement provides specific accounting and financial reporting guidance for combinations in the governmental environment.This Statement also improves the decision usefulness of financial reporting by requiring that disclosures be made by governments about combination arrangements in which they engage and for disposals of People • government operations. +Profess. Co1I1 Be\(11l(Ithr Va ii hers 49 • Future Accounting Standard Changes-Continued GASB Statement No.70-Accounting and Financial Reporting for Nonexchnage Financial Guarantees Summary Some governments extend financial guarantees for the obligations of another government,a not-for-profit organization,a private entity,or individual without directly receiving equal or approximately equal value in exchange(a nonexchange transaction).As a part of this nonexchange financial guarantee,a government commits to indemnify the holder of the obligation if the entity or individual that issued the obligation does not fulfill its payment requirements.Also,some governments issue obligations that are guaranteed by other entities in a nonexchange transaction. The objective of this Statement is to improve accounting and financial reporting by state and local governments that extend and receive nonexchange financial guarantees. This Statement requires a government that extends a nonexchange financial guarantee to recognize a liability when qualitative factors and historical data,if any, indicate that it is more likely than not that the government will be required to make a payment on the guarantee. The amount of the liability to be recognized should be the discounted present value of the best estimate of the future outflows expected to be incurred as a result of the guarantee. When there is no best estimate but a range of the estimated future outflows can be established,the amount of the liability to be recognized should be the discounted present value of the minimum amount within the range. This Statement requires a government that has issued an obligation guaranteed in a nonexchange transaction to report the obligation until legally released as an obligor.This Statement also requires a government that is required to repay a guarantor for making a payment on a guaranteed obligation or legally assuming the guaranteed obligation to continue to recognize a liability until legally released as an obligor. When a government is released as an obligor,the government should recognize revenue as a result of being relieved of the obligation. This Statement also provides additional guidance for intra-entity nonexchange financial guarantees involving blended component units. This Statement specifies the information required to be disclosed by governments that extend nonexchange financial guarantees. In addition,this Statement requires new information to be disclosed by governments that receive nonexchange financial guarantees. The provisions of this Statement are effective for reporting periods beginning after June 15,2013. Earlier application is encouraged. Except for disclosures related to cumulative amounts paid or received in relation to a nonexchange financial guarantee,the provisions of this Statement are required to be applied retroactively. Disclosures related to cumulative amounts paid or received in relation to a nonexchange financial guarantee may be applied prospectively. How the Changes in This Statement Will Improve Financial Reporting The requirements of this Statement will enhance comparability of financial statements among governments by requiring consistent reporting by those governments that extend nonexchange financial guarantees and by those governments that receive nonexchange financial guarantees.This Statement also will enhance the information disclosed about a government's obligations and risk exposure from extending nonexchange financial guarantees. This Statement also will augment the ability of financial statement users to assess the probability that governments will repay obligation holders by requiring disclosures about obligations that are issued with this type of financial guarantee. GASB Statement No.71 -Pension Transition for Contributions Made Subsequent to the Measure Date-an Amendment of GASB Statement No. 68 Summary The objective of this Statement is to address an issue regarding application of the transition provisions of Statement No. 68, Accounting and Financial Reporting for Pensions.The issue relates to amounts associated with contributions, if any,made by a state or local government employer or nonemployer contributing entity to a defined benefit pension plan after the measurement date of the government's beginning net pension liability. People +Process. (,uill1. lit•vontlmr Nuollmm 50 Future Accounting Standard Changes-Continued Statement No.68 requires a state or local government employer(or nonemployer contributing entity in a special funding situation)to recognize a net pension liability measured as of a date(the measurement date)no earlier than the end of its prior fiscal year.If a state or local government employer or nonemployer contributing entity makes a contribution to a defined benefit pension plan between the measurement date of the reported net pension liability and the end of the government's reporting period, Statement No. 68 requires that the government recognize its contribution as a deferred outflow of resources.In addition, Statement No.68 requires recognition of deferred outflows of resources and deferred inflows of resources for changes in the net pension liability of a state or local government employer or nonemployer contributing entity that arise from other types of events. At transition to Statement No.68,if it is not practical for an employer or nonemployer contributing entity to determine the amounts of all deferred outflows of resources and deferred inflows of resources related to pensions,paragraph 137 of Statement No.68 required that beginning balances for deferred outflows of resources and deferred inflows of resources not be reported. Consequently,if it is not practical to determine the amounts of all deferred outflows of resources and deferred inflows of resources related to pensions,contributions made after the measurement date of the beginning net pension liability could not have been reported as deferred outflows of resources at transition.This could have resulted in a significant understatement of an employer or nonemployer contributing entity's beginning net position and expense in the initial period of implementation. This Statement amends paragraph 137 of Statement No. 68 to require that,at transition,a government recognize a beginning deferred outflow of resources for its pension contributions,if any,made subsequent to the measurement date of the beginning net pension liability. Statement No. 68,as amended,continues to require that beginning balances for other deferred outflows of resources and deferred inflows of resources related to pensions be reported at transition only if it is practical to determine all such amounts. The provisions of this Statement are required to be applied simultaneously with the provisions of Statement No.68. How the Changes in This Statement Will Improve Financial Reporting The requirements of this Statement will eliminate the source of a potential significant understatement of restated beginning net position and expense in the first year of implementation of Statement No.68 in the accrual-basis financial statements of employers and nonemployer contributing entities.This benefit will be achieved without the imposition of significant additional costs. I Note.From GASB Pronouncements Summaries.Copyright 2014 by the Financial Accounting Foundation,401 Merritt 7, Norwalk,CT 06856,USA,and is reproduced with permission. This communication 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. The comments and recommendations in this report are purely constructive in nature,and should be read in this context. Our audit would not necessarily disclose all weaknesses in the system because it was based on selected tests of accounting records and related data. If you have any questions or wish to discuss any of the items contained in this letter,please feel free to contact us at your convenience. We wish to thank you for the opportunity to be of service and for the courtesy and cooperation extended to us by your staff Oalb 4"¢bteO,U.�° ABDO,EICK&MEYERS,LLP Minneapolis,Minnesota March 27,2014 People Coin°. 13nontiiii, \ulilIn'rs 51 ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA ANNUAL FINANCIAL REPORT FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 52 THIS PAGE IS LEFT BLANK INTENTIONALLY 53 ELK RIVER MUNICIPAL UTILITIES ELK RIVER,MINNESOTA TABLE OF CONTENTS FOR THE YEAR ENDED DECEMBER 31,2013 Page No. INTRODUCTORY SECTION Public Utilities Commission and Administration 5 FINANCIAL SECTION Independent Auditor's Report 9 Management's Discussion and Analysis 13 Financial Statements Statements of Net Position 20 Statements of Revenues,Expenses and Changes in Net Position 24 Statements of Cash Flows 26 Notes to the Financial Statements 31 REQUIRED SUPPLEMENTARY INFORMATION Schedule of Funding Progress for the Retiree Health Plan 52 SUPPLEMENTARY INFORMATION Schedules of Operating Revenues and Expenses 54 Electric Fund Summary of Operations and Unaudited Statistics 58 Water Fund Summary of Operations and Unaudited Statistics 60 OTHER REPORTS Auditor's Report on Minnesota Legal Compliance 65 54 THIS PAGE IS LEFT BLANK INTENTIONALLY 55 INTRODUCTORY SECTION ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA FOR THE YEAR ENDED DECEMBER 31, 2013 56 THIS PAGE IS LEFT BLANK INTENTIONALLY 57 ELK RIVER MUNICIPAL UTILITIES ELK RIVER,MINNESOTA PUBLIC UTILITIES COMMISSION AND ADMINISTRATION DECEMBER 31,2013 PUBLIC UTILITIES COMMISSION Name Title John Dietz Chairperson Daryl Thompson Vice-Chairperson Al Neadeau Trustee ADMINISTRATION Name Title Troy Adams General Manager Theresa Slominski Finance and Office Manager David Berg Water Superintendent Mark Fuchs Line Superintendent Wade Lovelette Technical Services Superintendent Tom Sagstetter Conservation and Key Accounts Manager Judy McSpadden Recording Clerk 58 THIS PAGE IS LEFT BLANK INTENTIONALLY 59 FINANCIAL SECTION ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 60 THIS PAGE IS LEFT BLANK INTENTIONALLY 61 I ' 'ABDO r & cio MEYE RS HT Grtifird Puhlir-lrienu,„„,, 8 folaru((onls INDEPENDENT AUDITOR'S REPORT Public Utilities Commission Elk River Municipal Utilities Elk River,Minnesota Report on the Financial Statements We have audited the accompanying financial statements of the business-type activities and each major fund of the Elk River Municipal Utilities(the Utilities)of the City of Elk River,Minnesota(the City),as of and for the years ended December 31,2013 and 2012,and the related notes to the financial statements,which collectively comprise the City's basic financial statements as listed in the table of contents. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America;this includes the design,implementation,and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express opinions on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements,whether due to fraud or error. In making those risk assessments,the auditor considers internal control relevant to the Utilities preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of the Utilities internal control. Accordingly,we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management,as well as evaluating the overall financial statement presentation. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opinions As discussed in Note 1B,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 business- type activities and each major fund of the City as of December 31,2013 and 2012 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. 5201 Eden Avenue,Suite 250 Edina,MN 55436 952 835 9090 Fax 952.835.3261 62 THIS PAGE IS LEFT BLANK INTENTIONALLY 63 Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the Management's Discussion and Analysis starting on page 13 and Schedule of Funding Progress on page 52,be presented to 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 not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information 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 financial statements of the 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 and the supplemental information marked"unaudited"have not been subjected to the auditing procedures applied in the audit of the financial statements and,accordingly,we do not express an opinion or provide any assurance on them. Old)EALk• AVM)We ABDO,EICK&MEYERS,LLP Minneapolis,Minnesota March 27,2014 ftf111�C rl'ocess, (;dill; �LIIIIfA'Ilti 64 THIS PAGE IS LEFT BLANK INTENTIONALLY 65 Management's Discussion and Analysis This section of the Elk River Municipal Utilities(the Utilities)annual financial report presents our analysis of the Utilities' financial performance during the fiscal year that ended December 31,2013. 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$54,016,088(net position). Net Position increased by$2,409,730 or 5 percent. A rebounding economy resulted in more new connections and a significant increase in connection fees. • The Utilities' cash balance at the close of the current fiscal year was$15,448,172. • Electric usage overall was up an average of less than 1 percent,at 0.17 percent from the prior year. Residential usage decreased 1 percent,Commercial usage increased 9 percent,and Industrial usage decreased less than I percent. • Water usage overall down an average of 2.5 percent from the prior year. Residential usage decreased 8 percent,and Commercial usage increased 4 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-term and long-term financial information about its activities. The Statements of Net Position includes all of the Utilities'assets and liabilities and provides information about the nature and amounts of investments in resources(assets)and the obligations to 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 Position. 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 to provide information about the Utilities'cash receipts and cash payments during the reporting period. The statement reports cash receipts,cash payments and net changes in cash resulting from operations, investing and 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 the cash balance during the reporting period. 66 FINANCIAL ANALYSIS OF THE UTILITIES Our analysis of the Utilities begins on page 20 in the Financial Section. One of the 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 Net Position,and the Statements of Revenues, Expenses and Changes in Net Position report information about the Utilities' activities in a way that will help answer this question. These two statements report the net position of the Utilities and changes in this net position. You can think of the Utilities'net position(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 position is 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. NET POSITION To begin our analysis,a summary of the Utilities' Statements of Net Position is presented in Table A-1. As can be seen from the Table,net assets increased$2,409,730 to$54,016,088 in fiscal 2013 up from$51,606,358 in fiscal 2012. TABLE A-1 Condensed Statement of Net Assets Increase 2013 2012 (Decrease) Assets Current and other $ 19,466,124 $ 18,412,934 $ 1,053,190 Capital 48,879,659 47,780,955 1,098,704 Total assets 68,345,783 66,193,889 2,151,894 Total deferred outflows 75,525 83,765 (8,240) Liabilities Current 5,801,938 4,651,084 1,150,854 Non-current 8,603,282 10,020,212 (1,416,930) Total liabilities 14,405,220 14,671,296 (266,076) Net position Net investment in capital assets 39,358,482 36,747,341 2,611,141 Restricted for debt service 647,000 724,500 (77,500) Unrestricted 14,010,606 14,134,517 (123,911) Total net position $ 54,016,088 $ 51,606,358 $ 2,409,730 Looking at Table A-1,you can see that most of the change in net position was realized in the current and capital assets,which increased$2,151,894 in fiscal 2013. The increase is in the cash accounts and due largely to increased sales,which can be attributed to the economy. As the economy has begun rebounding we have had an increase in connections,a 74 percent increase from conservative budget amounts and a 38 percent increase over the prior year. Capital projects also increased with the completion of projects carried over from the prior year as well as a substation transformer upgrade and a water tower sandblasted and painted. 67 Water and Electric Rates Electric-The latest increase in the Utilities'electric rates was effective January 2014. The monthly base charges are based upon the type of service. The monthly charges are$11.00 for residential,$19.00 for commercial,and$60.00 for industrial customers. In addition to the base charges the residential rate is$.1318/KWh for May-September usage,and$.1178/KWh for October-April usage; the commercial rate is$.1266/KWh for May-September usage,and$.1051/KWh for October-April usage;the industrial rate is $.0626/KWh energy charge year round with a demand charge of$16.45/KW May-September,and$11.67/KW for October-April. Water-The Utilities' latest increase in residential and commercial rates was effective January 2014,after a three year rate freeze from 2010-2012.The monthly base charge for residential customers is$8.11 per month. In addition to the base charge,the Utilities currently charges its residential customers$1.62 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,and range from$9.73 to$102.75. An irrigation meter is$43.26 for every month the meter is utilized. There is also a charge per thousand gallons,the same tiers as the residential rates of$1.62,$3.50,and$4.00,except the graduation from the lower tier to the higher tier(s)is calculated based on previous consumption. Certain other rates may be offered for conservation incentive purposes. The Utilities currently offers a Senior Citizen base charge that is gradually increasing on an annual basis and will be eliminated in 2015 once parity with the regular residential base charge is achieved. 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 electric customers that have their service discontinued will be charged a minimum of$50.00 to have their service reconnected. Commercial/Industrial three phase electric customers that have their service discontinued will be charged a minimum of$150.00 to have their service reconnected. Residential and Commercial/Industrial water customer that have their water shut-off will be charged a fee of$100.00 to have their water turned on/reconnected. There are no reconnections after 3:30pm and payments for reconnection /tum on are not accepted at the property site;payments must be made prior to dispatching reconnection. Customers can come in to the office between the hours of 8:00am and 3:00pm to make the payment by cash,money order or credit card;or pay online or by phone with a credit card.The Utilities abides by the Cold Weather Rules. Deposit Policy Per our Deposit Policy,the Utility collects social security numbers from new accounts and utilizes a credit risk assessment tool called "Online Utility Exchange"to determine if a deposit is necessary as a proactive measure to try and reduce uncollectible accounts. 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)there is no deposit required. If there is a lower than 68 percent probability of non-default,a deposit appropriate to the services supplied will be required before utility service will be extended. If the customer chooses not to provide a social security number,the deposit is automatically required. Residential deposit amounts are$100 for apartments,$100 for homes with water and sewer,$150 for homes with electric only services,and$250 for homes with all services(electric,water,and sewer). For commercial and industrial customers,a service agreement would need to be signed that identifies the guarantor of their business and the guarantor's social security number.A deposit of 2 times the estimated highest monthly bill will be required,with a minimum deposit of$250.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 to 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 the account. The appropriate interest will be applied to the account per state statutes. 68 STATEMENTS OF REVENUES,EXPENSES AND CHANGES IN NET POSITION While the Statements of Net Position shows the change in financial assets and liabilities,the Statements of Revenues,Expenses and Changes in Net Position,provides answers as to the nature and source of these changes. As can be seen in Table A-2,revenues in excess of expenses was the main source of the increase in net position of$2,409,730 in fiscal 2013. A closer examination of the individual categories affecting the source of changes in net position is discussed below: TABLE A-2 Condensed Statements of Revenues, Expenses and Changes in Net Position Increase 2013 2012 (Decrease) Revenues Operating $ 33,124,503 $ 32,523,832 $ 600,671 Nonoperating 388,535 373,401 15,134 Total revenues 33,513,038 32,897,233 615,805 Expenses Operating 30,371,131 29,509,870 861,261 Nonoperating 382,736 341,517 41,219 Total expenses 30,753,867 29,851,387 902,480 Income before contributions and operating transfers 2,759,171 3,045,846 (286,675) Capital contributions-developer infrastructure and connection fees 295,549 174,607 120,942 Capital contributions of asset from City 121,172 218,845 (97,673) Transfers from other City funds 40,000 1,372 38,628 Transfers to other City funds (806,162) (857,692) 51,530 Change in net position 2,409,730 2,582,978 (173,248) Net position,January 1 51,606,358 49,023,380 2,582,978 Net position,December 31 $ 54,016,088 $ 51,606,358 $ 2,409,730 Revenues Table A-2 shows that operating revenue increased by 1.85 percent in 2013 for the Electric and Water Departments combined. Nonoperating revenue is comprised of transmission rebate revenue in the Electric Department,and water tower lease revenue in the Water Department,as well as connection fees in both departments. Regarding transmission rebates,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 helps keep our rates down. In 2013,rebates received from our 2011 filings were approximately$5,400 per month.The Water Department is receiving lease revenue from Sprint for antennas on the water towers. In 2013 this amount was approximately$98,000, and will continue for the duration of the multi-year contract. Capital Contributions increased this year for a water main project of approximately$121,000. Water Connection Fees increased approximately$100,000,and Electric Connection Fees increased approximately$33,000.The increase in Connection Fees was largely impacted by the resurgence in new homes as the economy has begun rebounding. Total Expenses In reviewing total expenses in Table A-2 you will notice that there was an increase of 2.7 percent overall. Purchased Power(the amount the Utilities pays for the power distributed)increased 3.7 percent. 69 CAPITAL ASSETS The Utilities' investment in capital assets for its business-type activities as of December 31,2013 amounts to$48,879,659(net of accumulated depreciation). This investment in capital assets includes land,buildings, improvements and equipment. A table summarizing the balances by fund follows: Increase 2013 2012 (Decrease) Land $ 360,952 $ 321,637 $ 39,315 Land improvements 13,846 16,372 (2,526) Buildings 2,221,552 2,212,880 8,672 Machinery and equipment 1,238,555 1,143,015 95,540 Infrastructure 42,779,585 43,802,050 (1,022,465) Construction in progress 2,265,169 285,001 1,980,168 Total $ 48,879,659 $ 47,780,955 $ 1,098,704 The total increase in the Utilities' investment in capital assets for the current fiscal year was 2.3 percent. Major capital asset events during the current fiscal year included the following: • The Electric Department upgraded the transformer at the North Substation,and the Water Department sandblasted and repainted the Freeport Water Tower. • The increase in capital projects completed resulted in$2.2 million assets being added,and an additional$2.2 million in projects carried over to the next fiscal year as Construction in Progress. • Accumulated depreciation for the year increased$3 million from prior year's asset additions. Additional information on the Utilities' capital assets can be found in Note 2B starting on page 38 of this report. LONG-TERM DEBT At year end,the Utilities had$9,974,484 in long-term debt down from$11,457,123 in fiscal 2012. The Utilities prepaid the 2004A bonds to reduce debt balances. More detailed information about the Utilities' long-term liabilities is presented in the Notes to the Financial Statements starting on page 40 and below: Increase 2013 2012 (Decrease) G.O.revenue bonds $ 3,430,000 $ 4,015,000 $ (585,000) Revenue bonds 4,340,000 5,085,000 (745,000) Unamortized premium on bonds 37,478 41,567 (4,089) Promissory note 1,789,224 1,975,812 (186,588) Compensated absences payable 332,740 299,384 33,356 OPEB liability 45,042 40,360 4,682 Total $ 9,974,484 $ 11,457,123 $ (1,482,639) 70 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.It is the Utilities' goal to not have to rely on increasing rates to meet those increases but continue to look for ways to increase efficiencies and reduce costs,while providing excellent customer service. Elk River Municipal Utilities' mission is to provide safe,cost-effective,reliable,quality utilities in an environmentally and financially responsible manner. We have met that mission in our customer service delivery and our successful financial results,and will continue to strive to meet that mission in the future. 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 at 13069 Orono Parkway in Elk River,MN. 71 FINANCIAL STATEMENTS ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 72 ELK RIVER MUNICIPAL UTILITIES ELK RIVER,MINNESOTA STATEMENTS OF NET POSITION-CONTINUED ON THE FOLLOWING PAGES DECEMBER 31,2013 AND 2012 Electric 2013 2012 ASSETS CURRENT ASSETS Cash and temporary investments $ 11,410,293 $ 10,646,164 Receivables Accrued interest 13,225 9,286 Accounts,net of allowance 2,422,866 2,293,525 Special assessments 3,801 - Other receivables 61,905 25,403 Due from other City fund 13,522 6,839 Due from other governments 12,209 - Inventories 963,608 928,800 Prepaid expenses 178,028 187,839 TOTAL CURRENT ASSETS 15,079,457 14,097,856 CAPITAL ASSETS Land 264,672 233,220 Land improvements 63,147 63,147 . Buildings 2,945,998 2,847,699 Equipment and machinery 4,390,338 4,180,967 Infrastructure 46,695,793 46,403,093 Construction in progress 1,553,538 281,176 CAPITAL ASSETS,COST 55,913,486 54,009,302 LESS ACCUMULATED DEPRECIATION (28,786,989) (27,883,481) TOTAL CAPITAL ASSETS,NET 27,126,497 26,125,821 OTHER ASSETS Restricted cash 647,000 724,500 TOTAL ASSETS 42,852,954 40,948,177 DEFERRED OUTFLOWS OF RESOURCES Deferred charges on refunding 60,419 67,011 TOTAL ASSETS AND DEFERRED OUTFLOW OF RESOURCES 42,913,373 41,015,188 The notes to the financial statements are an integral part of this statement. 73 • Water Total 2013 2012 2013 2012 $ 3,390,879 $ 3,254,530 $ 14,801,172 $ 13,900,694 3,306 2,322 16,531 11,608 89,838 124,307 2,512,704 2,417,832 58,263 25,935 62,064 25,935 12,517 2,703 74,422 28,106 129,441 129,289 142,963 136,128 - - 12,209 - 15,005 16,920 978,613 945,720 40,418 34,572 218,446 222,411 3,739,667 3,590,578 18,819,124 17,688,434 96,280 88,417 360,952 321,637 - - 63,147 63,147 815,901 791,326 3,761,899 3,639,025 387,829 375,717 4,778,167 4,556,684 32,750,301 32,372,187 79,446,094 78,775,280 711,631 3,825 2,265,169 285,001 34,761,942 33,631,472 90,675,428 87,640,774 (13,008,780) (11,976,338) (41,795,769) (39,859,819) 21,753,162 21,655,134 48,879,659 47,780,955 - - 647,000 724,500 25,492,829 25,245,712 68,345,783 66,193,889 15,106 16,754 75,525 83,765 25,507,935 25,262,466 68,421,308 66,277,654 74 ELK RIVER MUNICIPAL UTILITIES ELK RIVER,MINNESOTA STATEMENTS OF NET POSITION-CONTINUED DECEMBER 31,2013 AND 2012 Electric 2013 2012 CURRENT LIABILITIES Accounts payable S 2,793,958 $ 1,860,460 Salaries and benefits payable 134,394 81,732 Accrued interest payable 82,026 94,796 Due to other City funds 563,738 463,520 Due to other governments - 155,225 Customer deposits payable 439,550 386,416 Unearned revenue - 8,262 Compensated absences-current portion 106,070 101,094 Notes payable-current portion 189,353 186,588 Bonds payable-current portion 503,000 588,000 TOTAL CURRENT LIABILITIES 4,812,089 3,926,093 NON-CURRENT LIABILITIES Net other postemployment benefits liability 45,042 40,360 Compensated absences-less current portion 137,437 115,973 Notes payable-less current portion 1,599,871 1,789,224 Bonds payable,net-less current portion 4,678,983 5,410,254 TOTAL NON-CURRENT LIABILITIES 6,461,333 7,355,811 TOTAL LIABILITIES 11,273,422 11,281,904 NET POSITION Net investment in capital assets 20,215,709 18,218,766 Restricted for debt service 647,000 724,500 Unrestricted 10,777,242 10,790,018 TOTAL NET POSITION $ 31,639,951 $ 29,733,284 The notes to the financial statements are an integral part of this statement. 75 Water Total 2013 2012 2013 2012 S 38,950 $ 33,208 $ 2,832,908 S 1,893,668 17,310 8,065 151,704 89,797 36,368 43,005 118,394 137,801 243,838 42,078 807,576 505,598 102 - 102 155,225 37,311 6,311 476,861 392,727 43,191 31,095 43,191 39,357 45,779 44,229 151,849 145,323 - 189,353 186,588 527,000 517,000 1,030,000 1,105,000 989,849 724,991 5,801,938 4,651,084 - - 45,042 40,360 43,454 38,088 180,891 154,061 - - 1,599,871 1,789,224 2,098,495 2,626,313 6,777,478 8,036,567 2,141,949 2,664,401 8,603,282 10,020,212 3,131,798 3,389,392 14,405,220 14,671,296 19,142,773 18,528,575 39,358,482 36,747,341 - - 647,000 724,500 3,233,364 3,344,499 14,010,606 14,134,517 S 22,376,137 S 21,873,074 $ 54,016,088 $ 51,606,358 76 ELK RIVER MUNICIPAL UTILITIES ELK RIVER,MINNESOTA STATEMENTS OF REVENUES,EXPENSES AND CHANGES IN NET POSITION FOR THE YEARS ENDED DECEMBER 31,2013 AND 2012 Electric 2013 2012 OPERATING REVENUES Charges for services $ 29,949,116 $ 29,016,238 Security systems 282,502 295,600 LFG project 1,029,674 1,053,807 Generation credit (859,066) (501,473) Connection maintenance 189,611 156,204 • Customer penalties 254,542 238,314 TOTAL OPERATING REVENUES 30,846,379 30,258,690 OPERATING EXPENSES Purchased power 21,254,950 20,499,773 Production 886,464 885,996 Distribution 1,083,877 1,023,849 Depreciation 2,029,496 2,099,594 Customer accounts 711,055 707,539 General and administrative 2,162,050 2,133,561 TOTAL OPERATING EXPENSES 28,127,892 27,350,312 • OPERATING INCOME 2,718,487 2,908,378 NONOPERATING REVENUES(EXPENSES) Interest income 81,289 117,753 Miscellaneous revenue 182,920 144,779 Interest expense (211,429) (236,261) Gain(loss)on sale of capital assets (83,438) 2,260 TOTAL NONOPERATING REVENUES(EXPENSES) (30,658) 28,531 - INCOME BEFORE CONTRIBUTIONS AND TRANSFERS 2,687,829 2,936,909 CAPITAL CONTRIBUTIONS - DEVELOPER INFRASTRUCTURE AND CONNECTION FEES - - CONTRIBUTION OF ASSETS FROM CITY - - TRANSFERS FROM OTHER CITY FUNDS - TRANSFERS TO OTHER CITY FUNDS (781,162) (816,864) CHANGE IN NET POSITION 1,906,667 2,120,045 NET POSITION,JANUARY I 29,733,284 27,613,239 • NET POSITION,DECEMBER 31 $ 31639,951 $ 29,733,284 The notes to the financial statements are an integral part of this statement. 77 Water Total 2013 2012 2013 2012 S 2,214,697 $ 2,219,145 $ 32,163,813 S 31,235,383 282,502 295,600 - - 1,029,674 1,053,807 - - (859,066) (501,473) 39,099 25,387 228,710 181,591 24,328 20,610 278,870 258,924 2,278,124 2,265,142 33,124,503 32,523,832 - - 21,254,950 20,499,773 424,617 458,736 1,311,081 1,344,732 250,133 162,780 1,334,010 1,186,629 1,032,442 1,028,593 3,061,938 3,128,187 47,693 48,385 758,748 755,924 488,354 461,064 2,650,404 2,594,625 2,243,239 2,159,558 30,371,131 29,509,870 34,885 105,584 2,753,372 3,013,962 20,799 30,870 102,088 148,623 103,527 78,739 286,447 223,518 (89,441) (105,256) (300,870) (341,517) 1,572 (1,000) (81,866) 1,260 36,457 3,353 5,799 31,884 71,342 108,937 2,759,171 3,045,846 295,549 174,607 295,549 174,607 121,172 218,845 121,172 218,845 40,000 1,372 40,000 1,372 (25,000) (40,828) (806,162) (857,692) 503,063 462,933 2,409,730 2,582,978 21,873,074 21,410,141 51,606,358 49,023,380 $ 22,376,137 S 21,873,074 $ 54,016,088 $ 51,606,358 78 ELK RIVER MUNICIPAL UTILITIES ELK RIVER,MINNESOTA STATEMENTS OF CASH FLOWS -CONTINUED ON THE FOLLOWING PAGES FOR THE YEARS ENDED DECEMBER 31,2013 AND 2012 Electric 2013 2012 CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers and users $ 30,744,006 $ 30,481,587 Other operating cash receipts 134,209 125,965 Payments to suppliers (24,329,126) (23,771,526) Payments to employees (1,518,107) (1,460,301) NET CASH PROVIDED(USED) BY OPERATING ACTIVITIES 5,030,982 5,375,725 CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Transfers from City - - Transfers to City (781,162) (816,864) Increase in due to other City funds 93,535 84,127 NET CASH PROVIDED(USED)BY NONCAPITAL FINANCING ACTIVITIES (687,627) (732,737) CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Acquisition of capital assets (2,540,610) (1,334,562) Proceeds from sale of capital assets 27,000 11,471 Proceeds from connection fees - - Principal payments on revenue bonds (813,000) (559,000) Payments on short term account to acquire capital assets - (180,000) Interest paid on revenue bonds (220,878) (241,275) Principal payments on promissory note (186,588) (187,070) NET CASH PROVIDED(USED)BY CAPITAL AND RELATED FINANCING ACTIVITIES (3,734,076) (2,490,436) CASH FLOWS FROM INVESTING ACTIVITIES Interest on investments 77,350 113,216 NET INCREASE IN CASH AND CASH EQUIVALENTS 686,629 2,265,768 CASH AND CASH EQUIVALENTS,JANUARY 1 11,370,664 9,104,896 CASH AND CASH EQUIVALENTS,DECEMBER 31 $ 12,057,293 $ 11,370,664 RECONCILIATION OF CASH AND CASH EQUIVALENTS TO THE STATEMENT OF NET POSITION Cash and temporary investments $ 11,410,293 $ 10,646,164 Restricted cash 647,000 724,500 TOTAL CASH AND CASH EQUIVALENTS $ 12,057,293 $ 11,370,664 The notes to the financial statements are an integral part of this statement. 79 Water Total 2013 2012 2013 2012 $ 2,310,937 $ 2,231,224 $ 33,054,943 $ 32,712,811 105,809 87,822 240,018 213,787 (822,255) (836,986) (25,151,381) (24,608,512) (370,140) (351,049) (1,888,247) (1,811,350) 1,224,351 1,131,011 6,255,333 6,506,736 40,000 1,372 40,000 1,372 (25,000) (40,828) (806,162) (857,692) 201,608 55,260 295,143 139,387 216,608 15,804 (471,019) (716,933) (1,010,051) (114,709) (3,550,661) (1,449,271) 2,325 - 29,325 11,471 295,549 174,607 295,549 174,607 (517,000) (491,000) (1,330,000) (1,050,000) - - - (180,000) (95,248) (110,492) (316,126) (351,767) - - (186,588) (187,070) (1,324,425) (541,594) (5,058,501) (3,032,030) 19,815 29,735 97,165 142,951 136,349 634,956 822,978 2,900,724 3,254,530 2,619,574 14,625,194 11,724,470 $ 3,390,879 $ 3,254,530 $ 15,448,172 $ 14,625,194 S 3,390,879 $ 3,254,530 $ 14,801,172 $ 13,900,694 - - 647,000 724,500 $ 3,390,879 $ 3,254,530 $ 15,448,172 $ 14,625,194 80 ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA STATEMENTS OF CASH FLOWS-CONTINUED FOR THE YEARS ENDED DECEMBER 31,2013 AND 2012 Electric 2013 2012 RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED(USED)BY OPERATING ACTIVITIES Operating income $ 2,718,487 $ 2,908,378 Adjustments to reconcile operating income to net cash provided(used)by operating activities: Other revenue related to operations 182,920 144,779 Bad debt expense 14,103 42,395 Depreciation 2,029,496 2,099,594 (Increase)decrease in assets: Accounts receivable (143,444) 162,727 Other receivables (36,502) (20,441) Special assessments (3,801) - Due from other governments (12,209) 1,627 Inventories (34,808) 68,325 Prepaid expenses 9,811 (65,773) Increase(decrease)in liabilities: Accounts payable 333,498 (1,730) Salaries and benefits payable 52,662 7,233 Net other postemployment benefits liability 4,682 4,601 Unearned revenue (8,262) 8,262 Compensated absences 26,440 2,023 Due to other governments (155,225) (38,183) Customer deposits payable 53,134 51,908 NET CASH PROVIDED(USED) BY OPERATING ACTIVITIES $ 5,030,982 $ 5,375,725 NONCASH CAPITAL AND RELATED FINANCING ACTIVITIES Amortization of bond premium $ 3,271 $ 3,271 Amortization of deferred charges on refunding $ 6,592 $ 6,592 Loss on disposal of capital assets $ 110,438 $ 9,211 Capital assets purchased on account $ 600,000 $ - Contribution of capital assets $ - $ - The notes to the financial statements are an integral part of this statement. 81 Water Total 2013 2012 2013 2012 $ 34,885 $ 105,584 $ 2,753,372 $ 3,013,962 103,527 78,739 286,447 223,518 328 186 14,431 42,581 1,032,442 1,028,593 3,061,938 3,128,187 34,141 (26,804) (109,303) 135,923 (9,814) 7,888 (46,316) (12,553) (32,328) (7,114) (36,129) (7,114) - - (12,209) 1,627 1,915 8,989 (32,893) 77,314 (5,846) (15,887) 3,965 (81,660) 5,742 (51,854) 339,240 (53,584) 9,245 1,602 61,907 8,835 - - 4,682 4,601 12,096 1,195 3,834 9,457 6,916 812 33,356 2,835 102 (918) (155,123) (39,101) 31,000 - 84,134 51,908 $ 1,224,351 $ 1,131,011 $ 6,255,333 $ 6,506,736 $ 818 $ 818 $ 4,089 $ 4,089 $ 1,648 $ 1,648 $ 8,240 $ 8,240 $ 753 $ 1,000 $ 111,191 $ 10,211 $ - $ - $ 600,000 $ - $ 121,172 $ 218,845 $ 121,172 $ 218,845 82 THIS PAGE IS LEFT BLANK INTENTIONALLY 83 ELK RIVER MUNICIPAL UTILITIES ELK RIVER,MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31,2013 AND 2012 Note l: 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 the 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 that 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(I)the ability of the primary government to impose its will on that organization or(2)the potential for the organization to provide specific benefits to,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 a self-balancing set of accounts.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 taxes,grants,entitlements and donations.Revenue from property taxes is recognized in the year for which the tax is levied. Revenue from grants,entitlements and donations is recognized in the year in which all eligibility requirements have been satisfied. Eligibility requirements include timing requirements,which specify the year when the resources are required to be used or the year when use is first permitted,matching requirements,in which the 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 States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. 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. Proprietary funds include the following fund type: Enterprise funds account for those operations that are financed and operated in a manner similar to 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. 84 ELK RIVER MUNICIPAL UTILITIES ELK RIVER,MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31,2013 AND 2012 Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-CONTINUED The Utilities reports the following major proprietary funds: The Electric fund accounts for the electric distribution operations. The Water fund accounts for the 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,deferred outflows of resources,and net position Cash and cash equivalents The Utilities'cash and cash equivalents are considered to 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. The Utilities may also invest idle funds as authorized by Minnesota statutes,as follows: 1. 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 the Federal Reserve System. 6. Commercial paper issued by United States banks corporations or their 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. 85 ELK RIVER MUNICIPAL UTILITIES ELK RIVER,MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31,2013 AND 2012 Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-CONTINUED 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 31,2013 and December 31,2012 is as follows: Increase 2013 2012 (Decrease) Electric $ 109,845 $ 109,845 $ Water 26,250 26,250 Total $ 136,095 $ 136,095 $ Interfund 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 funds". Inventories Inventories are stated at lower of average cost or market on the first-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 set 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. Interest incurred during the construction phase is reflected in the 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: Lives in Years Description Electric Water Production 4-20 25 -50 Transmission 30 - Distribution 10-33 25 -50 General 10-50 10-50 86 ELK RIVER MUNICIPAL UTILITIES ELK RIVER,MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31,2013 AND 2012 Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-CONTINUED Deferred outflows of resources In addition to assets,the statement of financial position will sometimes report a separate section for deferred outflows of resources.This separate financial statement element,deferred outflows of resources,represents a consumption of net position that applies to a future period(s)and so will not be recognized as an outflow of resources(expense/expenditure) until then.The Utility only has one item that qualifies for reporting in this category,which is a deferred charge on refunding reported in the government-wide statement of net position.A deferred charge on refunding results from the difference in the carrying value of refunded debt and its reacquisition price.This amount is deferred and amortized over the shorter of the life of the refunded or refunding debt. Long-term obligations Long-term debt is reflected as a liability in the fund issuing the obligation.Bond premiums and discounts are amortized over the life of the bonds using the straight-line method. Bond issuance costs are reported as an expense in the period incurred. 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 960 hours,converted to cash and deposited into their Post Health Care Savings account.The liability for vacation and sick pay is reported as a liability in the respective funds at year end. Postemployment 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 a pay-as-you-go basis.The liability was actuarially determined,in accordance with GASB Statement 45,at January I,2011. Performance Metrics and Incentive Compensation Through Utilities Performance Metric-based Incentive Compensation system(UPMIC)the Utilities employees will have an opportunity,as a group,to each earn a maximum of 2 percent of their total gross wage paid during the Measurement Period.The percentage of UMPIC is calculated using a Score Card.The Score Card has three categories: Safety, Reliability and Quality of Utility Services which are divided into various weighted factors.This incentive was created to help the Utilities to become more efficient and successful in meeting strategic goals and mission and deliver improved value to the Utilities customers. The liability at year end is recorded as part of accrued wages. Net position Net position represents the difference between assets and liabilities and deferred inflows.Net position is displayed in three components: a. Net investment in capital assets-Consists of capital assets,net of accumulated depreciation reduced by any outstanding debt attributable to acquire capital assets. b. Restricted net position-Consists of net position 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 position-All other net position that do not meet the definition of"restricted"or"net investment in capital assets". 87 ELK RIVER MUNICIPAL UTILITIES ELK RIVER,MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31,2013 AND 2012 Note I: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-CONTINUED Comparative 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 the prior year data have been reclassified in order to be consistent with the current year's presentation. Note 2: DETAILED NOTES ON ALL FUNDS A. Deposits and investments Custodial credit risk for deposits and investments is the risk that in the event of a bank failure,the Utilities' deposits and investments may not be returned or the Utility will not be able to recover collateral securities in the possession of an outside party. In accordance with Minnesota statutes and as authorized by the 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 110 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 government with taxing powers which is rated"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 government 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 to 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 that is not owned or controlled by the financial institution furnishing the collateral. The selection should be approved by the government entity. At December 31,2013,the Utilities'carrying amount of deposits was$12,074,666 and the bank balance was $11,978,833.Of the bank balance$500,000 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 31,2012,the Utilities' carrying amount of deposits was$11,508,557 and the bank balance was $12,484,544.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. 88 • ELK RIVER MUNICIPAL UTILITIES ELK RIVER,MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31,2013 AND 2012 Note 2: DETAILED NOTES ON ALL FUNDS-CONTINUED Investments The Utilities' investment balances were as follows for December 31,2013: 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 $ 380,209 Non-pooled investments U.S.Government Agency Securities AA+ more than 3 years 476,936 Brokered CD's N/A less than 6 months 669,498 Brokered CD's N/A 6 months to 1 year 1,111,819 Brokered CD's N/A 1 to 3 years 290,132 Brokered CD's N/A more than 3 years 444,512 Total non-pooled investments 2,992,897 Total investments $ 3,373,106 (1) Ratings were provided by various credit rating agencies where applicable to indicate associated credit risk. (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 31,2012: 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 $ 21,812 Non-pooled investments U.S. Government Agency Securities Aaa more than 3 years 489,773 Brokered CD's N/A less than 6 months 431,303 Brokered CD's N/A 6 months to 1 year 488,909 Brokered CD's N/A Ito 3 years 1,481,477 Brokered CD's N/A more than 3 years 202,963 Total non-pooled investments 3,094,425 Total investments $ 3,116,237 (1) Ratings were provided by various credit rating agencies where applicable to indicate associated credit risk. (2) Interest rate risk is disclosed using the segmented time distribution method. N/A Indicates not applicable or available. 89 ELK RIVER MUNICIPAL UTILITIES ELK RIVER,MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31,2013 AND 2012 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: 2013 2012 Deposits $ 12,074,666 $ 11,508,557 Investments 3,373,106 3,116,237 Cash on hand 400 400 Total $ 15,448,172 $ 14,625,194 Cash and investments Unrestricted $ 14,801,172 $ 13,900,694 Restricted 647,000 724,500 Total $ 15,448,172 $ 14,625,194 The investments of the Utility are subject to the following risks: • Credit Risk. Is the 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 32 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 their 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. • Interest 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. 90 ELK RIVER MUNICIPAL UTILITIES ELK RIVER,MINNESOTA NOTES TO THE FINANCIAL STATEMENTS • DECEMBER 31,2013 AND 2012 Note 2: DETAILED NOTES ON ALL FUNDS-CONTINUED B. Capital assets Electric and Water fund capital asset activity for the year ended December 31,2013 was as follows: Beginning Ending Balance Increases Decreases Balance Capital assets not being depreciated Land $ 321,637 $ 39,315 $ - $ 360,952 Construction in progress 285,001 2,972,484 (992,316) 2,265,169 Total capital assets not being depreciated 606,638 3,011,799 (992,316) 2,626,121 Capital assets being depreciated Land improvements 63,147 - - 63,147 Buildings 3,639,025 122,874 - 3,761,899 Machinery and equipment 4,556,684 367,179 (145,696) 4,778,167 Infrastructure 78,775,280 1,762,297 (1,091,483) 79,446,094 Total capital assets being depreciated 87,034,136 2,252,350 (1,237,179) 88,049,307 Less accumulated depreciation for Land improvements (46,775) (2,526) - (49,301) Buildings (1,426,145) (114,202) - (1,540,347) Machinery and equipment (3,413,669) (241,865) 115,922 (3,539,612) Infrastructure (34,973,230) (2,703,345) 1,010,066 (36,666,509) Total accumulated depreciation (39,859,819) (3,061,938) 1,125,988 (41,795,769) • Total capital assets being depreciated,net 47,174,317 (809,588) (111,191) 46,253,538 Business-type activities capital assets,net $ 47,780,955 $ 2,202,211 $ (1,103,507) $ 48,879,659 91 ELK RIVER MUNICIPAL UTILITIES ELK RIVER,MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31,2013 AND 2012 Note 2: DETAILED NOTES ON ALL FUNDS-CONTINUED Electric and Water fund capital asset activity for the year ended December 31,2012 was as follows: Beginning Ending Balance Increases Decreases Balance Capital assets not being depreciated Land $ 281,775 $ 39,862 $ - $ 321,637 Construction in progress 205,726 1,399,943 (1,320,668) 285,001 Total capital assets not being depreciated 487,501 1,439,805 (1,320,668) 606,638 Capital assets being depreciated Land improvements 63,147 - - 63,147 Buildings 3,506,625 142,856 (10,456) 3,639,025 Machinery and equipment 4,458,926 203,391 (105,633) 4,556,684 Infrastructure 77,569,561 1,205,719 - 78,775,280 Total capital assets being depreciated 85,598,259 1,551,966 (116,089) 87,034,136 Less accumulated depreciation for Land improvements (44,249) (2,526) - (46,775) Buildings (1,329,255) (102,467) 5,577 (1,426,145) Machinery and equipment (3,260,524) (250,459) 97,314 (3,413,669) Infrastructure (32,200,495) (2,772,735) - (34,973,230) Total accumulated depreciation (36,834,523) (3,128,187) 102,891 (39,859,819) Total capital assets being depreciated,net 48,763,736 (1,576,221) (13,198) 47,174,317 Business-type activities capital assets,net $ 49,251,237 $ (136,416) $ (1,333,866) $ 47,780,955 Depreciation expense was charged to functions/programs of the Utilities as follows: 2013 2012 Business-type Activities Water $ 1,032,442 $ 1,028,593 Electric 2,029,496 2,099,594 Total depreciation expense-business-type activities $ 3,061,938 $ 3,128,187 92 ELK RIVER MUNICIPAL UTILITIES ELK RIVER,MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31,2013 AND 2012 Note 2: DETAILED NOTES ON ALL FUNDS-CONTINUED C. Long-term debt General obligation revenue 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 31, Description and Issued Rate Date Date 2013 2012 G.O.Water Revenue Refunding Bonds of 2008 $ 3,085,000 2.75-3.65 % 02/20/08 02/01/22 $ 2,180,000 $ 2,450,000 G.O.Water Revenue Bonds of 2003B 1,995,000 3.55-3.70 12/09/03 02/01/14 235,000 465,000 G.O.Capital Improvement Plan Bonds of 2010A 1,265,000 2.00-4.00 04/21/10 08/01/23 1,015,000 1,100,000 Total G.O.Revenue and Refunding Bonds $ 3,430,000 $ 4,015,000 The annual requirements to amortize the general obligation revenue and refunding bonds as of December 31,2013 are as follows: Year Ending December 31, Principal Interest Total 2014 $ 595,000 $ 106,007 $ 701,007 2015 300,000 92,840 392,840 2016 305,000 84,333 389,333 2017 320,000 74,850 394,850 2018 335,000 63,948 398,948 2019-2023 1,575,000 132,484 1,707,484 Total $ 3,430,000 $ 554,462 $ 3,984,462 The G.O.revenue bonds were issued to finance capital improvements and are to be repaid from future revenues pledged from the Water and Electric funds and are backed by the full faith and credit of the Utilities. In both 2012 and 2013,annual principal and interest payment on the bonds required about 27 percent of revenues from the Water fund. For 2012,principal and interest paid and total customer revenues for the Water fund were$601,492 and $2,265,142,respectively. For 2013,principal and interest paid and total customer revenues for the Water fund were $612,249 and$2,278,124,respectively. In both 2012 and 2013,annual principal and interest payment on the bonds required about 0.3 percent of revenues from the Electric fund. For 2012,principal and interest paid and total customer revenues for the Electric fund were$93,840 and$30,258,690,respectively. For 2013,principal and interest paid and total customer revenues for the Electric fund were$96,520 and$30,846,379,respectively. 93 ELK RIVER MUNICIPAL UTILITIES ELK RIVER,MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31,2013 AND 2012 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 Interest Issue Maturity December 31, Description and Issued Rate Date Date 2013 2012 Electric Revenue Bonds,Series 2004A $ 940,000 4.10-4.25 % 08/01/04 02/01/15 $ - $ 330,000 Electric Revenue Bonds,Series 2006A 3,595,000 3.50-4.00 03/02/06 08/01/21 2,180,000 2,405,000 Electric Revenue Bonds,Series 2007A 2,875,000 4.00 03/28/07 02/01/22 2,160,000 2,350,000 Total Revenue Bonds $ 4,340,000 $ 5,085,000 The annual requirements to amortize the revenue bonds as of December 31,2013 are as follows: Year Ending December 31, Principal Interest Total 2014 $ 435,000 $ 165,023 $ 600,023 2015 455,000 148,480 603,480 2016 470,000 131,160 601,160 2017 490,000 113,053 603,053 2018 515,000 93,815 608,815 2019-2022 1,975,000 160,964 2,135,964 Total $ 4,340,000 $ 812,495 $ 5,152,495 The revenue bonds were issued to finance the acquisition and construction of major capital facilities and are to be repaid from future revenues pledged from the Electric fund. In 2012 and 2013,annual principal and interest payment on the bonds required about 2.5 percent and 3.0 percent of revenues from the Electric fund,respectively. For 2012,principal and interest paid and total customer revenues for the Electric fund were$706,435 and$30,258,690,respectively. For 2013,principal and interest paid and total customer revenues for the Electric fund were$937,358 and$30,846,379, respectively. 94 ELK RIVER MUNICIPAL UTILITIES ELK RIVER,MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31,2013 AND 2012 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. Authorized Interest Issue Maturity December 31, Description and Issued Rate Date Date 2013 2012 Landfill Generator Note $ 3,521,000 - % 03/19/02 02/19/22 $ 1,789,224 $ 1,975,812 The annual requirements to amortize the generator note as of December 31,2013 are as follows: Year Ending December 31, Principal Interest Total 2014 $ 189,348 $ - $ 189,348 2015 191,508 - 191,508 2016 194,292 - 194,292 2017 195,216 - 195,216 2018 198,252 - 198,252 2019-2022 820,608 - 820,608 Total $ 1,789,224 $ - $ 1,789,224 Changes in long-term liabilities • Long-term liability activity for the year ended December 31,2013 was as follows: Beginning Ending Due Within Balance Increases Decreases Balance One Year Business-type activities Bonds payable General obligation revenue bonds $ 4,015,000 $ - $ (585,000) $ 3,430,000 $ 595,000 Revenue bonds 5,085,000 - (745,000) 4,340,000 435,000 Unamortized premium on bonds 41,567 - (4,089) 37,478 - Total bonds payable,net 9,141,567 - (1,334,089) 7,807,478 1,030,000 Notes payable 1,975,812 - (186,588) 1,789,224 189,353 Compensated absences payable 299,384 246,089 (212,733) 332,740 151,849 OPEB liability 40,360 6,073 (1,391) 45,042 - Business-type activity long-term liabilities $11,457,123 $ 252,162 $(1,734,801) $ 9,974,484 $ 1,371,202 95 ELK RIVER MUNICIPAL UTILITIES ELK RIVER,MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2013 AND 2012 Note 2: DETAILED NOTES ON ALL FUNDS-CONTINUED D. Interfund receivables,payables and transfers The composition of interfund balances at December 31,2013 is as follows: Receivable Fund Payable Fund Amount Purpose Electric City-General fund $ 4,378 Sales tax/franchis fees Electric City-Nonmajor 290 Sales tax/franchis fees Electric City-Sewer 845 4th quarter billings Electric City-Garbage 6,405 4th quarter billings Electric City-General fund 1,756 PERA aid Total Electric fund receivable from City 13,674 Water City-General fund 439 PERA aid Water City-Capital projects fund 128,850 TIF 22 Water Access Charge Total Water fund receivable from City 129,289 Total receivable from City $ 142,963 City-General fund Electric $ 64,405 Shared building maint. costs City-Nonmajor Electric 640 Arena advertising costs City-Nonmajor Electric 56,821 December transfer of 3%of revenue City-Nonmajor Electric 210,875 4th quarter franchise fees City- Sewer Electric 132,430 Billed sewer on behalf of City City-Garbage Electric 98,567 Billed garbage on behalf of City Total Electric fund payable to City 563,738 City-General fund Water 13,845 Shared building maint.costs City-Nonmajor Water 229,993 Water Main Improvements Total Water fund payable to City 243,838 Total payable to City $ 807,576 96 ELK RIVER MUNICIPAL UTILITIES ELK RIVER,MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31,2013 AND 2012 Note 2: DETAILED NOTES ON ALL FUNDS-CONTINUED The composition of interfund balances at December 31,2012 is as follows: Receivable Fund Payable Fund Amount Purpose Electric City-General fund $ 1,115 Electric sales tax paid by City Electric City-Nonmajor 65 Electric sales tax paid by City Electric City-Sewer 361 City share of project costs Electric City-Garbage 3,542 City share of project costs Electric City-General fund 1,756 Electric share of insurance dividends Total Electric fund receivable from City 6,839 Water City-General fund 439 PERA aid Water City-Capital projects fund 128,850 TIF 22 Water Access Charge Total Water fund receivable from City 129,289 Total receivable from City $ 136.128 City-General fund Electric $ 46,804 Shared building maint.costs City-multiple funds Electric 57,938 December transfer of 3%of revenue City-General fund Electric 48,422 Electric share of insurance City-General fund Electric 1,836 Electric share of vehicle maint. City-General fund Electric 6,982 Electric share of fuel City-General fund Electric 64,244 Electric share of project costs City-Sewer Electric 128,802 Billed sewer on behalf of City City-Garbage Electric 108,492 Billed garbage on behalf of City Total Electric fund payable to City 463,520 City-General fund Water 11,701 Shared building maint. costs City-General fund Water 1,787 Water share of fuel City-General fund Water 1,424 Water share of vehicle maint. City-General fund Water 19,438 Water share of project costs City-General fund Water 7,728 Water share of insurance • Total Water fund payable to City 42,078 Total payable to City $ 505,598 97 ELK RIVER MUNICIPAL UTILITIES ELK RIVER,MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31,2013 AND 2012 Note 2: DETAILED NOTES ON ALL FUNDS-CONTINUED Interfund transfers completed in 2013 are detailed as follows: Transfer from Transfer to Other Other Transfer out City Funds City Funds Electric $ - $ 781,162 Water 40,000 25,000 Total transfers out $ 40,000 $ 806,162 The transfer out of the Electric fund was the annual transfer of 3 percent of 2013 revenues to City hinds.The transfer out of the Water fund was for its share of bonding.The transfer in to the Water fund was for water main reimbursement from City Trunk Fees. Interfund transfers completed in 2012 are detailed as follows: Transfer from Transfer to Other Other Transfers City Funds City Funds Electric $ - $ 816,864 Water 1,372 40,828 Total transfers out $ 1,372 $ 857,692 The transfer out of the Electric fund was the annual transfer of 3 percent of 2012 revenues to City funds, $753,553,and contributions to a fiber project,$63,311.The transfer out of the Water fund was for its share of bonding,$25,000,and contributions to a fiber project,$15,828.The transfer in to the Water fund was for water main reimbursement from City Trunk Fees. 98 ELK RIVER MUNICIPAL UTILITIES ELK RIVER,MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31,2013 AND 2012 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 the General Employees Retirement Fund(GERF),which is a cost-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 to 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. Two methods are used to compute benefits for PERA's Coordinated and Basic Plan members. The retiring member receives the higher of step-rate benefit accrual formula(Method 1)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,the annuity accrual rate is 2.7 percent of average salary for Basic Plan members and 1.7 percent for Coordinated Plan members for each year 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.A single-life annuity is a lifetime annuity that ceases upon death of the retiree--no survivor annuity is payable. There are also various types of joint and survivor annuity options available which will be payable over joint lives.Members may also leave their 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 at 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 not receiving them yet,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(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 9.10 percent and 6.25 percent,respectively,of their annual covered salary in 2013.In 2013,the Utilities was required to contribute the following percentages of annual covered payroll: 11.78 percent for Basic Plan GERF members and 7.25 percent for Coordinated Plan GERF members.The Utilities' contributions to the General Employees Retirement Fund for the years ending December 31,2013,2012 and 2011 were$185,983,$170,944,and$160,459,respectively. The Utilities' contributions were equal to the contractually required contributions for each year as set by Minnesota statute. 99 ELK RIVER MUNICIPAL UTILITIES ELK RIVER,MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2013 AND 2012 Note 4: OTHER INFORMATION A. Territorial acquisition agreement In 1991,the Utilities entered into a 20 year agreement to transfer ownership of electric plant and electric service to customers in certain areas receiving electric service from Anoka Electric Cooperative,Inc. (AEC). In 2010 the Utility completed the final purchase under this agreement. The agreed cost of property purchased from AEC is net book value. The Utilities also pays 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 ten years from the date of sale of each individual area. The Utilities paid$1,023 and$3,948 in 2013 and 2012,respectively,for loss of revenues under this agreement. 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 the 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 governmental 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 the loss can be reasonably estimated. Liabilities, if any,include an amount for claims that have been incurred but not reported(IBNRs). 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.On May 14,2013 the Utilities signed a new agreement with Minnesota Municipal Power Agency(MMPA). The Utilities entered into an agreement in 2007 with Central Minnesota Municipal Power Agency(CMMPA)to acquire an interest in the CAPX Initiative Brookings Project,a power transmission line in Minnesota. The project is a 250 mile, 345 kV AC transmission line with a rating of 2,300 MW,between Brookings, South Dakota,and the Southeast Twin Cities. In 2011 there was increased opportunity for investment,and subsequent agreements provide the Utilities with an ownership share of$5.6 million or 18.89 percent. The return on this investment through CMMPA is designed to provide approximately$124,000 annually over the 40 year project life. 100 ELK RIVER MUNICIPAL UTILITIES ELK RIVER,MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31,2013 AND 2012 Note 5: POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS Plan Description. Elk River Municipal Utilities(the Utilities)administers a multi-employer defined benefit healthcare plan ("the Retiree Health Plan"). 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 at 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 2013,the Utility contributed$0 to the plan.Plan members receiving benefits contribute 100 percent of their premium costs. In fiscal year 2013,total member contributions were$0. Annual OPEB Cost 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 to cover normal cost each year and to amortize any unfunded actuarial liabilities(or funding excess)over a period not 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 $ 6,793 Interest on net OPEB obligation 1,614 Adjustment to annual required contribution (2,334) Annual OPEB Cost(expense) 6,073 Contributions made - Direct(explicit)subsidy Implicit subsidy (1,391) Increase in net OPEB obligation 4,682 Net OPEB obligation-beginning of year 40,360 Net OPEB obligation-end of year $ 45,042 The Utilities' annual OPEB cost,the percentage of annual OPEB cost contributed to the plan,and the net OPEB obligation for December 31,2013 and the preceding three fiscal years was as follows: Three Year Trend Information Percentage Year Annual Annual OPEB Net OPEB Ending OPEB Cost Contributed Obligation 12/31/2013 $ 4,682 - % $ 45,042 12/31/2012 4,601 - % 40,360 12/31/2011 5,663 - 35,759 Funded Status and Funding Progress. As of December 31,2011,the actuarial accrued liability for benefits was$42,681,all of which was unfunded. The covered payroll(annual payroll of active employees covered by the plan)was$2,286,547 and the ratio of the unfunded actuarial accrued liability to the covered payroll was 1.87 percent. 101 ELK RIVER MUNICIPAL UTILITIES ELK RIVER,MINNESOTA NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31,2013 AND 2012 Note 5: POSTEMPLOYMENT BENEFITS OTHER THAN PENSION-CONTINUED 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 the funded status of the 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 the 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 for active employees-Based on the historical average retirement age for the covered group,active plan members were assumed to retire at age 62,or at the first subsequent year in which the member would qualify for benefits. Participation Rate-It is assumed that 10 percent of active participants continue coverage until age 65.Participants are assumed to continue in their 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 the 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 8.5 percent initially,reduced to an ultimate rate of 5.0 percent after seven years, was used. Health insurance premiums-2011 health insurance premiums for retirees were used per the valuation report. 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 35b of GASB 45. Disability-None Actuarial Method-Projected Unit Credit with 30-year amortization of the unfunded liability. Valuation date-January 1,2011 Based on the 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, 2013 was thirty years. Note 6: SUBSEQUENT EVENT On February 12,2014 the Utilities issued$2,030,000 of Electric Revenue Refunding Bonds, Series 2014A,to provide resources for the crossover refunding of$2,180,000 of the outstanding principal of the Electric Revenue Bonds,Series, 2006A on August I, 2014. It is anticipated that the refunded maturities will be called and prepaid at a price of par plus accrued interest on May 1,2014,which is within 90 days of settlement of the bonds. 102 • THIS PAGE IS LEFT BLANK INTENTIONALLY 103 REQUIRED SUPPLEMENTARY INFORMATION ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 104 ELK RIVER MUNICIPAL UTILITIES ELK RIVER,MINNESOTA REQUIRED SUPPLEMENTARY INFORMATION FOR THE YEARS ENDED DECEMBER 31,2013 AND 2012 Schedule of funding progress for the retiree health plan Unfunded Actuarial UAAL as a Percentage Valuation Actuarial Actuarial Accrued Funded Covered of Covered Valuation Value of Accrued Liability Payroll Date Assets Liability (UAAL) Ratio Payroll yr 12/31/2011 $ - $ 42,681 $ 42,681 - % $ 2,286,547 1.87 % 12/31/2008 - 56,892 56,892 - 2,300,000 2.47 105 SUPPLEMENTARY INFORMATION ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 106 ELK RIVER MUNICIPAL UTILITIES ELK RIVER,MINNESOTA SUPPLEMENTARY INFORMATION SCHEDULES OF OPERATING REVENUES AND EXPENSES- CONTINUED ON THE FOLLOWING PAGES FOR THE YEARS ENDED DECEMBER 31,2013 AND 2012 Electric 2013 2012 OPERATING REVENUES Charges for services Elk River $ 27,154,253 $ 26,215,619 Otsego 2,359,164 2,294,146 Big Lake 196,644 271,531 Dayton 239,055 234,942 Security systems 282,502 295,600 LFG Project 1,029,674 1,053,807 Generation credit (859,066) (501,473) Connection maintenance 189,611 156,204 Customer penalties 254,542 238,314 TOTAL OPERATING REVENUES 30,846,379 30,258,690 • OPERATING EXPENSES Purchased power 21,254,950 20,499,773 Production Supervision and labor 71,556 68,207 Natural gas 38,431 27,265 Supplies and power for pumping 67,906 62,884 Landfill gas expense 670,478 683,246 Maintenance of structures 20,516 19,550 Maintenance of equipment (5,384) 14,067 Maintenance of plant 22,961 10,777 Total 886,464 885,996 Transmission and distribution Supervision and labor 32,426 30,732 Maintenance of overhead lines 256,047 222,298 Maintenance of underground lines 127,159 173,775 Maintenance of station equipment 40,373 53,223 Transportation 147,886 95,273 Maintenance of customer service 8,503 6,459 Maintenance of customer meters 70,109 68,710 Miscellaneous 401,374 373,379 Total 1,083,877 1,023,849 Services to City 498,146 481,907 Depreciation 2,029,496 2,099,594 Customer accounts expense Meter reading 21,173 15,971 Billing and collection 177,633 167,266 Bad debts 14,103 42,395 Total 212,909 225,632 107 Water Total 2013 2012 2013 2012 $ 2,214,697 $ 2,219,145 $ 29,368,950 $ 28,434,764 - - 2,359,164 2,294,146 - - 196,644 271,531 - - 239,055 234,942 - - 282,502 295,600 - - 1,029,674 1,053,807 - - (859,066) (501,473) 39,099 25,387 228,710 181,591 24,328 20,610 278,870 258,924 2,278,124 2,265,142 33,124,503 32,523,832 - 21,254,950 20,499,773 10,126 9,870 81,682 78,077 - 38,431 27,265 301,331 292,104 369,237 354,988 - - 670,478 683,246 14,751 22,430 35,267 41,980 98,409 134,332 93,025 148,399 - - 22,961 10,777 424,617 458,736 1,311,081 1,344,732 16,956 15,908 49,382 46,640 - - 256,047 222,298 - - 127,159 173,775 - - 40,373 53,223 14,884 11,199 162,770 106,472 123,064 67,273 131,567 73,732 95,229 68,400 165,338 137,110 - - 401,374 373,379 250,133 162,780 1,334,010 1,186,629 - - 498,146 481,907 1,032,442 1,028,593 3,061,938 3,128,187 5,659 6,225 26,832 22,196 41,706 41,974 219,339 209,240 328 186 14,431 42,581 47,693 48,385 260,602 274,017 108 ELK RIVER MUNICIPAL UTILITIES ELK RIVER,MINNESOTA SUPPLEMENTARY INFORMATION SCHEDULES OF OPERATING REVENUE AND EXPENSES-CONTINUED FOR THE YEARS ENDED DECEMBER 31,2013 AND 2012 Electric 2013 2012 OPERATING EXPENSES-CONTINUED General and administrative Salaries $ 518,761 $ 428,201 Employee pensions and benefits 979,148 947,018 Dues 81,183 96,776 Office supplies and billing expense 62,061 72,277 Office utilities and maintenance 23,752 17,934 Consulting fees 4,530 5,771 Legal and audit 59,105 59,940 Environmental compliance 20,953 25,383 Conservation improvement project 84,127 143,1 1 1 Insurance 155,915 139,018 Telephone 20,606 18,767 Advertising 5,143 4,109 Education and meetings 136,442 145,613 Miscellaneous 10,324 29,643 Total 2,162,050 2,133,561 TOTAL OPERATING EXPENSES 28,127,892 27,350,312 OPERATING INCOME 2,718,487 2,908,378 NONOPERATING REVENUES(EXPENSES) • Interest income 81,289 117,753 Miscellaneous revenue 182,920 144,779 Interest expense (211,429) (236,261) Gain(loss)on sale of capital assets (83,438) 2,260 TOTAL NONOPERATING REVENUES(EXPENSES) (30,658) 28,531 INCOME BEFORE CONTRIBUTIONS AND TRANSFERS 2,687,829 2,936,909 _ CAPITAL CONTRIBUTIONS- DEVELOPER INFRASTRUCTURE AND CONNECTION FEES - - CONTRIBUTION OF ASSETS FROM CITY - TRANSFERS FROM OTHER CITY FUNDS - TRANSFERS TO OTHER CITY FUNDS (781,162) (816,864) CHANGE IN NET POSITION 1,906,667 2,120,045 NET POSITION,JANUARY 1 29,733,284 27,613,239 NET POSITION,DECEMBER 31 $ 31,639,951 $ 29,733,284 109 • Water Total 2013 2012 2013 2012 $ 134,104 $ 110,250 $ 652,865 $ 538,451 225,115 217,435 1,204,263 1,164,453 30,789 29,093 111,972 125,869 18,894 28,263 80,955 100,540 7,089 5,127 30,841 23,061 6,760 3,442 11,290 9,213 6,589 6,288 65,694 66,228 - - 20,953 25,383 7,739 4,645 91,866 147,756 22,528 18,343 178,443 157,361 5,164 4,703 25,770 23,470 194 3,230 5,337 7,339 19,063 16,883 155,505 162,496 4,326 13,362 14,650 43,005 488,354 461,064 2,650,404 2,594,625 2,243,239 2,159,558 30,371,131 29,509,870 34,885 105,584 2,753,372 3,013,962 20,799 30,870 102,088 148,623 103,527 78,739 286,447 223,518 (89,441) (105,256) (300,870) (341,517) 1,572 (1,000) (81,866) 1,260 36,457 3,353 5,799 31,884 71,342 108,937 2,759,171 3,045,846 295,549 174,607 295,549 174,607 121,172 218,845 121,172 218,845 40,000 1,372 40,000 1,372 (25,000) (40,828) (806,162) (857,692) 503,063 462,933 2,409,730 2,582,978 21,873,074 21,410,141 51,606,358 49,023,380 $ 22,376,137 $ 21,873,074 $ 54,016,088 $ 51,606,358 110 ELK RIVER MUNICIPAL UTILITIES ELK RIVER,MINNESOTA ELECTRIC FUND • SUMMARY OF OPERATIONS AND UNAUDITED STATISTICS FOR THE YEARS ENDED DECEMBER 31,2005 THROUGH DECEMBER 31,2013 SUMMARY OF OPERATIONS 2005 2006 2007 OPERATING REVENUES Sales of electricity $ 15,276,987 $ 16,495,049 $ 19,164,797 Other operating revenues(expenses) 444,579 482,668 501,746 TOTAL OPERATING REVENUES 15,721,566 16,977,717 19,666,543 OPERATING EXPENSES Purchased power 9,625,519 10,101,458 12,176,034 Distribution 1,528,057 1,942,577 1,829,971 Services to the City 331,644 328,148 358,029 Depreciation 1,553,663 1,561,096 1,920,798 Other operating expenses 1,731,317 1,936,275 1,977,973 TOTAL OPERATING EXPENSES 14,770,200 15,869,554 18,262,805 OPERATING INCOME 951,366 1,108,163 1,403,738 TRANSFERS FROM OTHER CITY FUNDS - - - TRANSFERS TO OTHER CITY FUNDS (388,927) (420,000) (483,000) NONOPERATING REVENUES 700,592 887,803 710,858 NET INCOME $ 1263,031 $ 1,575,966 $ 1,631,596 PERCENT OF CHANGE Sales of electricity 10.901% 7.973% 16.185% Purchased power 12.404% 4.945% 20.537% PERCENT OF REVENUES Purchased power 61.225% 59.498% 61.912% UNAUDITED STATISTICS MISCELLANEOUS 2005 2006 2007 KWh's purchased 193,700,298 205,645,631 225,973,086 KWh's sold 182,515,644 194,975,530 211,298,886 Line loss 11,184,654 10,670,101 14,674,200 Percent of line loss 5.774% 5.189% 6.494% REVENUES PER KWh SOLD $ 0.0837 $ 0.0846 $ 0.0907 COST PER KWh PURCHASED $ 0.0497 $ 0.0491 $ 0.0539 NUMBER OF CUSTOMERS 8,306 8,562 8,945 TOTAL CONTRIBUTION/TRANSFERS TO CITY $ 388,927 $ 420,000 $ 483,000 111 2008 2009 2010 2011 2012 2013 $ 22,303,994 $ 23,591,485 $ 26,060,301 $ 27,894,341 $ 30,070,045 $ 30,978,790 637,909 636,258 732,261 689,645 188,645 (132,411) 22,941,903 24,227,743 26,792,562 28,583,986 30,258,690 30,846,379 14,778,270 16,161,444 18,373,386 19,604,951 20,499,773 21,254,950 2,162,797 1,937,096 1,892,212 1,960,742 1,909,845 1,970,341 409,222 428,508 434,415 474,934 481,907 498,146 2,057,851 2,126,794 2,062,942 2,041,717 2,099,594 2,029,496 2,196,770 2,272,917 2,399,236 2,350,706 2,359,193 2,374,959 21,604,910 22,926,759 25,162,191 26,433,050 27,350,312 28,127,892 1,336,993 1,300,984 1,630,371 2,150,936 2,908,378 2,718,487 - - 53.741 - - - (540,636) (585,141) (657,086) (711,415) (816,864) (781,162) 249,022 (146,352) (154,956) (105,604) 28,531 (30,658) $ 1,045,379 $ 569,491 $ 872,070 $ 1,333,917 $ 2,120,045 $ 1,906,667 16.380% 5.772% 10.465% 7.038% 7.800% 3.022% 21.372% 9.360% 13.687% 6.703% 4.564% 3.684% 64.416% 66.706% 68.576% 68.587% 67.748% 68.906% 2008 2009 2010 2011 2012 2013 241,837,173 247,595,137 264,642,834 276,026,892 287,553,108 290,025,919 224,226,048 232,772,722 250,711,834 261,235,297 273,455,846 273,945,354 17,61 1,125 14,822,415 13,931,000 14,791,595 14,097,262 16,080,565 7.282% 5.987% 5.264% 5.359% 4.902% 5.545% $ 0.0995 S 0.1013 $ 0.1039 $ 0.1068 $ 0.1100 S 0.1131 $ 0.06I1 $ 0.0653 $ 0.0694 $ 0.0710 $ 0.0713 $ 0.0733 9,203 9,170 9,207 9,227 9,285 9,358 $ 540,636 S 585.141 $ 657,086 $ 711,415 $ 816,864 $ 781,162 112 ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA WATER FUND SUMMARY OF OPERATIONS AND UNAUDITED STATISTICS FOR THE YEARS ENDED DECEMBER 31,2005 THROUGH DECEMBER 31,2013 SUMMARY OF OPERATIONS 2005 2006 2007 OPERATING REVENUES Sales of water $ 1,347,542 $ 1,749,932 $ 2,113,166 OPERATING EXPENSES Operating expenses less depreciation 1,038,035 1,069,988 1,191,346 Depreciation 790,454 790,451 921,450 TOTAL OPERATING EXPENSES 1,828,489 1,860,439 2,112,796 TOTAL OPERATING INCOME(LOSS) $ (480,947) $ (110,507) $ 370 PERCENT OF CHANGE Sales of water 15.38% 29.86% 20.76% UNAUDITED STATISTICS ' MISCELLANEOUS 2005 2006 2007 WATER PUMPED(gallons) 705,746,000 812,560,000 873,742,000 WATER SOLD(gallons) 632,256,000 726,169,000 783,948,000 Percent of line loss 10.41% 10.63% 10.28% Revenues per 1,000 gallons pumped $ 1.90 $ 2.14 $ 2.41 Revenues per 1,000 gallons sold $ 2.13 $ 2.41 $ 2.70 Number of customers 4,074 4,317 4,413 WATER SUPPLIER SERVICES 2005 2006 2007 Flushing hydrants 25,000,000 25,000,000 27,000,000 Back washing 8,400,000 9,000,000 8,400,000 Fire department use 1,000,000 1,000,000 1,000,000 New water main disinfectant and flushing 5,000,000 6,500,000 1,000,000 • Flushing seasonal well - Meter inaccuracy 3,100,000 3,000,000 - Street and Sewer Maintenance - - - Water tower paint and clean - - Water line and irrigation leaks - - Frozen pipes bursting in abandoned homes - - - Water Supplier Services 42,500,000 44,500,000 37,400,000 113 2008 2009 2010 2011 2012 2013 $ 2,130,124 $ 2,206,429 $ 1,913,661 $ 1,832,817 $ 2,265,142 $ 2,278,124 1,185,413 1,102,437 989,736 1,008,562 1,130,965 1,210,797 974,848 956,993 955,323 980,197 1,028,593 1,032,442 2,160,261 2,059,430 1,945,059 1,988,759 2,159,558 2,243,239 $ (30,137) $ 146,999 $ (31,398) $ (155,942) $ 105,584 S 34,885 0.80% 3.58% (13.27%) (4.22%) 23.59% 0.57% 2008 2009 2010 2011 2012 2013 854,133,000 782,951,000 686,289,000 651,907,000 847,283,200 785,377,000 727,029,000 708,286,000 627,209,000 599,701,000 727,912,000 709,760,000 14.88% 9.54% 8.61% 8.01% 14.09% 9.63% $ 2.48 $ 2.81 $ 2.79 $ 2.81 $ 2.67 S 2.90 $ 2.93 S 3.12 $ 3.05 $ 3.06 $ 3.11 $ 3.21 4,508 4,467 4,511 4,515 4,542 4,613 Gallons 2008 2009 2010 2011 2012 2013 30,000,000 33,000,000 35,000,000 34,000,000 46,400,000 45,000,000 8,400,000 8,400,000 9,000,000 8,000,000 30,000,000 8,000,000 5,000,000 1,000,000 3,000,000 4,000,000 16,500,000 5,000,000 2,000,000 2,000,000 3,000,000 4,000,000 9,000,000 5,000,000 - 4,000,000 - 3,600,000 - - 1,300,000 - - 6,500,000 3,000,000 - - - - - 617,000 - - - 2,000,000 - 2,000,000 - - - - 7,000,000 7,000,000 25,000,000 27,000,000 5,000,000 - - - 70,400,000 72,700,000 59,000,000 52,000,000 119,000,000 75,617,000 114 THIS PAGE IS LEFT BLANK INTENTIONALLY 115 OTHER REQUIRED REPORTS ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA FOR THE YEAR ENDED DECEMBER 31, 2013 116 THIS PAGE IS LEFT BLANK INTENTIONALLY 117 s ' , 'ABDO pet, EICK & . 01 MEYERS LIP Certified Public;lnnunlnnts R Consulta us INDEPENDENT AUDITOR'S REPORT ON MINNESOTA LEGAL COMPLIANCE Public Utilities Commission Elk River Municipal Utilities Elk River,Minnesota We have audited, in accordance with auditing standards generally accepted in the United States of America,the financial statements of the business-type activities and each major fund of Elk River Municipal Utilities(the Utilities)of the City of Elk River,Minnesota (the City)as of and for the years ended December 31, 2013 and 2012,and the related notes to the financial statements,and have issued our report thereon dated March 27,2014. The Minnesota Legal Compliance Audit Guide for Political Subdivisions,promulgated by the State Auditor pursuant to Minnesota Statute§6.65,contains seven categories of compliance to be tested: contracting and bidding,deposits and investments,conflicts of interest,public indebtedness,claims and disbursements,miscellaneous provisions,and tax increment financing. Our audit considered all of the listed categories,except that we did not test for compliance with the provisions for tax increment financing because the Utilities has not established a tax increment financing district. In connection with our audits,nothing came to our attention that caused us to believe that the Utilities failed to comply with the provisions of the Minnesota Legal Compliance Audit Guide for Political Subdivisions.However,our audit was not directed primarily toward procedures,other matters may have come to our attention regarding the Utilities' noncompliance with the above referenced provisions.Accordingly,had we performed additional procedures,other matters may have come to our attention regarding the Utilities' noncompliance with the above referenced 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. (MIIa ;Mile 11, ABDO,EICK&MEYERS, LLP Minneapolis,Minnesota March 27,2014 5201 Eden Avenue,Suite 250 Edina,MN 55436 952 835 9090 I Fax 952.835.3261 118