5.1. ERMUSR 04-14-2015 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 14, 2015 5.1
SUBJECT:
2014 Financial Audit
BACKGROUND:
Audit fieldwork was completed February 26th and 27th by our auditors,Abdo, Eick&Meyers
(AEM). Again this year, AEM completed and compiled the enclosed audit report this year, and
issued an opinion letter. Elk River Municipal Utilities staff has reviewed for approval.
DISCUSSION:
Mr. Andrew Berg of AEM will be at our meeting to present the 2014 audit and answer questions
you may have.
ACTION REQUESTED:
Accept 2014 Annual Financial Report
ATTACHMENTS:
• ERMU Annual Financial Report For the Year Ended December 31, 2014.
• AEM Management Letter
INATUPEI Page 1 of 1
Reliable Public
Power Provide/ P O W E K E D T O S E R V E
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Annual Financial Report
Elk River Utilities
Elk River, Minnesota
For the Year Ended
December 31, 2014
ABDO
EICK &
MEYERS El S LLP
Certified Public Accountants&Consultants
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ELK RIVER MUNICIPAL UTILITIES
ELK RIVER, MINNESOTA
ANNUAL FINANCIAL REPORT
FOR THE YEAR ENDED
DECEMBER 31, 2014
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ELK RIVER MUNICIPAL UTILITIES
ELK RIVER,MINNESOTA
TABLE OF CONTENTS
FOR THE YEAR ENDED DECEMBER 31,2014
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
Statement of Net Position 20
Statement of Revenues,Expenses and Changes in Net Position 23
Statement of Cash Flows 24
Notes to the Financial Statements 27
Required Supplementary Information
Schedule of Funding Progress for the Retiree Health Plan 44
Supplementary Information
Schedule of Operating Revenues and Expenses 46
Electric Fund
Summary of Operations and Unaudited Statistics 48
Water Fund
Summary of Operations and Unaudited Statistics 50
OTHER REPORTS
Independent Auditor's Report on Minnesota Legal Compliance 55
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INTRODUCTORY SECTION
ELK RIVER MUNICIPAL UTILITIES
ELK RIVER, MINNESOTA
FOR THE YEAR ENDED
DECEMBER 31, 2014
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ELK RIVER MUNICIPAL UTILITIES
ELK RIVER,MINNESOTA
PUBLIC UTILITIES COMMISSION AND ADMINISTRATION
DECEMBER 31,2014
PUBLIC UTILITIES COMMISSION
Name Title
John Dietz Chairperson
Daryl Thompson Vice-Chairperson
Allan Neadeau Trustee
ADMINISTRATION
Name Title
Troy Adams General Manager
Theresa Slominski Finance and Office Manager
Eric Volk Water Superintendent
Mark Fuchs Line Superintendent
Wade Lovelette Technical Services Superintendent
Tom Sagstetter Conservation and Key Accounts Manager
Michelle Canterbury Executive Administrative Assistant
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FINANCIAL SECTION
ELK RIVER MUNICIPAL UTILITIES
ELK RIVER, MINNESOTA
FOR THE YEAR ENDED
DECEMBER 31, 2014
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ABDO
EICK &
MEYERS J LLP
Certified Public Accountants& Consultants
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 Elk River Municipal Utilities(the Utilities)of the City of Elk River,
Minnesota(the City),as of and for the year ended December 31,2014,and the related notes to the 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 audit. We conducted our audit in accordance
with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform
the audit 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 presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion,the financial statements referred to above present fairly,in all material respects,the financial position of the Utilities of
the City as of December 31,2014,and the changes in financial position and cash flows thereof for the year then ended in accordance
with accounting principles generally accepted in the United States of America.
Emphasis of Matter
As discussed in Note 1 B,the financial statements present only the Electric and Water enterprise funds and do not purport to,and do
not present fairly the financial position of the City as of December 31,2014,the changes in its financial position,or,where applicable,
its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
Our opinion is not modified with respect to this matter.
5201 Eden Avenue,Suite 250
Edina,MN 55436
952.835 9090 I Fax 952.835-3261
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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 44,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 audit was 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.
OIL& wittem/Li/
ABDO,EICK&MEYERS,LLP
Minneapolis,Minnesota
April 7,2015
People
+Process®
Going
Beyondthe
'umbers
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Management's Discussion and Analysis
This section of the Elk River Municipal Utilities(the Utilities)of the City of Elk River,Minnesota annual financial report presents our
analysis of the Utilities'financial performance during the fiscal year that ended December 31,2014.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$56,055,589(net position). Net
Position increased by$2,039,501 or 3.8 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$15,778,591.
• Electric usage overall was up an average of less than 1 percent,at 0.22 percent from the prior year.Residential usage
increased 0.2 percent,Commercial usage increased 2 percent,and Industrial usage decreased less than 1 percent.
• Water usage overall was down an average of 5.2 percent from the prior year.Residential usage decreased 9 percent,and
Commercial usage decreased 2 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.
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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$2,039,501 to$56,055,589 in fiscal 2014 up from$54,016,088 in fiscal 2013.
TABLE A-1
Condensed Statement of Net Position
Increase
2014 2013 (Decrease)
Assets
Current and other $ 20,288,649 $ 19,466,124 $ 822,525
Capital 48,254,028 48,879,659 (625,631)
Total assets 68,542,677 68,345,783 196,894
Total deferred outflows 67,284 75,525 (8,241)
Liabilities
Current 5,269,454 5,801,938 (532,484)
Non-current 7,284,918 8,603,282 (1,318,364)
Total liabilities 12,554,372 14,405,220 (1,850,848)
Net position
Net investment in capital assets 40,218,203 39,358,482 859,721
Restricted for debt service 490,500 647,000 (156,500)
Unrestricted 15,346,886 14,010,606 1,336,280
Total net position $ 56,055,589 $ 54,016,088 $ 2,039,501
Looking at Table A-1,you can see that most of the change in net position was realized in liabilities,which decreased$1,850,848 in
2014. The decrease in current liabilities is a result of the 2014A bond refunding,as well as the$2,180,000 prepayment of the 2006
bonds. The increase in net position can also be attributed to the change in current assets,which increased$822,525. This increase is
due largely to increased sales,which can be attributed to the economy. Capital assets also decreased$625,631 as a result of removal
of inactive assets from the asset schedules with our software conversion.
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Water and electric rates. Electric-The latest increase in the Utilities'electric rates was effective January 2015. The monthly base
charges are based upon the type of service. The monthly charges are$12.00 for residential,$20.00 for commercial,and$60.00 for
industrial customers. In addition to the base charges the residential rate is$.1360/KWh for May-September usage,and$.1205/KWh
for October-April usage;the commercial rate is$.1304/KWh for May-September usage,and$.1087/KWh for October-April usage;
the industrial rate is$.0649/KWh energy charge year round with a demand charge of$16.94/KW May-September,and$11.99/KW for
October-April.
Water-The Utilities' latest increase in residential and commercial rates was effective January 2015.The monthly base charge for
residential customers is$8.43 per month. In addition to the base charge,the Utilities currently charges its residential customers$1.68
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$10.12 to$106.86.
An irrigation meter is$44.99 for every month the meter is utilized. There is also a charge per thousand gallons,the same tiers as the
residential rates of$1.68,$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
/turn 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 4:30pm 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.
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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
$2,039,501 in fiscal 2014. 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
2014 2013 (Decrease)
Revenues
Operating $ 33,515,012 $ 33,124,503 $ 390,509
Nonoperating 494,455 388,535 105,920
Total revenues 34,009,467 33,513,038 496,429
Expenses
Operating 31,742,912 30,371,131 1,371,781
Nonoperating 284,129 382,736 (98,607)
Total expenses 32,027,041 30,753,867 1,273,174
Income before contributions and operating transfers 1,982,426 2,759,171 (776,745)
Capital contributions-developer infrastructure and connection fees 375,329 295,549 79,780
Capital contributions of asset from City 175,091 121,172 53,919
Transfers from other City funds 329,490 40,000 289,490
Transfers to other City funds (822,835) (806,162) (16,673)
Change in net position 2,039,501 2,409,730 (370,229)
Net position,January 1 54,016,088 51,606,358 2,409,730
Net position,December 31 $ 56,055,589 $ 54,016,088 $ 2,039,501
Revenues. Table A-2 shows that operating revenue increased by 1.18 percent in 2014 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 2014,rebates received from our 2012 filings were approximately$5,500 per month. The Water
Department is receiving lease revenue from Sprint for antennas on the water towers. In 2014 this amount was approximately
$125,000,and will continue for the duration of the multi-year contract.
Water Connection Fees increased approximately$80,000,and Electric Connection Fees increased approximately$40,000.The
increase in Connection Fees was largely impacted by the resurgence in new construction 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 4.1 percent overall. Purchased
Power(the amount the Utilities pays for the power distributed)increased 3.5 percent.
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Capital Assets and Debt Administration
Capital assets. The Utilities' investment in capital assets for its business-type activities as of December 31,2014 amounts to
$48,254,028(net of accumulated depreciation). This investment in capital assets includes land,buildings,improvements and
equipment. A table summarizing the balances by fund follows:
Increase
2014 2013 (Decrease)
Land $ 361,303 $ 360,952 $ 351
Land improvements 8,936 13,846 (4,910)
Buildings 2,096,195 2,221,552 (125,357)
Machinery and equipment 1,582,080 1,238,555 343,525
Infrastructure 43,389,804 42,779,585 610,219
Construction in progress 815,710 2,265,169 (1,449,459)
Total $ 48,254,028 $ 48,879,659 $ (625,631)
The total decrease in the Utilities'investment in capital assets for the current fiscal year was 1.3 percent.
Major capital asset events during the current fiscal year included the following:
• The Electric Department upgraded several feeders and began work on the installation of a new feeder,and the Water
Department completed two water main projects.
• New accounting software was implemented in 2014 and fully depreciated inactive assets were not brought over. This
resulted in a decrease in both assets and accumulated depreciation,as well as net assets.
Additional information on the Utilities'capital assets can be found in Note 2B starting on page 33 of this report.
Long-term debt. At year end,the Utilities had$8,460,327 in long-term debt down from$9,974,484 in fiscal 2013. The Utilities
prepaid the 2006 bonds to reduce debt balances.More detailed information about the Utilities' long-term liabilities can be found in
Note 2C starting on page 34 and below:
Increase
2014 2013 (Decrease)
G.O.revenue bonds $ 2,835,000 $ 3,430,000 $ (595,000)
Revenue bonds 3,585,000 4,340,000 (755,000)
Unamortized premium on bonds 83,233 37,478 45,755
Promissory note 1,599,876 1,789,224 (189,348)
Compensated absences payable 302,286 332,740 (30,454)
OPEB liability 54,932 45,042 9,890
Total $ 8,460,327 $ 9,974,484 $ (1,514,157)
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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.
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Il
FINANCIAL STATEMENTS
ELK RIVER MUNICIPAL UTILITIES
ELK RIVER,MINNESOTA
FOR THE YEAR ENDED
DECEMBER 31, 2014
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ELK RIVER MUNICIPAL UTILITIES
ELK RIVER,MINNESOTA
STATEMENT OF NET POSITION
DECEMBER 31,2014
Electric Water Total
ASSETS
CURRENT ASSETS
Cash and temporary investments $ 11,606,610 $ 3,681,481 $ 15,288,091
Receivables
Accrued interest 363 91 454
Accounts,net of allowance 2,508,840 105,985 2,614,825
Special assessments 5,443 47,179 52,622
Other receivables 85,381 64,223 149,604
Due from other City funds 8,290 458,779 467,069
Due from other governments 25,832 - 25,832
Inventories 979,129 16,481 995,610
Prepaid expenses 175,687 28,355 204,042
TOTAL CURRENT ASSETS 15,395,575 4,402,574 19,798,149
CAPITAL ASSETS
Land 265,023 96,280 361,303
Land improvements 23,389 - 23,389
Buildings 2,859,360 815,240 3,674,600
Equipment and machinery 2,911,106 307,330 3,218,436
Infrastructure 40,601,888 32,631,587 73,233,475
Construction in progress 205,329 610,381 815,710
CAPITAL ASSETS,COST 46,866,095 34,460,818 81,326,913
LESS ACCUMULATED DEPRECIATION (20,038,050) (13,034,835) (33,072,885)
TOTAL CAPITAL ASSETS,NET 26,828,045 21,425,983 48,254,028
OTHER ASSETS
Restricted cash 490,500 - 490,500
TOTAL ASSETS 42,714,120 25,828,557 68,542,677
DEFERRED OUTFLOWS OF RESOURCES
Deferred charges on refunding 53,827 13,457 67,284
TOTAL ASSETS AND DEFERRED
OUTFLOW OF RESOURCES 42,767,947 25,842,014 68,609,961
The notes to the financial statements are an integral part of this statement.
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ELK RIVER MUNICIPAL UTILITIES
ELK RIVER,MINNESOTA
STATEMENT OF NET POSITION-CONTINUED
DECEMBER 31,2014
Electric Water Total
CURRENT LIABILITIES
Accounts payable $ 2,122,953 $ 385,061 $ 2,508,014
Salaries and benefits payable 150,914 22,780 173,694
Accrued interest payable 58,867 29,337 88,204
Due to other City funds 612,080 17,951 630,031
Due to other governments 129,298 2,700 131,998
Customer deposits payable 452,162 36,311 488,473
Unearned revenue - 73,631 73,631
Compensated absences-current portion 58,906 24,985 83,891
Notes payable-current portion 191,518 - 191,518
Bonds payable-current portion 672,000 228,000 900,000
TOTAL CURRENT LIABILITIES 4,448,698 820,756 5,269,454
NON-CURRENT LIABILITIES
Net other postemployment benefits liability 54,932 - 54,932
Compensated absences-less current portion 153,350 65,045 218,395
Notes payable-less current portion 1,408,358 - 1,408,358
Bonds payable,net-less current portion 3,733,556 1,869,677 5,603,233
TOTAL NON-CURRENT LIABILITIES 5,350,196 1,934,722 7,284,918
TOTAL LIABILITIES 9,798,894 2,755,478 12,554,372
NET POSITION
Net investment in capital assets 20,876,440 19,341,763 40,218,203
Restricted for debt service 490,500 - 490,500
Unrestricted 11,602,113 3,744,773 15,346,886
TOTAL NET POSITION $ 32,969,053 $ 23,086,536 $ 56,055,589
The notes to the financial statements are an integral part of this statement.
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ELK RIVER MUNICIPAL UTILITIES
ELK RIVER,MINNESOTA
STATEMENT OF REVENUES,EXPENSES AND CHANGES IN NET POSITION
FOR THE YEAR ENDED DECEMBER 31,2014
Electric Water Total
OPERATING REVENUES
Charges for services $ 30,411,069 $ 2,103,508 $ 32,514,577
Security systems 241,919 - 241,919
LFG project 1,103,177 - 1,103,177
Generation credit (784,248) - (784,248)
Connection maintenance 149,911 23,262 173,173
Customer penalties 244,857 21,557 266,414
TOTAL OPERATING REVENUES 31,366,685 2,148,327 33,515,012
OPERATING EXPENSES
Purchased power 21,994,652 - 21,994,652
Production 878,578 443,118 1,321,696
Distribution 1,282,774 207,359 1,490,133
Depreciation 1,914,062 1,083,770 2,997,832
Customer accounts 824,886 70,511 895,397
General and administrative 2,497,171 546,031 3,043,202
TOTAL OPERATING EXPENSES 29,392,123 2,350,789 31,742,912
OPERATING INCOME(LOSS) 1,974,562 (202,462) 1,772,100
NONOPERATING REVENUES(EXPENSES)
Interest income 98,442 23,984 122,426
Miscellaneous revenue 229,532 142,497 372,029
Interest expense (160,274) (72,646) (232,920)
Gain(loss)on sale of capital assets 29,525 (35,884) (6,359)
Bond issuance costs (44,850) - (44,850)
TOTAL NONOPERATING REVENUES(EXPENSES) 152,375 57,951 210,326
INCOME(LOSS)BEFORE CONTRIBUTIONS AND TRANSFERS 2,126,937 (144,511) 1,982,426
CAPITAL CONTRIBUTIONS-
DEVELOPER INFRASTRUCTURE AND CONNECTION FEES - 375,329 375,329
CONTRIBUTION OF ASSETS FROM CITY - 175,091 175,091
TRANSFERS FROM OTHER CITY FUNDS - 329,490 329,490
TRANSFERS TO OTHER CITY FUNDS (797,835) (25,000) (822,835)
CHANGE IN NET POSITION 1,329,102 710,399 2,039,501
NET POSITION,JANUARY 1 31,639,951 22,376,137 54,016,088
NET POSITION,DECEMBER 31 $ 32,969,053 $ 23,086,536 $ 56,055,589
The notes to the financial statements are an integral part of this statement.
77
ELK RIVER MUNICIPAL UTILITIES
ELK RIVER,MINNESOTA
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,2014
Electric Water Total
CASH FLOWS FROM OPERATING ACTIVITIES
Receipts from customers and users $ 31,288,755 $ 2,142,119 $ 33,430,874
Other operating cash receipts 192,433 121,231 313,664
Payments to suppliers (25,686,149) (847,666) (26,533,815)
Payments to employees (1,748,714) (403,343) (2,152,057)
NET CASH PROVIDED
BY OPERATING ACTIVITIES 4,046,325 1,012,341 5,058,666
CASH FLOWS FROM
NONCAPITAL FINANCING ACTIVITIES
Transfers from City - 329,490 329,490
Transfers to City (797,835) (25,000) (822,835)
(Increase)decrease in due from other City funds 5,232 (329,338) (324,106)
Increase(decrease)in due to other City funds 48,342 (225,887) (177,545)
NET CASH PROVIDED(USED)BY NONCAPITAL
FINANCING ACTIVITIES (744,261) (250,735) (994,996)
CASH FLOWS FROM CAPITAL
AND RELATED FINANCING ACTIVITIES
Acquisition of capital assets , (2,219,085) (274,940) (2,494,025)
Proceeds from sale of capital assets 33,000 7,254 40,254
Proceeds from connection fees - 375,329 375,329
Principal payments on revenue bonds (2,853,000) (527,000) (3,380,000)
Proceeds of refunding bonds issued,net of issuance
costs and premium on bonds 2,046,586 - 2,046,586
Interest paid on revenue bonds (191,704) (78,846) (270,550)
Principal payments on promissory note (189,348) - (189,348)
NET CASH USED BY CAPITAL
AND RELATED FINANCING ACTIVITIES (3,373,551) (498,203) (3,871,754)
CASH FLOWS FROM INVESTING ACTIVITIES
Interest on investments 111,304 27,199 138,503
NET INCREASE
IN CASH AND CASH EQUIVALENTS 39,817 290,602 330,419
CASH AND CASH EQUIVALENTS,JANUARY 1 12,057,293 3,390,879 15,448,172
CASH AND CASH EQUIVALENTS,DECEMBER 31 $ 12,097,110 $ 3,681,481 $ 15,778,591
RECONCILIATION OF CASH AND CASH
EQUIVALENTS TO THE STATEMENT OF NET POSITION
Cash and temporary investments $ 11,606,610 $ 3,681,481 $ 15,288,091
Restricted cash 490,500 - 490,500
TOTAL CASH AND CASH EQUIVALENTS $ 12,097,110 $ 3,681,481 $ 15,778,591
The notes to the financial statements are an integral part of this statement.
78
ELK RIVER MUNICIPAL UTILITIES
ELK RIVER,MINNESOTA
STATEMENT OF CASH FLOWS-CONTINUED
FOR THE YEAR ENDED DECEMBER 31,2014
Electric Water Total
RECONCILIATION OF OPERATING INCOME(LOSS)TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
Operating income(loss) $ 1,974,562 $ (202,462) $ 1,772,100
Adjustments to reconcile operating income(loss)
to net cash provided(used)by operating activities
Other revenue related to operations 229,532 142,497 372,029
Bad debt expense 2,926 145 3,071
Depreciation 1,914,062 1,083,770 2,997,832
(Increase)decrease in assets:
Accounts receivable (88,900) (16,292) (105,192)
Other receivables (23,476) (51,706) (75,182)
Special assessments receivable (1,642) 11,084 9,442
Due from other governments (13,623) - (13,623)
Inventories (15,521) (1,476) (16,997)
Prepaid expenses 2,341 12,063 14,404
Increase(decrease)in liabilities:
Accounts payable (71,005) (3,587) (74,592)
Salaries and benefits payable 16,520 5,470 21,990
Net other postemployment benefits liability 9,890 - 9,890
Unearned revenue - 30,440 30,440
Compensated absences payable (31,251) 797 (30,454)
Due to other governments 129,298 2,598 131,896
Customer deposits payable 12,612 (1,000) 11,612
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 4,046,325 $ 1,012,341 $ 5,058,666
NONCASH CAPITAL AND
RELATED FINANCING ACTIVITIES
Amortization of bond premium $ 14,863 $ 818 $ 15,681
Amortization of deferred charges on refunding S 6,592 $ 1,649 $ 8,241
Loss on disposal of capital assets $ 3,475 S 43,138 $ 46,613
Capital assets purchased on account $ - $ 349,698 $ 349,698
Contribution of capital assets $ - S 175,091 S 175,091
The notes to the financial statements are an integral part of this statement.
79
THIS PAGE IS LEFT BLANK
INTENTIONALLY
80
ELK RIVER MUNICIPAL UTILITIES
ELK RIVER,MINNESOTA
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31,2014
Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Nature of the business
The Elk River Municipal Utilities(the Utilities)is a municipal utility established by action of the City of Elk River(the
City)pursuant to Minnesota statute 412.321 and consequently it's Electric and Water funds are enterprise funds of the
City.The Public Utilities Commission(the Commission)members are appointed by 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(1)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.
81
ELK RIVER MUNICIPAL UTILITIES
ELK RIVER,MINNESOTA
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31,2014
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.
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.government 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.
82
ELK RIVER MUNICIPAL UTILITIES
ELK RIVER,MINNESOTA
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31,2014
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 31,2014 is as
follows:
2014
Electric $ 109,845
Water 26,250
Total $ 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
83
ELK RIVER MUNICIPAL UTILITIES
ELK RIVER,MINNESOTA
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31,2014
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
Vacation:All vacation benefits can be carried over from year to year and will be payable upon termination.Unused
vacation carryover is limited to the number of hours accrued during the previous year.
Sick Leave: 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 1,2014.
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.
84
ELK RIVER MUNICIPAL UTILITIES
ELK RIVER,MINNESOTA
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31,2014
Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-CONTINUED
c. Unrestricted net position-All other net position that do not meet the definition of"restricted"or"net
investment in capital assets".
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.
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 31,2014,the Utilities' carrying amount of deposits was$12,286,839 and the bank balance was
$12,289,849.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.
85
ELK RIVER MUNICIPAL UTILITIES
ELK RIVER,MINNESOTA
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31,2014
Note 2: DETAILED NOTES ON ALL FUNDS-CONTINUED
Investments
The Utilities' investment balances were as follows for December 31,2014:
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 $ 5,962
Non-pooled investments
U.S.Government Agency Securities AA+ 1 to 5 years 79,470
Brokered CD's N/A less than 6 months 320,672
Brokered CD's N/A 6 months to 1 year 345,018
Brokered CD's N/A 1 to 5 years 2,740,230
Total non-pooled investments 3,485,390
Total investments $ 3,491,352
(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.
A reconciliation of cash and temporary investments as shown in the financial statements for the Utilities follows:
2014
Deposits $ 12,286,839
Investments 3,491,352
Cash on hand 400
Total $ 15,778,591
Cash and temporary investments
Unrestricted $ 15,288,091
Restricted 490,500
Total $ 15,778,591
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 28 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.
86
ELK RIVER MUNICIPAL UTILITIES
ELK RIVER,MINNESOTA
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31,2014
Note 2: DETAILED NOTES ON ALL FUNDS-CONTINUED
• 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.
B. Capital assets
Capital asset activity for the year ended December 31,2014 was as follows:
Beginning Ending
Balance Increases Decreases Balance
Capital assets not
being depreciated
Land $ 360,952 $ 351 $ - $ 361,303
Construction in progress 2,265,169 1,843,677 (3,293,136) 815,710
Total capital assets
not being depreciated 2,626,121 1,844,028 (3,293,136) 1,177,013
Capital assets being depreciated
Land improvements 63,147 - (39,758) 23,389
Buildings 3,761,899 - (87,299) 3,674,600
Machinery and equipment 4,778,167 574,786 (2,134,517) 3,218,436
Infrastructure 79,446,094 3,293,136 (9,505,755) 73,233,475
Total capital assets
being depreciated 88,049,307 3,867,922 (11,767,329) 80,149,900
Less accumulated
depreciation for
Land improvements (49,301) (935) 35,783 (14,453)
Buildings (1,540,347) (118,624) 80,566 (1,578,405)
Machinery and equipment (3,539,612) (229,202) 2,132,458 (1,636,356)
Infrastructure (36,666,509) (2,649,071) 9,471,909 (29,843,671)
Total accumulated
depreciation (41,795,769) (2,997,832) 11,720,716 (33,072,885)
Total capital assets
being depreciated,net 46,253,538 870,090 (46,613) 47,077,015
Business-type activities
capital assets,net $ 48,879,659 $ 2,714,118 $ (3,339,749) $ 48,254,028
87
ELK RIVER MUNICIPAL UTILITIES
ELK RIVER,MINNESOTA
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31,2014
Note 2: DETAILED NOTES ON ALL FUNDS-CONTINUED
Depreciation expense was charged to functions/programs of the Utilities as follows:
2014
Business-type Activities
Water $ 1,083,770
Electric 1,914,062
Total depreciation expense-business-type activities $ 2,997,832
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 Balance at
Description and Issued Rate Date Date Year End
G.O.Water Revenue
Refunding Bonds of 2008 $ 3,085,000 2.75-3.65 % 02/20/08 02/01/22 $ 1,905,000
G.O.Capital Improvement
Plan Bonds of 2010A 1,265,000 2.00-4.00 04/21/10 08/01/23 930,000
Total G.O.Revenue Bonds $ 2,835,000
The annual debt service requirements to maturity for the general obligation revenue bonds are as follows:
Year Ending
December 31, Principal Interest Total
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 340,000 51,990 391,990
2020-2023 1,235,000 80,494 1,315,494
Total $ 2,835,000 $ 448,455 $ 3,283,455
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 2014,annual principal and interest payment on the bonds required about 28 percent of revenues from the Water fund.
The principal and interest paid and total customer revenues for the Water fund were$605,846 and$2,148,327,
respectively.
In 2014,annual principal and interest payment on the bonds required about 0.3 percent of revenues from the Electric
fund. The principal and interest paid and total customer revenues for the Electric fund were$95,160 and$31,366,685,
respectively.
88
ELK RIVER MUNICIPAL UTILITIES
ELK RIVER,MINNESOTA
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31,2014
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.
Balance
Authorized Interest Issue Maturity at
Description and Issued Rate Date Date Year End
Electric Revenue
Bonds,Series 2007A 2,875,000 4.00 03/28/07 02/01/22 $ 1,960,000
Electric Revenue Refunding
Bonds,Series 2014A 2,030,000 2.00-4.00 03/13/14 08/01/18 1,625,000
Total Revenue Bonds $ 3,585,000
The annual debt service requirements to maturity for the revenue bonds are as follows:
Year Ending
December 31, Principal Interest Total
2015 $ 600,000 $ 110,600 $ 710,600
2016 620,000 90,400 710,400
2017 635,000 73,500 708,500
2018 660,000 56,000 716,000
2019 250,000 37,800 287,800
2020-2022 820,000 50,200 870,200
Total $ 3,585,000 $ 418,500 $ 4,003,500
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 2014,annual principal and interest payment on the bonds
required about 2.5 percent of revenues from the Electric fund. Principal and interest paid and total customer revenues for
the Electric fund were$769,544 and$31,366,685,respectively.
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 Balance at
Description and Issued Rate Date Date Year End
Landfill
Generator Note $ 3,521,000 - % 03/19/02 02/19/22 $ 1,599,876
89
ELK RIVER MUNICIPAL UTILITIES
ELK RIVER,MINNESOTA
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31,2014
Note 2: DETAILED NOTES ON ALL FUNDS-CONTINUED
The annual debt service requirements to maturity for the generator note are as follows:
Year Ending
December 31, Principal Interest Total
2015 $ 191,518 $ - $ 191,518
2016 194,292 - 194,292
2017 195,216 - 195,216
2018 198,252 - 198,252
2019 200,916 - 200,916
2020-2022 619,682 - 619,682
Total $ 1,599,876 $ - $ 1,599,876
Changes in long-term liabilities
Long-term liability activity for the year ended December 31,2014 was as follows:
Beginning Ending Due Within
Balance Increases Decreases Balance One Year
Business-type activities
Bonds payable
General obligation
revenue bonds $ 3,430,000 $ - $ (595,000) $ 2,835,000 $ 300,000
Revenue bonds 4,340,000 2,030,000 (2,785,000) 3,585,000 600,000
Unamortized premium
on bonds 37,478 61,436 (15,681) 83,233 -
Total bonds payable,net 7,807,478 2,091,436 (3,395,681) 6,503,233 900,000
Notes payable 1,789,224 - (189,348) 1,599,876 191,518
Compensated
absences payable 332,740 76,656 (107,110) 302,286 83,891
OPEB liability 45,042 9,890 - 54,932 -
Business-type activity
long-term
liabilities $ 9,974,484 $ 2,177,982 $(3,692,139) $ 8,460,327 $ 1,175,409
Current Refunding
On March 13,2014 the City issued$2,030,000 of Electric Revenue Refunding Bonds,Series 2014A.The bonds bear an
average coupon rate of 2.17 percent and were used to call$2,180,000 of the outstanding principal of the Electric
Revenue Bonds,Series 2006.As a result of the refunding issue,the Utilities will achieve a net cash flow savings of
$239,104 and an economic gain(the present value of the difference between the old and the new debt service)of
$221,930.
90
ELK RIVER MUNICIPAL UTILITIES
ELK RIVER,MINNESOTA
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31,2014
Note 2: DETAILED NOTES ON ALL FUNDS-CONTINUED
D. Interfund receivables,payables and transfers
The composition of interfund balances at year end is as follows:
Receivable Fund Payable Fund Amount Purpose
Electric City-General fund $ 1,560 Sales tax/franchise fees
Electric City-Nonmajor 70 Sales tax/franchise fees
Electric City-Nonmajor 845 Supplies
Electric City-Sewer 560 4th quarter billings
Electric City-Garbage 3,499 4th quarter billings
Electric City-General fund 1,756 PERA aid
Total Electric fund receivable from City 8,290
Water City-Nonmajor 329,490 Watermain project
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 458,779
Total receivable from City $ 467,069
City-General fund Electric $ 73,449 Shared costs
City-Nonmajor Electric 59,872 December transfer of 3%of revenue
City-Nonmajor Electric 229,017 4th quarter franchise fees
City-Sewer Electric 147,820 Billed sewer on behalf of City
City-Garbage Electric 101,922 Billed garbage on behalf of City
Total Electric fund payable to City 612,080
City-General fund Water 17,951 Shared costs
Total payable to City $ 630,031
Interfund transfers completed in 2014 are detailed as follows:
Transfer from Transfer to
Other Other
Transfer out City Funds City Funds
Electric $ - $ 797,835
Water 329,490 25,000
Total transfers out $ 329,490 $ 822,835
The transfer out of the Electric fund was the annual transfer of 3 percent of 2014 revenues to City funds.The transfer out
of the Water fund was for its share of bonding.The transfer into the Water fund was for reimbursement related to the
watermain project.
91
ELK RIVER MUNICIPAL UTILITIES
ELK RIVER,MINNESOTA
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31,2014
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 five 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.
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 2014.In 2014,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 31,2014,2013 and 2012 were$203,953,$185,983,and$170,944,respectively.
The Utilities'contributions were equal to the contractually required contributions for each year as set by Minnesota
statute.
92
ELK RIVER MUNICIPAL UTILITIES
ELK RIVER,MINNESOTA
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31,2014
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$634 in 2014,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.The first transmission payment under the agreement of
$75,453 was receivable at December 31,2014.
D. Subsequent event
In March 2015,the Utilities entered into a 5 year agreement to transfer ownership of the electric plant and electric
service to customers in the remaining areas of Elk River receiving electric service from Connexus-a Territorial
Acquisition Agreement.
The terms of the agreement were based on the provisions outlined in Minnesota Statutes 216B.37-216B.47. These
provisions include compensation for plant and property at net book value,loss of revenue which is indexed and runs for
a ten year period from the transfer date specific to each area,and integration costs identified through a jointly prepared
integration study.
93
ELK RIVER MUNICIPAL UTILITIES
ELK RIVER,MINNESOTA
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31,2014
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
2014,the Utility contributed$0 to the plan.Plan members receiving benefits contribute 100 percent of their premium costs.
In fiscal year 2014,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 $ 10,693
Interest on net OPEB obligation 1,802
Adjustment to annual required contribution (2,605)
Annual OPEB Cost(expense) 9,890
Contributions made
Direct(explicit)subsidy -
Implicit subsidy -
Increase in net OPEB obligation 9,890
Net OPEB obligation-beginning of year 45,042
Net OPEB obligation-end of year $ 54,932
The Utilities'annual OPEB cost,the amount and percentage of annual OPEB cost contributed to the plan,and the net OPEB
obligation for December 31,2014 and the preceding two fiscal years was as follows:
Three Year Trend Information
Percentage
Year Annual Employer Annual OPEB Net OPEB
Ending OPEB Cost Contribution Contributed Obligation
12/31/2014 $ 9,890 $ - - % $ 54,932
12/31/2013 6,073 1,391 23 45,042
12/31/2012 4,601 - - 40,360
Funded Status and Funding Progress. As of December 31,2014,the actuarial accrued liability for benefits was$68,948,all
of which was unfunded.The covered payroll(annual payroll of active employees covered by the plan)was$2,810,413 and
the ratio of the unfunded actuarial accrued liability to the covered payroll was 2.50 percent.
94
ELK RIVER MUNICIPAL UTILITIES
ELK RIVER,MINNESOTA
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31,2014
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 60,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 7.5 percent initially,reduced to an ultimate
rate of 5.0 percent after eight years,was used.
Health insurance premiums-2014 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 1,2014
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,
2014 was thirty years.
95
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INTENTIONALLY
96
REQUIRED SUPPLEMENTARY INFORMATION
ELK RIVER MUNICIPAL UTILITIES
ELK RIVER,MINNESOTA
FOR THE YEAR ENDED
DECEMBER 31, 2014
97
ELK RIVER MUNICIPAL UTILITIES
ELK RIVER,MINNESOTA
REQUIRED SUPPLEMENTARY INFORMATION
FOR THE YEAR ENDED DECEMBER 31,2014
Schedule of funding progress for the retiree health plan
Unfunded
Actuarial UAAL as a
Actuarial Actuarial Actuarial Accrued Percentage
Valuation Value of Accrued Liability Funded Covered of Covered
Date Assets Liability (UAAL) Ratio Payroll Payroll
12/31/2014 S - $ 68,948 $ 68,948 - % $ 2,810,413 2.50 %
12/31/2011 - 42,681 42,681 - 2,286,547 1.87
12/31/2008 - 56,892 56,892 - 2,300,000 2.47
98
SUPPLEMENTARY INFORMATION
ELK RIVER MUNICIPAL UTILITIES
ELK RIVER, MINNESOTA
FOR THE YEAR ENDED
DECEMBER 31,2014
99
ELK RIVER MUNICIPAL UTILITIES
ELK RIVER,MINNESOTA
SUPPLEMENTARY INFORMATION
SCHEDULE OF OPERATING REVENUES AND EXPENSES
FOR THE YEAR ENDED DECEMBER 31,2014
Electric Water Total
OPERATING REVENUES
Charges for services
Elk River $ 27,553,417 $ 2,103,508 $ 29,656,925
Otsego 2,408,396 - 2,408,396
Big Lake 207,399 - 207,399
Dayton 241,857 - 241,857
Security systems 241,919 - 241,919
LFG Project 1,103,177 - 1,103,177
Generation credit (784,248) - (784,248)
Connection maintenance 149,911 23,262 173,173
Customer penalties 244,857 21,557 266,414
TOTAL OPERATING REVENUES 31,366,685 2,148,327 33,515,012
OPERATING EXPENSES
Purchased power 21,994,652 - 21,994,652
Production
Supervision and labor 54,812 7,516 62,328
Natural gas 48,881 - 48,881
Supplies and power for pumping 63,861 305,000 368,861
Landfill gas expense 641,309 - 641,309
Maintenance of structures 32,886 15,099 47,985
Maintenance of equipment 6,023 115,503 121,526
Maintenance of plant 30,806 - 30,806
Total 878,578 443,118 1,321,696
Transmission and distribution
Supervision and labor 25,236 15,130 40,366
Maintenance of overhead lines 351,455 - 351,455
Maintenance of underground lines 127,473 - 127,473
Maintenance of station equipment 33,525 - 33,525
Transportation 197,534 15,666 213,200
Maintenance of customer service 9,784 100,303 110,087
Maintenance of customer meters 91,249 76,260 167,509
Miscellaneous 446,518 - 446,518
Total 1,282,774 207,359 1,490,133
Services to City 530,340 - 530,340
Depreciation 1,914,062 1,083,770 2,997,832
Customer accounts expense
Meter reading 35,123 3,758 38,881
Billing and collection 256,497 66,608 323,105
Bad debts 2,926 145 3,071
Total 294,546 70,511 365,057
100
ELK RIVER MUNICIPAL UTILITIES
ELK RIVER,MINNESOTA
SUPPLEMENTARY INFORMATION
SCHEDULE OF OPERATING REVENUES AND EXPENSES-CONTINUED
FOR THE YEAR ENDED DECEMBER 31,2014
Electric Water Total
OPERATING EXPENSES-CONTINUED
General and administrative
Salaries $ 537,658 $ 128,013 $ 665,671
Employee pensions and benefits 1,126,167 258,951 1,385,118
Dues 89,783 36,853 126,636
Office supplies and billing expense 108,493 23,094 131,587
Office utilities and maintenance 21,603 6,651 28,254
Consulting fees 4,924 344 5,268
Legal and audit 45,497 8,026 53,523
Environmental compliance 24,766 - 24,766
Conservation improvement project 91,676 15,290 106,966
Insurance 197,140 31,670 228,810
Telephone 21,754 5,427 27,181
Advertising 2,914 2,996 5,910
Education and meetings 149,929 19,377 169,306
Miscellaneous 74,867 9,339 84,206
Total 2,497,171 546,031 3,043,202
TOTAL OPERATING EXPENSES 29,392,123 2,350,789 31,742,912
OPERATING INCOME(LOSS) 1,974,562 (202,462) 1,772,100
NONOPERATING REVENUES(EXPENSES)
Interest income 98,442 23,984 122,426
Miscellaneous revenue 229,532 142,497 372,029
Interest expense (160,274) (72,646) (232,920)
Gain(loss)on sale of capital assets 29,525 (35,884) (6,359)
Bond issuance costs (44,850) - (44,850)
TOTAL NONOPERATING
REVENUES(EXPENSES) 152,375 57,951 210,326
INCOME(LOSS)BEFORE CONTRIBUTIONS AND TRANSFERS 2,126,937 (144,511) 1,982,426
CAPITAL CONTRIBUTIONS-
DEVELOPER INFRASTRUCTURE AND CONNECTION FEES - 375,329 375,329
CONTRIBUTION OF ASSETS FROM CITY - 175,091 175,091
TRANSFERS FROM OTHER CITY FUNDS - 329,490 329,490
TRANSFERS TO OTHER CITY FUNDS (797,835) (25,000) (822,835)
CHANGE IN NET POSITION 1,329,102 710,399 2,039,501
NET POSITION,JANUARY 1 31,639,951 22,376,137 54,016,088
NET POSITION,DECEMBER 31 $ 32,969,053 $ 23,086,536 $ 56,055,589
101
ELK RIVER MUNICIPAL UTILITIES
ELK RIVER,MINNESOTA
ELECTRIC FUND
SUMMARY OF OPERATIONS AND UNAUDITED STATISTICS
FOR THE YEARS ENDED DECEMBER 31,2006 THROUGH DECEMBER 31,2014
SUMMARY OF OPERATIONS
2006 2007 2008
OPERATING REVENUES
Sales of electricity $ 16,495,049 $ 19,164,797 $ 22,303,994
Other operating revenues(expenses) 482,668 501,746 637,909
TOTAL OPERATING REVENUES 16,977,717 19,666,543 22,941,903
OPERATING EXPENSES
Purchased power 10,101,458 12,176,034 14,778,270
Distribution 1,942,577 1,829,971 2,162,797
Services to the City 328,148 358,029 409,222
Depreciation 1,561,096 1,920,798 2,057,851
Other operating expenses 1,936,275 1,977,973 2,196,770
TOTAL OPERATING EXPENSES 15,869,554 18,262,805 21,604,910
OPERATING INCOME 1,108,163 1,403,738 1,336,993
TRANSFERS FROM OTHER CITY FUNDS - - -
TRANSFERS TO OTHER CITY FUNDS (420,000) (483,000) (540,636)
NONOPERATING REVENUES 887,803 710,858 249,022
NET INCOME $ 1,575,966 $ 1,631,596 $ 1,045,379
PERCENT OF CHANGE
Sales of electricity 7.973% 16.185% 16.380%
Purchased power 4.945% 20.537% 21.372%
PERCENT OF REVENUES
Purchased power 59.498% 61.912% 64.416%
UNAUDITED STATISTICS
MISCELLANEOUS
2006 2007 2008
KWh's purchased 205,645,631 225,973,086 241,837,173
KWh's sold 194,975,530 211,298,886 224,226,048
Line loss 10,670,101 14,674,200 17,611,125
Percent of line loss 5.189% 6.494% 7.282%
REVENUES PER KWh SOLD $ 0.0846 $ 0.0907 $ 0.0995
COST PER KWh PURCHASED $ 0.0491 $ 0.0539 $ 0.0611
NUMBER OF CUSTOMERS 8,562 8,945 9,203
TOTAL CONTRIBUTION/TRANSFERS TO CITY $ 420,000 $ 483,000 $ 540,636
102
2009 2010 2011 2012 2013 2014
$ 23,591,485 $ 26,060,301 $ 27,894,341 $ 30,070,045 $ 30,978,790 $ 31,514,246
636,258 732,261 689,645 188,645 (132,411) (147,561)
24,227,743 26,792,562 28,583,986 30,258,690 30,846,379 31,366,685
16,161,444 18,373,386 19,604,951 20,499,773 21,254,950 21,994,652
1,937,096 1,892,212 1,960,742 1,909,845 1,970,341 2,161,352
428,508 434,415 474,934 481,907 498,146 530,340
2,126,794 2,062,942 2,041,717 2,099,594 2,029,496 1,914,062
2,272,917 2,399,236 2,350,706 2,359,193 2,374,959 2,791,717
22,926,759 25,162,191 26,433,050 27,350,312 28,127,892 29,392,123
1,300,984 1,630,371 2,150,936 2,908,378 2,718,487 1,974,562
- 53,741 - - - -
(585,141) (657,086) (711,415) (816,864) (781,162) (797,835)
(146,352) (154,956) (105,604) 28,531 (30,658) 152,375
$ 569,491 $ 872,070 $ 1,333,917 $ 2,120,045 $ 1,906,667 $ 1,329,102
5.772% 10.465% 7.038% 7.800% 3.022% 1.728%
9.360% 13.687% 6.703% 4.564% 3.684% 3.480%
66.706% 68.576% 68.587% 67.748% 68.906% 70.121%
2009 2010 2011 2012 2013 2014
247,595,137 264,642,834 276,026,892 287,553,108 290,025,919 288,320,724
232,772,722 250,711,834 261,235,297 273,455,846 273,945,354 274,546,059
14,822,415 13,931,000 14,791,595 14,097,262 16,080,565 13,774,665
5.987% 5.264% 5.359% 4.902% 5.545% 4.778%
$ 0.1013 $ 0.1039 $ 0.1068 $ 0.1100 $ 0.1131 $ 0.1148
$ 0.0653 $ 0.0694 $ 0.0710 $ 0.0713 $ 0.0733 $ 0.0763
9,170 9,207 9,227 9,285 9,358 9,449
$ 585,141 $ 657,086 $ 711,415 $ 816,864 $ 781,162 $ 797,835
103
ELK RIVER MUNICIPAL UTILITIES
ELK RIVER,MINNESOTA
WATER FUND
SUMMARY OF OPERATIONS AND UNAUDITED STATISTICS
FOR THE YEARS ENDED DECEMBER 31,2006 THROUGH DECEMBER 31,2014
SUMMARY OF OPERATIONS
2006 2007 2008
OPERATING REVENUES
Sales of water $ 1,749,932 $ 2,113,166 $ 2,130,124
OPERATING EXPENSES
Operating expenses less depreciation 1,069,988 1,191,346 1,185,413
Depreciation 790,451 921,450 974,848
TOTAL OPERATING EXPENSES 1,860,439 2,112,796 2,160,261
TOTAL OPERATING INCOME(LOSS) $ (110,507) $ 370 $ (30,137)
PERCENT OF CHANGE
Sales of water 29.86% 20.76% 0.80%
UNAUDITED STATISTICS
MISCELLANEOUS
2006 2007 2008
WATER PUMPED(gallons) 812,560,000 873,742,000 854,133,000
WATER SOLD(gallons) 726,169,000 783,948,000 727,029,000
Percent of line loss 10.63% 10.28% 14.88%
Revenues per 1,000 gallons pumped $ 2.14 $ 2.41 $ 2.48
Revenues per 1,000 gallons sold $ 2.41 $ 2.70 $ 2.93
Number of customers 4,317 4,413 4,508
WATER SUPPLIER SERVICES
2006 2007 2008
Flushing hydrants 25,000,000 27,000,000 30,000,000
Back washing 9,000,000 8,400,000 8,400,000
Fire department use 1,000,000 1,000,000 5,000,000
New water main disinfectant and flushing 6,500,000 1,000,000 2,000,000
Flushing seasonal well - - -
Meter inaccuracy 3,000,000 - -
Street and Sewer Maintenance - - -
Water tower paint and clean - - -
Water line and irrigation leaks - - -
Frozen pipes bursting in abandoned homes - - 25,000,000
Water Supplier Services 44,500,000 37,400,000 70,400,000
104
2009 2010 2011 2012 2013 2014
$ 2,206,429 $ 1,913,661 $ 1,832,817 $ 2,265,142 $ 2,278,124 $ 2,148,327
1,102,437 989,736 1,008,562 1,130,965 1,210,797 1,267,019
956,993 955,323 980,197 1,028,593 1,032,442 1,083,770
2,059,430 1,945,059 1,988,759 2,159,558 2,243,239 2,350,789
$ 146,999 $ (31,398) $ (155,942) $ 105,584 $ 34,885 $ (202,462)
3.58% (13.27%) (4.22%) 23.59% 0.57% (5.70%)
2009 2010 2011 2012 2013 2014
782,951,000 686,289,000 651,907,000 847,283,200 785,377,000 782,110,000
708,286,000 627,209,000 599,701,000 727,912,000 709,760,000 672,760,000
9.54% 8.61% 8.01% 14.09% 9.63% 13.98%
$ 2.81 $ 2.79 $ 2.81 $ 2.67 $ 2.90 $ 2.75
S 3.12 $ 3.05 $ 3.06 $ 3.11 $ 3.21 $ 3.19
4,467 4,511 4,515 4,542 4,613 4,676
Gallons
2009 2010 2011 2012 2013 2014
33,000,000 35,000,000 34,000,000 46,400,000 45,000,000 47,000,000
8,400,000 9,000,000 8,000,000 30,000,000 8,000,000 3,922,000
1,000,000 3,000,000 4,000,000 16,500,000 5,000,000 5,000,000
2,000,000 3,000,000 4,000,000 9,000,000 5,000,000 5,000,000
- 4,000,000 - 3,600,000 - -
1,300,000 - - 6,500,000 3,000,000 3,000,000
- - - - 617,000 1,000,000
- - 2,000,000 - 2,000,000 1,000,000
- - - 7,000,000 7,000,000 7,000,000
27,000,000 5,000,000 - - - -
72,700,000 59,000,000 52,000,000 119,000,000 75,617,000 72,922,000
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OTHER REPORTS
ELK RIVER MUNICIPAL UTILITIES
ELK RIVER, MINNESOTA
FOR THE YEAR ENDED
DECEMBER 31, 2014 •
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ABDO
EICK &
MEYERS LLP
Certified Public Accountants& Consultants
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
Elk River Municipal Utilities(the Utilities)of the City of Elk River,Minnesota(the City)as of and for the year ended December 31,
2014,and the related notes to the financial statements,and have issued our report thereon dated April 7,2015.
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 audit,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 obtaining knowledge of such noncompliance. 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.
0146 ilyitteu Lc
ABDO,EICK&MEYERS,LLP
Minneapolis,Minnesota
April 7,2015
5201 Eden Avenue,Suite 250
Edina,MN 55436
952 835 9090 I Fax 952.835.3261
109
Management Letter
Elk River Utilities
Elk River, Minnesota
For the Year Ended
December 31, 2014
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ABDO
EICK &
MEYERS LLP
Certified Public Accountants& Consultants April 7,2015
Management and Public Utilities Commission
Elk River Municipal Utilities
Elk River,Minnesota
We have audited the financial statements of the Elk River Municipal Utilities(the Utilities)of the City of Elk River,Minnesota,(the
City)for year ended December 31,2014. 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 November 7,2014. 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 internal 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
111
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. No new accounting policies were adopted and the application of
existing policies was not changed during the year ended December 31,2014. 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 depreciation
on capital assets,payroll related expenses,and the liability for the Utilities'Other Post-Employment Benefits(OPEB).
• Management's estimate of depreciation is based on estimated useful lives of the assets.Depreciation is calculated using the
straight-line method.
• Allocations of gross wages and payroll benefits are approved by the Board within the Utilities'budget and are derived from
each employee's estimated time to be spent servicing the respective functions of the Utility.These allocations are also used in
allocating accrued compensated absences payable.
• Management's estimate of its OPEB liability is based on several factors including,but not limited to,anticipated retirement
age for active employees,life expectancy,turnover,and healthcare cost trend rate.
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.
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Management Representations
We have requested certain representations from management that are included in the management representation letter dated
April 7,2015.
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.
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The results of the operations for the Electric Fund in terms of cash flow and the breakdown of the cash balances for the past four years
are as follows:
Electric Fund Cash Flows- Excluding Refunding Bonds
$35,000,000
$30,000,000
$25,000,000
$20,000,000
$15,000,000 I —
$10,000,000
$5,000,000
2011 2011 Receipts 2012 2012 Receipts 2013 2013 Receipts 2014 2014 Receipts
Disbursements Disbursements Disbursements Disbursements
Operating costs •Debt payments •Other(capital,interfund,etc.) •Operating receipts •Other(interest,interfund,etc.)
Excluded from the chart above in 2014 are the net refunding bond proceeds of$2,046,586 and related debt payments.
Electric Fund Cash Balances
$14,000,000
$11,370,664 $12,057,293 $12,097,110
$12,000,000
$9,104,896
$10,000,000
$8,000,000
$6,000,000
$4,000,000
$2,000,000
$-
2011 2012 2013 2014
Unrestricted Nom Restricted for debt service(bond covenents) —A—Unrestricted designated reserve*
*Unrestricted designated reserve:established to address the short-term financial variability inherent in operations. Potential sources
of this variability include risks associated with natural disasters,reduction in overall customer usage,changes in total system usage
resulting from the actions of large customers,failure to achieve budgeted levels of net income,changes in interest income,and general
operational exposures.
The target level for this reserve,included as the red line in the chart above,is the sum of six months operating expenditures less
depreciation and less purchase power costs,plus the sum of next year's total principal and interest payments,plus one month budgeted
average purchase power cost.The balance above this target level shall be unrestricted.
The cash provided by operating activities has remained strong and was sufficient to cover the amount of capital and
debt needs in 2014.The summary above highlights the significant amount of cash needed each year for the capital People
activities of the Utilities.The operations have been able to finance the capital activities for the last four years. We +pro
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recommend that the Utilities continue to closely monitor future cash flow with the use of projections and the capital
improvement plan. Going
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The results of the Electric fund are as follows:
Electric Operations Summary
2012 2013 2014
Total Percent Total Percent Total Percent
Operating revenues $ 30,258,690 100 % $ 30,846,379 100 % $ 31,366,685 100 %
Operating expenses 27,350,312 90 28,127,892 91 29,392,123 94
Operating income 2,908,378 10 2,718,487 9 1,974,562 6
Nonoperating revenues
(expenses) 28,531 - (30,658) - 152,375 -
Income before transfers 2,936,909 10 2,687,829 9 2,126,937 6
Transfers to City (816,864) (3) (781,162) (3) (797,835) (3)
Change in net position $ 2,120,045 7 % $ 1,906,667 6 % $ 1,329,102 3 %
Cash and
temporary investments $ 10,646,164 $ 11,410,293 $ 11,606,610
Restricted cash $ 724,500 $ 647,000 $ 490,500
Bonds and notes payable,
net of premium $ 7,974,066 $ 6,971,207 $ 6,005,432
$35,000,000
$30,000,000
$25,000,000
$20,000,000
$15,000,000
$10,000,000 `
$5,000,000
$-
2012 2013 2014
•Operating revenues •Operating expenses *Cash •Bonds
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The results of the operations for the Water Fund in terms of cash flow and the breakdown of the cash balances for the past four years
are as follows:
Water Fund Cash Flow ,
$3,500,000
$3,000,000
$2,500,000
$2,000,000 I
$1,500,000 - — -----
$1,000,000 �
$500,000
$-
2011 2011 Receipts 2012 2012 Receipts 2013 2013 Receipts 2014 2014 Receipts
Disbursements Disbursements Disbursements Disbursements
Operating costs •Debt payments •Other(capital,interfund,etc.) •Operating receipts ■Other(interest,connection fees,etc.)
Water Fund Cash Balance
$4,000,000 $3,681,481
$3,254,530 $3,390,879
$3,500,000
$3,000,000 -
$2,619,5 74
$2,500,000
$2,000,000
$1,500,000 -
$1,000,000
$500,000
$ ,
2011 2012 2013 2014
elm Unrestricted (Unrestricted designated reserve*
*Unrestricted Designated Reserve: This reserve is established to address the short-term financial variability inherent in operating a
Water Utility. Potential sources of this variability include but are not limited to:risks associated with natural disasters,reduction in
overall customer usage,changes in total system usage resulting from the actions of large customers,failure to achieve budgeted levels
of net income,changes in interest income,and general operational exposures.
The target level for this reserve,included as the red line in the chart above,is 6 months operating expenditures less depreciation plus
the sum of next year's total principal and interest payments. The balance above this target level shall be unrestricted.
The cash balance increased due to cash provided by operations exceeding cash used for noncapital and capital activities.As mentioned
in the analysis of the Electric fund it is important to continue to monitor future cash need with the use of a projection
and capital improvement plan. People
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The results of the Water fund are as follows:
Water Operations Summary
2012 2013 2014
Total Percent Total Percent Total Percent
Operating revenues $ 2,265,142 100 % $ 2,278,124 100 % $ 2,148,327 100 %
Operating expenses 2,159,558 95 2,243,239 98 2,350,789 109
Operating income(loss) 105,584 5 34,885 2 (202,462) (9)
Nonoperating revenues
(expenses) 3,353 - 36,457 2 57,951 3
Income(loss)before
contributions and transfers 108,937 5 71,342 4 (144,511) (6)
Capital contributions-developer
infrastructure and connection fees 174,607 8 295,549 13 375,329 17
Capital contributions from City 218,845 10 121,172 5 175,091 7
Transfers from City 1,372 - 40,000 2 329,490 15
Transfers to City (40,828) (2) (25,000) (1) (25,000) (1)
Change in net position $ 462,933 21 % $ 503,063 23 % $ 710,399 32 %
Cash and
temporary investments $ 3,254,530 $ 3,390,879 $ 3,681,481
Bonds payable,net of premium $ 3,143,313 $ 2,625,495 $ 2,097,677
$4,000,000
$3,500,000 '
$3,000,000 . �
$2,500,000
$2,000,000
$1,500,000 ,
$1,000,000
{
$500,000
rub,
$-
2012 2013 2014
■Operating revenues •Operating expenses ■Cash •Bonds
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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:(t)
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.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.
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. People
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The provisions of this Statement are required to be applied simultaneously with the provisions of Statement
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Future Accounting Standard Changes-Continued
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.
GASB Statement No.72-Fair Value Measurement and Application
Summary
This Statement addresses accounting and financial reporting issues related to fair value measurements.The definition of fair value
is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date.This Statement provides guidance for determining a fair value measurement for financial
reporting purposes.This Statement also provides guidance for applying fair value to certain investments and disclosures related to
all fair value measurements.
Fair Value Measurement
Fair value is described as an exit price.Fair value measurements assume a transaction takes place in a government's principal
market,or a government's most advantageous market in the absence of a principal market.The fair value also should be measured
assuming that general market participants would act in their economic best interest.Fair value should not be adjusted for
transaction costs.
To determine a fair value measurement,a government should consider the unit of account of the asset or liability.The unit of
account refers to the level at which an asset or a liability is aggregated or disaggregated for measurement,recognition,or
disclosure purposes as provided by the accounting standards.For example,the unit of account for investments held in a brokerage
account is each individual security,whereas the unit of account for an investment in a mutual fund is each share in the mutual
fund held by a government.
This Statement requires a government to use valuation techniques that are appropriate under the circumstances and for which
sufficient data are available to measure fair value.The techniques should be consistent with one or more of the following
approaches:the market approach,the cost approach,or the income approach.The market approach uses prices and other relevant
information generated by market transactions involving identical or comparable assets,liabilities,or a group of assets and
liabilities.The cost approach reflects the amount that would be required to replace the present service capacity of an asset.The
income approach converts future amounts(such as cash flows or income and expenses)to a single current(discounted)amount.
Valuation techniques should be applied consistently,though a change may be appropriate in certain circumstances.Valuation
techniques maximize the use of relevant observable inputs and minimize the use of unobservable inputs.
This Statement establishes a hierarchy of inputs to valuation techniques used to measure fair value.That hierarchy has three
levels. Level 1 inputs are quoted prices(unadjusted)in active markets for identical assets or liabilities.Level 2 inputs are inputs—
other than quoted prices—included within Level 1 that are observable for the asset or liability,either directly or indirectly.
Finally,Level 3 inputs are unobservable inputs,such as management's assumption of the default rate among underlying
mortgages of a mortgage-backed security.
A fair value measurement takes into account the highest and best use for a nonfinancial asset.A fair value measurement of a
liability assumes that the liability would be transferred to a market participant and not settled with the counterparty.In the absence
of a quoted price for the transfer of an identical or similar liability and if another party holds an identical item as an asset,a
government should be able to use the fair value of that asset to measure the fair value of the liability.
This Statement requires additional analysis of fair value if the volume or level of activity for an asset or liability has significantly
decreased.It also requires identification of transactions that are not orderly.Quoted prices provided by third parties are permitted,
as long as a government determines that those quoted prices are developed in accordance with the provisions of this Statement.
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Future Accounting Standard Changes-Continued
Fair Value Application
This Statement generally requires investments to be measured at fair value.An investment is defined as a security or other asset
that(a)a government holds primarily for the purpose of income or profit and(b)has a present service capacity based solely on its
ability to generate cash or to be sold to generate cash.Investments not measured at fair value continue to include,for example,
money market investments,2a7-like external investment pools,investments in life insurance contracts,common stock meeting
the criteria for applying the equity method,unallocated insurance contracts,and synthetic guaranteed investment contracts.A
government is permitted in certain circumstances to establish the fair value of an investment that does not have a readily
determinable fair value by using the net asset value per share(or its equivalent)of the investment.
This Statement requires measurement at acquisition value(an entry price)for donated capital assets,donated works of art,
historical treasures,and similar assets and capital assets received in a service concession arrangement.These assets were
previously required to be measured at fair value.
Fair Value Disclosures
This Statement requires disclosures to be made about fair value measurements,the level of fair value hierarchy,and valuation
techniques.Governments should organize these disclosures by type of asset or liability reported at fair value. It also requires
additional disclosures regarding investments in certain entities that calculate net asset value per share(or its equivalent).
The requirements of this Statement are effective for financial statements for periods beginning after June 15,2015.Earlier
application is encouraged.
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
measurement of certain assets and liabilities at fair value using a consistent and more detailed definition of fair value and accepted
valuation techniques.This Statement also will enhance fair value application guidance and related disclosures in order to provide
information to financial statement users about the impact of fair value measurements on a government's financial position.
(1)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.
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Minneapolis,Minnesota
April 7,2015
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