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4.1 ERMUSR 04-12-2022óşóĴĞŜĞşƓ >ŨŜŜƚşĿĐóƓĿŨş 61 April 7, 2022 Management and Public UtilitiesCommission 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)as of and for yearended December 31, 2021.Professional standards require that we provide you with information about our responsibilities under generally accepted auditing standards as well as certain information related to the planned scope and timing of our audit. We have communicated such information in our letter dated December 8, 2021. Professional standards require that we provide you with the following information related to our audit. Significant Audit Findings In planning and performing our audit of the financial statements, we considered the Utilities internal control over financial reporting (internal control) as a basis for designingthe 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 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. 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 financial statements. 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. 2 62 Qualitative Aspects of Accounting Practices Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used by the Utilitiesare described in Note 1 to the financial statements. No new accounting policies were adopted and the application of existing policies were not changed during the year ended December 31, 2021. We noted no transactions entered into by the Utilitiesduring 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 managements 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 U calculated using the straight-line method. Allocations of gross wages and payroll benefits are approved by the Commissionwithin Utilities. These allocations are also used in allocating accrued compensated absences payable. nsion liability is based on several factors including, but not limited to, anticipated investment return rate, retirement age for active employees, life expectancy, salary increases and form of annuity payment upon retirement. 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 significanceto 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 ial statements taken as a whole. Management Representations We have requested certain representations from management that are included in the management representation letter dated April 7, 2022. 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 d to report that no such disagreements arose during the course of our audit. 3 63 Management Consultations with Other Independent Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, simila 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 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 We applied certain limited procedures to the required Analysis, the Schedules of Employe the Schedule of Changes in Net Pension Liability (Asset) and Related Ratios), which is information that supplements the basic financial statements. Our procedures consisted of inquiries of management regarding the methods of preparing the financial statements, and other knowledge we obtained during our audit of the basic financial statements. We did not audit the RSI and do not express an opinion or provide any assurance on the RSI. We were engaged to report on the supplementary information (Schedule of Operating Revenues and Expense), which accompany the financial statements but are not RSI. With respect to this supplementary information, we made certain inquiries of management and evaluated the form, content, and methods of preparing the information to determine that the informationcomplies 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. We were not engaged to report on the introductory sectionor statistical sections, which accompany the financial statements but are not RSI. We did not audit or perform other procedures on this other information and we do not express an opinion or provide any assurance on them. 4 64 Future Accounting Standard Changes GASB Statement No. 87 -Leases Summary The objective of this Statement is to better meet the information needs of financial statement users by improving financial statements by requiring recognition of certain lease assets and liabilities for leases that previously were classified as operating leases and recognized as inflows of resources or outflows of resources based on the payment provisions of the contract. It establishes a single model for lease accounting based on the foundational principle that leases are financings of the right to use an underlying asset. Under this Statement, a lessee is required to recognize a lease liability and an intangible right-to-use lease asset, and a lessor is required to recognize a lease receivable and a activities. Effective Date and Transition The requirements of this Statement are effective for fiscal years beginning after June 15, 2021, and all reporting periods thereafter. Leases should be recognized and measured using the facts and circumstances that exist at the beginning of the period of implementation (or, if applied to earlier periods, the beginning of the earliest period restated). However, lessors should not restate the assets underlying their existing sales-type or direct financing leases. Any residual assets for those leases become the carrying values of the underlying assets. How the Changes in This Statement Will Improve Accounting and Financial Reporting liabilities that currently are not reported. It will enhance comparability of financial statements among governments by requiring lessees and lessors to report leases under a single model. This Statement also will enhance the decision- usefulness of the information provided to financial statement users by requiring notes to financial statements related to 5 65 Future Accounting Standard Changes (Continued) GASB Statement No. 91 -Conduit Debt Obligations Summary The primary objectives of this Statement are to provide a single method of reporting conduit debt obligations by issuers and eliminate diversity in practice associated with (1) commitments extended by issuers, (2) arrangements associated with conduitdebt obligations, and (3) related note disclosures. This Statement achieves those objectives by clarifying the existing definition of a conduit debt obligation; establishing that a conduit debt obligation is not a liability of the issuer; establishing standards for accounting and financial reporting of additional commitments and voluntary commitments extended by issuers and arrangements associated with conduit debt obligations; and improving required note disclosures. All conduit debt obligations involve the issuer making a limited commitment. Some issuers extend additional commitments or voluntary commitments to support debt service in the event the third party is, or will be, unable to do so. An issuer should not recognize a conduit debt obligation as a liability. However, an issuer should recognize a liability associated with an additional commitment or a voluntary commitment to support debt service if certain recognition criteria are met. As long as a conduit debt obligation is outstanding, an issuer that has made an additional commitment should evaluate at least annually whether those criteria are met. An issuer that has made only a limited commitment should evaluate whether those criteria are met when an event occurs that causes the issuer to reevaluate its willingness This Statement also addresses arrangements -often characterized as leases -that are associated with conduit debt obligations. In those arrangements, capital assets are constructed or acquired with the proceeds of a conduit debt obligation and used by third-party obligors in the course of their activities. Payments from third-party obligors are intended to cover and coincide with debt service payments. During those arrangements, issuers retain the titles to the capital assets. Those titles may or may not pass to the obligors at the end of the arrangements. This Statement requires issuers to disclose general information about their conduit debt obligations, organized by type of description of each type of commitment. Issuers that recognize liabilities related to supporting the debt service of conduit debt obligations also should disclose information about the amount recognized and how the liabilities changed during the reporting period. Effective Date and Transition The requirements of this Statement are effective for reporting periods beginning after December 15, 2021. Earlier application is encouraged. How the Changes in This Statement Will Improve Accounting and Financial Reporting The requirements of this Statement will improve financial reporting by eliminating the existing option for issuers to report conduit debt obligations as their own liabilities, thereby ending significant diversity in practice. The clarified definitionwill obligation. Requiring issuers to recognize liabilities associated with additional commitments extended by issuers and to recognize assets and deferred inflows of resources related to certain arrangements associated with conduit debt obligations also will eliminate diversity, thereby improving comparability in reporting by issuers. Revised disclosure requirements will provide financial statement users with better information regarding the commitments issuers extend and the likelihood that they will fulfill those commitments. That information will inform users of the potential impact of such commitments on the financial resources . 6 66 Future Accounting Standard Changes (Continued) GASB Statement No. 92 -Omnibus 2020 Summary The objectives of this Statement are to enhance comparability in accounting and financial reporting and to improve the consistency of authoritative literature by addressing practice issues that have been identified during implementation and application of certain GASB Statements. This Statement addresses a variety of topics and includes specific provisions about the following: The effective date of Statement No. 87, Leases, and Implementation Guide No. 2019-3, Leases, for interim financial reports Reporting of intra-entity transfers of assets between a primary government employer and a component unit defined benefit pension plan or defined benefit other postemployment benefit (OPEB) plan The applicability of Statements No. 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68, as amended, and No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, as amended, to reporting assets accumulated for postemployment benefits The applicability of certain requirements of Statement No. 84, Fiduciary Activities, to postemployment benefit arrangements Measurement of liabilities (and assets, if any) related to asset retirement obligations (AROs) in a government acquisition Reporting by public entity risk pools for amounts that are recoverable from reinsurers or excess insurers Reference to nonrecurring fair value measurements of assets or liabilities in authoritative literature Terminology used to refer to derivative instruments Effective Date and Transition The requirements of this Statement are effective as follows: The requirements related to the effective date of Statement 87 and Implementation Guide 2019-3, reinsurance recoveries, and terminology used to refer to derivative instruments are effective upon issuance. The requirements related to intra-entity transfers of assets and those relatedto the applicability of Statements 73 and 74 are effective for fiscal years beginning after June 15, 2020. The requirements related to application of Statement 84 to postemployment benefit arrangements and those related to nonrecurring fair value measurements of assets or liabilities are effective for reporting periods beginning after June 15, 2020. The requirements related to the measurement of liabilities (and assets, if any) associated with AROs in a government acquisition are effective for governmentacquisitions occurring in reporting periods beginning after June 15, 2020. Earlier application is encouraged and is permitted by topic. 7 67 Future Accounting Standard Changes (Continued) How the Changes in This Statement Will Improve Accounting and Financial Reporting The requirements of this Statement will enhance comparability in the application of accounting and financial reporting requirements and will improve the consistency of authoritative literature. More comparable reporting will improve the usefulness of information for users of state and local government financial statements. GASB Statement No. 93-Replacement of Interbank Offered Rates Summary The objective of this Statement is to address those and other accounting and financial reporting implications that result from the replacement of an IBOR. This Statement achieves that objective by: Providing exceptions for certain hedging derivative instruments to the hedge accounting termination provisions when an IBOR is replace Clarifying the hedge accounting termination provisions when a hedged item is amended to replace the reference rate Clarifying that the uncertainty related to the continued availability of IBORs does not, by itself, affect the assessment of whether the occurrence of a hedged expected transaction is probable Removing LIBOR as an appropriate benchmark interest rate for the qualitative evaluation of the effectiveness of an interest rate swap Identifying a Secured Overnight Financing Rate and the Effective Federal Funds Rate as appropriate benchmark interest rates for the qualitative evaluation of the effectiveness of an interest rate swap Clarifying the definition of reference rate, as it is used in Statement 53, as amended Providing an exception to the lease modifications guidance in Statement 87, as amended, for certain lease contracts that are amended solely to replace an IBOR as the rate upon which variable payments depend Effective Date and Transition The removal of LIBOR as an appropriate benchmark interest rate is effective for reporting periods ending after December 31, 2021. All other requirements of this Statement are effective for reporting periods beginning after June 15, 2020. Earlier application is encouraged. The exceptions to the existing provisions for hedge accounting termination and lease modifications in this Statement will reduce the cost of the accounting and financial reporting ramifications of replacingIBORs with other reference rates. The reliability and relevance of reported information will be maintained by requiring that agreements that effectively maintain an existing hedging arrangement continue to be accounted for in the same manner as before thereplacement of a reference rate. As a result, this Statement will preserve the consistency and comparability of reporting hedging derivative instruments and leases after governments amend or replace agreements to replace an IBOR. How the Changes in This Statement Will Improve Accounting and Financial Reporting The requirements of this Statement will enhance comparability in the application of accounting and financial reporting requirements and will improve the consistency of authoritative literature. More comparable reporting will improve the usefulness of information for users of state and local government financial statements. 8 68 Future Accounting Standard Changes (Continued) GASB Statement No. 94-Public-Private and Public-Public Partnerships and Availability Payment Arrangements Summary The primary objective of this Statement is to improve financial reporting by addressing issues related to public-private and public-public partnership arrangements (PPPs). As used in this Statement, a PPP is an arrangement in which a government (the transferor) contracts with an operator (a governmental or nongovernmental entity) to provide public services by conveying control of the right to operate or use a nonfinancial asset, such as infrastructure or other capital asset (the underlying PPP asset), for a period of time in an exchange or exchange-like transaction. Some PPPs meet the definition of a service concession arrangement (SCA), which the Board defines in this Statement as a PPP in which (1) the operator collects and is compensated by fees from third parties; (2) the transferor determines or has the ability to modify or approve which services the operator is required to provide, to whom the operator is required to provide the services, and the prices or rates that can be charged for the services; and (3) the transferor is entitled to significant residual interest in the service utility of the underlying PPP asset at the end of the arrangement. This Statement also provides guidance for accounting and financial reporting for availability payment arrangements (APAs). As defined in this Statement, an APA is an arrangement in which a government compensates an operator for services that may include designing, constructing, financing, maintaining, or operating an underlying nonfinancial asset for a period of time in an exchange or exchange-like transaction. Effective Date and Transition The requirements of this Statement are effective for fiscal years beginning after June 15, 2022, and all reporting periods thereafter. Earlier application is encouraged. PPPs should be recognized and measured using the facts and circumstances that exist at the beginning of the period of implementation (or if applicable to earlier periods, the beginning of the earliest period restated). How the Changes in This Statement Will Improve Accounting and Financial Reporting The requirements of this Statement will improve financial reporting by establishing the definitions of PPPs and APAs and providing uniform guidance on accounting and financial reporting for transactions that meet those definitions. That uniform guidance will provide more relevant and reliable information for financial statement users and create greater consistency in practice. This Statement will requiring governments to report assets and liabilities related to PPPs consistently and disclose important information about PPP transactions. The required disclosures will allow users to understand the scale and important aspects of a 9 69 Future Accounting Standard Changes (Continued) GASB Statement No. 96 -Subscription-Based Information Technology Arrangements Summary This Statement provides guidance on the accounting and financial reporting for subscription-based information technology arrangements (SBITAs) for government end users (governments). This Statement (1) defines a SBITA; (2) establishes that a SBITA results in a right-to-use subscription asset -an intangible asset -and a corresponding subscription liability; (3) provides the capitalization criteria for outlays other than subscription payments,including implementation costs of a SBITA; and (4) requires note disclosures regarding a SBITA. To the extent relevant, the standards for SBITAs are based on the standards established in Statement No. 87, Leases, as amended. Under this Statement, a government generally should recognize a right-to-use subscription asset -an intangible asset - and a corresponding subscription liability. A government should recognize the subscription liability at the commencement of the subscription term, -which is when the subscription asset is placed into service. The subscription liability should be initially measured at the present value of subscription payments expected to be made during the subscription term. Future subscription payments should be discounted using theinterest rate the SBITA vendor charges the government, government should recognize amortization of the discount on the subscription liability as an outflow of resources (for example, interest expense) in subsequent financial reporting periods. This Statement provides an exception for short-term SBITAs. Short-term SBITAs have a maximum possible term under the SBITA contract of 12 months(or less), including any options to extend, regardless of their probability of being exercised. Subscription payments for short-term SBITAs should be recognized as outflows of resources. This Statement requires a government to disclose descriptive information about its SBITAs other than short-term SBITAs, such as the amount of the subscription asset, accumulated amortization, other payments not included in the measurement of a subscription liability, principal and interest requirements for the subscription liability, and other essential information. Effective Date and Transition The requirements of this Statement are effective for fiscal years beginning after June 15, 2022, and all reporting periods thereafter. Earlier application is encouraged. Assets and liabilities resulting from SBITAs should be recognized and measured using the facts and circumstances that existed at the beginning of the fiscal year in which this Statement is implemented. Governments are permitted, but are not required, to include inthe measurement of the subscription asset capitalizable outlays associated with the initial implementation stage and the operation and additional implementation stage incurred prior to the implementation of this Statement. How the Changes in This Statement Will Improve Accounting and Financial Reporting The requirements of this Statement will improve financial reporting by establishing a definition for SBITAs and providing uniform guidance for accounting and financial reporting for transactions that meetthat definition. That definition and uniform guidance will result in greater consistency in practice. Establishing the capitalization criteria for implementation costs also will reduce diversity and improve comparability in financial reporting by governments. This Statement also will subscription asset and subscription liability for a SBITA and to disclose essential information about the arrangement. The 10 70 Future Accounting Standard Changes (Continued) GASB Statement No. 97-Certain Component Unit Criteria, and Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans -an amendment of GASB Statements No. 14 and No. 84, and a supersession of GASB Statement No. 32 Summary The primary objectives of this Statement are to (1) increase consistency and comparability related to the reporting of fiduciary component units in circumstances in which a potential component unit does not have a governing board and the primary government performs the duties that a governing board typically would perform; (2) mitigate costs associated with the reporting of certain defined contribution pension plans, defined contribution other postemployment benefit (OPEB) plans, and employee benefit plans other than pension plans or OPEB plans (other employee benefit plans) as fiduciary component units in fiduciary fund financial statements; and (3) enhance the relevance, consistency, and comparability of the accounting and financial reporting for Internal Revenue Code (IRC) Section 457 deferred compensation plans (Section 457 plans) that meet the definition of a pension plan and for benefits provided through those plans. This Statement requires that for purposes of determining whether a primary government is financially accountable for a potential component unit, except for a potential component unit that is a defined contribution pension plan, a defined contribution OPEB plan, or another employee benefit plan (for example, certain Section 457 plans), the absence of a governing board should be treated the same as the appointment of a voting majority of a governing board if the primary government performs the duties that a governing board typically would perform. This Statement also requires that the financial burden criterion in paragraph 7 of Statement No. 84, Fiduciary Activities, be applicable to only defined benefit pension plans and defined benefit OPEB plans that are administered through trusts that meet the criteria in paragraph 3 of Statement No. 67, Financial Reporting for Pension Plans, or paragraph 3 of Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, respectively. This Statement (1) requires that a Section 457 plan be classified as either a pension plan or another employee benefit plan depending on whether the plan meets the definition of a pension plan and (2) clarifies that Statement 84, as amended, should be applied to all arrangements organized under IRC Section 457 to determine whether those arrangements should be reported as fiduciary activities. This Statement supersedes the remaining provisions of Statement No. 32, Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans, as amended, regarding investment valuation requirements for reporting period in all circumstances. Effective Date and Transition The requirements of this Statement that (1) exempt primary governments that perform the duties that a governing board typically performs from treating the absence of a governing board the same as the appointment of a voting majority of a governing board in determining whether they are financially accountable for defined contribution pension plans, defined contribution OPEB plans, or other employee benefit plans and (2) limit the applicability of the financial burden criterion in paragraph 7 of Statement 84 to defined benefit pension plans and defined benefit OPEB plans that are administered through trusts that meet the criteria in paragraph 3 of Statement 67 or paragraph 3 of Statement 74, respectively, are effective immediately. The requirements of this Statement that are related to the accounting and financial reporting for Section 457 plans are effective for fiscal years beginning after June 15, 2021. For purposes of determining whether a primary government is financially accountable for a potential component unit, the requirements of this Statement that provide that for all other arrangements, the absence of a governing board be treated the same as the appointment of a voting majority of a governing board if the primary government performs the duties that a governing board typically would perform, are effective for reporting periods beginning after June 15, 2021. Earlier application of those requirements is encouraged and permitted by requirement as specified within this Statement. 11 71 Future Accounting Standard Changes (Continued) The Board considered the effective dates for the requirements of this Statement in light of the COVID-19 pandemic and in concert with Statement No. 95, Postponement of the Effective Dates ofCertain Authoritative Guidance. How the Changes in This Statement Will Improve Accounting and Financial Reporting The requirements of this Statement will result in more consistent financial reporting of defined contribution pension plans, defined contribution OPEB plans, and other employee benefit plans, while mitigating the costs associated with reporting those plans. The requirements also will enhance the relevance, consistency, and comparability of (1) the information related to Section 457 plans thatmeet the definition of a pension plan and the benefits provided through those plans and (2) investment information for all Section 457 plans. (1) Note. From GASB Pronouncements Summaries. Copyright 2021by the Financial Accounting Foundation, 401 Merritt 7, Norwalk, CT 06856, USA, and is reproduced with permission. * * * * * Restriction on Use This communicationis 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. Abdo Minneapolis, Minnesota April 7, 2022 12 72 Annual Financial Report 73 74 Elk River Municipal Utilities Elk River, Minnesota Table of Contents For the Year Ended December 31, 2021 Page No. Introductory Section Public Utilities Commission and Administration 7 Financial Section Independent Auditors Report 11 Managements Discussion and Analysis 15 Financial Statements Statement of Net Position 22 Statement of Revenues, Expenses and Changes in Net Position 25 Statement of Cash Flows 26 Notes to the Financial Statements 29 Required Supplementary Information - General Employees Retirement Fund 50 - General Employees Retirement Fund 50 Notes to the Required Supplementary Information - General Employees Retirement Fund 51 Supplementary Information Schedule of Operating Revenues and Expenses 54 Electric Fund Summary of Operations and Unaudited Statistics 56 Water Fund Summary of Operations and Unaudited Statistics 58 Other Report Independent Report on Minnesota Legal Compliance 63 3 75 4 76 INTRODUCTORY SECTION ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA FOR THE YEAR ENDED DECEMBER 31, 2021 5 77 6 78 Elk River Municipal Utilities Elk River, Minnesota Public Utilities Commission and Administration For the Year Ended December 31, 2021 7 79 8 80 FINANCIAL SECTION ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA FOR THE YEAR ENDED DECEMBER 31, 2021 9 81 10 82 Public Utilities Commission Elk River Municipal Utilities Elk River, Minnesota Report on the Financial Statements Opinion 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 yearended December31,2021, and the related notes to the financial statements, as listed in the table of contents. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Utilities as of December 31, 2021, 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. Basis for Opinions We conducted our audit in accordance with auditing standards generally accepted in the United States of America the Financial Statements section of our report. We are required to be independent of the Utilities and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. 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. In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about theUtilitiesability to continue as a going concern for twelve months beyond the financial statement date, including any currently known information that may raise substantial doubt shortly thereafter. 11 83 ments Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from Reasonable assuranceis a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements. In performing an audit in accordance with GAAS, we: Exercise professional judgment and maintain professional skepticism throughout the audit. Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Obtain an understanding of internal control relevant to the audit 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 Utilitiesinternal control. Accordingly, no such opinion is expressed. Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements. Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Utilitiesability to continue as a going concern for a reasonable period of time. We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit. Emphasis of Matter As discussed in Note 1B, 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, 2021, the changes in its financial position, its cash flows for the year then ended in accordancewith accounting principles generally accepted in the United States of America.Our opinion is not modified with respect to this matter. 12 84 Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America Analysis Page 15s Contributions to be presented to supplement the basic 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 historicalcontext. 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 prepari 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 auditwasconducted for the purpose of forming opinions on the financial statements that collectively comprise the contents are presented for the purpose of additional analysis and are not a required part of the financial statements of the 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 sectionand the havenot 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. Abdo Minneapolis, Minnesota April 7, 2022 13 85 14 86 This section of the Elk River Municipal Utilities (the Utilities) of the City of Elk River, Minnesota annual financial report December 31, 2021. Please read it in conjunction with the financial statements, which follow this section. Financial Highlights The assets and deferred outflows of resources of the Utilities exceeded its liabilities and deferred inflows of resources at the close of the most recent fiscal year by $75,101,658 (net position). Net Position increased by $3,446,286 or 4.8 percent. The increase is mainly due to revenues in excess of expenses during the year. cash balance at the close of the current fiscal year was $34,266,867. Electric usage overall was up an average of 5.1 percent. Residential usage increased 5.8 percent, Commercial usage increased 7.1 percent, and Industrial usage increased 4.5 percent. Water usage overall was up an average of 14.3 percent from the prior year. Residential usage increased 17.5 percent, and Commercial usage increased 10.8 percent. Overview of the Financial Statements This annual report consists of three parts: l 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 the private sector. These statements offer short-term and long-term financial information about its activities. The Statement of Net Position tion about the nature and amounts of investments in resources (assets) and the obligations to UtiliIt 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. Expenses and Changes in Net Position. 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. s 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. 15 87 Financial Analysis of the Utilities Our analysis of the Utilities begins on page 22 in the Financial Section. One of the most important questions asked about uThe Statement of Net Position, and the Statement of Revenues, Expenses and Changes in Net Position report information ill help answer this question. These two statements report the net position of the Utilities and changes in the net position. position (the difference between assets and liabilities) as one way to measure financial health or financial position. 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. s of Net Position is presented in Table A-1. As can be seen from the Table, net position increased $3,446,286 to $75,101,658 in fiscal 2021 up from $71,655,372 in fiscal 2020. TABLE A-1 Condensed Statement of Net Position 16 88 Water and Electric Rates. Electric - monthly base charges are based upon the type of service. The monthly charges are $13.75 for residential, $30.25 for non- demand, $75.50 for demand and $105.00 for large industrial demand customers. In addition to the base charges the residential rate is $.1308/kWh for June-October usage, and $.1195/kWh for November-May usage; the non-demand rate is $.1267/kWh for June-October, and $.1061/kWh for November-May; the demand rate is $.0670/kWh energy charge year round with a demand charge of $15.75/kW June-October, and $11.75/kW for November-May; the large industrial demand rate is $.0663/kWh energy charge year round with a demand charge of $15.25/kW June-October, and $11.25/kW November-May. Water - residential customers is $9.64 per month. In addition to the base charge, the Utilities currently charges its residential customers $1.94 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 size and range from $11.56 to $122.13. An irrigation meter is $20.57 per month. There is also a charge per 1,000 gallons, the same tiers as the residential rates of $1.94, $3.50, and $4.00, except the graduation from the lower tier to the higher tier(s) is calculated based on previous consumption. 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 Utilities may discontinue service of a customer not complying with the disconnect policy of the Utilities 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 customers 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 3:30 pm and payments for reconnection/turn on are not accepted at the property site; payments must be made prior to dispatching reconnection. Customers can come into the office between the hours of 8:00 am and 4:30 pm 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 Utilities collects social security numbers from new accounts and utilizes a ecessary 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. Generally, a deposit of 2 times the estimated highest monthly bill will be required, with a minimum deposit of $250 for non-demand customers, and minimum deposit of $1,000 for demand customers. The deposit shall be in the form of a cash deposit, 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 and held by the Utilities as a cash deposit. 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. 17 89 Statements of Revenues, Expenses and Changes in Net Position. While the Statements of Net Position shows the change in financial assets/deferred outflows and liabilities/deferred inflows, 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 $3,446,286 in fiscal 2021. A closer examination of the individual categories affecting the source of changes in net position is discussed below: TABLE A-2 Condensed Statements of Revenues, Expenses and Changes in Net Position Increase 20212020(Decrease) Revenues Operating$ 43,881,604$ 40,597,051$ 3,284,553 Nonoperating 959,409 1,004,012 (44,603) Total Revenues 44,841,013 41,601,063 3,239,950 Expenses Operating 40,770,940 36,632,689 4,138,251 Nonoperating 901,770 629,829 271,941 Total Expenses 41,672,710 37,262,518 4,410,192 Income Before Contributions and Operating Transfers 3,168,303 4,338,545 (1,170,242) Capital Contributions - Developer Infrastructure and Connection Fees 1,101,868 1,072,676 29,192 Grants 3,288 - 3,288 Contribution from Customers 385,316 174,557 210,759 Transfers from Other City Funds 195,245 - 195,245 Transfers to Other City Funds (1,407,734) (1,340,218) (67,516) Change in Net Position 3,446,286 4,245,560 (799,274) Net Position, January 1 71,655,372 67,409,812 4,245,560 Net Position, December 31$ 75,101,658$ 71,655,372$ 3,446,286 Revenues. Table A-2 shows that operating revenue increased by 8.1 percent in 2021 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. Regarding transmission rebates, in 2007 the Electric Department 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 2021, rebates received from our 2019 filings averaged approximately $42,000 per month. The Water Department is receiving lease revenue from Sprint and Verizon for antennas on the water towers. In 2021 this amount was approximately $276,000 and will continue for the duration of the multi-year contracts. 18 90 Total Expenses. In reviewing total expenses in Table A-2 you will notice that there was an increase of 11.8 percent overall, with the electric department increasing 11.3 percent, and the water department increasing 19.0 percent. Purchased Power is the biggest electric department expense, and it increased 16.2 percent. Capital Assets and Debt Administration Capital Assets. -type activities as of December 31, 2021 amounts to $81,350,610 (net of accumulated depreciation). This investment in capital assets includes land, buildings, improvements and equipment. A table summarizing the balances by fund follows: The total increase or the current fiscal year was 11.0 percent. Major capital asset events during the current fiscal year included the following: The Electric Department makes a loss of revenue payment as part of the cost of the territory acquisition increasing Intangibles. The Electric and Water Department purchased new transportation equipment increasing Machinery and Equipment, with the main increase due to the purchase of a new Bore Rig for the Electric Department. The Electric and Water Department completed some large road projects that contributed to the increase in Infrastructure. Construction in progress increased as projects started in the current year were not completed in 2021. B starting on page 36 of this report. Long-term Debt. At year end, the Utilities had $33,530,262 in long-term debt which increased from $21,046,480 in fiscal 2020.The increase is due to bonding for the new field services building in 2021. More detailed information about the -term liabilities can be found in Note 2C starting on page 37 and below: Increase 20212020(Decrease) G.O. Revenue Bonds$ 1,885,000$ 880,000$ 1,005,000 Revenue Bonds 29,930,000 18,985,000 10,945,000 Unamortized Premium on Bonds 1,506,138 765,740 740,398 Promissory Note 209,124 415,740 (206,616) Total$ 33,530,262$ 21,046,480$ 12,483,782 19 91 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 eet those increases but continue to look for ways to increase efficiencies and reduce costs, while providing excellent customer se-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 Finance Manager This financial report is designed to provide our citizens, customers, investors and creditors with a general overview of the ity 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 Melissa Karpinski, Elk River Municipal Utilities, PO Box 430, Elk River, Minnesota 55330-0430 or at 13069 Orono Parkway in Elk River, MN. 20 92 FINANCIAL STATEMENTS ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA FOR THE YEAR ENDED DECEMBER 31, 2021 21 93 Elk River Municipal Utilities Elk River, Minnesota Statement of Net Position December 31, 2021 ElectricWaterTotal Assets Current Assets Cash and temporary investments$ 21,680,955 $ 10,806,896 $ 3 2,487,851 Receivables Accrued interest 19,068 4,767 23,835 Accounts, net of allowance 3,502,736 175,165 3,677,901 Special assessments 7,248 23,603 30,851 Other receivables 148,186 9,805 157,991 Due from other City funds 4,350 128,850 133,200 Inventories 893,268 21,604 914,872 Prepaid expenses 260,234 47,618 307,852 Total Current Assets 26,516,045 11,218,308 37,734,353 Capital Assets Land 662,567 195,677 858,244 Intangible 25,895,865 - 25,895,865 Land improvements 34,081 - 34,081 Buildings 3,335,013 1,202,223 4,537,236 Machinery and equipment 4,161,248 516,242 4,677,490 Infrastructure 55,390,664 39,617,516 95,008,180 Construction in progress 6,993,891 249,707 7,243,598 Capital Assets, Cost 96,473,329 41,781,365 1 38,254,694 Less Accumulated Depreciation (35,913,939) (20,990,145) (56,904,084) Total Capital Assets, Net 60,559,390 20,791,220 81,350,610 Other Assets Restricted cash 1,779,016 - 1,779,016 Total Assets 88,854,451 32,009,528 1 20,863,979 Deferred Outflows of Resources Deferred pension resources 1,431,143 266,964 1,698,107 The notes to the financial statements are an integral part of this statement. 22 94 Elk River Municipal Utilities Elk River, Minnesota Statement of Net Position (Continued) December 31, 2021 ElectricWaterTotal Current Liabilities Accounts payable$ 4,887,198$ 685,629$ 5,572,827 Salaries and benefits payable 191,572 36,738 228,310 Accrued interest payable 459,191 29,406 488,597 Due to other City funds 968,343 112,767 1,081,110 Due to other governments 172,799 3,631 176,430 Customer deposits payable 965,089 170,625 1,135,714 Unearned revenue 1,067 212,743 213,810 Compensated absences 369,891 43,674 413,565 Notes payable - current portion 209,124 - 209,124 Bonds payable - current portion 1,055,000 320,000 1,375,000 Total Current Liabilities 9,279,274 1,615,213 10,894,487 Non-current Liabilities Due to other City funds 90,720 22,680 113,400 Bonds payable, net - less current portion 30,250,891 1,695,247 31,946,138 Net pension liability 1,978,758 369,988 2,348,746 Total Non-current Liabilities 32,320,369 2,087,915 34,408,284 Total Liabilities 41,599,643 3,703,128 45,302,771 Deferred Inflows of Resources Deferred pension resources 1,818,303 339,354 2,157,657 Net Position Net investment in capital assets 35,045,278 19,624,466 54,669,744 Restricted for debt service 1,779,016 - 1,779,016 Unrestricted 10,043,354 8,609,544 18,652,898 Total Net Position$ 46,867,648 $ 28,234,010 $ 7 5,101,658 The notes to the financial statements are an integral part of this statement. 23 95 24 96 Elk River Municipal Utilities Elk River, Minnesota Statement of Revenues, Expenses and Changes in Net Position For the Year Ended December 31, 2021 ElectricWaterTotal Operating Revenues Charges for services$ 39,473,717 $ 3,049,140$ 4 2,522,857 LFG project 1,019,097 - 1,019,097 Substation credit 4,800 - 4,800 Connection maintenance 263,330 71,520 334,850 Total Operating Revenues 40,760,944 3,120,660 43,881,604 Operating Expenses Purchased power 28,169,146 - 28,169,146 Production 1,002,631 674,815 1,677,446 Distribution 1,583,165 412,534 1,995,699 Depreciation 2,957,685 1,139,802 4,097,487 Customer accounts 562,574 73,472 636,046 General and administrative 3,350,641 844,475 4,195,116 Total Operating Expenses 37,625,842 3,145,098 40,770,940 Operating Income (Loss) 3,135,102 (24,438) 3,110,664 Nonoperating Revenues (Expenses) Interest income 52,514 24,677 77,191 Miscellaneous revenue 635,764 292,330 928,094 Interest expense and other (836,474) (65,296) ( 901,770) Gain/(Loss) on sale of capital assets (45,214) (662) (45,876) Total Nonoperating Revenues (Expenses) (193,410) 251,049 57,639 Income (loss) before Contributions and Transfers 2,941,692 226,611 3,168,303 Capital Contributions - Connection Fees - 548,948 548,948 Grants - 3,288 3,288 Contributions from Developers - 552,920 552,920 Contribution from Customers 385,316 - 385,316 Transfers from Other City Funds - 195,245 195,245 Transfers to Other City Funds (1,407,734) - (1,407,734) Total Contributions and Transfers (1,022,418) 1,300,401 277,983 Change in Net Position 1,919,274 1,527,012 3,446,286 Net Position, January 1 44,948,374 26,706,998 71,655,372 Net Position, December 31$ 46,867,648 $ 28,234,010 $ 7 5,101,658 The notes to the financial statements are an integral part of this statement. 25 97 Elk River Municipal Utilities Elk River, Minnesota Statement of Cash Flows For the Year Ended December 31, 2021 ElectricWaterTotal Cash Flows from Operating Activities Receipts from customers and users$ 38,976,603 $ 3,063,848$ 4 2,040,451 Other operating cash receipts 648,569 478,538 1,127,107 Payments to suppliers (30,572,031) (1,075,716) (31,647,747) Payments to employees (2,886,434) (691,068) ( 3,577,502) Net Cash Provided by Operating Activities 6,166,707 1,775,602 7,942,309 Cash Flows from Noncapital Financing Activities Transfers to City (1,407,734) - (1,407,734) (Increase) decrease in due from other City funds (161) 8,464 8,303 (Decrease) increase in due to other City funds 189,898 105,456 295,354 Net Cash Provided (Used) by Noncapital Financing Activities (1,217,997) 113,920 ( 1,104,077) Cash Flows from Capital and Related Financing Activities Acquisition of capital assets (9,626,428) (1,368,686) (10,995,114) Proceeds from connection fees - 548,948 548,948 Capital grants 3,288 3,288 Principal payments on bonds (1,145,000) (330,000) ( 1,475,000) Proceeds of bonds issued, net of issuance costs and premium on bonds 12,409,897 1,715,935 14,125,832 Interest paid on bonds (619,035) (13,874) ( 632,909) Principal payments on promissory note (206,616) - (206,616) Net Cash Provided (Used) by Capital and Related Financing Activities 812,818 555,611 1,368,429 Cash Flows from Investing Activities Interest on investments 46,364 23,140 69,504 Net Increase in Cash and Cash Equivalents 5,807,892 2,468,273 8,276,165 Cash and Cash Equivalents, January 1 17,652,079 8,338,623 25,990,702 Cash and Cash Equivalents, December 31$ 23,459,971 $ 10,806,896 $ 3 4,266,867 Reconciliation of Cash and Cash Equivalents to the Statement of Net Position Cash and temporary investments$ 21,680,955 $ 10,806,896 $ 3 2,487,851 Restricted cash 1,779,016 - 1,779,016 Total Cash and Cash Equivalents$ 23,459,971 $ 10,806,896 $ 3 4,266,867 The notes to the financial statements are an integral part of this statement. 26 98 Elk River Municipal Utilities Elk River, Minnesota Statement of Cash Flows (Continued) For the Year Ended December 31, 2021 ElectricWaterTotal Reconciliation of Operating Income (Loss) to Net Cash Provided by Operating Activities Operating income (loss)$ 3,135,102$ (24,438) $ 3,110,664 Adjustments to reconcile operating income (loss) to net cash provided by operating activities Other revenue related to operations 635,764 292,330 928,094 Bad debt expense 6,673 - 6,673 Depreciation 2,957,685 1,139,802 4,097,487 (Increase) decrease in assets/deferred outflows: Accounts receivable (1,849,727) (79,462) ( 1,929,189) Other receivables 12,805 186,208 199,013 Special assessments receivable (161) 2,950 2,789 Inventories (49,359) (13,225) (62,584) Prepaid expenses (47,856) (15,515) (63,371) Deferred pension resources (1,154,142) (223,263) ( 1,377,405) Increase (decrease) in liabilities/deferred inflows: Accounts payable 1,773,838 282,946 2,056,784 Salaries and benefits payable 22,144 7,838 29,982 Net other postemployment benefits liability (208,274) (44,526) ( 252,800) Unearned revenue 1,067 (32,925) (31,858) Compensated absences payable (17,096) 2,637 (14,459) Due to other governments 17,873 622 18,495 Customer deposits payable 64,480 52,625 117,105 Net pension liability (812,252) (76,549) ( 888,801) Deferred pension resources 1,678,143 317,547 1,995,690 Net Cash Provided by Operating Activities$ 6,166,707$ 1,775,602$ 7,942,309 Noncash Capital and Related Financing Activities Amortization of Bond Premium$ 61,585$ 3,394$ 64,979 Amortization of Deferred Charges on Refunding$ 14,481$ 3,620$ 18,101 Loss on Disposal of Capital Assets$ (45,213) $ (662)$ ( 45,875) Book Value of Disposed Capital Assets$ 291,647$ 20,167$ 311,814 Capital Assets Purchased on Account$ 931,011$ 292,226$ 1,223,237 Contribution of Capital Assets$ 385,316$ 748,165$ 1,133,481 The notes to the financial statements are an integral part of this statement. 27 99 28 100 Elk River Municipal Utilities Elk River, Minnesota Notes to the Financial Statements December 31, 2021 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 its 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 to the residents of Elk River and parts of Dayton, Big Lake and Otsego, Minnesota. The Utilities distributes water to the residents of Elk River, 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 organizations 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 grants, entitlements and donations. 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. 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 operations. 29 101 Elk River Municipal Utilities Elk River, Minnesota Notes to the Financial Statements December 31, 2021 Note 1: Summary of Significant Accounting Policies (Continued) 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 Electric and Water 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. C. Assets, Deferred Outflows of Resources, Liabilities, Deferred Inflows 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. government-wide cash and temporary investments pool is considered to be cash and cash equivalents for purposes of the statements of cash flows. 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. 4. 5.Obligation of a school district with an original maturity not exceeding 13 months and (i) rated in the highest category by a national bond rating service or (ii) enrolled in the credit enhancement program pursuant to statute section 126C.55. 6.ptances of United States banks eligible for purchase by the Federal Reserve System. 7.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. 8.Repurchase or reverse repurchase agreements and securities lending agreements with financial institutions 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. 9.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. 30 102 Elk River Municipal Utilities Elk River, Minnesota Notes to the Financial Statements December 31, 2021 Note 1: Summary of Significant Accounting Policies (Continued) Broker money market funds operate in accordance with appropriate state laws and regulations. The reported value of the pool is the same as the fair value of the shares. The Utilities categorizes its fair value measurements within the fair value hierarchy established by generally accepted accounting principles. The hierarchy is based on the valuation inputs used to measure the fair value of the asset. Level 1 inputs are quoted prices in active markets for identical assets; Level 2 inputs are significant other observable inputs; Level 3 inputs are significant unobservable inputs. The Utilities recurring fair value measurements are listed in detail on page 35 and are valued using a matrix pricing model (Level 2 inputs). The Utilities has the following recurring fair value measurements as of December 31, 2021: Negotiable certificates of deposit of $2,862,689 are valued using a matrix pricing model (Level 2 inputs). 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. 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, 2021 is as follows: Interfund Receivables and Payables Transactions between funds that are representative of lending/borrowing arrangements outstanding at the end of the -current portion of interfund loans). All other outstanding balances between Inventories and Prepaid items Inventories of materials and supplies are recorded at average cost, using the first-in, first out (FIFO) method. Certain payments to vendors reflect costs applicable to future accounting periods and are recorded as prepaid items. 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 as non-operating revenues or expenses. Donated capital assets are recorded at acquisition value at the date of donation. 31 103 Elk River Municipal Utilities Elk River, Minnesota Notes to the Financial Statements December 31, 2021 Note 1: Summary of Significant Accounting Policies (Continued) Major expenditures for improvements or capital asset projects are capitalized as projects are 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: Deferred Outflows of Resources In addition to assets, the statement of net 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 Utilities has one item, deferred pension resources, which qualifies for reporting in this category. Deferred pension resources result from actuarial calculation and current year pension contributions subsequent to the measurement date. Compensated Absences Vacation: All vacation benefits can be carried over from year to year and will be payable upon termination or retirement. Upon retirement, vacation can also be converted to cash and deposited into their Post Health Care Savings account. 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. Elk River Utilities has switched to age-based medical premiums and no longer has an Other Post Employment Benefits liability. Since medical premiums are age-based, the premiums are equal to the expected true cost of retiree coverage. As a result, there is no implicit subsidy for these benefits. There is also no explicit subsidy, since retirees must pay the full premium to remain covered during retirement. 32 104 Elk River Municipal Utilities Elk River, Minnesota Notes to the Financial Statements December 31, 2021 Note 1: Summary of Significant Accounting Policies (Continued) Pensions For purposes of measuring the net pension liability, deferred outflows/inflows of resources, and pension expense, information about the fiduciary net position of the Public Employees Retirement Association (PERA) and additions year end is June 30. For this purpose, plan contributions are recognized as of employer payroll paid dates and benefit payments and refunds are recognized when due and payable in accordance with the benefit terms. Investments are reported at fair value. The total pension expense for all plans recognized by the Utilities for the year ended December 31, 2021 was $47,639. The components of pension expense are noted in the plan summaries in Note 3. 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. 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. Deferred Inflows of Resources In addition to liabilities, the statement of net position and fund financial statements will sometimes report a separate section for deferred inflows of resources. This separate financial statement element, deferred inflows of resources, represents an acquisition of net position that applies to a future period(s) and so will not be recognized as an inflow of resources (revenue) until that time. The Utilities has only one type of item which qualifies for reporting in this category. The item, deferred pension resources, is reported only in the statement of net position and results from actuarial calculations. Net Position Net position represents the difference between assets and deferred outflows of resources and liabilities and deferred inflows of resources. Net position is displayed in three components: a.Net investment in capital assets - Consists of capital assets, net of accumulated depreciation reduced by any outstanding debt attributable to acquire capital assets. b.Restricted net position - Consists of net position restricted when there are limitations imposed on their use through external restrictions imposed by creditors, grantors, laws or regulations of other governments. c.Unrestricted net position - t in s first, then unrestricted resources as they are needed. 33 105 Elk River Municipal Utilities Elk River, Minnesota Notes to the Financial Statements December 31, 2021 Note 2: Detailed Notes on All Funds A.Deposits and Investments nd investments may not be returned or the Utilities 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 Utilities maintains deposits at those depository banks, all of which are members of the Federal Reserve System. Minnesota statutes require that all Utilities deposits be protected by insurance, surety bond or collateral. The fair value of collateral pledged must equal 110 percent of the deposits not covered by insurance or bonds, with the exception of irrevocable standby letters of credit issued by Federal Home Loan Banks as this type of collateral only requires collateral pledged equal to 100 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 national bond rating service, or revenue obligation securities of any state or local government with taxing powers 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 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, 2021$30,405,117 and the bank balance was $30,507,441. Of the bank balance $349,991 was covered by federal depository insurance, and the remaining balance was covered by 34 106 Elk River Municipal Utilities Elk River, Minnesota Notes to the Financial Statements December 31, 2021 Note 2: Detailed Notes on All Funds (continued) Investments The Utilities investment balances were as follows for December 31, 2021: (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. A reconciliation of cash and temporary investments as shown in the financial statements for the Utilities follows: The investments of the Utilities 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 svestments to the list on page 30 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 portfolio maturities shall be staggered to avoid undue concentration of assets with one broker-dealer or financial institution. 35 107 Elk River Municipal Utilities Elk River, Minnesota Notes to the Financial Statements December 31, 2021 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 undue concentration of assets in any one type of instrument. As of December 31, 2021 the Utilities has invested 5.0 percent or more of its total investment portfolio in the following issuers: Capital One National Association VA US (11.2 percent), Morgan Stanley Bank UT US (6.6 percent), New York Community Bank NY US (6.3 percent), Texas Exchange Bank TX US (6.3 percent), Institution for SV MA US (6.3 percent), BMO Harris Bank NA IL US (6.3 percent), Sallie Mae Bank UT US (6.3 percent), JPMorgan Chase Bank OH US (6.3 percent), Celtic Bank UT US (6.3 percent), and Comenity Bank DE US (5.1 percent). Interest Rate Risk. Is the risk that changes in interest rates will adversely affect the fair value of an investment. a specific maturity sector. B.Capital Assets Capital asset activity for the year ended December 31, 2021 was as follows: BeginningEnding BalanceIncreasesDecreasesBalance Capital Assets not being Depreciated Land$ 679,015$ 179,229$ -$ 858,244 Intangible 24,971,677 924,188 - 25,895,865 Construction in progress 1,209,742 9,425,944 (3,392,088) 7,243,598 Total Capital Assets not being Depreciated 26,860,434 10,529,361 (3,392,088) 33,997,707 Capital Assets being Depreciated Land improvements 23,389 10,692 - 34,081 Buildings 4,729,631 32,970 (225,365) 4,537,236 Machinery and equipment 4,449,783 485,435 (257,728) 4,677,490 Infrastructure 90,214,698 4,801,759 (8,277) 95,008,180 Total Capital Assets being Depreciated 99,417,501 5,330,856 (491,370) 104,256,987 Less Accumulated Depreciation for Intangible (1,502,152) (668,135) - (2,170,287) Land improvements (20,066) (1,411) - (21,477) Buildings (2,272,335) (125,640) 46,137 (2,351,838) Machinery and equipment (2,675,198) (382,131) 160,617 (2,896,712) Infrastructure (46,550,884) (2,920,170) 7,284 (49,463,770) Total Accumulated Depreciation (53,020,635) (4,097,487) 214,038 (56,904,084) Total Capital Assets being Depreciated, Net 46,396,866 1,233,369 (277,332) 47,352,903 Business-type Activities Capital Assets, Net$ 73,257,300$ 11,762,730$ (3,669,420) $ 81,350,610 36 108 Elk River Municipal Utilities Elk River, Minnesota Notes to the Financial Statements December 31, 2021 Note 2: Detailed Notes on All Funds (Continued) Depreciation expense was charged to functions/programs of the Utilities as follows: Construction Commitment The Utilities had the following outstanding construction commitment ad December 31, 2021: 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. 37 109 Elk River Municipal Utilities Elk River, Minnesota Notes to the Financial Statements December 31, 2021 Note 2: Detailed Notes on All Funds (Continued) The annual debt service requirements to maturity for the general obligation revenue bonds are as follows: In 2021, annual principal and interest payment on the bonds required about 0.7% percent of revenues from the Electric fund. The principal and interest paid and total customer revenues for the Electric fund were $285,600 and $40,760,944, respectively. In 2021, annual principal and interest payment on the bonds required about 11.0% percent of revenues from the Water fund. The principal and interest paid and total customer revenues for the Water fund were $343,874 and $3,120,660, respectively. Revenue Bonds The revenue bonds were issued to facilitate the membership buy-in with MMPA and construction of major capital facilities, and are to be repaid from future revenue pledged from the Electric fund. They will be retired from net revenues of the fund. Interest AuthorizedIssueMaturityBalance at DescriptionRate and IssuedDateDateYear End Electric Revenue Bonds, Series 2016A$ 9,755,0002.00 - 4.00%07/14/1602/01/36$ 8,465,000 Electric Revenue Refunding Bonds, Series 2016B 1,370,0002.00 - 4.0007/14/1602/01/22 240,000 Electric Revenue Bonds, Series 2018A 10,000,0003.50 - 5.0009/26/1808/01/48 9,415,000 Electric Revenue Bonds, Series 2021B 11,810,0002.00 - 5.0005/13/2108/01/51 11,810,000 Total Revenue Bonds$ 29,930,000 38 110 Elk River Municipal Utilities Elk River, Minnesota Notes to the Financial Statements December 31, 2021 Note 2: Detailed Notes on All Funds (Continued) The annual debt service requirements to maturity for the revenue bonds are as follows: In 2021, annual principal and interest payment on the bonds required about 3.6% percent of revenues from the Electric fund. Principal and interest paid and total customer revenues for the Electric fund were $1,478,435 and $40,760,944, respectively. Promissory Note The Utilities has issued a promissory note to provide for construction of a landfill gas generator. The note is to be paid from revenue of the system and is secured by the facility. 39 111 Elk River Municipal Utilities Elk River, Minnesota Notes to the Financial Statements December 31, 2021 Note 2: Detailed Notes on All Funds (Continued) The annual debt service requirements to maturity for the generator note are as follows: Changes in Long-term Liabilities Long-term liability activity for the year ended December 31, 2021 was as follows: 40 112 Elk River Municipal Utilities Elk River, Minnesota Notes to the Financial Statements December 31, 2021 Note 2: Detailed Notes on All Funds (Continued) D.Interfund Receivables, Payables and Transfers Interfunds The composition of interfund balances at year end is as follows: Receivable FundPayable Fund AmountPurpose ElectricCity$ 4,350December billings WaterCity 128,850TIF 22 Water Access Charge Total Receivable From City$ 133,200 CityElectric$ 99,871Shared costs CityElectric 4,071Supplies and Fuel CityElectric 800Bond disclosure services CityElectric 114,684December transfer of revenue CityElectric 268,9934th quarter franchise fees CityElectric 193,582Billed sewer on behalf of City CityElectric 148,828Billed garbage on behalf of City CityElectric 49,384Billed stormwater on behalf of City CityElectric 84,480Current portion of 2020B due to City CityElectric 90,720Noncurrent portion of 2020B due to City CityElectric 3,650Interest accrued of 2020B due to City Total Electric Fund Payable to City 1,059,063 CityWater 24,968Shared costs CityWater 3,982Supplies and Fuel CityWater 722Bond disclosure services CityWater 61,062 Water main future wellhouse CityWater 21,120Current portion of 2020B due to City CityWater 22,680Noncurrent portion of 2020B due to City CityWater 913Interest accrued of 2020B due to City Total Water Fund Payable to City 135,447 Total Payable to City$ 1,194,510 Transfers During the year ended December 31, 2021 the Utilities made the following transfers: The transfer out of the Electric fund was the annual transfer of 4 percent of 2021 Elk River revenues to City funds. The Electric fund transferred $1,407,734 in 2021. The City transferred $195,245 to the Water fund as contributed capital for the Water Main as part of the 2021 Street Improvements. 41 113 Elk River Municipal Utilities Elk River, Minnesota Notes to the Financial Statements December 31, 2021 Note 3: Defined Benefit Pension Plans - Statewide A.Plan Description The Utilities participates in the following cost-sharing multiple-employer defined benefit pension plans administered by the Public Employees Retirement Association of Minnesota (PERA). and administered in accordance with Minnesota statutes, chapters 353 and 356. tax qualified plans under Section 401(a) of the Internal Revenue Code. General Employees Retirement Plan All full-time and certain part-time employees of the Utilities are covered by the General Employees Plan General Employees Plan members belong to the Coordinated Plan. Coordinated Plan members are covered by Social Security. B.Benefits Provided PERA provides retirement, disability and death benefits. Benefit provisions are established by state statute and can only be modified by the state Legislature. Vested, terminated employees who are entitled to benefits but are not receiving them yet are bound by the provisions in effect at the time they last terminated their public service. General Employee Plan Benefits allowable service, age, and years of credit at termination of service. Two methods are used to compute benefits for PERA's Coordinated Plan members. Members hired prior to July 1, 1989, receive the higher of Method 1 or Method 2 formulas. Only Method 2 is used for members hired after June 30, 1989. Under Method 1, the accrual rate for Coordinated members is 1.2 percent of average salary for each of the first 10 years of service and 1.7 percent of average salary for each additional year. Under Method 2, the accrual rate for Coordinated members is 1.7 percent for average salary for all years of service. For members hired prior to July 1, 1989 a full annuity is available when age plus years of service equal 90 and normal retirement age is 65. For members hired on or after July 1, 1989 normal retirement age is the age for unreduced Social Security benefits capped at 66. Benefit increases are provided to benefit recipients each January. The postretirement increase is equal to 50 percent of the cost-of-living adjustment (COLA) announced by the SSA, with a minimum increase of at least 1 percent and a maximum of 1.5 percent. Recipients that have been receiving the annuity or benefit for at least a full year as of the June 30 before the effective date of the increase will receive the full increase. Recipients receiving the annuity or benefit for at least one month but less than a full year as of the June 30 before the effective date of the increase will receive a reduced prorated increase. For members retiring on January 1, 2024, or later, the increase will be delayed until normal retirement age (age 65 if hired prior to July 1, 1989, or age 66 for individuals hired on or after July 1, 1989). Members retiring under Rule of 90 are exempt from the delay to normal retirement. C. Contributions Minnesota statutes chapter 353 sets the rates for employer and employee contributions. Contribution rates can only be modified by the state Legislature. General Employees Fund Contributions Coordinated Plan members were required to contribute 6.50 percent of their annual covered salary in fiscal year 2021 and the Utilities was required to contribute 7.50 percent for Coordinated Plan members. The Utilities contributions to the General Employees Fund for the years ending December 31, 2021, 2020 and 2019 were $312,376, $289,644, and $285,668, respectively. The Utilities contributions were equal to the required contributions for each year as set by state statute. 42 114 Elk River Municipal Utilities Elk River, Minnesota Notes to the Financial Statements December 31, 2021 Note 3: Defined Benefit Pension Plans - Statewide (Continued) D.Pension Costs General Employees Fund Pension Costs At December 31, 2021, the Utilities reported a liability of $2,348,746 for its proportionate share of the General Employees Fundliability. The Utilities contribution of $16 million. The State of Minnesota is considered a non-employer contributing entity and the s contribution meets the definition of a special funding situation. pension liability associated with the Utilities totaled $71,625. The net pension liability was measured as of June 30, 2021, and the total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of that date. The Utilities proportionate share of the net pension liability was based on the Utilities contributions received by PERA during the measurement period for employer payroll paid dates from July 1, 2020 through June 30, 2021 relative to the total employer contributions received from all of P The Utilities proportionate share was 0.0550 percent which was an increase of 0.0010 percent from its proportion measured as of June 30, 2020. For the year ended December 31, 2021, the Utilities recognized pension expense of $41,860 for its proportionate share of pension expense. In addition, the Utilities recognized an additional $5,779 as pension 16 million to the General Employees Fund. At December 31, 2021, the Utilities reported its proportionate share of deferred outflows of resources and deferred inflows of resources, related to pensions from the following sources: DeferredDeferred OutflowsInflows of Resourcesof Resources Differences between Expected and Actual Economic Experience$ 13,643 $ 71,727 Changes in Actuarial Assumptions 1,434,096 50,410 Net Difference between Projected and Actual Earnings on Plan Investments - 2,035,520 Changes in Proportion 92,017 - Contributions paid to PERA subsequent to the Measurement Date 158,351 - Total$ 1,698,107 $ 2,157,657 43 115 Elk River Municipal Utilities Elk River, Minnesota Notes to the Financial Statements December 31, 2021 Note 3: Defined Benefit Pension Plans - Statewide (Continued) The $158,351 reported as deferred outflows of resources related to pensions resulting from the Utilit contributions subsequent to the measurement date will be recognized as a reduction of the net pension liability in the year ended December 31, 2022. Other amounts reported as deferred outflows and inflows of resources related to pensions will be recognized in pension expense as follows: E. Actuarial Assumptions The total pension liability in the June 30, 2021 actuarial valuation was determined using an individual entry-age normal actuarial cost method. The long-term rate of return on pension plan investments used in the determination of the total liability is 6.5 percent. This assumption is based on a review of inflation and investments return assumptions from a number of national investment consulting firms. The review provided a range of return investment return rates deemed to be reasonable by the actuary. An investment return of 6.5 percent was deemed to be within that range of reasonableness for financial reporting purposes. Inflation is assumed to be 2.25 percent for the General Employees Plan. Benefit increases after retirement are assumed to be 1.25 percent for the General Employees Plan. Salary growth assumptions in the General Employees Plan range in annual increments from 10.25 percent after one year of service to 3.0 percent after 29 years of service and 6.0 percent per year thereafter. Mortality rates for the General Employees Plan are based on the Pub-2010 General Employee Mortality Table. The tables Actuarial assumptions used in the June 30, 2021 valuation were based on the results of actuarial experience studies. The most recent four-year experience study in the General Employees Plan was completed in 2019. The assumption changes were adopted by the Board and become effective with the July 1, 2020 actuarial valuation. 44 116 Elk River Municipal Utilities Elk River, Minnesota Notes to the Financial Statements December 31, 2021 Note 3: Defined Benefit Pension Plans - Statewide (Continued) The following changes in actuarial assumptions and plan provisions occurred in 2021: General Employees Fund Changes in Actuarial Assumptions The investment return and single discount rates were changed from 7.50 percent to 6.50 percent, for financial reporting purposes. The mortality improvement scale was changed from Scale MP-2019 to Scale MP-2020. Changes in Plan Provisions There were no changes in plan provisions since the previous valuation. The State Board of Investment, which manages the investments of PERA, prepares an analysis of the reasonableness on a regular basis of the long-term expected rate of return using a building-block method in which best-estimate ranges of expected future rates of return are developed for each major asset class. These ranges are combined to produce an expected long-term rate of return by weighting the expected future rates of return by the target asset allocation percentages. The target allocation and best estimates of geometric real rates of return for each major asset class are summarized in the following table: F.Discount Rate The discount rate used to measure the total pension liability in 2021 was 6.50 percent. The projection of cash flows used to determine the discount rate assumed that contributions from plan members and employers will be made at rates set in Minnesota Statutes. Based on these assumptions, the fiduciary net position of the General Employees Fund were projected to be available to make all projected future benefit payments of current plan members. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability. 45 117 Elk River Municipal Utilities Elk River, Minnesota Notes to the Financial Statements December 31, 2021 Note 3: Defined Benefit Pension Plans - Statewide (Continued) G. Pension Liability Sensitivity The following presents the Utilities proportionate share of the net pension liability for all plans it participates in, calculated using the discount rate disclosed in the preceding paragraph, as well as what the Utilities proportionate share of the net pension liability would be if it were calculated using a discount rate one percentage point lower or one percentage point higher than the current discount rate: H. Pension Plan Fiduciary Net Position separately-issued PERA financial report that includes financial statements and required supplementary information. That report may be obtained on the Internet at www.mnpera.org. Note 4: Other Information A.Territorial Acquisition Agreement In 2015, the Utilities entered into an agreement to transfer ownership of electric plant and electric service to customers in eight designated areas receiving service from Connexus Energy. Specific payment terms have been negotiated for 5 years, and if any of the eight areas are not acquired within this timeframe, the payment terms may be renegotiated. In 2019, the Utilities acquired the final service areas. The agreed cost of property purchased from Connexus Energy is net book value, integration expenses, and a loss of revenue payment. The loss of revenue payment for each area acquired is based on a formula outlined in the agreement, payable for the subsequent ten years after initial purchase. The Utilities acquired designated service area 1 in 2015 for $877,807, service area 2 in 2016 for $663,586, service areas 3 and 4 in 2017 for $276,776, service areas 5 and 6 in 2018 for $298,736 and service areas 7 and 8 in 2019 for $78,457. The loss of revenue payments made were $411,157 in 2017, $570,725 in 2018, $751,860 in 2019, $834,185 in 2020, $857,538 in 2021 and $924,187 in 2022. All amounts paid are included in property and equipment, and loss of revenue payments are included in intangible assets. 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 rs. Liabilities are reported when it is probable that a loss has occurred, and the amount of the loss can be reasonably management is not aware of any incurred but not reported claims. 46 118 Elk River Municipal Utilities Elk River, Minnesota Notes to the Financial Statements December 31, 2021 Note 4: Other Information (Continued) C.Commitments 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. Revenues have been less than originally projected due to the decrease in Rate of Return (ROE) issued by FERC. The original ROE 12.38% has been reduced to 10.52%. The current return of 10.52% on this investment through CMMPA is designed to provide approximately $80K annually over the 40-year project life. With majority of the distribution once the bonds are paid off. The projected under recovery in 2021 is estimated to be $59K. The bond obligations are satisfied first, distribution to participants is directly affected by under recovery. The under recovery is rolled forward under the true up. However, the under recovery in 2021 (approximately $59K) would be included in the revenue requirements in 2023. The transmission payments for 2021 were $24,048, all of which was a receivable at December 31, 2021. Note 5: COVID-19 - March 11, 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. In response to the pandemic, the State of Minnesota has issued stay-at-home orders and other measures aimed at slowing the spread of the coronavirus. The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. Due to the rapid development and fluidity of this situation, the Utilities cannot determine the ultimate impact that the COVID-19 pandemic will have on its financial condition, liquidity, and future revenue collection, and therefore any prediction as to the ultimate impact on the financial condition, liquidity, and future results of its revenue collections is uncertain. 47 119 48 120 REQUIRED SUPPLEMENTARY INFORMATION ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA FOR THE YEAR ENDED DECEMBER 31, 2021 49 121 Elk River Municipal Utilities Elk River, Minnesota Required Supplementary Information For the Year Ended December 31, 2021 PERA Net Pension Liability - General Employees Fund Note: Schedule is intended to show 10-year trend. Additional years will be reported as they become available. - General Employees Fund Note: Schedule is intended to show 10-year trend. Additional years will be reported as they become available. 50 122 Elk River Municipal Utilities Elk River, Minnesota Required Supplementary Information (Continued) For the Year Ended December 31, 2021 Notes to the Required Supplementary Information - General Employee Retirement Fund Changes in Actuarial Assumptions 2021- The investment return and single discount rates were changed from 7.50 percent to 6.50 percent, for financial reporting purposes. The mortality improvement scale was changed from Scale MP-2019 to Scale MP-2020. 2020 - The price inflation assumption was decreased from 2.50% to 2.25%. The payroll growth assumption was decreased from 3.25% to 3.00%. Assumed salary increase rates were changed as recommended in the June 30, 2019 experience study. The net effect is assumed rates that average 0.25% less than previous rates. Assumed rates of retirement were changed as recommended in the June 30, 2019 experience study. The changes result in more unreduced (normal) retirements and slightly fewer Rule of 90 and early retirements. Assumed rates of termination were changed as recommended in the June 30, 2019 experience study. The new rates are based on service and are generally lower than the previous rates for years 2-5 and slightly higher thereafter. Assumed rates of disability were changed as recommended in the June 30, 2019 experience study. The change results in fewer predicted disability retirements for males and females. The base mortality table for healthy annuitants and employees was changed from the RP-2014 table to the Pub-2010 General Mortality table, with adjustments. The base mortality table for disabled annuitants was changed from the RP- 2014 disabled annuitant mortality table to the PUB-2010 General/Teacher disabled annuitant mortality table, with adjustments. The mortality improvement scale was changed from Scale MP-2018 to Scale MP-2019. The assumed spouse age difference was changed from two years older for females to one year older. The assumed number of married male new retirees electing the 100% Joint & Survivor option changed from 35% to 45%. The assumed number of married female new retirees electing the 100% Joint & Survivor option changed from 15% to 30%. The corresponding number of married new retirees electing the Life annuity option was adjusted accordingly. 2019 - The mortality projection scale was changed from MP-2017 to MP-2018. 2018 - The morality projection scale was changed from MP-2015 to MP-2017. The assumed benefit increase was changed from 1.00 percent per year through 2044 and 2.50 percent per year thereafter to 1.25 percent per year. 2017 - The Combined Service Annuity (CSA) loads were changed from 0.8 percent for active members and 60 percent for vested and non-vested deferred members. The revised CSA loads are now 0.0 percent for active member liability, 15.0 percent for vested deferred member liability and 3.0 percent for non-vested deferred member liability. The assumed post- retirement benefit increase rate was changed from 1.0 percent per year for all years to 1.0 percent per year through 2044 and 2.5 percent per year thereafter. 2016 - The assumed post-retirement benefit increase rate was changed from 1.0 percent per year through 2035 and 2.5 percent per year thereafter to 1.0 percent per year for all future years. The assumed investment return was changed from 7.9 percent to 7.5 percent. The single discount rate was changed from 7.9 percent to 7.5 percent. Other assumptions were changed pursuant to the experience study dated June 30, 2015. The assumed future salary increases, payroll growth and inflation were decreased by 0.25 percent to 3.25 percent for payroll growth and 2.50 percent for inflation. 2015 - The assumed post-retirement benefit increase rate was changed from 1.0 percent per year through 2030 and 2.5 percent per year thereafter to 1.0 percent per year through 2035 and 2.5 percent per year thereafter. 51 123 Elk River Municipal Utilities Elk River, Minnesota Required Supplementary Information (Continued) For the Year Ended December 31, 2021 Notes to the Required Supplementary Information - General Employee Retirement Fund - Continued Changes in Plan Provisions 2021 - There were no changes in plan provisions since the previous valuation. 2020 - Augmentation for current privatized members was reduced to 2.0% for the period July 1, 2020 through December 31, 2023 and 0.0% after. Augmentation was eliminated for privatizations occurring after June 30, 2020. 2019 - The employer supplemental contribution was changed prospectively, decreasing from $31.0 million to $21.0 6.0 million due per year through 2031. 2018 - The augmentation adjustment in early retirement factors is eliminated over a five-year period starting July 1, 2019, resulting in actuarial equivalence after June 30, 2024. Interest credited on member contributions decreased from 4.00 percent to 3.00 percent, beginning July 1, 2018. Deferred augmentation was changed to 0.00 percent, effective January 1, 2019. Augmentation that has already accrued for deferred members will still apply. Contribution stabilizer provisions were repealed. Postretirement benefit increases were changed from 1.00 percent per year with a provision to increase to 2.50 percent upon attainment of 90.00 percent funding ratio to 50.00 percent of the Social Security Cost of Living Adjustment, not less than 1.00 percent and not more than 1.50 percent, beginning January 1, 2019. For retirements on or after January 1, 2024, the first benefit increase is delayed until the retiree reaches normal retirement age; does not apply to Rule of 90 retirees, disability benefit recipients, or survivors. Actuarial equivalent factors were updated to reflect revised mortality and interest assumptions. 2017 - 18, and $6,000,000 thereafter. The Employer Supplemental Contribution for the Minneapolis Employees Retirement Fund $16,000,000 to $6,000,000 in calendar years 2019 to 2031. 2016 - There were no changes in plan provisions since the previous valuation. 2015 - On January 1, 2015, the Minneapolis Employees Retirement Fund was merged into the General Employees Fund, which increased the total pension liability by $1.1 billion and increased the fiduciary plan net position by $892 million. Upon consolidation, state and employer contributions were revised. 52 124 SUPPLEMENTARY INFORMATION ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA FOR THE YEAR ENDED DECEMBER 31, 2021 53 125 Elk River Municipal Utilities Elk River, Minnesota Supplementary Information Schedule of Operating Revenues and Expenses For the Year Ended December 31, 2021 ElectricWaterTotal Operating Revenues Charges for services Elk River$ 35,295,219$ 3,049,140$ 38,344,359 Otsego 2,977,624 - 2,977,624 Big Lake 192,642 - 192,642 Dayton 234,686 - 234,686 Other 773,546 - 773,546 LFG Project 1,019,097 - 1,019,097 Substation credit 4,800 - 4,800 Connection maintenance 263,330 71,520 334,850 Total Operating Revenues 40,760,944 3,120,660 43,881,604 Operating Expenses Purchased power 28,169,146 - 28,169,146 Production Supervision and labor 108,275 57,005 165,280 Natural gas 31,186 - 31,186 Supplies and power for pumping 46,275 313,693 359,968 Landfill gas expense 742,722 - 742,722 Maintenance of structures 11,633 173,376 185,009 Maintenance of equipment 37,825 130,741 168,566 Maintenance of plant 24,715 - 24,715 Total production 1,002,631 674,815 1,677,446 Transmission and distribution Supervision and labor 25,935 6,138 32,073 Maintenance of overhead lines 441,970 - 441,970 Maintenance of underground lines 326,844 - 326,844 Maintenance of station equipment 110,577 - 110,577 Transportation 221,527 10,198 231,725 Maintenance of customer service 10,006 59,187 69,193 Maintenance of customer meters 110,677 323,836 434,513 Miscellaneous 335,629 13,175 348,804 Total transmission and distribution 1,583,165 412,534 1,995,699 Services to City 224,814 1,259 226,073 Depreciation and amortization2,957,685 1,139,802 4,097,487 Customer accounts expense Meter reading 44,749 2,326 47,075 Billing and collection 286,338 69,887 356,225 Bad debts 6,673 - 6,673 Total customer accounts expense 337,760 72,213 409,973 54 126 Elk River Municipal Utilities Elk River, Minnesota Supplementary Information Schedule of Operating Revenues and Expenses (Continued) For the Year Ended December 31, 2021 ElectricWaterTotal Operating Expenses (Continued) General and administrative Salaries$ 794,649$ 226,227$ 1,020,876 Employee pensions and benefits 1,466,098 385,382 1,851,480 Dues 202,047 97,402 299,449 Office supplies and billing expense 74,005 23,717 97,722 Office utilities and maintenance 31,956 7,989 39,945 Consulting fees 27,704 20,813 48,517 Legal and audit 39,815 9,320 49,135 Environmental compliance 32,270 953 33,223 Conservation improvement project 358,582 9,832 368,414 Insurance 152,429 22,129 174,558 Telephone 31,254 7,366 38,620 Advertising 13,861 3,791 17,652 Education and meetings 118,020 24,356 142,376 Miscellaneous 7,951 5,198 13,149 Total general and administrative 3,350,641 844,475 4,195,116 Total Operating Expenses 37,625,842 3,145,098 40,770,940 Operating Income (Loss) 3,135,102 (24,438) 3,110,664 Nonoperating Revenues (Expenses) Interest income 52,514 24,677 77,191 Miscellaneous revenue 635,764 292,330 928,094 Interest expense and other (836,474) (65,296) (901,770) Gain/(loss) on sale of capital assets (45,214) (662) (45,876) Total Nonoperating Revenues (193,410) 251,049 57,639 Income before Contributions and Transfers 2,941,692 226,611 3,168,303 Capital Contributions - Connection Fees - 548,948 548,948 Grants - 3,288 3 ,288 Contributions from Developers - 552,920 552,920 Contributions from Customers 385,316 - 385,316 Transfers from Other City Funds - 195,245 195,245 Transfers to Other City Funds (1,407,734) - (1,407,734) Total Contributions and Transfers (1,022,418) 1,300,401 277,983 Change in Net Position 1,919,274 1,527,012 3,446,286 Net Position, January 1 44,948,374 26,706,998 71,655,372 Net Position, December 31$ 46,867,648$ 28,234,010$ 75,101,658 55 127 Elk River Municipal Utilities Elk River, Minnesota Electric Fund Summary of Operations and Unaudited Statistics For the Years Ended December 31, 2012 through December 31, 2021 Summary of Operations 2012201320142015 Operating Revenues Sales of electricity$ 30,070,045 $ 30,978,790 $ 3 1,514,246$ 3 2,704,279 Other operating revenues (expenses) 188,645 (132,411) ( 147,561) ( 152,557) Total Operating Revenues 30,258,690 30,846,379 31,366,685 32,551,722 Operating Expenses Purchased power 20,499,773 21,254,950 21,994,652 22,034,307 Distribution 1,909,845 1,970,341 2,161,352 2,330,969 Services to the City 481,907 498,146 530,340 520,727 Depreciation 2,099,594 2,029,496 1,914,062 1,922,359 Other operating expenses 2,359,193 2,374,959 2,791,717 3,087,792 Total Operating Expenses 27,350,312 28,127,892 29,392,123 29,896,154 Operating Income 2,908,378 2,718,487 1,974,562 2,655,568 Capital Contributions - - - - Transfers to Other City Funds (816,864) (781,162) ( 797,835) ( 824,743) Special Item - - - - Nonoperating Revenues 28,531 (30,658) 152,375 267,243 Net Income$ 2,120,045$ 1,906,667$ 1,329,102$ 2,098,068 Percent of Change Sales of electricity7.800%3.022%1.728%3.776% Purchased power4.564%3.684%3.480%0.180% Percent of Revenues Purchased power67.748%68.906%70.121%67.690% Unaudited Statistics Miscellaneous 2012201320142015 kWh's purchased 287,553,108 290,025,919 2 88,320,724 2 94,441,957 kWh's sold 273,455,846 273,945,354 2 74,546,059 2 82,265,268 Line loss 14,097,262 16,080,565 13,774,665 12,176,689 Percent of line loss4.902%5.545%4.778%4.136% Revenues Per kWh Sold$ 0.1100 $ 0.1131 $ 0 .1148$ 0 .1159 Cost Per kWh Purchased$ 0.0713 $ 0.0733 $ 0 .0763$ 0 .0748 Number of Customers 9,285 9,358 9,449 10,499 Total Contribution/Transfers to City$ 816,864$ 781,162$ 797,835$ 824,743 56 128 201620172018201920202021 $ 34,569,098 $ 36,458,061 $ 39,039,573 $ 3 7,640,985$ 3 7,714,965$ 3 9,719,268 (104,702) (337,237) (259,668) 453,648 207,542 1,041,676 34,464,396 36,120,824 38,779,905 38,094,633 37,922,507 40,760,944 23,991,069 25,402,576 26,710,514 24,851,301 24,240,440 28,169,146 2,041,810 2,385,263 2,660,231 2,546,634 2,458,699 2,585,796 230,312 202,421 215,296 210,791 229,086 224,814 2,005,093 2,046,935 2,297,349 2,856,258 2,896,839 2,957,685 3,558,315 3,357,276 3,318,016 4,090,102 4,133,940 3,688,401 31,826,599 33,394,471 35,201,406 34,555,086 33,959,004 37,625,842 2,637,797 2,726,353 3,578,499 3,539,547 3,963,503 3,135,102 - 209,051 352,104 125,764 174,557 385,316 (1,089,287) (1,113,264) (1,188,664) ( 1,157,445) ( 1,340,218) ( 1,407,734) 330,923 - - - - - 8,991 145,034 218,586 82,440 98,427 ( 193,410) $ 1,888,424$ 1,967,174$ 2,960,525$ 2,590,306$ 2,896,269$ 1,919,274 5.702%5.464%7.081%-3.582%0.197%5.314% 8.881%5.883%5.149%-6.961%-2.458%16.207% 69.611%70.327%68.877%65.236%63.921%69.108% 201620172018201920202021 311,990,595 320,349,631 339,917,944 3 36,570,637 3 37,016,741 3 47,974,385 301,838,731 313,952,561 331,124,011 3 25,981,176 3 24,469,638 3 41,047,710 10,151,864 6,397,070 8,793,933 10,589,461 12,547,103 6,926,675 3.254%1.997%2.587%3.146%3.723%1.991% $ 0.1145$ 0.1161$ 0.1179$ 0.1155$ 0.1162$ 0.1165 $ 0.0769$ 0.0793$ 0.0786$ 0.0738$ 0.0719$ 0.0810 10,816 11,448 11,983 12,244 12,365 12,789 $ 1,089,287$ 1,113,264$ 1,188,664$ 1,157,445$ 1,340,218$ 1,407,734 57 129 Elk River Municipal Utilities Elk River, Minnesota Water Fund Summary of Operations and Unaudited Statistics For the Years Ended December 31, 2012 through December 31, 2021 Summary of Operations 2012201320142015 Operating Revenues Sales of water$ 2,265,142$ 2,278,124$ 2,148,327$ 2,202,537 Operating Expenses Operating expenses less depreciation 1,130,965 1,210,797 1,267,019 1,277,466 Services to City - - - 5,719 Depreciation 1,028,593 1,032,442 1,083,770 1,131,110 Total Operating Expenses 2,159,558 2,243,239 2,350,789 2,414,295 Total Operating Income (Loss)$ 105,584$ 34,885$ (202,462)$ (211,758) Percent of Change Sales of water 23.59% 0.57% (5.70%) 2 .52% Unaudited Statistics Miscellaneous 2012201320142015 Water Pumped (Gallons) 847,283,200 785,377,000 7 82,110,000 7 99,974,000 Water Sold (Gallons) 727,912,000 709,760,000 6 72,760,000 6 76,842,000 Percent of Line Loss 14.09% 9.63% 13.98% 15.39% Revenues Per 1,000 Gallons Pumped$ 2.67$ 2.90$ 2.75$ 2.75 Revenues Per 1,000 Gallons Sold$ 3.11$ 3.21$ 3.19$ 3.25 Number of Customers 4,542 4,613 4,676 4,672 Water Supplier Services 2012201320142015 Flushing Hydrants 46,400,000 45,000,000 47,000,000 45,000,000 Back Washing 30,000,000 8,000,000 3,922,000 4,000,000 Fire Department Use 16,500,000 5,000,000 5,000,000 5,000,000 New Water Main Disinfectant and Flushing 9,000,000 5,000,000 5,000,000 5,000,000 Flushing Seasonal Well 3,600,000 - - - Meter Inaccuracy 6,500,000 3,000,000 3,000,000 - Street and Sewer Maintenance - 617,000 1,000,000 473,400 Water Tower Paint and Clean/Maintenance - 2,000,000 1,000,000 3,700,000 Well Maintenance - - - 700,000 Water Line and Irrigation Leaks 7,000,000 7,000,000 7,000,000 - Water Supplier Services 119,000,000 75,617,000 7 2,922,000 6 3,873,400 58 130 201620172018201920202021 $ 2,173,521$ 2,326,245$ 2,515,821$ 2,303,670$ 2,674,544$ 3,120,660 1,325,831 1,614,095 1,430,539 1,521,719 1,540,043 2,004,037 - - - 1,583 463 1,259 1,148,310 1,191,894 1,193,745 1,147,149 1,133,179 1,139,802 2,474,141 2,805,989 2,624,284 2,670,451 2,673,685 3,145,098 $ (300,620)$ (479,744)$ (108,463)$ (366,781)$ 859$ ( 24,438) (1.32%) 7.03% 8.15% (8.43%) 16.10% 16.68% 201620172018201920202021 801,603,000 788,182,000 822,546,000 7 78,595,000 8 72,733,000 9 77,238,000 666,656,000 686,032,000 737,689,000 6 64,924,000 7 56,383,000 8 63,076,000 16.83% 12.96% 10.32% 14.60% 13.33% 11.68% $ 2.71$ 2.95$ 3.06$ 2.96$ 3.06$ 3.19 $ 3.26$ 3.39$ 3.41$ 3.46$ 3.54$ 3.62 4,903 5,011 5,140 5,256 5,320 5,430 Gallons 201620172018201920202021 46,816,000 47,470,500 47,894,000 48,240,500 53,779,500 19,850,600 4,430,000 4,125,542 3,823,903 3,850,801 6,441,523 5,967,131 5,000,000 5,000,000 5,000,000 5,000,000 5,000,000 5,000,000 5,000,000 5,000,000 5,000,000 5,000,000 5,000,000 5,000,000 - - - - - - - - - - - - 1,800,000 1,550,000 1,550,000 1,550,000 1,550,000 1,550,000 4,000,000 4,000,000 4,000,000 4,000,000 5,000,000 4,000,000 7,358,000 7,000,000 7,000,000 7,000,000 7,000,000 7,000,000 - - - - - - 74,404,000 74,146,042 74,267,903 7 4,641,301 8 3,771,023 4 8,367,731 59 131 60 132 OTHER REPORT ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA FOR THE YEAR ENDED DECEMBER 31, 2021 61 133 62 134 ON MINNESOTA LEGAL COMPLIANCE Public Utilities Commission Elk River Municipal Utilities Elk River, Minnesota We have audited, in accordance with auditing standards generally accepted in the United States of America, the financial statements of the Elk River Municipal Utilities(the Utilities) of the City of Elk River, Minnesota (the City) as of and for the yearended December 31, 2021, and the related notes to the financial statementswhich collectively comprises the Utilities basic financial statements, and have issued our report thereon dated April 7, 2022. In connection with our audit, nothing came to our attention that caused us to believe that the Utilitiesfailed to comply with the provisions of the contracting and bidding, deposits and investments, conflicts of interest, public indebtedness, claims and disbursements, and miscellaneous provisions sections of the Minnesota Legal Compliance Audit Guide for Cities, promulgated by the State Auditor pursuant to Minn. Stat. § 6.65, insofar as they relate to accounting matters. 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 Utilitnoncompliance with the above referenced provisions, insofar as they relate to accounting matters. This report is intended solely for the information and use of those charged with governance and management of the Public Utilities Commission, andthe State Auditor and is not intended to be,and should not be,used by anyone other than these specified parties. Abdo Minneapolis, Minnesota April 7, 2022 63 135 UTILITIES COMMISSION MEETING TO:FROM: ERMU Commission Melissa Karpinski –Finance Manager MEETING DATE: AGENDA ITEM NUMBER: April 12, 2022 4.2 SUBJECT: 2021 Year End Reserve Balance ACTION REQUESTED: Designate unrestricted reserve balances above target levels for Electric and Water funds. BACKGROUND: The purpose for reserves to a public utility is to meet bond covenants and provide a financial buffer to mitigate unforeseen or volatile operational costs. In 2010, the commission adopted a financial reserves policy that defined the structure and formula on how financial reserves will be calculated for the Electric Utility and Water Utility funds. This provides transparency to the public on the purpose and levels of utility reserves. Additionally, this policy is consistent with Governance Policy G.4i2 Financial Reserves which was adopted by the commission in 2017. DISCUSSION: As defined by policy, the year end reserve balances are to be reviewed after the completion of the audit. These balances, if above their target levels, shall be unrestricted with a defaulting designation as working capital. The commission shall then consider optimal use of these unrestricted reserves. Staff recommends that unrestricted reserve balances above target levels for the Electric Utility fund be designated for electric service territory transfer costs, capital infrastructure costs, and Energy Adjustment Clause (EAC) to be capped at $500,000; and for the Water Utility fund to be designated for future capital infrastructure costs. Please note that part of the unrestricted reserve balances includes unspent bond proceeds for the new field services building. FINANCIAL IMPACT: None ATTACHMENTS: ERMU Policy – A.10 – Financial Reserves Policy ERMU Policy – G.4i2 – Financial Reserves Electric Reserves Policy Calculation Water Reserves Policy Calculation ______________________________________________________________________________ Page 1 of 1 136 MANAGEMENT POLICY Section: Category: Management Administration Policies Policy Reference: Policy Title: A.10 Financial Reserves Policy 1.0Purpose and Summary In order to maintain stable rates and provide reliable services, Elk River Municipal Utilities (ERMU) requires financial buffers in the form of reserves to mitigate changes in costs or operational performance. For ERMU there are two utility funds, the Electric Utility and the Water Utility. These funds shall have separate reserves. Their reserve balances shall be classified as either wĻƭƷƩźĭƷĻķ ŅƚƩ 5ĻĬƷ {ĻƩǝźĭĻ or ƓƩĻƭƷƩźĭƷĻķ 5ĻƭźŭƓğƷĻķ wĻƭĻƩǝĻ. The target levels for these reserves shall be determined by the criteria herein. These target levels and target criteria will be reviewed annually, modified by Utilities Commission to support the long-term goals of ERMU, and adopted with the annual budget. Unless otherwise specified by bond covenants, these reserve balances Management Investment Policy. 2.0Electric Utility Reserve Classifications Restricted for Debt Service: This reserve is established to maintain compliance with bond covenants. The target level for this reserve shall be set at the level specified by bond covenants. Unrestricted Designated Reserve: This reserve is established to address the short-term financial variability inherent in operating an Electric 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 load resulting from the actions of large customers, failure to achieve budgeted levels of net income, changes in cost of purchased power, changes in interest income, and general operational exposures. The target level for this reserve shall be set at the sum of 6 months operating expenditures less depreciation and less purchase power costs, plus the sum of ______________________________________________________________________________ Page 1 of 2 137 ERMU Management Policy A.10 Financial Reserves Policy ______________________________________________________________________________ interest payments, plus one month budgeted average purchase power cost. The balance above this target level shall be unrestricted. 3.0Water Utility Reserve Classifications Restricted for Debt Service: This reserve is established to maintain compliance with bond covenants. The target level for this reserve shall be set at the level specified by bond covenants. 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 shall be set at the sum of 6 months operating expenditures less depreciation plus the sum of The balance above this target level shall be unrestricted. 4.0Year-end Reserve Balances If the year-end reserve balances are above their target levels after the completion of the year- end audit, these balances shall be unrestricted with a defaulting designation as working capital. The Utilities Commission shall then consider optimal uses of these unrestricted reserves through any of the following but not limited to: working capital, designated for power costs (electric fund only), debt reduction, retention for reserve fund growth for future needs, or use for rate stabilization or reduction. If the year-end reserve balances are below their target levels after the completion of the year- end audit, the Utilities Commission shall consider the balances and plan for their replenishment to target levels in a timely manner. POLICY HISTORY: Adopted May 11, 2010 Revised May 10, 2011 *Moved November 12, 2019 Revised July 14, 2020 *As part of the Policy Manual Initiative, authority of this Financial Reserves Policy was delegated to management on November 12, 2019, and the policy was moved to the Management Policy Manual. ______________________________________________________________________________ Page 2 of 2 138 COMMISSIONPOLICY Section:Category: GovernanceDelegation to Management Policies Policy Reference:Policy Title: G.4i2Financial Reserves PURPOSE: With this policy, the Commission sets forth its expectations for the General Manager concerning the maintenance of POLICY: The General Manager shall ensure that ERMUmaintainscash reserves for its electric andwater utility enterprises thatarereasonable, prudent and necessary to: 1.Meet or exceed the requirements of all bond covenants 2.Demonstrate to rating agencies and investors that ERMUcredit worthy 3.Provide liquidity that is adequate, along withother risk-management measures, to ensure ongoing operation of the utility systems 4.Stabilize revenue requirements and customer rates 5.Manage the level of debt by fundinga portion of the capital investments In addition, the General Manager shallimplementaManagement Financial ReservesPolicythat sets forth the designated reserve funds to be maintained,along withtheir purposes andmethods for determining appropriate target levelsand requirements for internal controls, monitoring and reporting. Designated reserve funds may include, but are not limited to reserves restricted for debt service and unrestricted designated reserves. POLICY HISTORY: Adopted December 12, 2017 RevisedJuly 14, 2020 ______________________________________________________________________________ Page 1of1 139 8,508,3941,261,3597,882,326 Reserves 17,652,079 $$$$ 2021 n/a 75,523 258,736 3,352,3302,251,4932,020,037 Monthly $$$$$ 906,275 9,021,3561,779,0161,779,016 3,104,8332,170,3993,110,1159,021,356 40,227,95627,017,92023,459,97112,659,59912,659,599 Reserves $$$$$$$$$$$$$ ProposedAnnualAverage2022 140 Cost 4/2022 Cost Power Interest 61 Policy Power ReservesReservesReserves Expense and Purchased Balances Fund ReservesReservesReserves ExpendituresInterestDepreciationPurchasedPricipal Calculated CalculatedCalculated Cash Reserves Monthly Electric BudgetedBudgetedBudgetedProposedCalculatedProposedCalculatedProposed BudgetedBudgetedPeakAuditedCalculated ERMU Description 202220222022202220222021202120222022202220222022 Utilities Municipal for Service River Elk UnrestrictedDesignated2022ReservesRestrictedDebtUnrestrictedReserves 8,338,623 1,244,6947,093,930 Reserves $ $$$ 2021 n/a 3,864 99,927 269,616 Monthly $$$ Proposed 46,371 366,371 1,199,1241,361,3211,361,3219,445,5759,445,575 3,235,395 Reserves 10,806,896 $$$$$ $$$$$$ AnnualAverage2022 141 4/2022 Interest Policy ReservesReservesReserves 62 Expense and Balances Fund ReservesReservesReserves ExpendituresInterestDepreciationPricipal CalculatedCalculated Calculated Cash Reserves Water BudgetedBudgetedBudgetedBudgetedAuditedCalculatedProposedCalculatedProposedCalculatedProposed ERMU Description 20222022202220222021202220222022202220222022 Utilities Municipal for Service River Elk UnrestrictedDesignatedReservesRestrictedDebtUnrestrictedReserves UTILITIES COMMISSION MEETING TO:FROM: ERMU Commission Melissa Karpinski –Finance Manager MEETING DATE: AGENDA ITEM NUMBER: April 12, 2022 4.3 SUBJECT: 2021 Utilities Performance Incentive Compensation Distribution ACTION REQUESTED: Award the Performance Metrics and Compensation Distribution of 1.9% to qualifying employees per the terms of the policy. BACKGROUND: The Commission adopted a Performance Metrics program in December 2012, for implementation January 1, 2013, and revised January 14, 2020. This program was based on the ) program with the American Public Power Association’s Reliable Public Power Provider (RP 3 addition of financial goals. As defined by policy, this company performance basedprogram is designed to incentivize employee commitment towards the company’s success. “The successful performance of ERMU is measured in terms of the Utilities’ ability to meet our strategic goals and mission. By improving our efficiency and level of performance in meeting our strategic goals and mission we can improve the delivery of value to our customers.” Divided into categories representing core values of the company and again into sub-categories that are quantifiable, this program is designed to track goals that require the companywide support of employees to continually achieve. When the employees work together as a team to achieve these goals, the company recognizes a corresponding increase in value to our customers. DISCUSSION: The performance metrics were monitored and provided as updates to the employees and commission on a quarterly basis throughout the year. The program works exactly as intended as we witness employee motivation and efforts align to improve company performance for deficient criteria. Attached are the finalized results of the score card on which the employees have successfully achieved all the company performance metrics targets, except for one (the CAIDI metric). Per the policy, a multiplier of 95% would be used and qualifying employees would be eligible for a 1.9% distribution. FINANCIAL IMPACT: Budgeted item. ATTACHMENTS: ERMU Policy – G.4g1 – Performance Metrics and Incentive Compensation ERMU Performance Metrics and Incentive Compensation Policy Score Card - 2021 ______________________________________________________________________________ Page 1 of 1 142 G.4g1Performance Metrics and Incentive Compensation 1.0Purpose and Summary our strategic goals and mission. By improving our efficiency and level of performance in meeting our strategic goals and mission we can improve the delivery of value to our customers. To create incentives for employees to take personal responsibility for accomplishment of the Metrics-based Incentive Compensation system ( ERMU will have an opportunity, as a group, to earn annual incentive compensation for each qualifying employee by contributing individually to the overall success of ERMU on a daily basis. Under UPMIC, either all qualifying employees will earn an incentive compensation distribution in a given year, or none will. And not only will incentive compensation under UPMIC in that sense be an all or nothing proposition each year, but there will be an equal percentage sharebasis for all on which the incentive compensation will be paid out if earned. This appropriately reflects the reality that we all succeed, or fall short, together as a team. To administer the UPMIC and measure objectively the level of performance that must be achieved for qualifying employees to earn incentive compensation, the attached UMPIC be subject to revision annually based on the performance metrics adopted by the Commission Performance Metrics and creating incentive for employees to achieve the goals the Metrics embody, the Utilities believes it will be better able to focus efforts and resources on becoming more efficient and successful in meeting our strategic goals and mission and delivering improved value to our customers. 2.0Utilities Performance Metrics Score Card As reflected on the Score Card, the Performance Metrics are divided into the following three categories: Safety, Reliability and Quality of Utility Services; WorkforceDevelopment; and 143 Financial Goals. These categories are used to characterize the overall strategic goals and mission of ERMU. Under the Performance Metrics, these three main categories are then divided into various weighted factors, or sub-categories. These sub-categories, their percentage weight, and the goal or target for each, shall be established by the Utilities Commission annually. The Performance Metrics as adopted are reflected in the attached Score Card. As discussed above, the Performance Metrics and thus the Score Card are subject to modification and adoption by the Commission annually, which will normally occur during the U 3.0Utilities Performance Incentive Compensation Distribution Criteria Under the UMPIC a Performance-Based Compensation Incentive, if earned, will be distributed to Qualifying Employees annually. The total amount available to beearned by Utilities employees as a Performance Based Compensation Incentive each year will be an amount up to Period. The measuring period used to calculate how much, if any, of the Performance-Based Compensation Incentive the Utilities employees have earned will be the calendar year (the received its audit in the spring of the year following the Measurement Period, the Performance Metrics will be applied to determine whether the Performance-Based Compensation Incentive has been earned for the Measurement Period. In doing so, the performance of the Utilities in each sub-categorywill be reviewed. If the sub-category performance meets or exceeds the established goal, the sub-category will be scored with the designated percentage that will contribute to a total Performance Metrics Multiplier to be used as a factor in calculating the maximum factoring effect of 100%. The Multiplier is used to determine how much, if any, of the amount established by the Commission for the UMPIC Performance-Based Compensation Incentive has been earned in the Measurement Period. (For example if the Multiplier equals 100%, the distribution would equal 2%. If the Multiplier equals 75%, the distribution would equal 1.5%.) In other words, the amount establishedby the Commission may be earned on an annual basis by the group of Qualifying Employees (as defined below in Section 4.0) in whole, in part, or not at all. After the Multiplier is calculated on the Score Card, the Performance Based Compensation Incentive earned, if any, will be distributed to Qualifying Employees. The total amount to be distributed as the Performance Based Compensation Incentive will be the product of: a) the mployees during the Measurement Period. The percentage of the Performance Based Compensation Incentive awarded to each Qualifying Employee will be based on the gross wages of each Qualifying Employee during the Measurement Period. To each Qualifying Employee, the distribution would be allocated in a earned during the Measurement Period were equal to $50,000 and the Multiplier was equal to 100%, the total distribution to that employee would be equal to: $50,000 x 2% x 100% = $1,000.) 144 industry or customer base, the Commission reserves the right to withhold distribution of the Performance Based Compensation Incentive in any given year. 4.0Employee Qualifications and Distribution of the Incentive Compensation An employee of the Utilities willbe eligible for participation in the Performance Metrics Incentive Compensation distribution if the employee meets the following eligibility requirements a.The employee is in good standing with the Utilities. An employee would not be eligible while on disciplinary probation or a performance improvement action plan. b.The employee was a Full Time or Part Time employee during the Measurement Period. Seasonal, and Temporary employees are not eligible. The UMPIC Performance Based Compensation Incentive distribution will be made to Qualifying Employees on the first payroll date after the thirty day period following the date on which the in an open meeting. GP:3300714 v4 AdoptedDecember 12, 2012 Revised January 14, 2020 145 0 9030 7% 96% 0.39 1.99% 49.261 11.26%99.98% Result Current requirement126.250 meet requirementrequirementrequirementrequirementrequirementrequirementrequirementrequirementrequirementrequirementrequirementrequirementrequirement not Notes metmetmetDidmetmetmetmetmetmet 1 Awarded Multiplier Percentage 202 5550555555met 10met10met10met 95 20 Card 146 Score Multiplier: Min Min 0.5 95%95% 7.5% +15 Total <5% Target < percentile Budget <12% Meet > positive samples 0 Total Requirements Policy Score 5590th55<1205<9055555 10<10>20>10> PercentGoalScore Sub Compensation Program quality Incentive Trainings Recommended Standards Choice in Profit Turnover and Accuracy Copper Detection QualityLoss Energy and Loss Category Mandatory WaterLeadBacteriaCAIDISAIDISAIFILineWaterCleanParticipationEmployeeParticipationandMargins/NetReservesInventory Metrics Utilities 25 40 2012 2019 2016 12, 17, 11, of Municipal Performance Goals35 December Services Reliability OctoberDecember Quality River CategoryPercentSub Workforce Development and Utility Financial Safety, Elk G.4g1a AdoptedRevisedRevised UTILITIES COMMISSION MEETING TO:FROM: ERMU Commission Melissa Karpinski –Finance Manager MEETING DATE: AGENDA ITEM NUMBER: April 12, 2022 5.1 SUBJECT: Financial Report – February 2022 ACTION REQUESTED: Receive the February 2022 Financial Report DISCUSSION: Please note that these are the preliminary unaudited financial statements. Electric February’selectric kWh sales are up from the prior year, 2%. For further breakdown: Residential usage is up 4% Small Commercialusageis up 8% Large Commercial usage is down 1% Electric Operating Revenues for February of $3,043,701 are more than prior year by 7% and favorable to budget by 3%. February YTD is in line with prior year but unfavorable to budget by 4%. The budget YTD variance is mainly due to Elk River Sales. Other Revenues of $150,563 are less than the prior year by 31% and unfavorable to budget by 25%. Other Revenues YTD is less than the prior year by 17% and is unfavorable to budget by 22%. The prior YTD variance and budget YTD variance is mainly due to Contributions from Customers and Interest & Dividend Income. Overall, Total Revenues of $3,194,264 are more than the prior year by 4% and favorable to budget by 1%. YTD is less than the prior year by 1% and unfavorable to budget by 5%. Purchased Power of $2,304,997 is more than the prior year by 19% and is unfavorable to budget by 21%. YTD is more than prior year by 18% and is unfavorable to budget by 18%. YTD EAC charge is $520,849 more than prior year and $572,390 more than budget. EAC charge is partially offset by PCA revenue accrual. ,107are more thanthe prior year by 3% but are favorable to Administrative Expenses of $270 budget by 11%. YTD costs are more than the prior year by 2% but are favorable tobudgetby 9%. ______________________________________________________________________________ Page 1 of 2 147 General Expenses of $19,521areless than prior yearby 27% andarefavorable to budget by 60%. YTD costs are morethan the prior year by 8% but are favorable to budget by 48%. Total expensesYTDare 13% more than prior year andare unfavorable to budgetby 8%. The main driver causing the prior YTD variance and budget YTD variance is Purchased Power. For February 2022, the Electric Department has a Net Loss of ($86,871) and YTD Net Loss of ($588,737). This is behind the budgeted monthly Net Profit of $139,746 and is less than prior year monthly Net Profit of $152,176. YTD is behind the budgeted YTD Net Profit of $199,936 and is less than the prior YTD Net Profit of $245,095. Water February gallons of water sold are down 3% from the prior year. For further breakdown: Residential use is down 4% Commercial use is down 2% Water Operating Revenues for February of $128,288 are ahead of prior year by 3% and are favorable to budget by 9%. YTD is behind prior year by 1% but is favorable to budget by 4%. Other Revenues of $91,922 are ahead of prior year by 30% and favorable to budget by 23%. YTD is behind prior YTD by 4% and unfavorable to budget by 5%. The main driver causing the prior YTD variance and budget YTD variance is Interest & Dividend Income. Overall, Total Revenues of $220,210 are ahead of prior year by 12% but arebehind prior YTD by 2%. YTD Total Revenues are in linewith budget. Total Expenses of $278,984are morethanprior yearby 8% andmorethan theprior YTDby 5%. YTD is favorable to budget by 5%. For February 2022, the Water Department has a Net Loss of ($58,774) (typical for the water department) and YTD Net Loss of ($142,914). This is ahead ofthe budgeted monthly Net Loss of ($93,497) and ahead of the prior year monthly Net Loss of ($63,380). YTD is ahead of the budgeted YTD Net Loss of ($175,903) but is behind the prior YTD Net Loss of ($108,871). ATTACHMENTS: Balance Sheet 02.2022 Electric Balance Sheet 02.2022 Water Balance Sheet 02.2022 Summary Electric Statement of Revenues, Expenses and Changes in Net Position 02.2022 Summary Water Statement of Revenues, Expenses and Changes in Net Position 02.2022 Graphs Prior Year and YTD 2022 Detailed Electric Statement of Revenues, Expenses and Changes in Net Position 02.2022 Detailed Water Statement of Revenues, Expenses and Changes in Net Position 02.2022 ______________________________________________________________________________ Page 2 of 2 148