ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA ANNUAL FINANCIAL REPORT YEARS ENDED DECEMBER 31, 2012 AND 2011

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1 ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA ANNUAL FINANCIAL REPORT YEARS ENDED DECEMBER 31, 2012 AND 2011

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3 ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA TABLE OF CONTENTS DECEMBER 31, 2012 Page No. I. INTRODUCTORY SECTION Public Utilities Commission and Administration 5 II. FINANCIAL SECTION Independent Auditor s Report 9 Management s Discussion and Analysis 13 Financial Statements Statements of Net Position 20 Statements of Revenues, Expenses and Changes in Net Position 24 Statements of Cash Flows 26 Notes to Financial Statements 31 III. REQUIRED SUPPLEMENTARY INFORMATION Schedule of Funding Progress for the Retiree Health Plan 57 IV. SUPPLEMENTAL INFORMATION Schedules of Operating Revenues and Expenses 60 Electric Fund Summary of Operations and Unaudited Statistics 64 Water Fund Summary of Operations and Unaudited Statistics 66 V. OTHER REPORT Auditor s Report on Legal Compliance 71 1

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5 INTRODUCTORY SECTION ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA YEAR ENDED DECEMBER 31,

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9 FINANCIAL SECTION ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA YEARS ENDED DECEMBER 31, 2012 AND

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11 INDEPENDENT AUDITOR S REPORT Public Utilities Commission Elk River Municipal Utilities Elk River, Minnesota Report on the Financial Statements We have audited the accompanying financial statements of the business-type activities of the Elk River Municipal Utilities (the Utilities) of the City of Elk River, Minnesota (the City), as of and for the years ended December 31, 2012 and 2011, and the related notes to the financial statements, which collectively comprise the City s basic financial statements as listed in the table of contents. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express opinions on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Utilities preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Utilities internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall financial statement presentation. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. 9

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13 Opinions As discussed in Note 1B, the financial statements present only the Electric and Water enterprise funds and are not intended to present fairly the financial position of the City and the results of its operations and cash flows of its proprietary fund types in conformity with accounting principles generally accepted in the United States of America. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Electric and Water enterprise funds of the City as of December 31, 2012 and 2011 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Other Matters Change in Accounting Standards As described in the Note 6 to the basic financial statements, the Utilities adopted the provisions of Governmental Accounting Standards Board (GASB) Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position and Statement No. 65, Items Previously Reported as Assets and Liabilities, for the year ended December 31, Adoption of the provisions of these statements results in significant change to the classifications of the components of the financial statements. Required Supplementary Information Accounting principles generally accepted in the United States of America require that the Management s Discussion and Analysis and Schedule of Funding Progress, be presented to supplement the financial statements. Such information, although not a part of the financial statements, is required by the Government Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Supplementary Information in Relation to the Financial Statements as a Whole Our audits were conducted for the purpose of forming opinions on the financial statements that collectively comprise the Utilities financial statements as a whole. The introductory section and supplemental information listed in the table of contents are presented for the purpose of additional analysis and are not a required part of the financial statements of the Utilities. The supplemental information, except for the portion marked unaudited on which we express no opinion, has been subjected to the auditing procedures applied in the audits of the financial statements and, in our opinion, is fairly stated in all material respects in relation to the financial statements taken as a whole. The introductory section has not been subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we do not express an opinion or provide any assurance on them. May 6, 2013 Minneapolis, Minnesota ABDO, EICK & MEYERS, LLP Certified Public Accountants 11

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15 Management s Discussion and Analysis This section of the Elk River Municipal Utilities (the Utilities) annual financial report presents our analysis of the Utilities financial performance during the fiscal year that ended December 31, Please read it in conjunction with the financial statements, which follow this section. FINANCIAL HIGHLIGHTS The assets of the Utilities exceeded its liabilities at the close of the most recent fiscal year by $51,606,358 (net position). Net Position increased by $2,582,978 or 5 percent. Hot and dry weather conditions resulted in higher sales of electricity and water, far surpassing conservative budget goals. The Utilities cash balance at the close of the current fiscal year was $14,625,194. Electric usage was up an average of 4 percent. Residential usage increased less than 1 percent, while Commercial usage increased 4 percent and Industrial usage increased 8 percent. Water usage, however, was up an average of 20 percent. Residential usage increased 19 percent, and Commercial usage increased 16 percent. OVERVIEW OF THE FINANCIAL STATEMENTS This annual report consists of three parts; Management s Discussion and Analysis, Financial Statements, and Supplementary Information. The Financial Statements also include notes that explain in more detail some of the information in the financial statements. REQUIRED FINANCIAL STATEMENTS The financial statements of the Utilities report information about the Utilities using accounting methods similar to those used by private sector companies. These statements offer short-term and long-term financial information about its activities. The Statements of Net Position includes all of the Utilities assets and liabilities and provides information about the nature and amounts of investments in resources (assets) and the obligations to Utilities creditors (liabilities). It also provides the basis for computing rate of return, evaluating the capital structure of the Utilities and assessing the liquidity and financial flexibility of the Utilities. All of the current year s revenues and expenses are accounted for in the Statements of Revenues, Expenses and Changes in Net Position. This statement measures the success of the Utilities operations over the past year and can be used to determine whether the Utilities has successfully recovered all its costs through its user fees and other charges, profitability, and credit worthiness. The final required financial statement is the Statements of Cash Flows. The primary purpose of this statement is to provide information about the Utilities cash receipts and cash payments during the reporting period. The statement reports cash receipts, cash payments and net changes in cash resulting from operations, investing and financing activities and provides answers to such questions as where did cash come from, what was cash used for and what was the change in the cash balance during the reporting period. FINANCIAL ANALYSIS OF THE UTILITIES Our analysis of the Utilities begins on page 20 in the Financial Section. One of the most important questions asked about the Utilities finances is Is the Utilities as a whole better off or worse off as a result of this year's activities? The Statements of Net Position, and the Statements of Revenues, Expenses and Changes in Net Position report information about the Utilities activities in a way that will help answer this question. These two statements report the net position of the Utilities and changes in this net position. You can think of the Utilities net position (the difference between assets and liabilities) as one way to measure financial health or financial position. Over time, increases or decreases in the Utilities net position is one indicator of whether its financial health is improving or deteriorating. However, you will need to consider other non-financial factors such as changes in economic conditions, population growth, zoning, and new or changed government legislation. 13

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17 Water and Electric Rates - Continued Water - The Utilities latest increase in residential and commercial rates was effective January 2013, after a three year rate freeze. The monthly base charge for residential customers is $7.80 per month. In addition to the base charge, the Utilities currently charges its residential customers $1.56 per 1,000 gallons up to 9,000 gallons, $3.50 per 1,000 gallons between 9,000 gallons and 15,000 gallons, and $4.00 per 1,000 gallons for usage above 15,000 gallons. Commercial customer s base charges are based upon meter size, from $9.36 to $ An irrigation meter is $41.60 for every month the meter is utilized. There is also a charge per thousand gallons, the same tiers as the residential rates of $1.56, $3.50, and $4.00, except the graduation from the lower tier to the higher tier(s) is calculated based on previous consumption. Certain other rates may be offered for conservation incentive purposes. The Utilities offer a Senior Citizen rate as well. The Utilities requires payment of all utility bills to be paid by the due date stated on the monthly bill. A ten percent penalty is assessed for payments not received by the due date. The Utility may discontinue service of a customer not complying with the disconnect policy of the Utility after receiving a written disconnect notice. Residential and Commercial/Industrial single phase 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 $ to have their service reconnected. Residential and Commercial/Industrial water customer that have their water shut-off will be charged a fee of $ to have their water turned on/reconnected. There are no reconnections after 3:30pm and payments for reconnection /turn on are not accepted at the property site; payments must be made prior to dispatching reconnection. Customers can come in to the office between the hours of 8:00am and 3:00pm to make the payment by cash, money order or credit card; or pay online or by phone with a credit card. The Utilities abides by the Cold Weather Rules. Deposit Policy Per our Deposit Policy, the Utility collects social security numbers from new accounts and utilizes a credit risk assessment tool called Online Utility Exchange to determine if a deposit is necessary as a proactive measure to try and reduce uncollectible accounts. The amount of the deposit required will depend on the risk identified with the customer. For residential customers, if there is a 68 percent or higher probability of non default and no negative history (no disconnection for non-payment or late payments two or more times within 12 months) there is no deposit required. If there is a lower than 68 percent probability of non default, a deposit appropriate to the services supplied will be required before utility service will be extended. Residential deposit amounts are $100 for apartments, $100 for homes with water and sewer, $150 for homes with electric only services, and $250 for homes with all services (electric, water, and sewer). For commercial and industrial customers, a service agreement would need to be signed that identifies the guarantor of their business and the guarantor s social security number. A deposit of 2 times the estimated highest monthly bill will be required, with a minimum deposit of $250. The deposit shall be in the form of a cash deposit, personal payment guarantee, or an irrevocable letter of credit. The irrevocable letter of credit will be renewed as required and failure to do so will result in a charge equal to the amount of the letter of credit applied to the monthly utility bill. Deposits will be retained until the account is closed. The deposit will be returned to the customer within 45 days of termination of service, provided that the customer has paid in full all amounts due on the account. The appropriate interest will be applied to the account per state statutes. 15

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20 ECONOMIC FACTORS AND NEXT YEAR S BUDGETS AND RATES The increased emphasis toward renewable energy and away from coal-based energy, the challenge to reduce energy and water consumption while still maintaining the existing infrastructure, and the smart grid developments are all factors that point to potential increased cost in the coming years. It is the Utilities goal to not have to rely on increasing rates to meet those increases but continue to look for ways to increase efficiencies and reduce costs, while providing excellent customer service. Elk River Municipal Utilities mission is to provide safe, cost-effective, reliable, quality utilities in an environmentally and financially responsible manner. That will be a challenge in the coming years but it is a welcome challenge. CONTACTING THE UTILITIES FINANCIAL MANAGER This financial report is designed to provide our citizens, customers, investors and creditors with a general overview of the Utilities finances and to demonstrate the Utilities accountability for the money it receives. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to Theresa Slominski, Elk River Municipal Utilities, PO Box 430, Elk River, Minnesota or at Orono Parkway in Elk River, MN. 18

21 FINANCIAL STATEMENTS ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA YEARS ENDED DECEMBER 31, 2012 AND

22 ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA STATEMENTS OF NET POSITION DECEMBER 31, 2012 AND 2011 ASSETS CURRENT ASSETS Cash and temporary investments 10,646,164 Electric Restated $ $ 8,380,396 Receivables Accrued interest 9,286 4,749 Accounts, net of allowance 2,293,525 2,498,647 Special assessments - - Other receivables 25,403 4,962 Due from other City fund 6,839 27,551 Due from other governments - 1,627 Inventories 928, ,125 Prepaid expenses 187, ,066 TOTAL CURRENT ASSETS 14,097,856 12,037,123 CAPITAL ASSETS Land 233, ,236 Land improvements 63,147 63,147 Buildings 2,847,699 2,735,797 Equipment and machinery 4,180,967 4,102,753 Infrastructure 46,403,093 45,482,434 Construction in progress 281, ,838 CAPITAL ASSETS, COST 54,009,302 52,785,205 LESS ACCUMULATED DEPRECIATION (27,883,481) (25,885,141) TOTAL CAPITAL ASSETS, NET 26,125,821 26,900,064 OTHER ASSETS Restricted cash 724, ,500 TOTAL ASSETS 40,948,177 39,661,687 DEFERRED OUTFLOWS Deferred charge on refunding 67,011 73,603 TOTAL ASSETS AND DEFERRED OUTFLOW OF RESOURCES 41,015,188 39,735,290 The notes to the financial statements are an integral part of this statement. 20

23 Water Total Restated Restated $ 3,254,530 $ 2,619,574 $ 13,900,694 $ 10,999,970 2,322 1,187 11,608 5, ,307 97,689 2,417,832 2,596,336 25,935 18,821 25,935 18,821 2,703 10,591 28,106 15, , , , , ,627 16,920 25, ,720 1,023,034 34,572 18, , ,751 3,590,578 2,955,114 17,688,434 14,992,237 88,417 81, , , ,147 63, , ,828 3,639,025 3,506, , ,173 4,556,684 4,458,926 32,372,187 32,087,127 78,775,280 77,569,561 3,825 4, , ,726 33,631,472 33,300,555 87,640,774 86,085,760 (11,976,338) (10,949,382) (39,859,819) (36,834,523) 21,655,134 22,351,173 47,780,955 49,251, , ,500 25,245,712 25,306,287 66,193,889 64,967,974 16,754 18,402 83,765 92,005 25,262,466 25,324,689 66,277,654 65,059,979 21

24 ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA STATEMENTS OF NET POSITION - CONTINUED DECEMBER 31, 2012 AND 2011 Electric Restated CURRENT LIABILITIES Accounts payable $ 1,860,460 $ 2,042,190 Salaries and benefits payable 81,732 74,499 Accrued interest payable 94, ,131 Due to other City funds 463, ,105 Due to other governments 155, ,408 Customer deposits payable 386, ,508 Unearned revenue 8,262 - Compensated absences - current portion 101,094 92,925 Notes payable - current portion 186, ,444 Bonds payable - current portion 588, ,000 TOTAL CURRENT LIABILITIES 3,926,093 3,983,210 NON-CURRENT LIABILITIES Net other postemployment benefits liability 40,360 35,759 Compensated absences - less current portion 115, ,119 Notes payable - less current portion 1,789,224 1,979,438 Bonds payable, net - less current portion 5,410,254 6,001,525 TOTAL NON-CURRENT LIABILITIES 7,355,811 8,138,841 TOTAL LIABILITIES 11,281,904 12,122,051 NET POSITION Net investment in capital assets 18,218,766 18,250,260 Restricted for debt service 724, ,500 Unrestricted 10,790,018 8,638,479 TOTAL NET POSITION $ 29,733,284 $ 27,613,239 The notes to the financial statements are an integral part of this statement. 22

25 Water Total Restated Restated $ 33,208 $ 85,062 $ 1,893,668 $ 2,127,252 8,065 6,463 89,797 80,962 43,005 49, , ,202 42,078 20, , , , ,326 6,311 6, , ,819 31,095 29,900 39,357 29,900 44,229 41, , , , , , ,000 1,105,000 1,050, , ,793 4,651,084 4,714, ,360 35,759 38,088 39, , , ,789,224 1,979,438 2,626,313 3,144,131 8,036,567 9,145,656 2,664,401 3,183,755 10,020,212 11,322,596 3,389,392 3,914,548 14,671,296 16,036,599 18,528,575 18,734,444 36,747,341 36,984, , ,500 3,344,499 2,675,697 14,134,517 11,314,176 $ 21,873,074 $ 21,410,141 $ 51,606,358 $ 49,023,380 23

26 ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN FUND NET POSITION YEARS ENDED DECEMBER 31, 2012 AND 2011 Electric Restated OPERATING REVENUES Charges for services $ 29,016,238 $ 26,885,940 Security systems 295, ,432 LFG project 1,053,807 1,008,401 Generation credit (501,473) 140,609 Connection maintenance 156,204 35,564 Customer penalties 238, ,040 TOTAL OPERATING REVENUES 30,258,690 28,583,986 OPERATING EXPENSES Purchased power 20,499,773 19,604,951 Production 885, ,580 Distribution 1,023,849 1,075,162 Depreciation 2,099,594 2,041,717 Customer accounts 707, ,619 General and administrative 2,133,561 2,183,021 TOTAL OPERATING EXPENSES 27,350,312 26,433,050 OPERATING INCOME (LOSS) 2,908,378 2,150,936 NONOPERATING REVENUES (EXPENSES) Interest income 117, ,983 Miscellaneous revenue 144,779 73,712 Interest expense (236,261) (256,141) Gain (Loss) on sale of capital assets 2,260 (37,158) TOTAL NONOPERATING REVENUES (EXPENSES) 28,531 (105,604) INCOME BEFORE CONTRIBUTIONS AND TRANSFERS 2,936,909 2,045,332 CAPITAL CONTRIBUTIONS - DEVELOPER INFRASTUCTURE and CONNECTION FEES - - CONTRIBUTION OF ASSET FROM CITY - - TRANSFERS FROM OTHER CITY FUNDS - - TRANSFERS TO OTHER CITY FUNDS (816,864) (711,415) CHANGE IN NET POSITION 2,120,045 1,333,917 NET POSITION AS RESTATED, JANUARY 1 27,613,239 26,279,322 NET POSITION, DECEMBER 31 $ 29,733,284 $ 27,613,239 The notes to the financial statements are an integral part of this statement. 24

27 Water Total Restated Restated $ 2,219,145 $ 1,796,086 $ 31,235,383 $ 28,682, , , ,053,807 1,008, (501,473) 140,609 25,387 17, ,591 53,450 20,610 18, , ,885 2,265,142 1,832,817 32,523,832 30,416, ,499,773 19,604, , ,079 1,344,732 1,255, , ,213 1,186,629 1,209,375 1,028, ,197 3,128,187 3,021,914 48,385 39, , , , ,403 2,594,625 2,647,424 2,159,558 1,988,759 29,509,870 28,421, ,584 (155,942) 3,013,962 1,994,994 30,870 28, , ,534 78,739 84, , ,279 (105,256) (119,740) (341,517) (375,881) (1,000) - 1,260 (37,158) 3,353 (6,622) 31,884 (112,226) 108,937 (162,564) 3,045,846 1,882, , , , , , ,845-1, ,823 1, ,823 (40,828) (25,000) (857,692) (736,415) 462, ,112 2,582,978 1,655,029 21,410,141 21,089,029 49,023,380 47,368,351 $ 21,873,074 $ 21,410,141 $ 51,606,358 $ 49,023,380 25

28 ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2012 AND 2011 Electric CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers and users $ 30,481,587 $ 28,519,094 Other operating cash receipts 125, ,385 Payments to suppliers (23,771,526) (22,728,996) Payments to employees (1,460,301) (1,515,439) NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 5,375,725 4,396,044 CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Transfers from City - - Transfers to City (816,864) (711,415) Increase (decrease) in due to other City funds 84,127 (103) NET CASH PROVIDED (USED) BY NONCAPITAL FINANCING ACTIVITIES (732,737) (711,518) CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Acquisition of capital assets (1,334,562) (1,010,116) Proceeds from sale of capital assets 11,471 - Proceeds from connection fees - - Principal payments on revenue bonds (559,000) (548,000) Payments on short term account to acquire capital assets (180,000) - Interest paid on revenue bonds (241,275) (257,670) Principal payments on promissory note (187,070) (182,436) NET CASH PROVIDED (USED) BY CAPITAL AND RELATED FINANCING ACTIVITIES (2,490,436) (1,998,222) CASH FLOWS FROM INVESTING ACTIVITIES Interest on investments 113, ,350 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,265,768 1,796,654 CASH AND CASH EQUIVALENTS, JANUARY 1 9,108,171 7,311,517 CASH AND CASH EQUIVALENTS, DECEMBER 31 11,373,939 9,108,171 RECONCILIATION OF CASH AND CASH EQUIVALENTS TO THE STATEMENT OF NET POSITION Cash and temporary investments 10,646,164 8,380,396 Restricted cash 724, ,500 TOTAL CASH AND CASH EQUIVALENTS $ 11,370,664 $ 9,104,896 The notes to the financial statements are an integral part of this statement. 26

29 Water Total $ 2,231,224 $ 1,826,255 $ 32,712,811 $ 30,345,349 87,822 88, , ,538 (836,986) (611,490) (24,608,512) (23,340,486) (351,049) (335,002) (1,811,350) (1,850,441) 1,131, ,916 6,506,736 5,363,960 1, ,823 1, ,823 (40,828) (25,000) (857,692) (736,415) 55,260 (26,971) 139,387 (27,074) 15, ,852 (716,933) (450,666) (114,709) (1,024,229) (1,449,271) (2,034,345) , , , , ,853 (491,000) (477,000) (1,050,000) (1,025,000) - - (180,000) - (110,492) (124,603) (351,767) (382,273) - - (187,070) (182,436) (541,594) (1,429,979) (3,032,030) (3,428,201) 29,735 27, , , ,956 (173,568) 2,900,724 1,623,086 2,619,574 2,793,142 11,727,745 10,104,659 3,254,530 2,619,574 14,628,469 11,727,745 3,254,530 2,619,574 13,900,694 10,999, , ,500 $ 3,254,530 $ 2,619,574 $ 14,625,194 $ 11,724,470 27

30 ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA STATEMENTS OF CASH FLOWS - CONTINUED YEARS ENDED DECEMBER 31, 2012 AND 2011 RECONCILIATION OF OPERATING INCOME (LOSS) TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES Operating income (loss) 2,908,378 Electric $ $ 2,150,936 Adjustments to reconcile operating income (loss) to net cash provided (used) by operating activities: Other revenue related to operations 144,779 73,712 Bad debt expense 42,395 30,312 Depreciation 2,099,594 2,041,717 (Increase) decrease in assets: Accounts receivable 162,727 (125,863) Other receivables (20,441) 47,673 Special assessments - - Due from other governments 1,627 - Inventories 68,325 20,967 Prepaid expenses (65,773) 18,050 Increase (decrease) in liabilities: Accounts payable (1,730) (2,479) Salaries and benefits payable 7,233 2,844 Net other postemployment benefits liability 4,601 5,663 Unearned revenue 8,262 - Compensated absences 2, Due to other governments (38,183) 71,130 Customer deposits payable 51,908 60,971 NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ 5,375,725 $ 4,396,044 NONCASH CAPITAL AND RELATED FINANCING ACTIVITIES Amortization of bond premium $ 3,271 $ 3,275 Amortization of deferred charges on refunding $ 6,592 $ 6,600 Loss on disposal of capital assets $ 9,211 $ 37,158 Capital assets purchased on account $ - $ 180,000 Contribution of capital assets $ - $ - The notes to the financial statements are an integral part of this statement. 28

31 Water Total $ 105,584 $ (155,942) $ 3,013,962 $ 1,994,994 78,739 84, , , ,581 30,613 1,028, ,197 3,128,187 3,021,914 (26,804) (742) 135,923 (126,605) 7,888 (7,147) (12,553) 40,526 (7,114) (5,820) (7,114) (5,820) - - 1,627-8,989 12,839 77,314 33,806 (15,887) (263) (81,660) 17,787 (51,854) 45,701 (53,584) 43,222 1,602 2,168 8,835 5, ,601 5,663 1,195 10,733 9,457 10, , (918) 916 (39,101) 72, ,908 60,971 $ 1,131,011 $ 967,916 $ 6,506,736 $ 5,363,960 $ 818 $ 819 $ 4,089 $ 4,094 $ 1,648 $ 1,650 $ 8,240 $ 8,250 $ 1,000 $ - $ 10,211 $ 37,158 $ - $ - $ - $ 180,000 $ 218,845 $ - $ 218,845 $ - 29

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33 ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011 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 and consequently it s Electric and Water funds are enterprise funds of the City. The Public Utilities Commission (the Commission) members are appointed by the City Council. The Commission determines all matters of policy. The Commission appoints personnel responsible for the proper administration of all affairs relating to the Utilities. The Utilities distributes electricity and water to the residents of Elk River, Dayton, Big Lake and Otsego, Minnesota. The Utilities has considered all potential units for which it is financially accountable, and other organizations for which the nature and significance of their relationship with the Utilities are such that exclusion would cause the Utilities financial statements to be misleading or incomplete. The Governmental Accounting Standards Board (GASB) has set forth criteria to be considered in determining financial accountability. These criteria include appointing a voting majority of an organization s governing body, and (1) the ability of the primary government to impose its will on that organization or (2) the potential for the organization to provide specific benefits to, or impose specific financial burdens on the primary government. There are no component units. B. Measurement focus, basis of accounting and basis of presentation The accounts of the Utilities are organized and operated on the basis of funds. A fund is an independent fiscal and accounting entity with a self-balancing set of accounts. Fund accounting segregates funds according to their intended purpose and is used to aid management in demonstrating compliance with finance-related legal and contractual provisions. The minimum number of funds is maintained consistently with legal and managerial requirements. Revenue resulting from exchange transactions, in which each party gives and receives essentially equal value, is recorded on the accrual basis when the exchange takes place. Non-exchange transactions, in which the Utilities receives value without directly giving equal value in return, include property taxes, grants, entitlements and donations. Revenue from property taxes is recognized in the year for which the tax is levied. Revenue from grants, entitlements and donations is recognized in the year in which all eligibility requirements have been satisfied. Eligibility requirements include timing requirements, which specify the year when the resources are required to be used or the year when use is first permitted, matching requirements, in which the Utilities must provide local resources to be used for a specified purpose, and expenditure requirements, in which the resources are provided to the Utilities on a reimbursement basis. Grants and entitlements received before eligibility requirements are met are also recorded as unearned revenue. The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. 31

34 ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011 Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Proprietary funds are accounted for on the flow of economic resources measurement focus and use the accrual basis of accounting. Under this method, revenues are recorded when earned and expenses are recorded at the time liabilities are incurred. Proprietary funds include the following fund type: Enterprise funds account for those operations that are financed and operated in a manner similar to private business or where the Utilities has decided that the determination of revenues earned, costs incurred and/or net income is necessary for management accountability. Proprietary funds distinguish operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund s principal ongoing operations. The principal operating revenues of the Water and Electric enterprise funds are charges to customers for sales and service. Operating expenses for enterprise funds include the cost of sales and services, administrative expenses and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses. The Utilities reports the following major proprietary funds: The Electric fund accounts for the electric distribution operations. The Water fund accounts for the water distribution system. When both restricted and unrestricted resources are available for use, it is the Utilities policy to use restricted resources first, then unrestricted resources as they are needed. C. Assets, liabilities, deferred inflows, and net position Cash and cash equivalents The Utilities cash and cash equivalents are considered to be cash on hand, demand deposits and short-term investments with original maturities of three months or less from the date of acquisition. Cash balances from all funds are pooled and invested, to the extent available, in certificates of deposit and other authorized investments. Earnings from such investments are allocated on the basis of applicable participation by each of the funds. 32

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37 ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011 Note 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Compensated absences All vacation benefits can be carried over from year to year and will be payable upon termination. Sick leave can be accumulated to a maximum of 960 hours from year to year. Upon termination or retirement, employees will have 50 percent of unused sick leave, up to a maximum of 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 , subdivision 2b., public employers must allow retirees and their dependents to continue coverage indefinitely in an employer-sponsored health care plan, under the following conditions: 1) Retirees must be receiving (or eligible to receive) an annuity from a Minnesota public pension plan, 2) Coverage must continue in group plan until age 65, and retirees must pay no more than the group premium, and 3) Retirees may obtain dependent coverage immediately before retirement. All premiums are funded on a pay-as-you-go basis. The liability was actuarially determined, in accordance with GASB Statement 45, at January 1, Net position Net position represents the difference between assets and liabilities and deferred inflows. Net position is displayed in three components: a. Net investment in capital assets - Consists of capital assets, net of accumulated depreciation reduced by any outstanding debt attributable to acquire capital assets. b. Restricted net position - Consists of net position restricted when there are limitations imposed on their use through external restrictions imposed by creditors, grantors, laws or regulations of other governments. c. Unrestricted net position - All other net position that do not meet the definition of restricted or net investment in capital assets. Comparative data and reclassifications Comparative total data for the prior year have been presented in the selected sections of the accompanying financial statements in order to provide an understanding of changes in the Utilities financial position and operations. Also, certain amounts presented in the prior year data have been reclassified in order to be consistent with the current year s presentation. Deferred outflows of resources In addition to assets, the statement of financial position will sometimes report a separate section for deferred outflows of resources. This separate financial statement element, deferred outflows of resources, represents a consumption of net position that applies to a future period(s) and so will not be recognized as an outflow of resources (expense/ expenditure) until then. The Utility only has one item that qualifies for reporting in this category. It is the deferred charge on refunding reported in the government-wide statement of net position. A deferred charge on refunding results from the difference in the carrying value of refunded debt and its reacquisition price. This amount is deferred and amortized over the shorter of the life of the refunded or refunding debt. 35

38 Note 2: DETAILED NOTES ON ALL FUNDS A. Deposits and investments ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011 Custodial credit risk for deposits and investments is the risk that in the event of a bank failure, the Utilities deposits and investments may not be returned or the Utility will not be able to recover collateral securities in the possession of an outside party. In accordance with Minnesota statutes and as authorized by the Commission, the Utility maintains deposits at those depository banks, all of which are members of the Federal Reserve System. Minnesota statutes require that all Utility deposits be protected by insurance, surety bond or collateral. The market value of collateral pledged must equal 110 percent of the deposits not covered by insurance or bonds. Authorized collateral in lieu of a corporate surety bond includes: United States government Treasury bills, Treasury notes, Treasury bonds; Issues of United States government agencies and instrumentalities as quoted by a recognized industry quotation service available to the government entity; General obligation securities of any state or local government with taxing powers which is rated A or better by a national bond rating service, or revenue obligation securities of any state or local government with taxing powers which is rated AA or better by a national bond rating service; General obligation securities of a local government with taxing powers may be pledged as collateral against funds deposited by that same local government entity; Irrevocable standby letters of credit issued by Federal Home Loan Banks to a municipality accompanied by written evidence that the bank s public debt is rated AA or better by Moody s Investors Service, Inc., or Standard & Poor s Corporation; and Time deposits that are fully insured by any federal agency. Minnesota statutes require that all collateral shall be placed in safekeeping in a restricted account at a Federal Reserve Bank, or in an account at a trust department of a commercial bank or other financial institution that is not owned or controlled by the financial institution furnishing the collateral. The selection should be approved by the government entity. At December 31, 2012, the Utilities carrying amount of deposits was $11,508,557 and the bank balance was $12,484,544. Of the bank balance $250,000 was covered by federal depository insurance, and the remaining balance was covered by collateral held by the pledging financial institution s agent in the Utilities name. At December 31, 2011, the Utilities carrying amount of deposits was $8,669,521 and the bank balance was $10,032,467. Of the bank balance $250,000 was covered by federal depository insurance, and the remaining balance was covered by collateral held by the pledging financial institution s agent in the Utilities name. 36

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46 ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011 Note 2: DETAILED NOTES ON ALL FUNDS - CONTINUED Advance Refunding On April 21, 2010 the Utilities issued $1,265,000 of G.O. Capital Improvement Plan Bonds, Series 2010A, bearing an average coupon rate of 3.58 percent, to provide resources for the advance refunding of $1,270,000 of the outstanding principal of the City Hall Expansion Revenue Bonds, 2002B on February 1, The proceeds of the Series 2010A Bonds were deposited into an Escrow Account which shall pay issuance costs and purchase securities bearing interest to provide sufficient funds to pay the principal and interest on the 2002B bonds due April 21, 2010 through February 1, 2013 and pay the $1,125,000 called Revenue Bonds of 2002B on February 1, As a result of the refunding issue, the 2002B bonds were defeased and the Utilities will save $97,000 in debt service payments and achieve an economic gain (the present value of the difference between the old and the new debt service) of $90,

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50 ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011 Note 3: DEFINED BENEFIT PENSION PLANS - STATEWIDE - CONTINUED Two methods are used to compute benefits for PERA s Coordinated and Basic Plan members. The retiring member receives the higher of step-rate benefit accrual formula (Method 1) or a level accrual formula (Method 2). Under Method 1, the annuity accrual rate for a Basic Plan member is 2.2 percent of average salary for each of the first 10 years of service and 2.7 percent for each remaining year. The annuity accrual rate for a Coordinated Plan member is 1.2 percent of average salary for each of the first 10 years and 1.7 percent for each remaining year. Under Method 2, the annuity accrual rate is 2.7 percent of average salary for Basic Plan members and 1.7 percent for Coordinated Plan members for each year of service. For all GERF members hired prior to July 1, 1989 whose annuity is calculated using Method 1, a full annuity is available when age plus years of service equal 90. Normal retirement age is 65 for Basic and Coordinated members hired prior to July 1, Normal retirement age is the age for unreduced Social Security benefits capped at 66 for Coordinated members hired on or after July 1, A reduced retirement annuity is also available to eligible members seeking early retirement. There are different types of annuities available to members upon retirement. A single-life annuity is a lifetime annuity that ceases upon death of the retiree--no survivor annuity is payable. There are also various types of joint and survivor annuity options available which will be payable over joint lives. Members may also leave their contributions in the fund upon termination of public service, in order to qualify for a deferred annuity at retirement age. Refunds of contributions are available at any time to members who leave public service, but before retirement benefits begin. The benefit provisions stated in the previous paragraphs of this section are current provisions and apply to active plan participants. Vested, terminated employees who are entitled to benefits but are not receiving them yet, are bound by the provisions in effect at the time they last terminated their public service. PERA issues a publicly available financial report that includes financial statements and required supplementary information for GERF. That report may be obtained on the Internet at by writing to PERA, 60 Empire Drive #200, St. Paul, Minnesota, or by calling (651) or B. Funding policy Minnesota statutes, chapter 353 sets the rates for employer and employee contributions. These statutes are established and amended by the State legislature. The Utilities makes annual contributions to the pension plans equal to the amount required by Minnesota statutes. GERF Basic Plan members and Coordinated Plan members were required to contribute 9.1 percent and 6.25 percent, respectively, of their annual covered salary in In 2012, the Utilities was required to contribute the following percentages of annual covered payroll: percent for Basic Plan GERF members and 7.25 percent for Coordinated Plan GERF members. The Utilities contributions to the General Employees Retirement Fund for the years ending December 31, 2012, 2011 and 2010 were $170,944, $160,459, and $153,634, respectively. The Utilities contributions were equal to the contractually required contributions for each year as set by Minnesota statute. 48

51 ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011 Note 4: OTHER INFORMATION A. Territorial acquisition agreement In 1991, the Utilities entered into a 20 year agreement to transfer ownership of electric plant and electric service to customers in certain areas receiving electric service from Anoka Electric Cooperative, Inc. (AEC). In 2010 the Utility completed the final purchase under this agreement. The agreed cost of property purchased from AEC is net book value. The Utilities also pays AEC for loss of revenue for each area acquired based on a formula outlined in the agreement. In addition, the Utilities will compensate AEC for the loss of revenue from the future sale of electricity to electric customers in the areas acquired from AEC for a period of ten years from the date of sale of each individual area. The Utilities paid $3,948 and $8,114 in 2012 and 2011, respectively, for loss of revenues under this agreement. All amounts paid are included in property and equipment. B. Risk management The Utilities is exposed to various risks of loss related to torts; theft of, damage to and destruction of assets; errors and omissions; injuries to employees; and natural disasters for which the Utilities carries commercial insurance. The Utilities obtains insurance through participation in the League of Minnesota Cities Insurance Trust (LMCIT), which is a risk sharing pool with approximately 800 other governmental units. The Utilities pays an annual premium to LMCIT for its workers compensation and property and casualty insurance. The LMCIT is self-sustaining through member premiums and will reinsure for claims above a prescribed dollar amount for each insurance event. Settled claims have not exceeded the Utilities coverage in any of the past three fiscal years. Liabilities are reported when it is probable that a loss has occurred and the amount of the loss can be reasonably estimated. Liabilities, if any, include an amount for claims that have been incurred but not reported (IBNRs). The Utilities management is not aware of any incurred but not reported claims. C. Commitments The Utilities has received notice from their power supplier regarding the existing all requirements power contract exercising their right to give ten years notice to cancel the contract. The cancellation date would be effective September 30, The process has begun to renegotiate the existing contract, or contract with another power supplier. 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%. The return on this investment through CMMPA is designed to provide approximately $124,000 annually over the 40 year project life. The interim financing of the CapX-Brookings project was closed February 2012 and the principal amount of this note was paid off with the permanent financing. 49

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54 ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2012 AND 2011 Note 5: POSTEMPLOYMENT BENEFITS OTHER THAN PENSION - CONTINUED Health insurance premiums health insurance premiums for retirees were used per the valuation report. Withdrawal - The probability that an employee will remain employed until the assumed retirement age was determined using non-group specific age-based turnover data provided in Table 1 in Paragraph 35b of GASB 45. Disability - None Actuarial Method - Projected Unit Credit with 30-year amortization of the unfunded liability. Valuation date - January 1, 2011 Based on the historical and expected returns of the Utilities short-term investment portfolio, a discount rate of 4.0 percent was used. In addition, a simplified version of the entry age actuarial cost method was used. The unfunded actuarial accrued liability is being amortized as a level dollar amount over an open basis. The remaining amortization period at December 31, 2012 was thirty years. 52

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57 REQUIRED SUPPLEMENTARY INFORMATION ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA YEAR ENDED DECEMBER 31,

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61 SUPPLEMENTAL INFORMATION ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA YEAR ENDED DECEMBER 31,

62 ELK RIVER MUNICIPAL UTILITIES ELK RIVER, MINNESOTA SUPPLEMENTAL INFORMATION SCHEDULES OF OPERATING REVENUES AND EXPENSES YEARS ENDED DECEMBER 31, 2012 AND 2011 OPERATING REVENUES Charges for services Elk River 26,215,619 Electric Restated $ $ 24,264,576 Otsego 2,294,146 2,110,083 Big Lake 271, ,588 Dayton 234, ,693 Security systems 295, ,432 LFG Project 1,053,807 1,008,401 Generation credit (501,473) 140,609 Connection Maintenance 156,204 35,564 Customer penalties 238, ,040 TOTAL OPERATING REVENUES 30,258,690 28,583,986 OPERATING EXPENSES Purchased power 20,499,773 19,604,951 Production Supervision and labor 68,207 70,181 Natural gas 27,265 34,084 Supplies and power for pumping 62,884 59,674 Landfill gas expense 683, ,504 Maintenance of structures 19,550 20,467 Maintenance of equipment 14,067 15,421 Maintenance of plant 10,777 10,249 Total 885, ,580 Transmission and distribution Supervision and labor 30,732 32,272 Maintenance of overhead lines 222, ,978 Maintenance of underground lines 173, ,344 Maintenance of station equipment 53,223 60,874 Transportation 95, ,763 Maintenance of customer service 6,459 7,605 Maintenance of customer meters 68,710 85,829 Miscellaneous 373, ,497 Total 1,023,849 1,075,162 Services to City 481, ,934 Depreciation 2,099,594 2,041,717 Customer accounts expense Meter reading 15,971 19,208 Billing and collection 167, ,165 Bad debts 42,395 30,312 Total 225, ,685 60