MUSKEGO WATER PUBLIC UTILITY a Proprietary-Enterprise Fund of the CITY OF MUSKEGO Waukesha County, Wisconsin FINANCIAL STATEMENTS Including Independent Auditors’ Report December 31, 2012 and 2011 Prepared by City of Muskego Finance and Administration Department W182 S8200 Racine Avenue, Muskego, WI 53150-0749 Waukesha County, Wisconsin CITY OF MUSKEGO WATER PUBLIC UTILITY A Proprietary-Enterprise Fund of the CITY OF MUSKEGO TABLE OF CONTENTS As of and for the Years Ended December 31, 2012 and 2011 Independent Auditors’ Report 1-2 Financial Statements Statements of Net Position Statements Revenues, Expenses and Changes in Net Position Statements of Cash Flows Notes to Financial Statements 3–4 5 6–7 8 – 22 Supplementary Information Operation and Maintenance Expenses 23 Utility Plant in Service 24 Schedule of Construction Funds 25 Baker Tilly Virchow Krause, LLP 777 E Wisconsin Ave, 32nd Floor Milwaukee, WI 53202-5313 tel 414 777 5500 fax 414 777 5555 bakertilly.com INDEPENDENT AUDITORS' REPORT To the City Council City of Muskego Water Public Utility Muskego, Wisconsin Report on the Financial Statements We have audited the accompanying financial statements of City of Muskego Water Public Utility, an enterprise fund of the City of Muskego, Wisconsin, as of and for the years ended December 31, 2012 and 2011, and the related notes to the financial statements, as listed in the table of contents. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion 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 from 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 auditors’ 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 City of Muskego Water Public Utility's 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 City of Muskego Water Public Utility's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of City of Muskego Water Public Utility as of December 31, 2012 and 2011, and the changes in its financial position and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Page 1 Emphasis of Matters As discussed in Note 1, the financial statements present only the City of Muskego Water Public Utility enterprise fund and do not purport to, and do not present fairly the financial position of the City of Muskego, Wisconsin, as of December 31, 2012 and 2011 and the changes in its financial position and, where applicable, its cash flows for the years then ended, in accordance with accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter. As discussed in the Note 1, City of Muskego Water Public Utility adopted the provisions of GASB Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position, effective January 1, 2012. Our opinion is not modified with respect to this matter. Other Matters City of Muskego Water Public Utility has omitted the Management's Discussion and Analysis that accounting principles generally accepted in the United States of America require to be presented to supplement the financial statements. Such missing information, although not a part of the financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of the financial reporting for placing the financial statements in an appropriate operational, economic, or historical context. Our opinion on the financial statements is not affected by this missing information. Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The supplementary information as identified in the table of contents is presented for purposes of additional analysis and is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the supplementary information as identified in the table of contents is fairly stated in all material respects in relation to the financial statements as a whole. Milwaukee, Wisconsin September 12, 2013 Page 2 CITY OF MUSKEGO WATER PUBLIC UTILITY a Proprietary-Enterprise Fund of the CITY OF MUSKEGO STATEMENTS OF NET POSITION As of December 31, 2012 and 2011 ASSETS 2012 CURRENT ASSETS Cash and cash equivalents Accounts receivable - net Restricted assets Redemption account Cash and cash equivalents Construction funds Cash and cash equivalents Total Current Assets NONCURRENT ASSETS Restricted assets Reserve account Cash and cash equivalents Depreciation account Cash and cash equivalents Construction funds Cash and cash equivalents Reserve capacity assessments Cash and cash equivalents Water capacity assessments receivable Utility Plant Plant in service Accumulated depreciation Construction work in progress Other Assets Special assessments receivable Unamortized debt discount & expense Total Noncurrent Assets Total Assets $ 78,044 441,828 2011 $ 60,457 450,978 348,387 349,259 868,259 14,029 874,723 646,919 615,320 303,765 278,765 952,507 1,064,559 172,940 102,471 24,880 79,127 37,181,425 (8,092,524) 161,815 37,071,979 (7,311,572) 27,201 147,281 74,934 31,651,533 143,528 94,036 32,087,823 32,519,792 32,962,546 Page 3 CITY OF MUSKEGO WATER PUBLIC UTILITY a Proprietary-Enterprise Fund of the CITY OF MUSKEGO STATEMENTS OF NET POSITION (Continued) As of December 31, 2012 and 2011 LIABILITIES AND NET POSITION 2012 CURRENT LIABILITIES Accounts payable Accrued vacation, sick leave and compensatory time Unearned lease and other revenue Liabilities payable from restricted assets Accounts payable Current portion of long-term debt Accrued interest payable Total Current Liabilities NONCURRENT LIABILITIES Long-term debt Other unearned revenue Total Noncurrent Liabilities Total Liabilities NET POSITION Net investment in capital assets Restricted Equipment replacement Water capacity assesssments Debt Service Unrestricted TOTAL NET POSITION $ 23,491 99,540 81,722 2011 $ 11,375 98,625 80,792 1,857,648 34,221 2,096,622 24,902 564,092 35,756 815,542 4,722,156 58,525 4,780,681 6,877,303 6,463,034 61,048 6,524,082 7,339,624 24,345,272 24,626,413 303,765 271,179 314,166 408,107 278,765 98,620 313,503 305,621 $ 25,642,489 $ 25,622,922 See accompanying notes to financial statements. Page 4 CITY OF MUSKEGO WATER PUBLIC UTILITY a Proprietary-Enterprise Fund of the CITY OF MUSKEGO STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET POSITION For the Years Ended December 31, 2012 and 2011 2012 OPERATING REVENUES Charges for services and sales Other operating revenues Total Operating Revenues OPERATING EXPENSES Operation and maintenance Depreciation Taxes Total Operating Expenses Operating Income NONOPERATING REVENUES (EXPENSES) Investment income Interest on long term debt Amortization of bond premium Amortization of bond discount and expenses Total Nonoperating Revenues (Expenses) Income Before Capital Contributions and Transfers CAPITAL CONTRIBUTIONS INTERFUND TRANSFERS Tax equivalent CHANGE IN NET POSITION NET POSITION - Beginning of Year NET POSITION - END OF YEAR $ 1,857,360 133,852 1,991,212 2011 $ 1,744,578 128,219 1,872,797 631,991 761,861 23,527 1,417,379 684,065 768,089 24,406 1,476,560 573,833 396,237 17,629 (214,060) 18,938 (19,102) (196,595) 24,307 (289,030) (8,638) (273,361) 377,238 122,876 219,988 247,894 (577,659) (555,652) 19,567 (184,882) 25,622,922 25,807,804 $ 25,642,489 $ 25,622,922 See accompanying notes to financial statements. Page 5 CITY OF MUSKEGO WATER PUBLIC UTILITY a Proprietary-Enterprise Fund of the CITY OF MUSKEGO STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2012 and 2011 CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers Receipts from municipality for services Payments to suppliers Payments to employees Net Cash Provided by Operating Activities $ CASH FLOWS FROM NON-CAPITAL FINANCING ACTIVITIES Transfers paid to municipality for tax equivalent CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Proceeds from capital debt Acquisition and construction of capital assets Interfund advances paid Principal paid on long term debt Interest paid on long term debt Collections on special assessments Net Cash Provided by (Used in) Capital and Related Financing Activities CASH FLOWS FROM INVESTING ACTIVITIES Investment income Interest on investments Interest on special assessments Net Cash Provided by Investing Activities Net Change in Cash and Cash Equivalents CASH AND CASH EQUIVALENTS – Beginning of Year CASH AND CASH EQUIVALENTS – END OF YEAR CASH AND CASH EQUIVALENTS - END OF YEAR Unrestricted Restricted Redemption account Reserve account Construction Fund Reserve capacity assessments Depreciation Fund 2012 2011 1,730,180 $ 309,000 (366,825) (286,798) 1,385,557 1,589,665 302,250 (439,690) (290,435) 1,161,790 (577,659) (555,652) 135,708 (273,353) (564,092) (215,596) 187,099 1,271,645 (146,571) (213,118) (583,066) (298,999) 186,377 (730,234) 216,268 3,917 13,712 17,629 2,755 21,552 24,307 95,293 846,712 2,407,269 1,560,556 $ 2,502,562 $ 2,407,269 $ 78,044 $ 60,457 348,387 646,919 952,507 172,940 303,765 $ 2,502,562 349,259 615,320 1,078,588 24,880 278,765 $ 2,407,269 Page 6 CITY OF MUSKEGO WATER PUBLIC UTILITY a Proprietary-Enterprise Fund of the CITY OF MUSKEGO STATEMENTS OF CASH FLOWS (Continued) For the Years Ended December 31, 2012 and 2011 2012 NON CASH INVESTING, CAPITAL AND FINANCING ACTIVITIES Capital additions contributed to the Utility by customers and developers Assessments of benefits for property owners for improvements Debt issued for refunding Premium on debt issued for refunding Principal refunded RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Operating income Adjustments to reconcile operating income to net cash flows from operating activities Depreciation expense Depreciation charged to other accounts Changes in Assets and Liabilities Accounts receivable Prepaid items Accounts payable Accrued expenses Other deferred revenues Net Cash Provided by Operating Activities See accompanying notes to financial statements. 2011 $ $ $ $ $ 79,072 140,916 - $ $ $ $ $ $ 573,833 $ 761,861 24,415 $ 11,487 12,116 915 930 1,385,557 176,994 70,900 2,740,000 15,510 (2,740,000) 396,237 768,089 23,798 $ (14,203) 380 (6,643) 291 (6,160) 1,161,790 Page 7 CITY OF MUSKEGO WATER PUBLIC UTILITY A Proprietary-Enterprise Fund of the CITY OF MUSKEGO NOTES TO FINANCIAL STATEMENTS As of and for the Years Ended December 31, 2012 and 2011 NOTE I - S UMMARY OF S IGNIFICANT A CCOUNTING P OLICIES The financial statements of City of Muskego Water Public Utility (utility) have been prepared in conformity with accounting principles generally accepted in the United States of America as applied to enterprise funds of governmental units. The Governmental Accounting Standards Board (GASB) is the accepted standard-setting body for establishing governmental accounting and financial reporting principles. The significant accounting principles and policies utilized by the utility are described below: R EPORTING E NTITY The utility is a separate enterprise fund of the City of Muskego (municipality). The utility is managed by the City of Muskego’s Common Council. The utility provides water service to properties within the municipality. The water utility operates under service rules and rates established by the Public Service Commission of Wisconsin (PSCW). M EASUREMENT F OCUS , B ASIS OF A CCOUNTING AND B ASIS OF P RESENTATION The utility is presented as an enterprise fund of the municipality. Enterprise funds are used to account for operations that are financed and operated in a manner similar to private business or where the governing body has decided that the determination of revenues earned, costs incurred and net income is necessary for management accountability. The financial statements are reported using the economic resources measurement focus and the accrual basis of accounting. Under the accrual basis of accounting, revenues are recognized when earned and expenses are recorded when the liability is incurred or economic asset used. Revenues, expenses, gains, losses, assets and liabilities resulting from exchange and exchangelike transactions are recognized when the exchange takes place. In June 2011, the Governmental Accounting Standards Board (GASB) issued Statement No. 63 Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position. This statement provides financial reporting guidance for deferred outflows of resources and deferred inflows of resources. Previous financial reporting standards did not include guidance for these elements, which are distinct from assets and liabilities. The utility implemented this standard effective January 2012. The adoption of this standard did not have a significant effect on the utility's financial statements. Page 8 CITY OF MUSKEGO WATER PUBLIC UTILITY A Proprietary-Enterprise Fund of the CITY OF MUSKEGO NOTES TO FINANCIAL STATEMENTS As of and for the Years Ended December 31, 2012 and 2011 NOTE I - S UMMARY OF S IGNIFICANT A CCOUNTING P OLICIES (cont.) M EASUREMENT F OCUS , B ASIS OF A CCOUNTING AND B ASIS OF P RESENTATION (continued) Preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A SSETS , L IABILITIES AND N ET P OSITION Cash and Investments For purposes of the statement of cash flows, cash and cash equivalents have original maturities of three months or less from the date of acquisition. Investment of utility funds is restricted by state statutes. Investments are limited to: 1. Time deposits in any credit union, bank, savings bank or trust company maturing in three years or less. 2. Bonds or securities of any county, city, drainage district, technical college district, village, town, or school district of the state. Also, bonds issued by a local exposition district, local professional baseball park district, local professional football stadium district, local cultural arts district or by the University of Wisconsin Hospitals and Clinics Authority. 3. Bonds or securities issued or guaranteed by the federal government. 4. The local government investment pool. 5. Any security maturing in seven years or less and having the highest or second highest rating category of a nationally recognized rating agency. 6. Securities of an open end management investment company or investment trust, subject to various conditions and investment options. 7. Repurchase agreements with public depositories, with certain conditions. The utility has not adopted a formal investment policy and is covered under an investment policy adopted by the municipality. Please reference the City of Muskego financial statements for details of this investment policy and its assessment of deposit and investment risks. Investments are stated at fair value, which is the amount at which an investment could be exchanged in a current transaction between willing parties. Fair values are based on quoted market prices. No investments are reported at amortized cost. Adjustments necessary to record investments at fair value are recorded in the operating statement as increases or decreases in investment income. Page 9 CITY OF MUSKEGO WATER PUBLIC UTILITY A Proprietary-Enterprise Fund of the CITY OF MUSKEGO NOTES TO FINANCIAL STATEMENTS As of and for the Years Ended December 31, 2012 and 2011 NOTE I - S UMMARY A SSETS , L IABILITIES OF S IGNIFICANT A CCOUNTING P OLICIES (cont.) AND N ET P OSITION (cont.) Receivables/Payables Transactions between the utility and other funds of the municipality that are representative of lending/borrowing arrangements outstanding at year end are referred to as advances to/from other funds. All other outstanding balances between the utility and other funds of the municipality are reported as due to/from other funds. The utility has the right under Wisconsin statutes to place delinquent water bills on the tax roll for collection. As such, no allowance for uncollectible customer accounts is considered necessary. Restricted Assets Mandatory segregations of assets are presented as restricted assets. Such segregations are required by bond agreements and other external parties. Current liabilities payable from these restricted assets are so classified. The various revenue bond resolutions require segregation of the proceeds of the bond issue and the creation and continual funding of several accounts from operating revenue as described below: 1. Operation and Maintenance Fund – A monthly amount equal to the estimated current expenses for such month and for the following two months. 2. Special Redemption Fund – Principal and Interest: A monthly amount equal to one-sixth (1/6) of the next installment of interest coming due and an amount equal to one-twelfth (1/12) of the installment of principal of the bonds coming due on the next succeeding principal payment date. 3. Special Redemption Fund – Reserve: A monthly amount equal to the total Reserve Account requirements divided by twelve until the amount accumulated in the Reserve Account totals 125% of the average debt service on the outstanding bonds. 4. Depreciation Fund – An annually determined amount to finance the acquisition of capital equipment identified in the annual budget which is not financed by a revenue bond issue. 5. Surplus Fund – Any amount remaining after the above monthly transfers have been completed. Restricted net position represent Water Capacity Assessment Funds, Depreciation Funds and Special Redemption Fund – Principal and Interest Fund restricted assets less accrued interest payable from restricted assets. Page 10 CITY OF MUSKEGO WATER PUBLIC UTILITY A Proprietary-Enterprise Fund of the CITY OF MUSKEGO NOTES TO FINANCIAL STATEMENTS As of and for the Years Ended December 31, 2012 and 2011 NOTE I - S UMMARY OF A SSETS , L IABILITIES S IGNIFICANT A CCOUNTING P OLICIES (cont.) AND N ET P OSITION (cont.) Restricted Assets (cont.) Also, special assessment cash collections which are segregated for the future payment of debt service requirements are classified as restricted assets. Construction Funds (restricted) represent proceeds from long-term debt and interest earnings on the related funds which are expected to be utilized to finance certain construction projects in the subsequent year. Special Assessments Receivable This account represents the balances of special assessments levied against property owners for infrastructure improvements. The balances are receivable over various time periods with interest accrued annually. Deferred Special Assessments The balance of this account consists of amounts that will be assessed to property owners when specific property is annexed by the municipality or until vacant land is developed. Capital Assets Capital assets are defined by the utility as assets with an initial, individual cost of more than $5,000 and an estimated useful life in excess of one year. Capital assets of the utility are recorded at cost or the fair market value at the time of contribution to the utility. Major outlays for utility plant are capitalized as projects are constructed. Interest incurred on borrowed funds during the construction phase is reflected in the capitalized value of the utility plant constructed, net of interest earned on the invested proceeds over the same period. $0 of net interest was capitalized during the current year and the prior year. Capital assets in service is depreciated using the straight-line method over the following useful lives: Years Buildings and improvements Improvements other than buildings utilities distribution system Machinery and equipment 33 - 44 19 - 90 4 - 17 Compensated Absences Under terms of employment, employees are granted sick leave and vacations in varying amounts. Only benefits considered to be vested are disclosed in these statements. Vested vacation and sick leave pay is accrued when earned in the financial statements. The liability is liquidated from general operating revenues of the utility. Page 11 CITY OF MUSKEGO WATER PUBLIC UTILITY A Proprietary-Enterprise Fund of the CITY OF MUSKEGO NOTES TO FINANCIAL STATEMENTS As of and for the Years Ended December 31, 2012 and 2011 NOTE I - S UMMARY OF S IGNIFICANT A CCOUNTING P OLICIES (cont.) A SSETS , L IABILITIES A ND N ET P OSITION (cont.) Long-Term Obligations Long-term debt and other obligations are reported as utility liabilities. Bond premiums and discounts, as well as issuance costs, are deferred and amortized over the life of the bonds using the effective interest method. The bond discounts and issuance costs are reported as deferred charges. Unearned Revenues Unearned revenues principally represent deferred special assessments which will be reported as contributed capital when and if the property owner connects to the system and the assessment becomes due and deferred revenue on cell tower leases. Equity Classifications Equity is classified as net position and displayed in three components: a. Net investment in capital assets - Consists of capital assets including restricted capital assets, net of accumulated depreciation and reduced by the outstanding balances (excluding unspent debt proceeds) of any bonds, mortgages, notes, or other borrowings that are attributable to the acquisition, construction, or improvement of those assets. b. Restricted net position - Consists of net position with constraints placed on their use either by 1) external groups such as creditors, grantors, contributors, or laws or regulations of other governments or, 2) law through constitutional provisions or enabling legislation. c. Unrestricted net position - All other net positions that do not meet the definitions of "restricted" or "net investment in capital assets”. R EVENUES AND E XPENSES The utility distinguishes operating revenues and expenses from non-operating items. Operating revenues and expenses generally result from providing services and producing and delivering services in connection with the utility's principal ongoing operations. The principal operating revenues of the utility are charges to customers for services. Operating expenses for enterprise funds include the cost of services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as non-operating revenues and expenses. Operating Revenues Utility billings are rendered and recorded quarterly based on metered usage at rates authorized by the Public Service Commission. Page 12 CITY OF MUSKEGO WATER PUBLIC UTILITY A Proprietary-Enterprise Fund of the CITY OF MUSKEGO NOTES TO FINANCIAL STATEMENTS As of and for the Years Ended December 31, 2012 and 2011 NOTE I - S UMMARY R EVENUES AND OF S IGNIFICANT A CCOUNTING P OLICIES (cont.) E XPENSES (cont.) Taxes Municipal utilities are exempt from federal and state income taxes. Taxes included in the financial statements are social security taxes and the Public Service Commission remainder assessment. Capital Contributions Cash and capital assets are contributed to the utility from customers, the municipality or external parties. The value of property contributed to the utility is reported as revenue on the statements of revenues, expenses and changes in net position. Interfund Transfer The utility records an annual payment in lieu of taxes (PILOT) expense based on the value of its plant and the current assessment ratio and local and school portion of the mill rate. Effect of New Accounting Standards on Current Period Financial Statement The Governmental Accounting Standards Board (GASB) has approved Statement No. 65 - Items Previously Reported as Assets and Liabilities; Statement No. 66., Technical Corrections – 2012 an amendment of GASB Statements No. 10 and No. 62; Statement No. 67, Financial Reporting for Pension Plans – an amendment of GASB Statement No. 25; and Statement No. 68, Accounting and financial reporting for Pensions – an amendment of GASB Statement No. 27. Application of these standards may restate portions of these financial statements. Comparative Data Certain amounts presented in the prior year data may have been reclassified in order to be consistent with the current year’s presentation. Page 13 CITY OF MUSKEGO WATER PUBLIC UTILITY A Proprietary-Enterprise Fund of the CITY OF MUSKEGO NOTES TO FINANCIAL STATEMENTS As of and for the Years Ended December 31, 2012 and 2011 NOTE II - C ASH , C ASH E QUIVALENTS AND T EMPORARY I NVESTMENTS The Water Public Utility's cash and cash equivalents at year-end consisted of the following: 2011 2012 Cash and cash equivalents held by the City: Commingled cash and investments with City Wisconsin’s Local Government Investment Pool Total Reconciliation to financial statements Unrestricted cash and investments Restricted cash and investments Redemption account - current Construction funds - current Reserve account - non-current Depreciation account - non-current Construction funds - non-current Reserve capacity assessments - non-current Total Cash and Investments Associated Risk $ 1,481,384 1,021,178 $ 1,387,715 Not applicable 1,019,554 Credit risk $ 2,502,562 $ 2,407,269 $ 78,044 $ 348,387 646,919 303,765 952,507 172,940 2,502,562 $ 60,457 349,259 14,029 615,320 278,765 1,064,559 24,880 $ 2,407,269 Deposits in each local and area bank are insured by the FDIC in the amount of $250,000 for time and savings accounts (including NOW accounts), $250,000 for interest-bearing demand deposits accounts, and unlimited coverage for noninterest bearing transaction accounts as of December 31, 2012. On January 1, 2013, the temporary unlimited coverage for non-interest bearing transaction accounts expired. Therefore, demand deposit accounts (interest bearing and noninterest bearing) are insured for a total of $250,000 beginning January 1, 2013. In addition, if deposits are held in an institution outside of the state in which the government is located, insured amounts are further limited to a total of $250,000 for combined amount of all deposit accounts. Bank accounts are also insured by the State Deposit Guarantee Fund (SDGF) in the amount of $400,000. However, due to the relatively small size of the Guarantee Fund in relationship to the total deposits covered and other legal implications, recovery of material principle losses may not be significant to individual municipalities. The Utility, as a Proprietary-Enterprise Fund of the City of Muskego, maintains commingled cash and investment accounts with the City, except for its investment in the Pool. Federal depository insurance and the State Guarantee Fund insurance apply to the City of Muskego as an individual municipality and, accordingly, the amount of insured funds is not determinable for the Utility as a Proprietary-Enterprise Fund of the City. Also please refer to the City’s financial statements for information on risks on the Utility’s cash and investments with the City. Page 14 CITY OF MUSKEGO WATER PUBLIC UTILITY A Proprietary-Enterprise Fund of the CITY OF MUSKEGO NOTES TO FINANCIAL STATEMENTS As of and for the Years Ended December 31, 2012 and 2011 NOTE II - C ASH , C ASH E QUIVALENTS AND T EMPORARY I NVESTMENTS (cont.) The Wisconsin Local Government Investment Pool (LGIP) is part of the State Investment Fund (SIF), and is managed by the State of Wisconsin Investment Board. The SIF is not registered with the Securities and Exchange Commission, but operates under the statutory authority of Wisconsin Chapter 25. The SIF reports the fair value of its underlying assets annually. Participants in the LGIP have the right to withdraw their funds in total on one day’s notice. At December 31, 2012 and 2011 the fair value of the Utility’s share of the LGIP assets was substantially equal to the amount reported above. Credit Risk Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligation. As of December 31, 2012 and 2011 the utility had funds invested in LGIP. LGIP is unrated. See Note I Assets, Liabilities and Net Position – Cash and Investments for further information. NOTE III - R ESTRICTED A SSETS Restricted assets were comprised of the following restricted funds at December 31, 2012 and 2011: 2012 Cash and Cash Equivalents Special Redemption Funds Bond Reserve Fund Bond Principal and Interest Fund Total Other Debt Sevice Funds Construction Funds (financed by debt) Depreciation Funds Total cash and cash equivalents Water capacity assessments receivable Total Current assets Noncurrent assets Total 2011 $ 646,919 348,387 995,306 172,940 952,507 303,765 2,424,518 102,471 $ 615,320 349,259 964,579 24,880 1,078,588 278,765 2,346,812 79,127 $ 2,526,989 $ 2,425,939 $ 348,387 2,178,602 $ 445,121 1,980,818 $ 2,526,989 $ 2,425,939 Page 15 CITY OF MUSKEGO WATER PUBLIC UTILITY A Proprietary-Enterprise Fund of the CITY OF MUSKEGO NOTES TO FINANCIAL STATEMENTS As of and for the Years Ended December 31, 2012 and 2011 NOTE IV - D EFINED B ENEFIT P ENSION P LAN All eligible employees participate in the Wisconsin Retirement System (WRS), a cost-sharing, multipleemployer, defined benefit, public employee retirement system. All employees, initially employed by a participating WRS employer prior to July 1, 2011, expected to work at least 600 hours a year and expected to be employed for at least one year from employee's date of hire are eligible to participate in the WRS. All employees, initially employed by a participating WRS employer on or after July 1, 2011, and expected to work at least 1,200 hours a year and expected to be employed for at least one year from employee's date of hire are eligible to participate in the WRS. Prior to June 29, 2011, covered employees in the General category were required by statute to contribute 6.5% of their salary (3.9% for Executives and Elected Officials, 5.8% for Protective Occupations with Social Security, and 4.8% for Protective Occupations without Social Security) to the plan. Employers could make these contributions to the plan on behalf of employees. Employers were required to contribute an actuarially determined amount necessary to fund the remaining projected cost of future benefits. Effective the first day of the first pay period on or after June 29, 2011 the employee required contribution was changed to one-half of the actuarially determined contribution rate for General category employees, and Executives and Elected Officials. Required contributions for protective contributions are the same rate as general employees. Employers are required to contribute the remainder of the actuarially determined contribution rate. The employer may not pay the employee required contribution unless provided for by an existing collective bargaining agreement. Contribution rates for 2012 are: 2012 General Category 2011 General Category 2010 General Category Employee 5.9% 7.05% 6.2% Employer 5.9% 7.05% 6.2% The payroll for City of Muskego Water Utility employees covered by the WRS for the year ended December 31, 2012, 2011 and 2010 was $287,713, $290,727 and $287,557 respectively. The total required contribution for the year ended December 31, 2012 was $34,051, which consisted of 5.9% of payroll from the employer and 5.9% from employees. Total contributions for the years ending December 31, 2011 and 2010 were $33,724 and $31,661, respectively, equal to the required contributions for each year. Details of the plan are disclosed in the basic financial statements of the City of Muskego Page 16 CITY OF MUSKEGO WATER PUBLIC UTILITY A Proprietary-Enterprise Fund of the CITY OF MUSKEGO NOTES TO FINANCIAL STATEMENTS As of and for the Years Ended December 31, 2012 and 2011 NOTE V - C HANGES IN C APITAL A SSETS A summary of changes in capital assets for 2012 and 2011 follows: Balance 1/1/12 Capital assets, not being depreciated Intangible Easements Land and land rights Total Capital Assets Not Being Depreciated or Amortized Capital assets being depreciated Buildings and improvements Improvements other than buildings Machinery and equipment Total Capital Assets Being Depreciated Total Capital Assets Less: Accumulated depreciation Buildings and improvements Improvements other than buildings Machinery and equipment Total accumulated depreciation Construction in progress Net Utility Plant $ 36,500 29,148 Additions $ Retirements Balance 12/31/12 - $ - - $ - 36,500 29,148 65,648 - - 65,648 7,245,470 - - 7,245,470 27,003,060 2,757,801 76,931 37,839 5,324 27,079,991 2,790,316 37,006,331 114,770 5,324 37,115,777 37,071,979 114,770 5,324 37,181,425 (1,305,669) (194,401) (4,447,017) (1,558,886) (7,311,572) (460,664) (131,211) (786,276) (5,324) (5,324) 211,547 76,933 27,201 $ 29,787,608 $ (459,959) $ - 76,933 $ (1,500,070) (4,907,681) (1,684,773) (8,092,524) 161,815 29,250,716 Page 17 CITY OF MUSKEGO WATER PUBLIC UTILITY A Proprietary-Enterprise Fund of the CITY OF MUSKEGO NOTES TO FINANCIAL STATEMENTS As of and for the Years Ended December 31, 2012 and 2011 NOTE V - C HANGES IN C APITAL A SSETS (cont.) Balance 1/1/11 Capital assets, not being depreciated Intangible Easements Land and land rights Total Capital Assets Not Being Depreciated or Amortized Capital assets being depreciated Buildings and improvements Improvements other than buildings Machinery and equipment Total Capital Assets Being Depreciated Total Capital Assets Less: Accumulated depreciation Buildings and improvements Improvements other than buildings Machinery and equipment Total accumulated depreciation Construction in progress Net Utility Plant Additions Retirements Balance 12/31/11 $ 36,500 29,148 $ - $ - - $ - 36,500 29,148 $ 65,648 $ - $ - $ 65,648 7,203,297 42,173 - 7,245,470 26,736,950 2,747,376 310,772 11,555 44,662 1,130 27,003,060 2,757,801 36,687,623 364,500 45,792 37,006,331 36,753,271 364,500 45,792 37,071,979 (1,111,942) (193,727) (4,033,833) (1,419,140) (6,564,915) (457,846) (140,314) (791,887) (44,662) (568) (45,230) 182,303 175,951 20,849 $ 30,209,205 $ (245,084) $ - 176,513 $ (1,305,669) (4,447,017) (1,558,886) (7,311,572) 27,201 29,787,608 Page 18 CITY OF MUSKEGO WATER PUBLIC UTILITY A Proprietary-Enterprise Fund of the CITY OF MUSKEGO NOTES TO FINANCIAL STATEMENTS As of and for the Years Ended December 31, 2012 and 2011 NOTE VI - L ONG -T ERM D EBT A. The utility's long-term debt consists of Waterworks System Revenue Bonds, General Obligation Debt and Advances from Municipality. The transactions related to long-term debt for the years ending December 31, 2012 and 2011 are summarized below: Balance 01/01/12 Increases Waterworks System Revenue Bonds $ 4,990,000 General Obligation Debt 1,640,760 WI Safe Drinking Water Loan 304,348 92,018 Unamortized debt premium $ 7,027,126 Balance 01/01/11 Waterworks System Revenue Bonds $ 5,490,000 General Obligation Debt 439,137 Advances from Municipality 213,118 WI Safe Drinking Water Loan 317,392 Unamortized debt premium $ 6,459,647 Decreases Balance 12/31/12 Current Portion $ 135,708 - $ 475,000 75,700 13,392 18,938 $ 4,515,000 1,565,060 426,664 73,080 $ 475,000 1,362,485 20,163 - $ 135,708 $ 583,030 $ 6,579,804 $ 1,857,648 Current Portion Increases Decreases Balance 12/31/11 $ 2,740,000 1,271,645 92,018 $ 3,240,000 70,022 213,118 13,044 - $ 4,990,000 1,640,760 304,348 92,018 $ 475,000 75,700 13,392 - $ 4,103,663 $ 3,536,184 $ 7,027,126 $ 564,092 B. Details of long-term debt outstanding at December 31, 2012 are as follows: Type Waterworks System Revenue Bonds Waterworks System Revenue Refunding Bonds General Obligation Bonds General Obligation Bonds WI Safe Drinking Water Loan Date of Loan Interest Rate Principal Payable Interest Payable Original Amount Balance 12/31/2012 09/01/08 3.5-5.25 05/01/09-28 5/1&11/1 $ 2,450,000 $ 2,150,000 11/08/11 03/01/05 11/08/11 11/25/09 2-4 2.6-3.7 1.6 2.668 5/1&11/1 3/1&9/1 5/1&11/1 5/1&11/1 2,740,000 600,000 1,271,645 22,699 2,365,000 293,415 1,271,645 426,664 6,506,724 1,857,648 05/01/12-20 03/01/06-15 05/01/13 05/01/10-29 Less: Current portion of long-term debt $ Page 19 4,649,076 CITY OF MUSKEGO WATER PUBLIC UTILITY A Proprietary-Enterprise Fund of the CITY OF MUSKEGO NOTES TO FINANCIAL STATEMENTS As of and for the Years Ended December 31, 2012 and 2011 NOTE VI - L ONG -T ERM D EBT (cont.) C. The Waterworks System Revenue Bonds are not general obligations of the City of Muskego and are payable from the income and revenues derived from the operation of the system. The Utility has established separate funds, as described in Note I, to account for the allocation of the Utility's gross revenues in compliance with the debt resolutions. The General Obligation Debt is secured by the full faith and credit of the City. The Advances from City represent unsecured debt of the Utility to the City. The Wisconsin Safe Drinking Loan disbursement of financial assistance represents 5% of the Municipal obligations as required by the IRS to consummate the Municipal Obligation closing. A principal amount of $475,000 is available in the form of Water System Revenue Bonds. D. Annual principal and interest payments to maturity on long-term debt payable are as follows. Year Principal Interest Total Balance Outstanding 12/31 $ 2013 2014 2015 2016 2017 2018-2022 2023-2027 2028-2029 $ 1,857,648 494,111 525,418 421,820 447,402 1,561,301 938,370 260,654 $ 205,325 165,486 151,479 138,979 126,514 416,364 178,952 6,879 $ 2,062,973 659,597 676,897 560,799 573,916 1,977,665 1,117,322 267,533 $ 6,506,724 $ 1,389,978 $ 7,896,702 6,506,724 4,649,076 4,154,965 3,629,547 3,207,727 2,760,325 1,199,024 260,654 - E. All utility revenues net of specified operating expenses are pledged as security of the above revenue bonds until the bonds are defeased. Principal and interest paid for 2012 and 2011 were $644,794 and $3,503,082, respectively. The 2011 payments reflect a refunding of the 1999, 2000 and 2001 Water Revenue Bond Issues. Total customer gross revenues as defined for the same periods were $1.3 million and $1.4 million. Annual principal and interest payments are expected to require 28% of gross revenues on average. Page 20 CITY OF MUSKEGO WATER PUBLIC UTILITY A Proprietary-Enterprise Fund of the CITY OF MUSKEGO NOTES TO FINANCIAL STATEMENTS As of and for the Years Ended December 31, 2012 and 2011 NOTE VII – N ET P OSITION Net position reported on the statement of net position at December 31, 2012 following: 2012 Net investment in capital assets Land and land rights $ 29,148 $ Intangible easements 36,500 Construction in progress 161,815 Other capital assets net of accumulated depreciation 29,023,254 Less: related long-term debt outstanding (6,506,724) Plus: non-capital debt proceeds 646,919 Plus: unpsent bond proceeds 952,507 Plus: debt premium (73,081) Plus: debt discount 74,934 24,345,272 Total net investment in capital assets and 2011 include the 2011 29,148 36,500 27,202 29,694,757 (6,935,108) 615,319 1,064,559 94,036 24,626,413 Restricted Net Position Debt service Equipment replacement funds Reserve capacity assessments Total Restricted Net Position 314,166 303,765 271,179 889,110 313,503 278,765 98,620 690,888 Unrestricted Net Position 408,107 305,621 Total Utility Net Position $ 25,642,489 $ 25,622,922 When both restricted and unrestricted resources are available for use, it is the Utility’s policy to use restricted assets first, and then unrestricted resources as they are needed. NOTE VIII - A NTENNA L EASE A GREEMENTS The Utility has lease agreements with cellular phone companies to lease a water tower as a site for cellular antennas. The initial term of the leases were five years with the right to extend the leases for four additional five year terms. Rental income of $103,587 and $98,721 from rental of the water tower, for the years 2012 and 2011, respectively, is reported in other operating revenues. Future minimum rentals related to these leases are as follows: 2013 2014 2015 Total $ 108,058 113,461 119,134 $ 340,653 Page 21 CITY OF MUSKEGO WATER PUBLIC UTILITY A Proprietary-Enterprise Fund of the CITY OF MUSKEGO NOTES TO FINANCIAL STATEMENTS As of and for the Years Ended December 31, 2012 and 2011 NOTE IX - R ISK M ANAGEMENT The Water Utility is exposed to various risks of loss related to torts; theft of, damage to, or destruction of assets; errors and omissions; natural disasters; workers’ compensation and environmental damage. These risks are covered through the purchases of commercial insurance. The general aggregate insurance coverage limits decreased $1.0 million from coverage in the prior year. Insurance settlements for claims resulting from the risks covered by commercial insurance have not exceeded the insurance coverage in any of the past three years. NOTE X - O THER P OST E MPLOYMENT B ENEFITS Effective August 28, 2012, the City's group health insurance plan no longer provides coverage to retirees (or other qualified terminated employees) at blended premium rates. This resulted in the elimination of other postemployment benefit (OPEB) for the retirees, commonly referred to as an implicit rate subsidy. Certain specific information concerning the utility’s other post employment benefits has not been determined. NOTE XI - W ATER R ATES The utility implemented the current rates effective October 1, 2011. NOTE XII - C OMMITMENTS AND C ONTINGENCIES From time to time the Water Utility becomes involved in legal actions and claims, most of which normally occur in governmental utility operations. These legal actions and claims are generally defended by various insurance carriers, since claims brought against the Utility are generally covered by insurance policies. In the opinion of management, any legal actions and claims, and any other proceedings known to exist at December 31, 2012, are not likely to have a material adverse impact on the Utility’s financial position. Page 22 ЗЦРРЬЕМЕМТАНУ М =ОНМАТ ОМ CITY OF MUSKEGO WATER PUBLIC UTILITY a Proprietary-Enterprise Fund of the CITY OF MUSKEGO OPERATION AND MAINTENANCE EXPENSES For the Years Ended December 31, 2012 and 2011 2012 SOURCE OF SUPPLY Operation labor Maintenance of water source plant Total Source of Supply PUMPING EXPENSES Operation labor Fuel or power purchased Operation supplies and expenses Maintenance of pumping plant Total Pumping Expenses WATER TREATMENT EXPENSES Operation labor Chemicals Maintenance of water treatment plant Total Water Treatment Expenses TRANSMISSION AND DISTRIBUTION EXPENSES Operation labor Operation supplies and expenses Maintenance of distribution reservoirs Maintenance of mains Maintenance of services Maintenance of meters Maintenance of hydrants Maintenance of other plant Total Transmission and Distribution Expenses CUSTOMER ACCOUNT EXPENSES Meter reading labor Accounting and collecting labor Supplies and expenses Total Customer Account Expenses ADMINISTRATIVE AND GENERAL EXPENSES Administrative and general salaries Office supplies and expenses Outside services Property insurance Employee pensions and benefits Miscellaneous general expenses Transportation expense Total Administrative and General Expenses TOTAL OPERATION AND MAINTENANCE EXPENSES $ $ 783 5,806 6,589 2011 $ 979 1,331 2,310 64,708 91,652 21 3,656 160,037 62,327 87,546 206 8,196 158,275 4,222 17,739 898 22,859 4,906 16,269 495 21,670 52,006 5,996 4,104 13,780 2,078 3,090 20,612 1,124 102,790 52,277 8,022 792 72,416 2,999 5,068 25,328 103 167,005 1,628 12,891 11,052 25,571 1,980 12,784 9,022 23,786 126,871 21,196 42,097 15,460 85,778 6,051 16,692 314,145 118,061 21,236 45,514 15,100 87,779 5,410 17,919 311,019 631,991 $ 684,065 Page 23 CITY OF MUSKEGO WATER PUBLIC UTILITY a Proprietary-Enterprise Fund of the CITY OF MUSKEGO UTILITY PLANT IN SERVICE For the Year Ended December 31, 2012 Utility Plant in Service Balance 12/31/2011 INTANGIBLE PLANT Easements Organization $ 36,500 29,148 Additions $ Accumulated Depreciation Balance 12/31/2012 Retirements - $ - $ 36,500 29,148 Depreciation Rate -% -% Balance 12/31/2011 $ - Provisions Retirements $ $ - - Balance 12/31/2012 $ - SOURCE OF SUPPLY Well 1,578,016 - - 1,578,016 2.90% 500,052 45,763 - 545,815 PUMPING PLANT Structures and improvements Electric pumping equipment 4,427,645 1,580,707 - - 4,427,645 1,580,707 3.20% 4.40% 688,591 750,726 141,684 69,551 - 830,275 820,277 12,469 - - 12,469 6.00% 8,438 748 - 9,186 1,796,702 19,644,696 3,723,991 866,220 2,837,673 45,287 22,144 37,839 9,500 5,324 - 1,796,702 19,689,983 3,746,135 898,735 2,847,173 1.90% 1.30% 2.90% 5.50% 2.20% 360,939 2,466,430 1,017,441 513,403 618,207 34,139 255,675 108,317 48,829 62,533 5,324 - 395,078 2,722,105 1,125,758 556,908 680,740 171,785 19,991 106,628 239,808 - - 171,785 19,991 106,628 239,808 13.30% 5.80% 26.70% 2.90% 159,702 19,991 106,628 101,024 12,083 6,954 - 171,785 19,991 106,628 107,978 37,071,979 114,770 5,324 37,181,425 27,201 211,547 76,933 161,815 326,317 $ 82,257 $ 37,343,240 TREATMENT PLANT Water treatment equipment TRANSMISSION AND DISTRIBUTION PLANT Reservoirs and standpipes Transmission and distribution lines Services Meters Hydrants GENERAL PLANT Transportation Office furniture Computer equipment Structures and improvements CONSTRUCTION IN PROGRESS TOTAL UTILITY PLANT $ 37,099,180 $ $ 7,311,572 Less allocation of meter depreciation to the Sewer Utility 786,276 $ 5,324 $ 8,092,524 (24,415) $ 761,861 Page 24 CITY OF MUSKEGO WATER PUBLIC UTILITY a Proprietary-Enterprise Fund of the CITY OF MUSKEGO SCHEDULE OF CONSTRUCTION FUNDS December 31, 2012 Project Scada radio study / upgrade Meters and meter transmitters Light Fixtures Elevated Storage Truck Acquisition Well #9 Pump Station Durham Drive Janesville Road Pioneer Road Well #13 Watermain Loop Well #13 pumping station Transfer from working capital Interest earnings and unallocated TOTAL Construction Funds financed by: Debt proceeds Balance 12/31/2011 $ Other Sources - $ Costs - $ Balance 12/31/2012 Transfers 37,839 - $ 37,839 - $ 189,459 888,330 135,708 - 11,047 137,835 76,694 - - - - - 800 1,625 - - 2,425 $ 1,078,589 $ 137,333 $ 263,415 (124,661) 86,822 - $ - 51,624 898,458 $ 952,507 $ 952,507 Page 25