INDEPENDENT AUDITORS REPORT EXECUTIVE REPORT

Transcription

1 2017 Annual Report

2 EXECUTIVE REPORT We know our customers are why Modern Electric Water Company (MEWCo) exists. For that reason, on your behalf, we operate the business you own with integrity, focused on what it takes to provide the service you deserve. It is through the democratic election of your Board of Directors that you have representation of the shareholders interests and is key to maintaining accountability to the customer. Directors, who are customers themselves, help develop long-term strategy and goals to focus policies and rates which balance the day-to-day operation for today and position the company to be a viable business for the future. As a group committed to the strategic vision for the company, your Board measures the company s progress through a number of questions: Are we improving the quality of our service? Are we providing value to the members? And are we sustaining the financial health of MEWCo? These questions help us focus on a balance, as we seek innovative ways of utilizing technology to improve the reliability of your electrical and water services, improve our customer service, monitor and control costs as well as increase employee productivity. With all of these objectives in mind, however, safety continues to be the top priority when it comes to our employees and the general public. MEWCo not only provides extensive safety training for its employees, but also offers education to the public through programs such as electrical safety demonstrations for community and school groups. MEWCo s Board and employees are concerned for their customers and are committed to improving the quality of life in our community. Programs we sponsor include funding Food for Thought, SNAP Energy Assistance, ValleyFest, HUB, and SCC scholarships for our customers children. These contributions not only improve the quality of life in our service territory, they also create an environment that can nurture the economic development efforts within our community. Our 2017 Strategic Plan was based on a balanced approach: how well we delivered service (quality), what you receive as a customer (value) and how the organization remains financially stable and relevant in the future (sustainability). Within each of these three areas are activities and projects that we focused on in 2017, and will continue to influence our future plans as we execute our continuous strategic planning process. We hope the information in the following report will demonstrate our commitment to serving you. Joe M. Morgan General Manager Dave Thompson Board President INDEPENDENT AUDITORS REPORT To the Board of Directors of Modern Electric Water Company Spokane Valley, Washington We have audited the accompanying financial statements of Modern Electric Water Company (a nonprofit organization), which comprise the statements of balance sheets as of September 30, 2017 and 2016, and the related statements of income, retained earnings, and cash flows for the years then ended, and the related notes to the financial statements. 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 an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free 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 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 entity 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 entity 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. Basis for Qualified Opinion The service auditor s report, from UBS Financial Services Inc, covering the audit period was not available. This report examines and expresses an opinion on the suitability of the design and operating effectiveness of UBS Financial Services Inc s controls related to custody and servicing of client funds and securities system. Consequently, we were unable to determine, whether or not, the relevant controls provide reasonable assurance that they operated effectively through the period October 1, 2016 to September 30, Qualified Opinion In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion paragraph, the financial statements referred to above present fairly, in all material respects, the financial position of Modern Electric Water Company as of September 30, 2017 and 2016, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Anderson, Peretti & Co. Certified Public Accountants, P.S. Spokane Valley, Washington January 24,

3 MODERN ELECTRIC WATER COMPANY BALANCE SHEETS September 30, 2017 and 2016 ASSETS UTILITY PLANT (Note 2) Land $ 836,877 $ 836,877 Buildings & grounds 4,032,080 3,839,993 Equipment & vehicles 4,203,763 3,999,698 Tanks, towers & plant 8,806,142 7,900,406 Water system 10,171,982 9,915,577 Electric system 20,604,772 19,724,963 Construction in process 11, ,525 $ 48,666,941 $ 46,899,039 Less depreciation reserve 29,188,168 27,924,505 Net utility plant $ 19,478,773 $ 18,974,534 PLANT REPLACEMENT AND IMPROVEMENT FUNDS (Note 4) $ 32,799,497 $ 30,063,664 OTHER ASSETS Deferred charges (Note 7) $ 13,028 $ 17,914 Deposits 165, ,747 $ 178,249 $ 183,661 CURRENT ASSETS Cash and equivalents $ 2,009,660 $ 1,110,913 Receivables (Note 1): Customer accounts 1,739,470 1,497,818 Other 82 16,700 Inventory (Note 1) 320, ,784 Prepaid expenses 87,672 87,965 Total current assets $ 4,157,279 $ 3,044,180 $ 56,613,798 $ 52,266,039 STOCKHOLDERS' EQUITY (Note 3) Capital stock $1 par value $ 2,791 $ 2,785 Paid-in capital & earnings retained prior to ,113,957 2,113,957 Paid-in capital since ,371 44,371 Earnings retained ,224,762 46,818,293 Accumulated comprehensive income (Note 10) 2,505, LIABILITIES $ 52,890,918 $ 48,980,281 ACCRUED PENSION COSTS (Note 5) $ 1,519,687 $ 1,992,775 CURRENT LIABILITIES Accounts payable $ 1,738,210 $ 811,614 Accrued liabilities: Wages & vacation 330, ,477 Taxes & other 134, ,892 Total current liabilities $ 2,203,193 $ 1,292,983 $ 56,613,798 $ 52,266,039 See Notes to Financial Statements. 2 3

4 MODERN ELECTRIC WATER COMPANY STATEMENTS OF INCOME Years Ended September 30, 2017 and 2016 Electric Department Water OPERATING REVENUES: Customer service $ 14,144,128 $ 2,095,083 Customer construction 92, ,108 Total operating revenues $ 14,236,614 $ 2,341,191 OPERATING EXPENSES: Power purchases $ 9,350,449 $ 107,113 General operations 1,019, ,696 Maintenance & repairs 508, ,641 Depreciation 701, ,671 Taxes 551,163 94,723 Total operating expenses $ 12,130,870 $ 1,685,844 Income before administrative expenses $ 2,105,744 $ 655,347 Administrative expenses (Note 11) Income from operations OTHER INCOME (EXPENSE): Net investment income Gain on sale of assets Other income (expense) Total other income Net income TOTAL TOTAL $ 16,239,211 $ 15,228, , ,530 $ 16,577,805 $ 15,475,755 $ 9,457,562 $ 8,847,337 1,502,447 1,461, , ,959 1,214,941 1,144, , ,493 $ 13,816,714 $ 12,960,687 $ 2,761,091 $ 2,515,068 2,062,440 1,915,895 $ 698,651 $ 599,173 $ 832,144 $ 277,616 8,181 1,851 (132,507) (120,620) $ 707,818 $ 158,847 $ 1,406,469 $ 758,020 STATEMENTS OF RETAINED EARNINGS Years Ended September 30, 2017 and 2016 Balance, beginning $ 46,818,293 $ 46,060,273 Net income 1,406, ,020 Balance, ending $ 48,224,762 $ 46,818,293 4 See Notes to Financial Statements. 5

5 MODERN ELECTRIC WATER COMPANY STATEMENTS OF CASH FLOWS Years Ended September 30, 2017 and 2016 CASH FLOWS FROM OPERATING ACTIVITIES: Cash from customers $ 16,336,423 $ 15,400,003 Cash from investments 2,316 2,180 Cash paid for operations (13,544,213) (14,410,364) Net cash from operations $ 2,794,526 $ 991,819 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of assets $ 9,111 $ 3,101 Purchase of: Buildings & grounds (192,087) (8,273) Equipment & vehicles (271,090) (342,932) Tanks, towers & plant (267,175) (254,648) Water system (277,293) (835,163) Electric system (897,245) (698,613) Net cash used in investing $ (1,895,779) $ (2,136,528) Decrease in cash $ 898,747 $ (1,144,709) Beginning cash 1,110,913 2,255,622 Ending cash $ 2,009,660 $ 1,110,913 RECONCILIATION OF NET INCOME TO CASH FROM OPERATING ACTIVITIES: Net income $ 1,406,469 $ 758,020 Adjustments to reconcile net income to cash from operations: (Gain) on sale of fixed assets (8,181) (1,851) Depreciation & amortization 1,404,605 1,339,569 Net reinvested investment income (829,828) (275,436) Change in capital stock 6 1 (Increase) decrease in assets: Accounts receivable (241,652) (75,651) Other receivables 16,618 (16,618) Inventory 10,389 17,564 Prepaid expenses 293 4,565 Deposits 526 (18,481) Increase (decrease) in liabilities: Accounts payable 926,596 (720,358) Deferred revenue 270 (101) Accrued liabilities (16,654) 39,088 Accrued pension liabilities 125,069 (58,492) Net cash from operations $ 2,794,526 $ 991,819 Summary of Significant Non-Cash Activities: In the fiscal year ended 9/30/2016 the Company gifted the outgoing general manager a vehicle. The fair market value of the vehicle was $35,710. See Notes to Financial Statements. 6 7

6 What was done with Revenue For the Year Ended September 30, 2017 MODERN ELECTRIC WATER COMPANY NOTES TO FINANCIAL STATEMENTS NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Net Income 8% ` Power Purchased 54% Nature of business: The Company operates an electric and water utility company in Spokane Valley, Washington. A summary of the Company s significant accounting policies follows: Operations 9% Deprec. 7% Maint. 6% Admin Exp 12% Taxes 4% Revenue recognition: The Company realizes revenue from electric service monthly as the charges are earned. Water service and estimated usage are also billed monthly. Actual residential water usage is determined in June and September at which time water billings are adjusted accordingly. Accounts receivable: The allowance for bad debt reserve was zero at year end. Unpaid accounts receivable create a lien against the property and are therefore adequately secured. Receivables ninety days or more past due were $57,756 and $8,689 as of September 30, 2017 and 2016, respectively. Revenue For the Year Ended September 30, 2017 Electric service 82% Cash and cash equivalents: For the purposes of reporting the statements of cash flows, the Company considers all cash accounts, which are not subject to withdrawal restrictions or penalties, and all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The Company maintains its cash accounts in various banks located in Spokane Valley, Washington. Accounts at each bank are guaranteed by the Federal Deposit Insurance Corporation (FDIC). All accounts in any one bank are covered up to $250,000. A summary of the total insured and uninsured cash balances follows: Total cash in all banks $ 1,987,030 $ 1,116,673 Portion insured by FDIC 250, ,000 Uninsured cash balances $ 1,737,030 $ 866,673 Water service 14% Investment & other 4% Inventory: Inventory is recorded at average cost not in excess of replacement cost. 8 9

7 NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued) Income tax: The Company is a tax-exempt entity under Internal Revenue Code Section 501 (c) (12), per an exemption letter dated March 12, If a tax-exempt not-for-profit entity has taken uncertain tax positions (entering into transactions that may be subject to income tax on unrelated business income) that have a morelikely-than not possibility of being overturned on examination, the tax-exempt entity may be subject to a liability for the estimated taxes and related penalties and interest associated with those uncertain tax positions. For the years ended September 30, 2017 and 2016, management is not aware of any uncertain tax positions that would be subject to income taxes. As of January 24, 2018, (the date of the independent auditors report) years ended September 30, 2017, 2016, 2015 and 2014 are open to examination by major tax jurisdictions. Pension benefits: The Company has a defined benefit pension plan covering certain employees who meet the eligibility requirements. To be eligible, an employee must be 21 years of age. The plan provides benefits based on the average annual compensation of the highest five consecutive years of compensation out of the last ten years of service of each participant, which are subject to certain reductions if the employee retires before reaching age 65. Participants are required to contribute one percent of their pay to the plan. The employer contributes the remaining amount necessary to provide the plan s defined benefits. As of April 1, 2011, new union employees hired are not eligible for the defined benefit pension plan. The Company has a defined contribution pension plan covering union employees hired on or after April 1, To be eligible, an employee must be 21 years of age and have completed six months of continuous service. The Company contributes 6% of participants base wage and also matches participants contributions up to 8% of participants base wage. The company s contributions to this plan were $55,548 and $50,539 for 2017 and 2016, respectively. In addition, the Company has a deferred compensation plan which is available to all non-union employees and union employees hired prior to April 1, The Company matches employee contributions up to 5% of employee compensation. The Company s contributions to this plan were $78,9858and $78,555 for 2017 and 2016, respectively. 10 NOTES TO FINANCIAL STATEMENTS NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (continued) Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. NOTE 2. UTILITY PLANT Additions to utility plant are recorded at cost, including any applicable overhead costs. The cost of repairs and minor replacements is charged to maintenance. Gains and losses on the retirement of utility plant are included in the statements of income. Depreciation is computed on the straight-line method with the following range of lives and balances: Lives in Reserve for Depreciation Years at September Buildings & grounds $ 1,861,509 $ 1,756,503 Equipment & vehicles ,199,849 3,049,739 Tanks, towers & pumping plant ,830,299 5,637,569 Water system ,316,938 7,057,216 Electric system ,979,573 10,423,478 NOTE 3. STOCKHOLDERS EQUITY $ 29,188,168 $ 27,924,505 The Company (a Washington corporation) is owned by the owners of the real property within its corporate area. The Company s authorized capital consists of 6,000 shares of $1 par value stock. Stock certificates, as such, are not issued to each owner, but rather ownership is vested in the deed to their property. There are 2,791 acres of land which have vested ownership. Prior to December 31, 1963, the Company did not segregate retained earnings and paid-in capital. The retained earnings shown in the accompanying financial statements represent earnings retained since such date. Since its founding in 1905, Modern Electric Water Company has kept records of property ownership within the service district. These records are the basis for the Company s allocation of shares of common stock and the corresponding voting rights of each member of the Cooperative. 11

8 NOTES TO FINANCIAL STATEMENTS NOTE 3. STOCKHOLDERS EQUITY (continued) The Spokane County Assessor maintains separate property ownership records for all property in Spokane County. In May 2009, the Board of Directors of Modern Electric Water Company elected to adopt the Spokane County Assessor s records regarding property ownership as the basis for determining the ownership shares of Modern Electric Water Company shareholders. The adoption of these records will provide for a more accurate and consistent method of tracking property ownership and the related voting rights. The Company will adjust their records annually based on the County s property ownership records. NOTE 4. PLANT REPLACEMENT AND IMPROVEMENT FUNDS Management intends that these funds be used for replacement, expansion, upgrading of the Company s utility plant and extraordinary operating needs. Changes in various requirements of federal, state or local regulations could require the Company to incur substantial capital expenditures in order to comply with any such new regulations. Management s intention is to use these funds to meet such contingencies when they arise. The Company has invested the funds in debt and equity securities. Debt securities consist primarily of obligations of domestic corporations. Equity securities are held in managed fund portfolios. Since the Company neither buys investment securities in anticipation of short-term fluctuations in market prices nor absolutely commits to holding securities to maturity, these investments are classified as available-for-sale in accordance with FASB ASC 320 and are stated at market value. A summary of cost, market value and unrealized gains at September 30, 2017 and 2016 for these investments follows: Net Securities Securities Unrealized Market 2017 Cost Gain (Loss) Value Debt $ 5,740,230 $ 69,068 $ 5,809,298 Equity 23,156,654 3,833,545 26,990,199 $ 28,896,884 $ 3,902,613 $ 32,799, Debt $ 5,279,485 $ 54,109 $ 5,333,594 Equity 22,787,571 1,942,499 24,730,070 $ 28,067,056 $ 1,996,608 $ 30,063,664 Net comprehensive income (loss) for the years ended September 30, 2017 and 2016 was $1,906,005 and $1,688,869, respectively. Net comprehensive income consists of net unrealized holding gain (losses) arising during the year of $2,072,186 and $2,156,264, respectively, and reclassification 12 NOTES TO FINANCIAL STATEMENTS NOTE 4. PLANT REPLACEMENT AND IMPROVEMENT FUNDS (continued) adjustment for net realized gains (losses) included in net income for the year of $(166,181) and $(467,395), respectively. Accumulated comprehensive income at September 30, 2017 and 2016, is $3,902,613 and $1,996,608, respectively. The cost and market value of debt securities, by contractual maturities, as of September 30, 2017 are as follows: Market Cost Value Due in one year or less $ 4,546,769 $ 4,598,438 Due after one year through five years 988,515 1,002,910 Due after five years 204, ,950 $ 5,740,230 $ 5,809,298 NOTE 5. DEFINED BENEFIT PENSION PLAN Net pension cost for the Company s defined benefit pension plan consisted of the following components for the years ended 2017 and 2016: Service cost (benefits earned) $ 325,837 $ 248,107 Interest cost on projected benefit obligation 180, ,357 Actual return on plan assets (342,224) (250,551) Net amortization and deferral 338, ,739 Employee contributions (18,304) (19,144) $ 485,068 $ 301,508 Company contribution $ 360,000 $ 360,000 Benefits paid $ 854,340 $ 8,672 The following table sets forth the plan s funded status as of September 30, 2017 and 2016 and the amount recognized in the accompanying balance sheets as of September 30: Actuarial present value of benefit obligations: Vested benefits $ 3,474,878 $ 4,038,284 Accumulated benefits $ 3,522,238 $ 4,107,481 Projected benefits $ (4,939,251) $ (5,546,351) Plan assets at fair value 3,419,564 3,553,576 Plan assets less than projected benefit obligation $ (1,519,687) $ (1,992,775) Unrecognized net loss 1,397,576 1,995,773 Unrecognized prior service cost - - Other comprehensive income (1,397,576) (1,995,773) Asset (accrual) on balance sheet $ (1,519,687) $ (1,992,775) 13

9 NOTES TO FINANCIAL STATEMENTS NOTE 5. DEFINED BENEFIT PENSION PLAN (Continued) Net comprehensive income (loss) for the years ended September 30, 2017 and 2016 was $598,157 and $(1,008,944), respectively. Net comprehensive income consists of unrecognized net gain (loss) of $259,288 and $(1,156,683), respectively; plus (less) net amortization and deferral of $338,869 and $147,739, respectively. Benefits expected to be paid in each of the next five fiscal years and in aggregate for the five fiscal years thereafter: 2018 $93,391, 2019 $93,382, 2020 $93,368, 2021 $108,652, 2022 $125,543, 2023 to 2027 $1,094,612. The discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the benefit obligations were 4.00% and 3.00%, respectively, at September 30, The expected long-term rate of return on plan assets used in 2017 was 3.75%. NOTE 6. FAIR VALUE Fair value represents the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The carrying values of cash and cash equivalents, accounts receivable, inventory, prepaid expenses, accounts payable, accrued liabilities are reasonable estimates of their fair values. For assets and liabilities measured at fair value, the General Accepted Accounting Principal (GAAP) fair value hierarchy prioritizes the inputs used in different valuation methodologies, assigning the highest priority to unadjusted quoted prices for identical assets and liabilities in actively traded markets (Level 1) and the lowest priority to unobservable inputs (Level 3). Level 2 inputs consist of quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in non-active markets. The following table discloses by level within the fair value hierarchy the Company s assets measured and reported on the Balance Sheets as of September 30, 2017 and 2016: Level 1 Level Assets: Available for Sale Securities Debt Securities $ 5,478,486 $ 330,812 Equity Securities 26,060, ,654 Total $ 31,539,031 $ 1,260,466 NOTES TO FINANCIAL STATEMENTS NOTE 6. FAIR VALUE (Continued) Level 1 Level Assets: Available for Sale Securities Debt Securities $ 4,936,460 $ 397,134 Equity Securities 23,772, ,172 Total $ 28,709,358 $ 1,354,306 NOTE 7. PLANT SYSTEM STUDIES In fiscal year 2013, the Company undertook planning and rate studies in order to anticipate the future growth and demand requirements of its service area. This study was completed in fiscal year 2014 for a total cost of $29,314. This study is being amortized over 6 years and is reported at cost net of accumulated amortization. At September 30, 2017 and 2016, net book value was $13,028 and $17,914, respectively. Amortization expense at September 30, 2017 and 2016 was $4,886 and $ 4,886, respectively. NOTE 8. CONCENTRATIONS All water utilities in the State are required by the Washington Health Department to submit an updated comprehensive water plan outlining the strategies the companies will implement over a six year period to insure their compliance with new regulations. Modern Electric Water Company was required to submit, and has completed an updated plan for the six year period commencing June Effective October 1, 2006, the Company entered into a five-year agreement to purchase all of its electrical power from Bonneville Power Administration. On November 18, 2008 the Company gave authorization to enter into a new agreement with the Bonneville Power Administration to purchase all its electrical power from the Bonneville Power Administration starting October 1, 2011 and ending September 30, The Company is subject to a collective bargaining agreement that covers employees other than management and professional employees. The agreement was renewed on April 1, 2016 and expires on March 31, NOTE 9. DATE OF MANAGEMENT S REVIEW Subsequent events were evaluated on January 24, 2018, which is the date the financial statements were available to be issued

10 NOTES TO FINANCIAL STATEMENTS NOTE 10. ACCUMULATED COMPREHENSIVE INCOME The following table reflects changes to each component of accumulated other comprehensive income (OCI). Meet the Board of Directors and General Manager Beginning balance Unrealized Gains and Losses on Availablefor-Sale Securities $ 1,996,608 Defined Benefit Pension Items $ (1,995,733) Dave Thompson President Barry Baker Vice President OCI Reclassified out of accumulated OCI 2,072,186 (166,181) 259, ,869 Ending balance $ 3,902,613 $ (1,397,576) The following table reflects components of accumulated other comprehensive income at year end. 16 Unrealized gains and losses (note 4) $ 3,902,613 $ 1,996,608 Pension liability adjustment (note 5) (1,397,576) (1,995,733) $ 2,505,037 $ 875 NOTE 11. ADMINISTRATIVE EXPENSES General office wages and expense $ 840,208 $ 813,347 Taxes Bank fees 66,609 42,732 63,077 - Office supplies & maint. 265, ,082 Public relations 57,277 66,704 Dues & subscriptions 71,430 53,160 Pension plan 225, ,955 Postage 64,954 67,627 Accounting & legal fees 57,691 69,152 Insurance 53,381 54,444 Medical plan costs 104, ,036 Transportation costs 2,266 1,451 Company power usage 20,291 18,181 Depreciation 189, ,679 $ 2,062,440 $ 1,915,895 Sam Waldron Secretary/Treasurer Scott Hislop Director Chuck Taes Director Joe Morgan General Manager