MORGANTOWN UTILITY BOARD (A Component Unit of the City of Morgantown) MONONGALIA COUNTY Single Audit For the Years Ended June 30, 2018 and 2017

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1 Single Audit For the Years Ended June 30, 2018 and Second St Grand Central Ave. 150 W. Main St., #A 1310 Market St., # Wheeling Ave., #300 Marietta, OH Vienna, WV St. Clairsville, OH Wheeling, WV Cambridge, OH

2 Monongalia County TABLE OF CONTENTS TITLE PAGE Independent Auditor s Report... 1 Management s Discussion and Analysis... 4 Basic Financial Statements: Statements of Net Position Statements of Revenues, Expenses and Changes in Net Position Statements of Cash Flows Notes to the Financial Statements Required Supplementary Information: Schedule of Proportionate Share of Net Pension Liability Schedule of Contributions Supplementary Financial Information: Water Department Statements of Revenues, Expenses and Changes in Net Position Sewer Department Statements of Revenues, Expenses and Changes in Net Position Cheat Sewer Department Statements of Revenues, Expenses and Changes in Net Position Storm Water Department Statements of Revenues, Expenses and Changes in Net Position Schedule of Expenditures of Federal Awards Notes to the Schedule of Expenditures of Federal Awards Independent Auditor s Report on Internal Control Over Financial Reporting and On Compliance and Other Matters Required By Government Auditing Standards Independent Auditor s Report on Compliance with Requirements Applicable to the Major Federal Program and on Internal Control Over Compliance Required by The Uniform Guidance Schedule of Audit Findings 2 CFR i

3 313 Second St. Marietta, OH Grand Central Ave. Vienna, WV W. Main St., Suite A St. Clairsville, OH Market St., Suite 300 Wheeling, WV INDEPENDENT AUDITOR S REPORT 749 Wheeling Ave., Suite 300 Cambridge, OH November 27, 2018 Morgantown Utility Board Monongalia County 278 Greenbag Road Morgantown, West Virginia To the Board of Directors: Report on the Financial Statements We have audited the accompanying financial statements of the Morgantown Utility Board (the Board), a component unit of the City of Morgantown, as of and for the years ended June 30, 2018 and 2017, and the related notes to the financial statements, which collectively comprise the Board s basic financial statements as listed in the table of contents. Management s Responsibility for the Financial Statements Management is responsible for preparing and fairly presenting these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes designing, implementing, and maintaining internal control relevant to preparing and fairly presenting financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to opine on these financial statements based on our audit. We audited in accordance with auditing standards generally accepted in the United States of America and the financial audit standards in the Comptroller General of the United States Government Auditing Standards. Those standards require us to plan and perform the audit to reasonably assure the financial statements are free from material misstatement. An audit requires obtaining evidence about financial statement amounts and disclosures. The procedures selected depend on our judgment, including assessing the risks of material financial statement misstatement, whether due to fraud or error. In assessing those risks, we consider internal control relevant to the Board's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not to the extent needed to opine on the effectiveness of the Board's internal control. Accordingly, we express no opinion. An audit also includes evaluating the appropriateness of management s accounting policies and the reasonableness of their significant accounting estimates, as well as our evaluation of the overall financial statement presentation. We believe the audit evidence we obtained is sufficient and appropriate to support our audit opinion. 1

4 Morgantown Utility Board Independent Auditor s Report Page 2 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Morgantown Utility Board, as of June 30, 2018 and 2017, and the changes in financial position and cash flows thereof for the years then ended in accordance with the accounting principles generally accepted in the United States of America. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require this presentation to include Management s discussion and analysis, the Schedule of Proportionate Share of Net Pension Liability and the Schedule of Contributions to supplement the basic financial statements. Although this information is not part of the basic financial statements, the Governmental Accounting Standards Board considers it essential for placing the basic financial statements in an appropriate operational, economic, or historical context. We applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, consisting of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, to the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not opine or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to opine or provide any other assurance. Supplementary and Other Information Our audit was conducted to opine on the Board s basic financial statements taken as a whole. The Statements of Revenues, Expenses and Changes in Net Position for the Water Department, Sewer Department, Cheat Sewer Department and Storm Water Department present additional analysis and are not a required part of the basic financial statements. The Schedule of Expenditures of Federal Awards presents additional analysis as required by the U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards and is not a required part of the financial statements. The statements and schedules are management s responsibility, and derive from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. We subjected these statements and schedules to the auditing procedures we applied to the basic financial statements. We also applied certain additional procedures, including comparing and reconciling schedules directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves in accordance with auditing standards generally accepted in the United States of America. In our opinion, these statements and schedules are fairly stated in all material respects in relation to the basic financial statements taken as a whole. 2

5 Morgantown Utility Board Independent Auditor s Report Page 3 Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated November 27, 2018, on our consideration of the Board s internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters. That report describes the scope of our internal control testing over financial reporting and compliance, and the results of that testing, and does not opine on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Board s internal control over financial reporting and compliance. Perry and Associates Certified Public Accountants, A.C. Marietta, Ohio 3

6 Management s Discussion and Analysis For the Years Ending June 30, 2018 and 2017 (Unaudited) MORGANTOWN UTILITY BOARD MANAGEMENT S DISCUSSION AND ANALYSIS INTRODUCTION The Morgantown Utility Board is a municipally owned and operated utility providing potable water, sanitary sewer, and stormwater services directly to the residents of The City of Morgantown and to customers in certain surrounding municipalities and unincorporated areas of Monongalia County, as well as bulk water sales and sanitary sewer transmission and treatment to certain potable water and wastewater utilities owned and operated by nearby municipalities and public service districts (collectively, the Resale Customers ). MUB was created in 1987 by ordinance enacted on September 1, 1987 by the Council of The City of Morgantown under the provisions of the Act. The former Morgantown Water Commission and the Morgantown Sanitary Board were merged in 1987 to create MUB and the combined waterworks and sewerage system. On May 21, 2002, the Council of the Issuer enacted an ordinance creating a stormwater utility and expanding the authority of MUB to include the Stormwater System. By ordinance enacted on May 1, 2007, the City Council enacted an ordinance combining the existing combined waterworks and sewerage system and the Stormwater System to create a combined waterworks, sewerage and stormwater system which presently exists. The Combined Utility System includes direct potable water service to approximately 26,200 connections and direct sewer service to approximately 22,600 service connections. MUB also provides bulk water sales to approximately 12,500 customer accounts and bulk sewerage treatment for surrounding districts. The Stormwater System serves 15,200 customers. The management of the Morgantown Utility Board offers the following overview and analysis of the basic financial statements for the fiscal year ended June 30, Management encourages readers to utilize information in the Management Discussion and Analysis in conjunction with the accompanying basic financial statements. FINANCIAL HIGHLIGHTS On July 1, 2016 MUB enacted a water rate increase of 33% and a Morgantown sewer rate increase of 87.5%. The purpose of the increases was to fund debt service to finance major capital improvement projects to each system. The sewer system waste water treatment plant upgrade broke ground in January The project is expected to take four years of construction to complete. In excess of $23 million of the approximate $100 million project total was spent on the project in the current fiscal year. Debt service began February The water project and related debt service had been delayed. Forty four million par value of municipal bonds were issued on June 28, Groundbreaking for the new 370 million gallon water reservoir and raw water pipeline occurred in July Debt service begins July

7 Management s Discussion and Analysis For the Years Ending June 30, 2018 and 2017 (Unaudited) Fiscal year 2018 saw higher than usual water operating revenues. The nearly $3 million accumulated operating revenues since the 2012 rate increase will be used as an equity contribution towards the project. We experienced customer growth of 1.5%, but saw a 1% decrease in operating revenues. The decrease could be attributed to reduced water consumption following the significant increases in rates as well as unusually wet weather. Normal operating expenses increased 1%, which was 3.6% less than the expected rate. The water tank painting program continued with expenditures of $230,000. Watershed protection saw expenditures of $70,000. MUB s net property plant and equipment increased by $22.3 million in Additions to utility plant in service were $37.million. Retirements from utility plant in service totaled $8 million. Construction work in progress was $47 million at June 30, Depreciation expense was $8.4 million. The unfunded pension liability at June 30, 2018 is $8.5 million and the plan is 80.03% funded. OVERVIEW OF THE FINANCIAL STATEMENTS This annual report consists of three parts - management s discussion and analysis (this section), the basic financial statements, and required supplementary information. The basic financial statements provide information about the activities of MUB as a whole. The Statement of Net Position and the Statement of Activities provide information about the activities of the Board as a whole and present a long-term view of the Board s finances. Reporting Morgantown Utility Board as a Whole The Morgantown Utility Board operates all activities as propriety funds, same as a private business. MUB s basic financial statements include four components: The Statement of Net Position presents information on MUB s assets and liabilities with the difference between the two reported as Net Position. The Statement of Revenues, Expenses, and Changes in Net Position presents information showing how MUB s net position changed during the two most recent fiscal years. Results of operations are reported as underlying events occur, regardless of the timing of the cash flows. Revenues and expenses are reported in these statements for some items that will result in cash flows in future fiscal periods, (For example: billed but uncollected revenues, and employee earned but unused vacation leave). The Statement of Cash Flows reports cash receipts, cash payments, and net changes in cash from operations, non-capital financing, capital financing, and investing activities. The Notes to the Basic Financial Statements provide additional information that is essential to fully understand the data provided in the financial statements. 5

8 Management s Discussion and Analysis For the Years Ending June 30, 2018 and 2017 (Unaudited) FINANCIAL ANALYSIS Assets Current assets increased $6 million over the prior year. Current assets includes $3 million of MUB s equity contribution towards the water reservoir project and a $2.4 million June drawdown on the 2016 project fund. Net receivables decreased $100K from the prior year. Noncurrent assets has a net increase of $32 million in bond construction accounts. Net capital assets increased $22.3 million. Deferred outflows related to pensions decreased by $540K. Liabilities Current liabilities increased by $4 million. The largest portion of this change is in accounts payable which includes the $2.4 million payable offset to the June drawdown of the 2016 project fund. Billing services payable increased by $100K due to the addition of garbage billing for the City of Morgantown. Non-current liabilities increased by $ $144K increase in liabilities from restricted assets, $1.94 million increase in construction advances, $45.4 million increase in long-term debt, and $200k decrease in net pension liability. Deferred inflows related to pension increased by $301K. Net Position MUB s combined net position increased by $8,556,235 over the previous year to $124,000,903. Of this total $122,357,153 was invested in capital assets net of related debt, $4,699,947 restricted for debt service, and $(3,056,197) unrestricted. 6

9 Management s Discussion and Analysis For the Years Ending June 30, 2018 and 2017 (Unaudited) Schedule of Net Position Assets Current Assets $ 15,983,432 $ 10,241,365 $ 6,502,927 Noncurrent Assets 116,269,797 83,617,950 9,511,830 Capital Assets, net 232,806, ,470, ,917,186 Total Assets $ 365,060,036 $ 304,329,721 $ 220,931,943 Deferred Outflows of Resources 2,534,465 3,074,141 2,380,970 Total Assets and Deferred Outflows of Resources $ 367,594,501 $ 307,403,862 $ 223,312,913 Liabilities Current Liabilities $ 13,579,285 $ 9,559,014 $ 6,924,109 Noncurrent Liabilities 229,223, ,909, ,896,738 Total Liabilities 242,802, ,468, ,820,847 Deferred Outflows of Resources 791, , ,521 Total Liabilities and Deferred Inflows of Resources $ 243,593,598 $ 191,959,194 $ 116,231,368 Net Position Net Investment in Capital Assets 122,357, ,249, ,610,918 Restricted for Debt Service 4,699,947 4,644,279 3,556,196 Unrestricted (3,056,197) (2,448,976) (9,085,569) Total Net Position $ 124,000,903 $ 115,444,668 $ 107,081,545 7

10 Management s Discussion and Analysis For the Years Ending June 30, 2018 and 2017 (Unaudited) Schedule of Revenues, Expenses, and Changes in Net Position Operating Revenues: Water Sales $ 13,405,348 $ 13,447,981 $ 10,255,155 Sewer Sales 18,116,031 18,411,764 10,784,194 Storm Water Sales 1,889,824 1,898,317 1,896,211 Misc / Other 552, , ,763 Total Operating Revenues 33,963,520 34,284,419 23,381,323 Operating Expenses: Operations 13,531,168 13,560,503 12,693,075 Maintenance 3,137,201 3,021,084 2,830,053 Depreciation 8,408,810 8,664,954 8,692,352 Total Operating Expenses 25,077,179 25,246,541 24,215,480 Operating Income 8,886,341 9,037,878 (834,157) Net Nonoperating Income (Expense) (4,774,195) (4,083,946) (2,125,110) Income(Loss) Before Contributions 4,112,146 4,953,932 (2,959,267) Contributed Capital 4,444,089 3,409,191 3,137,422 Change in Net Position 8,556,235 8,363, ,155 Net Position Beginning of Year 115,444, ,081, ,903,390 Net Position End of Year $ 124,000,903 $ 115,444,668 $ 107,081,545 Operating revenues of $33,963,520 decreased by $321,000 or 1% from the prior fiscal year. Service revenues are the primary revenue source accounting for over 98% of operating revenues. Income from investments was $311,000. Income from the investment portfolio is used to subsidize both operations and maintenance as well as system capital improvements. At June 30, 2018 the market value of the portfolio was $8.3 million. Market exceeded cost by $385,000. In addition, interest earnings on the unspent balance of the 2016 Bond Project Fund were $715,000. These proceeds are committed to be used on designated capital improvements. Operating expenses in 2018, net of depreciation was $16,668,369, which is a.5% increase from Notable changes from 2017 were watershed protection costs decreased $160,000, water tank painting projects decreased by $130,000, water transmission and distribution costs increased by $137,000, Cheat Sewer treatment and disposal costs increased by $135,000 due mainly to the need to contract sludge disposal for several months rather than providing the service in house. Stormwater collecting costs decreased by $56,000. 8

11 Management s Discussion and Analysis For the Years Ending June 30, 2018 and 2017 (Unaudited) MUB total salaries in 2018 were nearly unchanged from 2017 salaries. However, MUB spent approximately $42k on contracted temporary labor. Capitalized labor was $1,033,000 in 2018 as compared to $1,100,000 in 2017, a decrease of $67,000. Administrative and general expenses, which includes fringe benefits, was relatively unchanged from Budgetary Highlights The Morgantown Utility Board Members approve each year the Utility s budget. Over the course of the year, significant deviations from budget are noted and reported on a monthly basis to Board Members. In 2018, MUB budgeted revenues were $35.3 million actual revenues were $35.5 million -.7% over budget Budgeted expenses, excluding depreciation, were $16.78 million. Actual expenses were $16.67 million nearly right on budget. A total of $32.4 million was spent on capital improvements. CAPITAL ASSETS AND DEBT ADMINISTRATION Capital Assets At the end of 2018, MUB had $363 million invested in capital assets ($233 million net of accumulated depreciation), including treatment facilities; buildings; equipment; and water, sewer, and storm lines. Major additions during the fiscal year included: $22,875,496 Waste Water Treatment Plant Upgrade MUB is constructing a major upgrade to the Star City Wastewater Treatment Plant (WWTP). The upgrade includes the decommissioning of the existing rotating biological contactor treatment process, and the addition of a membrane filtration treatment process. The existing activated sludge treatment process will remain. The upgrade will increase the 30-day average capacity of the WWTP to million gallons per day. Other upgrades at the WWTP include; a new headworks building, a new concrete silo digester, renovations and additions to the existing control building, ultra-violet disinfection, and various other plant and site improvements. $1,556,111 West Ridge Development This work was done at the request of the developer to provide sanitary sewer service to the proposed subdivision. The project included installation of approximately 4,600 feet of 16 DI waterline 4,000 feet of 12 DI waterline, 1,900 feet of 8 waterline, 4,900 feet of 12 sewer line, 2,400 feet of 8 sewer line, 3,200 feet of 6 force main, 2,100 feet of 4 force main and related appurtenances. $672,762 Cheat Cove - This work was done at the request of the developer to provide sanitary sewer service to the proposed subdivision. The project included installation of approximately 2,600 feet of 12 PVC pipe, 1,200 feet of 10 PVC pipe, 3,200 feet of 8 PVC pipe, and related appurtenances. $573,174 annual refunds of construction deposits to developers on main line extensions projects for customers accepting service from extensions. $481,952 Vehicle and Equipment Purchases $476,708 Cobun Creek Reservoir #2 Design Cost, Property Acquisition, and Permit Acquisition. MUB 9

12 Management s Discussion and Analysis For the Years Ending June 30, 2018 and 2017 (Unaudited) is planning to construct a new raw water reservoir as a secondary source water for the purpose of providing +/- 33 days of raw water storage in the event that the Monongalia River is unavailable for use. The construction will consist of an earthen and concrete impoundment with a storage capacity of 370 million gallons. $428,663 Water Treatment Plant Membrane Replacement This project was to replace the existing membrane filters to the current technology and at a drastically reduced cost. $402,313 Installation of new and replacement sewer services. $357,242 Rawley Ave This project was to replace and existing sanitary and storm lines that had reached their useful lives. The project include approximately 1,320 feet of 18 HDPE pipe, 1,230 feet of 8 PVC pipe, and related appurtenances. $337,578 Popenoe Run Interceptor Improvements. This project replaces and increases the capacity of the Popenoe Run Interceptor that has reached its useful life. The project included the installation of approximately 1,342 feet of 36 PVC pipe, 1,873 feet of 30 PVC pipe and approximately 800 feet of various other sizes of pipes. Additionally, 22 manholes were installed with the pipeline construction. $316,424 Installation of new and replacement water services $228,492 The Falling Waters The Lofts and Bluffs Developments - This work was done at the request of the developer to provide sanitary sewer service to the proposed subdivision. The project included installation of approximately 2,650 feet of 8 PVC pipe, and related appurtenances Long-Term Debt Bond proceeds are to fund several ongoing major capital improvement projects, many of which are included in the Capital Asset section above. The 2016A issue generated net proceeds of $73.7 million. In addition to the proceeds, MUB contributed accumulated revenues of $2.2. At June 30, 2018, $52.8 million remained in the construction trust account. MUB drew $2.2 million on the 2016B1 SRF issue $19 million remains unspent and $50,000 of the 2016B2 SRF Green issue is unspent. The 2014B issue had remaining proceeds of $5,593 on June 30, MUB issued three series of bonds in fiscal year The 2017A Bond was issued December 21, This issue refinanced the 2012C issue and generated new proceeds of $900,922. The 2018A closed January 31, One draw of $25,500 occurred at closing and the unspent balance is $368,574. The 2018B bonds were issued June 28, 2018, generating net proceeds of $48 million. MUB had $4.7 million on deposit with the WV Municipal Bond Commission as of June 30,

13 Management s Discussion and Analysis For the Years Ending June 30, 2018 and 2017 (Unaudited) During the fiscal year MUB retired $7.6 million of existing debt. At June 30, 2018, MUB had $212 million revenue and refunding bonds outstanding. More information regarding terms can be found in Note 6 of the Notes to the Financial Statements. ECONOMIC FACTORS AND NEXT YEAR S BUDGETS AND RATES Throughout the fiscal year, the Morgantown Utility Board (MUB) continued its routine capital improvement program (CIP). Routine CIP expenditures, not including projects funded with municipal bonds, still average over $4 million annually. This evidences a strong commitment to system renewal and replacement. A 33% water rate increase was approved Feb 2, 2016 and went into effect on July 1, The primary purpose of the increase is to fund improvements to the raw water storage facilities of the drinking water system. Construction of the improvements began in the Spring of By implementing the rate adjustment prior to the start of construction, MUB was able to accumulate revenues that will be used to make a $2.4 million equity contribution to the project funding, and has avoided capitalized interest charges during the construction period. This increase has also provided additional funds for operation and maintenance, looking forward for three years. An 87.5% sewer rate increase was approved Feb 2, 2016 and went into effect on July 1, The primary purpose of the increase is to fund improvements to the wastewater treatment facilities of the sewer system. Construction of the improvements began in December of By implementing the rate adjustment prior to the start of construction, MUB accumulated revenues to make a $2.2 million equity contribution to the project funding, and avoided capitalized interest charges during the construction period. This increase has also provided additional funds for operation and maintenance, looking forward for three years. Most of MUB s residential customers will remain billed on a bi-monthly basis. But the recent rate increases were accompanied by new monthly payment options in order to help make those combined bills more affordable. Sanitary sewer rates in the Cheat Lake area were not included in the above rate adjustments. The Cheat Lake system is a physically separate system, apart from that of the larger Morgantown system, and is managed and charged based on its own cost of service. The Cheat lake sewer rates were last increased (by 24%) in July That increase successfully addressed revenue shortfalls in the Cheat Lake service area. Stormwater rates were last increased (by 10%) in 2012 to support a $2.6 million stormwater project in the Sabraton area of Morgantown. An additional $500,000 was borrowed in 2014 to fund a stormwater project in the Forest Drive area, but debt service for that loan is paid via a special surcharge that applies only to the customers of that area, leaving base rates to all other customers unaffected. Stormwater revenues and expenditures remain steady and in balance. The 2012 stormwater bond had a balance due of $1.9 million, and matured in That debt was refinanced this year, with a new term of 30 years, and an additional $1.5 million was borrowed to finance newly proposed stormwater improvements at Third St, Forest Ave, Valley View Road, and adjacent areas. The reduced annual debt service resulting from the refinancing of the 2012 bonds nearly covers the new debt service incurred by the newly proposed debt, so that stormwater rates did not need to be adjusted. 11

14 Management s Discussion and Analysis For the Years Ending June 30, 2018 and 2017 (Unaudited) Debt service surcharges, similar to that described above for the 2014 Forest Drive stormwater project, have been used to fund other recent water and sewer projects. Such surcharges ease the cash flow burden for new customer groups, who would otherwise be unable to afford the cost of main line extensions to serve their area. Such extensions are done at the customers expense under PSC Rule 5.5. But, by borrowing the funds on behalf of the customers, and recovering the debt service via the surcharge, MUB creates a mechanism that allows new customers to spread their cost to a more affordable form, while leaving base rates to all other customers unaffected. MUB has recently begun construction of a new $1.15 million water extension to the Rockley Road area that will utilize the surcharge approach. MUB continues to complete routine water/sewer line extensions for new apartments and housing units. The pace of new construction for system additions remains strong in the current fiscal year, reflecting recovery from the slowdown of the national economy. Many new system additions have been to serve higher density apartment complexes aimed at the University student market, and involved upgrades of existing capacity consistent with urban redevelopment. Initial indicators show continued growth in general in the coming year. There were no new acquisitions of water or sewer systems in the recent year. However, MUB remains attentive to conditions and circumstances of neighboring systems and for opportunities to expand through favorable system acquisitions. At the request of the River Road PSD and the County Commission, MUB expects to acquire RRPSD in late 2019 or early A significant change in PSC regulations has simplified current and future MUB projects and rate increases. SB 234 was enacted by the WV Legislature and became effective June 12, It partially deregulated certain aspects of regulations applicable to MUB. Rate making is no longer subject to PSC review, except in certain unlikely cases. Morgantown City Council (which has always enacted MUB rates through the City ordinance process) is now the final reviewing authority for any proposed change in rates. Approval of the scope of proposed improvement projects is also now limited to City Council, as SB 234 exempts MUB from having to obtain a PSC Certificate of Convenience and Necessity. MUB submitted its Long Term Control Plan (LTCP) to West Virginia Department of Environmental Protection (DEP) in December An update to the LTCP was submitted in December This document provided information on how MUB will minimize and better manage its Combined Sewer Overflows (CSO s). It provided guidance for Wastewater Treatment Plant (WWTP) upgrades and collection/transmission system improvements to meet the regulatory requirements of the DEP and EPA. The document also provided guidance for capital project budgeting of the sewer system for the next twenty (20) years. The 2014 LTCP predicted approximately $70 million of sewer system improvements to be constructed as Group 1 of the plan to be completed by The LTCP includes additional groups/phases over the next years, subject to future prevailing conditions, including regulatory requirements, affordability, and available funding. We continue to await approval of the LTCP by DEP; and are currently engaged in an exchange of comments with DEP toward that goal. In order to stay on schedule for the earliest possible construction, we began detailed design engineering for Phase 1 of the proposed LTCP projects in mid calendar year Bids were received in September The increased sewer rates that were implemented in July 2016 fund the debt service for this $101 million project. Bonds were issued in November 2016, and construction began one month later. Bids for the proposed water system improvements, and funded by the July 2016 water rate increase, were received in November That project is estimated to cost $48 million. Bonds were issued in June 2018, and construction began one month later. 12

15 Management s Discussion and Analysis For the Years Ending June 30, 2018 and 2017 (Unaudited) In addition to the above, MUB continues to focus on ongoing renewal and/or replacement of aging, or otherwise inadequate facilities. In the water system, priority is given to lines that have been identified through a problematic leak history, or by having required excessive maintenance due to the age of the pipe. In our sanitary and storm sewer systems, priority is given to lines that have been identified through a problematic history of backups or other similar flow related failures, or by having required excessive maintenance due to the age of the pipe. Our annual budget for capital improvements are centered on these replacement projects, as particular portions of the piping networks are recognized to have reached the end of their useful lives. MUB continues to see increasing costs for operation and maintenance of the water, wastewater and stormwater systems. This results from increasing efforts to improve system operations through maintenance activities such as hydrant flushing, mainline cleaning, tank painting, etc. Operating costs in water operations will remain elevated compared to historic levels. Even though MUB was physically unaffected by the January 2014 Freedom Industries chemical leak in Charleston WV, new higher standards for source water protection resulting from subsequent legislation have added significantly to this cost category. MUB will continue to be guided by existing and future regulatory mandates that define increasingly stringent quality standards for its water, wastewater and stormwater operations. CONTACTING MUB S FINANCIAL MANAGEMENT This financial report is designed to provide our customers, investors, and creditors with a general overview of MUB s finances and to demonstrate MUB s accountability for the money it receives. If you have questions about this report or need additional financial information, contact the Morgantown Utility Board, Controller s Office, 278 Greenbag Road, Morgantown, West Virginia. 13

16 STATEMENTS OF NET POSITION JUNE 30, 2018 AND ASSETS: Current Assets: Cash and Cash Equivalents $ 8,057,309 $ 2,491,923 Accounts Receivable Net 2,690,053 2,480,710 Other Accounts Receivable 700,851 1,027,997 Interest and Dividend Receivable 40,421 32,561 Materials at Average Cost 1,637,437 1,500,512 Deposits and Prepayments 1,204,054 1,101,335 Accrued Utility Revenue 1,653,307 1,606,327 Total Current Assets 15,983,432 10,241,365 Capital Assets: Construction Work In Progress 47,410,006 22,998,907 Land 1,658,519 1,658,519 Intangible Plant 376, ,834 Buildings & Structures 27,618,485 27,540,765 Water Transmission & Distribution System 77,129,215 75,150,888 Sewer & Storm Collection System 121,870, ,301,637 Treatment Plant Equipment 72,846,947 73,371,378 Office Furniture & Equipment and Computer System 5,090,020 4,941,765 Vehicles & Heavy Duty Equipment 8,536,403 8,137,193 Total Capital Assets 362,537, ,477,886 Less: Accumulated Depreciation (129,730,404) (123,007,480) Total Net Capital Assets 232,806, ,470,406 Restricted Assets: Sinking Fund Investments 4,699,947 4,644,279 Bond Construction Accounts 101,755,359 69,489,731 Total Restricted Assets 106,455,306 74,134,010 Noncurrent Assets: Investments 9,320,476 8,952,236 Deferred Financing Costs 482, ,139 Other Net 11,044 22,565 Total Noncurrent Assets 9,814,491 9,483,940 TOTAL ASSETS 365,060, ,329,721 Deferred Outflows of Resources: Difference Between Expected and Actual Experience 221, ,600 Changes in Proportion and Differences Between Contributions and Proportionate Share of Contributions 74,657 - Net Difference Between Projected and Actual Earnings on Pension Plan Investments 585, ,849 Differences in Assumptions 1,652,611 1,936,692 Total Deferred Outflows of Resources 2,534,465 3,074,141 TOTAL ASSETS AND DEFERRED OUTFLOWS OF RESOURCES $ 367,594,501 $ 307,403,862 (Continued) The notes to the financial statements are an integral part of this statement. 14

17 STATEMENTS OF NET POSITION JUNE 30, 2018 AND 2017 (Continued) LIABILITIES: Current Liabilities: Accounts Payable $ 6,353,142 $ 2,519,679 Accrued Payroll 839, ,837 Billing Services Payable 437, ,926 Current Portion of Long-Term Debt 5,842,460 5,779,075 Unearned Revenue Other Accrued Liabilities 105, ,603 Total Current Liabilities 13,579,285 9,559,014 Noncurrent Liabilities: Liabilities from Restricted Assets: Customer deposits 635, ,030 Accrued Administrative Costs on Bonds 7,702 8,705 Accrued Interest on Bonds 678, ,820 Interest on Customer Deposits 6,098 6,098 Total Liabilities from Restricted Assets 1,328,240 1,184,653 Advances on Construction 13,047,711 11,106,883 Long-term Bonds and Notes Payable 206,362, ,931,696 Net Pension Liability 8,484,558 8,686,407 Total Noncurrent Liabilities 229,223, ,909,639 TOTAL LIABILITIES 242,802, ,468,653 Deferred Inflows of Resources: Differences Between Expected and Actual Experience 637, ,725 Changes in Proportion and Differences Between Contributions And Proportionate Share of Contributions 153, ,816 Total Deferred Inflows of Resources 791, ,541 Net Position: Net Investment in Capital Assets 122,357, ,249,365 Restricted Net Position 4,699,947 4,644,279 Unrestricted Net Position (Deficit) (3,056,197) (2,448,976) Total Net Postion 124,000, ,444,668 TOTAL LIABILITIES, DEFERRED INFLOWS OF RESOURCES AND NET POSITION $ 367,594,501 $ 307,403,862 The notes to the financial statements are an integral part of this statement. 15

18 STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET POSITION FOR THE YEARS ENDED JUNE 30, 2018 AND OPERATING REVENUES: Water Sales Revenue $ 13,405,348 $ 13,447,981 Sewerage Service Revenue 18,116,031 18,411,764 Stomwater Service Revenue 1,889,824 1,898,317 Billing Services Revenue 126, ,811 Forfeited Discounts 353, ,551 Rents from Water Property 20,470 19,438 Service Connection fees - Water 22,465 21,380 Other Operating Revenues 29,757 40,177 Total Operating Revenues 33,963,520 34,284,419 WATER OPERATING EXPENSES: Source of Supply 82, ,274 Pumping 417, ,085 Water Treatment 4,888,502 5,017,859 Transmission and Distribution 3,297,091 3,337,019 Customer Accounts 336, ,494 Administrative and General 3,078,260 2,932,989 Total Water Operating Expenses 12,100,726 12,244,720 SEWER OPERATING EXPENSES: Collecting 3,173,287 3,203,768 Pumping 1,368,313 1,365,168 Treatment and Disposal 2,727,769 2,625,340 Billing and Collecting 453, ,404 Administrative and General 3,664,961 3,737,224 Total Sewer Operating Expenses 11,387,605 11,329,904 STORMWATER UTILITY OPERATING EXPENSES: Collecting 1,062,667 1,095,827 Billing and Collecting 104,703 98,183 Administrative and General 421, ,907 Total Stormwater Operating Expenses 1,588,848 1,671,917 Total Operating Expenses 25,077,179 25,246,541 Operating Income/(Loss) 8,886,341 9,037,878 NONOPERATING REVENUES (EXPENSES) Investment Income 983, ,408 Interest on Financing (6,090,475) (4,774,000) Other 332, ,646 Total Non-Operating Revenues(Expenses) (4,774,195) (4,083,946) Net Income/(Loss) Before Contributed Capital 4,112,146 4,953,932 Contributed Capital 4,444,089 3,409,191 Change in Net Position 8,556,235 8,363,123 Total Net Position-Beginning 115,444, ,081,545 Total Net Position-Ending $ 124,000,903 $ 115,444,668 The notes to the financial statements are an integral part of this statement. 16

19 STATEMENT OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2018 AND Cash Flows from Operating Activities: Cash Received from Sales and Tap Fees $ 33,504,491 $ 32,216,975 Cash Received from Rental Fees 20,470 19,438 Cash Received from Reimbursement and Miscellaneous Income 509, ,565 Cash Payments to Suppliers for Goods and Services (6,992,730) (10,592,910) Cash Payments to Employees for Services (5,263,306) (5,024,684) Net Cash Provided by (Used by) Operations 21,778,334 17,104,384 Cash Flows from Capital and Related Financing Activities: Acquisition and Construction of Capital Assets (24,451,676) (11,160,635) Proceeds from New Issuance 53,296,094 78,502,706 Principal Paid on Long-Term Debt (7,639,076) (3,994,318) Interest Paid (5,948,725) (4,517,332) (Increase) Decrease in Sinking Fund (55,668) (1,088,083) (Increase) Decrease in Bond Construction Account (32,265,628) (69,484,216) Advances on Construction 1,940,828 (866,832) (Increase) Decrease in Deferred Financing Net of Amortization 26,168 21,433 (Increase) Decrease in Accrued Administrative Cost on Bonds (1,003) 1 Customer Deposits Including Interest 2,840 (8,720) Other Nonoperating Income 332, ,646 Change in Other Assets Net 11,521 (22,565) Net Cash Provided by (Used by) Capital and Related Financing Activities (14,751,875) (12,238,915) Cash Flows from Investing Activities: Proceeds from Sales of Investments 920,874 1,195,677 Purchase of Investments (1,582,060) (4,583,245) Interest Received 975, ,956 Net Cash Provided by (Used by) Investing Activities 314,784 (3,089,612) Net Increase/(Decrease) in Cash and Cash Equivalents 7,341,243 1,775,857 Cash and Cash Equivalents - July 1 716, ,066 Cash and Cash Equivalents - June 30 $ 8,057,309 $ 2,491,923 Cash Flows from Operating Activities: Operating Income $ 8,886,341 $ 9,037,878 Adjustments to Reconcile Operating Income to Cash Flows from Operating Activities: Depreciation and Amortization 8,465,390 8,762,084 (Increase) Decrease in Accounts Receivable 117,803 (1,114,645) (Increase) Decrease in Materials (136,925) (45,256) (Increase) Decrease in Deposits and Prepayments (102,719) (342,406) (Increase) Decrease in Accrued Utility Revenue (46,980) (447,822) (Increase) Decrease in Deferred Outflows 539,676 (693,171) Increase (Decrease) in Accounts Payable 3,833, ,667 Increase (Decrease) in Accrued Payroll 40,304 23,883 Increase (Decrease) in Billing Services Payable 90,864 68,910 Increase (Decrease) in Deferred Revenue Increase (Decrease) in Other Current Accrued Liabilities (7,772) (820) Increase (Decrease) in Deferred Inflows 300,711 80,020 Increase (Decrease) in Pension Liability (201,849) 1,207,036 Total Adjustments 12,891,993 8,066,506 Net Cash Provided by (Used by) Operating Activities $ 21,778,334 $ 17,104,384 The notes to the financial statements are an integral part of this statement. 17

20 Notes to the Financial Statements For the Years Ended June 30, 2018 and 2017 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations and Reporting Entity The Morgantown Utility Board (the Board) is a Class A Water, Sewer and Storm-water Utility as defined by the West Virginia Public Service Commission. The Board manages and operates the City of Morgantown, West Virginia, water, sewer and storm-water utilities as enterprise funds under an ordinance dated September 1, These utilities serve the City and other surrounding areas and the Board also provides billing and collecting services for other adjacent utilities. It also provides jobbing and contracting services for plant repairs to these adjoining utilities. The Board complies with Governmental Accounting Standards Board Statement No. 14, The Financial Reporting Entity and GASB Statement No. 39 Determining Whether Certain Organizations are Component Units. These statements establish standards for defining and reporting on the financial reporting entity. They define component units as legally separate organizations for which the officials of the primary government are financially accountable and other organizations for which the nature and significance of their relationship with a primary government are such that exclusion would cause the reporting entity s financial statements to be misleading or incomplete. Based on these criteria, the Board is a component unit of the City of Morgantown therefore these financial statements will be included in the City s financial statements as a component unit. The Board s management believes these financial statements present all activities for which the Board is financially accountable. Basis of Presentation Accounts of the Board are organized on the basis of fund accounting under one fund, an enterprise fund. Enterprise funds are proprietary funds used to account for business-type activities provided to the general public. These activities are financed primarily by user charges and the measurement of financial activity focuses on net income measurement similar to the private sector. The accompanying financial statements are presented on a combined basis because the water, sewer and storm-water utilities are under the control of the Board. Basis of Accounting and Measurement Focus These financial statements are presented on the accrual basis of accounting in accordance with generally accepted accounting principles (GAAP). The Governmental Accounting Standards Board (GASB) is responsible for establishing GAAP for state and local governments through its pronouncements (Statements and Interpretations). A summary of the significant accounting policies consistently applied in preparation of the accompanying financial statements follows. Measurement focus is a term used to describe which transactions are recorded within the various financial statements. The proprietary funds utilize an economic resources measurement focus. The accounting objectives of this measurement focus are the determination of operating income, changes in net assets (or cost recovery), financial position, and cash flows. All assets and liabilities (whether current or non-current) associated with their activities are reported. Proprietary fund equity is classified as net assets. All proprietary funds utilize 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. Proprietary funds distinguish operating revenues and expenses from non-operating items. Operating revenues and expenses generally result from providing services in connection with a proprietary fund s principal ongoing operations. The principal operating revenues of the Water, Sewer and Waste-Water funds are charges for water and sewer service. 18

21 Notes to the Financial Statements For the Years Ended June 30, 2018 and 2017 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Basis of Accounting and Measurement Focus (continued) 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. When both restricted and unrestricted resources are available for use, it is the Board s policy to use unrestricted resources first, and then restricted resources as they are needed. Cash and Cash Equivalents The Board, for the purposes of the Statement of Cash Flows, considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. All cash and investments of the proprietary fund type are pooled by the Board. Certain funds of the Board are temporarily invested by the West Virginia Municipal Bond Commission specifically on behalf of the Board as part of the Commission s consolidated investment pool. These investments are considered cash and cash equivalents due to their liquid nature. Investments The Board is allowed to invest excess funds in the following securities as governed by the West Virginia Code. 1. Any direct obligation of, or obligation guaranteed as to payment of both principal and interest by, the United States of America; 2. Any evidence of indebtedness issued by any United States government agency guaranteed as to payment of both principal and interest, directly or indirectly, by the United States of America; 3. Any evidence of indebtedness issued by the Federal National Mortgage Association to the extent such indebtedness is guaranteed by the Government National Mortgage Association; 4. Any evidence of indebtedness that is secured by first lien deed of trust or mortgage upon real property situate within West Virginia, if payment is substantially insured or guaranteed by the United States of America; 5. Direct and general obligations of the state of West Virginia; 6. Any undivided interest in a trust, the corpus of which is restricted to mortgages on real property and, unless all of the property is within West Virginia and insured, the trust is rated in one of the three highest rating grades by an agency which is nationally known in the field of rating pooled mortgage trusts; 7. Any bond, note debenture, commercial paper or other evidence of indebtedness of any private corporation or association: Provided that the security is rated in one of the three highest rating grades by an agency which is nationally known in the field of rating corporate securities: however, if any commercial paper or any security will mature within one year from the date of issuance, it must be rated in one of the two highest rating grades by a nationally known agency; 8. Negotiable certificates of deposits issued by any bank, trust company, national banking association or savings institution which mature in less than one year and are fully collateralized; 9. Interest earning deposits including certificates of deposit, with any designated West Virginia depository, which deposits are fully secured by a collaterally secured bond, and; 10. Mutual funds registered with the Securities and Exchange Commission which have assets in excess of three hundred million dollars. Investments are reported at fair value. The net increase in the cost-basis of investments consists of the realized gains and losses and the unrealized increase or decrease in the cost-basis of investments during the year. Realized gains or losses in sales of investments that had been held in more than one fiscal year and sold in the current fiscal year were included as a change in the cost-basis of investments reported in the prior year(s) and the current year. 19