MADISON METROPOLITAN SEWERAGE DISTRICT Madison, Wisconsin. FINANCIAL STATEMENTS December 31, 2013 and 2012

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1 Madison, Wisconsin FINANCIAL STATEMENTS

2 TABLE OF CONTENTS PAGE INDEPENDENT AUDITORS REPORT... 1 MANAGEMENT DISCUSSION AND ANALYSIS... 3 BASIC FINANCIAL STATEMENTS Statements of Net Position Statements of Revenues, Expenses, and Changes in Net Position Statements of Cash Flows Notes to Financial Statements REQUIRED SUPPLEMENTARY INFORMATION Schedule of Funding Progress... 44

3 CliftonLarsonAllen LLP CLAconnect.com Board of Commissioners Madison Metropolitan Sewerage District Madison, Wisconsin INDEPENDENT AUDITORS' REPORT Report on the Financial Statements We have audited the accompanying financial statements of the Madison Metropolitan Sewerage District, as of and for the years ended, and the related notes to the financial statements, which collectively comprise the entity s basic financial statements as listed in the table of contents. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors 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 and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. 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 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 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. An independent member of Nexia International 1

4 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the Madison Metropolitan Sewerage District, as of December 31, 2013 and 2012, and the changes in it s financial position and it s cash flows thereof for the years then ended in accordance with 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 that the Management Discussion and Analysis and the Schedule of Funding Progress on pages 3-11 and 43, be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated March 27, 2014, on our consideration of Madison Metropolitan Sewerage District's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the result of that testing, and not to provide an opinion 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 Madison Metropolitan Sewerage District s internal control over financial reporting and compliance. a Middleton, Wisconsin March 27,

5 MANAGEMENT DISCUSSION AND ANALYSIS Years ended Management s Discussion and Analysis for 2013 and 2012 The management of the Madison Metropolitan Sewerage District (the District) offers this narrative overview and analysis of the District s financial performance for calendar years 2013 and It should be read in conjunction with the District s financial statements which follow this section. The 2013 and 2012 financial statements have been prepared in accordance with generally accepted accounting principles. Financial Highlights Net position increased by $5.4 million (4.9 percent) from $110.2 million to $115.6 million in This compares to a $3.2 million (3.0 percent) increase in Operating revenues increased by $3.5 million (14.4 percent) from $24.4 million to $27.9 million in This compares to a $1.3 million (5.6 percent) increase in Operating expenses, excluding depreciation, increased by $1.8 million (12.4 percent) from $14.8 million to $16.6 million in This compares to a decrease of $0.5 million (3.0 percent) in Overview of Basic Financial Statements The financial statements of the District report information of the District using accounting methods similar to those used by private sector companies. These statements offer short-term and long-term financial information about its activities. The Statement of Net Position includes all of the District s assets, deferred outflows, liabilities and deferred inflows and provides information about the nature and amounts of investments in resources (assets) and the obligations to District creditors (liabilities). It also provides the basis for evaluating the capital structure of the District and assessing the liquidity and financial flexibility of the District. All of the District s revenues and expenses are accounted for in the Statement of Revenues, Expenses, and Changes in Net Position. This statement measures the success of the District s operations over the past year and can be used to determine whether the District has successfully recovered all its costs through its user fees and other charges, profitability, and credit worthiness. The Statement of Cash Flows reports cash receipts, cash payments, and net changes in cash resulting from operations, investing and financing activities and provides answers to such questions as where did cash come from, what was cash used for, and what was the change in the cash balance during the reporting period. 3

6 MANAGEMENT DISCUSSION AND ANALYSIS Years ended Net Position A summary of the District s Statement of Net Position is presented in Table A-1. Table A-1 Condensed Statement of Net Position (000's) Current Assets $ 32,553 $ 24,883 $ 20,223 Noncurrent Assets Capital assets, net of accumulated depreciation 194, , ,119 Other assets 9,839 10,620 10,322 Total assets 237, , ,664 Current Liabilities 10,918 10,202 9,665 Noncurrent Liabilities 109,185 89,785 59,058 Total liabilities 120,103 99,987 68,723 Deferred Inflows 1,713 1, Net Position Net investment in capital assets 83,820 84,567 84,110 Restricted 18,609 16,455 15,639 Unrestricted 13,132 9,189 7,255 Total net position $ 115,561 $ 110,211 $ 107,004 As of December 31, 2013 the District had total assets, less accumulated depreciation, of $237.4 million and total liabilities and deferred inflows of $121.8 million, resulting in $115.6 million of net position. Net position increased by $5.4 million (4.9 percent) in This compares to a net position increase of $3.2 million (3.0 percent) in The 2013 increase was due to connection charge revenues of $1.1 million and operating income of $4.3 million. Funds represented by the 2013 increase will be used to finance future interceptor construction, to increase reserves, and to offset a portion of future operating costs. Capital assets (land, structures, equipment, vehicles, etc.) comprise $195.0 million, or 82.1 percent of total assets at the end of At the end of 2012, capital assets had a value of $176.0 million and represented 83.2 percent of total assets. Capital assets increased $18.9 million in 2013 compared to a $30.0 million increase in

7 MANAGEMENT DISCUSSION AND ANALYSIS Years ended Net Position (continued) Future principal payments on bonds total $111.2 million at the end of 2013 and represent 93 percent of the District s liabilities. At the end of 2012, future principal payments on bonds totaled $91.5 million and represented 92 percent of the District s liabilities. Future principal payments were $19.7 million more than at the end of 2012 due to increased borrowing for capital projects in Future principal payments at the end of 2012 were $29.5 million more than at the end of There was a decrease in construction activity funded with bond funds in 2013 compared to The District s restricted assets consist of reserves for the payment of debt service and for unexpected expenses for the repair and replacement of equipment. Restricted assets increased by $2.2 million in 2013 to satisfy current and anticipated bond ordinance requirements for payment of debt service expenses. This compares to a $0.8 million increase in Unrestricted assets at the end of 2013 were $3.9 million more than at the end of Unrestricted assets increased by $1.9 million in The 2013 increase was due primarily to receiving loan proceeds for the Northeast Interceptor-SEI to FEI Replacement, the Process Control System Update and the Pumping Station 18 projects and to service charge revenues that were higher than budgeted. The 2012 increase was due primarily to receiving loan proceeds to finance the Nine Springs Eleventh Addition and the Operations Building HVAC Improvements projects. 5

8 MANAGEMENT DISCUSSION AND ANALYSIS Years ended Revenues, Expenses, and Changes in Net Position Table A-2 Condensed Statement of Revenues, Expenses, and Changes in Net Position (000's) Operating Revenues $ 27,929 $ 24,408 $ 23,105 Nonoperating Revenues Total revenues 28,199 25,060 23,522 Depreciation Expense 5,440 5,395 5,424 Other Operating Expense 16,649 14,813 15,276 Nonoperating Expense 1,847 2,429 1,941 Total expense 23,936 22,637 22,641 Income Before Capital Contributions 4,263 2, Capital Contributions 1, ,213 Change in net position 5,350 3,207 2,094 Beginning Net Position 110, , ,910 Ending Net Position $ 115,561 $ 110,211 $ 107,004 The District s revenues, expenses, and changes in net position are summarized in Table A-2. Operating revenue for 2013 increased by $3.5 million, or 14.4 percent, from $24.4 million to $27.9 million. This compares to the 2012 operating revenue increase of $1.3 million, or 5.6 percent. The 2013 increase was due primarily to higher service charge rates and higher loadings. 6

9 MANAGEMENT DISCUSSION AND ANALYSIS Years ended Revenues, Expenses, and Changes in Net Position (Continued) Non-operating revenues for 2013 were $0.382 million (58.6 percent) lower than in 2012, reflecting lower interest revenue and no principal forgiveness money received in Non-operating revenues for 2012 were 56.4 percent higher than in 2011, which was the result of one-time principal forgiveness money received in 2012 for a Clean Water Fund loan. Depreciation expense in 2013 of $5.4 million was approximately the same as the 2012 depreciation expenses. The 2012 depreciation expense of $5.4 million was approximately the same as the 2011 depreciation expenses. Other operating expenses for 2013 of $16.6 million were $1.8 million (12.4 percent) higher than 2012 expenses of $14.8 million. Other operating expenses for 2012 were 3.0 percent lower than 2011 expenses of $15.3 million. The increase in other operating expenses in 2013 was due largely to increased salary costs ($0.59 million), contracted services ($0.54 million), replacement parts and services ($0.35 million) and electric power ($0.24 million). Non-operating expenses for 2013 of $1.8 million, which are comprised of interest on the District s outstanding debt, other construction expenses and disposal of equipment, were $0.6 million lower than 2012 non-operating expenses, primarily due to a one-time contribution of the Southwest Interceptor North Leg and South Leg to the City of Madison in Non-operating expenses in 2012 were $0.49 million more than in Capital contributions include contributed capital assets and interceptor and treatment plant connection charge revenues. The one-time connection charges are assessed against each property in the District at the time sewerage service is made available. The charges are made on an area basis. An interceptor connection charge rate has been established for each major District interceptor sewer. The interceptor connection charge rates are adjusted annually to account for changes in construction costs. The Engineering News Record s Construction Cost Index is used for this purpose. Interceptor connection charge rates for 2013 increased by 2.7 percent. This compares to the 2012 increase of 2.4 percent. The treatment plant connection charge rate is adjusted annually to account for the change in excess capacity debt service paid by current users for facilities at the treatment plant that will be utilized by new users. The treatment plant connection charge rate is further adjusted by the typical bank passbook savings rate, or 4 percent, whichever is higher. The treatment plant connection charge rate for 2013 decreased by 6.9 percent. The 2012 rate increased 6.3 percent. The decrease in 2013 reflects the reduction to accumulated excess capacity debt service costs due to the Eleventh Addition project. The reduction was the result of resetting the excess capacity value to zero for those unit processes that were being enlarged as part of the Eleventh Addition project. Excess capacity debt service charges for the new Eleventh Addition facilities will accumulate in future years. Increases in 2012 reflect the additions to accumulated excess capacity debt service costs associated with the Ninth Addition, Tenth Addition, and Eleventh Addition projects. Capital contributions in 2013 of $1.1 million were $.3 million more than 2012 capital contributions of $0.8 million. This increase of 38.6 percent compared to 2012 was due to increased connection charge revenues. 7

10 MANAGEMENT DISCUSSION AND ANALYSIS Years ended Comparison of Actual Financial Results to Budget Each year the District adopts annual operating, capital projects and debt service budgets and a 10-year capital improvement plan following a public hearing. A comparison of the 2013 budgeted and actual amounts of operating revenues and expenses is shown in Table A-3. The District does not include depreciation as an operating expense in its annual budget, rather, it budgets sufficient income to cover the subsequent year s debt principal payments. Operating revenues for 2013 of $27.9 million were $1.2 million (4.6 percent) more than budgeted due to higher than anticipated wastewater volumes. Non-operating revenues of $0.27 million for interest income, struvite fertilizer sales, rent, and other miscellaneous items were $0.125 million (32 percent) less than budgeted. The largest item contributing to the difference was the delayed startup of the struvite harvesting facilities which resulted in a loss of $0.23 million in budgeted revenue. Operating expenses for 2013, excluding depreciation, were $0.7 million less than budgeted. The most significant under budget items were replacement parts and services, electric power, and administrative expenses which were a combined $0.9 million less than budgeted. Salaries and benefits were $0.3 million higher than budgeted because of a charge for the actuarial value of the District s post retirement benefits which are not budgeted. Non-operating expenses, which include the net value of retired equipment and the interest costs on the District s outstanding debt, were $1.2 million less than budgeted. This difference is largely due to interest costs which were capitalized. Budgeted income for 2013 of $6.9 million includes $5.6 million for 2014 principal payments on the District s outstanding debt and $0.6 million to fund future year s principal and interest. It is the District s policy to finance capital improvements for new users through borrowing. Sewerage system improvements typically have useful lives of more than twenty years, and the District typically issues twenty-year bonds. The system s users pay for the costs of the facilities they require for the conveyance and treatment of their wastewater over the life of the bonds. For this reason, the District does not budget to recover depreciation costs in addition to the debt service expenses, since this would in effect result in double-billing current users for these facilities. Charges to recover debt service expenses reflect the cost of the facilities currently in use. Charges to recover depreciation expenses would reflect the cost of replacing these same facilities at the end of their useful lives. 8

11 MANAGEMENT DISCUSSION AND ANALYSIS Years ended Table A-3 Comparison of Operating Budget to Actual Results for 2013 (000's) Budget Actual Variance Revenues From operations $ 26,690 $ 27,929 $ 1,239 Nonoperating $ (125) Use of Cash Reserves 138 Total revenues 27,223 28,199 1,114 Operating Expenses Depreciation expense - 5,440 5,440 Other operating expenses: Salaries with benefits 8,027 8, Administrative (134) Legal and accounting Insurance Power 3,145 2,914 (231) Natural gas Chemicals Motor and LP fuel (14) Water and sewer services (24) Contracted services 1,976 1,925 (51) Engineering Consulting Communication services Replacement parts and services 1,925 1,384 (541) Supplies Miscellaneous (41) Total other operating expenses 17,345 16,649 (696) Total operating expenses 17,345 22,089 4,744 Nonoperating Expenses Disposal of Equipment Construction Expenses Interest expense 2,784 1,506 (1,278) Total nonoperating expenses 3,005 1,847 (1,158) Total expenses 20,350 23,936 3,586 9

12 MANAGEMENT DISCUSSION AND ANALYSIS Years ended Income before capital contributions $ 6,873 $ 4,263 $ (2,472) Capital Assets At the end of 2013, the District had $195 million invested in capital assets comprised of the Nine Springs Wastewater Treatment Plant, seventeen major pumping stations, over one hundred miles of interceptor sewers and force mains, and associated facilities. Table A-4 summarizes these assets. Table A-4 Capital Assets (000's) Capital Assets Land $7,401 $7,401 $7,401 Structures and improvements 152, , ,551 Mechanical equipment 89,364 89,251 86,072 Office furniture and equipment 4,144 4,276 4,181 Vehicles 2,365 2,310 2,284 Construction In progress 55,192 39,653 7,554 Total 310, , ,043 Less accumulated depreciation 115, , ,923 Net property and equipment $ 194,985 $ 176,075 $ 146,120 The District s 10-year capital improvement plan for 2014 through 2023 includes $58 million of treatment plant upgrades and expansions and $116 million of collection system improvements. Treatment plant projects and larger collection system projects are expected to be financed with Clean Water Fund loans administered by the State of Wisconsin. Smaller collection system projects will be financed with reserve funds. Reserve fund balances vary depending on construction scheduling, collection of connection charges, and interest earned on investments. A minimum reserve balance of $3 million is maintained to finance any unplanned capital improvement that might be necessary on an emergency basis. Total capital assets increased by $23.8 million to $311 million. The District completed one conveyance system project in 2013, the Northeast Interceptor SEI to FEI project. This project increased the value of the District s assets by $8.1 million. The increase in total assets also reflects construction in progress costs 10

13 MANAGEMENT DISCUSSION AND ANALYSIS Years ended for the Eleventh Addition ($10.4 million) and the Process Control System Upgrade ($1.7 million) projects at the Nine Springs Wastewater Treatment Plant and for improvements in the conveyance system for the Pumping Station 18 ($3.2 million) and Pumping Station 18 Force Main ($0.27 million) projects. Debt Administration The District collects debt service costs through service charges. Since the services of the District are not directly related to the value of property, and since a substantial amount of property within the District is exempt from paying property taxes, a tax levy would result in an inequitable cost recovery system. The District maintains cash and investments in a debt service fund in an amount no less than what is required to abate levying an ad valorem tax for the general obligation debt service. The District manages the debt service fund so that by October 1 of each year the balance in the fund is sufficient to meet the current year s debt service payments plus the subsequent year s debt service payments. District debt service costs are allocated to used capacity and excess capacity in the facilities constructed with proceeds from the debt being retired. Excess capacity is defined as the difference between the design capacity and the used capacity of each project and is determined annually. Used capacity debt service is recovered based on the volume and pollutant loadings of the users. Excess capacity debt service is allocated in equal amounts to all users through an actual customer rate. This rate in turn is used as one component of the connection charge rate that is applied to newly served areas at the time they are served by extensions to the sewer system. General obligation debt outstanding as of the end of 2013 was $111.2 million which represents the remaining balance on the Clean Water Fund loans from the State of Wisconsin. This compares to a 2012 year-end balance of $91.5 million and a 2011 year-end balance of $62.0 million. Interest on these loans is payable semi-annually at rates of 2.4 to 3.3 percent. Detailed information on the District s Clean Water Fund loans is included in the notes to the financial statements. The District s outstanding debt is expected to increase by $60 million over the ten-year period from 2014 to 2023 due to anticipated projects in the collection system and treatment plant. In addition, the District may have to borrow an additional $100 million in 2021 and 2022 to construct advanced phosphorous removal facilities. Annual debt service obligations will increase 10 percent per year from 2013 to 2017, 5.5% percent in 2018 and 2019, and 3 percent thereafter, provided advanced phosphorous removal facilities are not constructed. Should these additional facilities be required, the District will modify its financial plans to include the additional borrowing. Due to the magnitude of the borrowing, the District would attempt to spread this increase over a number of years to lessen the impact on its ratepayers. By statute, the District can borrow up to 5 percent of the equalized value of the taxable property within the District. At the end of 2013 the borrowing limit was $1.83 billion. At the end of 2012 that borrowing limit was $1.82 billion. Over the next ten years, the total amount of debt would be no more than 9 percent of this limit without the advanced phosphorous removal facilities and could approach 15 percent of this limit if the $100 million advanced phosphorous project is undertaken. At the end of 2013 the District s debt of $111.2 million was at 6.1 percent of this limit. At the end of 2012 the District s debt of $91.5 million was at 5.0 percent of this limit. During the last two years the District did not experience any negative changes in debt credit rating or debt limitation. 11

14 MANAGEMENT DISCUSSION AND ANALYSIS Years ended Economic Factors Growth in the District s service area had been relatively constant at a rate of 1.5 to 2 percent per year until the economic slowdown that began in Since the 2008 slowdown, growth has slowed. The future growth trend is projected to return to the 1 to 2 percent level during the next decade. Due to increasing costs for meeting infrastructure replacement and capacity needs, the District s service charges are expected to increase at a rate of 6 to 8 percent through This annual increase is higher than the trend of the past thirty years, which matched the rate of inflation. The District s customer base consists of residential users and similar types of commercial and industrial users that, for the most part, do not utilize large quantities of water. This customer base characteristic results in a very stable revenue base since the loss of any one user will not significantly impact the District s service charge revenues. The University of Wisconsin is the largest user of District services and provided 5.5 percent of service charge revenues in 2013 and 5.6 percent in Oscar Mayer Foods Corporation is the largest industrial user and provided 1.8 percent of service charge revenues in 2013 and 2.1 percent in Contacting the District This discussion and analysis is intended to provide information for our customers and creditors concerning the District s financial performance and to demonstrate the District s accountability for the money it receives. If you have questions about this information, or need additional information, contact the Madison Metropolitan Sewerage District, 1610 Moorland Road, Madison, Wisconsin

15 STATEMENTS OF NET POSITION ASSETS Current assets: Cash and cash equivalents $ 13,349,637 $ 9,239,239 Receivables, net of allowance for uncollectible amounts: Transmission and treatment of sewage and septage disposal 6,759,833 6,053,957 Servicing pumping stations 64,920 56,367 Interceptor connection charges, current portion 934, ,459 Other 57,710 28,721 Prepaid insurance Inventories 1,178,246 1,109,420 Restricted assets - Cash and cash equivalents 10,207,311 7,691,865 Total current assets 32,552,972 24,883,361 Noncurrent assets: Investments - 737,596 Restricted Assets - Investments 9,061,030 9,205,688 Interceptor connection charges, less current portion 777, ,944 Capital assets: Capital assets not being depreciated 62,593,544 47,054,009 Capital assets being depreciated 248,304, ,061, ,898, ,115,536 Less: accumulated depreciation 115,912, ,040,405 Capital assets, net of depreciation 194,985, ,075,131 Total noncurrent assets 204,824, ,695,359 Total assets 237,377, ,578,720 (Continued) The accompanying notes are an integral part of the financial statements. 13

16 STATEMENTS OF NET POSITION LIABILITIES Current liabilities: Vouchers payable $ 3,757,285 $ 3,837,089 Accrued salaries 255, ,873 Payroll withholdings payable 106,571 93,488 Unearned receivables 5,114 1,769 Compensated absences, current portion 565, ,694 Total current liabilities 4,689,929 4,644,913 Liabilities payable from restricted assets: Bonds payable, current portion 5,568,912 5,114,733 Due to other governments 185,577 55,341 Accrued interest payable 473, ,172 Total current liabilities payable from restricted assets 6,228,244 5,557,246 Noncurrent liabilities, less current portion: Compensated absences 2,075,168 2,179,674 Other post employment benefits 1,513,569 1,211,740 Bonds payable 105,596,085 86,393,575 Total noncurrent liabilities 109,184,822 89,784,989 Total liabilities 120,102,995 99,987,148 Deferred Inflow: Interceptor connection charges 1,712,688 1,380,403 NET POSITION Net investment in capital assets 83,820,340 84,566,823 Restricted for: Debt service 15,609,009 13,455,040 Equipment replacement 3,000,000 3,000,000 Unrestricted 13,132,013 9,189,306 Total net position $ 115,561,362 $ 110,211,169 The accompanying notes are an integral part of the financial statements. 14

17 STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS Years Ended OPERATING REVENUES Charges for services: Transmission and treatment of sewage $ 27,278,717 $ 23,747,386 Servicing pumping stations 249, ,183 Septage disposal 382, ,419 Pretreatment monitoring 18,684 18,496 Total operating revenues 27,928,902 24,408,484 OPERATING EXPENSES Administration 3,787,900 3,153,567 Treatment 10,432,668 9,511,099 Collection 2,428,755 2,148,550 Depreciation 5,440,015 5,395,217 Total operating expenses 22,089,338 20,208,433 Operating income 5,839,564 4,200,051 NONOPERATING REVENUES (EXPENSES) Investment income (loss) (8,837) 200,728 Capital grants - 328,439 Rent 67,210 65,848 Other 211,877 57,411 Capital assets contributed to other governments - (568,957) Construction expenses (290,004) (284,518) Disposal of property and equipment (51,026) - Interest expense (1,506,071) (1,575,169) Total nonoperating revenues (expenses) (1,576,851) (1,776,218) Income before capital contributions 4,262,713 2,423,833 CAPITAL CONTRIBUTIONS 1,087, ,836 CHANGE IN NET POSITION 5,350,193 3,207,669 NET POSITION BEGINNING OF YEAR 110,211, ,003,500 END OF YEAR $ 115,561,362 $ 110,211,169 The accompanying notes are an integral part of the financial statements. 15

18 STATEMENTS OF CASH FLOWS Years Ended CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers and users $ 27,185,484 $ 23,961,972 Payments to suppliers (7,820,693) (7,045,990) Payments to employees (8,030,481) (7,688,945) Net cash provided by operating activities 11,334,310 9,227,037 CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Rent receipts 67,245 65,883 Other receipts 211,877 57,411 Net cash provided by noncapital financing activities 279, ,294 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Interest paid on long-term debt (2,508,796) (1,857,414) Principal paid on long-term debt (5,114,733) (6,321,212) Proceeds from issuance of long-term debt 24,771,422 35,820,320 Capital grants - 328,439 Construction expenses (290,004) (284,518) Acquisition of capital assets (23,818,681) (33,949,339) Sale of capital assets 12,307 10,278 Capital contributions received 1,087, ,836 Net cash used in capital and related financing activities (5,861,005) (5,469,610) CASH FLOWS FROM INVESTING ACTIVITIES Investment income 25,239 25,270 Proceeds from sales and maturities of investments 848,178 35,848 Net cash provided by investing activities 873,417 61,118 NET INCREASE IN CASH AND CASH EQUIVALENTS 6,625,844 3,941,839 CASH AND CASH EQUIVALENTS BEGINNING OF YEAR 16,931,104 12,989,265 END OF YEAR $ 23,556,948 $ 16,931,104 (Continued) The accompanying notes are an integral part of the financial statements. 16

19 STATEMENTS OF CASH FLOWS Years Ended RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Operating income $ 5,839,564 $ 4,200,051 Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation 5,440,015 5,395,217 Increase (decrease) from changes in: Receivables: Transmission and treatment of sewage and septage disposal (705,876) (478,736) Servicing pumping stations (8,553) 25,031 Other (28,989) 7,193 Inventories (68,826) 12,545 Vouchers payable 414,631 (56,707) Other liabilities 452, ,443 NET CASH PROVIDED BY OPERATING ACTIVITIES $ 11,334,310 $ 9,227,037 RECONCILIATION OF CASH AND CASH EQUIVALENTS TO THE STATEMENTS OF NET POSITION Unrestricted $ 13,349,637 $ 9,239,239 Restricted 10,207,311 7,691,865 TOTAL CASH AND CASH EQUIVALENTS $ 23,556,948 $ 16,931,104 NONCASH CAPITAL AND RELATED FINANCING ACTIVITIES Interceptor connection charges billed $ 1,419,765 $ 1,226,941 The accompanying notes are an integral part of the financial statements. 17

20 NOTE 1 - NATURE OF ACTIVITIES, REPORTING ENTITY, AND SIGNIFICANT ACCOUNTING POLICIES Nature of Activities and Reporting Entity The District is a corporate body with the powers of a municipal corporation for the purpose of carrying out the collection, transmission and treatment of wastewater. It was created by judgment of the County Court for Dane County entered on February 8, The District, which serves the City of Madison and surrounding cities, villages and towns in the Greater Madison Metropolitan Area, covering approximately square miles, is a special-purpose government that is governed by a five-member Board of Commissioners. The District is accountable to the County of Dane, Wisconsin. However, accountability extends only to the appointment of the District's Commissioners, who are appointed by the County Executive of the County of Dane, Wisconsin. Because the County Executive appoints the commissioners, the District and the County of Dane are considered related organizations. The District is legally separate and fiscally independent of the County of Dane as well as any other state or local governments. It has unlimited taxing powers and has the right to set rates or charges for services provided without the approval of another government. Also, there are no other agencies or entities which are financially accountable to the Commissioners of the District, or whose relationship with the District would require their financial statements to be included within the financial statements of the District. A summary of significant accounting policies follows: Basis of Accounting The accounting policies of the District conform to generally accepted accounting principles as applicable to local government enterprise funds. The accounts of the District are maintained, and the accompanying financial statements have been prepared, on the accrual basis of accounting. Under the accrual basis of accounting, revenues are recognized when earned, expenses are recognized when incurred, depreciation of assets is recognized, and all assets, deferred outflows, liabilities, and deferred inflows associated with the operation of the District are included in the Statements of Net Position. The principal operating revenues of the District are charges for service. Operating expenses for the District include costs directly related to administration, collection and treatment of wastewater, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses. 18

21 NOTE 1 - NATURE OF ACTIVITIES, REPORTING ENTITY, AND SIGNIFICANT ACCOUNTING POLICIES (Continued) Cash Equivalents For purposes of the statement of cash flows, highly liquid investments with a maturity of three months or less when acquired are considered to be cash equivalents. Deposits and Investments Investments are reported at fair value based on quoted market prices. No amounts are reported at amortized cost. Adjustments necessary to record investments at fair value are recorded in the statements of revenues, expenses and changes in net position as increases or decreases in investment income. Investments in the Local Government Investment Pool and the Wisconsin lnvestment Services Cooperative are reported at fair value based on the unit prices quoted by the funds, representing the fair value of the underlying investments. The District has adopted a formal investment policy and invests in accordance with Wisconsin State Statutes. Under state statute, investments are limited to: Time deposits in any credit union, bank, savings bank, trust company, or savings and loan association which is authorized to transact business in the state if the time deposits mature in not more than 3 years; Bonds or securities of any county, city, drainage district, technical college district, village, town or school district of the state; bonds issued by a local exposition district, local professional baseball park district, local professional football district, local cultural arts district, the University of Wisconsin Hospitals and Clinics Authority or the Wisconsin Aerospace Authority; Bonds or securities issued or guaranteed by the Federal government; Any security which matures within not more than 7 years, if that security has a rating which is the highest or 2 nd highest rating category assigned by Standard & Poor s corporation, Moody s investors service, or similar rating agency; Securities of an open-end management investment company or investment trust, if the company or trust does not charge a sales load, is registered under the investment company act of 1940, and if the portfolio is limited to bonds and securities issued by the federal government, bonds that are guaranteed as to principal and interest by the federal government; Repurchase agreements that are fully collateralized by bonds or securities of the federal government; The state local government investment pool. 19

22 NOTE 1 - NATURE OF ACTIVITIES, REPORTING ENTITY, AND SIGNIFICANT ACCOUNTING POLICIES (Continued) Inventories Inventories of supplies are valued at cost under the specific identification method. The consumption method is used to account for inventories. Under the consumption method, inventories are recorded as expenses at the time they are consumed. Receivables Receivables are reported at their gross values and are considered to be fully collectible as they are primarily due from other municipalities, except for pretreatment. Receivables related to pretreatment have been reduced by an allowance for the estimated uncollectible amounts of $5,170 as of, and is included in other receivables. Interceptor Connection Charges Receivables from interceptor connection charges are recognized when assessed and the revenue is delayed until the property owner connects with the intercepting sewer. No value has been placed on the future assessments against lands which are not currently served by intercepting sewers that were built with capacity to serve those lands. Restricted Cash and Investments Cash and investments are restricted for the purpose of unexpected repair and replacement, repayment of debt obligations, and amounts held for other governments. Capital Assets Capital assets are defined as assets with an initial cost of $5,000 or greater with an estimated useful life greater than one year. Capital assets are stated at cost. The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend the life of the asset are not capitalized. Major outlays for capital assets and improvements are capitalized as projects are constructed. Interest incurred during the construction phase of capital assets is included as part of the capitalized value of the assets constructed. Depreciation of structures, improvements, mechanical equipment, office furniture and equipment, and vehicles is computed using the straight-line method over the following estimated useful lives of the assets: Structures and improvements Heavy mechanical equipment Light mechanical equipment Office furniture and equipment Vehicles years years years 5-20 years 7 years When capital assets are disposed, depreciation is removed from the respective accounts and the resulting gain or loss, if any, is recorded in nonoperating activities. 20

23 NOTE 1 - NATURE OF ACTIVITIES, REPORTING ENTITY, AND SIGNIFICANT ACCOUNTING POLICIES (Continued) Compensated Absences District employees earn sick leave of fourteen days per year which may be accumulated up to a maximum of 200 days. Each December employees may elect to receive cash payments for 60 percent of their sick leave accumulated in excess of 100 days and 80 percent for sick leave accumulated in excess of 150 days, paid at their current rate of pay. Each December, employees are paid for all sick leave accumulated in excess of 200 days at their current rate of pay. Upon an employee's retirement or disability, 90 percent (100 percent for employees who have accrued at least 150 days of sick leave at any time during their employment) of previously earned but unpaid sick leave is converted to a cash value based on their current rate of pay, and this amount is contributed to the District s Retirement Health Savings Plan (RHSP) in the employee s name. Monies in this account can be used by the employee on a tax-free basis to pay for qualified medical expenses of the employee, their spouse and dependents. Any amounts remaining in the employee s RHSP account at the time of death of the retired or disabled employee may be used by the surviving spouse or eligible dependents on a tax-free basis to pay for qualified medical expenses. If there is no surviving spouse or dependents at the time of the employee s death, the remaining money in the account reverts to the District. No sick leave conversion amounts are paid to employees that terminate employment for reasons other than retirement or disability. The liability associated with accumulated sick pay for current and retired employees is reported as compensated absences liabilities in the statements of net position. Employees earn vacation in varying amounts based on length of service. Vacation earned is available for use in the following year. Vacation may be accumulated to a maximum of 27 days. Upon an employee s retirement or disability, 100 percent of previously earned but unpaid vacation is converted to a cash value based on their current rate of pay, and this amount is contributed to the District s Retirement Health Savings Plan (RHSP) in the employee s name. Employees that terminate their employment for reasons other than retirement or disability are paid for earned vacation resulting from a carry over at their current rate of pay. Vacation earned in the year of termination is paid at varying percentages, depending upon the time of the year termination is effective. The liability associated with accumulated vacation is reported as compensated absences liabilities in the statements of net position. Employees may also accumulate compensatory time for overtime work. Compensatory time may be carried over at year end, but must be used by March 31. After March 31, represented employees are paid for any unused compensatory time accumulated in the prior year at their current rate of pay. After March 31, non-represented employees unused compensatory time is credited to the employee s base expense account using the employee s current rate of pay, and the accrued salaries liability is reduced accordingly. The liability associated with accumulated compensatory time is reported as accrued salaries liability in the statements of net position. Long-Term Debt The District reports long-term debt at face value in the basic financial statements. Any bond premiums or discounts are capitalized and amortized over the term of the bond using the straight-line method. 21

24 NOTE 1 - NATURE OF ACTIVITIES, REPORTING ENTITY, AND SIGNIFICANT ACCOUNTING POLICIES (Continued) Deferred Inflows Deferred inflows are reported for interceptor connection charges that will become collectible at the time the related properties are connected to the system. Net Position: Net position is classified in three separate categories. The categories, and their general descriptions, are as follows: Net investment in capital assets consists of capital assets, net of accumulated depreciation, reduced by the outstanding balances of bonds, mortgages, notes, or other borrowings that are attributable to the acquisition, construction, or improvement of those assets. Restricted net position consists of restricted assets reduced by liabilities and deferred inflows of resources related to those assets. Generally a liability or deferred inflow relates to restricted assets if the asset results from a resource flow that also results in the recognition of a liability or deferred inflows or if the liability will be liquidated with the restricted assets reported. Unrestricted net position is the amount of the assets and deferred outflows, net of the liabilities and deferred inflows that are not included in the determination of net investment in capital assets or the restricted components of net position. When both restricted and unrestricted resources are available for debt service, it is the District s policy to use restricted resources first, then unrestricted resources. For unexpected repairs, it is the District s policy to use unrestricted resources first and restricted resources only when needed. Capital Contributions Capital contributions consist of interceptor connection charges and contributed capital assets. Risk Management The District is exposed to various risks of loss related to torts, theft of, damage to and destruction of assets, errors and omissions, natural disasters, and employee injury. The District retains the risk of loss for damage or destruction of its buildings (except for rental units), sewerage system and other infrastructure. For all other risks, the District carries commercial insurance. Claims have not exceeded coverage in any of the prior three fiscal years. Pollution Remediation Obligations The District owns land that has been remediated under a Superfund clean-up project. On-going monitoring and maintenance of the land is reported as an operating expense. These expenses totaled $74,952 and $9,794 in 2013 and 2012, respectively. Future expenses are expected to range from $10,000 to $30,000 annually. In 2013, the District was required to have a full Environmental Protection Agency (EPA) review, which resulted in increased costs of approximately $30,000. A full EPA review is required every five years. The District personnel performed additional maintenance on the land that is not required every year which accounts for additional costs in

25 NOTE 1 - NATURE OF ACTIVITIES, REPORTING ENTITY, AND SIGNIFICANT ACCOUNTING POLICIES (Continued) Reclassifications Certain reclassifications have been made to the 2012 information to conform to the 2013 presentation. The reclassifications did not change the previously reported net position or changes in net position. NOTE 2 - CASH, CASH EQUIVALENTS AND INVESTMENTS As of, cash, cash equivalents, and investments included the following: Petty cash $ 250 $ 250 Deposits Demand deposits 228,690 82,441 Savings accounts 11,487,476 7,760,075 Investments Institutional investment account U.S. Government obligations 2,010,860 2,188,726 U.S. Agency obligations 7,050,170 7,754,558 Insured deposit account 1,185, ,098 Local Government Investment Pool 10,655,256 8,243,651 Wisconsin Investment Series Cooperative - 507,589 $ 32,617,978 $ 26,874,388 The cash, cash equivalents, and investments are reported in the statements of net position as follows: Cash and cash equivalents Unrestricted $ 13,349,637 $ 9,239,239 Restricted 10,207,311 7,691,865 Investments Unrestricted - 737,596 Restricted 9,061,300 9,205,688 $ 32,617,978 $ 26,874,388 23

26 NOTE 2 - CASH, CASH EQUIVALENTS AND INVESTMENTS (Continued) Deposits of governmental entities held by an official custodian in banks located in the same state as the governmental entity are insured by the Federal Deposit Insurance Corporation (FDIC) in the amount of $250,000 for time and savings deposits and $250,000 for demand deposits per financial institution. In addition, the State of Wisconsin has a State Guarantee Fund, which provides a maximum of $400,000 per financial institution above the amount provided by the FDIC. However, due to the relatively small size of the State Guarantee Fund in relation to the total coverage, total recovery of losses may not be available. The carrying amount of the District's deposits totaled $12,901,442 and $8,179,614, with bank balances of $13,138,366 and $8,256,295 for the years ended, respectively. Of the bank balances, $13,138,366 and $8,169,197 were covered by FDIC insurance or collateralized, leaving $0 and $87,098 as uninsured and uncollateralized for the years ended, respectively. 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 Statutes 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, the fair value of the District s share of the LGIP s assets was substantially equal to the amount as reported in these statements. The investment in the Local Government Investment Pool is covered up to $400,000 by the State Guarantee Fund. Certificates of deposit held in the LGIP are covered by FDIC insurance, which applies to the proportionate public unit share of accounts. The investment in the Wisconsin Investment Series Cooperative (WISC) is not insured or collateralized. WISC is managed by RBC Global Asset Management (U.S.) Inc. Investments are restricted to investments permitted under Wisconsin Statutes Fair value is determined daily and is equal to the value of the trust shares. Funds may be withdrawn in whole or in part from Cash Management any time, funds in the Investment Series may be withdrawn after the minimum of fourteen (14) calendar days. At December 31, 2012, the District s share of WISC assets was substantially equal to the amount reported in these financial statements. The District also has investments in U.S. Government and U.S. Government Agency obligations purchased through a private sector securities dealer and held by a third-party custodian. These investments are readily marketable, specifically identifiable and include discount notes and adjustable and fixed rate mortgage backed securities. 24