FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 CASS RURAL WATER USERS DISTRICT

Transcription

1 FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 CASS RURAL WATER USERS DISTRICT

2 CASS RURAL WATER USERS DISTRICT Table of Contents INDEPENDENT AUDITOR'S REPORT ON FINANCIAL STATEMENTS 1 MANAGEMENT S DISCUSSION AND ANALYSIS 3 FINANCIAL STATEMENTS Statements of Net Assets 5 Statements of Revenue, Expenses, and Changes in Net Assets 6 Cash Flows 7 Notes to Financial Statements 9 INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTARY INFORMATION 14 SUPPLEMENTARY INFORMATION Directors and Officers 15 Schedule of Water Plant Accounts 16 Schedule of Accumulated Provisions for Depreciation 17 Comparative Statements of Operations 18 INDEPENDENT AUDITOR'S REPORT ON COMPLIANCE AND ON INTERNAL CONTROL OVER FINANCIAL REPORTING BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFROMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS 19 Schedule of Findings 21 FMHA COMMENTS 22 Page

3 INDEPENDENT AUDITOR S REPORT The Board of Directors Cass Rural Water Users District Kindred, North Dakota We have audited the accompanying statements of net assets of Cass Rural Water Users District as of December 31, 2005 and 2004, and the related statements of revenue, expenses and changes in net assets, and cash flows for the years then ended. These financial statements are the responsibility of the District's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America 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 of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cass Rural Water Users District as of December 31, 2005 and 2004, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued our report dated January 18, 2006 on our consideration of the organization s internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts and grants. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be read in conjunction with the report in considering the results of our audit. 1

4 The management s discussion and analysis on pages 3 through 4 is not a required part of the basic financial statements but is supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the supplementary information. However, we did not audit the information and express no opinion on it. Fargo, North Dakota January 18,

5 CASS RURAL WATER USERS DISTRICT MANAGEMENT S DISCUSSION AND ANALYSIS DECEMBER 31, 2005 AND 2004 This section of the District s financial report presents our analysis of the District s financial performance during the fiscal year ended December 31, Please read it in conjunction with the financial statements, which follow this section. The information in this MDA is presented under the following headings: Organization and Business Balance Sheet Overview Capital Assets and Debt Administration Income Statement Overview Request for Information ORGANIZATION AND BUSINESS Cass Rural Water Users District provides water service to approximately 3,100 rural residences and 13 communities in Cass County and parts of Traill, Barnes, Ransom and Richland counties serving a total estimated population of 12,500 in a 2,000 square mile service area. The District is a political subdivision of the State of North Dakota pursuant to Chapter of the North Dakota Century Code. The District recovers cost of service through user fees. BALANCE SHEET OVERVIEW The total assets of the District increased by 5.6% from $16.6 million to $17.5 million. The $1.0 million increase in total assets is broken down as follows: Water Plant in service Other Property and Investments Current Assets $1.2 million -$0.1 million -$0.1 million Water plant in service increased by $1.2 million and consisted of the pipeline improvements in areas north and south of Casselton and north and south of Fargo. These improvements were funded by a loan from the North Dakota Health Department through its Revolving Loan Program. This program loans funds at a low interest rate of 3% repayable over twenty years. The District became eligible for this funding after converting to a water district. Other property and investments decreased by approximately $100,000. The decrease is due to the removal of the notes receivable from Fargo and West Fargo. Those payments will be completed in December of Current Assets decreased by approximately $100,000 due to a lower cash balance at year end. Temporary cash investments are, by board policy, invested in certificates of deposit having a rate of return from 3% to 4%. (continued on next page) 3

6 MANAGEMENT S DISCUSSION AND ANALYSIS The net assets of the District increased by a little over $300,000. The majority of this increase resulted from investments in capital asset net of related debt. The District incurred additional long term debt of $959,361. Net long term debt increased by $576,560. CAPITAL ASSETS AND DEBT ADMINISTRATION At the end of 2005, the District had $13.8 million (net of accumulated depreciation) in a broad range of utility capital assets. The investment in capital assets includes land, buildings, improvements, water treatment plants, water transmission and distribution mains, water storage facilities, pump stations, machinery and equipment. This amount represents a 9.3% increase over the prior fiscal year. The majority of this increase came from the capitalization of the costs associated with the Pipeline improvement project. The District s net revenue, long term debt and contributions from customers are used to finance these capital investments. More detailed information concerning the additions and retirements appears later in this document on the Schedule of Water Plant Accounts. As of December 31, 2005 the District had a total long term debt including current maturities outstanding of $6,339,340. The District invests funds in certificates of deposit in such a manner so that as CD s mature funds are available to make the necessary payments. As of December 31, 2005 the District had funds on hand to make all debt payments through the year The North Dakota Municipal Bond Bank note having a current balance of $1,305,000 will be retired in March of The details of the various debt instruments are presented in more detail in note 5 of the financial statements. INCOME STATEMENT OVERVIEW For 2005 operating revenue increased by 4.4% or nearly $80,000. The increase in revenue came for the addition of approximately 79 new customers in various subdivisions in and around the Fargo West Fargo metro area as well as users throughout the county. There was a small increase in water rates to the bulk users class of $0.10 per 1,000 gallons. All areas of expense saw increases which resulted in an overall 18% increase in expenses over the prior year. Due to the aging infrastructure the District had undertaken a fairly aggressive repair and replacement program for such items as pumps, electrical motors, chemical feed equipment and certain critical valves. This coupled with a nearly $60,000 increase in purchased water cost accounted for most of the increased costs in this area. Other income (deductions) dropped substantially. In 2004 nearly $1.0 million was received from the bond issue to fund the Osgood subdivision. No similar funding was received in 2005 explaining the large decrease in this area. REQUEST FOR INFORMATION This financial report is designed to provide ratepayers and creditors with a general overview of the District s finances and demonstrate the District s accountability for monies it receives. If you have any questions about this report or need additional information, please contact: the General Manger, Cass Rural Water District, P.O. Box 98, Kindred, ND

7 CASS RURAL WATER USERS DISTRICT STATEMENT OF NET ASSETS DECEMBER 31, 2005 AND ASSETS WATER PLANT In service $ 19,240,374 $ 17,774,312 Less accumulated depreciation 5,529,286 5,227,095 Water plant - Net 13,711,088 12,547,217 OTHER PROPERTY AND INVESTMENTS Note receivable - 106,486 Special assessment receivable 858, ,000 Patronage capital credits from nonassociated companies 159, ,046 Special funds 180, ,582 1,197,915 1,327,114 CURRENT ASSETS Cash - general 42, ,946 Temporary cash investments 1,971,306 1,874,741 Accounts receivable, less accumulated provision for uncollectible accounts of $2,000 in 2005 and , ,884 Delinquent receivable, special assessment 19,108 - Note receivable, current portion 106, ,485 Special assessment receivable, current portion 66,000 66,000 Inventory 3,698 4,105 Prepayments 25,995 22,992 Interest receivable 17,075 14,041 Total current assets 2,549,258 2,650,194 DEFERRED DEBITS Debt issuance costs, net of accumulated amortization 41,534 49,345 $ 17,499,795 $ 16,573,870 See Notes to Financial Statements

8 NET ASSETS AND LIABILITIES NET ASSETS Invested in capital assets, net of related debt $ 7,371,748 $ 6,784,437 Restricted for debt service 924, ,000 Unrestricted 2,753,840 2,968,476 Total net assets 11,049,588 10,742,913 LONG - TERM DEBT, LESS CURRENT MATURITIES 5,850,186 5,294,852 CURRENT LIABILITIES Current maturities of long-term debt 489, ,928 Accounts payable 19,885 3,462 Accrued vacation 27,593 20,758 Accrued interest 63,389 43,957 Total current liabilities 600, ,105 $ 17,499,795 $ 16,573,870 5

9 CASS RURAL WATER USERS DISTRICT STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS YEARS ENDED DECEMBER 31, 2005 AND OPERATING REVENUE Metered sales to customers $ 1,851,409 1,770,728 Miscellaneous 44,128 44,944 Total operating revenue 1,895,537 1,815,672 OPERATING EXPENSES Pumping expense 163, ,606 Water treatment and testing expense 79,357 74,584 Transmission and distribution expense 417, ,984 Administrative and general expense 494, ,520 Purchased water 59,559 8,629 Depreciation expense 331, ,188 Taxes 29,261 25,374 Total operating expense 1,575,329 1,329,885 UTILITY OPERATING INCOME 320, ,787 OTHER INCOME (DEDUCTIONS) Investment income 63,218 44,142 Interest special assessment 44,231 - Special assessments - 990,000 Franchise fee payment 153,384 - Patronage capital credits 13,305 11,074 Membership revenue 19,925 41,219 Interest expense (307,596) (241,904) Total other income (deductions) (13,533) 844,531 CHANGE IN NET ASSETS 306,675 1,330,318 NET ASSETS, BEGINNING OF YEAR 10,742,913 9,412,595 NET ASSETS, END OF YEAR $ 11,049,588 $ 10,742,913 See Notes to Financial Statements 6

10 CASS RURAL WATER USERS DISTRICT STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2005 AND OPERATING ACTIVITIES Operating cash receipts from customers $ 1,881,470 $ 1,790,780 Cash payments to suppliers for goods and services (646,982) (530,725) Cash payments to employees for services (487,381) (457,625) Miscellaneous payments (81,009) (26,193) NET CASH FROM OPERATING ACTIVITIES 666, ,237 INVESTING ACTIVITIES Change in patronage capital credits and special fund (32,796) (32,796) Interest received 60,184 44,142 NET CASH FROM INVESTING ACTIVITIES 27,388 11,346 CAPITAL AND RELATED FINANCING ACTIVITIES Interest payments on debt (288,164) (259,210) Proceeds from long-term borrowings 959,359 1,660,485 Additions to plant (1,495,680) (1,697,767) Principal payments on long - term debt (379,660) (285,775) NET CASH USED FOR CAPITAL AND RELATED FINANCING RELATED ACTIVITIES (1,204,145) (582,267) NONCAPITAL FINANCING ACTIVITIES Proceeds from note receivable 106, ,485 Proceeds from special assessment receivable 91,123 - Franchise fee payment 153,384 - Membership revenue 19,925 41,219 NET CASH FROM NONCAPITAL FINANCING ACTIVITIES 370, ,704 NET CHANGE IN CASH AND CASH EQUIVALENTS (139,741) 353,020 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,153,687 1,800,667 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,013,946 $ 2,153,687 (continued on next page) 7

11 STATEMENTS OF CASH FLOWS Page OPERATING ACTIVITY RECONCILIATION Operating income $ 320,208 $ 485,787 Adjustments to reconcile net income to net cash from operating activities Depreciation expense 331, ,188 Amortization of debt expense 7,811 7,810 Changes in assets and liabilities Accounts receivable (14,067) (24,892) Inventory ,343 Prepayments (3,003) (5,209) Accounts payable 16,423 1,315 Accrued vacation 6,835 4,895 NET CASH FROM OPERATING ACTIVITIES $ 666,098 $ 776,237 NONCASH INVESTING ACTIVITIES Patronage capital credit $ 10,491 $ 11,074 Special assessment revenue $ - $ 990,000 See Notes to Financial Statements 8

12 CASS RURAL WATER USERS DISTRICT NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 NOTE 1 - SUMMARY OF SIGINFICANT ACCOUNTING POLICIES General The public utility activities of the District are non-regulated as such. However, the District follows the National Association of Regulatory Utility Commissioners' Uniform System of Accounts prescribed for Class A and B Water Utilities. Reporting entity For financial reporting purposes, a reporting entity's financial statements should include all component units over which another component unit (oversight unit) exercises financial accountability. Financial accountability includes such aspects as appointment of governing body members, designation of management, the ability to significantly influence operations and accountability for fiscal matters. Based upon the above criteria, there are no component units to be included within Cass Rural Water Users District as a reporting entity. Receivable and Credit Policy Trade receivables are uncollateralized customer obligations due under normal trade terms requiring payment within 30 days from the invoice date. Customers are charged a one time 5% charge for late payments. The receivables are non-interest bearing. Payments on trade receivables are applied to the latest unpaid invoices. Management reviews trade receivables monthly and charges operations with those considered uncollectible (direct write-off method). All remaining trade receivables are considered collectible. Notes receivable are stated at principal amounts plus accrued interest and are uncollateralized. Capital Assets Utility capital assets are stated at cost. The cost of additions to utility capital assets includes contracted work, direct labor and materials and allocable overheads. When units of property are retired, sold or otherwise disposed of in the ordinary course of business, their cost, less net salvage, is charged to accumulated depreciation. Repairs and the replacement and renewal of items determined to be less than units of property are charged to maintenance expense. Utility Plant and Retirements Utility plant is stated at cost. The cost of additions to utility plant includes contracted work, direct labor and materials, and allocable overheads. When units of property are retired, sold or otherwise disposed of in the ordinary course of business, their average book cost, less net salvage, is charged to accumulated provision for depreciation. Repairs and the replacement and renewal of items determined to be less than units of property are charged to maintenance expense. (continued on next page) 9

13 NOTES TO FINANCIAL STATEMENTS Depreciation Depreciation is computed on the straight-line method based upon estimated useful lives of the various classes of property. Such provision, as a percentage of the average balance of depreciable property in service, was 1.80% and 1.74% in 2005 and Investments Investments (money market accounts and certificates of deposit) are stated at cost. Cash and Cash Equivalents For purposes of reporting cash flows, the District considers all temporary cash investments to be cash equivalents. Unamortized Debt Expense These costs are being amortized over the term of the related debt (15 years). Revenue Recognition Revenue from water sales is reflected in the accounts at the time delivered. Pension Costs The policy is to fund pension costs accrued. Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Business and Credit Risk The District provides water service on account to its members which are located primarily in Cass County, North Dakota. NOTE 2 - ORGANIZATION AND NATURE OF OPERATIONS The District was organized and formally incorporated as of November 6, 1973, for the express purpose of providing water service in the state of North Dakota for the use and benefit of its members on a cooperative basis. Effective September 1, 2002, the organization reorganized as a water district under the authority of the North Dakota Century Code. (continued on next page) 10

14 NOTES TO FINANCIAL STATEMENTS NOTE 3 - LONG-TERM RECEIVABLES Notes During 2002, the District entered in to an agreement with the City of West Fargo, to relinquish its right to sell water within specified properties. The agreement called for a cash payment of $300,000, received in 2002, and five annual installments of $56,485 due December 15 of each year commencing with 2002 and ending December of The District entered into a similar agreement with the City of Fargo in This agreement calls for annual payments of $50,000 per year through The District has not reported these notes at its discounted balance due to the immaterial nature of the discount. Special assessments During 2004, the District entered into an agreement with the City of Fargo, to sell water within specified properties in the Osgood development located in Fargo. In order to serve the development, the District levied special assessments against the property in the development. The special assessments call for annual payments of $66,000 plus interest at 5.6% commencing with 2005 and ending NOTE 4 - WATER PLANT AND DEPRECIATION Depreciation Depreciation Plant Rates Plant Rates Intangible plant $ 3,507 $ 3,507 Distribution plant 18,403, % 17,034, % General plant 833, , Water plant in service $ 19,240,374 $ 17,774,312 NOTE 5 - LONG-TERM DEBT Maturity Interest Date Rate Bank of North Dakota % $ 572,346 $ 607,474 North Dakota Municipal Bond Bank ,305,000 1,560,000 Rural Utilities Service ,897,298 1,919,971 State Revolving Fund % 1,644, ,335 Bond Issue , ,000 6,339,340 5,762,780 Less current maturities (489,154) (467,928) $ 5,850,186 $ 5,294,852 (continued on next page) 11

15 NOTES TO FINANCIAL STATEMENTS All assets are pledged as security for these debts. The Bank of North Dakota notes require annual payments of principal and interest and the North Dakota Municipal Bond Bank notes require annual payments of principal and semi-annual payments of interest. On June 25, 1998, the District entered into a loan agreement with the Rural Utilities Service in the amount of $2,012,900. Cass Rural Water Users, Inc. has assigned and pledged sufficient revenue to pay principal and interest. Beginning in July 2000, monthly payments of $2,733 are required to be set aside in a reserve account until there is accumulated a sum of $327,900. This amount is reported as special funds within the other investment. Minimum principal and interest payments required during the next five years are estimated as follows: Principal Interest 2006 $ 489,154 $ 308, , , , , , , , , ,169, , ,181, , , , , , , , ,181 18,999 $ 6,339,340 $ 3,091,822 The North Dakota Municipal Bond Bank has entered into a forward refunding of their bonds. Proceeds of the refunding are allocated to its debtors, including the District, which results in a reduction of future interest payments. The District has a $1,935,200 Water Treatment Revenue Bond agreement with the state of North Dakota. The District has available $290,504 on the loan commitment. The agreement, upon advance, shall be repaid over a period not to exceed 20 years at an interest rate of 2.5%. The future maturity schedule above is based on the repayment of the entire note, including undrawn proceeds. NOTE 6 - PENSION PLAN Retirement benefits for substantially all employees are provided through participation in a Simplified Employee Pension Individual Retirement Account. The pension plan is a defined contribution plan to which the employer contributes a variable percentage of employees' gross salaries. The monies are deposited in an Individual Retirement Custodial Account in the name of the employee. The employees may contribute to the plan an amount equal to the legal limitation. The District contributed $13,954 and $11,869 to the custodial accounts for the years ended December 31, 2005 and 2004, respectively. (continued on next page) 12

16 NOTES TO FINANCIAL STATEMENTS NOTE 7 - COMMITMENTS Wholesale water Under its wholesale water agreement, the District is committed to purchase water from the City of Fargo. The District must purchase at least 500,000 gallons of treated water per month at $2.70 per thousand gallons of treated water. The agreement commenced on November 1, 2001, and will remain in effect for five years from the date of initial purchase of water, or December 1, 2007, whichever shall occur first. Water sale Under its water sale agreement, the District is committed to sell water to the City of West Fargo. The District will sell its water at $2.90 per thousand gallons. The agreement commenced on April 15, 2002, and will remain in effect until December 15, Franchise Fee Agreement The District entered into an agreement with the City of West Fargo on June 2005 in which the City of West Fargo purchased the rights and acquired a franchise to provide residential water services to the Westport Beach Additions located within the City of West Fargo city limits. In accordance with the agreement, the District agrees to release the Westport Beach Addition form its exclusive jurisdiction to the City of West Fargo as long as the City of West Fargo performs certain obligations, including installation of water meters at its own cost for each individual lot or user within the Westport Beach Addition, and payment of $1,848 per meter installed to the District until the City of West Fargo has installed a meter for each individual lot within the Westport Beach Addition. Joint Agreement with City of Fargo During 2005, the District entered into an agreement with the City of Fargo for the development of subdivisions Silverleaf and Custers Crossing located in the city limits of Fargo. Under the agreement, the City of Fargo will install the water infrastructure for the subdivisions. Upon completion, the District is responsible for the cost of the infrastructure. The anticipated completion date is May 2006 with an estimated cost of $175,000. The District plans on financing the construction through special assessment bonds. 13

17 INDEPENDENT AUDITOR S REPORT ON SUPPLEMENTARY INFORMATION The Board of Directors Cass Rural Water Users District Kindred, North Dakota Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information on pages is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. Fargo, North Dakota January 18,

18 CASS RURAL WATER USERS DISTRICT DIRECTORS, OFFICERS AND MANAGER Name Mel Scherweit Mark Johnson Gary A. Lee Charles Bowman Keith Burley Brad Koetz Edward Finger Position Chairman Vice Chairman Secretary/Treasurer Director Director Director Director R. Gordon Blixt Director Ray Carlson Jerry Blomeke Director Manager 15

19 CASS RURAL WATER USERS DISTRICT SCHEDULE OF WATER PLANT ACCOUNTS DECEMBER 31, 2005 Balance Balance 1/1/05 Additions Retirements 12/31/05 CLASSIFIED WATER PLANT IN SERVICE Intangible plant Organization $ 3,191 $ - $ - $ 3,191 Franchises and consents , ,507 Distribution plant Land and land rights 94, ,250 Collecting and impounding reservoirs 2,760, ,760,021 Wells 476, ,567 Electric pumping equipment 811,860 50, ,157 Water treatment equipment 807, ,621 Transmission and distribution mains 11,573,953 1,317,972-12,891,925 Service leads 21, ,169 Services Meters 488,717 4,417 3, ,731 17,034,203 1,372,686 3,403 18,403,486 General plant Structures and improvements 150,856 44, ,524 Office furniture and equipment 98,496 14, ,533 Transportation equipment 152,251 61,569 25, ,930 Tools, shop and garage equipment 78,536 2, ,931 Other equipment - reservoir monitors 256, , , ,994 26, ,381 Total water plant $ 17,774,312 $ 1,495,680 $ 29,618 $ 19,240,374 16

20 CASS RURAL WATER USERS DISTRICT SCHEDULE OF ACCUMULATED DEPRECIATION DECEMBER 31, 2005 Percent of Provision Depreciation Balance Balance to Plant Rates in % 1/01/04 Accruals Retirements 12/31/05 Investment DISTRIBUTION PLANT Collecting and impounding reservoirs 2.0 $ 917,049 $ 55,201 $ - $ 972, % Wells ,102 9, , % Electric pumping equipment ,622 40, , % Water treatment equipment , , % Transmission 1.0 1,995, ,739-2,111, % Meters ,751 19,699 3, , % Service Leads 1.0 1, , % Totals - distribution mains 4,695, ,974 3,403 4,932,876 GENERAL PLANT Structures and improvements 2.0 a/ 56,843 3,541-60, % Office furniture and equipment a/ 94,225 9, , % Transportation equipment 33.3 a/ 103,327 39,976 25, , % Tools, shop and garage equipment 15.0 a/ 62,204 12,059-74, % Reservoir monitors 10.0 a/ 215,191 25, , % Totals - general plant 531,790 90,610 25, ,410 Totals - all plant $ 5,227,095 $ 331,584 $ 29,393 $ 5,529,286 a/ = Unit basis 1/ = Charged to depreciation expense $ 227,190 Gain on retirement 104,394 Total accruals $ 331,584 17

21 CASS RURAL WATER USERS DISTRICT COMPARATIVE STATEMENTS OF OPERATIONS DECEMBER 31, Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent OPERATING REVENUE $ 1,895, % 1,815, % 1,790, $ 1,665, % $ 1,553, OPERATING EXPENSES Pumping 163, , , , , Water treatment and testing 79, , , , , Transmission and distribution 417, , , , , Administrative and general 494, , , , , Purchased water 59, , Depreciation 331, , , , , Taxes 29, , , , , Total operating expense 1,575, ,329, ,204, ,130, ,102, UTILITY OPERATING INCOME 320, , , , , OTHER INCOME (DEDUCTIONS) Investment income 76, , , , , Interest special assessment 44, Special assessment , Franchise fee payment 153, Interest expense (307,596) (16.2) (241,904) (13.3) (285,211) (15.9) (302,918) (18.2) (316,009) (20.3) Other 19, , , , , Total deductions (13,533) (0.7) 844, (157,824) (8.8) 366, , NET INCOME $ 306, % $ 1,330, % $ 428, $ 902, % $ 738,

22 INDEPENDENT AUDITOR'S REPORT ON COMPLIANCE AND ON INTERNAL CONTROL OVER FINANCIAL REPORTING BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS The Board of Directors Cass Rural Water Users District Kindred, North Dakota We have audited the financial statements of Cass Rural Water Users District, as of and for the fiscal year ended December 31, 2005, and have issued our report thereon dated January 18, 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. Compliance As part of obtaining reasonable assurance about whether Cass Rural Water Users District's financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grants, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance that are required to be reported under Government Auditing Standards. Internal Control over Financial Reporting In planning and performing our audit, we considered Cass Rural Water Users District's internal control over financial reporting in order to determine our auditing procedures for the purpose of expressing our opinion on the financial statements and not to provide assurance on the internal control over financial reporting. However, we noted a certain matter involving the internal control over financial reporting and its operation that we consider to be a reportable condition. Reportable conditions involve matters coming to our attention relating to significant deficiencies in the design or operation of the internal control over financial reporting that in our judgment, could adversely affect Cass Rural Water Users District's ability to record, process, summarize and report financial data consistent with the assertions of management in the financial statements. The reportable condition is described in the accompanying schedule of findings as item Finding

23 A material weakness is a condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements in amounts would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. Our consideration of the internal control over financial reporting would not necessarily disclose all matters in the internal control that might be reportable conditions and, accordingly, would not necessarily disclose all reportable conditions that are also considered to be material weaknesses. However, we do not believe the reportable condition described above is a material weakness. This report is intended solely for the information and use of management, the Board of Directors, and lenders and is not intended to be and should not be used by anyone other than these specified parties. Fargo, North Dakota January 18,

24 CASS RURAL WATER USERS DISTRICT SCHEDULE OF FINDINGS YEAR ENDED DECEMBER 31, 2005 REPORTABLE CONDITIONS Segregation of Duties Condition: The District has a limited number of office personnel and, accordingly, does not have adequate internal accounting controls in certain areas because of a lack of segregation of duties. Criteria: A good system of internal accounting control contemplates an adequate segregation of duties so that no one individual handles a transaction from its inception to its completion. Effect: Inadequate segregation of duties could adversely affect the District's ability to detect misstatements in amounts that would be material in relation to the financial statements in a timely period by employees in the normal course of performing their assigned functions. Recommendation: While we recognize that your office staff may not be large enough to permit an adequate segregation of duties in all respects for an effective system of internal control, it is important that you be aware of this condition. In situations like this, management's close supervision and review of accounting information is the best means of preventing and detecting errors and irregularities. Response: At the present time, the District has segregated the duties of in the most efficient manner possible, given its limited staff. Due to cost constraints, there will be no further administrative employees added. 21

25 FmHA COMMENTS The Board of Directors Cass Rural Water Users District Kindred, North Dakota We have audited the financial statements of Cass Rural Water Users District, for the year ended December 31, 2005, and have issued our report thereon dated January 18, In planning and performing our audit of the financial statements of Cass Rural Water Users District, for the year ended December 31, 2005, we considered its internal control over financial reporting in order to determine our auditing procedures for the purpose of expressing our opinion on the financial statements and not to provide assurance on the internal control over financial reporting. However, we noted certain matters involving the internal control over financial reporting and its operation that we consider to be reportable conditions under standards established by the American Institute of Certified Public Accountants. Reportable conditions involve matters coming to our attention relating to significant deficiencies in the design or operation of the internal control over financial reporting that, in our judgment, could adversely affect the District's ability to record, process, summarize and report financial data consistent with the assertions of management in the financial statements. The District has a limited number of office personnel and, accordingly, does not have adequate internal controls in certain areas because of a lack of segregation of duties. A good system of internal controls contemplates an adequate segregation of duties so that no one individual handles a transaction from its inception to its completion. While we recognize that your office staff is not large enough to permit an adequate segregation of duties in all respects for an effective internal control structure, it is important that you be aware of this condition. In situations like this, management's close supervision and review of accounting information is the best means of preventing and detecting errors and irregularities. A material weakness is a reportable condition in which the design or operation of one or more of the internal control over financial reporting elements does not reduce to a relatively low level the risk that errors or irregularities in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. Our consideration of the internal control over financial reporting would not necessarily disclose all matters in the internal control structure that might be reportable conditions and, accordingly, would not necessarily disclose all reportable conditions that are also considered to be material weaknesses as defined above. However, we do not believe the reportable condition described above is a material weakness. 22

26 Our comments on specific financial and accounting matters, as required by the Farmers Home Administration (FmHA), are detailed below: Accounting Records The District's accounting records and procedures in effect during the year were considered to be adequate in all material respects, except as noted in the internal control over financial reporting reportable condition above. Controls Over Assets Physical controls over assets of the system are considered to be adequate, except as noted in the internal control over financial reporting reportable condition above. Compliance with Loan Documents The District has complied with the provisions of the loan agreements, including maintenance of adequate cash reserves. Agreement of Financial Statements and Accounting Records The District's accounting records, after consideration of audit entries, are in agreement with the information in the audit report. Deposits All cash deposits are in institutions whose accounts are insured by an agency of the federal government. Insurance Coverage Commercial general liability $ 2,000,000 Property 2,000,000 Automobile: Liability Any Auto Uninsured motorist All owned Autos Physical damage ACV (less $25) Workers' compensation Statutory Umbrella liability 1,000,000 Income Taxes The District is a governmental entity, and as such, is not required to file income tax returns. Users Delinquent Over 60 Days The total amount due from users delinquent over 60 days was $2,

27 This letter supplements the information included in the financial statements. It is intended solely for the information and use of management, the Board of Directors, and lenders and is not intended to be and should not be used by anyone other than these specified parties. Fargo, North Dakota January 18,