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Jefferson Utilities Management Discussion and Analysis December 31, 2003 and 2002 The management of the Jefferson Utilities Commission offers all persons interested in the financial position of the utilities an objective, easy to read overview and analysis of the utilities’ financial performance during the year ending December 31, 2003. You are invited to read this narrative in conjunction with the utilities’ financial statements. _________ _________ Financial Highlights _______________ The water utility plant increased by $608,000 from the prior year. This was mainly due to the replacement of water main, water services and hydrants on S. Center Ave., S. Highland Ave. and E. Green St. The electric utility plant increased by $201,000 from the prior year. This was mainly due to the upgrade of the utilities’ electric distribution system. The utility is in the process of expanding the Crawfish River Substation. The total expected project cost is $627,000, with $560,000 expended by year end. The project is being funded by investments on hand. The water utility’s operating revenues decreased by $18,000 or about 2% due to the decrease in water sold by 25 million gallons in the industrial class. The water utility’s operating expenses decreased by $90,000 or about 16%. The decrease was due to the final payment of the painting of the south water tower in 2002. The electric utility’s operating revenues, generated mostly by user fees, decreased by $744,000 or about 9% due to the decrease in sales to industrial customers. Total kwh sold decreased by 11%. The electric utility’s operating expenses decreased by $636,000 or about 9%. Most of the decrease was due to purchased power costs being less. Total investment income for the utilities decreased $16,000 or 28% in 2003 because of the lower interest rates and use of investments for the substation project. ____________________________________________________________________________________ Overview of the Financial Statement The utilities (water and electric) are self-supporting entities and separate enterprise funds of the City of Jefferson. The utilities provide electric and water to properties within the City of Jefferson and some areas of the Jefferson and Aztalan townships. Jefferson Utilities Management Discussion and Analysis December 31, 2003 and 2002 The utilities is managed by a Utility Commission and operates under service rules and rates that are established by the Public Service Commission of Wisconsin (PSC). The accounting records are maintained in accordance with the Uniform System of Accounts prescribed by the PSC, and in accordance with the Governmental Accounting Standards Board. The annual report consists of two parts: Management’s Discussion and Analysis and the basic financial statements as well as the independent auditor’s report. An analysis of the utilities’ financial position begins with a review of the Statement of Net Assets, and the Statement of Revenues, Expenses and Changes in Net Assets. These two statements report the utilities’ net assets and changes therein. The utility’s net assets – ‘the difference between assets and liabilities’ is the key to measuring the financial health of the utility. Over time, increases or decreases in the net asset value are an indicator of whether the financial position is improving or deteriorating. However, it should be noted that the financial position may also be affected by other non-financial factors, including economic conditions, customer growth, climate conditions and new regulations. ____________________________________________________________________________________ Utility Financial Analysis ____________________________________________________________________________________ The Statement of Net Assets includes all of the utilities’ assets and liabilities and provides information about the nature and amount of investments in resources and the obligations to creditors. This statement provides the basis for evaluating the capital structure and assessing the liquidity and financial flexibility of the utilities. A summary of the utilities’ Statement of Net Assets is presented below in Tables 1. Jefferson Utilities Management’s Discussion and Analysis December 31, 2003 and 2002 _______________________________________________________________________________________ Utility Financial Analysis (cont.) _______________________________________________________________________________________ Table 1 Condensed Statement of Net Assets 2003 2002 Dollar Change 2,911,140 15,335,745 18,246,885 3,379,463 14,469,289 17,848,752 -468,323 866,456 398,133 Outstanding Long-term Debt Other Liabilities Total Liabilities 4,010,000 930,379 4,940,379 4,225,000 898,448 5,123,448 -215,000 31,931 (183,069) Investing in Capital Assets, Net of Related Debt -Restricted for Debt Service -Unrestricted 11,675,951 305,160 1,325,395 10,640,976 300,798 1,783,530 1,034,975 4,362 -458,135 Total Net Assets 13,306,506 12,725,304 581,202 Current and Other Assets Capital Assets Total Assets As can be seen from the above table, Jefferson Utilities’ assets increased $398,000 in 2003. The increase in net assets of $581,000 is primarily due to the increase in capital assets and decrease in long-term debt. The restricted portion of net assets include accounts that are limited by bond covenants. Listed below are restricted assets: Redemption - Used for debt service payments Reserve - Used for any deficiencies in the redemption account Depreciation - Used to restore deficiencies in the redemption and reserve accounts, And for funding plant replacements. Construction - Bond issue monies used only for the restricted construction project. The specific nature or source of these changes becomes more evident in the Condensed Statement of Revenues, Expenses and Changes in Net Assets as shown in Table 2. Jefferson Utilities Management’s Discussion and Analysis December 31, 2003 and 2002 _______________________________________________________________________________________ Utility Financial Analysis (cont.) _______________________________________________________________________________________ Table 2 Condensed Statement of Revenues, Expenses and Changes in Net Assets 2003 2002 Dollar Change Operating Revenues Non-Operating Revenues Total Revenues 8,453,856 46,358 8,500,213 9,215,987 665,224 9,281,211 -762,132 - 18,866 -780,998 Depreciation Expenses Other Operating Expenses Non-Operating Expenses Total Expenses 548,734 7,046,672 262,336 7,857,742 550,458 7,765,307 289,123 8,604,888 - 1,724 -718,635 - 26,787 -747,146 642,471 676,323 - 33,852 287,573 -348,842 12,945 -336,674 274,628 - 12,168 581,202 352,594 228,608 12,725,304 12,372,710 352,594 13,306,506 12,725,304 581,202 Income Before Capital Contributions Capital Contributions Transfers – Tax Equivalent Changes in Net Assets Beginning Net Assets Total Net Assets – Ending The utilities operating revenues decrease is due to decreased consumption by our two largest industrial customers. Jefferson Utilities Management’s Discussion and Analysis December 31, 2003 and 2002 Comparison of Water Revenues 500,000 400,000 300,000 2002 200,000 2003 100,000 0 Res. Comm. Ind. Private Fire Public Authority Other The average annual customers increased by 36 in 2003; but with the decrease by over 25 million gallons in industrial sales, revenues decreased $18,463 or 1.88% in 2003. Comparison of Electric Revenues 4,000,000 3,000,000 2,000,000 2002 1,000,000 2003 0 Res. Comm. Ind. Lg. Power Sm. St. Lights Indept. Power Other Sales of electricity decreased $706,786 or 8.68% in 2003. The number of customers increased by 353 in 2003. The decrease again results from reduced usage by the two largest industrial customers. Jefferson Utilities Management’s Discussion and Analysis December 31, 2003 and 2002 Comparison of Water Expenses 200,000 150,000 100,000 2002 50,000 2003 0 Pumping Water Treatment T&D Customer Accts. Sales Exp. Adm. & Gen. Deprec. Taxes Water operating expenses decreased by $94,761 or 12.83% in 2003 mainly due to the final payment for the painting of the south water tower and use of outside engineering costs. Comparison of Electric Expenses 400,000 300,000 200,000 2002 100,000 2003 0 Distribution Cust. Accts. Sales Exp. Adm. & Gen. Deprec. Taxes Electric operating expenses decreased by $625,598 or 8.26% in 2003. Purchased power expense, not shown in the above graph, went down from $6,477,706 in 2002 to $5,807,913 in 2003. Purchased Power directly corresponds to the amount of energy sold. The remaining electric operating expenses actually increased by $44,195 of 4%. Jefferson Utilities Management’s Discussion and Analysis December 31, 2003 and 2002 _______________________________________________________________________________________ Utility Financial Analysis (cont.) _______________________________________________________________________________________ The Statement of Cash Flows reports the cash provided and used by operating activities, as well as other cash sources such as investment income and cash payments for repayment of bonds and capital additions. Table 3 Condensed Statement of Cash Flows 2003 Cash & Cash Equivalents Beginning of Year: 2002 Dollar Change 905,034 848,755 56,279 1,560,107 -336,674 -1,634,441 542,985 1,454,735 -322,532 -1,333,326 257,402 105,372 -14,142 -301,115 285,583 131,977 56,279 75,698 Cash & Cash Equivalents End of Year: 1,037,011 905,034 131,977 Investments End of Year: 1,000,000 1,500,000 -500,000 Total Cash & Investment End of Year: 2,037,011 2,405,034 -368,023 Cash Flows From: Operating Income Noncapital Financing Capital Financing Investing Net Change in Cash and Cash Equivalents The primary reason for the decrease in total cash and investments is the use of funds for the Crawfish River Substation transformer and the water system replacements. Jefferson Utilities Management’s Discussion and Analysis December 31, 2003 and 2002 _______________________________________________________________________________________ Long-Term Debt _______________________________________________________________________________________ As of December 31, 2003, the utility has total revenue bond debt outstanding of $4,010,000 secured by a pledge of income and revenue to be derived from the operation of the utility. This issue was for the construction of the Crawfish Substation in 1998. The original debt was $6,000,000. _______________________________________________________________________________________ Currently Known Facts/Economic Conditions _______________________________________________________________________________________ The Jefferson Utilities has maintained project and financial planning in keeping pace with the City’s growth. Recent capital additions include a substation expansion, well and water tower. Infrastructure in new subdivisions and developments is contributed by the developer. Rate structures are consistently reviewed. The decrease in industrial electric and water sales resulted mostly from a labor strike at the largest utility customer. This strike was settled in early 2004. _______________________________________________________________________________________ Contacting Utilities’ Financial Management _______________________________________________________________________________________ This financial report is designed to provide our customers and creditors with a general overview of the utilities’ finances. If you have questions about this report, or need additional financial information, contact Jefferson Utilities, 425 Collins Rd., P.O. Box 396, Jefferson, WI 53549 (920-674-7711). General information relating to the Jefferson Utilities can be found at the utilities web site www.jeffersonutilities.com