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Management's Discussion and Analysis-Continued <br /> March 19,2004 <br /> CAPITAL ASSETS <br /> Capital Assets. The Utilities' investment in capital assets for its business type activities as of December 31,2003,amounts to <br /> $41,877,916(net of accumulated depreciation). This investment in capital assets includes land,buildings,improvements and <br /> equipment. The total increase in the Utilities' investment in capital assets for the current fiscal year was 49 percent. The large <br /> increase was mainly due to assets added from prior years. <br /> Additional information on the Utilities' capital assets can be found in Note 2D on page 19 of this report. <br /> LONG-TERM DEBT <br /> At year end,the Utilities had $10,792,940 in long-term debt up from$8,749,368 in fiscal 2002. The increase resulted from the <br /> issuance of the G.O.Water Revenue Bonds of 2003B. More detailed information about the Utilities' long-term liabilities is <br /> presented in the Notes to the Financial Statements on pages 15-16. <br /> ECONOMIC FACTORS AND NEXT YEAR'S BUDGET AND RATES <br /> The Utilities' Commission,management and staff considered many factors when setting the 2004 budget,rates and fees. An <br /> electric rate study projected growth at approximately 7 percent in 2003,7 percent in 2004 and between 5 and 7 percent in years <br /> thereafter. Purchased power and power production costs that make up for approximately 53 percent of total electric operating <br /> expense were predicted to increase. An electric rate increase was included in the revenue budget for 2004. <br /> Future projects or capital expenditures for the Electric Department include an ongoing infrastructure expansion, feeder ties, <br /> reconductoring and substation expansion. Also taken into consideration were a new digger derrick/bucket truck and fork truck for <br /> unloading delivery trucks. <br /> In the Water Department,a SCADA system is scheduled to be installed as well as improvements made to towers and wells. <br /> CONTACTING THE UTILITIES FINANCIAL MANAGER <br /> This financial report is designed to provide our citizens, customers, investors and creditors with a general overview of the <br /> Utilities' finances and to demonstrate the Utilities' accountability for the money it receives. Questions concerning any of the <br /> information provided in this report or requests for additional financial information should be addressed to Patricia Hemza,Elk <br /> River Municipal Utilities, 13069 Orono Parkway,Elk River, Minnesota 55330. <br /> Sincerely, <br /> Patricia Hemza <br /> Office Manager <br /> -IV- <br />