WARREN AVERETT O'SutuvAN CREEL HOLLEY-NAVARRE WATER SYSTEM, INC. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION

Transcription

1 HOLLEYNAVARRE WATER SYSTEM, INC. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION DECEMBER 31, 2012 AND 2011 WARREN AVERETT O'SutuvAN CREEL 316 South Baylen Street. Suite 300 Pensacola, Flonda (850) (888) Fax (850) www. warrenaverett. com

2 THE HOLLEYNAVARRE WATER SYSTEM, INC. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION DECEMBER 31, 2012 AND

3 THE HOLLEYNAVARRE WATER SYSTEM, INC. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION DECEMBER 31, 2012 AND 2011 TABLE OF CONTENTS INDEPENDENT AUDITOR'S REPORT CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets Consolidated Statements of Income and Comprehensive Earnings Consolidated Statements of Changes in Members' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements SUPPLEMENTARY INFORMATION Schedules of Water and Sewer Operating and Maintenance Expenses 20 1

4 WARREN AVERETT O'SULLIVAN CREEL A Business of Warren Averett, LLC I CPAs & Consultants INDEPENDENT AUDITOR'S REPORT Board of Directors The HolleyNavarre Water System, Inc. Report on Consolidated Financial Statements We have audited the accompanying consolidated financial statements of HolleyNavarre Water System, Inc. (the System) (a Florida corporation), which comprise the consolidated balance sheets as of December 3I, 20 I2 and 20 II, and the related consolidated statements of income and comprehensive earnings, changes in members' equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated 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 consolidated financial statements that are free from material misstatement, whether due to fraud or error... Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated 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 consolidated 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 consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Auditor's Responsibility 2

5 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of HolleyNavarre Water System, Inc. as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Report on Supplementary Information Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The Schedules of Water and Sewer Operating and Maintenance Expenses are presented for purposes of additional analysis and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audits of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the consolidated financial statements as a whole. 3 April15, 2013 Pensacola, Florida

6 THIS PAGE INTENTIONALLY LEFT BLANK

7 . THE HOLLEYNAVARRE WATER SYSTEM, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2012 and ASSETS UTILITY PLANT IN SERVICE, net 45,755,420 46,439,140 GOLF COURSE PROPERTY AND EQUIPMENT, net 2,239,469 RESTRICTED ASSETS Cash and cash equivalents 1,109,400 1,133,048 CURRENT ASSETS Cash and cash equivalents 4,455,325 4,779,595 Certificate of deposit 121, ,246. Accounts receivable, net of allowance for doubtful accounts of25,000 and 25, , ,469. Other receivables 34,511 31,511 Due from Fairpoint 87,230 59,738. Inventory 265, ,618 Prepaid expenses 200, ,498 5,976,991 6,040,675 OTHER ASSETS Utility deposits 11,599 11' 199 Advance to Fairpoint 260, ,700. Bond issue costs, net of accumulated amortization of 61,606 and 54,603 85,158 92,513 Total other assets 357, ,412 Total assets 55,438,737 53,977, The accompanying notes are an integral part of these financial statements. 4

8 LIABILITIES AND MEMBERS' EQUITY 2012 MEMBERS' Donated Contributions Retained Accumulated LONGTERM Liability net Total CURRENT Customer Total CURRENT Accounts Liability Current Total Total EQUITY 2011 capital 249, ,966 Membership certificates 216, ,125 in aid of construction, net of accumulated amortization of13,072,722 and 11,922,012 33,706,138 33,355,930 earnings 15,623,473 14,529,642 other comprehensive income (expense) p,646,778) (3,302,524) Total members' equity 46,149,419 45,040,139 LIABILITIES for pension benefits 2,295,967 2,262,489 Bonds, capital leases, and notes payable, of discount and current portion 4,577,250 4,653,581 longterm liabilities 6,873,217 6,916,070 LIABILITIES (Payable from Restricted Assets) Current portion of long term debt 305, ,745 deposits 845, ,688 Accrued interest 43,949 40,008 current liabilities (payable from restricted assets) 1,194,372 1,183,441 LIABILITIES (Payable from Current Assets) payable 138, ,167 Due to Fairpoint 67,270 63,278 for pension benefits current portion 861, ,300 portion of long term debt capital leases 57,503 Accrued expenses 97,416 51,880 current liabilities (payable from current assets) 1,221, ,625 liabilities and members' equity 55,438,737 53,977,275.

9 THE DECEMBER 2012 HOLLEYNAVARRE WATER SYSTEM, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE EARNINGS 31, 2012 AND REVENUE FROM UTILITY OPERATIONS 7,501,095 7,301,558 OPERATING EXPENSES Operating and maintenance 5,172,299 4,821,059 Depreciation and amortization 497, ,294 Net periodic pension expense 585, ,749 6,254,979 5,593,102 Operating Income 1,246,116 1,708,456 OTHER INCOME (EXPENSES) Interest income 6,525 5,961 Interest expense (215,932) (215,164) Golf course income, net 9,566 Other, net 47,556 41,272 (152,285) (167,931) Net NET INCOME 1,093,831 1,540,525 OTHER COMPREHENSIVE INCOME (LOSS) Prior service cost amortization 24,532 24,533 deferred gain (loss) (368,786) (1,613,320) (344,254) (1,588,787) COMPREHENSIVE EARNINGS (LOSS) 749,577 (48,262) The accompanying notes are an integral part of these financial statements. 5

10 I I I I I I I I I I I I I I I t I I I I I I I I I I I I I I I I THE HOLLEYNAVARRE WATER SYSTEM, INC. CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY DECEMBER 31, 2012 AND 2011 Accumulated Contributions Other Total Donated Membership in aid of Retained Comprehensive Members' Capital Certificates Construction Earnings Income Equity Balance, December 31, , ,960 32,899,413 12,989,117 (1,713,737) 44,622,719 Sale of membership certificates 9,165 9,165 Contributed capital 1,568,855 1,568,855 Amortization (1,112,338) (1,112,338) Total comprehensive earnings (loss) 1,540,525 (1,588,787) (48,262) Balance, December 31, , ,125 33,355,930 14,529,642 (3,302,524) 45,040,139 Sale of membership certificates 9,495 9,495 Contributed capital 1,500,917 1,500,917 Amortization (1,150,709) (1, 150, 709) Total comprehensive earnings (loss) 1,093,831 (344,254) 749,577 Balance, December 31, , ,620 33,706,138 15,623,473 (3,646, 778) 46,149,419 The accompanying notes are an integral part of these consolidntedfinancial statements. 6

11 ..... THIS PAGE INTENTIONALLY LEFT BLANK.

12 .J THE HOLLEYNAVARRE WATER SYSTEM, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS DECEMBER 31, 2012 AND CASH FLOWS FROM OPERATING ACTIVITIES Net income 1,093,831 1,540,525 Adjustments to reconcile net income to net cash (used in) provided by operating activities Depreciation and amortization expense, net Amortization of bond discount (Gain) Loss on disposal of assets Pension benefits 507,219 2,698 55, ,294 2,312 (5,378) (293,596) Changes in assets and liabilities Decrease (increase) in: Accounts receivable (90,086) (128,683) Other receivables Due from Fairpoint Prepaid expenses Inventory Deposits (3,000) (27,492) (37,279) (102,236) (400) 2,991 9,896 (11,744) (7,969) (150) Increase (decrease) in: Accounts payable Due to Fairpoint Accrued expenses Customer deposits (89,026) 3,992 49,477 (38,265) (86,007) (50,182) 13,195 77,780 Cash provided by operating activities 1,324,756 1,448,284 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of certificate of deposit Purchases of property and equipment for the golf course Additions to utility plant in service (493) (491) ( 1,994,566) (956,907) :.(.;.1,3_4_4;:, 7_77.:;,.) Cash used in investing activities (2,951,966) (1,345,268) The accompanying notes are an integral part of these financial statements. 7..

13 CASH FLOWS FROM FINANCING ACTIVITIES Contributions in aid of construction 1,500, ,756 Proceeds from longterm debt 78, ,650 Payments on longterm debt (309,839) (199,168) Membership certificates 9,495 9,165 Cash provided by financing activities 1,279,292 I,571,403 CHANGE IN CASH AND CASH EQUIVALENTS (347,918) 1,674,419 CASH CASH Unrestricted Cash..... CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,912,643 4,238,224 AND CASH EQUIVALENTS, END OF YEAR 5,564,725 5,912,643 AND CASH EQUIVALENTS CONSIST OF: Restricted 1,109,400 1,133,048 4,455,325 4,779,595 5,564,725 5,912,643 SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES paid during the year for interest 211, ,826 Contributions to utility plant in service 653,100 Equipment financed with capital lease 254,849.

14 NOTE 1 ORGANIZATION The HolleyNavarre Water System, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 HolleyNavarre Water System, Inc. (the "System") was organized in 1970 as a Florida notforprofit, member owned, mutual benefit association to provide water and sewer services to its members. The System began providing water services in In 1986, the System entered into a franchise agreement with Santa Rosa County, Florida, which granted the System an exclusive franchise to construct, operate and maintain a public water supply and a public sewer system in all or part of an area located in the southeastern part of Santa Rosa County. NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Basis of Presentation and Consolidation The consolidated financial statements of the System are prepared using the accrual method of accounting. These statements conform to predominant practices within the utilities industry. The consolidated financial statements reflect the consolidated financial position and operating results of the System and include The Club at Hidden Creek, LLC. The System formed The Club at Hidden Creek, LLC (The Club), a single member Limited Liability Company, in November 2012 to acquire and operate the Hidden Creek golf course in Navarre, Florida. Intraentity accounts and material transactions have been eliminated in consolidation. B. Revenue Recognition Revenue for the System is recognized monthly when services are provided. Actual usage is determined through monthly meter readings. Water and wastewater revenues include estimated amounts for unbilled usage. Membership revenue for the Club is recognized monthly. Golf course revenue such as greens fees and cart rentals are recognized when services are provided. Merchandise and food and beverage revenues are recognized as goods are sold. C. Cash and Cash Equivalents For purposes of reporting cash flows, the System and the Club consider all cash accounts, certificates of deposit, repurchase agreements, and investments in debt securities with original maturities of three months or less to be cash or cash equivalents. D. Certificates of Deposit Certificates of deposit with original maturities of over three months are considered "heldtomaturity" securities. 8

15 The HolleyNavarre Water System, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and Inventory for the System consists of materials and supplies used for construction projects and maintenance of the system. Inventory for the Club consists of golf merchandise and food and beverages for the restaurant. Inventory is stated at the lower of cost or market determined by the firstin, firstout (FIFO) method. F. Restricted Assets Assets required to be segregated by bond covenants and customer deposits are classified as restricted assets. G. Utility Plant NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) E. Inventory. The System capitalizes property and equipment costing 5,000 or more. Property acquired through purchase is stated at cost. Internally constructed property is recorded at the cost of materials, labor, and inhouse engineering costs (estimated to be I 0% of materials and labor). Property contributed by members and developers is recorded at its estimated fair value at the date received. Depreciation is computed using straightline methods with asset lives falling into the following ranges: Wastewater treatment system Distribution system Building Furniture, fixtures, and equipment H. Property and Equipment of the Golf Course 40 years 40 years 2025 years 5 10 years The Club capitalizes property and equipment as deemed appropriate by Management. Property acquired through purchase is stated at cost. Depreciation is computed using straightline methods with asset lives falling into the following ranges: Building and improvements Furniture, fixtures, and equipment I. Contributions in Aid of Construction 2025 years 5 10 years Property contributed by members and developers is recorded as contributions in aid of construction at its estimated fair value at the date received. These contributions are amortized over the estimated useful lives of the related contributed assets, with such amortization being offset against depreciation charged to operations. 9

16 The HolleyNavarre Water System, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) J. Income Taxes The System is generally exempt from payment of income taxes under Section 501(c) (12) of the Internal Revenue Code and related Florida Statutes. The System does pay tax on certain unrelated business income (UBI) as defmed by the Internal Revenue Code and Florida Statutes. The Club has elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code. The net income or loss of the Club will be reported by the System as a component of its UBI. The System is not aware of any uncertain tax positions that would require disclosure or accrual in accordance with generally accepted accounting principles. The System is no longer subject to tax examinations by tax authorities for years before K. Bond Issue Costs Cost incurred in issuing bonds (Note 6) have been capitalized and are amortized over the 20year term of the bonds using the straightline method. L. Use of Estimates in the Preparation of Consolidated Financial Statements The preparation of consolidated 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, disclosure of contingent assets, and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. M. Reclassifications Certain accounts in the prior year consolidated financial statements have been reclassified for comparative purposes to confirm to the presentation in the current year consolidated financial statements. The System has evaluated events and transactions that occurred between December 31, 2012 and April 15, 2013, which is the date that the consolidated financial statements were available to be issued, for possible recognition or disclosure in the consolidated financial statements. N. Subsequent Events. 10

17 The HolleyNavarre Water System, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 NOTE 3 UTILITY PLANT IN SERVICE Utility plant in service at December 31, 2012 and 2011 consists of the following: Wastewater treatment system 39,008,737 38,872,641 Water distribution system 20,807,730 20,691,798 Spray field rights 638, ,244 Furniture, fixtures, and equipment 2,547,614 2,191,324 Buildings and improvements 783, ,779 Land 1,072,968 1,072,968 64,859,072 64,250,754 Less: accumulated depreciation (19,349,529) (17,811,614} 45,509,543 46,439,140 Construction in progress Net utility plant in service Depreciation and amortization expense consists of the following: Depreciation: Utility plant and equipment 1,640,627 1,490,276 Amortization: Contributions in aid of construction (1,150,710) (1,112,338) Bond issue costs (1,143,354) (1,104,982) Net depreciation and amortization NOTE 4 GOLF COURSE PROPERTY AND EQUIPMENT, NET The golf course at December 31, 2012 consists of the following: Land and course improvements 1,030,679 Buildings and improvements 913,063 Furniture and equipment 72,011 Golf carts 233,662 2,249,415 Less: accumulated depreciation (9,946) Net property and equipment 21232e469 11

18 The HolleyNavarre Water System, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 NOTE 4 THE CLUB PROPERTY AND EQUIPMENT Depreciation expense related to property and equipment charged to operations for the year ended December 31,2012 was 9,946. NOTE 5 RESTRICTED ASSETS Assets have been restricted as follows: Restricted for customer deposits 960, ,736 Restricted for debt retirement 149, Total restricted assets ,048 NOTE 6 BONDS PAYABLE Bonds payable consists of the following: Santa Rosa County, Florida Industrial Development Refunding Revenue Bonds, Series 2004, secured by purchase money security interest in all assets and net revenues of the System; with interest from 3.85% to 5.15% payable semiannually, with annual principal payments through May ,800,000 2,985,000 Less: unamortized discount (28,894) (28,894) 2,771,106 2,956,106 Less: current portion (190,000) (185,000) 2,581,1Q6 2,711,1Q6 The annual debt service requirements for bonds payable at December 31, 2012 are as follows: Year ending December 31, PrinciQal Interest Total , , , , , , , , , , , , ,000 93, ,864 Thereafter 1,765, ,119 2,073,119 2,8QQ,QQQ ,

19 The HolleyNavarre Water System, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 lilllllll lilllllll NOTE 7 REDEMPTION PROVISIONS FLORIDA INDUSTRIAL DEVELOPMENT REFUNDING REVENUE BONDS Optional Redemption lilllllll.... The 2004 Bonds are subject to redemption by the Issuer solely at the direction of the Borrower upon the optional prepayment of the Loan by the Borrower on or after May 1, 2014, pursuant to the Loan agreement, in whole or in part on any date thereafter, from such maturities as the Borrower may elect (and by Jot within a single maturity as determined by the Trustee in its sole discretion) at the Redemption Price of the principal amount to be redeemed, plus accrued interest to the date fixed for redemption, without premium. Mandatory Redemption The Bonds maturing on May 1, 2021 are subject to mandatory sinking fund redemption prior to maturity in part by lot at a redemption price equal to the principal amount thereof and accrued interest thereon to the date fixed for redemption, from mandatory sinking fund payments in amounts sufficient to redeem the bonds on May 1 in the years and principal amounts shown below: NOTE 8 NOTE PAYABLE Year (May 1) Principal Amount 250, , ,000 On October 1, 2010, the System entered into a construction loan in the amount of 2,300,000 with Regions bank for the construction of the waste water treatment facility in Holley, Florida. The note has a term of the earlier of October 2030 or the Lender's exercise of the Put Option in October The principal balance of the Joan as of December 31, 2012 is 1,920,939. Interest is calculated at LIBOR plus 2% with a floor of 3.5%, which was the rate at December 31, Interest only payments were due from November 2010 to October 2011 with subsequent payments due in equal monthly principal payments based on a twenty year amortization. All System assets and project revenues secure the note. The System was in compliance with the required debt service covenant at December 3 1,

20 The HolleyNavarre Water System, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 NOTE 8 NOTE PAYABLE (Continued) On December 31, 2012, scheduled principal repayments on this loan are as fo Bows: Year ending December 31, Thereafter Total 115, , , ,000 1,460, NOTE 9 CAPITAL LEASES The System leases equipment in the ordinary course of business of The Club. The System is obligated under various capital lease commitments that expire between June 2016 and September 2016, and require minimum monthly payments ranging from 304 to 5,861. The assets under these capital leases totaled 254,849 and are included in the consolidated balance sheets as part of property and equipment of The Club. Amortization expense for assets held under capital leases amounted to approximately 4,900 for the year ended December 31, 2012, and is included as a component of depreciation and amortization expense. At December 31, 2012, the required minimum capital lease payments are as follows: Year ending December 31, Less amount attributable to interest Total NOTE 10 DONATED CAPITAL 73,979 73,979 73, ,367 (37,358) Donated capital consists of grants received from the Farmers Home Administration for expansion of the water distribution system. 14

21 The HolleyNavarre Water System, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 NOTE 11 MEMBERSHIP CERTIFICATES New customers are required to purchase a nonrefundable membership certificate for 5. NOTE 12 CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk include temporary cash investments and trade receivables. Concentration of credit risk with respect to trade receivables is limited due to the Company's large number of customers. The Company maintains deposits in financial institutions located in Florida and Alabama which may at times exceed amounts covered by insurance provided by the Federal Deposit Insurance Corporation. The System has not experienced any losses in such accounts, and management believes that its risk is limited because the institutions are large with strong financial positions. At December 31, 2012, the System had approximately 4,480,000, which exceeded the FDIC insured limits. The System regularly invests its idle cash in shortterm securities. At December 31, 2012, the System had approximately 828,200 in U.S. Treasury Securities and mutual funds. During 1998, the System, along with two other water utilities, formed Fairpoint Regional Utility System, Inc. (Fairpoint). The purpose of the organization is to develop a regional water source and delivery system to south Santa Rosa County, Florida. Fairpoint has financed the construction of the well fields and pipeline through government grants and loans. The members funded the first phases of the project, consisting of engineering estimates, permitting, and drilling oftest wells. The System advanced 260,700 for these costs. It is anticipated that this advance will be recovered. The amount of future contributions by the System to Fairpoint has not been determined. The System IS reimbursed for work performed by its employees and expenses incurred on behalf of Fairpoint. NOTE 13 COMMITMENTS During 2011, Fairpoint retained a letter of credit with a Bank for up to 2,744,384. The System is a guarantor of onethird of the outstanding principal, plus accrued interest. At December 31, 2012, the outstanding principal of this letter of credit was 2,700,000. Some lifetime memberships sold to members of the Club at Hidden Creek included a provision for repayment if the course is closed. This contingent obligation of the System at December , was approximately 545,

22 The HolleyNavarre Water System, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 Defined Benefit Pension Plan In January 2006 the System implemented a Defined Benefit Pension Plan designed to provide a pension benefit to longterm employees of the System. To be eligible to enter the plan, an employee must be 21 years of age and have one year of service (defined as 500 hours of service). An employee with five years or more of service who retires at age 65 will be provided a retirement benefit equal to 6% of their average annual compensation for each plan year of service up to ten years based upon their highest compensation for any consecutive 36 month period during their last ten years of service. Early retirement is provided for, with a reduction in benefits. Benefits accrue to employees at a rate of one year of service for each plan year during which 1,000 hours of service was completed prior to January 1, 2006 or 500 hours for years after that date. Employees become 100% vested after five years of participation. NOTE 14 RETIREMENT PLAN Generally accepted accounting principles requires the recognition of the funded status of its defined benefit postretirement plan in the System's balance sheet, the recognition of actuarial gains and losses and prior service costs and credits in the statement of income, and certain disclosures. The accumulated benefit obligation for the pension plan was 7,240,393 and 5,841,595 at December 31,2012 and 2011, respectively. Prior service costs as of January 1, 2006, are being amortized on a straight line basis over the expected future working lifetime of active participant at January 1, 2006, estimated to be years. Changes during the year in the projected benefit obligations and fair value of plan assets are as follows:. Change in benefit obligation Benefit obligation, beginning of year Service cost Interest cost Benefits paid Actuarial (gain) loss Benefit obligation, end of year Change in plan assets Fair value of plan assets, beginning ofyear Actual return on plan assets Employer contributions Benefits paid Fair value of plan assets, end of year ,226, , ,951 (13,181) ,513,433 3,468, , ,084 (13,181) 4,356, ,294, , ,646 (13,181) ,226,146 2,832,228 (31,035) 680,345 (13,181) 3,468, Liability for pension benefits

23 The HolleyNavarre Water System, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 NOTE 14 RETIREMENT PLANS (Continued) Pension plan assets are managed and invested in accordance with all applicable requirements, including ERISA and the Internal Revenue Code of 1986, as amended (Internal Revenue Code). The System's investment policy covers a diversified mix of assets, including equity and fixed income securities, and private equity. The System primarily minimizes the risk of large losses through diversification but also monitors and manages other aspects of risk. The actual composition of the System's pension plan assets as of December 31, 2012 and 2011, along with the targeted mix of assets, is as follows: Domestic equity International equity Fixed income Total Target 50% % % % % % Components of net periodic pension cost are as follows: Service cost Interest cost Amortization of prior service costs Amortization of unrecognized loss Expected return on assets Net periodic pension cost , ,951 24, ,378 (217,701) , ,646 24,533 46,466 (189,978) Amounts included in accumulated other comprehensive income at December 31, 2012 and 2011, related to the defined benefit pension plan that have not yet been recognized as components of net periodic pension cost along with the estimated amortization of such amounts for the next fiscal year are as follows: Prior service cost Net asset deferred (gain) loss Total , Estimated amortization as net period pension cost in 2013: Prior service cost Net asset deferred (gain) Joss Total ,774 2,857, , ,399 17

24 .... The HolleyNavarre Water System, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 NOTE 14 RETIREMENT PLANS (Continued) Future benefit payments reflect expected future service and are estimated based on assumptions used to measure the projected benefit obligation for the pension plan. At December 31, 2012, estimated benefit payments are as follows: Year ending December 31, ,276 84,236 86, , ,764 1,020,295 The System expects to contribute 861,399 to the pension plan for the year ending December 31, Actuarial Assumptions The weightedaverage rates assumed in the actuarial calculation used to determine both the benefit obligation at December 31, 2012 and 2011, and the net periodic costs for the pension plan are as follows: Discount Increase in IRS compensation Longterm return on plan assets % 3.00% 6.00% % 3.00% 6.00% The System determined the longterm rate of return based on historical asset class returns and current market conditions, taking into account the diversification benefits of investing in multiple asset classes. NOTE 15 RELATED PARTY TRANSACTIONS The System performs administrative and repair and maintenance services for Fairpoint Regional Utility System. During the year ended December 31, 2012 and 2011, the System recognized 245,964 and 223,216, respectively, for these services. These amounts are included in and offset the System's operating expenses. The System purchases water from Fairpoint Regional Utility System. During the year ended December 31, 2012 and 2011, the System incurred expenses totaling 794,860 and 737,543, respectively, for these purchases. 18

25 The HolleyNavarre Water System, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2012 and 2011 NOTE 16 EVENTS OCCURRING AFTER REPORTING DATE In March 2013, the Club entered into a capital lease agreement for new mowers. The lease requires monthly rental payments of3,376 for a term of 48 months. 19

26 .... SUPPLEMENTARY INFORMATION

27 The HolleyNavarre Water System, Inc. SCHEDULES OF WATER AND SEWER OPERATING AND MAINTENANCE EXPENSES For the years ended December 31, 2012 and Bad debts 19,412 Computer expense 38,191 Engineering and professional services 33,218 Equipment rental 3,520 Insurance 633,909 Legal and accounting 34,875 Miscellaneous 5,737 Office expense 257,589 Repairs and maintenance 683,958 Salaries and related costs 2,090,098 Supplies and chemicals 122,173 Taxes and licenses 8,103 Trustee and investment fees 3,270 Utilities 435,633 Vehicle 124,529 Wastewater operation and testing 103,780 Water operation and testing 25,408 Water purchases 794,860 Reimbursed by Fairpoint (245,964) 13,133 27,556 17,187 1, ,696 25,166 10, , ,005 1,945, ,021 30,663 3, , , ,749 30, ,543 (223,216) 5,172,299 4,821,059 See Independent Auditor's Report on Supplementary Information. 20

28 ......