$58,485,000 THE UTILITIES BOARD OF THE CITY OF CULLMAN (ALABAMA)

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1 NEW ISSUE BOOK-ENTRY ONLY Ratings:* Moody s: Aa3 (negative outlook)/aa3 Standard & Poor s: AA+ (stable outlook)/a In the opinion of Bond Counsel, assuming compliance by the Board with certain covenants set forth in the Indenture herein referred to with respect to certain conditions imposed by Section 103 of the Internal Revenue Code of 1986, as amended (the Code ), the interest income on the Series 2011 Bonds (a) will be excludable from gross income of the recipients thereof for Federal income tax purposes and (b) will not be an item of tax preference included in alternative minimum taxable income for the purpose of computing the alternative minimum tax on individuals and corporations under the Code. However, see Tax Exemption herein for certain other federal tax consequences to the recipients of the interest income on the Series 2011 Bonds. In the opinion of Bond Counsel, the interest income on the Series 2011 Bonds will be exempt from Alabama income taxation. $58,485,000 THE UTILITIES BOARD OF THE CITY OF CULLMAN (ALABAMA) Water Revenue Bonds Series 2011 Dated: Date of Delivery Due: September 1, as shown on the inside cover The Series 2011 Bonds are issuable as fully registered bonds in the denomination of $5,000 or any integral multiple thereof. Interest on the Series 2011 Bonds will be payable semiannually on each March 1 and September 1, commencing September 1, The Series 2011 Bonds will be issued as fully registered bonds, and when issued, will be registered in the name of CEDE & Co., as nominee of The Depository Trust Company, New York, New York ( DTC ). Purchases of beneficial interests in the Series 2011 Bonds will be made in book-entry form only and purchasers of a beneficial interest in the Series 2011 Bonds ( Beneficial Owners ) will not receive physical delivery of the certificates representing their interests in the Series 2011 Bonds. The principal of and interest on the Series 2011 Bonds will be paid directly to DTC, so long as DTC or its nominee is the registered owner of the Series 2011 Bonds. The final disbursements of such payments to the Beneficial Owners of the Series 2011 Bonds will be the responsibility of the DTC Participants and the Indirect Participants, all as defined and more fully described in this Official Statement under the caption THE SERIES 2011 BONDS Book-Entry Only System. The Series 2011 Bonds are being issued (a) to provide a portion of the funds necessary to construct certain capital improvements to the Board s water supply system herein described, (b) to provide a portion of the funds necessary to refund all of the outstanding bonds of the Board, (c) to fund the Debt Service Reserve Fund herein referred to and (d) to pay the costs of issuance of the Series 2011 Bonds. The Series 2011 Bonds, which will be issued under a Trust Indenture dated as of June 1, 2011, from the Board to Regions Bank, will constitute limited obligations of the Board, payable out of the revenues derived from the operation of the water supply system described herein after payment of the costs of operating and maintaining the said system. The Series 2011 Bonds do not constitute an obligation, debt or pledge of the City of Cullman, the State of Alabama or any political subdivision thereof, and neither the credit nor the taxing power of said state or any political subdivision thereof shall be pledged therefor. The Series 2011 Bonds are subject to redemption prior to their respective maturities as described herein. The scheduled payment of principal of and interest on the Series 2011 Bonds when due will be guaranteed under an insurance policy to be issued concurrently with the delivery of the Series 2011 Bonds by ASSURED GUARANTY MUNICIPAL CORP. The Series 2011 Bonds are offered when, as and if issued, subject to the approval of the validity thereof by Hand Arendall LLC, Birmingham, Alabama, Bond Counsel. Certain legal matters will be passed on for the Board by its counsel, Roy W. Williams, Jr., Cullman, Alabama, and for the Underwriters by their counsel, Haskell Slaughter Young & Rediker, LLC, Birmingham, Alabama. It is expected that the Series 2011 Bonds in definitive form will be available for delivery in New York, New York on or about June 3, The Frazer Lanier Incorporated Dated May 24, 2011 * For an explanation of Ratings, see Ratings herein. Company

2 $58,485,000 THE UTILITIES BOARD OF THE CITY OF CULLMAN (ALABAMA) WATER REVENUE BONDS SERIES 2011 Amounts, Maturities, Interest Rates, Yields and CUSIP Numbers $28,605,000 Serial Bonds Maturity (September 1) Principal Amount Interest Rate Yield CUSIP 2012 $ 325, % 1.110% FA , FB ,015, FC ,050, FD ,075, FE ,105, FF ,135, FG ,195, FH ,255, FJ ,290, FK ,355, * FL ,620, * FM ,700, FN ,770, FP ,840, * FQ ,935, FR ,010, FS ,100, FT ,500, * FU , FY ,295, FV6 $16,215, % Term Bonds Due September 1, 2037, Yield: 4.890% CUSIP: FW4 $13,665, % Term Bonds Due September 1, 2041, Yield: 5.030% CUSIP: FX2 Yield to earliest call date.

3 THE UTILITIES BOARD OF THE CITY OF CULLMAN (ALABAMA) MEMBERS OF THE BOARD OF DIRECTORS Dr. Wayne B. Fuller, Chairman Dr. Steven Murphree, Vice-Chairman John W. Cook Garlan E. Gudger, Jr. Max A. Townson SECRETARY OF THE BOARD Mike Manning MANAGEMENT OF THE BOARD David Freeman, Manager, Water Division Alan Davis, Assistant Manager, Water Division Ruth W. Rose, Cullman City Clerk Wesley Moore, Accountant FINANCIAL ADVISOR Protective Securities, A Division of ProEquities, Inc. COUNSEL TO THE BOARD Roy W. Williams, Jr. Cullman, Alabama AUDITORS Fricke, Sweatmon & Russell, P.C. Cullman, Alabama CONSULTING ENGINEERS CH2M Hill Birmingham, Alabama BOND COUNSEL Hand Arendall LLC Birmingham, Alabama

4 No dealer, broker, salesman or other person has been authorized by The Utilities Board of the City of Cullman, or the Underwriters to give any information or to make any representations, other than those contained in this Official Statement and, if given or made, such other information or representations must not be relied upon as having been authorized by any of the foregoing. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of the Series 2011 Bonds by any person in any jurisdiction in which it is unlawful for such person to make such offer, solicitation or sale. The information set forth herein has been obtained from The Utilities Board of the City of Cullman, the City of Cullman and other sources which are believed to be reliable, but it is not guaranteed as to accuracy or completeness by, and is not to be construed as a representation of, the Underwriters. The delivery of this Official Statement at any time does not imply that any information herein is correct as of any time subsequent to this date. TABLE OF CONTENTS Page INTRODUCTORY STATEMENT... 1 THE SERIES 2011 BONDS... 1 ADDITIONAL PARITY BONDS... 6 THE CITY-BOARD WATER SUPPLY AGREEMENT... 7 REDEMPTION OF THE OUTSTANDING BONDS... 8 DEBT SERVICE SCHEDULE... 8 ESTIMATED SOURCES AND USES OF FUNDS... 9 BOND INSURANCE... 9 THE BOARD THE SUPPLY SYSTEM THE CITY'S DISTRIBUTION SYSTEM TORNADO DAMAGE RESULTS OF OPERATIONS ECONOMIC AND DEMOGRAPHIC INFORMATION EMPLOYEE RETIREMENT PLAN TAX EXEMPTION RATINGS FINANCIAL STATEMENTS UNDERWRITING LITIGATION AND CONTINGENT LIABILITIES CONTINUING DISCLOSURE AGREEMENT THE FEDERAL BANKRUPTCY ACT BONDHOLDER RISKS LEGAL MATTERS MISCELLANEOUS Appendix A - Economic and Demographic Information Appendix B - Summary of the Indenture Appendix C - Audited Financial Statements of the Board (Water Division) for the Fiscal Years ending September 30, 2010 and September 30, 2009 Appendix D - Audited Financial Statement of the Water Fund of the City for the Fiscal Years ending September 30, 2010 and September 30, 2009 Appendix E - Report of Consulting Engineer Appendix F - Form of Opinion of Bond Counsel Appendix G - Summary of Continuing Disclosure Agreement Appendix H - Specimen Municipal Bond Insurance Policy. Assured Guaranty Municipal Corp. ("AGM") makes no representation regarding the Series 2011 Bonds or the advisability of investing in the Series 2011 Bonds. In addition, AGM has not independently verified, makes no representation regarding, and does not accept any responsibility for the accuracy or completeness of this Official Statement or any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of the information regarding AGM supplied by AGM and presented under the heading "Bond Insurance" and "Appendix H - Specimen Municipal Bond Insurance Policy". i

5 OFFICIAL STATEMENT pertaining to $58,485,000 THE UTILITIES BOARD OF THE CITY OF CULLMAN (ALABAMA) WATER REVENUE BONDS SERIES 2011 INTRODUCTORY STATEMENT This Official Statement of The Utilities Board of the City of Cullman (the "Board"), is being furnished to purchasers of $58,485,000 aggregate principal amount of its Water Revenue Bonds, Series 2011, to be dated the date of their delivery (the "Series 2011 Bonds"). The Series 2011 Bonds, which will be issued under a Trust Indenture dated as of June 1, 2011 (the "Indenture"), from the Board to Regions Bank, Birmingham, Alabama, as trustee (the "Trustee"), will constitute limited obligations of the Board payable solely from the net revenues derived by the Board from the operation of its water supply system (the "Supply System"). The Series 2011 Bonds are being issued (a) to provide a portion of the funds necessary to construct certain capital improvements (the "Reservoir Project") to the Supply System, (b) to provide a portion of the funds necessary to refund (i) the Board's outstanding Water Revenue Bond, DWSRF Series 1998, dated September 24, 1998 (the "Series 1998 Bonds"), now outstanding in the principal amount of $3,030,000 and (ii) the Board's outstanding Water Revenue Bonds, Series 2002, dated March 1, 2002 (the "Series 2002 Bonds"), now outstanding in the aggregate principal amount of $1,750,000 (together, the "Outstanding Bonds"), which together constitute all of the outstanding bonds of the Board and which were issued under a Trust Indenture dated as of December 1, 1986, as supplemented (the "1986 Indenture"), between the Board and The Bank of New York Mellon Trust Company, National Association, as successor trustee (the "1986 Trustee"), (c) to fund the Debt Service Reserve Fund hereinafter referred to and (d) to pay the costs of issuance of the Series 2011 Bonds. Wherever in this Official Statement a contract, indenture, resolution, or other document, or official act is referred to or summarized, such reference or summary is qualified by the exact terms of the document or official act so referred to or summarized. All such documents are matters of public record and are available for review by owners of the Series 2011 Bonds during usual business hours at the office of the Board. As used in this Official Statement, the term "Bonds" without other qualifying words means the Series 2011 Bonds and any Additional Bonds that may hereafter be issued under the Indenture. See Appendix B "Summary of Indenture Additional Bonds". Neither the delivery of this Official Statement nor any sale made hereunder implies that there has been no change in the affairs of the Board at any time subsequent to the date hereof. THE SERIES 2011 BONDS GENERAL DESCRIPTION OF THE SERIES 2011 BONDS The Series 2011 Bonds will be dated the date of their delivery, will mature in the amounts and on the dates, and will bear interest at the per annum rates set forth on the inside of the cover page hereof (computed on the basis of a 360-day year of twelve consecutive 30-day months), payable on September 1, 2011, and on each March 1 and September 1 thereafter, until the respective maturities thereof. The Series 2011 Bonds will be issued as fully registered bonds in the denomination of $5,000 or any integral multiple thereof and in accordance with the provisions of the Indenture. The Series 2011 Bonds will initially be registered under the book-entry only system described under the caption "Book-Entry Only System" (the "Book-Entry Only System") and the method of payment of the Series 2011 Bonds and matters pertaining to transfers and exchanges while the Series 2011 Bonds 1

6 are held in the Book-Entry Only System are described under that caption. During any period in which the Series 2011 Bonds are not held in the Book-Entry Only System, the payment and other provisions described below under "Discontinuation of Book-Entry Only System" will apply to the Series 2011 Bonds. BOOK-ENTRY ONLY SYSTEM The Depository Trust Company ("DTC"), New York, NY, will act as securities depository for the Series 2011 Bonds. The Series 2011 Bonds will be issued as fully-registered bonds registered in the name of Cede & Co. (DTC s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Series 2011 Bond certificate will be issued for each maturity of the Series 2011 Bonds, in the aggregate principal amount of such maturity, and will be deposited with DTC. DTC, the world s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-u.s. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC s participants ("Direct Participants") deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized bookentry transfers and pledges between Direct Participants accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC"). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has Standard & Poor s highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at and Purchases of the Series 2011 Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Series 2011 Bonds on DTC s records. The ownership interest of each actual purchaser of each Series 2011 Bond ("Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Series 2011 Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Series 2011 Bonds, except in the event that use of the book-entry system for the Series 2011 Bonds is discontinued. To facilitate subsequent transfers, all Series 2011 Bonds deposited by Direct Participants with DTC are registered in the name of DTC s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of the Series 2011 Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Series 2011 Bonds; DTC s records reflect only the identity of the Direct Participants to whose accounts such Series 2011 Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. 2

7 Beneficial Owners of the Series 2011 Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Series 2011 Bonds, such as redemptions, tenders, defaults, and proposed amendments to the security documents. For example, Beneficial Owners of the Series 2011 Bonds may wish to ascertain that the nominee holding the Series 2011 Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the Trustee and request that copies of notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the Series 2011 Bonds of a single maturity are being redeemed, DTC s practice is to determine by lot the amount of the interest of each Direct Participant in such maturity to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the Series 2011 Bonds unless authorized by a Direct Participant in accordance with DTC s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Board as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co. s consenting or voting rights to those Direct Participants to whose accounts the Series 2011 Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Principal, premium (if any) and interest payments on the Series 2011 Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC s practice is to credit Direct Participants accounts upon DTC s receipt of funds and corresponding detail information from the Board or the Trustee, on payable date in accordance with their respective holdings shown on DTC s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC, the Trustee or the Board, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal, premium (if any) and interest to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Board or the Trustee, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. THE BOARD AND THE TRUSTEE CANNOT AND DO NOT GIVE ANY ASSURANCES THAT DTC, THE DIRECT PARTICIPANTS OR THE INDIRECT PARTICIPANTS WILL DISTRIBUTE TO THE BENEFICIAL OWNERS OF THE SERIES 2011 BONDS (1) PAYMENTS OF PRINCIPAL, REDEMPTION PRICE OR INTEREST ON THE SERIES 2011 BONDS; (2) CERTIFICATES REPRESENTING AN OWNERSHIP INTEREST OR OTHER CONFIRMATION OF BENEFICIAL OWNERSHIP INTERESTS IN SERIES 2011 BONDS OR (3) REDEMPTION OR OTHER NOTICES SENT TO DTC OR CEDE & CO., ITS NOMINEE, AS THE REGISTERED OWNER OF THE SERIES 2011 BONDS, OR THAT THEY WILL DO SO ON A TIMELY BASIS OR THAT DTC, DIRECT PARTICIPANTS OR INDIRECT PARTICIPANTS WILL SERVE AND ACT IN THE MANNER DESCRIBED IN THIS OFFICIAL STATEMENT. THE CURRENT "RULES" APPLICABLE TO DTC ARE ON FILE WITH THE SECURITIES AND EXCHANGE COMMISSION, AND THE CURRENT "PROCEDURES" OF DTC TO BE FOLLOWED IN DEALING WITH DTC PARTICIPANTS ARE ON FILE WITH DTC. NEITHER THE BOARD NOR THE TRUSTEE WILL HAVE ANY RESPONSIBILITY OR OBLIGATION TO ANY DIRECT PARTICIPANT, INDIRECT PARTICIPANT OR ANY BENEFICIAL OWNER OR ANY OTHER PERSON WITH RESPECT TO: (1) THE SERIES 2011 BONDS; (2) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC OR ANY DIRECT PARTICIPANT OR INDIRECT PARTICIPANT; (3) THE PAYMENT BY DTC OR ANY DIRECT PARTICIPANT OR INDIRECT PARTICIPANT OF ANY AMOUNT DUE TO ANY BENEFICIAL OWNER IN RESPECT OF THE PRINCIPAL OR REDEMPTION PRICE OF OR INTEREST ON THE SERIES 2011 BONDS; (4) THE DELIVERY BY DTC OR ANY DIRECT PARTICIPANT OR INDIRECT PARTICIPANT OF ANY NOTICE TO ANY BENEFICIAL OWNER WHICH IS REQUIRED OR PERMITTED UNDER THE TERMS OF THE INDENTURE TO BE GIVEN TO BONDHOLDERS; (5) THE SELECTION OF THE BENEFICIAL OWNERS TO RECEIVE PAYMENT IN THE EVENT OF ANY PARTIAL REDEMPTION OF THE SERIES 2011 BONDS; OR (6) ANY CONSENT GIVEN OR OTHER ACTION TAKEN BY DTC AS A BONDHOLDER. 3

8 DISCONTINUATION OF BOOK-ENTRY ONLY SYSTEM DTC may determine to discontinue providing its services with respect to the Series 2011 Bonds at any time by giving notice to the Board and the Trustee and discharging its responsibilities with respect thereto under applicable law. Upon the giving of such notice, the book-entry only system for the Series 2011 Bonds will be discontinued unless a successor securities depository is appointed by the Board. In addition, the Board may discontinue the book-entry only system for the Series 2011 Bonds at any time by giving reasonable notice to DTC. In the event that the book-entry only system for the Series 2011 Bonds is discontinued, the following provisions would apply, subject to the further conditions set forth in the Indenture: The principal of the Series 2011 Bonds is payable at the corporate trust office of the Trustee in Birmingham, Alabama, only upon presentation and surrender of the Series 2011 Bonds. Interest on the Series 2011 Bonds is payable by check or draft mailed on the interest payment date by the Trustee to the registered holders of the Series 2011 Bonds at their respective addresses as shown on the registry books of the Trustee pertaining to the Series 2011 Bonds as of the close of business on the February 15 or August 15, as the case may be, next preceding the interest payment date (the "Record Date"). Any holder of not less than $500,000 in principal amount of Series 2011 Bonds then outstanding may make arrangements with the Trustee for the payment of interest thereon by wire transfer. Any principal or interest with respect to any Series 2011 Bond that becomes due on a day other than a Business Day (as defined in the Indenture) shall be payable on the next succeeding Business Day and no interest shall accrue in the interim. The Indenture makes special provision for payment of overdue interest which may be paid to a holder other than the registered holder of a Series 2011 Bond on the Record Date next preceding the interest payment date on which such interest became due and payable. The Series 2011 Bonds shall be registered as to both principal and interest and may be transferred only on the registry books of the Trustee pertaining to the Series 2011 Bonds. No transfer of the Series 2011 Bonds shall be permitted except upon presentation and surrender of such Series 2011 Bond at the office of the Trustee with written power to transfer signed by the registered owner thereof in person or by a duly authorized attorney in form and with guaranty of signature satisfactory to the Trustee. The holder of one or more of the Series 2011 Bonds may, upon request, and upon the surrender to the Trustee of such Series 2011 Bond, exchange such Series 2011 Bond for Series 2011 Bonds of other authorized denominations ($5,000 principal amount or any integral multiple thereof) of the same maturity and interest rate and together aggregating the same principal amount as the Series 2011 Bonds so surrendered. Any registration, transfer and exchange of Series 2011 Bonds shall be without expense to the holder thereof, except that the holder shall pay all taxes and other governmental charges, if any, required to be paid in connection with such transfer, registration or exchange. The holder of any Series 2011 Bond will be required to pay any expenses incurred in connection with the replacement of a mutilated, lost, stolen or destroyed Series 2011 Bond. If any Series 2011 Bond is duly called for redemption (in whole or in part), the Trustee shall not be required to register, transfer or exchange such Series 2011 Bond during the period of forty-five (45) days next preceding the date fixed for redemption. REDEMPTION Optional Redemption. Those of the Series 2011 Bonds having a stated maturity in 2021 or thereafter shall be subject to redemption and payment, at the option of the Board, on September 1, 2020, and on any date thereafter, as a whole or in part (but if redeemed in part, only in installments of $5,000 or any integral multiple thereof with those of the maturities to be redeemed to be selected by the Board, and if less than all the Series 2011 Bonds of a single maturity are to be redeemed, those (or portions thereof) of that maturity to be redeemed to be selected by the Trustee by lot), at and for a redemption price equal to the principal amount redeemed, plus accrued interest to the redemption date. Mandatory Redemption. (a) Those of the Series 2011 Bonds having a stated maturity in 2037 shall be subject to redemption and payment, and the Board shall redeem and pay such Series 2011 Bonds, at and for a 4

9 Redemption Price, with respect to each such Series 2011 Bond or portion thereof to be redeemed, equal to the principal amount thereof plus accrued interest to the Redemption Date (with those to be redeemed to be selected by the Trustee by lot) but only in the following principal amounts on September 1 in the following years: Year Principal Amount to be Redeemed 2032 $2,400, ,515, ,630, ,755, ,890, ,025,000 (1) (1) Maturity (b) Those of the Series 2011 Bonds having a stated maturity in 2041 shall be subject to redemption and payment, and the Board shall redeem and pay such Series 2011 Bonds, at and for a Redemption Price, with respect to each such Series 2011 Bond or portion thereof to be redeemed, equal to the principal amount thereof plus accrued interest to the Redemption Date (with those to be redeemed to be selected by the Trustee by lot) but only in the following principal amounts on September 1 in the following years: Year Principal Amount to be Redeemed 2038 $3,170, ,330, ,495, ,670,000 (1) (1) Maturity CREDITS AGAINST MANDATORY REDEMPTION The Board may, upon written direction to the Trustee not less than sixty (60) days prior to any such scheduled mandatory Redemption Date, direct that any or all of the following amounts be credited against the principal amount of Series 2011 Bonds required to be redeemed on such date: (i) the principal amount of Series 2011 Bonds having such a stated maturity delivered by the Board for cancellation and not previously claimed as a credit; and (ii) the principal amount of Series 2011 Bonds having such a stated maturity (A) previously redeemed pursuant to the provisions for optional redemption set forth above or (B) called to be redeemed pursuant to the provisions for optional redemption set forth above on or before such scheduled mandatory Redemption Date pursuant to a trust agreement satisfying the requirements of the Indenture, and not previously claimed as a credit. MANNER, NOTICE AND EFFECT OF REDEMPTION The Series 2011 Bonds are subject to redemption only in principal amounts of $5,000 or any integral multiple thereof. Notice of redemption is required to be mailed by registered or certified mail to the registered owner of each Series 2011 Bond called for redemption, such notice to be mailed not more than sixty (60) nor less than thirty (30) days prior to the date fixed for redemption. No further interest will accrue, after the date fixed for redemption, on the principal of any Series 2011 Bonds called for redemption if notice has been duly given as 5

10 provided in the Indenture, and payment therefor has been duly provided, and in such event any Series 2011 Bond called for redemption will no longer be protected by the provisions of the Indenture. SOURCE OF PAYMENT AND SECURITY The Series 2011 Bonds will constitute limited obligations of the Board, payable solely out of the revenues derived by the Board from the operation of the Supply System remaining after payment of the costs of maintaining and operating the Supply System. The revenues derived by the Board from the operation of the Supply System consists, in addition to investment income, of the amounts payable to the Board by the City pursuant to the Water Supply Agreement (see "THE CITY-BOARD WATER SUPPLY AGREEMENT" below). The City owns and operates a water distribution system (the "Distribution System") serving retail customers within the corporate limits of the City and the nearby unincorporated areas and also provides wholesale water to certain other water systems. The City purchases its entire water requirements from the Board and is the sole water customer of the Board. Consequently, the City is the source of all of the Board's revenues from the Supply System (except investment income). The Series 2011 Bonds will be issued under the Indenture and will be secured, pro rata one with the other, and with any of the Additional Bonds (see Appendix B "Summary of Indenture Additional Bonds") that may be issued under the Indenture, by a pledge of the revenues out of which they are payable (the "Pledged Revenues") and by the provisions of the Indenture. The Indenture does not contain a mortgage on the Supply System and is not subject to foreclosure. The Series 2011 Bonds are not general obligations of the Board, and the covenants and representations contained in the Indenture and in the Series 2011 Bonds do not and shall never constitute a liability or charge against the general credit of the Board. The Series 2011 Bonds are not obligations of the City of Cullman, the State of Alabama, or any political subdivision thereof (other than the Board) and neither the full faith and credit nor any of the taxes or taxing powers of said state or any political subdivision thereof are pledged for payment of the Series 2011 Bonds. In the Indenture the Board has created a Debt Service Reserve Fund to be held as a reserve or cushion for the payment of the principal of and interest on all Bonds outstanding under the Indenture which are to be secured by the Reserve Fund, including the Series 2011 Bonds. At the time of the issuance of the Series 2011 Bonds, the Board will deposit into the Reserve Fund, in cash, an amount equal to the Maximum Required Reserve Fund Deposit with respect to the Series 2011 Bonds. See Appendix B - "SUMMARY OF THE INDENTURE - Selected Definitions." At the time of the issuance of the Series 2011 Bonds, the Board will have no other outstanding obligations secured by a pledge of the Pledged Revenues, and will covenant that so long as the Bonds are outstanding, it will not make any pledge of Pledged Revenues that is prior to or on a parity with the pledge of Pledged Revenues made in the Indenture for the benefit of the Bonds. ADDITIONAL PARITY BONDS In the Indenture the Board will reserve the privilege of issuing additional bonds under the Indenture, on a parity with the Series 2011 Bonds, at any time, upon compliance with the conditions hereinafter referred to but otherwise without limit as to principal amount for the purpose of constructing capital improvements to the Supply System or for the purpose of refunding any obligations of the Board. As used in this Official Statement, the term "Bonds" without other qualifying words means the Series 2011 Bonds and any additional parity bonds ("Additional Bonds") that may hereafter be issued pursuant to the aforesaid reserved privilege. Among the conditions prerequisite to the issuance of Additional Bonds are the following: (1) Engineer's Certificate. If such Additional Bonds are being issued for the purpose of constructing any capital improvements to the Supply System other than what is required for the completion of the Reservoir Project, there must be furnished to the Trustee a certificate of an independent engineer stating the estimated costs of the proposed capital improvements (which must be not less than the proceeds to be realized from the sale of such Additional Bonds and available to pay the costs of the proposed capital improvements) and expressing the opinion that 6

11 the proposed improvements are of such nature as to be properly chargeable to fixed capital account by generally accepted accounting principles, that the improvements either are needed to serve prospective customers of the Supply System or are needed for the efficient operation of the Supply System, that the cost of the capital improvements will represent the reasonable value thereof, and that the acquisition of such capital improvements and the issuance of Additional Bonds for such purpose will be feasible. (2) Supplemental Water Supply Contract. There must be furnished to the Trustee an executed water supply contract additional to the Water Supply Agreement, which additional contract shall provide for the purchase from the Board of water at a fixed price or in quantity at a specified rate or rates that will produce an amount, in addition to such amounts then payable pursuant to the Water Supply Agreement, sufficient (i) to pay the principal of and interest on the Additional Bonds proposed to be issued and (ii) to pay the additional expenses of operating and maintaining the Supply System resulting from the capital improvements (if any) proposed to be acquired. THE CITY-BOARD WATER SUPPLY AGREEMENT The Board and the City will, in connection with the issuance of the Series 2011 Bonds, enter into an agreement (the "Water Supply Agreement") wherein the City agrees to purchase from the Board, and the Board agrees to sell to the City (subject to certain limitations) the City's entire water requirements for both retail and wholesale customers. In the Water Supply Agreement, the City has agreed to pay to the Board for the water made available to it on a monthly basis (whether or not the City actually withdraws and uses such water) (a) all operation and maintenance expenses of the Board referable to the Supply System, (b) amounts sufficient to pay the principal of and interest on the Series 2011 Bonds, and (c) amounts sufficient to establish and maintain the Reserve Fund (discussed below under "Summary of the Indenture") created in the Indenture. The times and amounts of such payments referable to debt service on the Series 2011 Bonds and the establishment of the Reserve Fund correspond respectively to the deposits required by the Indenture to be made to the Bond Fund (for debt service) and the Reserve Fund. Since the City is obligated under the Water Supply Agreement to pay all operation and maintenance expenses of the Board referable to the Supply System, such expenses are paid directly by the City out of funds on deposit in the City's Water Fund. The Water Supply Agreement terminates on September 30, The Board and the City have operated under agreements substantially identical to the Water Supply Agreement since 1954, and neither the Board nor the City has ever defaulted on its obligations under such prior agreements. As described below under "THE SUPPLY SYSTEM - The Reservoir Project" it is anticipated that, after the issuance of the Series 2011 Bonds, the Board will issue Additional Bonds (the "Completion Bonds") to finance the cost of completing the Reservoir Project, currently estimated to be approximately $14.3 million. In connection with that financing the City will enter into a supplemental water supply agreement with the Board substantially identical to the Water Supply Agreement wherein the City will agree to pay to the Board for water supply all debt service on such Additional Bonds. The obligations of the City to make payments under the Water Supply Agreement do not constitute general obligation debts of the City or a charge on its general fund, and such payments are required to be made solely out of the revenues to be derived by the City from the operation of the Distribution System. Such payments do, however, constitute, under the outstanding indenture of the City securing its existing water revenue indebtedness, an operating expense of the Distribution System, and are, in the provisions of the indenture of the City, required to be made on a monthly basis prior to the monthly payments with respect to debt service on the City's water revenue securities. 7

12 REDEMPTION OF THE OUTSTANDING BONDS Simultaneously with the issuance of the Series 2011 Bonds, the Board and the 1986 Trustee will enter into an Escrow Trust Agreement dated as of June 1, 2011 (the "Escrow Agreement") wherein there is created an Escrow Fund (the "Escrow Fund") for the payment and redemption of the Outstanding Bonds. The Board will deposit cash into the Escrow Fund, out of the proceeds of the Series 2011 Bonds and certain funds held by the 1986 Trustee under the 1986 Indenture, which will be sufficient without any investment thereof (a) to pay all principal and interest maturing with respect to the Series 1998 Bonds on or before July 5, 2011, and to pay the redemption price payable on July 5, 2011, with respect to all the Series 1998 Bonds, and (b) to pay all principal and interest maturing or subject to mandatory redemption with respect to the Series 2002 Bonds on or before September 1, 2011, and to pay the redemption price payable on September 1, 2011, with respect to the balance of the Series 2002 Bonds. DEBT SERVICE SCHEDULE The following table sets forth the principal and interest requirements for the Series 2011 Bonds: Fiscal Year Ended September 30 Principal Interest Total Debt Service 2011 $ 650, $ 650, $ 325,000 2,661, ,986, ,000 2,655, ,000, ,015,000 2,646, ,661, ,050,000 2,616, ,666, ,075,000 2,584, ,659, ,105,000 2,552, ,657, ,135,000 2,521, ,656, ,195,000 2,465, ,660, ,255,000 2,405, ,660, ,290,000 2,366, ,656, ,355,000 2,301, ,656, ,620,000 2,233, ,853, ,700,000 2,152, ,852, ,770,000 2,084, ,854, ,840,000 2,011, ,851, ,935,000 1,919, ,854, ,010,000 1,840, ,850, ,100,000 1,754, ,854, ,190,000 1,662, ,852, ,295,000 1,556, ,851, ,400,000 1,453, ,853, ,515,000 1,339, ,854, ,630,000 1,220, ,850, ,755,000 1,095, ,850, ,890, , ,854, ,025, , ,851, ,170, , ,853, ,330, , ,854, ,495, , ,853, ,670, , ,853, TOTALS $58,485,000 $54,293, $112,778,

13 ESTIMATED SOURCES AND USES OF FUNDS The proceeds to be derived from the sale of the Series 2011 Bonds, together with the funds on deposit under the 1986 Indenture, are expected to be applied substantially as follows: SOURCES: Series 2011 Bonds $58,485, Net Original Issue Premium 181, Transferred from 1986 Indenture Bond Fund 448, Transferred from 1986 Indenture Reserve Fund 558, Transferred from 1986 Indenture Replacement Fund 30, Total Sources: $59,703, USES: Deposit to Construction Fund $50,006, Deposit to Escrow Fund for Outstanding Bonds 4,884, Deposit to Reserve Fund 3,854, Cost of Issuance (including underwriters' discount, legal, fiscal, printing and bond insurance) 957, Total Uses: $59,703, BOND INSURANCE BOND INSURANCE POLICY Concurrently with the issuance of the Series 2011 Bonds, Assured Guaranty Municipal Corp. ("AGM") will issue its Municipal Bond Insurance Policy for the Series 2011 Bonds (the "Policy"). The Policy guarantees the scheduled payment of principal of and interest on the Series 2011 Bonds when due as set forth in the form of the Policy included as an appendix to this Official Statement. The Policy is not covered by any insurance security or guaranty fund established under New York, California, Connecticut or Florida insurance law. ASSURED GUARANTY MUNICIPAL CORP. AGM is a New York domiciled financial guaranty insurance company and a wholly owned subsidiary of Assured Guaranty Municipal Holdings Inc. ("Holdings"). Holdings is an indirect subsidiary of Assured Guaranty Ltd. ("AGL"), a Bermuda-based holding company whose shares are publicly traded and are listed on the New York Stock Exchange under the symbol "AGO". AGL, through its operating subsidiaries, provides credit enhancement products to the U.S. and global public finance, infrastructure and structured finance markets. No shareholder of AGL, Holdings or AGM is liable for the obligations of AGM. AGM s financial strength is rated "AA+" (stable outlook) by Standard and Poor s Ratings Services, a Standard & Poor s Financial Services LLC business ("S&P") and "Aa3" (negative outlook) by Moody s Investors Service, Inc. ("Moody s"). An explanation of the significance of the above ratings may be obtained from the applicable rating agency. The above ratings are not recommendations to buy, sell or hold any security, and such ratings are subject to revision or withdrawal at any time by the rating agencies, including withdrawal initiated at the request of AGM in its sole discretion. Any downward revision or withdrawal of any of the above ratings may have an adverse effect on the market price of any security guaranteed by AGM. AGM does not guarantee the market price of the securities it insures, nor does it guarantee that the ratings on such securities will not be revised or withdrawn. 9

14 Current Financial Strength Ratings. On January 24, 2011, S&P published a Request for Comment: Bond Insurance Criteria (the "Bond Insurance RFC") in which it requested comments on its proposed changes to its bond insurance ratings criteria. In the Bond Insurance RFC, S&P notes that it could lower its financial strength ratings on existing investment-grade bond insurers (including AGM) by one or more rating categories if the proposed bond insurance ratings criteria are adopted, unless those bond insurers (including AGM) raise additional capital or reduce risk. Reference is made to the Bond Insurance RFC, a copy of which is available at for the complete text of S&P s comments. On October 25, 2010, S&P published a Research Update in which it downgraded AGM s counterparty credit and financial strength rating from "AAA" (negative outlook) to "AA+" (stable outlook). Reference is made to the Research Update, a copy of which is available at for the complete text of S&P s comments. On December 18, 2009, Moody s issued a press release stating that it had affirmed the "Aa3" insurance financial strength rating of AGM, with a negative outlook. Reference is made to the press release, a copy of which is available at for the complete text of Moody s comments. AGM. There can be no assurance as to any further ratings action that Moody s or S&P may take with respect to For more information regarding AGM s financial strength ratings and the risks relating thereto, see AGL s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, which was filed by AGL with the Securities and Exchange Commission (the "SEC") on March 1, 2011, and AGL s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011, which was filed by AGL with the SEC on May 10, Capitalization of AGM. At March 31, 2011, AGM s consolidated policyholders surplus and contingency reserves were approximately $3,058,791,206 and its total net unearned premium reserve was approximately $2,285,987,748, in each case, in accordance with statutory accounting principles. Incorporation of Certain Documents by Reference. Portions of the following document filed by AGL with the SEC that relate to AGM are incorporated by reference into this Official Statement and shall be deemed to be a part hereof: (i) the Annual Report on Form 10-K for the fiscal year ended December 31, 2010 (which was filed by AGL with the SEC on March 1, 2011); and (ii) the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011 (which was filed by AGL with the SEC on May 10, 2011). All information relating to AGM included in, or as exhibits to, documents filed by AGL pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, after the filing of the last document referred to above and before the termination of the offering of the Bonds shall be deemed incorporated by reference into this Official Statement and to be a part hereof from the respective dates of filing such documents. Copies of materials incorporated by reference are available over the internet at the SEC s website at at AGL s website at or will be provided upon request to Assured Guaranty Municipal Corp.: 31 West 52nd Street, New York, New York 10019, Attention: Communications Department (telephone (212) ). Any information regarding AGM included herein under the caption "BOND INSURANCE Assured Guaranty Municipal Corp." or included in a document incorporated by reference herein (collectively, the "AGM Information") shall be modified or superseded to the extent that any subsequently included AGM Information (either directly or through incorporation by reference) modifies or supersedes such previously included AGM Information. Any AGM Information so modified or superseded shall not constitute a part of this Official Statement, except as so modified or superseded. 10

15 AGM makes no representation regarding the Bonds or the advisability of investing in the Series 2011 Bonds. In addition, AGM has not independently verified, makes no representation regarding, and does not accept any responsibility for the accuracy or completeness of this Official Statement or any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of the information regarding AGM supplied by AGM and presented under the heading "BOND INSURANCE". THE BOARD GENERAL The Board is a public corporation under the provisions of Act No. 175 adopted at the 1951 Regular Session of the Legislature of Alabama, as amended (now codified as Article 9 of Chapter 50 of Title 11 of the Code of the Alabama of 1975, as amended) (the "Authorizing Act"). The creation of the Board and its certificate of incorporation and amendments thereto, have, as required by the applicable statutes, been consented to by the governing body of the City of Cullman, Alabama (the "City"). Under its certificate of incorporation and Act No. 175, the Board has corporate power to acquire and operate the Supply System and to issue bonds payable from the revenues derived therefrom. In addition to owning and operating the Supply System, the Board owns and operates an electric distribution system serving the City and the surrounding area. The revenues from the electric system are not pledged for payment of the Series 2011 Bonds or any Additional Bonds issued under the Indenture. GOVERNING BODY Control of the Board is vested in a five-member board of directors elected by the governing body of the City for six-year staggered terms. The current members of the Board of Directors of the Board and the date of the end of their respective terms are set forth below: Name End of Term John W. Cook September 30, 2012 Dr. Wayne B. Fuller September 30, 2016 Garlan E. Gudger, Jr. September 30, 2014* Dr. Steven Murphree September 30, 2012 Max A. Townson September 30, 2014* *Under the provisions of the Authorizing Act, the terms of members of the Board of Directors who are also officers of the City expire on the earlier of the expiration date of their term or the date when such board members are no longer officers of the City. Unless they are re-elected as a member of the City Council and Mayor, respectively, the terms of Messrs. Gudger and Townson as officers of the City will expire on October 1, MANAGEMENT The management of the Board's water treatment plant and the maintenance and upkeep of the existing reservoir is under the supervision of David Freemen, Manager, Water Division. Mr. Freeman, age 58, has twentythree years experience in water treatment, including more than ten years as Manager of the Water Division of the Board. He holds an ADEM (Alabama Department of Environmental Management) Grade IV Water Certificate. Mr. Freeman is also responsible for preparing the fiscal year budget for the Board. He is a member of Alabama Rural Water Association Society of Water Professionals, Alabama Water & Pollution Control Association and American Water Works Association. Mr. Freeman is assisted by Alan Davis. Mr. Davis, age 54, has thirty years experience in water treatment and maintenance, with thirteen years as Assistant Manager of the Water Division. He holds an ADEM Grade IV Water Certificate and oversees water quality testing. He is a member of Alabama Rural Water Association Society of Water Professionals, Alabama Water & Pollution Control Association and American Water Works Association. 11

16 The finance and accounting responsibilities of the Board are managed by the Cullman City Clerk, Ruth W. Rose. Mrs. Rose, age 56, has been with the City of Cullman since 1987 and became the City Clerk in She was previously the head of Human Resources for the City. Mrs. Rose is assisted by the City's Accountant, Wesley Moore. Mr. Moore, age 27, has been with the City since From 2002 to 2006, he served as an Associate for the Wal-Mart Distribution Center in Cullman. He has a B.S. in Accounting from Athens State University and a M.B.A with Accounting Concentration from the University of North Alabama. The payroll and benefits expense of the Board is disbursed by the Electric Division of the Board and billed to the City. All operation and maintenance expenses of the Board are paid by the City Clerk out of the City's water fund as a component of the cost of water under the Water Supply Agreement between the City and the Board. DEBT LIMITATION The Board has full power under the applicable statutes and its certificate of incorporation to incur indebtedness in accordance with the provisions of said Act No. 175 without limitation as to aggregate principal amount. The Board is not subject to any general constitutional or statutory debt limitation. THE SUPPLY SYSTEM EXISTING SUPPLY SYSTEM The Supply System consists of (i) a 543 acre reservoir, (ii) a 24-million gallon per day (MGD) water filtration plant, (iii) three 2 MG clear wells, (iv) a sludge removal system, (v) raw water and finished water pump stations, each with a 24 MGD capability and (vi) a chlorine containment building. The available impoundments are capable of delivering 27 MGD. For water delivered by the Board to the City, the following table illustrates for a five fiscal-year period (i) total gallons pumped, (ii) average daily demand and (iii) average hours of pumping at the filtration plant: Fiscal Year Ended September 30 Total Gallons Pumped (000's) Average Daily Gallons Pumped Average Hours Pumped/Day ,684,813 10,090, ,626,554 9,935, ,348,831 9,149, ,266,262 8,948, ,421,861 9,382, RESERVOIR PROJECT The "Reservoir Project" consists of a new, 135-foot high, 2000-foot long dam and a 650-acre reservoir capable of supply 32-million gallons of water per day for transmission to the Board's water treatment plant ("WTP"). The Reservoir Project will meet the emergency and future water supply needs of the seven (7) water systems that provide water in Cullman County and portions of the four surrounding counties. The dam will serve a regional population of more than 100,000 people and meet the demand for residential, commercial, industrial and agricultural uses, serving the water needs of the area for the next years. The Reservoir Project includes an estimated $64.3 million in planned capital improvements. Construction is projected to be completed in three (3) stages over the next five (5) years. Phase I of the Reservoir Project will include (a) land acquisition, some relocations of roads, gas and water lines, and two (2) main power structures; (b) the construction of the water diversion tunnel; (c) the excavation of the borrow areas; and (d) the preparation of the dam foundation. Phase II includes construction of the main dam, spillway, intake structure and intake tower and the remaining relocations of roads, water, gas and electrical lines. Phase III includes construction of the 7-mile-long raw 12

17 water pipeline to the WTP. In 1999, the U.S. Army Corps of Engineers ("USACE") completed 95% of the design of Phase I for the project. The USACE has also completed preliminary plans for Phase II and Phase III of the Reservoir Project. The USACE has transferred the responsibilities of the Engineer of Record to the Board's Consulting Engineer, CH2M Hill, to fully complete the Phase I design and to start construction of Phase I of the Reservoir Project. The surveys and appraisals for the first twenty-two (22) tracts of land necessary to start construction of the dam are essentially complete, and the Board expects to begin making offers to property owners in the near future. It is not expected that the land acquisition will delay the completion of the Reservoir Project. Phase I construction of the dam foundation preparation must be finished before the Phase II improvements and the main dam can be started. The improvements associated with Phase III and the new raw water line can occur simultaneous to Phase I and are currently scheduled to maximize coordination and use of resources. At this time the schedule is to complete the design for Phase I in June 2011 and begin construction of Phase I in October 2011 with completion expected by December The design for the Phase II work will begin just after the construction begins for Phase I and will continue for approximately fifteen (15) months. Construction of the Phase II work is expected to start in June 2013 with completion expected by April The Phase III design is scheduled to begin in August 2011 with construction starting in June 2012 and ending approximately April It is expected at this time that the work for Phase I, Phase III, and a significant portion of the Phase II improvements will be completed within three (3) years with a reasonable expectation that approximately $50 million will be spent from June 2011 to June This initial $50 million expenditure will be funded from the proceeds of the Series 2011 Bonds. The Phase II improvements not funded from the Series 2011 Bonds will be funded from the proceeds of the Completion Bonds. In July of 1998, the Board, the City and the six Wholesale Customers (see "THE CITY'S DISTRIBUTION SYSTEM - General Information - Distribution System: Wholesale Customers" below) entered into a Reservoir Financing Agreement (the "Reservoir Financing Agreement") recognizing the need for the Reservoir Project and providing for the financing thereof by the Board. The Reservoir Financing Agreement further provided that upon completion of the Reservoir Project, the title thereto would be conveyed to a separate water reservoir supply district (the "District") governed by a nine (9) person board of directors, of which six (6) shall be appointed by Cullman County and three (3) shall be appointed by the City, and of the six (6) appointed by the County, three shall be residents of portions of the County not served by the County's water distribution system. The Wholesale Contracts (see "THE CITY'S DISTRIBUTION SYSTEM - General Information - Distribution System: Wholesale Customers") effectively amend certain provisions of the Reservoir Financing Agreement, including the requirement that the Reservoir Project be conveyed to the District upon the completion thereof. Pursuant to the Wholesale Contracts, the Reservoir Project shall not be conveyed to the District until sixty (60) days following payment in full of all indebtedness of the Board. THE CITY'S DISTRIBUTION SYSTEM GENERAL INFORMATION As noted above, the City owns and operates directly the Distribution System which serves retail customers in and near the corporate limits of the City and certain wholesale customers, and which purchases its entire water supply from the Board. The water purchases in past fiscal years have been pursuant to the water supply agreement in effect prior to the issuance of the Series 2011 Bonds. Future water purchases will be pursuant to the Water Supply Agreement. See "THE CITY-BOARD WATER SUPPLY AGREEMENT" above. Average daily demand of water during fiscal year 2010 was approximately 9,382,405 gallons per day, and peak daily demand was approximately 17,001,639 gallons. Present storage capacity is 14,000,000 elevated gallons and 6,000,000 gallons in plant clearwells. Water is distributed through approximately 250 miles of two-inch to 30-inch mains. 13

18 Distribution System: Retail Customers. The average number of the City's retail water customers was as follows for the fiscal years indicated: Fiscal Year Ended September 30 Customers Total Volume (000's Gallons) Annual Sales , ,781 $4,089, , ,417 4,398, , ,124 4,262, , ,086 4,127, , ,250 4,554,820 Distribution System: Wholesale Customers. The City sells water wholesale to six wholesale customers (the "Wholesale Customers"), including Cullman County and certain other rural water systems. The City has written water purchase agreements with a term extending beyond the final maturity of the Series 2011 Bonds with Cullman County, East Cullman Water System, Inc., Johnson's Crossing Water System and Walter Water Authority. The City has a written water purchase agreement with VAW Water Systems, Inc. which expires on November 1, 2039, and one with The Water Works and Sewer Board of the City of Hanceville which expires on July 26, The City plans to negotiate extensions of the contracts with VAW and Hanceville. The six Wholesale Customers, the charges paid to the City by each during the fiscal year ended September 30, 2010, and the percentage of annual sales each represented for such fiscal year are as follows: Wholesale Customers Date of Expiration of Current Contract Annual Sales Percentage of Total City Water Revenues Percentage of Sales to Wholesale Customers Cullman County 9/30/2046 $3,091, % 65.04% East Cullman Water System, Inc. 9/30/ , VAW Water Systems, Inc. 11/01/ , Johnson s Crossing Water System 9/30/ , Walter Water Authority 9/30/ , The Water Works and Sewer Board of the City of Hanceville 7/26/ , below: The Wholesale Customers have accounted for water sales by the City, on a percentage basis, as shown Fiscal Year Ending September 30 Percentage of Total City Water Sales (In Gallons) Percentage of Total City Water Revenues % 45.53% The largest retail customers of the City's Distribution System for the most recent fiscal year were as follows: 14

19 Distribution System Largest Retail Customers Fiscal Year 2010 Highest Water Usage (gallons) Water Revenues Cullman Regional Medical Center 27,356,800 $118, City of Cullman Parks & Recreation 18,939,000 94, USA Healthcare 17,126,100 78, Rehau, Incorporated 15,612,900 67, Cullman County Commission* 10,942,900 50, Wal Mart Stores 8,220,400 38, Cooper Industries 7,629,600 34, RusCorr 7,574,500 34, American Trim 5,651,100 25, Zippy Car Wash 4,908,100 22, Totals 123,961,400 $564, *Offices of the County served by the Distribution System. Not included in wholesale sales to the County for resale through the County's water system. SUMMARY OF WHOLESALE CONTRACTS Each of the Wholesale Customers (other than VAW Water System, Inc.) is a party to a Wholesale Contract providing for the purchase by such Wholesale Customer of such quantity of water as such Wholesale Customer may require for resale through the Wholesale Customer's system to all of its customers, with a maximum number of gallons per month that the City is required to provide to such customer. The contract with VAW Water System, Inc. ("VAW") provides for the purchase by VAW of not less than 150,000,000 gallons of water per year. VAW has the right to purchase water from sources other than the City and currently purchases approximately fifty percent (50%) of its water requirements from the City. The term of each of the Wholesale Contracts other than the contracts with The Water Works and Sewer Board of the City of Hanceville ("Hanceville") and VAW extend beyond the final maturity of the Series 2011 Bonds. The termination date for the Hanceville contract is July 26, 2012, and the termination date for the VAW contract is November 1, The City plans to negotiate with VAW and Hanceville for extensions of their Wholesale Contracts. It is anticipated that both extensions will allow those Wholesale Customers to purchase water from sources other than the City. Under the provisions of the Wholesale Contracts, the basic sale price of water delivered to the Wholesale Customers thereunder (the "Base Rate") is adjusted annually as follows: (a) Prior to March 1 of each fiscal year (October 1 to September 30) the City shall file with each Wholesale Customer a notice that (i) the City has determined that the Base Rate is to be adjusted to an amount specified in the said notice, and (ii) a certificate by an independent engineer setting forth the following: (1) The number of thousands of gallons of water delivered by the Board to the City during the then preceding fiscal year; (2) The total amount of the operation and maintenance expenses of the City's Distribution System during the then preceding fiscal year; 15

20 (3) The amount payable by the City on certain water revenue indebtedness of the City ("Distribution System Debt Service") during the then current fiscal year; (4) The quotient obtained by dividing the sum of (A) the operation and maintenance expenses referred to in the foregoing clause (2), and (B) the Distribution System Debt Service referred to in the foregoing clause (3) by the figure in the foregoing clause (1) (the said figure constituting the adjusted rate per thousand gallons of water and being sometimes herein called the "Adjusted Base Rate"); and (5) A statement by the independent engineer making the report that it is of the opinion that the Adjusted Base Rate does not exceed the rate considered by the said independent engineer to be reasonable in the circumstances. (b) The figure resulting, in the foregoing clause (4), from the application of the foregoing formula shall, upon the filing of the said notice and engineering report, become the Base Rate per thousand gallons of water furnished under the Wholesale Contracts during the period beginning with the first day of the fiscal year during which the notice and independent engineer's certificate are filed with the Wholesale Customers as provided above, and continuing until there shall be another adjustment of rate pursuant to the provisions of the Water Purchase Agreements. The Base Rate shall be applied retroactively to all purchases of water pursuant to the Wholesale Contracts since the beginning of the fiscal year during which such adjustment is made. The source of payment of the obligation of each Wholesale Purchaser under the Wholesale Contracts is limited to, and constitutes a charge on, the revenues derived by such Wholesale Customer from the operation of the water system operated by such Wholesale Customer. The payments made by each of the Wholesale Customers under the Water Purchase Agreements constitute an operating expense of that Wholesale Customer's water system. Neither party to each Wholesale Contract has the right to assign its interest in such Wholesale Contract without the written consent of the other party; provided that each party to a Wholesale Contract has the right to assign its interest in such Wholesale Contract to a trustee as security for any bonds or other securities that may be issued by such party. DISTRIBUTION SYSTEM RATES Rate Making Authority. The City has sole jurisdiction to set the rates for water service to the City s retail customers. The rates charged by the City for the sale of water to the Wholesale Customers are determined by the written water purchase agreements (the "Wholesale Contracts"). See "Summary of Wholesale Contracts" below. These rates are not subject to regulation by any Federal, State of Alabama or similar agency, but are subject to judicial review as to reasonableness. 16

21 2011: Current Retail Rate Schedule. The following retail water service rates became effective on January 1, Residential Rate Inside City/Commercial Rate Inside City/Industrial Rate Inside City Minimum Bill Over 3,000 gallons $ for 3,000 gallons 4.85 per 1,000 gallons Residential Rate Outside City/Commercial Rate Outside City/Industrial Rate Outside City Minimum Bill Over 3,000 gallons $25.60 for 3,000 gallons 5.90 per 1,000 gallons 2012: Future Retail Rate Schedule. The following retail water service rates will become effective on January 1, Residential Rate Inside City/Commercial Rate Inside City/Industrial Rate Inside City Minimum Bill Over 3,000 gallons $ for 3,000 gallons 5.35 per 1,000 gallons Residential Rate Outside City/Commercial Rate Outside City/Industrial Rate Outside City Minimum Bill Over 3,000 gallons $28.10 for 3,000 gallons 6.50 per 1,000 gallons Historical Retail Rates. The history of retail water service rates in effect prior to January 1, 2011, is as follows: Gallons 01/01/ /01/ /01/ /01/2010 Inside City: First 3,000 $15.65 for 3,000 gallons $16.45 for 3,000 gallons $17.31 for 3,000 gallons $19.00 for 3,000 gallons Over 3, per 1,000 gallons 3.80 per 1,000 gallons 4.00 per 1,000 gallons 4.40 per 1,000 gallons Outside City: First 3,000 $19.20 for 3,000 gallons $20.15 for 3,000 gallons $21.21 for 3,000 gallons $23.30 for 3,000 gallons Over 3, per 1,000 gallons 4.60 per 1,000 gallons 4.84 per 1,000 gallons 5.35 per 1,000 gallons Wholesale Rates. The Wholesale Contracts provide for annual adjustments of the wholesale water rate, which is standard as to all Wholesale Customers. The base rate for Wholesale Customers is based upon the Wholesale Customers' pro rata share of (a) certain of the City's costs of operation and maintenance of the Distribution System (including the costs of water paid to the Board, which in turn includes the operating costs of the Supply System and debt service on the Board's bonds) and (b) a portion of the debt service on indebtedness of the City referable to portions of the Distribution System that serve the wholesale operations of the City. Each Wholesale Customer's pro rata share is the percentage of the water purchased by the Wholesale Customers from the City as compared to the total water purchased by the City from the Board under the Water Supply Agreement. The current 17

22 wholesale base rate is $1.50/1000 gallons (to be adjusted no later than March 1 of each year based on prior fiscal year expenses). TORNADO DAMAGE A deadly tornado storm swept through six (6) southern states, including Alabama, on April 27, 2011, resulting in hundreds of deaths and inflicting millions of dollars in damage. The major impact in the City of Cullman was in the historical district in the downtown area of the City. Out of a total of 9,345 homes in the City, an estimated 110 were destroyed and 757 were damaged, but are inhabitable. In addition, approximately 94 business locations incurred damage, primarily in the downtown area. Out of a total of 1,649 business locations in the City, 25 were destroyed, and 69 were damaged but remain operational. The larger businesses in the City suffered only moderate, if any, damages. There was no infrastructure damage to either the Supply System or the Distribution System, and both systems continued to operate both during and after the storm. As a result of the loss of electrical power in the City, the Board and the City used back-up generators powered by diesel fuel to keep the Supply System and the Distribution System operating. The expenditures by the City for storm debris removal and other extraordinary storm-related purposes have been made (and will continue to be made) from the City's General Fund, and will not have a direct impact on the City's Water Fund. No major water customers of the Distribution System experienced any major damage in the storm, and the Board does not expect the damages resulting from the storm to materially adversely affect the financial condition of the City's Water Fund or cause a delay in the Reservoir Project. The City has more than sufficient reserves in its Water Fund to offset any temporary decline in revenues from the Distribution System that might result from the tornado storm. RESULTS OF OPERATIONS This section of the Official Statement presents certain historical operating data and financial information concerning the Supply System and the Distribution System. As noted above, all of the Board s revenues from the Supply System (other than investment income) have the City as their source. SUMMARY OF REVENUES AND EXPENSES OF SUPPLY SYSTEM The following data on the summary of revenues and expenses of the Board s Water Division (representing the Supply System) for the fiscal years ended September 30, 2006 through 2010, is derived from the audited financial statements of the Board. This summary should be read in conjunction with such financial statements and related notes of the Board. 18

23 SUMMARY OF REVENUES AND EXPENSES OF THE SUPPLY SYSTEM Fiscal Year Ending September Operating Revenue: Water Sales $3,237,676 (1) $4,449,279 $3,766,439 $3,576,883 $3,529,216 Miscellaneous Total Operating Revenue $3,238,356 $4,449,879 $3,767,039 $3,577,483 $3,529,884 Operating Expenses: Salaries and wages $707,727 $663,537 $701,267 $655,289 $670,543 Payroll taxes 53,660 50,297 53,241 49,845 50,890 Employees retirement 92,899 92, ,872 94,580 82,070 Employees life and health insurance 142, , , , ,913 Employees compensated absences 28,220 86,747 10,768 4,066 12,846 Uniforms 4,720 4,206 4,488 4,895 5,028 Telephone 6,067 5,408 4,870 4,528 5,050 Utilities 782, , , , ,876 Office supplies and expense 19,800 18,915 25,139 18,602 19,388 Professional services 17,284 12,245 13,160 10,140 12,065 Engineering Services 19,850 40, ,821 32,628 Other Contracted Services 15,435 21,590 41,633 88,021 23,746 Testing fees 10,683 3,773 4,951 21,314 21,707 Insurance 48,813 49,195 39,196 36,749 35,891 Travel and training 12,699 7,575 7,298 13,165 9,660 Dues and subscriptions 2,410 3, ,625 Permits and licenses ,695 Automotive repairs and maintenance 7,737 3,059 1,004 1,387 2,747 Automotive gasoline and oil 10,227 7,105 12,137 9,525 9,852 Small tools and equipment 2,006 1,027 4,488 4,895 6,104 General maintenance 4,044 3,524 4, ,502 Chemicals and other supplies 490, , , , ,948 Lab Supplies 9,771 4,407 4,628 4,846 5,740 Equipment rental 350 1, Advertisements Permits and licenses -0-2, ,695 Miscellaneous 6,446 7,979 2,295 1,758 2,681 Repairs and maint. - structure 96,880 20,312 53,971 24,399 33,843 Repairs and maint. - machinery 33,325 61,865 95,437 43,772 25,587 Repairs and maint. - other equipment 3,022 13,596 19,230 14,347 8,937 Director fees and expenses 29,318 3,403 12,650 13,800 13,800 Operating Expenses $2,659,295 $2,611,184 $2,403,953 $2,390,968 $2,243,223 Depreciation 517, , , , ,523 Total Operating Expenses $3,176,744 $3,044,642 $2,861,781 $2,836,927 $2,816,746 Operating Income $61,612 $1,405,237 $905,258 $740,556 $713,138 Other Income (expenses): Interest earned $695 $2,682 $38,446 $93,968 $71,578 Sale of assets -0-1, , Interest expense (211,114) (279,422) (173,977) (193,861) (208,587) Amortization of debt discount and exp. (16,498) (30,169) (33,205) (33,206) (33,206) Trustee fees (3,385) (6,655) (9,925) (9,925) (9,925) Total Other Income (Expenses) $(230,302) $ (312,264) $(178,661) $ (50,024) $ (180,017) Net Income $(168,690) $1,092,973 $ 726,597 $690,532 $ 533,121 (1) The decline from FY 2009 to FY 2010 in the payments from the City to the Board do not reflect a decline in water sales, but rather an increase for FY 2009 in operation and maintenance expenses and the retirement in FY 2099 of an outstanding bond issue of the Board. See "Summary of Revenues and Expenses of the City's Distribution System" below. 19

24 SUMMARY OF REVENUES AND EXPENSES OF THE CITY'S DISTRIBUTION SYSTEM The following summary of revenues and expenses of the City s Water Department (representing the Distribution System) for the fiscal years ended September 30, 2006 through 2010, is derived from the audited financial statements of the City. This summary should be read in conjunction with such financial statements and related notes. 20

25 SUMMARY OF REVENUES AND EXPENSES OF THE CITY'S DISTRIBUTION SYSTEM Fiscal Year Ending September Operating Revenue: Water Sales $9,309,060 $8,095,070 $7,726,268 $7,964,160 $7,535,676 Charges for Service Connection 60,730 75, ,955 97,335 78,365 Service Charges 73,482 66,915 60,083 34,080 38,975 Miscellaneous 19,770 15,753 36,852 30,667 14,452 Total Operating Revenue $9,463,042 $8,253,438 $7,982,158 $8,126,242 $7,667,468 Operating Expenses: Salaries and wages $551,188 $541,349 $491,073 $441,101 $450,798 Payroll taxes 42,688 41,555 35,810 36,932 33,355 Employees retirement 51,371 51,833 45,220 39,576 34,342 Employees life and health insurance 98,692 90,717 78,543 72,026 68,706 Employees Compensated absences 237 2,735 5,772 1,714 (5,641) Telephone 11,612 11,388 11,452 10,150 12,574 Utilities 21,143 21,248 19,564 17,877 21,128 Billing, accounting and collection fees 110,659 52,953 62,799 59,634 59,796 Office supplies and expense 25,161 22,813 20,020 5,092 5,826 Professional services 16,933 17,090 19,727 14,195 9,976 Engineering Services 10,020 21,955 30,212 61, ,385 Other Contracted Services 7,292 8,949 21,757 4,303 6,151 Testing fees 4,668 5,133 13,130 2,212 1,429 Travel and training 2,153 1,672 2,136 3,327 1,946 Dues and subscriptions 1,440 1,753 1,613 1,557 1,454 Permits and licenses 2, ,955 Automotive gasoline and oil 39,903 29,336 50,479 34,232 34,619 Automotive tires and tubes 4,787 2,947 4,432 3,783 4,994 Uniforms 5,484 5,034 5,017 5,520 6,104 Small tools and equipment 4,772 7,902 18,301 5, Insurance 49,621 47,804 45,861 41,101 38,775 Chemicals and other supplies 3,433 2,421 3,862 5,128 3,171 Legal advertisements ,105 Credit card fees 3, Miscellaneous 2,265 3,917 1,607 1,848 1,332 Repairs and maint. - structure ,543 3,139 2,422 Repairs and maint. - machinery 28,266 19,276 13,132 18,966 23,967 Repairs and maint. - other equipment 6,130 8,129 6,237 4,188 25,111 Repairs and maint. - system 163, , , , ,984 Operating Expenses $1,270,444 $1,282,468 $1,322,962 $1,396,476 $1,398,464 Cost of Purchased Water 3,237,676 4,449,279 3,766,439 3,576,883 3,529,216 Depreciation 727, , , , ,400 Total Operating Expenses $5,235,434 $6,380,879 $5,680,928 $5,505,834 $5,466,080 Operating Income $4,227,608 $1,872,559 $2,301,230 $2,620,408 $2,201,388 Other Income (expenses): Interest earned $59,715 $73,785 $307,405 $416,386 $161,521 Sale of assets -0-1, ,890 1,083 Interest expense (450,001) (540,108) (489,453) (519,721) (519,646) Amortization of debt discount and exp. (23,486) (23,486) (23,486) (23,486) (23,486) Trustee fees (3,180) (3,180) (3,180) (3,180) (3,180) Total Other Income (Expenses) $(416,952) $(491,163) $(208,714) $(128,111) $(383,708) Net Income $3,810,656 $1,381,396 $2,092,516 $2,492,297 $1,817,680 21

26 UNAUDITED SUMMARY OF REVENUES AND EXPENSES OF THE CITY'S DISTRIBUTION SYSTEM THROUGH MARCH 31, 2011 The following summary of revenues and expenses of the City s Water Department (representing the Distribution System) for the six-month period ended March 31, 2011, compared to the same period in Fiscal Year 2010, together with budget for Fiscal Year 2011, is derived from the City's unaudited financial statements: City of Cullman - Water Department March 31, 2011 (Unaudited) Budget 2011 YTD 2010 YTD Operating Revenues Operating Revenues $ 224, $ 109, $ 101, Charges for Services 7,700, ,984, ,136, Total Operating Revenues $7,924, $4,094, $4,238, Operating Expenditures Salaries $ 634, $ 304, $ 271, Payroll Taxes & Benefits 216, , , Professional Services 169, , , Repair & Maintenance 143, , , General Insurance 36, , , Other Services 36, , , Supplies 16, , , Fuels 43, , , Repair Materials 175, , , Utilities 23, , , Other Fees 38, , , Water Purchases 3,443, ,631, ,582, Equipment Purchases Total Operating Expenditures $4,978, $2,324, $2,209, Operating Gain or (Loss) $2,945, $1,769, $2,028, ECONOMIC AND DEMOGRAPHIC INFORMATION For certain economic and demographic information with respect to the City and the County, see Appendix A. 22

27 EMPLOYEE RETIREMENT PLAN Employees of the Board participate in the Employees' Retirement Systems maintained by the State of Alabama (the "Employees' System"). The present cost to the Board, based upon the most recent actuarial valuation (as of September 30, 2008) is 13.54% of payroll, which consists of the following: Normal Contribution Rate Pre-Retirement Death Benefit Rate Administrative Expense Rate Accrued Liability Rate Total 4.47% of payroll 0.15% of payroll 0.18% of payroll (8.74%) of payroll 13.54% of payroll The Employees' System does not undertake to fund the retirement plans of participating local governments and acts only in an administrative capacity, and then only upon the election of local governments. The statute permitting such election provides that "the retirement system shall not be liable for the payment of any pensions or other benefits on account of the employees or pensioners of any employers under this section, for which reserves have not been previously created from funds contributed by such employer or its employees for such benefits." The statute further provides that the agreement of the Board to contribute to the Employees' System on account of its employees is irrevocable, but should it become financially unable to make normal and accrued liability contributions, the Board would be deemed to be in default under the Employees' System. For a more complete discussion of the Board's retirement obligations with respect to its employees, see Note H in Appendix C to this Official Statement. For a description of the cost of Postemployment Benefits, see Note I in Appendix C. TAX EXEMPTION GENERAL Pursuant to the provisions of the Internal Revenue Code of 1986, as amended (the "Code"), the exclusion of the interest income on the Series 2011 Bonds from gross income of the recipients thereof for Federal income tax purposes is dependent upon the continued compliance by the Board with certain provisions of the Code subsequent to the issuance of the Series 2011 Bonds, including certain requirements relating to the use and expenditure of the proceeds of the Series 2011 Bonds, restrictions on the investment of proceeds earned prior to expenditure, and the requirement that certain earnings be rebated to the United States of America. In the Indenture, the Board has made certain covenants (the "Compliance Covenants") to the effect that it will comply with all conditions to and requirements imposed by the Code for the exclusion from gross income of the recipients thereof for Federal income tax purposes of the interest income on the Series 2011 Bonds. Failure to comply with the Compliance Covenants may result in the interest income on the Series 2011 Bonds being included in the gross income of the recipients thereof for Federal income tax purposes from the date of issuance of the Series 2011 Bonds. Hand Arendall LLC, bond counsel, is of the opinion that, under the Code, as presently construed and administered, and assuming compliance by the Board with the Compliance Covenants the interest income on the Series 2011 Bonds will be excludable from gross income of the recipients thereof for federal income tax purposes pursuant to the provisions of Section 103 of the Code and will not constitute an item of tax preference for the purpose of computing the liability of individuals and corporations for the alternative minimum tax imposed by Section 55 of the Code. Bond Counsel will express no opinion with respect to the Federal tax consequences to the recipients of the interest income on the Series 2011 Bonds under any provision of the Code not referred to above. Bond Counsel is of the opinion that the interest income on the Series 2011 Bonds is exempt from present Alabama income taxation. 23

28 CERTAIN COLLATERAL FEDERAL TAX CONSEQUENCES The following is a brief discussion of certain collateral Federal income tax matters with respect to the Series 2011 Bonds. It does not purport to deal with all aspects of Federal taxation that may be relevant to a particular owner of a Bond. Prospective investors, particularly those who may be subject to special rules, are advised to consult their own tax advisors regarding the Federal tax consequences of owning and disposing of the Series 2011 Bonds. Section 265 of the Code provides that, as a general rule, banks, thrifts, and other financial institutions may not deduct that portion of their interest expense that is allocable to tax-exempt obligations acquired after August 7, 1986, including the Series 2011 Bonds. Prospective owners of the Series 2011 Bonds should be aware that the ownership of such obligations may result in collateral Federal income tax consequences to various categories of persons, such as corporations (including S corporations and foreign corporations), financial institutions, property and casualty and life insurance companies, individual recipients of Social Security and railroad retirement benefits, individuals otherwise eligible for the earned income tax credit, and taxpayers deemed to have incurred or continued indebtedness to purchase or carry obligations the interest on which is not included in gross income for Federal income tax purposes. Interest on the Series 2011 Bonds may be taken into account in determining the tax liability of foreign corporations subject to the branch profits tax imposed by Section 884 of the Code. ORIGINAL ISSUE DISCOUNT The initial public offering price to be paid for certain of the Series 2011 Bonds (the "Original Issue Discount Bonds") is less than the principal amount thereof. Under existing law, the difference between (i) the amount payable at the maturity of each Original Issue Discount Bond, and (ii) the initial offering price to the public of such Original Issue Discount Bond constitutes original issue discount with respect to such Original Issue Discount Bond in the hands of any owner who has purchased such Original Issue Discount Bond in the initial public offering of the Series 2011 Bonds. Such initial owner is entitled to exclude from gross income (as defined in Section 61 of the Code) an amount of income with respect to such Original Issue Discount Bond equal to that portion of the amount of such original issue discount allocable to the period that such Original Issue Discount Bond continues to be owned by such owner. In the event of the redemption, sale or other taxable disposition of such Original Issue Discount Bond prior to stated maturity, however, the amount realized by such owner in excess of the basis of such Original Issue Discount Bond in the hands of such owner (adjusted upward by the portion of the original issue discount allocable to the period for which such Original Issue Discount Bond was held by such initial owner) is includable in gross income. Under existing law, the original issue discount on each Original Issue Discount Bond is accrued daily to the stated maturity thereof (in amounts calculated as described below for each six-month period ending on the date before the semiannual anniversary dates of the Series 2011 Bonds and ratably within each such six-month period) and the accrued amount is added to an initial owner's basis for such Original Issue Discount Bond for purposes of determining the amount of gain or loss recognized by such owner upon the redemption, sale or other taxable disposition thereof. The amount (if any) to be added to basis for each accrual period is equal to (a) the sum of the issue price and the amount of original issue discount accrued in prior periods (if any) multiplied by the yield to maturity (determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period) less (b) the amounts payable as current interest during such accrual period on such Series 2011 Bonds. The federal income tax consequences of the purchase, ownership, redemption, sale or other disposition of Original Issue Discount Bonds which are not purchased in the initial offering at the initial offering price may be determined according to rules which differ from those described above. All owners of Original Issue Discount Bonds should consult their own tax advisors with respect to the determination for federal, state and local income tax 24

29 purposes of interest accrued upon redemption, sale or other disposition of such Original Issue Discount Bonds and with respect to the federal, state, local and foreign tax consequences of the purchase, ownership, redemption, sale, gift or other disposition of such Original Issue Discount Bonds. ORIGINAL ISSUE PREMIUM The initial public offering price to be paid for certain of the Series 2011 Bonds (the "Original Issue Premium Bonds") is greater than the principal amount thereof. Under existing law, any owner who has purchased an Original Issue Premium Bond in the initial public offering of the Series 2011 Bonds is required to reduce his basis in such Original Issue Premium Bond by the amount of premium allocable to periods during which he holds such Original Issue Premium Bond, and the amount of premium allocable to each accrual period will be applied to reduce the amount of interest received by the owner during each such period. All owners of Original Issue Premium Bonds should consult their own tax advisors with respect to the determination for federal, state and local income tax purposes of interest accrued upon redemption, sale or other disposition of such Original Issue Premium Bond and with respect to the federal, state, local and foreign tax consequences of the purchase, ownership, redemption, sale, gift or other disposition of such Original Issue Premium Bond. RATINGS Moody s Investors Service, Inc. ("Moody's") and Standard & Poor s Ratings Service ("S&P") (each a "Rating Agency") are expected to assign ratings of "Aa3" (negative outlook) and "AA+" (stable outlook), respectively, to the Series 2011 Bonds with the understanding that upon delivery of the Series 2011 Bonds, a policy insuring payment when due of the principal and interest on the Series 2011 Bonds will be issued by AGM. Moody's and S&P have also given the Series 2011 Bonds underlying ratings of "Aa3" and "A", respectively. Any definitive explanation of the significance of any such rating may be obtained only from the appropriate Rating Agency. There is no assurance that any such rating will remain in effect for any given period of time or that any such rating will not be lowered or withdrawn entirely if, in the judgment of the appropriate Rating Agency, circumstances should warrant such action. Any such downward revision or withdrawal of any rating assigned to the Series 2011 Bonds could have an adverse effect on their market price. FINANCIAL STATEMENTS The financial statements and selected financial data of the Board's water division and the City's water department included in this Official Statement as Appendices C and D have been examined by Fricke, Sweatmon & Russell, P.C., Cullman, Alabama, independent certified public accountants, as set forth in their reports appearing in Appendices C and D, and are included in reliance upon such reports and upon the authority of such independent certified public accountants as experts in auditing and accounting. UNDERWRITING The Series 2011 Bonds are being purchased by Raymond James & Associates, Inc., The Frazer Lanier Company Incorporated and Merchant Capital, L.L.C. (the "Underwriters") at a price equal to $58,352, (reflecting an underwriting discount of $313, and a net original issue premium of $181,411.70). The Underwriters intend to offer the Series 2011 Bonds to the public at the prices or yields stated on the inside of the cover page hereof. Such initial offering prices may be changed from time to time by the Underwriters. The Board has been advised that the Underwriters may offer the Series 2011 Bonds to certain dealers and others at prices lower than the public offering prices. LITIGATION AND CONTINGENT LIABILITIES There is no litigation pending against the Board, nor to the knowledge of its officers or counsel, threatened, which in any way questions or affects the validity of the Series 2011 Bonds, or any proceedings or transactions relating to their issuance, sale and delivery. 25

30 While the Board is a defendant in several lawsuits and while it is involved in other pending litigation, it does not believe that such pending lawsuits and litigation (taken as a whole) will have a materially adverse effect upon its financial condition. CONTINUING DISCLOSURE AGREEMENT The Board and the City have entered into a Continuing Disclosure Agreement for the benefit of holders of the Series 2011 Bonds wherein the Board and the City have agreed to provide annually certain financial information and operating data relating to the Board and the City (the "Annual Reports"), and in the case of the Board, to provide notices of the occurrence of certain enumerated events. The Annual Reports will be filed by the Board and the City with the Municipal Securities Rulemaking Board ) through its Electronic Municipal Market Access ("EMMA") website at and with any other Nationally Recognized Municipal Securities Information Repository designated by the United States Securities and Exchange Commission for the purposes of Rule 15c2-12(b)(5) of the Securities and Exchange Commission (the "Rule"). The specific nature of the information to be contained in the Annual Reports or the notices of material events and other provisions of the Continuing Disclosure Agreement are summarized in "Appendix G - Summary of Continuing Disclosure Agreement." The Continuing Disclosure Agreement has been entered into in order to assist the Underwriters in complying with Rule. The Board and the City have previously entered into continuing disclosure agreements (the "Prior Agreements") for the benefit of the holders of the Outstanding Bonds which are similar to the Continuing Disclosure Agreement for the benefit of the holders of the Series 2011 Bonds. The Board and the City are in compliance with their respective obligations under the Prior Agreements. THE FEDERAL BANKRUPTCY ACT The rights and remedies of the holders of the Series 2011 Bonds are subject to the provisions of Chapter 9 of Title 11 of the United States Code ("the Bankruptcy Act"). Chapter 9 permits, under certain specified circumstances (but only after authorization by the legislature or by a governmental officer or organization empowered by state law to give such authorization), a political subdivision of a state -- such as the Board -- to file a petition for relief in the Federal Bankruptcy Court if it is insolvent or unable to meet its debts as they mature and desires to effect a plan to adjust its debts. Under the statute, the filing of such a petition operates, with certain limited exceptions, as an "automatic" stay of the commencement or the continuation of any judicial or other proceedings against the petitioner, its property, or any officer or inhabitant thereof and as an "automatic" stay of any act or proceeding which seeks to enforce a lien on the property of the petitioner or a lien on any taxes or assessments due to the petitioner. Chapter 9 also permits a political subdivision that files a petition under the Bankruptcy Act to issue, with the approval of the Court, certificates of indebtedness having priority of payment over pre-existing obligations. Any political subdivision filing a petition for relief under Chapter 9 must in due course file a plan for the adjustment of its debts, and such plan may include provisions modifying or altering the rights of creditors generally, or any class of them, secured or unsecured. Such plan, when confirmed by the Court, binds all creditors who had notice or knowledge of the plan and discharges all claims against the petitioning political subdivision provided for in the plan when (a) the petitioning subdivision has deposited, with a duly appointed disbursing agent, all money, securities or other consideration required by the plan to be distributed, and (b) the Court is satisfied that any securities to be so distributed are valid obligations of the petitioning political subdivision and that any provision to pay or secure such obligations is also valid. No plan may, however, be confirmed by the Court unless certain conditions occur, among which are (1) that the plan has been accepted in writing by two-thirds (2/3) in amount and fifty per cent (50%) in number of the allowed claims of each class which are affected by the plan, and (2) that the plan is fair, equitable and feasible and does not discriminate unfairly in favor of any creditor or class of creditors. While the matter is not entirely free from doubt, prospective purchasers of the Series 2011 Bonds should assume that existing Alabama statutes presently authorize the Board to file a petition for relief under Chapter 9. 26

31 BONDHOLDER RISKS The Series 2011 Bonds are payable solely out of the revenues derived from the operation of the Supply System and do not constitute a general obligation of or a charge against the general credit or taxing power of the State of Alabama, the City, the Board or any political subdivision of any of the foregoing. The ability of the Board to pay debt service on the Series 2011 Bonds may be affected by future events and conditions relating generally to, among other things, population trends and economic developments, the exact nature and extent of which are not presently determinable. LEGAL MATTERS Legal matters incident to the authorization and issuance of the Series 2011 Bonds by the Board are subject to the approval of Hand Arendall LLC, Birmingham, Alabama, Bond Counsel. Such opinion is expected to be in substantially the form attached hereto as Appendix F. Certain legal matters will be passed upon for the Board by Roy W. Williams, Jr., Cullman, Alabama, counsel to the Board, and for the Underwriters by Haskell Slaughter Young & Rediker, Birmingham, Alabama, counsel to the Underwriters. MISCELLANEOUS All references to or summaries of contracts or official acts are qualified by the exact terms of such contracts, documents or acts, each being an item of public record. So far as any statements are made in this Official Statement involving matters of opinion or estimates, whether or not expressly so stated, they are set forth as such and not as representations of fact, and no representation is made that any such estimates will be realized. The distribution of this Official Statement has been approved by the Board of Directors of the Board. THE UTILITIES BOARD OF THE CITY OF CULLMAN By /s/ Wayne B. Fuller Chairman of the Board of Directors Dated: May 24,

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33 APPENDIX A ECONOMIC AND DEMOGRAPHIC INFORMATION

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35 ECONOMIC AND DEMOGRAPHIC INFORMATION LOCATION, HISTORY AND BACKGROUND Situated in the Cumberland Plateau in the North-Central section of Alabama, Cullman County, Alabama (the "County") was created by the Alabama Legislature on January 24, It is separated from Blount and Walker Counties by the Mulberry and Sipsey forks of the Black Warrior River. The County is bordered on the west by Winston County and Walker County, on the north by Morgan County, on the northeast by Marshall County, and on the south and southeast by Blount County. mile. The land area of the County is approximately 755 square miles with approximately 105 persons per square The County contains 11 incorporated municipalities, which include the cities of Cullman and Hanceville and the towns of Baileyton, Colony, Dodge City, Fairview, Garden City, Good Hope, Holly Pond, South Vinemont and West Point. The City of Cullman, Alabama (the "City"), with a population in 2010 of 14,775, is the county seat and is situated approximately 50 miles north of Birmingham, Alabama, 30 miles south of Decatur, Alabama, and 50 miles southwest of Huntsville, Alabama. POPULATION TRENDS The County has experienced steady population growth over the years. The City grew 10.5% from 1990 to 2010 and the County grew 18.9% between 1990 and The following table summarizes historical population trends for the City, the County and the State of Alabama: Year Cullman City Cullman County State of Alabama ,883 45,572 3,266, ,601 52,445 3,444, ,084 61,642 3,893, ,367 67,613 4,040, ,995 77,483 4,447, ,775 80,406 4,779,736 Source: U.S. Census Bureau. EMPLOYMENT STATISTICS The County has been ranked by the Alabama Development Office four of the last five years as the number one county among Alabama's 67 counties for the total number of expanding industries. During 2010, a total of 44 companies expanded their operations and four new companies were announced. In particular, capital investment exceeded $53 million and 450 new jobs were announced. Over the past ten years, the County has seen nearly one billion dollars invested in new and expanding industries with the creation of nearly 8,000 jobs. The County ranks among the top five counties in the United States for poultry production. The County also ranks first in the state for sweet potato and agriculture production. The cattle industry is also very important to the County, where it ranks among the highest counties in the United States for cattlemen's association membership. The City of Cullman has experienced a 685-percent growth in manufacturing capital investment over the past 10 years. The following table shows employment for occupation and industry for the County based on a survey conducted by the Census Bureau for a five year period from 2005 through 2009: A-1

36 Number Employed Percentage Occupation Management, professional, and related occupations 8, % Service occupations 5, Sales and office occupations 7, Farming, fishing, and forestry occupations Construction, extraction, and maintenance occupations 5, Production, transportation, and material moving occupations 7, Industry Agricultural, forestry, fishing and hunting, and mining 1, Construction 3, Manufacturing 6, Wholesale trade 1, Retail trade 4, Transportation and warehousing, and utilities 2, Information Finance, insurance, real estate, and rental and leasing 1, Professional, scientific, management, administrative, and waste management services 1, Educational, health and social services 6, Arts, entertainment, recreation, accommodation and food services 2, Other services (except public administration) 1, Public administration The following table lists the largest employers in the County: Company Service or Product Approximate Number of Employees Cullman County School Board Education 1,225 Cullman Regional Medical Center Healthcare 1,069 Wal-Mart Distribution Center Retail Distribution 1,007 State of Alabama Government 683 Wallace State College Education 550 Cullman County Government Government 524 Wal-Mart Supercenter Retail 450 REHAU Manufacturing Automotive 387 Topre America Manufacturing Automotive 350 McGriff Industries, Inc. Transportation Tires 275 Source: Cullman County Economic Development Office. A-2

37 The following table lists the largest manufacturing and distribution employers in the County: Company Service or Product Approximate Number of Employees Wal-Mart Distribution Retail Distribution 1,007 REHAU Automotive Bumpers, Molding 387 Topre America Automotive Chassis 350 McGriff Industries, Inc. Transportation Tires 275 Rusken Packaging Packaging-Corrugated Sheets 250 American Proteins Poultry-Pet Food/Ag Meal 250 Yutaka Automotive-Exhaust/Brakes 226 Axsys General Dynamics Aerospace-Machining Optics 215 NAFCO Structured Metal 200 AAR/SUMMA Defense Contractor 192 Source: Cullman County Economic Development Office. The following table presents comparative unemployment statistics for the County, the State and the United States over the past ten years: COMPARATIVE EMPLOYMENT TRENDS Annual Averages (In thousands) Cullman County Employed Unemployed Unemployment Rate 9.2% 9.4% 4.5% 3.0% 3.0% 3.4% 4.6% 5.3% 5.5% 4.2% State of Alabama Employed 1, , , , , , , , , ,034.9 Unemployed Unemployment Rate 9.9% 10.1% 5.2% 3.5% 3.5% 3.8% 5.0% 5.4% 5.4% 4.7% United States Employed 139, , , , , , , , , ,933 Unemployed 14,825 14,265 8,924 7,078 7,001 7,591 8,149 8,774 8,378 6,801 Unemployment Rate 9.6% 9.3% 5.8% 4.6% 4.6% 5.1% 5.5% 6.0% 5.8% 4.7% Source: Alabama Department of Industrial Relations. Note: Unemployment rates computed using unrounded data; not seasonally adjusted. PER CAPITA PERSONAL INCOME Per Capita Personal Income is defined as the current income from all sources received by one resident in an area. It is measured before deduction of income and other personal taxes, but after deduction of personal contributions for social security, government retirement and other social insurance programs. A-3

38 The following chart provides a comparison of per capita income among the County, the State and the United States: Cullman County State of Alabama United States % of National % of National % of National Income Average Income Average Income Average 2008 $28,930 72% $33,655 84% $40, % , , , , , , , , , , , , , , , , , , , , , , , , Source: Bureau of Economic Analysis, U.S. Dept. of Commerce. MEDIAN FAMILY INCOME Median Family Income is defined by the U.S. Census as the amount which divides the income distribution of families into two equal groups, half having incomes above the median, half having incomes below the median. The following table provides a comparison of median family income for the County, the State and the United States over the past ten years. National, State and County Median Family Income United States $64,400 $64,000 $61,500 $59,000 $59,600 $58,000 $57,500 $56,500 $54,400 $52,500 Alabama 54,100 53,200 51,700 48,700 51,400 48,650 47,700 46,900 47,000 46,100 Cullman County 51,200 50,200 47,800 46,000 48,400 45,850 44,300 43,500 43,700 40,900 Source: U.S. Department of Housing and Urban Development. A-4

39 Information regarding household and family income in the County based on survey conducted by the Census Bureau for a five year period from 2005 through 2009 is as follows: Number Percent Households 30, % Less than $10,000 3, $10,000 to $14,999 2, $15,000 to $24,999 4, $25,000 to $34,999 4, $35,000 to $49,999 4, $50,000 to $74,999 5, $75,000 to $99,999 2, $100,000 to $149,999 2, $150,000 to $199, $200,000 or more Median household income (dollars) $38,394 (X) Families 22, Less than $10,000 1, $10,000 to $14,999 1, $15,000 to $24,999 2, $25,000 to $34,999 2, $35,000 to $49,999 3, $50,000 to $74,999 4, $75,000 to $99,999 2, $100,000 to $149,999 2, $150,000 to $199, $200,000 or more Median family income (dollars) $48,427 (X) Per capita income (dollars) $20,339 (X) Median earnings (dollars): Male full-time, year-around workers $36,848 (X) Female full-time, year-around workers $27,268 (X) Source: U.S. Census Bureau. A-5

40 HOUSING AND CONSTRUCTION The United States Census Bureau estimated that in 2009 the median value of owner-occupied units in the County was $102,500 compared to the median for the State of Alabama of $119,600. The following table provides comparative information on housing in the County for the periods indicated: Occupied Housing Units 31,055 30,714 31,269 30,953 29,919 Owner occupied 22,578 22,421 24,269 20,712 21,206 Renter occupied 8,477 8,293 7,000 10,241 8,713 Vacant Housing Units 5,760 5,734 5,105 5,415 6,381 Homeowner Vacancy Rate 1.4% 3.0% 2.1% 6.4% 2.6% Rental Vacancy Rate 5.1% 12.0% 4.1% 3.2% 9.9% Median value of Owner-Occupied Units $102,500 $106,600 $106,800 $108,600 $96,200 Source: U.S. Census Bureau. Recent residential construction activities in the County are summarized in the following table: NEW PRIVATELY-OWNED SINGLE FAMILY RESIDENTIAL BUILDING PERMITS CULLMAN COUNTY* Year Permits Issued Single-Family Construction Cost *Amounts reflect estimates with imputation. Source: U.S. Census Bureau $ 5,256, ,662, ,711, ,971, ,725, ,488, ,882, ,763, ,557, ,166,675 A-6

41 Government The County is governed by the Cullman County Commission, consisting of the chairman and two associate commissioners, each of whom is elected for a term of four years and each of whom serves full-time. The County Commission is responsible for the financial affairs of the County, the direction, control and maintenance of the property of the County, for setting policies of the County, including the preparation of the budget, the appropriation and expenditure of County funds and the settlement of claims against the County, the levy of certain taxes as provided by law, and the creation and investment of accounts for the payment of long term indebtedness. Members of the Cullman County Commission Name End of Current Term James D. Graves 2012 Darrell Hicks 2014 Stanley Yarbrough 2014 The City is governed by a mayor-council form of government. The council is elected at-large to four-year concurrent terms, ending in The Mayor is the Executive Officer and has general supervision and control over all officers and affairs of the City except as otherwise provided by law. Under the mayor-council form of government, the council is the local legislative body upon which rests the responsibility of determining the policies to be followed in the administration of the municipal government. The Mayor and Council Members are as follows: Max A. Townson Andy Page Garlan E. Gudger Jr. John W. Cook Clint Hollingsworth Jenny Folsom Mayor Council Member Council Member Council Member Council Member Council Member PERSONNEL The County employs approximately 550 people full time and part time in its various departments. No employees of the County are represented by labor unions or similar employee organizations. The County does not bargain collectively with any labor union or employee organization. The County has enjoyed good relations with all County employees and the County believes that good relations will continue. The City employs approximately 400 people full time and part time in its various departments. No employees of the City are represented by labor unions or similar employee organizations. The City does not bargain collectively with any labor union or employee organization. The City has enjoyed good relations with all City employees and the City believes that good relations will continue. EDUCATION Primary and Secondary. The County school system (consisting of all areas outside the corporate limits of the City of Cullman) consists of 13 elementary schools, 6 middle schools and 7 high schools. The County school system also includes the Cullman Area Career Center, the Child Development Center and C.A.R.E. There are approximately 9,700 students and 747 full-time teachers and administrators in the County school system, which is governed by the Cullman County Board of Education. All of the County's high schools are accredited by the Southern Association of Colleges and Schools and by the State of Alabama. The City of Cullman also maintains its A-7

42 own separate school system with one primary school (K-1), two elementary schools (2-6), one middle school (7-8) and one high school (9-12). There are approximately 3,022 students and 222 full-time teachers and administrators in the City school system. Vocational and Technical Education. The Cullman County Vocational Center and Wallace State College offer a full range of vocational and technical programs. Higher Education. The University of Alabama at Huntsville, located 45 miles north of the City of Cullman, and Birmingham-Southern College, The University of Alabama at Birmingham, and Samford University, located 50 miles south of the City of Cullman, offer a full spectrum of four-year degree programs in arts and sciences, education, business and management studies, medicine, health professions, and engineering. Auburn University has also developed a program with Wallace State College to offer a limited number of upper level university courses. Educational Levels. The following table demonstrates the percentage of the population who are high school graduates and who have completed bachelor's degrees for the County, the State and the nation for 2009: EDUCATIONAL LEVELS Percent of Population High School Graduates* Percent of Population With Completed Bachelor's Degree or More* Cullman County 74.7% 13.4% State of Alabama United States *25 years or older Source: U.S. Census Bureau. HEALTH FACILITIES Cullman Regional Medical Center is located within the City of Cullman. The Medical Center is a public 115-bed full-service facility. The Medical Center is owned and operated by The Health Care Authority of Cullman County. The Medical Center is staffed by approximately 95 active staff physicians, 180 courtesy and consulting physicians, and over 1,000 employees. The Medical Center features an oncology center, pediatrics, rehabilitation services, emergency care, outpatient services, maternity and women's centers, critical care, a sleep disorders clinic and inpatient dialysis and diagnostic imaging centers. In addition to the foregoing, Cullman Health Care Center provides extended nursing care. The Woodland Village Healthcare Center Nursing Home and the Hanceville Nursing Home provide a total of 352 nursing home beds. TRANSPORTATION Highways. The County is served by U.S. Interstate 65, U.S. Highways 31 and 278, and State Highways 91, 69 and 157. Rail. The CSX Railroad serves the County with its Nashville-to-Birmingham line. Airport. Folsom Field, an airport owned jointly by the City of Cullman and the County, has a lighted, 5,500-foot runway, a new terminal building which houses the Wallace State Flight School and Greentree Flight School, and a hanger to accommodate corporate jets and private planes. A proposed five-year expansion calls for A-8

43 additional hangers, maintenance facilities and other improvements. Birmingham and Huntsville are each within one hour's drive and are served by major airlines offering national and international flights. RECREATION The Cullman County Park System includes Clarkson Covered Bridge Park, Smith Lake Park and Sportsman s Lake Park. Clarkson Covered Bridge is the site of the 1863 Battle of Hog Mountain. The largest covered truss bridge in the state, Clarkson is named in the National Register of Historic Places and is surrounded by picturesque hiking trails and picnic facilities. Smith Lake Park features a water slide, boat launch, picnic areas, pavilions, fishing and 140 campsites ranging from cabins to primitive to full RV hookups. Sportsman s Lake in Cullman has train rides, fishing, pavilions, carpet golf and a large duck population that is a major draw for locals. In addition, the County is the site of Stoney Lonesome OHV Park, a 1,456 acre park that features trails for ATVs, rock crawlers, dirt bikes, mountain bikers, equestrians, hikers, pedestrians and more. The City of Cullman Park and Recreation system includes Heritage Park, Nesmith Park, and Ingle Park Recreation Center and the recently acquired Hurricane Creek Park. Heritage Park is a 70-acre complex in Cullman that features championship soccer and softball fields, tennis and basketball courts, a walking track, picnic shelters and pavilions, a children s playground and multipurpose fields which play host to such annual festivities as Relay For Life and A Day in The Park. Nesmith Park in Cullman features lighted softball and baseball fields, tennis and basketball courts, a picnic area and a playground. Ingle Park Recreation Complex in Cullman features a wood-floor gymnasium with fitness and weight rooms, and a game room featuring table tennis. Hurricane Creek Park, located north of Vinemont, features scenic cliffs and bluffs, hiking trails, a swinging bridge, and waterfalls. The City is also the site of the Cullman Aquatics and Wellness center, which features an outdoor water park and leisure pool, full fitness center, a walking track and competition pools. The Ave Maria Grotto at St. Bernard Abbey features miniature renditions of famous churches, basilicas, shrines and buildings from all over the word, including a representation of the city of Jerusalem. Built by the abbey s Brother Joseph in 1934, the grotto is a major tourist attraction for visitors from all over the world. RECENT LOCAL REFERENDUM A recent local referendum to permit alcohol sales in the City has resulted in a marked increase in potential new retail development in Cullman. In the fourth quarter of 2010, the City created and staffed a Retail Division within the Economic Development Department that will focus on increasing retail development, similar to previous efforts related to industrial recruitment. Several retail developers in Alabama are evaluating the City for potential projects and at least two of those developers have optioned land in Cullman. The City expects to capitalize on this opportunity to develop new retail business and boost the local tax base. A-9

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45 APPENDIX B SUMMARY OF THE INDENTURE

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47 APPENDIX B SUMMARY OF THE INDENTURE The following constitutes a summary of certain portions of the Indenture. This summary should be qualified by reference to other provisions of the Indenture referred to elsewhere in this Official Statement, and all references and summaries pertaining to the Indenture in this Official Statement are, separately and in whole, qualified by reference to the exact terms of the Indenture, a copy of which may be obtained from the Board. Selected Definitions "Additional Bonds" means additional parity bonds authorized to be issued under the Indenture subject to the conditions hereafter described. "Additional Reserve Fund" means one or more separate reserve funds created in Supplemental Indentures for the benefit of one or more series of Additional Bonds. "AGM" means Assured Guaranty Municipal Corp., the issuer of a Municipal Bond Insurance Policy for the Series 2011 Bonds. "Annual Debt Service Requirement" means, as of any date of determination, the amount of principal and interest maturing or Maturity Amount due with respect to the then outstanding Bonds secured by the Reserve Fund in such Fiscal Year less any amount payable or to be payable by the United States of America to the Board or the Trustee during such Fiscal Year as an interest subsidy or rebate with respect to interest on any outstanding Bonds secured by the Reserve Fund or any Additional Bonds to be issued (but only to the extent that such Additional Bonds are to be secured by the Reserve Fund and to the extent that such subsidy or rebate has not been offset or terminated and there is no inquiry, pending or threatened, pursuant to which the United States of America, or any agency thereof, has challenged the right of the Board or the Trustee to receive such subsidy or rebate); provided, however, (a) that the principal amount or Compounded Amount of any Bonds subject to a Mandatory Redemption Requirement during such Fiscal Year shall, for purposes of this definition, be considered as maturing in the Fiscal Year during which such redemption is required and not in the Fiscal Year in which their stated maturity occurs; (b) that for purposes of the definition, Bonds that are deemed paid under the provisions of Section 16.1 of the Indenture shall not be deemed to be outstanding; (c) that the rate of interest on Variable Rate Bonds outstanding at the time of such calculation shall be deemed to be the lesser of (i) the rate of interest borne by such Variable Rate Bonds on any date selected by the Board that is within the 60-day period prior to the date of such calculation, or (ii) the average per annum rate of interest borne by such Variable Rate Bonds, during the twelve-month period immediately preceding any date selected by the Board that is within the 60-day period prior to the date of such calculation; (d) that the rate of interest on Variable Rate Bonds then proposed to be issued shall be deemed to be the thirty-year Revenue Bond Index most recently published in The Bond Buyer as of any date selected by the Board that is within the 60-day period prior to the date of such calculation; or, if the Revenue Bond Index is no longer available, the average long-term fixed rate of interest as of a date selected by the Board that is within the 60-day period prior to the date of such calculation on securities of similar quality and having similar maturities as certified by an Independent Financial Advisor; B-1

48 (e) that the principal of Balloon Bonds shall be deemed to mature in annual installments over a period equal to the greater of (i) twenty years or (ii) the number of years (rounded to the next lowest number in the case of a part of a year) between the date with respect to which such calculation is made and the date of maturity of such Balloon Bonds, so as to result, in either case, in approximately equal payments of principal and interest (and if such Balloon Bonds are Variable Rate Bonds, the interest rate applicable thereto shall be calculated as provided in clauses (c) or (d) of this definition, whichever is applicable); and (f) that any on-going fees related to Variable Rate Bonds (such as fees for a Credit Facility, fees for liquidity providers, remarketing agent's fees and the like) shall be included as interest on such Variable Rate Bonds. "Authorized Board Representative" means any person designated as an Authorized Board Representative in a certificate signed by the Chairman of the Directors and containing the specimen signature of such person. "Balloon Bonds" means Current Interest Paying Bonds of a series, twenty-five percent (25%) or more of the original principal of which matures during any one Fiscal Year, if such maturing principal amount is not required to be amortized below such percentage by (a) a Mandatory Redemption Requirement prior to such Fiscal Year, or (b) deposits into the Bond Fund which are required to be applied to the payment of such principal. Tender Option Bonds shall not be treated as Balloon Bonds solely by virtue of the option on the part of the Holders thereof to have such Bonds purchased prior to their respective maturities. "Bank" means (a) a banking institution (i) whose senior short-term debt obligations are rated by a Credit Rating Agency, at the time of the delivery of a Reserve Fund Credit Facility, in the highest rating category and (ii) whose senior long-term debt obligations are rated by at least two Credit Rating Agencies, at the time of the delivery of a Reserve Fund Credit Facility, in one of its two highest rating categories, or (b) a banking institution owned or controlled by a bank holding company (i) whose senior short-term debt obligations are rated by a Credit Rating Agency, at the time of the delivery of a Reserve Fund Credit Facility, in the highest rating category and (ii) whose senior long-term debt obligations are rated by at least two Credit Rating Agencies, at the time of the delivery of a Reserve Fund Credit Facility, in one of its two highest rating categories. "Base Rate" means the rate announced by the Trustee as its prime rate and is one of several interest rate bases used by the Trustee. The Trustee lends at rates both above and below its prime rate, and the Board acknowledges that the Trustee's prime rate is not represented or intended to be the lowest or the most favorable rate offered by the Trustee. "Bond Insurance Policy" means a policy of municipal bond insurance with respect to (a) the payment of principal and interest on any series of Bonds, or (b) the payment to the Trustee of a sum of money to be deposited into the Reserve Fund. "Bond Insurer" means any insurance company insuring payment of municipal bonds and other similar obligations if such bonds or obligations so insured by it are eligible for a rating by at least two Credit Rating Agencies, at the time of the delivery of a Reserve Fund Credit Facility, in one of its two highest rating categories. "Capital Appreciation Bonds" means any of the Bonds that provide for the addition to the principal due thereon of all or any part of the accrued and unpaid interest thereon. "City" means the City of Cullman, Alabama. B-2

49 "City-Board Agreement" means that certain Water Supply Agreement between the City and the Board dated as of June 1, 2011, pertaining to the sale of water by the Board to the City. "Code" means the Internal Revenue Code of 1986, as amended. "Compounded Amount" means, for any date with respect to a Capital Appreciation Bond, the amount set forth in the supplemental indenture pursuant to which such Capital Appreciation Bond is issued as the Compounded Amount for such Bond on such date. "Credit Facility" means a Letter of Credit or Bond Insurance Policy guaranteeing or providing for (a) the payment of all or any portion of the principal of or the interest on any Bonds, (b) the payment of all or any portion of the Redemption Price of any Bonds or (c) the purchase price of any Bonds or a portion thereof. "Credit Facility Fees" means the initial, annual, semi-annual or quarterly fees and expenses charged to the Board by a Credit Facility Obligor for issuing and maintaining in effect a Credit Facility or a Reserve Fund Credit Facility; provided, however, that the term "Credit Facility Fees" shall not include any fees or expenses paid out of the proceeds from the issuance of any of the Bonds. "Credit Facility Obligor" means (a) the issuer of a Credit Facility, or (b) a Bank or a Bond Insurer issuing a Reserve Fund Credit Facility. "Credit Rating Agency" means (a) Moody s, (b) S&P, (c) Fitch, and (d) any successor to any of the foregoing by merger, consolidation or otherwise. "Current Interest Paying Bonds" means those of the Bonds that are not Capital Appreciation Bonds. "Fiscal Year" means the period commencing on October 1 in one calendar year and ending on September 30 of the next succeeding calendar year. "Fitch" means Fitch IBCA, Inc. "Independent Engineer" means an engineer who is duly registered and qualified to practice the profession of engineering under the laws of Alabama and who is not a full time employee of the Board. "Independent Financial Advisor" means an investment banking or financial advisory firm, commercial bank, or any other person not employed by the Board and appointed by the Board for the purpose of passing on questions relating to the availability and terms of specified types of securities and is actively engaged in and, in the good faith opinion of the Board, has a favorable reputation for skill and experience in underwriting or providing financial advisory services in respect of similar types of securities. "Letter of Credit" means an irrevocable letter of credit issued with respect to (a) the payment of principal, interest or premium on any series of Bonds, or (b) the payment to the Trustee of a sum of money to be deposited into the Reserve Fund. "Mandatory Redemption Requirement" means (a) with respect to the Series 2011 Bonds, the provisions, if any, of the Indenture with respect to the mandatory redemption of Series 2011 Bonds, and (b) with respect to any series of Additional Bonds, any provisions that may be set forth in the Supplemental Indenture authorizing the issuance of such Additional Bonds, for mandatory redemption of any Additional Bonds at a Redemption Price equal to the principal amount thereof. B-3

50 "Maturity Amount" means the aggregate principal and interest due and payable at maturity with respect to the Capital Appreciation Bonds. "Maximum Annual Debt Service Requirement" means, as of any date of determination, the maximum Annual Debt Service Requirement during the then current or any then succeeding Fiscal Year. "Maximum Required Reserve Fund Deposit" means, as of any date of determination, the lesser of (a) the Maximum Annual Debt Service Requirement, (b) 125% of the average Annual Debt Service Requirement due in the then current or any then succeeding Fiscal Year, or (c) ten percent of the aggregate original principal amount of all series of bonds issued under the Indenture which are secured by the Reserve Fund and which remain outstanding in whole or in part. "Moody s" means Moody s Investors Service, Inc. "Operating Expenses" means, for the applicable period or periods, (a) the reasonable and necessary expenses of efficiently and economically administering and operating the System, including, without limiting the generality of the foregoing, the cost of water purchased or produced, the cost of all items of labor, materials, supplies and equipment (other than equipment which, by generally accepted accounting principles, is properly chargeable to fixed capital account), premiums on insurance and fidelity bonds, fees for engineers, attorneys and accountants for services rendered (except in cases where such fees are properly chargeable, by generally accepted accounting principles, to fixed capital account), and reasonable compensation to the Trustee for its expenses incurred and services performed under the Indenture, all items herein specifically stated to constitute an operating expense, and all other items except depreciation and interest that by generally accepted accounting principles are properly chargeable to expenses of administration and operation, and (b) the expenses of maintaining the System in good repair and in good operating condition, but not including items that by generally accepted accounting principles are properly chargeable to fixed capital account. "Outstanding Amount" means, as of any date of determination, the sum of (a) the outstanding principal amount of Bonds issued in the form of Current Interest Paying Bonds, and (b) the then applicable Compounded Amount of the outstanding Bonds issued in the form of Capital Appreciation Bonds. "Reimbursement Obligation" means (a) an obligation on the part of the Board to reimburse a Credit Facility Obligor for amounts paid by such Credit Facility Obligor with respect to the principal of or the interest or premium, if any, on the Bonds under the terms of a Credit Facility, together with interest thereon, or (b) an obligation on the part of the Board to reimburse a Credit Facility Obligor for amounts paid by such Credit Facility Obligor with respect to a payment to the Trustee of a sum of money to be deposited into the Reserve Fund under the terms of a Reserve Fund Credit Facility, together with interest thereon; provided, however, that Credit Facility Fees shall not be included in calculating the amount of a Reimbursement Obligation. "Reserve Fund Credit Facility" means (a) a Letter of Credit issued by a Bank, or (b) a Bond Insurance Policy issued by a Bond Insurer, providing, in either case, for the payment to the Trustee of a sum of money to be deposited into the Reserve Fund. "Reservoir Project" means the Capital Improvements to the System or other properties of the Board described in the front portion of this Official Statement as constituting the "Reservoir Project". "S&P" means Standard & Poor s, a division of The McGraw-Hill Companies. B-4

51 "Series 2011 Bonds" means the Board's $58,485,000 aggregate principal amount Water Revenue Bonds, Series 2011, dated the date of their delivery, which are the bonds being offered by this Official Statement. "Supplemental Indenture" means an agreement supplemental to the Indenture. "System" means the water supply system of the Board, as said system now exists and as it may hereafter be extended and improved. "Tender Option Bonds" means Bonds that are required to be purchased on behalf of the Board, at the option of the Holders thereof, prior to their respective maturities; provided, however, that if no such option is thereafter exercisable, such Bond shall no longer be considered a "Tender Option Bond." Security Provided In the Indenture the Board has pledged for payment of all Bonds issued thereunder the revenues derived from the operation of the System remaining after the payment of the costs of operating and maintaining the same and has pledged and assigned to the Trustee the City-Board Agreement. THE INDENTURE DOES NOT CONSTITUTE A MORTGAGE ON THE SYSTEM AND IS NOT SUBJECT TO FORECLOSURE. Flow of Funds Flow of Funds Generally. The Indenture creates four special funds or accounts, which are designated the Construction Fund, the Revenue Account, the Bond Fund and the Reserve Fund. The Construction Fund created under the Indenture provides for the payment of (a) costs of acquiring and constructing the Reservoir Project and (b) the expenses of issuing the Series 2011 Bonds. Revenue Account. The Board is required to deposit in the Revenue Account, as received by it, all revenues derived from the operation of the System. On or prior to the last day of each month, the Board is required to pay all then current expenses referable to the System and thereafter to make the transfers to the Bond Fund and the Reserve Fund (in the order named) hereafter referred to. Any balance remaining in the Revenue Account on the last day of each month after making all required transfers and making up any deficits may be withdrawn by the Board and used for any lawful purpose. The Trustee is depository and custodian of the Bond Fund, the Reserve Fund and the Construction Fund but the Board may designate any bank or banks as depository for the Revenue Account. Bond Fund. The Board is required to deposit in the Bond Fund, on or before the last day of each month, an amount equal to 1/6 th of the interest payable with respect to the Bonds on the next succeeding interest payment date and 1/12 th of the principal payable with respect to the Bonds on the next succeeding September 1. Moneys on deposit in the Bond Fund are required to be applied for payment of the principal and interest on the Bonds as the same become due and payable. Reserve Fund. Contemporaneously with the issuance of the Series 2011 Bonds, there shall be deposited into the Reserve Fund an amount equal to the Maximum Required Reserve Fund Deposit. In the event Additional Bonds are issued, unless the Supplemental Indenture authorizing the issuance of such Additional Bonds expressly provides that such Additional Bonds shall not be secured by the Reserve Fund, the Board shall, on the date of issuance of such Additional Bonds, deposit into the Reserve Fund, either from the proceeds of such Additional Bonds or from other funds of the Board, the difference between the Maximum Required Reserve Fund Deposit immediately before and upon issuance of such Additional Bonds. Moneys forming a part of the Reserve Fund are to be held as a reserve or cushion for the payment of the principal of and interest on all Bonds outstanding under the Indenture which are secured by the Reserve Fund. Earnings on investments of moneys held in the Reserve Fund are required to be transferred as received to the Bond Fund. B-5

52 In the event that any series of Additional Bonds will not be secured by the Reserve Fund, the Board may, in the Supplemental Indenture authorizing such series of Additional Bonds, create an Additional Reserve Fund for the benefit of such series of Additional Bonds. Before making any draw or demand on a Reserve Fund Credit Facility to obtain moneys for transfer to the Bond Fund, the Trustee must first exhaust all moneys and securities on deposit in, or held as a part of, the Reserve Fund. In the event that, as a result of a draw or demand on a Reserve Fund Credit Facility, moneys paid pursuant to a Reserve Fund Credit Facility are transferred to the Bond Fund, then on the last day of each month, commencing with the month next following that during which such moneys were so paid and continuing each month thereafter until the Reimbursement Obligation resulting from such draw or demand has been fully repaid, the Board will, after first making any payments required to be made by the provisions of the Indenture on such date, transfer and pay to the Credit Facility Obligor issuing such Reserve Fund Credit Facility, out of the moneys in the Revenue Fund: (1) an amount equal to at least 1/12th of the Reimbursement Obligation referable to or resulting from such draw or demand, or (2) an amount sufficient to repay in full the Reimbursement Obligation referable to or resulting from such draw or demand. The Trustee shall, as of the first day of each March and September ascertain and determine, the amount on deposit in the Reserve Fund based upon the market value of any Eligible Investments held therein. If, according to such determination, there is on deposit in the Reserve Fund an amount based upon such valuation (but not as a result of any transfer to the Bond Fund) less than 95% of the amount then required to be on deposit therein, the Trustee shall so notify the Board in writing and the Board shall, within one hundred twenty (120) days, transfer and pay into the Reserve Fund, out of the moneys on deposit in the Revenue Account, an amount which, when added to the amount then on deposit in the Reserve Fund, will equal the amount then required to be on deposit in the Reserve Fund. If, according to such determination, there is on deposit in the Reserve Fund an amount in excess of the amount then required to be on deposit in the Reserve Fund, the Trustee will promptly transfer such excess to the Bond Fund through the transfer of cash or securities (valued as aforesaid) and, if and to the extent necessary to make such transfer in the exact amount required, shall convert to cash investments held in the Reserve Fund. The amount payable to the Trustee pursuant to a Reserve Fund Credit Facility shall be deemed to be on deposit in the Reserve Fund for purposes of the Indenture subject to the following conditions: (1) If the Reserve Fund Credit Facility is a Letter of Credit, it shall have a term, as of the date of issuance, of not less than two (2) years; and if the Reserve Fund Credit Facility is a Bond Insurance Policy, it shall have a term that extends until the final maturity of all Bonds then outstanding under the Indenture which are secured by the Reserve Fund. (2) The Reserve Fund Credit Facility shall not be secured by any interest in the revenues pledged under the Indenture for payment of the Bonds, in favor of the Credit Facility Obligor issuing such Reserve Fund Credit Facility, that is prior to or on a parity with the security interest therein provided by the Indenture; (3) Prior to any transfer to the Board of moneys on deposit in the Reserve Fund as a result of the delivery to the Trustee of such Reserve Fund Credit Facility, there shall be delivered to the Trustee a certified Resolution specifying the manner in which the Board intends to apply the funds thereby made available to it and an opinion of Bond Counsel to the effect that such transfer and the application of funds thereby made available to the Board in the manner specified in the said Resolution will not result in the interest income on any of the Bonds issued as tax-exempt obligations becoming includable in gross income of the recipients thereof for federal income taxation; (4) Not less than one hundred eighty (180) days prior to the expiration of any Reserve Fund Credit Facility, the Board will either furnish to the Trustee a substitute Reserve Fund Credit B-6

53 Facility complying with the requirements hereof for the initial Reserve Fund Credit Facility or deposit in the Reserve Fund an amount sufficient to bring the Reserve Fund to its then required level without taking into account any amounts payable under such Reserve Fund Credit Facility; and (5) In the event that subsequent to the delivery to the Trustee of a Reserve Fund Credit Facility, the issuer of such Reserve Fund Credit Facility is no longer rated by a Credit Rating Agency in one of its three highest rating categories, the Board will restore to the Reserve Fund the amount payable under such Reserve Fund Credit Facility in thirty-six (36) equal monthly payments, commencing on or before the last day of the month next succeeding the month during which such required rating was reduced or withdrawn. Subject to the provisions of the preceding paragraph, upon the delivery to the Trustee of a Reserve Fund Credit Facility, any amount then on deposit in the Reserve Fund in excess of the amount then required to be on deposit in the Reserve Fund shall be paid to the Board. Whenever the moneys on deposit in the Reserve Fund (exclusive of any amounts deemed to be on deposit pursuant to a Reserve Fund Credit Facility) together with the moneys on deposit in the Bond Fund which are referable to the Bonds secured by the Reserve Fund equals or exceeds the aggregate of the principal and interest then remaining unpaid with respect to the Bonds secured by the Reserve Fund, no further payments need be made into the Reserve Fund and the entire balance in the Reserve Fund may be transferred to the Bond Fund and applied solely to the payment of the principal, Maturity Amount or Redemption Price of, and the interest on, Bonds secured by the Reserve Fund. In the event that, in a Supplemental Indenture authorizing the issuance of a series of Additional Bonds, the Board creates an Additional Reserve Fund for such Additional Bonds, and such Supplemental Indenture contains provisions with respect to such Additional Reserve Fund relating to the replenishment of such Additional Reserve Fund and the reimbursement of credit facility obligors issuing reserve fund credit facilities which respect to such Additional Reserve Fund, the obligations of the Board with respect to the Additional Reserve Fund shall be on a parity with the obligations of the Board described herein with respect to the Reserve Fund, and if the amount on deposit in the Revenue Account on the last day of any month, after compliance with the deposits required to be made into the Bond Fund, is not sufficient to fund all such payments with respect to the Reserve Fund and such Additional Reserve Fund, such amounts remaining in the Revenue Account shall be applied pro rata according to the respective amounts which the Board is require to pay with respect to the Reserve Fund and such Additional Reserve Fund. Investment of Funds. The Board may at its option from time to time cause any or all of the moneys on deposit in the Bond Fund to be invested in securities that are direct obligations of the United States of America and securities unconditionally guaranteed by the United States of America ("Federal Securities") and may cause any or all of the moneys on deposit in the Reserve Fund and Construction Fund to be invested in Eligible Investments. Moneys on deposit in the Revenue Account may be invested in such manner as may be permitted by applicable law. Such securities, together with all income therefrom, shall become a part of the fund which moneys were used to make such investment to the same extent as if they were moneys on deposit therein; provided, that the Trustee shall transfer to the Bond Fund, the interest income from any such securities held in the Reserve Fund. Additional Bonds In the Indenture the Board has reserved the privilege of issuing additional bonds under the Indenture, on a parity with the Series 2011 Bonds, at any time, upon compliance with the conditions hereinafter referred to but otherwise without limit as to principal amount for any one or more of the following purposes: (a) constructing or acquiring capital improvements to the System (including the providing of funds with which to reimburse the Board for costs incurred by it in the construction or acquisition of capital improvements); (b) refunding any bonds outstanding under the Indenture; or (c) any other lawful purpose. As used in this Official Statement, the term "Bonds" without other qualifying words means the Series 2011 Bonds and any additional parity bonds ("Additional Bonds") that may hereafter be issued pursuant to the aforesaid reserved privilege. Among the conditions prerequisite to the issuance of Additional Bonds are the following: B-7

54 (1) Supplemental Indenture. The Board and the Trustee shall enter into a Supplemental Indenture containing the following: (i) a description of the Additional Bonds proposed to be issued, including the date, the aggregate principal amount, the series designation, the interest rate or rates, the maturity or maturities and the form of such additional bonds, and any provisions for redemption thereof prior to their respective maturities; (ii) a statement of the purpose or purposes for which the additional bonds are proposed to be issued; (iii) a statement as to whether or not such Additional Bonds are to be secured by the Reserve Fund; (iv) in the event that any such Additional Bonds are to be Variable Rate Bonds, specifying a maximum interest rate for such Additional Bonds; and (v) any other provisions that do not conflict with the provisions of the Indenture. (2) Independent Engineer's Certificate. If one of the purposes of issuing the Additional Bonds is payment of the costs of Capital Improvements to the System, other than Capital Improvements required for the completion of the Reservoir Project, the Board shall deliver to the Trustee a certificate of an Independent Engineer stating the estimate of such engineer as to the cost to the Board of the acquisition of Capital Improvements to be financed by the issuance of the proposed Additional Bonds (which cost must be not less than the proceeds which will be realized by the Board from the sale of the Additional Bonds proposed to be issued for such acquisition and available to pay the costs of such Capital Improvements) and expressing an opinion to the following effect; that the improvements proposed to be acquired by the Board with the proceeds derived from the sale of the Additional Bonds with respect to which such certificate is made are of such nature as to be properly chargeable to fixed capital account by generally accepted accounting principles; that the said Capital Improvements either (i) are needed to serve prospective customers of the System, or (ii) are needed for the efficient operation of the System; that the cost to the Board of the acquisition of the said Capital Improvements will represent the reasonable value thereof; and that the acquisition of said Capital Improvements and the issuance of Additional Bonds proposed to be issued therefor will be feasible. (3) Supplemental Water Supply Contract. The Board shall deliver to the Trustee an executed copy of a water supply contract additional to all such contracts then pledged under the Indenture, which contract shall provide for the purchase from the Board of water at a fixed price or in quantity at a specified rate or rates that will produce an amount sufficient (i) to pay the principal of and interest on the Additional Bonds proposed to be issued and (ii) to pay additional Operating Expenses resulting from the Capital Improvements (if any) proposed to be acquired. Credit Facility for Additional Bonds. The Board may, in connection with the issuance of any series of Additional Bonds, (a) provide a Credit Facility therefore, (b) enter into such agreements as are necessary and appropriate with a Credit Facility Obligor providing, inter alia, for (i) the payment of the fees and expenses of such Credit Facility Obligor, which fees and expenses shall be payable out of the proceeds from the sale of such Additional Bonds or as an Operating Expense, as appropriate and (ii) the terms and conditions of such Credit Facility and any security to be provided for such Credit Facility and for the payment of the obligations of the Board with respect thereto, B-8

55 (c) secure any of its obligations with respect to such Credit Facility by an agreement providing for the purchase of any Bonds secured thereby, with such adjustments as to interest rates, methods of determination of interest, maturities or redemption provisions as shall be specified by the Board in the applicable Supplemental Indenture, (d) incur a Reimbursement Obligation which may be secured by a lien or charge on the revenues pledged under the Indenture subordinate to the lien or charge thereon created in the Indenture for the benefit of the Bonds, (e) provide, in any such agreement and in the appropriate Supplemental Indenture, that for the purpose of giving consents, receiving notices and certain specified other purposes, such Credit Facility Obligor shall be deemed to be the Holder of all Bonds secured by such Credit Facility, and (f) provide in any such agreement and in the appropriate Supplemental Indenture that the maturity of the Bonds secured by such Credit Facility may not be accelerated without the consent of the Credit Facility Obligor issuing such Credit Facility. Particular Covenants of the Board The Indenture will contain the following covenants of the Board, among others: Maintenance of Books and Records. The Board will maintain, in accordance with accepted accounting principles, complete books, records and accounts pertaining to the System. Annual Audits. The Board will within one hundred eighty (180) days following the close of each Fiscal Year cause an audit of its books for such Fiscal Year to be made by an independent auditor. Within ten days following the receipt of such audit, the Board will furnish a copy thereof to the Trustee and to the holder of any of the Bonds who makes written request therefor and to the original purchaser or purchasers of each series of the Bonds. In the event the audit required is not furnished within one hundred eighty (180) days following the close of any Fiscal Year, the Trustee may, at the expiration of such period, employ an independent auditor to make the audit for such Fiscal Year. The Indenture provides that the Trustee shall be under no duty to review or analyze any such audit furnished to it, and shall hold any such audit solely as a repository for the benefit of the Holders of the Bonds. No Free Service. The Board will not furnish or permit to be furnished by or from the System any free water or other service to any person whatsoever. All water and other service furnished from the System will be charged for at the rates at the time established therefor. Maintain Adequate Rates. The Board will make and maintain rates and charges for the water supplied from the System and will make collections in such manner as will produce amounts sufficient to pay all Operating Expenses, to maintain the System in good and operating condition and to make all payments required to be made in the Bond Fund and Reserve Fund. Priority of Pledge. The pledge of revenues from the operation of the System shall be prior and superior to any pledge thereof hereafter made for the benefit of any securities hereafter issued or any contract hereafter made by the Board other than any of the Additional Bonds. Continued Operation of System. The Board will not sell or lease the whole or any integral part of the System, will continuously operate the System or cause the same to be operated, in an economical and efficient manner, and will keep the System in good repair and efficient operating condition; provided, however, that the Board may sell or lease portions of the System if the Board delivers to the Trustee a certificate of the Chairman of the Board of Directors of the Board to the effect that such sale or lease will not have a material adverse effect on the production of revenues from the System. The Board may, however, consolidate with or merge into any public B-9

56 corporation, or transfer the System as an entirety to the City or to another public corporation if the property or income of such other public corporation is not subject to taxation and, upon any such consolidation, merger or transfer, the due and punctual payment of the principal of and interest on the Bonds and the observance of the agreements of the Indenture are expressly assumed in writing by the corporation formed by such consolidation or into which such merger shall be made or to which the System shall be transferred as an entirety. Preservation of the Tax-Exempt Status of Series 2011 Bonds. The Indenture contains an agreement on the part of the Board that from and after the date of issuance of the Series 2011 Bonds, the Board will (a) in a timely manner, make all payments of any amount that is required, by the provisions of Section 148(f) of the Code and any applicable regulations, to be paid by the Board to the United States of America in order that the Series 2011 Bonds shall not be treated as "arbitrage bonds" within the meaning of Section 103(b)(2) and 148 of the Code and any applicable regulations promulgated thereunder, in order to preserve the exemption of the interest on the Series 2011 Bonds from gross income of the recipients thereof for Federal income tax purposes, and (b) refrain from taking any action that would, under the provisions of Section 103 of the Code (as it now exists) and any applicable regulations, result in the interest on any of the Series 2011 Bonds being or becoming subject to gross income of the recipients thereof for Federal income tax purposes. The Indenture further provides that such covenants and agreements of the Board relating to the tax-exempt status of the interest on the Series 2011 Bonds shall, if and to the extent that compliance with them is required, survive any so-called "constructive" payment and retirement of the Series 2011 Bonds (including, without limitation, the establishment of an escrow providing for retirement of the Series 2011 Bonds on a future date) and shall continue in effect until (1) all the Series 2011 Bonds have become due and payable in accordance with their terms, whether at maturity, by call for redemption or otherwise, and (2) the entire principal and interest (and premium, if any) due and payable thereon have been paid or moneys sufficient therefor have been irrevocably deposited with the Trustee. Insurance Insurance Required. The Board will keep all portions of the System that are of the character and type customarily insured by organizations operating a business similar to the System insured against loss by fire, including extended coverage, tornado and windstorm, to the extent of the full insurable value thereof. The Board will also carry workmen's compensation insurance and public liability insurance in such amounts and to such extent as is customarily carried by like organizations engaged in like businesses of comparable size. Disposition of Insurance Proceeds. Proceeds on physical properties constituting a portion of the System coming into the hands of the Trustee shall be applied by the Trustee, at the direction of the Board, for one of the following purposes: (a) the purchase or construction of additional property which the Board shall deem to have utility equal to that destroyed; or (b) the repairing or the renewing of the property damaged or destroyed. Events of Default and Remedies Events of Default. The following constitute default under the Indenture: (a) Failure by the Board to pay the principal of and interest on any of the Bonds when such principal and interest respectively become due and payable, whether by maturity or otherwise; (b) Failure by the Board to commence the repair or replacement of any property forming a part of the System that may be damaged or destroyed and that is necessary to the B-10

57 continued and efficient operation of the System, within 120 days after the occurrence of such damage or destruction; (c) The sale, lease or other disposition by the Board of the System or any integral part thereof in violation of any provisions of the Indenture; (d) Failure by the Board to perform any of the agreements on its part contained in the Indenture (other than as provided in (a), (b) and (c) above) after thirty (30) days' written notice to it of such failure made by the Trustee or by the holders of 25% in Outstanding Amount of the Bonds; or (e) Determination by a court having jurisdiction that the Board is insolvent or bankrupt, or appointment by a court having jurisdiction of a receiver for the Board or for a substantial part of the System, or approval by a court of competent jurisdiction of any petition for reorganization of the Board or rearrangement or readjustment of its obligations under any provisions of the bankruptcy laws of the United States. Remedies of Default. Upon the occurrence of default, the Trustee shall have the following right and remedies: (a) Acceleration. The Trustee may, by written notice to the Board, declare the Outstanding Amount of and the interest accrued on all the Bonds forthwith due and payable, and such Outstanding Amount and interest shall thereupon become and be immediately due and payable, anything herein or in the Bonds to the contrary notwithstanding; provided, however, that a Supplemental Indenture authorizing a series of Additional Bonds secured in whole or in part by a Credit Facility may provide that the right of the Trustee to accelerate the maturity of the Bonds of that series (or the portion thereof secured by such Credit Facility) is subject to the consent of the Credit Facility Obligor issuing such Credit Facility. If, however, the Board makes good that default and every other default hereunder (except for those installments of Outstanding Amount and interest declared due and payable that would, absent such declaration, not be due and payable), with interest on all overdue payments of Outstanding Amount and interest, and makes reimbursement of all the reasonable expenses of the Trustee, then the Trustee may (and, if requested in writing by the Holders of a majority in Outstanding Amount of the then outstanding Bonds, shall), by written notice to the Board, waive such default and its consequences, but no such waiver shall affect any subsequent default or right relative thereto. (b) Suits at Law or in Equity. The Trustee is empowered (1) to sue on the Bonds, (2) by mandamus, suit or other proceedings to enforce and compel performance of all agreements of the Board in the Indenture, including the fixing of rates and the collection, proper segregation and proper application of the revenues from the System, (3) by action or suit in equity, to require the Board to account as if it were the trustee of an express trust for the holders of the Bonds, and (4) by action or suit in equity, to enjoin any act or things which may be unlawful or in violation of the rights of the holders of the Bonds. (c) Receivership. The Trustee shall be entitled to and shall have, regardless of the sufficiency of any security or the availability of any other remedy, the appointment of a receiver to administer and operate the System and perform the covenants on the part of the Board contained in the Indenture. Any receiver so appointed shall be entitled to take over and administer all of the following then on hand which shall be applicable to the System: cash on hand or on deposit, accounts and notes receivable, stocks, evidences of indebtedness, choses in action, customers' service and extension deposits, water and other property held for sale in the ordinary source of business or for consumption in the operation of the System. Remedies Vested in Trustee for Benefit of Bondholders. All remedies under the Indenture are vested exclusively in the Trustee for the equal and pro rata benefit of all holders of the Bonds, unless the Trustee refuses or neglects to act within a reasonable time after written request so to act addressed to the Trustee by the holders of 25% B-11

58 in Outstanding Amount of the Bonds, accompanied by indemnity satisfactory to the Trustee, in which event the holder of any of the Bonds may thereupon so act in the name and behalf of the Trustee or may so act in his own name and behalf in lieu of action by or in the name and behalf of the Trustee. Except as provided in the preceding sentence, no holder of any of the Bonds shall have the right to enforce any remedy under the Indenture, and then only for the equal and pro rata benefit of the holders of all the Bonds. Concerning the Trustee Limitation of Liability. The Trustee shall not be liable under the Indenture except for its noncompliance with the provisions thereof, its willful misconduct or its gross negligence. Notice of Defaults. The Trustee need not notice any default under the Indenture except a default in the payment of the principal of and the interest on the Bonds, unless requested so to do by the holders of 25% in Outstanding Amount. Institution of Suit. The Trustee may, in its own name and at any time institute or intervene in any suit for the enforcement of all rights under the Indenture without the necessity of joining as parties to such suit or proceedings any holders of the Bonds. The holders of the Bonds appoint the Trustee as their irrevocable agent and attorney in fact for the purpose of enforcing all such rights of action, but such appointment does not include the power to agree to accept new securities of any nature in lieu of the Bonds or to alter or amend the terms of the Indenture except as therein provided. Payment of Prior Charges. The Trustee may pay any charge which the failure of the Board to pay has made or will make an encumbrance or lien or charge on the revenues for the System prior to or on a parity with charge on said revenues contained in the Indenture on the System. Any sum so expended by the Trustee shall be secured by the Indenture, shall bear interest at the lesser of (a) Base Rate plus 2% or (b) the highest rate of interest then permitted by law from the date of payment thereof, and shall be entitled to priority of payment over any of the Bonds or interest thereon. Resignation and Discharge. The Trustee may resign and be discharged by written notice given to the Board and the holders of the Bonds. The Trustee may at any time be removed by a written instrument signed by the holders of a majority in Outstanding Amount of the Bonds. Appointment of Successor Trustee. If the Trustee resigns, is removed or is otherwise incapable of acting, a successor may be appointed by the holders of a majority in Outstanding Amount of the Bonds. Modification of the Indenture Without the consent of the holders of any Bonds, the Board and the Trustee may amend the Indenture for any of the following purposes: (a) to add to the covenants and agreements of the Board; or (b) to cure any ambiguity, defect or inconsistent provision or to subject additional revenues to the pledge contained in the Indenture. With the consent of the holders of 66-2/3% in Outstanding Amount of the Bonds then outstanding, the Board and the Trustee may enter into supplemental indentures as they deem necessary or desirable for the purpose of modifying, altering, amending, adding to or rescinding in particular any of the terms or provisions of the Indenture; provided that without the written consent of the holders of all Bonds affected no reduction in the principal amount of, rate of interest on, or the premium payable upon redemption of any Bond shall be made; and provided further, that without the written consent of the holders of all the Bonds none of the following shall be permitted: Bond; (a) (b) An extension of the maturity of any installment of principal of or interest on any any change in the schedule of mandatory redemption of any series of the Bonds; B-12

59 (c) the creation of a lien or charge on the System or revenues therefrom ranking prior to, or (except in connection with the issuance of Additional Bonds) on a parity with, the lien or charge thereon contained in the Indenture; (d) the establishment of preferences or priorities as between Bonds; or (e) a reduction in the Outstanding Amount of Bonds the holders of which are required to consent to such supplemental indenture. Satisfaction of the Indenture Whenever the entire indebtedness secured by the Indenture (including, without limitation, any unpaid Reimbursement Obligation), including all proper charges of the Trustee thereunder, shall have been fully paid, the Trustee shall cancel, satisfy and discharge the lien of the Indenture. For purposes of the Indenture (including, without limitation, the provisions pertaining to the issuance of Additional Bonds) any of the Bonds shall be deemed to have been paid when there shall have been irrevocably deposited with the Trustee for payment thereof the entire amount (principal, interest and premium, if any) due or to be due thereon until and at maturity, and, further, any of the callable Bonds shall also be deemed to have been paid when the Board shall have deposited with the Trustee the applicable redemption price of such callable Bond, and evidence that such callable Bond has been called for redemption in accordance with the Indenture. In addition, any Bonds shall for all purposes of the Indenture be deemed fully paid if the Board and the Trustee enter into a trust agreement making provision for the retirement of such Bonds by creating for that purpose an irrevocable trust fund sufficient to provide for payment and retirement of such Bonds (including payment of the interest that will mature thereon until and on the dates they are retired, as such interest becomes due and payable), either by redemption prior to their respective maturities, by payment at their respective maturities or by payment of part thereof at their respective maturities and redemption of the remainder prior to their respective maturities, which said trust fund shall consist of (A) Federal Securities which are not subject to redemption prior to their respective maturities at the option of the issuer and which, if the principal thereof and the interest thereon are paid at their respective maturities, will produce funds sufficient so to provide for payment and retirement of such Bonds, or (B) both cash and such securities which together will produce funds sufficient for such purpose, or (C) cash sufficient for such purpose. Concerning AGM and Bond Insurance The Indenture provides that AGM shall be deemed to be the sole holder of the Series 2011 Bonds for the purpose of exercising any voting right or privilege or giving any consent or direction or taking any other action that the holders of the Series 2011 Bonds are entitled to take pursuant to the provisions of the Indenture pertaining to (a) defaults and remedies and (b) the duties and obligations of the Trustee. B-13

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61 APPENDIX C AUDITED FINANCIAL STATEMENTS OF THE BOARD (WATER DIVISION) FOR FISCAL YEARS 2010 AND 2009

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137 APPENDIX E REPORT OF CONSULTING ENGINEER

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139 Final Report Series 2011 Water Revenue Bonds Engineer s Report Prepared for The Utilities Board of the City of Cullman May 2011

140 CH2M HILL Plaza Building May 12, th Avenue South, Suite# 320 Birmingham, Alabama Tel (205) Fax (205) The Utilities Board of the City of Cullman Attn: Dr. Wayne Fuller, Chairman 106 Second Avenue NE, Cullman, AL Subject: Engineers Report for Series 2011 Water Revenue Bonds Dear Dr. Fuller: CH2M HILL is pleased to submit the attached Engineer s Report to be included in the official statement prepared by The Utilities Board of the City of Cullman, Alabama (the Board) in connection with the issuance of its Water Revenue Bonds, Series 2011 (the Series 2011 Bonds). This report presents the findings of CH2M HILL s evaluation of the Board s existing water supply system, and presents financial factors associated with the sale of the Series 2011 Bonds. This report is based on CH2M HILL s analysis of the Board s records, reports, capital improvement program, and discussions with the Board and City of Cullman (the City) personnel. The evaluation of the Board s water supply system (System) includes a discussion of the system s history and organization, service area, water treatment and City distribution system (the City System), and capital improvement program. This report also includes a review of historical operating results, and presents projected operating results for FY (FY 2011) through FY 2015 (the study period) and the projected debt service on the Series 2011 Bonds. Background The Board s water division staff maintain and operate the System, including Lake Catoma and the Cullman Water Treatment Plant (WTP). Key staff are well qualified and capable of managing current responsibilities and planning for implementation of future improvements. The Board retained CH2M HILL in 2008 to serve as the engineer for the Cullman WTP and the Duck River Reservoir Project. CH2M HILL has reviewed and reported on various aspects of the water supply system facilities engineering, management, and operations, including development of its 2008 Water Supply and Treatment Master Plan. As a result of these earlier studies, CH2M HILL has knowledge of and experience with the area s water supply system and operating procedures. CULLMANCOVERLETTERFINAL COPYRIGHT 2011 BY CH2M HILL, INC.

141 Dr. Wayne Fuller, Chairman Page 2 May 12, 2011 The System is well maintained and managed, and is in good operating condition. Effective planning policies provide for the inspection, repair, improvement, and replacement of facilities, and have enabled the Board to meet state and Federal regulations. The Board sells all water produced directly to the City under the terms of the City-Board Water Supply Agreement (the Water Supply Agreement). The term of the Water Supply Agreement extends beyond the term of the Series 2011 Bonds. The City provides service to the City and surrounding areas, including six wholesale customers. The City has negotiated extensions to the terms of these wholesale service agreements, with the exception of two, to beyond the maturity of the Series 2011 Bonds. The City is in the process of renegotiating its agreement with these two wholesale customers whose contracts have not yet been extended beyond the maturity of the Series 2011 bonds. Raw Water Supply The Board s current water permit was issued by the Alabama Department of Environmental Management (ADEM) in July 2009 and expires in July This permit allows for the production of 24 million gallons per day (mgd). This is the current safe yield of Lake Catoma, which is the Board s current sole water supply source. It is also the capacity of the Cullman WTP, which treats the raw water from Lake Catoma. There are no known issues at this time that would prevent ADEM from renewing or expanding the permit in the future. The proposed Duck River Reservoir Project, along with Lake Catoma, will increase the average safe yield of the Board s raw water supply to 56 mgd. This quantity will meet average daily demands and the projected single-day water use demands beyond 2057 during normal conditions. It is expected at this time that the work for Phase I, Phase III, and a significant portion of the Phase II improvements will be completed within 3 years, with a reasonable expectation that approximately $50 million will be spent from June 2011 to June This initial $50 million expenditure will be funded from the proceeds of the Series 2011 Bonds; the Phase II improvements that are not funded from the Series 2011 Bonds will be funded from the proceeds of the proposed Completion Bonds that are anticipated to be issued in Water Rates and Revenues The Board s water supply charges to the City are automatically adjusted annually per the Water Supply Agreement to cover the costs of water production. The projected charges to the City will provide sufficient revenue to cover the cost of operations and debt service requirements. The City s revenues under the projected rates presented herein will be sufficient to meet all operating and other expenses, including debt service payments and bond reserve requirements. The City s agreements with its wholesale customers provide for the rates to be revised annually to cover the debt service requirements and their share of the CULLMANCOVERLETTERFINAL COPYRIGHT 2011 BY CH2M HILL, INC.

142 Dr. Wayne Fuller, Chairman Page 3 May 12, 2011 operating costs. The City s rates result in charges to its customers that are within the range of typical user bills being collected by other comparable water utilities in Alabama. In CH2M HILL s opinion, the Board s proposed issuance of the Series 2011 Water Revenue Bonds, in the preliminary total aggregate principal amount of $59 million for the purposes described in the subject report on the System, dated the date hereof, is advisable. Sincerely, CH2M HILL Thomas W. Harwell Jr., P.E. Senior Project Manager CULLMANCOVERLETTERFINAL COPYRIGHT 2011 BY CH2M HILL, INC.

143 Contents Section Page 1 Introduction General Description of Capital Improvement Program System Description Creation of the Board Organizational Structure Governing Body Management Water System Board City Service Area and Customers Existing and Projected Water Demands Raw Water Supply Capital Improvement Program Total Capital Improvement Program Financial Analysis Financial Evaluation of the System Customer/Usage Growth City s Ten Largest Water Customers Historical Revenues and Costs Projected Debt Issues Water Rates Financial Projections Comparison to Bills in Other Communities Works Cited Exhibit 2-1 City Service Area Boundary Map City Water System Retail Accounts FY Flow Projections for the Cullman WTP (in mgd) Demand per Capita Flow Projections (mgd) Proposed Board Capital Improvement Plan (Water) City of Cullman Retail Customers City of Cullman Wholesale Customers Water Usage (thousand gallons) Water Usage and Revenues for the City s 10 Largest Retail Customers (FY 2010) Historical Revenues and Costs, Cullman Utilities Board (FY 2006 to FY 2010) GNV DOCX/ WBG DFB COPYRIGHT 2011 BY CH2M HILL, INC. III

144 CONTENTS, CONTINUED Exhibit Page 4-5 Historical Revenues and Costs, City of Cullman Water Distribution System (FY 2006 to FY 2010) Projected Debt Service Schedule, Cullman Utilities Board City of Cullman Debt Service Schedule Cost to Purchase Water, City of Cullman City of Cullman Water Retail Rates City of Cullman Wholesale Water Rate Projected Cash Flow, Cullman Utilities Board Revenue Requirements, Cullman Utilities Board Projected Cash Flow, City of Cullman Revenue Requirements, City of Cullman Projected Impact to Wholesale Customer Water Rate City of Cullman Retail Water Rate Comparison with Other Communities GNV DOCX/ WBG DFB COPYRIGHT 2011 BY CH2M HILL, INC. IV

145 SECTION 1 Introduction The Utilities Board of the City of Cullman (the Board ) authorized CH2M HILL to prepare this report to analyze the feasibility of the Board obtaining funding in connection with its water supply system (the System). Such funding is being considered for ongoing and future water projects, as described herein. The Board is contemplating the issuance of long-term revenue bonds (the Series 2011 Bonds) in the 2nd quarter of 2011 to fund the initial improvements. The Board is also contemplating a second revenue bond issue in 2014 (the Completion Bonds) to fund the remaining improvements. The Board provides water on a wholesale basis to one customer, the City of Cullman (the City). The City then provides water distribution service to its retail customers and transmission service for its wholesale customers located primarily in Cullman County, but also in small portions of Winston and Morgan Counties. This report describes the organization and management of the Board and the System s water service to the City, facilities, operations, capital improvement program (CIP), and historical and projected financial performance. The Board s fiscal year ( FY ) runs from October 1 to September 30. Historical operating results are presented for FY ( FY 2007 ) through FY 2010, and projected operating results are presented for FY 2011 through FY This report also discusses the City s water service area, facilities, operations, and financial performance. The Board has previously financed capital improvements relating to the Water Supply System through proceeds of a Water Revenue Bond, DWSRF Series 1998 and Water Revenue Bonds, Series The Board intends to use a portion of the proceeds of the Series 2011 Bonds to refund the Series 1998 Bond and the Series 2002 Bonds. All capitalized terms not otherwise defined herein have the meaning ascribed thereto in the Trust Indenture pursuant to which the Series 2011 Bonds are being issued. 1.1 General Description of Capital Improvement Program The Board s CIP includes an estimated $64.3 million in planned capital improvements related to the Duck River Reservoir Project to be constructed over the next 5 years. The project is being constructed in three phases. Phase I of the project will include land acquisition; some relocations for roads, gas, water lines, and two main power structures; construction of the water diversion tunnel; excavation of the borrow areas; and preparation of the dam foundation. Phase II includes construction of the main dam, spillway, intake structure, and intake tower and remaining relocations for roads, water, gas, and electrical lines. Phase III includes construction of the 7-mile-long raw water pipeline to the Cullman Water Treatment Plant (WTP). In 1999 the U.S. Army Corps of Engineers (USACE) completed the 95% design of Phase I for the project. The USACE has also completed preliminary plans for Phase II and Phase III of the project. GNV DOCX/ WBG DFB COPYRIGHT 2011 BY CH2M HILL, INC.

146 SECTION 1. INTRODUCTION Phase I construction of the dam foundation preparation must be finished before the Phase II improvements and the main dam can be started. The improvements associated with Phase III and the new raw water line can occur simultaneous to Phase I and are currently scheduled to maximize coordination and use of resources. At this time the schedule is to complete the design for Phase I in June 2011, and begin construction of Phase I in October 2011 with completion by December The Phase III design is scheduled to begin in August 2011 with construction starting June 2012 and ending April The design for the Phase II work would begin just after the construction begins for Phase I, and would continue for approximately 15 months. Construction of the Phase II work is expected to start in June 2013 with a 20-month duration ending April It is expected at this time that the work for Phase I, Phase III, and a significant portion of the Phase II improvements will be completed within 3 years with a reasonable expectation that approximately $50 million will be spent from June 2011 to June This initial $50 million expenditure will be funded from the proceeds of the Series 2011 Bonds, with the Phase II improvements not funded from the Series 2011 Bonds, funded from the proceeds of the proposed Completion Bonds. GNV DOCX/ WBG DFB COPYRIGHT 2011 BY CH2M HILL, INC.

147 SECTION 2 System Description 2.1 Creation of the Board The Utilities Board of the City of Cullman, Alabama, was incorporated as a public corporation under the provisions of Section 394 to 402, inclusive, of Title 37 of the Code of Alabama, as amended, and Act No. 175 adopted at the 1951 Regular Session of the Legislature of Alabama. The Board owns and operates a Water Supply System for the City of Cullman, and on October 16, 1951, assumed the operations and control of the City s Electric Department. The Board also owns and operates the electric distribution system serving the City of Cullman and purchases electric energy from the Tennessee Valley Authority (TVA) for distribution to its customers. 2.2 Organizational Structure The Board is formed with five board members appointed by the City Council of Cullman each serving 6-year terms. The Board is a public corporation under the provisions of Act No. 175 adopted at the 1951 Regular Session of the Legislature of Alabama, as amended (now codified as Article 9 of Chapter 50 of Title 11 of the Code of the Alabama of 1975, as amended). The creation of the Board and its certificate of incorporation and amendments thereto, have, as required by the applicable statutes, been consented to by the governing body of the City. Under its certificate of incorporation and Act No. 175, the Board has corporate power to acquire and operate the System and to issue bonds payable from the revenues derived therefrom. In addition to owning and operating the System, the Board owns and operates an electric distribution system serving the City and the surrounding area. The revenues from the electric system are not pledged for payment of the Series 2011 Bonds or any Additional Bonds issued under the Indenture. 2.3 Governing Body Control of the Board is vested in a five-member board of directors elected by the governing body of the City for 6-year staggered terms. The current members of the Board of Directors of the Board and the date of the end of their respective terms are provided below: Name End of Term John W. Cook September 30, 2012 Wayne B. Fuller September 30, 2016 Garlan E. Gudger, Jr. September 30, 2014 Steven Murphree September 30, 2012 Max A. Townson September 30, 2014 GNV DOCX/ WBG DFB COPYRIGHT 2011 BY CH2M HILL, INC.

148 SECTION 2. SYSTEM DESCRIPTION 2.4 Management The management of the Board s WTP and the maintenance and upkeep of the existing reservoir is under the supervision of David Freeman, Manager, Water Division. Mr. Freeman has 23 years experience in water treatment, including more than 10 years as Manager of the Water Division of the Board. He holds an Alabama Department of Environmental Management (ADEM) Grade IV Water Certificate. Mr. Freeman is also responsible for preparing the fiscal year budget for the Board. He is a member of Alabama Rural Water Association (ARWA) Society of Water Professionals (SWP), Alabama Water & Pollution Control Association (AWPCA), and American Water Works Association (AWWA). Mr. Freeman is assisted by Alan Davis. Mr. Davis has 30 years experience in water treatment and maintenance, with 13 years as Assistant Manager of the Water Division. He holds an ADEM Grade IV Water Certificate and oversees water quality testing. He is a member of ARWA SWP, AWPCA, and AWWA. The finance and accounting responsibilities of the Board are managed by the Cullman City Clerk, Ruth W. Rose. Ms. Rose is assisted by the City s Accountant, Wesley Moore. The payroll and benefits expense of the Board are disbursed by the Electric Division of the Board and billed to the City. All operations and maintenance (O&M) expenses of the Board are paid by the City Clerk out of the City s water fund as a component of the cost of water under the Water Supply Agreement between the City and the Board. 2.5 Water System Board The Cullman Utilities Board owns and operates a constructed lake (Lake Catoma), which includes a water intake structure and the Cullman WTP. The Board provides all of the water it produces to the City under the water supply agreement City Service Area and Customers The City operates a water transmission and distribution system serving the City and surrounding areas. The City s service area is predominantly located in Cullman County in north Alabama. The City is currently responsible for supplying potable water to an area including approximately 100,000 residents, commercial establishments, institutions, and numerous industries located in Cullman County, as well as customers located in the northeastern corner of Winston County near the Town of Addison, and the southern portion of Morgan County near the Town of Eva. The Board is the sole wholesale water supply provider to the City of Cullman. The City then provides water to the City s service area and sells wholesale water to six water systems outside the City s boundaries. The contracts between the City and the wholesale customers, except for the contracts with VAW Water District and Hanceville, require these customers to take all of their water requirements from the City. The City service area is shown in Exhibit 2-1. GNV DOCX/ WBG DFB COPYRIGHT 2011 BY CH2M HILL, INC.

149 tu 31 tu 278 Cullman!( tu 231 Lewis Smith Lake 65 Water District Service Areas Water District Service Areas Addison* City of Cullman County Commission System East Cullman Water District Garden City Water District* Hanceville Water District Johnson Crossing Water District V.A.W. Water District Walter Water District *supplied by Cullman County ± Cullman, Alabama

150 SECTION 2. SYSTEM DESCRIPTION Exhibit 2-2 summarizes the growth in the City s retail customer base from FY 2005 FY The total number of retail customers served by the City amounted to 10,994 in EXHIBIT 2-2 City Water System Retail Accounts FY Fiscal Year No. of Retail Customers , , , , , ,994 In addition to serving an increasing number of residential customers, the City must provide water for the area s expanding commercial and industrial establishments. Agricultural industries, such as poultry and livestock producers, traditionally have served as the economic base for Cullman County. Today, Cullman County ranks within the top 60 counties in the country for agricultural income, and many of these industries require adequate and dependable supplies of water. Although Cullman County ranks as one of the top poultry-producing counties in the U.S. and agribusiness is vital to the local economy, significant industrial expansion has occurred in the service area supplied by the City during the past 15 years and is expected to continue in the future. Since 2001, the Cullman area has been ranked by Site Selection Magazine within the top 10 areas in America for new and expanding industries. 1 There are approximately 140 manufacturing or distribution companies currently located in Cullman County. These represent a wide array of industrial categories. Nine are automotive manufacturing industries. Others include poultry processing, tire re-treading, polymer processing, kitchen cabinet production, the manufacture of components for the missile and space industry. As industries continue to locate and expand in the County, the need for an adequate supply of finished water will increase Existing and Projected Water Demands The Cullman WTP has a capacity of 24 mgd and draws its water from Lake Catoma. On the basis of ADEM s monthly operating reports, the WTP has experienced a current maximum day demand (MDD) of 18.1 mgd. The plant has reached an MDD as high as 21.7 mgd in the past 10 years. In 2008, CH2M HILL prepared an updated water demand projection as part of an evaluation of the Cullman WTP. This analysis validated the 1995 USACE and Lockwood Greene finding that an additional water supply is needed. On the basis of CH2M HILL s analysis for the WTP, the City will need to be capable of providing potable water to approximately 1 Cullman Economic Development Authority GNV DOCX/ WBG DFB COPYRIGHT 2011 BY CH2M HILL, INC.

151 SECTION 2. SYSTEM DESCRIPTION 96,596 people by 2027 and 118,957 people by 2057, which represents a 14.3-percent increase during the next 20 years and a 45.6-percent increase within the next 50 years. 2 A modified demand-per-capita method was used to project the maximum day water demands from 2008 through the year For this method, census data from 1997 to 2007 from the U.S. Census Bureau were used to develop the population projection. Using the ADEM monthly operating reports, the maximum daily flow for each month from 1997 to 2007 was recorded and then used to calculate per capita flow projections for the WTP (see Exhibit 2-3). EXHIBIT 2-3 Flow Projections for the Cullman WTP (in mgd) Cullman Water - Modified Demand Per Capita Max Month Flow - plant Max Month flow - Max gpcd Max Month Flow - Avg gpcd MGD Max Monthly Flow (MGD) MGD MGD MGD MGD MGD MGD maximum gpcd average gpcd MGD Year Using the modified demand per capita method, the projected MDDs were calculated using the average gallon per capita per day (gpcd) increases from a 2007 MDD of 18 mgd, a 2027 MDD of 23 mgd, and a 2057 MDD of 28 mgd (see Exhibit 2-3). That is an increase of approximately 22 percent, or 1.1 percent per year, from 2007 to Projecting out 50 years, from 2007 to 2057, shows an MDD increase of 36 percent, or 0.71 percent per year. The MDD calculated from the maximum gpcd increases at a rate of 33 percent, or 1.7 percent a year from 2007 to 2027, and a rate of 45 percent, or 0.91 percent a year from 2007 to It should be noted that while the historical demand does show a decline at the end of the 10- year period from 1997 to 2007, CH2M HILL used the peak day demand from that period in the demand per capita projections. This approach allows the City to plan for demand under worst-case conditions. Exhibit 2-4 lists the calculated flow projections using the modified demand per capita method. 2 For additional information regarding projected future population estimates, see the CH2M HILL Technical Memorandum: Cullman Utilities Water Treatment Plant Flow Projections, dated November 6, GNV DOCX/ WBG DFB COPYRIGHT 2011 BY CH2M HILL, INC.

152 SECTION 2. SYSTEM DESCRIPTION EXHIBIT 2-4 Demand per Capita Flow Projections (mgd) Utilities Board of the City of Cullman Year MDD with Average Demand Per Capita Ratio Applied Projected MDD Increase Annual Increase MDD MDD with Max Demand Per Capita Ratio Applied Projected MDD Increase Annual Increase MDD %/yr %/yr %/yr %/yr Raw Water Supply Before the construction of the Cullman WTP and Lake Catoma in 1967, Lake George served as the area s only raw water supply. Because of limited capacity and other considerations, Lake Catoma was constructed and Lake George was abandoned as a raw water source. The location of Lake Catoma is shown in Exhibit 2-1. With storage capacity of 16,400 acre-ft, Lake Catoma is currently Cullman s sole source of raw water. Lake Catoma is reported to have a safe yield of approximately 24 mgd. The intake and raw water pump station are sized for 24 mgd. The design capacity for the Cullman WTP provides for the production of up to 24 mgd of finished water per day Ability to Meet Long-term Water Supply Needs On the basis of the population and water demand projections, the raw water supply from the Duck River Reservoir Project, combined with that of Lake Catoma, will provide an estimated average safe yield of 56 mgd. This quantity will meet average daily demands and the projected single-day water use demand beyond 2057 during normal conditions Treatment The Board owns and operates the Cullman WTP, which has a design capacity of up to 24 mgd of finished water per day. The treatment plant includes three separate treatment trains, each consisting of a flocculation basin, settling basin, and six dual media filters with the capacity to treat up to 8 mgd per train. Finished water storage is provided by three 2.0 million gallon (MG) tanks. The initial plant began operation in 1967, along with Lake Catoma. The WTP was expanded to 16 mgd in 1988 and expanded to 24 mgd in The Water Supply and Treatment Master Plan (CH2M HILL, 2008) provides for replacement and renewal along with expansion of the facility if needed to accommodate growth of the area. The plan calls for approximately $14 million in renewal and replacement improvements at the WTP within the next 5 to 7 years and approximately $5 million in expansion improvements, if needed, which are anticipated to be funded with future issues of revenue bonds. 3 Additional information about the Cullman WTP is provided in the CH2M HILL Technical Memorandum: Water Treatment Plant Evaluation and Recommendations for Capital and Operational Improvements. GNV DOCX/ WBG DFB COPYRIGHT 2011 BY CH2M HILL, INC.

153 SECTION 2. SYSTEM DESCRIPTION Transmission and Distribution The potable water transmission system consists of a dedicated 30-inch-diameter pipeline to the City s distribution system that starts on the WTP property line. The City water distribution system consists of approximately 275 miles of water mains ranging in size from 2 to 30-inches in diameter Regulatory The Boards current water permit was issued July 2009 by ADEM. This permit allows for the production of 24 mgd and expires in July The Board plans to renew and expand the permit when needed. There are no known issues at this time that would prevent ADEM from renewing or expanding the permit in the future. GNV DOCX/ WBG DFB COPYRIGHT 2011 BY CH2M HILL, INC.

154 SECTION 3 Capital Improvement Program The project is being constructed in three phases. Phase I of the project will be to acquire the initial land, electrical transmission tower relocations, construct the diversion tunnel, and complete the dam foundation preparation. The USACE had essentially completed a design for Phase I in Phase II of the project will be to construct the dam, spillway, intake structure, pump station, and raw water pipeline. The components of the Phase II work have been preliminary designed and are defined. Completion of the Phase I work and borrow pit excavations will further define the Phase II work final design. Phase III of the project is construction of the raw water pipeline to the existing Cullman WTP. The project cost for the first 3 years is estimated to be approximately $50 million including the dam area land acquisition, environmental monitoring, cultural resources preservation, construction management, engineering and design of Phase I, Phase II and Phase III, major road and electrical relocations, construction of the Phase I tunnel and dam foundation preparation; construction of significant portions of the Phase II work for the main dam, spillway, intake structure and pump station and construction of the Phase III work for the raw water pipeline. On November 9, 2006, the USACE issued a Clean Water Act Section 404 permit to allow the construction of this project. Currently the Board is in the process of acquiring land and USACE is in the process of transferring the Engineer of Record responsibility to CH2M HILL to fully complete the Phase I design and begin construction of Phase I of the project. 3.1 Total Capital Improvement Program Exhibit 3-1 presents a tabulation of the total costs of the planned Phase I, II, and III and other associated estimated costs for the capital improvement program. The total cost of the Phase I improvements is estimated at $10.2 million, with total cost of the Phase II improvements estimated at $30.7 million, total cost of the Phase III improvements estimated at $10.1 million, and other associated costs estimated at $13.3 million, for a total cost of $64.3 million. Exhibit 3-1 also presents the proposed schedule for constructing these improvements. This schedule assumes that the Phase I and III improvements and a portion of the Phase II improvements will be constructed in FY 2012 and FY 2013, and the remainder of the Phase II improvements in FY 2014 FY This cost estimate for the water system improvements has been prepared for guidance in project evaluation and implementation from the information available at the time the estimate was developed. The final costs of the project will depend on the actual scope of the project agreed upon by the Board and regulatory agencies; actual labor and material costs; competitive market conditions; final project scope; implementation schedule; and other variable conditions. As a result, the final project costs may vary from the estimate presented herein. GNV DOCX/ WBG DFB COPYRIGHT 2011 BY CH2M HILL, INC.

155 ID Task Name Cost 0 Duck River Project Schedule - Revised Mar 2011 $64,373, $64,373, tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr 2 $ $ $130, Design and Regulatory Coordination with the Corps 8 $130, $180, Stream Use Clas Water Quality 19 $413, $6,278, Cultural Resources Land Acquisition Activities (Phase I Initially) 29 $475, Biologica 35 $ $ $110, Annual Watershed Management Plan Review and Update 41 $ $85, Upland Habitat Compensation 49 $120, Operations and Maintenance Plan 53 $195, Emergency Action Plan 56 $4,880, Relocations 57 $2,392, $40, $300, $12, $1,370, $748, $14, $230, NPDES Construction Stormwater 70 $10,182, Phase 1 Construction 71 $600, $30, Project: Duck River Project Schedule - Date: Wed 5/11/11 Task Split Progress Milestone Summary Project Summary External Tasks External Milestone Deadline

156 ID Task Name Cost 73 $30, tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr tr 74 $ $9,522, $30,773, Phase 2 Construction 77 $2,808, $30, $30, $ $27,904, $10,130, Phase 3 Construction 83 $915, $30, $30, $ $9,155, $60, Flow Monitoring Plan (downstream of the Dam) 92 $0.00 on) Project: Duck River Project Schedule - Date: Wed 5/11/11 Task Split Progress Milestone Summary Project Summary External Tasks External Milestone Deadline

157 SECTION 3. CAPITAL IMPROVEMENT PROGRAM The funding sources for the planned improvements to the System include the issuance of the Series 2011 Bonds in the 2nd quarter of 2011 and the issuance of the Completion Bonds in GNV DOCX/ WBG DFB COPYRIGHT 2011 BY CH2M HILL, INC.

158 SECTION 4 Financial Analysis This section provides an overview of the financial results of the Board s Water Supply System from FY 2006 through FY 2010 and projections for FY 2011 through FY The financial analysis includes an evaluation of the historical and future operations of the System. This section also provides an overview of the financial results and projections for the City of Cullman s Water Department, which is the lone customer of the Cullman Utilities Board. The financial information contained in this section was derived from comprehensive annual financial statements from the Board and the Water Fund of the City, the Board s water demand projections, the FY 2011 Wholesale Water Rate report (CDG Engineers and Associates, 2011), the projected debt service schedule for the Series 2011 and Completion Bonds provided by the Board s investment bankers, and the Board s and City s Water Fund respective annual operating budgets and financial results for FY 2007 through February Discussions were held with individuals familiar with various aspects of the Board s and City s water operations, including employees from water and finance departments and certain outside consultants. 4.1 Financial Evaluation of the System The expenses and revenues associated with operation of the System are accounted for in the audit of the Water Division of the Board. The expenses and revenues associated with operation of the City of Cullman s Water Distribution System are accounted for in the audit of the City of Cullman s Water Fund. 4.2 Customer/Usage Growth The Board sells all of its water to the City of Cullman. Consequently, all of the Board s revenues from the System (except investment income) have the City as their source. The Board and the City will, in connection with the issuance of the Series 2011 Bonds, enter into an agreement (the Water Supply Agreement ) wherein the City agrees to purchase all of its water from the Board, and the Board agrees to sell to the City (subject to certain limitations) the City s entire water requirements for both retail and wholesale customers. The City owns and operates a water distribution system serving retail customers within the corporate limits of the City and nearby unincorporated areas. The City s retail customers include residential, commercial, and industrial accounts. Exhibit 4-1 shows the historical number of retail water system customer accounts for FY 2005 through FY 2010, and projected accounts as of FY 2011 through FY For the projection period of FY 2011 through FY 2015, customer accounts are projected to increase at an average annual growth rate of 1.0 percent. The City is expected to connect approximately 550 retail customer accounts to the water system between FY 2010 and FY GNV DOCX/ WBG DFB COPYRIGHT 2011 BY CH2M HILL, INC.

159 SECTION 4. FINANCIAL ANALYSIS EXHIBIT 4-1 City of Cullman Retail Customers Fiscal Year Retail Customers Actual ,370 Annual Growth Actual ,583 2% Actual ,748 2% Actual ,750 0% Actual ,909 1% Actual ,994 1% Projected ,104 1% Projected ,215 1% Projected ,327 1% Projected ,440 1% Projected ,555 1% The City also sells water to six wholesale customers. In FY 2010, Cullman County represented approximately 65 percent of the City s total water sales to wholesale customers. East Cullman Water Authority and VAW Water Systems, Inc., represented 19 percent and 11 percent of total wholesale water sales, respectively. Sales of water to the City s wholesale customers have represented between 72 to 76 percent of the City s total water sales volume, and between 44 to 52 percent of Water Department s revenues for the last 6 years ( ). EXHIBIT 4-2 City of Cullman Wholesale Customers Water Usage (thousand gallons) Wholesale Customer FY 2007 FY 2008 FY 2009 FY 2010 Cullman County 1,522,280 1,510,883 1,522,258 1,538,215 Johnsons Crossing Water 98,316 87,513 83,371 90,693 City of Hanceville 33,842 88,212 9,373 6,173 Walter Water Authority 40,968 27,538 25,597 29,164 East Cullman Water Authority 457, , , ,576 VAW Water Systems, Inc. 309, , , ,427 Total 2,461,830 2,351,979 2,288,483 2,356, City s Ten Largest Water Customers The top 10 retail customers of the City s Water System are shown in Exhibit 4-3. The exhibit presents each of these customers annual water usage in gallons for FY 2010 as well as their total water billings. The large users include medical facilities, local and County government, and other retail and industrial activities. Combined, these ten largest customers account for 6.1 percent of the System s total annual water sales revenue in FY GNV DOCX/ WBG DFB COPYRIGHT 2011 BY CH2M HILL, INC.

160 SECTION 4. FINANCIAL ANALYSIS EXHIBIT 4-3 Water Usage and Revenues for the City s 10 Largest Retail Customers (FY 2010) Highest Water Usage (gallons) Water Revenues Cullman Regional Medical Center 27,356,800 $118,306 City of Cullman Parks & Recreation 18,939,000 $94,822 USA Healthcare 17,126,100 $78,113 Rehau, Incorporated 15,612,900 $67,603 Cullman County Commission 10,942,900 $50,131 Wal Mart Stores 8,220,400 $38,844 Cooper Industries 7,629,600 $34,438 RusCorr 7,574,500 $34,382 American Trim 5,651,100 $25,174 Zippy Car Wash 4,908,100 $22,586 Total 123,961,400 $564, Historical Revenues and Costs The Board s actual revenues and expenses for FY 2006 through FY 2010 are shown in Exhibit 4-4. The exhibit shows the primary sources of funds to be operating revenues from water sales to the City of Cullman. The primary uses of funds include expenses, such as personnel, chemical, utility expenses, and debt service. Revenues have fluctuated with the water purchases by the City and with changes in costs. In FY 2010, revenues declined as the volume rate charged by the Board declined because of a reduction in the Board s costs (an outstanding bond issue was retired in FY 2009). Operating expenses have increased by approximately 4 percent per year from FY 2006 to FY The System has reported positive net income in each year except FY 2010, which reported a loss of approximately $169,000. The City s water distribution system s actual revenues and expenses for FY 2006 through FY 2010 are shown in Exhibit 4-5. The table shows the primary sources of funds to be operating revenues from water sales to the City s retail and wholesale customers. The primary uses of funds include the cost of purchasing water from the Board s water supply system and other expenses, such as personnel expenses and debt service. Revenues have fluctuated with the water purchases by the City s retail and wholesale customers and changes in the volume charges to the City s wholesale customers. Operating expenses increased from FY 2006 to FY 2009, before declining significantly in FY These fluctuations are primarily because of changes in repair and maintenance expenses as well as in the cost to purchase water. The City s water system has reported positive net income in each year, as presented in the exhibit. GNV DOCX/ WBG DFB COPYRIGHT 2011 BY CH2M HILL, INC.

161 SECTION 4. FINANCIAL ANALYSIS EXHIBIT 4-4 Historical Revenues and Costs, Cullman Utilities Board (FY 2006 to FY 2010) Operating Revenue: Water Sales 3,529,216 3,576,883 3,766,439 4,449,279 3,237,676 Miscellaneous Total Operating Revenue 3,529,884 3,577,483 3,767,039 4,449,879 3,238,356 Operating Expenses: Personal Expenses 943, , ,985 1,014,811 1,025,335 Current Expenses 1,217,794 1,368,027 1,227,677 1,497,197 1,471,415 Repairs and Maintenance 68,367 82, ,638 95, ,227 Director fees and expenses 13,800 13,800 12,650 3,403 29,318 Operating Expenses 2,243,223 2,390,968 2,403,953 2,611,184 2,659,295 Depreciation 573, , , , ,449 Total Operating Expenses 2,816,746 2,836,927 2,861,781 3,044,642 3,176,744 Operating Income 713, , ,258 1,405,237 61,612 Other Income (expenses): Interest earned 71,578 93,968 38,446 2, Sale of assets , ,300 0 Interest expense (208,587) (193,861) (173,977) (279,422) (211,114) Amortization of debt discount and exp. (33,206) (33,206) (33,205) (30,169) (16,498) Trustee fees (9,925) (9,925) (9,925) (6,655) (3,385) Total Other Income (Expenses) (180,017) (50,024) (178,661) (312,264) (230,302) Net Income $533,121 $690,532 $726,597 $1,092,973 $(168,690) GNV DOCX/ WBG DFB COPYRIGHT 2011 BY CH2M HILL, INC.

162 SECTION 4. FINANCIAL ANALYSIS EXHIBIT 4-5 Historical Revenues and Costs, City of Cullman Water Distribution System (FY 2006 to FY 2010) Operating Revenue: Water Sales 7,535,676 7,964,160 7,726,268 8,095,070 9,309,060 Charges for Service Connection 78,365 97, ,955 75,700 60,730 Service Charges 38,975 34,080 60,083 66,915 73,482 Miscellaneous 14,452 30,667 36,852 15,753 19,770 Total Operating Revenue 7,667,468 8,126,242 7,982,158 8,253,438 9,463,042 Operating Expenses: Personal Expenses 581, , , , ,176 Current Expenses 338, , , , ,635 Repairs and Maintenance 469, , , , ,633 Operating Expenses 1,398,464 1,396,476 1,322,962 1,282,468 1,270,444 Cost of Purchased Water 3,529,216 3,576,883 3,766,439 4,449,279 3,237,676 Depreciation 538, , , , ,314 Total Operating Expenses 5,466,080 5,505,834 5,680,928 6,380,879 5,235,434 Operating Income 2,210,088 2,620,408 2,301,230 1,872,559 4,227,608 Other Income (expenses): Interest earned 161, , ,405 73,785 59,715 Sale of assets 1,083 1, ,826 0 Interest expense (519,646) (519,721) (489,453) (540,108) (450,001) Amortization of debt discount and exp. (23,486) (23,486) (23,486) (23,486) (23,486) Trustee fees (3,180) (3,180) (3,180) (3,180) (3,180) Total Other Income (Expenses) (383,708) (128,111) (208,714) (491,163) (416,952) Net Income $1,817,680 $2,492,297 $2,092,516 $1,381,396 $3,810,656 GNV DOCX/ WBG DFB COPYRIGHT 2011 BY CH2M HILL, INC.

163 SECTION 4. FINANCIAL ANALYSIS 4.5 Projected Debt Issues Exhibit 4-6 shows the projected debt service for the Board. The Series 2011 Bonds are being issued to provide a portion of the funds necessary to refund all outstanding bonds of the Board (Series 2002 Bonds and Series 1998 Bond), to construct certain capital improvements to the Board s water supply system, fund a debt service reserve fund, and to pay the costs of issuance of the Series 2011 Bonds. EXHIBIT 4-6 Projected Debt Service Schedule, Cullman Utilities Board Fiscal Year Series 2011 Completion Bonds Total 2011 $1,069,231 $1,069, $3,240,125 $3,240, $3,243,525 $3,243, $3,815,025 $378,588 $4,193, $3,812,425 $1,012,175 $4,824, $3,809,625 $1,007,075 $4,816, $3,810,425 $1,010,700 $4,821, $3,809,625 $1,007,750 $4,817, $3,811,625 $1,011,950 $4,823, $3,810,875 $1,010,550 $4,821, $3,807,375 $1,008,750 $4,816, $3,811,125 $1,008,500 $4,819, $4,001,625 $1,007,500 $5,009, $4,004,375 $1,010,750 $5,015, $4,003,125 $1,008,000 $5,011, $4,002,875 $1,009,500 $5,012, $4,003,375 $1,010,000 $5,013, $4,004,375 $1,009,500 $5,013, $4,005,625 $1,008,000 $5,013, $4,001,875 $1,010,500 $5,012, $4,003,125 $1,011,750 $5,014, $4,003,875 $1,011,750 $5,015, $4,002,875 $1,010,500 $5,013, $4,005,313 $1,008,000 $5,013, $4,005,663 $1,009,250 $5,014, $4,003,663 $1,007,488 $5,011, $4,004,050 $1,009,150 $5,013, $4,006,300 $1,008,975 $5,015, $4,004,888 $1,011,963 $5,016, $4,004,550 $1,007,850 $5,012, $4,004,763 $1,011,900 $5,016, $0 $1,008,588 $1,008, $0 $1,008,175 $1,008, $0 $1,010,400 $1,010,400 Notes: 1) Projected debt service schedule is based on market conditions and certain assumptions as of May 2, Market conditions at the time the Series 2011 and the Completion Bonds are structured and sold may be different, resulting in actual debt service that varies from the amounts presented above. 2) Series 2011 Bonds assume funding $50MM of the Duck River Reservoir Project, refunding Series 2002 Bonds and Series 1998 Bonds, fully funded debt service reserve fund, and payment of costs of issuance. 3) Series 2014 Completion Bonds assume funding $14.3MM of the Duck River Reservoir Project, fully funded debt service reserve fund, and payment of costs of issuance. The City of Cullman Water Department advanced $1,266,649 to the Utilities Board for engineering, testing, legal expenses, and other costs associated with the proposed dam and GNV DOCX/ WBG DFB COPYRIGHT 2011 BY CH2M HILL, INC.

164 SECTION 4. FINANCIAL ANALYSIS reservoir. According to the City Water Fund Audited Financial Statements 2010, these funds will be repaid to the City of Cullman Water Department with the proceeds of the Series 2011 Bonds issued by the Board. The forecast includes issuing approximately $60 million in revenue bonds in 2011 (including funds for refunding the Board s outstanding Series 1998 Bond and Series 2002 Bonds and bond issuance costs and funding of the Bond Reserve). The estimated annual debt service on the Series 2011 Bonds was provided by the Board s investment bankers. The Board is expected to issue additional revenue bonds in 2014 to complete the construction of the Duck River Reservoir Project (Completion Bond). Construction proceeds from the Completion Bond issuance is estimated to be $14.3 million and was assumed to have a 30-year term. 4 The City of Cullman s water distribution system has a number of existing debt obligations (see Exhibit 4-7). The Series 2001 Water Revenue Warrants are repayable solely from the revenues derived from the operation of the water distribution system. The General Obligation Warrant Series 2002 SRF, the General Obligation Water System Warrant Series 2004 DWSRF DL, the General Obligation Water System Warrant Series 2005 DWSRF DL, the General Obligation Water System Warrant Series 2005B DWSRF BL, and the General Obligation Water System Warrant Series 2008 DWSRF DL are general obligations of the City of Cullman. Payments to the Board from the City s Water Fund are operating expenses of the City s water distribution system (see Exhibit 4-5 Cost of Purchased Water ). EXHIBIT 4-7 City of Cullman Existing Debt Service Schedule Fiscal Year Water Revenue Series 2001 General Obligation Series 2002-SRF General Obligation Series 2004 DWSRF DL General Obligation Series 2005 DWSRF DL General Obligation Series 2005B DWSRF BL General Obligation Series 2008 DWSRF DL FY 2011 $999,898 $189,400 $187,405 $168,364 $99,163 $83,062 $1,727,292 FY 2012 $997,805 $190,025 $188,669 $170,085 $97,212 $81,488 $1,725,284 FY 2013 $993,302 $190,475 $189,780 $166,730 $95,262 $84,825 $1,720,374 FY 2014 $190,065 $190,750 $190,739 $168,299 $98,312 $83,075 $921,240 FY 2015 $189,168 $190,850 $186,621 $169,715 $96,200 $81,325 $913,879 FY 2016 $192,855 $190,775 $187,428 $166,055 $99,088 $84,487 $920,688 FY 2017 $196,002 $190,525 $188,081 $167,319 $96,812 $82,563 $921,302 FY 2018 $193,720 $190,100 $188,583 $168,430 $99,538 $85,550 $925,921 FY 2019 $191,000 $189,500 $188,931 $169,389 $97,100 $83,450 $919,370 FY 2020 $192,750 $188,725 $189,128 $170,195 $99,662 $81,350 $921,810 FY 2021 $194,000 $192,775 $189,171 $170,849 $97,063 $84,162 $928,020 FY 2022 $194,750 $191,475 $189,062 $166,426 $99,462 $81,888 $923,063 FY $188,801 $166,927 $96,700 $84,525 $536,953 FY $188,387 $167,276 $98,938 $82,075 $536,676 FY $187,821 $167,472 $96,012 $84,537 $535,842 FY $167,516 $98,088 $81,913 $347,517 FY $84,200 $84,200 FY $81,400 $81,400 Total 4 Completion bonds debt service schedule assumes current market interest rate of 6.0 percent. GNV DOCX/ WBG DFB COPYRIGHT 2011 BY CH2M HILL, INC.

165 SECTION 4. FINANCIAL ANALYSIS 4.6 Water Rates The Board and the City signed an agreement in 1954 for the Board to provide water on a wholesale basis to the City. This agreement has been amended many times. The sales price of the water supplied under this agreement is determined by the Board s monthly O&M expenses disbursed plus bond and interest requirements. The Board and the City are still operating under this agreement, and plan to enter into a new agreement in connection with the issuance of the Series 2011 Bonds. Exhibit 4-8 presents the actual water pumped by the Board s supply system and the water revenues received from the sale of water to the City. EXHIBIT 4-8 Cost to Purchase Water, City of Cullman Fiscal Year Total Gallons Pumped (000's) Water Sales Cost/000 gallons ,684,813 $3,529,216 $ ,626,554 $3,576,883 $ ,348,831 $3,766,439 $ ,266,262 $4,449,279 $ ,421,861 $3,237,676 $0.95 The Board and the City will, in connection with the issuance of the Series 2011 Bonds, enter into an agreement (the Water Supply Agreement ) wherein the City agrees to purchase from the Board, and the Board agrees to sell to the City (subject to certain limitations) the City s entire water requirements for both retail and wholesale customers. In the Water Supply Agreement, the City has agreed to pay to the Board for the water made available to it on a monthly basis: a) all O&M expenses of the Board referable to the System, b) amounts sufficient to pay the principal of and interest on the Series 2011 Bonds and future bond issues, and c) all other amounts that the Board is required to pay under the Indenture. The City has sole jurisdiction to set the rates for water service to the City s retail customers. Rates for the City s water service to its Wholesale Customers are determined by Wholesale Contracts it has negotiated with these customers. These rates are not subject to regulation by any Federal, State of Alabama or similar agency, but are subject to judicial review as to reasonableness. During the past 3 years (FY 2009 through FY 2011), the Water System retail rates have been increased by an average of 10 percent each year. Exhibit 4-9 shows the City s previous and current Water System retail rates effective January 1, The City has approved a retail rate increase in FY 2012 of 10 percent that will increase the minimum bill to $22.90 per month for customers located within the City limits (see method of calculation below). EXHIBIT 4-9 City of Cullman Water Retail Rates Inside City Limits Minimum Bill $16.45 $17.31 $19.00 $20.85 $22.90 Consumption Charge per 1,000 gallons over 3,000 gallons $3.80 $4.00 $4.40 $4.85 $5.35 GNV DOCX/ WBG DFB COPYRIGHT 2011 BY CH2M HILL, INC.

166 SECTION 4. FINANCIAL ANALYSIS EXHIBIT 4-9 City of Cullman Water Retail Rates Outside City Limits Minimum Bill $20.15 $21.21 $23.30 $25.60 $28.10 Consumption Charge over 3,000 gallons $4.60 $4.84 $5.35 $5.90 $6.50 Notes: Rates Effective January 1 Minimum Bill includes 3,000 gallons The City has executed water purchase agreements with each of its six wholesale customers. Each Wholesale Customer (except the City of Hanceville) has entered into a contract with the City to proportionally share in the costs of financing the Duck River Reservoir Project. The City is in ongoing discussions with the City of Hanceville to also renegotiate their contract. The City of Hanceville contract expires in The contract with VAW expires in 2039, and is not expected to be extended prior to issuing the Series 2011 Bonds. The City is in the process of renegotiating the extensions with Hanceville and VAW. The terms of the other contracts extend beyond the final maturity of the Series 2011 Bonds. These agreements provide the method and procedure for calculating annual adjustments of the wholesale water rate, which is standard for all Wholesale Customers. The base rate for Wholesale Customers is based on the following calculation: 1) The number of thousand gallons of water delivered by the Board to the Cullman water distribution system during the then preceding year; 2) The total chargeable O&M expenses of the Cullman water distribution system during the then preceding fiscal year; 3) The amount of a certain portion of the City s water system debt service during the then current fiscal year; 4) The quotient obtained by dividing the sum of a) the O&M expenses referred to in the foregoing clause 2) and, b) the City s water system debt service referred to in the foregoing clause 3) by the figure in the foregoing clause 1) (the said figure constituting the adjusted rate per thousand gallons of water and being sometimes herein called the adjusted rate ); and 5) A statement by the independent engineer making the report that the engineer is of the opinion that the adjusted rate per thousand gallons of water does not exceed the rate considered by the independent engineer to be reasonable in the circumstances. Exhibit 4-10 presents the wholesale water rate from FY 2008 through FY The wholesale water rate has ranged from $1.50 per thousand gallons in FY 2011 to $2.01 per thousand gallons in FY The reduction in the wholesale rate in FY 2011 is because of the reduced chargeable operating expenses coupled with an increase in the total gallons delivered. GNV DOCX/ WBG DFB COPYRIGHT 2011 BY CH2M HILL, INC.

167 SECTION 4. FINANCIAL ANALYSIS EXHIBIT 4-10 City of Cullman Wholesale Water Rate FY 2008 FY 2009 FY 2010 FY 2011 Total Gallons Delivered (000s) 3,626,554 3,348,831 3,266,262 3,421,859 Chargeable Operating Expenses $4,557,016 $4,768,156 $5,529,483 $4,106,112 Chargeable Debt Service $982,831 $1,013,694 $1,034,145 $1,034,372 Total Chargeable Expenses $5,539,847 $5,781,850 $6,563,628 $5,140,484 Consumption Rate ($/1,000 gallons) $1.53 $1.73 $2.01 $ Financial Projections A 5-year financial projection was developed to analyze the impact on water rates of financing the construction of the Duck River Reservoir Project, as well as addressing annual O&M requirements. The building blocks of the financial plan are the projections of costs that the Board and the City will incur during the planning period, FY 2011 through FY 2015, and the revenues, under existing and proposed rates, that the Board and the City expect to generate during the same period. The financial plan is based on a set of overall assumptions related to customer growth, inflation, and other factors. The following general assumptions were used in developing the plan: Customer growth and increases in water sales will occur at the following annual rates: City of Cullman retail customers: 1.00% City of Cullman wholesale customers: 1.00% O&M costs annual escalation factors: Salaries and wages: 5.0% Other Operating expenses: 3.0% Total Operating expenses are expected to increase by $283,000 (2010 dollars) in FY 2015 associated with operation of the Duck River Reservoir and intake facilities. Beginning balances for FY 2011 for the Board and the City s water utility funds were assumed to be the working capital (current assets - current liabilities) for each entity. The working capital was calculated from information obtained from FY 2010 financial statements for the City and the Board, respectively. Interest earned on investments: 2.0% No additional capital projects are planned to be constructed by the Board during the 5-year analysis period, other than completion of the Duck River Reservoir Project. It is assumed bonds will be issued in 2014 to pay for the completion of the Duck River Reservoir Project. The annual revenue projections for the City of Cullman include a 10-percent approved retail water rate increase in FY GNV DOCX/ WBG DFB COPYRIGHT 2011 BY CH2M HILL, INC.

168 SECTION 4. FINANCIAL ANALYSIS Exhibit 4-11 presents the projected cash flows for the Board s water supply utility from FY 2011 through FY The beginning balance for the Board s water supply system was estimated to be approximately $1.4 million for FY The balance was calculated by subtracting the current liabilities ($220,000) from the current assets ($1.6 million) as reported in the Board s FY 2010 financial statements. Water revenues are projected to be nearly $3.3 million in FY Annual operating revenues for the Board s water supply system increase by approximately $5.1 million during the Study Period of this analysis, until they reach $8.4 million in FY The primary reasons for this include increases in debt service obligations associated with the Duck River Reservoir Project, and operating expense increases that are reflected in the forecast of the Board s water supply charges to the City. Operating expenses for the System are projected to be approximately $2.9 million in FY The forecast of operating expenses was developed from the Board s detailed water supply expenses incurred by category for the fiscal year ending September 30, These results were then adjusted for expected changes in costs because of inflation or changes in operations. An inflation rate of 3.0 to 5.0 percent was applied to the entire cost within each expense category. The overall result was an average annual rate of increase in operating expenses (excluding depreciation) of 3.8 percent through FY In FY 2015, operation of the Duck River Reservoir Project is assumed to commence, and operating costs of this system are expected to increase the total operating costs of the Board by $283,000 (in 2010 dollars) in that fiscal year. EXHIBIT 4-11 Projected Cash Flow, Cullman Utilities Board Projected Projected Projected Projected Projected Description FY FY FY FY FY Beginning Balance 1,357, , , , ,167 Water Revenue 3,270,053 6,176,149 6,300,289 7,063,254 8,568,592 Misc Revenue Interest Revenue 27,158 14,608 14,344 14,233 12,003 Sale of Assets Total Sources of Funds 4,655,785 6,921,848 7,032,495 7,789,820 9,181,442 Supply O&M 2,856,143 2,964,540 3,077,318 3,194,661 3,644,842 Water Supply Utility Capital Existing Debt Service ,168 New Debt Service 1,069,231 3,240,125 3,243,525 4,193,613 4,824,600 Available Ending Fund Balance 730, , , , ,832 Total Uses of Funds 4,655,785 6,921,848 7,032,495 7,789,820 9,181,442 Exhibit 4-12 presents the Board s projected revenue requirements and the required water supply charges to the City. Rate revenue requirements consist of O&M expenses (including transfers), annual debt service obligations, and pay-as-you-go capital expenses. Non-rate revenue sources, such as interest and miscellaneous revenue, and use of reserves are deducted from the revenue requirements to estimate the required revenue from the City to cover the Board s costs. As Exhibit 4-12 illustrates, increased revenues will be necessary to cover the revenue requirements associated with the bond issuance to pay for the Duck River Reservoir Project. The forecast revenue requirements for the Board s water division project a need for an increase in the water supply revenues from the City of approximately 87 percent in FY 2012, GNV DOCX/ WBG DFB COPYRIGHT 2011 BY CH2M HILL, INC.

169 SECTION 4. FINANCIAL ANALYSIS a 1 percent increase in FY 2013, an 11 percent increase in FY 2014, and a 16 percent increase in FY The primary reason for the required revenue increase is to provide sufficient revenues to cover the increase in annual debt service payments associated with the Series 2011 bond issuance and subsequent Completion Bond issuance. EXHIBIT 4-12 Revenue Requirements, Cullman Utilities Board FY FY FY FY FY Beginning Balance 1,357, , , , ,546 Revenue Requirements Supply O&M 2,856,143 2,964,540 3,077,318 3,194,661 3,644,842 Debt Service 1,069,231 3,240,125 3,243,525 4,193,613 4,824,600 Rate Funded Capital Total 3,925,374 6,204,665 6,320,843 7,388,274 8,469,442 Less: Non Rate Revenue 27,838 15,288 15,024 14,913 8,711 Use of Reserves 627,483 13,228 5, , ,546 Total Revenue Requirements 3,270,053 6,176,149 6,300,289 7,063,254 8,309,185 Revenue 3,270,053 6,176,149 6,300,289 7,063,254 8,275,309 Overall Revenue Increase Needed 0% 87% 1% 11% 16% Exhibit 4-13 presents the projected cash flows for the City s water distribution system from FY 2011 through FY The beginning balance for the City s water distribution system was estimated to be approximately $10.2 million for FY The balance was calculated by subtracting the current liabilities ($812,000) from the current assets ($11.0 million) as reported in the Board s FY 2010 financial statements. Water revenues, including retail and wholesale revenues, are projected to be approximately $8.6 million in FY Annual operating revenues for the City s water distribution system increase by approximately $3.0 million during the Study Period of this analysis, until they reach $11.5 million in FY The primary reasons for this include the planned retail rate increases in FY 2012 (10 percent), modest customer growth, and the increased revenue from wholesale customers because of increased purchased water costs. The forecasted rate adjustments are designed to cover the additional cost to purchase water from the Board. Operating expenses for the distribution system, including the cost to purchase water and debt service, are projected to be approximately $6.3 million in FY The forecast of operating expenses was developed from the City s detailed water distribution expenses incurred by category for the fiscal year ended September 30, These results were then adjusted for expected changes in costs because of inflation or changes in operations. An inflation rate of 3.0 to 5.0 percent was applied to the entire cost within each expense category. By FY 2015, total operating expenses are projected to increase to $10.8 million. The major reason for the large increase in expenses is the cost to purchase water, which is GNV DOCX/ WBG DFB COPYRIGHT 2011 BY CH2M HILL, INC.

170 SECTION 4. FINANCIAL ANALYSIS projected to increase significantly with the bond issuances associated with the Duck River Reservoir Project. The overall result was an average annual rate of increase in operating expenses (excluding depreciation) of nearly 14.3 percent during the analysis period. Throughout the analysis period, the City will maintain a positive beginning balance that will allow them the financial security to withstand modest fluctuations to water rate revenue and unplanned increases to operating expenses. The projected beginning balance in FY 2015 is approximately $17.4 million. EXHIBIT 4-13 Projected Cash Flow, City of Cullman Projected Projected Projected Projected Projected Description FY FY FY FY FY Beginning Balance 10,180,821 12,856,604 13,208,913 15,491,828 17,408,260 Water Sales -Retail 5,060,405 5,622,110 5,678,331 5,735,114 5,792,466 Water Sales -Wholesale 3,575,075 3,595,694 5,639,927 5,195,049 5,753,673 Connection Fees 60,730 60,730 60,730 60,730 60,730 Misc Revenue 19,770 19,770 19,770 19,770 19,770 Service Charges 73,482 73,482 73,482 73,482 73,482 Interest Revenue 203, , , , ,165 Sale of Assets Total Sources of Funds 19,173,899 22,485,522 24,945,332 26,885,810 29,456,545 Distribution O&M 1,319,950 1,375,176 1,432,841 1,493,056 1,555,938 Purchased Water 3,270,053 6,176,149 6,300,289 7,063,254 8,309,185 Existing Debt Service 1,727,292 1,725,284 1,720, , ,879 Available Ending Fund Balance 12,856,604 13,208,913 15,491,828 17,408,260 18,677,543 Total Uses of Funds 19,173,899 22,485,522 24,945,332 26,885,810 29,456,545 Exhibit 4-14 presents the revenue requirements for the City s water distribution system and the required percentage rate increases for the utility. Rate revenue requirements consist of O&M expenses (including transfers), annual debt service obligations, and pay-as-you-go capital expenses. Non-rate revenue sources, such as interest and miscellaneous revenue, and use of reserves are deducted from the revenue requirements to estimate the required revenue from rates. As Exhibit 4-14 illustrates, no additional increases beyond the approved 10-percent increase to retail customers in FY 2011 and FY 2012 are needed during the 5-year projection period (FY 2011 FY 2015). The City s revenue requirements will not need to increase dramatically because they have sufficient operating income each year and have been able to establish a healthy reserve balance. It is expected that the City will continue to evaluate the water distribution system costs and revenues, and adjust rates as needed to meet the system needs. EXHIBIT 4-14 Revenue Requirements, City of Cullman FY FY FY FY FY Beginning Balance 10,180,821 12,856,604 13,208,913 15,491,828 17,408,260 Revenue Requirements Supply O&M 1,319,950 1,375,176 1,432,841 1,493,056 1,555,938 Purchased Water 3,270,053 6,176,149 6,300,289 7,063,254 8,309,185 Debt Service 1,727,292 1,725,284 1,720, , ,879 Rate Funded Capital Total 6,317,295 9,276,609 9,453,504 9,477,550 10,779,002 GNV DOCX/ WBG DFB COPYRIGHT 2011 BY CH2M HILL, INC.

171 SECTION 4. FINANCIAL ANALYSIS EXHIBIT 4-14 Revenue Requirements, City of Cullman FY FY FY FY FY Less: Non Rate Revenue 357, , , , ,147 Use of Reserves Total Revenue Requirements 5,959,697 8,865,495 9,035,344 9,013,731 10,276,855 Retail Rate Revenue 5,060,405 5,622,110 5,678,331 5,735,114 5,792,466 Wholesale Rate Revenue 3,575,075 3,595,694 5,639,927 5,195,049 5,753,673 Total Rate Revenue 8,635,480 9,217,804 11,318,258 10,930,163 11,546,138 Overall Revenue Increase Needed 1 10% 10% 0% 0% 0% Note: 1 Rate increases in FY , FY , and FY have been approved by the City, and projected revenues reflect these approved rates. Exhibit 4-15 presents the actual wholesale water rate for FY 2011 and the projected wholesale water rate from FY 2012 through FY The projected wholesale water rate was calculated using the formula presented in Section 4.6, Water Rates. Purchased water costs were assumed to be equal to the projected Total Revenue Requirements of the Utilities Board, as presented in Exhibit To estimate eligible distribution O&M expenses, a review of the distribution O&M costs used to calculate the FY 2011 wholesale water rate (CDG Engineers and Associates, 2011) was completed. After removing purchased water costs and depreciation, it was estimated that 68 percent of the remaining distribution O&M costs were allocated to the wholesale customers. For this analysis, it was assumed that 68 percent of future distribution O&M costs (less purchased water cost and depreciation) was allocable to wholesale customers. Total eligible costs used to calculate the wholesale customer rate are expected to increase from approximately $5.1 million in FY 2011 to $8.8 million in FY The primary reason for the projected increase in the eligible costs is the increased debt service and operating costs associated with the Duck River Reservoir Project that is reflected in the Purchased Water Cost. The wholesale water rate is projected to increase from $1.50 per thousand gallons in FY 2011 and FY 2012 to $2.32 per thousand gallons in FY The wholesale rates decline in FY 2014 as the City s debt service costs decline in FY EXHIBIT 4-15 Projected Impact to Wholesale Customer Water Rate FY FY FY FY FY Purchased Water Costs 3,237,676 3,270,053 6,176,149 6,300,289 7,063,254 Eligible Distribution O&M $868, , , ,457 1,020,618 Eligible Distribution Debt Svc 1,034, , , , ,168 Total Eligible Costs 5,140,494 5,170,145 8,109,489 7,469,811 8,273,040 Projected Gallons Pumped (000s) 3,421,859 3,456,080 3,490,640 3,525,547 3,560,802 Cost per 1,000 gallons $1.50 $1.50 $2.32 $2.12 $2.32 % Change 0% 55% -9% 10% GNV DOCX/ WBG DFB COPYRIGHT 2011 BY CH2M HILL, INC.

172 SECTION 4. FINANCIAL ANALYSIS 4.8 Comparison to Bills in Other Communities Exhibit 4-16 presents a comparison of the current monthly residential water bills for selected cities and counties in Alabama. The City s current (FY 2011) monthly water bill for residential customers consuming 5,000 gallons of water per month is $ This amount is slightly higher than the overall average monthly bill of $27.85 for the other communities surveyed, but within the range of the other communities surveyed. With the proposed retail rate adjustments presented in Exhibit 4-14, the City s monthly charges for a typical residential customer would rise to $33.60 in FY EXHIBIT 4-16 City of Cullman Retail Water Rate Comparison with Other Communities Estimated City Monthly Bill Huntsville $10.66 Decatur $10.70 Mobile $14.16 Dothan $16.28 Auburn $17.83 Tuscaloosa $19.95 Cherokee County $25.20 Cullman $30.55 Montgomery $36.47 Birmingham $37.16 Double Springs $41.80 Curry $43.23 Berry $58.00 Average $27.85 Notes: 1) Assumed 5,000 gallons per month 2) 1 cubic foot = 7.48 gallons 3) Monthly water bills exclude drought rates or other surcharges and utility taxes The total annual bill for residential water service in the City, assuming 5,000 gallons of water usage per month, would amount to $367. This represents approximately 1.1 percent of the median household income in Cullman in It should be noted that direct bill comparisons between communities are difficult because of differing system requirements (that is, filtered system vs. well system), policy decisions, debt service, tax structures, and usage levels for the various utilities. Seasonality and pricing structures also drive different usage levels. Finally, future rate increases of other communities are not known at this time, which makes comparisons of future water rates difficult. GNV DOCX/ WBG DFB COPYRIGHT 2011 BY CH2M HILL, INC.

173 SECTION 5 Works Cited CDG Engineers and Associates Annual Adjustment for Wholesale Water Rates for Fiscal Year January CH2M HILL Technical Memorandum: Cullman Utilities Water Treatment Plant Flow Projections. November 6, CH2M HILL Water Supply and Treatment Master Plan. Prepared for the Utilities Board of the City of Cullman, Alabama. March City-Data.com. Median Household Income, Cullman, AL. Available at: Accessed on March 1, City of Auburn, Alabama. Fee Schedule for Water and Sewer, Effective January 1, Available at: Accessed on March 1, City of Birmingham, Alabama. Residential Rates. Effective January 1, Available at: id=109&itemid=177. Accessed on March 1, City of Cullman. Audited Financial Statements, Water Fund City of Decatur, Alabama. Decatur Utilities Residential Rate Schedule. Effective October Available at: Accessed on March 1, City of Dothan, Alabama. Dothan Utilities Water/Wastewater Division. Effective October 1, Available at: Accessed on March 1, City of Tuscaloosa, Alabama. Water Rate and Fee Schedule. Effective October 1, Available at: Accessed on March 1, Cullman Utilities Board. Audited Financial Statements, Water Division DBC Finance. Cullman Series 2011 Debt Service Schedule. DBC Finance. Cullman Series 2014 Debt Service Schedule. Huntsville Utilities. Residential Rates. Effective September Available at: Accessed on March 1, Mobile Area Water and Sewer System. Water and Sewer System Fee Schedule. Effective January 1, Available at: Accessed on March 1, GNV DOCX/ WBG DFB COPYRIGHT 2011 BY CH2M HILL, INC.

174 SECTION 5. WORKS CITED Montgomery Water Works and Sanitary Sewer Board. Rate Information. Effective January 1, Available at: GNV DOCX/ WBG DFB COPYRIGHT 2011 BY CH2M HILL, INC.

175 APPENDIX F FORM OF OPINION OF BOND COUNSEL

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177 APPENDIX F FORM OF OPINION OF BOND COUNSEL [Date of Initial Delivery] The Utilities Board of the City of Cullman Cullman, Alabama Re: $58,485,000 The Utilities Board of the City of Cullman Water Revenue Bonds, Series 2011 Ladies and Gentlemen: We have acted as Bond Counsel in connection with the issuance of the above-referenced bonds (herein called "the Bonds") and as such we have examined certified copies of proceedings showing the organization under the laws of Alabama of The Utilities Board of the City of Cullman (herein called "the Board"), together with copies of proceedings of the Board and other documents submitted to us pertaining to the authorization, sale and issuance of the Bonds. As to questions of fact material to our opinion, we have relied upon certified proceedings and other certifications of public officials and others furnished to us without undertaking to verify the same by independent investigation. The opinions hereinafter expressed and the statements hereinafter made are based upon our examination of the aforesaid proceedings and documents. The documents submitted to us show as follows: (a) that the Bonds have been issued under a Trust Indenture dated as of June 1, 2011 (herein called "the Indenture"), from the Board to Regions Bank (herein called "the Trustee"); (b) that the Board has reserved, in the Indenture, the privilege of issuing from time to time additional bonds (herein called "Additional Bonds") in one or more series, without limitation as to principal amount, secured on a parity with the Bonds, upon compliance with the conditions set forth in the Indenture; and (c) that the Board and the City of Cullman, Alabama (herein called "the City") have entered into an agreement (herein called "the Supply Agreement") extending beyond the final maturity of the Bonds, wherein (i) the Board is required to furnish to the City, and the City is required to purchase from the Board, the entire water requirements of the City for sale to the customers of the City's water distribution system (herein called "the Distribution System"), as now or hereafter constituted, and (ii) the City is required to pay to the Board, but solely out of the revenues derived from the operation of the Distribution System, for the water made available to it on a monthly basis (whether or not the City actually withdraws and uses such water), all operation and maintenance expenses of the System, amounts sufficient to pay the principal of and the interest on the Bonds and amounts sufficient to establish and maintain the Reserve Fund created in the Indenture. F-1

178 We are of the following opinion: (1) that the Board has been duly organized as a public corporation pursuant to the laws of Alabama and has corporate power to own and operate its water supply system (herein called "the Supply System"), to issue the Bonds and to execute and deliver the Indenture; (2) that in the authorization, execution and issuance of the Bonds, all applicable requirements of the constitution and laws of Alabama have been complied with; (3) that the Bonds are in due and legal form and evidence valid special obligations of the Board payable solely out of the revenues derived from the operation of the Supply System, remaining after payment of the expenses of operating and maintaining the Supply System; (4) that the Bonds have been issued under the Indenture and are secured, pro rata with any of the Additional Bonds that may hereafter be issued, and without preference or priority of one bond over another, by a pledge of the said revenues out of which they are payable and by the provisions of the Indenture; (5) that the said pledge is a valid pledge of said revenues, subject to all prior lawful charges on said revenues; (6) that the Indenture has been duly authorized, executed and delivered on behalf of the Board and constitutes a valid and binding agreement, enforceable against the Board, subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting the enforcement of creditors' rights generally; (7) that the Bonds are exempt from registration under the Securities Act of 1933, as amended, and the Indenture is exempt from qualification under the Trust Indenture Act of 1939, as amended; (8) that the Supply Agreement constitutes a valid and binding agreement, enforceable against the parties thereto, subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting the enforcement of creditors' rights generally; (9) that under presently existing law, the interest on the Bonds is exempt from income taxation by the State of Alabama; and (10) that under the Internal Revenue Code of 1986, as amended (herein called "the Code"), as presently construed and administered, and assuming compliance by the Board with the covenants set forth in the Indenture with respect to certain requirements of Federal tax law, the interest income on the Bonds will be excludable from gross income of the recipients thereof for Federal income tax purposes pursuant to the provisions of Section 103(a) of the Code. In addition, the interest income on the Bonds will not be an item of tax preference included in alternative minimum taxable income for the purpose of computing the alternative minimum tax imposed by Section 55 of the Code. We express no opinion with respect to the Federal tax consequences of ownership of the Bonds under any other provision of the Code. We have not examined the title of the Board to the Supply System, but have, pursuant to instructions, assumed that the Board has good title to the Supply System, subject to "Permitted Encumbrances," as that term is defined in the Indenture. F-2

179 The Indenture provides that in the event the Board should default in any of the provisions thereof in the manner and for the time therein provided, the Trustee may declare all bonds then outstanding under the Indenture to be forthwith due and payable, whereupon the same shall immediately become due and payable and the Trustee shall be entitled to exercise the rights specified in the Indenture. The Indenture does not, however, constitute a mortgage on the Supply System and is not, therefore subject to foreclosure. The Indenture further provides that to the extent and in the manner provided thereby, it may be amended with the written consent of the holders of at least 66-2/3% in principal amount of the bonds then outstanding thereunder. We express no opinion with respect to the accuracy, adequacy or completeness of the Official Statement of the Board relating to the Bonds. Yours very truly,, F-3

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181 APPENDIX G SUMMARY OF THE CONTINUING DISCLOSURE AGREEMENT

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183 APPENDIX G SUMMARY OF THE CONTINUING DISCLOSURE AGREEMENT The following is a summary of the Continuing Disclosure Agreement (the "Agreement") entered into by the Board and the City, for the benefit of the holders of the Series 2011 Bonds, in order to assist the Underwriters in complying with the provisions of Rule 15c2-12 (the "Rule"), promulgated by the Securities and Exchange Commission (the "Commission") pursuant to the Securities Exchange Act of Except where otherwise defined in this Appendix, all capitalized terms have the meaning assigned in the front portion of this Official Statement. Annual Report of the Board. The Board agrees, in accordance with the provisions of the Rule, to provide or cause to be provided to the Municipal Securities Rulemaking Board (the "MSRB"), in an electronic format prescribed by the MSRB, within 180 days after the close of each fiscal year of the Board (October 1 September 30) ending on or after September 30, 2011, the following annual financial information and operating data (the "Board s Annual Report") with respect to such fiscal year: (a) a summary of the revenues and expenses of the Board's Water Division of the type included in the Official Statement under "RESULTS OF OPERATIONS - Summary of Revenues and Expenses of Supply System"; and (b) information with respect to (i) total gallons pumped from the Supply System, (ii) daily average gallons pumped, (iii) the average hours pumped per day and (iv) the peak day gallons pumped. If audited financial statements for the Board's Water System for the related fiscal year are not submitted as part of the Board's Annual Report, then the Board agrees to provide such audited financial statements, when and if available, to the MSRB. Currently, continuing disclosure information is provided to the MSRB through its Electronic Municipal Market Access ("EMMA") website at The Board reserves the right to modify from time to time the specific types of information provided or the format of the presentation of the Board s Annual Report, to the extent necessary or appropriate in the judgment of the Board; provided that, the Board agrees that any such modification will be done in a manner consistent with the Rule. Annual Report of the City. The City agrees, in accordance with the provisions of the Rule, to provide or cause to be provided to the MSRB, in an electronic format prescribed by the MSRB, within 180 days after the close of each fiscal year of the City (October 1 September 30) ending on or after September 30, 2011, the following annual financial information and operating data (the "City s Annual Report") with respect to such fiscal year: (a) a summary of the revenues and expenses of the City s water department of the type included in the Official Statement under "RESULTS OF OPERATIONS Summary of Revenues and Expenses of the City's Distribution System"; and; (b) operating data with respect to the Distribution System of the type included in the Official Statement under "THE CITY'S DISTRIBUTION SYSTEM." If audited financial statements for the City's water department for the related fiscal year are not included as part of the City's Annual Report, then the City agrees to provide such audited financial statements, when and if available, to the MSRB. Currently, continuing disclosure information is provided to the MSRB through its Electronic Municipal Market Access ("EMMA") website at G-1

184 The City reserves the right to modify from time to time the specific types of information provided or the format of the presentation of the City s Annual Report, to the extent necessary or appropriate in the judgment of the City; provided that, the City agrees that any such modification will be done in a manner consistent with the Rule. Notice of Material Events. The Board agrees to provide or cause to be provided to the MSRB, in a timely manner not in excess of ten (10) business days after the occurrence of the event, notice of any of the following events with respect to the Series 2011 Bonds: (a) Principal and interest payment delinquencies; (b) Non-payment related defaults, if material; (c) Unscheduled draws on any reserve funds reflecting financial difficulties; (d) Unscheduled draws on credit enhancements reflecting financial difficulties; (e) Substitution of credit or liquidity providers, or their failure to perform; (f) Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notice of Proposed Issue (IRS Form 5701 TEB) or other material notices or determinations with respect to the tax status of the Series 2011 Bonds, or other material events affecting the tax status of the Series 2011 Bonds; (g) Modifications to rights of Bondholders, if material; (h) Bond calls, if material, and tender offers; (i) Defeasances; (j) Release, substitution or sale of property securing repayment of the Series 2011 Bonds, if material; (k) Rating changes; (l) Bankruptcy, insolvency, receivership or similar event with respect to the Board; (m) The consummation of a merger, consolidation, or acquisition involving the Board or the sale of all or substantially all of the assets of the Board, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; or (n) Appointment of a successor or additional trustee or the change of the name of a trustee, if material. The Board may from time to time choose to provide notice of the occurrence of certain other events, in addition to those listed above, if, in the judgment of the Board, such other event is material with respect to the Series 2011 Bonds, but the Board does not undertake to commit to provide any such notice of the occurrence of any material event except those events listed above. Notice of Non-Compliance. The Board and the City each agree to provide or cause to be provided, in a timely manner, to the MSRB notice of any failure by the Board or the City to provide the annual financial information described herein on or prior to the dates respectively set forth in said sections. Beneficiaries and Enforcement. The Board and the City agree that their respective undertakings pursuant to the Rule set forth in the Agreement are intended to be for the benefit of the holders of the Series 2011 Bonds and G-2

185 shall be enforceable by such holders; provided, that the right of the holders of the Series 2011 Bonds to enforce the provisions of the Agreement shall be limited to a right to obtain specific enforcement of the respective obligations of the Board and the City under the Agreement. No failure by the Board or the City to comply with its respective obligations under the Agreement shall constitute an event of default under the Indenture. Amendment. The Agreement may be amended without the consent of any holders of the Series 2011 Bonds if (a) such amendment is made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature, or status of the Board or the City, as the case may be; (b) the Agreement, as so amended, would have complied with the requirements of the Rule at the time of the execution thereof, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and (c) the Board and the City receive an opinion of nationally recognized bond counsel that such amendment does not materially impair the interests of any of the holders of the Series 2011 Bonds. G-3

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187 APPENDIX H SPECIMEN MUNICIPAL BOND INSURANCE POLICY

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189 H-1

190 H-2