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1 NEW ISSUE BOOK ENTRY ONLY se BAH BUILD RMGMICA MUTUAL BUILD RMGMICA MUTUAL Piper Jaffray RATINGS: S&P: AA (Stable)(Insured) Moody s: A2 (Underlying) (See RATINGS herein) In the opinion of Bond Counsel, the interest on the Series 2017 Bonds will be excludable from gross income for federal income tax purposes under existing statutes, regulations, rulings and court decisions. In the opinion of Bond Counsel, interest on the Series 2017 Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although it is included in adjusted current earnings in calculating corporate alternative minimum taxable income. In the opinion of Bond Counsel, the interest on the Series 2017 Bonds will be exempt from income taxation by the State of Alabama under existing statutes. For a discussion of other possible tax consequences of receiving interest on the Series 2017 Bonds, see TAX EXEMPTION herein. Dated: Date of Issuance $48,710,000 THE GOVERNMENTAL UTILITY SERVICES CORPORATION OF THE CITY OF BESSEMER (ALABAMA) WATER SUPPLY REVENUE BONDS Series 2017 Due: June 1, as shown on inside cover The Series 2017 Bonds are issuable only in fully registered form and will be initially registered only in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ( DTC ), serving as securities depository for the Series 2017 Bonds. The Series 2017 Bonds will be available to purchasers in denominations of $5,000 or any integral multiple thereof, issued on a parity with any Additional Bonds issued pursuant to the Indenture that is hereinafter described, only under the book-entry system maintained by DTC through its brokers and dealers who are, or act through, DTC Participants (as defined herein). The purchasers of the Series 2017 Bonds will not receive physical delivery thereof. Interest on the Series 2017 Bonds will be payable on June 1, 2018, and on each June 1 and December 1 thereafter. Payments of principal of, premium, if any, and interest on the Series 2017 Bonds will be paid by U.S. Bank National Association, Birmingham, Alabama, the Trustee and registrar of the Series 2017 Bonds (the Trustee ), to DTC or its nominee. DTC will credit such payments to the accounts of DTC Participants, which will make payments to the Beneficial Owners (as defined herein) of the Series 2017 Bonds as more fully described herein. For so long as any purchaser is the Beneficial Owner of a Series 2017 Bond, such purchaser must maintain an account with a broker or dealer who is, or acts through, a DTC Participant to receive payment of the principal of, premium, if any, and interest on such Series 2017 Bonds. The Series 2017 Bonds will constitute limited obligations of The Governmental Utility Services Corporation of the City of Bessemer (the GUSC ), a public corporation created under the laws of the State of Alabama, payable solely out of the net revenues derived from the operation of a water intake, treatment and supply facility and an approximately 16.5-mile water transmission line (the Project ) owned by the GUSC, and will be secured by a first pledge of such net revenues. See SOURCE OF PAYMENT AND SECURITY. The Series 2017 Bonds will not constitute an obligation or debt of the State of Alabama, the City of Bessemer, Alabama (the City ), or any municipality, county or other political subdivision thereof. No holder of any of the Series 2017 Bonds shall ever have the right to demand payment from ad valorem taxes or general revenues of the City or the State of Alabama. The GUSC has no taxing power. The GUSC and the City have entered into a Water Supply Agreement dated as of June 1, 1998, as amended as herein described, pursuant to which the GUSC sells water from the Project to the City, and the City purchases and pays for such water on a monthly basis in such minimum amounts (regardless of the amount of water actually received by the City from the GUSC) as will be sufficient to provide for the payment of the operation and maintenance expenses of the GUSC and the payment, when due, of the principal of, interest on and premium (if any) on the Series 2017 Bonds. The Series 2017 Bonds are subject to redemption prior to maturity as described herein. See THE SERIES 2017 BONDS-Redemption. The scheduled payment of principal of and interest on the Series 2017 Bonds when due will be guaranteed under a municipal bond insurance policy to be issued by Build America Mutual Assurance Company ( BAM ). For Maturities, Interest Rates, Prices or Yields and CUSIP Numbers, see Inside Front Cover The Series 2017 Bonds are offered, subject to prior sale, when, as and if issued and received by the Underwriter thereof, subject to the approval of the validity thereof by Butler Snow LLP, Birmingham, Alabama, Bond Counsel. Certain legal matters will be passed upon for the City and for the GUSC by their counsel, Paden & Paden, P.C., Bessemer, Alabama, and for the Underwriter by its counsel, Ezell Law, LLC, Birmingham, Alabama. It is expected that the Series 2017 Bonds in definitive form will be available for delivery through the Depository Trust Company in New York, New York, on or about November 9, Dated: October 26, 2017

2 $48,710,000 THE GOVERNMENTAL UTILITY SERVICES CORPORATION OF THE CITY OF BESSEMER (ALABAMA) WATER SUPPLY REVENUE BONDS Series 2017 Dated: Date of Issuance Due: June 1, as shown below Maturity (June 1) Principal Amount Interest Rate Yield CUSIP 2018 $ 705, % 1.200% CW ,380, % CX ,420, % CY ,495, % CZ ,570, % DA ,650, % DB ,730, % DC ,815, % DD ,905, % DE ,005, % DF ,105, % 2.600* DG ,210, % 2.700* DH ,320, % 2.800* DJ ,435, % 2.870* DK ,555, % 2.940* DL ,685, % 3.000* DM ,820, % 3.260* DN ,930, % 3.310* DP ,050, % DQ8 $9,925,000 Term Bonds Due June 1, 2039 at 5.000%; Yield 3.240%*; CUSIP: DT2 Copyright 2017, American Bankers Association. CUSIP data herein are provided by Standard & Poor s CUSIP Service Bureau, a division of The McGraw-Hill Companies, Inc. All rights reserved. The CUSIP numbers listed above are being provided only for the convenience of the reader and neither the GUSC, the City, nor the Underwriter makes any representation with respect to such numbers or undertakes any responsibility for their accuracy now or at any time in the future. Any CUSIP number may change after the issuance of the Series 2017 Bonds as a result of subsequent events, including the procurement of secondary market portfolio insurance or other similar enhancement that is applicable to all or certain portions of the Series 2017 Bonds. * Yield calculated to first optional redemption date, December 1, 2027.

3 THE GOVERNMENTAL UTILITY SERVICES CORPORATION OF THE CITY OF BESSEMER Sarah W. Belcher, Chairperson and Director Alphonso Patrick, Co-Chairperson and Director Maurice Muhammad, Secretary - Treasurer and Director CITY OF BESSEMER Mayor Kenneth E. Gulley Council Members Jesse Matthews, President Cynthia Donald, President Pro-Tem Cleophus King Ron Marshall Chester W. Porter Donna Thigpen David Vance City Clerk Wanda Taylor Finance Director and City Treasurer Kela Pryor City and GUSC Counsel Paden & Paden, P.C. Bessemer, Alabama Underwriter Piper Jaffray & Co. Birmingham, Alabama Underwriter s Counsel Ezell Law, LLC Birmingham, Alabama Bond Counsel Butler Snow LLP Birmingham, Alabama

4 No dealer, broker, salesman or other person has been authorized to give any information or to make any representations, other than as contained in this Official Statement, in connection with the offering of the Series 2017 Bonds described herein, and, if given or made, such other information or representations must not be relied upon as having been authorized by the GUSC or by the Underwriter. 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 2017 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 furnished by the GUSC or by the City and by other sources which are believed to be reliable, but is not guaranteed as to accuracy or completeness, and is not to be construed as a representation by the Underwriter. The information and expressions of opinion herein are subject to change without notice and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the GUSC since the date hereof. All estimates and assumptions contained herein are believed to be reliable, but no representation is made that such estimates or assumptions are correct or will be realized. All quotations from and summaries and explanations of provisions of laws and documents in this Official Statement do not purport to be complete, and reference is made to such laws and documents for full and complete statements of their provisions. In connection with this offering the Underwriter may engage in transactions that stabilize, maintain or otherwise affect the price of the Series 2017 Bonds. Such transactions may include purchases of the Series 2017 Bonds for the purpose of maintaining the price of the Series 2017 Bonds. Such transactions, if commenced, may be discontinued at any time. The Underwriter has provided the following sentence for inclusion in this Official Statement: The Underwriter has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information. This Official Statement is being provided to prospective purchasers either in bound printed format or in electronic format. This Official Statement may be relied upon only if it is in its bound printed format or as printed in its entirety in such electronic format. In making an investment decision, investors must rely on their own examination of the terms of the offering, including the merits and risks involved. Build America Mutual Assurance Company ( BAM ) makes no representation regarding the Series 2017 Bonds or the advisability of investing in the Series 2017 Bonds. In addition, BAM 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 BAM, supplied by BAM and presented under the heading Bond Insurance and Appendix E - Specimen Municipal Bond Insurance Policy and Specimen Reserve Policy. i

5 TABLE OF CONTENTS SUMMARY STATEMENT... 1 INTRODUCTION... 4 THE GUSC... 5 THE PROJECT... 5 THE SERIES 2017 BONDS... 6 BOOK-ENTRY SYSTEM BOND INSURANCE THE WATER SYSTEM ESTIMATED SOURCES AND USES OF FUNDS ADDITIONAL BONDS DEBT SERVICE SCHEDULE RATE COVENANT OF THE CITY CERTAIN BONDHOLDERS RISKS TAX EXEMPTION LITIGATION LEGALITY RATINGS UNDERWRITING CONTINUING DISCLOSURE UNDERTAKING SOURCES OF INFORMATION GENERAL INFORMATION CERTIFICATE CONCERNING OFFICIAL STATEMENT Appendix A - Information Concerning the City of Bessemer, Alabama Appendix B - Audited Financial Statements of the Water Service Department and the GUSC Appendix C - Proposed Form of Bond Counsel Opinion Appendix D - Summaries of Legal Documents Appendix E - Specimen Municipal Bond Insurance Policy and Specimen Reserve Policy Appendix F - Summary of Continuing Disclosure Agreements Page

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7 SUMMARY STATEMENT (This Summary Statement is subject in all respects to the more detailed information contained herein. All terms not defined herein shall have the meanings assigned to them in the hereinafter defined Indenture) The Governmental Utility Services Corporation of the City of Bessemer (the GUSC ) is a public corporation and instrumentality organized and existing under the laws of the State of Alabama, and particularly pursuant to the provisions of Chapter 97, Title 11, Code of Alabama The GUSC was incorporated on October 24, The City of Bessemer, Alabama (the City ). The City is a municipality of the State of Alabama. It is located in the southwest area of Jefferson County, which is Alabama s most populous county. As of the 2010 Census, the City has a population of approximately 27,456 people and is the fourth largest municipality in Jefferson County. The City is governed by a mayor/council form of government. The Water System. The City owns, operates and maintains a water distribution system (the Water System ). A summary of the components of the Water System is outlined herein under the caption THE WATER SYSTEM. The Electric Service Department of the City sends a combined bill for the electric, water and sewer monthly fees and rates to each customer, and the Electric Service Department of the City remits to the City s Water Service Department the portion of a customer s payment corresponding to the monthly water fees and rates for that customer. The Project. The Project herein described, which is owned by the GUSC, consists of a water intake structure, a treatment and supply facility with the capacity to operate at 24 million gallons per day, and an approximately 16.5-mile water transmission line (the Project ). The Project was constructed in order to reduce the cost of purchasing water for the Water System and to establish an independent source of water for the City. The City has entered into a Water Supply Agreement, dated as of April 1, 1998 (the Water Supply Agreement ) with the GUSC for the exclusive supply of water for the Water System. The GUSC has also heretofore entered into a Water Facilities Service Agreement dated February 27, 1997, with Covanta of Bessemer, Inc. ( Covanta ) a wholly-owned subsidiary of Covanta Corporation, as amended by a First Amendment to Water Facilities Service Agreement dated as of June 1, 1998 (the said Water Facilities Service Agreement, as so amended being herein called the Water Service Agreement ) by which Covanta agreed to construct and manage the Project as the agent of the GUSC for a contractual term of twenty years from the date of completion of construction of the Project. Construction of the Project was completed in the month of July, 2001, and the original term of the Water Service Agreement would have extended until The GUSC determined that it could operate the Project at a lower cost than the required payments to Covanta under the Water Service Agreement, and the GUSC agreed to pay the sum of $1,500,000 to Covanta in consideration of the termination of the Water Service Agreement by Covanta. In order to finance the construction and equipping of the Project the GUSC has heretofore issued and sold its Water Supply Revenue Bonds, Series 1998, dated June 1, 1998 (the Series 1998 Bonds ) originally issued in the aggregate principal amount of $56,815,000. The Series 1998 Bonds were issued under a Trust Indenture dated as of June 1, 1998 (the Original Indenture ) from the GUSC to U.S. Bank National Association, Birmingham, Alabama as Trustee (the Trustee ), as well as its Water Supply Revenue Refunding Bonds, Series 2002, dated March 1, 2002 (the Series 2002 Bonds ), originally issued in the aggregate principal amount of $3,070,000. The Series 2002 Bonds were issued under the Original Indenture, as amended and supplemented by a First Supplemental Trust Indenture dated as of February 1, 2002 (the First Supplemental Indenture ) and a Second Supplemental Trust Indenture dated as of March 1, 2002 (the Second Supplemental Indenture ) from the GUSC to the Trustee. The Series 2002 Bonds were issued in order to refund those of the Series 1998 Bonds having stated maturities in 2003 to 2008, inclusive, in the aggregate principal amount of $3,060,000. 1

8 The GUSC has also issued and sold its Water Supply Revenue Refunding Bonds, Series 2008, dated April 1, 2008 (the Series 2008 Bonds ) originally issued in the aggregate principal amount of $61,310,000 and now outstanding in the aggregate principal amount of $51,630,000. The Series 2008 Bonds were issued under the Original Indenture, as amended and supplemented by the First Supplemental Indenture, by the Second Supplemental Indenture and by a Third Supplemental Trust Indenture dated as of April 1, 2008 (the Third Supplemental Indenture ) from the GUSC to the Trustee for the purposes of refunding and retiring the Series 1998 Bonds and certain of the Series 2002 Bonds (the Refunded Series 2002 Bonds ) and obtaining funds with which to terminate the Water Service Agreement by the said payment of $1,500,000 to Covanta. All of the Series 2002 Bonds have now been paid and retired. The Series 2017 Bonds will be issued and sold under the Original Indenture, as supplemented and amended by the First Supplemental Indenture, by the Second Supplemental Indenture, by the Third Supplemental Indenture, and by a Fourth Supplemental Trust Indenture dated as of November 1, 2017 (the Fourth Supplemental Indenture ) from the GUSC to the Trustee (the Original Indenture, the First Supplemental Indenture, the Second Supplemental Indenture, the Third Supplemental Indenture and the Fourth Supplemental Indenture being herein together called the Indenture ). The Series 2017 will be issued for the purposes of refunding and retiring the outstanding Series 2008 Bonds and obtaining funds to pay for certain capital improvements to the Water System (the Series 2017 Improvements ). The Series 2017 Bonds will be secured by the net revenues generated from the exclusive sale of water to the City pursuant to the Water Supply Agreement, on a parity of lien and pledge each with the other. The City in turn sells the water purchased from the GUSC to its customers. Under the terms of the Water Supply Agreement, the City is obligated to pay amounts, as the purchase price for water purchased from the GUSC, corresponding to the operation and maintenance expenses of the Project and the principal of, premium, if any, and interest on the Series 2017 Bonds when due. The payments by the City to the GUSC under the Water Supply Agreement are an operating expense of the Water System to be paid prior to any payment of any principal of or interest on the City s outstanding water revenue indebtedness. Use of Proceeds. The net proceeds of the Series 2017 Bonds, after deduction of all issuance costs, will be used by the GUSC to refund the Series 2008 Bonds and to pay for a portion of the costs of the Series 2017 Improvements. The Series 2017 Bonds - General Description. The Series 2017 Bonds will be issued on a parity of lien and pledge with any Additional Bonds issued pursuant to the Indenture as regards the pledge of the net revenues from the Project. The Series 2017 Bonds will be issued in the aggregate principal amount of $48,710,000. The Series 2017 Bonds will be issued to provide funds to refund the Series 2008 Bonds and to pay for a portion of the costs of the Series 2017 Improvements. The Series 2017 Bonds will be issued as fully registered bonds, registerable as to both principal and interest, in the denomination of $5,000 each. The Series 2017 Bonds are payable solely from a first lien on the net revenues to be derived from the operation of the Project, on a parity with any Additional Bonds issued pursuant to the Indenture. See SOURCE OF PAYMENTS AND SECURITY. Interest on Series 2017 Bonds. In the opinion of Bond Counsel, under existing law, and assuming compliance with the tax covenants described herein, interest on the Series 2017 Bonds will not be includable in gross income for purposes of federal income taxation. In addition, in the opinion of Bond Counsel, interest on the Series 2017 Bonds is, under existing statutes and regulations as presently construed, exempt from Alabama income taxation. The GUSC has covenanted in the Indenture to comply with the Internal Revenue Code. See, however, TAX EXEMPTION herein regarding certain other tax considerations. 2

9 Reserve Fund. The GUSC is required by the Indenture to maintain a Reserve Fund in addition to the Bond Fund, after giving effect to any surety bond, insurance policy or letter of credit deposited in such Reserve Fund defined in the Indenture in an amount equal to the maximum annual debt service requirement with respect to the Series 2017 Bonds. See SOURCE OF PAYMENT AND SECURITY. Water Rates. The City adopts the rates to be charged for services from the Water System by resolution. The rates and the City s rules and regulations regarding service are not subject to review by any federal or state regulatory authority. The City has covenanted to make, impose, charge and collect the rates for the services of the Water System (the Service Charges ) sufficient (i) to pay all the expenses of operating the Water System, including payments to the GUSC under the Water Supply Agreement (the Current Expenses ); and (ii) to pay at least 120% of the then applicable maximum annual debt service requirement on the non-refunded portion of the City s $24,995,000 in original principal amount of Water Revenue Warrants, Series 2008, dated January 1, 2008 (the Series 2008 Water Warrants ) issued pursuant to a Trust Agreement dated as of January 1, 2008 (the Trust Agreement ), between the City and U.S. Bank National Association, as trustee, and any other parity Warrants. Additionally, in calendar year 2017, the City anticipates the issuance of certain water revenue warrants, to be issued pursuant to the Trust Agreement, as amended. See RATE COVENANT OF THE CITY and SOURCE OF PAYMENT AND SECURITY. Redemption. The Series 2017 Bonds are subject to optional, mandatory and extraordinary redemption prior to maturity as described under THE SERIES 2017 BONDS Redemption, herein. Additional Bonds. The Indenture permits the issuance of Additional Bonds on a parity of lien and pledge with the Bonds of the GUSC. See ADDITIONAL BONDS. 3

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11 OFFICIAL STATEMENT $48,710,000 THE GOVERNMENTAL UTILITY SERVICES CORPORATION OF THE CITY OF BESSEMER (ALABAMA) WATER SUPPLY REVENUE BONDS SERIES 2017 INTRODUCTION This Official Statement of The Governmental Utility Services Corporation of the City of Bessemer, an Alabama public corporation (the GUSC ), which includes the cover page and the appendices hereto, is being furnished in connection with the sale by the GUSC of its $48,710,000 in aggregate principal amount Water Supply Revenue Bonds, Series 2017, dated the date of their issuance (the Series 2017 Bonds ). The Series 2017 Bonds will be issued under a Trust Indenture dated as of June 1, 1998 (herein referred to as the Original Indenture ), as supplemented and amended by a First Supplemental Trust Indenture dated as of February 1, 2002 (the First Supplemental Indenture ), by a Second Supplemental Trust Indenture dated as of March 1, 2002 (the Second Supplemental Indenture ), by a Third Supplemental Trust Indenture dated as of April 1, 2008 (the Third Supplemental Indenture ), and by a Fourth Supplemental Trust Indenture dated as of November 1, 2017 (the Fourth Supplemental Indenture ), from the GUSC to U.S. Bank National Association, Birmingham, Alabama, as Trustee (the Trustee ). The Series 2017 Bonds will be issued pursuant to the provisions of Chapter 97 of Title 11 of the Code of Alabama 1975, as amended (the Act ). The GUSC has heretofore issued under the Original Indenture, as supplemented by the First Supplemental Indenture, the Second Supplemental Indenture, and the Third Supplemental Trust Indenture (i) its Water Supply Revenue Bonds, Series 1998, dated June 1, 1998 (the Series 1998 Bonds ), originally issued in the aggregate principal amount of $56,815,000, its (ii) its Water Supply Revenue Refunding Bonds, Series 2002, dated March 1, 2002 (the Series 2002 Bonds ), originally issued in the aggregate principal amount of $3,070,000, and (iii) its Water Supply Revenue Refunding Bonds, Series 2008, dated April 1, 2008 (the Series 2008 Bonds ), originally issued in the aggregate principal amount of $61,310,000 and now outstanding in the aggregate principal amount of $54,010,000. The Series 1998 Bonds were issued in order to finance a water supply plant or facility (the Project ) to serve the City of Bessemer, Alabama (the City ) and the surrounding territory. The Series 2002 Bonds were issued for the purpose of refunding those of the Series 1998 Bonds having stated maturities in 2003 to 2008 in the aggregate principal amount of $3,060,000. The Series 2008 Bonds were issued for the purpose of refunding the Series 1998 Bonds and certain of the Series 2002 Bonds and thereby enabling the GUSC to reduce its net interest cost, and to enable the GUSC to obtain funds with which to provide for the termination of that certain Water Facilities Service Agreement dated February 27, 1997 (the Water Service Agreement ) between the GUSC and Covanta of Bessemer, Inc. ( Covanta ), as amended, by which Covanta had heretofore operated and maintained the Project. All capitalized terms used herein shall have the meanings as set forth herein and as defined in Appendix D - Summaries of Legal Documents. The Series 2017 Bonds are being issued for the purpose of providing funds to refund the outstanding Series 2008 Bonds and to make certain capital improvements to the Project (the Series 2017 Improvements ). The Series 2017 Bonds will be payable from the revenues derived from the Project, which is a water treatment and supply facility with the capacity to provide 24 million gallons of water per day, and an approximately 16.5-mile water transmission line and is owned by the GUSC. The Series

12 Bonds and any other Additional Bonds issued under the Original Indenture, as supplemented and amended by the First Supplemental Indenture, the Second Supplemental Indenture the Third Supplemental Indenture and the Fourth Supplemental Indenture (together, the Indenture ), and any other supplements to the Indenture are special, limited obligations of the GUSC, payable solely out of the net revenues from the operation of the Project, including the Water Supply Agreement hereinafter described. The information contained in this Official Statement does not purport to be comprehensive or definite. All references herein to, or summaries of the Indenture, the Water Supply Agreement or any contract, resolution or other document or official act related to the Series 2017 Bonds are qualified in their entirety by the exact terms of such documents or official acts, which are items of public record available from the GUSC. All references herein to, or summaries of, the Series 2017 Bonds are qualified in their entirety by the definitive forms thereof and the information with respect thereto included in the Indenture. THE GUSC The GUSC is a public corporation and instrumentality organized and existing under the laws of the State of Alabama, and a resolution adopted by the governing body of the City, authorizing its incorporation. The general purpose of the GUSC is the promotion of the health, welfare and safety of the people of the City by the financing of utility service facilities in the City and the surrounding territory. The powers of the GUSC are exercised by a three-member Board of Directors consisting of residents of the City who are appointed by the governing body of the City. The Series 2017 Bonds do not constitute a general obligation indebtedness of the City, and the City is in no way obligated for payment of the principal of or the interest and premium (if any) on the Series 2017 Bonds from moneys raised by ad valorem taxes or general revenues of the City. No holder of the Series 2017 Bonds shall have the right to compel any exercise of the taxing power of the City to pay the Series 2017 Bonds or any interest thereon. Further, the GUSC has no taxing power, and the Series 2017 Bonds are special obligations of the GUSC payable solely from the amount payable to the GUSC from the City pursuant to a Water Supply Agreement dated as of June 1, 1998, as amended by a First Amendment to Water Supply Agreement dated March 1, 2002, by a Second Amendment to Water Supply Agreement dated as of April 1, 2008, and by a Third Amendment to Water Supply Agreement dated as of November 1, 2017 (together the Water Supply Agreement ) between the City and the GUSC. The Water Supply Agreement obligates the City to pay to the GUSC, for any quantity of water supplied to the Water System, moneys that will be sufficient to pay the principal of and the interest on all outstanding Bonds of the GUSC. At present the GUSC has issued no other outstanding indebtedness other than the Series 2008 Bonds. THE PROJECT The Project consists of a water intake structure, a water treatment and supply facility with the capacity to operate at 24 million gallons per day, and an approximately 16.5-mile water transmission line. The Project is located in the western portion of Jefferson County, Alabama, and includes components necessary for the withdrawal, treatment and transmission of potable water to a connection point on the Water System. The components of the Project include a raw water intake and pumping station, raw water transmission main, water treatment plant, and potable water transmission main. Each component is more specifically described herein below. Based upon the existing water quality data for the raw water source, which is the Black Warrior River, the Project is designed to meet current and currently anticipated future water supply regulations of the Alabama Department of Environmental Management ( ADEM ) and the United States Environmental Protection Agency. The Project utilizes existing technologies widely accepted in the water supply 5

13 industry for treating surface water sources having similar characteristics. The processes and components of the Project are suitable for meeting the water treatment and transportation goals of the GUSC. General Description THE SERIES 2017 BONDS The Series 2017 Bonds will be issued in the aggregate principal amount of $48,710,000. The Series 2017 Bonds will be dated the date of their issuance, and will bear semi-annual interest at the rates set forth on the cover hereof (computed on the basis of a 360-day year of twelve consecutive 30-day months), payable on June 1, 2018, and on each June 1 and December 1 thereafter, and will mature on June 1 in the years and in the principal amounts set forth on said cover. The Series 2017 Bonds will be issued as fully registered bonds, registerable as to both principal and interest, in the denominations of $5,000 or in any integral multiple thereof. The principal of and premium (if any) on the Series 2017 Bonds will be payable at the principal corporate trust office of the Trustee, and the interest on the Series 2017 Bonds will be paid by the Trustee by draft or check mailed to the registered owner of the Series 2017 Bonds as such registered owner s name shall appear on the registry books of the Trustee on the fifteenth (15th) day of the calendar month immediately preceding each interest payment date. The principal of and the interest and premium (if any) on the Series 2017 Bonds will be payable in lawful money of the United States of America. Source of Payment and Security General. The Series 2017 Bonds will be special, limited obligations of the GUSC and will be payable solely from and will be secured by a pledge of the net revenues to be derived by the GUSC from the sale of water to the City pursuant to the Water Supply Agreement on a parity of lien and pledge with any Additional Bonds hereinafter issued by the GUSC. The Water Supply Agreement obligates the City to pay for water purchases ( Basic Payments ) on a monthly basis in such minimum amounts (irrespective of the amount of water actually received by the City from the GUSC) as will be sufficient to pay all operation and maintenance expenses of the Project and to provide for the payment, when due, of the principal of and the interest and premium (if any) on the Series 2017 Bonds. Lien of the Indenture. By and subject to the terms of the Indenture, the GUSC will, for the benefit of the holders of all bonds issued thereunder including the Series 2017 Bonds and any Additional Bonds hereinafter described (the Bonds ) and to secure payment of the principal thereof and the interest thereon, assign and pledge to the Trustee the following revenues, rights and interests related to the Project: (1) All moneys received by the GUSC from the City under the Water Supply Agreement for payment of debt service on the Series 2017 Bonds and all other revenues and receipts derived by the GUSC from the Project together with any investments, reinvestments or proceeds thereof, (2) All right, title and interest of the GUSC in and to the Water Supply Agreement, except for certain rights personal to or obligations of the GUSC which are expressly provided in the Water Supply Agreement; and (3) All moneys, rights and properties which may in any manner be transferred to or deposited with the Trustee by the GUSC, or anyone on its part, as additional security for the payment of all or any series of the Bonds or which, pursuant to the Indenture or the Water Supply Agreement, may be pledged to the Trustee s as such additional security. 6

14 The lien of the Indenture on the revenues and other receipts from the Project will be subject, however, to Permitted Encumbrances as defined in the Indenture. As previously stated, the purchase of water by the City from the GUSC constitutes an operation and maintenance expense of the Water System, which will be prior and superior to payment of the principal of and the interest on any water revenue indebtedness of the City. For a description of the City s presently outstanding Water System debt, see The Water System - Outstanding Indebtedness herein. Application of Revenues and Creation of Funds. General. The Indenture provides for the maintenance of five special funds, namely the Revenue Fund, the Operation and Maintenance Fund, the Replacement Fund, the Debt Service Fund and the Reserve Fund (together, the Indenture Funds ). The Trustee has been designated in the Indenture as the depository, custodian and disbursing agent for each of such funds. The Revenue Fund. The GUSC is required to deposit into the Revenue Fund, daily as received by it, all of the payments received from the City pursuant to the Water Supply Agreement. On or before the last Business Day of each calendar month, moneys on deposit in the Revenue Fund are to be transferred into the following funds in the following order, to the extent of the sufficiency thereof: (1) into the Operation and Maintenance Fund; (2) into the Replacement Fund, the amount, if any, required pursuant to the Water Service Agreement (as defined in the Indenture) to be paid therein; (3) into the Interest Account of the Debt Service Fund, to the extent necessary to make ratable deposits for the payment of interest on the Bonds; (4) into the Principal Account of the Debt Service Fund, to the extent necessary to make ratable deposits for the payment of principal of the Bonds; (5) into the Reserve Fund, to the extent that the amount on deposit therein shall be less than the Maximum Reserve Fund Requirement; and Fund. (6) any balance remaining to be paid to the Operation and Maintenance The Operation and Maintenance Fund. The Operation and Maintenance Fund is created for the purpose of providing moneys for the operation and maintenance of the Project. On or before the 15th day of each calendar month, the Trustee is required to transfer from the Revenue Fund to the Operation and Maintenance Fund the amount required to pay all unpaid Operating Expenses. The Trustee will apply moneys on deposit in the Operation and Maintenance Fund to the payment of all Operating Expenses that are then due and that were incurred during the then current or any then preceding calendar month. The Replacement Fund. The Replacement Fund was created for the purpose of performing nonroutine maintenance with respect to the Project and constructing capital improvements during the ten-year period commencing, at the end of the tenth (10th) year following completion of construction of the Project in the year Pursuant to the Indenture, the GUSC is required to deposit into the Replacement Fund the amounts anticipated by the GUSC to be needed for non-routine maintenance expenses and capital improvements to be incurred over the ten-year period beginning at the end of the tenth (10th) year 7

15 following the date the Project is accepted by the GUSC under the Water Service Agreement (as defined in the Indenture). The Debt Service Fund. The Debt Service Fund consists of two separate accounts, designated the Interest Account and the Principal Account. Out of the moneys on deposit in the Debt Service Fund, the Trustee shall make provision for the payment of the principal of and the interest on the Bonds as said principal and interest respectively become due. (1) Interest Account. On or before the last Business Day of each month, commencing with the month of December, 2017, the Trustee will transfer moneys from the Revenue Fund into the Interest Account of the Debt Service Fund to the extent and in the order described therein, the amounts described in the next succeeding paragraph. Moneys on deposit in the Interest Account shall be used solely for the purpose of paying interest on the Bonds as the same becomes due and payable. (2) Principal Account. On or before the last Business Day of each month, commencing with the month of December, 2017, the Trustee will transfer moneys from the Revenue Fund into the Principal Account of the Debt Service Fund to the extent and in the order described therein, the amounts described in the next succeeding paragraph. Moneys on deposit in the Principal Account shall be used solely for the purpose of paying principal on the Bonds, as the same becomes due and payable. The following amounts shall be paid or transferred into the applicable Accounts of the Debt Service Fund at the following times: (1) Amounts Referable to Series 2017 Bonds. In order to provide funds for the payment of the principal of and the interest on the Series 2017 Bonds, there shall be transferred or paid into the applicable Accounts of the Debt Service Fund, out of moneys held in the Revenue Fund the following amounts at the following times: (a) simultaneously with the issuance and sale of the Series 2017 Bonds and out of the proceeds derived therefrom, into the Interest Account that portion of such proceeds allocable to premium (if any) and accrued interest; (b) on or before the last Business Day of December, 2017, and on or before the last Business Day of each calendar month thereafter until and including May, 2018, into the Interest Account an amount equal to one-sixth (1/6) of the interest becoming due with respect to the then outstanding Series 2017 Bonds on June 1, 2018; (c) on or before the last Business Day of December, 2017, and on or before the last Business Day of each calendar month thereafter until and including May, 2018, into the Principal Account an amount equal to one-sixth (1/6) of the principal amount of Series 2017 Bonds maturing or being subject to mandatory redemption on June 1, 2018; (d) on or before the last Business Day of June, 2018, and on or before the last Business Day of each calendar month thereafter until and including May, 2039, into the Interest Account an amount equal to one-sixth (1/6) of the interest becoming due with respect to the Series 2017 Bonds on the next succeeding Bond Payment Date; and 8

16 (e) on or before the last Business Day of June, 2018, and on or before the last day of each calendar month thereafter until and including May, 2039, into the Principal Account an amount equal to one-twelfth (1/12) of the principal amount of Series 2017 Bonds maturing or being subject to mandatory redemption on the next succeeding June 1. (2) Amounts Referable to Additional Bonds. In order to provide for the payment of the principal of and the interest on any Additional Bonds, there shall be transferred or paid into the applicable Accounts of the Debt Service Fund the following amounts at the following times: (a) simultaneously with the issuance and sale of such Additional Bonds and out of the proceeds derived therefrom. into the Interest Account that portion of such proceeds allocable to premium (if any) and accrued interest; (b) out of moneys on deposit in the Revenue Fund, such moneys as, when added to any other funds provided for the payment of such Additional Bonds, shall be necessary to pay the principal and interest maturing with respect to such Additional Bonds, as well as the redemption price of any such Additional Bonds that are required to be redeemed prior to the maturity thereof, such moneys to be paid into the applicable Accounts of the Debt Service Fund in such amounts and on such dates as shall be provided in the Supplemental Indenture or Indentures under which such Additional Bonds are issued. (3) General. There shall be transferred or paid into the Debt Service Fund any other moneys that are expressly required to be transferred or paid therein by the provisions of the Indenture or any Supplemental Indenture. There shall be credited against any required payment into any Account of the Debt Service Fund any amount then held in such account, but only to the extent that such amount does not itself consist of prior payments required to be made and has not theretofore been credited against any payment previously required to be made. In the event that the moneys paid or transferred into any Account of the Debt Service Fund with respect to any calendar month shall be less than the total amount required by the Indenture to be paid therein with respect to such calendar month, then on or before the last day of the next succeeding calendar month and on or before the last day of each calendar month thereafter until such time as the payments into the Debt Service Fund are current, the GUSC will pay into the Debt Service Fund (in addition to the monthly payments described above) all moneys remaining in the Revenue Fund on the last day of each of said months after payment into the Debt Service Fund, the Replacement Fund and the Operation and Maintenance Fund of the amount due to be paid therein during such month. The Reserve Fund. At the time of the delivery of the Series 2017 Bonds, the GUSC will cause to be deposited in the Reserve Fund a Municipal Bond Debt Service Reserve Insurance Policy (the Reserve Policy ) of Build America Mutual Assurance Company in the amount of approximately $3,646,250.00, which is an amount equal to the Maximum Annual Debt Service Requirement with respect to the Series 2017 Bonds. If at any time during any calendar month the total amount held in the Reserve Fund is less than the Maximum Reserve Fund Requirement then, on or before the last Business Day of such calendar month, the Trustee shall pay into the Reserve Fund an amount obtained by dividing (i) the amount by 9

17 which the Maximum Annual Debt Service Requirement exceeds the amount then held in the Reserve Fund by (ii) the number of months between the first day of such calendar month and the last day of the twelfth calendar month next succeeding that during which the amount held in the Reserve Fund first fell below the Maximum Annual Debt Service Requirement, all to the end that the monthly amounts to be so paid into the Reserve Fund will cause any deficiency in the Reserve Fund to be restored within twelve (12) months after such deficiency first occurred. In the event that the GUSC hereafter issues any Additional Bonds, the GUSC will cause to be added to the moneys then on deposit in the Reserve Fund an amount equal to the increase in the Maximum Annual Debt Service Requirement resulting from the issuance of such Additional Bonds. Moneys forming a part of the Reserve Fund are to be held as a reserve for the payment of the principal of and the interest on the Bonds, but shall be used for such purpose only when necessary to prevent a default in payment of the principal of or the interest on the Bonds when due. Enforceability of Remedies The Bonds are payable from the payments to be made under the Water Supply Agreement and from moneys derived from the enforcement of the Indenture. Under existing law (including particularly the United States Bankruptcy Code), the remedies specified in the Indenture may not be readily available or may be limited. The various legal opinions to be delivered concurrently with the delivery of the Series 2017 Bonds will be qualified as to the enforceability of the various legal instruments by limitations imposed by state and federal laws, rulings and decisions affecting remedies, and by bankruptcy, reorganization or other laws affecting the enforcement of creditors rights from time to time in effect, and by the availability of a remedy of specific performance or other equitable relief being subject to the discretion of the court. Limited Obligation The Series 2017 Bonds will not be general obligations of the GUSC, nor will they in any way constitute a debt or liability of the State of Alabama, the City, or any other political subdivision of such state. None of the Series 2017 Bonds will be payable from any funds other than those pledged for the payment thereof under the Indenture. The GUSC has no taxing power. Redemption Provisions Optional Redemption. Those of the Series 2017 Bonds having stated maturities in 2028 and thereafter will be subject to redemption, at the option of the GUSC, prior to their respective maturities, on December 1, 2027, and on any date thereafter, as a whole or in part and if in part, those to be redeemed shall be from such maturity or maturities as shall be specified by the GUSC, at a redemption price for each Series 2017 Bond redeemed equal to its par or face amount, plus accrued interest thereon to the date fixed for redemption. The Series 2017 Bonds will be subject to redemption only in principal amounts of $5,000 or any integral multiple thereof. In the event that less than all of the principal of the Series 2017 Bonds of a particular maturity are redeemed and prepaid, the Trustee shall select by lot that portion of the principal of the Series 2017 Bonds of such maturity to be redeemed and prepaid. Mandatory Redemption. Those of the Series 2017 Bonds maturing on June 1, 2039, shall be subject to mandatory redemption prior to their stated maturity, at a redemption price equal to the face amount of each such Series 2017 Bond to be redeemed plus accrued interest thereon to the date fixed for redemption, in the following respective principal amounts on June 1, in the following years: 10

18 Redemption Year Redemption Price 2037 $3,150, ,305,000 As a result of such mandatory redemption, $3,470,000 in principal amount of Series 2017 Bonds maturing on June 1, 2039 will remain to be paid on their stated maturity date. Notice. Written notice of each such redemption of the Series 2017 Bonds must be given, not more than sixty (60) nor less than thirty (30) days before the date fixed for redemption, to the registered owners of each of the Series 2017 Bonds being called for redemption by registered or certified mail at their addresses shown on the registry books of the Trustee. BOOK-ENTRY SYSTEM The Depository Trust Company ( DTC ), New York, New York, will act as securities depository for the Series 2017 Bonds. The Series 2017 Bonds will be issued as fully-registered securities 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 2017 Bond certificate will be issued for each maturity of the Series 2017 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 a Standard & Poor s rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at Purchases of Series 2017 Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Series 2017 Bonds on DTC s records. The ownership interest of each actual purchaser of each Series 2017 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 11

19 ownership interests in the Series 2017 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 Series 2017 Bonds, except in the event that use of the book-entry system for the Series 2017 Bonds is discontinued. To facilitate subsequent transfers, all Series 2017 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 Series 2017 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 2017 Bonds; DTC s records reflect only the identity of the Direct Participants to whose accounts such Series 2017 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. Beneficial Owners of Series 2017 Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Series 2017 Bonds, such as redemptions, defaults and proposed amendments to the Series 2017 Bond documents. For example, Beneficial Owners of Series 2017 Bonds may wish to ascertain that the nominee holding the Series 2017 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 2017 Bonds within a 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 Series 2017 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 GUSC 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 Series 2017 Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Principal and interest payments on the Series 2017 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 GUSC or the Trustee, on payable dates 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 Series 2017 Bonds 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 GUSC, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the GUSC 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. 12

20 DTC may discontinue providing its services as depository with respect to the Series 2017 Bonds at any time by giving reasonable notice to the GUSC or the Trustee. Under such circumstances, in the event that a successor depository is not obtained, Series 2017 Bond certificates are required to be printed and delivered. The GUSC may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, Series 2017 Bond certificates will be printed and delivered. The information in this section concerning DTC and DTC s book-entry system has been obtained from DTC, but the GUSC takes no responsibility for the accuracy or completeness thereof. Neither the GUSC nor the Trustee shall have any responsibility or obligation with respect to: (i) the accuracy of the records of DTC or any Participant with respect to any beneficial ownership interest of the Series 2017 Bonds; (ii) the delivery to any Participant, Beneficial Owner of the Series 2017 Bonds or other person, other than DTC, of any notice with respect to the Series 2017 Bonds; (iii) the payment to any Participant, Beneficial Owner of the Series 2017 Bonds or other Person, other than DTC, of any amount with respect to the principal of, premium, if any, or interest on, the Series 2017 Bonds; (iv) any consent given by DTC as registered owner; or (v) the selection by DTC or any Participant of those Beneficial Owners to receive payment if the Series 2017 Bonds are redeemed in part. Registration, Transfer and Exchange on Discontinuance of Book-Entry Only System The provisions of the Indenture described below shall apply in the event that the book-entry system is discontinued. U.S. Bank National Association, Birmingham, Alabama, is the registrar, paying agent and transfer agent for the Series 2017 Bonds and in such capacity is herein called the Trustee. Under applicable provisions of the Indenture, the Series 2017 Bonds will be registered as to both principal and interest and will be transferable only on the registry books of the Trustee. The Trustee will keep at its principal office registry and transfer books in which it will note the registration and transfer of the Series 2017 Bonds. The person in whose name any Series 2017 Bond is registered on the books of the Trustee will be considered the absolute owner thereof for all purposes and will be the sole person to whom payments of principal thereof and interest and premium (if any) thereon will be made. The Series 2017 Bonds are transferable only on the registry and transfer books of the Trustee, and no transfer of a Series 2017 Bond shall be valid unless it is duly presented for transfer at the principal corporate trust office of the Trustee with written power to transfer signed by the registered owner in person or by duly authorized attorney. Upon the proper transfer of any Series 2017 Bond, the Trustee will deliver to the transferee a new Series 2017 Bond registered in the name of such transferee. Any one or more of the Series 2017 Bonds may be exchanged for a Series 2017 Bond or Bonds in an authorized denomination or denominations aggregating the same principal amount as that of the Series 2017 Bond or Bonds surrendered therefor, but only if such Series 2017 Bonds have the same maturity and bear interest at the same rate, and only to the extent and subject to the conditions provided in the Indenture. In every case involving any transfer or exchange of any of the Series 2017 Bonds that is requested by the holder thereof, such holder shall be responsible for paying all taxes and other government charges relating to such transfer or exchange. In addition, if a Series 2017 Bond is lost, stolen, destroyed or mutilated, the GUSC and the Trustee may require satisfactory indemnification for the 13

21 replacement thereof and may charge the holder of such Series 2017 Bond any fees and expenses incurred by them in connection with the replacement thereof. Subject only to these exceptions, every registration, transfer or exchange of Series 2017 Bonds will be made without any expense to the holders thereof. The Trustee will not be required to transfer or exchange any Series 2017 Bonds (i) during the period commencing on the fifteenth day of the month next preceding any interest payment date and ending on such interest payment date, and (ii) in the case of any Series 2017 Bond called for redemption (in whole or in part), during the period of forty-five (45) days next preceding the date fixed for such redemption. Bond Insurance Policy BOND INSURANCE Concurrently with the issuance of the Series 2017 Bonds, Build America Mutual Assurance Company ( BAM ) will issue its Municipal Bond Insurance Policy for the Series 2017 Bonds (the Policy ). The Policy guarantees the scheduled payment of principal of and interest on the Series 2017 Bonds when due as set forth in the form of the Policy included as an exhibit 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. Build America Mutual Assurance Company BAM is a New York domiciled mutual insurance corporation and is licensed to conduct financial guaranty insurance business in all fifty states of the United States and the District of Columbia. BAM provides credit enhancement products solely to issuers in the U.S. public finance markets. BAM will only insure obligations of states, political subdivisions, integral parts of states or political subdivisions or entities otherwise eligible for the exclusion of income under section 115 of the U.S. Internal Revenue Code of 1986, as amended. No member of BAM is liable for the obligations of BAM. The address of the principal executive offices of BAM is: 200 Liberty Street, 27 th Floor, New York, New York 10281, its telephone number is: , and its website is located at: BAM is licensed and subject to regulation as a financial guaranty insurance corporation under the laws of the State of New York and in particular Articles 41 and 69 of the New York Insurance Law. BAM s financial strength is rated AA/Stable by S&P Global Ratings, a business unit of Standard & Poor s Financial Services LLC ( S&P ), which rating was affirmed on June 26, An explanation of the significance of the rating and current reports may be obtained from S&P at The rating of BAM should be evaluated independently. The rating reflects the S&P s current assessment of the creditworthiness of BAM and its ability to pay claims on its policies of insurance. The above rating is not a recommendation to buy, sell or hold the Series 2017 Bonds, and such rating is subject to revision or withdrawal at any time by S&P, including withdrawal initiated at the request of BAM in its sole discretion. Any downward revision or withdrawal of the above rating may have an adverse effect on the market price of the Series 2017 Bonds. BAM only guarantees scheduled principal and scheduled interest payments payable by the issuer of the Series 2017 Bonds on the date(s) when such amounts were initially scheduled to become due and payable (subject to and in accordance with the terms of the Policy), and BAM does not guarantee the market price or liquidity of the Series 2017 Bonds, nor does it guarantee that the insured rating on the Series 2017 Bonds will not be revised or withdrawn. 14

22 Capitalization of BAM BAM s total admitted assets, total liabilities, and total capital and surplus, as of June 30, 2017, and as prepared in accordance with statutory accounting practices prescribed or permitted by the New York State Department of Financial Services, were $500.3 million, $68.8 million and $431.5 million, respectively. BAM is party to a first loss reinsurance treaty that provides first loss protection up to a maximum of 15% of the par amount outstanding for each policy issued by BAM, subject to certain limitations and restrictions. BAM s most recent Statutory Annual Statement, which has been filed with the New York State Insurance Department and posted on BAM s website at is incorporated herein by reference and may be obtained, without charge, upon request to BAM at its address provided above (Attention: Finance Department). Future financial statements will similarly be made available when published. BAM makes no representation regarding the Series 2017 Bonds or the advisability of investing in the Series 2017 Bonds. In addition, BAM 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 BAM, supplied by BAM and presented under the heading BOND INSURANCE. Additional Information Available from BAM Credit Insights Videos. For certain BAM-insured issues, BAM produces and posts a brief Credit Insights video that provides a discussion of the obligor and some of the key factors BAM s analysts and credit committee considered when approving the credit for insurance. The Credit Insights videos are easily accessible on BAM s website at buildamerica.com/creditinsights/. (The preceding website address is provided for convenience of reference only. Information available at such address is not incorporated herein by reference.) Credit Profiles. Prior to the pricing of bonds that BAM has been selected to insure, BAM may prepare a pre-sale Credit Profile for those bonds. These pre-sale Credit Profiles provide information about the sector designation (e.g. general obligation, sales tax); a preliminary summary of financial information and key ratios; and demographic and economic data relevant to the obligor, if available. Subsequent to closing, for any offering that includes bonds insured by BAM, any pre-sale Credit Profile will be updated and superseded by a final Credit Profile to include information about the gross par insured by CUSIP, maturity and coupon. BAM pre-sale and final Credit Profiles are easily accessible on BAM s website at buildamerica.com/obligor/. BAM will produce a Credit Profile for all bonds insured by BAM, whether or not a pre-sale Credit Profile has been prepared for such bonds. (The preceding website address is provided for convenience of reference only. Information available at such address is not incorporated herein by reference.) Disclaimers. The Credit Profiles and the Credit Insights videos and the information contained therein are not recommendations to purchase, hold or sell securities or to make any investment decisions. Credit-related and other analyses and statements in the Credit Profiles and the Credit Insights videos are statements of opinion as of the date expressed, and BAM assumes no responsibility to update the content of such material. The Credit Profiles and Credit Insight videos are prepared by BAM; 15

23 they have not been reviewed or approved by the issuer of or the underwriter for the Series 2017 Bonds, and the issuer and underwriter assume no responsibility for their content. BAM receives compensation (an insurance premium) for the insurance that it is providing with respect to the Series 2017 Bonds. Neither BAM nor any affiliate of BAM has purchased, or committed to purchase, any of the Series 2017 Bonds, whether at the initial offering or otherwise. General Information THE WATER SYSTEM The City purchased the Water System from Alabama Water Service Company in Since that time, the Water System has been an enterprise of the City. The Mayor of the City is the ex officio Manager of the Water System. The Water System serves the 51 square mile service area within the corporate limits of the City, the municipalities of Brighton, Hueytown, Midfield, Lipscomb, and the unincorporated communities of Dolomite, Muscoda, New Village, Lacy s Chapel, and a portion of McCalla. The Water System also serves the Lake Cyrus and Ross Bridge communities located within the corporate limits of the City of Hoover, Alabama. The City water service area totals over 80 square miles. More than 26,000 commercial and domestic customers are now receiving water from the Water System. All of the customers are metered. Some 40 industrial users purchase water from the Water System. Among the industrial users are U.S. Pipe and Foundry Co. and U.S. Steel Corporation. The Governmental Utility Service Corporation of the City of Bessemer (GUSC) is the exclusive source of water to the Water System. The Water System has an aggregate of 24,000,000 gallons of existing above-ground storage capacity. The Water System is subject to regulation by the Alabama Department of Environmental Management with respect to water quality and improvements and additions to the Water System. The Water System is required to chlorinate water purchased from the GUSC to treat impurities which enter the Water System at any time that leaks are repaired. The Water System sells water at wholesale to two public water distribution systems (Alabaster and Helena). Those water systems operate in an area contiguous to the service area of the Water System. The terms of those contracts permit rate increases. Alabaster Water Board The City and the Alabaster Water Board, an agency of the City of Alabaster, Alabama, which is located to the south of the City, have entered into a Water Supply Agreement dated April 18, 2006, the term of which extends for thirty (30) years from the initial date of delivery of water to the Alabaster Water Board. Under that agreement, the City agreed to sell to the Alabaster Water Board, and the Alabaster Water Board agreed to purchase from the City, certain quantities of water not to exceed 5,972,603 gallons per day on an annualized basis. The said sale of water to the Alabaster Water Board will substantially lower the cost of water to the City that is purchased from the GUSC. On August 1, 2007, the City and the Alabaster Water Board entered into a First Amendment to the Water Supply Agreement. Under that amendment, the City and the Alabaster Water Board agreed (i) to provide for the construction by the City of a water supply line along Shelby County Highway 52 by which the City will deliver water to the Alabaster Water Board, (ii) to amend the service territories of the City and the Alabaster Water Board, and (iii) to acknowledge the delays experienced as of the date of said Amendment in obtaining all necessary permits and authorizations before construction of a water supply line between the City and the Alabaster Water Board. 16

24 Utility Board of the City of Helena, Alabama The City and the Utility Board of the City of Helena, Alabama (hereinafter referred to as Helena), which is located to the south of the City, have entered into a Water Supply Agreement dated March 16, 2004, the initial term of the agreement was 10 years subject to a 10 year automatic renewal unless terminated by either party by March 31, Under that agreement, the City agreed to sell Helena, and Helena agreed to purchase from the City, certain quantities of water not to exceed 3,000,000 gallons per day. The said sale of water to Helena will substantially lower the cost of water to the City that is purchased from the GUSC. Other Municipalities Served by the Water System Although the City owns the water distribution systems in the municipalities of Midfield, Lipscomb, Brighton, and Hueytown in which it now supplies water to the public, the City has no record indicating that franchises have been granted to the City for the operation of the water systems in those cities. In the event that a competing provider of water services desires to operate in the aforementioned cities, such a competing provider of services would have to install lines that parallel the City s existing lines. Under the laws of Alabama, the City would be permitted to retain and operate all water facilities which were in existence at the time of the incorporation of any municipality in which it sells water, but the City could be compelled to discontinue service through any facilities installed after the incorporation of a municipality from which the City did not hold a franchise. The Water System has expanded in Midfield by approximately 54% since 1954, which is the year of incorporation for Midfield. In 1954, there were approximately 1,950 water customers in Midfield, and today there are approximately 3,000 such customers. The Water System in Hueytown has expanded approximately 35% since 1960, which is the year of incorporation for Hueytown. In 1960, there were approximately 4,500 water customers in Hueytown, and today there are approximately 6,000 such customers. The City is now expanding the City s existing water transmission lines in Hueytown that are utilized in connection with the Project. Delinquencies The policy of the City is to discontinue service sixty days after any bill for water becomes due. A late charge of 10% is charged ten days after the bills are rendered. The Water System experiences about a 2.4% bad debt loss. All rate increases go into effect the date the meters are read rather than the date bills are sent or the date the increase is adopted by the City Council of the City. Water Pressure At present, pressure on the Water System s downtown grid is limited to gradient 712 MSL because some of its mains have been in service for 100 years. The City has made various improvements to the Water System that were funded with the proceeds of the City s Water Revenue Warrants, Series 2000, in order to alleviate and remediate this problem. Water Rates The water rates for the Water System were set by Resolution No of the City Council dated December 1, Water rates are increased automatically on February 1 of each year based upon the increase in the Consumer Price Index for the previous year as of October. The City is not subject to any state regulatory body as pertains to the determination of rates, but there is a judicially imposed 17

25 standard of reasonableness on all rates. The City is subject to the Alabama Department of Environmental Management with respect to water quality and construction of all improvements to the Water System. Rates The following is the retail rate schedule for water effective as of February 1, 2017: Residential Commercial $ 3.32 per 100 cu. ft. $ 3.32 per 100 cu. ft. Residential Availability Charges Per Month 5/8 inch meter $ /4 inch meter inch meter inch meter Commercial Availability Charges Per Month 5/8 inch meter $ /4 inch meter inch meter /2 inch meter inch meter inch meter inch meter inch meter inch meter 1, Fire Protection Public - $ per year or $17.88 per month per hydrant Sprinkler Heads - $ per year or $22.96 per month up to 500 head increments If a meter serves more than one Residential unit, the availability charge for a ¾ meter will apply to each additional unit. If a meter serves more than one Commercial unit, the availability charge for a ¾ meter will apply to each additional unit. Trailer parks will be charged by the total number of available lots or pads, multiplied by 70% times the rate for a ¾ meter, or by the size of the master meter serving the park, whichever is greater. 18

26 Fees Tapping Fee Residential 3/4 $ 1, Additional Sprinkler Tap (Paid for at time of original tap) Commercial 1 $ 2, , , , , Water Capital Recovery Fee (Payable at time of application for water service) Residential/Commercial/Industrial 3/4 $ 1, , , and above 6, Hotels/Motels, Apartments, Nursing Homes/Assistant Living Facilities, and Hospitals (Payable at time Building Permit is issued) Hotels/Motels: Multiply the number of rooms in the hotel/motel by.35 by the amount set forth for a 3/4 inch line. Apartments: Multiply the number of rooms in the Apartments by.50 by the amount set forth for a 3/4 inch line. Nursing Homes/Assistant Living Facilities: Multiply the number of rooms in the Nursing Homes/Assistant Living Facility by.30 by the amount set forth for a 3/4 inch line. Hospitals: Multiply the number of rooms in the Hospital by.50 by the amount set forth for a 3/4 inch line. Major Consumers The following is a list of the ten largest water users for the 2016 fiscal year and the gallons consumed: 19

27 Name Cubic Feet Gallons Alabaster Water Board 37,744, ,325,120 Utility Board of the City of Helena 16,485, ,313,784 Bessemer Housing Authority 9,122,500 68,236,300 Oak Grove Resource 7,059,200 52,802,816 Milo s Tea 6,901,700 51,624,716 Griffin Wheel Co. 5,211,800 38,984,264 UAB Medical West 3,518,500 26,318,380 US Cast Iron & Pipe 3,032,500 22,683,100 Renaissance Ross Bridge 2,970,700 22,220,836 Jeff County Commission 2,558,600 19,138,328 Koch Parks, LLC 2,383,100 17,825,588 Source: Bessemer Utilities Financial Information Regarding the Water System CITY OF BESSEMER WATER SERVICE DEPARTMENT STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS For the years ended September 30, 2017, 2016, 2015, 2014, and 2013 Operating revenues: 2017 * Residential and domestic $10,172,336 $10,728,365 $10,540,841 $10,454,274 $ 9,657,089 Commercial 1,226,206 1,331,415 1,348,238 1,173,582 1,106,041 Industrial 3,374,153 3,718,897 3,391,477 3,163,135 2,952,503 Public and Private Protection 34,810 34,810 34,994 34,720 32,474 Other Public Authorities 1,179,936 1,194,462 1,118,178 1,149,373 1,083,055 Customers Forfeited Discounts and Penalties 1,117,574 1,166,835 1,041, , ,326 Sewer Commissions 1,162,603 1,007,374 1,183,011 1,088, ,367 Rental and Other Fees , , ,418 Other Revenue 488, , ,088 54,252 63,530 Total Operating Revenues 18,755,878 20,155,374 19,369,942 18,594,903 17,009,803 Operating expenses: Water Purchased 7,720,239 7,422,542 7,427,259 7,209,134 7,022,289 Power and Pumping 611, , , , ,787 Transmission and Distribution 3,940,295 3,861,217 3,501,927 3,251,671 3,106,885 Customer Accounting and Collection 1,016,814 1,059,804 1,178,180 1,277,085 1,192,056 Bad Debt Expense 200, , , ,646 Administrative and General 1,420,476 1,432,450 1,351,296 1,165,610 1,053,566 Depreciation 685, , , , ,079 * Unaudited. 20

28 Tax Equivalents 247, , , , ,170 Amortization 17,711 16, Payroll Taxes 211, , , , ,215 Total Operating Expenses 16,071,154 15,734,518 15,345,629 14,583,158 14,245,693 Operating Income 2,684,725 4,420,857 4,024,314 4,011,745 2,764,110 Nonoperating Income (Expense) Interest Income ,012 2,176 Interest Expense (1,063,050) (1,078,650) (1,103,050) (1,117,250) (1,129,517) Amortization of Bond Cost (16,045) (16,045) (16,045) Total Nonoperating Income (Expense) (1,062,949) (1,077,790) (1,118,795) (1,132,283) (1,143,386) Change in Net Position 1,621,775 3,343,067 2,905,518 2,879,461 1,620,724 Net Position, Beginning of the Year 18,306,923 14,051,652 15,752,659 12,873,198 11,252,474 Restatement (4,606,526) Net Position, End of the Year $19,928,698 $18,306,923 $14,051,652 $15,752,659 $12,873,198 Financial Information Regarding the GUSC THE GOVERNMENTAL UTITLITY SERVICES CORPORATION OF BESSEMER, ALABAMA STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS For the years ended September 30, 2016, 2015, 2014, and OPERATING REVENUES $ 7,477,631 $ 7,438,553 $ 7,175,984 $ 7,030,061 OPERATING EXPENSES Administrative Services 13,200 13,300 12,000 12,000 Bank Charges Depreciation Expense 985, , , ,434 Insurance Expense 103, , , ,024 Licenses and Permits ,153 Miscellaneous 2, ,101 Office Supplies 9,475 11,128 5,862 7,215 Operating and Maintenance 3,239,178 3,144,502 3,002,130 2,918,897 Postage Professional Fees 90,475 89,130 55,662 45,329 Travel and Conferences 3,225 1,421 2,951 1,223 Trustee Fees 5,820 5,820 10,570 4,000 Vehicle Expense ,571 TOTAL OPERATING EXPENSES 4,454,267 4,351,651 4,178,090 4,073,251 OPERATING INCOME 3,023,364 3,086,902 2,997,894 2,956,810 21

29 NON-OPERATING INCOME (EXPENSES) Amortization (86,088) Capital Loss (1,537) Interest Expense (2,716,388) (2,778,538) (2,839,928) (2,900,890) Interest Income ,524 1,577 Loss on Disposal of Depreciable Assets TOTAL OTHER INCOME (EXPENSES) (2,716,337) (2,777,867) (2,838,404) (2,986,825) CHANGE IN NET POSITION 307, , ,490 (30,015) NET POSITION BEGINNING OF YEAR (16,473,714) (16,848,422) (16,012,476) (15,982,461) PRIOR PERIOD ADJUSTMENT ,676 (995,432) --- NET POSITION RESTATED BEGINNING OF YEAR --- (16,782,746) (17,007,908) --- NET POSITION END OF YEAR $ (16,166,687) $ (16,473,711) $ (16,848,418) $ (16,012,476) In addition, the following table shows the unaudited statement of revenue, expenses, and changes in fund net assets of the GUSC for the fiscal year ended September 30, 2017: 2017 REVENUE $ 7,912, OPERATING EXPENSES Chemicals 1,338, Salary and related expenses 726, Insurance-General 115, Insurance-Health 172, Legal Fees 25, Office Expense 4, Meeting Supplies Professional Fees 13, Accounting 27, Licenses and Permits 5, Depreciation 981, Bank Fees 5, Bank Service Charges Dues and Subscriptions 3, Engineering 111, Fuel 2, Parts 11, Plant Supplies 6, Postage and Delivery Repairs & Maintenance 223, Electrical System Maintenance Generator Maintenance 10, Water Analysis 12, Conferences Travel 1, Telephone 9, Uniforms & Mat Rental 1, Utilities 1,083, TOTAL OPERATING EXPENSES 4,897,

30 OPERATING INCOME (LOSS) 3,014, OTHER INCOME (EXPENSE) Interest Income 1, Interest Expense (2,653,048.36) Issuance fees (30,000.00) TOTAL OTHER INCOME (EXPENSE) (2,681,670.20) CHANGE IN NET ASSETS 332, BEGINNING NET ASSETS (16,166,688.18) ENDING NET ASSETS $(15,833,726.84) Insurance of the Water System The City carries insurance for the Water System for the types of claims and in amounts that are customary for similar enterprises. The City has commercial general liability insurance of $5 million, with a rider of $2 million and coverage for employees of $1 million for each occurrence; commercial automobile insurance of $ 1 million for each accident with a rider of $40,000 for each uninsured motorist; property insurance of $17 million with an equipment floater of $1,010,675; blanket commercial crime insurance of $5,000 for each occurrence: an umbrella policy of $5 million; and a public officials errors and omissions policy of approximately $5 million. The City has workmen s compensation insurance through Wausau. The City believes its insurance coverage is prudent and consistent with the practices of similar entities. Outstanding Indebtedness The City has heretofore issued its Water Revenue Warrants, Series 2008, dated January 1, 2008 (the Series 2008 Water Warrants ), originally issued in the aggregate principal amount of $24,995,000. The Series 2008 Water Warrants were issued in order to refund certain outstanding obligations of the City that were issued in order to construct certain capital improvements to the Water System. The Series 2008 Water Warrants were issued under a Trust Agreement dated as of January 1, 2008 (herein referred to as the Trust Agreement ), by and between the City and The Bank of New York Trust Company, N.A., Birmingham, Alabama, as Trustee. The City anticipates issuing certain water revenue warrants on a parity with the Series 2008 Water Warrants in calendar year 2017; however, the issuance of such warrants is not guaranteed. Such water revenue warrants would be issued in order to refund all or a portion of the Series 2008 Water Warrants and to finance certain capital improvements. The Series 2008 Water Warrants are payable, equally and ratably, solely from a first lien on the gross revenues derived from the operation of the Water System after payment of all operating expenses of the Water System, including payments required to be made by the City under the Water Supply Agreement. The purchase of water from the GUSC by the City is a Current Expense of the Water System, as that term is defined in the Trust Agreement, and must be paid prior to any debt service on the Series 2008 Water Warrants and additional parity warrants. The City has covenanted in the Trust Agreement to maintain rates and charges for water service in an amount sufficient to provide debt service coverage on the Series 2008 Water Warrants and any parity warrants issued hereafter, after payment for the water purchased from the GUSC and other operating expenses of the Water System, of not less than 120% of maximum annual debt service on the Series 2008 Water Warrants and any parity warrants issued hereafter. 23

31 The following schedule sets forth the current debt service for the Series 2008 Water Warrants that is payable from the revenues of the Water System: Fiscal Year ended September 30 Series 2008 Water Warrants Principal Series 2008 Water Warrants Interest Total Debt Service on Series 2008 Water Warrants 2018 $ 540,000 $ 1,041,850 $ 1,581, ,000 1,019,500 1,579, , ,560 1,585, , ,101 1,585, , ,273 1,583, , ,856 1,584, , ,050 1,584, , ,400 1,585, , ,050 1,584, , ,850 1,584, , ,250 1,582, , ,625 1,581, , ,625 1,583, ,035, ,125 1,583, ,090, ,000 1,585, ,145, ,125 1,584, ,205, ,375 1,585, ,265, ,625 1,583, ,330, ,750 1,583, ,395, ,625 1,580, ,470, ,000 1,584, ,545,000 38,625 1,583,625 TOTALS $21,000,000 $13,839,240 $34,839,240 ESTIMATED SOURCES AND USES OF FUNDS Bonds: The following is the expected sources and use of the proceeds from the sale of the Series 2017 Sources: Principal Amount of the Series 2017 Bonds... $48,710, Plus Net Original Issue Premium... 6,800, Transfer from existing debt service funds... 1,684, Total Sources... $57,194,

32 Uses: To Refund the Series 2008 Bonds... $52,867, To Fund the Series 2017 Improvements... 3,200, Expenses of Issuance (1)... 1,127, Total Uses... $57,194, (1) Includes underwriter s discount, legal and accounting fees, initial trustee fees, printing, municipal bond insurance premium and surety costs, printing costs, and other costs of issuance. Series 2017 Improvements The Series 2017 Improvements will include the installation of a dredging lagoon and equipment to haul dry sludge to a drying area; the addition of a maintenance building as well as a chemical storage and feed building; removal of existing gas feed equipment and installation of a liquid bleach system; the reconditioning and repair of raw water pumps; a new plant booster system; replacing filter media sieves; in-plant supervisory control and data acquisition ( SCADA ) computer network upgrading; reconditioning of mud valves; improvements to intake and raw water lines; and the installation of different coagulants for plant optimization. ADDITIONAL BONDS The Indenture will permit the GUSC from time to time, if it is not in default thereunder and if the City is not in default under the Water Supply Agreement and all required deposits to all funds created under the Indenture are current, to issue additional bonds ( Additional Bonds ) without limitation as to principal amount upon compliance with the conditions contained in the Indenture and all the Additional Bonds shall be secured on a parity of lien with the Series 2017 Bonds and all other Bonds at any time issued under the Indenture. Additional Bonds may be issued for the purpose of (i) obtaining funds to pay the costs of making additions, modifications or improvements to the Project, (ii) refunding or otherwise retiring all or any portion of any one of more series of Bonds then outstanding under the Indenture, (iii) any combination of the preceding purposes, or (iv) for any lawful purpose for which the City shall request the GUSC to issue Additional Bonds. Among the conditions precedent to the issuance of Additional Bonds are the following: (a) a supplemental Water Supply Agreement between the GUSC and the City obligating the City to pay such additional, supplemental or changed Basic Payments as will be sufficient to provide for the payment, when due, of the principal of and the interest and premium (if any) on all Bonds that will be outstanding under such Indenture following the issuance of such Additional Bonds; and (b) a supplemental indenture between the GUSC and the Trustee providing for and describing such Additional Bonds and, among other things, requiring that there be paid into a debt service reserve fund created in the Indenture for such series of Additional Bonds, out of the principal proceeds of such Additional Bonds or any other moneys of the GUSC or the City available therefor, such amount as may be necessary to cause there to be on deposit in such debt service reserve fund immediately following the issuance of such Additional Bonds a sum at least equal to one hundred percent (100%) of the Maximum 25

33 Annual Debt Service Requirement during the current or any subsequent year with respect to such Additional Bonds. As further conditions precedent to the issuance of any Additional Bonds, the Indenture will require either of the following documents, among other things, to be furnished to the Trustee: (i) a certificate of an independent certified public accountant certifying that the Adjusted Annual Net Income for the Fiscal Year immediately preceding the Fiscal Year during which such Additional Bonds are to be issued was in an amount not less than the sum of one hundred twenty percent (120%) of the Maximum Annual Debt Service Requirement that will apply immediately following the issuance of such bonds; or (ii) an opinion of an independent certified public accountant stating that if any increase in rates for water service from the Water System that has actually been put into effect as of the date of issuance of such Additional Bonds had been effective throughout the Fiscal Year next preceding the Fiscal Year during which any such Additional Bonds are issued, the Adjusted Annual Net Income derived from the operation of the Water System during any such next preceding Fiscal Year would have been not less than one hundred twenty percent (120%) of the Maximum Annual Debt Service Requirement immediately following the issuance of such Additional Bonds, and setting forth in detail all calculations of such Adjusted Annual Net Income for Debt Service and such Maximum Annual Debt Service Requirement. Certain Definitions. As used in this Official Statement, the term Annual Net Income means the total operating revenues of the Water System during a Fiscal Year, less all operating expenses incurred during such Fiscal Year (excluding interest, depreciation, amortization, any amounts payable to the City in lieu of taxes and items of property charged to the fixed capital account). As used in this Official Statement, the term Maximum Annual Debt Service Requirement means, as of the date of any determination thereof, the maximum debt service in any Fiscal Year of the City with respect to all City Water System Indebtedness. The term City Water System Indebtedness means all obligations issued under the Original Indenture or any indenture pursuant to which the City issues obligations to refund obligations issued under the Original Indenture. As used in this Official Statement, the term Adjusted Annual Net Income means Annual Net Income for a Fiscal Year computed as though the payments under the Water Supply Agreement (as defined in the Indenture) during such Fiscal Year were equal to the maximum amount estimated by the City to be payable under the Water Supply Agreement during the then current or any future Fiscal Year of the City following the issuance of any Additional Bonds then proposed to be issued. If any Additional Bonds are issued for the purpose of acquiring additional property, such supplemental indenture will likewise be required to subject such additional property to the lien of the Indenture. 26

34 DEBT SERVICE SCHEDULE The following table sets forth the projected debt service on the Series 2017 Bonds: Fiscal Year Ended September 30 Principal on the Series 2017 Bonds Interest on the Series 2017 Bonds Total Debt Service on the Series 2017 Bonds 2018 $ 705,000 $1,280, $1,985, ,380,000 2,261, ,641, ,420,000 2,220, ,640, ,495,000 2,149, ,644, ,570,000 2,074, ,644, ,650,000 1,996, ,646, ,730,000 1,913, ,643, ,815,000 1,827, ,642, ,905,000 1,736, ,641, ,005,000 1,641, ,646, ,105,000 1,540, ,645, ,210,000 1,435, ,645, ,320,000 1,325, ,645, ,435,000 1,209, ,644, ,555,000 1,087, ,642, ,685, , ,644, ,820, , ,645, ,930, , ,642, ,050, , ,645, ,150, , ,646, ,305, , ,643, ,470, , ,643, TOTALS $48,710,000 $29,801, $78,511, RATE COVENANT OF THE CITY In the Trust Agreement pursuant to which the Series 2008 Water Warrants were issued, the City has placed into effect a schedule of rates, fees and charges for the services, facilities and commodities furnished by the Water System and as often as it shall appear necessary it will revise and adjust such schedule of rates, fees and charges to the extent necessary to produce funds sufficient in each fiscal year to (i) operate, maintain and repair the Water System in accordance with sound business practice (including payments to the GUSC under the Water Supply Agreement), (ii) produce Net System Revenues equal to one hundred and twenty percent (120%) of the debt service requirement for the Series 2008 Water Warrants and any additional warrants issued on a party therewith, and (iii) to create and maintain a debt service reserve. CERTAIN BONDHOLDERS RISKS Summarized below are a number of risks that could adversely affect the operation of the Project or the timely payment of the principal of and the interest and premium (if any) on the Series 2017 Bonds and that should be considered by prospective purchasers of the Series 2017 Bonds. The following discussion is not intended to be exhaustive, but includes certain major risk factors that should be 27

35 considered along with other risk factors set forth elsewhere in this Official Statement, including the Appendices hereto. Limited Obligation The Series 2017 Bonds are limited obligations of the GUSC, payable solely from payments to be made by the City pursuant to the Water Supply Agreement. The payments by the City to the GUSC under the Water Supply Agreement are limited obligations of the City, payable solely from revenues of the Water System. The GUSC has no appreciable assets other than its interest in the Project. The Water System Although the decision to enter into the Water Supply Agreement was based upon assumptions and business judgments that the City believes are reasonable and appropriate, the success of the Water System and the Project is subject to conditions that may change in the future to an extent that cannot be presently determined. The realization of assumptions made by the City and the GUSC are subject to the capabilities of the management of the Project by the GUSC and the City s management of the Water System and to future economic and other conditions that are unpredictable and that may adversely affect revenues and payments of principal of and interest on the Series 2017 Bonds. These factors include the inability to predict the extent of future economic activity in the Service Area of the City. TAX EXEMPTION In the opinion of Butler Snow LLP, Birmingham, Alabama, Bond Counsel, under existing statutes, regulations, rulings and court decisions, interest on the Series 2017 Bonds will be excluded from gross income for federal income tax purposes and will not be an item of tax preference for purposes of the federal alternative minimum tax imposed on individuals and corporations. In the opinion of Bond Counsel, interest on the Series 2017 Bonds will be exempt from income taxation by the State of Alabama under existing statutes. Prospective purchasers of the Series 2017 Bonds should be aware of the provision included in the Internal Revenue Code of 1986, as amended (the Code ), which will require that interest on the Series 2017 Bonds received by a corporation (as defined for federal income tax purposes) be taken into account in determining adjusted current earnings for the purpose of computing the alternative minimum tax imposed on such corporations. Also, in the case of United States branches of foreign corporations, the interest on the Series 2017 Bonds will be subject to the branch profits tax imposed by the Code. Prospective purchasers of the Series 2017 Bonds should also be aware of the provision included in the Code which will require property and casualty insurance companies owning Series 2017 Bonds to reduce their loss reserve deduction by 15% of the interest received or accrued on the Series 2017 Bonds. Furthermore, prospective purchasers of the Series 2017 Bonds should recognize that interest on the Series 2017 Bonds may become subject to federal income taxation from the date of issuance in the event that the GUSC fails to satisfy certain requirements imposed by the Code respecting (i) limitations on the use of bond proceeds in the trade or business of, or to make or finance loans to, persons other than governmental units, (ii) restrictions on investment earnings on proceeds of the Series 2017 Bonds, and (iii) the rebate to the federal government of certain arbitrage profits. Prior to enactment of the Code, financial institutions (including commercial banks) generally were permitted to invest deposited funds in tax-exempt obligations, while continuing to deduct interest paid to depositors. The corporate tax preference rules reduced by 20% the amount which could be deducted by financial institutions for interest on funds allocable to tax exempt obligations acquired after 28

36 1982. In general, the Code denies financial institutions 100% of interest deductions that are allocable to tax-exempt obligations acquired on or after August 8, Although interest on the Series 2017 Bonds will be excluded from gross income for federal income tax purposes as discussed in the preceding paragraphs, the Social Security Amendments of 1983 provide that, under certain circumstances, receipt of such tax-exempt interest could subject to federal income taxation a portion of Social Security or railroad retirement benefits received by a bondholder that would not otherwise be taxable. A prospective purchaser of the Series 2017 Bonds should consult his personal tax adviser in this regard in connection with his decision to purchase any of the Series 2017 Bonds. Original Issue Discount Under existing law, the original issue discount in the selling price of any Series 2017 Bond sold at a discount at the time of the initial offering, to the extent properly allocable to each holder of such Series 2017 Bond, is excluded from gross income for federal income tax purposes with respect to such holder. The original issue discount is the excess of the stated redemption price at maturity of such Series 2017 Bond over its initial offering price to the public, excluding underwriters and other intermediaries, at which price a substantial amount of the Series 2017 Bonds of such maturity were sold. Under Section 1288 of the Code, original issue discount on tax-exempt bonds accrues on a compound basis. The amount of original issue discount that accrues to an owner of a Series 2017 Bond during any accrual period generally equals (i) the issue price of such Series 2017 Bond plus the amount of original issue discount accrued in all prior accrual periods, multiplied by (ii) the yield to maturity of such Series 2017 Bond (determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period), minus (iii) any interest payable on such Series 2017 Bond during such accrual period. The amount of original issue discount so accrued in a particular accrual period will be considered to be received ratably on each day of the accrual period, will be excluded from gross income for federal income tax purposes, and will increase the holder s tax basis in such Series 2017 Bond. Purchasers of any Series 2017 Bonds at an original issue discount should consult their tax advisors regarding the determination and treatment of original issue discount for federal income tax purposes, and with respect to state and local tax consequences of owning such Series 2017 Bonds. Premium An amount equal to the excess of the purchase price of the Series 2017 Bond over its stated redemption price at maturity constitutes premium on such Series 2017 Bond. A purchaser of a Series 2017 Bond must amortize any premium over such Series 2017 Bond s term using constant yield principles, based on the purchaser s yield to maturity. As premium is amortized, the purchaser s basis in such Series 2017 Bond is reduced by a corresponding amount, resulting in an increase in the gain (or decrease in the loss) to be recognized for federal income tax purposes upon a sale or disposition of such Series 2017 Bond prior to its maturity. Even though the purchaser s basis is reduced, no federal income tax deduction is allowed. Purchasers of any Series 2017 Bonds at a premium, whether at the time of initial issuance or subsequent thereto, should consult with their own tax advisors with respect to the determination and treatment of premium for federal income tax purposes and with respect to state and local tax consequences of owning such Series 2017 Bonds. LITIGATION There is no litigation pending or, to the knowledge of the GUSC, threatened, contesting the validity of the Series 2017 Bonds or relating to the organization of the GUSC, the incumbency of any of the GUSC s officers, or the issuance or sale of the Series 2017 Bonds. Simultaneously with the delivery 29

37 of the Series 2017 Bonds, the GUSC will deliver a certificate to the effect that no such litigation is pending or, to the knowledge of the GUSC, threatened. LEGALITY Legal matters incident to the authorization and issuance of the Series 2017 Bonds by the GUSC are subject to the approval of Butler Snow LLP, Birmingham, Alabama, Bond Counsel, whose approving opinion will be delivered with the Series 2017 Bonds. Such opinion is expected to be in substantially the form attached hereto as Appendix C. Certain legal matters will be passed upon for the GUSC and the City by their counsel, Paden & Paden, P.C., Bessemer, Alabama. Certain matters will be passed upon for the Underwriter by its counsel, Ezell Law, LLC, Birmingham, Alabama. RATINGS Standard & Poor s Global Ratings, a business unit of Standard & Poor s Financial Service, LLC ( S&P ), is expected to assign a rating of AA (Stable Outlook) to the Series 2017 Bonds, with the understanding that, upon delivery of the Series 2017 Bonds, the Policy will be issued by Build America Mutual Assurance Company ( BAM ). The first rating, shown next to the caption Insured, reflects S&P s current assessment of the creditworthiness of BAM and its ability to pay claims on its policies of insurance. For a discussion of such rating, see BOND INSURANCE Build America Mutual Assurance Company herein. Separately, the second rating, shown next to the caption Underlying, reflects Moody s Investors Service, Inc. ( Moody s ) underlying rating of the creditworthiness of the GUSC. Such ratings reflect only the views of such organizations and any desired explanation of the significance of such ratings should be obtained from the rating agency furnishing the same. Generally, a rating agency bases its rating on the information and materials furnished to it and on investigations, studies and assumptions of its own. There is no assurance such rating will continue for any given period of time or that such rating will not be revised downward or withdrawn entirely by S&P and/or Moody s, if in the judgment of such rating agency, circumstances so warrant. Any such downward revision or withdrawal of either or both of such ratings may have an adverse effect on the market price of the Series 2017 Bonds. UNDERWRITING The Series 2017 Bonds are being purchased by Piper Jaffray & Co. (the Underwriter ), at a price of $54,901,508.55, plus accrued interest to the date of delivery, if any, which price reflects an underwriter s discount of $608,875.00, and a net original issue premium of $6,800,383.55, with respect to the Series 2017 Bonds. The initial offering prices set forth on the cover page of this Official Statement may be changed from time to time by the Underwriter, which may offer the Series 2017 Bonds to certain dealers and others at prices lower than the public offering prices. The Underwriter has entered into a distribution agreement (the Distribution Agreement ) with Charles Schwab & Co., Inc. ( CS&Co. ) for the retail distribution of certain securities offerings, including the Series 2017 Bonds, at the original issue prices. Pursuant to the Distribution Agreement, CS&Co. will purchase Series 2017 Bonds from the Underwriter at the original issue price less a negotiated portion of the selling concession applicable to any Series 2017 Bonds that CS&Co. sells. CONTINUING DISCLOSURE UNDERTAKING The City and the GUSC will each enter into a Continuing Disclosure Agreement (each a Continuing Disclosure Agreement, and together, the Continuing Disclosure Agreements ) for the benefit of the beneficial owners of the Series 2017 Bonds in which they will undertake to send certain 30

38 information annually, and each of the City and the GUSC will undertake in its respective Continuing Disclosure Agreement to provide notice of certain events to the Municipal Securities Rulemaking Board pursuant to the requirements of Section (b)(5) of Rule 15c2-12 (the Rule ), as amended, adopted by the Securities and Exchange Commission (the SEC ) under the Securities Exchange Act of 1934, as amended. The information to be provided on an annual basis, the events which will be noticed on an occurrence basis, and a summary of other terms of the Continuing Disclosure Agreements, including termination, amendment and remedies, are set forth in Appendix F to this Official Statement. A failure by either the City or the GUSC to comply with its respective Continuing Disclosure Agreement will not constitute an event of default under the Indenture, and beneficial owners of the Series 2017 Bonds are limited to the remedies described in the Agreement. A failure by either the City or the GUSC to comply with its respective Continuing Disclosure Agreement must be reported in accordance with the Rule and must be considered by any broker, dealer or municipal securities dealer before recommending the purchase or sale of the Series 2017 Bonds in the secondary market. Consequently, such a failure may adversely affect the transferability and liquidity of the Series 2017 Bonds and their market price. The City and the GUSC have engaged Digital Assurance Certification, L.L.C. ( DAC ), as their disclosure dissemination agent for the purpose of ensuring ongoing compliance with their respective continuing disclosure filing requirements. DAC, in its capacity as disclosure dissemination agent (the Disclosure Dissemination Agent ), will have only the duties specifically set forth in the Continuing Disclosure Agreements. The Disclosure Dissemination Agent s obligation to deliver the information at the times and with the contents described in the Continuing Disclosure Agreements is limited to the extent the City or the GUSC has provided such information to the Disclosure Dissemination Agent as required by the respective Continuing Disclosure Agreements. The Disclosure Dissemination Agent has no duty with respect to the content of any disclosures or notices made pursuant to the terms of the Continuing Disclosure Agreements. The Disclosure Dissemination Agent has no duty or obligation to review or verify any information, disclosures or notices provided to it by the City or the GUSC and shall not be deemed to be acting in any fiduciary capacity for the City, the GUSC, the holders of the Series 2017 Bonds or any other party. The Disclosure Dissemination Agent has no responsibility for either the City s or the GUSC s failure to report to the Disclosure Dissemination Agent a notice event or a duty to determine the materiality thereof. The Disclosure Dissemination Agent shall have no duty to determine, or liability for failing to determine, whether the City or the GUSC has complied with its respective Continuing Disclosure Agreement. The Disclosure Dissemination Agent may conclusively rely upon certifications of the City or the GUSC at all times. Previous Non-Compliance In connection with previous issues of their obligations, the City and the GUSC undertook to provide annual filings of certain financial information and operating data pursuant to the requirements of the Rule. In a number of instances, the City and the GUSC have failed to timely file such annual financial information and operating data. With a few exceptions, notices of such failures to provide such annual financial information and operating data have not been filed in accordance with the Rule. After discovery of such non-compliance, the City (acting for itself and on behalf of the GUSC) filed audited financial statements and certain annual operating data for its fiscal years 2008 through 2012 with the Municipal Securities Rulemaking Board via its Electronic Municipal Market Access (EMMA) system on October 14, Also, on June 11, 2015, the City filed with EMMA audited financial statements for its Water Service Department for its fiscal years 2011 through The City s annual financial information and operating data for its fiscal years ended September 30, 2013 through 2016 were due to be filed, in each instance, no later than the following March

39 Although those deadlines were not met, the City s audited financial statements for each of those fiscal years were filed with EMMA no later than the following June 30. In a number of instances, the audited financial statements filed with EMMA as described in the preceding paragraphs did not contain all of the operating data or operating budgets provided for in the continuing disclosure undertakings of the City and the GUSC. Working in conjunction with DAC, the City has in recent years made a number of late filings with EMMA in an effort to correct those deficiencies. Certain outstanding obligations of the City are or have been secured by bond insurance. At various times in the past five years, the ratings attributable to such bond insurance have changed. Information about such rating changes for bond insurers has been publicly reported. The City has not filed a notice pursuant to its continuing disclosure undertakings with respect to each such rating change. SOURCES OF INFORMATION All of the descriptions and summaries of the statutes, resolutions, opinions. agreements, financial data, revenue projections, engineering studies, and other related reports described in this Official Statement are made subject to all of the provisions of such documents. These descriptions and summaries do not purport to be complete statements of such provisions and reference is made to such documents, copies of which are either publicly available or available for inspection during normal business hours at the GUSC s offices located at 1700 Third Avenue, Bessemer, Alabama GENERAL INFORMATION The following appendices are made a part of this Official Statement: Appendix A - Information Concerning the City of Bessemer, Alabama; Appendix B - Audited Financial Statements of the Water Service Department and the GUSC; Appendix C Proposed Form of Bond Counsel Opinion; Appendix D - Summaries of Legal Documents; Appendix E - Specimen Municipal Bond Insurance Policy; and Appendix F Summary of Continuing Disclosure Agreements. CERTIFICATE CONCERNING OFFICIAL STATEMENT The City has reviewed the information contained herein as it relates to the City, the Project, the Water System and the sources of revenue and expense of the Water System, as well as all related matters set forth herein. Such information is true and correct as of this date, and such information does not contain an untrue statement of a material fact or omit to state a material fact which should be included herein for the purpose of which the Official Statement is intended to be used, or which is necessary to make the statements herein, in light of the circumstances under which they were made, not misleading. Dated: October 26, 2017 THE GOVERNMENTAL UTILITY SERVICES CORPORATION OF THE CITY OF BESSEMER CITY OF BESSEMER, ALABAMA By /s/ Sarah W. Belcher Chairperson of the Board of Directors By /s/ Kenneth E. Gulley Mayor 32

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41 APPENDIX A INFORMATION CONCERNING THE CITY OF BESSEMER, ALABAMA CITY GOVERNMENT AND ADMINISTRATION The City government is organized under the Mayor and Council form of government with a Mayor, one Council member elected at large, and seven Council members elected from seven districts. The President of the City Council is elected by the Council from among its members for a four-year term. The Mayor, who is not a member of the Council but who has veto powers, is elected at large. The present terms of all City elected officers expire in October, The names of the present officers of the City are set forth on the inside of the front cover hereof. Wanda Taylor serves as City Clerk, a position which is subject to civil service regulations. Wanda Taylor has held this position since July 15, Kela Pryor serves as Finance Director and Treasurer of the City, a position which is subject to civil service regulations. Kela Pryor has held this position since March 16, The City employs approximately 500 persons in such capacities as firemen, policemen, administrative, park and recreation, department supervisors and equipment operators. In addition, the City employs approximately 100 persons in the operation and maintenance of its water and electric utility systems. ECONOMIC AND DEMOGRAPHIC INFORMATION RESPECTING THE CITY General The City of Bessemer is located in the southwest area of Jefferson County and adjoins the City of Birmingham, Alabama on the western boundary of the City of Birmingham. The City has been incorporated for over 125 years. Jefferson County (the County ) is the principal center of finance, trade, manufacturing, transportation, medicine and education in the State. The City of Bessemer, the City of Birmingham and thirty-two (32) other municipalities are located within the County s 1,113 square miles. The County is the center of the seven-county Birmingham-Hoover Metropolitan Statistical Area (MSA) which covers 5,332 square miles. The Birmingham- Hoover MSA had a 2010 population in excess of 1,000,000 persons. Population The following table sets forth population statistics for the United States, the State of Alabama, the County and the City City of Bessemer 33,497 29,672 27,456 Jefferson County 651, , ,466 State of Alabama 4,040,587 4,447,100 4,779,736 United States 248,709, ,421, ,745,538 Source: U.S. Census Bureau A-1

42 Employment Based upon a civilian employed population age 16 and over of 10,693, the following table sets forth estimated employment statistics by industry for the City for the 3rd Quarter, 2013: City of Bessemer Employment by Industry Employer Percentage(%) Agriculture, Forestry, Fishing and Hunting, and Mining 0.7 Construction 4.7 Manufacturing 11.1 Wholesale Trade 2.5 Retail Trade 16.8 Transportation and Warehousing, and Utilities 5.9 Information 2.0 Finance and Insurance, and Real Estate and Rental and Leasing 5.7 Professional, Scientific, and Management, and Administrative and Waste Management Services 7.5 Educational Services, and Health Care and Social Assistance 25.6 Arts, Entertainment, and Recreation, and Accommodation and Food Services 8.4 Other Services, Except Public Administration 5.2 Public Administration 3.9 Total wage and salary employees 100.0% Source: American Community Survey The following table sets forth labor force data, estimates and employment rates for the City for the years indicated: Civilian Labor Force 10,615 10,301 10,166 10,017 10,065 Employment 9,200 9,234 9,188 9,105 9,068 Unemployment 1,415 1, Unemployment Rate 13.3% 10.4% 9.6% 9.1% 9.9% Source: U.S. Department of Labor, Bureau of Labor Statistics. The following table sets forth comparative unemployment rates for the City, the County, the State of Alabama and the United States for the years indicated: A-2

43 City of Bessemer 13.3% 10.4% 9.6% 9.1% 9.9% Jefferson County State of Alabama United States Source: U.S. Department of Labor, Bureau of Labor Statistics. Major Employers The major employers in the City, their principal activity and the number of employees of each are as follows: Number of Employer Product Employees UAB West Healthcare 1,077 Dollar General Retail Store and Distribution Center 695 Wal-Mart Retail 610 U.S. Pipe Foundry 551 CVS / Caremark Retail Pharmacy and Distribution Center 430 Piggy Wiggly Distribution Center Wholesale 400 Lowes Home Center Retail 336 Southern Store Fixture Retail 300 Golden Living Meadowood Nursing Home 192 Berkmans Food (McDonalds) Fast Food 168 Income Levels Median family income is defined by the U.S. Census Bureau 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. For the year 2017, the U.S. Department of Housing and Urban Development estimates the following with respect to median family income levels in the jurisdictions indicated: Median Family Income Jefferson County $63,100 State of Alabama 55,500 United States 68,000 Source: U.S. Department of Housing and Urban Development. Education The Bessemer City School System operates 5 elementary schools, 1 middle school, 1 junior high school and 1 high school with a combined enrollment of over 4,500 students. A-3

44 Utilities Electricity is supplied to the residents of the City by Tennessee Valley Authority and distributed by Bessemer Electric Service. Water is supplied by Bessemer Water Service. Sanitary sewer service is supplied by Jefferson County. Natural gas services are supplied by Alabama Gas Company. Health Care Services UAB Medical Center West is an affiliate of UAB Health System, with a 300-bed hospital with an active staff of 86 physicians located in the City. Transportation The City is served by Interstates 20/59 and the metropolitan by-pass, Interstate 459, runs through a part of the City. Bessemer Municipal Airport has a 6,007 foot paved and lighted runway and offers hangers, tie-downs and refueling services. Birmingham-Shuttlesworth International Airport is located 20 miles from the City. Railroads serving the City include BNSF, CSX Transportation and Norfolk Southern. A-4

45 APPENDIX B Audited Financial Statements of the City of Bessemer, Alabama Water Service Department and of the GUSC

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47 CITY OF BESSEMER, ALABAMA WATER SERVICE DEPARTMENT COMPARATIVE FINANCIAL STATEMENTS SEPTEMBER 30, 2016 and 2015

48 CITY OF BESSEMER, ALABAMA WATER SERVICE DEPARTMENT SEPTEMBER 30, 2016 and 2015 TABLE OF CONTENTS Pane Independent Accountants' Compilation Report 1-2 Management's Discussion and Analysis 3-10 Statements of Net Position Statements of Revenues, Expenses and Changes in Net Position 13 Statements of Cash Flows Notes to Financial Statements 16-33

49 PRINCIPAL tit I ASSOC ATES Audit Tax Advisory CERTIFIED PUBLIC ACCOUNTANTS INDEPENDENT ACCOUNTANT'S COMPILATION REPORT To the Honorable Mayor and Members of the City Council Bessemer, Alabama We have compiled the accompanying financial statements of the business-type activities the City of Bessemer, Alabama Water Service Department ("the Water Service"), as of September 30, 2016 and 2015 and the related statements of changes in net position, revenues and expenses, and cash flows for the years then ended. We have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or provide any assurance about whether the financial statements are in accordance with accounting principles generally accepted in the United States of America. Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America and for designing, implementing, and maintaining internal control relevant to the preparation and fair presentation of the financial statements. Our responsibility is to conduct the compilation in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. The objective of a compilation is to assist management in presenting financial information in the form of financial statements without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the financial statements. The Principal & Associates, Inc. Certified Public Accountants 2100 South Bridge Parkway, Suite 650 P.O. Box Birmingham, Alabama December 7, South Bridge Parton/ay, Suite 650 * P.O. Box Birmingham, Alabama /1 Fax Eugene.Pitts@CPA.com Member or ArriAACCIII Instilule of Certified Public AccountortIS Member of the Alabomo Society of Certil led. Public Accui intanti (A1C PA)

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51 Pages 3-10 intentionally left blank Pages 3-10 intentionally left blank BASIC FINANCIAL STATEMENTS BASIC FINANCIAL STATEMENTS

52 CITY OF BESSEMER, ALABAMA WATER SERVICE DEPARTMENT STATEMENT OF NET POSITION SEPTEMBER 30, 2016 AND Assets Current Assets: Cash on Deposit $ 5,397,324 $ 1,632,979 Other receivable 1, ,154,147 Materials and supplies 524, ,670 Prepaid insurance 7,271 63,835 Due from Bessemer Electric Service 5,073,739 1,512,310 Total current assets ,923 5,720,941 Restricted Assets Cash on Deposit 807, ,593 Investments 2,263,034 2,263,034 Total Restricted Assets 3,070, ,627 Utility Plant in Service Water plant in service 47,728,937 47,568,469 Less: accumulated depreciation (18,916,545) (18,229,082) 28,812,392 29,339,386 Construction work in progress 6,940,752 5,528,300 Net plant and equipment 35,753,144 34,867,686 Other Assets: Unamortized bond discount cost 304, ,976 DEFERRED OUTFLOWS OF RESOURCES Deferred amount on pension 407, , , ,266 TOTAL ASSETS AND DEFERRED OUTFLOWS OF RESOURCES $ 52,529,455 $ 43,912,496 See Accountant's Compilation report and notes to financial statements. 11

53 CITY OF BESSEMER, ALABAMA WATER SERVICE DEPARTMENT STATEMENT OF NET POSITION SEPTEMBER 30, 2016 AND LIABILITIES AND EQUITY Current liabilities: Trade accounts payable $ 1,417,069 $ 415,461 Payable to other municipalities 3,750,557 1,448,026 Accrued interest 273, ,363 Accrued payroll 130,298 Current Compensated absences 40, ,993 Current maturities of revenue warrants Due to Bessemer Electric Service 1,454,937 Total current liabilities 7,587,386 2,741,842 Long-term debt: Revenue warrants, less current portion 21,000,000 21,520,000 Compensated Balances, less current portion 697, ,211 Net pension liability 5,604,299 4,833,889 Total Long-Term Debt 27,301,465 26,905,100 Total liabilities 34,888,851 29,646,942 DEFERRED INFLOWS OF RESOURCES Deferred amount on pension 213,902 Net Position Investment in capital assets, net of related debt 10,837,001 10,967,686 Restricted: Debt service 2,263,034 2,263,034 Water system contingency 807, ,593 Unrestricted 3,733, ,339 Total net position 17,640,604 14,051,652 Total Liabilities, Net Position, and Deferred Inflows $ 52, $ 43,912,496 See Accountant's Compilation report and notes to financial statements. 12

54 CITY OF BESSEMER, ALABAMA WATER SERVICE DEPARTMENT STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN POSITION FOR THE YEARS ENDED SEPTEMBER 30, 2016 AND Operating revenue: Residential and domestic $ 10,728,365 $ 10,540,841 Commercial 1,331,415 1,348,238 Industrial 3,718,897 3,391,477 Public and private protection 34,810 34,994 Other public authorities 1,194,462 1,118,178 Customers' forfeited discounts and penalties 1,166,834 1,041,888 Sewer commissions 1,007,374 1,183,011 Rental & Other fees 870, ,226 Other revenue 103, ,088 Total operating revenues 20,155,374 19,369,942 Operating expenses: Water purchased 7,422,542 7,427,259 Power and pumping 639, ,641 Transmission and distribution 3,866,619 3,501,927 Customer accounting and collection 1,052,677 1,178,180 Bad debt expense 200, ,407 Administrative and general 1,413,000 1,351,296 Depreciation 687, ,595 Tax equivalents 185, ,524 Payroll taxes 230, ,800 Total operating expenses 15,697,297 15,345,629 Operating income 4,458,077 4,024,314 Nonoperating income (expense): Interest income Interest expense (1,078,650) (1,103,050) Amortization of bond cost (20,473) (16,045) Total nonoperating income (expense) (1.098,263) (1, ) Change in Net Position 3,359,814 2,905,518 Net Position, beginning of the year 14,051,652 15,752,660 Restatement 229,138 (4,606,526) Net Position, end of the year $ 17,640,604 $ 14,051,652 See Accountant's Compilation report and notes to financial statements. 13

55 CITY OF BESSEMER, ALABAMA WATER SERVICE DEPARTMENT STATEMENT OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 2016 AND 2015 INCREASE (DECREASE) IN CASH ON DEPOSIT CASH FLOWS FROM OPERATING ACTIVITIES Cash received from customers $ 20,318,265 $ 19,649,367 Cash payments to employees for services (2,940,281) (2,496,300) Cash paid to suppliers for goods and services (8,565,119) ( I 1,578,997) Net cash provided by operating activities 8,812,865 5,574,070 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Principal payments on revenue warrants (500,000) (480,000) Interest paid (1,078,451) (1,107,850) Net cash used by capital and related financing activities (1,578,451) (1,587,850) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property plant and equipment (2,925,222) (2,500,395) Investment in/sale of restricted accounts (1,342,343) Interest received Net cash provided (used) by investing activities (2,924,362) (3,842,438) NET INCREASE (DECREASE) IN CASH ON DEPOSIT 4,310, ,782 CASH ON DEPOSIT AT BEGINNING OF THE YEAR 1,894,572 1,750,790 CASH ON DEPOSIT AT END OF THE YEAR 6,204,624 1,894,572 CASH ON DEPOSIT CONSISTED OF THE FOLLOWING: Current assets 5,397,324 1,632,979 Restricted assets 807, ,593 Total $ 6,204,624 $ 1,894, See Accountant's Compilation report and notes to financial statements.

56 CITY OF BESSEMER, ALABAMA WATER SERVICE DEPARTMENT STATEMENT OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 2016 AND 2015 RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES OPERATING INCOME $ 4,458,077 $ 4,951,813 ADJUSTMENTS TO RECONCILE OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation 687, ,595 Bad Debt Expense 200, ,407 Changes in assets and liabilities: Prepaid expenses 56,564 (63,835) Due From Bessemer Electric Service (1,557,260) 14,610,588 Other receivables 162,891 (648,074) Inventories (166,663) 231,225 Accrued interest payable 199 (4,800) Accounts payable 1,001, ,560 Compensated Absences 81,925 (135,058) Salaries & Wages payable 130,298 Due to Bessemer Electric Service 1,454,937 ( 14,831,976) Payable to other municipalities 2,302, ,625 Total adjustments 4,354, ,257 NET CASH PROVIDED BY OPERATING ACTIVITIES $ 8,812,865 $ 5,574,070 SUPPLEMENTAL DISCLOSURE OF NONCASH AND RELATED FINANCING ACTIVITIES Decrease in original debt discount cost 20,473 16, See Accountant's Compilation report and notes to financial statements.

57 CITY OF BESSEMER, ALABAMA WATER SERVICE DEPARTMENT NOTES TO THE FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICES The accounting policies of the Water Service (Utility) conform to generally accepted accounting principles as they apply to governments. The following is a summary of the more significant accounting policies: Reporting Entity Because the Water Service is a department of the City of Bessemer, the Water Service's financial data is incorporated into the Annual Financial Report of the City of Bessemer. Theses financial statements are intended to present the financial position, changes in financial position and cash flows attributable only to the Water Service. The management of the Water Service is selected by the Mayor. Basis of Accounting and Measurement Focus The Utility reports its activities as an enterprise fund, which is used to account for operations that are financed and operated in a manner similar to a private business enterprise, where the intent of the Utility is that the costs of delivering utility service to its service area on a continuing basis be financed or recovered primarily through user charges, capital grants and similar funding. Revenues and expenses are recognized on the full accrual basis of accounting. Revenues are recognized in the accounting period in which they are earned and expenses are recognized in the period incurred, regardless of when the related cash flows take place. Operating revenues and expenses result from exchange transactions associated with the principal activity of the Utility. Exchange transactions are those in which each party receives and gives up essentially equal values. The principal operating revenues of the Utility is Water sales to its customers. Management, administration and depreciation expenses are also considered operating expenses. Other revenues and expenses not included in the above categories are reported as non-operating revenues and expenses. Financial Reporting The Utility's basic financial statements are prepared in accordance with Generally Accepted Accounting Principles in the United States of America (GAAP) issued by the Governmental Accounting Standards Board (GASB) applicable to governmental entities that use proprietary fund accounting, including GASB Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements. Revenues are recognized when earned, and costs and expenses are recognized when incurred. 16

58 CITY OF BESSEMER, ALABAMA WATER SERVICE DEPARTMENT NOTES TO THE FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (CONTINUED) Financial Reporting (Continued) In September 2011, the GASB issued Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position effective for financial statements for periods beginning after December 15, The Utility implemented this new pronouncement in the current year. The effect of the implementation of this statement to the Utility financial reporting was limited to renaming of Net Assets to Net Position. In conjunction with the implementation of GASB Statement No. 63, the Utility has early implemented the provisions of GASB Statement No. 65, Items Previously Reported as Assets and Liabilities. The changes in this guidance did not affect the Utility. Net Position The financial statements utilize a net position presentation. Net position is categorized as follows: The invested in capital assets component of net position consists of capital assets, net of accumulated depreciation and reduced by any debt outstanding against the acquisition, construction or improvement of those assets. Deferred outflows of resources and deferred inflows of resources that are attributable to the acquisition, construction, or improvement of those assets or related debt are included in this component of net position. Restricted net position consists of restricted assets reduced by liabilities and deferred inflows of resources related to those assets for which constraints are imposed thereon by external parties, such as creditors' binding debt covenants, grantors, contributors, laws or regulations of other governments, or constraints imposed by law through constitutional provisions or enabling legislation. Unrestricted net position is the net amount of the assets, deferred outflows of resources, liabilities, and deferred inflows of resources that are not included in the determination of the net investment in capital assets or restricted component of net position. Purchase Water Water for re-sale to customers is purchased from the Governmental Utility Service Corporation of Bessemer, Alabama.

59 CITY OF BESSEMER, ALABAMA WATER SERVICE DEPARTMENT NOTES TO THE FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (CONTINUED) Pensions The Employees' Retirement System of Alabama (the Plan) financial statements are prepared using the economic resources measurement focus and accrual basis of accounting. Contributions are recognized as revenues when earned, pursuant to the plan requirements. Benefits and refunds are recognized when due and payable in accordance with the terms of the plan. Expenses are recognized when the corresponding liability is incurred, regardless of when the payment is made. Investments are reported at fair value. Financial statements are prepared in accordance with requirements of the Governmental Accounting Standards Board (GASB). Under these requirements, the Plan is considered a component unit of the State of Alabama and is included in the State's Comprehensive Annual Financial Report. Water Plant in Service The utility plant in service is stated at cost less accumulated depreciation. Capital assets of the utility plant are defined by the Water Service as assets with an initial individual cost of $5,000 or more and an estimated life in excess of one year. Additions and significant improvements that extend the useful life of a capital asset are capitalized. Ordinary maintenance and repairs are charged to expense as incurred. Capital assets are depreciated over their estimated useful lives by using the straight-line method: Buildings 50 years Water and Sewer Distribution 50 years Transportation Equipment 10 years Other Equipment 10 years Furniture 10 years Office Equipment 5 years When property subject to depreciation is retired or otherwise disposed of in the normal course of business, its cost and the related accumulated provision for depreciation are removed from the accounts, and the gain or loss on such disposition is reflected in income. Land has an indefinite life and is not depreciated. Trusteed Funds Indenture agreements with a financial institution related to the Water Service Revenue Warrants Series 2008 require certain funds to be established and controlled by a trustee. The accounts of the trusteed funds are maintained on the cash receipts and disbursement basis and are adjusted for financial statement purposes to reflect accrued receivables and payables and certain inter-fund monthly transfers of cash to restricted investment accounts representing construction, debt service, debt service reserve, and improvement funds. These funds provide for payment of principal and interest on the warrants, establish a reserve in the event that revenues of the Water Service are insufficient to service the debt, and provide for payment of reasonable cost of capital improvements to the system. 18

60 CITY OF BESSEMER, ALABAMA WATER SERVICE DEPARTMENT NOTES TO THE FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (CONTINUED) The trusteed funds assets include investments that are uninsured and unregistered, with the securities held by the trustee, but not in the Utility's name. Investments Investments consist of money market funds and U.S. government and agency obligations. All investment income is reported in the statement of revenues, expenses, and changes in net position. Cash Equivalents For the purposes of the statements of cash flows, the Water Service considers investments with original maturity of three (3) months or less to be cash equivalents. Inventories Material and supply inventories are stated at the lower of average cost or market. Prepaid Items Certain payments to vendors reflect costs applicable to future accounting periods and are recorded as prepaid items. Debt Deferred Charge and Warrant Discount Cost Debt deferred charge on refunding and warrant discount cost is capitalized and amortized over the term of the bonds using the straight-line method. Risk Management The Water Service is exposed to various risks of losses related to theft of, damage to, and destruction of assets, errors and omissions, injuries to employees, torts, and natural disasters. The Water Service manages these risks through the purchase of commercial insurance.

61 CITY OF BESSEMER, ALABAMA WATER SERVICE DEPARTMENT NOTES TO THE FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (CONTINUED) Financial Instruments The carrying amounts of the Water Service's cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their fair value because of the immediate or short-term maturity of these financial instruments. The carrying amounts of long-term obligations approximate fair value because the stated interest rates on the indebtedness approximate current borrowing rates. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Budget The Water Service prepares an internal operations budget for management purposes which is approved by the Mayor. Reclassifications Certain prior year's data presented in the financial statements have been reclassified to conform to the current year presentation. These reclassifications had no effect on total assets, change in net position, or cash flows. Deferred outflows/inflows of resources Deferred Outflows of Resources A deferred outflow of resources represents a consumption of net position that applies to a future period and will not be recognized as an outflow of resources (expense/expenditure) until that future time. A deferred charge on refunding arises from advance refunding of debt. The difference between the cost of the securities placed in trust for future payment of refunded debt and the net carrying value of that debt is deferred and amortized as a component of interest expense over the shorter of the term of the refunding issue or the original term of the refunded debt. The unamortized amount is reported as a deferred outflow of resources in the statements of net position. Deferred Inflows of Resources A deferred inflow of resources represents an acquisition of net position that applies to a future period and therefore will not be recognized as an inflow of resources (revenue) until that future time. 20

62 CITY OF BESSEMER, ALABAMA WATER SERVICE DEPARTMENT NOTES TO THE FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (CONTINUED Compensated Absences Compensated absences have been accounted for in accordance with GASB Statement No. 16, Accounting for Compensated Absences. Vacation leave is earned on graduated rates based on the employee's length of service (one day per month of service, initially) and up to forty days of unused leave may be carried over to the following year. After one year of service, an employee is eligible to receive up to 40 days of accrued vacation leave upon separation of service if they leave the City in good standing. Vacation pay is accrued when incurred in the financial statements. Sick leave is earned at a rate of one day per month of service. After five years of service, an employee is eligible to receive up to 75 days of accrued sick leave (100% of the first 60 days of accrued sick leave and 50% of the next 30 days of accrued sick leave) upon separation of service if they leave the City in good standing. Sick leave is accrued when incurred in the fmancial statements for those employees that meet the longevity requirements and is limited to the maximum days eligible for payment upon separation of service. It is necessary for the Utility Department to operate on a 24-hour basis regardless of weather or holidays. It has been the City's policy to allow those employees that work in those departments to accrue hours of holiday leave time and miscellaneous overtime leave with no cap. At various times, the City has approved lump sum payments of this accrued compensation, but this is on a discretionary basis. Upon separation of service from the City, employees are entitled to receive payment for any accrued compensation related to holiday leave or miscellaneous overtime leave. The record keeping for compensated absences is handled by the payroll clerk and the value of compensated absences is based on the reported hours accrued at the current hourly rate for each employee. It is reasonably possible that the actual amount paid for compensated absences will be different than the estimated value of accrued compensated absences. NOTE 2 CUSTOMER ACCOUNTS RECEIVABLE The Electric Service bills and collects from customers for services provided by the Water Service and the Electric Service Department, which is another department of the City. At September 30, 2016 and 2015, the Water Service customer receivables totaled approximately $22,423,270 and $19,174,914 and the allowance for doubtful accounts was $17,349,532 and $17,662,604, respectively. NOTE 3 CASH AND CASH EQUIVALENTS The Mayor approves all banks or other institutions as depositories for the Utility funds, The Mayor requires all funds on deposit to be collateralized by a pledge of unencumbered securities. The carrying amount of cash bank balances at September 30, 2016 totaled $8,467,659, and the bank balance was $10,515,881. Of this total, $1,000,001 was insured by federal depository insurance, $9,515,880 was collateralized with securities held by banks in their trust departments and $-0- was uncollateralized. 21

63 CITY OF BESSEMER, ALABAMA WATER SERVICE DEPARTMENT NOTES TO THE FINANCIAL STATEMENTS NOTE 3 CASH AND CASH EQUIVALENTS (CONTINUED) Investments Assumptions The Utility's Bond Indentures limits trusteed investments to "eligible investments." The Utility has not adopted a formal investment policy for trusteed investments or other Utility investments. Eligible investments include any of the following: federal obligations and eligible bank obligations. As of September 30, 2016, the Utility had the following investments and maturities: Market Less Than Investment Type Value 1 year Federal US Treasury Obligations 2,263,034 $ 2,263,034 Certificate of Deposits 2,263,034 $ 2,263,034 As of September 30, 2015, the Utility had the following investments and maturities: Market Less Than Investment Type Value 1 year Federal US Treasury Obligations 2,263,034 $ 2,263,034 Certificate of Deposits 2,263,034 $ 2,263,034 Interest Rate Risk The Utility does not have a formal investment policy that limits investment maturities as a means of managing its exposure to fair value losses arising from increasing interest rates. Credit Risk. The Utility's Bond Indenture limits investments to Eligible Investments defined as Federal Obligations and Eligible Bank Obligations (fully collateralized by Federal Obligations). As of September 30, 2016, the Federal U.S, Treasury obligations were rated Aaa and AAA by Standard & Poor's and Moody's, respectively. Custodial Credit Risk. For an investment, custodial credit risk is the risk that, in the event of the failure of the counterparty, the Utility will not be able to recover the value of its investments or collateral securities that are in the possession of an outside party. Balances are held in securities that are allowed by the Indenture, which require no collateralization. The accounts are in the name of the Trustee for the benefit of the holder. 22

64 CITY OF BESSEMER, ALABAMA WATER SERVICE DEPARTMENT NOTES TO THE FINANCIAL STATEMENTS NOTE 3 CASH AND CASH EQUIVALENTS (CONTINUED) Deposits As of September 30, 2016 and 2015, the Utility's deposits were entirely covered by federal depository insurance or by the Security for Alabama Funds Enhancement Program (SAFE Program). The SAFE Program was established by the Alabama Legislature and is governed by the provisions contained in the Code of Alabama 1975, Sections 41-14A-1 through 41-14A-14. Under the SAFE Program, all public funds are protected through a collateral pool administered by the Alabama State Treasurer's Office. Under this program, financial institutions holding deposits of public funds must pledge securities as collateral against those deposits. In the event of failure of a financial institution, securities pledged by that financial institution would be liquidated by the State Treasurer to replace the public deposits not covered by the Federal Deposit Insurance Corporation (FDIC). If the securities pledged fail to produce adequate funds, every institution participating in the pool would share the liability for the remaining balance. At September 30, 2016 and 2015, the Utility investment balances were as follows: Investment Type Federal US Treasury Obligations Certificate of Deposits 2016 Carrying Carrying 2015 Amount Fair Value Amount Fair Value S 2,263,034 $ 2,263,034 $ 2,263,034 $ 2,263,034 2,263,034 $ 2,263,034 $ 2,263,034 $ 2,263,034 TRUSTEED FUNDS Indenture agreements with a financial institution related to the Water Service Revenue Warrants Series 2008 that require monthly transfers of cash to restricted investment accounts representing construction, debt service, debt service reserve, and improvement funds. These Funds provide for payment of principal and interest on the warrants, establish a reserve in the event that revenues of the Water Service are insufficient to service the debt, and provide for payment of reasonable cost of capital improvements to the system. Amounts not needed to fund requirements may be used for any lawful purpose. Components and descriptions of the various funds, exclusive of accrued interest, are as follow at September 30: Construction fund $ 1 $ 1 Warrant fund 653, ,249 Reserve fund 1,609,784 1,609,784 $ 2,263,034 $ 2,263,034 23

65 CITY OF BESSEMER, ALABAMA WATER SERVICE DEPARTMENT NOTES TO THE FINANCIAL STATEMENTS Investments (continued) NOTE 4 WATER REVENUE WARRANTS SERIES 2008 On January 1, 2008, the City of Bessemer issued $24,995,000 in Water Revenue Warrants, Series 2008 (secured by revenues of the Water Service). The Series 2008 warrants were issued to, a) refund all the outstanding Water Revenue Warrants issued in 1996 and 2000, b) finance the cost of improvements, and c) pay the cost of issuing the Series 2008 Warrants. The debt service requirements of the Series 2008 Warrants to maturity are as follows: Utility revenue warrants, rates varying from 4% to 6%, Series 2008, maturing January 1, 2039 $21,520,000 $22,020,000 Less current maturities of loan payable 520, ,000 Noncurrent maturities of loan payable $21,000,000 $21,520,000 Maturities of the loan payable are as follows: ? 520, , , ,000 Thereafter 19,310,000 $21,520,000 The unamortized bond discount balances at September 30, 2016 and 2015, totaled 5304,842 and $357,976, respectively. The Indenture agreement with a Bank related to the Water Service Revenue Warrants Series 2008 contains various covenants including a provision which requires the Water Service to produce revenues sufficient in each fiscal year to (i) operate, maintain and repair the Water System in accordance with sound business practice (ii), produce an amount equal to 1.20 times the Annual Debt Service Requirement as defined by the Indenture. The Water Service has complied with these requirements of Indenture. 24

66 CITY OF BESSEMER, ALABAMA WATER SERVICE DEPARTMENT NOTES TO THE FINANCIAL STATEMENTS NOTE 4 WATER REVENUE WARRANTS SERIES 2008 (CONTINUED) Activity during 2016 related to long-term debt principal obligations is as follows: Balance at Balance at Due September 30, September 30, Within 2015 Additions Payments 2016 One Year Water Revenue Warrants Series 2008 $ 22, $ - $ 500,000 $ 21,520;000 $ 520,000 Compensated Absences 656,204 81, ,129 40,963 $ 22,676,204 $ $ 500,000 $ 22,258,129 $ 560,963 The aggregate maturities of long-term debt at September 30, 2016 are as follows: Principal Interest Total Year ending September 30: 2015 $ - $ - $ ,000 1,063,050 1,583, ,000 1,041,850 1,581, ,000 1,019,500 1,579, , ,560 1,585, ,380,000 4,555,748 7,935, ,450, ,400 7,916, ,740,000 2,181,250 7,921, ,740, ,000 6,332,000 $ 21,520,000 $ 14,915,358 $ 36,435,358

67 CITY OF BESSEMER, ALABAMA WATER SERVICE DEPARTMENT NOTES TO THE FINANCIAL STATEMENTS NOTE 5 LEASE. Operating Lease Agreement -Warehouse Space The Electric Service leases operating space to the Water Service Department. The lease requires an annual lease payment of $25,616. NOTE 6 CAPITAL ASSETS Balances of major classes of utility capital assets and accumulated depreciation at September 30, 2016 and changes therein for the year then ended are as follows: Capital assets activity for the year ended September 30, 2016, was as follows: 9/30/15 Beginning Balance Increases Decreases 9/30/16 Ending Balance Capital Assets not being depreciated Land $ 80,495 $ $ $ 80,495 Construction in Progress 5,528,300 1,412,452 6,940,752 Total Capital Assets, not being depreciated 5,608,795 1,412,452-7,021,247 Capital Assets Building and capital facilities 342, ,832 Plant equipment 45,028, ,228 45,132,958 Furniture and other equipment 2,116,412 56,239 2,172,651 Total Capital Assets, being depreciated 47,487, ,467 47,648,441 Less accumulated depreciation Building and capital facilities 214,397 3, ,553 Plant equipment 17,122, ,425 17,756,941 Furniture and other equipment 892,168 49, ,050 Total accumulated depreciation 18,229, ,463 18,916,544 Total Capital Assets being depreciated, net 29,258,893 (526,996) 28,731,897 Net capital assets $ 34,867,688 $ 885,456 $ 35,753,144 26

68 CITY OF BESSEMER, ALABAMA WATER SERVICE DEPARTMENT NOTES TO THE FINANCIAL STATEMENTS CAPITAL ASSETS (CONTINUED) Balances of major classes of utility capital assets and accumulated depreciation at September 30, 2015 and changes therein for the year then ended are as follows: Note 7 Changes in Amounts Invested in Capital Assets, Net of Related Debt The changes in amounts invested in capital assets, net of related debt are summarized as follows for the years ended September 30: Balance at beginning of year $ 10,967,686 $ 9,564,233 Change in net capital assets 369,315 1,883,453 Change in related warrants (500,000) (480,000) Change in related capital lease Balance at end of year $ 10,837,001 10,967,686 Note 8 CONTINGENCIES The Water Service is involved in various lawsuits. The lawsuits are in the early stages of litigation, and no gain or loss contingency can be estimated. Consequently, no financial statement accruals have been recorded. In the opinion of the Water Services' management, the potential adverse impact of these lawsuits would not have a material effect on the financial statements. Note 9 INTERCOMPANYPAYABLE The Electric Service pays certain expense incurred by the Water Service and subsequently, records an intercompany receivable due from the Water Service. The amount due the Electric Service as September 30, 2016 and 2015 was $1,454,937 and $-0-, respectively. Note 10 SUBSEQUENT EVENTS Events occurring after September 30, 2016, have been evaluated for possible adjustment to the financial statements or disclosure as of December 7, 2016, which is the date the financial statements were available to be issued. The Utility is not aware of any subsequent events that would require recognition or disclosure in the financial statements. 27

69 CITY OF BESSEMER, ALABAMA WATER SERVICE DEPARTMENT NOTES TO THE FINANCIAL STATEMENTS NOTE 11 IMPLEMENTATION OF NEW ACCOUNTING PRONOUNCEMENTS For the year ended September 30, 2016, the Utility implemented the following Governmental Accounting Standards Board pronouncement: Governmental Accounting Standards Board Statement No. 68 In September 2012, the GASB issued Statement 68, Accounting and Financial Reporting for Pensions. This Statement replaces the requirements of Statement No. 27, Accounting for Pensions by State and Local Governmental Employers, and Statement No. 50, Pension Disclosures, as they relate to governments that provide pensions through pension plans administered as trusts or similar arrangements that meet certain criteria. Statement No. 68 requires governments providing defined benefit pensions to recognize their long-term obligation for pension benefits as a liability for the first time, and to more comprehensively and comparably measure the annual costs of pension benefits. The Statement also enhances accountability and transparency through revised and new note disclosures and required supplementary information. The provisions of this Statement are effective for the fiscal year ending September 30, As discussed in Note 11, the changes in this guidance did not affect the Utility's financial reporting. RESTATEMENT The Board recorded a retroactive restatement as a result of implementing Governmental Accounting Standards Board Statement 68, Accounting and Financial Reporting for Pensions. GASB Statement No. 68 establishes the accounting requirements for government employers who provide pension benefits to their employees through a trust. Accounting changes adopted to conform to this Statement should be applied retroactively. The Board elected not to restate previously issued financial statements. As a result, the cumulative effect of applying this Statement has been reported as a restatement of pension cost in the statement of net position. The amount of the adjustment was ($4,606,526). Future Accounting Pronouncements The Governmental Accounting Standards Board has issued statements that will become effective in subsequent fiscal years. The statements address: Accounting and financial reporting for pensions; Mergers, acquisitions and transfers of operations; and Financial guarantees. The Utility Service is currently evaluating the effects that these statements will have on its financial statements for subsequent fiscal years.

70 NOTE 12 EMPLOYEE RETIREMENT PLAN The City of Bessemer (including the employees of the Utilities Service Department) contributes to the Employees' Retirement System of Alabama (RSA), an agent multipleemployer public employee retirement system that acts as a common investment and administrative agent for the various state agencies and depaltments. Plan description. The Employees' Retirement System of Alabama (ERS), an agency multiple-employer plan, was established October 1, 1945 under the provisions of Act 515 of the Legislature of 1945 for the purpose of providing retirement allowances and other specified benefits for state employees, State Police, and on an elective basis, to all cities, counties, towns and quasi-public organizations. The responsibility for the general administration and operation of ERS is vested in its Board of Control. The ERS Board of Control consists of 13 trustees. The Plan is administered by the Retirement Systems of Alabama (RSA). Title 36-Chapter 27 of the Code of Alabama grants the authority to establish and amend the benefit terms to the ERS Board of Control. The Plan issues a publicly available financial report that can be obtained at Benefits provided. State law establishes retirement benefits as well as death and disability benefits and any ad hoc increase in postretirement benefits for the ERS. Benefits for ERS members vest after 10 years of creditable service. State employees who retire after age 60 (52 for State Police) with 10 years or more of creditable service or with 25 years of service (regardless of age) are entitled to an annual retirement benefit, payable monthly for life. Local employees who retire after age 60 with 10 years or more of creditable service or with 25 or 30 years of service (regardless of age), depending on the particular entity's election, are entitled to an annual retirement benefit, payable monthly for life. Service and disability retirement benefits are based on a guaranteed minimum or a formula method, with the member receiving payment under the method that yields the highest monthly benefit. Under the formula method, members of the ERS (except State Police) are allowed % of their average final compensation (highest 3 of the last 10 years) for each year of service. State Police are allowed 2.875% for each year of State Police service in computing the formula method. Act 377 of the Legislature of 2012 established a new tier of benefits (Tier 2) for members hired on or after January 1, Tier 2 ERS members are eligible for retirement after age 62 (56 for State Police) with 10 years or more of creditable service and are entitled to an annual retirement benefit, payable monthly for life. Service and disability retirement benefits are based on a guaranteed minimum or a formula method, with the member receiving payment under the method that yields the highest monthly benefit. Under the formula method, Tier 2 members of the ERS (except State Police) are allowed 1.65% of their average final compensation (highest 5 of the last 10 years) for each year of service. State Police are allowed 2.375% for each year of state police service in computing the formula method. Members are eligible for disability retirement if they have 10 years of credible service, are currently in-service, and determined by the RSA Medical Board to be permanently incapacitated from further performance of duty. Preretirement death benefits are calculated and paid to the beneficiary on the member's age, service credit, employment status and eligibility for retirement. 29

71 NOTE 12 EMPLOYEE RETIREMENT PLAN- (continued) Contributions. Covered members of the ERS contributed 5% of earnable compensation to the ERS as required by statute until September 30, From October 1, 2011, to September 30, 2012, covered members of the ERS were required by statute to contribute 7.25% of earnable compensation. Effective October 1, 2012, covered members of the ERS are required by statute to contribute 7.50% of earnable compensation. Certified law enforcement, correctional officers, and firefighters of the ERS contributed 6% of earnable compensation as required by statute until September 30, From October 1, 2011, to September 30, 2012, certified law enforcement, correctional officers, and firefighters of the ERS were required by statute to contribute 8.25% of eamable compensation. Effective October 1, 2012, certified law enforcement, correctional officers, and firefighters of the ERS are required by statute to contribute 8.50% of earnable compensation. State Police of the ERS contribute 10% of eamable compensation. ERS local participating employers are not required by statute to increase contribution rates for their members. Tier 2 covered members of the ERS contribute 6% of earnable compensation to the ERS as required by statute. Tier 2 certified law enforcement, correctional officers, and firefighters of the ERS are required by statute to contribute 7% of earnable compensation. Tier 2 State Police members of the ERS contribute 10% of earnable compensation. These contributions rates are the same for Tier 2 covered members of ERS local participating employers. The ERS establishes rates based upon an actuarially determined rate recommended by an independent actuary. The actuarially determined rate is the estimated amount necessary to finance the costs of benefits earned by employees during the year, with additional amounts to finance any unfunded accrued liability, the pre-retirement death benefit and administrative expenses of the Plan. For the year ended September 30, 2015, the Utility's active employee contribution rate was 5.00 % of covered employee payroll, and the Utility's average contribution rate to fund the normal and accrued liability costs was % of covered employee payroll. Utility's contractually required contribution rate for the year ended September 30, 2015 was % of pensionable pay for Tier 1 employees, and 1236% of pensionable pay for Tier 2 employees,. These required contribution rates are based upon the actuarial valuation dated September 30, 2013, a percent of annual pensionable payroll, and actuarially determined as an amount that, when combined with member contributions, is expected to finance the costs of benefits earned by members during the year, with an additional amount to finance any unfunded accrued liability. Total employer contributions to the pension plan from the Utility were $441,266 for the year ended September 30,

72 NOTE 12 EMPLOYEE RETIREMENT PLAN- (continued) Pension Liabilities, Pension Expense, and Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pensions At September 30, 2015 the Utility Department reported a liability of $4,833,889 for its proportionate share of the collective net pension liability. The collective net pension liability was measured as of September 30, 2014 and the total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of September 30, The Utility Department's proportion of the collective net pension liability was based on the employers' shares of contributions to the pension plan relative to the total employer contributions of all participating ERS employers. At September 30, 2014 the Utility Department's proportion was 10.53%, which was an increase (decrease) of (.02%) from its proportion measured as of September 30, 2013, For the year ended September 30, 2015, the Utility Department recognized pension expense of $169,948. At September 30, 2015 the Utility Department reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources: Deferred Outflows Deferred Inflows of Resources of Resources Differences between expected and actual experience $ 0 $ 0 Changes of assumptions 0 0 Net difference between projected and actual earnings on pension plan investments 0 0 Employer contributions subsequent to the Measurement date 407,212 Total $ 407,212 $ 213,902 September 30, 2015 Employer Contributions applied to pension liability $441,266 reported as deferred outflows of resources related to pensions resulting from the Utility Department contributions subsequent to the measurement date will be recognized as a reduction of the net pension liability in the year ended September 30, Other amounts reported as deferred outflows of resources and deferred inflows of resources related to pensions will be recognized in pension expense as follows: Year ended September 30: 2016 $ , , , , ,478 Thereafter 4,478 31

73 NOTE 12 EMPLOYEE RETIREMENT PLAN- (continued) Actuarial assumptions. The total pension liability in the September 30, 2013 actuarial valuation was determined using the following actuarial assumptions, applied to all periods included in the measurement: Inflation 3.00% Salary increases 3.75% % Investment rate of return* 8.00% *Net of pension plan investment expense Mortality rates for ERS were based on the RP-2000 Combined Mortality Table Projected with Scale AA to 2015 set forward three years for males and two years for females. The rates of mortality for the period after disability retirement are according to the sex distinct RP-2000 Disability Mortality Table. The actuarial assumptions used in the September 30, 2013 valuation were based on the results of an investigation of the economic and demographic experience for the ERS based upon participant data as of September 30, The Board of Control accepted and approved these changes on January 27, 2012, which became effective at the beginning of fiscal year The long-term expected rate of return on pension plan investments was determined using a log-normal distribution analysis in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation. The target asset allocation and best estimates of geometric real rates of return for each major asset class are as follows: Long-Term Target Allocation Expected Rate of Return* Fixed Income 25.00% 5.00% U.S. Large Stocks 34.00% 9.00% U.S. Mid Stocks 8.00% 12.00% U.S. Small Stocks 3.00% 15.00% International Developed Market Stocks 15.00% 11.00% International Emerging Market Stocks 3.00% 16.00% Real Estate 10.00% 7.50% Cash 2.00% 1.50% Total % Includes assumed rate of inflation of 2.50%. 32

74 NOTE 12 EMPLOYEE RETIREMENT PLAN- (continued) Discount rate. The discount rate used to measure the total pension liability was the long term rate of return, 8%. The projection of cash flows used to determine the discount rate assumed that plan member contributions will be made at the current contribution rate and that the employer contributions will be made in accordance with the funding policy adopted by the ERS Board of Control. Based on those assumptions, components of the pension plan's fiduciary net position were projected to be available to make all projected future benefit payments of current pan members. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability. Sensitivity of the Utility Department's proportionate share of the net pension liability to changes in the discount rate The following table presents the Utility Department's proportionate share of the net pension liability calculated using the discount rate of 8%, as well as what the Utility Department's proportionate share of the net pension liability would be if it were calculated using a discount rate that is 1-percentage point lower (7%) or 1-percentage-point higher (9%) than the current rate: 1% Decrease Current Rate 1% Increases (7.00%) (8.00%) (9.00%) Utility Department's proportionate share of $6,304,394 $5,604,299 $3,732,996 collective net pension liability (Dollar amounts in thousands) Pension plan fiduciary net position Detailed information about the pension plan's fiduciary net position is available in the separately issued RSA Comprehensive Annual Report for the fiscal year ended September 30, The supporting actuarial information is included in the GASB Statement No. 67 Report for the ERS prepared as of September 30, The auditor's report dated May 1, 2015 on the total pension liability, total deferred outflows of resources, total deferred inflows of resources, total pension expense for the sum of all participating entities as of September 30, 2014 along with supporting schedules is also available. The additional financial and actuarial information is available at 33

75 THE GOVERNMENTAL UTILITY SERVICES CORPORATION OF BESSEMER, ALABAMA Audited Financial Statements September 30, 2016

76 THE GOVERNMENTAL UTILITY SERVICES CORPORATION OF BESSEMER, ALABAMA Table of Contents PAGE INDEPENDENT AUDITORS' REPORT 1 2 FINANCIAL STATEMENTS Statement of Net Position 3 4 Statement of Revenues, Expenses, and Changes in Net Position 5 Statement of Cash Flows 6 7 NOTES TO THE FINANCIAL STATEMENTS 8 21 REQUIRED SUPPLEMENTAL INFORMATION Schedule of Changes in Net Pension Liability 22 Schedule of Employer Contributions 23

77 JOHN W. KELLUM, KElLUM. in, HI. CPA CHARLES R R. WiLSON, WILSON. CPA LORI L. KES, KES. CPA PHILLJP PHlWP 0. D. EADS. EAOS. CPA BENJAMIN D. DOUGHTY, DOUGHTY. CPA Lt LINDY 40Y 8. B. EICHELBERGER, EICHELBERGER. CPA JAMES C. BOHANNON, BOHANNON. CPA. CFE KELLUM, WILSON & ASSOCIATES, P.C. P errilied C..t;f-' Paite P.. 1Jw --4CCtl _Accounlani.4.. n1an LORNA ROAD, SUITE 212 HOOVER, HOOVER. ALABAMA (205) FAX (205) kwa@kwacpa.net JASPER OFFICE PHILLIP PHilliP D. PADS. EAOS. CPA ELLIOTT BOULEVARD JASPER, JASPER. At AL (206) (205) CHARLES W. HULLETT. HUU.ETT. CM CPA (192'l'? ) INDEPENDENT AUDITORS' REPORT To the Board of Directors The Governmental Utility Services Corporation of Bessemer, Alabama Bessemer, Alabama We have audited the accompanying financial statements of the Governmental Utility Services Corporation of Bessemer, Alabama (the '`GUSC"), "GUSC"), as of and for the year ended September 30, 2016, and the related notes to the financial statements, as listed in the table of contents. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures' in the financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. =======================================MEMBERSOF======================================= - AMERICAN INSTITUTE OF CERTIFIED PUBLIC PUSLIC ACCOUNTANTS - ALABAMA AlABAMA STATE SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS

78 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the GUSC as of September 30, 2016, and the respective changes in financial position and cash flows thereof for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the schedule of changes in the net pension liability and the schedule of employer contributions be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United states of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. The GUSC has omitted the management s discussion and analysis that accounting principles generally accepted in the United States of America require to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of the financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. Our opinion on the basic financial statements is not affected by this missing information. li.e,-14 4, Iiii eig7t- cf-- 4#4,40c444a-as,,C... Kellum, Wilson & Associates, P.C. December 12, 2016

79 THE GOVERNMENTAL UTILITY SERVICES CORPORATION OF BESSEMER, ALABAMA Statement of Net Position September 30, 2016 ASSETS CURRENT ASSETS Cash $ 48,673 Restricted Cash and Cash Equivalents 2,601,968 Unbilled Receivable 417,296 Restricted Investments 115,228 Prepaid Insurance 58,881 TOTAL CURRENT ASSETS 3,242,046 NONCURRENT ASSETS Land 639,576 Depreciable Assets, Net 32,226,448 Net Pension Asset 19,715 TOTAL NONCURRENT ASSETS 32,885,739 TOTAL ASSETS 36,127,785 DEFERRED OUTFLOW OF RESOURCES Net Difference Between Projected and Actual Earnings on Plan Investments 13,560 Difference Between Expected and Actual Experience 17,826 Deferred Employer Contributions Subsequent to Valuation Date 16,559 Deferred Loss on Refunding 1,203,179 TOTAL DEFERRED OUTFLOWS OF RESOURCES 1,251,124 The accompanying notes are an integral part of these statements

80 THE GOVERNMENTAL UTILITY SERVICES CORPORATION OF BESSEMER, ALABAMA Statement of Net Position September 30, 2016 CURRENT LIABILITIES Accounts Payable $ 231,702 Accrued Expenses 10,527 Current Portion of Bonds Payable 1,380,000 Accrued Interest 827,404 TOTAL CURRENT LIABILITIES 2,449,633 NONCURRENT LIABILITIES Bonds Payable Less Unamortized Discount of $534,037 51,095,963 TOTAL NONCURRENT LIABILITIES 51,095,963 TOTAL LIABILITIES 53,545,596 DEFERRED INFLOW OF RESOURCES Net Difference Between Projected and Actual Earnings on Plan Investments - TOTAL DEFERRED INFLOWS OF RESOURCES - NET POSITION Net Investment in Capital Assets (19,609,939) Restricted 1,889,792 Unrestricted 1,553,460 TOTAL NET POSITION $ (16,166,687) The accompanying notes are an integral part of these statements

81 THE GOVERNMENTAL UTILITY SERVICES CORPORATION OF BESSEMER, ALABAMA Statement of Revenue, Expenses, and Changes in Net Position For the Year Ended September 30, 2016 OPERATING REVENUES $ 7,477,631 OPERATING EXPENSES Administrative Services 13,200 Bank Charges 456 Depreciation Expense 985,411 Insurance Expense 103,762 Licenses and Permits 799 Miscellaneous 2,045 Office Supplies 9,475 Operating and Maintenance 3,239,178 Postage 421 Professional Fees 90,475 Travel and Conferences 3,225 Trustee Fees 5,820 TOTAL OPERATING EXPENSES 4,454,267 OPERATING INCOME 3,023,364 NON-OPERATING INCOME (EXPENSES) Interest Expense (2,716,388) Interest Income 51 TOTAL OTHER INCOME (EXPENSES) (2,716,337) CHANGE IN NET POSITION 307,027 NET POSITION BEGINNING OF YEAR (16,473,714) NET POSITION END OF YEAR $ (16,166,687) The accompanying notes are an integral part of these statements

82 THE GOVERNMENTAL UTILITY SERVICES CORPORATION OF BESSEMER, ALABAMA Statement of Cash Flows For the Year Ended September 30, 2016 CASH FLOWS FROM OPERATING ACTIVITIES Cash Receipts from Customer $ 7,402,101 Cash Payments to Suppliers (2,522,113) Cash Payments to Employees (777,134) NET CASH PROVIDED BY OPERATING ACTIVITIES 4,102,854 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Bond Principal Payments (1,330,000) Purchase of Property, Plant, and Equipment (22,735) Interest Paid on Bonds (2,532,088) NET CASH USED BY CAPITAL AND RELATED FINANCING ACTIVITIES (3,884,823) CASH FLOWS FROM INVESTING ACTIVITIES Interest Received from Investments 51 Change in Restricted Investments 104,772 NET CASH PROVIDED BY INVESTING ACTIVITIES 104,823 NET INCREASE IN CASH AND CASH EQUIVALENTS 322,854 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,327,787 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,650,641 RECONCILIATION OF CASH AND CASH EQUIVALENTS TO STATEMENT OF NET POSITION Cash $ 48,673 Restricted Cash and Cash Equivalents 2,601,968 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,650,641 The accompanying notes are an integral part of these statements

83 THE GOVERNMENTAL UTILITY SERVICES CORPORATION OF BESSEMER, ALABAMA Statement of Cash Flows Continued For the Year Ended September 30, 2016 RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Operating Income $ 3,023,364 Adjustments to Reconcile Operating Income to Net Cash Provided by Operating Activities: Depreciation 985,411 (Increase) Decrease in: Unbilled Receivable (75,530) Prepaid Insurance 857 Net Pension Asset 43,779 Deferred Outflows (30,533) Increase (Decrease) in: Accounts Payable 171,758 Accrued Expenses (6,743) Deferred Inflows (9,509) NET CASH PROVIDED BY OPERATING ACTIVITIES $ 4,102,854 The accompanying notes are an integral part of these statements

84 THE GOVERNMENTAL UTILITY SERVICES CORPORATION OF BESSEMER, ALABAMA Notes to the Financial Statements September 30, 2016 NOTE 1: DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Government Utility Services Corporation of Bessemer, Alabama (the GUSC ), is a public corporation and instrumentality organized and existing under the laws of the State of Alabama and particularly pursuant to the provisions of Chapter 97, Title 11, Code of Alabama The GUSC was incorporated on October 17, The Project consists of a water intake structure, a 12 MGD water treatment and supply facility with the capacity to operate at 24 MGD, and an approximately 16.5-mile water transmission line (the Project ). In order to reduce the cost of purchasing water for the Bessemer Water System (the System ) and establish an independent source of water for the City of Bessemer (the City ), the City has entered into a water supply agreement, dated as of April 1998, (the Water Supply Agreement ) with the GUSC for the exclusive supply of water for the System. The GUSC s Water Supply Revenue Bonds, Series 2008 (the Series 2008 Bonds ), are secured by the net revenues generated from the exclusive sale of water to the City pursuant to the Water Supply Agreement. The City will in turn sell the water purchased from the GUSC to its customers. Under the terms of the Water Supply Agreement, the City will be obligated to pay amounts, as the purchase price for the water, corresponding to the operation and maintenance expenses of the GUSC and principal and interest on the Series 2008 Bonds when due. The payments by the City to the GUSC under the Water Supply Agreement will be an operating expense of the System to be paid prior to any payment of any principal or interest on the City s outstanding water revenue indebtedness. The financial statements of the GUSC have been prepared in conformity with generally accepted accounting principles (GAAP). The more significant of the GUSC s accounting policies are described below. Basis of Accounting and Operating Income The accrual basis of accounting is used and, accordingly, revenues are recorded when earned and expenses are recorded at the time liabilities are incurred. GUSC s operating revenues and expenses result from providing services and delivering water in connection with ongoing operations. Operating expenses for GUSC include the cost of services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are classified as nonoperating in the financial statements. Plant and Equipment Plant and equipment are stated at the original cost, including interest on funds borrowed to finance the construction of the Project. The cost of maintenance, repairs, and replacement of minor items of property is charged to maintenance expenses. The cost of replacement of property (exclusive of minor items and property) is charged to utility plant

85 THE GOVERNMENTAL UTILITY SERVICES CORPORATION OF BESSEMER, ALABAMA Notes to the Financial Statements September 30, 2016 NOTE 1: DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Depreciation Depreciation is recorded on a straight-line basis over the useful lives of the assets as follows: Water Plant Furniture and Equipment Vehicle 50 years 5 10 years 5 years Capitalization of Interest Interest costs related to bond issues are capitalized only during the construction period. These costs are netted against applicable interest earnings on construction account investments. During the year ended September 30, 2016, the GUSC did not have any capitalized interest. Interest cost incurred and charged to expense in the current period totaled $2,716,388. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes thereto. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents consist of restricted and unrestricted cash on hand and short-term investments with maturities of three months or less. Unbilled Receivable Unbilled receivable represents operating expenses and debt service paid or incurred by the GUSC that have not been billed to the City as of the fiscal year ended September 30, Restricted and Unrestricted Resources When both restricted and unrestricted resources are available for use, it is the GUSC s policy to use restricted resources first, then unrestricted resources as needed. Restricted assets and liabilities payable from restricted assets current in nature are reported with current assets and current liabilities in the financial statements. Restricted Assets report assets restricted for operating expenses, non-routine maintenance, constructing capital improvements, and liquidation of bonds payable. See Note 4 for information describing restricted assets. Right of Offset Receivables from and payables to external parties are reported separately and are not offset in the financial statements, unless a right of offset exists

86 THE GOVERNMENTAL UTILITY SERVICES CORPORATION OF BESSEMER, ALABAMA Notes to the Financial Statements September 30, 2016 NOTE 1: DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Pensions The Employees Retirement, System of Alabama (the Plan) financial statements are prepared using the economic resources measurement focus and accrual basis of accounting. Contributions are recognized as revenues when ended, pursuant to the plan requirements. Benefits and refunds are recognized when due and payable in accordance with the terms of the plan. Expenses are recognized when the corresponding liability is incurred, regardless of when the payment is made. Investments are reported at fair value. Financial statements are prepared in accordance with requirements of the Governmental Accounting Standards Board (GASB). Under these requirements, the Plan is considered a component unit of the State of Alabama and is included in the State s Comprehensive Annual Financial Report. NOTE 2: CONCENTRATION OF CREDIT RISK The City of Bessemer is the GUSC s only customer. If the City is unable to meet its obligations to the GUSC, the GUSC will not be able to meet its obligations for debt service and operating expenses. The City is currently meeting its obligations as required under the Water Supply Agreement. NOTE 3: LAND AND DEPRECIABLE ASSETS Balances of major classes of assets at September 30, 2016, are as follows: Description 2015 Additions Deletions 2016 Land $ 639,576 $ - $ - $ 639,576 Construction in Progress $ - $ - $ - $ - Depreciable Assets Water Plant $ 47,102,604 $ - $ - $ 47,102,604 Furniture and Equipment 306,229 22, ,964 Vehicles 43, ,400 Subtotal 47,452,233 $ 22,735 $ - 47,474,968 Less: Accumulated Depreciation 14,263,109 15,248,520 Total Depreciable Assets $ 33,189,124 $ 32,226,448 Depreciation expense was $985,411 for the year ended September 30,

87 THE GOVERNMENTAL UTILITY SERVICES CORPORATION OF BESSEMER, ALABAMA Notes to the Financial Statements September 30, 2016 NOTE 4: RESTRICTED ASSETS These funds are restricted to uses outlined in the Trust Indentures. The balance of restricted funds at September 30, 2016, is as follows: Indenture Fund Description 2016 Replacement Fund $ 297,342 Reserve Fund Account - Cost of Issuance Fund - Debt Service Fund 1,374,441 Operations and Maintenance 1,045,412 Revenue Fund - Total $ 2,717,195 NOTE 5: LONG-TERM BONDS PAYABLE The outstanding Series 2008 Bonds mature in varying amounts beginning June 1, 2017, until June 1, 2039, and interest is payable semiannually on June 1 and December 1, ranging from 3.75 percent to 5.00 percent. The revenues of the GUSC are pledged as security for repayment of the Series 2008 Bonds. Long-term bonds payable activity for the year ended September 30, 2016, is as follows: Description 2015 Additions Deletions 2016 Bonds Payable $ 54,340,000 $ - $ 1,330,000 $ 53,010,000 Less: Unamortized Discount 583,355-49, ,037 $ 53,756,645 $ 52,475,963 The following schedule presents the total debt service that will be payable on the Series 2008 Bonds for the fiscal years ended September 30, 2017, through 2039: Fiscal Year Principal on Interest on Ending Series 2008 Series 2008 September 30 Bonds Bonds 2017 $ 1,380,000 $ 2,482, ,430,000 2,430, ,485,000 2,373, ,545,000 2,313, ,610,000 2,250, ,145,000 10,154, ,450,000 7,853, ,455,000 4,844, ,510,000 1,068,000 Total $ 53,010,000 $ 35,769,

88 THE GOVERNMENTAL UTILITY SERVICES CORPORATION OF BESSEMER, ALABAMA Notes to the Financial Statements September 30, 2016 NOTE 6: DEPOSITS IN FINANCIAL INSTITUTIONS Demand Deposits At September 30, 2016, $250,000 in demand deposit accounts were covered by FDIC Insurance. The GUSC is identified as a public funds depositor and is therefore part of Alabama s S.A.F.E. program. Trustee Held Funds The GUSC maintains trustee accounts required by the bond indentures which hold cash and are invested primarily in U.S. government obligations, U.S. agencies and instrumentalities, and a repurchase agreement with a forward contract ( forward delivery agreement ). Credit Risk State statutes limit the GUSC to invest in obligations of the U.S. Treasury, U.S. Corporate Debt, U.S. Corporate Equities, State of Alabama Obligations, County Obligations, and other Municipal Obligations, as well as bank certificates of deposit, bank public funds investments accounts, and repurchase agreements. Interest Rate Risk The GUSC does not have a formal investment policy that limits investment maturities as a means of managing its exposure to fair value arising from increasing interest rates. The GUSC entered into a forward delivery agreement with Wachovia/Wells Fargo (the provider) upon the issuance of their Series 2002 bonds and amended that agreement with the issuance of the Series 2008 bonds. The GUSC entered into the forward delivery agreement to hedge against future interest rate declines and to provide immediate relief to the City by applying the fee received from the provider to the City s accounts receivable balance. The initial fee received was $586,500 with a subsequent reduction of $39,000 charged to the deferred loss on refunding upon the issuance of the Series 2008 bonds. The net fees received from the forward delivery agreement provided a 3.77% guaranteed rate of return on future monthly debt service payments. The forward delivery agreement allows the provider to invest in commercial paper which is rated at the time of purchase in the single highest classification, A-1 by S&P or P-1 by Moody s. These investments do not comply with eligible investments as mandated by state statute. However, under the agreement the risk of loss resides with the provider and not the GUSC. Concentration of Credit Risk The GUSC places no limit on the amounts the GUSC may invest in any one issuer. Investments in U.S. Treasury Reserves and investments held under the forward delivery agreement make up percent and percent of the GUSC s investments, respectively

89 THE GOVERNMENTAL UTILITY SERVICES CORPORATION OF BESSEMER, ALABAMA Notes to the Financial Statements September 30, 2016 NOTE 6: DEPOSITS IN FINANCIAL INSTITUTIONS (CONTINUED) Concentration of Credit Risk (Continued) Investments Credit Rating Maturity Fair Value Direct Investments Federated U.S. Treasury Reserves AAAm, Aaa-mf 1 90 days $ 1,045,412 Subtotal 1,045,412 Investments Under Forward Delivery Agreement Federated U.S. Treasury Reserves AAAm, Aaa-mf 1 90 days $ 411,440 FHLMC Discount Note P-1, A-1+ 11/29/ ,928 Federal Farm Credit Banks P-1, A-1+ 5/30/ ,649 Federal Farm Credit Banks P-1, A-1+ 12/6/ ,947 Federal Home Loan Banks P-1, A-1+ 10/12/ ,990 Federal Home Loan Banks P-1, A-1+ 11/16/ ,944 Federal Home Loan Banks P-1, A-1+ 11/23/ ,964 Subtotal 1,373,862 Total $ 2,419,274 NOTE 7: DEFINED BENEFIT PENSION PLAN General Information about the Pension Plan Plan Description. The Employees Retirement System of Alabama, an agency multiple-employer plan, was established October 1, 1945, under the provisions of Act 515 of the Legislature of 1945 for the purpose of providing retirement allowances and other specified benefits for state employees, State Police, and on an elective basis, to all cities, counties, towns, and quasi-public organizations (this includes GUSC). The responsibility for the general administration and operation of ERS is vested in its Board of Control. The ERS Board of Control consists of 13 trustees. The Plan is administered by the Retirement Systems of Alabama (RSA). Title 36-Chapter 27 of the Code of Alabama grants the authority to establish and amend the benefit terms to the ERS Board of Control. The Plan issues a publicly available financial report that can be obtained at

90 THE GOVERNMENTAL UTILITY SERVICES CORPORATION OF BESSEMER, ALABAMA Notes to the Financial Statements September 30, 2016 NOTE 7: DEFINED BENEFIT PENSION PLAN (CONTINUED) General Information about the Pension Plan (Continued) The ERS Board of Control consists of 13 trustees as follows: 1) The Governor, ex officio. 2) The State Treasurer, ex officio. 3) The State Personnel Director, ex officio. 4) The State Director of Finance, ex officio. 5) Three vested members of ERS appointed by the Governor for a term of four years, no two of whom are from the same department of state government nor from any department of which an ex officio trustee is the head. 6) Six members of ERS who are elected by members from the same category of ERS for a term of four years as follows: a. Two retired members with one from the ranks of retired state employees and one from the ranks of retired employees of a city, county, or a public agency each of whom is an active beneficiary of ERS. b. Two vested active state employees. c. Two vested active employees of an employer participating in ERS pursuant to Benefits Provided. State law establishes retirement benefits as well as death and disability benefits and any ad hoc increase in postretirement benefits for the ERS. Benefits for Tier 1 ERS members vest after 10 years of creditable service. State employees who retire after age 60 (52 for State Police) with 10 years or more of creditable service or with 25 years of service (regardless of age) are entitled to annual retirement benefit, payable monthly for life. Local employees who retire after age 60 with 10 years or more of creditable service or with 25 or 30 years of service (regardless of age), depending on the particular entity s election, are entitled to an annual retirement benefit, payable monthly for life. Service and disability retirement benefits are based on a guaranteed minimum or a formula method, with the member receiving payment under the method that yields the highest monthly benefit. Under the formula method, Tier 1 members of the ERS (except State Police) are allowed % of their average final compensation (highest 3 of the last 10 years) for each year of service. State police are allowed 2.875% for each year of State Police service in computing the formula method. Act 377 of the Legislature of 2012 established a new tier of benefits (Tier 2) for members hired on or after January 1, Tier 2 ERS members are eligible for retirement after age 62 (56 for State Police) with 10 years or more of creditable service and are entitled to an annual retirement benefit, payable monthly for life. Service and disability retirement benefits are based on a guaranteed minimum or a formula method, with the member receiving payment under the method that yields the highest monthly benefit. Under the formula method, Tier 2 members of the ERS (except State Police) are allowed 1.65% of their average final compensation (highest 5 of the last 10 years) for each year of service. State Police are allowed % for each year of State Police service in computing the formula method

91 THE GOVERNMENTAL UTILITY SERVICES CORPORATION OF BESSEMER, ALABAMA Notes to the Financial Statements September 30, 2016 NOTE 7: DEFINED BENEFIT PENSION PLAN (CONTINUED) General Information about the Pension Plan (Continued) Members are eligible for disability retirement if they have 10 years of credible service, are currently in-service, and determined by the RSA Medial Board to be permanently incapacitated from further performance of duty. Preretirement death benefits are calculated and paid to the beneficiary on the member s age, service credit, employment status, and eligibility for retirement. The ERS serves approximately 846 local participating employers. These participating employers include 287 cities, 65 counties, and 494 other public entities. The ERS membership includes approximately 84,393 participants. As of September 30, 2015, membership consisted of: Retirees and beneficiaries currently receiving benefits 22,211 Terminated employees entitled to but not yet receiving benefits 1,353 Terminated employees not entitled to a benefit 5,451 Active Members 55,164 Post-DROP participants still in active service 214 Total 84,393 Contributions. Tier 1 covered members of the ERS (except State Police and certified law enforcement, correctional officers, and firefighters) contributed 5% of earnable compensation to the ERS as required by statute until September 30, From October 1, 2011, to September 30, 2012, Tier 1 covered members of the ERS (except State Police and certified law enforcement, correctional officers and firefighters) were required by statute to contribute 7.25% of earnable compensation. Effective October 1, 2012, Tier 1 covered members of the ERS (except State Police and certified law enforcement, correctional officers and firefighters) are required by statute to contribute 7.50% of earnable compensation. Tier 1 certified law enforcement, correctional officers, and firefighters of the ERS contributed 6% of earnable compensation as required by statute until September 30, From October 1, 2011, to September 30, 2012, certified law enforcement, correctional officers, and firefighters of the ERS were required by statute to contribute 8.25% of earnable compensation. Effective October 1, 2012, Tier 1 certified law enforcement, correctional officers, and firefighters of the ERS are required by statute to contribute 8.50% of earnable compensation. Tier 1 State Police of the ERS contribute 10% of earnable compensation. ERS local participating employers are not required by statute to increase contribution rates for their members. Tier 2 covered members of the ERS (except State Police and certified law enforcement, correctional officers and firefighters) contribute 6% of earnable compensation to the ERS as required by statute. Tier 2 certified law enforcement, correctional officers, and firefighters of the ERS are required by statute to contribute 7% of earnable compensation. Tier 2 State Police members of the ERS contribute 10% of earnable compensation. These contributions rates are the same for Tier 2 covered members of ERS local participating employers

92 THE GOVERNMENTAL UTILITY SERVICES CORPORATION OF BESSEMER, ALABAMA Notes to the Financial Statements September 30, 2016 NOTE 7: DEFINED BENEFIT PENSION PLAN (CONTINUED) General Information about the Pension Plan (Continued) The ERS establishes rates based upon an actuarially determined rate recommended by an independent actuary. The actuarially determined rate is the estimated amount necessary to finance the costs of benefits earned by employees during the year, with additional amounts to finance any unfunded accrued liability, the pre-retirement death benefit and administrative expenses of the Plan. For the year ended September 30, 2016, the GUSC s active employee contribution rate was 3.11 percent of covered employee payroll, and the GUSC s average contribution rate to fund the normal and accrued liability costs was 2.74 percent of covered employee payroll. The GUSC s contractually required contribution rate for the year ended September 30, 2016, was 3.17% of pensionable pay for Tier 1 employees, and 2.96% of pensionable pay for Tier 2 employees. These required contribution rates are based upon the actuarial valuation dated September 30, 2014, a percent of annual pensionable payroll, and actuarially determined as an amount that, when combined with member contributions, is expected to finance the costs of benefits earned by members during the year, with an additional amount to finance any unfunded accrued liability. Total employer contributions to the pension plan from the System were $18,747 for the year ended September 30, Net Pension Liability The GUSC s net pension liability was measured as of September 30, 2015, and the total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of September 30, 2014, rolled forward to September 30, 2015, using standard roll-forward techniques as shown in the following table: Total Pension Liability As of September 30, 2014 (a) $ 294,646 Entry Age Normal Cost for October 1, 2014 September 30, 2015 (b) $ 47,788 Actual Benefit Payments and Refunds for October 1, 2014 September 30, 2015 (c) $ 0 Total Expected Pension Liability As of September 30, 2015 [(a) x (1.08)] + (b) [(c) x (1.04)] $ 366,006 Difference between Expected and Actual Experience (Gain)/Loss $ 19,

93 THE GOVERNMENTAL UTILITY SERVICES CORPORATION OF BESSEMER, ALABAMA Notes to the Financial Statements September 30, 2016 NOTE 7: DEFINED BENEFIT PENSION PLAN (CONTINUED) Net Pension Liability (Continued) Actuarial assumptions. The total pension liability in the September 30, 2014, actuarial valuation was determined using the following actuarial assumptions, applied to all periods included in the measurement: Inflation 3.00% Salary increases 3.75% % Investment rate of return* 8.00% *Net of pension plan investment expense Mortality rates for ERS were based on the RP-2000 Combined Mortality Table Projected with Scale AA to 2015 set forward three years for males and two years for females. The rates of mortality for the period after disability retirement are according to the sex distinct RP-2000 Disability Mortality Table. The actuarial assumptions used in the September 30, 2014, valuation were based on the results of an investigation of the economic and demographic experience for the ERS based upon participant data as of September 30, The Board of Control accepted and approved these changes on January 27, 2012, which became effective at the beginning of fiscal year The long-term expected rate of return on pension plan investments was determined using a log-normal distribution analysis in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation. The target asset allocation and best estimates of geometric real rates of return for each major asset class are as follows: Target Allocation Long-Term Expected Rate of Return* Fixed Income 25.00% 5.00% U.S. Large Stocks 34.00% 9.00% U.S. Mid Stocks 8.00% 12.00% U.S. Small Stocks 3.00% 15.00% International Developed Market Stocks 15.00% 11.00% International Emerging Market Stocks 3.00% 16.00% Real Estate 10.00% 7.50% Cash 2.00% 1.50% Total % *Includes assumed rate of inflation of 2.50%

94 THE GOVERNMENTAL UTILITY SERVICES CORPORATION OF BESSEMER, ALABAMA Notes to the Financial Statements September 30, 2016 NOTE 7: DEFINED BENEFIT PENSION PLAN (CONTINUED) Net Pension Liability (Continued) Discount rate. The Discount rate used to measure the total pension liability was the long-term rate of return, 8%. The projection of cash flows used to determine the discount rate assumed that plan member contributions will be made at the current contribution rate and that the employer contributions will be made in accordance with the funding policy adopted by the ERS Board of Control. Based on those assumptions, components of the pension plan s fiduciary net position were projected to be available to make all projected future benefit payments of current plan members. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability. Changes in Net Pension Liability Increase(Decrease) Total Plan Net Pension Fiduciary Pension Liability Net Position Liability (a) (b) (a)-(b) Balances at 9/30/2014 $ 294,646 $ 358,140 $ (63,494) Changes for the year: Service Cost 47,788-47,788 Interest 23,572-23,572 Differences Between Expected and Actual Experience 19,875-19,875 Contributions Employer - 15,489 (15,489) Contributions Employee - 27,463 (27,463) Net Investment Income - 4,504 ( 4,504) Benefit Payments, Including Refunds of Employee Contributions Administrative Expenses Transfers Among Employers Net Changes 91,235 47,456 43,779 Balances at 9/30/2015 $ 385,881 $ 405,596 $ (19,715)

95 THE GOVERNMENTAL UTILITY SERVICES CORPORATION OF BESSEMER, ALABAMA Notes to the Financial Statements September 30, 2016 NOTE 7: DEFINED BENEFIT PENSION PLAN (CONTINUED) Net Pension Liability (Continued) Sensitivity of the net pension liability to changes in the discount rate. The following table presents the GUSC s net pension liability calculated using the discount rate of 8%, as well as what the GUSC s proportionate share of the net pension liability would be if it were calculated using a discount rate that is 1- percentage-point lower (7%) or 1-percentage-point higher (9%) than the current rate: 1% Decrease Current Rate 1% Increase (7.00%) (8.00%) (9.00%) GUSC s Net Pension Liability $ 42,283 $ (19,715) $ (70,624) Pension plan fiduciary net position. Detailed information about the pension plan s fiduciary net position is available in the separately issued RSA Comprehensive Annual Report for the fiscal year ended September 30, The supporting actuarial information is included in the GASB Statement No. 68 Report for the ERS prepared as of September 30, The auditor s report dated October 17, 2016, on the Schedule of Changes in Fiduciary Net Position by Employer and accompanying notes is also available. The additional financial and actuarial information is available at Pension Expense and Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pensions For the year ended September 30, 2016, the GUSC recognized pension expense of $18,373. At September 30, 2016, the GUSC reported deferred outflows of resources and deferred inflows of resources related to pension of the following sources: Deferred Outflows Deferred Inflows of Resources of Resources Differences Between Expected and Actual Experience $ 17,826 $ - Changes of Assumptions - - Net Difference Between Projected and Actual Earnings on Pension Plan Investments 13,560 - Employer Contributions Subsequent to the Measurement Date 16,559 - Total $ 47,945 $

96 THE GOVERNMENTAL UTILITY SERVICES CORPORATION OF BESSEMER, ALABAMA Notes to the Financial Statements September 30, 2016 NOTE 7: DEFINED BENEFIT PENSION PLAN (CONTINUED) Net Pension Liability (Continued) Amounts reported as deferred outflows of resources and deferred inflows of resources to pensions will be recognized in pension expense as follows: Year Ended September 30: 2017 $21, , , , ,049 Thereafter 7,581 Total $ 47,945 NOTE 8: NET POSITION At September 30, 2016, the net position of the GUSC consisted of the following: Net investment in capital assets: Net property, plant, and equipment $ 32,866,024 Less: Water supply revenue bonds payable, net (52,475,963) Total net investment in capital assets (19,609,939) Restricted: Assets restricted for debt service 1,374,441 Less: Accrued interest payable from restricted assets (827,404) Total restricted for debt service 547,037 Assets restricted for replacement 297,343 Assets restricted for operating and maintenance 1,045,412 Total restricted net position 1,889,792 Unrestricted net position 1,553,460 Total net position $ (16,166,687) None of the net position is restricted by enabling legislation

97 THE GOVERNMENTAL UTILITY SERVICES CORPORATION OF BESSEMER, ALABAMA Notes to the Financial Statements September 30, 2016 NOTE 9: CONTINGENCY On May 5, 2008, the GUSC terminated the management agreement with Covanta. The GUSC committed to provide the employees with life insurance comparable to that provided by Covanta which provided coverage equal to twice the amount of annual salary. The GUSC has secured adequate life insurance on all but one employee. The coverage shortfall is approximately $100,000. On October 10, 2013, the GUSC resolved this life insurance shortfall by entering into an agreement with the employee that his spouse will receive $100,000 upon his death if the terms and conditions of the agreement are met. NOTE 10: SUBSEQUENT EVENTS The GUSC has evaluated subsequent events through December 12, 2016, the date which the financial statements were available to be issued

98 THE GOVERNMENTAL UTILITY SERVICES CORPORATION OF BESSEMER, ALABAMA Schedule of Changes in Net Pension Liability Fiscal Year Ending September 30, TOTAL PENSION LIABILITY Service Cost $ 47,788 $ 45,359 Interest 23,572 18,466 Changes in Benefit Terms - - Differences Between Expected and Actual Experience 19,875 - Changes of Assumptions - - Benefit Payments, Including Refunds of Employee Contributions - - NET CHANGE IN TOTAL PENSION LIABILITY 91,235 63,825 TOTAL PENSION LIABILITY BEGINNING 294, ,821 TOTAL PENSION LIABILITY ENDING (a) $ 385,881 $ 294,646 PLAN FIDUCIARY NET POSITION Contributions Employer $ 15,489 $ 24,486 Contributions Member 27,463 25,979 Net Investment Income 4,504 35,665 Benefit Payments, Including Refunds of Employee Contributions - - Transfers Among Employers - - NET CHANGE IN PLAN FIDUCIARY NET POSITION 47,456 86,130 PLAN NET POSITION BEGINNING 358, ,010 PLAN NET POSITION ENDING (b) $ 405,596 $ 358,140 NET PENSION LIABILITY (ASSET) ENDING (a) - (b) $ (19,715) $ (63,494) Plan Fiduciary Net Position as a Percentage of the Total Pension Liability % % Covered-Employee Payroll* $ 549,248 $ 519,581 Net Pension Liability (Asset) as a Percentage of Covered-Employee Payroll -3.59% % *Employer's covered-payroll during measurement period is the total covered payroll. For FY2016, the measurement period is October 1, 2014, through September 30, GASB issued a statement "Pension Issues" in March, 2016 to redefine covered payroll for FY2016. The accompanying notes are an integral part of these financial statements

99 THE GOVERNMENTAL UTILITY SERVICES CORPORATION OF BESSEMER, ALABAMA Schedule of Employer Contributions September 30, Actuarially Determined Contributions* $ 16,559 $ 15,489 Contributions in Relation to the Actuarially Determined Contributions* 16,559 15,489 Contribution Deficiency (Excess) $ - $ - Covered-Employee Payroll** $ 603,574 $ 549,248 Contributions as a Percentage of Covered-Employee Payroll 2.74% 2.82% *Amount of employer contributions related to normal and accrued liability components of employer rate net of any refunds or error service payments. For FY2016, the fiscal year 10/01/2015 through 09/30/2016. **Employer's covered-payroll for FY2016 is the total covered payroll for October 1, 2015, through September 30, NOTES TO SCHEDULE Actuarially determined contribution rates are calculated as of September 30, three years prior to the end of the fiscal year in which contributions are reported. Contributions for fiscal year 2016 were based on the September 30, 2013, actuarial valuation. Methods and Assumptions used to Determine Contribution Rates for the period October 1, 2015, through September 30, 2016: Actuarial Cost Method Entry Age Amortization Method Level Percent Closed Remaining Amortization Period 30 Years Asset Valuation Method Five Year Smooth Market Inflation 3% Salary Increases %, Including Inflation Investment Rate of Return 8.00%, Net of Pension Plan Investment Expense Including Inflation The accompanying notes are an integral part of these financial statements

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101 APPENDIX C PROPOSED FORM OF BOND COUNSEL OPINION November 9, 2017 The Governmental Utility Services Corporation of the City of Bessemer Bessemer, Alabama Gentlemen: We have served as Bond Counsel to THE GOVERNMENTAL UTILITY SERVICES CORPORATION OF THE CITY OF BESSEMER (herein called the GUSC ), and in connection therewith, we have examined certified copies of proceedings and other documents showing the organization under the laws of the State of Alabama of the GUSC, together with copies of proceedings of the GUSC and other documents and certifications submitted to us pertaining to the issuance and validity of $48,710,000 THE GOVERNMENTAL UTILITY SERVICES CORPORATION OF THE CITY OF BESSEMER Water Supply Revenue Bonds Series 2017 (which bonds are herein called the Series 2017 Bonds ). We have not examined any of the executed Series 2017 Bonds, but we have been furnished with appropriate certificates respecting their form and due execution. In our examination of all documents and certificates pertaining to the issuance of the Series 2017 Bonds, we have assumed the authenticity of documents submitted to us as originals, the conformity to the original documents of documents submitted to us as copies, the authenticity of the originals of such latter documents and the correctness of any facts stated in such documents The documents submitted to us show as follows: (a) the Series 2017 Bonds have been issued under a Trust Indenture dated as of June 1, 1998, as supplemented and amended by a First Supplemental Indenture dated as of February 1, 2002, by a Second Supplemental Indenture dated as of March 1, 2002, by a Third Supplemental Trust Indenture dated as of March 1, 2008, and a Fourth Supplemental Indenture dated as of November 1, 2017 (said Trust Indenture, as so supplemented and amended, being herein called the Indenture ) between the GUSC and U.S. Bank National Association, as trustee (herein, together with its successors in trust, called the Trustee ); (b) the GUSC has heretofore issued under the Indenture (i) its Water Supply Revenue Bonds, Series 1998, dated June 1, 1998 (the Series 1998 Bonds ), originally issued in the aggregate principal amount of $56,815,000, (ii) its Water Supply Revenue Refunding Bonds, Series 2002, dated March 1, 2002 (the Series 2002 Bonds ), originally issued in the aggregate principal amount of $3,070,000, and (iii) its Water Supply Revenue Refunding Bonds, Series 2008, dated April 1, 2008 (the Series 2008 Bonds ), originally issued in the aggregate principal amount of $61,310,000 and now outstanding in the aggregate principal amount of $51,630,000; C-1

102 (c) the GUSC and the City of Bessemer, Alabama (herein called the City ), have entered into a Water Supply Agreement dated as of June 1, 1998, as amended by a First Amendment to Water Supply Agreement dated March 1, 2002, by a Second Amendment to Water Supply Agreement dated as of March 1, 2008, and by a Third Amendment to Water Supply Agreement dated as of November 1, 2017 (together the Water Supply Agreement ), pursuant to which the GUSC has acquired, constructed and installed a water supply system (herein, as defined in the Indenture called the Project ) and the City has agreed to purchase water furnished from the Project for a term extending until the Series 2017 Bonds have been paid in full; (d) the Water Supply Agreement obligates the City to make payments directly to the Trustee, for the account of the GUSC, on such dates and in such amounts as shall, together with certain proceeds from the sale of the Series 2017 Bonds and other moneys, be sufficient to provide for the payment, when due, of the principal of and the interest and premium (if any) on the Series 2017 Bonds becoming due or accruing during the term of the Water Supply Agreement; and (e) in the Indenture the GUSC has reserved the privilege of issuing from time to time, upon compliance with the conditions set forth in the Indenture, additional bonds (herein called Additional Bonds ) in one or more series, without limitation as to principal amount, that are secured on a parity with the Series 2017 Bonds. In rendering the opinion hereinafter expressed that the interest on the Series 2017 Bonds is not includable in the gross income of the holders thereof for federal income tax purposes, we have relied, in part, upon certain covenants, representations and warranties made by the GUSC in the Indenture and upon certain covenants, representations and warranties made by the City in the Water Supply Agreement. In rendering the opinions hereinafter expressed, we have also relied upon the opinion of Messrs. Paden & Paden, P.C., of Bessemer, Alabama, who have served as counsel to the GUSC in connection with the transactions involving the sale and issuance of the Series 2017 Bonds. Based upon and subject to the foregoing, and subject to the following qualifications, we are of the following opinions on the date hereof: (1) The GUSC is a public corporation organized and existing under the constitution and laws of the State of Alabama and has all requisite power and authority under the laws of the State of Alabama, including particularly the provisions of Code of Alabama 1975, Title 11, Chapter 97, (i) to issue, sell and deliver the Series 2017 Bonds, (ii) to use the proceeds thereof to refund and retire certain outstanding obligations of the GUSC, (iii) to own, operate and dispose of the Project, and (iv) to enter into and perform its obligations under the Water Supply Agreement and the Indenture. (2) The Water Supply Agreement has been duly authorized, executed and delivered by the GUSC and by the City and constitutes a valid and binding agreement of the GUSC and of the City which is legally enforceable in accordance with its terms, except that (i) the enforceability of any of the agreements contained in the Water Supply Agreement may be limited by bankruptcy, insolvency, reorganization and other similar laws affecting the enforcement of creditors rights generally, and (ii) any court before which any enforcement proceeding may be brought will have discretion, in accordance with general equitable principles, to deny or limit the remedy of specific performance or other equitable relief with respect to contractual obligations other than for the payment of money. (3) The Indenture has been duly authorized, executed and delivered by the GUSC and, assuming due authorization, execution and delivery thereof by the Trustee, constitutes a valid and binding agreement of the GUSC which is legally enforceable in accordance with its terms, except that (i) the enforceability of any of the agreements contained in the Indenture may be limited by bankruptcy, insolvency, reorganization and other similar laws affecting the enforcement of creditors rights generally, and (ii) any court before which any enforcement proceeding may be brought will have discretion, in accordance with general equitable principles, to deny or limit C-2

103 the remedy of specific performance or other equitable relief with respect to contractual obligations other than for the payment of money. (4) The Series 2017 Bonds have been duly authorized, executed, issued and delivered by the GUSC, and assuming due authentication thereof by the Trustee, are legal, valid and binding special obligations of the GUSC, entitled to the benefits and security of the Water Supply Agreement and the Indenture, except to the extent that the enforceability thereof may be limited by bankruptcy, insolvency, reorganization and other similar laws affecting the enforcement of creditors rights generally. (5) Under the Indenture the payment of the principal of and the interest and premium (if any) on the Series 2017 Bonds is secured, pro rata and without preference or priority of the Series 2017 Bonds over any Additional Bonds, (i) by a valid pledge and assignment of the payments which are required by the Water Supply Agreement to be paid to the Trustee in respect of debt service on the Series 2017 Bonds, (ii) by a valid pledge and assignment of all other revenues to be derived by the GUSC from the Project, and (iii) by a valid assignment to the Trustee of all right, title and interest of the GUSC in and to the Water Supply Agreement (except certain expense payment, indemnification and other rights retained by the GUSC). (6) The Series 2017 Bonds do not constitute an indebtedness of the GUSC or of the City within the meaning of any constitutional provision or statutory limitation of the State of Alabama, or a charge against the general credit of the GUSC, nor shall the GUSC be obligated to pay the principal of or the interest on the Series 2017 Bonds except from (i) the revenues to be derived by the GUSC from the Project or (ii) any other moneys which may be received from or in connection with the Project or which may be made available to the Trustee under the Indenture or the Water Supply Agreement. (7) Under existing statutes the interest income on the Series 2017 Bonds is exempt from income taxation by the State of Alabama. (8) Under existing statutes, regulations, rulings and court decisions, the interest on the Series 2017 Bonds is excludable from gross income for federal income tax purposes pursuant to Section 103 of the Internal Revenue Code of 1986, as amended to the date hereof (the Tax Code ), and interest on the Series 2017 Bonds is excludable from federal alternative minimum taxable income as defined in Section 55(b)(2) of the Tax Code, except that such interest is required to be included in calculating the adjusted current earnings adjustment applicable to corporations for purposes of computing the federal alternative minimum taxable income of corporations. The opinions expressed in this paragraph assume continuous compliance with the covenants and representations contained in the GUSC s and the City s certified proceedings and in certain other documents or certain other certifications furnished to us. We express no opinion regarding other federal tax consequences arising with respect to the Series 2017 Bonds. The opinions expressed in this opinion letter are subject to the following: The Indenture provides that, in the event the GUSC should default in any of the provisions thereof in the manner and for the time therein provided, the Trustee may declare all the 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 establish a mortgage lien on the Project that will be subject to foreclosure. We have not examined the title of the GUSC to any property, whether real, personal or mixed, constituting part of the Project, and we therefore express no opinion thereon. The rights of the owners of the Series 2017 Bonds and the enforceability of the Series 2017 Bonds, the Water Supply Agreement and the Indenture are limited by bankruptcy, insolvency, reorganization, moratorium, and C-3

104 other similar laws affecting creditors rights generally, and by equitable principles, whether considered at law or in equity. In rendering the foregoing opinions, we are not opining upon matters relating to the corporate status of the Trustee, the power of the Trustee to execute or deliver the Indenture, or the enforceability of the Indenture against the Trustee. We have not examined the title of the GUSC to any property, whether real, personal or mixed, constituting part of the Project, and we therefore express no opinion thereon. We have been employed solely for the purpose of preparing certain legal documents and supporting certificates, reviewing the transcript of proceedings by which the Series 2017 Bonds have been authorized to be issued and rendering an opinion in conventional form relating solely to the validity and legality of the Series 2017 Bonds, to the legal security for their payment, to the exemption of the interest thereon from income taxation by the State of Alabama, to the excludability of the interest thereon from gross income for federal income tax purposes and to certain related matters. We are opining only upon those matters set forth herein, and we are not passing upon the accuracy, adequacy or completeness of the Official Statement relating to the Series 2017 Bonds or any other statements made in connection with any offer or sale of the Series 2017 Bonds or upon any federal or state tax consequences arising from the receipt or accrual of interest on or the ownership or disposition of the Series 2017 Bonds, except those specifically addressed herein. This opinion letter is issued as of the date hereof and we assume no obligation to revise or supplement this opinion letter to reflect any facts or circumstances that may hereafter come to our attention or any changes in law that may hereafter occur. Very truly yours, BUTLER SNOW LLP C-4

105 APPENDIX D SUMMARIES OF LEGAL DOCUMENTS The following portion of this Official Statement contains summaries of certain provisions of the Water Supply Agreement and Indenture. Such summaries do not purport to be complete descriptions and contain only brief outlines of the terms and provisions of such documents. The summaries are qualified in their entirety by reference to such documents, all of which will be available for inspection at the offices of the Trustee. THE WATER SUPPLY AGREEMENT The following, in addition to information herein contained under the headings INTRODUCTION, THE Series 2017 BONDS and THE PROJECT, summarizes certain provisions of the Water Supply Agreement. Any reference to the Bonds shall be construed to mean not only the Series 2017 Bonds but also (unless the context clearly indicates otherwise) any Additional Bonds that may then be outstanding. See ADDITIONAL BONDS. General Throughout the term of the Water Supply Agreement, the GUSC shall tender delivery to the City of all water processed at the Project. Water shall be deemed to be delivered by the GUSC to the City when it reaches the Water System. The point at which water reaches the Water System (the Delivery Point ) is the point at which the Project is connected to the Water System. To the extent that water is available from the Project, the City is obligated to satisfy all of its water requirements, including the requirements of any entities connected to the Water System, from water processed at the Project. The City is obligated to construct all necessary improvements to the Water System in order to receive water at the Delivery Point pursuant to the Water Supply Agreement and to distribute such water through its Water System. Duration of Term and Payment Provisions The term of the Water Supply Agreement began with its delivery and will continue, subject to prior termination as therein provided, for so long as any Bonds are outstanding. Under the Water Supply Agreement, the City is required to make payments to (or for the account of) the GUSC as follows: (A) Formula. Commencing with the first Billing Period and for each Billing Period during the term of the Water Supply Agreement, whether or not the City accepts delivery of any water, the City shall pay the GUSC a Water Charge in accordance with the following formula: WC = OM + DS Where: WC = Water Charge OM = Operation and Maintenance Charge DS = Debt Service on the Bonds (B) Operation and Maintenance Charge. The Operation and Maintenance Charge for any Billing Period shall be an amount equal to actual operation and maintenance expenses and administrative and overhead expenses incurred by the GUSC with any deposit requirements with respect to an Operating Reserve Fund, if any, to be established by the GUSC. To the extent that such amount is less than zero, such amount shall constitute a D-1

106 Reserve Fund Rebate and shall be credited against the Water Charge for such Billing Period. The Operating Reserve Fund is intended to provide funds which can be used by the GUSC to pay costs related to the operation of the Project. The GUSC shall have the right, in its sole discretion, without the consent of the City, to withdraw amounts from the Operating Reserve Fund in order to pay any costs incurred by it relating to the operation of the Project. Furthermore, the GUSC may pledge such Operating Reserve Fund to the Trustee on behalf of the holders of the Bonds. (C) Debt Service on the Bonds. Debt Service on the Bonds for any Billing Period shall be an amount equal to any payment or deposit obligation of the GUSC with respect to the Bonds and any reserve fund related thereto, including payments related to interest, principal and premium on the Bonds, whether at stated maturity or payable pursuant to the redemption or acceleration of Bonds, and, if permitted by law, including the purchase of Bonds on the open market (i) for the succeeding Billing Period, and (ii) for the current Billing Period and any prior Billing Period to the extent not already paid by the City. The portion of each Water Charge attributable to Debt Service on the Bonds shall be paid by the City directly to the Trustee. The City agrees that Debt Service on the Bonds shall include the payments on the Series 2017 Bonds. Prior to the issuance of any Additional Bonds, the City and the GUSC shall enter into a supplement to the Water Supply Agreement setting forth the debt service payments on such Additional Bonds. The prior written approval of the City shall not be required as a condition to the issuance by the GUSC of Additional Bonds provided that the principal amount of such Additional Bonds does not exceed 5% of the original aggregate principal amount of the Series 2017 Bonds. (D) Billing Statements. For each Billing Period, the GUSC shall render a billing statement (a Billing Statement ) to the City which shall set forth the Water Charge and the components thereof. The City shall pay the Water Charge due to the GUSC within 10 days of its receipt of the Billing Statement; provided however, that so long as any Bonds are outstanding under the Indenture, the City shall pay the Water Charge directly to the Trustee. (E) Estimates and Adjustments. To the extent that the actual value of any item in any Billing Statement cannot be accurately determined at the Billing Statement date, such item shall be billed on an estimated basis and an adjustment shall be made to reflect the difference between such estimated amount and the actual amount on such item on the Billing Statement next following the date on which the GUSC learns the exact amount of such item. (F) Other Payments. Prior to the initial Billing Period, in addition to the amounts specified in (A) above, the City shall pay any payment or deposit obligation of GUSC with respect to the Bonds and any reserve fund related thereto, including, payments related to interest, principal and premium on the Bonds, whether at stated maturity or payable pursuant to the redemption or acceleration of Bonds, and, if permitted by law, including the purchase of Bonds on the open market, which amount is either currently payable by GUSC or payable by GUSC within the succeeding thirty (30) days. (G) GUSC shall provide Billing Statements to the City in accordance with the procedures set forth in Section 4.2 of the Water Supply Agreement and the City shall pay the billed amount within ten (10) days of its receipt of each billing statement. Obligations of the City Unconditional The City is unconditionally obligated to pay the amounts specified under the Water Supply Agreement whether or not the Water System or the Project are operable or operating and the payments by the City to the GUSC are not subject to any reduction, whether by offset or otherwise, and are not conditioned upon the performance or nonperformance by the GUSC under the Water Supply Agreement. The obligation of the City to pay the amounts specified in the Water Supply Agreement shall be a revenue obligation payable solely from revenues derived by the City from the operation of the Water System. D-2

107 Additional Covenants of the City Service Covenant. Throughout the term of the Water Supply Agreement, the City will continue to provide the service of distributing water throughout the geographic area covered by the Water System. In furtherance of this covenant, the City shall operate the Water System in a sound and economical manner and will maintain the Water System in good repair and working order and condition. Rate Covenant. Throughout the term of the Water Supply Agreement, the City will make and maintain such rates and charges for water service supplied from the City and will make collections from the users thereof in such manner as shall produce funds sufficient to enable the City to pay all costs of the Water System, including- all amounts required to be paid to the GUSC under the Water Supply Agreement. Events of Default and Remedies GUSC Events of Default. (A) Definition. A GUSC Event of Default under the Water Supply Agreement means any of the following: (1) the GUSC fails to perform or observe any material term, covenant, condition or provision of the Water Supply Agreement for thirty (30) days after receipt of written notice from the City specifying the nature of the GUSC s failure, unless within such thirty (30) day period the GUSC either corrects such failure or, if such failure cannot be corrected within such period, the GUSC, within such thirty (30) day period, commences reasonable actions to correct the failure and diligently pursues the same; (2) the filing by the GUSC of a petition seeking relief under the Federal Bankruptcy Code or any federal or State statute intended to provide relief for political subdivisions which are insolvent or unable to meet their obligations as they mature; (3) the failure of the GUSC to pay any undisputed amounts owed to the City under the Water Supply Agreement within thirty (30) days following receipt of an invoice therefor; or (4) any material representation of the GUSC in the Water Supply Agreement is substantially untrue or incorrect when made. (B) Remedies. (1) Upon the occurrence of a GUSC Event of Default, the City may take any action at law or in equity it may have to enforce the payment of any damages or the performance of any obligations of the GUSC under the Water Supply Agreement. (2) Upon the occurrence of a GUSC Event of Default, and after the City proceeds in accordance with the next preceding paragraph, the City shall be permitted to terminate the Water Supply Agreement only if: (a) monetary damages are not paid when due by the GUSC or (b) the GUSC refuses to perform its obligations under the Water Supply Agreement; however, the City may not terminate the Water Supply Agreement without the prior express written consent of the Bond Insurer for so long as the Insurance Policy remains in force and effect. See Termination of the Water Supply Agreement herein. City Events of Default. (A) Definition. A City Event of Default under the Water Supply Agreement means any of the following: D-3

108 (1) the City fails to perform or observe any material term, covenant, condition or provision of the Water Supply Agreement for thirty (30) days after receipt of written notice from the GUSC specifying the nature of the City s failure, unless within such thirty (30) day period the City either corrects such failure or, if such failure cannot be corrected within such period, the City, within such thirty (30) day period, commences reasonable actions to correct the failure and diligently pursues the same; (2) the filing by the City of a petition seeking relief under the Federal Bankruptcy Code or any federal or State statute intended to provide relief for political subdivisions which are insolvent or unable to meet their obligations as they mature; (3) the failure of the City to pay any amounts related to the Bonds when due or the failure of the City to pay any undisputed amounts owed to the GUSC under the Water Supply Agreement within thirty (30) days following receipt of an invoice therefor; or (4) any material representation of the City in the Water Supply Agreement is substantially untrue or incorrect when made. (B) Remedies. (1) Upon the occurrence of a City Event of Default, the GUSC may take any action at law or in equity it may have to enforce the payment of any damages or the performance of any obligations of the City under the Water Supply Agreement. (2) Upon the occurrence of a City Event of Default, and after the GUSC proceeds in accordance with the next preceding paragraph, the GUSC shall be permitted to terminate the Water Supply Agreement only if: (a) monetary damages are not paid when due by the City or (b) the City refuses to perform its obligations under the Water Supply Agreement; however, the GUSC may not terminate the Water Supply Agreement without the prior express written consent of the Bond Insurer for so long as the Insurance Policy remains in force and effect. See Termination of the Water Supply Agreement herein. Amendment of the Water Supply Agreement Any amendment of the Water Supply Agreement will require the prior written consent of the Trustee and must comply with the applicable provisions of the Indenture. See Amendment of the Water Supply Agreement under THE INDENTURE. Termination of the Water Supply Agreement Regarding GUSC Events of Default, anything contained in the Water Supply Agreement to the contrary notwithstanding, the City may not terminate the Water Supply Agreement without the prior express written consent of the Bond Insurer for so long as the Insurance Policy remains in force and effect. Regarding City Events of Default, anything contained in the Water Supply Agreement to the contrary notwithstanding, the GUSC may not terminate the Water Supply Agreement without the prior express written consent of the Bond Insurer for so long as the Insurance Policy remains in force and effect. Regarding the term of the Water Supply Agreement, anything contained in the Water Supply Agreement to the contrary notwithstanding, the term of the Water Supply Agreement, as amended, shall commence on the date of delivery of the Third Amendment to Water Supply Agreement and shall continue in effect for so long as any Bonds D-4

109 are outstanding (and if the Insurance Policy remains in force and effect at the time that Bonds covered by the Insurance Policy are paid in full, then for two calendar years following such payment in full), but in no event longer than 40 years from the date of delivery of the Third Amendment to Water Supply Agreement. THE INDENTURE The following, in addition to information herein contained under the headings INTRODUCTION, THE Series 2017 BONDS, THE PROJECT, and THE WATER SUPPLY AGREEMENT, summarizes certain provisions of the Indenture. Any reference to the Bonds shall be construed to mean not only the Series 2017 Bonds but also (unless the context clearly indicates otherwise) any Additional Bonds that may then be outstanding. See ADDITIONAL BONDS. Pledge and Assignment Under the Indenture, in order to secure to the bondholders the payment of the principal of and interest and premium (if any) on the Series 2017 Bonds, the GUSC has pledged and assigned to the Trustee the following revenues, rights and interests related to the Project: (1) all moneys received by the GUSC from the City under the Water Supply Agreement for payment of debt service on the Series 2017 Bonds and all other revenues and receipts derived by the GUSC from the Project together with any investments, reinvestments or proceeds thereof; (2) all right, title and interest of the GUSC in and to the Water Supply Agreement, except for certain rights personal to or obligations of the GUSC which are expressly provided in the Water Supply Agreement; and (3) all moneys, rights and properties which may in any manner be transferred to or deposited with the Trustee by the GUSC, or anyone on its part, as additional security for the payment of all or any series of the Bonds or which, pursuant to the Indenture or the Water Supply Agreement, may come into the Trustee s control as such additional security. The Indenture will not create a mortgage covering the Project or the Water System. Issuance of the Series 2017 Bonds The Indenture will set forth detailed provisions for (1) the issuance of the Series 2017 Bonds, (2) the form of the Series 2017 Bonds, (3) the registration, transfer and exchange of the Series 2017 Bonds and (4) the redemption of the Series 2017 Bonds. The Debt Service Fund The Indenture has created a special fund (the Debt Service Fund ) for the purpose of providing for the payment of the principal of and the interest and premium (if any) on the Bonds issued thereunder. The Trustee will be designated as the depository, custodian and disbursing agent for the Debt Service Fund. The Trustee will be required by the Indenture to make provision out of the moneys in the Debt Service Fund for payment of the principal of and the interest on the Bonds, as said principal and interest respectively become due, and for the redemption, prior to maturity, of any Bonds required by the provisions of the Indenture to be redeemed. Until all Bonds issued under the Indenture have been fully paid, moneys in the Debt Service Fund shall be used solely for the payment of the interest on such Bonds, for the payment of the principal of such Bonds at their stated maturity and for the redemption of such Bonds under the conditions of redemption and at the redemption prices specified in the Indenture. Whenever the total of the moneys in the Debt Service Fund created in the Indenture shall be sufficient to retire and redeem all the Bonds then outstanding, the GUSC and the Trustee will be required by the Indenture to take all necessary actions to redeem and retire all such outstanding Bonds on the earliest practicable date on which under the terms of the Indenture they may be so redeemed and retired. D-5

110 Application of Revenues and Creation of Funds See SOURCE OF PAYMENT AND SECURITY-Application of Revenues and Creation of Funds. Investment of Funds The Indenture will require the Trustee to keep all moneys on deposit in the Operation and Maintenance Fund, the Debt Service Fund, the Reserve Fund, the Replacement Fund and the Revenue Fund fully invested to the extent practicable. Moneys on deposit in such Indenture Funds will be required to be invested only in Eligible Investments (as hereinafter defined). The Indenture will require investments forming a part of the Debt Service Fund to come due at such times and in such amounts as will assure the availability of cash sufficient to pay, when due, required debt service with respect to the Bonds, including any required redemption of such Bonds. The Indenture will provide that all investments and the income therefrom shall become a part of the Indenture Fund from which moneys were used to make such investments. As used in this Official Statement, the term Eligible Investments means Federal Securities, any securities that are permitted by law and approved by the Insurer or any share or other investment unit in a money market fund that invests solely in such securities. Federal Securities means (i) any debt securities that are direct obligations of the United States of America, (ii) any debt securities payment of the principal of and the interest on which is unconditionally guaranteed by the United States of America and (iii) any repurchase agreement for the purchase of securities described in (i) and (ii) entered into with any bank whose certificates of deposit qualify as Federal Securities. Insurance The Indenture will require the GUSC to keep the Project continuously insured. The Trustee is named as an additional insured party. Events of Default and Remedies An Event of Default by the GUSC under the Indenture will result from (i) the failure by the GUSC to pay when due, the principal of and the interest and premium (if any) on any of the Bonds outstanding thereunder, (ii) an Event of Default under the Water Supply Agreement (as Event of Default is therein defined), (iii) any warranty, representation or other statement by or on behalf of the GUSC in the Indenture or the Water Supply Agreement or in any certificate furnished with respect thereto being false or misleading in any material respect at the time made, (iv) the failure by the GUSC to perform any of its other obligations under the Indenture if, after thirty (30) day written notice to it of such failure, it shall not have commenced and be diligently pursuing appropriate corrective action, or (v) the appointment of a receiver for the Project, readjustment of the obligations of the GUSC under the bankruptcy laws or other similar events. The Indenture provides that, upon written notice to the GUSC, the Trustee is empowered to accelerate the maturity of all the Bonds then outstanding upon a default in payment of the principal of or the interest or premium (if any) on any of the Bonds outstanding thereunder or upon the occurrence of an Event of Default under the Water Supply Agreement. The Indenture will further provide that the Trustee is empowered, upon the occurrence of any Event of Default thereunder, regardless of whether such an Event of Default also authorizes acceleration of the maturity of the Bonds, to take whatever other actions at law or in equity may appear necessary or desirable to enforce any obligation of the GUSC or the City thereunder. If, upon the occurrence of an Event of Default under the Indenture, the GUSC makes good the default which is the reason for such Event of Default and every other default thereunder, except any principal and interest declared payable that would not otherwise be due, with interest on all overdue payments of principal, interest and D-6

111 premium (if any), and makes reimbursement of all the reasonable expenses of the Trustee, then the Trustee may in its discretion, and shall upon the written request of the holders of twenty-five (25%) in principal amount of the Bonds then outstanding under the Indenture, waive such default and its consequences. Further, except in the case of a default in the payment of the principal of or the interest or premium (if any) on the Bonds outstanding under the Indenture, the Trustee may in its discretion, and shall upon the written request of the holders of twenty-five (25%) in principal amount of the Bonds then outstanding thereunder, waive such default and its consequences without the GUSC having theretofore made good such default. Except for giving notice to the holders of the Bonds and Piper Jaffray & Co., the Underwriter for the GUSC in connection with the issuance of the Series 2017 Bonds, the Indenture will not require the Trustee to take any action with respect to any Event of Default or any other event which, with the giving of notice or the passage of time or both, would constitute an Event of Default, unless requested to do so by the holders of ten percent (10%) in principal amount of any series of the Bonds then outstanding thereunder. The Indenture will further provide that the Trustee is not required, upon the occurrence of an Event of Default, to exercise any of its rights or powers thereunder unless requested so to do in writing by the holders of ten percent (10%) or more in principal amount of any series of the Bonds then outstanding thereunder and unless indemnified by such holders against the prospective liabilities and expenses that, in its opinion, might result from the requested exercise of such rights or powers. Whenever the Trustee shall have a choice of remedies or a discretion as to details in the exercise of its powers with respect thereto, it will be required, under the terms of the Indenture, to follow any specific directions given by the holders of a majority in principal amount of the Bonds at the time outstanding thereunder, unless the observance of such directions would, in the opinion of the Trustee, unjustly prejudice any non-assenting bondholders. Anything in the Indenture to the contrary notwithstanding, upon the occurrence and continuance of an Event of Default. the Insurer shall be entitled to control and direct the enforcement of all rights and remedies granted to the holders of the Bonds under the Indenture, including, without limitation: (i) the right to accelerate the principal of the Bonds as described in the Indenture, and (ii) the right to annul any declaration of acceleration, and the Insurer shall also be entitled to approve all waivers of Events of Default. Supplemental Indentures The Indenture permits the GUSC and the Trustee, without the consent of or notice to any bondholders to enter into supplemental indentures (which will become a part of the Indenture) for the purpose of adding further covenants and agreements on the part of the GUSC, curing ambiguities, defects or inconsistent provisions, subjecting additional property and the revenues therefrom to the lien of the Indenture and providing for the surrender by the GUSC of any right or power or granting to bondholders, or the Trustee for the bondholders any lawful right or power. The Indenture will also permit the GUSC and the Trustee to enter into other supplemental indentures, with the written consent of the holders of twenty-five percent (25 %) in principal amount of the Bonds then outstanding thereunder except that, without the written consent of the holder of each Bond affected, the GUSC and the Trustee may not enter into any supplemental indenture that has the effect of reducing the principal amount of, the rate of interest on, or the premium payable upon the redemption of any Bond. Moreover, without the written consent of the holders of all the Bonds then outstanding under the Indenture, the GUSC and the Trustee are not permitted to enter into any supplemental indenture permitting the extension of the maturity of any installment of principal of or interest on any Bond, a reduction in principal amount or a postponement in the redemption date of any Bonds required to be redeemed prior to the stated maturities thereof pursuant to any mandatory redemption provisions applicable to such Bonds, the creation of a lien or charge on the Project or on the revenues therefrom ranking prior to or (except in connection with the issuance of Additional Bonds) on a parity with the lien of the Indenture, the establishment of preferences or priorities as between Bonds, or a reduction in the aggregate principal amount of Bonds the holders of which are required to consent to such supplemental indenture. D-7

112 Amendment of the Water Supply Agreement The Indenture permits the City and the GUSC, with the written consent of the Trustee, but without the consent of or notice to any bondholders, to amend the Water Supply Agreement for the purpose of substituting or adding property subject to the demise thereof, curing ambiguities, defects or inconsistent provisions, or making provision with respect to matters arising under the Water Supply Agreement for any other purpose if such provisions are necessary or desirable and are not inconsistent with the provisions of the Water Supply Agreement or the Indenture and do not, in the judgment of the Trustee, adversely affect the interests of the bondholders. The Indenture also permits the City and the GUSC, with the written consent of the Trustee and the Holders of twentyfive percent (25%) in principal amount of the Bonds then outstanding to amend the Water Supply Agreement to such extent as shall be deemed necessary or desirable by the GUSC and the City, except that, without the written consent of the Holders of all the Bonds then outstanding, no such amendment with respect to the Water Supply Agreement shall permit a reduction in the amount of Basic Payments payable under the Water Supply Agreement, a chance in due date of Basic Payments prior to full payment of the Bonds or any other change that, in the judgment of the Trustee, might adversely affect the interests of the Bondholders. The Trustee In the Indenture the Trustee has agreed to perform the duties required of it therein, either expressly or by reasonable implication, but the Trustee will not be liable under the Indenture except for its non-compliance with the provisions thereof, its willful misconduct or its gross negligence. The GUSC is obligated to pay the expenses incurred by the Trustee and the advances made by it in the performance of its duties under the Indenture, as well as reasonable compensation for the Trustee s services. That obligation is secured by the Indenture, and the payment of such expenses, advances and compensation will be given priority in the Indenture over the payment of the principal of and the interest and premium (if any) on the Bonds. The Indenture permits the Trustee, upon written notice to the GUSC and the Bondholders as required in the Indenture, to resign and be discharged of the trusts created thereby. Any successor Trustee shall be a bank or trust company authorized to administer trusts and having combined capital, surplus and undivided profits of at least $100,000,000. Defeasance of the Indenture The Indenture provides that it may be cancelled and satisfied of record upon the deposit with the Trustee of cash sufficient to provide for full payment of all the Bonds then outstanding thereunder, including, the interest that will mature thereon until such payment. In addition, any of the Bonds may, for purposes of the Indenture, be considered as fully paid upon the execution by the GUSC and the Trustee of an appropriate trust agreement under which there shall be deposited, for payment or redemption of such Bonds and for payment of the interest to mature thereon until maturity or redemption, Federal Securities, cash or any combination of cash and Federal Securities, which together with the income anticipated to be derived from such securities, will produce moneys sufficient to provide for the payment, redemption and retirement of such Bonds. For purposes of said trust agreement, Federal Securities shall have the meaning given to such term in the section hereof captioned Investment of Funds under THE INDENTURE. Further conditions precedent to any of the Bonds being considered paid as a result of the effectuation of any such trust agreement are (i) that there shall have theretofore been adopted all necessary proceedings relating to the redemption of any Bonds that are required to be redeemed prior to their respective maturities, (ii) that the Trustee shall have been furnished with an opinion of nationally recognized bond counsel to the effect that the effectuation of any such trust agreement will not result in subjecting to federal income taxation the interest on any of the Bonds that are to be paid pursuant to such trust agreement, and (iii) that the Trustee shall have been furnished D-8

113 a certificate of a firm of certified public accountants stating that the trust fund established by such trust agreement will produce moneys sufficient to provide for the full payment and retirement of such Bonds. When any of the Bonds are considered paid under the conditions described above, they shall no longer be secured by or entitled to the benefit of the Indenture, nor will the holders of such Bonds (or the Trustee on their behalf) thereafter have any rights whatever against the City under the Water Supply Agreement, even though for some reason moneys for the payment of the principal of and the interest and premium (if any) on such Bonds may not be available on the respective due dates thereof. Should any of the Bonds not be presented for payment when due, the Trustee will be required, subject to the provisions of any applicable escheat or other similar law, to retain and set aside in the Debt Service Fund (but separate and apart from the other moneys therein) a sum of money sufficient to pay such Bonds when the same shall be presented (upon which sum the Trustee shall not be required to pay interest and which the Trustee may not invest). All liability of the GUSC to the holders of such Bonds and all rights of such holders against the GUSC under such Bonds or under the Indenture shall thereupon cease and terminate, and the sole right of such holders shall thereafter be against such deposit. D-9

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115 APPENDIX E SPECIMEN MUNICIPAL BOND INSURANCE POLICY AND SPECIMEN RESERVE POLICY

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117 ms s# BIM MUNICIPAL BOND INSURANCE POLICY ISSUER: [NAME OF ISSUER] Policy No: MEMBER: [NAME OF MEMBER] BONDS: $ in aggregate principal amount of [NAME OF TRANSACTION] [and maturing on] Effective Date: Risk Premium: $ Member Surplus Contribution: $ Total Insurance Payment: $ BUILD AMERICA MUTUAL ASSURANCE COMPANY ( BAM ), for consideration received, hereby UNCONDITIONALLY AND IRREVOCABLY agrees to pay to the trustee (the Trustee ) or paying agent (the Paying Agent ) for the Bonds named above (as set forth in the documentation providing for the issuance and securing of the Bonds), for the benefit of the Owners or, at the election of BAM, directly to each Owner, subject only to the terms of this Policy (which includes each endorsement hereto), that portion of the principal of and interest on the Bonds that shall become Due for Payment but shall be unpaid by reason of Nonpayment by the Issuer. On the later of the day on which such principal and interest becomes Due for Payment or the first Business Day following the Business Day on which BAM shall have received Notice of Nonpayment, BAM will disburse (but without duplication in the case of duplicate claims for the same Nonpayment) to or for the benefit of each Owner of the Bonds, the face amount of principal of and interest on the Bonds that is then Due for Payment but is then unpaid by reason of Nonpayment by the Issuer, but only upon receipt by BAM, in a form reasonably satisfactory to it, of (a) evidence of the Owner s right to receive payment of such principal or interest then Due for Payment and (b) evidence, including any appropriate instruments of assignment, that all of the Owner s rights with respect to payment of such principal or interest that is Due for Payment shall thereupon vest in BAM. A Notice of Nonpayment will be deemed received on a given Business Day if it is received prior to 1:00 p.m. (New York time) on such Business Day; otherwise, it will be deemed received on the next Business Day. If any Notice of Nonpayment received by BAM is incomplete, it shall be deemed not to have been received by BAM for purposes of the preceding sentence, and BAM shall promptly so advise the Trustee, Paying Agent or Owner, as appropriate, any of whom may submit an amended Notice of Nonpayment. Upon disbursement under this Policy in respect of a Bond and to the extent of such payment, BAM shall become the owner of such Bond, any appurtenant coupon to such Bond and right to receipt of payment of principal of or interest on such Bond and shall be fully subrogated to the rights of the Owner, including the Owner s right to receive payments under such Bond. Payment by BAM either to the Trustee or Paying Agent for the benefit of the Owners, or directly to the Owners, on account of any Nonpayment shall discharge the obligation of BAM under this Policy with respect to said Nonpayment. Except to the extent expressly modified by an endorsement hereto, the following terms shall have the meanings specified for all purposes of this Policy. Business Day means any day other than (a) a Saturday or Sunday or (b) a day on which banking institutions in the State of New York or the Insurer s Fiscal Agent (as defined herein) are authorized or required by law or executive order to remain closed. Due for Payment means (a) when referring to the principal of a Bond, payable on the stated maturity date thereof or the date on which the same shall have been duly called for mandatory sinking fund redemption and does not refer to any earlier date on which payment is due by reason of call for redemption (other than by mandatory sinking fund redemption), acceleration or other advancement of maturity (unless BAM shall elect, in its sole discretion, to pay such principal due upon such acceleration together with any accrued interest to the date of acceleration) and (b) when referring to interest on a Bond, payable on the stated date for payment of interest. Nonpayment means, in respect of a Bond, the failure of the Issuer to have provided sufficient funds to the Trustee or, if there is no Trustee, to the Paying Agent for payment in full of all principal and interest that is Due for Payment on such Bond. Nonpayment shall also include, in respect of a Bond, any payment made to an Owner by or on behalf of the Issuer of principal or interest that is Due for Payment, which payment has been recovered from such Owner pursuant to the United States Bankruptcy Code in accordance with a final, nonappealable order of a court having competent jurisdiction. Notice means delivery to BAM of a notice of claim and certificate, by certified mail, or telecopy as set forth on the attached Schedule or other acceptable electronic delivery, in a form satisfactory to BAM, from and signed by an Owner, the Trustee or the Paying Agent, which notice shall specify (a) the person or entity making the claim, (b) the Policy Number, (c) the claimed amount, (d) payment instructions and (e) the date such claimed amount becomes or became Due for Payment. Owner means, in respect of a Bond, the person or entity who, at the time of Nonpayment, is entitled under the terms of such Bond to payment thereof, except that Owner shall not include the Issuer, the Member or any other person or entity whose direct or indirect obligation constitutes the underlying security for the Bonds.

118 BAM may appoint a fiscal agent (the Insurer s Fiscal Agent ) for purposes of this Policy by giving written notice to the Trustee, the Paying Agent, the Member and the Issuer specifying the name and notice address of the Insurer s Fiscal Agent. From and after the date of receipt of such notice by the Trustee, the Paying Agent, the Member or the Issuer (a) copies of all notices required to be delivered to BAM pursuant to this Policy shall be simultaneously delivered to the Insurer s Fiscal Agent and to BAM and shall not be deemed received until received by both and (b) all payments required to be made by BAM under this Policy may be made directly by BAM or by the Insurer s Fiscal Agent on behalf of BAM. The Insurer s Fiscal Agent is the agent of BAM only, and the Insurer s Fiscal Agent shall in no event be liable to the Trustee, Paying Agent or any Owner for any act of the Insurer s Fiscal Agent or any failure of BAM to deposit or cause to be deposited sufficient funds to make payments due under this Policy. To the fullest extent permitted by applicable law, BAM agrees not to assert, and hereby waives, only for the benefit of each Owner, all rights (whether by counterclaim, setoff or otherwise) and defenses (including, without limitation, the defense of fraud), whether acquired by subrogation, assignment or otherwise, to the extent that such rights and defenses may be available to BAM to avoid payment of its obligations under this Policy in accordance with the express provisions of this Policy. This Policy may not be canceled or revoked. This Policy sets forth in full the undertaking of BAM and shall not be modified, altered or affected by any other agreement or instrument, including any modification or amendment thereto. Except to the extent expressly modified by an endorsement hereto, any premium paid in respect of this Policy is nonrefundable for any reason whatsoever, including payment, or provision being made for payment, of the Bonds prior to maturity. THIS POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW. THIS POLICY IS ISSUED WITHOUT CONTINGENT MUTUAL LIABILITY FOR ASSESSMENT. In witness whereof, BUILD AMERICA MUTUAL ASSURANCE COMPANY has caused this Policy to be executed on its behalf by its Authorized Officer. BUILD AMERICA MUTUAL ASSURANCE COMPANY By: Authorized Officer

119 Address: 200 Liberty Street, 27th floor New York, New York Telecopy: (attention: Claims) Notices (Unless Otherwise Specified by BAM)

120 ins is# BAIA MUNICIPAL BOND DEBT SERVICE RESERVE INSURANCE POLICY ISSUER: ISSUER_NAME, STATE_NAME Policy No: MEMBER: MEMBER_COMPANY, STATE_NAME BONDS: $ in aggregate principal amount of, Effective Date: Risk Premium: $ Member Surplus Contribution: $ Total Insurance Payment: $ Maximum Policy Limit: $ BUILD AMERICA MUTUAL ASSURANCE COMPANY ( BAM ), for consideration received, hereby UNCONDITIONALLY AND IRREVOCABLY agrees to pay to the trustee (the Trustee ) or paying agent (the Paying Agent ) for the Bonds named above under the Security Documents, subject only to the terms of this Policy (which includes each endorsement hereto), that portion of the principal of and interest on the Bonds that shall become Due for Payment but shall be unpaid by reason of Nonpayment by the Issuer. BAM will make payment as provided in this Policy to the Trustee or Paying Agent on the later of (i) the Business Day on which such principal and interest becomes Due for Payment and (ii) the first Business Day following the Business Day on which BAM shall have received a completed Notice of Nonpayment in a form reasonably satisfactory to it. A Notice of Nonpayment will be deemed received on a given Business Day if it is received prior to 1:00 p.m. (New York time) on such Business Day; otherwise, it will be deemed received on the next Business Day. If any Notice of Nonpayment received by BAM is incomplete, it shall be deemed not to have been received by BAM for purposes of this paragraph, and BAM shall promptly so advise the Trustee or Paying Agent who may submit an amended Notice of Nonpayment. Payment by BAM to the Trustee or Paying Agent for the benefit of the Owners shall, to the extent thereof, discharge the obligation of BAM under this Policy. Upon disbursement under this Policy in respect of a Bond and to the extent of such payment, (a) BAM shall become the owner of such Bond, any appurtenant coupon to such Bond and right to receipt of payment of principal of or interest on such Bond and shall be fully subrogated to the rights of the Owner, including the Owner s right to receive payments under such Bond and (b) BAM shall become entitled to reimbursement of the amount so paid (together with interest and expenses) pursuant to the Security Documents and Debt Service Reserve Agreement.