Attalla Water Works Board. Financial Statements. for the. Years Ended September 30, 2015 and 2014

Transcription

1 Attalla Water Works Board Financial Statements for the Years Ended HINDSMAN, P. C. Certified Public Accountants

2 ATTALLA WATER WORKS BOARD TABLE OF CONTENTS INDEPENDENT AUDITORS' REPORT 1-3 FINANCIAL STATEMENTS Statements of Net Position Statements of Revenues, Expenses and Changes in Net Position Statements of Cash Flows Notes to Financial Statements REQUIRED SUPPLEMENTARY INFORMATION Schedule of Changes in Net Pension Liability Schedule of Employer Contributions Schedule of Funding Progress - Retiree Health Plan Notes to Required Supplementary Information SUPPLEMENTARY INFORMATION Schedules of Operating Expenses 36 Schedule of Restricted Assets 37 Bonded Debt 38 Financial and Operating Summary Independent Auditors' Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards Schedule of Findings and Responses 43-44

3 HINDSMAN, P.C. CERTIFIED PUBLIC ACCOUNTANTS INDEPENDENT AUDITORS' REPORT To the Board of Directors of the Attalla Water Works Board of the City of Attalla, Alabama REPORT ON THE FINANCIAL STATEMENTS We have audited the accompanying financial statements of the Attalla Water Works Board (the Board), as of and for the years ended, and the related notes to the financial statements, which collectively comprise the Board's basic 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 an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of 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 auditor's 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 Club Drive Suite 200, Gadsden, AL I P.O. Box 1070, Gadsden, AL Telephone I Facsimile I

4 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 respective financial position of the Board as of, and the changes in its net position and its cash flows for the years then ended in accordance 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 Net Pension Liability, Schedule of Employer Contributions, and the Schedule of Funding Progress - Retiree Health Plan on pages 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. Management 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 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. Other Information Our audits were conducted for the purpose of forming opinions on the financial statements that collectively comprise the Board's basic financial statements. The supplementary information on pages 35 through 39 is presented for purposes of additional analysis and is not a required part of the basic financial statements. The supplementary information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the supplementary information is fairly stated, in all material respects, in relation to the basic financial statements as a whole.

5 OTHER REPORTING REQUIRED BY GOVERNMENT AUDITING STANDARDS In accordance with Government Auditing Standards, we have also issued our report dated December 28, 2015 on our consideration of the Board's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, grant qgreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Board's internal control over financial reporting and compliance. December 28, 2015

6 ATTALLA WATER WORKS BOARD STATEMENTS OF NET POSITION ASSETS CURRENT ASSETS Cash and Cash Equivalents Office Working Fund $ 200 $ 200 Demand Deposit 380, ,578 Certificate of Deposit 102, ,968 Replacement Fund 105,155 85,872 Payroll Fund 1,831 1,869 Water Deposit Fund 176, ,710 Total Cash 766, ,997 Accounts Receivable 444, ,947 Inventories 125, ,259 Prepaid Expenses 5,112 5,001 Prepaid Insurance 31,545 33,087 Total Current Assets 1,373,739 1,378,291 RESTRICTED ASSETS Bond Principal and Interest Funds 45,980 48,754 Debt Reserve Funds 481, ,240 Construction Funds 4,661,147 5,003,640 Total Restricted Assets 5,188,367 5,533,634 UTILITY PLANT Land 208, ,796 Construction in Progress 207,540 16,750 Utility Plant and Equipment 9,017,657 8,737,925 Less Accumulated Depreciation 4,057,000 3,835,428 Total Utility Plant 5,376,610 5,101,043 TOTAL ASSETS $ 11,938,716 $ 12,012,968 DEFERRED OUTFLOWS OF RESOURCES Deferred Loss on Refunding of Debt $ 244,500 $ 257,937 Employer Pension Costs Subsequent to Measurement Date 38,269 TOTAL DEFERRED OUTFLOWS OF RESOURCES $ 282,769 $ 257,937 The accompanying notes are an integral part to these statements. 4

7 ATTALLA WATER WORKS BOARD STATEMENTS OF NET POSITION LIABILITIES CURRENT LIABILITIES Accounts Payable $ 18,776 $ 28,766 Accrued Vacation and Sick Pay 35,564 26,741 Accrued Payroll and Withholdings 12,782 8,476 Due City of Attalla - Sewer Charges 103,814 96,821 Due City of Attalla - Sanitary Charges 59,949 61,335 Unearned Rental Income 1,595 1,595 Accrued Utility Tax 14,937 15, , ,829 CURRENT LIABILITIES PAYABLE FROM RESTRICTED ASSETS Current Maturities of Revenue Bonds Payable 195, ,000 Less Unamortized Discount {12,815) {12,815) Net Bonds Payable 182, ,185 Accrued Revenue Bond Interest Payable 23,670 32,035 Total Current Liabilities Payable from Restricted Assets 205, ,220 Total Current Liabilities 453, ,049 NON-CURRENT LIABILITIES Customers' Meter Deposits 195, ,020 Net OPEB Obligation 34,840 5,011 Net Pension Liability 317,341 Revenue Bonds, Net of Current Maturities 8,485,000 8,680,000 Less Unamortized Bond Discount (309,681) (322,494) Total Non-current Liabilities 8,722,575 8,550,537 TOTAL LIABILITIES $ 9,175,847 $ 8,988,586 DEFERRED INFLOWS OF RESOURCES Difference in Projected and Actual Earnings - Pension Plan $ 53,885 $ NET POSITION Net Investment in Capital Assets 1,924,753 1,837,929 Restricted for Debt Service 503, ,959 Unrestricted 563, ,631 TOTAL NET POSITION $ 2,991,753 $ 3,282,519 The accompanying notes are an integral part to these statements. 5

8 ATTALLA WATER WORKS BOARD STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET POSITION For the Years Ended OPERATING REVENUES Water Service Fees - Residential $ 1,525, 110 $ 1,501,427 Water Service Fees - Industrial 554, ,734 Collection Fees 90,230 83,635 City of Attalla - Collection Fees 76, ,031 Lease Income 19,140 16,665 Other 11,262 10,749 Total Operating Revenues 2,276,799 2,238,241 OPERA TING EXPENSES Direct Costs 315, , 173 Salaries and Related Expense 885, ,631 Other Operating Expenses 717, ,603 Total Operating Expenses 1,918,207 1,696,407 Operating Income 358, ,834 NON-OPERA TING REVENUES (EXPENSES) Interest Income 1,869 1,684 Gain on Sale of Assets 18, 117 6,900 Interest Expense - Bonds (290,383) (96,579) Interest Expense - Other (1,024) Trustee Fees (8,900) (4, 150) Amortization Expense (26,252) (13,402) Bond Issuance Costs {77,782) Total Non-operating (Expenses) (305,549) (184,353) INCREASE IN NET POSITION 53, ,481 Net Position - Beginning of Year, As Previously Reported 3,282,519 2,925,038 Prior Period Adjustment (343,809) Net Position, Beginning of Year, As Restated 2,938,710 2,925,038 Net Position, End of Year $ 2,991,753 $ 3,282,519 The accompanying notes are an integral part of these statements. 6

9 ATTALLA WATER WORKS BOARD STATEMENTS OF CASH FLOWS For the Years Ended 2015 CASH FLOWS FROM OPERATING ACTIVITIES Cash Receipts from Customers $ 2,312,872 $ Cash Payments to Suppliers for Goods and Services (1,052,526) Cash Payments to Employees for Services (606,667) NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 653,679 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Proceeds from Sale of Equipment 19,500 Additions to Capital Assets (532,377) Proceeds from Issuance of Bonds Proceeds from Issuance of Note Payable Transferred to Escrow Account to Refund Bonds Principal Payment on Bonds (180,000) Interest Payment on Bonds (298,748) Principal Payment on Note Payable Interest Payment on Note Payable Bond Issuance Costs Trustee Fees (8,900) NET CASH PROVIDED (USED) IN CAPITAL AND RELATED FINANCING ACTIVITIES (1,000,525) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of Restricted Investments (478,704) Proceeds from Sale of Restricted Investments 823,969 Interest Received on Investments 1,869 NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 347,134 NET INCREASE IN CASH Al\ID CASH EQUIVALENTS 288 CASH AT BEGINNING OF YEAR 766,197 CASH AT END OF YEAR $ 766,485 $ , 130,989 (698,992) (773,594) 658,403 15,400 (253,684) 7,360,163 50,153 (2,178,128) (150,000) (83,245) (50, 153) (1,024) (62,495) (4, 150) 4,642,837 (5,504,816) 372,816 1,684 (5, 130,316) 170, , ,197 The accompanying notes are an integral part of these statements. 7

10 ATTALLA WATER WORKS BOARD STATEMENTS OF CASH FLOWS (Continued) For the Years Ended RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Operating Income $ 358,592 $ Adjustments to Reconcile Operating Income to Cash Flow from Operations Depreciation 255,427 (Increase) Decrease in: Accounts Receivable 29,018 Inventory (25,409) Prepaid Expenses (111) Prepaid Insurance 1,542 Deferred Employer Pension Costs (6,356) Increase (Decrease) in: Accounts Payable (9,990) Due to City of Attalla 5,607 Accrued Liabilities 12,971 Net OPEB Liability 29,829 Net Pension Liability (58,381) Projected and Actual Pension Earnings 53,885 Water Deposits 7,055 NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 653,679 $ 541, ,238 (112,972) (10,066) 778 (33,473) 21,157 11, 136 1,326 5, ,403 The accompanying notes are an integral part of these statements. 8

11 A TT ALLA WATER WORKS BOARD NOTES TO FINANCIAL STATEMENTS NOTE A - POLICIES NATURE OF ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING Nature of Activities The Attalla Water Works Board {the Board) is a public corporation under the laws of the State of Alabama. The purpose of the Board is to produce or acquire and distribute water to its residential and commercial customers within and around the City of Attalla, Alabama. Reporting Entity The Governmental Accounting Standards Board (GASB) establishes standards for defining and reporting on the financial reporting entity. The definition of the reporting entity is based primarily on the notion of financial accountability. A primary government is financially accountable for agencies that make up its legal entity. It is also financially accountable for a legally separate agency if its officials appoint a voting majority of that agency's governing body and either it is able to impose its will on that agency or there is a potential for the agency to provide specific financial benefits to, or to impose specific financial burdens on, the primary government. There are no component units which should be included as part of the financial reporting entity of the Board. The Board is not considered a component unit of the City of Attalla for financial reporting purposes. Criteria in this determination are the Board's financial independence, selection of management, independence of operations, and accountability for fiscal matters. Measurement Focus, Basis of Accounting, and Financial Statement Presentation All activities of the Board are accounted for within a proprietary {enterprise) fund. Proprietary funds are used to account for operations that are (a) financed and operated in a manner similar to private business enterprises where the intent of the governing body is that the costs (expenses, including depreciation) of providing goods or services to the general public on a continuing basis be financed or recovered primarily through user charges; or (b) where the governing body has decided that periodic determination of revenues earned, expenses incurred, and/or net income is appropriate for capital maintenance, public policy, management control, or other purposes. Proprietary funds are accounted for using the economic resources measurement focus and the accrual basis of accounting. Under the accrual basis of accounting, revenues are recognized when earned and expenses are recognized when the liability is incurred or economic asset used. Revenues, expenses, gains, losses, assets and liabilities resulting from exchange and exchange-like transactions are recognized when the exchange takes place. 9

12 ATTALLA WATERWORKS BOARD NOTES TO FINANCIAL STATEMENTS (Continued) NOTE A - NATURE OF ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Measurement Focus, Basis of Accounting, and Financial Statement Presentation {Continued) The Board's net position is required to be classified into three categories defined as: Net Investment in Capital Assets- consists of capital assets reduced by outstanding balances of any related debt obligations and deferred inflows of resources attributable to the acquisition, construction, or improvement of those assets and increase in balances of deferred outflows of resources related to those assets. Restricted - net position is considered restricted if its use is constrained to a particular purpose. Restrictions are imposed by external organizations such as federal or state laws or buyers of the Board's bonds. Restricted net position is reduced by liabilities and deferred inflows of resources related to the restricted assets. Unrestricted - consists of all other net position that does not meet the above two components and is available for general use by the Board. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents For the purpose of the Statements of Cash Flows, the Board considers all highly liquid securities with maturities of three months or less to be cash equivalents. Accounts Receivable The Board reports trade receivables at net realizable value. Management determines the allowance for doubtful accounts based on historical losses and current economic conditions. On a continuing basis, management analyzes delinquent receivables, and once these receivables are determined to be uncollectible, they are written off through a charge against an existing allowance account or against earnings. The Board considers all accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts is recorded. Any losses on accounts receivable, in the Board's opinion, would be insignificant after applying customer deposits. Inventories Inventories are valued at lower of cost (first-in, first-out basis) or market and consist of repair parts and meters. 10

13 ATTALLA WATER WORKS BOARD NOTES TO FINANCIAL STATEMENTS (Continued) NOTE A - NATURE OF ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Amortization The discounts on the bonds are being amortized using the straight-line method over the life of the bonds, which are 10 to 30 years. Results under the straight-line method do not differ materially from results under the effective interest method. Payments in Lieu of Taxes The Attalla Water Works Board of the City of Attalla, Alabama, is not subject to federal, state, or local tax. However, annual payments are made to the City of Attalla in lieu of ad valorem and business license taxes. Restricted Assets The Bond Indentures require that certain funds and bank accounts be established and controlled by the trustees in accordance with the terms of the indenture. To conform to the provision of the bond indentures, the accounts of the trusteed funds are kept on a cash receipts and disbursements basis and adjusted at the end of the fiscal year to record the accrued and unpaid interest. All funds held in Trusteed Accounts are required to be secured by federal securities having a market value of not less than the amount of moneys on deposit. Utility Plant and Depreciation The policy of the Board is to capitalize expenditures for plant additions and improvements. Capital assets are defined by the Board as assets with an initial cost of more than $250. Water system is recorded at cost. Depreciation of utility plant is applied consistently based on the estimated useful lives of the various assets by groups and applied to the original cost of the properties on a straight-line basis, excluding fully depreciated assets. Improvements that extend the useful life of the assets are capitalized and depreciated over the remaining useful life of the asset. Interest on bonds is capitalized during the construction period for assets financed by bond proceeds. Lives for calculation of depreciation rates on the principal asset classification are as follows: Water System and Buildings Vehicles and Mobile Equipment Shop Equipment and Furniture and Fixtures Land Improvements years 5-10 years 5-10 years 15 years 11

14 ATTALLA WATER WORKS BOARD NOTES TO FINANCIAL STATEMENTS (Continued) NOTE A - NATURE OF ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Operating Revenues and Expenses Operating revenues and expenses consist of those revenues that result from the ongoing principal operations of the Board. Operating revenues consist primarily of charges for services. Non-operating revenues and expenses consist of those revenues and expenses that are related to financing and investing types of activities and result from non-exchange transactions or ancillary activities. When an expense is incurred that can be paid using either restricted or unrestricted resources (net position), the Board's policy is to first apply those expenses toward restricted resources to the extent that such are available and then toward unrestricted net resources. Unbilled Water Revenue/Accounts Receivable Revenue for water delivered but not billed under the Board's billing methods is estimated and accrued annually. Most Board customers are billed monthly. All accounts receivable are from customers in the Attalla area. Accounts receivable at September 30, 2015 and 2014 consisted of the following: Water Sewer Other Unbilled - Estimated Total Accounts Receivable $178,670 61,791 60, ,618 $ $206,285 58,725 61, ,977 $ 473,947 Investments Investments, which consist of money market funds and U.S. government and agency securities, are stated at fair market value based on quoted market prices with all investment income, including changes in the fair value of investments, reported in the statements of revenues, expenses and changes in net position. These securities are adjusted for impairments in value considered to be other than temporary. Capital Contributions Transmission and distribution system assets contributed to the Board by installers are capitalized at the installers' costs, which approximate fair value at the time of the Board's acquisition, and recorded as revenue when received. Reclassifications Certain reclassifications have been made to the prior year financial statements in order for them to conform to the current year presentations. 12

15 ATTALLA WATER WORKS BOARD NOTES TO FINANCIAL STATEMENTS (Continued) NOTE A - NATURE OF ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Risk Management The Board is exposed to normal business risk in the course of operations. Commercial insurance is purchased by the Board to cover any normal, insurable loss up to policy limits. During the past three years, there have been no losses, which exceed insured amounts. Presentation of Certain Taxes The Board collects various taxes from customers and remits these amounts to applicable taxing authorities. The Board's accounting policy is to exclude these taxes from revenues and cost of sales. Deferred Outflows/Inflows of Resources In addition to assets, the statement of financial position includes a separate section for deferred outflows of resources. This separate financial statement element, deferred outflows of resources, represents a consumption of net position that applies to future periods and so will not be recognized as an outflow of resources (expense) until then. The Board reports the deferred charge on refunding and the pension contributions subsequent to the last actuarial measurement date as deferred outflows in the statement of net position. A deferred loss on refunding results from the difference in the carrying value of refunded debt and its reacquisition price. This amount is deferred and amortized over the shorter of the life of the refunded or refunding debt. In addition to liabilities, the statement of financial position will sometimes report a separate section for deferred inflows of resources. This separate financial statement element, deferred inflows of resources, represents an acquisition of net position that applies to a future period and so will not be recognized as an inflow of resources (revenue) until that time. The Board reports the difference in projected and actual earnings of its pension plan as a deferred inflow of resources in the statements of net position. Recently Adopted Accounting Standards GASS Statement No. 68, Accounting and Financial Reporting for Pensions, and GASS Statement No. 71, Pension Transition for Contributions made Subsequent to the Measurement Date -An Amendment of GASB Statement No. 68, are effective for financial statements for periods beginning after June 15, These statements establish accounting and financial reporting requirements for pensions that are provided through pension plans administered as trusts or equivalent arrangements that meet certain criteria. The organization has implemented these statements in the year ended September 30, Prior year deferred outflows of resources in the amount of $31,913 and a beginning net pension liability of $375,722 resulted in an adjustment to beginning equity to reflect the implementation of GASS Statement Nos. 68 and

16 A TT ALLA WATER WORKS BOARD NOTES TO FINANCIAL STATEMENTS (Continued) NOTE A - NATURE OF ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Restatement of Prior Year Balances The October 1, 2014 beginning Net Position was restated due to the implementation of GASB Statements 68 and 71 as follows: Net Position, October 1, 2014, previously stated Restatement of net position due to the implementation of GASB 68 and 71 Net Position, Oct.ober 1, 2012, restated $ 3,282,519 (343,809) $ 2, It is not practical to determine the amounts of beginning balances related to implementation of GASB Statement Nos. 68 and 71, therefore the prior year financial statements have not been restated. NOTE B - DEPOSITS WITH FINANCIAL INSTITUTIONS The Board's deposits at year-end were held by financial institutions in the State of Alabama's Security of Alabama Funds Enhancement (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 institution would be liquidated by the State Treasurer to replace the public deposits not covered by the Federal Depository Insurance Corporation (FDIC). If the securities pledged failed to produce adequate funds, every institution participating in the pool would share the liability for the remaining balance. At, the Board had cash deposits and equivalents with a carrying amount of $766,485 and $766, 197 and a total bank balance of $805, 102 and $811,220, respectively. NOTE C - RESTRICTED ASSETS Assumptions The Board's Bond Indenture limits trusteed investments to "eligible investments". The Board has not adopted a formal investment policy for trusteed investments or other Board investments. Eligible investments include any of the following: federal obligations, eligible bank obligations, obligations issued by any state of the United States of America and publicly traded securities. 14

17 ATTALLA WATER WORKS BOARD NOTES TO FINANCIAL STATEMENTS (Continued) NOTE C - RESTRICTED ASSETS (Continued) The Board has established the Debt Reserve Funds, Bond Principal and Interest Fund and Construction Funds in accordance with the Bond Indentures. These restricted assets had the following balances as of : Bond Principal and Interest Funds Debt Reserve Funds Construction Fund Series Construction Fund Series Construction Fund Series Total Restricted Assets $ 45, ,240 4,660, $ 5, $ 48, ,240 5,003, $ The balance in all of the above funds at were invested in the First American Treasury Obligation Fund. Restricted investments consisted of the following at : Carrying Market Carrying Market Value Value Value Value First American Treasury Obligation Fund $ 5.188,367 $ 5, $ 5,533,634 $ 5,533,634 Credit Risk - The Bond Indenture establishes the investments allowed by the Board as Federal Securities, certain money market funds regulated under the Federal Investment Company Act of 1940 and/or Secured Deposits having a rating by Standard & Poors Rating Service of AAAm-G AAAm; or AA-m and if rated by Moody's Investors Service, Inc., rated Aaa, Aa1 or Aa2. The funds are invested in the First American Treasury Obligation Fund, a money market mutual fund, which invests in a portfolio of short-term U.S. Treasury obligations and repurchase agreements backed by such obligations. The First American Treasury Obligation Fund has the highest credit rating (AAAm from Standard and Poors, a nationally recognized statistical rating organization). Interest Rate Risk - The Bond Indenture requires the funds be invested in securities having a stated maturity not later than five years after the date the investment is made. The First American Treasury Obligation Fund invests in U.S. Treasury Securities with maturities of 397 days or less. The Fund has a dollar-weighted average portfolio maturity of 60 days or less. 15

18 A TT ALLA WATER WORKS BOARD NOTES TO FINANCIAL STATEMENTS (Continued) NOTE C - RESTRICTED ASSETS (Continued) Custodial Credit Risk - For an investment, custodial credit risk is the risk that, in the event of the failure of the counterparty, the Board 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 holders. NOTE D - CAPITAL ASSETS Capital asset activity for the year ended September 30, 2015 is as follows: Capital Assets, Not Being Depreciated: Balance Balance October 1 September Additions Retirements 2015 Land $ 181,796 $ 28,000 $ (1,383) $ 208,413 Construction in Progress 207,540 (16,750) 207,540 Total Capital Assets, Not Being 415,953 Depreciated, at Historical Costs 198, ,540 (18,133) Other Capital Assets, Being Depreciated Water System and Improvements 7,617, ,665 7,831,525 Buildings 490, ,799 Land Improvement 30,399 5,148 35,547 Shop Equipment 144,892 13, ,394 Furniture and Fixtures 64,831 15,555 66,386 Vehicles 389, (33,855) 435,006 Total Other Capital Assets, Being Depreciated, at Historical Cost 8,737, ,587 (33,855} 9,017,657 Less Accumulated Depreciation for: Water System and Improvements 3,291, ,802 3,477,609 Buildings 207,048 13, ,405 Land Improvement 8,190 1,448 9,638 Shop Equipment 112,033 8, ,156 Furniture and Fixtures 37,665 6,052 43,717 Vehicles 178,685 40,645 (33,855} 185,475 Total Accumulated Depreciation 3,835, ,427 (33,855) 4,057,000 Other Capital Assets, Net 4,902,497 58,160 4,960,657 Total Capital Assets, Net $ 510:1 043 $ 293,700 $ (:18,133} $ 5,376 6:10 16

19 ATTALLA WATERWORKS BOARD NOTES TO FINANCIAL STATEMENTS (Continued) NOTE D - CAPITAL ASSETS (Continued) Capital asset activity for the year ended September 30, 2014 is as follows: Capital Assets, Not Being Depreciated: Balance Balance October 1 September Additions Retirements 2014 Land $ 181,796 $ $ $ 181,796 Construction in Progress 7,663 16,750 (7,663} 16,750 Total Capital Assets, Not Being Depreciated, at Historical Costs 189,459 16,750 (7,663) 198,546 Other Capital Assets, Being Depreciated Water System and Improvements 7,526,364 91,496 7,617,860 Buildings 479,899 10, ,799 Land Improvement 30,399 30,399 Shop Equipment 141,609 3, ,892 Furniture and Fixtures 46,482 18,349 64,831 Vehicles 289, ,569 (20,656} 389,144 Total Other Capital Assets, Being Depreciated, at Historical Cost 8,513, ,597 (20,656) 8,737,925 Less Accumulated Depreciation for: Water System and Improvements 3,115, ,299 3,291,807 Buildings 194,235 12, ,048 Land Improvement 7, ,190 Shop Equipment 105,357 6, ,033 Furniture and Fixtures 32,958 4,707 37,665 Vehicles 167,532 31,809 (20,656} 178,685 Total Accumulated Depreciation 3,622, ,238 (20,656} 3,835,428 Other Capital Assets, Net 4,891,138 11,359 4,902,497 Total Capital Assets, Net $ $ 28 jq9 $ (Z,663) $ 5,:101,043 17

20 ATTALLA WATER WORKS BOARD NOTES TO FINANCIAL STATEMENTS (Continued) NOTE E-LONG-TERM DEBT On August 26, 2014, Water Revenue Bonds, Series 2014, dated August 15, 2014 were issued in the amount of $7,690,000 with interest rates ranging from 2.25% to 3.625%, a portion of which was to advance refund $1,430,000 of outstanding 2007 Water Revenue Bonds with interest ranging from 4.40% to 4.60% and $580,000 of outstanding 2008 Water Revenue Bonds with an interest rate of 5.375%. Of the total net proceeds of $7,360, 163 (after discount of $322,338 and payment of $77,782 in underwriting fees, insurance and other issuance costs) $2,101,053 plus an additional $77,076 of 2007 and 2008 Series sinking fund monies were deposited into irrevocable trust with an escrow agent. Those monies were used to purchase U.S. government securities to provide for all future debt service payments on the 2007 and 2008 Series Bonds. As a result, the 2007 and 2008 Series Bonds are considered defeased and the liability for those bonds have been removed from the Statement of Net Position. The 2007 and 2008 Series Bonds will be repaid in their entirety on their respective call dates of September 1, 2015 and September 1, The advance refunding resulted in an accounting loss of $215,601, which has been capitalized in accordance with professional standards, and is being amortized on a straightline basis (which approximates the effective interest method through 2044). The Board increased its aggregate debt services payments by approximately $137,000 over the next 30 years and incurred an economic gain (difference between the present values of the old and new debt service payments) of $506,035. On August 11, 2011, Water Revenue Bonds, Series 2011, dated August 1, 2011 were issued in the amount of $1,885,000. The Series 2011 bonds require annual principal payments beginning September 1, 2012 and ending September 1, 2021, and bear interest at rates ranging from 2.00% to 3.375% payable semi-annually. Long-term liability activity for the year ended September 30, 2015 was as follows: Amount Beginning Ending Due in Balance Additions Reductions Balance One Year 2011 Water Revenue Bonds $1,170,000 $ $ (155,000) $1,015,000 $165, Water Revenue Bonds 7,690,000 (25,000) 7,665,000 25,000 Net OPEB Obligation 5,011 29,829 34,840 Net Pension Liability 317, ,341 Unamortized Bond Discount (335,309) 12,813 (322,496) (12,815) Customers' Meter Deposits 188,020 7, ,075 $ 13 Z:ll Z22 $ $ ( :l6z :lbz) $ 13,904.Z6Q $ 1ZZ.:l85 18

21 ATTALLA WATERWORKS BOARD NOTES TO FINANCIAL STATEMENTS (Continued) NOTE E - LONG-TERM DEBT (Continued) Long-term liability activity for the year ended September 30, 2014 was as follows: Beginning Ending Balance Additions Reductions Balance 2008 Water Revenue Bonds $ 580,000 $ - $ (580,000) $ 2007 Water Revenue Bonds 1,430,000 (1,430,000) 2011 Water Revenue Bonds 1,320,000 (150,000) 1,170, Water Revenue Bonds 7,690,000 7,690,000 Net OPEB Obligation 3,685 1,326 5,011 Unamortized Bond Discount (66,696) (322,338) 53,725 (335,309) Customers' Meter Deposits 182, ,020 $ 3449,564 $ Z, $ ( 2,:106,2Z5) $ 8 ZHZ22 Amount Due in One Year $ 155,000 25,000 (12,815) $ The long-term debt is payable as follows: Fiscal Year Ending September 30, Principal Interest Sinking Fund Requirements , , , , ,000 1,170,000 1,330,000 1,550,000 1,855,000 1,750, , , , , ,271 1,229, 168 1,066, , , , , , , , ,271 2,399, 168 2,396,305 2,392,775 2,397,064 1,916,876 NOTE F - RETIREMENT PLAN $ 8.680,000 $ 5,221,237 $ 13, 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. 19

22 ATTALLA WATER WORKS BOARD NOTES TO FINANCIAL STATEMENTS (Continued) NOTE F- RETIREMENT PLAN (Continued) 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. 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. Effective January 1, 2013, the Alabama Legislature 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 1 O years) for each year of service. State Police are allowed 2.375% for each year of state police service in computing the formula method. 20

23 A TT ALLA WATER WORKS BOARD NOTES TO FINANCIAL STATEMENTS (Continued) NOTE F - RETIREMENT 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 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. 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 earnable 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 earnable compensation. ERS local participating employers are not required by statute to increase contribution rates for their members. As such, employees of the Board contribute 5% of eligible salary to the plan. 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. As of the measurement date of September 30, 2014, the Board's membership consisted of: Number Inactive Members or their Beneficiaries Currently Receiving Benefits 6 Inactive Members Entitled To But Not Yet Receiving Benefits 0 21

24 ATTALLA WATER WORKS BOARD NOTES TO FINANCIAL STATEMENTS (Continued) NOTE F - RETIREMENT 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, 2015, the organization's active employee contribution rate was 7.50% of covered employee payroll, and the organization's average contribution rate to fund the normal and accrued liability costs was 7.15% of covered employee payroll. The Board's contractually required contribution rate for the year ended September 30, 2015 was 7.50% of pensionable pay for Tier 1 employees, and 5.20% of pensionable pay for Tier 2 employees. These required contribution rates are based upon the actuarial valuation dated September 30, 2012, 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 Board were $40, 142 for the year ended September 30, Net Pension Liability The Board's 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 September 30, 2013 rolled forward to September 30, 2014 using standard roll-forward techniques as shown in the following table: TPL Roll -Forward (a) TPL as of September 30, 2013 (b) Entry Age Normal Cost for the period October 1, September 30, 2014 (c) Actual Benefit Payments and Refunds for the period October 1, September 30, 2014 (d) TPL as of September 30, 2014 =[(a) x (1.08)] + (b) - [(c) x (1.04)] $ 2,075,569 37,174 (86,707) $ 2,188,613 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 Salary increases Investment rate of return* 3.00% 3.75% 7.25% 8.00% *Net of pension plan investment expense 22

25 ATTALLA WATER WORKS BOARD NOTES TO FINANCIAL STATEMENTS (Continued) NOTE F -RETIREMENT PLAN (Continued) 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: Fixed Income U.S. Large Stocks U.S. Mid Stocks U.S. Small Stocks International Developed Market Stocks International Emerging Market Stocks Real Estate Cash Total *Includes assumed rate of inflation of 2.50%. Target Allocation 25.00% 34.00% 8.00% 3.00% 15.00% 3.00% 10.00% 2.00% Long-Term Expected Rate of Return* 5.00% 9.00% 12.00% 15.00% 11.00% 16.00% 7.50% 1.50% 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. 23

26 ATTALLA WATER WORKS BOARD NOTES TO FINANCIAL STATEMENTS (Continued) NOTE F - RETIREMENT PLAN (Continued) Changes in Net Pension Liability Total Pension Liability (a) Plan Fiduciary Net Position (b) Net Pension Liability (Asset) (a)- (b) Balances at September 30, 2013 $ 2,075,569 $ 1,699,847 Changes for the year: Service.cost 37, Interest 162,577 - Changes of assumptions - - Difference between expected and Actual experience - - Contributions - employer - 31,913 Contributions - employee - 24,103 Net investment income - 202,116 Benefit payments, including refunds of Employee contributions (86,707) (86,707) Administrative expense - - Transfers among Employers - - Net changes 113, ,425 $ 375,722 37, , (31,913) (24,103) (202, 116) - (58,381) Balances at September 30, 2014 $ 2,188,613 $ 1,871,272 $ 317,341 Sensitivity of the net pension liability to changes in the discount rate The following table presents the organization's net pension liability calculated using the discount rate of 8%, as well as what the organization's proportionate share of the net pension liability would be if it were calculated using a discount rate that is 1 % lower (7%) or 1 % higher (9%) than the current rate: Plan's Net Pension Liability 1% Decrease (7.00%) $584,758 Current Discount Rate (8.00%) $317,341 1% Increase (9.00%) $90,832 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 GASS Statement No. 68 Report for the ERS prepared as of September 30, The auditor's report dated June 3, 2015 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 24