CITY OF FLORENCE, ALABAMA ELECTRICITY, GAS, AND WATER AND WASTEWATER DEPARTMENTS. FINANCIAL STATEMENTS JUNE 30, 2007 and 2006

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1 ELECTRICITY, GAS, AND WATER AND WASTEWATER DEPARTMENTS FINANCIAL STATEMENTS JUNE 30, 2007 and 2006

2 ELECTRICITY, GAS, AND WATER AND WASTEWATER DEPARTMENTS TABLE OF CONTENTS Independent Auditors Report 1 PAGE Management Discussion and Analysis 2 13 Financial Statements: Electricity Department Balance Sheets 14 Statements of Revenues, Expenses, and Changes in Fund Net Assets 15 Statements of Cash Flows Gas Department Balance Sheets 18 Statements of Revenues, Expenses, and Changes in Fund Net Assets 19 Statements of Cash Flows Water and Wastewater Department Balance Sheets 22 Statements of Revenues, Expenses, and Changes in Fund Net Assets 23 Statements of Cash Flows Notes to Financial Statements Required Supplementary Information: Electricity Department Schedule of Revenues, Expenses, and Changes in Fund Net Assets Budget and Actual (GAAP Budgetary Basis) 46 Gas Department Schedule of Revenues, Expenses, and Changes in Fund Net Assets Budget and Actual (GAAP Budgetary Basis) 47 Water and Wastewater Department Schedule of Revenues, Expenses, and Changes in Fund Net Assets Budget and Actual (GAAP Budgetary Basis) 48 Supplementary Schedules: Graphical Representation Source of Funds 49 Use of Funds 50 Electricity Department Schedule of Utility Plant in Service and Accumulated Depreciation 51 Gas Department Schedule of Utility Plant in Service and Accumulated Depreciation 52 Water and Wastewater Department Schedule of Revenues and Expenses Killen System 53 Schedule of Utility Plant in Service and Accumulated Depreciation 54

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4 ELECTRICITY, GAS, AND WATER AND WASTEWATER DEPARTMENTS MANAGEMENT S DISCUSSION AND ANALYSIS FISCAL YEAR 2007 FINANCIAL HIGHLIGHTS The individual enterprise funds experienced the following changes in net assets: Electricity increased $1.8 million or 3%; Gas increased $2.1 million or 6%; Water and Wastewater increased $2.0 million or 4%. The individual enterprise funds experienced the following changes in net utility plant: Electricity increased $2.0 million or 3.2%; Gas decreased $.7 million or 2.0%; Water and Wastewater decreased $.6 million or 1%. The individual enterprise funds experienced the following changes in operating revenues: Electricity increased $5.7 million or 6%; Gas decreased $7.1 million or 20%; Water and Wastewater increased $.5 million or 4%. The individual enterprise funds experienced the following changes in operating expenses: Electricity increased $5.5 million or 6%; Gas decreased $7.9 million or 23%; Water and Wastewater increased $.7 million or 6%. The individual enterprise funds experienced the following changes in nonoperating revenues: Electricity increased about $203,500 or 45%; Gas increased about $11,000 or 7%; Water and Wastewater decreased about $.7 million or 61%. The individual enterprise funds experienced the following changes in nonoperating expenses: Electricity decreased $20,000 or 4%; Gas decreased about $16,500 or 8%; Water and Wastewater decreased $120,000 or 5%. OVERVIEW OF THE FINANCIAL STATEMENTS Florence Utilities is accounted for through three separate enterprise funds Electricity, Natural Gas, and Water and Wastewater. This annual report contains the financial statements of each of these funds. This annual report consists of three parts: Management s Discussion and Analysis, Financial Statements, and Supplementary Information. The financial statements also include notes that explain in more detail some of the information in the financial statements. REQUIRED FINANCIAL STATEMENTS The financial statements of Florence Utilities report information about Florence Utilities using accounting methods similar to those used by private sector companies. These statements offer short-term and long-term financial information about its activities. Page 2

5 The balance sheet includes all of each fund s assets and liabilities and provides information about the nature and amounts of investments in resources (assets) and the obligations to Florence Utilities creditors (liabilities). It also provides the basis for computing rate of return, evaluating the capital structure of Florence Utilities, and assessing the liquidity and financial flexibility of Florence Utilities. All of the current year s revenues and expenses are accounted for in the Statement of Revenues, Expenses, and Changes in Fund Net Assets. This statement measures the success of Florence Utilities operations over the past year and can be used to determine whether Florence Utilities has successfully recovered all its costs through its user fees and other charges, profitability, and credit worthiness. The other required financial statement is the Statement of Cash Flows. The primary purpose of this statement is to provide information about Florence Utilities cash receipts and cash payments during the reporting period. This statement reports cash receipts, cash payments, and net changes in cash resulting from operations, investing, and financing activities; and provides answers to such questions as where did the cash come from, what was cash used for, and what was the change in cash balance during the reporting period. FINANCIAL ANALYSIS OF FLORENCE UTILITIES One of the most important questions asked about Florence Utilities finances is Is Florence Utilities, as a whole, better off or worse off as a result of the year s activities? The Balance Sheet and the Statement of Revenues, Expenses, and Changes in Fund Net Assets report information about Florence Utilities activities in a way that will help answer this question. These two statements report the net assets of each fund and the changes in them. You can think of each fund s net assets the difference between assets and liabilities as one way to measure financial health or financial position. Over time, increases or decreases in net assets are one indicator of whether its financial health is improving or deteriorating. However, you will also need to consider other non-financial factors such as change in economic conditions, weather, customer growth, regulatory and legislative mandates. Electricity Department The Electricity Department s net assets increased from last year by $1,758,293 or about 3%. The summaries below focus on the Electricity Department s net assets and changes in net assets during the years presented. Electricity Department Net Assets Variance FY 2007 FY 2006 Dollars Percent Current Assets $ 23,918,806 $ 24,120,752 $ (201,946) -0.84% Capital Assets, Net 66,114,645 64,091,685 2,022, % Other Noncurrent Assets 5,748,859 5,533, , % Total Assets $ 95,782,310 $ 93,745,836 $ 2,036, % Current Liabilities $ 19,826,814 $ 19,400,217 $ 426, % Noncurrent Liabilities 12,360,894 12,509,310 (148,416) -1.19% Total Liabilities $ 32,187,708 $ 31,909,527 $ 278, % Invested in Capital Assets, $ 58,129,645 $ 55,631,685 $ 2,497, % Net of Related Debt Restricted 1,049,442 1,006,514 42, % Unrestricted 4,415,515 5,198,110 (782,595) % Total Net Assets $ 63,594,602 $ 61,836,309 $ 1,758, % Page 3

6 Changes in the Electricity Department s net assets can be determined by reviewing the following condensed Statement of Revenues, Expenses, and Changes in Fund Net Assets for the years presented. As the table below indicates, operating revenues increased approximately $5.7 million or about 6% from FY During FY 2007, TVA had three rate increases to its distributors one effective October 2006, one effective January 2007, and the last effective April Florence Utilities passed these rate increases along to our customers. Our corresponding rate increases were revenue neutral for us. In FY 2007, we experienced a.1% decrease in kwh sold over that for FY The Electricity Department experienced an increase in nonoperating revenues of $203,502 primarily due to increased interest revenues caused by increasing interest rates and increasing cash balances. The Electricity Department experienced a decrease in nonoperating expenses by $21,086 or about 4%, primarily interest expense. Electricity Department Statements of Revenues, Expenses, and Changes in Fund Net Assets Variance FY 2007 FY 2006 Dollars Percent Operating Revenues $ 96,379,642 $ 90,654,106 $ 5,725, % Operating Expenses Cost of Sales $ 77,106,081 $ 72,026,577 $ 5,079, % Operations 7,266,566 7,256,274 10, % Maintenance 3,557,491 3,141, , % Depreciation 4,090,647 4,056,048 34, % Taxes and Tax Equivalents 2,805,650 2,807,484 (1,834) -0.07% Total Operating Expenses $ 94,826,435 $ 89,287,394 $ 5,539, % Operating Income $ 1,553,207 $ 1,366,712 $ 186, % Nonoperating Revenues (Expenses) Nonoperating Revenues $ 656,739 $ 453,237 $ 203, % Nonoperating Expenses (451,653) (472,739) 21, % Total Nonoperating Revenues (Exp) $ 205,086 $ (19,502) $ 224, % Change in Net Assets $ 1,758,293 $ 1,347,210 $ 411, % Total Net Assets - Beginning 61,836,309 60,489,099 1,347, % Total Net Assets - Ending $ 63,594,602 $ 61,836,309 $ 1,758, % Page 4

7 Gas Department The Gas Department s net assets increased from last year by $2,073,344 or about 6%. The summaries below focus on the Gas Department s net assets and changes in net assets during the years presented. Gas Department Net Assets Variance FY 2007 FY 2006 Dollars Percent Current Assets $ 9,749,616 $ 7,790,584 $ 1,959, % Capital Assets, Net 33,377,926 34,062,973 (685,047) -2.01% Other Noncurrent Assets 604, ,427 5, % Total Assets $ 43,731,936 $ 42,451,984 $ 1,279, % Current Liabilities $ 1,620,544 $ 2,147,184 $ (526,640) % Noncurrent Liabilities 3,783,318 4,050,070 (266,752) -6.59% Total Liabilities $ 5,403,862 $ 6,197,254 $ (793,392) % Invested in Capital Assets, $ 29,567,926 $ 29,987,973 $ (420,047) -1.40% Net of Related Debt Restricted 522, ,069 13, % Unrestricted 8,237,738 5,757,688 2,480, % Total Net Assets $ 38,328,074 $ 36,254,730 $ 2,073, % Changes in the Gas Department s net assets can be determined by reviewing the following condensed Statement of Revenues, Expenses, and Changes in Fund Net Assets for the years presented. As the table below indicates, operating revenues decreased approximately $7.1 million or about 20% from FY The Gas Department had six changes to rates in FY 2007 effective August 2006, October 2006, December 2006, January 2007, February 2007, and March These rate changes reflected a decrease in our cost of gas sold. The Gas Department experienced an approximate 12% decrease in overall sales volume in FY 2007 over FY This was due to one of our large customers going to transportation services from us rather than purchasing natural gas from us. Cost of sales decreased by $8.2 million or about 31% due to decreased gas prices and the change of the large customer to transportation of natural gas purchased from others mentioned above. The Gas Department experienced an increase in nonoperating revenues of $11,022 primarily due to increased interest revenues caused by rising interest rates. The Gas Department experienced a decrease in nonoperating expenses of $16,467 or 8% due to a slight decrease in interest expense. Page 5

8 Gas Department Statements of Revenues, Expenses, and Changes in Fund Net Assets Variance FY 2007 FY 2006 Dollars Percent Operating Revenues $ 28,042,810 $ 35,133,653 $ (7,090,843) % Operating Expenses Cost of Sales $ 18,714,185 $ 26,939,901 $ (8,225,716) % Operations 2,578,323 2,394, , % Maintenance 1,622,847 1,443, , % Depreciation and Amortization 1,424,989 1,477,001 (52,012) -3.52% Taxes and Tax Equivalents 1,607,915 1,611,264 (3,349) -0.21% Total Operating Expenses $ 25,948,259 $ 33,865,789 $ (7,917,530) % Operating Income $ 2,094,551 $ 1,267,864 $ 826, % Nonoperating Revenues (Expenses) Nonoperating Revenues $ 175,681 $ 164,659 $ 11, % Nonoperating Expenses (196,888) (213,355) 16, % Total Nonoperating Revenues (Exp) $ (21,207) $ (48,696) $ 27, % Change in Net Assets $ 2,073,344 $ 1,219,168 $ 854, % Total Net Assets - Beginning 36,254,730 35,035,562 1,219, % Total Net Assets - Ending $ 38,328,074 $ 36,254,730 $ 2,073, % Page 6

9 Water and Wastewater Department The Water and Wastewater Department s net assets increased from last year by $2,025,193 or about 4%. The summaries below focus on the Water and Wastewater Department s net assets and changes in net assets during the years presented. Water and Wastewater Department Net Assets Variance FY 2007 FY 2006 Dollars Percent Current Assets $ 10,741,879 $ 9,691,442 $ 1,050, % Capital Assets, Net 94,087,222 94,719,280 (632,058) -0.67% Other Noncurrent Assets 5,145,082 5,124,002 21, % Total Assets $ 109,974,183 $ 109,534,724 $ 439, % Current Liabilities $ 5,482,152 $ 5,268,952 $ 213, % Noncurrent Liabilities 51,239,567 53,038,501 (1,798,934) -3.39% Total Liabilities $ 56,721,719 $ 58,307,453 $ (1,585,734) -2.72% Invested in Capital Assets, $ 39,301,366 $ 38,420,654 $ 880, % Net of Related Debt Restricted 4,610,179 4,543,070 67, % Unrestricted 9,340,919 8,263,547 1,077, % Total Net Assets $ 53,252,464 $ 51,227,271 $ 2,025, % Changes in the Water and Wastewater Department s net assets can be determined by reviewing the following condensed Statement of Revenues, Expenses, and Changes in Fund Net Assets for the years presented. As the table below indicates, operating revenues increased approximately $.5 million or about 4% from FY 2006 revenues. Increased operating revenues were largely due to the weather during FY 2007 being conducive to good sales. Operating expenses increased by $.7 million or about 6% due to various increased costs. The Department wrote off construction in progress projects which we felt would not be completed. We expensed $599,530 from these projects in FY The Water and Wastewater Department experienced a decrease in nonoperating revenues of $743,363 or 61% primarily due to one-time grant proceeds of $891,817 from an EPA Special Appropriations Grant (SPAP STAG) in FY 2006 not replicated in FY 2007 and increased interest revenues in FY 2007 caused by increasing interest rates. The Water and Wastewater Department experienced a decrease in nonoperating expenses of $120,449, or 5% primarily due to decreasing interest expense. Page 7

10 Water and Wastewater Department Statements of Revenues, Expenses, and Changes in Fund Net Assets Variance FY 2007 FY 2006 Dollars Percent Operating Revenues $ 16,137,765 $ 15,592,514 $ 545, % Operating Expenses Water Treatment and Pumping $ 2,475,556 $ 2,300,447 $ 175, % Sewage Disposal 1,791,393 1,757,495 33, % Transmission and Distribution 1,109,578 1,133,845 (24,267) -2.14% Accounting and Collections 1,011,142 1,079,501 (68,359) -6.33% Administrative and General 2,175,903 1,563, , % Depreciation 2,505,331 2,531,689 (26,358) -1.04% Taxes and Tax Equivalents 1,375,226 1,356,181 19, % Total Operating Expenses $ 12,444,129 $ 11,722,382 $ 721, % Operating Income $ 3,693,636 $ 3,870,132 $ (176,496) -4.56% Nonoperating Revenues (Expenses) Nonoperating Revenues $ 468,306 $ 1,211,669 $ (743,363) % Nonoperating Expenses (2,136,749) (2,257,198) 120, % Total Nonoperating Revenues (Exp) $ (1,668,443) $ (1,045,529) $ (622,914) 59.58% Change in Net Assets $ 2,025,193 $ 2,824,603 $ (799,410) % Total Net Assets - Beginning 51,227,271 48,402,668 2,824, % Total Net Assets - Ending $ 53,252,464 $ 51,227,271 $ 2,025, % BUDGETARY HIGHLIGHTS As required, the City Council adopts a budget for each enterprise fund comprising the Florence Utilities. The FY 2007 original budgets for the Electricity, Gas, and Water and Wastewater Departments were adopted on July 6, The Electricity Department s budget was amended on September 5, 2006, December 19, 2006, January 2, 2007, February 20, 2007, and March 20, The Gas Department s budget was amended on September 5, 2006, February 20, 2007, and April 3, The Water and Wastewater Department s budget was amended on September 5, 2006 and February 20, A budget comparison statement is prepared monthly for each department for internal use and is distributed to elected officials and the appropriate management personnel. A budget comparison report is included for the Electricity Department, Gas Department, and the Water and Wastewater Department in the Required Supplementary Information Section of this annual report. Below is a summarized report and brief explanation of highlights. Page 8

11 Electricity Department Electricity Department Schedule of Revenues, Expenses, and Changes in Fund Net Assets Budget and Actual (GAAP Budgetary Basis) For Year Ended June 30, 2007 Final Variance Budget Actual Dollars Percent Operating Revenues $ 95,721,200 $ 96,379,642 $ 658, % Operating Expenses 94,246,100 94,826, , % Operating Income $ 1,475,100 $ 1,553,207 $ 78, % Nonoperating Revenues (Expenses) 105, ,086 99, % Change in Net Assets $ 1,580,600 $ 1,758,293 $ 177, % As the above budget report shows, the Electricity Department exceeded budgeted Change in Net Assets by $177,693. This represents less than.2% of budgeted operating revenues. As you can see on the budget schedule in the required supplementary information, sales revenues and the associated cost of sales were higher than expected due to an improved sales environment. Gas Department Gas Department Schedule of Revenues, Expenses, and Changes in Fund Net Assets Budget and Actual (GAAP Budgetary Basis) For Year Ended June 30, 2007 Final Variance Budget Actual Dollars Percent Operating Revenues $ 27,933,600 $ 28,042,810 $ 109, % Operating Expenses 26,940,600 25,948,259 (992,341) -3.68% Operating Income $ 993,000 $ 2,094,551 $ 1,101, % Nonoperating Revenues (Expenses) (100,500) (21,207) 79, % Change in Net Assets $ 892,500 $ 2,073,344 $ 1,180, % The Gas Department exceeded the budgeted Change in Net Assets by $1,180,844. This represents less than 4.2% of budgeted operating revenues. As you can see on the budget schedule in the required supplementary information, the gas sales revenues exceeded expectations due to a better than expected sales environment. The cost of sales was less than expectations due to lower than expected cost of natural gas supplies and the change from the large customer to transportation of gas purchased from others. Page 9

12 Water and Wastewater Department Water and Wastewater Department Schedule of Revenues, Expenses, and Changes in Fund Net Assets Budget and Actual (GAAP Budgetary Basis) For Year Ended June 30, 2007 Final Variance Budget Actual Dollars Percent Operating Revenues $ 15,235,360 $ 16,137,765 $ 902, % Operating Expenses 11,626,889 12,444, , % Operating Income $ 3,608,471 $ 3,693,636 $ 85, % Nonoperating Revenues (Expenses) (1,944,300) (1,668,443) 275, % Change in Net Assets $ 1,664,171 $ 2,025,193 $ 361, % The Water and Wastewater Department exceeded the budgeted Change in Net Assets by $361,022. This represents about 2.4% of final budgeted operating revenues. This was caused primarily by better than expected sales. CAPITAL ASSETS AND DEBT ADMINISTRATION Capital Assets At the end of FY 2007, capital assets comprised the majority of each fund s assets. The following are summaries highlighting each fund s changes in capital assets. More detailed information is presented for each department in the supplementary schedules section. Electricity Department Electricity Department Capital Assets, Net FY 2007 Variance FY 2007 FY 2006 Dollars Percent Utility Plant in Service (at Cost) $ 126,295,202 $ 125,731,753 $ 563, % Construction in Progress 3,193,920 1,219,334 1,974, % Less: Accumulated Depreciation (63,374,477) (62,859,402) (515,075) 0.82% Net Utility Plant $ 66,114,645 $ 64,091,685 $ 2,022, % As the above table shows, the Electricity Department experienced a 3.16% increase in net utility plant. The department plans to finance capital expenditures in FY 2008 through cash generated from operations. Page 10

13 Gas Department Gas Department Capital Assets, Net FY 2007 Variance FY 2007 FY 2006 Dollars Percent Utility Plant in Service (at Cost) $ 49,821,739 $ 49,213,422 $ 608, % Acquisition Adjustment (net of amortization) 254, ,753 (10,661) -4.03% Construction in Progress 8, ,613 (184,608) % Less: Accumulated Depreciation (16,705,910) (15,607,815) (1,098,095) 7.04% Net Utility Plant $ 33,377,926 $ 34,062,973 $ (685,047) -2.01% As the above table shows, the Gas Department decreased net utility plant by 2.01%. The department plans to finance capital expenditures in FY 2008 through cash generated from operations. Water and Wastewater Department Water and Wastewater Department Capital Assets, Net FY 2007 Variance FY 2007 FY 2006 Dollars Percent Utility Plant in Service (at Cost) $ 128,125,341 $ 125,133,138 $ 2,992, % Construction in Progress 919,922 2,102,226 (1,182,304) % Less: Accumulated Depreciation (34,958,041) (32,516,084) (2,441,957) 7.51% Net Utility Plant $ 94,087,222 $ 94,719,280 $ (632,058) -0.67% As the above table shows, the Water and Wastewater Department decreased net utility plant by.67%. In FY 2007, the Department made capital improvements, particularly in the wastewater area. As mentioned earlier, the Department took a write-off of $599,530 in construction in progress for projects that would not be completed. The department plans to finance additional capital expenditures with cash generated from operations, the remaining balance of the 2006 SRF Warrant, and additional SRF financing. Page 11

14 Long-term Debt During FY 2007, each department had outstanding revenue warrants. The amount and discussion of these issues are discussed more fully in the notes to the financial statements. Electricity Department The Electricity Department has one warrant issue that has not been defeased, the Electric Revenue Warrants, Series The interest rates range from 4.10% to 5.25%. The issue is insured by Financial Security Assurance, Inc. It was issued with an underlying A1 and A+ by Moody s and Standard & Poor s, respectively. This issue requires that the Electricity Department s Annual Net Income (as defined in the indenture) be at least 1.25 times the maximum Annual Debt Service Requirement. For FY 2007, the Electricity Department exceeded that requirement at about 9.53 times. Gas Department The Gas Department has two outstanding warrant issues at year-end as described in the financial statement notes. The Natural Gas Revenue Warrant, Series 1998 interest rates range from 3.60% to 4.90%. The issue is insured by AMBAC. It was issued with an underlying A1 and A+ rating from Moody s and Standard & Poor s, respectively. This issue requires that the Gas Department s Annual Net Income (as defined in the indenture) be at least 1.25 times the maximum Annual Debt Service Requirement. For FY 2007, the Gas Department exceeded that requirement at about times. The other issue outstanding is a line of credit warrant with Bank Independent, the Natural Gas Revenue Taxable Warrants, Series 2003, issued April At year-end, there was no outstanding balance on it. The Department did not utilize this line of credit during FY This line of credit is to be used to finance gas purchases, and is available until July This warrant has an interest rate of 4.99%. Water and Wastewater Department The Water and Wastewater Department has six warrant issues outstanding that have not been defeased. These issues are (1) Water and Sewer Revenue Warrants, Series 1995, interest rates ranging from 3.5% to 5.625% (2) Water and Sewer Revenue Warrants, SRF Series 1998, interest rate 3.75%, (3) Water and Sewer Revenue Warrants, SRF Series 1999, interest rate 3.5%, (4) Water and Sewer Revenue Warrants, SRF Series 1999B, interest rate 3.5%, (5) Water and Sewer Revenue Warrants, SRF Series 2000, interest rate 3.85%, and (6) Water and Sewer Revenue Warrants, SRF Series 2006, interest rate 3.25%. The SRF warrants are issued through a federally funded (EPA) loan program to states for wastewater improvements. In Alabama, this program is administered by ADEM. The SRF series warrants are financing massive renovations of portions of our wastewater system. At year-end, approximately $1.5 million remains available of the new issue. The 1995 Series is insured by AMBAC. The department received an A rating from Moody s at its issue. The 1995 issue requires that the Water and Wastewater Department s Annual Net Income (as defined in the indenture) be at least 1.25 times the maximum Annual Debt Service Requirement. For FY 2007, the Water and Wastewater Department exceeded that requirement at about 1.32 times. Page 12

15 ECONOMIC FACTORS AND NEXT YEAR S BUDGET AND RATES The geographic area served by Florence Utilities is facing an improving economic environment, notwithstanding increased unemployment rates. The Florence MSA s unemployment rate for August 2007 was 4.7% as compared to 4.1% for August The State of Alabama s unemployment rates were 3.8% for August 2007, and 3.6% for August In addition to the economic environment, the weather is an important factor in determining utility sales. Although it is impossible to predict the weather in the upcoming year, sales revenues less the cost of power purchased for sale for FY 2008 through August for electricity have increased over the same number through the same time last year by 20%. FY 2008 sales revenues from water and wastewater operations through August have increased 5% over the same period in FY The City Council adopted the Gas Department s and the Water and Wastewater Department s FY 2008 budget on July 17, The City Council adopted the Electricity Department s FY 2008 budget on August 21, The City Council adopted amended budgets for each Department on September 18, The City s power contract with TVA provides for a fuel cost adjustment (FCA), revised quarterly, on sales to its distributors. In FY 2008, the FCA has resulted in rate increases to our customers effective July 2007 and October In addition to the FCA, TVA is considering raising its base rates to its distributors in Florence Utilities anticipates passing any rate increases or decreases on to its customers. The Gas Department s rate ordinance allows for gas increases/decreases without further City Council action. The volatility of natural gas makes this ability for quick rate action important for the Department s financial health. Effective August 2007 and September 2007, we implemented rate decreases. The City has entered into a Consent Order with the Alabama Department of Environmental Management that will require the City to correct 13 known Sanitary Sewer Overflows within the sewer collection system. The Department anticipates borrowing the majority of the required funds from the State Revolving Fund. The City Council approved a rate ordinance providing for water and wastewater rate increases effective July 2007, July 2008, July 2009, and July 2010 to fund the financing of these repairs. CONTACTING FLORENCE UTILITIES FINANCIAL MANAGER This financial report is designed to provide the Electricity Department s, Gas Department s, and Water and Wastewater Department s ratepayers and creditors with a general overview of their finances and to demonstrate Florence Utilities accountability for the money it receives. If you have questions about this report or need additional financial information, contact the Controller of Utilities, Florence Utilities, P.O. Box 877, Florence, AL Page 13

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17 ELECTRICITY DEPARTMENT BALANCE SHEETS JUNE 30, 2007 and 2006 ASSETS Current assets: Cash and cash equivalents $ 5,068,654 $ 5,748,081 Receivables (net) 9,609,302 9,489,867 Accrued interest receivable 13,666 9,066 Inventories 1,700,667 1,446,622 Prepaid expenses 7,526,517 7,427,116 Total current assets $ 23,918,806 $ 24,120,752 Noncurrent assets: Restricted cash and cash equivalents $ 1,049,442 $ 1,006,514 Capital assets: Utility plant in service (at cost) 126,295, ,731,753 Construction in progress 3,193,920 1,219,334 Less: accumulated depreciation 63,374,477 62,859,402 Receivables from customers for conservation loans 3,883,742 3,567,947 Prepaid purchased power-tva DEU program 647, ,150 Unamortized debt issuance costs 168, ,788 Total noncurrent assets $ 71,863,504 $ 69,625,084 Total assets $ 95,782,310 $ 93,745,836

18 LIABILITIES Current liabilities: Accounts payable $ 13,461,736 $ 13,128,540 Customer deposits 5,201,970 4,978,654 Accrued annual and sick leave 525, ,056 Accrued taxes and expenses 74, ,156 Deferred interest income-tva DEU program 29,600 29,600 Total current liabilities $ 19,292,503 $ 18,889,006 Liabilities payable from restricted assets: Revenue warrants payable within one year $ 500,000 $ 475,000 Accrued interest 34,311 36,211 Total liabilities payable from restricted assets $ 534,311 $ 511,211 Noncurrent liabilities: Revenue warrants payable after one year $ 7,485,000 $ 7,985,000 Unamortized debt discount (64,293) (69,651) Advances from TVA for conservation loans 4,004,955 3,677,227 Accrued annual and sick leave 787, ,584 Deferred interest income-tva DEU program 147, ,150 Total noncurrent liabilities $ 12,360,894 $ 12,509,310 Total liabilities $ 32,187,708 $ 31,909,527 NET ASSETS Invested in capital assets, net of related debt $ 58,129,645 $ 55,631,685 Restricted for debt service 1,049,442 1,006,514 Unrestricted 4,415,515 5,198,110 Total net assets $ 63,594,602 $ 61,836,309 Total liabilities and net assets $ 95,782,310 $ 93,745,836 The accompanying notes and independent auditors' report are an integral part of these financial statements. Page 14

19 ELECTRICITY DEPARTMENT STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN FUND NET ASSETS FOR THE YEARS ENDED JUNE 30, 2007 and Operating revenues: Electric sales: Residential $ 50,206,984 $ 47,289,164 Small commercial 9,297,321 8,818,643 Large commercial 33,189,290 30,942,498 Public street and highway lighting 1,624,531 1,531,988 Forfeited discounts 813, ,786 Rents from electric property 619, ,464 Other operating revenues 628, ,563 Total operating revenues $ 96,379,642 $ 90,654,106 Operating expenses: Costs of sales $ 77,106,081 $ 72,026,577 Operations 7,266,566 7,256,274 Maintenance 3,557,491 3,141,011 Depreciation 4,090,647 4,056,048 Taxes and tax equivalents 2,805,650 2,807,484 Total operating expenses $ 94,826,435 $ 89,287,394 Operating income $ 1,553,207 $ 1,366,712 Nonoperating revenues (expenses): Interest revenues $ 488,108 $ 344,238 Merchandising revenues (net of costs) 168, ,999 Interest expense (432,632) (453,718) Amortization of debt discount and costs (19,021) (19,021) Total nonoperating revenues (expenses) $ 205,086 $ (19,502) Change in net assets $ 1,758,293 $ 1,347,210 Total net assets beginning 61,836,309 60,489,099 Total net assets ending $ 63,594,602 $ 61,836,309 The accompanying notes and independent auditors' report are an integral part of these financial statements. Page 15

20 ELECTRICITY DEPARTMENT STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2007 and Cash flows from operating activities: Receipts from customers and users $ 96,428,838 $ 89,135,530 Receipts from interfund services provided 1,894,765 1,869,859 Payments to suppliers (80,719,402) (73,819,010) Payments to employees for services and benefits exclusive of capitalized costs (8,775,020) (8,236,432) Payments for interfund services used (2,836,485) (2,928,373) Net cash provided by operating activities $ 5,992,696 $ 6,021,574 Cash flows from noncapital financing activities: Increase in receivables from customers for conservation loans $ (315,795) $ (210,789) Increase in advances from TVA for conservation loans 327, ,655 Deferred TVA DEU program (net) 100, ,000 Net cash provided by (used) for noncapital financing activities $ 111,933 $ 101,866 Cash flows from capital and related financing activities: Purchase and construction of capital assets (net) $ (6,062,759) $ (4,712,396) Removal costs of retirements of capital assets (374,148) (275,898) Salvage value of retirements of capital assets 121, ,698 Principal paid on capital debt (475,000) (455,000) Interest paid on capital debt (434,532) (455,463) Net cash used by capital and related financing activities $ (7,224,636) $ (5,768,059) Cash flows from investing activities: Interest on investments $ 483,508 $ 342,156 Net cash provided by investing activities $ 483,508 $ 342,156 Net increase (decrease) in cash and cash equivalents $ (636,499) $ 697,537 Balances beginning of the year 6,754,595 6,057,058 Balances end of the year $ 6,118,096 $ 6,754,595 Classified as: Current assets $ 5,068,654 $ 5,748,081 Restricted assets 1,049,442 1,006,514 Totals $ 6,118,096 $ 6,754,595 The accompanying notes and independent auditors' report are an integral part of these financial statements. Page 16

21 ELECTRICITY DEPARTMENT STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2007 and Reconciliation of operating income to net cash provided (used) by operating activities: Operating income $ 1,553,207 $ 1,366,712 Adjustments to reconcile operating income to net cash provided (used) by operating activities: Depreciation $ 4,292,144 $ 4,229,819 Income from merchandising revenues (net of costs) 168, ,999 Change in assets and liabilities: Receivables (net) (119,435) (2,265,582) Inventories (254,045) (96,887) Prepaid expenses (99,401) (913,629) Accounts and other payables 451,595 3,592,142 Total adjustments $ 4,439,489 $ 4,654,862 Net cash provided by operating activities $ 5,992,696 $ 6,021,574 The accompanying notes and independent auditors' report are an integral part of these financial statements. Page 17

22 GAS DEPARTMENT BALANCE SHEETS JUNE 30, 2007 and 2006 ASSETS Current assets: Cash and cash equivalents $ 6,741,484 $ 3,055,439 Accounts receivable (net) 1,039,512 1,836,383 Accrued interest receivable 7,900 3,772 Inventories 1,949,076 2,883,974 Prepaid expenses 11,644 11,016 Total current assets $ 9,749,616 $ 7,790,584 Noncurrent assets: Restricted cash and cash equivalents $ 522,410 $ 509,069 Capital assets: Utility plant in service (at cost) 49,821,739 49,213,422 Acquisition adjustment (net of amortization) 254, ,753 Construction in progress 8, ,613 Less: accumulated depreciation 16,705,910 15,607,815 Unamortized debt issuance costs 81,984 89,358 Total noncurrent assets $ 33,982,320 $ 34,661,400 Total assets $ 43,731,936 $ 42,451,984

23 LIABILITIES Current liabilities: Accounts payable $ 1,089,924 $ 1,640,231 Accrued annual and sick leave 181, ,878 Accrued taxes and expenses 58,907 48,387 Total current liabilities $ 1,330,762 $ 1,866,496 Liabilities payable from restricted assets: Revenue warrants payable within one year $ 275,000 $ 265,000 Accrued interest 14,782 15,688 Total liabilities payable from restricted assets $ 289,782 $ 280,688 Noncurrent liabilities: Revenue warrants payable after one year $ 3,535,000 $ 3,810,000 Unamortized debt discount (24,578) (26,747) Accrued annual and sick leave 272, ,817 Total noncurrent liabilities $ 3,783,318 $ 4,050,070 Total liabilities $ 5,403,862 $ 6,197,254 NET ASSETS Invested in capital assets, net of related debt $ 29,567,926 $ 29,987,973 Restricted for debt service 522, ,069 Unrestricted 8,237,738 5,757,688 Total net assets $ 38,328,074 $ 36,254,730 Total liabilities and net assets $ 43,731,936 $ 42,451,984 The accompanying notes and independent auditors' report are an integral part of these financial statements. Page 18

24 GAS DEPARTMENT STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN FUND NET ASSETS FOR THE YEARS ENDED JUNE 30, 2007 and Operating revenues: Gas sales: Residential $ 9,788,622 $ 10,301,635 Commercial 5,868,985 6,611,438 Industrial 9,537,907 15,853,406 Resale and transportation 2,605,350 2,107,370 Service fees 87,366 90,922 Forfeited discounts 142, ,551 Other operating revenues 11,754 11,331 Total operating revenues $ 28,042,810 $ 35,133,653 Operating expenses: Costs of sales $ 18,714,185 $ 26,939,901 Operations 2,578,323 2,394,224 Maintenance 1,622,847 1,443,399 Depreciation 1,414,328 1,466,340 Amortization of acquisition adjustment 10,661 10,661 Taxes and tax equivalents 1,607,915 1,611,264 Total operating expenses $ 25,948,259 $ 33,865,789 Operating income $ 2,094,551 $ 1,267,864 Nonoperating revenues (expenses): Interest revenues $ 168,424 $ 85,172 Gain on disposition of assets 1,971 75,842 Miscellaneous nonoperating income 5,286 3,645 Interest expense (187,345) (203,812) Amortization of debt discount and costs (9,543) (9,543) Total nonoperating revenues (expenses) $ (21,207) $ (48,696) Change in net assets $ 2,073,344 $ 1,219,168 Total net assets beginning 36,254,730 35,035,562 Total net assets ending $ 38,328,074 $ 36,254,730 The accompanying notes and independent auditors' report are an integral part of these financial statements. Page 19

25 GAS DEPARTMENT STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2007 and Cash flows from operating activities: Receipts from customers and users $ 28,849,537 $ 34,653,608 Payments to suppliers (19,000,780) (29,434,022) Payments to employees for services and benefits exclusive of capitalized costs (2,824,192) (2,921,528) Payments for interfund services used (2,296,282) (2,286,716) Net cash provided by operating activities $ 4,728,283 $ 11,342 Cash flows from noncapital financing activities: Proceeds from noncapital debt $ $ 500,000 Principal paid on noncapital debt (500,000) Interest paid on noncapital debt (6,445) Net cash used by noncapital financing activities $ - $ (6,445) Cash flows from capital and related financing activities: Purchase and construction of capital assets (net) $ (719,583) $ (1,678,438) Proceeds from disposition of assets 18,575 97,840 Removal costs of retirements of capital assets (38,934) (45,106) Principal paid on capital debt (265,000) (255,000) Interest paid on capital debt (188,251) (198,195) Net cash used by capital and related financing activities $ (1,193,193) $ (2,078,899) Cash flows from investing activities: Interest on investments $ 164,296 $ 84,246 Net cash provided by investing activities $ 164,296 $ 84,246 Net increase (decrease) in cash and cash equivalents $ 3,699,386 $ (1,989,756) Balances beginning of the year 3,564,508 5,554,264 Balances end of the year $ 7,263,894 $ 3,564,508 Classified as: Current assets $ 6,741,484 $ 3,055,439 Restricted assets 522, ,069 Totals $ 7,263,894 $ 3,564,508 The accompanying notes and independent auditors' report are an integral part of these financial statements. Page 20

26 GAS DEPARTMENT STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2007 and 2006 (Continued) Reconciliation of operating income to net cash provided (used) by operating activities: Operating income $ 2,094,551 $ 1,267,864 Adjustments to reconcile operating income to net cash provided (used) by operating activities: Depreciation $ 1,414,328 $ 1,466,340 Amortization of acquisition adjustment 10,661 10,661 Miscellaneous nonoperating income 5,286 3,645 Gain on disposition of equipment 1,971 75,842 Change in assets and liabilities: Receivables (net) 796,871 (576,079) Inventories 934,898 (2,400,030) Prepaid expenses (628) 2,418 Accounts and other payables (529,655) 160,681 Total adjustments $ 2,633,732 $ (1,256,522) Net cash provided by operating activities $ 4,728,283 $ 11,342 The accompanying notes and independent auditors' report are an integral part of these financial statements. Page 21

27 WATER AND WASTEWATER DEPARTMENT BALANCE SHEETS JUNE 30, 2007 and 2006 ASSETS Current assets: Cash and cash equivalents $ 8,076,825 $ 7,563,855 Accounts receivable (net) 1,676,419 1,436,199 Accrued interest receivable 69,545 52,324 Inventories 520, ,354 Prepaid expenses 398, ,710 Total current assets $ 10,741,879 $ 9,691,442 Noncurrent assets: Restricted cash and cash equivalents $ 4,610,179 $ 4,543,070 Capital assets: Utility plant in service (at cost) 128,125, ,133,138 Construction in progress 919,922 2,102,226 Less: accumulated depreciation 34,958,041 32,516,084 Unamortized debt issuance costs 534, ,932 Total noncurrent assets $ 99,232,304 $ 99,843,282 Total assets $ 109,974,183 $ 109,534,724

28 LIABILITIES Current liabilities: Accounts payable $ 560,071 $ 625,371 Retainage payable on construction contracts 31,081 37,859 Accrued annual and sick leave 183, ,876 Accrued taxes and expenses 242, ,983 Total current liabilities $ 1,017,878 $ 1,082,089 Liabilities payable from restricted assets: Revenue warrants payable within one year $ 3,770,000 $ 3,475,000 Accrued interest 694, ,863 Total liabilities payable from restricted assets $ 4,464,274 $ 4,186,863 Noncurrent liabilities: Revenue warrants payable after one year $ 51,015,856 $ 52,823,626 Unamortized debt discount (52,134) (63,938) Accrued annual and sick leave 275, ,813 Total noncurrent liabilities $ 51,239,567 $ 53,038,501 Total liabilities $ 56,721,719 $ 58,307,453 NET ASSETS Invested in capital assets, net of related debt $ 39,301,366 $ 38,420,654 Restricted for debt service 4,610,179 4,543,070 Unrestricted 9,340,919 8,263,547 Total net assets $ 53,252,464 $ 51,227,271 Total liabilities and net assets $ 109,974,183 $ 109,534,724 The accompanying notes and independent auditors' report are an integral part of these financial statements. Page 22

29 WATER AND WASTEWATER DEPARTMENT STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN FUND NET ASSETS FOR THE YEARS ENDED JUNE 30, 2007 and Operating revenues: Water sales: Residential $ 5,336,492 $ 5,028,554 Commercial 2,815,670 2,675,516 Resale 1,564,038 1,452,150 Sewer service sales: Residential 2,923,856 2,852,636 Commercial 3,118,024 3,291,326 Forfeited discounts 121, ,625 Other operating revenues 257, ,707 Total operating revenues $ 16,137,765 $ 15,592,514 Operating expenses: Water treatment and pumping $ 2,475,556 $ 2,300,447 Sewage disposal 1,791,393 1,757,495 Transmission and distribution 1,109,578 1,133,845 Accounting and collections 1,011,142 1,079,501 Administrative and general 2,175,903 1,563,224 Depreciation 2,505,331 2,531,689 Taxes and tax equivalents 1,375,226 1,356,181 Total operating expenses $ 12,444,129 $ 11,722,382 Operating income $ 3,693,636 $ 3,870,132 Nonoperating revenues (expenses): Interest revenues $ 460,130 $ 310,376 Gain on disposition of assets 8,176 9,476 Capital grant 891,817 Interest expense (2,078,916) (2,199,365) Amortization of debt discount and costs (57,833) (57,833) Total nonoperating revenues (expenses) $ (1,668,443) $ (1,045,529) Change in net assets $ 2,025,193 $ 2,824,603 Total net assets beginning 51,227,271 48,402,668 Total net assets ending $ 53,252,464 $ 51,227,271 The accompanying notes and independent auditors' report are an integral part of these financial statements. Page 23

30 WATER AND WASTEWATER DEPARTMENT STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2007 and Cash flows from operating activities: Receipts from customers and users $ 15,570,019 $ 15,345,439 Payments to suppliers (3,934,707) (2,782,837) Payments to employees for services and benefits exclusive of capitalized costs (3,715,530) (3,647,572) Payments for interfund services used (2,300,064) (2,252,166) Net cash provided by operating activities $ 5,619,718 $ 6,662,864 Cash flows from capital and related financing activities: Purchase and construction of capital assets (net) $ (1,884,206) $ (3,139,468) Proceeds from disposition of assets 10,933 15,432 Proceeds from capital grant 891,817 Proceeds from capital debt 1,962,230 1,934,178 Principal paid on capital debt (3,475,000) (3,335,000) Interest paid on capital debt (2,096,505) (2,236,835) Net cash used for capital and related financing activities $ (5,482,548) $ (5,869,876) Cash flows from investing activities: Interest on investments $ 442,909 $ 286,232 Net cash provided by investing activities $ 442,909 $ 286,232 Net increase in cash and cash equivalents $ 580,079 $ 1,079,220 Balances beginning of the year 12,106,925 11,027,705 Balances end of the year $ 12,687,004 $ 12,106,925 Classified as: Current assets $ 8,076,825 $ 7,563,855 Restricted assets 4,610,179 4,543,070 Totals $ 12,687,004 $ 12,106,925 The accompanying notes and independent auditors' report are an integral part of these financial statements. Page 24

31 WATER AND WASTEWATER DEPARTMENT STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2007 and 2006 (Continued) Reconciliation of operating income to net cash provided (used) by operating activities: Operating income $ 3,693,636 $ 3,870,132 Adjustments to reconcile operating income to net cash provided (used) by operating activities: Depreciation $ 2,505,331 $ 2,531,689 Gain on disposition of assets 8,176 9,476 Change in assets and liabilities: Receivables (net) (240,220) 47,988 Inventories 8,914 (16,763) Prepaid expenses (288,940) (42,063) Accounts and other payables (67,179) 262,405 Total adjustments $ 1,926,082 $ 2,792,732 Net cash provided by operating activities $ 5,619,718 $ 6,662,864 The accompanying notes and independent auditors' report are an integral part of these financial statements. Page 25

32 ELECTRICITY, GAS, AND WATER AND WASTEWATER DEPARTMENTS NOTES TO FINANCIAL STATEMENTS JUNE 30, 2007 and 2006 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Florence Utilities (the Utilities ) are comprised of the Electricity, Gas, and Water and Wastewater Departments of the City of Florence, Alabama. The Utilities provide electricity, natural gas, water and wastewater services to the City of Florence (the City ) and various areas of Lauderdale County. The financial statements of the Utilities have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) as applied to governmental units. The Governmental Accounting Standards Board (GASB) is the accepted standard setting body for establishing governmental accounting and financial reporting principles. Basis of Accounting and Financial Statement Presentation: These three (3) enterprise funds are included as blended component units in the financial statements of the City of Florence, Alabama. The Department managers supervise the daily operations of providing services to citizens and are accountable to the Mayor and City Council. Financial statements are presented for each department. The footnotes are presented separately for each department, where applicable, and jointly for areas where common descriptions exist. The City and all related departments have adopted the provisions of GASB Statement No. 34, Basic Financial Statements and Management s Discussion and Analysis for State and Local Governments. Statement No. 34 established standards for external financial reporting for all state and local governmental entities, which includes a statement of net assets or balance sheet, a statement of revenues, expenses, and changes in fund net assets, and a statement of cash flows. It requires the classification of net assets into three components invested in capital assets, net of related debt; restricted; and unrestricted. These classifications are defined as follows: Invested in capital assets, net of related debt This component of net asset consists of capital assets, including restricted capital assets, net of accumulated depreciation and reduced by the outstanding balances of any bonds, mortgages, notes, or other borrowings that are attributable to the acquisition, construction, or improvements of those assets. If there are significant unspent related debt proceeds at year-end, the portion of the debt attributable to the unspent proceeds are not included in the calculation of invested in capital assets, net of related debt. Rather, that portion of the debt is included in the same net assets component as the unspent proceeds. Restricted net assets This component of net assets consists of constraints placed on net asset use through external constraints imposed by creditors (such as through debt covenants), grantors, contributors, or law or regulations of other governments or constraints imposed by law through constitutional provisions or enabling legislation. Unrestricted net assets This component of net assets consist of net assets that do not meet the definition of restricted or invested in capital assets, net of related debt. In addition, the Statement requires the reporting of capital contributions as a change in net assets, the presentation of the Statement of Cash Flows using the direct method, and the inclusion of Management s Discussion and Analysis (MD&A) that provides an analysis of the Utilities overall financial position and results of operations. Page 26

33 ELECTRICITY, GAS, AND WATER AND WASTEWATER DEPARTMENTS NOTES TO FINANCIAL STATEMENTS JUNE 30, 2007 and 2006 (Continued) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The financial statements of the Utilities are prepared primarily on the accrual basis of accounting, whereby revenues are recognized when earned and expenses are recognized when incurred, with the exception of the accounting for unbilled revenues. The Utilities do not accrue any unbilled revenue from the dates of the most recent meter readings to the balance sheet date. However, revenues are recorded through the complete billing cycle that could include revenues subsequent to the year-end. This policy has been consistently followed and is an accepted accounting treatment followed by public utility systems. The Utilities' proprietary activities apply all applicable GASB pronouncements, as well as all Financial Accounting Standards Board (FASB) Statements and Interpretations, Accounting Principles Board (APB) Opinions, and Accounting Research Bulletins (ARBs) issued on or before November 30, 1989, unless those pronouncements conflict with or contradict GASB pronouncements. Furthermore, the Utilities also apply all FASB statements and Interpretations issued after November 30, 1989, except for those that conflict with or contradict GASB pronouncements. Accounts Receivable Trade: The Electricity department acts as billing and collection agent for other City departments and other county utilities. Inventories: Inventories are presented at the lower of average cost or market on a first-in, first-out basis and are expensed when used. Inventories consist primarily of materials and supplies held for consumption or construction projects. Debt Premiums, Discounts, and Issuance Costs: Debt premiums and discounts, as well as issuance costs, are deferred and amortized over the term of the related debt using the straight-line method. Bonds and warrants payable are reported net of the applicable premium or discount. Debt issuance costs are reported as deferred charges. Prepaid Expenses: Payments made to vendors that will benefit beyond the fiscal year end are recorded as prepaid items using the consumption method by recording a current asset for the prepaid amount and reflecting the expenses in the year in which it is consumed. Cash and Cash Equivalents: For purposes of the statement of cash flows, the Utilities consider all currency, demand deposits, certificates of deposit, and money market accounts with financial institutions and short-term U. S. Government securities to be cash equivalents. Page 27

34 ELECTRICITY, GAS, AND WATER AND WASTEWATER DEPARTMENTS NOTES TO FINANCIAL STATEMENTS JUNE 30, 2007 and 2006 (Continued) NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Revenues and Expenses: Operating revenues and expenses consist of those revenues and expenses that result from the ongoing principal operations of the Utilities. Operating revenues consist primarily of charges for services. Nonoperating revenues and expenses consist of those revenues and expenses that are related to financing and investing types of activities and result from nonexchange transactions or ancillary activities. When an expense is incurred for purposes for which there are both restricted and unrestricted net assets available, it is the Utilities policy to apply those expenses to restricted net assets to the extent such are available and then to unrestricted net assets. Net Assets: Net assets represent the difference between assets and liabilities. Net assets reported as invested in capital assets, net of related debt consists of capital assets, net of accumulated depreciation, reduced by the outstanding balance of any borrowing used for the acquisition, construction, or improvement of those assets. Net assets are reported as restricted when there are limitations imposed on their use either through constitutional provisions or enabling legislation adopted or through external restriction imposed by creditors, grantors, or laws or regulations of other governments. When both restricted and unrestricted resources are available for use, it is the Utilities' policy to use restricted resources first, then unrestricted resources as they are needed. The Utilities have restricted net assets relative to those resources necessary to comply with various covenants of bond financing agreements. Annual and Sick Leave: The Utilities accrue its liability for earned but unpaid annual and sick leave costs. The City s annual leave policy provides for a minimum of five (5) days and a maximum of twenty-one (21) days (Electricity department employees-maximum of twenty-six (26) days) of annual leave to all regular full-time employees, depending on years of service and date of hire and is accrued as a liability at the current rate of pay. The sick leave policy provides that all regular full-time employees earn sick leave at the rate of one and ¼ (1.25) days per month of employment. Sick leave accumulates automatically without limit. After fifteen (15) years of continuous service, accumulated sick leave is accrued as a liability at a rate of one (1) day out of every five (5) days at the current rate of pay. Upon separation of employment for employees with fifteen (15) or more years of service, the City deposits the employee s sick leave accrual into a Post Employment Health Plan (PEHP) account. This monetary benefit is non-taxable to the employee; however, its use is restricted to fund future health insurance premiums. In addition to the sick leave, the Utilities currently contribute $25 per month per employee into a separate PEHP account. Use of these funds is restricted to allowable medical expenses and can only be accessed after termination of employment. Reclassifications: Certain amounts presented in the prior year data have been reclassified in order to be consistent with the current year s presentation. Estimates: The preparation of financial statements in conformity with U.S. 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. Page 28

35 ELECTRICITY, GAS, AND WATER AND WASTEWATER DEPARTMENTS NOTES TO FINANCIAL STATEMENTS JUNE 30, 2007 and 2006 (Continued) NOTE 2 UTILITY PLANT Electricity Department Utility plant is stated at historical cost. Major renewals and betterments, including internal labor cost, are recorded to utility plant, while general routine maintenance and replacements that do not extend the useful life or improve the assets are charged to operations in the period incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which is from 5 to 50 years. Depreciation for the fiscal year 2007 totaled $4,292,144 of which $4,090,647 was charged against income. Amounts applicable to certain transportation equipment, which was allocated to various accounts on the basis of vehicle usage, totaled $201,497 for the year ended June 30, Depreciation for the fiscal year 2006 totaled $4,229,819 of which $4,056,048 was charged against income. Amounts applicable to certain transportation equipment, which was allocated to various accounts on the basis of vehicle usage, totaled $173,771 for the year ended June 30, As of June 30, 2007 and 2006, nondepreciable capital assets consist of land, land rights, and right-ofways in the amount of $1,012,336 and $1,012,336, respectively. A summary of utility plant in service is presented below: Balance Additions and Retirements Balance Beginning and and End of Year Reclassifications Reclassifications of Year Transmission plant $ 26,565,089 $ 154,060 $ 103,945 $ 26,615,204 Distribution plant 85,241,987 2,914, ,556 87,313,516 General plant 13,924,677 1,020,029 2,578,224 12,366,482 Totals $ 125,731,753 $ 4,088,174 $ 3,524,725 $ 126,295,202 Gas Department Utility plant is stated at historical cost. Major renewals and betterments, including internal labor cost, are recorded to utility plant, while general routine maintenance and replacements that do not extend the useful life or improve the assets are charged to operations in the period incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which is from 5 to 50 years. Depreciation expense amounted to $1,414,328 for 2007 and $1,466,340 for As of June 30, 2007 and 2006, nondepreciable capital assets consist of land, land rights, and right-ofways in the amount of $320,554 and $320,476, respectively. A summary of utility plant in service is presented below: Balance Additions and Retirements Balance Beginning and and End of Year Reclassifications Reclassifications of Year Transmission plant $ 9,672,753 $ 1,048 $ 15,102 $ 9,658,699 Distribution plant 32,300, , ,908 33,014,754 General plant 7,239,847 89, ,995 7,148,286 Totals $ 49,213,422 $ 917,322 $ 309,005 $ 49,821,739 Page 29

36 ELECTRICITY, GAS, AND WATER AND WASTEWATER DEPARTMENTS NOTES TO FINANCIAL STATEMENTS JUNE 30, 2007 and 2006 (Continued) NOTE 2 UTILITY PLANT (Continued) During the 2000 fiscal year, the Department performed improvements to the Gate Station purchased in fiscal year 1998 and in doing so retired approximately one-half of the equipment. The Department was able to obtain information on the costs of the original equipment and based on that information, the Department was able to determine the cost of the retirements, and reclassify the difference between the purchase price of the Gate Station and the cost of the equipment. The Department then reclassified from Measuring and Regulating Equipment to the Gas Plant Acquisition Adjustment account, in the amount of $355,373 and also reclassified from Accumulated Depreciation to Accumulated Amortization of Gas Plant Acquisition Adjustment in the amount of $15,992. The Department is amortizing the Acquisition Adjustment over a 33-year period. Current and prior year amortization amounted to $10,661. As of June 30, 2007 and 2006, accumulated amortization amounted to $101,281 and $90,620, respectively. Water and Wastewater Department Utility plant is stated at historical cost. Major renewals and betterments, including internal labor cost, are recorded to utility plant, while general routine maintenance and replacements that do not extend the useful life or improve the assets are charged to operations in the period incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which is from 5 to 75 years. Depreciation expense amounted to $2,505,331 for 2007 and $2,531,689 for As of June 30, 2007 and 2006, nondepreciable capital assets consist of land, land rights, and right-ofways in the amount of $782,889 and $782,889, respectively. A summary of utility plant in service is presented below: Balance Additions and Retirements Balance Beginning and and End of Year Reclassifications Reclassifications of Year Transmission and distribution plant $ 122,285,958 $ 2,853,792 $ $ 125,139,750 General plant 2,847, ,542 66,131 2,985,591 Totals $ 125,133,138 $ 3,058,334 $ 66,131 $ 128,125,341 NOTE 3 RECEIVABLES AND PAYABLES Receivables at June 30, 2007 and 2006 were as follows for each department: Electricity Department Customer accounts $ 8,166,092 $ 8,317,279 Miscellaneous 541, ,794 Secured customer deposits 906, ,006 Accrued rents 219, ,405 Less: allowance for doubtful accounts (224,387) (223,617) Net receivables $ 9,609,302 $ 9,489,867 Page 30

37 ELECTRICITY, GAS, AND WATER AND WASTEWATER DEPARTMENTS NOTES TO FINANCIAL STATEMENTS JUNE 30, 2007 and 2006 (Continued) NOTE 3 RECEIVABLES AND PAYABLES (Continued) Gas Department Customer accounts $ 1,135,384 $ 1,730,545 Miscellaneous 24,098 37,477 Construction project reimbursements 271,302 Less: allowance for doubtful accounts (119,970) (202,941) Net receivables $ 1,039,512 $ 1,836,383 Water and Wastewater Department Customer accounts $ 1,607,076 $ 1,399,233 Miscellaneous 17,464 63,111 Construction project reimbursements 151,673 64,736 Less: allowance for doubtful accounts (99,794) (90,881) Net receivables $ 1,676,419 $ 1,436,199 Payables at June 30, 2007 and 2006 were as follows for each department: Electricity Department Vendors $ 13,199,161 $ 13,076,981 Salaries and benefits 335, ,030 Other governments ,685 Total $ 13,535,812 $ 13,387,696 Gas Department Vendors $ 769,885 $ 1,297,075 Salaries and benefits 106, ,798 Other governments 272, ,745 Total $ 1,148,831 $ 1,688,618 Water and Wastewater Department Vendors $ 319,060 $ 399,355 Salaries and benefits 129, ,096 Other governments 354, ,903 Total $ 802,900 $ 858,354 Page 31

38 ELECTRICITY, GAS, AND WATER AND WASTEWATER DEPARTMENTS NOTES TO FINANCIAL STATEMENTS JUNE 30, 2007 and 2006 (Continued) NOTE 4 STORAGE GAS Gas Department The Department has purchased a volume of gas storage capacity from certain gas suppliers. This gas is purchased in off demand periods during the year and is sold during peak demand periods. Payment for the gas is made when allotted to the storage facility by the supplier. The Department expenses the gas as it is sold and used by customers. At June 30, 2007 and 2006, the Department had $1,682,543 and $2,612,494, respectively, in storage gas that is valued using the weighted average method. NOTE 5 RESTRICTED ASSETS Revenue warrants issued by the Utilities require that certain amounts from debt proceeds and debt service outlays are deposited into restricted funds and that they are used for the specified purposes of those funds. The funds are invested in government securities that are carried at fair market value. Electricity Department A schedule of special funds created for capital construction and debt service by the Series 1999 Warrant Indenture is as follows: Series 1999 Warrant Funds Short-term U. S. Government Securities (Interest yield rate of 4.50% in 2007 and % in 2006) $ 88,291 $ 89,283 Accrued interest receivable Series 1999 Debt Service Reserve Fund Short-term U. S. Government Securities (Interest yield rate of 4.50% in 2007 and % in 2006) 957, ,725 Accrued interest receivable 3,544 3,353 Total restricted cash and cash equivalents $ 1,049,442 $ 1,006,514 Gas Department A schedule of special funds created for capital construction and debt service by the Series 1998 Warrant Indenture is as follows: Series 1998 Warrant Funds Short-term U. S. Government Securities (Interest yield rate of 4.62% in 2007 and % in 2006) $ 41,921 $ 50,543 Accrued interest receivable Series 1998 Debt Service Reserve Fund Short-term U. S. Government Securities (Interest yield rate of 4.62% in 2007 and % in 2006) 478, ,775 Accrued interest receivable 1,772 1,681 Total restricted cash and cash equivalents $ 522,410 $ 509,069 Page 32

39 ELECTRICITY, GAS, AND WATER AND WASTEWATER DEPARTMENTS NOTES TO FINANCIAL STATEMENTS JUNE 30, 2007 and 2006 (Continued) NOTE 5 RESTRICTED ASSETS (Continued) Water and Wastewater Department A schedule of special funds created for capital construction and debt service by the Series 1995 and SRF Warrant Indentures is as follows: Series 1995 Warrant Funds Short-term U.S. Government Securities (Interest yield rate of 4.62% in 2007 and % in 2006) $ 106,417 $ 131,520 Accrued interest receivable 1, Series 1995 Debt Service Reserve Fund Short-term U.S. Government Securities (Interest yield rate of 4.62% in 2007 and % in 2006) 1,292,634 1,262,844 Accrued interest receivable 4,785 4,646 SRF Warrant Funds Short-term U.S. Government Securities (Interest yield rate of 4.50% in 2007 and 4.34% in 2006) 3,194,102 3,133,606 Accrued interest receivable 10,456 10,234 Total restricted cash and cash equivalents $ 4,610,179 $ 4,543,059 NOTE 6 TVA POWER AND CONSERVATION PROGRAMS Electricity Department Conservation Program The Department has entered into a contract with TVA to jointly establish a home energy conservation program that provides eligible customers with arranged financing for home energy conservation improvements. As a part of this contract, the Department is a fiscal intermediary for the conservation loans provided by the program. The Department had at June 30, 2007 and 2006, a total of $3,883,742 and $3,567,947, respectively, of energy conservation loans due from customers participating in the program. These loans are to be repaid in monthly installments by the customer over a 10-year period at an interest rate established by TVA. Under the terms of the contract, as amended, the Department has received advances on these conservation loans in the amount of $4,004,955 and $3,677,227 for the years ended June 30, 2007 and 2006, respectively. Power Programs The Department participates in the TVA Power Invoice Prepayment Program. This program allows the Department to electronically transfer funds, which are nonrefundable, on a weekly basis to be applied to the monthly TVA power invoice. An early payment credit is computed on a daily basis at a rate established monthly by TVA and is added to the prepayment account. This rate has been slightly higher than the interest rate currently earned on temporary cash investments with local banks. The prepayment balances of $7,279,852 and $7,226,947 as of June 30, 2007 and 2006, respectively, are reflected as prepayments in the financial statements. Page 33

40 ELECTRICITY, GAS, AND WATER AND WASTEWATER DEPARTMENTS NOTES TO FINANCIAL STATEMENTS JUNE 30, 2007 and 2006 (Continued) NOTE 6 TVA POWER AND CONSERVATION PROGRAMS (Continued) The Department has entered into two (2) agreements with TVA under the Discounted Energy Units Program. The program entitles the Department to receive a discount of 2.5 cents per kwh on monthly contract volume of 217,500 kwh for a period of 10 years with the discount being applied to the monthly power invoice. The Department recorded the initial contract investments of $500,000 and $500,000 together with deferred interest income of $152,500 and $143,500 as deferred assets with an offsetting deferred liability for the interest income portion of the agreement. As of June 30, 2007, the balance of the investments was $777,150 with $647,550 reported as noncurrent prepaid purchased power and $129,600 reported as current. The balance of the deferred interest income was $177,150 with $147,550 reported as noncurrent deferred interest income and $29,600 as current. As of June 30, 2006, the balance of the investments was $906,750 with $777,150 reported as noncurrent prepaid purchased power and $129,600 reported as current. The balance of the deferred interest income was $206,750 with $177,150 reported as noncurrent deferred interest income and $29,600 as current. NOTE 7 LONG-TERM OBLIGATIONS Electricity Department Long-term liability activity for the year ended June 30, 2007 was as follows: Electric Revenue Warrants, Series 1999 Balance beginning of the year $ 8,460,000 Less: Principal paid on capital debt 475,000 Balance end of the year $ 7,985,000 On July 8, 1999, the City of Florence, Alabama issued Electric Revenue Warrants, Series 1999 in the amount of $11,280,000 with interest rates ranging from 4.10% to 5.25% for capital improvements including the construction of electrical substations, construction of administrative offices at the warehouse, and replacement of underground high voltage cable. The net revenues of the system are irrevocably pledged for payment of the principal and interest of the warrants. Principal is payable annually on June 1. Interest is payable semi-annually on each June 1 and December 1. The Series 1999 Warrants with stated maturities on June 1, 2010 and thereafter will be subject to prior optional redemption, in whole or in part in $5,000 multiples on June 1, 2009 or on any date thereafter, at the following applicable redemption price for each such warrant to be redeemed plus accrued interest thereon to the date fixed for redemption: Optional Redemption Redemption Periods Price June 1, 2009 through May 31, % June 1, 2010 and thereafter 100% Page 34

41 ELECTRICITY, GAS, AND WATER AND WASTEWATER DEPARTMENTS NOTES TO FINANCIAL STATEMENTS JUNE 30, 2007 and 2006 (Continued) NOTE 7 LONG-TERM OBLIGATIONS (Continued) The Series 1999 Warrants maturing on June 1, 2019 are required to be redeemed on June 1, 2015 and on each June 1 thereafter in the following principal amounts at a redemption price equal to the principal amount thereof plus accrued interest thereon: Principal Amount to be Mandatorily Year Redeemed 2015 $ 705, , , ,000 Debt service over the remaining term of the warrants is summarized as follows: Principal Maturities and Scheduled Fiscal Year Mandatory Ending Redemption Interest Total Debt June 30 Payments Payable Service 2008 $ 500,000 $ 411,733 $ 911, , , , , , , , , , , , , ,535,000 1,017,454 4,552, ,690, ,138 1,824,138 Totals $ 7,985,000 $ 2,949,217 $ 10,934,217 Less: portion due within one year 500,000 Long-term debt at June 30, 2007 $ 7,485,000 Page 35

42 ELECTRICITY, GAS, AND WATER AND WASTEWATER DEPARTMENTS NOTES TO FINANCIAL STATEMENTS JUNE 30, 2007 and 2006 (Continued) NOTE 7 LONG-TERM OBLIGATIONS (Continued) Gas Department Long-term liability activity for the year ended June 30, 2007 was as follows: Natural Gas Revenue Warrants, Series 1998 Natural Gas Revenue Warrants, Series 2003 Total Balance beginning of the year $ 4,075,000 $ $ 4,075,000 Less: Principal paid on debt 265, ,000 Balance end of the year $ 3,810,000 $ - $ 3,810,000 The Department issued Natural Gas System Revenue Taxable Warrants, Series 2003, on April 30, 2003 in the amount of $3,000,000 to purchase storage gas during off-peak periods. These warrants are issued under a line of credit agreement with Bank Independent. Proceeds of the loan will be advanced as requested by the Department. The revenues of the system are pledged for payment of the principal and interest of these warrants. Interest is payable semi-annually on each July 15 and January 15 until maturity at a rate of 4.99%. The entire outstanding principal balance of these warrants is due on July 15, As of June 30, 2007 and 2006, the Department had no advances outstanding. On November 1, 1998, the Department issued Natural Gas Revenue Warrants, Series 1998 in the amount of $5,650,000 with interest rates ranging from 3.60% to 4.90% for capital improvements and castiron replacement within the system. The net revenues of the system are irrevocably pledged for payment of the principal and interest of the warrants. Principal is payable annually on June 1. Interest is payable semi-annually on each June 1 and December 1. The Series 1998 Warrants with stated maturities on June 1, 2009 and thereafter will be subject to prior optional redemption, in whole or in part in $5,000 multiples on June 1, 2008 or on any date thereafter at the following applicable redemption price for each such warrant to be redeemed plus accrued interest thereon to the date fixed for redemption: Optional Redemption Redemption Periods Price June 1, 2008 through May 31, % June 1, 2009 through May 31, % June 1, 2010 and thereafter 100% Page 36

43 ELECTRICITY, GAS, AND WATER AND WASTEWATER DEPARTMENTS NOTES TO FINANCIAL STATEMENTS JUNE 30, 2007 and 2006 (Continued) NOTE 7 LONG-TERM OBLIGATIONS (Continued) The Series 1998 Warrants maturing on June 1, 2018 are required to be redeemed as a mandatory sinking fund redemption on June 1, 2014 and on each June 1 thereafter in the following principal amounts at a redemption price equal to the principal amount thereof plus accrued interest thereon: Principal Amount to be Mandatorily Year Redeemed 2014 $ 360, , , ,000 Debt service over the remaining term of the warrants is summarized as follows: Principal Maturities and Scheduled Fiscal Year Mandatory Ending Redemption Interest Total Debt June 30 Payments Payable Service 2008 $ 275,000 $ 177,385 $ 452, , , , , , , , , , , , , ,880, ,490 2,270, ,000 21, ,315 Totals $ 3,810,000 $ 1,176,325 $ 4,986,325 Less: portion due within one year 275,000 Long-term debt at J une 30, 2007 $ 3,535,000 Page 37

44 NOTE 7 LONG-TERM OBLIGATIONS (Continued) CITY OF FLORENCE, ALABAMA ELECTRICITY, GAS, AND WATER AND WASTEWATER DEPARTMENTS NOTES TO FINANCIAL STATEMENTS JUNE 30, 2007 and 2006 (Continued) Water and Wastewater Department Long-term liability activity for the year ended June 30, 2007 was as follows: Water Water Water Water Water Water and Sewer and Sewer and Sewer and Sewer and Sewer and Sewer Revenue Revenue Revenue Revenue Revenue Revenue Warrants, Warrants, SRF Warrants, SRF Warrants, SRF Warrants, SRF Warrants, SRF Series 1995 Series 1998 Series 1999 Series 1999B Series 2000 Series 2006 Total Balance beginning of the year $ 5,890,000 $ 17,775,000 $ 17,240,000 $ 4,310,000 $ 10,490,000 $ 593,626 $ 56,298,626 Add: Proceeds from capital debt 1,962,230 1,962,230 Less: Principal paid on capital debt 940, , , , ,000 3,475,000 Balance end of the year $ 4,950,000 $ 16,875,000 $ 16,350,000 $ 4,090,000 $ 9,965,000 $ 2,555,856 $ 54,785,856 Page 38

45 ELECTRICITY, GAS, AND WATER AND WASTEWATER DEPARTMENTS NOTES TO FINANCIAL STATEMENTS JUNE 30, 2007 and 2006 (Continued) NOTE 7 LONG-TERM OBLIGATIONS (Continued) The Department issued Water and Sewer Revenue Warrants, Series 1995, dated November 1, 1995 in the amount of $13,470,000 with interest rates ranging from 3.500% to 5.625%. The warrants were issued for capital improvements to the Cypress Creek water treatment facility and to its wastewater system; advance refunding of the Water and Sewer Revenue Bonds, Series 1988, dated December 1, 1988, and advance refunding of the Water Revenue Bonds, Series A, dated May 1, 1988 (the Killen Bonds ). The net revenues of the system are irrevocably pledged for payment of the principal and interest of these warrants. Principal and interest is payable semi-annually on each June 1 and December 1. The warrants with stated maturities on December 1, 2006 and thereafter will be subject to prior optional redemption in whole or in part in $5,000 multiples on June 1, 2006 or on any date thereafter at the following applicable redemption price for each such warrant to be redeemed plus accrued interest thereon to the date fixed for redemption: Optional Redemption Redemption Periods Price June 1, 2006 through May 31, % June 1, 2007 and thereafter 100% The Department issued Water and Sewer Revenue Warrants, SRF Series 1998, dated January 27, 1998 in the amount of $21,795,000 bearing an interest rate of 3.75%. The warrants were issued for capital improvements to the Cypress Creek wastewater treatment facility and the Sweetwater Creek Interceptor projects. The warrants were issued under the State of Alabama Revolving Fund (SRF) and are administered jointly by the Alabama Water Pollution Control Authority (AWPCA) and the Alabama Department of Environmental Management (ADEM). The revenues of the system are pledged for payment of the principal and interest of these Warrants and were issued in parity with the Series 1995 Revenue Warrants. Interest accrued on the warrants until September 1, 2000 and the Department, as a part of the capital projects, capitalized that interest. Principal is payable annually on August 15. Interest is payable semi-annually on each February 15 and August 15. The Department issued Water and Sewer Revenue Warrants, SRF Series 1999, dated December 23, 1998 in the amount of $21,250,000 bearing an interest rate of 3.50%. The warrants were issued for capital improvements to the Cypress Creek wastewater treatment facility and the Sweetwater Creek Interceptor projects. The warrants were issued under the SRF and are administered jointly by the AWPCA and ADEM. The revenues of the system are pledged for payment of the principal and interest of these Warrants and were issued in parity with the Series 1995 and 1998 Revenue Warrants. Interest accrued on the warrants until September 1, 2000 and the Department, as a part of the capital projects, capitalized that interest. Principal is payable annually on August 15. Interest is payable semi-annually on each February 15 and August 15. The Department issued Water and Sewer Revenue Warrants, SRF Series 1999B, dated December 23, 1998, on October 19, 1999 in the amount of $5,310,000 bearing an interest rate of 3.50%. The warrants were issued for capital improvements to the Cypress Creek wastewater treatment facility. The warrants were issued under the SRF and are administered jointly by the AWPCA and ADEM. The revenues of the system are pledged for payment of the principal and interest of these Warrants and were issued in parity with the Series 1995 and 1998 Revenue Warrants. Interest accrued on the warrants until September 1, 2000 and the Department, as a part of the capital projects, capitalized that interest. Principal is payable annually on August 15. Interest is payable semi-annually on each February 15 and August 15. Page 39

46 ELECTRICITY, GAS, AND WATER AND WASTEWATER DEPARTMENTS NOTES TO FINANCIAL STATEMENTS JUNE 30, 2007 and 2006 (Continued) NOTE 7 LONG-TERM OBLIGATIONS (Continued) The Department issued Water and Sewer Revenue Warrants, SRF Series 2000, dated December 22, 1999 in the amount of $12,835,000 bearing an interest rate of 3.85%. The warrants were issued for capital improvements to the Cypress Creek wastewater treatment facility and the River Interceptor projects. The warrants were issued under the SRF and are administered jointly by the AWPCA and ADEM. The revenues of the system are pledged for payment of the principal and interest of these Warrants and were issued in parity with the Series 1995 and 1998 Revenue Warrants. Interest accrued on the warrants until September 1, 2000 and the Department, as a part of the capital projects, capitalized that interest. Principal is payable annually on August 15. Interest is payable semi-annually on each February 15 and August 15. The Department issued Water and Sewer Revenue Warrants, SRF Series 2006, dated January 15, 2006 in the amount of $4,030,000 bearing an interest rate of 3.25%. The warrants were issued for constructing wastewater treatment and related facilities in connection with the sanitary sewer system. The warrants were issued under the SRF and are administered jointly by the AWPCA and ADEM. The revenues of the system are pledged for payment of the principal and interest of these Warrants. Interest in the amount of $125,185 has been accrued on the warrants until August 15, 2007 and the Department, as a part of the capital projects, capitalized that interest. Principal is payable annually beginning on February 15, Interest is payable semi-annually on each February 15 and August 15 beginning in August As of June 30, 2007, the remaining balance of the warrants to be requested from ADEM was $1,474,144. Debt service over the remaining term of the warrants is summarized as follows: Principal Maturities and Scheduled Fiscal Year Mandatory Ending Redemption Interest Total Debt June 30 Payments Payable Service 2008 $ 3,770,000 $ 2,051,698 $ 5,821, ,935,000 1,919,691 5,854, ,100,000 1,752,830 5,852, ,275,000 1,578,584 5,853, ,825,000 1,396,763 5,221, ,950,000 5,020,838 22,970, ,140,000 1,516,948 18,656, ,265, ,100 1,391,100 Totals $ 56,260,000 $ 15,363,452 $ 71,623,452 Less: Portion due within one year 3,770,000 Amount of SRF funds available for disbursement 1,474,144 Long-term debt at June 30, 2007 $ 51,015,856 Page 40

47 ELECTRICITY, GAS, AND WATER AND WASTEWATER DEPARTMENTS NOTES TO FINANCIAL STATEMENTS JUNE 30, 2007 and 2006 (Continued) NOTE 8 PENSION AND DEFERRED COMPENSATION PLANS Pension Plan Plan Description The City of Florence, Alabama Employees Retirement Plan is a single-employer defined benefit pension plan administered by General American Life Insurance Company of St. Louis (a subsidiary of MetLife) providing retirement benefits to plan members. The latest City of Florence Employees Retirement Plan Actuarial Valuation Report can be obtained by contacting the City Clerk. Funding Policy The contribution requirements for plan members is 2.56% of the first $350 of monthly earnings (excluding overtime pay) plus 5.12% of monthly earnings in excess of $350. Employer contributions are based on employee contributions using a factor of Annual Pension Cost and Net Pension Obligation The City s annual pension cost and net pension obligation to the Plan for the latest actuarial valuation period were as follows: Annual required contribution $ 3,429,592 Interest on net pension obligation (71,855) Adjustment to annual required contribution (119,534) Annual pension cost $ 3,238,203 Contributions made 3,187,574 Increase (decrease) in net pension obligation $ 50,629 Net pension obligation, October 1, 2005 (958,066) Net pension obligation, October 1, 2006 $ (907,437) The annual required contribution for the year was determined as part of the October 1, 2005 actuarial valuation using the entry age normal cost actuarial method with frozen initial liability. The actuarial assumptions included (a) 7.5% investment rate of return, and (b) included a salary increase component of 3.5%. The assumptions did not include postretirement benefit increases. The unfunded actuarial liability is being amortized as a level dollar amount. The remaining amortization period at October 1, 2005 was seventeen (17) years. Three-Year Trend Information Fiscal Annual Percentage Net Year Pension of APC Pension Ended Cost (APC) Contributed Obligation October 1, 2006 $ 3,238, % $ (907,437) October 1, ,250, % (958,066) October 1, ,175, % (1,145,572) Schedule of Funding Progress Accrued UAAL as a Actuarial Actuarial Liability (AAL) Unfunded Percentage Valuation Value of Frozen AAL Funded Covered of Covered Date Assets Entry Age (UAAL) Ratio Payroll Payroll October 1, 2006 $ 61,149,457 $ 72,170,897 $ 11,021, % $ 24,300, % October 1, ,190,319 68,736,219 13,545, % 23,418, % October 1, ,258,655 64,217,861 14,959, % 22,840, % Page 41

48 ELECTRICITY, GAS, AND WATER AND WASTEWATER DEPARTMENTS NOTES TO FINANCIAL STATEMENTS JUNE 30, 2007 and 2006 (Continued) NOTE 8 PENSION AND DEFERRED COMPENSATION PLANS (Continued) Deferred Compensation Plan The City offers its employees a deferred compensation plan created in accordance with Internal Revenue Code Section 457. The plan, available to all City employees, permits them to defer a portion of their salary until future years. Participation in the plan is optional. The deferred compensation is not available to employees until termination, retirement, death, or unforeseeable emergency. As required by Federal regulations, these plan assets are held in trust for the exclusive benefit of participants and their beneficiaries. The City has no fiduciary relationship with the trust. In accordance with the provisions of GASB Statement No. 32, Accounting and Financial Reporting for Internal Revenue Code Section 457 Deferred Compensation Plans, the plan assets are not reported in the City s financial statements. NOTE 9 RISK MANAGEMENT The City s risk management activities are accounted for through three (3) self-insurance funds. The purpose of these funds is to administer employee health, property and liability, and workers compensation insurance programs of the City on a cost-reimbursement basis. These funds account for the risk financing activities of the City but do not constitute a transfer of risk from the City. The City retains risk of loss on the employee health, property and liability, and a portion of workers compensation insurance. For the insured portion of workers compensation insurance, there have been no reductions in insurance coverage. Settlement amounts have not exceeded insurance coverage for the current year or the three prior years. Additional information related to the self-insurance funds can be requested from the City s Insurance department. The Utilities remit payments to these self-insurance funds and any liability resulting to the Utilities will be paid from these funds. NOTE 10 POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS In addition to the pension benefits previously discussed, the City provides postretirement health and life insurance benefits, in accordance with City resolution, to retirees for a maximum of three years or until age 65, whichever occurs first. These benefits are also provided to those employees with 30 years of credited service who retire between the ages of 57 and 62. The benefits are financed on the pay-as-yougo method (i.e. expense is recognized when paid). The amount of benefits paid and the number of participants are as follows: Amount Participants Amount Participants Electricity $ 67, $ 84, Gas $ 9,753 3 $ 7,125 3 Water and wastewater $ 3,184 1 $ 1,968 1 Page 42

49 ELECTRICITY, GAS, AND WATER AND WASTEWATER DEPARTMENTS NOTES TO FINANCIAL STATEMENTS JUNE 30, 2007 and 2006 (Continued) NOTE 11 LEASE COMMITMENTS Electricity Department The Department entered into a "Use Facilities" lease with TVA on April 21, This lease provides the Department with the use of facilities located in the Wilson Hydro Area. The lease shall continue in effect for the term of the Power Contract dated July 6, 1966, between TVA and the City of Florence and shall include any extension, renewal, or replacement thereof. The Department is on a five (5) year rolling Power Contract. Therefore, the future minimum lease payments will always be five (5) years until the Department informs TVA of its intent to cancel the contract. The monthly charge has been recomputed to be $20,289, effective on December 1, The future minimum annual rental payments for the succeeding five (5) years are as follows: NOTE 12 DEPOSITS AND INVESTMENTS Fiscal Year Ending Amount 2008 $ 243, , , , ,468 Total $ 1,217,340 On April 17, 2007, the City adopted an investment policy to formalize the framework for the City's investment activities. The policy generally limits its investments to non-negotiable certificates of deposit. For the Electricity Department, the policy allows funds to be invested in the TVA Prepaid Power Program and the TVA Discounted Energy Unit Program. Under the terms of bond indentures, the Utilities are required to deposit into certain bond funds for debt service. These investments are governed by the bond indenture, held by the paying agent as required under the indenture, and are invested in U. S. Government securities. The custodial credit risk for deposits is the risk that, in the event of a bank failure, the Utilities will not be able to cover deposits or will not be able to recover collateral securities that are in the possession of an outside party. The Utilities' deposits at year-end 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 Depository 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. Page 43

50 ELECTRICITY, GAS, AND WATER AND WASTEWATER DEPARTMENTS NOTES TO FINANCIAL STATEMENTS JUNE 30, 2007 and 2006 (Continued) NOTE 13 CONTINGENCIES AND COMMITMENTS The Utilities are party to certain legal actions arising in the ordinary course of business. In management s opinion, the Utilities have adequate insurance coverage and/or legal defenses, if needed, and do not believe that they will materially affect the Utilities operations or financial position. Amounts received or receivable from grantor agencies are subject to audit and adjustment by grantor agencies. Any disallowed claims, including amounts already collected, may constitute a liability of the applicable funds or the general fund. The amount, if any, which may be disallowed by the grantor, cannot be determined at this time although the Utilities expect such amounts to be immaterial. Electricity Department In prior years, the Department has advanced refunded various debt issues by irrevocably depositing funds into escrow accounts to provide for the retirement of principal and interest of these issues. These funds consist of essentially risk-free investments in U.S. Government securities. A portion of the debt was loaned from the U.S. Department of Agriculture Rural Utilities Service. The outstanding balance of these defeased debt issues at June 30, 2007 and 2006 was $210,000 and $5,607,000, respectively. The Department enters into agreements with contractors for the construction and expansion of the system and for system maintenance. As of June 30, 2007, open contracts for construction totaled $86,199 of which $0 had been recorded as construction in progress. As of June 30, 2007, open contracts for system maintenance totaled $2,387,448 of which $780,417 had been recorded as current maintenance expense. As of June 30, 2006, open contracts for system maintenance totaled $960,505 of which $304,614 had been recorded as current maintenance expense. Gas Department The Department entered into an agreement with two (2) energy suppliers to purchase natural gas in the futures market. This agreement allows the Department to purchase gas at current rates for delivery at a future time. If the quantities of gas purchased are not needed for resale during the month for which it was purchased, the Department could transport the gas to its storage facilities, or the Agreement allows the suppliers to re-purchase the gas at market price. Thus, management does not believe that the risk of loss from the purchase commitment would materially affect the Department s operations or financial position. As of June 30, 2007 and 2006, the Department had made purchase commitments amounting to $2,491,178 and $7,718,452, respectively, for the subsequent fiscal year's gas needs. Water and Wastewater Department In prior years, the Department has advanced refunded various bond issues by irrevocably depositing funds into escrow accounts to provide for the retirement of principal and interest of these issues. These funds consist of essentially risk-free investments in U.S. Government securities. The outstanding balance of these defeased debts at June 30, 2007 and 2006 was $3,275,000. The Department enters into agreements with contractors for the construction and expansion of the system. As of June 30, 2007, open contracts for construction totaled $2,041,438 of which $473,969 had been recorded as construction in progress. As of June 30, 2007, open contracts for system maintenance totaled $145,636 of which $72,075 had been recorded as current maintenance expense. As of June 30, 2006, open contracts for construction totaled $1,700,856 of which $898,620 had been recorded as construction in progress. Page 44

51 ELECTRICITY, GAS, AND WATER AND WASTEWATER DEPARTMENTS NOTES TO FINANCIAL STATEMENTS JUNE 30, 2007 and 2006 (Continued) NOTE 14 SUBSEQUENT EVENT Water and Wastewater Department The Department intends to issue Water and Sewer Revenue Warrants under the State of Alabama Revolving Fund in the approximate amount of $9,000,000. These warrants will be used to construct wastewater treatment and related facilities in connection with the sanitary sewer system. Page 45

52 REQUIRED SUPPLEMENTARY INFORMATION

53 ELECTRICITY DEPARTMENT SCHEDULE OF REVENUES, EXPENSES, AND CHANGES IN FUND NET ASSETS BUDGET AND ACTUAL (GAAP BUDGETARY BASIS) FOR THE YEAR ENDED JUNE 30, 2007 Actual Variance with Amounts Final Budget - Budgeted Amounts (Budgetary Positive Original Final Basis) (Negative) Operating revenues: Electric sales: Residential $ 49,175,000 $ 48,061,200 $ 50,206,984 $ 2,145,784 Small commercial 9,440,000 9,232,900 9,297,321 64,421 Large commercial 35,715,000 34,791,000 33,189,290 (1,601,710) Public street and highway lighting 1,622,000 1,589,100 1,624,531 35,431 Forfeited discounts 817, , ,061 (3,939) Rents 565, , ,915 54,915 Other operating revenues 665, , ,540 (36,460) Total operating revenues $ 97,999,000 $ 95,721,200 $ 96,379,642 $ 658,442 Operating expenses: Costs of sales $ 78,600,000 $ 76,318,800 $ 77,106,081 $ 787,281 Operations: Transmission 370, , ,646 4,146 Distribution 2,350,100 2,402,300 2,421,446 19,146 Customer accounts 1,437,100 1,483,800 1,534,708 50,908 Customer service and information assistance and instruction 54,000 55,600 57,755 2,155 Sales 81,000 81,000 68,106 (12,894) Administrative and general 2,965,000 2,984,800 2,807,905 (176,895) Maintenance: Transmission 348, , ,302 (65,898) Distribution 2,861,800 2,890,100 2,939,317 49,217 Administrative and general 253, , ,872 66,572 Depreciation 4,200,000 4,200,000 4,090,647 (109,353) Taxes and tax equivalents 2,839,700 2,839,700 2,805,650 (34,050) Total operating expenses $ 96,360,700 $ 94,246,100 $ 94,826,435 $ 580,335 Operating income $ 1,638,300 $ 1,475,100 $ 1,553,207 $ 78,107 Nonoperating revenues (expenses): Interest revenues $ 300,000 $ 442,300 $ 488,108 $ 45,808 Merchandising revenues (net of costs) 117, , ,631 53,631 Interest expense (432,700) (432,700) (432,632) 68 Amortization of debt discount and costs (19,100) (19,100) (19,021) 79 Total nonoperating revenues (expenses) $ (34,300) $ 105,500 $ 205,086 $ 99,586 Change in net assets $ 1,604,000 $ 1,580,600 $ 1,758,293 $ 177,693 Total net assets beginning 61,836,309 61,836,309 61,836,309 Total net assets ending $ 63,440,309 $ 63,416,909 $ 63,594,602 $ 177,693 Page 46

54 GAS DEPARTMENT SCHEDULE OF REVENUES, EXPENSES, AND CHANGES IN FUND NET ASSETS BUDGET AND ACTUAL (GAAP BUDGETARY BASIS) FOR THE YEAR ENDED JUNE 30, 2007 Actual Variance with Amounts Final Budget - Budgeted Amounts (Budgetary Positive Original Final Basis) (Negative) Operating revenues: Gas sales: Residential $ 9,670,000 $ 9,670,000 $ 9,788,622 $ 118,622 Commercial 6,000,000 5,810,000 5,868,985 58,985 Industrial 14,070,000 9,445,000 9,537,907 92,907 Resale and transportation 2,800,000 2,775,000 2,605,350 (169,650) Service fees 90,000 90,000 87,366 (2,634) Forfeited discounts 130, , ,826 12,826 Other operating revenues 13,600 13,600 11,754 (1,846) Total operating revenues $ 32,773,600 $ 27,933,600 $ 28,042,810 $ 109,210 Operating expenses: Costs of sales $ 24,980,000 $ 19,845,000 $ 18,714,185 $ (1,130,815) Operations: Transmission 80,800 83, ,099 57,599 Distribution 321, , ,248 22,948 Customer accounts 572, , ,701 (84,799) Sales 48,500 48,500 55,429 6,929 Administrative and general 1,376,600 1,386,700 1,462,846 76,146 Maintenance: Transmission 1,800 1,800 1,405 (395) Distribution 1,418,800 1,458,700 1,595, ,264 Administrative and general 29,100 29,100 25,478 (3,622) Depreciation 1,525,000 1,475,000 1,414,328 (60,672) Amortization of acquisition adjustment 10,700 10,700 10,661 (39) Taxes and tax equivalents 1,620,800 1,620,800 1,607,915 (12,885) Total operating expenses $ 31,985,700 $ 26,940,600 $ 25,948,259 $ (992,341) Operating income $ 787,900 $ 993,000 $ 2,094,551 $ 1,101,551 Nonoperating revenues (expenses): Interest revenues $ 80,000 $ 97,000 $ 168,424 $ 71,424 Gain on disposition of assets 2,500 2,500 1,971 (529) Miscellaneous nonoperating income 2,000 2,000 5,286 3,286 Interest expense (192,400) (192,400) (187,345) 5,055 Amortization of debt discount and costs (9,600) (9,600) (9,543) 57 Total nonoperating revenues (expenses) $ (117,500) $ (100,500) $ (21,207) $ 79,293 Change in net assets $ 670,400 $ 892,500 $ 2,073,344 $ 1,180,844 Total net assets beginning 36,254,730 36,254,730 36,254,730 Total net assets ending $ 36,925,130 $ 37,147,230 $ 38,328,074 $ 1,180,844 Page 47

55 WATER AND WASTEWATER DEPARTMENT SCHEDULE OF REVENUES, EXPENSES, AND CHANGES IN FUND NET ASSETS BUDGET AND ACTUAL (GAAP BUDGETARY BASIS) FOR THE YEAR ENDED JUNE 30, 2007 Actual Variance with Amounts Final Budget - Budgeted Amounts (Budgetary Positive Original Final Basis) (Negative) Operating revenues: Water sales: Residential $ 4,974,500 $ 4,974,500 $ 5,336,492 $ 361,992 Commercial 2,596,600 2,596,600 2,815, ,070 Resale 1,419,700 1,419,700 1,564, ,338 Sewer service sales: Residential 2,756,000 2,756,000 2,923, ,856 Commercial 3,288,300 3,288,300 3,118,024 (170,276) Forfeited discounts 104, , ,906 17,006 Other operating revenues 95,360 95, , ,419 Total operating revenues $ 15,235,360 $ 15,235,360 $ 16,137,765 $ 902,405 Operating expenses: Water treatment and pumping $ 2,239,390 $ 2,253,990 $ 2,475,556 $ 221,566 Sewage disposal 1,681,700 1,694,100 1,791,393 97,293 Transmission and distribution 1,061,900 1,074,900 1,109,578 34,678 Accounting and collections 881, ,914 1,011, ,228 Administrative and general 1,598,765 1,606,965 2,175, ,938 Depreciation 2,527,100 2,527,100 2,505,331 (21,769) Taxes and tax equivalents 1,573,920 1,573,920 1,375,226 (198,694) Total operating expenses $ 11,563,789 $ 11,626,889 $ 12,444,129 $ 817,240 Operating income $ 3,671,571 $ 3,608,471 $ 3,693,636 $ 85,165 Nonoperating revenues (expenses): Interest revenues $ 250,700 $ 275,700 $ 460,130 $ 184,430 Gain (loss) on disposition of assets 8,176 8,176 Interest expense (2,152,100) (2,152,100) (2,078,916) 73,184 Amortization of debt discount and costs (67,900) (67,900) (57,833) 10,067 Total nonoperating revenues (expenses) $ (1,969,300) $ (1,944,300) $ (1,668,443) $ 275,857 Change in net assets $ 1,702,271 $ 1,664,171 $ 2,025,193 $ 361,022 Total net assets beginning 51,227,271 51,227,271 51,227,271 Total net assets ending $ 52,929,542 $ 52,891,442 $ 53,252,464 $ 361,022 Page 48

56 SUPPLEMENTARY SCHEDULES

57 ELECTRICITY, GAS, AND WATER AND WASTEWATER DEPARTMENT SOURCE OF FUNDS JUNE 30, % 2% ELECTRICITY Residential 34% Small commercial Large commercial 52% Public street and highway lighting Other operating revenues 10% 9% 1% GAS 34% 35% Residential Commercial Industrial Resale and transportation Other operating revenues 21% WATER AND WASTEWATER 2% 18% 19% 34% Residential water sales Commercial water sales Resale water sales Residential sewer service sales Commercial sewer service sales Other operating revenues 10% 17% Percentages in graphs may not add up to 100 percent due to rounding. Page 49

58 ELECTRICITY, GAS, AND WATER AND WASTEWATER DEPARTMENT USE OF FUNDS JUNE 30, % 4% 3% ELECTRICITY 8% Costs of sales Operations Maintenance Depreciation Taxes and tax equivalents 81% 5% 6% GAS 6% Costs of sales 10% Operations Maintenance Depreciation and amortization 73% Taxes and tax equivalents WATER AND WASTEWATER 11% 21% 20% 14% Water treatment and pumping Sewage disposal Transmission and distribution Accounting and collections Administrative and general Depreciation Taxes and tax equivalents 17% 8% 9% Percentages in graphs may not add up to 100 percent due to rounding. Page 50