AUDITED FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION MUNICIPAL UTILITIES BOARD OF THE CITY OF ALBERTVILLE ELECTRIC SYSTEM ALBERTVILLE, ALABAMA

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1 AUDITED FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION MUNICIPAL UTILITIES BOARD OF THE CITY OF ALBERTVILLE ELECTRIC SYSTEM ALBERTVILLE, ALABAMA June 30, 2017 and 2016

2 TABLE OF CONTENTS PAGE INDEPENDENT AUDITORS REPORT... 1 MANAGEMENT S DISCUSSION AND ANALYSIS... 3 FINANCIAL STATEMENTS: Statements of Net Position Statements of Revenues, Expenses and Changes in Net Position Statements of Cash Flows NOTES TO FINANCIAL STATEMENTS REQUIRED SUPPLEMENTARY INFORMATION OTHER THAN MD&A Schedule of Proportionate Share of the Net Pension Liability Schedule of Employer Contributions SUPPLEMENTARY INFORMATION Schedules of Operating Expense Schedules of Operating Statistics... 40

3 JFNB JOHNSON, FEIGLEY, NEWTON and BRAND, LLP Accounting, Auditing & Consulting H. Joe Johnson, CPA ( ) INDEPENDENT AUDITORS' REPORT George W. Feigley, CPA J. Gail Newton, Partner Michael L. Brand, CPA Board Members The Municipal Utilities Board of the City of Albertville - Electric System Albertville, Alabama Report on the Financial Statements We have audited the accompanying financial statements of the business-type activities of the Municipal Utilities Board of the City of Albertville - Electric System, as of and for the year ended June 30, 2017, and the related notes to the financial statements, which collectively comprise the Board's basic financial statements as listed in the table of contents. Ma11age111e111's Re.;po11sibility for the Fi11a11cial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that arc free from material misstatement, whether due to fraud or error. Auditor's Respo11sibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opi11io11s In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, each major fund, and the aggregate remaining fund information of the Municipal Utilities Board of the City of Albertville - Electric System, as of June 30, 2017, and the respective changes in financial position thereof, for the year then ended in accordance with accounting principles generally accepted in the United States of America. 106 W. Washington Street Post Office Box 876 Athens, Alabama S56H Athens Decatur Wats 800.6S5.81S4 Fax 266.2SS.7267

4 Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management s discussion and analysis on pages 3 9 and the pension schedules on pages be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the Municipal Utilities Board of the City of Albertville Electric System s basic financial statements. The schedules of operating expense and statistical section are presented for purposes of additional analysis and are not a required part of the basic financial statements. The schedules of operating expense are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the schedules of operating expense are fairly stated in all material respects in relation to the basic financial statements as a whole. The statistical section has not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we do not express an opinion or provide any assurance on it. Comparative Statements The financial statements for the prior period were audited by a predecessor auditor. The predecessor auditor issued an unqualified opinion on the financial statements as of and for the year ended June 30, 2016 and the date of the auditor s report was October 25, Emphasis of Matter As discussed in Note 1, the financial statements of the Municipal Utilities Board of the City of Albertville Electric System, are intended to present the financial position, the changes in financial position and cash flows of only that portion of the business-type activities attributable to the transactions of the Electric System. The do not purport to, and do not present fairly the financial position of the Municipal Utilities Board of the City of Albertville, as a whole, as of June 30, 2017 and 2016, the changes in its financial position and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter. Johnson, Feigley, Newton & Brand, LLP October 20, 2017

5 MANAGEMENT S DISCUSSION AND ANALYSIS (MD&A) The MD&A represents management s examination and analysis of the Electric System s financial condition and performance for the years ending June 30, 2017 and This information should be read in conjunction with the financial statements. USING THIS ANNUAL REPORT This annual report consists of a series of financial statements. These financial statements report information about the Electric System using full accrual accounting methods as well as accounting procedures as outlined by the Federal Energy Regulatory Commission in the Uniform System of Accounts prescribed for Public Utilities and Licensees and with the provisions of its Power contract with the Tennessee Valley Authority. The Municipal Utilities Board (MUB) was reorganized and incorporated on May 15, 2013, under Article 9, Chapter 50, Title 11 (Sections et seq.) of the Code of Alabama (1975). Prior to May, 2013, MUB operated within the confines of an Act of the Alabama Legislature passed in While operating under the 1943 Act, MUB was organized as an entity of the City of Albertville and the City had to issue all debt for MUB. The new form of organization allows MUB to issue its own debt. The three member Board of Directors of MUB (appointed by the City Council of Albertville) was given complete control of the public utilities in the City of Albertville. In addition to the Electric System, the Board also governs the Water and Waste Water Systems of the City. Even though MUB is a municipal entity, the financial statements are presented more similar to a private business entity because a majority of the revenues in the Electric, Water and Waste Water Systems are generated from user fees, not any type of public tax. The Governmental Accounting Standards Board requires that these types of municipal entities follow accounting procedures more similar to those of private business. However, the mission of the Board is not to be a profitable entity, unlike a private system, but is to be able to finance all or most of its activities through user fees and reinvest assets in improving and maintaining the system. The financial statements include a statement of net position; a statement of revenues, expenses and changes in net position; a statement of cash flows; and notes to the financial statements. The statement of net position presents the financial position of the Electric System and all its assets and liabilities, with the difference reported as net position. Over time, increases or decreases in the System s net position are one indicator of whether the System s financial position is improving or deteriorating. The statement of revenues, expenses, and changes in net position presents the results of the System s activities over the course of the fiscal year. This statement also provides information about the System s recovery of costs. Rate setting policies vary; however, the primary objective of any rate model is to improve equity among customer classes and ensure that capital costs are allocated on the basis of long-term capacity needs, ensuring that growth pays for growth

6 The statement of cash flows presents changes in cash and cash equivalents, resulting from operating, financing and investing activities. This statement presents cash inflows and cash outflows for the fiscal year. The notes to the financial statements provide required disclosures and other information vital to obtaining a full understanding of the System s financial statements. The notes present information about the System s accounting policies, significant account balances and activities, material risks, obligations, commitments, contingencies and subsequent events, if any. Supplementary information, providing additional financial detail, is also provided. The financial statements were prepared by the Board s accounting staff from the detailed books and records of the System. The financial statements were then audited and adjusted, if necessary, during the independent external audit process

7 Financial Analysis The following comparative condensed financial statements serve as the key financial data and indicators for management, monitoring and planning. The financial statements are studied in depth to detect trends, project growth and prepare budgets for the upcoming year. Municipal Utilities Board of the City of Albertville - Electric System Condensed Financial Statements Fiscal Year Ending June 30, 2017 Variance Condensed Statements of Net Position Dollars Percent Utility Plant $43,167,396 $40,085,057 $3,082, % Less Accumulated Depreciation ($21,152,852) ($20,314,309) ($838,543) 4.13% Utility Plant Net of Depreciation $22,014,544 $19,770,748 $2,243, % Current Assets & Other Assets $23,512,665 $23,533,524 ($20,859) -0.09% Deferred Outflow of Resources $720,618 $683,796 $36, % Total Assets and Deferred Outflows $46,247,827 $43,988,068 $2,259, % Current Liabilities $7,762,950 $7,676,564 $86, % Long Term Liabilities $6,847,837 $6,913,073 ($65,236) -0.94% Total Liabilities $14,610,787 $14,589,637 $21, % Net Position: Net Invested in Capital Assets $22,014,544 $19,770,748 $2,243, % Unrestricted $9,622,496 $9,627,683 ($5,187) -0.05% Total Net Position $31,637,040 $29,398,431 $2,238, % Total Liabilities and Net Position $46,247,827 $43,988,068 $2,259, % Condensed Statements of Revenues, Expenses, and Changes in Net Position Variance of 2017 Actual Data to: Budget 2016 Actual Actual Budget Actual Dollars Percent Dollars Percent Revenues: Electric Sales Revenue $47,659,725 $46,000,000 $45,749,230 $1,659, % $1,910, % Other Revenue $717,289 $725,000 $696,010 -$7, % $21, % Total Operating Revenue $48,377,014 $46,725,000 $46,445,240 $1,652, % $1,931, % Expenses: Purchased Power & Operating Exp $46,244,758 $44,543,000 $43,785,423 $1,701, % $2,459, % Operating Income $2,132,256 $2,182,000 $2,659,817 -$49, % ($527,561) % Non-Operating Income and Expense-Net $106,353 $55,000 $21,120 $51, % $85, % Increase (Decrease) in Net Position $2,238,609 $2,237,000 $2,680,937 $1, % ($442,328) % - 5 -

8 Financial Analysis The following comparative condensed financial statements serve as the key financial data and indicators for management, monitoring and planning. The financial statements are studied in depth to detect trends, project growth and prepare budgets for the upcoming year. MUNICIPAL UTILITIES BOARD OF THE CITY OF ALBERTVILLE - ELECTRIC SYSTEM Condensed Financial Statements Fiscal Year Ending June 30, 2016 Variance Condensed Statements of Net Position Dollars Percent Utility Plant $40,085,057 $37,988,343 $2,096, % Less Accumulated Depreciation ($20,314,309) ($19,269,299) ($1,045,010) 5.42% Utility Plant Net of Depreciation $19,770,748 $18,719,044 $1,051, % Restricted Assets $0 $6 ($6) % Current Assets and Other Assets $23,533,524 $22,470,871 $1,062, % Deferred Outflow of Resources $683,796 $289,608 $394, % Total Assets and Deferred Outflows $43,988,068 $41,479,529 $2,508, % Current Liabilities $7,676,564 $8,153,313 ($476,749) -5.85% Long Term Liabilities $6,913,073 $6,393,914 $519, % Deferred Inflows of Resources $0 $214,808 ($214,808) % Total Liabilities and Deferred Inflows $14,589,637 $14,762,035 ($172,398) -1.17% Net Position: Net Invested in Capital Assets $19,770,748 $18,351,171 $1,419, % Unrestricted $9,627,683 $8,366,323 $1,261, % Total Net Position $29,398,431 $26,717,494 $2,680, % Total Liabilities, Deferred Inflows and Net Position $43,988,068 $41,479,529 $2,508, % Condensed Statements of Revenues, Expenses, and Changes in Net Position Variance of 2016 Actual Data to: Budget 2015 Actual Actual Budget Actual Dollars Percent Dollars Percent Revenues: Electric Sales Revenue $45,749,230 $48,450,000 $47,333,500 ($2,700,770) -5.57% (1,584,270) -3.35% Other Revenue $696,010 $780,000 $728,974 ($83,990) % (32,964) -4.52% Total Operating Revenue $46,445,240 $49,230,000 $48,062,474 ($2,784,760) -5.66% (1,617,234) -3.36% Expenses: Operating Expense $43,785,423 $47,113,000 $45,567,180 ($3,327,577) -7.06% (1,781,757) -3.91% Operating Income $2,659,817 $2,117,000 $2,495,294 $542, % 164, % Non-Operating Income and Expense-Net $21,120 ($50,000) ($21,039) $71, % 42, % Increase (Decrease) in Net Position $2,680,937 $2,067,000 $2,474,255 $613, % 206, % - 6 -

9 FINANCIAL POSITION Statement of Net Position The Electric System s financial position remains stable for Total assets and deferred outflows increased $2,259,759, mostly due to increased net plant. Total liabilities increased $21,150. Total net position (total assets and deferred outflows less total liabilities) of $31,637,040 reflects an increase of $2,238,609 from last year, a 7.6% increase. Of this amount, 70% is invested in net plant assets and 30% is unrestricted. For the fiscal year ending 2016, total assets and deferred outflows increased $2,508,539, due to increased cash and cash equivalents and increased net plant. Total liabilities increased $42,410 mostly due to increased Net Pension Liability. Accounts payable due to TVA decreased $38,100. Total long-term debt was reduced by $365,000 this year eliminating all long term debt. Total net position (total assets and deferred outflows less total liabilities) of $29,398,431 reflects an increase of $2,680,937 from last year, a 10% increase. Of this amount, 67% is invested in net plant assets and 33% is unrestricted. Results of Operations The majority of the Electric System s operating revenues are derived from sales of electricity. Other revenue consists of forfeited discounts, rent from electric property and miscellaneous electric revenue. Miscellaneous revenue includes service fees, returned check fees, temporary service fees, reconnect fees, collections charges and transfer fees. The Electric System has five classes of sales: residential, commercial, industrial, street and athletic, and outdoor lighting. Total sales revenue increased 4% in 2017, mostly due to flow through of a TVA rate increase in October The Electric System s largest expense is purchased power. $40,383,480 was used in 2017 to purchase power from TVA. Purchased power was 85% of sales revenue. Total operating expense, excluding purchased power, increased $605,468 in 2017, an 11% increase. Depreciation expense increased $169,667 due to additions to plant. Distribution and maintenance expense increased $131,755 due to increased payroll and overhead. General and administrative expense increased $111,245 due to increased GASB45 and GASB68 costs and increased employee welfare expense. Taxes and tax equivalents increased $104,334 due to increased tax equivalent payments to the City of Albertville. Customer accounts expense increased $65,113 due to increased payroll. For the fiscal year ending 2016, total sales revenue decreased 3%, mostly due to lower fuel cost charges. $38,529,613 was used in 2016 to purchase power from TVA. Purchased power was 84.22% of sales revenue. Total operating expense, excluding purchased power, decreased $62,649 in Operating and maintenance expense decreased $49,307 mostly due to a decrease in general and administrative expense. Depreciation expense increased $14,962. Tax and tax equivalents decreased $28,304 mostly due to less payroll tax allocated to the Electric department

10 Capital Assets and Debt Administration Total Electric Plant for 2017 (before depreciation, retirements, and reclassifications) increased $4,419, % of this increase, $1,856,522, was invested in meters. The Electric system installed 11,047 AMI meters in $492,368 was invested in overhead conductors and devices and $452,311 was used for transformers. $411,303 was used for transportation equipment including $209,210 for a bucket truck, $91,174 for a dump truck, and $92,285 for four pickup trucks. $314,856 was used for poles, towers and fixtures and street lighting increased $218,490. $160,675 was invested in communication equipment to purchase software for the AMI meter system and $134,085 was used for new servers and a camera system. 83 new overhead services were installed and 55 underground services were installed for a total cost of $131,126. Substation equipment increased $119,593 and $66,932 was added to security lighting. $54,527 was invested in Stores Equipment for a new forklift and floor sweeper. Structures increased $6,600 for Electric s share of improvements at the fuel pumps at the warehouse. The Electric system currently has zero debt. Total Electric Plant for 2016 (before depreciation, retirements, and reclassifications) increased $2,599, % of this increase, $1,258,023, was invested in communication equipment to install 55 miles of fiber optic lines. $466,687 was used for transportation equipment including $247,503 for a digger derrick, $184,173 for a bucket truck, $29,468 for a pickup truck and $5,543 for miscellaneous. $273,064 was used for poles, towers and fixtures and $169,160 was invested in transformers. $140,153 was invested in overhead conductors and devices. Substation equipment increased $107,067 and $69,807 was added to security lighting. 79 new overhead services were installed and 32 underground services for a total cost of $57,030. New meters were purchased for $31,408 and street lighting increased $21,850. $5,708 was used for software upgrades. The Electric Department s only debt in 2016 was an outstanding Bond issued in 2013 to legally defease the 2004 Bonds. This bond was reduced by $365,000 which paid off the bond. The Electric system currently has zero debt. Economic Factors and Next Year s Budget and Rates The Capital Expenditures Budget for 2018 has been projected at $4,152,695. These expenditures will include: $844,000 Structures & Improvements includes fleet shop renovation and washbay at warehouse. $761,553 Conductors and Devices includes 43,500 feet of underground primary. $550,039 Transformers includes transformers for the recreation center project and downtown. $484,494 Poles, Tower & Fixtures includes 42 concrete poles and 111 wood poles. $399,920 Security Lights approximately 319 security lights of various wattage and 62 poles. $310,000 Transportation Equipment includes a bucket truck and two pickups. $225,300 Communications Equipment includes outage and meter management systems. $170,000 Substation Equipment breakers and switches at Primary substation. $123,450 Meters includes 183 AMI meters

11 $91,439 Street Lights includes 13 poles and 140 lights. $84,500 Services approximately 80 overhead and 50 underground services. $50,000 Lab Equipment meter testing equipment. $38,000 Tools, Shop & Garage Equipment includes mini excavator. $20,000 Computer Equipment miscellaneous computer replacements. Final Comments The Electric System s management and the MUB Board annually prepare and review operating budgets, payroll budgets and capital purchases budgets. The preparation of these budgets involves reviewing several factors such as: anticipated growth and expansion or cut backs in industrial load; forecasted expenses; and determination of capital needs. These budgets provide a blueprint for operations for the next year and assist in determining financial position for the near future. It is the opinion of management that Electric rates are currently adequate to fund necessary expenditures and to maintain the Electric System in good repair. However, if growth far exceeds projected rates and additional facilities would have to be constructed, then electric rates would have to be reviewed. Elden Chumley General Manager/CEO Municipal Utilities Board of Albertville Theresa Bailey, CPA Chief Financial Officer Municipal Utilities Board of Albertville - 9 -

12 STATEMENTS OF NET POSITION JUNE 30, 2017 AND 2016 ASSETS CURRENT ASSETS Cash and cash equivalents $ 9,741,132 $ 9,670,144 Certificates of deposit 5,056,141 5,010,857 Accounts receivable - customers 6,380,739 6,231,176 Account receivable - Water 26,531 - Accrued interest receivable 8,870 7,875 Current portion of note receivable - Water System 76,506 74,657 Accrued rent receivable 163, ,598 Materials and supplies 467, ,870 Prepaid expenses 18,479 22,773 21,939,939 21,593,950 NONCURRENT ASSETS Capital Assets Land and construction in progress 501,688 1,109,513 Electric plant in service, net 21,512,856 18,661,235 22,014,544 19,770,748 Other Assets Energy Right loans receivable 1,087,884 1,380,170 Note receivable - Water System, net of current 448, ,086 Deposit and loan - associated company 36,261 34,318 1,572,726 1,939,574 TOTAL ASSETS 45,527,209 43,304,272 DEFERRED OUTFLOWS OF RESOURCES Proportionate share of collective deferred outflows related to net pension liability 720, ,796 Total deferred outflows of resources 720, ,796 TOTAL ASSETS AND DEFERRED OUTFLOWS $ 46,247,827 $ 43,988,068 The notes to financial statements are an integral part of these financial statements. -10-

13 STATEMENTS OF NET POSITION JUNE 30, 2017 AND LIABILITIES CURRENT LIABILITIES Accounts payable Purchased power $ 3,542,404 $ 3,544,336 Related party 879, ,586 Other 250, ,530 Customer deposits 2,684,334 2,568,657 Accrued wages and compensated absences 315, ,379 Other current liabilities 89,896 62,076 TOTAL CURRENT LIABILITIES 7,762,950 7,676,564 NONCURRENT LIABILITIES Energy right loans - Tennessee Valley Authority 1,115,815 1,422,068 Net pension liability 5,191,812 5,026,153 Accrued liability - OPEB 540, ,852 6,847,837 6,913,073 NET POSITION Invested in capital assets, net of related debt 22,014,544 19,770,748 Restricted for: Debt service - - Unrestricted 9,622,496 9,627,683 TOTAL NET POSITION 31,637,040 29,398,431 TOTAL LIABILITIES AND NET POSITION $ 46,247,827 $ 43,988,068 The notes to financial statements are an integral part of these financial statements. -11-

14 STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET POSITION JUNE 30, 2017 AND Percent of Percent of Operating Operating Amount Revenue Amount Revenue OPERATING REVENUE Electric sales revenue Residential $ 11,293, % $ 10,881, % General Power - 50 KW and under 3,591, % 3,448, % General Power - over 50 KW 32,141, % 30,805, % Street, athletic and outdoor lighting 657, % 638, % Less uncollectible accounts (24,049) -0.05% (25,124) -0.05% 47,659, % 45,749, % Revenue from forfeited discounts 187, % 172, % Rent from Electric property 323, % 317, % Other Electric revenue 205, % 206, % 48,377, % 46,445, % PURCHASED POWER 40,383, % 38,529, % Revenue less power costs 7,993, % 7,915, % OPERATING EXPENSE Operating expense 3,262, % 2,931, % Depreciation 1,539, % 1,370, % Taxes and tax equivalents 1,058, % 953, % 5,861, % 5,255, % OPERATING INCOME 2,132, % 2,659, % NONOPERATING REVENUE (EXPENSE) Interest income 116, % 78, % Gain on disposal of capital assets % 1, % Interest expense (10,571) -0.02% (59,239) -0.13% Amortization of debt issue costs/discounts % % 106, % 21, % CHANGE IN NET POSITION 2,238, % 2,680, % NET POSITION - BEGINNING OF YEAR 29,398,431 26,717,494 NET POSITION - END OF YEAR $ 31,637,040 $ 29,398,431 The notes to financial statements are an integral part of these financial statements. -12-

15 STATEMENTS OF CASH FLOW FOR THE YEARS ENDED JUNE 30, 2017 AND CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers $ 47,510,162 $ 46,373,188 Payments to suppliers (40,938,448) (39,857,286) Payments to employees (2,634,887) (2,626,640) Other receipts (payments) 101, ,587 NET CASH PROVIDED BY OPERATING ACTIVITIES 4,038,139 4,289,849 CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Principal payments received on note receivable - Water 76,505 72,852 Interest received on note receivable - water 14,931 15,664 Increase(decrease) in Energy Right Loan Advances from TVA (306,253) (282,365) Increase(decrease) in customer deposits 115, ,740 CASH FLOWS (USED)PROVIDED BY NONCAPITAL FINANCING ACTIVITIES (99,140) 74,891 CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Acquisition and construction of capital assets (4,216,743) (2,520,170) Proceeds from disposal of capital assets - 3,000 Principal paid on bonds and notes payable - (365,000) Interest paid on bonds and notes payable - (5,475) NET CASH USED BY CAPITAL AND RELATED FINANCING ACTIVITIES (4,216,743) (2,887,645) CASH FLOWS FROM INVESTING ACTIVITIES Interest received on cash and cash equivalents 101,730 58,841 (Increase) Decrease in receivables from customers for Energy Right Loans 292, ,558 CASH FLOWS PROVIDED BY INVESTING ACTIVITIES 394, ,399 NET INCREASE IN CASH AND CASH EQUIVALENTS 116,272 1,813,494 CASH AND CASH EQUIVALENTS - Beginning 14,681,001 12,867,507 CASH AND CASH EQUIVALENTS - Ending $ 14,797,273 $ 14,681,001 The notes to financial statements are an integral part of these financial statements. -13-

16 STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN STATEMENTS OF CASH FLOW FOR THE YEARS ENDED JUNE 30, 2017 AND RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Operating income $ 2,238,609 $ 2,659,817 Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation 1,830,388 1,462,779 Bad debts 24,049 25,124 Changes in assets and liabilities: (Increase) Decrease in accounts receivable (149,563) 298,796 (Increase) Decrease in rent receivable (1,972) 4,615 (Increase) Decrease in material and supplies (53,101) 72,125 (Increase) Decrease in prepaid expenses 4,294 4,417 (Increase) Decrease in deposit and loan - associated company (1,943) (1,966) (Decrease) Increase in related party (27,526) (38,100) (Decrease) Increase in accounts payable (135,466) (235,147) (Decrease) Increase in accrued wages and compensated absences 78,355 (97,138) (Increase) Decrease in deferred outflows of resources - net pension liability (36,822) (444,958) (Decrease) Increase in deferred inflows of resources - net pension liability - (214,808) (Decrease) Increase in net pension liability 165, ,306 (Decrease) Increase in accrued liability - other post employment benefits 75,358 59,722 (Decrease) Increase in other current liabilities 27,820 (8,735) Total adjustments 1,799,530 1,630,032 NET CASH PROVIDED BY OPERATING ACTIVITIES $ 4,038,139 $ 4,289,849 The notes to financial statements are an integral part of these financial statements. -14-

17 NOTES TO FINANCIAL STATEMENTS JUNE 30, 2017 and 2016 NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - ORGANIZATION The Municipal Utilities Board of the City of Albertville, Alabama (the Board) was reorganized and incorporated on May 15, 2013, under Article 9, Chapter 50, Title 11 (Sections et seq.) of the Code of Alabama (1975). Prior to May 15, 2013, the Board operated within the confines of an Act of the Alabama Legislature passed in While operating under the 1943 Act, the Board was organized as an entity of the City of Albertville and the City had to issue all debt for the Board. The new form of organization allows the Board to issue its own debt. The objectives for which the Board was formed are to acquire, operate, maintain, improve, and extend an electric system, a water distribution system, and a sanitary sewer system within the City of Albertville and the territory within Marshall County. The Board is also authorized to own and operate a natural gas distribution system, but no such system presently exists. The Board uses enterprise fund accounting for the separate departments, electric, water, and waste water, and issues separate financial statements for each. The financial statements present only the Municipal Utilities Board of the City of Albertville - Electric System (the Electric System) and do not purport to, and do not, present the financial position of the Municipal Utilities Board of the City of Albertville and the changes in its financial position or its cash flows. The property and business of the Municipal Utilities Board of the City of Albertville is managed by a three member Board of Directors appointed by the Mayor and City Council of the City of Albertville. The members of the Board and management at June 30, 2017 were as follows: Board of Directors James Gentry, Chairman Paul McAbee, Secretary Harold Chitwood, Member Management Elden Chumley, General Manager/CEO NATURE OF BUSINESS The Electric System provides electric power to residents and businesses in the City of Albertville, Alabama area. The power is purchased under contract from the Tennessee Valley Authority (TVA). ACCOUNTING PRINCIPLES The Electric System's financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America 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 PRESENTATION AND ACCOUNTING The Electric System utilizes the accrual basis of accounting. Under this basis of accounting, revenues are recognized when earned and expenses are recognized when the related liability is incurred. REGULATION The Electric System is subject to limited regulations granted by federal statute to the TVA. These regulations include approving the Electric System's rates. RECOGNITION OF ELECTRIC REVENUE AND COST Electric revenue and the related cost of power purchased are recognized when electricity is used by the ultimate consumer. -15-

18 NOTES TO FINANCIAL STATEMENTS JUNE 30, 2017 and 2016 (Continued) NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued TAXES The Electric System is not subject to federal and state income taxes. The Electric System collects utility tax from its customers on behalf of the State of Alabama. Revenue is presented net of tax collected in the statement of revenues, expenses, and changes in net position. INVENTORIES Inventories of material and supplies are priced at the lower of average cost or market. CASH EQUIVALENTS The Electric System considers all highly liquid investments with a maturity of three months or less when purchased to be cash and cash equivalents. ACCOUNTS RECEIVABLE Accounts receivable represents amounts billed to individuals and businesses in the Albertville area for electric, water, and waste water services provided by the Municipal Utilities Board of the City of Albertville. All services are billed and collected by the Electric System, with revenues recognized by each department through an intercompany system of accounting. As of June 30, 2017 and 2016, the total receivables due from customers were $6,380,739 and $6,231,176, respectively. The Board uses the direct write-off method for uncollectible accounts. An allowance for doubtful accounts at June 30, 2017 and 2016 is not considered necessary. ENERGY RIGHT LOANS RECEIVABLE These loans represent amounts due from customers who used the proceeds for electric home appliances or energy efficient home improvements. The Electric System, in turn, borrows the amount of the loan from TVA and as payments are received from customers, the Electric System remits them to TVA. The Electric System acts as an agent for TVA in this energy loan project. On July 1, 2015, the Electric Department opted to allow TVA to administer all future loans and repayments in the Energy Right Loan Program. The Electric System will continue to collect and remit any outstanding loans according to TVA program guidelines until these existing loans are paid in full. The existing loans are estimated to be paid in full by CONCENTRATION OF CREDIT RISK The Board grants credit to its customers, substantially all of who are located in the City of Albertville, Alabama. AMORTIZATION Debt issuance costs, bond discounts or premiums, and deferred losses on refunding are amortized over the terms of the bonds using a method which approximates the effective interest method. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. -16-

19 NOTES TO FINANCIAL STATEMENTS JUNE 30, 2017 and 2016 (Continued) NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued - UTILITY PLANT Utility plant is stated at cost less accumulated depreciation. Depreciation is calculated on the composite-rate method at rates recommended by TVA. Retirements of units of property from service have been charged to the accumulated depreciation accounts at the original cost of the units plus cost of removal. Salvage value of the units retired is credited to the accumulated depreciation accounts. The costs of maintenance, repairs and replacing minor items are charged principally to expense as incurred. Depreciation rates are as follows: Distribution Plant: Land and land rights 2.50% Station equipment 4.00% Poles, towers, fixtures 4.75% Overhead conductors and devices 2.75% Line transformers 2.50% Services 4.50% Meters - regular 3.00% Meters - AMI 5.00% Installation on customers' premises 8.00% Street lighting and signal systems 8.00% General Plant: Land and land rights 0.00% Structures and improvements 3.00% Furniture and equipment 10.00% Transportation equipment 12.00% Stores equipment 10.00% Tools, shop and garage equipment 8.00% Laboratory equipment 10.00% Communication equipment 10.00% NET POSITION Net position is divided into three components: Net invested in capital assets - consists of net capital assets reduced by outstanding balances of any related debt obligations and deferred inflows of resources attributable to the acquisition, construction, or improvement of those assets increased by balances of deferred outflows of resources related to those assets. Restricted consists of external constraints placed on net position use imposed by creditors (such as through debt covenants), grantors, contributors, or laws or regulations of other governments or constraints imposed by law through constitutional provisions or enabling legislation. Unrestricted consists of all other net position that does not meet the definition of the above two components and is available for general use by the Electric System. -17-

20 NOTES TO FINANCIAL STATEMENTS JUNE 30, 2017 and 2016 (Continued) NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued - PENSIONS The Employees' Retirement System of Alabama (the Plan) financial statements are prepared using the economic resources measurement focus and accrual basis of accounting. Contributions are recognized as revenues when earned, pursuant to the plan requirements. Benefits and refunds are recognized when due and payable in accordance with the terms of the plan. Expenses are recognized when the corresponding liability is incurred, regardless of when the payment is made. Investments are reported at fair value. Financial statements are prepared in accordance with requirements of the Governmental Accounting Standards Board (GASB). Under these requirements, the Plan is considered a component unit of the State of Alabama and is included in the State's Comprehensive Annual Financial Report. NOTE B CASH AND CASH EQUIVALENTS Cash and cash equivalents include the following amounts at June 30, 2017 and 2016: UNRESTRICTED Working funds $ 3,000 $ 3,000 Checking accounts 9,738,132 9,667,144 Certificates of deposit 5,056,141 5,010,857 14,797,273 14,681,001 RESTRICTED Debt service fund - - $ 14,797,273 $ 14,681,001 The Municipal Utilities Board of the City of Albertville's deposits at year-end were held by financial institutions in the State of Alabama's Security of Alabama Funds Enhancement (SAFE) Program. The SAFE Program was established by the Alabama Legislature and is governed by the provisions contained in the Code of Alabama 1975, Sections 41-14A-1 through 41-14A-14. Under the SAFE Program all public funds are protected through a collateral pool administered by the Alabama State Treasurer's Office. Under this program, financial institutions holding deposits of public funds must pledge securities as collateral against those deposits. In the event of failure of a financial institution, securities pledged by that 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 failed to produce adequate funds, every institution participating in the pool would share the liability for the remaining balance. -18-

21 NOTES TO FINANCIAL STATEMENTS JUNE 30, 2017 and 2016 (Continued) NOTE C CAPITAL ASSETS Information related to property, plant and equipment of the Electric System for the year ended June 30, 2017 was as follows: Balance at Balance at June 30, 2016 Increases Decreases June 30, 2017 Capital assets not being depreciated: Distribution plant: Land and land rights $ 81,683 $ - $ 77 $ 81,606 General plant: Land and land rights 356, ,504 Construction in progress, net change 671, ,748 63,578 Total capital assets not being depreciated 1,109, , ,688 Capital assets being depreciated: Electric plant in service: Distribution plant: Station Equipment 7,296, ,593-7,416,292 Poles, towers, fixtures 6,457, , ,320 6,648,845 Overhead conductors and devices 5,199, ,368 40,227 5,651,951 Line transformers 5,963, , ,100 6,300,296 Services 2,894, ,126 38,218 2,987,550 Meters 1,554,916 1,856,522-3,411,438 Installation on customers' premises 1,451,923 66,932 67,370 1,451,485 Street lighting and signal system 823, ,490 23,747 1,018,270 31,641,913 3,652, ,982 34,886,127 General plant: Structures and improvements 2,723,689 6,600-2,730,289 Furniture and equipment 338, , ,170 Transportation equipment 2,464, , ,196 2,554,627 Stores equipment 20,794 54,527-75,321 Tools, shop and garage equipment 165, ,035 Laboratory equipment 34, ,784 Communication equipment 1,586, , ,747,353 7,333, , ,241 7,779,579 Total capital assets being depreciated 38,975,544 4,419, ,223 42,665,

22 NOTES TO FINANCIAL STATEMENTS JUNE 30, 2017 and 2016 (Continued) Balance at Balance at June 30, 2016 Increases Decreases June 30, 2017 Less accumulated depreciation for: Distribution plant: Station Equipment $ 4,729,430 $ 292,453 $ - $ 5,021,883 Poles, towers, fixtures 4,228, , ,873 4,282,297 Overhead conductors and devices 1,725, , ,628 1,749,177 Line transformers 1,521, , ,951 1,525,369 Services 2,191, ,814 67,810 2,254,795 Meters 306, ,724 (246) 421,487 Installation on customers' premises 1,097, ,628 71,337 1,143,086 Street lighting and signal system 818,450 28,202 61, ,974 16,619,919 1,285, ,031 17,183,068 General plant: Structures and improvements 726,147 81, ,022 Furniture and equipment 338,085 9, ,919 Transportation equipment 2,115, , ,671 2,155,623 Stores equipment 20,794 4,016-24,810 Tools, shop and garage equipment 165, ,035 Laboratory equipment 34, ,784 Communication equipment 293, ,928 19, ,589 3,694, , ,738 3,969,782 Total accumulated depreciation 20,314,309 1,830, ,769 21,152,850 Total capital assets being depreciated, net 18,661,235 2,589,075 (262,546) 21,512,856 Net book value $ 19,770,748 $ 2,589,075 $ 345,279 $ 22,014,544 Depreciation expense for the year ended June 30, 2017 was charged to the following accounts: Depreciation expense $ 1,539,911 Transportation expense clearing 290,477 $ 1,830,

23 NOTES TO FINANCIAL STATEMENTS JUNE 30, 2017 and 2016 (Continued) Information related to property, plant and equipment of the Electric System for the year ended June 30, 2016 was as follows: Balance at Balance at June 30, 2015 Increases Decreases June 30, 2016 Capital assets not being depreciated: Distribution plant: Land and land rights $ 83,083 $ - $ 1,400 $ 81,683 General plant: Land and land rights 356, ,504 Construction in progress, net change 805, , ,326 Total capital assets not being depreciated 1,245, ,859 1,109,513 Capital assets being depreciated: Electric plant in service: Distribution plant: Station Equipment 7,189, ,067-7,296,699 Poles, towers, fixtures 6,288, , ,592 6,457,310 Overhead conductors and devices 5,085, ,153 25,946 5,199,810 Line transformers 5,919, , ,294 5,963,086 Services 2,859,823 57,030 22,211 2,894,642 Meters 1,523,508 31,408-1,554,916 Installation on customers' premises 1,416,131 69,807 34,015 1,451,923 Street lighting and signal system 815,316 21,850 13, ,527 31,098, , ,697 31,641,913 General plant: Structures and improvements 2,723, ,723,689 Furniture and equipment 332,377 5, ,085 Transportation equipment 2,039, ,687 41,687 2,464,521 Stores equipment 20, ,794 Tools, shop and garage equipment 165, ,035 Laboratory equipment 34, ,784 Communication equipment 328,700 1,258,023-1,586,723 5,644,900 1,730,418 41,687 7,333,631 Total capital assets being depreciated 36,742,971 2,599, ,384 38,975,

24 NOTES TO FINANCIAL STATEMENTS JUNE 30, 2017 and 2016 (Continued) Balance at Balance at June 30, 2015 Increases Decreases June 30, 2016 Less accumulated depreciation for: Distribution plant: Station Equipment $ 4,440,874 $ 288,556 $ - $ 4,729,430 Poles, towers, fixtures 4,077, , ,890 4,228,791 Overhead conductors and devices 1,614, ,292 30,692 1,725,354 Line transformers 1,509, , ,810 1,521,791 Services 2,087, ,403 25,510 2,191,791 Meters 260,320 46, ,517 Installation on customers' premises 1,026, ,085 42,493 1,097,795 Street lighting and signal system 777,086 59,022 17, ,450 15,794,200 1,227, ,053 16,619,919 General plant: Structures and improvements 644,436 81, ,147 Furniture and equipment 311,146 26, ,085 Transportation equipment 2,039,521 92,535 16,239 2,115,817 Stores equipment 20, ,794 Tools, shop and garage equipment 165, ,035 Laboratory equipment 34, ,784 Communication equipment 259,383 33,745 (600) 293,728 3,475, ,930 15,639 3,694,390 Total accumulated depreciation 19,269,299 1,462, ,692 20,314,309 Total capital assets being depreciated, net 17,473,672 1,137,255 (50,308) 18,661,235 Net book value $ 18,719,044 $ 1,137,255 $ 85,551 $ 19,770,748 Depreciation expense for the year ended June 30, 2016 was charged to the following accounts: Depreciation expense $ 1,370,244 Transportation expense clearing 92,535 $ 1,462,

25 NOTES TO FINANCIAL STATEMENTS JUNE 30, 2017 and 2016 (Continued) NOTE D TENNESSEE VALLEY AUTHORITY ENERGY RIGHT PROGRAM Under the Tennessee Valley Authority's (TVA) Energy Right Program, the Electric System receives advances from TVA and loans these funds to consumers to cover the cost of energy conservation improvements. The loans to the consumer are interest-bearing and are generally repaid over a 36 to 120 month period. The Electric System remits to TVA the collections from the consumers on a monthly basis. Any losses sustained for nonpayment of these loans are charged to TVA. A summary of these loans at June 30, 2017 and 2016 is as follows: Energy Right Loans receivable from customers $ 1,087,884 $ 1,380,170 Energy Right Loans payable to TVA $ 1,115,815 $ 1,422,068 NOTE E ASSOCIATED COMPANY Central Service Association (CSA) is the software development company, owned by its members, utilized by the Municipal Utilities Board of the City of Albertville. CSA allocates amounts to its members for project expenses in addition to charges for services. The Municipal Utilities Board of the City of Albertville has deposited funds with CSA to cover the float and exposure related to the timing interval for the billing and collection process. The loan amounts were derived from CSA's allocation of its annual excess collections over prior years. These loans were a part of an effort to build capital to purchase CSA' s building and to re-engineer major software projects for the Membership's use. NOTE F NOTE RECEIVABLE WATER SYSTEM During the year ended June 30, 2014, the Electric System sold to the Water System and to the Waste Water System each a portion of the Office Land, Building and Equipment. The Electric System financed for the Water System the sale amount of the Office Land, Building and Equipment over 10 years at 2.45% with monthly payments of $7, beginning December 1, Changes in the note receivable from the Water System for the year ended June 30, 2017 was as follows: Balance at Balance at June 30, 2016 Issues Retirements June 30, 2017 Note receivable - Water System $ 599,743 $ - $ 74,656 $ 525,087 Changes in the note receivable from the Water System for the year ended June 30, 2016 was as follows: Balance at Balance at June 30, 2015 Issues Retirements June 30, 2016 Note receivable - Water System $ 672,595 $ - $ 72,852 $ 599,

26 NOTES TO FINANCIAL STATEMENTS JUNE 30, 2017 and 2016 (Continued) NOTE F NOTE RECEIVABLE WATER SYSTEM - continued Total principal and interest maturities of the note receivable for the years ended June 30 are as follows: NOTE G PENSION PLAN Principal Interest Total 2018 $ 76,507 $ 12,009 $ 88, ,402 10,114 88, ,345 8,171 88, ,335 6,181 88, ,375 4,141 88, ,123 2, ,398 $ 525,087 $ 42,891 $ 567,978 The Municipal Utilities Board of the City of Albertville (the Board) contributes to the Employees Retirement System of Alabama, an agent multiple-employer public employee retirement system, which acts as a common investment and administrative agent for the various state agencies and departments. General Information about the Pension Plan Plan description The Employees' Retirement System of Alabama (ERS), an agency multiple-employer plan, was established October l, 1945 under the provisions of Act 515 of the Legislature of 1945 for the purpose of providing retirement allowances and other specified benefits for state employees, State Police, and on an elective basis, to all cities, counties, towns and quasi-public organizations. The responsibility for the general administration and operation of ERS is vested in its Board of Control. The ERS Board of Control consists of 13 trustees. The Plan is administered by the Retirement Systems of Alabama (RSA). Title 36-Chapter 27 of the Code of Alabama grants the authority to establish and amend the benefit terms to the ERS Board of Control. The Plan issues a publicly available financial report that can be obtained at The ERS Board of Control consists of 13 trustees as follows: 1) The Governor, ex officio. 2) The State Treasurer, ex officio. 3) The State Personnel Director, ex officio. 4) The State Director of Finance, ex officio. 5) Three vested members of ERS appointed by the Governor for a term of four years, no two of whom are from the same department of state government nor from any department of which an ex officio trustee is the head. 6) Six members of ERS who are elected by members from the same category of ERS for a term of four years as follows: a. Two retired members with one from the ranks of retired state employees and one from the ranks of retired employees of a city, county, or a public agency each of whom is an active beneficiary of ERS. b. Two vested active state employees. c. Two vested active employees of an employer participating in ERS pursuant to