CITY OF KERMIT, TEXAS ANNUAL FINANCIAL AND COMPLIANCE REPORT

CITY OF KERMIT, TEXAS ANNUAL FINANCIAL AND COMPLIANCE REPORT FOR THE YEAR ENDED SEPTEMBER 30, 2012

CITY OF KERMIT, TEXAS ANNUAL FINANCIAL AND COMPLIANCE REPORT FOR THE YEAR ENDED SEPTEMBER 30, 2012 TABLE OF CONTENTS Exhibit Page LETTER OF TRANSMITTAL Independent Auditor's Report 1 Management's Discussion and Analysis 3 Basic Financial Statements Government Wide Statements: A-1 Statement of Net Assets 9 B-1 Statement of Activities 10 Governmental Fund Financial Statements: C-1 Balance Sheet 12 C-2 Reconciliation for Exhibit C-1 13 C-3 Statement of Revenues, Expenditures, and Changes in Fund Balance 14 C-4 Reconciliation for Exhibit C-3 15 C-5 Budgetary Comparison Statement - General Fund 16 Proprietary Fund Financial Statements: D-1 Statement of Net Assets 17 D-2 Statement of Revenues, Expenses, and Changes in Fund Net Assets 18 D-3 Statement of Cash Flows 20 Notes to the Financial Statements 21 Other Supplementary Information E-1 Statement of Revenues, Expenses and Changes in Net Assets, Budget and Actual for Water and Sewer Fund 37 E-2 Statement of Revenues, Expenses and Changes in Net Assets, Budget and Actual for Solid Waste Fund 38

CITY OF KERMIT, TEXAS ANNUAL FINANCIAL AND COMPLIANCE REPORT FOR THE YEAR ENDED SEPTEMBER 30, 2012 Exhibit Federal Awards Section TABLE OF CONTENTS (CONTINUED) Page Report on Compliance and Internal Control Over Financial Reporting Based on an audit of Financial Statements Performed in Accordance with Government Auditing Standards 39 Report on Compliance with Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control over Compliance in Accordance with OMB Circular A-133 41 Schedule of Findings and Questioned Costs 43 Summary Schedule of Prior Audit Findings 44 Corrective Action Plan 45 K-1 Schedule of Expenditures of Federal Awards 46 Notes to Schedule of Federal Awards 47

LETTER OF TRANSMITTAL City of Kermit, Texas Name of City Winkler County We, the undersigned, certify that the attached Annual Financial and Compliance Report of the above named city was reviewed and (check one) approved disapproved for the year ended September 30, 2012 at a meeting of the Council of such city on the 23 rd day of July, 2013. Signature of Mayor Signature of City Manager If the City Council disapproved of the Annual Financial and Compliance Report, the reason(s) for disapproving it is (are): (attach list as necessary)

MANAGEMENT S DISCUSSION AND ANALYSIS In this section of the Annual Financial and Compliance Report, we, the managers of the City of Kermit, Texas, discuss and analyze the City s financial performance for the fiscal year ended September 30, 2012. Please read it in conjunction with the Independent Auditor s Report on page 1, and the City s Basic Financial Statements, which begin on page 9. FINANCIAL HIGHLIGHTS The City s net assets increased by $265,422 as a result of this year s operations. Net assets of our governmental funds decreased by $205,866, or 11.8% and net assets of our business-type activities increased by $471,288, or approximately13.8%. (Exhibit B-1) The decrease in the governmental funds is not alarming because the City transferred its solid waste sanitation function from the general fund to a businesstype activity fund during the year. During the year, the City had operating expenditures that were $524,531 more than the $1,946,655 generated in tax and other revenues for the governmental programs. (Exhibit C-3) This compares to last year when expenditures exceeded revenues by $544,849. In the City s business-type activities, revenues increased by $655,844, while expenses increased by $715,752. These large increases were mainly the result of the addition of the Solid Waste function as an internal business-type activity during the fiscal year. Total cost of the City s programs was $4,040,814 while last year's cost was $3,974,212. (Exhibit B-1) The General Fund ended the year at $595,566 and the ending fund balance from last year was $708,527. The resources available for appropriation were $55,540 more than budgeted for the General Fund primarily due to the increased sales and use taxes and franchise taxes that all areas of the Permian Basin are enjoying in the current economy. USING THIS ANNUAL REPORT This annual report consists of a series of financial statements. The government-wide financial statements include the Statement of Net Assets and the Statement of Activities (on pages 9 and 10-11). These provide information about the activities of the City as a whole and present a longer-term view of the City s property and debt obligations and other financial matters. They reflect the flow of total economic resources in a manner similar to the financial reports of a business enterprise. Fund financial statements (starting on page 12) report the City s operations in more detail than the government-wide statements by providing information about the City s most significant funds. For governmental activities, these statements tell how services were financed in the short term as well as what resources remain for future spending. They reflect the flow of current financial resources, and supply the basis for tax levies and the appropriations budget. For proprietary activities, fund financial statements tell how goods or services of the City were sold to departments within the City or to external customers and how sales revenues covered the expenses of the goods or services. The notes to the financial statements (starting on page 21) provide narrative explanations or additional data needed for full disclosure in the government-wide statements or the fund financial statements. Reporting the City as a Whole The Statement of Net Assets and the Statement of Activities The analysis of the City s overall financial condition and operations begins on page 9. Its primary purpose is to show whether the City is better off or worse off as a result of the year s activities. The Statement of Net Assets includes all the City s assets and liabilities at the end of the year while the Statement of Activities includes all the revenues and expenses generated by the City s operations during the year. These apply the accrual basis of accounting, which is the basis used by private sector companies. All of the current year s revenues and expenses are taken into account regardless of when cash is received or paid. The City s revenues are divided into those provided by outside parties who pay for the costs of programs (such as utility funds) and grants provided by outside parties and agencies (program revenues), and revenues provided by the taxpayers or other unrestricted sources (general revenues). All the City s assets are reported whether they serve the current year or future years. Liabilities are considered regardless of whether they must be paid in the current or future years. 3

These two statements report the City s net assets and changes in them. The City s net assets (the difference between assets and liabilities) provide one measure of the City s financial health, or financial position. Over time, increases or decreases in the City s net assets are one indicator of whether its financial health is improving or deteriorating. To fully assess the overall health of the City, however, you should consider non-financial factors as well, such as changes in the City s property tax base or the condition of the City s facilities. In the Statement of Net Assets and the Statement of Activities, we divide the City into two kinds of activities: Governmental Activities: Most of the City s basic services are reported here. Property, Sales & Use, and Franchise Taxes finance most of these activities. Business-type Activities: The City charges a fee to customers to help it cover all or most of the cost of services it provides in the Water Utility System and Solid Waste Funds. Reporting the City s Most Significant Funds Fund Financial Statements The fund financial statements begin on page 12 and provide detailed information about the most significant funds not the City as a whole. Laws and contracts require the City to establish some funds, such as grants received from a government agency. The City s administration establishes many other funds to help it control and manage money for particular purposes. The City s two kinds of funds governmental and proprietary use different accounting approaches. Governmental Funds: Most of the City s basic services are reported in governmental funds. These use the modified accrual method of accounting (a method that measures the receipt and disbursement of cash and all other financial assets that can be readily converted to cash) and report balances that are available for future spending. The governmental fund statements provide a detailed short-term view of the City s general operations and the basic services it provides. We describe the differences between governmental activities (reported in the Statement of Net Assets and the Statement of Activities) and governmental funds in reconciliation schedules following each of the fund financial statements. Proprietary Funds: The City reports the activities for which it charges users (whether outside customers or units of the City) in proprietary funds using the same accounting methods employed in the Statement of Net Assets and the Statement of Activities. In fact, the City enterprise funds are the business-type activities reported in the government-wide statements but containing more detail and additional information, such as cash flows. GOVERNMENT-WIDE FINANCIAL ANALYSIS Our analysis focuses on the net assets (Table I) and changes in net assets (Table II) of the City s governmental and business-type activities. Net assets of the City s governmental activities were $1,534,390. Unrestricted net assets the part of net assets that can be used to finance day-to-day operations without constraints established by debt covenants, enabling legislation, or other legal requirements were $600,023 at September 30, 2012. Net assets of the City s business-type activities were $3,889,106, which included $1,209,458 in unrestricted net assets, $1,350,575 in net assets restricted by debt covenants and $1,329,073 in Investment in capital assets, net of related debt. 4

Table I Net Assets Governmental Activities Business-type Activities 2012 2011 2012 2011 Current and other assets $ 1,000,452 $ 1,112,160 $ 3,153,121 $ 5,413,702 Capital assets 1,044,966 1,008,714 5,921,686 2,313,865 Total assets $ 2,045,418 $ 2,120,874 $ 9,074,807 $ 7,727,567 Long-term liabilities $ 91,391 $ 21,847 $ 4,415,000 $ 3,830,000 Other liabilities 419,637 372,978 770,701 483,401 Total liabilities $ 511,028 $ 394,825 $ 5,185,701 $ 4,313,401 Net Assets: Invested in capital assets, net of related debt $ 901,871 $ 955,482 $ 1,329,073 $ 2,313,865 Restricted 32,496 28,631 1,350,575 - Unrestricted 600,023 741,936 1,209,458 1,100,301 Total Net Assets $ 1,534,390 $ 1,726,049 $ 3,889,106 $ 3,414,166 Table II Changes in Net Assets Revenues: Governmental Activities Business-type Activities 2012 2011 2012 2011 Program Revenues: Charges for Services $ 201,530 $ 837,416 $ 2,004,220 $ 1,344,489 Operating Grants: TDCJ Grant for Police Department Radios - 145,272 - - General Revenues: Maintenance and OperatIons Taxes 566,281 538,349 - - General Sales Taxes 716,244 569,245 - - Franchise Taxes 243,286 243,070 - - Other Taxes 22,931 17,046 - - Penalty & Interest 39,138 28,018 - - Grants & Contributions not restricted 9,201 5,730 - - Miscellaneous 161,914 182,774 812 3,924 Special Assessments - - 334,360 322,364 Investment Earnings 4,988 10,703 1,331 6,555 Total Revenue $ 1,965,513 $ 2,577,623 $ 2,340,723 $ 1,677,332 5

Table II Changes in Net Assets Continued Governmental Activities Business-type Activities 2012 2011 2012 2011. Expenses: Sewerage $ - $ - $ 838,826 $ 751,669 Utility Office - - 108,425 76,759 Finance - - 60,157 58,717 Solid Waste/Sanitation - 684,846 595,489 - General Government 50,930 50,899 - - City Hall 182,949 188,531 - - Municipal Court 28,669 26,631 - - Administration 228,737 154,963 - - Police 981,097 964,567 - - Fire Department 54,410 89,458 - - Inspections 2,126 424 - - Street, Humane and City Shop 583,328 557,290 - - Street Lights 108,719 98,998 - - Cemetary and Parks 172,502 165,024 - - EMS 12,000 90,038 - - Debt Interest and Expenses 2,172 3,777 30,278 11,621 Total Expenses $ 2,407,639 $ 3,075,446 $ 1,633,175 $ 898,766 Increase (Decrease) in Net Assets before transfers $ (442,126) $ (497,823) $ 707,548 $ 778,566 Transfers 236,260 525,495 (236,260) (525,495) Increase (Decrease) in Net Assets $ (205,866) $ 27,672 $ 471,288 $ 253,071 Net Assets - October 1 1,726,049 1,698,377 3,414,166 3,161,095 Prior Period Adjustments 7,752-3,652 - Net Assets - September 30 $ 1,527,935 $ 1,726,049 $ 3,889,106 $ 3,414,166 The cost of all governmental activities this year was $2,471,186. (Exhibit C-3) However, as shown in the Statement of Activities on pages 10 and 11, some of the costs were paid by those who directly benefited from the programs ($201,530). THE CITY S FUNDS As the City completed the year, its governmental funds (as presented in the balance sheet on page 12) reported a fund balance of $595,566 while it reported a fund balance of $708,527 last year. Over the course of the year, the City Council made revisions to the City s budget. These budget amendments added $453,419 to budgeted expenditures and $257,931 to budgeted revenues for the year for an additional budgeted decrease in fund balance for all funds of $195,488. 6

CAPITAL ASSET AND DEBT ADMINISTRATION Capital Assets At September 30, 2012, the City had $13,863,057 invested in a broad range of capital assets, including land, the water system, sewer system and the solid waste fund. This amount represents a net increase of $3,965,685 or 40%. The significant additions were the construction of the water treatment facility and the garbage collection equipment purchased this year. This year s net additions included: Additions: Land for cemetary expansion $ 56,600 Two Ford Explorers for Police Department 62,699 Car/Body cameras 16,990 Ford F750 dump truck 68,685 Animal Shelter construction/completion 6,978 Water Treatment Plant Construction in Progress: Construction costs 2,674,264 Architect's fees 189,472 Capitalized Interest 96,119 Other capitalized costs 209 Garbage Collection Equipment 793,669 Total Additions $ 3,965,685 Dispositions (cost): Total Dispositions $ - Net Additions $ 3,965,685 Debt The capital lease obligation with Caterpillar for the front end loader decreased by $21,167 during the year and the existing $8,188 loan for the police vehicles purchased in 2009 was completely extinguished. The City purchased two Ford Explorers for $62,699 and a Ford F750 dump truck for $68,685. Both these purchases were financed with two loans with a local credit union. The City paid $8,066 and $3,427 in principal payments on these loans, respectively. Issuance of General Obligation Bonds During the fiscal year ending September 30, 2008 the City passed an ordinance whereby $4,595,000 in General Obligation Bonds was sold to the Texas Water Development Board. The proceeds of these bonds are designated to construct a new wastewater treatment system. This construction was mandatory because the City s current wastewater treatment system was considered deficient under state requirements. The bond repayments are funded by a specially-assessed charge to the residents of the City who have a water meter connection. The additional charge to each resident is $12 per water meter per month. City managers project that the revenue from this assessment will be sufficient to make the required payments on the debt. As of September 30, 2012, the project was estimated to be 90% completed. The City expects to have the water system totally operational before next summer. However, due to various factors relating to the closure of the old treatment system, the substantial completion date of this project is in question. Issuance of Tax Notes During the current fiscal year, the City issued $930,000 in tax notes to fund garbage collection equipment. The City terminated its contract with an outside party to collect and dispose of the city's solid waste and began operating the sanitation function internally in July 2012. City administration felt citizens would be 7

much better served in this capacity by City personnel. Additionally, administration determined that the City could recognize some savings by taking the sanitation service in house. As of September 30, 2012, the City had expended $793,669 of the $930,000 bond proceeds to purchase equipment for its solid waste services. The bond repayments are funded by the net revenue generated by the operation of the solid waste collection service provided by the City and by property taxes if the net revenue generated by operations fails to be adequate. ECONOMIC FACTORS AND NEXT YEAR S BUDGET AND RATES The City s elected and appointed officials considered many factors when setting the fiscal year 2012-2013 budget and tax rate. One of those factors is the economy and, in particular, the oil & gas industry. The price of crude oil and natural gas has remained relatively high during the course of the current year, which substantially impacts the evaluation of properties on the mineral roll. The City s population has held at a small, steady increase in recent years, and it is possible that it may continue into the foreseeable future. However, administration is fully aware of the volatility of the oil and gas industry and has attempted to adopt a conservative approach to the City's financial operations. These indicators were taken into account when adopting the General Fund budget for 2012-2013. Amounts available for appropriation in the General Fund budget are $1,784,875, a decrease of 5.6% under the final 2011-2012 budget of $1,891,115. Budgeted expenditures are expected to decrease by 6.3% to $2,438,602 from $2,602,992 in 2011-2012. There is a budgeted inter-fund transfer from the System Fund and the Solid Waste Fund to the General Fund for 2012-2013 in the amount of $675,000. If these estimates are realized, the City s budgetary General Fund Balance is not expected to increase or decrease by the close of 2012-2013 fiscal year. CONTACTING THE CITY S FINANCIAL MANAGEMENT This financial report is designed to provide our citizens, taxpayers, customers, investors, and creditors with a general overview of the City s finances and to show the City s accountability for the money it receives. If you have questions about this report or need additional financial information, contact the City s finance office at the City of Kermit, 110 S. Tornillo, Kermit, Texas, 79745. 8

BASIC FINANCIAL STATEMENTS

CITY OF KERMIT, TEXAS STATEMENT OF NET ASSETS SEPTEMBER 30, 2012 EXHIBIT A-1 Data Control Codes Governmental Activities Primary Government Business Type Activities Government- Wide Total ASSETS 1010 Cash and Cash Equivalents $ 787,574 $ 1,373,786 $ 2,161,360 1150 Receivables (net of allowance for uncollectibles) 180,382 211,968 392,350 1520 Capitalized Debt Issuance Costs - 118,650 118,650 Restricted Assets: 1611 Temporarily Restricted Cash 32,496 1,448,717 1,481,213 Capital Assets: 1710 Land 74,664 6,300 80,964 1720 Infrastructure, net 405,554-405,554 1730 Buildings, net 79,860 10,080 89,940 1740 Improvements other than Buildings, net - 787,043 787,043 1750 Machinery and Equipment, net 484,888 973,391 1,458,279 1780 Construction in Progress - 4,144,872 4,144,872 1000 Total Assets 2,045,418 9,074,807 11,120,225 LIABILITIES 2020 Accounts Payable 2140 Accrued Interest Payable 2400 Water Meter Deposits Payable Noncurrent Liabilities 2501 Due Within One Year 2502 Due in More Than One Year 367,933 266,178 634,111-14,781 14,781-144,742 144,742 51,704 345,000 396,704 91,391 4,415,000 4,506,391 2000 Total Liabilities 511,028 5,185,701 5,696,729 NET ASSETS 3200 Invested in Capital Assets, Net of Related Debt 3810 Restr by Enabling Legislation/Debt Covenants 3900 Unrestricted Net Assets 901,871 1,329,073 2,230,944 32,496 1,350,575 1,383,071 600,023 1,209,458 1,809,481 3000 Total Net Assets $ 1,534,390 $ 3,889,106 $ 5,423,496 The notes to the Financial Statements are an integral part of this statement. 9

CITY OF KERMIT, TEXAS STATEMENT OF ACTIVITIES FOR THE YEAR ENDED SEPTEMBER 30, 2012 Data Control Codes Expenses Primary Government: GOVERNMENTAL ACTIVITIES: 10 General Government $ 50,930 $ 11 City Hall 182,949 12 Municipal Court 28,669 13 Administration 228,737 21 Police Department 981,097 22 Fire Department 54,410 24 Inspections 2,126 30 Street, Humane and City Shop Departments 583,328 31 Street Lighting 108,719 32 Sanitation Service - 33 Parks and Cemetary 172,502 40 County Ambulance 12,000 73 Capital Lease Interest Payments 1,590 74 Other Debt Interest 582 Total Governmental Activities: BUSINESS-TYPE ACTIVITIES: 701Water Utility System 702Solid Waste Fund Total Business-Type Activities: Program Revenues Charges for Services - - 4,823-878 - - 137,104-58,725 - - - - 2,407,639 201,530 1,014,531 618,644 1,309,578 694,642 1,633,175 2,004,220 TOTAL PRIMARY GOVERNMENT: $ 4,040,814 $ 2,205,750 Data Control Codes 5010 5120 5170 5180 5190 5600 5700 5710 5800 5800 General Revenues: Taxes: Property Taxes, Levied for General Purposes Sales Taxes Franchise Taxes Other Taxes Penalty and Interest Grants and Contributions Not Restricted Miscellaneous Revenue Special Assessments Investment Earnings Transfers In (Out) Total General Revenues and Transfers Change in Net Assets Net Assets - Beginning Prior Period Adjustment Net Assets--Ending The notes to the Financial Statements are an integral part of this statement. 10

EXHIBIT B-1 Governmental Activities Net (Expense) Revenue and Changes in Net Assets Primary Government Business-type Activities Total $ (50,930) $ - $ (50,930) (182,949) - (182,949) (23,846) - (23,846) (228,737) - (228,737) (980,219) - (980,219) (54,410) - (54,410) (2,126) - (2,126) (446,224) - (446,224) (108,719) - (108,719) 58,725-58,725 (172,502) - (172,502) (12,000) - (12,000) (1,590) - (1,590) (582) - (582) (2,206,109) - (2,206,109) - 295,047 295,047-75,998 75,998-371,045 371,045 (2,206,109) 371,045 (1,835,064) 566,281-566,281 716,244-716,244 243,286-243,286 22,931-22,931 39,138-39,138 9,201-9,201 161,914 812 162,726-334,360 334,360 4,988 1,331 6,319 236,260 (236,260) - 2,000,243 100,243 2,100,486 $ (205,866) 1,726,049 14,207 471,288 3,414,166 3,652 265,422 5,140,215 17,859 1,534,390 $ 3,889,106 $ 5,423,496 11

CITY OF KERMIT, TEXAS BALANCE SHEET GOVERNMENTAL FUNDS SEPTEMBER 30, 2012 EXHIBIT C-1 Data Control Codes General Fund ASSETS 1010 Cash and Cash Equivalents $ 1050 Taxes Receivable 1051 Allowance for Uncollectible Taxes (credit) 1150 Receivables (Net) Restricted Assets: 1611 Temporarily Restricted Cash 787,574 175,545 (5,603) 10,440 1000 Total Assets $ 1,000,452 LIABILITIES 2010 Accounts Payable $ 2020 Wages and Salaries Payable 2030 Compensated Absences Payable 2220 Deferred Revenues 32,496 130,200 46,181 58,563 169,942 2000 Total Liabilities 404,886 FUND BALANCES 3260 Restricted by Enabling Legislation 3600 Unassigned Fund Balance 32,496 563,070 3000 Total Fund Balances 595,566 4000 Total Liabilities and Fund Balances $ 1,000,452 The notes to the Financial Statements are an integral part of this statement. 12

CITY OF KERMIT, TEXAS RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET ASSETS SEPTEMBER 30, 2012 EXHIBIT C-2 Total Fund Balances - Governmental Funds Capital assets used in governmental activities are not financial resources and therefore are not reported in governmental funds. At the beginning of the year, the cost of these assets was $4,348,280 and the accumulated depreciation was $3,339,568. In addition, long-term liabilities, including bonds payable, are not due and payable in the current period, and, therefore are not reported as liabilities in the funds. The net effect of including the beginning balances for capital assets (net of depreciation) and long-term debt in the governmental activities is to increase (decrease) net assets. Current year capital outlays and long-term debt principal payments are expenditures in the fund financial statements,but they should be shown as increases in capital assets and reductions in long-term debt in the government-wide financial statements. The net effect of including the 2012 capital outlays and debt principal payments is to increase (decrease) net assets. $ 595,566 836,046 108,537 The 2012 depreciation expense increases accumulated depreciation. The net effect of the current year's depreciation is to decrease net assets. (175,701) Various other reclassifications and eliminations are necessary to convert from the modified accrual basis of accounting to accrual basis of accounting. These include recognizing deferred revenue as revenue, eliminating interfund transactions, reclassifying the proceeds of bond sales as an increase in bonds payable, and recognizing the liabilities associated with maturing long-term debt and interest. The net effect of these reclassifications and recognitions is to increase (decrease) net assets. Net Assets of Governmental Activities $ 169,942 1,534,390 The notes to the Financial Statements are an integral part of this statement. 13

CITY OF KERMIT, TEXAS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE GOVERNMENTAL FUNDS FOR THE YEAR ENDED SEPTEMBER 30, 2012 EXHIBIT C-3 Data Control Codes General Fund REVENUES: Taxes: 5110 Property Taxes $ 5120 General Sales and Use Taxes 5170 Franchise Tax 5180 Other Taxes 5190 Penalty and Interest on Taxes 5200 Licenses and Permits 5400 Charges for Services 5510 Fines 5610 Investment Earnings 5620 Rents and Royalties 5640 Contributions & Donations from Private Sources 5700 Other Revenue 577,815 716,244 243,286 22,931 39,138 32,283 175,780 110,474 4,988 30 9,201 14,485 5020 Total Revenues 1,946,655 EXPENDITURES: Current: 0010 General Government 0011 City Hall 0012 Municipal Court 0013 Administration Public Safety: 0021 Police Department 0022 Fire Department 0024 Inspections 0030 Street, Humane and City Shop Departments 0031 Street Lighting 0033 Parks and Cemetary 0040 County Ambulance Debt Service: 0071 Capital Lease Principal Payments 0072 Other Debt Principal 0073 Capital Lease Interest Payments 0074 Other Debt Interest 50,930 211,154 28,669 227,345 981,927 54,410 2,126 586,717 108,719 164,169 12,000 21,167 19,681 1,590 582 6030 Total Expenditures 2,471,186 1100 Excess (Deficiency) of Revenues Over (Under) Expenditures OTHER FINANCING SOURCES (USES): 7912 Sale of Real and Personal Property 7913 Proceeds from Capital Leases 7915 Transfers In 7956 Insurance Recovery on Damaged Property (524,531) 25,750 130,711 236,260 4,642 7080 Total Other Financing Sources (Uses) 397,363 1200 Net Change in Fund Balances (127,168) 0100 Fund Balance - October 1 (Beginning) 708,527 1300 Prior Period Adjustment 14,207 3000 Fund Balance - September 30 (Ending) $ 595,566 The notes to the Financial Statements are an integral part of this statement. 14

EXHIBIT C-4 CITY OF KERMIT, TEXAS RECONCILIATION OF THE GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES TO THE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED SEPTEMBER 30, 2012 Total Net Change in Fund Balances - Governmental Funds Current year capital outlays and long-term debt principal payments are expenditures in the fund financial statements, but they should be shown as increases in capital assets and reductions in long-term debt in the government-wide financial statements. The net effect of removing the 2012 capital outlays and debt principal payments is to increase (decrease) net assets. Depreciation is not recognized as an expense in governmental funds since it does not require the use of current financial resources. The net effect of the current year's depreciation is to decrease net assets. $ (127,168) 108,537 (175,701) Various other reclassifications and eliminations are necessary to convert from the modified accrual basis of accounting to accrual basis of accounting. These include recognizing deferred revenue as revenue, adjusting current year revenue to show the revenue earned from the current year's tax levy, eliminating interfund transactions, reclassifying the proceeds of bond sales, and recognizing the liabilities associated with maturing long-term debt and interest. The net effect of these reclassifications and recognitions is to increase (decrease) net assets. Change in Net Assets of Governmental Activities $ (11,534) (205,866) The notes to the Financial Statements are an integral part of this statement. 15

Data Control CITY OF KERMIT, TEXAS SCHEDULE OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE BUDGET AND ACTUAL - GENERAL FUND FOR THE YEAR ENDED SEPTEMBER 30, 2012 Budgeted Amounts Codes Original Final Actual Amounts (GAAP BASIS) EXHIBIT C-5 Variance With Final Budget Positive or (Negative) REVENUES: Taxes: 5110 Property Taxes $ 564,190 $ 577,083 $ 577,815 $ 732 5120 General Sales and Use Taxes 535,000 669,787 716,244 46,457 5170 Franchise Tax 220,300 223,300 243,286 19,986 5180 Other Taxes - 20,328 22,931 2,603 5190 Penalty and Interest on Taxes 29,000 29,000 39,138 10,138 5200 Licenses and Permits 14,150 19,205 32,283 13,078 5300 Intergovernmental Revenue and Grants 16,400 16,400 - (16,400) 5400 Charges for Services 833,350 173,245 175,780 2,535 5510 Fines 90,000 100,952 110,474 9,522 5610 Investment Earnings 10,000 10,000 4,988 (5,012) 5620 Rents and Royalties - 200 30 (170) 5640 Contributions & Donations from Private Sources - 8,601 9,201 600 5700 Other Revenue 32,200 43,015 14,485 (28,530) 5020 Total Revenues 2,344,590 1,891,115 1,946,655 55,540 EXPENDITURES: Current: 0010 General Government 0011 City Hall 0012 Municipal Court 0013 Administration Public Safety: 0021 Police Department 0022 Fire Department 0024 Inspections 0030 Street, Humane and City Shop Departments 0031 Street Lighting 0032 Sanitation Service 0033 Parks and Cemetary 0040 County Ambulance Debt Service: 0071 Capital Lease Principal Payments 0072 Other Debt Principal 0073 Capital Lease Interest Payments 0074 Other Debt Interest - 19,776 50,930 (31,154) 140,680 214,250 211,154 3,096 27,832 27,282 28,669 (1,387) 166,555 227,674 227,345 329 951,947 986,012 981,927 4,085 63,519 61,185 54,410 6,775 1,350 2,267 2,126 141 609,223 604,201 586,717 17,484 100,000 101,417 108,719 (7,302) 569,383 - - - 179,799 179,799 164,169 15,630 12,000 12,000 12,000-167,128 148,702 21,167 127,535-16,254 19,681 (3,427) - 1,862 1,590 272-311 582 (271) 6030 Total Expenditures 2,989,416 2,602,992 2,471,186 131,806 1100 Excess (Deficiency) of Revenues Over (Under) Expenditures OTHER FINANCING SOURCES (USES): 7912 Sale of Real and Personal Property 7913 Proceeds from Capital Leases 7915 Transfers In 7956 Insurance Recovery on Damaged Property (644,826) (711,877) (524,531) 187,346 - - 25,750 25,750 - - 130,711 130,711 477,698 295,919 236,260 (59,659) - - 4,642 4,642 7080 Total Other Financing Sources (Uses) 477,698 295,919 397,363 101,444 1200 Net Change in Fund Balances (167,128) (415,958) (127,168) 288,790 0100 Fund Balance - October 1 (Beginning) 708,527 708,527 708,527-1300 Prior Period Adjustment - - 14,207 14,207 3000 Fund Balance - September 30 (Ending) $ 541,399 $ 292,569 $ 595,566 $ 302,997 The notes to the Financial Statements are an integral part of this statement. 16

CITY OF KERMIT, TEXAS STATEMENT OF NET ASSETS PROPRIETARY FUNDS SEPTEMBER 30, 2012 Business-Type Activities - Enterprise Funds EXHIBIT D-1 Water Solid Total Utility Waste Enterprise System Fund Funds ASSETS Current Assets: Cash and Cash Equivalents $ 1,334,984 $ 38,802 $ 1,373,786 Restricted Assets - Current: Temporarily Restricted Cash 1,318,875 129,842 1,448,717 Accounts Receivable-Net of Uncollectible Allowance 143,973 67,995 211,968 Total Current Assets Noncurrent Assets: Capitalized Debt Issuance Costs Capital Assets: Land Purchase and Improvements Buildings Accumulated Depreciation - Buildings Improvements other than Buildings Accumulated Depreciation - Other Improvements Machinery and Equipment Accumulated Depreciation - Machinery & Equipment Construction in Progress Total Noncurrent Assets 2,797,832 236,639 3,034,471 98,391 20,259 118,650 6,300-6,300 13,909-13,909 (3,829) - (3,829) 3,605,952-3,605,952 (2,818,909) - (2,818,909) 738,123 793,669 1,531,792 (527,344) (31,057) (558,401) 4,144,872-4,144,872 5,257,465 782,871 6,040,336 Total Assets 8,055,297 1,019,510 9,074,807 LIABILITIES Current Liabilities: Accounts Payable Wages and Salaries Payable Compensated Absences Payable Accrued Interest Payable Bonds Payable - Current Revenue Bonds Payable Payable from Restricted Assets - Current: Meter Deposits Payable Total Current Liabilities NonCurrent Liabilities: Bonds Payable - Non-Current: Revenue Bonds Payable Total Noncurrent Liabilities 137,938 46,003 183,941 52,736 4,131 56,867 20,600 4,770 25,370 11,875 2,906 14,781-145,000 145,000 200,000-200,000 144,742-144,742 567,891 202,810 770,701 3,630,000 785,000 4,415,000 3,630,000 785,000 4,415,000 Total Liabilities 4,197,891 987,810 5,185,701 NET ASSETS Investments in Capital Assets, Net of Debt Restricted by Debt Covenants Unrestricted Net Assets 1,329,073-1,329,073 1,318,875 31,700 1,350,575 1,209,458-1,209,458 Total Net Assets $ 3,857,406 $ 31,700 $ 3,889,106 The notes to the Financial Statements are an integral part of this statement. 17

EXHIBIT D-2 (Cont'd) CITY OF KERMIT, TEXAS STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN FUND NET ASSETS PROPRIETARY FUNDS FOR THE YEAR ENDED SEPTEMBER 30, 2012 Business-Type Activities - Enterprise Funds Water Utility System Solid Waste Fund Total Enterprise Funds OPERATING REVENUES: Charges for Water Services $ 830,398 $ - $ 830,398 Charges for Sewerage Service 346,589-346,589 Tapping Fees 20,100-20,100 Reconnect Fees 24,570-24,570 Charges for Late Payments 87,921-87,921 Sanitation Charges for Services - 694,642 694,642 Investment Earnings 1,170-1,170 Other Revenue 812-812 Total Operating Revenues 1,311,560 694,642 2,006,202 OPERATING EXPENSES: Water/Sewer Department Personnel Services - Salaries and Wages 252,428-252,428 Personnel Services - Employee Benefits 109,279-109,279 Purchased Professional & Technical Services 14,263-14,263 Purchased Property Services 230,612-230,612 Other Operating Expenses 4,410-4,410 Supplies 112,979-112,979 Total Water/Sewer Department 723,971-723,971 Utility Office Personnel Services - Salaries and Wages 43,447-43,447 Personnel Services - Employee Benefits 19,080-19,080 Purchased Professional & Technical Services 31,830-31,830 Purchased Property Services 6,050-6,050 Other Operating Expenses 3,548-3,548 Supplies 4,470-4,470 Total Utility Office 108,425-108,425 Finance Personnel Services - Salaries and Wages 38,360-38,360 Personnel Services - Employee Benefits 16,935-16,935 Purchased Professional & Technical Services 3,295-3,295 Other Operating Expenses 218-218 Supplies 1,349-1,349 Total Finance 60,157-60,157 Solid Waste Personnel Services - Salaries and Wages - 29,540 29,540 Personnel Services - Employee Benefits - 7,468 7,468 Purchased Professional & Technical Services - 456,784 456,784 Purchased Property Services - 1,783 1,783 Other Operating Expenses - 46,103 46,103 Supplies - 22,754 22,754 Total Solid Waste - 564,432 564,432 Depreciation 114,855 31,057 145,912 Total Operating Expenses 1,007,408 595,489 1,602,897 The notes to the Financial Statements are an integral part of this statement. 18

CITY OF KERMIT, TEXAS STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN FUND NET ASSETS PROPRIETARY FUNDS FOR THE YEAR ENDED SEPTEMBER 30, 2012 Business-Type Activities - Enterprise Funds EXHIBIT D-2 Water Utility System Solid Waste Fund Total Enterprise Funds Operating Income 304,152 99,153 403,305 NON-OPERATING REVENUES (EXPENSES): Transfers In Bond Issuance Cost Special Assessments for Revenue Bonds Investment Earnings on Revenue Bond Funds Bond Interest Expense - 13,698 13,698 (6,962) (2,940) (9,902) 334,360-334,360 161-161 (161) (20,215) (20,376) Total Non-operating Revenue (Expenses) 327,398 (9,457) 317,941 Income Before Transfers 631,550 89,696 721,246 Transfers Out Change in Net Assets Total Net Assets - October 1 (Beginning) Prior Period Adjustment Total Net Assets - September 30 (Ending) (191,962) (57,996) (249,958) 439,588 3,414,166 3,652 $ 3,857,406 31,700 - - $ 31,700 471,288 3,414,166 3,652 $ 3,889,106 The notes to the Financial Statements are an integral part of this statement. 19

CITY OF KERMIT, TEXAS STATEMENT OF CASH FLOWS PROPRIETARY FUNDS FOR THE YEAR ENDED SEPTEMBER 30, 2012 EXHIBIT D-3 Business-Type Activities Water Solid Total Utility Waste Enterprise System Fund Funds Cash Flows from Non-Capital Financing Activities: Operating Transfer Out Operating Transfers In Net Cash Provided by (Used for) Non-Capital Financing Activities Cash Flows from Capital & Related Financing Activities: Construction Costs Capital Equipment Purchases Special Assessments for Revenue Bonds Interest Earnings on Bond-Related Cash Bond Proceeds Bond Principal Retirements Bond Interest Paid Bond Maintenance Costs Bond Issuance Costs Refund of Bond Issuance Cost Net Cash Provided by (Used for) Capital & Related Financing Activities (191,961) (57,996) (249,957) - 13,698 13,698 (191,961) (44,298) (236,259) (2,863,944) - (2,863,944) - (793,669) (793,669) 334,360-334,360 161-161 - 930,000 930,000 (195,000) - (195,000) (96,706) (17,308) (114,014) (800) - (800) - (25,000) (25,000) - 1,800 1,800 (2,821,929) 95,823 (2,726,106) Net Increase(Decrease) in Cash and Cash Equivalents (2,681,952) 168,644 (2,318,308) Cash and Cash Equivalents at Beginning of the Year: 5,140,811-5,140,811 Cash and Cash Equivalents at the End of the Year: $ 2,458,859 $ 168,644 $ 2,822,503 Reconciliation of Operating Income to Net Cash Provided By Operating Activities: Operating Income: $ 304,152 $ 99,153 $ 403,305 Adjustments to Reconcile Operating Income to Net Cash Provided by Operating Activities: Depreciation 114,855 31,057 145,912 Health Insurance Premium paid in Prior Year Effect of Increases and Decreases in Current 3,652-3,652 Assets and Liabilities: Decrease (increase) in Receivables 24,365 (67,996) (43,631) Increase (decrease) in Accounts Payable 54,659 46,003 100,662 Increase (decrease) in Payroll-Related Payables 17,271 8,902 26,173 Increase (decrease) in Meter Deposits 7,984-7,984 Net Cash Provided by Operating Activities $ 526,938 $ 117,119 $ 644,057 The notes to the Financial Statements are an integral part of this statement. 20

CITY OF KERMIT, TEXAS NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED SEPTEMBER 30, 2012 I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The City of Kermit, Texas (the City ) is a municipal corporation under the applicable laws and regulations of the State of Texas. It has a Council Manager form of government with the Council Members and Mayor being elected by registered voters of the City. The City Manager is appointed by the City Council and serves as to the Council needs. The Mayor presides over the council meetings but holds no voting power. The City prepares its basic financial statements in conformity with generally accepted accounting principles promulgated by the Governmental Accounting Standards Board and other authoritative literature; and it complies with the requirements of the appropriate version of Texas s uniform accounting requirements and the requirements of contracts and grants of agencies from which it receives funds. A. REPORTING ENTITY The public elects the Mayor and Council. The Council has the authority to make decisions, appoint administrators and managers, and significantly influence operations. They also have the primary accountability for fiscal matters. B. GOVERNMENT-WIDE AND FUND FINANCIAL STATEMENTS The Statement of Net Assets and the Statement of Activities are government-wide financial statements. They report information on all of the City of Kermit, Texas activities with most of the inter-fund activities removed. Governmental Activities include programs supported primarily by taxes, grants, and other inter-governmental revenues. Businesstype activities include operations that rely to a significant extent on fees and charges for support. The Statement of Activities demonstrates how other people or entities that participate in programs the City operates have shared in the payment of the direct costs. The charges for services column includes payments made by parties that purchase, use, or directly benefit from goods or services provided by a given function or segment of the City. The grants and contributions columns include amounts paid by organizations outside the City to help meet the operational and capital requirements of a given function. If revenue is not program revenue, it is general revenue used to support all of the City s functions. Taxes are always general revenue. Inter-fund activities between governmental funds and proprietary funds appear as due to/due from on the Governmental Fund Balance Sheet and the Proprietary Fund Statement of Net Assets and as other resources and other uses on the governmental fund Statement of Revenues, Expenditures, and Changes in Fund Balance and on the Proprietary Fund Statement of Revenues, Expenses, and Changes in Fund Net Assets. All inter-fund transactions between governmental funds are eliminated on the government-wide statements. Inter-fund activities between governmental funds and enterprise funds remain on the government-wide statements and appear on the government-wide Statement of Net Assets as internal balances and on the Statement of Activities as inter-fund transfers. The fund financial statements provide reports on the financial condition and results of operations for two fund categories governmental and proprietary. The City considers some governmental and proprietary funds major and reports their financial condition and results of operations in a separate column. Proprietary funds distinguish operating revenues and expenses from non-operating items. Operating revenues result from providing goods and services in connection with a proprietary fund s principal ongoing operations; they usually come from exchange or exchange-like transactions. All other revenues are non-operating. Operating expenses can be tied specifically to the production of the goods and services, such as materials, labor, and direct overhead. Other expenses are non-operating. C. MEASUREMENT FOCUS, BASIS OF ACCOUNTING, AND FINANCIAL STATEMENT PRESENTATION The government-wide financial statements use the economic resources measurement focus and the accrual basis of accounting, as do the proprietary fund financial statements. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of timing of the related cash flows. Property taxes are recognized as revenues in the year for which they are levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met. 21

Governmental fund financial statements use the current financial resources measurement focus and the modified accrual basis of accounting. With this measurement focus, only current assets, current liabilities, and fund balances are included on the balance sheet. Operating statements of these funds present net increases and decreases in current assets (i.e., revenues and other financing resources and expenditures and other financing uses). The modified accrual basis of accounting recognizes revenues in the accounting period in which they become both measurable and available, and it recognizes expenditures in the accounting period in which the fund liability is incurred, if measurable, except for un-matured interest and principal on long-term debt, which is recognized when due. The expenditures related to certain compensated absences and claims and judgments are recognized when the obligations are expected to be liquidated with expendable available financial resources. The City considers all revenues available if they are collectible within 60 days after year-end. Revenues from local sources consist primarily of property taxes and sales taxes. Property tax, sales tax, and revenues received from the State are recognized under the susceptible to accrual concept, that is, when they are both measurable and available. The City considers them available if they will be collected within 60 days of the end of the fiscal year. Miscellaneous revenues are recorded as revenue when received in cash because they are generally not measurable until actually received. Investment earnings are recorded as earned, since they are both measurable and available. Grant funds are considered to be earned to the extent of expenditures made under the provisions of the grant. Accordingly, when such funds are received, they are recorded as deferred revenues until related and authorized expenditures have been made. If the balance has not been expended by the end of the project period, grantors sometimes require the city to refund all or part of the unused amount. The Proprietary Fund Types are accounted for on a flow of economic resources measurement focus and utilize the accrual basis of accounting. This basis of accounting recognizes revenues in the accounting period in which they are earned and become measurable and expenses in the accounting period in which they are incurred and become measurable. The City applies all Governmental Accounting Standards Board (GASB) pronouncements. With this measurement focus, all assets and all liabilities associated with the operations of these funds are included on the fund Statement of Net Assets. The fund equity is segregated into (1) investments in capital assets, net of related debt, (2) restricted by enabling legislation and (3) unrestricted net assets. D. FUND ACCOUNTING The City reports the following major governmental fund: General Fund The general fund is the City s primary operating fund. It accounts for all financial resources except those required to be accounted for in another fund. The City reports the following major proprietary funds: Water and Sewer Fund The Water and Sewer Fund is used to account for the provision of water and sewer services to the residents of the City. All activities necessary to provide such services are accounted for in this fund, including administration, operations, maintenance, financing and billing and collection. Included in the Water and Sewer Fund are deposits required to open a utility account. The deposits received to open an account are restricted as to use and considered a current liability of the Fund. Solid Waste Fund - The Solid Waste Fund is used to account for the trash collection and disposal of solid waste of the residents of the City. All activities necessary to provide such services are accounted for in this fund including operations, maintenance and financing. E. OTHER ACCOUNTING POLICIES 1. In the government-wide financial statements and proprietary fund types in the fund financial statements, long-term debt and other long-term obligations are reported as liabilities in the applicable governmental activities, business-type activities, or proprietary fund type financial statement of net assets. 2. It is the City s policy to permit full-time employees to accumulate earned but unused vacation and sick pay benefits. These employees may accumulate up to 240 hours of unused vacation benefits and up to 720 hours of unused sick leave benefits. Unused sick leave benefits will not be paid to the employees upon resignation or termination of employment. An estimate is made of the amount of accumulated vacation benefits that will be paid within one year. This estimate is recorded as a current liability on the governmental fund financial statements. The remainder of the vacation benefits, if any, is reported as a long-term liability on the government-wide financial statements. 22

The accumulated vacation benefits are reported as a current liability on the Statement of Net Assets in the Proprietary Fund. 3. Capital assets, which include land, buildings, furniture and equipment, and infrastructure, are reported in the applicable governmental or business-type activities columns in the government-wide financial statements. The City defines capital assets as assets with an initial, individual cost of more than $5,000 and an estimated useful life of more than one year. Such assets are recorded at historical cost or estimated historical cost if purchased or constructed. Donated capital assets are recorded at estimated fair market value at the date of donation. The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend assets lives are not capitalized. Major outlays for capital assets and improvements are capitalized as projects are constructed. Buildings, furniture, and equipment of the City and its component unit are depreciated using the straight-line method over the following estimated useful lives: Assets Years Buildings 22 to 45 Building Improvements 15 Infrastructure 10 to 45 Water & Sewer System 10 to 45 Office Equipment 7 to 10 Computer Equipment 5 to 10 II. STEWARDSHIP, COMPLIANCE, AND ACCOUNTABILITY BUDGETARY DATA The City Council adopts an appropriated budget for the General Fund and System Fund. The City is required to present the adopted and final amended budgeted revenues and expenditures for each of these funds. The City compares the final amended budget to actual revenues and expenditures. The General Fund Budget report appears in Exhibit C-5 and the System Fund Budget report appears in Exhibit E-1. The following procedures are followed in establishing the budgetary data reflected in the basic financial statements: 1. Prior to September 1, the City Manager submits to the City council a proposed operating budget for the fiscal year commencing the following October 1. The operating budget includes proposed expenditures and the means of financing them for the upcoming year, along with estimates for the current year and the actual data for the preceding year. 2. A meeting of the City Council is then called for the purpose of adopting the proposed budget. At least ten days public notice of the meeting must be given. 3. Prior to October 1, the Council legally enacts the budget through passage of a resolution. Once a budget is approved, it can only be amended at the function and fund level by approval of a majority of the members of the Council. Amendments are presented to the Council at its regular meetings. Each amendment must have Council approval. As required by law, such amendments are made before the fact, are reflected in the official minutes of the Council, and are not made after fiscal year-end. 23