the utilities board of the city of daphne, alabama financial

THE UTILITIES BOARD OF THE CITY OF DAPHNE, ALABAMA

FINANCIAL STATEMENTS WITH INDEPENDENT AUDITORS' REPORT

Years Ended September 30,2011 and 2010

•:·.;,J

THE UTILITIES BOARD OF THE CITY OF DAPHNE, ALABAMA TABLE OF CONTENTS

Independent Auditors' Report

Management's Discussion and Analysis

Basic Financial Statements Statements of Net Assets

Statements of Revenues, Expenses and Changes in Net Assets

Statements of Cash Flows

Notes to Financial Statements

Supplementary Information Departmental Statement of Revenues and Expenses Statement of Revenues and Expenses - Budget and Actual

Single Audit Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards

Independent Auditors' Report on Compliance with Requirements Applicable to Each Major Program and on Internal Control Over Compliance in Accordance with OMB Circular A-133

Schedule of Expenditures of Federal Awards

Notes to the Schedule of Expenditures of federal Awards

Schedule of Findings and Questioned Costs

Independent Auditors' Report on Compliance and Computation of Historical Debt Service Coverage Ratio

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INDEPENDENT AUDITORS' REPORT

ry \.

To the Utilities Board City of Daphne Daphne, Alabama

INDEPENDENT AUDITORS' REPORT

We have audited the accompanying financial statements of the Utilities Board of the City of Daphne, Alabama (the Board}, as of and for the years ended September 30, 2011 and 2010, as listed in the table of contents. These financial statements are the responsibility of the Board's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Utilities Board of the City of Daphne, Alabama, as of September 30, 2011 and 2010, and the results of its operations and cash flows for the years then ended in conformity with generally accepted accounting principles accepted in the United States of America.

The Management's Discussion and Analysi~ on pages 3 through 8 is not a required part of the basic financial statements but is supplementary information required by the Government Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the supplementary information. However, we did not audit the information and express an opinion on it.

In accordance with Government Auditing Standards, we have also issued a report dated February 22, 2012, on our consideration of the Board's internal control over financial reporting and our test of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on Internal control over financial reporting or on compliance. That report is an integral part of an audit performed In accordance with Government Auditing Standards and should be considered in assessing the results of our audit.

Accounting principles generally accepted in the United States of America require that the management's discussion and analysis on pages 3 through 8 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.

m ~ru r 1n "j Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the Utilities Board of the City of Daphne, Alabama's financial statements as a whole. The introductory section is presented for purposes of additional analysis and is not a required· part of the financial statements. The accompanying schedule of expenditures of federal awards is presented for purposes of additional analysis as required by U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, and is also not a required part of the financial statements. The schedule of expenditures of federal awards is the responsibility of management and was derived from and relate directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole. The introductory 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.

Robertson, Andreoli and Covington, P.C. Certifted Public Accountants

February 22, 2012

BASIC FINANCIAL STATEMENTS

THE UTILITIES BOARD OF THE CITY OF DAPHNE, ALABAMA STATEMENTS OF NET ASSETS September 30, 2011 and 2010

Assets Current Assets

Cash Accounts receivable (net of allowance

for doubtful accounts of $60,926 in 2011 and $52,447 In 201 0}

Other receivables Inventory Prepaid expenses

Total current assets

Restricted Assets Cash, restricted for the retirement of long-term debt Bond proceeds receivable, restricted for capital projects

Total restricted assets

Property, Plant and Equipment Land Buildings Machinery and equipment Office equipment Plant

Less: accumulated depreciation Total property, plant and

equipment, net

Total assets

$

$

2011 2010

10,622,010 $ 10,826,177

1',271,150 1,304,856 144,783 156,678 297,175 309,049 152,930 190,624

12,488,048 12,787,384

1,979,999 1,894,273 1,058,101 415,176 3,038,100 2,309,449

694,024 343,642 1,746,737 517,916 2,115,550 2,115,550

700,999 673,029 52,048,977 46,307,768 57,306,287 49,957,905 ~18,299,621} (16,953,786}

39,006,666 33,004,119

54,532,814 $ 48,100,952

9

Liabilities and Net Assets 2011 2010

Current Liabilities Accounts payable $ 622,860 $ 439,028 Utility tax payable 4,645 19,000 Pilot fee payable 22,660 19,143 Franchise fees payable 5,904 5,330 Accrued salaries and payroll liabilities 117,031 101,290 Deferred income 66,730 74,850 Due to City of Daphne 102,015 329,346

Total current liabilities 941,845 987,987

Current Liabilities Payable from Restricted Assets

Accrued interest 212,775 200,750 Current portion of bonds payable 1,770,000 1,575,000

Total current liabilities payable from restricted assets · 1,982,775 1,775,750 .

Other Liabilities Customer deposits 1,118,866 1,059,152

Total other liabilities 1,118,866 1,059,152

Long-Term Liabilities Bonds payable, less current portion 21,795,000 20,220,000 Unamortized bond discount and issuance costs (372,758) (351,341) Deferred amount on refunding and interest rate swap ~1.149,419} (1,234,219)

T otallong-term liabilities 20,272,823 18,634,440

Total liabilities 24,316,309 22,457,329

Net Assets Invested in capital assets, net of related debt 16,751,068 12,593,929 Restricted for the retirement of long-term debt 1,979,999 1,894,273 Restricted for capital projects 1,058,101 415,176 Unrestricted 10,427,337 10,740,245

Total net assets 30,216,505 25,643,623

Total liabilities and net assets $ 54,532,814 $ 48,100,952

The accompanying notes are an integral part of these financial statements.

THEUTILITIESBOARDOFTHE 10

CITY OF DAPHNE, AlABAMA STATEMENTS OF REVENUES, EXPENSES _,.",., ~~ ~: .,·"'··''":> ~~· ~:;;\·;~··: tf:"\ if? ·v~ v AND CHANGES IN NET ASSETS 1,;<, ' );'BJ ~~~?. ~/: V-\ ~:: w i•~l ~1 ~~\ \f~ ~')11 ~ ' Years Ended September 30, 2011 and 2010

"'·· "}, kYit\l I~ i I ~ a t\i ~ ~ ·· , ·

Operating Revenues 2011 2010

Service income $ 12,233,806 $ 11,738,603

Connection and capacity fees 428,061 667,725

Penalties 72,248 69,201

Cut on/off fees 39,429 37,960

Aid to construction 20,800 10,275

Total operating revenues 12,794,344 12,523,764

Operating Expenses Salaries 2,802,070 2,647,414

Fringe benefits 868,017 825,768

System expense 2,870,034 2,913,023

Repairs and maintenance 541,237 933,487

Bad debts 65,663 72,429

Supplies and other system expense 608,648 476,028

Communications 71,617 70,800

Professional services 173,201 287,072

Meetings, dues and travel 84,499 81,980

Insurance 151,331 147,219

Vehicle expense 173,817 135,123

Uniforms 33,634 31,478

Depreciation 1,345,836 1,293,648

Total operating expenses 9,789,604 9,915,469

Operating Income 3,004,740 2,608,295

Nonoperating Revenues (Expenses) Interest income 23,315 30,036

Other revenue 188,434 114,919

Lawsuit settlement 22,814 0

Principal forgiveness 2,235,169 0

Interest expense (784,807) (808,306)

Amortization ~116,783) ~115,225!

Total nonoperating revenues {expenses) 1,568,142 (778,576)

Increase In Net Assets 4,572,882 1,829,719

Total Net Assets, beginning of year 25,643,623 23,813,904

Total Net Assets, end of year $ 30,216,505 $ 25,643,623


THE UTILITIES BOARD OF THE 11

CITY OF DAPHNE, ALABAMA ;·r;,!\~f7r~, m :~ .• ~ ~, % "'"' • it\ rr/~ ~ ~ \~c; !71{!. ·•·' l't ,.~··~~~ "'' "' ~* ?:' jl'·~ fi ,>., ·~ '"':-'; '''1 ~~r~ f J.-)", '' ., }. I{ .'\ I fj •

STATEMENTS OF CASH FLOWS . ~ :'~i L: ;'•~ \:;, Ill ~:: .;i ~·>i ii:\ 1:~. ;,j~1'., m :.. N' M lli ~ til ~ ·'u ,. li'.>. '

'~· 1®] , . \.1 . •

Years Ended September 30, 2011 and 2010

2011 2010

Cash Flows Provided By Operating Activities

Cash received from customers $ 12,653,944 $ 12,148,953

Cash received as interest 23,315 30,036

Other operating cash receipts 188,434 114,919

Cash received from lawsuit settlement 22,814 0 Cash received from principal forgiveness 2,235,169 0 Cash paid to employees (2,786,329) (2,641 ,943)

Cash paid for employee benefits and taxes (868,017) (825,768)

Cash paid to suppliers for goods and services (4,540,281) (4,862,988)

Cash paid for interest (772,782~ (808,065)

Net cash provided by operating activities 6,156,267 3,155,144

Cash Flows (Used) By Investing Activities

Capital outlays (7,348,382) {3,348,004)

Net cash (used) by Investing activities (7,348,382) (3,348,004)

Cash Flows Provided (Used) Provided By Capital Financing Activities

Bond payments (1,575,000} (1,230,000}

Bond proceeds 2,648,674 2,464,485

Net cash provided (used) by capital financing activities 1,073,674 1,234,485

Net Increase In Cash and Cash Equivalents (118,441} 1,041,625

Cash and Cash Equivalents, beginning of year 12,720,450 11,678,825

Cash and Cash Equivalents, end of year $ 12,602,009 $ 12,720,450

Summary

Current Assets - cash and cash investments $ 10,622,010 $ 10,826,177

Restricted Assets - cash and cash investments 1,979,999 1,894,273 Total cash and cash Investments $ 12,602,009 $ 12,720,450


THE UTILITIES BOARD OF THE CITY OF DAPHNE, ALABAMA STATEMENTS OF CASH FLOWS Years Ended September 30, 2011 and 2010

Reconciliation of net Income to net cash provided by operating activities:

Change in net assets

Adjustments to reconcile net Income (loss) to cash provided (used) by operating activities:

Depreciation Amortization

Change in current assets and liabilities: (lncrease)decrease in accounts receivable (lncrease)decrease in other receivables (lncrease)decrease in prepaid expenses (lncrease)decrease in Inventory lncrease(decrease) in accounts payable Increase( decrease) in other payables lncrease(decrease) in accrued Interest Increase( decrease) in customer deposits

Total adjustments Net cash provided by operating activities

$

$


2011 2010

4,572,882 $ 1,829,719

1,345,836 1,293,648 116,783 115,225

33,706 (279,062) 11,895 (41,408) 37,694 (22,151) 11,874 34,235

183,832 273,568 (229,974) (107,031)

12,025 241 59,714 58,160

1,583,385 1,325,425 6,156,267 $ 3,155,144

--------------------------..,....------~~ ---~·~

NOTES TO THE FINANCIAL STATEMENTS

·'

THE UTILITIES BOARD OF THE CITY OF DAPHNE, ALABAMA NOTES TO FINANCIAL STATEMENTS September 30, 2011 and 2010

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

13

The Utilities Board of the City of Daphne, Alabama (the Board) was formed in 1953, to provide water, gas and sewer services for the Daphne area.

A. Generally Accepted Accounting Principles The Board follows generally accepted accounting principles as stated in the Government Accounting Standards Board (GASB} Statement Number 34. The Board applies GASB pronouncements, as well as, all Financial Accounting Standards Board Statements and Interpretations, Accounting Principles Board Opinions and Accounting Research Bulletins issued on or before November 30, 1989, unless they conflict with a GASB pronouncement.

B. Basis of Accounting The accounting records are accounted for using the accrual basis of accounting. Revenues are recognized when they are earned, and expenses are recognized when they are incurred.

·c. Cash and Cash Equivalents Cash and cash equivalents include cash on hand, demand deposits and certificates of deposit with original maturities of three months or less. At September 30, 2011 and 2010, the carrying amount of the Board's deposits were fully Insured and collateralized with pledged securities held by the Security for Alabama Funds Enhancement program (SAFE PROGRAM}. Restricted cash and cash equivalents are invested directly in U.S. Government debt securities.

D. Customer Accounts Receivable Customer accounts receivable are reported at their gross value, and where appropriate, are reduced by the portion that is expected to be uncollectible. Financial instruments which potentially subject the Board to concentrations of credit risk are accounts receivable. The majority of the Board's accounts receivable consists of a large number of small receivables. The Board requires no collateral from its customers.

E. Restricted Assets Based on certain bond covenants, the Board is required to establish and maintain prescribed amounts of resources (consisting of cash and temporary investments} that can be used only to service outstanding debt, a reserve fund to be used only to prevent a default and all bond proceeds to be used only for specific construction projects stated in bond indentures.

F. Property, Plant and Equipment Property, plant and equipment are stated at cost. Assets acquired by gift are recorded at their fair market value at the date of transfer. Depreciation of exhaustible fixed assets Is charged as an expense against operations, and accumulated depreciation is reported oil the balance sheet. Depreciation has been provided over the estimated useful lives using the straight-line method of depreciation. The service lives by type of asset are as follows:

Water works system Sewer system Gas system Buildings Furniture and equipment

G. Amortization of Bond Expenses

50 years 50 years 50 years 20 years

5-10 years

The cost of issuance of bonds is being amortized, on the straight-line basis, over the life of the bonds. This method is not in conformance with, but approximates, generally accepted accounting principles.

---------------------------------------------

THE UTILITIES BOARD OF THE CITY OF DAPHNE, ALABAMA · NOTES TO FINANCIAL STATEMENTS September 30, 2011 and 2010

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -continued

H. Compensated Absences Board employees are entitled to certain compensated absences based on the length of employment. With minor exceptions, compensated absences do not vest or accumulate, and are recorded as expenses when they are paid.

I. Inventories Inventories consist of materials and supplies used for repairs and the installation of gas, sewer and water lines, and are valued at the lower of cost or market, with cost determined on the first-in, first-out method.

J. Pension Plan The Board participates in the Alabama Employees' Retirement System. All eligible employees contribute 5% of their salaries and the Board contributed 6.60% and 5.13% of employees' salaries during 2011 and 2010, respectively.

K. Payable from Restricted Assets Certain assets of the Board have been restricted for debt service, reserves held to prevent any possible default, and construction financed by the Board's revenue bonds. These assets consist of cash, temporary investments and funds held by an intermediary agency, restricted as follows:

Payable from Restricted Assets 2011

Accrued interest $ 212,775 Bonds payable (current portion) 1,770,000

L__ 1 982.775

L. Use of Estimates

$

$

2010 . 200,750 1,575,000 1.775.Z5.Q

In conformity with generally accepted accounting principles, the preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses in the financial statements and accompanying notes. Although these estimates are based on management's knowledge of current events, actual results may ultimately differ from estimates.

M. Reclassifications Certain reclassifications have been made to prior year balances in order to conform to current year presentation.

NOTE 2 - RETIREMENT COMMITMENTS

A. Plan Description The Board contributes to the Employees' Retirement System of Alabama, an agent multiple-employer public employee retirement system that acts as a common investment and administrative agent for the various state agencies and departments.

Substantially all employees are members of the Employees' Retirement System of Alabama. Membership is mandatory for covered or eligible employees of the Board. Benefits vest after 10 years of creditable service. Vested employees may retire with full benefits at age 60 or after 25 years of service. Retirement benefits are calculated by two methods with retirees receiving payment under the method that yields the highest monthly benefit. The methods are (1) Minimum Guarantee, and (2) Formula, of which

THE UTILITIES BOARD OF THE CITY OF DAPHNE, ALABAMA NOTES TO FINANCIAL STATEMENTS September 30,2011 and 2010

NOTE 2 • RETIREMENT COMMITMENTS -continued

the formula method usually produces the highest monthly benefit. Under this method, retirees are allowed 2.0125% of their average final salary (best three of the last ten years) for each year of service. Disability retirement benefits are calculated in the same manner. Pre-retirement death benefits in the amount of the annual salary for the fiscal year preceding death are provided to plan members.

The Employees' RetirementSystem was established as of October 1, 1945, under the provisions of Act 515, Acts of Alabama 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 general administration and operation of the Employees' Retirement System is vested in the Board of Control. Benefit provisions are established by the Code of Alabama 1975, Sections 36-27-1 through 36-27-103, as amended, Sections 36-27-120 through 36-27-139, as amended, and Sections 36-27B-1 through 36-278-6. Authority to amend the plan rests with the Legislature of Alabama. However, the Legislature has granted the Commission authority to accept or reject various Cost-Of-Living-Adjustments (COLAs} granted to retirees.

The Retirement Systems of Alabama issues a publicly available financial report that includes financial statements and required supplementary information for the Employees' Retirement System of Alabama. That report may be obtained by writing to The Retirement Systems of Alabama, 135 South Union Street, Montgomery, Alabama 36130-2150.

B. Funding Policy Plan members are required to contribute 5.00% of their annual covered salary. The Board is required to contribute at an actuarially determined rate; the current rate is 6.60% and 5.13% of annual covered payroll In 2011 and 2010, respectively. The contribution requirements of plan members and the Board are established and may be amended by the RSA Board of Control.

C. Annual Pension Cost For 2011 and 2010, the Board's annual pension cost of $120,490 and $112,313, respectively, for the plan was equal to the Board's required and actual contributions. The required contribution was determined as part of the September 30, 2011 and 2010 actuarial valuations using the entry age actuarial cost method. The actuarial assumptions Included (a) 8% investment rate of return, (b) projected salary Increases ranging from 4.61% to 7.75% per year and (c) no cost of living adjustments. Both (a) and (b) Included an inflation component of 4.5%. The actuarial valuation was determined using techniques that smooth the effects of short-term volatility in the market value of investments over a five-year period. The plan's unfunded actuarial accrued liability is being amortized as a level percentage of projected payroll on an open basis.

Fiscal Year Ending

9/30/2008 9/30/2009 9/30/2010

Three-Year Trend Information

Annual Pension Cost(APC) $123,919 $132,030 $112,314

Percentage of APC Contributed

100% 100% 100%

Net Pension Obligation

$0 $0 $0

THE UTILITIES BOARD OF THE CITY OF DAPHNE, ALABAMA NOTES TO FINANCIAL STATEMENTS September30, 2011 and 2010

NOTE 2 -RETIREMENT COMMITMENTS- continued .

REQUIRED SUPPLEMENTARY INFORMATION Schedule of Funding Progress

Actuarial Actuarial Accrued Un-funded Actuarial Value of Liability (ML) ML Funded Valuation Assets• -Entry Age (UML) Ratio

Date (a} (b) 1 (b- a} (a lll) 9/30/2005 $2,765,063 $2,81 0, 7011 $45,638 98.4% 9/30/2006" $2,980,641 $3,185,997 . $205,356 93.6% 9/30/2007 $3,220,815 $3,266,665 $45,850 98.6% 9/30/2008 $3,474,205 $3,673,232 $199,027 94.6% 9/30/2009 $3,629,353 $4,072,098 $442,745 89.1% 9/30/20103 $3,704,748 $4,631,523 $926,775 80.0% 9/30/20104 $3,704,748 $4,661,325 $956,577 79.5%

1 - Reflects liability for cost of living benefit Increases granted on or after October 1, 1978.

2 - Reflects changes In actuarial assumptions.

,~ r !II 16 If) w ~ '~i f:1'

ii "~ ~

UMlasa Covered Percentage of Payroll Covered Payroll

(c) ((b- !ll c)) $2,002,452 2.3% $2,237,906 9.2% $2,222,215 2.1% $2,417,997 8.2% $2,492,363 17.8% $2,459,088 37.7% $2,459,088 38.9%

3- Reflects the impact of Act 2011-27, which closes DROP program for new applicants after March 24, 2011.

4- Reflects the impact of Act 2011-27 as well as Act 2011-676, which Increases the member contribution rates by 2.25% beginning

October 1, 2011 and by an additional 0.25% beginning October 1, 2012. • -Market value of assets as of September 30, 2010: $3,125,861

NOTE 3- BOND PROCEEDS RECEIVABLE

A description of the Board's bond proceeds receivable is as follows:

The Board entered into a bond agreement "Series 2006- CWSRF-DL" on September 1, 2006 to provide the funds necessary to pay the cost

of certain improvements to the waterworks plant and distribution system. The bond proceeds totaled $3,815,000 with $162,798 being capitalized interest and $3,652,202 going to the project fund.

The Board entered into a bond agreement "Series 2011- CWSRF" on March 1, 2011 to provide the funds necessary to pay the cost

of certain improvements to the waterworks plant and distribution system. The bond proceeds totaled $3,345,000 with $53,401 being capitalized interest and $3,291,599 going to the project fund.

Total bond proceeds receivable

$

$

$

2011 2010

0 $ 415,176

1.058.101 .oo:..$ ___ _;::.0

1.058.1 01 ~$ =="""41,y5~1k!7~6


NOTE 4 ·LONG-TERM DEBT

The following is a summary of changes In note and bond transactions for the current year:

Notes Bonds Pa~able Pa:iable

Balance, beginning of year $ 0 $ 21,795,000 $ Additions 0 3,345,000 Reductions 0 ( 1,575,000} Balance, end of year $ 0 $ 23.565,000 $

A description of the Board's long~term debt is as follows:

Bonds Payable 2011

a. Series 1994~SRF Water, Gas and Sewer Revenue Bonds, due in annual principal installments each August 1 and semi~annual interest payments each February 1 and December 1, with a 2.85% fixed rate of interest, with a maturity date of August, 2015 $ 1,230,000 $

b. Series 2003 Water, Gas and Sewer Revenue Bonds, due in annual principal installments each June 1 and semi~annual interest payments each June 1 and December 1, interest rates vary from 2.125% to 4.375%, with a maturity date of June, 2020 4,675,000

c. Series 2005~SRF Water, Gas, and Sewer Revenue Bonds due in annual principal installments each August 15, and semi~annual interest payments August 15 and February 15, with a 3.25% fixed rate of interest, with a maturity date of August, 2025 2,670,000

d. Series 2006-SRF Water, Gas, and Sewer Revenue Bonds due in annual principal installments each August 15, and semi-annual interest payments August 15 and February 15, with a 3.25% fixed rate of interest, with a maturity date of August, 2027 835,000

Total 21,795,000

3,345,000 (1,575,000) 23.565,000

2010

1,500,000

5,095,000

2,820,000

875,000

THE UTILITIES BOARD OF THE CITY OF DAPHNE, ALABAMA NOTES TO FINANCIAL STATEMENTS Se tember 30,2011 and 2010

NOTE 4- LONG-TERM DEBT- continued

e. Series 2006-SRF Water, Gas, and Sewer Revenue Bonds due in annual principal installments each August 15, and semi-annual interest payments August 15 and February 15, with a 3.25% fixed rate of interest, with a maturity date of August, 2027

f. Series 2007- Water, Gas, and Sewer Revenue Bonds due in annual principal installments each June 1, and semi-annual interest payments June 1 and December 1, Interest rates vary from 3.56% to 4.0%, with a maturity date of June, 2030

g. Series 2008- Water, Gas, and Sewer Revenue Bonds due in annual principal installments each June 1, and semi-annual interest payments June 1 and December 1, interest rates vary from 2.25% to 4.0%, with a maturity date of June, 2030

h. Series 2011-SRF Water, Gas, and Sewer Revenue Bonds due in annual principal installments each February 15, and semi-annual interest payments February 15 and August 15, with a 3.10% rate of interest, with a maturity date of February, 2031 Total bonds payable Less current portion T otallong-term bonds payable

2011

3,235,000

2,975,000

4,600,000

3.345.000 23,565,000

1.770.000 $ 21.795.000

The annual requirements to amortize debt, including interest, are as follows:

Notes Bonds September 30 Pa~able Pa~able

2012 $ 0 $ 2,573,554 2013 0 2,586,013 2014 0 2,601,110 2015 0 2,609,249 2016 0 2,270,316

2017-2031 0 17,313,143 $ Q 9.! 29,953,385

Restrictive Covenants

2010

3,385,000

3,085,000

5,035,000

0 21,795,000 1.575.000

$ 20.220.000

Total $ 2,573,554

2,586,013 2,601,110 2,609,249 2,270,316

17,313,143 :& 29,953,385

The bond agreements contain various covenants pertaining to debt service coverage. The board complied with all debt covenants at September 30, 2012, insofar as they relate to accounting matters.


NOTE 4 ·LONG-TERM DEBT- continued

Advanced Refunding On June 1, 2003, the Board entered into a current refunding of Its $5,250,000 Water, Gas and Sewer Revenue Bonds, Series 1993 consisting of the remaining outstanding principal amount of $5,015,000, of which $35,000 of the term bonds matured on June 1, 2003 and of which $4,980,000 of the term bonds matured on or after June 1, 2004 were redeemed on June 1, 2003. The $5,840,000 Water, Gas and Sewer Revenue Bonds, Series 2003, were issued for the purpose of refunding the Series 1993 Water, Gas and Sewer Revenue Bonds. The new bond rates will vary between 1.25% to 4.375% and will provide a gross present value savings on aggregate debt service of $388,093.99. This difference, reported on the accompanying financial statements as a deduction from bonds payable, is being charged to operations through the year 2020 using the straight-line method over the life of the bonds. This method is not in conformance, but approximates generally accepted accounting principles.

NOTE 5 - CONTRIBUTED CAPITAL

Contributed capital consists of contributions from the City of Daphne and the State of Alabama Department of Transportation made in prior fiscal years. $2,235,169 was contributed during 2011 by the Alabama Water Pollution Control Authority in the form of partial principal forgiveness of the 2011 CWSRL bond issuance.

NOTE 6 - DEFERRED SEWER FEES

This amount represents payments made by individual customers for future sewer connections when service is made available. The deferred revenue will be recognized as revenue when individual customers connect to the sewer system.

NOTE 7- RELATED PARTY TRANSACTIONS

The City Council of the City of Daphne, Alabama (the City) appoints the members of the Board, and because of this appointment power, is a related organization to the Board.

The Board provides billing and collection of garbage fee services for the City. The Board remits to the City on a monthly basis all funds collected during the previous month for garbage service. The City also provides the Board with minor repair services and fuel for the Board's vehicles. Charges for these services are billed to the Board by the City on a monthly basis. Amounts due to the City as of September 30, 2011 and 2010 were $102,015 and $329,346, respectively.

In addition to above-mentioned transactions, the Board and City also work jointly on utility extension projects from time to time. Amounts received from the City are recorded as contributed capital in the financial records of the Board.


NOTE 8- SUPPLEMENTAL BOND DISCLOSURES

The following Is a summary of the activity in the bond cash accounts during the current year:

Beginning Balance Deposits Withdrawals

Replacerrent Fund Acct. No. 911053 $ 108,561 $ 0 $ 0 Series 1994 SRf Acct. No. 911001 50,992 305,551 305,018 2003 Reserve Fund Acct. No. 911061 110,233 423,909 325,305 2005 DWSRL Bond Fund Acct. No. 911011 40,289 241,349 241,363 2006 CWSRF Bond Fund Acct. No. 911041 43,409 259,619 259,725 2006 DWSRF Bond Fund Acct. No. 911021 11,654 69,585 69,738 2007 Bond Fund Acct. No. 911071 76,165 228,361 228,131 2007 Bond Reserve Fund Acct. No. 911072 238,718 0 0 2008 Bond Fund Acct. No. 911081 203,008 608,721 608,740 2008 Bond Reserve Fund Acct. No. 911083 912,168 . 1 0

$ 1,795,197 $ 2,137,096 $ 2,038,020

Ending Balance

$ 108,561 . 51,525 208,837

40,275 43,303 11,501 76,395

238,718 202,989 912,169

$ 1,894,273

During the fiscal years ended September 30, 2011 and 2010, the Board expended $7,348,387 and $3,348,006 respectively, for capital improvements to the water, sewer and gas systems.

NOTE 9- CUSTOMER DEPOSITS

Individual customers are required to make water, sewer and gas meter deposits. The amount of deposits required to be inade are as follows: water - $50, sewer - $50 and gas - $75. The deposits are to be applied against any usage charge not paid by the customer or refunded to the customer when the account is closed.

NOTE 10- CAPACITY FEES

Capacity fees are required to be paid when a customer connects to the water and sewer systems. The amount of capacity fees for water and sewer are $2,100 and $2,800 respectively.

SUPPLEMENTARY INFORMATION

THE UTILITIES BOARD OF THE CITY OF DAPHNE, ALABAMA DEPARTMENTAL STATEMENT OF REVENUES AND EXPENSES Years Ended September 30,2011 and 2010

2011 SUPPORT

Operating Revenues Service income $ 0 $ Connection and capacity fees 0 Penalties 0 Cut onfoff fees 0 Aid to construction 0

Total operating revenues

Operating Expenses Salaries 687,881 Fringe benefits 216,274 System expense 9,403 Repairs and maintenance 8,223 Bad debts 65,663 Supplies and other system expense 457,936 Communications 22,078 Professional services 136,158 Meetings, dues and travel 41,849 Insurance 151,331 Vehicle expense 11,663 Uniforms 655 Depreciation 117,471

Total operating expenses 1,926,585

Operating lncome(Loss} $ {1 ,926,585) $

2010 2011 2010 SUPPORT METER METER

0 $ 0 $ 0 $ 0 0 0 0 0 0 0 0 0 0 0 0

698,987 192,562 177,294 213,786 50,253 46,844

9,133 0 0 7,300 154,583 372,501

72,429 0 0 350,955 8,874 11,332

20,832 5,539 4,994 271,522 0 0

37,791 417 1,010 147,219 0 0

9,357 23,897 17,655 715 2,574 2,825

114,539 17,917 15,241 1,954,565 456,616 649,696

{1,954,565) $ (456,616) $ {649,696) $

2011 2010 2011 2010 WATER WATER GAS GAS

4,069,684 $ 3,680,828 $ 3,305,790 $ 3,710,666 207,498 326,433 0 0

72,248 69,201 0 0 39,429 37,960 0 0

0 0 20,800 10,275 4,388,859 4,114.422 3,326,590 3,726,941

530,796 451,367 206,755 191,114 155,387 149,652 55,663 58,326 737,461 536,488 1,050,132 1,140,898 183,004 309,121 81,127 156,811

0 0 0 0 2,686 3,009 85,371 61,086

12,722 12,639 8,119 8,705 7,995 7,495 8,660 4,950

11,310 20,117 19,692 15,651 0 0 0 0

42,836 28,331 20,811 16,634 9,861 8,466 4,868 2,500

379,311 369,482 195,440 184,741 2,073,369 1,896,167 1,736,638 1,842,016

2,315,490 $ 2,218,25~ $ 1,589,952 $ 1,878.~·--

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2011 2010 2011 SEWER SEWER MAINTENANCE

Operating Revenues Service income $ 4,858,332 $ 4,347,109 $ 0 $ Connection and capacity fees 220,563 341,292 0 Penalties 0 0 0 Cut on/off fees 0 0 0 Aid to construction 0 0 0

Total operating revenues 5,078,895 4,688,461

Operating Expenses Salaries 625,216 596,157 406,592 Fringe benefrts 190,531 181,087 146,875 System expense 1,062,647 1,209,635 6,063 Repairs and maintenance 89,706 68,426 15,131 Bad debts 0 0 0 Supplies and other system expense 14,916 11,615 21,054 Communications 9,484 10,083 10,417 Professional services 20,388 3,105 0 Meetings, dues and travel 4,434 4,226 5,052 Insurance 0 0 0 Vehicle expense 36,448 34,506 23,439 Uniforms 9,922 10,069 4,102 Depreciation 635,697 609,645 0

Total operating expenses ~.699,389 2,738,554 638,725

Operating lncome(Loss) $ 2,379,506 $ 1,949,847 $ (638,725) $

See auditors' report

2010 2011 2010 MAINTENANCE LINE LOCATES LINE LOCATES

0 $ 0 $ 0 $ 0 0 0 0 0 0 0 0 0 0 0 0

371,243 152,268 160,652 128,719 53,034 47,354

6,278 4,328 10,591 14,006 9,463 5,322

0 0 0 20,271 17,811 17,760

9,948 3,258 3,599 0 0 0

1,373 1,745 1,812 0 0 0

17,038 14,723 11,602 4,991 1,652 1,912

0 0 0 573,867 ~58,282 286,604

(573,867) $ (258,282) $ (260,604) $

2011 2010 TOTAL TOTAL

12,233,806 $ 11,738,603 428,061 667,725

72,248 69,201 39,429 37,960 20,800 10,275

12.794,344 1~.523,764

2,802,070 2,647,414 868,017 825,768

2,870,034 2,913,023 541,237 933,487 65,663 72,429

608,648 476,028 71,617 70,800

173,201 287,072 84,499 81,980

151,331 147,219 173,817 135,123 33,634 31,478

1,345,836 1,293,648 9,789,604 9,915,469

3,004,740 $ 2,608,295

,;l) ~:-<;0

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"' .....

THE UTILITIES BOARD OF THE 22 CITY OF DAPHNE, ALABAMA

(:~·f,r.J ~-~~··· STATEMENT OF REVENUES AND EXPENSES ~'(t',~l /i.\ ~ ·I' [~~ ,.

BUDGET AND ACTUAL 4J.:If tLP Year Ended September 30, 2011, with comparative totals for 2010 Page 1 of 1 · ~;~i

~·:

2011 2011 2011 2010 BUDGET ACTUAL VARIANCE ACTUAL

Operating Revenues Service Income $ 11,180,491 $ 12,233,806 $ 1,053,315 $ 11,738,603 Capacity fees 10,000 428,061 418,061 667,725 Penalties 80,000 72,248 (7,752) 69,201 Cut on/off fees 36,000 39,429 3,429 37,960 Aid to construction 0 20,800 20,800 10,275 Total operating revenues 11,306,491 12,794,344 1,487,853 12,523,764

Operating Expenses Salaries 2,756,396 2,802,070 45,674 2,647,414 Fringe benefits 998,670 868,017 (130,653) 825,768 System expense 2,640,422 2,870,034 229,612 2,913,023 Repairs and maintenance 1,339,953 541,237 (798,716) 933,487 Bad debts 0 65,663 65,663 72,429 Supplies and other system expense 202,800 608,648 405,848 476,028 Communications 79,900 71,617 (8,283} 70,800 Professional services 315,000 173,201 (141,799} 287,072 Meetings, dues and travel 114,809 84,499 (30,310) 81,980 Insurance 160,000 151,331 (8,669} 147,219 Vehicle expense 125,300 173,817 48,517 135,123 Uniforms 27,000 33,634 6,634 31,478 Depreciation 1,226,500 1,345,836 119,336 1,293,648 Total operating expenses 9,986,750 9,789,604 (197,146) 9,915,469

Operating Income 1,319,741 3,004,740 1,684,999 2,608,295

Nonoperating Revenues (Expenses) Interest income 72,500 23,315 (49,185) 30,036 Other revenue 141,000 188,434 47,434 114,919 Lawsuit settlement 0 22,814 22,814 0 Principal forgiveness 0 2,235,169 2,235,169 0 Interest expense (782,000} (784,807) (2,807) (808,306) Amortization (115,225~ {116,783~ (1,558) (115,225~ Total nonoperating revenues (expenses) (683,725) 1,568,142 2,251,867 (778,576)

Change In Net Assets $ 636,016 4,572,882 $ 3,936,866 1,829,719

Net Assets, beginning of year 25,643,623 23,813,904

Net Assets, end of year $ 30,216,505 $ 25,643,623

See auditors' report

SINGLE AUDIT

23

REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN

ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS

To the Utilities Board of the City of Daphne, Alabama Daphne, Alabama

We have audited the financial statements of the Utilities Board of the City of Daphne, Alabama (the Board), as of and for the year ended September 30, 2010, and have issued our report thereon dated February 22, 2012. 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.

Internal Control Over Financial Reporting

In planning and performing our audit, we considered the Utilities Board of the City of Daphne, Alabama's internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Utilities Board of the City of Daphne, Alabama's internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the Utilities Board of the City of Daphne, Alabama's internal control over financial reporting.

Our consideration of internal control over financial reporting was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control over financial reporting that might be significant deficiencies, or material weaknesses and therefore, there can be no assurance that all deficiencies, significant deficiencies, or material weaknesses have been identified. However, as described in the accompanying schedule of findings and questioned costs, we identified certain deficiencies in internal control over financial reporting that we consider to be material weaknesses and other deficiencies that we consider to be significant deficiencies.

A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis. We consider the deficiencies described in the accompanying schedule of findings and questioned costs to be material weaknesses, listed as item: 05-1.

Compliance and Other Matters

As part of obtaining reasonable assurance about whether the Board's financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grants, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance that are required to be reported under Government Accounting Standards.

..,,~

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24

1{7 llj)l (~iJ ~>>' /,;:~:.::.)

This report Is int~nded solei~ for t~e Information and use of management and th~ tf~t:\t~;Ji~\~.~ 'J

Department of Agnculture and 1s not mtended to be and should not be used by anyone other ttiM4JllelF.l specified parties. .~J:~~ ·

Robertson, Andreoli and Covington, P.C. Certified Public Accountants

February 22, 2012

•'·

INDEPENDENT AUDITORS' 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

To the Utilities Board of the City of Daphne, Alabama Daphne, Alabama

Compliance

25

We have audited the Utilities Board of the City of Daphne, Alabama's compliance with the types of compliance requirements described in the OMB Circular A-133 Compliance Supplement thatcould have a direct and material effect on each of the Utilities Board of the City of Daphne, Alabama's major federal programs for the year ended September 30, 2011. The Utilities Board of the City of Daphne, Alabama's major federal programs are Identified in the summary of auditor's results section of the accompanying schedule of findings and questioned costs. Compliance with the requirements .of laws, regulations, contracts, and grants applicable to each of its major federal programs is the responsibility of the Utilities Board of the City of Daphne, Alabama's management. Our responsibility is to express an opinion on the Utilities Board of the City of Daphne, Alabama's compliance based on our audit.

We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred. to above that could have a direct and material effect on major federal program occurred. An audit includes examining, on a test basis, evidence about the Utilities Board of the City of Daphne, Alabama's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination of the Utilities Board of the City of Daphne, Alabama's compliance with those requirements.

In our opinion, The Utlllt.ies Board of the City of Daphne, Alabama complied, in all material respects, with the compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended September 30, 2011.

Internal Control Over Compliance

Management of the Utilities Board of the City of Daphne, Alabama is responsible for establishing and maintaining effective internal control over compliance with the requirements of laws, regulations, contracts, and grants applicable to federal programs. In planning and performing our audit, we considered the Utilities Board of the City of Daphne, Alabama's internal control over compliance with the requirements that could have a direct and material effect on a major federal program to determine the auditing procedures for the purpose of expressing our opinion on compliance and to test and report on internal control over compliance in accordance with OMB Circular A-133, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the Utilities Board of the City of Daphne, Alabama's Internal control over compliance.

-----------------------------------·--·----- ·--

A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis.

Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be deficiencies, significant deficiencies, or material weaknesses. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses as defined above.

The Utilities Board of the City of Daphne, Alabama's responses to the findings identified In our audit are described in the accompanying schedule of findings and questioned costs. We did not audit the Utilities Board of the City of Daphne, Alabama's responses, and accordingly, we express no opinion on the responses.

This report is intended solely for the information and use of Management and the United States Environmental Protection Agency and is not intended to be and should not be used by anyone other than these specified parties.


February 22, 2012

THE UTILITIES BOARD OF THE CITY OF DAPHNE, ALABAMA SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS Year Ended September 30, 2011

Environmental Protection Agency Capitalization Grants for Clean Water State Revolving Funds Capitalization Grants for Clean Water State Revolving Funds Total Environmental Protection Agency

Total federal financial assistance

FEDERAL

CFDA

NUMBER

66.458 66.458

CONTRACT

IDENTIFYING

NUMBER

CS010231-04 CS010231-05

FEDERAL

EXPENDITURES

$

$

415,176 4,476,214

4,891,390

THE UTILITIES BOARD OF THE CITY OF DAPHNE, ALABAMA NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS Year Ended September 30, 2011

NOTE 1- BASIS OF PRESENTATION

The accompanying schedule of expenditures of federal awards includes the federal contract and grant activity of the Utilities Board of the City of Daphne, Alabama and is presented on the modified accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of OMB Circular A~133, Audits of States, Local Governments and Non~Profit Organizations.

THE UTILITIES BOARD OF THE CITY OF DAPHNE, ALABAMA . SCHEDULE OF FINDINGS AND QUESTIONED COSTS Year Ended September 30, 2011

SECTION I -Summary of Auditors' Results Financial Statements

Type of auditors' report issued:

Internal control over financial reporting: Material weakness{es) identified? Significant deficiencies identified that are not considered to be material weaknesses? Noncompliance material to financial statements noted?

Federal Awards Internal control over major programs:

Material weakness( es) identified? Significant deficiencies identified that are not considered to be material weaknesses?

Type of auditors' report issued on compliance for major programs:

Any audit findings disclosed that are required to be reported in accordance with section 510(a) of Circular A-133? '

Identification of Major Programs: CFDA Name of Federal Program 66.458 Capitalization Grants for Clean Water State Revolving Funds

Dollar threshold used to distinguish between type A and type B programs: $300,000.00

Auditee qualified as low-risk auditee?

Section II - Financial Statement Findings Reportable Condition 05-1

Unqualified

Yes None reported No

No None reported

None

No

Condition: There is an absence of appropriate segregation of duties consistent with appropriate control objectives, and an absence of appropriate reviews and approvals of transactions and accounting entries.

Criteria: Adequate segregation of duties are necessary within the accounting functions, as well as, appropriate reviews and approvals. ·

Effect: There Is not sufficient segregation of duties or reviews and approvals of transactions within the accounting functions. This could allow material misstatement of the financial statements to occur and not be discovered in a timely manner.

Recommendation: Due to the size of the organization and the limited number of staff, a certain absence of segregation of duties is inherent. The Board has done everything in its power to minimize the effect of this limitation, however, without the hiring of additional staff this finding will remain.

Response: We concur with the recommendation, however, it is not practical to hire additional personnel at this time.

Section Ill - Federal Award Findings and Questioned Costs None

INDEPENDENT AUDITORS' REPORT ON COMPLIANCE AND COMPUTATION OF HISTORICAL DEBT SERVICE COVERAGE RATIO

INDEPENDENT AUDITORS' REPORT ON COMPLIANCE AND COMPUTATION OF HISTORICAL DEBT SERVICE COVERAGE RATIO

Board of Directors The Utilities Board of the City of Daphne, Alabama

We have audited, in accordance with generally accepted auditing standards, the balance sheet of The Utilities Board of the City of Daphne obligated under the Trust Indenture (the Indenture) dated June 1, 1990, related statements of revenues, expenses and changes In retained earnings and cash flows for the year then ended, and have issued our report thereon dated February 20, 2012.

In connection with our audit, the Board complied with all of the terms, covenants, provisions or conditions of Article XI, "Particular Covenants of the Board," of the Indenture dated June 1, 1990 insofar as they relate to accounting matters.

This report is intended solely for the use of the Utilities Board of the City of Daphne and The Bank of New York Trust Company, N.A., trustee under the Indenture, and should not be used for any other purpose.


February 22, 2012

'·.' . I

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the utilities board of the city of daphne, alabama financial

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