SUMTER COUNTY WATER AUTHORITY LIVINGSTON. ALABAMA AUDITED FINANCIAL STATEMENTS AND ADDITIONAL INFORMATION

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1 LIVINGSTON. ALABAMA AUDITED FINANCIAL STATEMENTS AND ADDITIONAL INFORMATION FOR THE YEARS ENDED DECEMBER AND 2014

2 LIVINGSTON. ALABAMA CONTENTS Page No. Independent Auditors' Report Statement of Net Position Statement of Revenues, Expenses and Changes in Net Position Statement of Cash Flows Notes to Financial Statements Required Supplemental Information Schedule of Changes in Net Pension Liability Schedule of Employer Contributions Additional Information Statement of Assets Restricted for Revenue Bond Debt Service 24

3 MASON AND GARDNER CPAs LLC CERTIFIED PUBLIC ACCOUNTANTS 301 NORTH MAIN AVENUE P.o. Box836 DEMOPOLIS, AlABAMA PHIUP M. MASON, CPA JAMES D. GARDNER, JR., CPA ROBIN C. PEARSON, CPA NAOMI H. ALLEN, CPA TELEPHONE (334) 289-Q620 FACSIMILE (334) 289-Q686 MORGAN P. HURST, CPA INDEPENDENT AUDITORS' REPORT Board of Directors Sumter County Water Authority Livingston, Alabama We have audited the accompanying financial statements of the Sumter County Water Authority as of and for the years ended December 31, 2015 and 2014, and the related notes to the financial statements, which collectively comprise the Sumter County Water Authority's basic financial statements as listed in the table of contents. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected dep~nd on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. MEMBERS AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS MEMBERS ALABAMA SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS

4 Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the Sumter County Water Authority as of December 31, 2015 and 2014, and the changes in its financial position and cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter As discussed in Note A to the financial statements, in 2015 the Authority adopted new guidance, Governmental Accounting Standards Board Statement No. 68, Accounting and Financial Reporting for Pensions-an Amendment of GASB Statement No. 27. With the implementation of GASB No. 68, the Authority recognized a net pension asset for the year ended December 31, It was not practical to restate prior periods for the implementation of GASB No. 68. Our opinion is not modified with respect to the above stated matter. Other Matters Required Supplementary Information Management has omitted management's discussion and analysis that accounting principles generally accepted in the United States of America require to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. Our opinion on the basic financial statements is not affected by this missing information. Accounting principles generally accepted in the United States of America require that the schedule of changes in net pension liability and the schedule of employer contributions on pages 22 and 23 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming an opinion on the financial statements that collectively comprise the Sumter County Water Authority's basic financial statements. The statement of assets restricted for revenue bond debt service is presented for purposes of additional analysis and is not a required part of the financial statements of the Sumter County Water Authority. 2 MASON AND GARDNER CPAS LLC, CERTIFIED PUBLIC ACCOUNTANTS

5 The statement of assets restricted for revenue bond debt service is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the statement of assets restricted for revenue bond debt service is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole. ;J;~~~ 41{.ac_ Mason and Gardner CPAs LLC Certified Public Accountants September 2, MASON AND GARDNER CPAs llc, CERTIFIED PUBLIC ACCOUNTANTS

6 STATEMENT OF NET POSITION December December 31, Assets and Deferred Outflows of Resources Current Assets: Cash Cash - Chemical Waste Tax- Construction Certificates of deposit - Construction Accounts receivable, less allowance for doubtful accounts of $713,000 in 2015 and $602,000 in 2014 Accrued revenue Prepaid expenses and other current assets Total Current Assets Noncurrent Assets: Restricted Assets: Customer meter deposits: Cash Bond construction fund Bond principal and interest redemption fund Bond debt service reserve fund Total Restricted Assets Capital Assets, net of accumulated depreciation Net pension asset Other Assets: Utility deposit Total Other Assets Deferred Outflows of Resources Total Assets and Deferred Outflows of Resources Liabilities, Deferred Inflows of Resources, and Net Position Current Liabilities Payable from Current Assets: $ 829,825 $ 636,109 Accounts payable 996, ,225 Accrued expenses 384, ,287 Total Current Liabilities Payable from Current Assets 138, ,463 Current Liabilities Payable from Restricted Assets: 154, ,286 Accrued interest 16,851 14,227 Current portion of long-term debt 2,520,385 2,300,597 Customer meter deposits Total Current Liabilities Payable from Restricted Assets 112, ,728 Long-term Debt: 1,377,086 2,161,402 Bonds payable 50,303 44, Deferred Inflows of Resources 1,539,396 2,313,395 5,376,343 4,834,950 Net Position: Invested in capital assets, net of related debt 144,005 Restricted: Bond construction fund Bond principal and interest redemption Bond debt service reserve Unrestricted Total Net Position 16,124 Total Liabilities, Deferred Inflows of Resources, $9,596,713 $9,449,402 and Net Position $ 51,482 $ 21, , , , ,277 20,249 21,149 90,000 90, , , , ,745 2,057,623 2,146,523 27,875 3,228,720 2,598,427 1,377,086 2,161,402 50,303 44, ,441,400 2,112,763 7,097,511 6,916,857 $9,596,713 $9,449,402 The accompanying notes are an integral part of the financial statements. 4

7 STATEMENT OF REVENUES. EXPENSES AND CHANGES IN NET POSITION Year Ended December Operating Revenues: Water sales $ 1,026,579 $ 1,063,857 Penalties 31,860 32,346 Meter set fees 14,700 18,060 Total Operating Revenues 1,073,139 1,114,263 Operating Expenses: Depreciation and amortization 319, ,522 Salaries 297, ,726 Utilities 110, ,052 Maintenance and repairs 58,798 52,928 Water purchases 45,922 65,580 Employee benefits 35,832 43,702 Office supplies and postage 33,823 29,896 Truck expenses 27,641 43,131 Insurance 24,011 27,544 Legal and audit services 23,080 21,828 Payroll taxes 22,578 23,193 Miscellaneous 21,869 10,099 Water sampling expense 16,217 14,084 Training expense 2,220 4,735 Bad debt expense 1,547 4,728 Board expense Retirement expense {8,720} 17,931 Total Operating Expenses 1,033,125 1,073,285 Operating Income (Loss) 40,014 40,978 Non-Operating Revenues and (Expenses): Interest earned 3,805 9,583 Chemical waste tax 35,470 60,722 Other income 49,166 50,796 Bond issuance cost (73,533} Interest expense and fiscal agent charges {55,211} {21,149} Increase (Decrease) in Net Position 73,244 67,397 Net Position, beginning of year, before restatement 6,916,857 6,849,460 Cumulative effect of change in accounting principle 107,410 Net Position, beginning of year, after restatement 7,024,267 6,849,460 Net Position, end of year $ 7,097,511 $ 6,916,857 The accompanying notes are an integral part of the financial statements. 5

8 STATEMENT OF CASH FLOWS Year Ended December Cash Flows from Operating Activities: Cash receipts from customers Cash payments for salaries and benefits Cash payments to suppliers for goods and services Net Cash Provided by Operating Activities Cash Flows from Non-Capital Financing Activities: Chemical waste tax Decrease {increase) in certificates of deposit Increase {decrease) in customer meter deposits Other income Net Cash Flows Provided by Non-Capital Financing Activities Cash Flows from Capital and Related Financing Activities: Acquisition of property, plant and equipment, net Proceeds from long-term debt Decrease {increase) in bond funds Principal paid on long-term debt Interest and fiscal agent charges paid on long-term debt Net Cash Flows Used by Capital and Related Financing Activities Cash Flows from Investing Activities: Interest income Decrease {increase) in restricted assets Net Cash Provided by Investing Activities Net Increase {Decrease) in Cash Cash, beginning of year Cash, end of year Reconciliation of Operating Income to Net Cash Provided by Operating Activities: Operating income {loss) Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation and amortization Decrease {increase) in accounts receivable Decrease {increase) in accrued revenue Decrease {increase) in miscellaneous receivables Decrease {increase) in prepaid expenses Increase {decrease) in accounts payable- trade Increase {decrease) in accrued expenses Decrease {increase) in deferred outflows of resources Decrease {increase) in net pension asset Increase {decrease) in deferred inflows of resources Net Cash Provided by Operating Activities $ 1,083,012 {322,092) {391,886) 369,034 35,470 {192) 4,350 49,166 88,794 {861,093) 778,276 {90,000) (55,011~ (227,828) 3,805 (4,277~ (472) 229,528 1,596,334 $ 1,825,862 $ 40, ,700 2,982 9,574 {2,684) 60 30,396 {6, 164) 1,832 {54,551) 27,875 $ 369,034 $ 1,172,559 {372,075) (384,553~ 415,931 60,722 {4,842) 7,911 50, ,587 {41,974) 2,162,990 {2,205,667) {84,651) 9,583 (7, 150~ 2, ,300 1,148,034 $ 1,596,334 $ 40, ,522 8,076 2,420 47,800 7 {5) 133 $ 415,931 The accompanying notes are an integral part of the financial statements. 6

9 NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31 I 2015 AND 2014 A. Summary of Significant Accounting Policies The Sumter County Water Authority was incorporated as a public corporation on June 7, 1972, under Jaws of the State of Alabama. The Sumter County Commission, which is the governing body of the determining county under Alabama law, approved the incorporation on the same date. The purpose of the Authority is to provide drinking water to rural areas of Sumter County, Alabama. The accounting and reporting policies of the Authority relating to the funds and account groups included in the financial statements conform to generally accepted accounting principles applicable to state and local governments. Generally accepted accounting principles for local governments include those principles prescribed by the Governmental Accounting Standards Board {GASB), the American Institute of Certified Public Accountants in the publication entitled Audits of State and Local Governmental Units and by the Financial Accounting Standards Board {when applicable). The more significant accounting policies of the Authority are described below. Financial Reporting Entity The Authority is a separate and distinct entity apart from the Sumter County Commission. The Commission does appoint the members to the board of directors of the Authority but does not exercise any other attributes of control over the Authority. The Authority does not exercise oversight control over any other unit of government. Measurement Focus, Basis of Accounting and Financial Statement Presentation Measurement focus is a term used to describe which transactions are recorded within the various financial statements. Basis of accounting refers to when transactions are recorded regardless of the measurement focus applied. Proprietary funds utilize an economic resources measurement focus. The accounting objectives of this measurement focus are the determination of operating income, changes in net position {or cost recovery), financial position and cash flows. All assets and liabilities {whether current or noncurrent) associated with their activities are reported. Proprietary fund equity is classified as net position. All proprietary funds utilize the accrual basis of accounting. Under the accrual basis of accounting, revenues are recognized when earned and expenses are recorded when the liability is incurred or economic asset used. Proprietary funds distinguish operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services in connection with a proprietary fund's principal ongoing operations. The principal operating revenues of the Authority's enterprise funds are charges to water customers for sales and services. The Authority also recognizes as operating revenue the portion of tap fees intended to recover the cost of connecting new customers to the system. Operating expenses for enterprise funds include the cost of sales and services, administrative expenses and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses. Cash and Cash Equivalents For purposes of the statement of cash flows, the Authority considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Investments Investments are made in fully secured time deposits or Federal Securities and are stated at cost. 7

10 FOR THE YEARS ENDED DECEMBER 31 I 2015 AND 2014 Accounts Receivable and Accrued Revenues Accounts receivable represent amounts due from customers for water, sewer and garbage services and are shown net of an allowance for doubtful accounts. All water billing is performed on a cyclical basis which gives rise to unbilled services at the end of any given period. The Authority has recorded estimated accounts receivable and related revenues, based on the number of days of unbilled services for each cycle as of the end of the fiscal year. Inventories and Prepaid Expenses Due to the immaterial amount of inventories on hand, materials and supplies are expensed when purchased. Certain payments to vendors reflect costs applicable to future accounting periods and are recorded as prepaid items in the financial statements. Restricted Assets Certain assets of the Authority are restricted in their use and are unavailable for use for general operations. These assets and the related liabilities associated with them are shown separately in the financial statements. Capital Assets Capital assets are recorded at cost. Depreciation is computed under the straight-line basis over the estimated useful lives of the related assets. Expenditures for maintenance and repairs are charged to expense as incurred whereas major betterments and system extensions are capitalized. Estimated useful lives are as follows: Asset Class Water distribution system Trucks and equipment Furniture and fixtures Fence Estimated Useful Life years 5-6 years 5-10 years 10 years Bond Discount Bond discounts are being amortized, using the interest method, over the life of the bonds and are reported as a reduction of bonds payable in the statement of net position. Long-Term Debt Long-term debt and other obligations are reported as utility liabilities at face value, net of applicable deferred bond discounts. Deferred Outflows/Inflows of Resources In addition to assets, the statement of net position will sometimes report a separate section for deferred outflows of resources. This separate financial statement element, deferred outflows of resources, represents a consumption of net position that applies to a future period(s) and so will not be recognized as an outflow of resource (expense/expenditure) until that time. The Authority reported deferred retirement plan contributions. The deferred retirement plan contributions represents employer pension plan contributions subsequent to the measurement date and should be consumed in the subsequent year. 8

11 FOR THE YEARS ENDED DECEMBER 31 I 2015 AND 2014 In addition to liabilities, the statement of net position will sometimes report a separate section for deferred inflows of resources. This separate financial statement element, deferred inflows of resources, represents an acquisition of net position that applies to a future period(s) and so will not be recognized as an inflow of resources (revenue) until that time. The Authority reports the net difference between projected and actual earnings on retirement plan investments as deferred inflows on funds on the statement of net position. Compensated Absences For vacation leave and other compensated absences with similar characteristics, GASB Statement No. 16 requires the accrual of a liability as the benefits are earned by the employees, if both of these conditions are met: a. The employees' right to receive compensation is attributable to services already rendered. b. It is probable that the employer will compensate the employees for the benefits through paid time off or some other means, such as cash payments at termination or retirement. An accrual for earned sick leave should be made only to the extent it is probable that the benefits will result in termination payments, rather than be taken as absences due to illness or other contingencies, such as medical appointments and funerals. All permanent employees of the Authority accumulate annual leave as follows: for employees with six months of service, five days per year; for employees with one year of service, ten days per year; for employees with ten years of service, fifteen days per year and for employees with fifteen years of service, twenty days per year. An employee can carry over to the next year only five days accumulation of annual leave. All permanent employees of the Authority accumulate sick leave at the rate of one day per month and can accrue up to 80 days in total. At termination, all unused annual leave is paid to qualifying employees. Pensions The Employees' Retirement System of Alabama (the Plan) financial statements are prepared using the economic resources measurement focus and the accrual basis of accounting. Contributions are recognized as revenues when earned, pursuant to plan requirements. Benefits and refunds are recognized when due and payable in accordance with the terms of the plan. Expenses are recognized when the corresponding liability is incurred, regardless of when the payment is made. Investments are reported at fair value. Financial statements are prepared in accordance with requirements of the Governmental Accounting Standards Board (GASB). Under these requirements, the Plan is considered a component unit of the State of Alabama and is included in the State's Comprehensive Annual Financial Report. Net Position Net position comprises the various net earnings from operating income, nonoperating revenues and expenses and capital contributions. The Authority classifies net position as follows: Invested in Capital Assets, Net of Related Debt - Capital assets, net of accumulated depreciation and outstanding principal balances of debt attributable to the acquisition, construction, or improvement of those assets. (Any significant unspent proceeds at yearend related to capital assets are reported as restricted funds.) Restricted - Constraints imposed on net position by external creditors, grantors, contributors, laws or regulations of other governments, or law through constitutional provision or enabling legislation. 9

12 FOR THE YEARS ENDED DECEMBER 31 I 2015 AND 2014 Unrestricted - Net position that is not subject to externally imposed stipulations. Unrestricted net position may be designated for specific purposes by action of the Board. Capitalization of Interest The Financial Accounting Standards Board issued Accounting Standards Codification (ASC , formerly known as FAS No. 24) requiring capitalization of interest costs for all assets that are constructed for an enterprise's use. The amount of interest to be capitalized is that portion of the interest incurred during the asset's acquisition period which theoretically could have been avoided if expenditures for the asset had not been made. The amount of interest for capital assets constructed by the Authority to be capitalized is based on the weighted-average amount of accumulated expenditures for the period multiplied by the Authority's interest rate for the obligation incurred specifically to finance the construction of the capital asset. For 2015, $11,124 of interest was capitalized and for 2014, there was no interest capitalized. Operating Revenues and Expenses Operating revenues and expenses consist of those revenues that result from the ongoing principal operations of the Authority. Operating revenues consist primarily of charges for services. Nonoperating revenues and expenses consist of those revenues and expenses that are related to financing and investing type of activities and result from nonexchange transactions or ancillary activities. When an expense is incurred for purposes for which there are both restricted and unrestricted net position available, it is the Authority's policy to apply those expenses to restricted net position to the extent such are available and then to unrestricted net position. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Subsequent Events Management has evaluated subsequent events through September 2, 2016, which is the date the accompanying financial statements were available to be issued. B. Change in Accounting Principle and Restatement of Net Position In fiscal year 2015, the Authority adopted GASB Statement No. 68, Accounting and Financial Reporting for Pensions. GASB Statement No. 68 will improve financial reporting for pensions. GASB Statement No. 68 establishes a definition of a pension plan that reflects the primary activities associated with the pension arrangement - determining pensions, accumulating and managing assets dedicated for pensions, and paying benefits to plan members as they come due. The Statement establishes standards for measuring and recognizing liabilities, deferred outflows of resources, deferred inflows of resources, and expenses/expenditures. For defined benefit pensions, this Statement identifies the methods and assumptions that should be used to project benefit payments, discount projected benefit payments to their actuarial present value, and attribute that present value to periods of employee service. An actuarial valuation under GASB Statement No. 68 was not obtained for the year ended September 30, 2013, therefore, it was not practical to restate prior periods for the implementation of GASB Statement No. 68. The components of the restatement are as follows: 10

13 FOR THE YEARS ENDED DECEMBER AND Previously Presented GASB Statement No Restatement Restated Net pension asset Deferred retirement plan contributions Net position $ 6,916,857 $ 89,454 $ 89,454 17,956 17, ,410 7,024,267 C. Deposits and Certificates of Deposit The Authority maintains a cash and investment system in which substantially all cash is invested in either interest bearing checking accounts or certificates of deposit. The custodial credit risk for deposits is the risk that, in the event of a bank failure, the Authority will not be able to cover deposits or will not be able to recover collateral securities that are in the possession of an outside party. The Authority's deposits at year-end were entirely covered by federal depository insurance or by the Security for Alabama Funds Enhancement Program (SAFE Program). The SAFE Program was established by the Alabama Legislature and is governed by the provisions contained in the Code of Alabama 1975, Sections 41-14A-1 through 41-14A-14. Under the SAFE Program all public funds are protected through a collateral pool administered by the Alabama State Treasurer's Office. Under this program, financial institutions holding deposits of public funds must pledge securities as collateral against those deposits. In the event of failure of a financial institution, securities pledged by that financial institution would be liquidated by the State Treasurer to replace the public deposits not covered by the Federal Depository Insurance Corporation (FDIC). If the securities pledged fail to produce adequate funds, every institution participating in the pool would share the liability for the remaining balance. D. Certificates of Deposits Certificates of deposit consisted of: Certificates of deposit with Regions Bank, Livingston, Alabama, due within one year, with interest of.050% and 1.270% in 2015 and 2014, respectively December $ 384,479 $ 384,287 E. Investments Investments consisted of the following: Restricted Assets: Trust Money Market Investment Account, held by fiscal agent, Regions Bank, Birmingham, Alabama December $ 1,427,391 $ 2,205,667 11

14 FOR THE YEARS ENDED DECEMBER 31 I 2015 AND 2014 F. Capital Assets Capital assets activity for the year ended December 31, 2015 was as follows: Balance December 31, 2014 Additions Deletions Property, Plant and Equipment Nondepreciable assets: Land $ 48,367 $ $ Infrastructure 14,978 Depreciable assets: Water distribution system 11,402,513 Office building and parking lot 371,904 Transportation equipment 171,765 Other equipment 687,263 65,653 12,696,790 65,653 Less: Accumulated depreciation 7,861, ,700 4,834,950 (254,047) Construction in progress 795,440 $ 4,834,950 $ 541,393 $ Balance December 31, 2015 $ 48,367 14,978 11,402, , , ,916 12,762,443 8,181,540 4,580, ,440 $ 5, Capital assets activity for the year ended December 31, 2014 was as follows: Balance December 31, 2013 Additions Deletions Property, Plant and Equipment Nondepreciable assets: Land $ 48,367 $ $ Infrastructure 14,978 Depreciable assets: Water distribution system 11,396,628 5,885 Office building and parking lot 371,904 Transportation equipment 154,451 17,314 Other equipment 668,488 18,775 12,654,816 41,974 Less: Accumulated depreciation 7,545, ,522 5,109,498 (274,548) Balance December 31, 2014 $ 48,367 14,978 11,402, , , ,263 12,696,790 7,861,840 4,834,950 Construction in progress $ 5,109,498 $ (274,548) $ $ 4,834,950 G. Long-Term Debt On August 28, 2014, the Authority issued $2,250,000 in Water Revenue Bonds, Series 2014 with an average interest rate of 2.82% to pay for certain capital improvements to the Authority's water system, including extending the system to serve new customers and installing radio-read water meters throughout the water system. 12

15 FOR THE YEARS ENDED DECEMBER 31 I 2015 AND 2014 The following is a summary of long-term debt transactions for the year ended December 31, 2015: Balance, beginning of year Bonds issued Bonds retired Balance, end of year $ 2,250,000 90,000 $ 2,160,000 Bonds payable at December 31, 2015, consisted of the following: Water Revenue Bonds, Series 2014 Less: Original issue discount Less: Current portion $ 2,160,000 (12,377) (90,000) $ 2,057,623 The annual requirements to amortize the water revenue refunding bonds are as follows: Year Ended December 31, Principal Interest Total 2016 $ 90,000 $ 60,747 $ 150, ,000 58, , ,000 55, , ,000 53, , ,000 52, , ,000 50, , ,000 48, , ,000 46, , ,000 43, , ,000 40, , ,000 37, , ,000 34, , ,000 31, , ,000 27, , ,000 23, , ,000 19, , ,000 15, , ,000 10, , ,000 5, ,220 $ 2,160,000 $ 713,998 $ 2,873,998 The Water Revenue Bond agreement establishes several funds to be held by the fiscal agent in trust. These funds and their req~irements are as follows: Bond principal and interest redemption fund -The bond agreement requires that the Authority deposit 1/6 of the interest and 1/12 of the principal due on the subsequent payment date. Money in this fund is to be used solely for payment of principal and interest as they mature and come due. 13

16 FOR THE YEARS ENDED DECEMBER 31 I 2015 AND 2014 Bond debt service reserve - The bond agreement requires that the Authority deposit into this fund a qualified surety bond in the amount of the maximum required reserve. The maximum required reserve is equal to the Authority's maximum annual debt service, $153,570, which occurs in the fiscal year ending December 31, Money in the reserve fund is to be used to pay principal and interest on the bonds, but only in the event that, at the time of any principal or interest payment date, money in the bond principal and interest redemption fund is insufficient for such purpose. At December 31, 2015, all provisions of the bond agreement as it relates to these reserves have been met by the Authority. The Water Revenue Bonds are subject to redemption at the option of the Authority on any date on or after September 1, 2022, in whole or in part in multiples of $5,000, in inverse order of maturities and by random selection within a maturity. For redemption dates on or after September 1, 2022, the redemption price is equal to the principal amount to be redeemed plus accrued interest to the date fixed for redemption. H. Defined Benefit Pension Plan Plan Description The Sumter County Water Authority participates in 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. The Employees' Retirement System of Alabama, an agency multiple-employer plan, was established as of October 1, 1945, under the provisions of Act 515 of the Legislature of 1945 for the purpose of providing retirement allowances and other specified benefits for state employees, State Police, and on an elective basis, to all cities, counties, towns and quasi-public organizations. The responsibility for the general administration and operation of ERS is vested in its Board of Control. The ERS Board of Control consists of 13 trustees. The Plan is administered by the Retirement System of Alabama (RSA). Title 36-Chapter 27 of the Code of Alabama grants the authority to establish and amend the benefit terms to the ERS Board of Control. The Plan issues a publicly available financial report that can be obtained at The ERS Board of Control consists of 13 trustees as follows: 1. The Governor, ex officio 2. The State Treasurer, ex officio 3. The State Personnel Director, ex officio 4. The State Director of Finance, ex officio 5. Three vested members of ERS appointed by the Governor for a term of four years, no two of whom are from the same department of state government nor from any department of which an ex officio trustee is the head. 6. Six members of ERS who are elected by members from the same category of ERS for a term of four years as follows: (a) Two retired members with one from the ranks of retired state employees and one from the ranks of retired employees of a city, county or a public agency each of whom is an active beneficiary of ERS. (b) (c) Two vested active state employees. Two vested active employees of an employer participating in ERS pursuant to Section

17 Benefits Provided SUMTER COUNTY WATER AUTHORITY FOR THE YEARS ENDED DECEMBER 31 I 2015 AND 2014 State law establishes retirement benefits as well as death and disability benefits and any ad hoc increase in postretirement benefits for the ERS. Benefits for ERS members vest after 1 0 years of creditable service. State employees who retire after age 60 (52 for State Police) with 10 years or more of creditable service or with 25 years of service (regardless of age) are entitled to an annual retirement benefit, payable monthly for life. Local employees who retire after age 60 with 10 years or more of creditable service or with 25 or 30 years of service (regardless of age), depending on the particular entity's election, are entitled to an annual retirement benefit, payable monthly for life. Service and disability retirement benefits are based on a guaranteed minimum or a formula method, with the member receiving payment under the method that yields the highest monthly benefit. Under the formula method, members of the ERS are allowed % of their average final compensation (highest 3 of the last 10 years) for each year of service. State Police are allowed 2.875% for each year of state police service in computing the formula method. Act 377 of the Legislature of 2012 established a new tier of benefits (Tier 2) for members hired on or after January 1, Tier 2 ERS members are eligible for retirement after age 62 (56 for State Police) with 10 years or more of creditable service and are entitled to an annual retirement benefit, payable monthly for life. Service and disability retirement benefits are based on a guaranteed minimum or a formula method, with the member receiving payment under the method that yields the highest monthly benefit. Under the formula method, Tier 2 members of the ERS (except State Police) are allowed 1.65% of their average final compensation (highest 5 of the last 10 years) for each year of service. State Police are allowed 2.375% for each year of state police service in computing the formula method. Members are eligible for disability retirement if they have 10 years of creditable service, are currently in-service and determined by the RSA Medical Board to be permanently incapacitated from further performance of duty. Preretirement death benefits are calculated and paid to the beneficiary based on the member's age, service credit, employment status and eligibility for retirement. Pre-GASB No. 68 Required Disclosures Annual Pension Cost In 2014, the Authority's annual pension cost of $17,931 for the Employees' Retirement System was equal to the Authority's required and actual contributions. The required contribution was determined as part of an actuarial valuation performed as of September 30, The actuarial assumptions used in the valuation include (a) rate of return on the investment of present and future assets of 8.00% a year compounded annually, (b) assumed annual rates of future salary increases ranging from 3.75% to 7.25%, and (c) no post-retirement benefit increases. The actuarial value of the Employees' Retirement System assets was determined using techniques that smooth the effects of short-term volatility in the market value of investments over a five year period. The unfunded actuarial liability of the Employees' Retirement System is being amortized as a level percentage of projected payroll on an open basis. The remaining amortization period at September 30, 2013 was 30 years. Trend Information for the Employees' Retirement System is as follows: Year Ended September 30, Annual Pension Cost (APC) $ 21,055 18,118 17,540 Percentage of APC Contributed 100% 100% 100% Net Pension Obligation 15

18 FOR THE YEARS ENDED DECEMBER AND 2014 The most recent schedule of Funding Progress for the Employees' Retirement System follows: Actuarial Accrued Liability Unfunded Actuarial Actuarial (AAL)- AAL Funded Covered Valuation Assets Entry Age (UAAL) Ratio Payroll Date (a) (b) (b-a) (alb) (c) $ 836,388 $ 994,144 $ 157, % $317, ,901 1,113, , % 363, ,139 1,092, , % 279, ,684 1,016, , % 238, , ,660 78, % 191, , ,176 (73,254) 91.5% 214,424 is as UAAL as a Percentage of Covered Payroll ((b-a)/c) 49.7% 70.1% 82.6% 70.5% 41.3% (34.2)% GASB No. 68 Required Disclosures The ERS serves approximately 846 local participating employers. These participating employers include 287 cities, 65 counties and 494 other public entities. The ERS membership includes approximately 83,874 participants. As of September 30, 2014, membership consisted of: Retirees and beneficiaries currently receiving benefits Terminated employees entitled to but not yet receiving benefits Terminated employees not entitled to a benefit Active members Total 21,691 1,252 5,048 55,883 83,874 Contributions Covered members of the ERS contributed 5% of earnable compensation to the ERS as required by statute until September 30, From October 1, 2011 to September 30, 2012, covered members of the ERS were required by statute to contribute 7.25% of earnable compensation. Effective October 1, 2012, covered members of the ERS are required by statute to contribute 7.50% of earnable compensation. Certified law enforcement, correctional officers and firefighters of the ERS contributed 6% of earnable compensation as required by statute until September 30, From October 1, 2011 to September 30, 2012, certified law enforcement, correctional officers and firefighters of the ERS were required to contribute 8.25% of earnable compensation. Effective October 1, 2012, certified law enforcement, correctional officers and firefighters of the ERS are required by statute to contribute 8.50% of earnable compensation. State Police of the ERS contribute 10% of earnable compensation. ERS local participating employers are not required by statute to increase contribution rates for their members. Tier 2 covered members of the ERS contribute 6% of earnable compensation to the ERS as required by statute. Tier 2 certified law enforcement, correctional officers and firefighters of the ERS are required by statute to contribute 7% of earnable compensation. Tier 2 State Police members of the ERS contribute 10% of earnable compensation. These contribution rates are the same for Tier 2 covered members of ERS local participating employers. The ERS establishes rates based upon an actuarially determined rate recommended by an independent actuary. The actuarially determined rate is the estimated amount necessary to finance the costs of benefits earned by employees during the year, with additional amounts to finance any unfunded accrued liability, the pre-retirement death benefit and administrative 16

19 FOR THE YEARS ENDED DECEMBER 31 I 2015 AND 2014 expenses of the Plan. For the year ended December 31, 2015, the Authority's active employee contribution rate was 5% of covered employee payroll and the Authority's average contribution rate to fund the normal and accrued liability costs was 3.0% of covered employee payroll. The Authority's contractually required contribution rate for the year ended December 31, 2015 was 3.0% of pensionable pay for Tier 1 employees and 1.0% of annual pay for Tier 2 employees. These required contribution rates are based upon the actuarial valuation dated September 30, 2013, a percent of annual payroll, actuarially determined as an amount that, when combined with member contributions, is expected to finance the costs of benefits earned by members during the year, with an additional amount to finance any unfunded accrued liability. Total employer contributions to the pension plan from the Authority were $16,124 for the year ended December 31, Net Pension Assets The Authority's net pension assets were measured as of September 30, 2014, and the total pension liability used to calculate the net pension assets was determined by an actuarial valuation as of September 30, 2013 rolled forward to September 30, 2014 using standard roll-forward techniques as shown in the following table: Total pension liability as of September 30, 2013 (a) Entry age normal cost for October 1, 2013-September 30, 2014 (b) Actual benefit payments and refunds for October 1, 2013-September 30, 2014 (c) Total pension liability as of September 30, 2014 [(a) x (1.08)] + (b)- [(c) x (1.04)] $ 789,966 $ 16,667 $ (44,106) $ 823,960 Actuarial Assumptions The total pension liability in September 30, 2013 actuarial valuation was determined using the following actuarial assumptions, applied to all periods in the measurement: Inflation Salary increases Investment rate of return, net of pension plan investment expense 3.00% 3.75%-7.25% 8.00% Mortality rates for ERS were based on the RP-2000 Combined Mortality Table Projected with Scale AA to 2015 set forward three years for males and two years for females. The rates of mortality for the period after disability retirement are according to the sex distinct RP-2000 Disability Mortality Table. The actuarial assumptions used in the September 30, 2013 valuation were based on the results of an investigation of the economic and demographic experience for the ERS based upon participant data as of September 30, The Board of Control accepted and approved these changes on January 27, 2012, which became effective at the beginning of fiscal year

20 FOR THE YEARS ENDED DECEMBER AND 2014 The long-term expected rate of return on pension plan investments was determined using a lognormal distribution analysis in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation. The target asset allocation and best estimates of geometric real rates of return for each major asset class are as follows: Fixed income U.S. large stocks U.S. mid stocks U.S. small stocks International developed market stocks International emerging market stocks Real estate Cash Total * Includes assumed rate of inflation of 2.50% Discount Rate Target Allocation 25.00% 34.00% 8.00% 3.00% 15.00% 3.00% 10.00% 2.00% % Long-Term Expected Rate of Return* 5.00% 9.00% 12.00% 15.00% 11.00% 16.00% 7.50% 1.50% The discount rate used to measure the total pension liability was the long term rate of return, 8%. The projection of cash flows used to determine the discount rate assumed that plan member contributions will be made at the current rate and that the employer contributions will be made in accordance with the funding policy adopted by the ERS Board of Control. Based on those assumptions, components of the pension plan's fiduciary net position were projected to be available to make all projected future benefit payments of current plan members. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability. Changes in Net Pension Assets Balances at September 30, 2013 Changes for the year: Service cost Interest Differences between expected and actual experience Contributions-employer Contributions-employee Net investment income Benefit payments, including refunds of employee contributions Administrative expense Transfers among employers Net changes Balances at September 30, Total Pension Liability (a) $ 789,966 16,667 61,433 (44,106) 33,994 $ 823,960 Increases (Decrease) Less Fiduciary Net Position (b) $ 879,420 17,247 10, ,557 (44,106) 88,545 $ 967,965 Net Pension Assets (a)-(b) $ (89,454) 16,667 61,433 (17,247) (1 0,847) (104,557) (54,551) $ (144,005)

21 FOR THE YEARS ENDED DECEMBER AND 2014 Sensitivity of the Board's Proportionate Share of the Net Pension Assets to Changes in the Discount Rate The following table presents the Authority's net pension assets calculated using the discount rate of 8%, as well as what the Authority's proportionate share of the net pension assets would be if it were calculated using a discount rate that is 1-percentage point lower (7%) or 1-percentage point higher (9%) than the current rate: Board's proportionate share of collective net pension liability (assets) 1% Decrease (7.00%) $ (61,819) Current Rate (8.00%) $ (114,005) 1% Increase (9.00%) $ 214,746) Pension Plan Fiduciary Net Position Detailed information about the pension plan's fiduciary net position is available in the separately issued RSA Comprehensive Annual Report for the fiscal year ended September 30, The supporting actuarial information is included in the GASB Statement No. 68 Report for the ERS prepared as of September 30, The auditor's report dated June 3, 2015 on the Schedule of Changes in Fiduciary Net Position by Employer and accompanying notes is also available. The additional financial and actuarial information is available at Pension Liabilities, Pension Expenses, Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pensions For the year ended December 31, 2015, the Authority recognized pension expense of $(8,720). At December 31, 2015 the Authority reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources: Deferred Outflows of Resources Deferred Inflows of Resources Differences between expected and actual experience Changes of assumptions Net differences between projected and actual earnings on pension plan investments Changes in proportion and difference between employer contributions and proportional share of contributions Employer contributions subsequent to measurement date $ 16,124 $ 27,875 Total $ 16,124 $ 27,875 19

22 FOR THE YEARS ENDED DECEMBER 31 I 2015 AND 2014 Amounts reported as deferred outflows of resources and deferred inflows of resources related to pensions will be recognized in pension expense as follows: Year Ended December 30, Amount 2016 $ 6, , , , Thereafter I. Concentration of Credit Risk The Authority has financial instruments, namely cash and accounts receivable, which potentially subject it to concentrations of credit risk. The Authority minimizes its risk for cash by placing its cash deposits with high quality financial institutions that are participants in the Security for Alabama Funds Enhancement (SAFE) Program. Water accounts receivable risk is limited due to the large number of water customers having generally small balances. In addition, the Authority monitors the status of individual customer balances and maintains a cut off system and security deposit requirement to reduce the amount of potential losses. J. Risk Management The Authority is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; injuries to employees; and natural disasters. In order to protect itself from exposure to losses under risks described above; the Authority carries traditional commercial insurance, including workers' compensation and employee health insurance, rather than finance these risks through self-insurance. Settled claims resulting from these risks have not exceeded commercial insurance coverage in any of the past three years. K. Water Rates The following schedule summarizes water rates effective for the year ended December 31, 2015: Residential: Minimum usage up to 2,500 gallons - $12.50 Usage over 2,500 gallons - $5.00 per 1,000 gallons Commercial: Minimum usage up to 1 0,000 gallons - $50.00 Usage over 1 0,000 gallons - $5.00 per 1,000 gallons Industrial: Minimum usage up to 10,000 gallons - $50.00 Usage over 1 0,000 gallons - $5.00 per 1,000 gallons 20