The Utilities Board of the City of Ozark, Alabama

Transcription

1 The Utilities Board of the City of Ozark, Alabama FINANCIAL STATEMENTS For The Year Ended September 30, 2016

2 The Utilities Board of the City of Ozark, Alabama Table of Contents September 30, 2016 REPORT Independent Auditors Report 1 FINANCIAL STATEMENTS Management s Discussion and Analysis (MD&A) 4 Statement of Net Position 8 Statement of Revenues, Expenses, and Changes in Net Position 10 Statement of Cash Flows 12 Notes to Financial Statements 13 Required Supplementary Information: Schedule of Funding Progress for the Retiree Health Plan 32 Schedule of Changes in Net Pension Liability 33 Schedule of Employer Contributions 34 Other Supplementary Information: Schedules of Bond Amortization Requirements 35 Schedules of Operating Revenues Water and Sewer 37 Schedules of Operating Expenses Water 38 Schedules of Operating Expenses Sewer 39 Independent Auditors Report on Internal Control Over Financial Reporting and 40 on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards

3 INDEPENDENT AUDITORS' REPORT To the Board of Directors of The Utilities Board of the City of Ozark, Alabama Report on the Financial Statements We have audited the accompanying financial statements of the Utilities Board of the City of Ozark, Alabama (the Board ) as of and for the year ended September 30, 2016, and the related notes to the financial statements, which collectively comprise the Board'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. Auditor s 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 and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. 1

4 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Board, as of September 30, 2016, and the respective changes in financial position and cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis on pages 4 through 7, schedule of funding progress on page 32, schedule of changes in net pension liability on page 33, and schedule of employer contributions on page 34 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the GASB, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the Board s basic financial statements. The schedules of bond amortization requirements (pages 35 and 36), schedules of operating revenues water and sewer (page 38), schedules of operating expenses water (page 38), and schedules of operating expenses sewer (page 39) are presented for purposes of additional analysis and are not a required part of the basic financial statements. The schedules of bond amortization requirements, schedules of operating revenues water and sewer, schedules of operating expenses water, and schedules of operating expenses sewer have 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 them. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated January 9, 2017, on our consideration of the Board's internal control over financial reporting and on our 2

5 tests 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 the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Board's internal control over financial reporting and compliance. CARR, RIGGS & INGRAM, L.L.C. Enterprise, Alabama January 9,

6 MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A) Our discussion and analysis of the financial performance of The Utilities Board of The City of Ozark, Alabama (the Board ) provides an overview of the Board s financial activities for the year ended September 30, This discussion should be read in conjunction with the Board s financial statements. Financial Highlights The following are the financial highlights for the Board for the year ending September 30, 2016: The Board s total assets increased by $188,881. This increase was primarily due to expenditures related to completion of capital and maintenance related projects. Total operating revenues increased from prior year revenues by $51,722. Operating revenue exceeded operating expenses by $378,755. Operating expenses increased by $76,308 from the previous reporting period primarily from an increase in maintenance and materials. Revenue to debt coverage for fiscal year 2016 was 1.47 which meets the bond covenants of Overview of the Financial Statements This discussion and analysis are intended to serve as an introduction to the Board s basic financial statements. The Board s basic financial statements are comprised of 1) the statement of net position, 2) the statement of revenues, expenses, and changes in net position, 3) the statement of cash flows, and 4) notes to the financial statements. This report also contains other supplementary information in addition to the basic financial statements themselves. Financial Statements. The statement of net position presents information on all of the Board s assets, deferred outflows, liabilities, and deferred inflows, with the difference between assets and deferred outflows and liabilities and deferred inflows reported as net position. Over time, increases or decreases in net position may serve as useful indicators of whether the financial position of the Board is improving or deteriorating. The statements of revenues, expenses, and changes in net position show the business type activity of the Board (water and sewer) and provide information regarding income and expenses, both operating and non operating, that affect net position. While income and direct expenses of the water system and the sewer system are shown separately, there are no external requirements to account for the activities separately. It is management s decision to report income and direct expenses separately in order to provide support for rates and charged services rendered. Notes to the Financial Statements. The notes provide additional information that is essential to a full understanding of the data provided in the financial statements. The notes to the financial statement can be found on pages 13 through 31 of this report. Other Information. In addition to the basic financial statements and accompanying notes, this report also presents certain supplementary information that may be beneficial to the reader. 4

7 Condensed Statements of Net Position A comparison of condensed statements of net position information follows: September 30, 2016 September 30, 2015 Variance Assets Current assets $ 3,907,241 $ 3,692,220 $ 215,021 Capital assets, net 24,191,698 24,462,074 (270,376) Other assets 3,496,366 3,252, ,236 Total assets 31,595,305 31,406, ,881 Deferred outflows of resources 1,015, , ,274 Liabilities Current liabilities 946, , ,246 Long term liabilities 19,195,530 18,437, ,565 Total liabilities 20,142,043 19,255, ,811 Deferred inflows of resources 48,620 86,098 (37,478) Net Position $ 12,419,953 $ 12,941,131 $ (521,178) Condensed Statements of Revenues, Expenses and Changes in Net Position A comparison of condensed statements of revenues, expenses, and changes in net position follows: September 30, 2016 September 30, 2015 Variance Operating revenues $ 4,221,132 $ 4,169,410 $ 51,722 Operating expenses 3,842,377 3,766,069 76,308 Non operating revenues (expenses) (899,933) (731,706) (168,227) Change in net position $ (521,178) $ (328,365) $ (192,813) Financial Analysis As noted earlier, over time the change in net position may serve as a useful indicator of a utility s financial position. In the case of the Board, assets and deferred outflows exceeded liabilities and deferred inflows by $12,419,953 at the close of the most recent fiscal year, which is a decrease of $521,178 over the past year. By far, the largest portion of the Board s net position reflects its investment in capital assets (e.g., land, buildings, plants, distribution and collection lines, machinery, and equipment) net of related outstanding debt used to acquire those assets. 5

8 The Board uses these capital assets to provide services to the citizens of Ozark; consequently, these assets are not available for future spending. Although the Board s investment in its capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from user charges and other sources, since the capital assets themselves cannot be used to liquidate these liabilities. Under the indentures of the various water and sewer revenue bonds, the Board is required to charge water and sewer tapping fees, as well as sewer usage fees, based on metered water use, for sewer service if the sewer is available to the customer. Funds restricted for debt service represent amounts deposited monthly into a restricted bank account for the current year s payments of principal and interest. Certain funds are restricted as a Debt Service reserve requirement. These funds were reserved as a lump sum at the inception of the bonds. Amounts restricted for bond construction are held in restricted accounts for capital projects paid from the proceeds of various bond issues. All excess funds over and above what is needed for operations are available for pay as you go projects. Capital Asset and Debt Administration Capital Assets. The largest portion of the Board s net position reflects a net investment in capital assets of $7,458,651 or 24% of total assets. This investment in capital assets includes land, buildings and system improvements, machinery and equipment, distribution and collection lines, and plants. Long term Debt. At the end of the 2016 fiscal year the Board had total bonded debt outstanding of $16,733,047 (including the current portion and net of discount/premium), an increase of $663,852 from the previous year primarily due to refunding of the Series 2007 bonds and issuance of the Series 2016 bonds. Next Year s Budget and Rates These factors were considered in preparing the Board s FY 2017 Budget: The revenue projection was based on actual revenues for the past two years. There was a 4% increase in the cost of employee health insurance benefits. A 4.5% increase in salaries for all full time employees. Electricity and fuel costs were calculated with a 1% increase over the past fiscal year. The Board is in the fourth year of an annual water tank maintenance contract for seven tanks at an annual cost of $72,358. Utilizing approximately $10,000 for economic development. Capital improvements planned include approximately $2,000,000 remaining from the 2013 and 2016 bond issues. This leaves approximately $1,100,000 remaining for future projects. 6

9 Budget revenues are always impacted by the weather. Water sales increase during dry years and decrease during wet years. However, usage rate increases can reduce customer water usage. Longrange revenue versus expense projections indicates a need for an annual water and sewer rate increase per year, and the Board has voted to do so. Effective November 1, 2016, a 3% increase in the Usage Rate for both water and sewer and a 3% increase in the water and sewer Base Charge went into effect, which should increase the annual revenue by approximately $200,000, or $2.52 per month per customer. As a result of this planning, the Board now has the financial ability to complete some capital improvement projects phased out over several years instead of taking on more long term debt. The Board is currently in compliance with all federal and state environmental regulations and has made a commitment to ensure that the Board s financial resources will not be detrimental to maintaining that compliance. There were permit violations at the Southside Wastewater Treatment Facility during fiscal year during the $2.1 million renovation of the 30 year old facility that resulted in sanctions from the Alabama Department of Environmental Management ( ADEM ). The Board paid a fine of $8,350 to ADEM in 2016 for the violations. The Consent Order with ADEM will end in April of 2017 if the Board remains in compliance with all regulations. The Board is currently, and has been, in compliance with all regulations since May of Request for Information This financial report is designed to provide a general overview of the Board s finances for all those with an interest. Questions concerning any of the information in this report or requests for additional information should be addressed to the General Manager, Post Office Box 1125, Ozark, Alabama

10 The Utilities Board of the City of Ozark, Alabama Statement of Net Position September 30, 2016 Assets Current assets Cash and cash equivalents $ 2,209,550 Investments 910,177 Accounts receivable 683,174 Inventories 83,768 Prepaid expenses 17,347 Accrued interest 3,225 Total current assets 3,907,241 Restricted assets Construction funds 2,984,807 Bonds and interest funds 80,305 Restricted for customer deposits 229,970 Total restricted assets 3,295,082 Capital assets Land 148,601 Construction in progress 646,505 Buildings 676,405 Utility plant 114,833 Water distribution system 15,713,578 Sewer system 17,190,634 Equipment 837,671 Waste water treatment facility 9,601,562 Total capital assets 44,929,789 Accumulated depreciation (20,738,091) Total capital assets, net of accumulated depreciation 24,191,698 Other assets Unamortized bond insurance 201,284 Total assets 31,595,305 Deferred Outflows of Resources Deferred outflows related to pension 241,507 Deferred charge on refunding 773,804 Total deferred outflows of resources 1,015,311 Continued See accompanying notes to the financial statements. 8

11 The Utilities Board of the City of Ozark, Alabama Statement of Net Position (Continued) September 30, 2016 Liabilities Current liabilities Accounts payable $ 221,706 Accrued wages 40,167 Compensated absences 158,349 Payroll withholdings payable 3,179 Utility taxes payable 13,702 Note payable 30,656 Total current liabilities 467,759 Liabilities payable from restricted assets Interest payable 43,754 Bonds payable 435,000 Total current liabilities from restricted assets 478,754 Long term debt Bonds payable, net 16,298,047 Note payable 451,339 Net pension liability 1,715,345 Other post employment benefits 500,384 Customer deposits 230,415 Total long term debt 19,195,530 Total liabilities 20,142,043 Deferred Inflows of Resources Deferred inflows related to pension 48,620 Net Position Net investment in capital assets 7,458,651 Restricted for debt service 80,305 Restricted for customer deposits 229,970 Restricted for construction projects 2,984,807 Unrestricted 1,666,220 Total net position $ 12,419,953 See accompanying notes to the financial statements. 9

12 The Utilities Board of the City of Ozark, Alabama Statement of Revenues, Expenses, and Changes in Net Position For the Year Ended September 30, 2016 See accompanying notes to the financial statements. 10 Water Sewer Total Operating Revenues Charges for service $ 2,464,675 $ 1,567,140 $ 4,031,815 Tapping fees 6,225 3,900 10,125 Service charges 43,982 23,241 67,223 New service connections Penalties 57,769 31,107 88,876 Other revenues 16,640 6,243 22,883 Total operating revenues 2,589,291 1,631,841 4,221,132 Operating Expenses Amortization 5,258 2,831 8,089 Building and equipment repair 68,829 49, ,902 Chemicals 15,854 60,523 76,377 Computer expense 7,839 4,371 12,210 Depreciation 385, ,117 1,024,070 Dues and subscriptions 2,103 1,132 3,235 Economic development 6,500 3,500 10,000 Electric, power, and gas 284, , ,545 Employee and community relations 14,605 9,120 23,725 Garbage collection expense 6,660 6,660 Insurance 44,191 23,795 67,986 Insurance employees 120,294 98, ,473 Legal and professional 21,979 23,607 45,586 Maintenance materials 19,218 77,338 96,556 Mileage 3,266 1,758 5,024 Miscellaneous 748 6,022 6,770 Monitor and testing 57,717 35,077 92,794 Office expense 19,765 10,913 30,678 Payroll taxes 38,197 34,896 73,093 Postal and freight 11,436 6,428 17,864 Retirement 76,936 72, ,213 Salaries 540, ,453 1,031,017 Small tools 737 1,055 1,792 Taxes 166, ,136 Telephone 16,764 10,907 27,671 Travel 1, ,254 Vehicle expense 35,151 33,602 68,753 Worthless accounts 4,204 3,700 7,904 Total operating expenses 1,970,214 1,872,163 3,842,377 Continued

13 The Utilities Board of the City of Ozark, Alabama Statement of Revenues, Expenses, and Changes in Net Position For the Year Ended September 30, 2016 (Continued) Water Sewer Total Operating income (loss) 619,077 (240,322) 378,755 Nonoperating Revenues (Expenses) Interest income 6,091 3,279 9,370 Bond expense (2,730) (1,470) (4,200) Interest expense (588,316) (316,787) (905,103) Total nonoperating revenues (expenses) (584,955) (314,978) (899,933) Change in Net Position 34,122 (555,300) (521,178) Net Position Beginning 12,941,131 Net Position Ending $ 12,419,953 See accompanying notes to the financial statements. 11

14 The Utilities Board of the City of Ozark, Alabama Statement of Cash Flows For the year ended September 30, 2016 Cash Flows From Operating Activities Receipts from customers and users $ 4,203,886 Payments to suppliers (1,120,254) Payments to and on behalf of employees (1,432,898) Other receipts and payments, net (143,154) Net cash provided by operating activities 1,507,580 Cash Flows From Capital and Related Financing Activities Principal payments on long term debt (13,694) Principal payments on revenue bonds (6,410,000) Net proceeds from revenue bonds 7,306,664 Bond agent fees and issuance costs (76,700) Interest paid (660,218) Purchase of property, plant and equipment (907,000) Net cash used in capital and related financing activities (760,948) Cash Flows From Investing Activities Interest received 9,370 Net Increase in Cash and Cash Equivalents 756,002 Cash and Cash Equivalents Beginning 4,748,630 Cash and Cash Equivalents Ending $ 5,504,632 Reconciliation of Cash and Cash Equivalents to the Statement of Net Position: Cash and cash equivalents current assets $ 2,209,550 Cash and cash equivalents noncurrent assets 3,295,082 Cash and cash equivalents end of year $ 5,504,632 Reconciliation of Operating Income to Net Cash Provided by Operating Activities: Operating income $ 378,755 Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation and amortization 1,032,159 Bad debt expense 7,904 Changes in operating assets and liabilities: Decrease in accounts receivable 5,637 Increase in inventories (1,354) Increase in prepaid expenses (11,015) Increase in deferred outflows related to pension (103,681) Increase in accounts payable 10,444 Increase in accrued expenses 16,840 Increase in net pension liability 144,816 Decrease in deferred inflows related to pension (37,478) Increase in other post retirement benefit obligations 55,962 Increase in customer deposits 8,591 Net cash provided by operating activities $ 1,507,580 See accompanying notes to the financial statements. 12

15 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Utilities Board of the City of Ozark, Alabama Notes to Financial Statements The financial statements of the Utilities Board of the City of Ozark, Alabama (the Board ) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP ) and reporting guidelines established by the Governmental Accounting Standards Board ( GASB ). The following notes to the financial statements are an integral part of the Board s financial statements. Reporting Entity The Board is the primary government with oversight responsibility and control over activities related to the supply of water and sewer services for the City of Ozark, Alabama. The Board s Board of Directors has decision making authority, the power to set rates, arrange financing, designate management, significantly influence operations, and primary accountability for fiscal matters. As such, the Board is considered a primary reporting entity, and its accounting and reporting policies conform to GAAP. Basis of Accounting The Board is reported as a proprietary fund and uses the economic resources measurement focus and accrual basis of accounting. The accrual basis of accounts recognizes revenues when earned and expenses when incurred. Proprietary funds distinguish operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund s principal ongoing operations. The principal operating revenues of the Board s enterprise fund are charges to customers for sales and services. The Board 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 The Board s cash and cash equivalents are considered to be cash on hand, demand deposits, and short term investments with original maturities of three months or less from the date of acquisition. Investments The Board's investments consist of certificates of deposits with original maturities of more than three months from the date of acquisition. 13

16 The Utilities Board of the City of Ozark, Alabama Notes to Financial Statements NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Accounts Receivable Provisions for credit losses are charged to income in amounts sufficient to maintain the allowance at a level considered adequate to cover current losses, as deemed necessary by management. Bad debt expense was $7,904 for the year ended September 30, 2016 and there was no allowance for doubtful accounts as all outstanding account balances were deemed collectible. Inventories Inventories are stated at the lower of cost or market, with cost being determined by the first in, first out method. The Board uses the consumption method of accounting for inventory. Restricted Assets Certain proceeds of the Board s revenue bonds, as well as certain resources set aside for their repayment, are classified as restricted assets on the statement of net position because they are maintained in separate bank accounts and their use is limited by applicable bond covenants. At September 30, 2016, all restricted assets were in the form of cash. Generally, it is the Board s policy to use restricted assets before unrestricted assets when both are available to fund specific expenditures. Capital Assets All proprietary funds are accounted for on a cost of services or capital maintenance measurement focus. This means all assets and liabilities (whether current or non current) associated with their activity are included in their statements of net position. The Board maintains a $2,500 capitalization threshold for property, plant and equipment. Capital assets are recorded at historical cost or estimated historical cost if purchased or constructed. Depreciation is computed using the straight line method over the estimated useful life of the assets, ranging from five to fifty years. Improvements that extend the useful life of the assets are capitalized and depreciated over the remaining useful life of the asset. Unamortized Bond Insurance Unamortized debt expense related to bond insurance is amortized by using the outstanding principal method over the life of the related debt and is reported as unamortized bond insurance on the statement of net position. Other bond issuance costs are expensed as incurred. Unbilled Revenues Unbilled revenues are recognized at the end of each fiscal year and combined with accounts receivable for financial statement reporting. Unbilled revenues are based on the usage incurred in September and billed, during October following the close of the fiscal year. 14

17 The Utilities Board of the City of Ozark, Alabama Notes to Financial Statements NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Compensated Absences It is the Board's policy to allow employees to carry over 240 hours of vacation leave annually. Employees terminating employment will be paid for all carried over vacation leave up to 240 hours and any additional vacation leave accrued during the year of separation. Employees who retire after twenty five years of continuous service are entitled to be paid for all accumulated sick leave not to exceed 728 hours at retirement. Liabilities and expenses for compensated absences are reported in the statement of net position and statement of revenues, expenses, and changes in net position, respectively. Deferred Outflows/Inflows of Resources In addition to assets, the statement of net position sometimes reports 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 and will be recognized as an outflow of resources (expense/expenditure) in a subsequent period. The Board has two items reported in this category, deferred charge on debt refunding and deferred outflows related to pension. A deferred charge on refunding results from the difference in the carrying value of refunded debt and its reacquisition price. This amount is deferred and amortized over the shorter of the life of the refunded or refunding debt. A deferred outflow related to pension results from pension contributions related to normal and accrued employer liability (net of any refunds or error service payments) subsequent to the measurement date, in accordance with GASB Statement No. 71. 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 and so will not be recognized as an inflow of resources (revenue) until that time. The Board has one item that qualifies for reporting in this category, the deferred inflows related to pension. A deferred inflow related to pension results from the net difference between projected and actual earnings on plan investments, in accordance with GASB Statement No. 71, and is amortized over five years beginning with the year in which the difference occurred. Net Position The Board s net position is divided into three components: Net investment in capital assets This component of net position consists of the historical cost of capital assets, net of accumulated depreciation, and is reduced by the outstanding balances of any bonds, notes or other borrowings that are attributable to the acquisition, construction, or improvement of those assets. Deferred outflows of resources and deferred inflows of resources that are attributable to the acquisition, construction, or improvement of those assets or related debt should also be included in this component of net position. 15

18 The Utilities Board of the City of Ozark, Alabama Notes to Financial Statements NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Restricted This component of net position consists of assets that are restricted by debt covenants, contributors, contractual provisions, or enabling legislation, reduced by liabilities and deferred inflows of resources related to those assets. The Board s restricted net position as reported in the statement of net position consists of cash and investments. Unrestricted This component of net position is the net amount of the assets, deferred outflows or resources, liabilities, and deferred inflows of resources that are not included in the determination of net investment in capital assets or the restricted components of net position. Estimates Management uses estimates and assumptions in preparing these financial statements in accordance with GAAP. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were used. Impact of Recently Issued Accounting Pronouncements Recently Issued and Adopted The accounting policies of the Board are based upon GAAP as prescribed by the GASB. Effective October 1, 2015 the Board adopted the following GASB Statements: GASB Statement No. 72, Fair Value Measurement and Application ( GASB 72 ), addresses accounting and financial reporting issues related to fair value measurements. GASB 72 will be effective for the Board beginning with its year ending September 30, This Statement provides guidance for determining a fair value measurement for financial reporting purposes and the related disclosures. This Statement requires a government to use valuation techniques that are appropriate under the circumstances and for which sufficient data are available to measure fair value. This Statement establishes a hierarchy of inputs to valuation techniques used to measure fair value. This Statement also requires disclosures to be made about fair value measurements, the level of fair value hierarchy, and valuation techniques. GASB Statement No. 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68 ( GASB 73 ), extends the approach to accounting and financial reporting established in Statement 68 to all pensions. It establishes requirements for defined contribution pensions that are not within the scope of Statement 68. Requirements of this Statement for pension plans that are within the scopes of Statement No. 67 or Statement 68, are effective for fiscal years beginning after June 15, Thus, these requirements of GASB 73 will be effective for the Board beginning with its year ending September 30, GASB 73 clarifies the application of certain provisions of Statements 67 and 68 with regard to: (1) Information that is required to be presented as notes, (2) Accounting and financial reporting for separately financed specific liabilities, and (3) Timing of employer recognition of revenue. 16

19 The Utilities Board of the City of Ozark, Alabama Notes to Financial Statements NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) GASB Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments ( GASB 76 ), supersedes GASB Statement No. 55, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments. GASB 76 will be effective for the Board beginning with its year ending September 30, Recently Issued Other accounting standards that the Board is currently reviewing for applicability and potential impact on the financial statements include: GASB Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans ( GASB 74 ), replaces GASB Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, as amended, and GASB Statement No. 57, OPEB (Other Postemployment Benefits) Measurement by Agent Employers and Agent Multiple Employer Plans. GASB 74 will be effective for fiscal years beginning after June 15, Included are requirements for defined contribution OPEB plans that replace the requirements for those OPEB plans in Statement No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans, as amended, Statement 43, and Statement No. 50, Pension Disclosures. GASB 74 also includes requirements to address financial reporting for assets accumulated for purposes of providing defined benefit OPEB through OPEB plans that are not administered through trusts that meet the specified criteria. GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions ( GASB 75 ), replaces the requirements of Statements No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, as amended, and No. 57, OPEB Measurements by Agent Employers and Agent Multiple Employer Plans, for OPEB. GASB 75 will be effective for fiscal years beginning after June 15, This Statement establishes standards for recognizing and measuring liabilities, deferred outflows of resources, deferred inflows of resources, and expense/expenditures. In addition, this Statement details the recognition and disclosure requirements for employers with payables to defined benefit OPEB plans that are administered through trusts that meet the specified criteria and for employers whose employees are provided with defined contribution OPEB. GASB Statement No. 77, Tax Abatement Disclosures ( GASB 77 ), requires governments that enter into tax abatement agreements to disclose: (1) Brief descriptive information concerning the agreement; (2) The gross dollar amount of taxes abated during the period; and 3) Commitments made by government, other than to abate taxes, that are part of the tax abatement agreement. GASB 77 will be effective for fiscal years beginning after December 15,

20 The Utilities Board of the City of Ozark, Alabama Notes to Financial Statements NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) GASB Statement No. 78, Pensions Provided Through Certain Multiple Employer Defined Benefit Pension Plans ( GASB 78 ), amends the scope and applicability of GASB Statement No. 68. It excludes pensions provided to employees of state or local governmental employers through a cost sharing multiple employer defined benefit pension plan that (1) is not a state or local government pension plan, (2) is used to provide defined benefit pensions both to employees of state or local governmental employers and to employees of employers that are not state or local government employers, and (3) has no predominate state or local government employer. This Statement establishes requirements for recognition and measurement of pension expense, expenditures, and liabilities; note disclosure; and required supplementary information for pensions that have the characteristics described above. GASB 78 will be effective for fiscal years beginning after December 15, GASB Statement No. 79, Certain External Investment Pools and Pool Participants ( GASB 79 ), addresses accounting and financial reporting for certain external investment pools and pool participants. It establishes criteria for an external investment pool to qualify for making the election to measure all of its investments at amortized cost for financial reporting purposes. GASB 79 establishes additional note disclosure requirements for qualifying external investment pools that measure all of their investments at amortized costs for financial reporting purposes and for governments that participate in those pools. GASB 79 will be effective for fiscal years beginning after June 15, GASB Statement No. 80, Blending Requirements for Certain Component Units, an amendment of GASB Statement No. 14 ( GASB 80 ), amends the blending requirements for the financial statement presentation of component units of all state and local governments. GASB 80 will be effective for fiscal years beginning after June 15, GASB Statement No. 81, Irrevocable Split Interest Agreements ( GASB 81 ), requires that a government that receives resources pursuant to an irrevocable split interest agreement recognize assets, liabilities, and deferred inflows of resources at the inception of the agreement. GASB 81 will be effective for the fiscal years beginning after December 15, GASB Statement No. 82, Pension Issues, an amendment of GASB Statements No. 67, No. 68, and No. 73 ( GASB 82 ), addresses issues regarding (1) the presentation of payroll related measures in required supplementary information, (2) the selection of assumptions and the treatment of deviations from the guidance in an Actuarial Standard of Practice for financial reporting purposes, and (3) the classification of payments made by employers to satisfy employee (Plan member) contribution requirements. GASB 82 will be effective for fiscal years beginning after June 15,

21 NOTE 2 DEPOSITS AND INVESTMENTS Custodial Risk The Utilities Board of the City of Ozark, Alabama Notes to Financial Statements The custodial credit risk for deposits is the risk that, in the event of a bank failure, the Board will not be able to recover deposits or collateral securities that are in the possession of an outside party. The Board's deposits at year end were entirely covered by federal depository insurance or by the Security for Alabama Funds Enhancement ( SAFE ) Program. The SAFE Program was established by the Alabama Legislature and is governed by the provisions contained in the Code of Alabama 1975, Sections 41 14A 1 through 41 14A 14. Under the SAFE Program all public funds are protected through a collateral pool administered by the Alabama State Treasurer s Office. Under this program, financial institutions holding deposits of public funds must pledge securities as collateral against those deposits. In the event of failure of a financial institution, securities pledged by that financial institution would be liquidated by the State Treasurer to replace the public deposits not covered by the Federal Depository Insurance Corporation (FDIC). If the securities pledged fail to produce adequate funds, every institution participating in the pool would share the liability for the remaining balance. Credit and Interest Rate Risk Concentration of credit risk is the risk of loss attributable to the quantity of the government s investments in a single issuer. Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. The Board has limited its interest rate risk by investing in money market funds which are required to maintain an average dollar weighted portfolio maturity of 90 days or less and certificates of deposits held at local banks with an original maturity of one year or less. NOTE 3 RECEIVABLES Receivables consist of the following: September 30, 2016 Accounts receivable $ 197,521 Unbilled revenue 485,653 Receivables $ 683,174 19

22 The Utilities Board of the City of Ozark, Alabama Notes to Financial Statements NOTE 4 CAPITAL ASSETS Capital asset activity for the year ended September 30, 2016 was as follows: Beginning Balance 10/1/15 Increases Decreases Ending Balance 9/30/16 Capital assets, not being depreciated: Land $ 148,601 $ $ $ 148,601 Construction in progress 293, ,342 (76,654) 646,505 Total capital assets, not being depreciated $ 442,418 $ 429,342 $ (76,654) $ 795,106 Capital assets, being depreciated: Buildings Utility plant Water distribution system Sewer system Waste water treatment facility $ 661, ,833 15,576,300 17,071,546 $ 15, , ,088 $ $ 676, ,833 15,713,578 17,190,634 9,498, ,745 9,601,562 Equipment 811,013 26, ,671 Total capital assets, being depreciated 43,733, ,006 44,134,683 Total accumulated depreciation (19,714,021) (1,024,070) (20,738,091) Total capital assets, being depreciated, net $ 24,019,656 $ (623,064) $ $ 23,396,592 Depreciation expense was charged to functions/departments of the Board as follows: Water $ 385,953 Sewer 638,117 $ 1,024,070 Construction in progress as of September 30, 2016 includes several ongoing projects. The sewer system improvement project is the most significant and is expected to be completed by the end of December The total contract amount related to the project is approximately $1,312,000; estimated costs remaining under the construction commitment are expected to be approximately $909,

23 The Utilities Board of the City of Ozark, Alabama Notes to Financial Statements NOTE 5 LONG TERM DEBT The changes in long term liabilities of the Board for the year ended September 30, 2016 were as follows: Beginning Balance 10/1/15 Additions Reductions Ending Balance 9/30/16 Due Within One Year Revenue bonds payable $ 16,475,000 $ 6,795,000 $ (6,410,000) $ 16,860,000 $ 435,000 Unamortized premium (discount) (405,805) 193,594 85,258 (126,953) Note payable 495,689 (13,694) 481,995 30,656 Total $ 16,564,884 $ 6,988,594 $ (6,338,436) $ 17,215,042 $ 465,656 Bonds Payable 2013 Bonds On February 1, 2013, the Board issued $10,640,000 of Series 2013 bonds. As a result, the 2003 and 2006 series bonds are considered defeased and the Board has removed the liability from its accounts. The outstanding principal on the defeased bonds was repaid during FY16, and there was no remaining outstanding principal balance as of September 30, The carrying difference between the reacquisition price (funds required to refund the old debt) and the net carrying amount of the old debt is carried as deferred refunding cost and is amortized over the remaining life of the old bond issue (as it was shorter than the life of the new debt) on the straight line basis. The amount deferred on the reacquisition was $467,992. The total amount amortized for the year ended September 30, 2016 was $49,368 and was reported as part of interest expense. The remaining deferred refunding cost at September 30, 2016 was $286,978. The remainder of the Series 2013 bonds that were not used to defease the Series 2003 and 2006 bonds will be used for capital improvement projects. The interest rate on the bond varies from year to year and ranges from 1.5% to 3.75% and the debt service requirements to maturity of these bonds are as follows: Year Ending September 30, Principal Interest 2017 $ 135,000 $ 357, , , , , , , , , ,000 1,732, ,000 1,694,025 21

24 NOTE 5 LONG TERM DEBT (Continued) The Utilities Board of the City of Ozark, Alabama Notes to Financial Statements Year Ending September 30, Principal Interest ,335,000 1,441, ,980, , ,800, ,813 $ 10,065,000 $ 7,533,456 Principal and interest paid for the year ended September 30, 2016 was $530,806 for the Series 2013 bonds. Bond discount expense on the 2013 bonds for the year ended September 30, 2016 was $11, Bonds On June 29, 2016, the Board issued $6,795,000 of Series 2016 bonds. As a result, the 2007 Series bonds are considered defeased and the Board has removed the liability from its accounts. The outstanding principal on the defeased bonds was repaid in September The remainder of the Series 2013 bonds that were not used to defease the Series 2007 bonds will be used for capital improvement projects. The carrying difference between the reacquisition price (funds required to refund the old debt) and the net carrying amount of the old debt is carried as deferred refunding cost and will be amortized over the remaining life of the new bond issue (as it was shorter than the remaining life of the old debt) on the straight line basis. The amount deferred on the reacquisition was $495,080. The total amount amortized for the year ended September 30, 2016 was $8,251 and was reported as part of interest expense. The remaining deferred refunding cost at September 30, 2016 was $486,823. Although the advance refunding resulted in the recognition of an accounting loss of $495,080, the Board reduced its aggregate debt service payments by approximately $425,000 over the next 15 years. The difference between the net present value of the net cash flows of the old and new debt resulted in an economic loss of approximately $286,000. The interest rate on the bond varies from year to year and ranges from 2.0% to 3.0% and the debt service requirements to maturity of these bonds are as follows: Year Ending September 30, Principal Interest 2017 $ 300,000 $ 167, , , , , , , , , ,360, , ,625, ,219 $ 6,795,000 $ 1,425,447 22

25 NOTE 5 LONG TERM DEBT (Continued) The Utilities Board of the City of Ozark, Alabama Notes to Financial Statements Interest paid for the year ended September 30, 2016 was $28,871 for the Series 2016 bonds, and no principal was due or paid. Bond premium amortization on the 2016 bonds for the year ended September 30, 2016 was $3,227. Note Payable Included in long term debt is a note payable due to the City of Ozark, Alabama. The note is due in monthly installments through February 2026 with interest ranging from 3.35% to 5%. During 2016, the Board remitted payments to the City of Ozark for $37,483, which includes $13,694 principal and $23,789 interest. Refer to Note 10, Related Party Transactions, for additional information. NOTE 6 UTILITY REVENUES PLEDGED The Board has pledged future revenues derived from the operation of the Board's combined activities remaining after the cost of operating and maintaining to repay the Series 2016 and Series 2013 bonds. Proceeds from the bonds are being used to upgrade the utility systems. The bonds are payable through The total principal and interest remaining on the bonds is discussed above in Note 5, Long Term Debt. Net operating income for the year ended September 30, 2016 was $378,755. Interest and principal debt service for the bonds noted is $960,044 for the year ended September 30, NOTE 7 EMPLOYEE RETIREMENT PLAN Summary of Significant Accounting Policies for the Pension Plan Pensions. The Employees Retirement System of Alabama (the Plan ) financial statements are prepared using the economic resources measurement focus and accrual basis of accounting. Contributions are recognized as revenues when earned, pursuant to the plan requirements. Benefits and refunds are recognized when due and payable in accordance with the terms of the Plan. Expenses are recognized when the corresponding liability is incurred, regardless of when the payment is made. Investments are reported at fair value. Financial statements are prepared in accordance with requirements of the 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. General Information about the Pension Plan Plan description. The Employees Retirement System of Alabama ( ERS ), an agency multipleemployer plan, was established 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 operating of ERS is vested in its 23