PREPARED BY: Kimberly Green Accounting Managergfoa.net/cafr/COA2012/WestKnoxUtilityDistrictTN.pdfof...

THE WEST KNOX UTILITY DISTRICT OF KNOX COUNTY

Knoxville, Tennessee

COMPREHENSIVE ANNUAL

FINANCIAL REPORT

FOR THE YEARS ENDED June 30, 2012 and 2011

PREPARED BY:

Kimberly Green Accounting Manager

THE WEST KNOX UTILITY DISTRICT OF KNOX COUNTY COMPREHENSIVE ANNUAL FINANCIAL REPORT

June 30, 2012 and 2011

TABLE OF CONTENTS

Page Number

INTRODUCTORY SECTION Letter of Transmittal ............................................................................................................................................... i-iii Organizational Chart ................................................................................................................................. iv Roster of District Officials and Others ...................................................................................................... v GFOA Certificate of Achievement ............................................................................................................ vi FINANCIAL SECTION Independent Auditor’s Report ................................................................................................................... 1-2 Management’s Discussion and Analysis .................................................................................................. 3-11

Basic Financial Statements: Balance Sheets ..................................................................................................................................... 12-13 Statements of Revenues, Expenses, and Changes in Net Assets ....................................................... 14-15 Statements of Cash Flows .................................................................................................................... 16-17 Notes to the Financial Statements ........................................................................................................ 18-36

Required Supplementary Information: Schedule of Employer Pension Contributions – Last Ten Fiscal Years ................................................ 37 Schedule of Employer Pension Funding Progress – Last Seven Valuation Dates ............................... 38

Supplementary Information: Schedule of Expenditures of Federal and State Awards....................................................................... 39 Schedule of Debt Service Requirements .............................................................................................. 40-41 Schedule of Water Rates and Statistics ................................................................................................ 42 Schedule of Insurance Coverage .......................................................................................................... 43 Schedule of Unaccounted for Water ..................................................................................................... 44-45 STATISTICAL SECTION (UNAUDITED) Net Assets by Component – Last Ten Fiscal Years ................................................................................. 46 Changes in Net Assets – Last Ten Fiscal Years ...................................................................................... 47-48 Customer Statistics and Rates – Last Ten Fiscal Years .......................................................................... 49 Water Produced, Sold and Consumed – Last Ten Fiscal Years .............................................................. 50 Annual Tap Sales – Last Ten Fiscal Years .............................................................................................. 51 Number of Water and Sewer Customers by Type – Last Ten Fiscal Years ............................................. 52 Water and Wastewater Rates – Last Ten Fiscal Years ............................................................................ 53-54 Ten Largest Customers – Current Fiscal Year and Nine Years Ago ....................................................... 55 Outstanding Debt Per Customer – Last Ten Fiscal Years ....................................................................... 56 Pledged Revenue Coverage – Last Ten Fiscal Years ............................................................................. 57 Demographic and Economic Statistics – Last Ten Calendar Years ......................................................... 58 Principal Employers – Current Calendar Year and Nine Years Ago ........................................................ 59 Number of Employees By Activity – Last Ten Fiscal Years ..................................................................... 60 Annual Wastewater Plant Flows and Capacity in Millions of Gallons – Last Ten Fiscal Years ........................................................................................................... 61 Operating and Capital Indicators – Last Eight Fiscal Years ..................................................................... 62 COMPLIANCE SECTION Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards ................................................................................ 63-64 Schedule of Findings and Responses ...................................................................................................... 65

Schedule of Corrected Prior Audit Findings ............................................................................................. 66-67

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The District is governed by a Board of Commissioners composed of three citizens who reside in or are customers of the District. Board members are appointed by the Knox County Mayor for a term of four years. The District’s capital assets consist of two water treatment plants, one wastewater treatment facility, one office building and related maintenance facility, and five water reservoir tanks. The collection system, consisting of mains, laterals and pump stations, is owned and maintained by the District. The District receives no financial support from Knox County, Tennessee and has no taxing authority. The District’s water and wastewater revenues are derived from charges based upon metered water consumption of customers. The water and wastewater rates are established by the Board of Commissioners. Budgeting The District adopts flexible annual operating and capital budgets. Budgets are adopted on a basis consistent with GAAP. The current operating budget details the District’s plans to earn and expend funds for charges incurred for operation, maintenance, certain interest and general functions, and other charges for the fiscal year. The capital budget details the plan to receive and expend cash basis capital contributions, grants, borrowings and certain revenues for capital projects. Financial Overview During 2012, the District’s operating income was $2,444,755 which was $715,992 more than 2011 or 41.4%. The District’s pledged revenue bond coverage ratio increased to 2.16 in 2012 vs. 2.08 in 2011. The operating income increased mainly due to an increase in water and wastewater revenues from reducing the minimum bill from 1,500 gallons to 1,000 gallons. Local Economy The District is located within the Knoxville Metropolitan Statistical Area (MSA) which includes Knox, Blount, Anderson, Sevier, Loudon and Union Counties. The Knoxville MSA is also the trade center for several counties in East Tennessee, and parts of Kentucky, Virginia and North Carolina. For calendar year-ended 2011, the unemployment rates according to the U.S. Bureau of Labor Statistics for Knox County, State and Nation were 6.9%, 9.2% and 8.9%, respectively. Per capita income in calendar year 2010 for Knox County, State and Nation was $35,219, $35,307 and $39,937 respectively. The Knoxville MSA has several large employers including the Tennessee Valley Authority, U.S. Department of Energy, Alcoa Aluminum, several hospitals, Clayton Homes, Denso, the University of Tennessee, and several regional shopping malls and centers. Long-Term Financial Planning The District has projected a 1% to 2% annual increase in the number of customers over the next five years. The District is currently making several capital improvements including several water line improvements and extensions. The financing of the District’s capital improvements is by internally generated cash flows and the issuance of long-term debt. The District’s debt coverage ratio has consistently been in excess of the required bond covenants. Major Initiatives The District is working to expand their Daugherty Water Treatment plant from 2 million gallons per day to 8 million gallons per day. The Daugherty Water Treatment Plant expansion will also include some significant water main projects. These will involve the installation of larger water transmission mains to transfer the additional treated water into the water distribution system. These projects are to be financed by current operations and internally generated cash flows and a bond issue.

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The District is in the process of locating a new wastewater treatment plant in Hardin Valley. One hundred fifty acres of property have been purchased and the District is currently working with its consulting engineer and TDEC on a NPDES discharge permit. The existing plant is close to operating at the daily maximum capacity of four million gallons. This project also involves a study of the District's largest wastewater pump station, the Ten Mile Pump Station. Alternatives are being evaluated on needs for this station and whether flow from the station should be routed to the new wastewater treatment plant. This also involves the evaluation of sewer rehabilitation needs in the Ten Mile Basin. This study will likely result in some significant capital projects to allow the District to service the increasing demand in the area.

The District haS contracted with a local engineering conSUlting fi rm for aSSistance In eValUating sewer sub-basin 9, the District's largest sewer sub-basin. This firm will evaluate the entire basin utilizing smoke testing, manhole inspections, flow monitOring, and closed circuit televising of the sewer lines. Likewise, the same has been done for the Ten Mile Basin with another engineering firm which will likely result in some significant capital projects in that basin. They will be making recommendations to the District in reports for future capital projects based on their findings. The District's current 5-year capital improvements plan reflects funds to complete the study and begin some capital improvement projects in this sub-basin.

The District is currently rebuilding the Mobileland Wastewater Pump Station. Due to its age and pumping capacity, this station is limited in its ability to meet current needs. This project is under construction.

The District has two waterline projects underway to replace several problematic and deteriorating water lines within the District's water distribution system. These projects will replace waterlines at approximately 15 different locations in the water distribution system, including most of the existing mains which are two-inch diameter galvanized water mains. This project is under construction.

The District has a design complete and is in the process of acquiring easements to replace a sanitary sewer main near Joe Hinton Road with a larger sanitary sewer main. The existing main is approaching capacity and the capacity needs to be increased to avoid regulatory violations. This project will soon be ready for bidding and construction.

Awards

The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the District for its CAFR for the fiscal year ended June 30, 20~1. This was the eighth consecutive year that the District received this award. In order to be awarded a Certificate of Achievement, the District must publish an easily readable and efficiently organized CAFR. This report must satisfy both generally accepted accounting principles and applicable legal requirements.

A Certificate Of ACI'Iievement is valid for a periOd of OM year only. We believe that our current comprehensive annual financial report continues to meet the Certificate of Achievement Program's requirements and we are submitting it to the GFOA to determine its eligibility for another certificate.

Acknowledgements

The preparation of this CAFR results from the combined efforts of the staff of the Finance Department and technical assistance provided by our independent auditors. Those involved have our sincere appreciation for the individual and collective contributions made in preparation of the report. ThanK you very much for your prOfessional dedication.

Recognition and appreciation are also extended to the Board for its continued guidance of the operation of the District in a financially responsible and progressive manner.

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ORGANIZATIONAL CHART

June 30, 2012

Board of CommissionersDaniel H. Hurst

Robert H. SterchiRuth Ann Milsaps

ManagementDrexel A. Heidel, General Manager

Wayne Hastings, Asst. Manager

FinancialKimberly Green

Mapping/CADDMartin Gillenwaters

Water PlantRon Medley, Superintendent

Sampling O & M

Billing

Collections

Customer Service

DistributionDoug Alderman, Superintendent

Repairs/Meters Yard Repairs Service Technician

Meter ReadingTyler Anderson, Foreman Line Flushing Cross Connections

Wastewater Plant

Laboratory O & M

Sewer Collection

I & I Maintenance

Sewer Pump Stations

Maintenenace

EngineeringAdam Byard, P.E.

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ROSTER OF DISTRICT OFFICIALS AND OTHERS

June 30, 2012 Board of Commissioners Expiration of Term Daniel H. Hurst, President December 31, 2013 Robert H. Sterchi, Jr., Vice-President December 31, 2014 Ruth A. Milsaps, Secretary December 31, 2012

Management

Drexel A. Heidel, PE, General Manager

Wayne Hastings, Assistant Manager

Kimberly Green, Accounting Manager Independent Auditor General and Bond Counsel Pugh & Company, P.C. John Owings, Attorney at Law Certified Public Accountants Robertson, Overbey, Wilson & Beeler Knoxville, Tennessee Knoxville, Tennessee

Consulting Engineer

Louis Robbins GRW Engineers, Inc. Nashville, Tennessee

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TSCPA

Members of the Tennessee Society Of Certified Public Accountants

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315 NORTH CEDAR BLUFF ROAD – SUITE 200 100 E. TENNESSEE AVENUE

KNOXVILLE, TENNESSEE 37923 OAK RIDGE, TENNESSEE 37830

TELEPHONE 865-769-0660 TELEPHONE 865-483-5634

TELECOPIER 865-769-1660 TELECOPIER 865-483-9781

P.O. BOX 31409

KNOXVILLE, TENNESSEE 37930-1409

TOLL FREE 800-332-7021

INDEPENDENT AUDITOR’S REPORT Board of Commissioners The West Knox Utility District of Knox County Knoxville, Tennessee We have audited the accompanying balance sheets of The West Knox Utility District of Knox County (the District) as of June 30, 2012 and 2011, and the related statements of revenues, expenses and changes in net assets and cash flows for the years then ended. These financial statements are the responsibility of the District’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits 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 of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to previously present fairly, in all material respects, the financial position of The West Knox Utility District of Knox County as of June 30, 2012 and 2011, and the changes in financial position and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued our report dated December 12, 2012, on our consideration of the District’s internal control over financial reporting and on our 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 internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit.

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Accounting principles generally accepted in the United States of America require that the management's discussion and analysis on pages 3-11 and the Schedule of Employer Pension Contributions on page 37 and the Schedule of Employer Pension Funding Progress on page 38 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. Our audit was conducted for the purpose of forming an opinion on the basic financial statements. The supplementary information on pages 39-45 is presented for purposes of additional analysis and is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the supplementary information is fairly stated in all material respects in relation to the financial statements as a whole. Our audit was conducted for the purpose of forming an opinion on the basic financial statements. The introductory and statistical sections are presented for the purposes of additional analysis and are not a required part of the basic financial statements. Such information has not been subjected to the auditing procedures applied in the audit of the basic financial statements, and accordingly, we do not express an opinion or provide any assurance on it.

Pugh &Company, P.C.

Certified Public Accountants Knoxville, Tennessee December 12, 2012

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MANAGEMENT’S DISCUSSION AND ANALYSIS This section presents management’s analysis of The West Knox Utility District of Knox County’s (the District) financial condition and results of operations for the years ending June 30, 2012 and 2011. This information should be read in conjunction with the accompanying financial statements and the additional information we have furnished in our letter of transmittal on pages i to iii.

FINANCIAL HIGHLIGHTS Management believes the District’s financial position is strong. The District maintained good debt service coverage and was in compliance with all debt covenants. The following are key financial highlights:

• During 2012, the District delivered 2.02 billion gallons of water and treated 1.52 billion gallons of wastewater, representing an increase of 2.6% and an increase of 6.46%, respectively, from the previous year.

• Total assets at year-end 2012 were $161.3 million and exceeded liabilities by $82.0 million. Of the total net

assets, $22.9 million was unrestricted and was available to support operations. Total assets and total net assets increased from 2011 to 2012 by $3.8 million and $2.5 million, respectively. Unrestricted net assets increased during 2012 by $3.2 million.

• Operating revenues were $16.2 million in 2012, an increase of $2.0 million from 2011.

• Operating expenses before depreciation increased by $1.2 million or 14.2% when compared to 2011.

• Operating income for the year was $2.4 million, representing a 41.4% increase from 2011. The increase in

net assets before capital contributions increased by $764,905 when compared to 2011.

• The ratios of operating income to total operating revenues were 15.1% for 2012 and 12.2% for 2011.

• Debt service coverage ratio was 2.16% for 2012, exceeding the 1.20% required by various bond covenants.

• Cash capital contributions were $69,290 for 2012, a decrease of $841,249 when compared to 2011.

Developer contributions of facilities were $1,745,692, an increase of $905,887 when compared to 2011.

• As a result of ongoing state and county road construction within the District, several water and wastewater line relocation projects were in progress and engineering costs were incurred related to the new wastewater treatment plant on Melton Hill Lake. The amount of construction in progress was $12,359,573 and $10,558,234 at year-end 2012 and 2011, respectively. The remaining commitments were $16,669,890 and $1,010,195 at June 30, 2012 and 2011, respectively.

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MANAGEMENT’S DISCUSSION AND ANALYSIS (Continued)

OVERVIEW OF THE ANNUAL FINANCIAL STATEMENTS Management’s Discussion and Analysis (MD&A) serves as an introduction to the basic financial statements and supplementary information. The MD&A represents management’s examination and analysis of the District’s financial condition and performance. Summary financial statement data, key financial and operational indicators used in the District’s budget, bond resolutions and other management tools are used for this analysis. The financial statements report information about the District using full accrual accounting methods as utilized by similar business activities in the private sector. However, rate-regulated accounting principles applicable to private sector utilities are not used by government utilities. The financial statements include a balance sheet; a statement of revenues, expenses, and changes in net assets; a statement of cash flows; and notes to the financial statements. The balance sheet presents the financial position of the District on the accrual basis of accounting. While the balance sheet provides information about the nature and amount of resources and obligations at year-end, the statement of revenues, expenses, and changes in net assets presents the results of the business activities over the course of the fiscal year and information as to how the net assets changed during the year. All changes in net assets are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of the related cash flows. This statement also provides certain information about the District’s recovery of its costs. The District’s rates are based on a cost of service rate study that is updated annually. Rate setting policies use different methods of cost recovery not fully provided for by generally accepted accounting standards. The primary objectives of the rate model are to improve equity among customer classes and to ensure that capital costs are allocated on the basis of long-term capacity needs, ensuring that growth pays for growth. The statement of cash flows presents changes in cash and cash equivalents, resulting from operational, financing, and investing activities. This statement presents cash receipts and cash disbursement information, without consideration of the earnings event, when an obligation arises, or depreciation of capital assets. The notes to the financial statements provide required disclosures and other information that are essential to a full understanding of material data provided in the statements. The notes present information about the District’s accounting policies, significant account balances and activities, material risks, obligations, commitments, contingencies and subsequent events, if any.

SUMMARY OF ORGANIZATION AND BUSINESS The District was created under the authority of Title 7, Chapter 82 of the 1937 Utility District Law of the State of Tennessee. The District began operations on October 18, 1954. The purpose of the District is to “acquire, construct, improve, extend, operate and maintain a water and wastewater treatment system. The District serves 25,474 water and 20,734 wastewater customers in the northwestern portion of Knox County. The District’s primary source of water is drawn from the Clinch River that forms Melton Hill Lake which borders Knox and Anderson counties. The District is governed by a Board of Commissioners composed of three citizens who reside in or are current customers of the District. Board members are appointed by the Knox County Mayor for a term of four years. The District’s capital assets consist of two water treatment plants, one wastewater treatment facility, one office building and related maintenance facility, and five water reservoir tanks. The collection system, consisting of mains, laterals and pump stations, is owned and maintained by the District. The District receives no financial support from Knox County, Tennessee and has no taxing authority. The District’s revenues are derived from water and wastewater charges based upon metered water consumption of customers. The water and wastewater rates are established by the Board of Commissioners.

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FINANCIAL ANALYSIS The following comparative condensed financial statements and other selected information provides key financial data and indicators for management, monitoring, and planning.

ASSETS 2012 2011 2010

Current Assets $ 48,877 $ 51,775 $ 17,334Capital Assets:

Producing – Net 92,649 88,969 90,854Construction in Progress 12,360 10,558 5,814

Other 7,394 6,223 6,223

TOTAL ASSETS $ 161,280 $ 157,525 $ 120,225

LIABILITIES

Current Liabilities $ 3,477 $ 2,801 $ 2,141Non-Current Liabilities 75,780 75,163 40,156

Total Liabilities 79,257 77,964 42,297

NET ASSETS

Invested in Capital Assets, Net of Related Debt 57,114 56,394 58,903Restricted 1,998 3,449 2,735Unrestricted 22,911 19,718 16,290

Total Net Assets 82,023 79,561 77,928

TOTAL LIABILITIES AND NET ASSETS $ 161,280 $ 157,525 $ 120,225

Condensed Balance Sheets(In Thousands of Dollars)

June 30, 2012 and 2011, 2010

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FINANCIAL ANALYSIS (Continued)

2012 2011 2010Operating Revenues

Water $ 7,226 $ 6,580 $ 5,905Wastewater 8,019 6,628 6,080Connection Fees 487 562 668Customer Forfeited Discounts 237 180 167Service Fees 91 90 111Wastewater Inspection Fees 5 8 13Miscellaneous 151 161 37

Total Operating Revenues 16,217 14,209 12,982

Operating ExpensesWater Purification and Supply 1,132 954 952Wastewater Collection and Treatment 2,326 2,148 2,002Water Treatment and Distribution 2,446 2,204 2,056Capacity Management Operations

Maintenance (CMOM) 1,302 1,009 976Shop and General Maintenance 306 319 223Customer Accounting 132 132 131Administrative and General 2,211 1,861 1,822Depreciation 3,916 3,853 3,772

Total Operating Expenses 13,772 12,480 11,935

Operating Income 2,445 1,729 1,047

For The Years Ended June 30, 2012, 2011 and 2010(In Thousands of Dollars)

and Changes in Net AssetsCondensed Statements of Revenues, Expenses,

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FINANCIAL ANALYSIS (Continued)

2012 2011 2010

Non-Operating Revenues (Expenses)Investment Income 280 4 357Interest Expense (2,048) (1,850) (1,354)Gain (Loss) on Disposal of Capital Assets (30) 0 1

Total Non-Operating - Net (1,798) (1,847) (996)

Increase (Decrease) in Net Assets Before Capital Contributions 647 (118) 50

Capital ContributionsCash Contributions 69 911 771Non-Cash 1,746 840 2,447

Total Capital Contributions 1,815 1,750 3,218

Change in Net Assets 2,462 1,633 3,268

Net Assets, Beginning of Year, As Previously Reported 78,949 77,341 74,196

Prior Period Adjustments 612 587 464

Net Assets, Beginning of Year, as Restated 79,561 77,928 74,660

Net Assets, End of Year $ 82,023 $ 79,561 $ 77,928

Condensed Statements of Revenues, Expenses,and Changes in Net Assets (Continued)

(In Thousands of Dollars)For The Years Ended June 30, 2012, 2011 and 2010

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OTHER SELECTED INFORMATION

Selected Data:2012 2011 2010

Employees at Year-End 63 63 63Average Employees 63 63 62Customers (Billing Units) at Year End:

Water 25,474 25,368 25,117Wastewater 20,734 20,509 20,266

Water (Millions of Gallons)Treated (Pumped) 2,023 1,970 1,790Sold 1,855 1,749 1,659

Wastewater Treated (Millions of Gallons) 1,525 1,432 1,485

Per Average Employee:Operating Revenues $ 257,406 $ 225,536 $ 207,392Operating Expenses 218,601 198,096 192,502

Average Realized Rates per 1,000 Gallons of Water Sold:Water - Residential 3.99 3.82 3.56 Wastewater - Residential 6.21 5.42 5.24

Ratio of Operating Revenues to:Operating Expenses 1.18 1.14 1.08 Operating Expenses - Net of Depreciation 1.65 1.65 1.58 Total Assets 0.10 0.09 0.11 Net Assets 0.20 0.18 0.17

Debt Related Ratios:Long-Term Liabilities to Net Assets 0.92 0.94 0.52 Long-Term Liabilities to Total Assets 0.47 0.48 0.33 Operating Coverage 2.16 2.08 2.11

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GENERAL TRENDS AND SIGNIFICANT EVENTS Customer growth in the District increased .04% during 2012 and increased 24% over the last ten years. FINANCIAL CONDITION The District's financial condition remained strong at year-end with adequate liquid assets and a reasonable level of unrestricted net assets. The current financial condition, staff capabilities, operating plans and upgrade plans to meet future water quality requirements are well balanced and under control. During 2012, total assets grew 2.4%, or $3,755,125, with 4.5% represented by additions to capital assets. Net assets increased in 2012 by $2,462,106, with approximately 74% of the increase resulting from capital contributions. During 2011, total assets grew 31.0%, or $37,301,023, with $35,283,263 represented by additions to bonds payable. Net assets increased in 2011 by $1,632,5603, with all of the increase resulting from capital contributions. Accounts receivable at year-end 2012 were 7.7% less than fiscal year 2011 and 65.3% less than fiscal year 2010. The change from 2010 is due mainly to $1.2M from the State Revolving Loan Fund related to the Clean Water Act grant and loan. At 2012 year-end, 89% of accounts receivable were current within 30 days. The District's provision for bad debt expense for 2012 was $80,138 compared to $116,212 in 2011. RESULTS OF OPERATIONS Operating Revenues Revenues from operations fall into three general categories: water service, wastewater service and ancillary charges. Ancillary charges include connection fees, account set up and penalty fees, and charges for miscellaneous billed services. Operating income increased $715,992 in 2012, increased $781,760 in 2011, and decreased $530,433 in 2010. The average realized rate from water sales was $3.99 per thousand gallons in 2012, $3.82 in 2011, and $3.56 in 2010. Capital Contributions The District collects water and wastewater connection fees to ensure that current customers do not bear the burden of growth. These fees are paid at the time a new customer water meter is connected to the system. In addition, the District accepts new water and wastewater lines that are donated by residential and commercial real estate developers. Capital contributions during 2012, 2011 and 2010 consisted of the following:

2012 2011 2010

Cash Capital Contributions fromVarious Developers $ 10,200 $ 11,952 $ 264,561State of TN - ARRA Grant 59,090 898,587 505,562

Donated Lines by Developers 1,745,692 839,805 2,446,918

Total $ 1,814,982 $ 1,750,344 $ 3,217,041

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GENERAL TRENDS AND SIGNIFICANT EVENTS (Continued) Expenses Operating expenses, excluding depreciation, increased by $1,229,154 in 2012, increased by $463,821 in 2011, and decreased $(2,656) in 2010 or 14.2%, 5.7%, and (.03)%, respectively. This was a result of significant increases (decreases) in:

2012 2011 2010

Salaries and Benefits $ 379,041 $ 209,394 $ 44,937Power Purchased 77,779 171,282 (157,751)Repairs and Maintenance 319,752 (44,576) 96,251CMOM Program 184,725 (27,694) 38,552Chemicals 24,347 41,379 (40,466)Legal 66,626 10,838 40,079Treatment of Wastewater (19,633) 49,753 (17,683)Other 196,517 53,445 (6,575)

Total $ 1,229,154 $ 463,821 $ (2,656)

Depreciation expense of the District’s system increased by $62,665 in 2012, increased by $81,105 in 2011, and increased by $532,552 in 2010 or 1.6%, 2.2%, and 16.4%, respectively. CAPITAL ASSETS The District is undergoing an extensive water and wastewater line relocation, replacement, and extension program. The majority of the relocations are due to several state and county road projects within the District. In addition, the District is improving and increasing the capacity of its water and wastewater treatment facilities in order to provide adequate capacity for future customer growth. During 2012, 2011, and 2010, the District increased its capital assets before depreciation and disposals by $6,721,787, $6,713,327, and $6,022,730, respectively. This increase is due to the following:

2012 2011 2010

Water Line Extensions and Improvements $ 298,920 $ 532,454 $ 1,784,428Water Plant Upgrades 113,263 224,175 735,934Wastewater Lines 5,924,847 600,638 2,892,098Wastewater Plant Improvements 868,962 457,532 241,357Office Buildings and Equipment 72,194 28,302 96,217Vehicles and Equipment 347,879 125,787 172,398Land and Easements 0 0 (5,400)Disposals (2,705,616) 0 0

4,920,449 1,968,888 5,917,032Construction in Progress-Net 1,801,338 4,744,439 105,698

Total $ 6,721,787 $ 6,713,327 $ 6,022,730

The District's capital asset activity for 2012 and 2011 is described in Notes 3 and 4 to the financial statements.

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GENERAL TRENDS AND SIGNIFICANT EVENTS (Continued) DEBT At year-end 2012, 2011 and 2010, the District had $72.1, $72.9, and $37.5 million in long and short-term debt, a decrease of $816,442 in 2012, an increase of $35,405,163 in 2011, and a decrease of $587,226 in 2010. During 2012, 2011 and 2010, the District paid principal of $948,267, $813,327, and $1,110,082, respectively. A new $35 million bond issue was completed during 2011 as well as additional draws on notes payable. The long-term liabilities to total asset ratio was .47, .48, and .33 in 2012, 2011 and 2010 respectively. More detailed information about the District’s long-term debt is described in Notes 6 and 7 to the financial statements. ECONOMIC FACTORS AND NEXT FISCAL YEAR

• Number of customers is projected to increase by 1% to 2% during 2013.

• Overall a salary rate increase of 4.0% is expected for employees for 2013.

• Effective August 1, 2012, the District lowered the number of gallons covered by the minimum monthly billing for water and wastewater from 1,000 to 500, the minimum sewer bill was increased by $1.50 from $19.77 to $21.27.

• FY 2013 Budget:

Revenues $ 17,480,948 Expenses (16,453,212) Increase in Net Assets Before Capital Contributions $ 1,027,736

CONTACTING THE DISTRICT This comprehensive annual financial report is designed to provide our customers, creditors and regulatory agencies with a general overview of the District's finances. If you have any questions about this report or need additional information, you may contact the District at:

Drexel Heidel, General Manager West Knox Utility District

2328 Lovell Road Knoxville, TN 37932

865-690-2521 www.wkud.com

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


BALANCE SHEETS

As of June 30, 2012 2011

CURRENT ASSETSCash and Cash Equivalents $ 14,274,905 $ 9,281,703Cash and Cash Equivalents - Restricted 255,131 545,987Investments, at Fair Value 6,894,640 9,464,800Investments - Restricted, at Fair Value 25,179,648 30,361,043Accounts Receivable - (Net of Allowance for Uncollectible Accounts

of $78,404 for 2012 and $163,138 for 2011) 2,173,317 1,952,399Accounts Receivable - ARRA and SRF 0 65,240Inventory - Materials 31,576 39,751Prepaid Expenses 67,815 63,997

Total Current Assets 48,877,032 51,774,920

NON-CURRENT ASSETSCapital Assets

Property, Plant and Equipment 142,958,855 138,038,406Construction in Progress 12,359,573 10,558,234Less: Accumulated Depreciation (50,309,722) (49,069,405)

Capital Assets - Net 105,008,706 99,527,235

OTHER ASSETSNet Pension Asset 105,046 0Investments - Restricted, at Fair Value 2,024,904 3,114,453Bond Issuance Costs - Net 590,908 624,763Deferred Outflow - Interest Rate Swap 4,546,259 2,356,358Deposits 127,651 127,652

Total Other Assets 7,394,768 6,223,226

Total Non-Current Assets 112,403,474 105,750,461

TOTAL ASSETS $ 161,280,506 $ 157,525,381

ASSETS

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BALANCE SHEETS (Continued)

As of June 30, 2012 2011

CURRENT LIABILITIESAccounts Payable $ 285,278 $ 302,667Accounts and Retainage Payable - Construction 1,213,460 561,758Payroll and Related Liabilities 267,651 259,903Other Accrued Liabilities 516,758 516,532Accrued Revenue Bond Interest Payable 202,447 211,053Revenue Bonds and Note Payable - Current Portion 991,489 949,201

Total Current Liabilities 3,477,083 2,801,114

NON-CURRENT LIABILITIES

Net Pension Obligation 0 155,153Revenue Bonds and Note Payable - Net of Current Portion 71,124,735 71,983,465Derivative Instrument - Interest Rate Swap 4,546,259 2,356,358Deferred Compensation Payable 0 563,784Accrued Interest - Knox County Note Payable 109,228 104,412

Total Non-Current Liabilities 75,780,222 75,163,172

Total Liabilities 79,257,305 77,964,286

NET ASSETSInvested in Capital Assets - Net of Related Debt 57,113,801 56,393,854Restricted:

Debt Service 1,997,699 3,449,387Unrestricted 22,911,701 19,717,854

Total Net Assets 82,023,201 79,561,095

TOTAL LIABILITIES AND NET ASSETS $ 161,280,506 $ 157,525,381

LIABILITIES AND NET ASSETS

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STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS

For the Years Ended June 30, 2012 2011OPERATING REVENUES

Water $ 7,226,168 $ 6,579,910Wastewater 8,018,859 6,627,587Connection Fees 486,860 561,677Customer Forfeited Discounts 237,367 179,705Service Fees 91,025 90,425Wastewater Inspection Fees 5,250 8,075Miscellaneous 151,066 161,405

Total Operating Revenues 16,216,595 14,208,784

OPERATING EXPENSESWater Purification and Supply 1,132,055 954,279Wastewater Collection and Treatment 2,325,821 2,147,830Water Treatment and Distribution 2,445,654 2,203,916Wastewater Capacity Management Operations

Maintenance (CMOM) 1,302,429 1,008,816Shop and General Maintenance 306,275 318,855Customer Accounting 132,195 131,543Administrative and General 2,211,369 1,861,405Depreciation - Water System 1,717,089 1,703,880Depreciation - Wastewater System 1,988,219 1,932,735Depreciation - Other 210,734 216,762

Total Operating Expenses 13,771,840 12,480,021

Operating Income 2,444,755 1,728,763

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STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS (Continued)

For the Years Ended June 30, 2012 2011

NON-OPERATING REVENUES (EXPENSES)Investment Income, Net $ 279,997 $ 3,591Interest Expense (2,047,737) (1,850,135)Net Gain (Loss) on Disposal of Capital Assets (29,891) 0

Total Non-Operating Revenues (Expenses), Net (1,797,631) (1,846,544)

INCREASE (DECREASE) IN NET ASSETS BEFORE CAPITAL CONTRIBUTIONS 647,124 (117,781)

CAPITAL CONTRIBUTIONSCash Contributions 69,290 910,539Developers Contributions of Capital Assets 1,745,692 839,805

Total Capital Contributions 1,814,982 1,750,344

CHANGE IN NET ASSETS 2,462,106 1,632,563

NET ASSETS, BEGINNING OF YEAR, AS PREVIOUSLY REPORTED 78,949,568 77,340,793

PRIOR PERIOD ADJUSTMENTS - SEE NOTE 15 611,527 587,739

NET ASSETS, BEGINNING OF YEAR, AS RESTATED 79,561,095 77,928,532

NET ASSETS, END OF YEAR $ 82,023,201 $ 79,561,095

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STATEMENTS OF CASH FLOWS


CASH FLOWS FROM OPERATING ACTIVITIESReceipts from Customers and Users $ 16,075,276 $ 15,453,666Payments to Employees (5,582,407) (4,222,483)Payments to Suppliers (5,036,650) (4,240,429)

Net Cash Provided by (Used in) Operating Activities 5,456,219 6,990,754

CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIESCash Capital Contributed by Customers 69,290 910,539Acquisition and Construction of Capital Assets (7,000,267) (5,548,441)Interest Paid on Long - Term Debt (2,514,796) (1,792,303)Principal Paid on Long - Term Debt (948,267) (829,022)Other Debt Service Charges 0 (1,976)Proceeds from Debt Issue 0 34,847,687Bond Issuance Costs 0 (250,000)Proceeds from Loan 88,634 1,347,883

Net Cash Provided by (Used in) Capital and Related

Financing Activities (10,305,406) 28,684,367 CASH FLOWS FROM INVESTING ACTIVITIES

Interest Received on Investments 990,426 278,752Purchases of Investments (33,387,035) (41,386,005)Proceeds from Sales and Maturities of Investments 41,948,142 8,443,633

Net Cash Provided by (Used in) Investing Activities 9,551,533 (32,663,620)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,702,346 3,011,501 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 9,827,690 6,816,188 CASH AND CASH EQUIVALENTS, END OF YEAR $ 14,530,036 $ 9,827,690

Cash and Cash Equivalents at End of Year Consist of:Unrestricted Cash and Cash Equivalents $ 14,274,905 $ 9,281,703Restricted Cash and Cash Equivalents 255,131 545,987

Total $ 14,530,036 $ 9,827,690

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STATEMENTS OF CASH FLOWS (Continued)


RECONCILIATION OF OPERATING INCOME TONET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

Operating Income $ 2,444,755 $ 1,728,763Adjustments to Reconcile Operating Income

to Net Cash Provided by (Used in) Operating Activities:Depreciation 3,916,042 3,853,377Bad Debt Expense 80,138 116,213Changes in:

Accounts Receivable (155,678) 1,309,787Other Current Assets 4,357 (19,643)Other Assets (105,045) (127,092)Accounts Payable (17,389) 240Payroll and Related Liabilities 7,748 19,276Other Accrued Liabilities (718,709) 109,833

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 5,456,219 $ 6,990,754

Noncash Investing, Capital and Financing Activities:Gain (Loss) on Investments $ (710,429) $ (429,198)Amortization of Bond and Note Discounts 5,281 7,471Amortization of Bond Issuance Costs 33,855 30,218Amortization of Deferred Cost of Defeased Bonds 37,910 38,615Contributions of Capital Assets by Developers 1,745,692 839,805Capitalized Interest on Construction Projects 544,105 277,448

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NOTES TO THE FINANCIAL STATEMENTS

June 30, 2012 and 2011 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The West Knox Utility District of Knox County (WKUD) was created under the authority of Title 7, Chapter 82 of the 1937 Utility District Law of the State of Tennessee. The WKUD Board of Commissioners are appointed by the Knox County Mayor for a term of four years. Knox County does not have any fiscal or budgetary control over WKUD. The operations of WKUD (the District) are funded by water and wastewater rates established by the Board of Commissioners. Basis of Accounting and Presentation - The District's financial statements are presented on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. The District applies all Governmental Accounting Standards Board (GASB) pronouncements as well as Financial Accounting Standards Board (FASB) statements and interpretations, and the Accounting Principles Board (APB) of the Committee on Accounting Procedure issued on or before November 30, 1989, unless those pronouncements conflict with or contradict GASB pronouncements. The District applies only GASB pronouncements issued after November 30, 1989. All activities of the District are accounted for within a single proprietary (enterprise) fund. Proprietary funds are used to account for operations that are (a) financed and operated in a manner similar to private business enterprises where the intent of the governing body is that the cost (expenses, including depreciation) of providing goods or services to the general public on a continuing basis be financed or recovered primarily through user charges; or (b) where the governing body has decided that periodic determination of revenues earned, expenses incurred, and/or net income is appropriate for capital maintenance, public policy, management control, accountability, or other purposes. The District makes a distinction between operating revenues and expenses from non-operating items. Operating revenues and expenses generally result from providing services in connection with its principal ongoing operations. The principal operating revenues of the District are water and wastewater charges to customers. Operating expenses consist of salaries, benefits, utilities, operating contracts for maintenance, insurance and depreciation on capital assets. All revenues and expenses not meeting these definitions are reported as non-operating revenues and expenses. The accounting and financial reporting treatment applied to the District is determined by its measurement focus. The transactions of the District are accounted for on a flow of economic resources measurement focus. With this measurement focus, all assets and all liabilities associated with the operations are included on the balance sheet. Net assets (i.e., total assets net of total liabilities) are segregated into invested in capital assets, net of related debt; restricted for capital activity and debt service; and unrestricted components. Budgeting - The District adopts flexible annual operating and capital budgets. Budgets are adopted on a basis consistent with generally accepted accounting principles. The current operating budget details the District's plans to earn and expend funds for charges incurred for operation, maintenance, certain interest and general functions, and other charges for the fiscal year. The capital budget details the plan to receive and expend cash basis capital contributions, grants, borrowings and certain revenues for capital projects. The District’s budgets are not legally binding. There were no budgetary amendments during 2012 and 2011. All of the unexpended and unencumbered appropriations in the operating budget remaining at the end of the fiscal year lapse. No appropriation for a capital project in the capital budget lapses until the purpose for which the appropriation was made has been accomplished or abandoned. Management submits a proposed budget to the District's Board of Commissioners prior to the June Board meeting. A budget is adopted by resolution prior to July 1. During the year, management is authorized to transfer budgeted amounts between line items within the District's departments.

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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Cash Equivalents, Deposits and Investments - Cash and cash equivalents, for purposes of the statement of cash flows, include restricted and unrestricted cash on hand or on deposit, interest in State Treasurer's Pool, certificates of deposit, and debt security investments with a maturity at purchase of three months or less. Investments are reported at their fair value. Fair value is based upon quoted market prices. Realized gains and (losses) from the sale of investments are calculated separately from the change in the fair value. Realized gains or (losses) in the current period include unrealized amounts from prior periods. Restricted Assets - Restricted assets represent cash and investments maintained in accordance with bond resolutions, loan agreements, grant awards, and other resolutions and formal actions of the District or by agreement for the purpose of funding certain debt service payments, depreciation and contingency activities, and improvements and extensions to the system. Restricted assets are generally not available for current operating expenses. (See Note 9.) Receivables and Revenues - Revenues are billed monthly to customers on a cyclical meter reading basis. Revenues are not accrued for usage from the last meter reading date to year-end. Accounts receivable are stated at the amount management expects to collect from outstanding balances. The District provides for estimated uncollectible receivables through a reduction of gross water revenues and a credit to an allowance based on its assessment of the current status of individual accounts and historical write-off experience. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. Operating revenues consist of water and wastewater revenues net of allowance for uncollectibles, and forfeited discounts, inspection fees and various service fees. Connection (tap) fees are recorded as revenue to the extent of expenses incurred in connecting a customer to the system. Connection fees in excess of costs, if any, are recorded as cash capital contributions. Non-operating revenue consists of investment income. Investment income is interest earned, the accretion of interest on zero coupon debt instruments and the change in the fair value of investment securities. Expenses - Operating expenses consist of the cost of water and wastewater collection, treatment, storage, and distribution. Other operating expenses include customer billing, collections, administrative and general and depreciation of capital assets. Non-operating expenses consist of interest on long-term liabilities and loss on the disposal or impairment of capital assets. Inventories - Material and supply inventories are stated cost using the first-in, first-out method. Incidental supplies and chemicals are not included in inventory. Capital Assets - Property, plant and equipment in service and construction in progress are recorded at cost, if purchased or constructed. Assets acquired through contributions from developers or other customers are capitalized at their estimated fair market value, if available, or at engineers’ estimated fair market value or cost to construct at the date of the contribution. Utility systems acquired from other governmental service providers are recorded at the purchase price, limited to fair market value. Maintenance and repairs, which do not significantly extend the value or life of property plant or equipment, are expensed as incurred. The District defines capital asset as an asset with an initial individual cost, or a project with a cumulative cost, of more than $3,000 and an estimated useful life in excess of one year. Interest is not capitalized on project costs funded by contributed capital, such as grants, gifts and impact fees. Interest costs of tax-exempt borrowings are capitalized net of related investment earnings on the proceeds. Depreciation is not recorded until the assets are actually put into use.

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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Assets are depreciated on the straight-line method. Depreciation is calculated using the following estimated useful lives:

Years Source of Supply Equipment 15-50 Water Treatment Plant 40-50 Wastewater Treatment Plant 40 Transmission and Distribution Systems 40-50 Equipment 5-20 Structures and Improvements 10-50 Office Furniture, Equipment and Vehicles 5-20

Long-Term Obligations and Costs - Long-term obligations are reported at face value, net of applicable premiums and discounts. Premiums and discounts, issuance costs, and gains or losses on advance refundings and defeasances after June 30, 1994, are deferred and amortized over the life of the bonds. Compensation for Future Absences - Accumulated vacation eligible to be paid to employees at termination is recorded as an expense and liability as the benefits are earned. Contributions - Contributions are recognized in the statement of revenues, expenses, and changes in net assets when earned. Contributions include developer contributed utility systems, capacity and other supplemental support by other utilities and industrial customers and federal, state and local grants in support of system improvements. Net Assets - Net assets comprise the various net earnings from operating and non-operating revenues, expenses and contributions of capital. Net assets are classified in the following three components: invested in capital assets, net of related debt; restricted for capital activity and debt service; and unrestricted net assets. Invested in capital assets, net of related debt, consists of all capital assets, net of accumulated depreciation and reduced by outstanding debt that is attributable to the acquisition, construction and improvement of those assets; debt related to unspent proceeds or other restricted cash and investments is excluded from the determination. Restricted for capital activity and debt service consists of net assets for which constraints are placed thereon by external parties, such as lenders, grantors, contributors, laws, regulations and enabling legislation, including self-imposed legal mandates. Unrestricted consists of all other net assets not included in the above categories (see Note 9). When both restricted and unrestricted resources are available for use, it is the District’s policy to use restricted resources first, then unrestricted resources as they are needed. Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet date, and reported amounts of revenues and expenses during the reporting period. Estimates are used to determine depreciation expense, the allowance for doubtful accounts and certain claims and judgment liabilities, among other amounts. Actual results may differ from those estimates. Restatement of Comparative Statements and Reclassifications– The 2011 financial statements have been restated to record prior period adjustments to record unbilled revenue related to meter reading as discussed in Note 16. In addition, certain items in the 2011 financial statements have been reclassified to conform with the 2012 financial statements.

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NOTE 2 - DEPOSITS AND INVESTMENTS At June 30, 2012 and 2011, the District had the following deposits and investments:

Weighted WeightedAverage Average

Fair Maturity Fair MaturityValue (Years) Value (Years)

Deposits:Demand Deposits $ 14,530,036 N/A $ 9,827,690 N/A

Investments:Federal Agency Securities 2,451,740 1.26 3,856,268 1.80U.S. Treasuries 2,024,903 1.39 7,050,624 1.25Municipal Bonds 22,177,983 0.68 24,857,528 1.19Mutual Funds (See Note 11) 0 N/A 563,784 N/ACertificates of Deposit 7,444,565 0.82 6,612,091 1.73

Total Investments 34,099,191 42,940,295

Total $ 48,629,227 $ 52,767,985

2012 2011

A summary of the deposits and investments on the balance sheets at June 30, 2012 and 2011 is as follows:

2012 2011Current Assets:

Cash and Cash Equivalents $ 14,274,905 $ 9,281,703Cash and Cash Equivalents - Restricted 255,131 545,987Investments 6,894,640 9,464,800Investments - Restricted 25,179,648 30,361,043

46,604,324 49,653,533Other Assets:

Investments - Restricted 2,024,904 3,114,453

Total $ 48,629,228 $ 52,767,986

As of June 30, 2012 and 2011, the District’s investments were in the following:

2012 2011

Certificates of Deposits 21.8% 15.4%Federal Agency Securities 7.2% 9.0%U.S. Treasuries 5.9% 16.4%Municipal Bonds 65.0% 57.9%Mutual Funds 0.0% 1.3%

Total 100.0% 100.0%

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NOTE 2 - DEPOSITS AND INVESTMENTS (Continued) Deposits – Custodial Credit Risk The District's deposits, with a carrying amount of $14,274,905 and $9,281,703 at June 30, 2012 and 2011, respectively, were covered by the bank collateral pool administered by the Treasurer of the State of Tennessee. The bank may use one of three different pledged security levels (90, 100 or 105%) depending on the specific bank holding the deposit. Participating banks determine the aggregate balance of their public fund accounts for the District. Collateral securities required to be pledged by the participating banks to protect their public fund accounts are pledged to the State Treasurer on behalf of the bank collateral pool. The securities pledged to protect these accounts are pledged in the aggregate rather than against each individual account. The members of the pool may be required by agreement to pay an assessment to cover any deficiency. Under this additional assessment agreement, public fund accounts covered by the pool are considered to be insured and classified as Category 1, under GASB Statement No. 40, for purposes of custodial credit risk disclosure. Investments, at Fair Value The District’s investments at June 30, 2012 and 2011, with a carrying amount of $26,654,626 and $35,764,420 are in U.S. Government and Federal Agency Debt Securities and Municipal Bonds which are registered in the District’s name. As required by GASB Statement No. 31, the carrying value of investments is presented at fair value. Investments - Deferred Compensation Plan The District had a non-qualified deferred compensation plan for several key employees prior to 2012. The District had purchased whole life insurance policies that had cash surrender values invested in various mutual funds. These investments were carried at fair value and were $563,784 at June 30, 2011. In accordance with GASB Statement No. 40, these investments were not classified for purposes of custodial credit risk disclosure in 2011. In 2012 the liability for the non-qualified deferred compensation plan and the payment of benefits were assumed by the District’s Defined Benefit Pension Plan (see Note 10). The associated investments were cashed in and the cash was contributed to the Defined Benefit Pension Plan. Investment Income, Net Investment income, net for 2012 and 2011 consisted of the following:

2012 2011

Interest Income $ 990,426 $ 432,789Gains (Losses) - Net (710,429) (429,198)

Net Total $ 279,997 $ 3,591

Investment Policies State statute (T.C.A. § 7-82-108) authorizes the District to invest in obligations of the federal government, federal agency securities, State of Tennessee, state local government investment pool (SLGIP), municipal bonds issued in Tennessee, money market funds, certificates of deposit and other time deposits and repurchase agreements. The District may also invest in collateralized certificates of deposit, money market funds or repurchase agreements by banks pledging specific debt securities or those which participate in the state collateral pool. Custodial Credit Risk: The District’s investment policy requires that investment securities be registered in the name of West Knox Utility District. Credit Risk: The District’s investment policy and state law limits investments in non-federal obligations to issuers that are rated in the two highest rating categories by a nationally recognized rating agency of such obligations. Ratings were obtained from either Moody’s or Standard & Poor’s.

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NOTE 2 - DEPOSITS AND INVESTMENTS (Continued) Investment Policies (Continued) At June 30, 2012, the District's investments in marketable debt securities, at fair value, had the following credit ratings:

Credit2011 Rating

Federal Agency SecuritiesFederal Farm Credit Bank $ 950,046 AA Federal Home Loan Bank 500,150 AA Fannie Mae 1,001,544 AA

Total $ 2,451,740

Municipal Bonds49 Municipal Bonds $ 18,957,595 AA 10 Municipal Bonds 3,220,388 AAA

Total $ 22,177,983

Interest Rate Risk: The District’s Investment Policy limits its holdings to obligations having a final maturity on the date of investment of not to exceed forty-eight (48) months, or which may be tendered by the holder to the issuer thereof, or an agent of the issuer, at not less than forty-eight (48) month intervals. Investments are made based upon prevailing market conditions with the intent to hold the instrument until maturity. If the performance of the portfolio can be improved upon by the sale of an investment prior to maturity, the policy allows for the implementation of this strategy.

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NOTE 3 - CAPITAL ASSETS A summary of capital asset activity and changes in accumulated depreciation for the year ended June 30, 2012 is as follows:

DeletionsBalance Additions Retirements Balance07/01/11 Transfers Transfers 06/30/12

Capital Assets Not Being DepreciatedWater System:

Land and Easements $ 215,580 $ 0 $ 0 $ 215,580Construction in Progress 2,363,374 5,744,864 0 8,108,238

Wastewater System:Land and Easements 464,672 0 0 464,672Construction in Progress 8,194,861 1,107,585 (5,051,111) 4,251,335Office Property and Equipment - Land 244,189 0 0 244,189Total Capital Assets Not Being Depreciated 11,482,676 6,852,449 (5,051,111) 13,284,014

Capital Assets Being Depreciated:Water System:

Mains, Lines and Equipment 46,904,020 298,920 (1,793,756) 45,409,184Treatment Facilities 14,329,555 4,623 (68,002) 14,266,176

Wastewater System:Collection Lines and Equipment 50,104,368 1,510,528 4,414,319 56,029,215Treatment Facilities 21,595,911 340,810 213,401 22,150,122Office Property and Equipment 4,180,110 420,073 (420,465) 4,179,716

Total Capital Assets Being Depreciated 137,113,964 2,574,954 2,345,497 142,034,413

Less Accumulated Depreciation Water System:

Mains, Lines and Equipment (14,997,305) (1,362,046) 1,793,757 (14,565,595)Treatment Facilities (6,162,218) (355,042) 146,752 (6,370,508)

Wastewater System:Collection Lines and Equipment (14,830,426) (1,213,398) 0 (16,043,824)Treatment Facilities (10,224,037) (774,821) 314,749 (10,684,109)Office Property and Equipment (2,855,419) (210,732) 420,465 (2,645,686)

Total Accumulated Depreciation (49,069,405) (3,916,039) 2,675,723 (50,309,722)

Total Capital Assets Being Depreciated - Net 88,044,559 (1,341,085) 5,021,220 91,724,691

Total Capital Assets $ 99,527,235 $ 5,511,364 $ (29,891) $ 105,008,705

Depreciation expense was $3,916,041 for 2012.

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NOTE 3 - CAPITAL ASSETS (Continued) A summary of capital asset activity and changes in accumulated depreciation for the year ended June 30, 2011 is as follows:

DeletionsBalance Additions Retirements Balance07/01/10 Transfers Transfers 06/30/11

Capital Assets Not Being DepreciatedWater System:

Land and Easements $ 215,580 $ 0 $ 0 $ 215,580Construction in Progress 1,047,265 1,611,030 (294,921) 2,363,374

Wastewater System:Land and Easements 464,672 0 0 464,672Construction in Progress 4,766,531 3,428,330 0 8,194,861Office Property and Equipment - Land 244,189 0 0 244,189Total Capital Assets Not Being Depreciated 6,738,237 5,039,360 (294,921) 11,482,676

Capital Assets Being Depreciated:Water System:

Mains, Lines and Equipment 46,371,566 238,643 293,811 46,904,020Treatment Facilities 14,105,380 224,175 0 14,329,555

Wastewater System:Collection Lines and Equipment 49,503,730 600,638 0 50,104,368Treatment Facilities 21,138,379 457,532 0 21,595,911Office Property and Equipment 4,026,022 154,088 0 4,180,110

Total Capital Assets Being Depreciated 135,145,077 1,675,076 293,811 137,113,964

Less Accumulated Depreciation Water System:

Mains, Lines and Equipment (13,642,160) (1,355,145) 0 (14,997,305)Treatment Facilities (5,813,483) (348,735) 0 (6,162,218)

Wastewater System:Collection Lines and Equipment (13,635,650) (1,194,776) 0 (14,830,426)Treatment Facilities (9,486,078) (737,959) 0 (10,224,037)Office Property and Equipment (2,638,655) (216,764) 0 (2,855,419)

Total Accumulated Depreciation (45,216,026) (3,853,379) 0 (49,069,405)

Total Capital Assets Being Depreciated - Net 89,929,051 (2,178,303) 293,811 88,044,559

Total Capital Assets $ 96,667,288 $ 2,861,057 $ (1,110) $ 99,527,235

Depreciation expense was $3,853,378 for 2011.

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NOTE 4 - CONSTRUCTION IN PROGRESS Construction in progress at June 30, 2012 and 2011 consists of:

Actual Remaining Actual RemainingProject To Date Commitment To Date Commitment

Joe Hinton Rd/Huntwood Ln - Sewer Replacement $ 82,731 $ 611,444 $ 46,300 $ 52,700

Ball Camp Road Water Line Relocation - Engineering 194,750 0 194,750 0

Ten Mile WWPS Basin Study 362,854 666,680 124,326 637,425

Sub-Basin 9 SSES 1,186,623 0 535,665 0

Ball Camp/Northampton - Wastewater Lines 3,166 0 4,035,079 0

Melton Lake WWTP - Engineering 4,053,419 0 3,854,132 43,200

Daugherty Water Plant Upgrades 4,076,875 15,097,329 1,065,250 275,370

Mobile Land Sewage PumpStation - Engineering 0 0 64,600 1,500

Galvanized Water Line Replacements 2,273,947 17,954 604,393 0

Other Small Projects 125,208 276,483 33,739 0

Total $ 12,359,573 $ 16,669,890 $ 10,558,234 $ 1,010,195

20112012

NOTE 5: - GAIN (LOSS) ON DISPOSAL AND IMPAIRMENT OF CAPITAL ASSETS During 2012, the District abandoned various equipment no longer in service. The loss on disposal and impairment of capital assets is as follows:

2012 2011Sales Proceeds $ 0 $ 0Less: Net Book Value of Capital Assets (29,891) 0

Gain (Loss) $ (29,891) $ 0

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NOTE 6 - REVENUE BONDS AND NOTES PAYABLE Overview Bonds and notes payable at June 30, 2012 and 2011, consisted of the following:

2012 2011Water and Sewer System Revenue Bonds Build America

Bonds (BABS) $35,000,000 Dated November 30, 2010,Series 2010 $ 35,000,000 $ 35,000,000

Public Building Authority of Sevier County, Tennessee LoanAgreement $35,425,000 dated August 1, 2009,Series 2009 V-B-1 32,790,000 33,625,000

Rural Development Water and Sewer Revenue Bonds, $1,340,000 Series 2004 1,208,170 1,226,497

Note Payable - Knox County, Tennessee 1,700,000 1,700,000

Note Payable - State Revolving Funds 2,084,222 2,090,530

Total Bonds and Notes Payable 72,782,392 73,642,027

Less: Unamortized Discount (147,029) (152,310)

Deferred Cost - Refunded Bonds (519,139) (557,051)72,116,224 72,932,666

Less: Current Portion (991,489) (949,201)

Total Long-Term Bonds and Notes $ 71,124,735 $ 71,983,465

The bond holders have a statutory mortgage lien upon the District as created by T.C.A. § 7-82-101, and will remain in effect until the various bond issues are paid in full. There is a bond covenant with a minimum debt service coverage ratio of 1.2, and as of June 30, 2012 and 2011 the ratio was 2.16 and 2.08, respectively. Interest expense for 2012 and 2011 consisted of the following:

2012 2011

Interest Paid $ 1,965,875 $ 1,771,855Amortization of Bond Discounts 5,281 2,655Amortization of Note Discounts 4,816 4,816Paying Agent's Fees and Service Charges 0 1,976Amortization of Deferred Cost of Refunding 37,910 38,615Amortization of Bond Issuance Cost 33,855 30,218

Total $ 2,047,737 $ 1,850,135

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NOTE 6 - REVENUE BONDS AND NOTES PAYABLE (Continued) Activity Long-term debt activity during 2012 and 2011 was as follows:

Balance Balance Due WithinJuly 01, 2011 Additions Reductions June 30, 2012 One Year

Revenue Bonds $ 69,699,187 $ 0 $ 848,046 $ 68,851,141 $ 895,117Notes Payable 3,790,530 88,632 94,940 3,784,222 96,372Less: Deferred Cost of Refunding (557,051) 0 (37,912) (519,139) 0

Total $ 72,932,666 $ 88,632 $ 905,074 $ 72,116,224 $ 991,489

2012

Balance Balance Due W ithinJuly 01, 2010 Additions Reductions June 30, 2011 One Year

Revenue Bonds $ 35,664,823 $ 35,002,655 $ 968,291 $ 69,699,187 $ 854,257Notes Payable 2,458,343 1,347,882 15,695 3,790,530 94,944Less: Deferred Cost of Refunding (595,663) 0 (38,612) (557,051) 0

Total $ 37,527,503 $ 36,350,537 $ 945,374 $ 72,932,666 $ 949,201

2011

The additions to long-term debt in 2012 and 2011 consisted of the following:

2012 2011Bond Issuances $ 0 $ 35,000,000Note Payable - State Revolving Funds 88,632 1,347,882Deferred Cost of Defeasement 0 0Accretion of Bond Interest - Series 1997B 0 0Amortization of Bond Discounts 0 2,655

Total $ 88,632 $ 36,350,537

Debt Service A summary of the debt service requirements for principal and interest at June 30, 2012, is as follows:

Coupon BABS TreasuryPrincipal Interest Rebate Net Interest Total

$ 991,489 $ 4,083,556 $ (826,324) $ 3,257,232 $ 4,248,7211,388,839 4,037,456 (826,324) 3,211,132 4,599,971

736,265 3,989,042 (826,324) 3,162,718 3,898,9831,118,745 3,955,812 (826,324) 3,129,488 4,248,2331,171,281 3,903,514 (826,324) 3,077,190 4,248,4717,247,107 18,893,243 (4,127,988) 14,765,255 22,012,3629,367,168 17,036,944 (4,054,222) 12,982,722 22,349,890

11,337,039 14,577,916 (3,935,704) 10,642,212 21,979,25113,083,396 11,490,119 (3,743,291) 7,746,828 20,830,22415,441,063 7,095,045 (2,471,383) 4,623,662 20,064,72510,900,000 1,549,789 (542,070) 1,007,719 11,907,719

$ 72,782,392 $ 90,612,436 $ (23,006,278) $ 67,606,158 $ 140,388,550

2016

Ending June 30,Fiscal Years

201320142015

2043-2045

Total

20172018-20222023-20272028-20322033-20372038-2042

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NOTE 6 - REVENUE BONDS AND NOTES PAYABLE (Continued) Description of the Loan Payable to Public Building Authority of Sevier County Series 2009 V-B-1 The Public Building Authority of Sevier County has issued its Local Government Public Improvement Bonds, Series 2009 V-B-1. The bonds are to provide refunding of Series 1997 I-A-1, 2000 II-D-2, and 2005 IV-C-1 Bonds. Interest payments are made the first of each month. Monthly payments include a reimbursement to the letter of credit provider. One monthly payment each quarter includes additional interest and swap payments and fees, in addition to the LOC reimbursement. The effective interest rate for 2011 was 4.3% and the estimated rate for 2012 is 4.3%. The loan principal payments began June 1, 2010, and annual principal payments due June 1 of each year continue through 2035. The current refunding resulted in a difference between the reacquisition price and the net carrying amount of the old debt of $634,946. This difference is reported in the accompanying financial statements as a deduction from bonds payable and is being charged to operations through the year 2034 using the proportionate-to-stated interest requirements method. The bond issue costs are amortized over the life of the bonds using the proportionate-to-stated interest requirements method. Although the reacquisition price exceeded the net carrying amount of the old debt, the District reduced its aggregate debt service payments by $1,237,925. No economic gain or loss was obtained since the transaction exchanged old variable rate debt with new variable rate debt. The amount of the reacquisition price recorded as part of the bond interest expense was $37,910 and $38,615 for the years ended June 30, 2012 and 2011, respectively. Under its loan agreement, the Public Building Authority, at the request of the District, has entered into an interest rate swap agreement for all of the outstanding Local Government Improvement Revenue Bonds, Series II-D-2. Based on the loan agreement and swap agreement, the District owes interest at an effective fixed rate of 3.97% and 3.26% at June 30, 2012 and 2011, respectively (see Note 7). Description of the Build America Bonds (BABS), Series 2010 The District has issued taxable water and sewer revenue bonds, series 2010 (Federally Taxable – Build America Bonds – Direct Subsidy). The funds are to provide the District financing for certain water and sewer improvement projects under the agreement dated November 30, 2010. Interest payments are made semi-annually at a gross interest rate of 6.83%, or at a net rate of 4.44% after subsidies. The loan principal payments begin June 1, 2021 and continue through June 1, 2045. Beginning in year 2026 there is a mandatory redemption of bonds with various maturity dates. The District receives a direct subsidy of 35% from the United States Government that reduces its interest costs. The District has no assurance that the United States Government will continue to make the direct subsidy payments, at a gross interest rate of 6.83% or that the United States Congress will not attempt to reduce the amount of the direct subsidy payments. The bonds received a AA+ rating from Standard & Poor’s. Interest subsidies received by the District during the year ended June 30, 2012 totaled $826,324. Description of the 2004 Rural Development Bonds The Series 2004 Water and Sewer Revenue Bonds dated June 23, 2004 were issued by the U.S. Department of Agriculture - Rural Development in the amount of $1,340,000. The Bonds carry an interest rate of 4.375% and are payable in 456 monthly installments of $6,044 beginning July 23, 2004 and ending on June 23, 2042. Note Payable - Knox County Knox County agreed to participate with the District by providing funds to expedite utility relocation necessary for construction of improved roadways within the northwest portion of the County. The District has received a total of $2,000,000 from the County before repayments. The District is obligated to repay the funds including an additional $140,000 to reimburse the County for administrative costs associated with the agreement. The funds are to be reimbursed as follows:

Fiscal Years Ending June 30, 2012

2014 $ 350,000 2019 1,490,000 Total $ 1,840,000

The District has accrued a portion of the $140,000 as interest payable. The amount accrued for 2012 and 2011 was $109,228 and $104,412, respectively.

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NOTE 6 - REVENUE BONDS AND NOTES PAYABLE (Continued) Note Payable – State Revolving Fund The District entered into an agreement with the Tennessee Department of Environment and Conservation’s State Revolving Fund Loan Program on September 29, 2009. The agreement was to provide financing for the wastewater collection system expansion along Ball Camp Road and Northampton Commons areas. The total project is estimated at $3,658,096, of which $1,829,048 will be a loan from the State Revolving Fund and $1,829,048 will be provided by the American Recovery and Reinvestment Act of 2009 (ARRA). The funds provided by ARRA consist of $1,463,238 in debt forgiveness and $365,810 as a note payable. Interest begins after each disbursement request is made by the District as the project progresses at 1.5%. Principal payments begin within 90 days after the project is complete or within 120 days after 90% of the project loan has been disbursed, whichever event occurs earlier. The note payable will be amortized over 20 years. The project was completed during 2012. The amount of note payable accumulated as of June 30, 2012 and 2011 was $2,084,222 and $2,090,530, respectively. NOTE 7 - INTEREST RATE SWAP Under its loan agreement, the Public Building Authority of Sevier County, TN (the “Authority”), at the request of the District, has entered into an interest rate swap agreement for all of the outstanding Local Government Improvement Revenue Bonds, Series II-D-2. The District has one interest rate swap classified as a hedging derivative instrument. The hedging derivative is an effective hedge using the dollar offset method. The dollar offset method divides the changes in the fair value of the derivative by the changes in fair value of the hedgeable item. Objective of the Interest Rate Swap In order to protect against the potential of rising interest rates and to balance its mixture of variable and fixed rate debt, the District requested the Authority, on its behalf, to enter into an interest rate swap in connection with its $12.5 million Series II-D-2 variable-rate bonds. The intention of the swap was to effectively change the District’s variable interest rate on the bonds to a synthetic fixed rate. The Series II-D-2 bonds have since been refunded with a portion of the proceeds of the Series V-B-1 bonds and the interest rate swap is now associated with the Series V-B-1 bonds. Terms Under the swap, the Authority pays the counterparty a fixed payment of 4.40 percent and receives a variable payment computed as 63.50 percent of the Five-Year London Interbank Offered Rate (LIBOR). The swap has a notional amount of $12.50 million and the associated variable-rate bond has a $12.50 million principal amount. At no time will the notional amount on interest rate swap agreement exceed the outstanding principal of the Series V-B-1 Bonds. The bonds’ variable rates have historically approximated the Securities Industry and Financial Markets Association lndex (the “SIFMA”). The bonds and the related swap agreement mature on June 1, 2030. As of June 30, 2012 and 2011, rates were as follows:

2012 2011Interest Rate Swap:

Fixed Payment to Counterparty 4.40 % 4.40 %Variable Payment from Counterparty (0.62) (1.24)

Net Interest Rate Swap Payments 3.78 3.16 Variable-Rate Bond Coupon Payments 0.19 0.10

Synthetic Interest Rate on Bonds 3.97 % 3.26 %

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NOTE 7 - INTEREST RATE SWAP (Continued) Fair Value As of June 30, 2012 and 2011, the swap had a negative fair value of $(4,546,259) and $(2,356,358), respectively. The fair value is reported on the balance sheet under non-current assets and liabilities. The negative fair value of the swap may be countered by reductions in total interest payments required under the variable-rate bond, creating lower synthetic rates. Because the rates on the District’s variable-rate bonds adjust to changing interest rates, the bonds do not have a corresponding fair value increase. The fair value model calculates future cash flows by projecting forward rates and then discounts those cash flows at their present value. Credit Risk As of June 30, 2012 and 2011, the District was not exposed to credit risk because the swap had a negative fair value. However, should interest rates change and the fair value of the swap becomes positive, the District would be exposed to credit risk in the amount of the derivative’s fair value. The swap counterparty, Morgan Keegan Financial Products (“MKFP”) was rated “A+” by Standard and Poor’s as of June 30, 2012, with its Credit Support Provider, Deutsche Bank, rated Aa3/A+/AA- by Moody’s, Standard and Poor’s, and Fitch, respectively. Termination Risk The derivative contract uses the International Swap Dealers Association Master Agreement, which includes standard termination events, such as failure to pay and bankruptcy. The Schedule to the Master Agreement includes an “additional termination provision.” The Authority or the counterparty may terminate the swap if the other party fails to perform under the terms of the contract. If the swap is terminated, the variable-rate bond would no longer carry a synthetic interest rate. Also, if at the time of termination the swap has a negative fair value, the Authority would be liable to the counterparty for a payment equal to the swap’s fair value. Likewise, if the swap has a positive fair value at termination, the counterparty would be liable to the Authority for a payment equal to the swap’s fair value. Interest Rate Risk The District is exposed to interest rate risk on the interest rate swap. The bonds’ variable rates have historically approximated the Securities Industry and Financial Markets Association Index (SIFMA). As the SIFMA swap index decreases, the District’s net payments on the swap increases. Basis Risk As noted above, the swap exposes the District to basis risk should SIFMA increase to above 63.5% of LIBOR, thus increasing the synthetic rate on the bonds. If a change occurs that results in the SIFMA to be below 63.5% of LIBOR, then the synthetic rate on the bonds will decrease. Rollover Risk The District is not exposed to rollover risk because the maturity dates for the hedged variable rate bonds and the interest rate swap agreement are the same – June 1, 2030.

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NOTE 7 - INTEREST RATE SWAP (Continued) Swap Payments and Associated Debt As of June 30, 2012, debt service requirements of the variable-rate debt and net swap payments, assuming current interest rates remain the same, for their term are as follows. As rates vary, variable-rate bond interest payments and net swap payments will vary.

Net InterestFiscal Year Rate Swap

Ending June 30 Principal Interest Payment Total

2013 $ 0 $ 23,750 $ 473,006 $ 496,7562014 0 23,750 473,006 496,7562015 0 23,750 473,006 496,7562016 0 23,750 473,006 496,7562017 0 23,750 473,006 496,756

2018-2022 0 118,750 2,365,031 2,483,7812023-2027 3,935,000 116,024 2,310,730 6,361,7542028-2030 8,565,000 33,260 662,398 9,260,658

$ 12,500,000 $ 386,784 $ 7,703,189 $ 20,589,973

Variable Rate Bonds

NOTE 8 – OTHER NON-CURRENT LIABILITIES Other non-current liabilities activity during 2012 and 2011 was as follows:

Balance BalanceJune 30, 2011 Additions Reductions June 30, 2012

Net Pension Obligation $ 155,153 $ 0 $ 155,153 $ 0Derivative Instrument - Interest Rate Swap 2,356,358 2,189,901 0 4,546,259Deferred Compensation Payable 563,784 146,878 276,568 0

Total $ 3,075,295 $ 2,336,779 $ 431,721 $ 4,546,259

Balance BalanceJune 30, 2010 Additions Reductions June 30, 2011

Net Pension Obligation $ 110,760 $ 44,393 $ 0 $ 155,153Derivative Instrument - Interest Rate Swap 2,900,557 0 544,199 2,356,358Deferred Compensation Payable 344,030 219,754 0 563,784

Total $ 3,355,347 $ 264,147 $ 544,199 $ 3,075,295

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NOTE 9 - NET ASSETS Net assets represent the difference between assets and liabilities. The net assets for 2012 and 2011 were as follows:

2012 2011Invested in Capital Assets, Net of Related Debt:

Net Property, Plant and Equipment $ 105,008,706 $ 99,527,235Less: Revenue Bonds Payable (68,332,002) (69,142,136)Less: Notes Payable (3,784,222) (3,790,530)Add: Debt Proceeds to be Used for Capital Assets 25,434,779 30,361,043Less: Reclassification from Restricted for Capital Activity (1,213,460) (561,758)

57,113,801 56,393,854

Restricted for Capital Activity:Restricted Cash and Cash Equivalents 255,131 495,947Restricted Investments 25,179,648 30,361,043Less: Accounts Payable for Capital Assets (1,213,460) (561,758)Less: Debt Proceeds to be Used for Capital Assets (25,434,779) (30,856,990)Reclassified to Invested in Capital Assets - Net of

Related Debt 1,213,460 561,7580 0

Restricted for Debt Service:Restricted Cash and Cash Equivalents 175,242 545,987Restricted Investments 2,024,904 3,114,453Less: Accrued Bond Interest Payable (202,447) (211,053)

1,997,699 3,449,387

Unrestricted 22,911,701 19,717,854

Total $ 82,023,201 $ 79,561,095

NOTE 10 - RETIREMENT PLAN Plan Description The West Knox Utility District Defined Benefit Pension Plan (the Plan) is a single-employer qualified, noncontributory defined benefit retirement plan covering all full-time employees who have been employed for six months, and are 21 years old. The Plan is managed by USI Consulting Group under a Group Annuity Policy. Substantially all of the employees are participants in the plan. Benefits are determined by a formula of 2% per year of service times the compensation base, limited to 100%. The compensation base is defined as the highest consecutive five-year average salary over all years of service. The normal form of benefit is a single life annuity (Qualified Joint and Survivor Annuity is the required standard option) but participants also have an option for a lump sum payment. Vesting begins at 20% per year after one year of service. An employee becomes fully vested after five years of service with a normal retirement age of 65. The Plan does not issue separate financial statements. The Board of Commissioners can amend or change the Plan. Funding Policy The contribution requirement is determined annually by actuarial valuation. It is the intention of the District to pay the full cost of the plan as determined by actuarial valuation; the actual contribution rates were 31.56% and 17.03% of annual covered payroll for 2012 and 2011, respectively.

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NOTE 10 - RETIREMENT PLAN (Continued) Annual Pension Cost and Net Pension Obligation The District's annual pension cost and net pension obligation for the current year and prior year was as follows:

2012 2011

Annual Required Contribution $ 992,834 $ 461,366

Interest on Net Pension Obligation 10,473 7,753

Adjustment to Annual Required Contribution (20,121) (10,485)

Annual Pension Cost 983,186 458,634

Reclassification of Deferred Compensation Plan 434,094 0

Contributions Made 809,291 414,241

Increase (Decrease) in Net Pension Obligation (260,199) 44,393Net Pension (Asset) Obligation, Beginning of Year 155,153 110,760

Net Pension (Asset) Obligation, End of Year $ (105,046) $ 155,153

The annual required contribution for the current year was determined as part of the July 1, 2011 actuarial valuation using the service prorated unit credit method. The actuarial assumptions for fiscal year 2012 and 2011, respectively, included a pre-retirement and post-retirement interest rate of 6.75% and 7.00%, and salary increase assumption of 3% and 2%. For fiscal year 2012, participants were assumed to take a lump sum distribution valued at 4.0%. For fiscal year 2011, participants were assumed to take an annuity distribution. Plan investments are in mutual funds. For valuation purposes, assets are valued at market value. The plan uses the service prorated unit credit method. Under this method, annual contributions consist of the normal cost, plus an amortization of the unfunded actuarial accrued liability over a 30-year period.

Three-Year Trend Information

NetFiscal Annual Percentage PensionYear Pension Of APC (Asset)

Ending Cost (APC) Contributed Obligation

06-30-12 $ 983,186 126.46% $ (105,046)06-30-11 458,634 90.32% 155,15306-30-10 466,391 79.94% 110,760

Funding Status and Progress

Actuarial Valuation Date 7/1/2011 7/1/2010 7/1/2009

Fair Value of Assets $ 4,828,412 $ 3,439,293 $ 2,678,751

Actuarial Accrued Liability 13,913,710 5,829,756 4,822,209

Total Unfunded Actuarial Accrued Liability $ 9,085,298 $ 2,390,463 $ 2,143,458

Funded Ratio (Actuarial Value of Assets as a Percentage of the ActuarialAccrued Liability) 35% 59% 56%

Annual Covered Payroll $ 2,431,841 $ 2,470,802 $ 2,469,788

Ratio of the Unfunded Actuarial Liabilityto Annual Covered Payroll 374% 97% 87%

See Note 16 for subsequent events related to the retirement plan.

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NOTE 11 - NET WATER REVENUES Net Water revenues earned during 2012 and 2011 was as follows:

2012 2011

Gross Water Revenues $ 7,306,306 $ 6,696,122Less: Provision for Bad Debt Expense (80,138) (116,212)

Net Water Revenues $ 7,226,168 $ 6,579,910

NOTE 12 - RISK MANAGEMENT The District is exposed to various risks of losses related to torts; theft of damage to, and destruction of assets; injuries to employees; and natural disasters. The District carries commercial insurance for these risks. Settled claims resulting from these risks have not exceeded commercial insurance coverage in any of the past three years. NOTE 13 - ECONOMIC CONCENTRATION The majority of the District's customers reside in the western portion of Knox County, Tennessee. A significant number of the District's customers are employed with various federal government contractors located in Oak Ridge, Tennessee. These contractors operate three U.S. Department of Energy (DOE) facilities that are vital to research and development, national defense and waste management. DOE operations are contingent upon annual U.S. congressional appropriations. The District's 10 largest customers approximate 9% and 10% of water and wastewater sales during 2012 and 2011, respectively. These customers are primarily rental properties, various corporations and a hospital. NOTE 14 – VIOLATIONS OF ENVIRONMENTAL REGULATIONS On September 15, 2011, the District entered into an administrative order with the U.S. Environmental Protection Agency (EPA) concerning the District’s compliance with the Clean Water Act (CWA) and specifically Sanitary Sewer Overflows (SSO). The District was required to submit a Corrective Action Plan (CAP) to the EPA by April 1, 2012. The CAP was expected to provide details of the District’s plans for improvements to its wastewater collection system during fiscal years 2012 through 2017. The CAP was prepared in final format and submitted to the EPA on schedule. The EPA subsequently approved the CAP. Current spending estimates directly related to the CAP to address projects specifically called for in the EPA Order are $8,465,600 for flow monitoring, pump station improvements, and sewer system rehabilitation and replacement work to sewer lines and appurtenances. There is an additional $8,020,000 planned in future construction in an effort to also eliminate recurring overflows. Although these projects are not specifically identified in the Order, the Order does call the District to address recurring overflow locations and for improvements to address them.

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NOTE 15 – RESTATEMENT OF BEGINNING NET ASSETS – PRIOR PERIOD ADJUSTMENTS Prior to 2012 the District did not record unbilled revenue associated with its meter reading cutoff activities because the amounts of unbilled revenue were not material to the financial statements. However, at June 30, 2012 the amounts of unbilled revenue were material to the financial statements. Therefore, revenue pertaining to the fiscal years prior to 2011 has been recorded as a prior period adjustment in the 2012 financial statements totaling $611,527. The comparative financial statements for 2011 have been restated to adjust for unbilled revenue. As a result, the beginning balance of unrestricted net assets as of July 1, 2010 increased by $587,739 to reflect the cumulative effect of this adjustment on prior years. The following financial statement line items were affected by the restatement:

Previously

As Originally Unrecorded

Reported Revenue As Restated

As of June 30, 2011:

Accounts Receivable $ 1,340,872 $ 611,527 $ 1,952,399

Unrestricted Net Assets 19,106,327 611,527 19,717,854

For the Year Ended June 30, 2011:

Operating Reveunes - Water $ 6,567,497 $ 12,413 $ 6,579,910

Operating Revenues - Wastewater 6,616,211 11,376 6,627,587

Change in Net Assets 1,608,774 23,789 1,632,563

NOTE 16 - SUBSEQUENT EVENTS Effective August 1, 2012, the District lowered the number of gallons covered by the minimum monthly billing for water and wastewater from 1,000 to 500, the minimum sewer bill was increased by $1.50 from $19.77 to $21.27. Effective July 1, 2012, the District amended their pension plan benefits. The benefit formula was increased to 2.25% per year of service up from 2.00%. The average earnings are calculated on 36 consecutive months lowered from 60 months. The normal retirement age was lowered to 62 from 65.

REQUIRED SUPPLEMENTARY INFORMATION

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SCHEDULE OF EMPLOYER PENSION CONTRIBUTIONS

Last Ten Fiscal Years

Percentage ofAnnual Required Contributions Contributions/

Contribution (ARC) Made ARC

$ 266,340 $ 277,514 104.2%

283,263 278,111 98.2%

314,155 311,057 99.0%

335,596 331,963 98.9%

368,708 363,766 98.7%

406,818 398,067 97.8%

466,553 372,854 79.9%

447,055 451,534 101.0%

461,366 414,241 89.8%

992,834 1,243,385 125.2%2012

2008

2009

2010

2011

2003

2004

2005

2006

2007

Fiscal Year

- 38 -


SCHEDULE OF EMPLOYER PENSION FUNDING PROGRESS

Last Seven Valuation Dates

Actuarial Valuation Date 7/1/11 7/1/10 7/1/09 7/1/08 7/1/07 7/1/06 7/1/05

Fair Value of Assets $ 4,828,412 $ 3,439,293 $ 2,678,751 $ 2,859,720 $ 2,752,981 $ 2,296,050 $ 2,238,039

Actuarial Accrued Liability 13,913,710 5,829,756 4,822,209 5,071,461 4,503,149 3,961,457 3,732,662

Total Unfunded Actuarial Accrued Liability $ 9,085,298 $ 2,390,463 $ 2,143,458 $ 2,211,741 $ 1,750,168 $ 1,665,407 $ 1,494,623

Funded Ratio (ActuarialValue of Assets as a Percentage of the Actuarial Accrued Liability) 35% 59% 56% 56% 61% 58% 60%

Annual Covered Payroll $ 2,431,841 $ 2,470,802 $ 2,469,788 $ 2,244,806 $ 2,141,834 $ 2,017,957 $ 1,860,402

Ratio of the Unfunded Actuarial Liability to Annual Covered Payroll 374% 97% 87% 99% 82% 83% 80%

Note (a) Information from the first actuarial valuation date is July 1, 2005.

Note (b) The Governmental Accounting Standards Board (GASB) requires the plan to prepare the Schedule of Funding Progress using the entry

age actuarial cost method. The requirement to present the Schedule of Funding Progress using the entry age actuarial cost method

went into effect during FY 2006 (actuarial valuation 7/1/2005).

Note (c) The July 1, 2011 acturial valuation changed the discount rate from 7.0% to 6.75% and assumed 100% of participants withdraw their benefits

as a lump sum distribution valued at 4% rather than an annuity.

SUPPLEMENTARY INFORMATION

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SCHEDULE OF EXPENDITURES OF FEDERAL AND STATE AWARDS

For the Year Ended June 30, 2012

Contract Beginning Expenditures/ EndingCFDA Number for (Accrued) Cash Amounts (Accrued)

Program Name Number State Awards Deferred Receipts Earned Deferred

FEDERAL AWARDS Direct Federal Loan:

Environmental Protection Capitalization Grants for Agency Through the TN Clean Water Dept. of Environment State Revolving Fundsand Conservation Loan (ARRA) 66.458 $ (6,524) $ 21,296 $ 14,772 $ 0

Principal Forgiveness (ARRA) 66.458 (26,096) 85,186 59,090 0Total (32,620) 106,482 73,862 0

STATE AWARD Direct State Loan:

TN Dept. of Environment Capitalization Grants for and Conservation Clean Water State

Revolving Funds Loan (Non-ARRA) N/A CWA 2009-245 (32,620) 106,480 73,860 0

TOTAL FEDERAL AND STATE AWARDS $ (65,240) $ 212,962 $ 147,722 $ 0

Note: Significant Accounting Policies

The Schedule of Federal and State Awards includes the grant activity of the District and is presented on the accrual basis of accounting.

The information in this schedule is presented in accordance with requirements of OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Therefore, some amounts presented in this schedule may differ from amounts presented in, or used in, the preparation of the basic financial statements.

Grantor Agency

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FiscalYear

Ending Total Total June 30, Principal Interest Principal Interest (a) Principal Interest Principal Interest

2013 $ 875,000 $ 1,639,500 $ 0 $ 1,534,601 $ 20,117 $ 52,411 $ 895,117 $ 3,226,5122014 920,000 1,595,750 0 1,534,601 21,015 51,513 941,015 3,181,8642015 615,000 1,549,750 0 1,534,601 21,953 50,575 636,953 3,134,9262016 995,000 1,519,000 0 1,534,601 22,933 49,595 1,017,933 3,103,1962017 1,045,000 1,469,250 0 1,534,601 23,957 48,571 1,068,957 3,052,4222018 1,095,000 1,417,000 0 1,534,601 25,026 47,502 1,120,026 2,999,1032019 1,150,000 1,362,250 0 1,534,601 26,143 46,385 1,176,143 2,943,2362020 0 1,304,750 0 1,534,601 27,310 45,218 27,310 2,884,5692021 1,210,000 1,304,750 250,000 1,534,601 28,529 43,999 1,488,529 2,883,3502022 1,270,000 1,244,250 250,000 1,527,857 29,803 42,725 1,549,803 2,814,8322023 1,335,000 1,180,750 250,000 1,520,870 31,133 41,395 1,616,133 2,743,0152024 1,400,000 1,114,000 250,000 1,513,557 32,523 40,005 1,682,523 2,667,5622025 1,470,000 1,044,000 250,000 1,506,082 33,974 38,554 1,753,974 2,588,6362026 1,545,000 970,500 250,000 1,498,364 35,491 37,037 1,830,491 2,505,9012027 1,620,000 893,250 250,000 1,490,401 37,075 35,453 1,907,075 2,419,1042028 1,700,000 812,250 250,000 1,481,139 38,730 33,798 1,988,730 2,327,1872029 1,785,000 727,250 250,000 1,471,876 40,459 32,069 2,075,459 2,231,1952030 1,875,000 638,000 250,000 1,462,614 42,265 30,263 2,167,265 2,130,8772031 1,970,000 544,250 250,000 1,452,051 44,152 28,376 2,264,152 2,024,6772032 2,070,000 445,750 250,000 1,441,489 46,123 26,405 2,366,123 1,913,6442033 2,170,000 342,250 250,000 1,430,926 48,181 24,347 2,468,181 1,797,5232034 2,280,000 233,750 250,000 1,420,364 50,332 22,196 2,580,332 1,676,3102035 2,395,000 119,750 250,000 1,409,801 52,579 19,949 2,697,579 1,549,5002036 0 0 2,550,000 1,399,239 54,926 17,602 2,604,926 1,416,8412037 0 0 2,675,000 1,291,501 57,378 15,150 2,732,378 1,306,6512038 0 0 2,775,000 1,178,482 59,939 12,589 2,834,939 1,191,0712039 0 0 2,900,000 1,054,024 62,614 9,914 2,962,614 1,063,9382040 0 0 3,025,000 923,959 65,409 7,119 3,090,409 931,0782041 0 0 3,150,000 788,287 68,329 4,199 3,218,329 792,4862042 0 0 3,275,000 644,962 59,772 1,154 3,334,772 646,1162043 0 0 3,475,000 495,950 0 0 3,475,000 495,9502044 0 0 3,625,000 337,837 0 0 3,625,000 337,8372045 0 0 3,800,000 172,906 0 0 3,800,000 172,906

Total $ 32,790,000 $ 23,472,000 $ 35,000,000 $ 42,725,947 $ 1,208,170 $ 956,068 $ 68,998,170 $ 67,154,015

(a) Note: The interest related to the BABS is net of the 35% subsidy payment from the U.S. Government.


Total Revenue BondsSeries 2004Water & Sewer Revenue Bonds$1,340,000 Rural Development

Series 2009-V-B-1Improvement Revenue Bonds

$35,425,000 Public $35,000,000 Water andSewer Revenue Bonds(BABS) - Series 2010

SCHEDULE OF DEBT SERVICE REQUIREMENTS

June 30, 2012

- 41 -


SCHEDULE OF DEBT SERVICE REQUIREMENTS (Continued)

June 30, 2012

FiscalYear Total

Ending Debt June 30, Principal Interest Principal Interest Service

2013 $ 0 $ 0 $ 96,372 $ 30,720 $ 4,248,721 2014 350,000 0 97,824 29,268 4,599,971 2015 0 0 99,312 27,792 3,898,983 2016 0 0 100,812 26,292 4,248,233 2017 0 0 102,324 24,768 4,248,471 2018 0 0 103,872 23,220 4,246,221 2019 1,350,000 140,000 105,444 21,648 5,736,471 2020 0 0 107,040 20,052 3,038,971 2021 0 0 108,648 18,444 4,498,971 2022 0 0 110,292 16,800 4,491,727 2023 0 0 111,960 15,132 4,486,240 2024 0 0 113,652 13,440 4,477,177 2025 0 0 115,368 11,724 4,469,702 2026 0 0 117,108 9,984 4,463,484 2027 0 0 118,884 8,220 4,453,283 2028 0 0 120,672 6,420 4,443,009 2029 0 0 122,496 4,596 4,433,746 2030 0 0 124,344 2,748 4,425,234 2031 0 0 107,798 866 4,397,493 2032 0 0 0 0 4,279,767 2033 0 0 0 0 4,265,704 2034 0 0 0 0 4,256,642 2035 0 0 0 0 4,247,079 2036 0 0 0 0 4,021,767 2037 0 0 0 0 4,039,029 2038 0 0 0 0 4,026,010 2039 0 0 0 0 4,026,552 2040 0 0 0 0 4,021,487 2041 0 0 0 0 4,010,815 2042 0 0 0 0 3,980,888 2043 0 0 0 0 3,970,950 2044 0 0 0 0 3,962,837 2045 0 0 0 0 3,972,915

Total $ 1,700,000 $ 140,000 $ 2,084,222 $ 312,134 $ 140,388,550

Knox County Note Payable Note PayableState Revolving Fund

- 42 -


SCHEDULE OF WATER RATES AND STATISTICS

June 30, 2012

1. As of June 30, 2012 and 2011, the District serviced water and wastewater customers as show below. Hotels, motels and apartments are billed on a commercial per unit basis.

Water Billing Wastewater BillingCustomers Units Customers Units

Residential 20,531 20,535 16,258 16,337 Commercial 854 860 549 554 Multi-Space Units 42 4,079 36 3,843

TOTAL 21,427 25,474 16,843 20,734

Residential 20,474 20,596 16,044 16,123 Commercial 839 838 538 543 Multi-Space Units 5 3,934 5 3,843

TOTAL 21,318 25,368 16,587 20,509

2. Monthly Water Rate Schedule - (Effective July 1, 2011).

(a) Residential Water Rate:1st 1,000 Gal. - $11.30 minimum billAll over 1,000 Gal. - $3.21 per 1,000 Gal.

(b) Commercial, Municipal, Public Schools, Hospital Service Rate:1st 1,000 Gal. - $14.25 minimum billAll over 1,000 Gal. - $3.21 per 1,000 Gal.

(c) Hotel, Motel per Unit or Space:1st 1,000 Gal. - $4.37 minimum billAll over 1,000 Gal. - $3.21 per 1,000 Gal.

3. Monthly Wastewater Rate Schedule - (Effective July 1, 2011)

(a) Residential Rate:1st 1,000 Gal. - $19.77 minimum billNext 12,000 Gal. - $3.84 per 1,000 Gal.All over 13,000 Gal. - No Charge

(b) Commercial, Municipal, Public Schools, Hospital Rate:1st 1,000 Gal. - $28.30 minimum billAll over 1,000 Gal. - $3.84 per 1,000 Gal.

(c) Hotel, Motel per Unit or Space:1st 1,000 Gal. - $14.42 minimum billAll over 1,000 Gal. - $3.84 per 1,000 Gal.

(d) Industrial Rate determined on an individual basis.

2012 20114. Wastewater Treated (Per Thousand Gallons) 1,524,800 1,431,730

2012

2011

- 43 -

CoverageSelective Insurance Company of South Carolina

Commercial General Liability $ 2,000,000Products Liability and Completed Operations 2,000,000Personal and Advertising Injury 1,000,000

Selective Insurance Company of South CarolinaComprehensive Automobile Liability:Bodily Injury and Property Damage 1,000,000Medical Payments (Private Passenger Autos) 5,000Uninsured Motorist 1,000,000Comprehensive (Designated Vehicles) - Deductible 500 - 2,000Collision (Designated Vehicles) - Deductible 500 - 2,000

Selective Insurance Company of South CarolinaFire and Extended Coverage:Office Building and Service Shop:

Lovell Road - Co-insurance 90% 1,283,360Personal Property - Co-insurance 90% 187,200

West Top Trail Tanks 1,404,000Sewer Plant Lab - Byington Solway Industrial Park - Co-insurance 90% 1,884,178 Personal Property - Co-insurance 90% 156,000Taylor's View Road Tank 780,000Water Treatment Plant - Henderson - Co-insurance 90% 780,000

Personal Property - Co-insurance 90% 104,000Water Treatment Plant - Williams Bend Road - Co-insurance 90% 1,560,000

Personal Property - Co-insurance 90% 78,000Chemical Storage Building - Williams Bend Road - Co-insurance 90% 208,000

Personal Property - Co-insurance 90% 52,000Water Pumping Station - Williams Bend Road - Co-insurance 90% 334,880Pellissippi and Carmichael Road Tanks 1,560,000Pump Station - 10 Mile - Co-insurance 90% 520,000Pump Station - Watt Road - Co-insurance 90% 156,000Pump Station - Couch Mill Road - Co-insurance 90% 780,000Pump Station - Karns #1 - Co-insurance 90% 364,000Pump Station - Karns #2 - Co-insurance 90% 156,000Pump Station - Pellissippi State 90% 312,000Pump Station - Dutchtown 90% 208,000Pump Station - Hardin Valley 90% 312,000Pump Station - Covered Bridges Road 90% 416,000Pump Station - Parkwest Hospital 90% 208,000

Selective Insurance Company of South CarolinaContractors Equipment - $500 Deductible 631,754

Selective Insurance Company of South CarolinaBusiness Computer Coverage 342,000Burglary and Robbery - Inside 1,000Burglary and Robbery - Outside 1,000Employee Dishonesty (Per Employee) 100,000

Selective Insurance Company of South CarolinaWorker's Compensation:Bodily Injury by Accident 100,000Bodily Injury by Disease 500,000

All policies begin November 1, 2011 and expire November 1, 2012.


SCHEDULE OF INSURANCE COVERAGE

June 30, 2012

- 44 -


SCHEDULE OF UNACCOUNTED FOR WATER


W ater Treated and Purchased: W ater Pumped (Potable) 2,023,431,000 W ater Purchased 0 Total W ater Treated and Purchased 2,023,431,000

Accounted for W ater: W ater Sold 1,830,975,900 Metered for Consumption (in house usage) 23,821,700 Fire Department(s) Usage 0 Flushing 0 Tank Cleaning/Filling 0 Street Cleaning 0 Bulk Sales 0 W ater Bill Adjustments 0 Total Accounted for W ater 1,854,797,600 Unaccounted for W ater 168,633,400 Percent Unaccounted for W ater 8.33%

Other (explain) See Below

Explain Other: None

All amounts included in this schedule are supported by documentation on file at the water system. If no support is on file for a line item or if the line item is not applicable, a "0" is shown.

(All amounts in gallons)

- 45 -


SCHEDULE OF UNACCOUNTED FOR WATER (Continued)


W ater Treated and Purchased: W ater Pumped (Potable) 1,970,355,000 W ater Purchased 0 Total W ater Treated and Purchased 1,970,355,000

Accounted for W ater: W ater Sold 1,725,742,700 Metered for Consumption (in house usage) 23,116,900 Fire Department(s) Usage 0 Flushing 0 Tank Cleaning/Filling 0 Street Cleaning 0 Bulk Sales 0 W ater Bill Adjustments 0 Total Accounted for W ater 1,748,859,600 Unaccounted for W ater 221,495,400 Percent Unaccounted for W ater 11.24%

Other (explain) See Below

Explain Other: None

All amounts included in this schedule are supported by documentation on file at the water system. If no support is on file for a line item or if the line item is not applicable, a "0" is shown.

(All amounts in gallons)

STATISTICAL SECTION This part of the District’s Comprehensive Annual Financial Report presents detailed information as a context for understanding what the information in the financial statements, note disclosures, and required supplementary information says about the District’s overall financial health. Contents Pages Financial Trends These schedules contain trend information to help the reader understand how the District’s financial performance and well-being have changed over time. .............................................. 46-48 Revenue Capacity These schedules contain information to help the reader assess the District’s operating revenues and customer statistics. ........................................................................................................... 49-55 Debt Capacity This schedule presents information to help the reader assess the affordability of the District’s current levels of outstanding debt and the District’s ability to issue additional debt in the future. ...................................................................................................................................... 56-57 Demographic and Economic Information These schedules offer demographic and economic indicators to help the reader understand the environment within which the District’s financial activities take place. ........................... 58-59 Operating Information These schedules contain service data to help the reader understand how the information in the District’s financial report relates to the water and wastewater services provided by the District. .............................................................................................................. 60-62 Sources: Unless otherwise noted, the information in these schedules is derived from the Comprehensive Annual Financial Reports for the relevant year.

- 46 -


NET ASSETS BY COMPONENT - RESTATED


Invested inCapital Assets -

Net of Capital DebtRelated Debt Activity Service Unrestricted Total

2003 $ 32,289,627 $ 0 $ 11,977,156 $ 3,546,926 $ 47,813,709

2004 30,367,858 0 8,561,776 10,299,232 49,228,866

2005 33,859,670 0 5,157,203 14,088,571 53,105,444

2006 42,199,197 0 5,888,019 11,705,233 59,792,449

2007 41,267,013 0 2,326,654 20,120,991 63,714,658

2008 49,936,793 0 2,492,214 18,208,290 70,637,297

2009 56,070,348 0 2,714,591 15,369,624 74,154,563

2010 58,903,105 0 2,735,181 15,826,000 77,464,286

2011 56,393,854 0 3,449,387 19,717,854 79,561,095

2012 57,113,801 0 1,997,699 22,911,701 82,023,201

Year

RestrictedFiscal

2003 2004 2005 2006 2007Operating Revenues

Water $ 4,618,042 $ 4,556,052 $ 4,549,526 $ 4,918,348 $ 5,209,055Wastewater 4,739,812 4,831,881 4,842,546 5,124,708 5,309,446Connection Fees 440,645 463,611 758,989 896,803 950,182Customer Forfeited Discounts 118,555 118,819 118,042 127,405 117,458Service Fees 69,920 73,760 83,660 115,575 111,045Wastewater Inspection Fees 6,620 7,500 12,850 14,950 15,200Miscellaneous 23,783 26,492 26,456 49,200 96,029

Total Operating Revenues 10,017,377 10,078,115 10,392,069 11,246,989 11,808,415

Operating Expenses:Water Purification and Supply 646,870 725,741 723,464 825,479 870,009Wastewater Collection & Treatment 1,723,962 1,383,871 1,235,609 1,485,914 1,611,691Water Treatment and Distribution 1,647,328 1,649,907 1,703,661 1,960,942 2,062,880Wastewater CMOM Program 0 376,059 644,939 814,525 881,854Shop & General Maintenance 150,923 158,571 205,935 193,322 205,248Customer Accounting 190,130 100,850 104,136 105,870 109,609Administrative & General 1,184,211 1,232,889 1,256,631 1,335,677 1,543,671Depreciation 2,228,626 2,386,401 2,307,360 2,521,052 2,839,447

Total Operating Expenses 7,772,050 8,014,289 8,181,735 9,242,781 10,124,409

Operating Income 2,245,327 2,063,826 2,210,334 2,004,208 1,684,006

Non-Operating Revenues (Expenses): Investment Income, Net 824,425 140,809 524,426 684,283 948,715Interest Expense (1,682,464) (1,578,800) (1,464,854) (1,822,819) (1,357,753)Arbitrage Expense - Net 0 0 0 0 (385,000)Net Gain (Loss) on Disposal of Capital Assets 0 (946,374) 108,335 0 (11,817)

Total Non-Operating Revenues (Expenses), Net (858,039) (2,384,365) (832,093) (1,138,536) (805,855)

Increase (Decrease) in Net AssetsBefore Capital Contributions 1,387,288 (320,539) 1,378,241 865,672 878,151

Capital Contributions: Cash 994,500 560,534 33,600 42,150 61,150Developers Contributions of Capital Assets 635,795 1,259,416 2,548,991 5,863,437 3,067,164

Total Capital Contributions 1,630,295 1,819,950 2,582,591 5,905,587 3,128,314

Change in Net Assets $ 3,017,583 $ 1,499,411 $ 3,960,832 $ 6,771,259 $ 4,006,465

The CMOM program was mandated by the Tennessee Department of Environment and Conservation in 2004.Note:



CHANGES IN NET ASSETS - RESTATED

-47 -

2008 2009 2010 2011 2012Operating Revenues

Water $ 6,107,965 $ 6,035,260 $ 5,905,111 $ 6,579,910 $ 7,226,168Wastewater 6,091,063 6,035,520 6,080,389 6,627,587 8,018,859Connection Fees 1,036,402 479,445 668,361 561,677 486,860Customer Forfeited Discounts 164,054 119,988 167,133 179,705 237,367Service Fees 116,000 86,260 110,980 90,425 91,025Wastewater Inspection Fees 14,650 4,850 12,875 8,075 5,250Miscellaneous 95,856 56,249 36,956 161,405 151,066

Total Operating Revenues 13,625,990 12,817,572 12,981,805 14,208,784 16,216,595

Operating Expenses:Water Purification and Supply 984,906 971,009 952,292 954,279 1,132,055Wastewater Collection & Treatment 1,727,789 2,019,949 2,001,500 2,147,830 2,325,821Water Treatment and Distribution 2,057,086 2,177,861 2,056,342 2,203,916 2,445,654Wastewater CMOM Program 1,166,283 937,514 976,065 1,008,816 1,302,429Shop & General Maintenance 279,609 244,752 223,464 318,855 306,275Customer Accounting 121,805 136,668 131,183 131,543 132,195Administrative & General 1,623,820 1,677,726 1,821,978 1,861,405 2,211,369Depreciation 2,985,239 3,239,722 3,772,274 3,853,377 3,916,042

Total Operating Expenses 10,946,537 11,405,201 11,935,098 12,480,021 13,771,840

Operating Income 2,679,453 1,412,371 1,046,707 1,728,763 2,444,755

Non-Operating Revenues (Expenses): Investment Income, Net 1,334,549 729,435 357,591 3,591 279,997Interest Expense (1,925,886) (1,781,968) (1,354,288) (1,850,135) (2,047,737)Arbitrage Expense - Net 0 0 0 0 0Net Gain (Loss) on Disposal of Capital Assets 0 (55,931) 1,386 0 (29,891)

Total Non-Operating Revenues (Expenses), Net (591,337) (1,108,464) (995,311) (1,846,544) (1,797,631)

Increase (Decrease) in Net AssetsBefore Capital Contributions 2,088,116 303,907 51,396 (117,781) 647,124

Capital Contributions: Cash 93,815 44,295 770,123 910,539 69,290Developers Contributions of Capital Assets 4,824,956 3,253,324 2,446,918 839,805 1,745,692

Total Capital Contributions 4,918,771 3,297,619 3,217,041 1,750,344 1,814,982

Change in Net Assets $ 7,006,887 $ 3,601,526 $ 3,268,437 $ 1,632,563 $ 2,462,106


CHANGES IN NET ASSETS - RESTATED (Continued)

THE WEST KNOX UTILITY DISTRICT OF KNOX COUNTY-

48 -

- 49 -


CUSTOMER STATISTICS AND RATES


Rates per Rates perFiscal Minimum 1,000 Minimum 1,000Year W ater W astewater Bill Gallons Bill Gallons

2003 20,564 15,887 $ 9.17 $ 2.79 $ 14.57 $ 3.34

2004 20,800 16,269 9.17 2.79 14.57 3.34

2005 20,648 16,537 9.17 2.79 14.57 3.34

2006 22,040 17,481 9.17 2.79 14.57 3.34

2007 22,524 17,508 10.55 3.21 16.27 3.84

2008 23,099 18,110 10.55 3.21 16.27 3.84

2009 23,449 18,587 10.55 3.21 16.27 3.84

2010 25,117 20,266 10.55 3.21 16.27 3.84

2011 25,368 20,509 10.55 3.21 16.27 3.84

2012 25,474 20,734 11.30 3.21 19.77 3.84

Customer Billing Units

W ater W astewater

The water and wastewater rates are per 1,000 gallons.

Notes: Rates are based upon a single family residence.

Minimum bill is based upon the first 2,500 gallons of water purchased for fiscal years 2001 to 2009.

Minimum bill is based upon the first 1,500 gallons of water purchased for the fiscal year 2010 and 2011.

- 50 -


WATER PRODUCED, SOLD AND CONSUMED


Fiscal WaterYear Water Pumped Sold and Consumed Water Unbilled Percent Lost

2003 1,837,000 1,513,000 324,000 17.64

2004 1,956,595 1,529,507 427,088 21.83

2005 1,861,679 1,474,606 387,073 20.79

2006 2,010,141 1,644,854 365,287 18.17

2007 1,941,109 1,595,267 345,842 17.82

2008 2,046,717 1,734,393 312,324 15.26

2009 1,921,738 1,686,815 234,923 12.22

2010 1,789,928 1,659,172 130,756 7.31

2011 1,970,355 1,748,860 221,495 11.24

2012 2,023,431 1,854,798 168,633 8.33

Gallons of Water (In Thousands)

- 51 -


ANNUAL TAP SALES


Fiscal Water Meter SewerYear Taps Sold Taps Sold Total Taps

2003 386 323 709

2004 432 361 793

2005 695 634 1,329

2006 663 596 1,259

2007 683 611 1,294

2008 671 586 1,257

2009 263 196 459

2010 522 481 1,003

2011 315 317 632

2012 227 206 433

- 52 -


NUMBER OF WATER AND SEWER CUSTOMERS BY TYPE


Fiscal Year Residential Multi-Family Commercial Hotel/Motel Total

Water2003 16,660 38 491 5 17,194 2004 17,037 37 503 5 17,582 2005 17,309 40 521 5 17,875 2006 18,190 40 605 5 18,840 2007 18,671 42 629 5 19,347 2008 19,194 42 681 5 19,922 2009 19,498 N/A 722 5 20,225 2010 20,477 N/A 740 5 21,222 2011 20,474 N/A 839 5 21,318 2012 20,531 N/A 854 42 21,427

Wastewater2003 12,336 31 329 5 12,701 2004 12,676 32 346 5 13,059 2005 12,929 32 354 5 13,320 2006 13,874 32 390 5 14,301 2007 14,328 32 402 5 14,767 2008 14,890 32 442 5 15,369 2009 15,093 N/A 467 5 15,565 2010 15,931 N/A 482 5 16,418 2011 16,044 N/A 538 5 16,587 2012 16,258 N/A 549 36 16,843

Effective July 2009, the multi-family category was eliminated.

- 53 -


WATER AND WASTEWATER RATES


Water RatesBase Rate 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012(First 2,500 Gallons) (e)(f)

Residential $ 9.17 $ 9.17 $ 9.17 $ 9.17 $ 10.55 $ 10.55 $ 10.55 $ 10.55 $ 10.55 $ 11.30Multi-Family 8.13 8.13 8.13 8.13 9.35 9.35 N/A N/A N/A N/ACommercial 12.39 12.39 12.39 12.39 14.25 14.25 14.25 14.25 14.25 14.25Hotel/Motel (per unit) 3.79 3.79 3.79 3.79 4.36 4.36 4.36 4.36 4.36 4.37

Usage Rates(Per 1,000 Gallons)


All Over 75,000

Residential $ 1.75 $ 1.75 $ 1.75 $ 1.75 $ 2.01 $ N/A $ N/A $ N/A $ N/A $ N/AMulti-Family 1.75 1.75 1.75 1.75 2.01 N/A N/A N/A N/A N/ACommercial 1.75 1.75 1.75 1.75 2.01 N/A N/A N/A N/A N/AHotel/Motel (per unit) 1.75 1.75 1.75 1.75 2.01 N/A N/A N/A N/A N/A

Wastewater RatesBase Rate(First 2,500 Gallons) (e)(f)


*Note: (a) Increases in water and wastewater rates must be approved by the Board of Commissioners.(b) The water rate tier of all over 75,000 was eliminated in 2008.(c) Effective June 2008, the commercial and hotel/motel changed to a single tier rate structure for wastewater.(d) Effective July 2009, the multi-family category was eliminated.(e) Effective April 2010, the minimum bill was reduced from 2,500 gallons to 1,500 gallons.(f) Effective July 2011, the minimum bill was reduced from 1,500 gallons to 1,000 gallons.

Fiscal Year

- 54 -


WATER AND WASTEWATER RATES (Continued)


Wastewater RatesBase Rate (Continued) 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012(Per 1,000 Gallons)

Residential2,500 to 10,500 $ 3.34 $ 3.34 $ 3.34 $ 3.34 $ 3.84 $ 3.84 $ 3.84 $ N/A $ N/A $ N/A1,500 to 13,000 0 0 0 0 0 0 0 3.84 3.84 N/A1,000 to 13,000 0 0 0 0 0 0 0 0 0 3.84

No No No No No No No No No NoAll over 13,000 Charge Charge Charge Charge Charge Charge Charge Charge Charge Charge

Multi-Family2,500 to 10,500 $ 3.34 $ 3.34 $ 3.34 $ 3.34 $ 3.84 $ 3.84 $ N/A $ N/A $ N/A $ N/A

No No No No No No N/A N/A N/A N/AAll over 13,000 Charge Charge Charge Charge Charge Charge

CommercialAll Over 2,500 $ N/A $ N/A $ N/A $ N/A $ N/A $ 3.67 $ 3.67 $ N/A $ N/A $ N/AAll Over 1,500 0 0 0 0 0 0 0 3.84 3.84 N/AAll Over 1,000 0 0 0 0 0 0 0 0 0 3.842,500 to 27,500 3.19 3.19 3.19 3.19 3.67 N/A N/A N/A N/A N/ANext 45,000 3.15 3.15 3.15 3.15 3.62 N/A N/A N/A N/A N/ANext 75,000 2.55 2.55 2.55 2.55 2.93 N/A N/A N/A N/A N/ANext 75,000 2.41 2.41 2.41 2.41 2.77 N/A N/A N/A N/A N/ANext 75,000 2.39 2.39 2.39 2.39 2.75 N/A N/A N/A N/A N/A

Hotel/MotelAll Over 1,500 $ N/A $ N/A $ N/A $ N/A $ N/A $ 3.84 $ 3.84 $ 3.84 $ 3.84 $ N/AAll Over 1,000 0 0 0 0 0 0 0 0 0 3.842,500 to 13,000 3.34 3.34 3.34 3.34 3.84 N/A N/A N/A N/A N/A

All over 13,000 No No No No No N/A N/A N/A N/A N/ACharge Charge Charge Charge Charge

*Note: (a) Increases in water and wastewater rates must be approved by the Board of Commissioners.(b) The water rate tier of all over 75,000 was eliminated in 2008.(c) Effective June 2008, the commercial and hotel/motel changed to a single tier rate structure for wastewater.(d) Effective July 2009, the multi-family category was eliminated.(e) Effective April 2010, the minimum bill was reduced from 2,500 gallons to 1,500 gallons.(f) Effective July 2011, the minimum bill was reduced from 1,500 gallons to 1,000 gallons.

Fiscal Year

- 55 -


TEN LARGEST CUSTOMERS

Current Fiscal Year and Nine Years Ago

(a) (a)Total Percentage Total Percentage

Type of Annual of Total Annual of TotalBusiness Sales Sales Sales Sales

Parkwest Hospital Medical $ 352,763 2.31 % $ 183,112 1.97 %

Woodlands West Apartments Rental Real Estate 202,134 1.33 0 0.00

Sunchase Apartments Rental Real Estate 202,461 1.33 174,893 1.89

Brendon Park Apartments Rental Real Estate 121,964 0.80 88,269 0.95

Country Club Apartments Rental Real Estate 94,278 0.62 0 0.00

Holiday Inn Hospitality 130,855 0.86 98,725 1.06

Warren House Apartments Rental Real Estate 91,751 0.60 0 0.00

Cedar Bluff Apartments Rental Real Estate 82,506 0.54 0 0.00

Hampton Inn Hospitality 69,353 0.45 53,422 0.58

Tennessee Veterans Home Medical 44,775 0.29 0 0.00

The Wilkinson Group Rental Real Estate 0 0.00 158,387 1.71

Cracker Barrel Rental Real Estate 0 0.00 18,600 0.20

Ft. Sanders/Parkwest Phy. Medical 0 0.00 15,452 0.17

Tom's Foods Food Processor 0 0.00 162,351 1.75

PBR Automotive Manufacturing 0 0.00 60,023 0.65

Total $ 1,392,840 9.14 % $ 1,013,234 10.93 %

Note: (a) Sales include only water and wastewater net revenues.(b) In prior years some customers were reported under a different name.

Customer

FY 2012 FY 2003

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OUTSTANDING DEBT PER CUSTOMER


Number OutstandingFiscal Revenue Notes of Debt perYear Bonds Payable Total Customers (a) Customer

2003 $ 36,850,171 $ 2,000,000 $ 38,850,171 20,564 $ 1,889

2004 36,187,697 1,900,000 38,087,697 20,800 1,831

2005 33,992,462 1,900,000 35,892,462 20,648 1,738

2006 41,418,978 1,900,000 43,318,978 22,040 1,965

2007 39,825,115 1,700,000 41,525,115 22,524 1,844

2008 37,880,936 1,700,000 39,580,936 23,099 1,714

2009 36,415,147 1,700,000 38,115,147 23,449 1,625

2010 35,664,823 2,458,343 38,123,166 25,117 1,518

2011 69,699,187 3,790,530 73,489,717 25,368 2,897

2012 68,851,141 3,784,222 72,635,363 25,474 2,851

(a) Number of customers is based upon water customer billing units.

(b) No debt to personal income ratio is shown because personal income for the District's service area is not

available.

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PLEDGED REVENUE COVERAGE


(a) (b) Net Revenues (c)Fiscal Gross Operating Available for Interest CoverageYear Revenues Expenses Debt Service Principal Paid Total Ratio

2003 $ 11,453,135 $ 5,543,424 $ 5,909,711 $ 2,490,000 $ 940,041 $ 3,430,041 1.72

2004 10,884,922 5,627,887 5,257,035 2,765,000 927,733 3,692,733 1.43

2005 10,631,562 5,874,375 4,757,187 1,943,393 1,807,015 3,750,408 1.27

2006 11,942,756 6,721,729 5,221,027 1,846,236 2,244,398 4,090,634 1.28

2007 12,776,854 7,284,963 5,491,891 1,117,980 1,806,377 2,924,357 1.88

2008 14,557,107 7,961,297 6,595,810 1,383,206 2,441,758 3,824,964 1.72

2009 13,536,061 8,165,479 5,370,582 856,893 2,347,530 3,204,423 1.68

2010 13,348,152 8,162,823 5,185,329 1,110,082 1,348,672 2,458,754 2.11

2011 14,558,877 8,626,644 5,932,233 813,327 2,034,247 2,847,574 2.08

2012 17,062,739 9,855,798 7,206,941 853,326 2,477,826 3,331,152 2.16

Note:

interest.

Debt Service Requirements

(a) Includes operating revenues, interest income received less accretion and cash contributions. (b) Does not include depreciation expense.

(c) Interest includes interest paid, paying agent's fees and service charges net of capitalized construction period

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DEMOGRAPHIC AND ECONOMIC STATISTICS (b)

Last Ten Calendar Years

PersonalIncome Per Capita

Calendar (Thousands Personal Year Population (c) of Dollars) (d) Income County State

2002 391,418 $ 11,760,023 $ 30,039 3.9 % 4.6 %

2003 396,742 12,257,757 30,901 4.1 5.5

2004 400,340 12,826,956 32,040 4.1 5.4

2005 404,972 13,301,853 32,815 4.4 5.1

2006 411,967 14,140,692 33,963 4.5 4.5

2007 416,352 15,201,428 34,180 3.4 4.7

2008 430,019 15,666,206 34,696 4.8 6.4

2009 435,725 15,371,687 35,278 8.0 10.5

2010 432,226 N/A 35,219 7.0 9.5

2011 436,104 N/A N/A 6.9 9.2

Notes: (a) N/A = Data not available.(b) Demographic and economic information is for Knox County Tennessee. This information for

the District's service area is not available.(c) Population – U.S. Bureau of the Census.(d) Income – Bureau of Economic Analysis, U.S. Department of Commerce.(e) Unemployment Rates – Tennessee Department of Labor and Workforce Development.

Unemployment Rate (e)

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PRINCIPAL EMPLOYERS

Current Calendar Year and Nine Years Ago

% of Total % of Total Number of MSA Number of Knox County

Industry Employees Employees Employees Workforce

The University of Tennessee Education 6,400 2.69 % 9,317 4.45 %

Covenant Health Health Care 9,494 3.99 8,000 3.82

Knox County Schools Education 6,891 2.89 7,230 3.45

Tennova Healthcare Health Care 3,857 1.62 0 0.00

Wal-Mart Stores, Inc. Retail Store 4,007 1.68 2,413 1.15

K-VA-T Food Stores Retail Grocery 3,924 1.65 0 0.00

State of Tennessee Government 3,528 1.48 0 0.00

Baptist Health Health Care 0 0.00 2,347 1.12

Knox County Government 2,998 1.26 2,500 1.19

St. Mary's Health Health Care 0 0.00 3,470 1.66

University of Tennessee Medical Center Health Care 3,942 1.65 3,088 1.47

City of Knoxville Government 2,811 1.18 3,500 1.67

State of TennesseeRegional Offices Government 0 0.00 2,401 1.15

Total 47,852 20.09 44,266 21.13

Notes: (a) Only Knox County presented.(b) The Knoxville – Knox County MSA consists of six counties: Anderson, Blount, Knox, Loudon, Sevier, and Union.

Source: Greater Knoxville Chamber Partnership.

2011 2002

Employer (a)

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NUMBER OF EMPLOYEES BY ACTIVITY


WATER 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Water Plant Operations 7 7 7 7 7 7 7 7 7 7Water Plant Maintenance 2 2 2 2 2 2 2 2 2 2Water Systems Maintenance 9 10 10 12 12 12 12 13 12 12

18 19 19 21 21 21 21 22 21 21

SEWERSewer Plant Operations 4 4 4 4 4 4 4 4 2 2Sewer Plant Maintenance 4 4 6 7 5 7 7 7 8 8Sewer Systems Maintenance (CMOM) 7 6 8 9 11 12 13 13 16 16

15 14 18 20 20 23 24 24 26 26

ENGINEERING/ INSPECTION/CONSTRUCTIONEngineering 1 1 1 1 1 1 1 1 1 1Inspections 2 2 2 2 2 3 2 2 2 2Construction 2 2 2 1 1 1 1 1 1 1

5 5 5 4 4 5 4 4 4 4

ADMINISTRATIONBilling/Customer Service 6 6 6 6 6 6 6 6 6 6Meter Reading 5 5 5 5 5 4 4 3 2 2Human Resources 1 1 1 1 1 1 1 1 1 1Finance & Accounting 1 1 1 1 1 1 1 1 1 1Executive Administration 2 2 2 2 2 2 2 2 2 2

15 15 15 15 15 14 14 13 12 12

TOTAL EMPLOYEES 53 53 57 60 60 63 63 63 63 63

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ANNUAL WASTEWATER PLANT FLOWS AND CAPACITY IN MILLIONS OF GALLONS


Annual Annual Unused Percent ofWastewater Design Plant PlantPlant Flow Flow Capacity Utilization

1,170.85 1,460.00 289.15 80.2

1,403.50 1,460.00 56.50 96.1

1,475.22 1,460.00 (15.22) 101.0

1,269.82 1,460.00 190.18 87.0

1,201.53 1,460.00 258.47 82.3

1,130.71 1,460.00 329.29 77.4

1,310.83 1,460.00 149.17 89.8

1,484.55 1,460.00 (24.55) 101.7

1,432.23 1,460.00 27.77 98.1

1,524.81 1,460.00 (64.81) 104.4

Flows expressed in millions of gallons.

Monthly operating reports to the Tennessee Department of Environment and Conservation.

2012

2011

2010

2009

Source:

Note:

2008

2007

FiscalYear

2006

2005

2004

2003

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WEST KNOX UTILITY DISTRICT OF KNOX COUNTY

OPERATING AND CAPITAL INDICATORS

Last Eight Fiscal Years

2005 2006 2007 2008 2009 2010 2011 2012

Area in Square Miles: 72 72 72 72 72 72 72 72

Water System:Miles of Water Mains 310 315 355 366 368 378 383 384Number of Treatment Plants 2 2 2 2 2 2 2 2Number of Service Connections 17,875 18,840 19,347 19,922 20,225 21,222 21,318 21,427Number of Fire Hydrants 934 971 1,011 1,013 1,195 1,195 1,195 1,195Daily Average Consumption

in Gallons 5.35 million 5.10 million 5.73 million 6.0 million 5.65 million 4.90 million 5.39 million 5.54 millionMaximum Daily Capacity of

Plant in Gallons 12.48 million 12.48 million 12.48 million 12.48 million 12.48 million 12.48 million 12.48 million 12.48 million

Wastewater System:Miles of Sanitary Sewers 150 157 225 236 246 260 264 276Number of Treatment Plants 1 1 1 1 1 1 1 1Number of Service Connections 13,320 14,301 14,767 15,369 15,565 16,418 16,587 16,843Daily Average Treatment

in Gallons 4 million 4 million 3.29 million 3.10 million 3.59 million 4.11 million 3.92 million 4.18 millionMaximum Daily Capacity of

Treatment Plant in Gallons 4 million 4 million 4 million 4 million 4 million 4 million 4 million 4 million

Data prior to 2005 is unavailable.Note:

COMPLIANCE SECTION

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TSCPA

Members of the Tennessee Society Of Certified Public Accountants

McGladrey Alliance is a premier affiliation of independent accounting and consulting firms. McGladrey Alliance member firms maintain their name, autonomy and independence and are responsible for their own client fee arrangements, delivery of services and maintenance of client relationships. McGladrey Alliance is a business of McGladrey LLP which operates under the McGladrey brand as

the fifth largest U.S. provider of assurance, tax and consulting services. McGladrey, the McGladrey logo and the McGladrey Alliance signatures are used under license by McGladrey LLP.

315 NORTH CEDAR BLUFF ROAD – SUITE 200 100 E. TENNESSEE AVENUE

KNOXVILLE, TENNESSEE 37923 OAK RIDGE, TENNESSEE 37830

TELEPHONE 865-769-0660 TELEPHONE 865-483-5634

TELECOPIER 865-769-1660 TELECOPIER 865-483-9781

P.O. BOX 31409

KNOXVILLE, TENNESSEE 37930-1409

TOLL FREE 800-332-7021

REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS

BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS

Board of Commissioners The West Knox Utility District of Knox County Knoxville, Tennessee We have audited the financial statements of The West Knox Utility District of Knox County (the District) as of and for the year ended June 30, 2012 and have issued our report thereon dated December 12, 2012. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control Over Financial Reporting Management of the District is responsible for establishing and maintaining effective internal control over financial reporting. In planning and performing our audit, we considered the District’s internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the District’s internal control over financial reporting. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the District’s financial statements will not be prevented, or detected and corrected on a timely basis. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over financial reporting that might be deficiencies, significant deficiencies, or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined previously. However, we identified a deficiency in internal control over financial reporting described in the accompanying schedule of findings and responses that we consider to be a significant deficiency in internal control over financial reporting as item number 2011-3. A significant deficiency is a deficiency, or combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.

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Compliance and Other Matters As part of obtaining reasonable assurance about whether the District’s financial statements are free of material misstatements, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed an instance of noncompliance or other matters that is required to be reported under Government Auditing Standards and which is described in the accompany schedule of findings and responses as item number 2011-5. The District’s responses to the findings identified in our audit are described in the accompanying schedule of findings and responses. We did not audit the District’s responses and accordingly, we express no opinion on them. This report is intended solely for the information and use of management, the Board of Commissioners and various governmental agencies and is not intended to be and should not be used by anyone other than these specified parties.

Pugh &Company, P.C.

Certified Public Accountants Knoxville, Tennessee December 12, 2012

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SCHEDULE OF FINDINGS AND RESPONSES

June 30, 2012 2011-3 Reconciliation of Receivables Report

Criteria or Specific Requirement - The District's internal controls related to receivables balancing need to be strengthened.

Condition - The monthly accounts receivable aging report is not being reconciled to the general ledger. Cause and Effect - Differences between the aging report and the general ledger are not discovered and

corrected in a timely manner. Recommendation - The aging reports should be reconciled to the general ledger at the end of each month

and should be documented in the District’s accounting records. Management's Previous Response - We concur with this recommendation and will reconcile the aging

reports during fiscal year 2012.

Current Year Update – Accounting personnel are still having problems with the monthly balancing of the accounts receivable aging report to the general ledger.

Management’s Current Year Response – Management is reviewing the daily postings to accounts receivable and the general ledger for differences. The difference will be identified and adjusted and the balance will be reconciled monthly.

2011-5 EPA Violations

Criteria or Specific Requirement – The District is required to comply with the Clean Water Act. Condition - The District is in violation of the Clean Water Act. Cause and Effect - The District is exposed to regulatory action from the Environmental Protection Agency

(EPA). Recommendation - The District must develop and submit a corrective action plan (CAP) to address the

violations within the EPA administrative order. Management's Previous Response - We have already begun the study and preparation of the CAP that

will be submitted to the EPA by April 1, 2012. Current Year Update – The Corrective Action Plan (CAP) was prepared in final format and submitted to

the EPA on schedule by April 1, 2012. The EPA subsequently approved the CAP. The CAP identified $6,600,000 in sewer rehabilitation work to be performed, broken into five projects. The plan is to complete all five projects approximately one year ahead of the EPA Order deadline, then perform post-construction flow monitoring and evaluation to measure our success in inflow/infiltration reduction and then evaluate if any further work may be required. Management’s Current Year Response – Management is satisfied that schedules are being met as required and is pleased to have EPA concurrence with the Corrective Action Plan. Management is closely monitoring to ensure that schedules and budgets stay on track. The Board of Commissioners has been advised of the EPA Order requirements, the CAP requirements, the financial impacts, and the schedule, and the Board is in concurrence with the proposed actions.

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SCHEDULE OF CORRECTED PRIOR AUDIT FINDINGS

June 30, 2012 2010-1 Investment Policies

Criteria or Specific Requirement - Section 7-82-108 of Tennessee Code Annotated requires the District to follow its investment policy and state statutes.

Condition - The District held $300,096 in a cash management market fund at June 30, 2010 and 2011,

which is not an eligible investment for utility districts in Tennessee. Cause and Effect – The trustee Bank of New York Mellon has not released the funds even though they

have been requested to do so on several occasions by management. Recommendation - We recommend the District notify its investment representative to sell this investment

and bring its investments into compliance with state law. Management's Response - We have instructed our investment representative to sell the necessary

investments to comply with state law and our policy. Current Year Update – Ineligible investments have been sold. 2011-1 Transfers Between Bank Accounts

Criteria or Specific Requirement - The District's internal controls related to transfers between bank accounts need to be strengthened.

Condition - Transfers between bank accounts are not reviewed and approved by management. Cause and Effect – Management has not instituted a control procedure related to bank transfers.

Recommendation - Management should review and approve all bank transfers. We recommend management consult with the District's depository bank to implement a secure bank transfer approval process and document their review in the District’s accounting records.

Management's Response - We concur and will revise our policies and procedures and consult with our depository bank for implementation in fiscal year 2012. Current Year Update – Management now reviews and approves all transfers between bank accounts.

2011-2 Review of Bank Reconciliations

Criteria or Specific Requirement - The District's internal controls related to bank reconciliation reviews need to be strengthened.

Condition - Management does not review and approve monthly bank reconciliations.

Cause and Effect – Management has not implemented a control procedure for review of bank reconciliations.

Recommendation - Management should review and approve each bank account's monthly reconciliation and document the review in the District’s accounting records.

Management's Response - We concur and will review and approve each monthly bank reconciliation

during fiscal year 2012. Current Year Update – Management now reviews and approves each bank account’s monthly

reconciliation.

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2011-4 Retainage Payable on Large Contracts

Criteria or Specific Requirement – T.C.A. § 66-34-104 requires the District to place construction retainage for all contracts over $500,000 into an interest-bearing escrow account.

Condition - The District is not placing construction retainage for all contracts over $500,000 into an interest-bearing escrow account as required by state statute.

Cause and Effect - Construction contractors of the District are not receiving interest on the retainage held

by the District as allowed by state law. Recommendation - The District should contact its bank to set up an interest-bearing escrow account for

future construction projects that are contracted for over $500,000. Management's Response - We concur and will place retainage in an escrow account for future qualified

construction projects. Current Year Update – Interest-bearing escrow accounts are now being set up as required.

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