Knox-Chapman Utility District 2011

KNOX-CHAPMAN UTILITY DISTRICT OF KNOX COUNTY Knoxville, Tennessee

COMPREHENSIVE ANNUAL FINANCIAL REPORT

For the Years Ended February 28, 2011 and 2010

PREPARED BY:

Carol Taylor, Finance Director

KNOX-CHAPMAN UTILITY DISTRICT OF KNOX COUNTY

Knoxville, Tennessee

COMPREHENSIVE ANNUAL FINANCIAL REPORT February 28, 2011 and 2010

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 .............................................................................................. 18-43

Required Supplementary Information:

Schedule of Employer Pension Contributions – Last Ten Fiscal Years .................................... 44

Schedule of Employer Pension Funding Progress – Last Six Valuation Dates ......................... 45

Other Supplementary Information:

Schedule of Debt Service Requirements .................................................................................... 46-49

Schedule of Insurance Coverage ................................................................................................ 50-51

Schedule of Water Rates and Statistics ...................................................................................... 52-53

Schedule of Unaccounted For Water ......................................................................................... 54-55



COMPREHENSIVE ANNUAL FINANCIAL REPORT February 28, 2011 and 2010

CONTENTS (Continued) Page

Number Statistical Section (Unaudited)

Net Assets by Component – Last Ten Fiscal Years ..................................................................... 56

Changes in Net Assets – Last Ten Fiscal Years ........................................................................... 57-59

Water Produced, Sold and Consumed – Last Ten Fiscal Years ................................................... 60

Annual Taps Sold – Last Ten Fiscal Years .................................................................................. 61

Number of Water and Wastewater Customers by Type – Last Ten Fiscal Years ........................ 62

Water and Wastewater Rates – Last Ten Fiscal Years ................................................................ 63-64

Ten Largest Customers – Current Fiscal Year and Nine Years Ago ........................................... 65

Outstanding Debt Per Customer – Last Ten Fiscal Years............................................................ 66

Pledged Revenue Coverage – Last Ten Fiscal Years ................................................................... 67

Demographic and Economic Statistics – Last Ten Calendar Years ............................................. 68

Principal Employers – Current Calendar Year and Nine Years Ago ........................................... 69

Number of Employees by Activity – Last Ten Fiscal Years ....................................................... 70

Operating and Capital Indicators – Last Seven Fiscal Years ....................................................... 71

Internal Control and 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 .............................................................................................. 72-73

Schedule of Audit Findings and Responses ................................................................................ 74-75

Schedule of Prior Year Audit Findings ........................................................................................ 76

INTRODUCTORY SECTION

...• ~. .•.... ............. ...... . Kno:r-CMpmlln Utility Dilt,ict. OJ ".

BoardofCQmmissioners(}f Kn.o~ .. Chapmatl Utility Distn;ctofKJloX County

Kn'Oxville, 'Tennessee

Stale law and tb,eComptroJlerof the Treasury, State ofTennessee,requirettmt every political subdivision Qrttluni~jpalcPtpO..arionpublish .. withinsixttlonthsofthe close of eacnfiscat year .. end.a c0tnpleteset of aadi~.ed ~~statunents+ This Cottlprehensiv:eAnnuaIFinauciai. Report. (CAFR) of the KnoxChaptnftliUtilityJ)istrictofKnox COunty (the District) ispublishedtb fulfUlthese requirettlents for the fisad years ~d.ed February 28, 2011 aud 2010.

:' IRt~l Controls

ManaJ~ntassUD1esful1 tespo~ibiUty f'Or the completeness and reliability of the informatiQncontained in.thi$teport,b~upon a comprehensive framewor!cQfintetfla1controlthtJi it has estahlishedfor this purpose. ~aD$C the cost of ~~' .. oontrol shQutd not eJ{«ledauti~ipat.ed benefits,. the ()bjective is to proVide reasonable, rfttb,erthan absolute. assurance tb,at tb,e tlnauoial statements are free oftmlfetiai misstatements.

,PughandCo~y, ·fl+C. has issued aJl.un'lualified ("clea,tf') opinion ontheDistrict'sfmancial.stafettlents for theyearenQed February 23,2011. As stated in the independentauqitor's r.eport, the audit was CQndU(:tedin ~Ptdancewith~enerally t;teceptedauditingstandart\sand Government Auditing Stondardl, i~sued .bytheCb'ln,ptr()ll~tG~Jaa'al of tb.e United a.es, The inde:~dent auditor'srepQrt is loeat~dat tb.e front ofthefinancialse0tlonotthls report.

Managem!(At's OiWUSSiQl1 mAd Analy:si§ (MO.&A.)

Generally Accepted Acoounting Principles (GAAP) require that management provide a narrative introduction, overview, audanalysis.to aeoompauythe fintl'l:lCial. statements in the form of MD&A .. This Letter of Trausmittal is designed to complement the MD&A aud sbould·be.read in conjunction with it. The District's MD&A can befotmd immediately foUowingtbeIndependent Auditor's Report. .

~ (); 8o:r9569 ~ KnOXville, Tennelsee !'7940-(J569. Telepkl>.M e65.J'17~"4g7 - 1 -

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Profile of the District 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 April 20, 1955. The purpose of the District is to “acquire, construct, improve, extend, operate, and maintain a water system.” The District serves 13,035 water and 2,311 wastewater customers in Knox, Sevier, and Blount counties. The District’s primary source of water is drawn from the French Broad River. The District is governed by a Board of Commissioners composed of three citizens who live within or who are customers of the District. Board members are appointed by the Knox County Mayor for a term of four years. The District’s primary capital assets consist of one water treatment plant, one office building and related maintenance facility, and eight water reservoir tanks. The District receives no financial support from Knox, Sevier, or Blount Counties, 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. 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. 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 2010, the unemployment rates according to the U.S. Bureau of Labor Statistics for Knox County, Tennessee, and the Nation were 7.0%, 9.5% and 9.2%, respectively. Per capita income in 2009 for Knox County, Tennessee, and the Nation was $35,278, $34,277 and $39,635, 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 several years. The District is planning several capital improvements including upgrading water and sewer lines, pump stations, and building an additional water plant to accommodate the increased growth in the area.

Long-Term Financial Planning (Continued)

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.

Relevant Financial Policies

The combination of continued customer growth and moderate rate increases are projected to provide the District with adequate resources to provide for the delivery of water and wastewater services and for capital improvements.

Major Initiatives

The District is designing a major improvement project to its wastewater collection system. The District is currently working on a new raw water intake system for the water treatment plant and a pump station on High Bluff Road. On March 31, 2011, the District issued $14.89 million in bonds to build a new water plant, and construction is expected to last three to four years. The District received an AA - rating from Standard & Poor's on this new bond issue.

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 February 28, 2010. This was the sixth consecutive year the District has received this prestigious 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 Achievement is valid for a period of only one year. We believe that our current comprehensive annual financial report continues to meet the Certificate of Achievement Program's requirements and are submitting it to the GFOA to determine its eligibility for another certificate.

Acknowledgments

The preparation of this CAFR results from the combined efforts of our staff 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.

Respectfully submitted,

~J~ General Manager

~~:rJ Finance Director

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Finance Director Carol Taylor Board of Commissioners Assistant

Sewer Collection

Susan Lakin President- Greg Logue Superintendent - Larry Key

<

~ Sue Atchley

I Office Manager I Richard Montgomery Susan Lakin

1 Collection Ol2!rators

George Baker Blake Hobby

Billing & Customer Service

Susan Lakin Mary Saunders Tamera Bartolo

Tonda Ford Sherri Wesley

Management '---- Manager- Gary Joqes -

Assistant Manager.;. Jerry Mason

..-I ..

Is~~ Wam, Plam Distribution Superintendent- Earl Setzer Superintendent - Chad Benton

I Assistant- Scott Prater

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I I I OQeration &

Line Flushing Customer Service I Maintenance

I Alan Jinks Mike Franklin

Scott Prater Hvdrant Construction & Randy WiUenbarger

Gary Thomas Flowing & Line ReQairs Meter R!i!aders PumQ Station

Gary Jenkins Maintenance Bryan Jenkins Locates David Burnett Maintenance &

Jason Headrick Scott Prater Pat McDaniel Alan Jinks Eric Purgason ReQair

ReQair Don Cusick Randy Whittenbarger Wayne Key

SamQling Bryan Jenkins Jake Baker MaQQing (On Retainer)

I Scott Prater Insl2!ction Pete Kwaak

Jason Headrick Pat McDaniel Pam Underwood

I Paul Latham I I

I I

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--n .....

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ROSTER OF DISTRICT OFFICIALS AND OTHERS

February 28, 2011

Board of Commissioners Expiration of Term Gregory Logue, President June 15, 2011 Richard Montgomery, Treasurer October 6, 2012 Sue Atchley, Secretary April 4, 2014 Management Title Gary E. Jones General Manager Jerry Mason Assistant Manager Carol Taylor Finance Director Independent Auditors General Counsel Pugh & Company, P.C. Edward Cox, Attorney at Law Certified Public Accountants Hagood, Tarpy & Cox Knoxville, Tennessee Knoxville, Tennessee

Consulting Engineer

David Kiefer, P.E. Jordan, Jones & Goulding


Certificate of Achievement for Excellence

in Financial Reporting

Presented to

Knox-Chapman Utility District

of Knox County, Tennessee

For its Comprehensive Annual

Financial Report

. for the Fiscal Year Ended

February 28,2010

A Certificate of Achievement for Excellence in Financial Reporting is presented by the Government Finance Officers

Association of the United States and Canada to government units and public employee retirement

systems whose comprehensive annual financial reports (CAFRs) achieve the highest standards in government accounting

and financial reporting.

President

Executive Director

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FINANCIAL SECTION

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P U G H & C O M P A N Y , P . C .

WILL J. PUGH, CPA CERTIFIED PUBLIC ACCOUNTANTS

RONNIE G. CATE, CPA OFFICES

C. LARRY ELMORE, CPA P.O. BOX 31409

W. JAMES PUGH, JR., CPA KNOXVILLE, TENNESSEE 37930-1409 HOME FEDERAL PLAZA - SUITE 200

DANIEL C. FRANKLIN, CPA ___________ 315 NORTH CEDAR BLUFF ROAD

JAMES H. JONES, CPA KNOXVILLE, TENNESSEE 37923

LISA W. HILL, CPA MEMBERS TELEPHONE 865-769-0660

SUSAN R. FOARD, CPA TOLL FREE 800-332-7021

ANDREW R. HARPER, CPA AMERICAN INSTITUTE OF TELECOPIER 865-769-1660

R.E. FOUST, CPA CERTIFIED PUBLIC ACCOUNTANTS

A. TED HOTZ, CPA 100 E. TENNESSEE AVENUE

BARRETT V. SIMONIS, CPA TENNESSEE SOCIETY OF OAK RIDGE, TENNESSEE 37830

JOHN W. BACON, CPA CERTIFIED PUBLIC ACCOUNTANTS TELEPHONE 865-483-5634

CALVIN C. HOWARD, CPA TELECOPIER 865-483-9781

INDEPENDENT AUDITOR’S REPORT

Board of Commissioners Knox-Chapman Utility District of Knox County Knoxville, Tennessee We have audited the accompanying balance sheet of Knox-Chapman Utility District of Knox County (the “District”) as of February 28, 2011, and the related statements of revenues, expenses, and changes in net assets, and cash flows for the year 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 audit. The financial statements as of February 28, 2010, and for the year then ended, were audited by Bacon, Howard and Company, CPAs, who merged with Pugh and Company, P.C. as of January 1, 2011, and whose report dated June 17, 2010, expressed an unqualified opinion on the 2010 financial statements. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Knox-Chapman Utility District of Knox County as of February 28, 2011, and the changes in its financial position and cash flows for the year 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 June 29, 2011, 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. Management's Discussion and Analysis on pages 3 through 11, and the Schedule of Employer Pension Contributions and Schedule of Employer Pension Funding Progress on pages 44 through 45 are not required parts of the basic financial statements, but are supplementary information required by accounting principles generally accepted in the United States of America. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit this information and express no opinion on it.

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Our audit was conducted for the purpose of forming an opinion on the 2011 basic financial statements taken as a whole. The introductory, other supplementary, and statistical sections listed in the table of contents are presented for purposes of additional analysis and are not a required part of the basic financial statements. The accompanying 2011 other supplementary information has been subjected to the tests and other auditing procedures applied in our audit of the 2011 basic financial statements mentioned above, and in our opinion, is fairly stated in all material respects in relation to the 2011 basic financial statements taken as a whole. The introductory and statistical sections have not been subjected to the auditing procedures applied in the audit of the 2011 basic financial statements and, accordingly, we express no opinion on them. The basic financial statements for the year ended February 28, 2010, were audited by Bacon, Howard and Company, CPAs, who merged with Pugh and Company, P.C. as of January 1, 2011, and whose report dated June 17, 2010, expressed an unqualified opinion on those basic financial statements. Their report, as of the same date, on the 2010 other supplementary information stated that, in their opinion, the other supplementary information was fairly stated in all material respects in relation to the 2010 basic financial statements, taken as a whole.

Pugh &Company, P.C.

Certified Public Accountants Knoxville, Tennessee June 29, 2011

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MANAGEMENT'S DISCUSSION AND ANALYSIS This section presents management's analysis of Knox-Chapman Utility District's (the District) financial condition and results of operations for the years ending February 28, 2011, 2010 and 2009. 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: • The District increased water rates by 3% effective March 1, 2009. • The District treated 1.41 and 1.37 billion gallons of water, representing an increase of 2.9% and a

decrease of (2.1)% from the previous years. • Total assets at year-end 2011 and 2010 were $44.2 and $43.5 million and exceeded liabilities (net

assets) by $20.6 and $19.6 million, respectively. • Unrestricted net assets at year-end 2011 and 2010 were $5.5 and $5.3 million and were available to

support short-term operations. Unrestricted net assets increased by $202,912 during 2011 and increased by $619,150 during 2010.

• Operating revenues in 2011 and 2010 were $6.9 and $6.3 million, an increase of $620,799 and a

decrease of $(183,126) or 9.8% and (2.8)% ,when compared to 2010 and 2009, respectively. • Operating expenses in 2011 and 2010 were $5.31 and $5.04 million, an increase of $271,544 and an

increase of $58,652, or 5.4% and 1.2%, when compared to 2010 and 2009, respectively. • Operating income for 2011 and 2010 was $1,641,349 and $1,292,094, representing an increase of

27.0% and a decrease of (15.8)% over 2010 and 2009. Net assets, before capital contributions, increased by $247,172 and decreased by $537,429 when compared to 2010 and 2009, respectively.

• The ratios of operating income to total operating revenues were 23.6 for 2011 and 20.4 for 2010. • Debt service coverage was 166% for 2011, 144% for 2010 and 160% for 2009, exceeding the 120%

required by various bond covenants. • Cash capital contributions were $335,583 for 2011 and $9,166 for 2010. The 2011 contributions were

due primarily to construction of lines for various projects reimbursed by various developers.

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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 were 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 a full 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 statement of cash flows presents cash receipt and cash disbursement information and changes in cash and cash equivalents resulting from operational, financing, and investing activities. The basic financial statements can be found on pages 12-17. 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. Other supplementary information contains information about long-term debt, insurance coverage, schedule of water rates and unaccounted water.

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MANAGEMENT’S DISCUSSION AND ANALYSIS (Continued) FINANCIAL ANALYSIS The following comparative condensed financial statements and other selected information provide key financial data and indicators for management, monitoring, and planning.

Condensed Balance Sheets (In Thousands of Dollars)

February 28, 2011, 2010 and 2009 ASSETS 2011 2010 2009 Current Assets $ 7,336 $ 9,815 $ 7,409Capital Assets: Producing – Net 30,902 31,361 27,356 Construction in Progress 5,483 1,714 4,408Other Assets – Net 457 640 4,822 TOTAL ASSETS $ 44,178 $ 43,530 $ 43,995 LIABILITIES Current Liabilities $ 1,791 $ 1,423 $ 1,756Non-Current Liabilities 21,825 22,528 23,187 Total Liabilities 23,616 23,951 24,943 NET ASSETS Invested in Capital Assets, Net of Related Debt 13,350 13,009 13,096Restricted Capital Activity - - - Debt Service 1,677 1,238 1,243Unrestricted 5,535 5,332 4,713 Total Net Assets 20,562 19,579 19,052 TOTAL LIABILITIES AND NET ASSETS $ 44,178 $ 43,530 $ 43,995

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MANAGEMENT’S DISCUSSION AND ANALYSIS (Continued)

Condensed Statements of Revenues, Expenses, and Changes in Net Assets (In Thousands of Dollars)

For The Years Ended February 28, 2011, 2010 and 2009

2011 2010 2009 Operating Revenues Water – Net $ 5,541 $ 5,011 $ 5,073 Wastewater - Net 1,161 1,094 1,057 Connection Fees 202 189 314 Service Fees 48 38 50 Miscellaneous 1 - 21 Total Operating Revenues 6,953 6,332 6,515 Operating Expenses Water Purification and Supply 1,152 1,160 983 Water Transmission and Distribution 1,423 1,233 1,554 Wastewater Collection 635 576 554 Customer Accounting and Collection 340 400 363 Administrative and General 627 612 572 Depreciation and Amortization 1,135 1,059 955 Total Operating Expenses 5,312 5,040 4,981 Operating Income 1,641 1,292 1,534 Non-Operating Revenues (Expenses) Investment Income 67 168 463 Interest Expense (1,061) (1,066) (1,061) Gain (Loss) on Disposal of Capital Assets - 6 2 Total Non-Operating Revenues (Expenses) – Net (994) (892) (596) Increase in Net Assets Before Capital Contributions 647 400 938 Capital Contributions Cash 336 9 119 Donated Lines - 118 463 Total Capital Contributions 336 127 582 Change in Net Assets 983 527 1,520 Net Assets, Beginning of Year 19,579 19,052 17,532 Net Assets, End of Year $ 20,562 $ 19,579 $ 19,052

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OTHER SELECTED INFORMATION

2011 2010 2009

Employees at Year-End 29 31 32Average Employees 30 31 31Customers (Billing Units) at Year-End: Water 13,035 12,986 12,945 Wastewater 2,311 2,299 2,278 Water (Millions of Gallons) Treated 1,413 1,374 1,397 Sold: Retail 794.0 767.3 804.9 Wholesale 42.7 40.9 20.9 Per Average Employee: Operating Revenues $ 231,763 $ 204,261 $ 210,168 Operating Expenses 177,051 162,581 160,688 Residential Rates Per 1,000 Gallons of Water Consumed: Water $ 5.71 $ 5.71 $ 5.54 Wastewater 3.76 3.76 3.65 Ratio of Operating Revenues to: Operating Expenses 1.31 1.26 1.31 Operating Expenses – Net of Depreciation and Amortization 1.66 1.59 1.62 Total Assets .16 .15 .15 Net Assets .34 .32 .34 Debt Related Ratios: Long-Term Debt to Net Assets 1.10 1.19 1.26 Long-Term Debt to Total Assets .51 .53 .54 Operating Coverage 1.66 1.44 1.60 GENERAL TRENDS AND SIGNIFICANT EVENTS Customer growth in the District has remained steady over the last decade. The District's number of water customers increased during 2011, 2010, and 2009 by 0.4%, 0.3% and 1.0%, respectively.

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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. Total assets increased by $647,937 and decreased by $(465,327) or 1.5% and (1.1)% during 2011 and 2010, respectively. Customer accounts receivable at year-end 2011 were $55,189 greater than year-end 2010 and $33,060 greater than year-end 2009. At 2011 and 2010 years-end, 97% and 99% of accounts receivable were current within 30 days. The District's bad debt expense was $25,660 and $19,786 during 2011 and 2010, respectively. 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. The District has four classes of water and wastewater customers: residential, wholesale, commercial, and industrial. The average realized rate from water sales per thousand gallons during 2011, 2010 and 2009:

2011 2010 2009 Retail $ 6.50 $ 6.09 $ 6.46Wholesale 1.61 1.61 1.61

Capital Contributions The District collects water and wastewater connection fees in order to ensure that current customers do not bear the burden of growth. These fees are paid by new customers and represent the cost of water and wastewater capacity of the new customer. 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.

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RESULTS OF OPERATIONS Capital contributions during 2011, 2010 and 2009 consisted of the following:

2011 2010 2009 Cash: Developers $ 335,583 $ 9,166 $ 119,525Noncash: Donated Capital Assets by Developers - 117,990 463,105 Total $ 335,583 $ 127,156 $ 582,630

During FY 2011, the District received $331,162 from a developer to help defray the cost of water and wastewater lines completed in prior years. Expenses Operating expenses, excluding depreciation and amortization, increased by $195,583 in 2011, decreased by $(44,917) in 2010, and decreased by $(178,318) in 2009, or 4.5%, (1.1)% and (1.8)%, respectively. This was a result of increases (decreases) in:

2011 2010 2009 Salaries and Benefits $ 5,268 $ 162,859 $ 57,862 Repairs and Maintenance (119,389) 52,382 (72,175)Wastewater Treatment Fees 42,995 (1,094) 10,774 Power Purchased 53,600 (31,713) 58,086 Vehicle Expenses 16,292 (43,245) (7,613)Line Expenses (678) (3,284) (46,609)Engineering Fees 17,256 18,806 (88,838)Sevierville Water Estimate 185,500 (185,500) - Other (5,261) (14,128) (89,805) Total $ 195,583 $ (44,917) $ (178,318)

Depreciation and amortization expense of the District's system increased by $75,961 and $103,569, or 7.2%, and 10.8% during 2011 and 2010, respectively. This increase was primarily the result of improvements made to the water plant and water and wastewater lines during 2010 and 2009.

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CAPITAL ASSETS During 2011, 2010 and 2009, the District increased its producing capital assets by $677,569, $5,061,754, and $1,121,810, respectively. These increases were due to the following: 2011 2010 2009 Vehicles $ 48,754 $ 35,200 $ 100,221Water Plant 9,589 219,116 120,123Water and Wastewater Lines 586,004 4,741,879 845,650Machinery and Equipment 5,845 65,559 55,816Land and Easements 27,377 - -

Total $ 677,569 $ 5,061,754 $ 1,121,810 The District's capital asset activity for 2011 and 2010 is described in Notes 3, 4 and 5 to the financial statements. DEBT At year-end 2011, 2010 and 2009, the District had $22.6, $23.3 and $23.9 million in long and short-term debt, a decrease of $(666,714) in 2011, a decrease of $(651,089) in 2010 and an increase of $798,553 during 2009. During 2011, 2010 and 2009, the District paid $761,286, $753,452, and $730,737, respectively in debt principal payments. During 2009, the District incurred an additional debt with the City of Maryville for $1.4 million. The debt is the District’s share of the City’s cost to expand their wastewater treatment facility. The District will make semi-annual payments beginning December 1, 2008 through June 1, 2038. The long-term debt to total asset ratio decreased from .53 in 2010 to .51 in 2011. More detailed information about the District’s debt is described in Notes 7 through 9 to the financial statements. ECONOMIC FACTORS AND FISCAL YEAR 2012

Water and wastewater rates will remain unchanged during FY 2012, but the number of gallons covered by the monthly minimum bill will decrease from 1,500 to 1,000.

Number of customers is projected to increase by 1% during 2012.

Pension contribution rate is 25.7% of salaries for 2011 vs. 27.4% in 2010.

Overall a salary rate increase of 3% for employees for 2012.

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ECONOMIC FACTORS AND NEXT FISCAL YEAR (Continued)

FY 2012 Operating Budget:

Revenues $ 6,955,000Expenses 6,274,789 Increase in Net Assets Before Capital Contributions $ 680,211

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:

Gary Jones, General Manager Knox-Chapman Utility District

P.O. Box 9569 Knoxville, TN 37940

865-577-4497

BASIC FINANCIAL

STATEMENTS

2011 2010Current Assets Cash and Cash Equivalents $ 1,226,765 $ 735,187 Cash and Cash Equivalents - Restricted 1,551,943 4,352,599 Investments, at Fair Value 4,103,570 4,328,742 Accounts Receivable - Customers (Net of Allowance for Uncollectible Accounts of $23,000 for 2011 and $19,500 for 2010) 437,268 382,079 Note Receivable 11,809 11,336 Prepaid Expenses 4,936 4,623

Total Current Assets 7,336,291 9,814,566

Non-Current Assets Capital Assets – Net of Accumulated Depreciation/Amortization: Land and Construction in Progress 5,855,800 2,060,302 Plant, Equipment and Intangible Assets 30,529,793 31,014,226

Total Capital Assets 36,385,593 33,074,528

Other Assets: Investments - Restricted, at Fair Value 247,384 393,836 Bond Issuance Cost - Net 163,316 176,995 Note Receivable 44,198 56,007 Net Pension Asset - 12,913 Deposits 898 898

Total Other Assets 455,796 640,649

Total Non-Current Assets 36,841,389 33,715,177

TOTAL ASSETS $ 44,177,680 $ 43,529,743


BALANCE SHEETSFebruary 28, 2011 and 2010

ASSETS

The accompanying notes are an integral part of these financial statements.- 12 -

2011 2010Current Liabilities

Accounts Payable $ 226,868 $ 175,998 Accounts and Retainage Payable – Construction 413,285 158,472 Accrued Liabilities 229,317 201,139 Accrued Revenue Bond Interest 122,170 126,007 Revenue Bonds and Notes Payable – Current Portion 799,534 761,286

Total Current Liabilities 1,791,174 1,422,902

Non-Current LiabilitiesNet Pension Obligation 2,020 - Revenue Bonds and Notes Payable – Net of Current Portion 21,823,252 22,528,214

Total Non-Current Liabilities 21,825,272 22,528,214

Total Liabilities 23,616,446 23,951,116

Net AssetsInvested in Capital Assets – Net of Related Debt 13,349,522 13,008,591 Restricted:

Debt Service 1,677,157 1,238,393 Unrestricted 5,534,555 5,331,643

Total Net Assets 20,561,234 19,578,627

TOTAL LIABILITIES AND NET ASSETS $ 44,177,680 $ 43,529,743


BALANCE SHEETS (Continued)February 28, 2011 and 2010

LIABILITIES AND NET ASSETS


2011 2010Operating Revenues

Water – Net $ 5,541,484 $ 5,011,101 Wastewater – Net 1,160,582 1,094,036 Connection Fees 201,400 188,840 Service Fees 48,038 38,115 Miscellaneous 1,387 -

Total Operating Revenues 6,952,891 6,332,092

Operating ExpensesWater Purification and Supply 1,152,397 1,160,015 Water Transmission and Distribution 1,423,243 1,232,915 Wastewater Collection 634,798 575,847 Customer Accounting and Collection 339,774 400,622 Administrative and General 626,703 611,933 Depreciation and Amortization 1,134,627 1,058,666

Total Operating Expenses 5,311,542 5,039,998

Operating Income 1,641,349 1,292,094

Non-Operating Revenues (Expenses) Investment Income 66,925 168,004 Interest Expense (1,061,250) (1,065,746) Gain (Loss) on Disposal and Impairment of Capital Assets - 5,500

Total Non-Operating Revenues (Expenses) - Net (994,325) (892,242)

Increase in Net Assets Before Capital Contributions 647,024 399,852


STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET ASSETSFor the Years Ended February 28, 2011 and 2010


2011 2010

Capital ContributionsCash Contributions $ 335,583 $ 9,166 Developers Contributions of Capital Assets - 117,990

Total Capital Contributions 335,583 127,156

Change in Net Assets 982,607 527,008

Net Assets, Beginning of Year 19,578,627 19,051,619

Net Assets, End of Year $ 20,561,234 $ 19,578,627


STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS (Continued)For the Years Ended February 28, 2011 and 2010


2011 2010Cash Flows from Operating Activities

Receipts from Customers and Users $ 6,916,857 $ 6,327,338 Payments to Employees (2,170,770) (2,185,937) Payments to Suppliers (1,920,298) (1,718,075)

Net Cash Provided by Operating Activities 2,825,789 2,423,326

Cash Flows from Capital and Related FinancingActivities

Acquisition and Construction of Capital Assets (4,190,876) (2,409,808) Interest Paid on Long-Term Debt (947,056) (947,682) Principal Paid on Long-Term Debt (761,286) (753,461) Paying Agent Fees (9,781) (3,570) Capital Contributions 335,583 9,166 Proceeds from Sale of Capital Assets - 5,500

Net Cash Used in Capital and RelatedFinancing Activities (5,573,416) (4,099,855)

Cash Flows from Investing ActivitiesInterest Received on Investments 66,925 96,664 Purchase of Investments - (3,042,776) Sale of Investments 371,624 6,973,648

Net Cash Provided by Investing Activities 438,549 4,027,536

Net Increase (Decrease) in Cash and Cash Equivalents (2,309,078) 2,351,007

Cash and Cash Equivalents, Beginning of Year 5,087,786 2,736,779

Cash and Cash Equivalents, End of Year $ 2,778,708 $ 5,087,786


STATEMENTS OF CASH FLOWSFor the Years Ended February 28, 2011 and 2010


2011 2010Cash and Cash Equivalents at End of Year

Consist of:Unrestricted Cash and Cash Equivalents $ 1,226,765 $ 735,187 Restricted Cash and Cash Equivalents 1,551,943 4,352,599

Total $ 2,778,708 $ 5,087,786

Reconciliation of Operating Income to Net CashProvided by Operating ActivitiesOperating Income $ 1,641,349 $ 1,292,094 Adjustments to Reconcile Operating Income

to Net Cash Provided by Operating Activities:Depreciation and Amortization 1,134,627 1,058,666 Provision for Uncollectible Receivables 25,660 19,786

Changes in:Accounts Receivable (80,849) (52,846) Note Receivable 11,336 10,881 Net Pension Asset 12,913 21,831 Materials and Supplies Inventory - 253,846 Prepaid Expenses (313) (231) Accounts Payable 50,870 (21,769) Accrued Pension Liability 2,020 - Accrued Liabilities 28,176 (158,932)

Net Cash Provided by Operating Activities $ 2,825,789 $ 2,423,326

Noncash Investing ActivitiesUnrealized Gains (Losses) on Investments $ - $ (73)

Noncash Capital and Related Financing ActivitiesContributions of Capital Assets by Developers $ - $ 117,990 Amortization of Bond Discounts 16,209 16,516 Accrued Interest on Note Payable 6,716 8,141 Amortization of Deferred Refunding Loss on Defeased Bonds 71,646 77,706 Amortization of Bond Issuance Costs 13,679 13,941


STATEMENTS OF CASH FLOWS (Continued)For the Years Ended February 28, 2011 and 2010


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NOTES TO THE FINANCIAL STATEMENTS February 28, 2011 and 2010

NOTE 1: SIGNIFICANT ACCOUNTING POLICIES Reporting Entity Knox-Chapman Utility District of Knox County (the District) was created on April 20, 1955, by Knox County, Tennessee under the authority of Title 7, Chapter 82 of the 1937 Utility District Law of the State of Tennessee. The District serves approximately 12,986 water and 2,299 wastewater customers in Knox, Blount and Sevier Counties. The District’s Board of Commissioners is appointed by the Knox County Mayor for staggered four-year terms. Knox County does not have any fiscal or budgetary control over the District. In addition, Knox County does not approve or pledge assets to secure the debts of the District. The operations of the District are funded by water and wastewater rates established by the Board of Commissioners. A summary of the major accounting policies of the District are presented as follows: A. Basis of Accounting and Presentation The District's financial statements are presented on the full 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, or net income is appropriate for capital maintenance, public policy, management control, accountability, or other purposes.

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NOTES TO THE FINANCIAL STATEMENTS (Continued)

February 28, 2011 and 2010

NOTE 1: SIGNIFICANT ACCOUNTING POLICIES (Continued) B. Budgeting 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. 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 projects 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 contribution fees, grants, borrowings, and certain revenues for capital projects. The District’s budgets are not legally binding. There were no budgetary amendments during 2011 and 2010. All 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 March Board meeting. A budget is adopted by resolution prior to March 1. During the year, management is authorized to transfer budgeted amounts between line items within the District's departments. C. Cash Equivalents, Deposits, and Investments Cash and cash equivalents, for purposes of the statements of cash flows, include restricted and unrestricted cash on hand or on deposit, interest in State Treasurer's Investment 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.

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NOTE 1: SIGNIFICANT ACCOUNTING POLICIES (Continued) D. 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. E. 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 probable uncollectible receivables through a reduction (expense) 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 are recorded as capital contributions. Non-operating revenues consist of investment income. Investment income is interest earned, net of related fees, and the change in unrealized gains and losses on the fair value of marketable debt securities. Other non-operating revenues include the gain on the sale of capital assets. F. 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 on capital assets. Non-operating expenses consist of interest on long-term liabilities and loss on the disposal or impairment of capital assets.

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NOTE 1: SIGNIFICANT ACCOUNTING POLICIES (Continued) G. Capital Assets and Intangible 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. Intangible assets are recorded at cost. Estimated useful lives are based upon renewal periods as limited by contractual or legal provisions. Maintenance and repairs, which do not significantly extend the value or life of property, plant, and equipment, are expensed as incurred. 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 and amortization is not recorded until the assets are actually put into use. The District defines a capital, or intangible asset, as an asset with an initial individual cost, or a project with a cumulative cost of more than $5,000 and an estimated useful life in excess of one year. Assets are depreciated or amortized on the straight-line method. Depreciation and amortization is calculated using the following estimated useful lives:

Years Transmission and Distribution Systems 40-50 Vehicles 5-10 Equipment 5-20 Buildings and Improvements 15-40 Office Furniture and Equipment 5-10 Meters 20 Wastewater Capacity Costs 20-30

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NOTE 1: SIGNIFICANT ACCOUNTING POLICIES (Continued) H. 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.

I. Compensated Absences The District pays employees, upon termination or retirement, unused sick leave up to a maximum of 120 days at 50% of their hourly pay rate. The District records an expense and liability as the benefits are earned under the vesting method. Employees must use accumulated vacation time before December 31. J. 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. K. Reclassifications Certain amounts in the prior year have been reclassified to correspond with the current year. There was no effect upon prior year's results. L. 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. 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.

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NOTE 1: SIGNIFICANT ACCOUNTING POLICIES (Continued)

M. 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 accounts. Actual results may differ from those estimates.

NOTE 2: DEPOSITS AND INVESTMENTS

At February 28, 2011 and 2010, the District had the following deposits and investments:

2011 2010 Weighted Weighted Average Average Fair Maturity Fair Maturity Value (Years) Value (Years) Deposits: Demand Deposits $ 2,778,708 N/A $ 1,855,908 N/A

Investments: Certificates of Deposit 4,350,953 N/A 4,722,650 N/A Federal Agency Debt Securities - N/A 3,231,806 0.08

Total Investments 4,350,953 7,954,456

Total $ 7,129,661 $ 9,810,364

A summary of the deposits and investments on the balance sheets at year-end 2011 and 2010:

2011 2010 Current Assets: Cash and Cash Equivalents $ 1,226,765 $ 735,187 Cash and Cash Equivalents - Restricted 1,551,943 4,352,599 Investments 4,103,569 4,328,742 6,882,277 9,416,528Other Assets: Investments – Restricted 247,384 393,836

Total $ 7,129,661 $ 9,810,364

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NOTE 2: DEPOSITS AND INVESTMENTS (Continued) As of February 28, 2011 and 2010, the District’s investments were in the following: 2011 2010

Certificates of Deposit 100% 59.4%Federal Agency Debt Securities - 40.6

Total 100% 100.0% A. Restricted Cash Equivalents The restricted cash equivalents are for construction projects and are to be used solely for the repayment of debt and improvements to the District's system. B. Custodial Credit Risk – Deposits Tennessee State Law requires utility districts to secure deposits by having financial institutions pledge governmental securities as collateral. The market value of pledged securities must equal at least 105% of the District's uninsured deposits. As of February 28, 2011, $255,639 of the District’s deposits held in a financial institution were exposed to custodial credit risk because they exceeded the National Credit Union Administration’s $250,000 insured limit. The District's remaining deposits were fully insured by the FDIC, NCUA or covered by the state bank collateral pool. All of the District's cash equivalents, deposits, and investments in certificates of deposit at February 28, 2010, were covered by Federal Depository Insurance Coverage (FDIC) and 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.

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NOTE 2: DEPOSITS AND INVESTMENTS (Continued) C. Investment Risks As required by GASB Statement No. 31, the carrying value of the investments is presented at fair value.

D. Investment Income Investment income for 2011 and 2010 consisted of the following: 2011 2010 Interest Income $ 66,925 $ 96,664Unrealized Gain (Loss) on Investments - (73)Realized Gains on Investments - 71,413 Total $ 66,925 $ 168,004

The calculation of realized gains and losses is independent of the calculation of the net change in the fair value of investments. Realized gains on the sale of investments during 2011 and 2010 include $-0- and $12,487 of unrealized gains that were included as a change in the fair value of investments reported in prior years. E. Investment Policies State statute (TCA § 7-82-108) authorizes the District to invest in obligations of the federal government, federal agency debt 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 Knox-Chapman Utility District. All safekeeping receipts for investment instruments are held in accounts in the District’s name and all securities are registered in the District’s name. Credit Risk: The District’s Investment Policy 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. At February 28, 2010, all of the District’s investments in federal agency debt securities were rated Aa3 by Moody’s Investors Services and AA by Standard and Poor’s.

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NOTE 2: DEPOSITS AND INVESTMENTS (Continued) E. Investment Policies (Continued) 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. Presently, the District is investing in securities which mature in 24 months or less. The District is currently targeting a one year average maturity and has the flexibility to expand this to three years if market opportunities warrant the adjustment. 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. Concentration of Credit Risk: The District’s Investment Policy has no limit to its exposure to federal government and federal agency issuers as a whole or individually. All other obligations are limited with a maximum exposure of 25% of the entire investment portfolio of all funds.

The District’s Investment Policy does not require diversification among authorized investment broker-dealers.

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February 28, 2011 and 2010 NOTE 3: CAPITAL ASSETS A summary of capital asset activity and changes in accumulated depreciation and amortization for the year ended February 28, 2011, was as follows: Deletions Balance Retirements Balance Capital Assets 3/1/2010 Additions Transfers 2/28/2011 Capital Assets Not Being Depreciated/Amortized: Water System: Land and Easements $ 271,380 $ 27,377 $ - $ 298,757 Construction in Progress 606,462 1,344,204 - 1,950,666 Wastewater System: Land and Easements 73,554 - - 73,554 Construction in Progress 1,108,906 2,910,169 (486,252) 3,532,823 Total Capital Assets, Not Being Depreciated/Amortized 2,060,302 4,281,750 (486,252) 5,855,800 Capital Assets Being Depreciated/Amortized: Water System:

Mains, Lines and Equipment 18,323,565 56,613 - 18,380,178 Treatment Facilities 10,067,306 9,589 - 10,076,895 Wastewater System: Collection Lines and Equipment 9,667,582 46,164 486,252 10,199,998 Wastewater Capacity Costs 2,849,920 - - 2,849,920 Office Property and Equipment 776,528 2,822 - 779,350 Vehicles 555,559 48,754 (19,850) 584,463 Total Capital Assets Being Depreciated/Amortized 42,240,460 163,942 466,402 42,870,804 Less Accumulated Depreciation/Amortization For: Water System: Mains, Lines and Equipment (3,329,876) (499,105) - (3,828,981) Treatment Facilities (3,822,950) (221,423) - (4,044,373) Wastewater System: Collection Lines and Equipment (2,889,583) (235,640) - (3,125,223) Wastewater Capacity Costs (321,236) (118,820) - (440,056) Office Property and Equipment (433,481) (17,831) - (451,312) Vehicles (429,108) (41,808) 19,850 (451,066) Total Accumulated Depreciation/Amortization (11,226,234) (1,134,627) 19,850 (12,341,011) Total Capital Assets Being Depreciated/Amortized - Net 31,014,226 (970,685) 486,252 30,529,793 Net Capital Assets $ 33,074,528 $ 3,311,065 $ - $ 36,385,593

Depreciation and amortization expense was $1,015,807 and $118,820 for 2011.

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February 28, 2011 and 2010 NOTE 3: CAPITAL ASSETS (Continued) A summary of capital asset activity and changes in accumulated depreciation for the year ended February 28, 2010, was as follows: Deletions Balance Retirements Balance Capital Assets 3/1/2009 Additions Transfers 2/28/2010 Capital Assets Not Being Depreciated/Amortized: Water System: Land and Easements $ 271,380 $ - $ - $ 271,380 Construction in Progress 3,458,384 492,542 (3,344,464) 606,462 Wastewater System: Land and Easements 73,554 - - 73,554 Construction in Progress 949,676 1,069,495 (910,265) 1,108,906 Total Capital Assets, Not Being Depreciated/Amortized 4,752,994 1,562,037 (4,254,729) 2,060,302 Capital Assets Being Depreciated/Amortized: Water System: Mains, Lines and Equipment 14,727,098 252,003 3,344,464 18,323,565 Treatment Facilities 10,067,306 - - 10,067,306 Wastewater System: Collection Lines and Equipment 8,460,709 296,608 910,265 9,667,582 Wastewater Capacity Costs 2,849,920 - - 2,849,920 Office Property and Equipment 553,314 223,214 - 776,528 Vehicles 550,073 35,200 (29,714) 555,559 Total Capital Assets Being Depreciated/Amortized 37,208,420 807,025 4,225,015 42,240,460 Less Accumulated Depreciation/Amortization For: Water System: Mains, Lines and Equipment (2,897,678) (432,198) - (3,329,876) Treatment Facilities (3,600,687) (222,263) - (3,822,950) Wastewater System: Collection Lines and Equipment (2,672,774) (216,809) - (2,889,583) Wastewater Capacity Costs (202,416) (118,820) - (321,236) Office Property and Equipment (419,578) (13,903) - (433,481) Vehicles (404,149) (54,673) 29,714 (429,108) Total Accumulated Depreciation/Amortization (10,197,282) (1,058,666) 29,714 (11,226,234) Total Capital Assets Being Depreciated/Amortized - Net 27,011,138 (251,641) 4,254,729 31,014,226 Net Capital Assets $ 31,764,132 $ 1,310,396 $ - $ 33,074,528

Depreciation and amortization expense was $939,846 and $118,820 for 2010

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NOTE 4: INTANGIBLE ASSETS A. Wastewater Capacity Costs During 2007, the District amended their agreement with the City of Maryville to increase the City’s wastewater treatment plant capacity to accommodate the District’s increase in wastewater sent to the City’s wastewater treatment plant. The District recorded a related intangible asset of $1,429,332 to be amortized over the remaining term of the contract of 20 years. The remaining net wastewater capacity costs were $1,095,820 and $1,167,287 at February 28, 2011 and 2010. Amortization expense for 2011 and 2010 was $71,467 annually. The District entered into an agreement with the City of Maryville to pay the City for its share of any new construction costs to the City’s wastewater treatment plant. The District also recorded a related intangible asset of $1,420,588 to be amortized over the term of the City’s related debt of 30 years. The remaining net wastewater capacity costs were $1,314,044 and $1,361,397 at February 28, 2011 and 2010. Amortization expense for 2011 and 2010 was $47,353 annually.

NOTE 5: CONSTRUCTION IN PROGRESS Construction in progress at February 28, 2011 and 2010, consisted of: 2011 2010 Actual

To Date Remaining

Commitment Actual

To Date Remaining

Commitment Burnett’s Creek Pump Station $ 25,469 $ 1,000 $ 12,610 $ - Raw Intake Pump Station 1,645,381 965,832 427,168 2,535,686 Co-op Road Replacement Project - - 352,744 115,314 Warehouse Remodel 68,066 20,632 8,363 49,083 Other Capital Projects 237,219 - 170,931 - High Bluff Pump Station 3,507,354 145,773 743,552 2,221,371 Total $ 5,483,489 $ 1,133,237 $ 1,715,368 $ 4,921,454

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NOTE 6: GAIN (LOSS) ON DISPOSAL AND IMPAIRMENT OF CAPITAL ASSETS During 2010, the District sold surplus vehicles and equipment to private individuals. The District’s gain (loss) on disposal and impairment of capital assets is as follows: 2010

Sales Proceeds $ 5,500Less: Net Book Value of Capital Assets -

Gain (Loss) $ 5,500

NOTE 7: REVENUE BONDS AND NOTES PAYABLE A. Overview On October 30, 2003, the District issued $9,535,000 in Water and Sewer Revenue Refunding and Improvement Bonds, Series 2003 with an average interest rate of 3.7%. Principal payments are due annually in varying amounts from $220,000 to $730,000 through 2028. The bonds were issued to finance the continued expansion and upgrading of the District’s distribution system and to currently refund the 1994 series issue. The current refunding in 2004 resulted in a difference between the reacquisition price and the net carrying amount of the old debt of $921,466, which includes $428,341 from the remaining deferred refunding loss from the 1994 advance refunding issue. This difference, reported in the accompanying financial statements as a deduction from bonds payable, is being charged to operations through the year 2019 using the proportionate-to-stated interest requirements method. The bond issuance costs and discount 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 $1,168,586 and obtained an economic gain (difference between the present values of the old and new debt service payments) of $844,370. The amount of the reacquisition price recorded as part of bond interest expense was $69,141 and $75,059 during 2011 and 2010, respectively. On September 28, 2005, the District issued $2,194,100 in Water and Wastewater Revenue Bonds, Series 2005 with an average interest rate of 4.125%. These bonds are payable to Rural Development, a department of the U.S. Department of Agriculture. The bonds are payable in 456 monthly installments of $9,545 beginning October 26, 2006 and ending September 28, 2043. The bonds were issued to finance the radio read meter replacement program. The bond issuance costs are being amortized over the life of the bonds using the straight line method.

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NOTE 7: REVENUE BONDS AND NOTES PAYABLE (Continued) A. Overview (Continued) On August 30, 2007, the District issued $7,425,000 in Water and Sewer Revenue Refunding and Improvement Bonds, Series 2007A with an average interest rate of 4.19%. Principal payments are due annually in varying amounts from $75,000 to $600,000 through 2031. The bonds were issued to finance extensions and improvements to the District’s water procurement, treatment, storage and distribution system and to currently refund the 1997 Series issue. The current refunding resulted in a difference between the reacquisition price and the net carrying amount of the old debt of $26,220. This difference is reported in the accompanying financial statements as a deduction from bonds payable and is being charged to operations through the year 2023 using the proportionate-to-stated interest requirements method. The bond issuance costs and discount 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 $160,357 and obtained an economic gain (difference between the present values of the old and new debt service payments) of $117,105. The amount of the reacquisition price recorded as part of bond interest expense was $2,505 and $2,647 during 2011 and 2010, respectively. On August 30, 2007, the District issued $4,175,000 in Water and Sewer Revenue Bonds, Series 2007B with an average interest rate 4.52%. Principal payments are due annually in varying amounts from $625,000 to $775,000 beginning in 2032 through 2037. The bonds were issued to finance extensions and improvements to the District’s water procurement, treatment, storage and distribution system. The bond issuance costs and discount are amortized over the life of the bonds using the proportionate-to-stated interest requirements method.

The bond holders have a statutory mortgage lien upon the District as permitted by TCA § 7-82-101, and will remain in effect until the various bond issues are paid in full. While the interest on all of the above bonds is generally exempt from federal income taxes for individuals and corporations, it should be noted that the interest may affect (i) adjusted current earnings and the environmental tax for certain corporations, (ii) loss reserve deduction for property and casualty insurance companies, (iii) branch profits tax by certain foreign corporations, (iv) passive income for certain S-corporations, and (v) the determination of gross income for recipients of certain social security and railroad retirement benefits.

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NOTE 7: REVENUE BONDS AND NOTES PAYABLE (Continued) A. Overview (Continued) On March 20, 1990, the District entered into an agreement to expedite the construction of sewer lines to furnish sewer services to the Stock Creek Drainage Basin area in Knox County. Under this agreement, Knox County provided $1,900,000 to the District for the construction of these lines. The rights of Knox County with repayment are subordinate to all other creditors. 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 final principal payment is to be paid on June 2, 2014 for $1,350,000. The District has accrued a portion of the $140,000 as interest payable. Interest expense was $6,716 and $8,141 during 2011 and 2010. The amount of accrued interest payable at year-end 2011 and 2010 was $113,498 and $106,782, respectively. The District amended their agreement with the City of Maryville (#1) to increase the amount of wastewater sent to the City’s wastewater treatment plant from 400,000 gallons to 700,000 gallons per day see (see Notes 3 and 4). The District further agreed to pay the City an initial down payment of $322,986 in March 2006 and to make 20 annual payments to the City of $79,710 beginning July 1, 2006 as part of its share to the City to make improvements to increase the capacity of the City's treatment facility. The District recorded a $1,106,346 liability for the net present value of the annual payments using an interest rate of 4.10%. The amount of interest expense was $37,802 and $39,452 for 2011 and 2010, respectively. The amount of principal payments was $41,908 and $40,258 for 2011 and 2010, respectively. The amount of the liability at February 28, 2011 and 2010, was $880,082 and $921,990. The District entered into an agreement with the City of Maryville (#2) to pay the City for its share of any new construction costs to the City’s wastewater treatment plant. During 2009, the City issued bonds to finance the upgrade and expansion of their plant (see Notes 3 and 4). The District’s portion of the City’s expansion was $1,420,588 recorded as a liability with an interest rate of 4.53% in the District’s financial statements. The District has agreed to pay the City semi-annual payments beginning December 1, 2008 through June 1, 2038. The annual payments range from $65,048 to $117,620. The amount of interest expense was $68,049 and $65,049 for 2011 and 2010, respectively. The first principal payment will be due June 1, 2011.

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NOTE 7: REVENUE BONDS AND NOTES PAYABLE (Continued) A. Overview (Continued) Bonds and notes payable at 2011 and 2010, consisted of the following:

2011 2010 Water and Sewer Revenue Refunding and Improvement Bonds, Series 2003 $ 6,020,000 $ 6,630,000 Water and Sewer Revenue Bonds, Series 2005 2,048,707 2,078,085 Water and Sewer Revenue Refunding and Improvement Bonds, Series 2007A 7,115,000 7,195,000 Water and Sewer Revenue Bonds, Series 2007B 4,175,000 4,175,000 Note Payable – Knox County 1,350,000 1,350,000 Note Payable – City of Maryville – #1 880,082 921,990 Note Payable – City of Maryville – #2 1,420,588 1,420,588 Total Face Value of Bonds and Notes Payable 23,009,377 23,770,663 Add: Accrued Interest on Note Payable to Knox County 113,498 106,782 Less: Unamortized Bond Discount (192,476) (208,686) Unamortized Amount on Deferred Refunding Loss (307,613) (379,259) 22,622,786 23,289,500 Less: Current Portion (799,534) (761,286) Total Long-Term Debt $ 21,823,252 $ 22,528,214

Interest expense for bonds and notes payable consisted of:

2011 2010 Interest Payments $ 947,056 $ 957,741 Less: Capitalized Interest - (10,060) Change in Accrued Interest Payable on Revenue Bonds at Year-End (3,837) (1,809) Amortization of Bond Discount 16,209 16,516 Amortization of Deferred Refunding Loss 71,646 77,706 Amortization of Bond Issuance Costs 13,679 13,941 Paying Agent Fees 9,781 3,570 Interest on Note Payable – Knox County 6,716 8,141 Total $ 1,061,250 $ 1,065,746

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NOTE 7: REVENUE BONDS AND NOTES PAYABLE (Continued) B. Activity Long-term debt activity during 2011 was as follows:

2011 Due

Bonds and Notes Balance Balance Within Notes Payable 3/1/2010 Additions Reductions 2/28/2011 One Year

Revenue Bonds $ 20,078,085 $ - $ (719,378) $ 19,358,707 $ 745,613Notes Payable 3,692,578 - (41,908) 3,650,670 53,921 23,770,663 - (761,286) 23,009,377 799,534

Noncash Items: Add: Accrued Interest On Note Payable 106,782 6,716 - 113,498 - Less: Bond Discount 2003 Series (78,695) 8,876 - (69,819) - Less: Bond Discount 2007 A & B Series (129,991) 7,334 - (122,657) - Less: Deferred Refunding Loss (379,259) 71,646 - (307,613) -

Total $ 23,289,500 $ 94,572 $ (761,286) $ 22,622,786 $ 799,534

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NOTE 7: REVENUE BONDS AND NOTES PAYABLE (Continued) B. Activity (Continued) Long-term debt activity during 2010 was as follows:

2010 Due

Bonds and Notes Balance Balance Within Notes Payable 3/1/2009 Additions Reductions 2/28/2010 One Year

Revenue Bonds $ 20,441,279 $ - $ (363,194) $ 20,078,085 $ 719,378Notes Payable 4,082,836 - (390,258) 3,692,578 41,908 24,524,115 - (753,452) 23,770,663 761,286

Noncash Items: Add: Accrued Interest On Note Payable 98,641 8,141 - 106,782 - Less: Bond Discount 2003 Series (87,825) 9,130 - (78,695) - Less: Bond Discount 2007 A & B Series (137,377) 7,386 - (129,991) - Less: Deferred Refunding Loss (456,965) 77,706 - (379,259) -

Total $ 23,940,589 $ 102,363 $ (753,452) $ 23,289,500 $ 761,286

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NOTE 7: REVENUE BONDS AND NOTES PAYABLE (Continued) C. Debt Service The annual requirements for the payment of the principal and interest on the bonds and notes payable as of February 28, 2011, are as follows:

Year Principal Interest Total

2012 $ 799,534 $ 917,871 $ 1,717,405 2013 832,372 889,120 1,721,492 2014 190,802 858,651 1,049,453 2015 1,544,138 990,800 2,534,938 2016 867,612 842,811 1,710,423

2017-2021 4,124,948 3,685,081 7,810,029 2022-2026 4,491,275 2,836,992 7,328,267 2027-2031 4,088,340 1,842,736 5,931,076 2032-2036 4,231,800 980,763 5,212,563 2037-2041 1,563,708 167,640 1,731,348 2042-2044 274,848 15,050 289,898

Total $ 23,009,377 $ 14,027,515 $ 37,036,892 D. Pledged Revenue Coverage During 2011 and 2010, the District’s pledged revenue coverage ratio was 1.66 and 1.44. The District is required to maintain a minimum coverage ratio of 1.20.

NOTE 8: DEFEASANCE OF DEBT A. Description of the 1994 Defeasance In 1994, there was an advance refunding of debt with defeasance under a refunding trust agreement with Home Federal Bank of Tennessee, F.S.B., Knoxville, Tennessee, dated June 1, 1994. The principal payment on the defeased debt began January 1, 2003.

Principal

Amount Outstanding 2011 2010

Water and Sewer Revenue Bonds, Series 1989 $ 4,245,000 $ 4,620,000

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NOTE 8: DEFEASANCE OF DEBT (Continued) B. Description of the 1997 Defeasance In 2008, there was an advanced refunding of debt with defeasance under a refunding trust agreement with Regions Bank. The principal payment on the defeased debt began January 1, 2009. Principal Amount Outstanding 2011 2010 Water and Sewer Revenue Bonds, Series 1997 $ 1,325,00 $ 1,400,000 NOTE 9: DEFERRED CHARGES Bond Issuance Costs At February 28, 2011 and 2010, the net unamortized bond issuance costs related to the following: 2011 2010 Water and Sewer Revenue Bonds: Series 2003 $ 60,046 $ 67,680 Series 2005 6,863 7,078 Series 2007A 54,752 58,821 Series 2007B 41,655 43,416 Total Unamortized Bond Issuance Cost - Net $ 163,316 $ 176,995

The amortization amount recorded as part of interest expense was $13,679 and $13,941 during 2011 and 2010, respectively.

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NOTE 10: NET ASSETS Net assets represent the difference between assets and liabilities. The net assets for 2011 and 2010 were as follows: 2011 2010 Invested in Capital Assets, Net of Related Debt: Net Property, Plant and Equipment $ 36,385,593 $ 33,074,528 Less: Revenue Bonds and Notes Payable - Net of Discounts and Unamortized Deferred Refunding Loss (22,622,786) (23,289,500) Add: Debt Proceeds to be Used for Capital Assets - 3,382,035 Less: Reclassification from Restricted for Capital Activity (413,285) (158,472) 13,349,522 13,008,591 Restricted for Capital Activity: Restricted Cash and Cash Equivalents - 3,232,108 Restricted Investments - 149,927 Less: Accounts Payable for Capital Assets (413,285) (158,472) Less: Debt Proceeds to be Used for Capital Assets - (3,382,035) Reclassified to Invested in Capital Assets – Net of Related Debt 413,285 158,472 - - Restricted for Debt Service: Restricted Cash and Cash Equivalents 1,551,943 1,120,491 Restricted Investments 247,384 243,909 Less: Accrued Interest Payable – Revenue Bonds (122,170) (126,007) 1,677,157 1,238,393 Unrestricted 5,534,555 5,331,643 Total $ 20,561,234 $ 19,578,627

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NOTE 11: NET WATER AND WASTEWATER REVENUES Net water and wastewater revenues earned during 2011 and 2010 are as follows: 2011 2010 Water Wastewater Water Wastewater Gross Revenues $ 5,562,526 $ 1,165,201 $ 5,022,379 $ 1,102,544 Less: Provision for Bad Debts (21,042) (4,619) (11,278) (8,508)

Total $ 5,541,484 $ 1,160,582 $ 5,011,101 $ 1,094,036

NOTE 12: RETIREMENT PLAN A. Plan Description The Knox-Chapman Utility District Employees Pension Plan (the Plan) is a self-administered, single-employer defined benefit plan which provides retirement, disability and death benefits to Plan members and beneficiaries. The Plan may be amended by the District’s Board of Commissioners. The Plan is funded by a group annuity policy issued by Metropolitan Life Insurance Company. The participation eligibility of the Plan is a minimum age of 21 and a minimum of six months of service. Normal retirement is 65 years of age and five years of service. Vesting begins at 20% per year after two years of service. Employees are fully vested after six years of service. Normal retirement at age 65 is 70% of compensation and the retirement benefit is reduced by 1/35 for each year of service less than 35. Compensation is defined as the highest consecutive five-year average salary over all years of service. During 2007, the District amended the plan by increasing the benefit from 50% to 70% of compensation. In addition, the District increased the normal retirement service from 25 to 35 years. The normal form of benefit is a single life annuity (Qualified Joint and Survivor Annuity is the required standard option). Early retirement benefits are reduced actuarially for each year by which early retirement precedes normal retirement. The Plan does not issue separate financial statements. B. Funding Policy The contribution requirement is determined annually by actuarial valuation. It is the District’s policy to pay the full cost of the Plan as determined by actuarial valuation. Contributions are made monthly. The current annual pension cost is approximately 25.7% and 27.4% of annual covered payroll for 2011 and 2010.

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NOTE 12: RETIREMENT PLAN (Continued) C. Annual Pension Cost and Net Pension Obligation The District’s annual pension cost and net pension obligation for 2011 and 2010 were as follows: 2011 2010 Annual Required Contribution $ 362,386 $ 383,638 Interest on Net Pension Obligation (839) (2,258)Adjustment to Annual Required Contribution 1,101 2,962 Annual Pension Cost 362,648 384,342 Contributions Made 347,715 362,511 Increase (Decrease) in Net Pension Obligation 14,933 21,831 Net Pension Obligation (Asset), Beginning of Year (12,913) (34,744) Net Pension (Asset) Obligation, End of Year $ 2,020 $ (12,913)

The net pension (asset) obligation has been recorded as an (asset) liability in the accompanying balance sheets as required by GASB Statement No. 27. The annual required contribution for the current year was determined as part of the March 1, 2010 actuarial valuation using the aggregate actuarial cost method. The actuarial assumptions included a pre-retirement interest rate of 6.5% and post-retirement rate of 6.0%. The salary scale was 4% and cost of living was 3%. For valuation purposes, assets were valued at market value. Under the aggregate actuarial cost method, there is no separate unfunded actuarial liability to be funded. This plan uses the aggregate actuarial cost method which does not identify or separately amortize unfunded actuarial accrued liabilities. Information about the plan’s funded status and funding progress has been prepared using the entry age actuarial cost method for that purpose and that information presented is intended to serve as a surrogate for the funded status and funding progress of the plan.

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NOTE 12: RETIREMENT PLAN (Continued) C. Annual Pension Cost and Net Pension Obligation (Continued)

Three- Year Trend Information

Annual Percentage Net Years Ending Pension of APC Pension (Asset) February 28 Cost (APC) Contributed Obligation

2011 $ 362,648 95.88% $ 2,020 2010 384,342 94.32 (12,913)2009 313,115 132.45 (34,744)

D. Funding Status and Progress Actuarial Valuation Date 3/1/2010 3/1/2009 Actuarial Value of Assets $ 1,766,783 $ 978,716 Actuarial Accrued Liability 4,004,024 3,695,994 Total Unfunded Actuarial Accrued Liability $ 2,237,241 $ 2,717,278 Funded Ratio (Actuarial Value of Assets as a Percentage of the Actuarial Accrued Liability 44% 26% Annual Covered Payroll $ 1,422,364 $ 1,384,488 Ratio of the Unfunded Actuarial Liability to Annual Covered Pay 157% 196%

The schedule of funding progress, presented as required supplementary information (RSI) following the notes to the financial statements, presents multiyear trend information about whether the actuarial value of plan assets are increasing or decreasing over time relative to the actuarial accrued liability for benefits.

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NOTE 13: RISK MANAGEMENT The District is exposed to various risks of losses related to torts; theft, damage to, and destruction of assets; errors and omissions; 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 14: ECONOMIC CONCENTRATION The majority of the District’s customers reside in the southeastern portion of Knox County, Tennessee. The District’s 10 largest customers approximated 11.6% and 11.9% of total water and wastewater revenues in 2011 and 2010, respectively. NOTE 15: CAPITAL CONTRIBUTIONS - CASH Cash capital contributions earned by the District during 2011 and 2010, consisted of: 2011 2010 Developers $ 335,583 $ 9,166

During 2011, the District received $331,162 from a developer to help defray the cost of water and wastewater lines completed in prior years. NOTE 16: OPERATING LEASES

The District has two operating leases. It leased a parcel of land on September 1, 2002 for $450 per year for 25 years. The second lease is for an antenna site that began September 1, 2000 for $225 monthly for sixty months with two automatic renewals of sixty months each. This lease also provides for a 5% lease increase annually. The monthly lease payment during 2011 and 2010 was $366 and $349, respectively. Lease expenses were $4,311 and $4,555 for 2011 and 2010, respectively.

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NOTE 16: OPERATING LEASES (Continued)

Future lease payments are as follows:

Fiscal Year 2011 2010

2011 $ - $ 4,7432012 4,958 4,9582013 5,184 5,1842014 5,420 5,4202015 4,086 4,0862016 450 450

2017-2021 2,250 2,2502022-2026 2,250 2,250

2027 450 450

Total $ 25,048 $ 29,791 NOTE 17: SUBSEQUENT EVENTS Effective March 16, 2011, the District lowered the number of gallons covered by the minimum monthly billing for Water and Wastewater from 1,500 to 1,000. On March 31, 2011, and subsequent to the year end, the District issued $14,890,000 of Series 2011 Revenue Bonds to fund additions to its raw water treatment plant, storage, distribution, and wastewater collection system. As required by the bond covenant for the Series 2011 Bonds and all outstanding parity bonds, the District funded a debt service reserve in the amount of $2,190,000. On May 5, 2011, the District's Board of Commissioners approved the hiring of a new plan administrator for the retirement plan.

REQUIRED SUPPLEMENTARY

INFORMATION

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SCHEDULE OF EMPLOYER PENSION CONTRIBUTIONS

Last Ten Fiscal Years

Fiscal Year

Annual Required

Contribution (ARC)

Contributions Made

Percentage of Contributions Made to ARC

2002 $ 144,918 $ 134,694 92.95% 2003 156,466 142,596 91.14 2004 172,646 161,209 93.37 2005 177,888 170,981 96.12 2006 186,918 190,953 102.16 2007 (a) 291,785 257,726 88.33 2008 292,799 373,418 127.53 2009 314,583 414,731 131.84 2010 383,638 362,511 94.49 2011 362,386 347,715 95.95

Note: (a) During FY 2007 the District increased the benefit from 50% of compensation to 70%. In addition, the District increased the normal retirement service requirements from 25 to 35 years.


SCHEDULE OF EMPLOYER PENSION FUNDING PROGRESS

Last Six Valuation Dates

Actuarial Valuation Date 3/1/2005 3/1/2006 3/1/2007 3/1/2008 3/1/2009 3/1/2010 Actuarial Value of Assets $ 797,937 $ 830,648 $ 1,074,598 $ 1,349,982 $ 978,716 $ 1,766,783 Actuarial Accrued Liability 1,970,893 2,893,088 3,063,003 3,329,363 3,695,994 4,004,024 Total Unfunded Actuarial Accrued Liability $ 1,172,956 $ 2,062,440 $ 1,988,405 $ 1,979,381 $ 2,717,278 $ 2,237,241 Funded Ratio (Actuarial Value of Assets as a Percentage of the Actuarial Accrued Liability 40% 29% 35% 41% 26% 44% Annual Covered Payroll $ 1,100,921 $ 1,213,626 $ 1,196,154 $ 1,264,694 $ 1,384,488 $ 1,422,364 Ratio of the Unfunded Actuarial Liability to Annual Covered Pay 107% 170% 166% 157% 196% 157%

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

Note (b) During FY 2007, (3/1/2006 actuarial valuation) the District increased the benefit from 50% of compensation to 70%. In addition, the District increased the normal retirement service requirements from 25 to 35 years. Data prior to 3/1/2005 is unavailable.

Note (c) 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 3/1/2005).

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OTHER SUPPLEMENTARY

INFORMATION


SCHEDULE OF DEBT SERVICE REQUIREMENTS

February 28, 2011

Series 2003 Bonds Series 2005 Bonds Series 2007A Bonds Series 2007B Bonds

Year Principal Interest Principal Interest Principal Interest Principal Interest

2012 $ 630,000 $ 247,671 $ 30,613 $ 83,927 $ 85,000 $ 296,923 $ - $ 188,4252013 655,000 225,621 31,663 82,877 90,000 293,523 - 188,4252014 - 202,696 33,231 81,309 100,000 289,923 - 188,4252015 - 202,696 34,628 79,912 100,000 285,923 - 188,4252016 670,000 202,696 36,084 78,456 100,000 281,923 - 188,4252017 705,000 176,566 37,379 77,161 110,000 277,923 - 188,4252018 730,000 148,366 39,172 75,368 110,000 273,523 - 188,4252019 545,000 118,436 40,819 73,721 120,000 269,123 - 188,4252020 115,000 95,819 42,535 72,005 500,000 264.263 - 188,4252021 120,000 90,644 44,120 70,420 525,000 244,013 - 188,4252022 125,000 85,244 46,177 68,363 550,000 222,488 - 188,4252023 130,000 79,619 48,119 66,421 550,000 199,938 - 188,4252024 290,000 73,769 50,142 64,398 450,000 177,113 - 188,4252025 305,000 60,356 52,069 62,471 475,000 158,438 - 188,4252026 320,000 46,250 54,438 60,102 500,000 138,488 - 188,4252027 330,000 31,450 56,727 57,813 500,000 117,488 - 188,4252028 350,000 16,188 59,112 55,428 525,000 96,488 - 188,4252029 - - 61,443 53,097 550,000 74,175 - 188,4252030 - - 64,180 50,360 575,000 50,525 - 188,4252031 - - 66,878 47,662 600,000 25,790 - 188,4252032 - - 69,688 44,851 - - 625,000 188,4252033 - - 72,496 42,044 - - 650,000 160,925

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SCHEDULE OF DEBT SERVICE REQUIREMENTS (Continued)

February 28, 2011

Series 2003 Bonds Series 2005 Bonds Series 2007A Bonds Series 2007B Bonds

Year Principal Interest Principal Interest Principal Interest Principal Interest

2034 - - 75,666 38,874 - - 675,000 132,0002035 - - 78,847 35,693 - - 700,000 101,6252036 - - 82,162 32,378 - - 750,000 69,7752037 - - 85,529 29,011 - - 775,000 35,6502038 - - 89,212 25,328 - - - -2039 - - 92,962 21,578 - - - -2040 - - 96,870 17,670 - - - -2041 - - 100,898 13,642 - - - -2042 - - 105,183 9,356 - - - -2043 - - 109,606 4,934 - - - -2044 - - 60,059 760 - - - -

Total $ 6,020,000 $ 2,104,087 $ 2,048,707 $ 1,677,390 $ 7,115,000 $ 4,037,991 $ 4,175,000 $ 4,456,900

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February 28, 2011

Total Revenue Bonds Knox Co. Note Payable City of Maryville N/P #1 City of Maryville N/P #2 Total Debt

Year Principal Interest Principal Interest Principal Interest Principal Interest Service

2012 $ 745,613 $ 816,946 $ - $ - $ 43,627 $ 36,083 $ 10,294 $ 64,842 $ 1,717,405 2013 776,663 790,446 - - 45,415 34,295 10,294 64,379 1,721,492 2014 133,231 762,353 - - 47,277 32,433 10,294 63,865 1,049,453 2015 134,628 756,956 1,350,000 140,000 49,216 30,494 10,294 63,350 2,534,938 2016 806,084 751,500 - - 51,234 28,476 10,294 62,835 1,710,423 2017 852,379 720,075 - - 53,334 26,377 10,294 62,321 1,724,780 2018 879,172 685,682 - - 55,521 24,189 10,294 61,806 1,716,664 2019 705,819 649,705 - - 57,797 21,913 10,294 61,291 1,506,819 2020 657,535 620,512 - - 60,167 19,543 10,294 60,776 1,428,827 2021 689,120 593,502 - - 62,634 17,076 10,294 60,313 1,432,939 2022 721,177 564,520 - - 65,202 14,509 10,294 59,902 1,435,604 2023 728,119 534,403 - - 67,875 11,835 10,294 59,490 1,412,016 2024 790,142 503,705 - - 70,658 9,052 53,529 58,146 1,485,232 2025 832,069 469,690 - - 73,555 6,155 57,647 55,819 1,494,935 2026 874,438 433,265 - - 76,570 3,139 59,706 53,362 1,500,480 2027 886,727 395,176 - - - - 61,765 50,781 1,394,449 2028 934,112 356,529 - - - - 65,882 48,027 1,404,550 2029 611,443 315,697 - - - - 70,000 45,055 1,042,195 2030 639,180 289,310 - - - - 74,118 41,856 1,044,464 2031 666,878 261,877 - - - - 78,235 38,428 1,045,418 2032 694,688 233,276 - - - - 82,353 34,815 1,045,132 2033 722,496 202,969 - - - - 86,471 31,016 1,042,952

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February 28, 2011

Total Revenue Bonds Knox Co. Note Payable City of Maryville N/P #1 City of Maryville N/P #2 Total Debt

Year Principal Interest Principal Interest Principal Interest Principal Interest Service

2034 750,666 170,874 - - - - 90,588 27,032 1,039,160 2035 778,847 137,318 - - - - 94,706 22,863 1,033,734 2036 832,162 102,153 - - - - 98,823 18,447 1,051,585 2037 860,529 64,661 - - - - 102,941 13,588 1,041,719 2038 89,212 25,328 - - - - 107,059 8,338 229,937 2039 92,962 21,578 - - - - 113,237 2,835 230,612 2040 96,870 17,670 - - - - - - 114,540 2041 100,898 13,642 - - - - - - 114,540 2042 105,183 9,356 - - - - - - 114,539 2043 109,606 4,934 - - - - - - 114,540 2044 60,059 760 - - - - - - 60,819

Total $ 19,358,707 $ 12,276,368 $ 1,350,000 $ 140,000 $ 880,082 $ 315,569 $ 1,420,588 $ 1,295,578 $ 37,036,892

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SCHEDULE OF INSURANCE COVERAGE

February 28, 2011

Standard Workers' Compensation Coverage

Selective Insurance Company of South Carolina Meets All State Requirements Policy #WC 7944189 $500,000 Each Accident Policy Period – 3/11/10 – 3/11/11 $500,000 Policy Limit-Disease $500,000 Each Employee-Disease

Comprehensive and Blanket Crimes Bond Occurrence Selective Insurance Company of South Carolina Policy #S 1892481 Policy Period – 3/11/10 – 3/11/11 Employee Dishonesty $ 100,000Employee Benefits Liability $ 1,000,000Loss Inside or Outside Premises Per Location $ 25,000

General Liability Selective Insurance Company of South Carolina Policy Period – 3/11/10– 3/11/11 Policy #S 189248100 General Aggregate Limit - $ 2,000,000Products/Completed Operations Aggregate - $ 2,000,000Personal and Advertising Injury Limit - $ 1,000,000Each Occurrence Limit - $ 1,000,000Fire Damage Limit - $ 100,000Medical Payments - $ 5,000

Business Automobile Policy Selective Insurance Company of South Carolina Policy #S 1892481 Policy Period – 3/11/10 – 3/11/11 Bodily Injury and Property Damage - $ 1,000,000Auto Medical Payments $ 5,000Comprehensive – Actual Cash Value Less

$250 Deductible Collision - $500 Deductible

Commercial Inland Marine (Work Equipment) Selective Insurance Company of South Carolina Policy #S 1892481 Policy Period – 3/11/10 – 3/11/11 Total of Equipment Described on Policy - $ 389,306

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SCHEDULE OF INSURANCE COVERAGE (Continued)

February 28, 2011

Commercial Property Insurance Selective Insurance Company of South Carolina Policy #S 1892481 Policy Period – 3/11/10 – 3/11/11 Special Causes of Loss $500.00 Deductible Schedule of Locations on Commercial Property Insurance Policy: 1. Building #1 R-1905 John Sevier Highway $ 5,125,960 Building Filtration Plant and Warehouse 1,177,280 Contents 2. 1905 John Sevier Highway $ 464,880 Building Office and Warehouse 93,600 Contents 3. French Road/John Sevier Highway $ 11,960 Building Pump House and Water Pumps 18,720 Contents 4. Porterfield Gap Road $ 19,240 Building Pump House /Pumps and Fittings 10,400 Contents 5. Chapman Highway at Sevier County Line $ 7,280 Building Pump House /Pumps/Fittings 15,600 Contents 6. Pump Stations at Nineteen Locations Insured for $22,360 to $89,440 Each $ 643,760 Building 7. South Point Pump Station $ 109,720 Contents 8. Water Reservoir Tanks at Eight Locations $ 3,285,880 Structure

Note: Required information for Bond Covenants.

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SCHEDULE OF WATER RATES AND STATISTICS


1. As of February 28, 2011 and 2010, the District serviced water and wastewater customers as

shown below. Hotels, motels, apartments and mobile home parks are billed on a commercial unit basis. The district had 2,311 and 2,299 sewer customers for the years ended February 28, 2011 and 2010, respectively.

Billing Units 2011 2010

Residential and Commercial 13,010 12,962Industrial 25 24 Total 13,035 12,986

2. Monthly Water Rate Schedule per 1,000 Gallons – (In effect as of February 28, 2011 and

2010.)

(A) Water Rates – Residential and Commercial:

2011 2010 2011 2010

First 1,500 gallons 2,000 gallons $ 13.28 $ 13.28Over 1,500 gallons 2,000 gallons 5.71 5.71

(B) Water Rates – Industrial:

First 1,500 gallons 2,000 gallons $ 14.43 $ 14.43Next 8,500 gallons 8,000 gallons 5.80 5.8010,000 25,000 gallons 25,000 gallons 4.54 4.5425,000 to 60,000 gallons 60,000 gallons 4.40 4.40Over 60,000 4.10 4.10

(C) Sewer Rates – Residential – Arrowhead Subdivision to Alcoa Highway:

Sewer Improvement $ 9.60 $ 9.60First 1,500 gallons 2,000 gallons 7.57 7.57

Over 1,500 gallons 2,000 gallons 3.76 3.76

(D) Sewer Rates – Residential – Stock Creek Development:

Sewer Improvement $ 11.60 $ 11.60First 1,500 gallons 2,000 gallons 7.57 7.57Over 1,500 gallons 2,000 gallons 3.76 3.76

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SCHEDULE OF WATER RATES AND STATISTICS (Continued)


(E) Sewer Rates – Commercial and Contract Subdivisions: 2011 2010 2011 2010 Sewer Improvement $ 14.00 $ 14.00First 1,500 gallons 2,000 gallons 7.94 7.94Over 1,500 gallons 2,000 gallons 3.95 3.95

(F) Sewer Rates – Industrial: Sewer Improvement $ 24.00 $ 24.00

Over 1,500 gallons 2,000 gallons 5.18 5.18 3. Water Tap Fees

¾” $ 850 $ 8501” 2,600 2,6002” 3,600 3,6003” 5,600 5,6004” 7,000 7,0006” 10,000 10,000

4. Sewer Tap Fees

Includes Inspection $ 850 $ 850

5. Fireline Tap Fees

Tap (Per Inch, Plus Cost of Meter) $ 1,000 $ 1,000Fire Hydrant 3,500 3,500Private Fire Hydrant (Per Month) 9.70 9.70Sprinkler Heads (Per Month) .30 .30

6. Service Charge $ 40.00 $ 40.00

7. Returned Check Charge $ 25.00 $ 25.00

8. Renter’s Deposit $ 60.00 $ 60.00

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SCHEDULE OF UNACCOUNTED FOR WATER

February 28, 2011

(All amounts in gallons)

Water Treated and Purchased: Water Pumped (Potable) 1,412,966,000 Water Purchased 0

Total Water Treated and Purchased 1,412,966,000 Accounted for Water: Water Sold 836,738,209 Metered for Consumption (in house usage) 1,697,340 Fire Department(s) Usage 48,000,000 Flushing 5,258,716 Tank Cleaning/Filling 0 Street Cleaning 0 Bulk Sales 0 Water Bill Adjustments 11,129,000

Total Accounted for Water 902,823,265 Unaccounted for Water 510,142,735

Percent Unaccounted for Water 36.10% Other (explain) See Below

Explain Other: 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.

None

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SCHEDULE OF UNACCOUNTED FOR WATER

February 28, 2010

(All amounts in gallons)

Water Treated and Purchased: Water Pumped (Potable) 1,374,041,000 Water Purchased 15,600

Total Water Treated and Purchased 1,374,056,600 Accounted for Water: Water Sold 808,197,010 Metered for Consumption (in house usage) 1,881,210 Fire Department(s) Usage 48,000,000 Flushing 39,758,370 Tank Cleaning/Filling 0 Street Cleaning 0 Bulk Sales 0 Water Bill Adjustments 21,624,180

Total Accounted for Water 919,460,770 Unaccounted for Water 454,595,830

Percent Unaccounted for Water 33.08% Other (explain) See Below

Explain Other: 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.

None

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. 56-59 Revenue Capacity These schedules contain information to help the reader assess the District’s operating revenues and customer statistics. 60-65 Debt Capacity These schedules present 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. 66-67 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. 68-69 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. 70-71 Sources: Unless otherwise noted, the information in these schedules is derived from the Comprehensive Annual Financial Reports for the relevant year.

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NET ASSETS BY COMPONENT Last Ten Fiscal Years

Invested in Capital Assets - Restricted

Fiscal Net of Capital Debt Year Related Debt Activity Service Unrestricted Total

2002 $ 4,243,437 $ - $ 1,378,401 $ 1,561,117 $ 7,182,955

2003 4,606,292 - 1,463,096 2,084,640 8,154,028

2004 4,558,397 2,783,597 627,325 2,554,807 10,524,126

2005 6,230,335 2,381,948 405,680 2,584,860 11,602,823

2006 8,897,471 432,171 958,688 3,684,313 13,972,643

2007 12,920,922 - 748,488 2,235,493 15,904,903

2008 13,695,019 - 1,354,090 2,482,599 17,531,708

2009 13,096,119 - 1,243,007 4,712,493 19,051,619

2010 13,008,591 - 1,238,393 5,331,643 19,578,627

2011 13,349,522 - 1,677,157 5,534,555 20,561,234

2002 2003 2004 2005

Operating RevenuesWater – Net $ 2,935,093 $ 3,273,786 $ 3,351,756 $ 3,624,758 Wastewater – Net 630,317 676,413 733,600 830,217 Connection Fees 234,700 261,060 333,855 427,920

Service Fees 7,205 9,643 13,575 14,845

Miscellaneous 2,770 4,052 1,774 11,476

Total Operating Revenues 3,810,085 4,224,954 4,434,560 4,909,216

Operating ExpensesWater Purification and Supply 529,456 579,895 374,042 404,562

Water Transmission and Distribution 773,997 918,280 1,358,497 1,610,806

Wastewater Collection 479,718 500,679 332,974 381,478

Customer Accounting and Collections 203,162 213,515 204,958 210,186

Administrative and General 456,232 473,975 486,543 492,515

Depreciation and Amortization 484,277 496,259 508,909 571,352

Total Operating Expenses 2,926,842 3,182,603 3,265,923 3,670,899

Operating Income 883,243 1,042,351 1,168,637 1,238,317

Non-Operating Revenues (Expenses)Investment Income 74,436 233,838 13,986 69,562 Interest Expense (649,265) (630,991) (643,204) (560,179) Gain (Loss) on Disposal and

Impairment of Capital Asset 20,533 - 6,850 (24,745)

Total Non-Operating Revenues (Expenses) - Net (554,296) (397,153) (622,368) (515,362)

Increase in Net Assets BeforeCapital Contributions 328,947 645,198 546,269 722,955

Capital ContributionsCash Contributions 85,876 46,345 1,185,175 17,440 Developers Contributions of

Capital Assets 160,153 279,530 638,654 338,302

Total Capital Contributions 246,029 325,875 1,823,829 355,742

Change in Net Assets $ 574,976 $ 971,073 $ 2,370,098 $ 1,078,697


CHANGES IN NET ASSETSLast Ten Fiscal Years

- 57 -

2006 2007 2008

Operating RevenuesWater – Net $ 3,785,976 $ 4,074,712 $ 4,911,391 Wastewater – Net 897,658 913,975 1,027,277 Connection Fees 537,960 575,540 495,445 Service Fees 18,552 26,748 45,087 Miscellaneous 9,861 724 22,233

Total Operating Revenues 5,250,007 5,591,699 6,501,433

Operating ExpensesWater Purification and Supply 357,513 511,251 680,491 Water Transmission and Distribution 1,585,408 1,646,696 2,021,240 Wastewater Collection 592,307 605,751 609,572 Customer Accounting and Collections 254,651 301,679 351,678 Administrative and General 512,797 611,817 541,586 Depreciation and Amortization 653,393 819,025 909,302

Total Operating Expenses 3,956,069 4,496,219 5,113,869

Operating Income 1,293,938 1,095,480 1,387,564

Non-Operating Revenues (Expenses)Investment Income 140,295 165,484 339,831 Interest Expense (546,886) (627,505) (853,119) Gain (Loss) on Disposal and

Impairment of Capital Asset (9,952) (664) 4,526

Total Non-Operating Revenues (Expenses) - Net (416,543) (462,685) (508,762)

Increase in Net Assets BeforeCapital Contributions 877,395 632,795 878,802

Capital ContributionsCash Contributions 183,867 101,841 111,280 Developers Contributions of

Capital Assets 1,308,558 1,197,624 636,723

Total Capital Contributions 1,492,425 1,299,465 748,003

Change in Net Assets $ 2,369,820 $ 1,932,260 $ 1,626,805



CHANGES IN NET ASSETS (Continued)

- 58 -

2009 2010 2011

Operating RevenuesWater – Net $ 5,072,870 $ 5,011,101 $ 5,541,484 Wastewater – Net 1,057,380 1,094,036 1,160,582 Connection Fees 314,150 188,840 201,400 Service Fees 49,494 38,115 48,038 Miscellaneous 21,324 - 1,387

Total Operating Revenues 6,515,218 6,332,092 6,952,891

Operating ExpensesWater Purification and Supply 982,676 1,160,015 1,152,397 Water Transmission and Distribution 1,554,416 1,232,915 1,423,243 Wastewater Collection 554,127 575,847 634,798 Customer Accounting and Collections 362,908 400,622 339,774 Administrative and General 572,122 611,933 626,703 Depreciation and Amortization 955,097 1,058,666 1,134,627

Total Operating Expenses 4,981,346 5,039,998 5,311,542

Operating Income 1,533,872 1,292,094 1,641,349

Non-Operating Revenues (Expenses)Investment Income 463,118 168,004 66,925 Interest Expense (1,061,209) (1,065,746) (1,061,250) Gain (Loss) on Disposal and

Impairment of Capital Asset 1,500 5,500 -

Total Non-Operating Revenues (Expenses) - Net (596,591) (892,242) (994,325)

Increase in Net Assets BeforeCapital Contributions 937,281 399,852 647,024

Capital ContributionsCash Contributions 119,525 9,166 335,583 Developers Contributions of

Capital Assets 463,105 117,990 -

Total Capital Contributions 582,630 127,156 335,583

Change in Net Assets $ 1,519,911 $ 527,008 $ 982,607

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Last Ten Fiscal YearsCHANGES IN NET ASSETS (Continued)



WATER PRODUCED, SOLD AND CONSUMED


Direct Rates Per 1,000 Gallons Water Wastewater

Fiscal Year Produced Sold and

Consumed Unbilled Minimum

Bill Usage Rate

Minimum Bill

Usage Rate Gallons Percentage

2002 1,075,536 827,798 247,738 23.03 $ 9.67 $ 4.27 $ 17.00 $ 2.81

2003 1,213,551 919,724 293,827 24.21 9.67 4.27 17.27 2.81

2004 1,218,448 855,484 362,964 29.79 9.96 4.27 17.27 2.81

2005 1,352,562 947,201 405,361 29.97 10.26 4.40 17.44 2.89

2006 1,333,817 1,030,656 303,161 22.73 10.26 4.40 17.44 2.89

2007 1,369,378 1,084,945 284,433 20.77 10.67 4.58 17.68 3.01

2008 1,492,592 900,341 592,251 39.68 12.27 5.27 18.60 3.47

2009 1,397,017 900,078 496,939 35.57 12.89 5.54 18.95 3.65

2010 1,374,057 919,461 454,596 33.08 13.28 5.71 19.17 3.76

2011 1,412,966 902,823 510,143 36.10 13.28 5.71 19.17 3.76 Notes: (a) Gallons are measured per 1,000 gallons.

(b) Monthly minimum bill is based upon the first 2,000 gallons of water purchased and treated (decreased to 1,500 in 2011). (c) Minimum bill rates are for residential customers only. The District has two categories for wastewater rates, the largest

customer base category is presented. (d) Usage rate is per thousand gallons of water purchased or treated in excess of the first 2,000 gallons on a monthly basis

(decreased to 1,500 in 2011). (e) During 2008, the State changed how unbilled water was calculated.

- 60 -

- 61 -


ANNUAL TAPS SOLD


Water Wastewater Fiscal Meter Taps Taps Total Year Sold Sold Taps Sold

2002 356 70 426

2003 308 83 391

2004 332 103 435

2005 378 102 480

2006 450 98 548

2007 466 113 579

2008 305 67 372

2009 180 35 215

2010 100 21 121

2011 92 20 112

- 62 -


NUMBER OF WATER AND WASTEWATER CUSTOMERS BY TYPE


Fiscal Year Residential Commercial Industrial Other Total

Water

2002 10,251 280 14 15 10,5602003 10,553 282 15 15 10,8652004 10,865 318 14 13 11,2102005 11,163 332 18 13 11,5262006 11,621 356 19 12 12,0082007 12,093 379 21 11 12,5042008 12,344 438 23 11 12,8162009 12,465 445 25 10 12,9452010 12,513 441 24 8 12,9862011 12,551 450 25 9 13,035

Wastewater

2002 1,524 85 120 6 1,7352003 1,583 87 122 6 1,7982004 1,780 99 18 1 1,8982005 1,866 119 18 1 2,0042006 1,943 119 18 1 2,0812007 2,034 118 18 1 2,1712008 2,090 128 19 1 2,2382009 2,125 133 19 1 2,2782010 2,142 137 19 1 2,2992011 2,149 141 20 1 2,311

Note: Information is from customer billing records from February 28 of every year. “Commercial” includes apartments and multiple business malls. “Other” includes government buildings, schools, and churches.


WATER AND WASTEWATER RATES


Fiscal Year Water Rates Base Rate Meter Size 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 (First 2,000 Gallons) (c) 3/4” $ 9.67 $ 9.67 $ 9.96 $ 10.26 $ 10.26 $ 10.67 $ 12.27 $ 12.89 $ 13.28 $ 13.28 1” 9.67 10.01 10.51 10.83 11.15 11.60 13.34 14.01 14.43 14.43 2” 9.67 10.01 10.51 10.83 11.15 11.60 13.34 14.01 14.43 14.43 6” 9.67 10.01 10.51 10.83 11.15 11.60 13.34 14.01 14.43 14.43 8” 9.67 10.01 10.51 10.83 11.15 11.60 13.34 14.01 14.43 14.43

Usage Rates (Per 1,000 Gallons) 1,500 to 8,000 Gallons $ 3.88 $ 4.07 $ 4.27 $ 4.40 $ 4.40 $ 4.58 $ 5.27 $ 5.54 $ 5.71 $ 5.71 Over 10,000 Gallons 3.11 (b) (b) (b) (b) (b) (b) (b) (b) (b)

Notes: (a) Increases in water and wastewater rates must be approved by the Board of Commissioners.

(b) During FY 2003, the District combined the water usage rate for all use in excess of 2,000 gallons into one category. (c) During FY 2011, the minimum monthly usage decreased from 2,000 to 1,500 gallons.

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WATER AND WASTEWATER RATES (Continued)


Fiscal Year Wastewater Rates Base Rate Meter Size 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 (First 2,000 Gallons) (c) 3/4” Residential $ 5.14 $ 5.40 $ 5.67 $ 5.84 $ 5.84 $ 6.08 $ 7.00 $ 7.35 $ 7.57 $ 7.57 3/4" Commercial 5.14 5.40 5.94 6.12 6.12 6.37 7.33 7.70 7.94 7.94 1” 2.55 2.82 3.80 4.00 4.00 4.16 4.79 5.03 5.18 5.18 2” 2.55 2.82 3.80 4.00 4.00 4.16 4.79 5.03 5.18 5.18 6” 2.55 2.82 3.80 4.00 4.00 4.16 4.79 5.03 5.18 5.18 8” 2.55 2.82 3.80 4.00 4.00 4.16 4.79 5.03 5.18 5.18

Usage Rates (Per 1,000 Gallons) Over 2,000 Gallons Residential $ 2.55 $ 2.68 $ 2.81 $ 2.89 $ 2.89 $ 3.01 $ 3.47 $ 3.65 $ 3.76 $ 3.76 Commercial 2.55 2.68 2.94 3.03 3.03 3.16 3.64 3.83 3.95 3.95 Industrial 2.55 2.82 3.80 4.00 4.00 4.16 4.79 5.03 5.18 5.18

Notes: (a) Increases in water and wastewater rates must be approved by the Board of Commissioners. (b) During FY 2003, the District combined the water usage rate for all use in excess of 2,000 gallons into one category.

(c) During FY 2011, the minimum monthly usage decreased from 2,000 to 1,500 gallons.

- 64 -

- 65 -


TEN LARGEST CUSTOMERS

Current Fiscal Year and Nine Years Ago FY 2011 FY 2002 Total Percentage Total Percentage Type of Annual of Total Annual of Total

Customer Business Sales Sales Sales Sales

Cintas Corporation

Uniform Laundry Service $ 171,616 2.56% $ - - %

Fastop Market #21 Retail 138,361 2.06 - -

Johnson Bible College Higher

Education 117,775 1.76 68,515 1.92 Sevier County Schools Education 77,154 1.15 80,026 2.24 Tuckaleeche Utility District Utility 69,966 1.04 32,739 .92 Knox County Schools Education 67,578 1.01 80,753 2.26 Siemens Medical Solutions USA

Healthcare 60,134 .90 - -

Harrison Chilhowee School Education 30,466 .45 18,358 .52 Southlake RV Park Residential 23,542 .35 - - Wal-Mart Super Center Retail Store 23,083 .34 - - Williamsburg Villas Residential - - 9,012 .25 Southlake RV Park Residential - - 13,802 .39 Tennessee Farmers Co-op

Retail Outlet - - 5,872 .16

David Berry Residential - - 3,532 .10 Metzeler Auto Systems Retail Store - - 3,478 .10 Total $ 779,675 11.63% $ 316,087 8.87%

Note: Total annual sales include net water and wastewater revenues only.

- 66 -


OUTSTANDING DEBT PER CUSTOMER


Principal Number OutstandingFiscal Revenue Notes of Debt Per Year Bonds Payable Total (a) Customers (b) Customer

2002 $ 9,370,000 $ 1,900,000 $ 11,270,000 10,560 $ 1,067

2003 9,045,000 1,900,000 10,945,000 10,865 1,007

2004 11,140,000 1,900,000 13,040,000 11,210 1,163

2005 10,865,000 1,700,000 12,565,000 11,526 1,090

2006 12,449,243 1,700,000 14,149,243 12,008 1,178

2007 11,804,318 2,738,069 14,542,387 12,504 1,163

2008 21,133,344 2,700,920 23,834,264 12,816 1,860

2009 20,441,279 4,082,836 24,524,115 12,945 1,894

2010 20,078,085 3,692,578 23,770,663 12,986 1,831

2011 19,358,707 3,650,670 23,009,377 13,035 1,765

Notes: (a) Outstanding debt principal is the face value.

(b) Number of customers is based upon water customers.

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

2002 $ 3,921,523 $ 2,442,565 $ 1,478,958 $ 300,000 $ 564,841 $ 864,841 1.71

2003 4,312,186 2,686,344 1,625,842 525,000 545,221 1,070,221 1.52

2004 4,496,918 2,757,014 1,739,904 505,000 562,041 1,067,041 1.63

2005 4,978,756 3,099,547 1,879,209 275,000 425,969 700,969 2.68

2006 5,390,302 3,302,676 2,087,626 609,857 419,564 1,029,421 2.03

2007 5,757,183 3,677,194 2,079,989 1,036,188 506,553 1,542,741 1.35

2008 6,712,186 4,204,567 2,507,619 708,123 662,291 1,370,414 1.83

2009 6,684,372 4,026,249 2,658,123 730,737 934,774 1,665,511 1.60

2010 6,428,756 3,981,332 2,447,424 753,461 947,682 1,701,143 1.44

2011 7,019,816 4,176,915 2,842,901 761,286 947,056 1,708,342 1.66

Notes: (a) Includes operating revenues and interest income received.(b) Does not include depreciation and amortization expense.(c) Principal and Interest paid on revenue bond debt and notes payable.(d) According to the Series 2003, 2005 and 2007 Bond covenants, the District is required to maintain

a minimum service coverage ratio (net revenues/debt service) of 1.20.

Debt Service Requirements

Last Ten Fiscal YearsPLEDGED REVENUE COVERAGE


-67 -

- 68 -


DEMOGRAPHIC AND ECONOMIC STATISTICS

Last Ten Calendar Years

Calendar Year

Personal Income

(Thousands of Dollars)

Per Capita Personal Income

Unemployment Rate

Population County State

2001 387,092 $ 11,297,562 $ 29,182 3.7% 4.6%

2002 391,418 11,760,023 30,039 3.9 5.2

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 N/A 7.0 9.5

Notes: (a) N/A = Data not available. (b) Only Knox County is presented. (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.

- 69 -


PRINCIPAL EMPLOYERS

Current Calendar Year and Nine Years Ago

2010 2001

Employer Industry Number of Employees

% of Total MSA

Employees Number of Employees

% of Total MSA

Employees U.S. Department of Energy Government 13,925 5.99% 12,610 6.13%

The University of Tennessee Education 9,326

4.01

9,317 4.53

Covenant Health Health Care 9,000 3.87 8,000 3.89

Knox County Schools Education 6,945 2.99 8,104 3.94

Mercy Health Partners Health Care 5,700 2.45 3,606 1.75

Wal-Mart Stores, Inc. Retail Store 4,336 1.87 - -

K-VA-T Food Stores Retail Grocery 3,983 1.71 - -

University Health System Health Care 3,802 1.64 - -

State of Tennessee Government 3,750 1.61 - -

McGhee-Tyson Military Base 3,493 1.50 - -

Knox County Government - - 2,500 1.21

Clayton Homes Manufacturing - - 2,500 1.21

University of Tennessee Medical Center Health Care -

-

3,225 1.57

City of Knoxville Government - - 2,820 1.37

State of Tennessee Regional Offices Government -

-

2,401 1.17

Total 64,260 27.64% 55,083 26.77%

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


NUMBER OF EMPLOYEES BY ACTIVITY

Last Ten Fiscal Years 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 WATER AND WASTEWATER Water Purification 4 4 4 5 4 5 5 5 5 5 Water Treatment 12 12 12 12 12 12 11 12 11 10 Water Collection 2 2 2 2 2 3 3 3 3 3 Customer Accounting and Collection 3 3 3 3 3 4 3 3 3 3 21 21 21 22 21 24 22 23 22 21 ADMINISTRATION Billing and Customer Service 5 5 5 5 5 5 5 5 5 4 Finance and Accounting 1 1 1 1 1 2 2 2 2 2 Administrative 2 2 2 2 2 2 2 2 2 2

8 8 8 8 8 9 9 9 9 8 TOTAL EMPLOYEES 29 29 29 30 29 33 31 32 31 29

- 70 -


OPERATING AND CAPITAL INDICATORS

Last Seven Fiscal Years

2005 2006 2007 2008 2009 2010 2011 Area in Square Miles: 60 60 60 60 60 60 60 Water System: Miles of Water Mains 330 400 408 440 460 383 393 Number of Treatment Plants 1 1 1 1 1 1 1 Number of Service Connections 11,526 12,008 12,504 12,816 12,945 12,986 13,035 Number of Fire Hydrants 460 501 536 584 625 656 669 Daily Average Consumption in Gallons (MGD) 3.8 3.7 3.9 3.9 3.9 3.8 3.9 Maximum Daily Capacity of Plant in Gallons (MGD) 4.2 4.2 5.2 5.2 5.2 5.2 6 Water Storage Capacity (MGD) 4.3 4.3 4.3 4.3 4.3 4.3 5.2 Number of Pumping Stations 20 20 22 22 23 23 23 Number of Reservoirs 8 8 8 8 8 8 8 Wastewater System: Miles of Sanitary Sewers 54 54 55 57 58 73 74 Number of Service Connections 2,004 2,081 2,187 2,238 2,278 2,299 2,311

Note: (a) MGD = Millions of gallons per day. (b) 2010 was the first year the District implemented a new mapping system.

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INTERNAL CONTROL AND

COMPLIANCE SECTION

- 72 -

P U G H & C O M P A N Y , P . C .

WILL J. PUGH, CPA CERTIFIED PUBLIC ACCOUNTANTS

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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 Knox-Chapman Utility District of Knox County Knoxville, Tennessee We have audited the financial statements of Knox-Chapman Utility District of Knox County (the District) as of and for the year ended February 28, 2011, and have issued our report thereon dated June 29, 2011. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control Over Financial Reporting In planning and performing our audit, we considered the 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 the District’s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the District’s internal control over financial reporting. Our consideration of internal control over financial reporting was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control over financial reporting that might be significant deficiencies or material weaknesses and therefore, there can be no assurance that all deficiencies, significant deficiencies, or material weaknesses have been identified. However, as described in the accompanying schedule of findings and responses, we identified a certain deficiencies in internal control over financial reporting that we consider to be a material weakness. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis. We consider the deficiency described in the accompanying schedule of findings and responses as item 2011-1 to be a material weakness.

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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 misstatement, 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 one instance of noncompliance or other matter that is required to be reported under Government Auditing Standards and which is described in the accompanying schedule of findings and responses as item 2011-2. 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 June 29, 2011

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SCHEDULE OF AUDIT FINDINGS AND RESPONSES

February 28, 2011

A: SUMMARY OF AUDITOR’S RESULTS

1. The auditor’s report expresses an unqualified opinion on the financial statements of the District.

2. One deficiency that was considered a material weakness was disclosed during the audit of the

financial statements and is reported in the “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”.

3. One reportable instance of noncompliance material to the financial statements of the District

was disclosed during the audit of the financial statements and is reported in the “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”.

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SCHEDULE OF AUDIT FINDINGS AND RESPONSES (Continued)

February 28, 2011

Item 2011-1: Financial Statement Reporting (Material Weakness) The District does not have adequate controls to detect misstatements in the financial statements or to prepare interim financial statements in accordance with generally accepted accounting principles. Recommendation: We recommend the District develop a training program for the accounting staff to provide them with the necessary knowledge and skills to properly record, process and report financial data reliably. Response: This is a fundamental weakness for most smaller utility districts. It is not a weakness we will be able to solve in the short-term. Item 2011-2: Uninsured and Uncollateralized Deposits (Reportable Instance of Noncompliance) According to TCA § 9-4-103 to 107, deposits of utility districts in Tennessee are required to be collateralized or covered by the state bank collateral pool. At February 28, 2011, $255,639 of the District’s deposits were exposed to custodial credit risk because this amount exceeded the NCUA’s $250,000 insured limit and were not covered by the bank collateral pool as administered by the Treasurer of the State of Tennessee. Subsequent to year-end, these deposits were deposited in other insured depository accounts. Recommendation: We recommend the District consider developing a monitoring program to review its portfolio and to ensure compliance with state law. Response: We concur with this recommendation and will comply with state law.

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SCHEDULE OF PRIOR YEAR AUDIT FINDINGS

February 28, 2011

Item Finding Type Status

10-1 Financial Statement Reporting Repeated as a current year finding

as item 2011-1.

10-2 Election of Officers Corrected

Documents

Knox-Chapman Utility District 2011