FY 2012

Comprehensive Annual

Financial Report

Fiscal Year Ended June 30, 2012

Comprehensive Annual Financial Report Fiscal Year Ended June 30, 2012

For

Metropolitan Sewerage District of Buncombe County, North Carolina Asheville, North Carolina

Prepared By - Finance Department

W. Scott Powell, CLGFO, Director of Finance

Published December 12, 2012

Table of Contents

Page No.

Introductory Section Letter of Transmittal Certificate of Achievement for Excellence in Financial Reporting (GFOA) Map of District Boundary Principal Officials Organizational Chart

1‐8 9 10 11 12

Financial Section Independent Auditor’s Report Management’s Discussion and Analysis

13‐14 15‐22

Basic Financial Statements: Statement of Net Position Statement of Revenues, Expenses and Changes in Net Position Statement of Cash Flows Notes to Basic Financial Statements

23 24 25 26‐56

Required Supplemental Information:

Other Post‐Employment Benefits – Schedule of Funding Progress

57

Other Post‐Employment Benefits – Employer Contribution and Notes to the Required Schedules

58

Supplemental Financial Data:

Comparative Statement of Net Position Comparative Statements of Revenues, Expenses and Changes in Net Position

60 61

Schedules of Revenues and Expenditures – Budget and Actual (Non‐GAAP): Enterprise Fund

62‐63

Combining Statement of Net Position, All Funds (Non‐GAAP)

64

Combining Schedule of Revenues, Expenses and Changes in Net Position, All Funds – (Non‐GAAP)

65

Table of Contents

Page No.

Statistical Section Introduction Net Position by Component Changes in Net Position General Revenues by Source Expenses by Function Sewer Charge Revenue by Customer Type Customer Accounts by Member Agency Residential Sewer Rates Principal Commercial Users Ratio of Outstanding Debt Revenue Bond Coverage

67 68 69 70 71 72 73 74 75 76 77‐78

Demographic & Economic Statistics Personal Income by Industry Principal Employers Employees by Division Operating Indicators by Division

79 80 81 82‐84 85‐88

Compliance Section Independent Auditor’s 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

89‐90

This page intentionally left blank.

Introductory Section

D December 12, 2012

ewerage Disttrict of Bunccombe Coun ty, North Caarolina To the Mettropolitan Se Board of Diirectors, Bon ndholders, and Custome ers

We are ple eased to present the Comprehensivve Annual Finnancial Repo ort (CAFR) o of the Metro opolitan Sewerage D District of Buncombe Co ounty, North Carolina ((MSD or District) for thee fiscal yearr ended June 30, 20 012. State laaw requiress local goverrnments to publish with hin six months of the cclose of each fiscal year a com mplete set of financial statementss presented in conform mity with geenerally accepted accounting principles (GA AAP) and au udited in acccordance witth auditing sstandards geenerally accepted in n the United d States of A America by aa firm of lic ensed certiffied public aaccountants.. MSD’s Bond Order requires re elease of such audited ffinancial stattements witthin seven m months of th he close of the fiscaal year. Thiss CAFR prese ents MSD’s financial staatements, and adds this transmittaal letter and statistical data to aassist the reaader in analyyzing our finnancial statements.

This reportt consists of o managem ment’s repre esentations concerning the financces of the D District.

Consequen ntly, manage ement assum mes full resp ponsibility foor the complleteness and d reliability o of all of the inform mation presented in th his report. To providee a reasonable basis for makingg these representations, MSD’’s managem ment establisshed an inteernal contro ol frameworrk that is deesigned ets from losss, theft, or misuse and d to compilee sufficient reliable both to protect the District’s asse information n for the pre eparation off financial sttatements inn conformityy with GAAP P. Because tthe cost of internal controls should not ou utweigh theiir benefits, M MSD’s framework of internal contrrols has been desiggned to provvide reasonaable rather tthan absolutte assurancee that the financial statements will be fre ee from material misstatement. As managem ment, we asssert that, tto the best of our knowledge and belief, this financiaal report is co omplete andd reliable in all material respects.

Cherry, Bekaert & Holland, L.L.P., a firm of liicensed certtified publicc accountantts, has auditted the financial statements. TThe goal of th he independ dent audit w was to provid de reasonab ble but not absolute assurance that MSD’s financial sttatements for the fiscaal year endeed June 30, 2012, are free of material misstatemen m t. The inde ependent au udit involveed examinin ng, on a teest basis, evvidence supporting the amoun nts and disclosures in the financiial statements; assessing the acco ounting principles u used and siggnificant estimates made e by manageement; and evaluating tthe overall fiinancial statement presentation. The indep pendent aud ditor concludded, based u upon the au udit, that theere was ble basis forr rendering an unqualiffied opinionn that MSD’s financial sstatements for the a reasonab fiscal year ended June e 30, 2012, are fairly prresented in conformity with GAAP P. The indep pendent eport is pressented as the e first compo onent of thee financial seection of thiss report. auditor’s re Fiscal Year Ended June 30,, 2012

1

Introduction Section

Metropolitan Sewerage District of Buncombe County, North Carolina

Accounting standard (GASB No. 34) requires that management provide a narrative introduction, overview, and analysis to accompany the basic financial statements in the form of Management’s Discussion and Analysis (MD&A). This letter of transmittal is designed to complement the MD&A, which is placed immediately following the report of the independent auditors, and should be read in conjunction with it.

Accounting standard (GASB No. 44) calls for revised statistical reports designed to increase assistance to the reader in assessing the financial situation and condition of the District. Readers may note some changes in report formats from prior years. In addition, new schedules for which there is no information prior to implementation of GASB No. 34 may have less than the otherwise required ten years of comparative data.

Financial trend information is presented to assist readers in understanding and assessing how a government’s financial position has changed over time. Revenue capacity information is intended to assist users in understanding and assessing the factors affecting a government’s ability to generate revenues.

Debt capacity information is designed to assist users in understanding and assessing a government’s debt burden and its ability to issue additional debt. Demographic and economic information is intended to assist users in understanding the socioeconomic environment within which a government operates and provide information that facilitates comparisons of financial statement information over time and among governments. Operating information should provide contextual information about a government’s operations and resources to assist readers in using financial statement information to understand and assess a government’s economic condition.

Profile of the District Overview The District was created by the state of North Carolina in 1962 to provide a wastewater treatment plant serving the City of Asheville and surrounding communities, including Biltmore Forest, Weaverville, Black Mountain, Montreat, Woodfin, the Woodfin Sanitary Water & Sewer District, and certain other unincorporated areas of Buncombe County. Through separate contractual arrangements, the District also serves customers in the Cane Creek Water and Sewer District in northern Henderson County and in the Avery Creek Sanitary Sewer District in southern Buncombe County. The collection system has been extended over the years as a result of expansion and development, and now collects wastewater through approximately 986 miles of sewer line with 28,000 manholes and serves over 50,000 residential and commercial customers and over 20 significant industries. The wastewater treated by the District is gathered in the collector sewer systems located primarily within the boundaries of the municipalities and other political subdivisions comprising the District and conveyed to the wastewater treatment plant through large sewer lines called interceptors that generally run parallel to the French Broad River, the Swannanoa

2

Fiscal Year Ended June 30, 2012

Metropolitan Sewerage District of Buncombe County, North Carolina

Introduction Section

River or one of their primary and secondary tributaries. Included in the system are remote pumping stations that pump wastewater through force mains where gravity flow is not feasible.

With the Sewer Consolidation, which was signed in 1990, the District agreed to take possession of and to operate, maintain, and repair or replace, as necessary, the various collector sewer systems, which were simultaneously deeded to MSD by these same political subdivisions. Many of the collector sewer systems were undersized, deteriorated, and inadequately maintained. Since taking over the sewer systems, the District has developed and implemented, with input from its member political subdivisions, an ongoing Capital Improvement Program (the “CIP”). Approximately 921,000 linear feet of existing sewer line have been replaced since consolidation, representing over 18% of the entire collection system. In addition, the District expects to replace another 250,000 feet of existing sewer lines over the next five years as mandated by our Collection System Permit. The District also has an aggressive program in effect for systematic preventative maintenance of collector sewers. The lines are first cleaned using water under high pressure and then are videotaped. The cleaning reduces line blockages and overflows, and the videotapes enable the District to locate and repair problems in the lines. The District cleans and inspects by videotaping between 15% and 20% of its system each year.

The District also owns, operates, and maintains a 40 million gallon per day (MGD) wastewater treatment plant to treat raw sewage and industrial wastewater as well as a hydroelectric facility, which is used primarily to generate power for the wastewater treatment plant, but also provides electricity for sale back to the local utility.

Member agencies providing water service include the sewer fees on their water bills and provide customer service and collection services to the District for a negotiated fee. However, the District direct bills about 460 customers, predominantly local industries and private residences served by wells, yet connected to the sewer system.

Budget The annual budget serves as the foundation for the District’s financial planning and control. The Bond Order requires that the District adopt its final budget on or before June 15 of each year after a preliminary budget hearing no more than 30 days prior to adoption. North Carolina General Statutes call for an annual balanced budget ordinance based upon expected revenues, along with a budget message, to be presented to the governing board no later than June 1. During the spring, District departmental staff work with the Board’s Finance and Personnel Committees to develop an operational budget by function (administration, system services, plant operation, etc.), and District engineers work with the Board’s Planning and Capital Improvement Plan Committees on a capital budget.

Fiscal Year Ended June 30, 2012

3

Introduction Section

Metropolitan Seweerage District oof Buncombe CCounty, North Carolina

After the Board B appro oves the bu udget, it is administereed by Deparrtment head ds who mayy make transfers of o appropriaations within n a departm ment and bby the Geneeral Manageer who mayy make transfers between dep partments. B Budget to acctual comparrisons of fin nancial data for the yearr ended June 30, 20 012 may be found in th he suppleme ental inform mation follow wing the nottes to the fiinancial statementss.

Factors Affecting A g Financia al Condittion The inform mation prese ented in th he financial statementss is perhapss best undeerstood wheen it is considered from the broader perrspective off the specifiic environm ment within which the District operates.

Local Econ nomy The Asheviille‐Buncombe County area a in whicch the Distrrict is locateed possessess a combinaation of characterisstics that help protect itt in the currrent econom mic climate. They consisst of a re‐em merging more techn nologically aadvanced ind dustrial base e, a strong ttourism possition, conceentrated heaalthcare employmen nt, manufaccturing dive ersity, and positive population in‐‐migration. These facto ors are discussed in further detail in the M Management’s Discussionn and Analyssis (MD&A).

nomic development initiatives an nd various private/pub blic program ms have arrisen in Local econ response to t these recent develo opments designed to sstrengthen tthe local economy. Industrial recruitmen nt, workforce e developme ent, urban revitalizationn, broadband d access, and improvem ments to interstate highways are a example es of active and pen ding projeccts. Area leeaders realize the e of cooperaation and acttion to maintain a healthhy, diverse, and sustainaable econom my. importance

While indu ustrial usage is decliningg, residentiaal and comm mercial expaansion has reesulted in aa higher demand for MSD services, as evide enced by growth in oveerall revenuee, and especcially by facility and n develop pment. The majority off new resid dents being District tap fees directly resullting from new customers result from m emphasis on in‐fill developmennt by local communities and largge new ns with developer‐donated sewer inffrastructuree. subdivision 4

Fiscal Year EEnded June 300, 2012

Metropolitan Sewerage Disstrict of Buncombe County, North N Carolinaa

Introoduction Sectioon

Long-Term m Financial Planning In 2001, th he District co ompleted a twenty‐year Wastewatter System M Master Plan to identify system improveme ents needed d to handle sstructural prroblems andd wet‐weath her flow conditions, to im mprove the perform mance at th he Water Re eclamation Facility (WR RF), and to prepare thee system to handle expected fu uture wastewater flowss. In 2007, th he District coompleted a Facility Plan n, which speecifically focused on n the equipm ment and pro ocesses with hin the WRFF. This plan established a methodollogy for prioritizing rehabilitatio on efforts att the plant.

In November 2008, the e District’s Collection Sysstem Masterr Plan was co ompleted. TThis plan focuses on the orderlyy growth of the collection system into future sservice areaas. As the seewer system m grows over time, this plan will w ensure th hat extensio ons of the ssystem are m made in an orderly fash hion, in e with the planning policcies of the District’s mem mber agencies. accordance

e plans as guides, District engineerss developedd a ten‐year Capital Imp provement P Program Using these (CIP), which is updated annually. The capitall budgeting process begins with co onsidering p projects ed by vario identified in i these plaans, as welll as those recommend r ous departm ments to deeal with recurring w wastewater ccollection an nd treatmen nt problems.. Engineerin ng staff priorritize such projects, preparing ccost estimates and a sugggested time etable for coonstruction. The CIP Com mmittee, consisting of represen ntatives from m the Districct’s memberr agencies, m meets to revview the pro ogram and to make recommendations to th he Board concerning the e CIP’s adop tion as part of the annual budget.

ntinues to h have the larggest impact on the Distrrict’s current and futuree financial position.

The CIP con In connectiion with the e long‐term CIP, the Disstrict preparres a ten‐year cash flow w projection, which integrates revenue and d expenditurre projection ns with plan ned capital eexpenditurees to anticipaate rate increases and timing off debt issuan nce.

Major In nitiatives and a Acc complishm ments Collection System & Plant Reha abilitation The Districct maintainss an aggresssive, proactiive rehabilittation progrram for thee regional 986‐mile collection n system, ass well as thee plant facility. Since 19 991, the time th hat MSD asssumed owneership and m maintenancee of the local public collecttion systemss, over $293.7 million haas been re‐inve ested back innto the systeem.

Final Microscreen M n Replacem ment Projectt

Interio or of Filter Build ding, near final completio on

Fiscal Year Ended June 30,, 2012

The District is neaaring compleetion of thee Final Micro oscreen replace ement projeect at the WRF. The new process uses “micro‐filters” to remove fin ne particles from the treated wastew water. This $$10.7 million n, five‐year project will help to further improve M MSD effluentt quality to well‐above permit standards,, prior to fin al dischargee into the Freench Broad R River.

5

Introduction Section

Metropolitan Seweerage District oof Buncombe CCounty, North Carolina

Dingle Creeek @ Crow wfields – Phase I & II The Districct partners with local agencies a on projects w whenever po ossible. Thiss not only rreduces overalll costs, but also helps to reduce th he number o of times that a neighborrhood will be disturbed to rehabilittate old mple, the Disttrict and thee City of infrrastructure. In this exam Ash heville partnnered to reehabilitate the water & & sewer systems, and the streeets ‐ all o of which needed reh habilitation in this areea. The sew wer portion n alone totaled over 3, 300 feet.

Sig gnificant Reeduction of Sanitary Sewer Overflows Red duction of SSanitary Sew wer Overflow ws (SSO’s) is one of the e District’s primary go oals related to the co ollection sysstem. This has been accomplish hed by agggressive Dinggle Creek @ Crow wfields ‐ Phase I & II reh habilitation and preventativve maintenaance (line cleaning) proggrams. Overr the past eleve en years, the District has realized a signifficant reduction o of SSO’s – fro om 289 in FYY2000 to 25 in FY2012.

Excellencee in Management Reco ognition Prrogram Aw ward The District was reccognized on nce again for outsta nding wastewater treatmentt efforts by the National Associatioon of Clean Wate er Agencies (NACWA – fformerly AM MSA) and recceived the prestiggious NACW WA Gold Award A signifying cons istent NPDES permit compliaance during the 2011 caalendar yearr. This Example off Stream Crossin ng marks the e tenth con nsecutive year y the Diistrict has been honored with w a “Peakk Performan nce Award” representinng continued d excellencee in environ nmental prote ection.

NACW WA has est ablished the Excellencce in Managgement Recoggnition Proogram to recognize public clean water utilities that implement progressive managgement initiattives and t hereby advvance the ggoals of thee Clean Water Act.. NACWA is committed to clean water w and a healthy envvironment aand strives to help ensure that member aagencies havve the tools they need tto meet thesse objectivees. MSD wass one of only four national recip pients of thiss award in 2009.

In November 2012, MSSD received the Collectio on System oof the Year A Award (Largee System), frrom the N.C. American Water Works W Association ‐ Waater Environnment Assocciation (NC AWWA‐WEA A). This award, onlyy one of wh hich was awaarded statew wide, recognnizes MSD’ss significant activities regarding collection ssystem management, op peration & m maintenancee, and capitaal re‐investm ment/rehabiilitation of the colle ection system m.

6

Fiscal Year EEnded June 300, 2012

Metropolitan Sewerage Disstrict of Buncombe County, North N Carolinaa

Introoduction Sectioon

Improved Customer Service S Ressponse The System ms Services D Department reclassified a managem ment position n to that of aa first respo onder to handle em mergency callls between 4:00 p.m. and 11:30 p.m. as weell as holidaays, which rreduced average ressponse time from 90 minutes in FY2 2006 to 26 m minutes in FYY2012.

Environmeental Regullations Com mpliance The Districct received favorable regulatory reports froom the No orth Carolin na Departm ment of Environment and Natu ural Resourcces for wasttewater dis charge, pretreatment, collections system, n, the Districct maintaineed and air quaality permitss. In addition ISO 14001 Environmen ntal complian nce certificattion.

ms permit re equires replacement orr The Collecttion System rehabilitation of at le east 250,000 0 linear fee et of sewerr main everyy five years. In FY2012, the Districtt completedd in excess o of 43,943 linear feet, over 21,081 off which wass performed by District fforces. Over the past fivve years, thee District hass rehabilitate ed a total of 252,916 lin near feet off sewer main n.

Another re equirement of the annual Collection Systemss permit is to perform preventativve maintenance on att View o of the MSD Treaatment Facility least 500,0 000 linear fe eet of sewerr line. During the currennt year, the District cleaned over 8 873,000 linear feet.

Continuing Disclo osure Ob bligation The District issued revvenue bondss as well as revenue reffunding bon nd most receently in Sep ptember 2009. In acccordance w with the requ uirements off the Securitties Exchangge Commissiion Rule 15C C‐12, as amended, and the North N Carolina Local Government G t Commission, the District will provide continuing disclosure information to recognizzed municippal security information n repositoriees. This will include e the audited d financial sttatements, h historical neet revenues and debt co overage, futu ure rate increases and listing off the District’s largest commercial annd industriall customers..

Financia al Awardss The Govern nment Finan nce Officers Association n of the Unitted States aand Canada (GFOA) awaarded a Certificate of Achievem ment for Exccellence in FFinancial Repporting to M Metropolitan n Sewerage District of Buncom mbe County, North Carolina for its comprehens c sive annual ffinancial rep port (CAFR) for the fiscal year ended June e 30, 2011. This was the seventeennth consecu utive year th hat the District has achieved this t prestigiious award.. In order to receive a Certificatte of Achieevement aw ward, a governmen nt must publish an eaasily readab ble and effi ciently orgaanized comprehensive annual financial re eport. This report mu ust satisfy both b generaally accepteed accounting principles and applicable legal require ements.

Fiscal Year Ended June 30,, 2012

7

Metropolitan Seweerage District oof Buncombe CCounty, North Carolina

Introduction Section

A Certificatte of Achievvement is valid for a period of on e year onlyy. We believve that our current Comprehen nsive Annual Financiall Report co ontinues too meet thee Certificatee of Achievvement Program’s requirementts and we arre submitting it to the G GFOA to deteermine its eligibility for aanother certificate.

In addition, the Districct also received the GFO OA’s Distingguished Budgget Presentaation Award d for its 12 budget do ocument. In order to quaalify for the Distinguisheed Budget Presentation Award, annual 201 the Districtt’s budget document d was w judged proficient p inn several categories, including as aa policy document, a financial p plan, an operations guide, and a com mmunication ns device.

Acknow wledgmen nts The preparration of thiss report could not have been accom mplished witthout the deedicated servvices of staff througghout the District and th he District’s independennt auditor, C Cherry, Bekaert & Hollan nd L.L.P. We would like to accknowledge the hard work and ddedication of Cheryl R Rice, the D District’s Accountingg Manager. In addition, a special thanks to TTeresa Gilbeert who asssembled the CAFR documentss and preparred many off the graphss and to Ashheville Cham mber of Com mmerce for current economic d data and insiightful identtification of b business treends.

We also wo ould like to tthank the m members of tthe Finance Committee and Board ffor their sup pport of maintainingg high stand dards of fiscaal accountab bility and ressponsibility ffor the Distriict.

Respecttfully Submittted,

omas E. Hartye, P.E. Tho General Manaager

8

W. Scott Powell, CLGFO D Director of Finance

Fiscal Year EEnded June 300, 2012

Metropolitan Sewerage Disstrict of Buncombe County, North N Carolinaa

Introoduction Sectioon

Certifica ate of Achieveme ent

Fiscal Year Ended June 30,, 2012

9

Introduction Section

Metropolitan Seweerage District of Buncombe CCounty, North Carolina

Map of District D Bo oundary

10

Fiscal Year EEnded June 300, 2012

Metropolitan Sewerage District of Buncombe County, North Carolina

Introduction Section

Principal Officials

Board Members

Representative of

Steven T. Aceto Jackie W. Bryson Jon E. Creighton Max L. Haner E. Glenn Kelly Esther Manheimer Chris Pelly Al Root Bill Russell Bill Stanley M. Jerry VeHaun Robert C. Watts

Town of Montreat Woodfin Sanitary Water & Sewer District County of Buncombe County of Buncombe Town of Biltmore Forest City of Asheville City of Asheville Town of Weaverville City of Asheville County of Buncombe Town of Woodfin Town of Black Mountain

Legal Counsel

Auditing Firm

Engineer of Record

Roberts & Stevens, P.A.

Cherry, Bekaert & Holland,

McGill & Associates

General Manager

Director of Finance

Thomas E. Hartye, P.E.

W. Scott Powell, CLGFO

Fiscal Year Ended June 30, 2012

11

Introduction Section

Metropolitan Sewerage District of Buncombe County, North Carolina

Organizational Chart

MSD Board

Committees CIP Finance Personnel Planning Right of Way

Legal Counsel

Auditing Firm

Engineer of Record

General Manager Thomas E. Hartye, P.E.

# of employees = 2

Executive Secretary Sondra Honeycutt

Capital Improvement

Financial Services

Human Resources

Planning & Development

System Services

Water Reclamation Facility

Director Ed Bradford, P.E.

Director W. Scott Powell, CLGFO

Director Jim Hemphill

Director Stan Boyd, P.E.

Director Mike Stamey, P.E.

Director Peter Weed

Project Mgmt Design & Drafting Construction Right‐of‐Way GIS

Accounting Investments Cash Flow Mgmt Finance & Budget Purchasing Warehouse

Human Resources Payroll Employee Benefits Environmental, Health & Safety

Allocations Plan Review Sewer Connections

# of employees = 20

# of employees = 8

Director Ken Stines Construction Pipeline Mtce.

Technical Services

Financial Forecasting Operations Maintenance Facility Mtce.

Industrial Waste Fleet Maintenance IT MIS

# of employees = 6

# of employees = 8

# of employees = 57

# of employees = 49

Number of Employees: 150

Employee/Representative

12

Contractors

Fiscal Year Ended June 30, 2012

Financial Section

Independent Auditors’ Report

The Board of Directors Metropolitan Sewerage District of Buncombe County, North Carolina Asheville, North Carolina

We have audited the accompanying Statement of Net Position of the Metropolitan Sewerage District of Buncombe County, North Carolina (the “District”) as of June 30, 2012 and the related Statements of Revenues, Expenses, and changes in Net Position, 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.

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 that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the District as of June 30, 2012, and the respective changes in 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 October 26, 2012 on our consideration of the District’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit.

Fiscal Year Ended June 30, 2012

13

Finanncial Section

Metropolitan Seweerage District oof Buncombe CCounty, North Carolina

As discusse ed in the Notes N to the Financial Statementss, the Distriict adopted the provissions of Governmen ntal Accoun nting Standaards Board Statement No. 63, Finnancial Reporting of D Deferred Outflows off Resources, Deferred Inf nflows of Ressources, andd Net Position, as of and for the yearr ended June 30, 2012.

2 This statement s results r in th he District reporting d deferred infllows of ressources, deferred ou utflows of re esources and d changes th he presentattion of the reespective fin nancial stateements.

Accountingg principless generally accepted in the Unnited Statees of Ameerica requirre that manageme ent’s discusssion and analysis and required r suppplementaryy informatio on, as listed d in the table of co ontents, be presented to t suppleme ent the basiic financial sstatements. Such inform mation, although not a part off the basic fiinancial stattements, is rrequired by the Govern nmental Acco ounting Standards Board, who considers itt to be an essential par t of the finaancial reportting for placcing the ents in an ap ppropriate o operational, economic, or historical context. W We have basic financial stateme d proceduress to the req quired suppl ementary in nformation in accordance with applied cerrtain limited auditing staandards gen nerally accep pted in the U United Statees of Americca, which consisted of in nquiries of managem ment about the method ds of preparing the inforrmation and comparing the information for consistencyy with management’s responses to t our inquiiries, the baasic financiaal statemen nts, and other know wledge we obtained during our audiit of the basic financial sstatements. We do not express an opinion or provide any assuraance on the informationn because tthe limited procedures do not provide us with sufficie ent evidence e to express an opinion oor provide any assurance.

Our audit was conduccted for the e purpose of o forming oopinions on the financial statemen nts that collectivelyy comprise the Districtt’s financial statementss as a who ole. The Inttroductory SSection, Supplemen ntal Financial Data, and SStatistical Se ection, as listted in the taable of conteents, are preesented for purpose es of additio onal analysis and are nott a required part of the basic financcial statemen nts. The Supplemen ntal Financial Data is the e responsibility of managgement, and d was derived from, and relates directly to the underlyying accountting and oth her records used to preepare the fin nancial stateements.

The inform mation has be een subjecte ed to the au uditing proceedures appliied in the au udit of the fiinancial statementss and certtain additio onal proced dures, incluuding comp paring and reconcilingg such information n directly to o the underllying accoun nting and otther recordss used to prrepare the fiinancial statementss or to the e financial statementss themselvees, and oth her additional procedu ures in accordance e with auditting standarrds generally accepted in the Unitted States o of America. In our opinion, th he informattion is fairly stated in n all mater ial respectss in relation to the fiinancial statementss as a whole. The Introductory and tthe Statisticaal Sections h have not beeen subjected d to the auditing prrocedures ap pplied in the e audit of basic financiaal statementts and, acco ordingly, we do not express an opinion or p provide assu urance on them.

Charlotte, N North Carolina October 26 6, 2012

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Fiscal Year EEnded June 300, 2012

Metropolitan Sewerage District of Buncombe County, North Carolina

Financial Section

Management’s Discussion and Analysis As management of the Metropolitan Sewerage District of Buncombe County (District), we offer readers of the District’s financial statements this narrative overview and analysis of the financial activities of the District for the fiscal year ended June 30, 2012.

Financial Highlights For the year ended June 30, 2012, the District implemented Governmental Accounting Standards Board (“GASB”) Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position. This statement results in the District reporting deferred inflows of resources, deferred outflows of resources and changes the presentation of its financial statements.

 Net Position—Net Position is defined as the value of all assets plus deferred outflows of resources less all liabilities and deferred inflows of resources. Net restricted position is restricted by law, bond covenant, or other contractual arrangement, less debt incurred. The financial well‐being of a government is reflected to a large degree in the growth of net position.  The District’s net position totals $308.4 million and reflects a $9.2 million or 3.1%

increase from the prior year. The income and expense items affecting this improvement will be discussed in greater detail in the section below titled Financial Analysis of the District.  The $9.2 million increase attributable to the District’s normal operations includes

contributed capital assets from developers and member agencies of $2 million.  Net invested in capital assets increased by $18.5 million or 7.4%, evidencing the District’s

aggressive rehabilitation of infrastructure as well as an increase in developer and member agency donated sewer lines and pump stations.

 Outstanding debt:  After a principal repayment of $5.3 million, the District’s has approximately $96.2 million

of outstanding debt exclusive of related unamortized discounts and premiums.

Overview of the Financial Statements This discussion and analysis is intended to serve as an introduction to the District’s basic financial statements. The District’s basic financial statements are comprised of two components: the financial statements and notes to the financial statements that explain in more detail some of the information in the financial statements. After the notes, supplemental information is provided to show details about the District’s fund structure as set forth in the Bond Order. Budgetary information required by the North Carolina General Statutes also can be found in this part of the statements.

Fiscal Year Ended June 30, 2012

15

Finanncial Section

Metropolitan Seweerage District oof Buncombe CCounty, North Carolina

Basic Fin nancial Statemen S nts The financial statements of the District report informaation about the Districtt using acco ounting methods siimilar to tho ose used by private‐secctor compannies. There aare three required stateements, which provvide both lo ong‐term an nd short‐terrm informattion about the Districtt’s overall fiinancial status.

The Statem ment of Nett Position prresents information on all of the D District’s asssets, plus deferred outflows off resources, less liabilitie es, and deferred inflowss of resourcees with the d difference reeported as net position. This statement s provides p info ormation abbout the typ pes and amo ounts of ressources (assets), de eferred outfllows of resources, and the obligatioons to Districct creditors ((liabilities) and may be used to o measure the financial health of the t District by providin ng the basis for evaluatting the capital stru ucture of the e District and d assessing liiquidity and financial fleexibility.

ment of Revvenues, Expe enses, and Changes in Net Positio on presents the currentt year’s The Statem results of operations and can be e used to determine how successsful the District has b been in collecting rrevenues, co ontrolling exp penses, and recovering ccosts througgh user fees and chargess.

The final re equired financial statem ment is the SStatement oof Cash Flow ws. This stateement reporrts cash receipts, caash paymentts, and net cchanges in ccash resultinng from operating, invessting, and fin nancing activities, and a may be used to de etermine how w cash orig inated, whaat that cash was used ffor, and how these activities ressulted in the e change to ccash balancee during thee year.

These financial statem ments should be evaluated with oother extern nal factors such as economic conditions, regional em mployment sstatistics, an nd populatioon growth fo or a more co omplete anaalysis of the Districtt’s current an nd future fin nancial condition.

Financia al Analysis of the District D Net Positio on As previoussly noted, net assets may serve ove er time as oone useful in ndicator of aan entity’s fiinancial condition. The Districct’s assets plus urces deferred outflows of resou on at exceeded liabilities by $308.4 millio June 30, 2012. The largest propo ortion of the District’s net position, approximattely 87.6% %, reflects the District’s in nvestment in i capital assets (e.g. land, buildings, interceptor and collector sewer lin nes, treatm ment facilities, equipment, e etc.) less any related de ebt outstan nding that was issued to acquire these e items. As tthese assets arre required to pro ovide 16

Fiscal Year EEnded June 300, 2012

Metropolitan Sewerage Disstrict of Buncombe County, North N Carolinaa

Finnancial Sectionn

ent services,, these resouurces are no ot available ffor future spending. wastewater collection and treatme Although the District’ss investment in its capital assets iss reported n net of the o outstanding related debt, the resources r ne eeded to repay that de ebt must be provided b by other sou urces as the capital assets cann not be used to liquidate these liabilitties. An add itional $7.5 million or 2..4% of the D District’s net position are funds restricted b by the Bond Order to bee held in resserve for either debt service or for emerge ency capitall equipmentt repair or replacemennt. The Disttrict also haas $0.6 million net position restricted for rehabilitatio on of the Ave ery’s Creek SSanitary District. The remaining balance of $30 million n is unrestriicted and may m be used d to fund p ay‐as‐you ggo capital prrojects, med dical or workers compensation n claims, replacement reserves, or anny other leggal purpose.

The Districct’s overall financial f position impro oved duringg the fiscal year ended d June 30, 2 2012 as overall net assets grew w by 3.1%. Th he District’s financial strrategy is to sset rates at a level sufficcient to cover operating and de ebt service e expenses as w well as to prrovide aboutt half of the funding for pay‐as‐ ess of this appproach is vvisible in the continuing growth you‐go infrrastructure rrehabilitation. The succe of District net assets. Current assets will decrease graduually as cash h and investtments are u used to rehabilitate e infrastructure, until the next plann ned revenuee bond issuan nce.

– Condensed Summaryy of Net Po osition Table 1 –

FY 2012

Current an nd Other Asse ets Capital Assets, net Tota al Assets

$

Deferred Outflows of Re esources Long-Term m Liabilities Outstanding O Other Liabilities Tota al Liabilities Net Positio on: Net investm ment in capita al assets Restricted for: f Debt Servvice Bond Covvenant Avery’s Creek Sanitary District Unrestricted Tota al Net Positio on

Fiscal Year Ended June 30,, 2012

$

43,592,323 364,831,341 408,423,664

FY 20 011

5 52,933,985 35 51,722,014 40 04,655,999

(17.65%) 3.73% 0.93%

6,734,174

3,550,286

89.68%

98,353,929 8,402,611 106,756,540

9 99,491,444 9,494,496 10 08,985,940

(1.14%) (11.50%) (2.05%)

270,297,021

25 51,754,578

7.37%

6,622,656 916,696 578,142 29,986,783

7,849,253 824,822 620,880 3 38,170,812

(15.63%) 11.14% (6.88%) (21.44%)

29 99,220,345

3.07%

308,401,298 3

$

% Increase (Decrea ase) 2012 versu us 2011

$

17

Finanncial Section

Metropolitan Seweerage District oof Buncombe CCounty, North Carolina

Table 2 – – Condense ed Summaryy of Revenu ues, Expensses, and Ch hanges in N Net Position n

FY 201 12 Operating Revenues: R Sewer Cha arges Facility and Tap Fees Miscellane eous Total Operating O Revenues

$

FY 2011

26,894,894 2,238,171 612,721 29,745,786

3.55% 3.72% 48.19% 4.48%

6,66 63,907 1,45 52,459 1,10 06,158 95 58,738 1,54 45,557 2,25 55,450 7,68 81,340 21,66 63,609

6,536,352 1,337,258 1,234,810 927,655 1,344,307 2,142,086 7,520,744 21,043,212

1.95% 8.61% ((10.42%) 3.35% 14.97% 5.29% 2.14% 2.95%

9,41 15,028

8,702,574

8.19%

31 11,807 (2,90 00,650) 36 65,704 (14 44,651) 8 86,165 (2,28 81,625)

493,002 (3,042,912) 423,881 (156,120) 42,232 (2,239,917)

((36.75%) (4.68%) ((13.72%) (7.35%) 104.03% 1.86%

Income before other tra ansactions

7,13 33,403

6,462,657

10.38%

Capital Con ntribution Special item – Avery’s Cre eek Sanitary District D asset contribution from m Buncombe County C

2,04 47,550

742,770

175.66%

-

2,099,089

(1 100.00%)

Change in Net N Position

9,18 80,953

9,304,516

(1.33%)

299,22 20,345

289,915,829

3.21%

299,220,345

3.07%

Operating Expenses: E Salaries an nd Employee Benefits Contractua al Services Utilities Repairs an nd Maintenance Other Sup pplies and Exp penses Insurance Claims and Expenses Depreciation Total Operating O Exp penses Operating Income I Nonoperatiing Revenuess (Expenses):: Interest Income Interest Exxpense Less Capitalized Interesst Amortizatiion of Bond Isssuance Costss Gain (Losss) on Sale of Surplus S Property Total Nonoperating N g Revenues (E Expenses)

Total Net Position, begiinning of yea ar Total Net Position, end of year

$

27,84 49,176 2,32 21,474 90 07,987 31,07 78,637

308,40 01,298

$

% Incre ease Decrea ase) 2012 versus 2011

$

The Conde ensed Summ mary of Reve enues, Expenses, and C Changes in N Net Position n shown in TTable 2 above provvides information concerrning what ccontributed to the net changes repo orted in Tablle 1.

18

Fiscal Year EEnded June 300, 2012

Metropolitan Sewerage District of Buncombe County, North Carolina

Financial Section

The section below discusses significant factors contributing to the District’s 3.1% increase in net assets from $299.2 million to $308.4 million.

 Operating Revenues:  Sewer revenues increased 3.6%. The District had raised domestic sewer rates by 3.0% at

the beginning of the fiscal year and experienced a consumption increase due to a dry spring and summer.  Facility and tap fees received increased 3.7% from the previous year reflecting a rebound

in development in the area.  Miscellaneous Income increased 48.2%. This was due to the District selling renewable

energy credits associated with the hydroelectric facility as well as receiving an $110,439 pass thru grant.

 Operating Expenses were kept fairly flat with the exception of:  Other supplies and expenses—The District experienced a 15.0% increase due to the

need for additional chemical supplies for the water reclamation facility. This is a direct result of the secondary microscreens being offline for a $10.4 million renovation slated to be completed December 2012.  Utilities expense—an increase in internally generated hydroelectric power due to a

repair attributed to the 10.4% decrease in the current year.  Interest income—Decreasing short‐term interest rates resulted in the 36.8% decrease in the

District’s interest income.  Interest expense—Interest expense decreased due to reduction in short term rates paid on

the District’s variable rate debt in the current year.  Capitalized interest—Interest capitalized on rehabilitated infrastructure is computed based

on construction‐in‐progress beginning balances plus additions during the year. Current year additions were up 11.4% as compared to FY 2011. The reduction in the short term rates paid on the District’s variable rate debt in the current year attributed to the 13.7% decrease in capitalized interest.  Capital Contribution—The amounts reported as capital contributions represent the

estimated fair market value of donated sewer collection lines by developers and member agencies. The District has no direct control over the amount of contributions received. These amounts are reflected as equal income and capital expenditures in the financial statements.

Capital Asset and Debt Administration Capital Assets The District owns capital assets with a historical cost of $503,826,145. These assets consist of land (including easements), land improvements including a hydroelectric dam, buildings, collector sewer lines, interceptor lines (large pipelines into which collector sewers feed), construction equipment Fiscal Year Ended June 30, 2012

19

Finanncial Section

Metropolitan Seweerage District oof Buncombe CCounty, North Carolina

and machin nery, service e vehicles, offfice machin nes, and com mputer hardw ware and software. The District has begun several projjects expectted to cost $ $45.7 millio n to compleete, and at JJune 30, 201 12, was committed to contracts expected tto cost $2.5 million.

nsactions du uring the yeaar include: Major capittal asset tran  Reh habilitation o of over 50,00 00 feet of se ewer line inc luding:  Rollingwood d Road Unclaaimed Sewe er Rehabilitattion

 Town Brancch Intercepto or  Lake Julian W Wet Weathe er Intercepto or  Town Moun ntain Road G General Sewe er Rehabilitaation  Secondary M Microscreen Replacement  Treatment P Plant electriccal system renovations

Table 3 – Capital Asssets

FY 2012 Land Easements Land Impro ovements Buildings Machinery and a Equipment Interceptor Sewer Lines Collector Se ewer Lines Constructio on in Progresss Subtotal

$

Less: Accum mulated Depre eciation Net Properrty, Plant and d Equipmentt

FY 2011 1

2,5 515,666 6,4 499,623 4,4 428,329 49,1 110,773 56,0 017,334 110,8 832,382 260,5 561,140 13,8 860,898 503,8 826,145

$

(138,9 994,804) $

364,8 831,341

2,5 515,666 6,0 061,191 4,1 149,044 49,0 041,068 55,5 507,672 108,6 621,465 252,9 904,769 4,8 818,414 483,6 619,289 (131,897,275)

$

351,7 722,014

More detailed informaation on the e District’s capital c assetts is presented in Notee 5 to the fiinancial statementss.

ministration Debt Adm At June 30, 2012, the District had d $96,208,84 40 in par va lue of outsttanding debt. Unlike citties and counties, the District d does not havve a debt lim mit. Howeveer, the Distrrict’s Bond O Order requirres that be set to ach hieve a miniimum debt sservice coveerage ratio o of 1.2 annuallly. This meaans that user rates b in any yearr, after the D District pays all current o operating exxpenses, thee net revenu ues remainin ng must be at least 120% of thaat year’s prin ncipal and interest paym ments.

20

Fiscal Year EEnded June 300, 2012

Metropolitan Sewerage District of Buncombe County, North Carolina

Financial Section

The District holds an Aa2 rating from Moody’s Investor Service, an AA rating from Standard & Poor’s, and an AA+ rating from Fitch. These high ratings allow the District to pay a lower rate of interest than other entities with less favorable ratings.

Further details on long‐term debt are provided in Note 3 and 4 to the financial statements.

Economic Factors and Next Year’s Budget and Rates The District, located in Buncombe County within the Asheville Metropolitan Area, has been in a better economic position than many other communities in the state and the nation due to several key factors.

 Unemployment—From 2003 through 2012, Asheville’s unemployment rate has been among the lowest compared to the other ten metropolitan areas in North Carolina. As of June 2012, Asheville’s unemployment rate was 7.3%. This holds well below the state and national averages of 9.9% and 8.4% respectively. Over the past year, about 1,400 jobs have been added to the economy increasing current employment to 171,700.  Balanced economic growth—The Asheville metropolitan area has developed a unique and

balanced economy based on several key drivers. Actions of each driver can overlap and support other drivers in the local economy. History has also shown that a period of weakness for one driver can lead to the expansion of another.

Key drivers include:  Specialized health care industry  Stable tourism activity  Restructured manufacturing sector  Baby‐boom fueled population growth  Resilient housing market  Growing professional services sector

 Local healthcare employment—At over 32,500 workers, health services are now the

largest industry sector in the Asheville metropolitan area. Ambulatory health services are the chief source of the new jobs. Strong gains in well‐paying health services had softened earlier losses in the traditional manufacturing sector. As of June 2012, stable growth in local healthcare services continued at an annual rate of 2% to 4% due to the concentration of tertiary care facilities and the in‐migration of baby‐ boomers and retirees. Future growth in local healthcare services is expected to be at a more moderate rate due to the national economic downturn.  Consistent tourism destination—The tourism market experienced an 8.6% increase

over the previous year. Evidence of a slow recovering economy having an impact on travel patterns.

Fiscal Year Ended June 30, 2012

21

Financial Section

Metropolitan Sewerage District of Buncombe County, North Carolina

 Manufacturing employment—Recent economic indicators suggest job loss in

manufacturing has been impacted by the current recession. The industry did not experience any change during the current year. With 18,300 workers, the industry continues to be transformed into a high‐skilled sector restructured around an advanced group of machinery, plastics, and electronics manufacturers.  Continued moderate population growth—Population growth remains a consistent

and stable contributor to the local economy. Estimates indicate moderate growth patterns will continue between 1.5% and 2.0% per year. More than 95% of local population growth is from in‐migration, with the remaining from births over deaths.  Residential building—Asheville is seeing a downturn in the residential market.

Currently, homes sales are up 11% with the average price increased over 1.0%. In addition, nearly 592 new residential building permits were issued in 2012. This is a 3.5% increase over the previous year.  Professional and Business sector—The confluence of retiring baby boomers, local

quality of life, and economic growth has resulted in the emergence of a growing professional and business services sector. This sector includes many highly technical and well‐paid services such as engineering and computer design, and temporary employment services.

The major economic challenge facing the District is the decline of traditional industry in the area, especially textiles. However, the loss in industrial sewer revenues is expected to be offset from the growing numbers of domestic customers and increased consumption rates.

Based on the District’s projections for residential, commercial, and industrial sewer use, sewer rates will increase by 2.5% for the fiscal year ending June 30, 2013 to provide adequate funding for operations, debt service, and the District’s long‐term Capital Improvement Program.

Requests for Additional Information This report is designed to provide an overview of the District’s finances for those with an interest in this area. Questions concerning any of the information found in this report or requests for additional information should be directed to W. Scott Powell, Director of Finance, Metropolitan Sewerage District, 2028 Riverside Drive, Asheville, NC 28804, (828)‐255‐8211, or spowell@msdbc.org.

22

Fiscal Year Ended June 30, 2012

Metropolitan Sewerage Disstrict of Buncombe County, North N Carolinaa

Finnancial Sectionn

Stateme ent of Net Position June 30, 2012

Assets: Current ass ets: nts Cash and cash equivalen d cash and cash h equivalents Restricted Receivables (net): Accountts Sales Employ yee Grant Interestt Inventorie es Prepaid expenses e Tottal current assetts

$

92,540 5,19 22,710 72 1 14,727 2,731 51,245 25 92,216 29 32,178 13 30,599 39,03

Noncurrent assets: d cash and cash h equivalents Restricted Tottal restricted as sets

62,643 3,26 62,643 3,26

Defferred bond iss uance costs-net

99,081 1,29

Capital Asse ets: Land Easementts Plant and equipment Constructtion in progresss Less: acc cumulated depr eciation Tottal property and d equipment

15,666 2,51 99,623 6,49 49,958 480,94 60,898 13,86 94,804) (138,99 31,341 364,83

Tottal noncurrent assets a

93,065 369,39

Total assets

23,664 408,42

Deferred outflows of reso ources: dging derivative e Accumulated decrease in fair value of hed

34,174 6,73

Liabilities: bilities: Current liab Payments from current assets: a Accountts payable and accrued expenses Currentt portion of com mpensated abse ences payable Payments from restricted d cash and cash h equivalents: nterest payable Bond in Currentt portion of long g term obligatio ons Tottal current liabilities

99,496 2,89 3 32,000 49,290 1,04 21,825 4,42 02,611 8,40

Noncurrent liabilities: Compens ated absences, net of current portion Other posst-employment benefits Derivative e liability Deferred Revenue m obligations, net n of current maturities m Long-term Tottal noncurrent liabilities

96,001 69 03,700 80 34,174 6,73 7,559 12,495 90,11 53,929 98,35

Total liabilitiess Net positio on: Net investtment in capitall assets Restricted d for: Avery's Creek Sanitry District D ervice Debt se Bond co ovenant Unrrestricted Total net posittion

26,51 18,112 04,140 5,90

56,540 106,75 97,021 270,29

$

78,142 57 22,656 6,62 16,696 91 86,783 29,98 01,298 308,40

The e accompanyin ng notes are an n integral part oof the financial statements.

Fiscal Year Ended June 30,, 2012

23

Finanncial Section

Metropolitan Seweerage District oof Buncombe CCounty, North Carolina

Stateme ent of Reve enues, Exp penses, and Changess in Net Po osition For the Y Year Ended June 30, 20 012

Operating g revenues: Sewer charges Facilityy and tap fees Miscellaneous T Total operating revenues

$

27,849 9,176 2,321 1,474 907 7,987 31,078 8,637

Operating g expenses: Salarie es and employe ee benefits Contra actual services Utilitie es Repairrs and maintenance Other supplies and expenses e d expenses Insurance claims and Depreciation T Total operating expenses O Operating incom me

6,663 3,907 1,452 2,459 1,106 6,158 958 8,738 1,545 5,557 5,450 2,255 7,681 1,340 21,663 3,609 9,415 5,028

Nonopera ating revenue s (expenses): Interesst income Interesst expense Amorttization of bond issuance costs Gain (Loss) on disposal of surplus property p T Total nonoperating revenues (expenses) ( In ncome before contributions c

311 1,807 (2,534 4,946) (144 4,651) 86 6,165 (2,281 1,625) 7,133 3,403

Capita al contribution

7,550 2,047

C Change in net position p

0,953 9,180

nning of year Total Net Position, begin o year Total Net Position, end of

0,345 299,220 $

1,298 308,401

The e accompanyin ng notes are an n integral part oof the financial statements.

24

Fiscal Year EEnded June 300, 2012

Metropolitan Sewerage Disstrict of Buncombe County, North N Carolinaa

Finnancial Sectionn

Stateme ent of Cash h Flows For the Y Year Ended June 30, 20 012 Cash flows f from op perating activiities: Ca ash received from customerss Sa ales tax paid Ca ash paid to em mployees for services Ca ash paid for go oods and servicces Otther operating revenue erating activitie es Net cash prrovided by ope

$

Cash flows f from ca apital and relatted financing activities: a Accquisition and construction of o capital assetts Prroceeds from sale s of surplus property

Prrincipal paid on n bond maturitties

Interest paid on bond maturitie es a related financing activitie es Net cash ussed by capital and

(18,341,475 5) 5 119,195 (5,324,825 5) 5) (3,092,685 0) (26,639,790

f from inv vesting activitties: Cash flows Prroceeds from sale s of Investm ents Pu urchases of inv vestments Interest on invesstments Net cash prrovided by inve esting activities

0 1,500,000 0) (1,320,000 9 298,089 9 478,089

et increase (de ecrease) in cash h and cash equ uivalents Ne

Cash and cash equiv valents, July 1 Cash and cash equiv valents, June 30

29,523,438 8 5) (337,145 8) (5,629,648 8) (8,446,548 1 914,781 8 16,024,878

3) (10,136,823

$

8 45,821,718 35,684,895 5

$

9,415,028 8

Recon nciliation of operating incom me to net cash h proviided by operatting activities:: Operating incom me djustments to reconcile operrating income to t net cash Ad

prrovided by ope erating activitie es:

Depreciatio on

assets and liab Changes in bilities:

e) in receivables s (Increase

Decrease e in inventory

(Increase e) in prepaid ite ems

(Decrease e) in accounts payable and accrued expenses

Increase in other post-e employment benefits b

Increase in accrued com mpensated abssences

T Total adjustme ents Net cash c provided by operating activities a

0 7,681,340 (977,563 3) 6 1,146 8) (129,678 9) (175,299 0 196,000 13,904 4 0 6,609,850 $

8 16,024,878

esting, capital, and financingg activities:

Noncash inve 1. At variou us times duringg the year ende ed June 30, 2012 the District received contribution of sew wer lines consttructed by develo opers with a re eported estimaated fair value of $2,047,5500.

The e accompanyin ng notes are an n integral part oof the financial statements.

Fiscal Year Ended June 30,, 2012

25

Finanncial Section

Metropolitan Seweerage District oof Buncombe CCounty, North Carolina

Notes tto Basic Fin nancial Staatements June 30, 2012

Note 1 - Summarry of Sign nificant Accountin A ng Policie es The acco ounting poliicies of the e Metropolittan Sewera ge District of Buncom mbe County,, North Carolina ((District) con nform to gen nerally accepted accounnting princip ples as appliccable to enteerprise‐ type gove ernments. Th he followingg is a summaary of the moore significant accountin ng policies:

A. Rep porting Entiity The e District is aa public bod dy and bodyy politic and corporate o of the State of North Carolina, creaated pursuaant to the North Carolina Metroppolitan Sewerage Distriicts Act (Arrticle 5, Chaapter 162A of the Gene eral Statute es of North Carolina, as amended). The Distrrict was estaablished in 1962 by th he North Carolina Statte Stream SSanitation C Committee for the purpose of con nstructing an nd operating facilities ffor sewage treatment w within the p political subdivisions serrviced by the e District as listed below w.

Cityy of Asheville

e

Beaaverdam Water and Sew wer District

Tow wn of Biltmore Forest Tow wn of Black M Mountain

Busbee Sanitaryy Sewer Disttrict Can ney Valley Saanitary Sewe er District Crescent Hill Sanitary Sewer District Woodfin Sanitary Water an nd Sewer Disstrict

Town of M Montreat Enka‐Cand dler Water an nd Sewer District Fairview Saanitary Seweer District Skyland Sanitary Seweer District Swannanoa Water and d Sewer Disttrict Town of W Weaverville Venable Saanitary Distrrict

der the North Carolina Metropolitaan Seweragge Districts A Act, the Disstrict is auth horized, Und amo ong other th hings, to: (a) acquire, co onstruct, im prove, extend, maintain n, and operate any sew werage syste em or part th hereof (inclu uding facilitiies for the ggeneration aand transmisssion of elecctric power and energy)) within or w without the District; (b) to issue revvenue bondss to pay the costs of an ny of the fo oregoing; an nd (c) to sett and collecct rents, rates, fees and d other charges for provvision of sew werage serviices and the use of any District facillities.

The e District Boaard consists of twelve m members apppointed as fo ollows: threee from the County of B Buncombe, tthree from the City of Assheville, andd one each frrom Woodfin Sanitary W Water & Sew wer District, and the Tow wns of Biltm more Forest, Black Moun ntain, Montreat, Woodffin, and Weaverville.

The e District ow wns, operate es, and maintains a waastewater trreatment plant as well as the relaated network of collecto or and interceptor seweers. The treaatment plan nt has a capaacity to treaat up to 40 million gallons per day, but curreently receivves an averaage of 18.1 million gallons per dayy from appro oximately 50,000 resideential and ccommercial customer acccounts tran nsported thrrough approximately 990 0 miles of coollector seweers.

26

Fiscal Year EEnded June 300, 2012

Metropolitan Sewerage District of Buncombe County, North Carolina

Financial Section

The District’s basic financial statements include all transactions of the District for which the District is financially accountable. Financial accountability is defined as appointment of a majority of a component unit’s board and either the ability to impose the will of the District or the possibility that the component unit will provide a financial benefit to or impose a financial burden on the District. Based on these criteria, the District has determined that there are no component units, which come under the criteria for inclusion. The District is not a component unit of any other governmental entity.

B. Basis of Presentation — Fund Accounting The accounts of the District are organized and operated on the basis of funds in accordance with the District’s Bond Order. A Fund is an independent fiscal and accounting entity with a self‐balancing set of accounts comprised of assets, liabilities, fund equity, revenues, and expenditures or expenses as appropriate. Fund accounting segregates funds according to their intended purpose and is used to aid management in demonstrating compliance with finance‐related legal and contractual provisions. The minimum number of funds is maintained consistent with legal and managerial requirements.

The District presents the basic financial statements on an enterprise fund basis. The Enterprise Fund accounts for those operations (a) that are financed and operated in a manner similar to private business enterprises where the intent of the governing body is that costs (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 the periodic determination of revenues earned, expenses incurred, and/or net income is appropriate for capital maintenance, public policy, management control, accountability, and other purposes.

C. Measurement Focus and Basis of Accounting The proprietary fund is accounted for on the flow of economic resources measurement focus. With this measurement focus, all assets and all liabilities associated with the operation of these funds are included on the balance sheet. Proprietary Funds are presented in the financial statements on the accrual basis of accounting. Under this basis, revenues are recognized in the accounting period when earned and expenses are recognized in the period they are incurred.

As permitted by generally accepted accounting principles, the District has elected to apply only applicable FASB Statements and Interpretations issued before November 30, 1989 that do not contradict GASB pronouncements in its accounting and reporting practices for its enterprise operations.

D. Budgetary Data Budgets are adopted as required by state statute and in compliance with the Bond Order. All annual appropriations lapse at fiscal year‐end. The budget is prepared using the modified Fiscal Year Ended June 30, 2012

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Metropolitan Sewerage District of Buncombe County, North Carolina

accrual basis of accounting, which is consistent with the accounting system used to record transactions during the fiscal year. Expenditures may not legally exceed appropriations at the functional level. Management is authorized to transfer appropriations within a department; however, any revisions that alter total expenditures of any function must be approved by the governing board. There were no budget amendments.

As required by North Carolina state law (G.S. 159‐26(d)), the District maintains encumbrance accounts, which are considered to be “budgetary accounts.” Encumbrances outstanding at year‐end represent the estimated amounts of the expenditures ultimately to result if unperformed contracts in progress at year‐end are completed. Encumbrances outstanding at year‐end do not constitute expenditures or liabilities.

E. Deposits and Investments All deposits of the District are made in board‐designated official depositories and are secured as required by State law [G.S. 159‐31]. The District may designate as an official depository any bank or savings and loan association whose principal office is located in North Carolina. In addition, the Board may establish time deposit accounts such as NOW and SuperNOW accounts, money market accounts, and certificates of deposit.

State law [G.S. 159‐30(c)] authorizes the District to invest in obligations of the United States or obligations fully guaranteed both as to principal and interest by the United States; obligations of the State of North Carolina, (the “State”); bonds and notes of any North Carolina local government or public authority; obligations of certain non‐guaranteed federal agencies; certain high quality issues of commercial paper and bankers’ acceptances and the North Carolina Capital Management Trust (NCCMT).

The District’s Bond Order limits investments to: a. government obligations; b. obligations of the following agencies: Federal Financing Bank, Federal Home Loan Banks;

Federal Home Loan Mortgage Corporation (except for stripped mortgage securities which are purchased at prices exceeding their principal amounts), The Federal National Mortgage Association (except for stripped mortgage securities which are purchased at prices exceeding their principal amounts), the Government National Mortgage Association, the Federal Housing Administration and the Farmers Home Administration; c. direct general obligations of the State secured by the full faith and credit and taxing

power of the State rated in one of the two highest rating categories by Moody’s and S&P; d. bonds and notes of any North Carolina local government or public authority (other than

the District), subject to such restrictions as the Secretary of the Local Government Commission may impose, provided such bonds or notes are rated in one of the two highest rating categories by Moody’s and S&P; 28

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Metropolitan Sewerage District of Buncombe County, North Carolina

Financial Section

e. savings certificates or certificates of deposit issued by any commercial bank or savings

and loan association organized under the laws of the State or in any federal bank or savings and loan association having its principal office in the State; provided, however, that any principal amount of such certificates in excess of the amount insured by the federal government or any agency thereof; or by a mutual deposit guaranty association authorized by the Administrator of the Savings Institutions Division of the Department of Commerce of the State, be fully collateralized by obligations reserved by financial institution; f.

prime quality commercial paper (having original maturities of not more than 270 days) bearing the highest rating of Moody’s and S&P and not bearing a rating below the highest by any nationally recognized rating service which rates the particular obligation;

g. Participating shares in the cash portfolio of North Carolina Capital Management Trust,

provided that the investments of such fund are limited to those qualifying for investment under this definition and that said fund is certified by the Local Government Commission; h. A commingled investment pool established and administered by the State Treasurer

pursuant to G. S. 147‐69.3;

i.

Repurchase agreements with respect to Government Obligations if entered into with certain restrictions;

j.

Any other investment now or hereafter permitted for investment of funds by the District by the General Statutes of North Carolina, including, without limitation, Section 159‐30 of the General Statutes of North Carolina.

The District’s investments with a maturity of more than one year at acquisition and non‐ money market investments are reported at fair value as determined by quoted market prices. The securities of the NCCMT Cash Portfolio, a SEC‐registered (2a – 7) money market mutual fund, are valued at fair value, which is the NCCMT’s share price. The NCCMT Term Portfolio’s securities are valued at fair value. Money market investments that have a remaining maturity at the time of purchase of one year or less are reported at amortized cost. Non‐participating interest earnings and investment contracts are reported at cost.

F. Restricted Assets and Liabilities Any unexpended bond proceeds from the revenue bonds issued by the District are classified as restricted assets because their use is completely restricted to the purpose for which the bonds were originally issued. Cash and investments included in the District’s bond service and debt service reserve accounts are classified as restricted because their use is completely restricted for reserves and debt service of the outstanding bonds. The District first applies restricted resources when an expense is incurred for purposes for which both restricted and unrestricted net assets are available.

Fiscal Year Ended June 30, 2012

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Any amounts payable from restricted assets are considered restricted liabilities. At June 30, 2012, the bond interest payable of $1,049,290 and the current portion of long‐term debt $4,421,825 represents total restricted liabilities of the District.

G. Allowance for Doubtful Accounts All receivables that historically experience uncollectible accounts are shown net of an allowance for doubtful accounts. This amount is estimated based on the percentage of receivables that were written off in prior years. The allowance was $751,047 as of June 30, 2012.

H. Inventories Inventories consist of materials and supplies held for consumption and expensed as used.

Inventories are valued at the lower of cost (first‐in, first‐out) or market.

I. Capital Assets Capital assets, primarily property and equipment, are recorded at original cost at the time of acquisition or constructed. Donated assets are recorded at the estimated fair market value at the date of donation. Any interest incurred during the construction phase of capital assets is reflected in the capitalized value of the assets constructed. Assets costing at least $15,000 and with a useful life of over one year are capitalized. The cost of normal maintenance and repairs that do not add to the value of the asset or materially extend asset lives are not capitalized. Depreciation is computed on the straight‐line basis. Assets are depreciated based on useful life estimated by District engineers as follows: See Note 5 for further details.

Buildings and Waste Treatment Plants Improvements other than Buildings Waste Treatment and Pumping Stations Machinery Interceptor Sewer Lines Collector Sewer Lines Office Furniture and Fixtures Lab Equipment Maintenance Equipment Automobiles and Trucks Communication Equipment Computer equipment and software

50 years 10-50 years 10-15 years 50-100 years 50-100 years 10 years 5-10 years 5-10 years 5-10 years 5-10 years 3-5 years

J. Deferred Bond Issuance Costs Costs incurred in issuing Series 2003 refunding revenue bonds, Series 2008A refunding revenue bonds, Series 2008B refunding revenue bonds, Series 2009A revenue bonds, and Series 2009B refunding revenue bonds have been deferred and are being amortized over the term of the bonds using an effective interest method of amortization.

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Financial Section

K. Compensated Absences The vacation policy of the District provides for the accumulation of up to forty (40) days earned vacation leave with such leave being fully vested when earned. Accordingly, an expense and a liability for compensated absences and any salary‐related payments such as retirement contributions and payroll taxes are recorded. Accumulated earned vacation at June 30, 2012 is $728,001 and is included in accrued expenses. See Note 3D for further details.

The District's sick leave policy provides for an unlimited accumulation of earned sick leave.

Accumulated sick leave at June 30, 2012 amounts to approximately $2.1 million. Sick leave does not vest but any unused sick leave accumulated at the time of retirement may be used in the determination of length of service for retirement benefit purposes. Since the District has no obligation for the accumulated sick leave until it is actually taken, no accrual for sick leave has been made.

L. Cash Equivalents For the purposes of the statement of cash flows, the District considers all highly liquid investments (including restricted assets) with an original maturity of three months or less when purchased to be cash equivalents.

M. New Pronouncements The District has implemented the following Governmental Accounting Standards Board (GASB) pronouncement:  Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred

Inflows of Resources, and Net Position, will be effective for the District beginning after December 15, 2011. The objective of this Statement is to provide financial reporting guidance for deferred outflows of resources and deferred inflows of resources. The requirements of this Statement will improve financial reporting by standardizing the presentation of deferred outflows of resources and deferred inflows of resources and their effects on a government’s net position. It alleviates uncertainty about reporting those financial statement elements by providing guidance where none previously existed. The District has elected to early implement this statement as of June 30, 2012.

The Governmental Accounting Standards Board (GASB) has issued several statements not yet implemented by the District. Those statements which may have future impact on the District include:  Statement No. 65, Items Previously Reported as Assets and Liabilities, will be effective for

the District beginning after December 15, 2012. The objective of this Statement is to establish accounting and financial reporting standards that reclassify, as deferred outflows of resources or deferred inflows of resources, certain items that were previously reported as assets and liabilities and recognizes, as outflows of resources or Fiscal Year Ended June 30, 2012

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inflows of resources, certain items that were previously reported as assets and liabilities.

It will also provide other financial reporting guidance related to the impact of the financial statement elements deferred outflows of resources and deferred inflows of resources, such as changes in the determination of the major fund calculations and limiting the use of the term deferred in financial statement presentations. Management is currently evaluating the impact this statement will have on the District’s financial statements.

 Statement No. 66, Technical Corrections—2012—An amendment of GASB Statements

No. 10 and No. 62 will be effective for the District beginning after December 15, 2012.

The objective of this Statement is to improve accounting and financial reporting for a governmental financial reporting entity by resolving conflicting guidance that resulted from the issuance of two pronouncements, Statements No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, and No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre‐November 30, 1989 FASB and AICPA Pronouncements.

It amends Statement No. 10, Accounting and Financial Reporting for Risk Financing and Related Insurance Issues, by removing the provision that limits fund‐based reporting of an entity’s risk financing activities to the general fund and the internal service fund type.

As a result, governments should base their decisions about fund type classification on the nature of the activity to be reported, as required in Statement 54 and Statement No. 34, Basic Financial Statements—and Management's Discussion and Analysis—for State and Local Governments. Finally, it amends Statement 62 by modifying the specific guidance on accounting for operating lease payments that vary from a straight‐line basis, the difference between the initial investment (purchase price) and the principal amount of a purchased loan or group of loans, and servicing fees related to mortgage loans that are sold when the stated service fee rate differs significantly from a current (normal) servicing fee rate. These changes clarify how to apply Statement No. 13, Accounting for Operating Leases with Scheduled Rent Increases, and result in guidance that is consistent with the requirements in Statement No. 48, Sales and Pledges of Receivables and Future Revenues and Intra‐Entity Transfers of Assets and Future Revenues, respectively. Management is currently evaluating the impact this statement will have on the District’s financial statements.

N. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

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Financial Section

O. Operating and Nonoperating Revenues and Expenses The District defines operating revenue and expenses as those directly received and incurred in the process of providing wastewater collection and treatment. Nonoperating revenues and expenses are those resulting from incidental functions such as investment income, interest expense on long‐term debt, and sale of surplus equipment.

P. Deferred Revenue From time to time, the District may receive grants, cost‐sharing or other revenue with respect to future periods. Such funds are classified as deferred revenue and recognized in the period when the requisite activities and conditions are completed.

Note 2 - Deposits and Investments A. Deposits All of the District’s deposits are either insured or collateralized by using the Pooling Method.

Under the Pooling Method, which is a collateral pool, all uninsured deposits are collateralized with securities held by the State Treasurer’s agent in the name of the State Treasurer. Since the State Treasurer is acting in a fiduciary capacity for the District, these deposits are considered to be held by the District’s agent in the District’s name. The amount of the pledged collateral is based on an approved averaging method for non‐interest‐bearing deposits and the actual current balance for interest‐bearing deposits. Depositories using the Pooling Method report to the State Treasurer the adequacy of their pooled collateral covering uninsured deposits. The State Treasurer does not confirm this information with the District or the escrow agent. Because of the inability to measure the exact amount of collateral pledged for the District under the pooling method, the potential exists for under collateralization, and this risk may increase in periods of high cash flows.

However, the State Treasurer enforces strict standards of financial stability for each depository that collateralizes public deposits under the Pooling Method and the District relies on the State Treasurer to monitor those financial institutions. The District’s formally adopted investment policy attempts to mitigate custodial credit risk for deposits by pre‐ qualifying the financial institutions receiving funds. The District also complies with the provisions of G.S. 159‐31 when designating official depositories and verifying that deposits are properly secured.

At June 30, 2012, the District’s deposits had a carrying amount of $19,586,482 and a bank balance of $20,536,121. Of the bank balance, $750,000 was covered by federal depository insurance and $19,786,121 in interest‐bearing deposits was covered by collateral held under the pooling method.

At June 30, 2012, the District had a cash balance of $1,146,000, which was held by a bank trustee under various escrow agreements with collateralization agreements as determined Fiscal Year Ended June 30, 2012

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sufficient by the respective bond attorneys. The cash resulted from several investments, which had recently matured. The amount was reinvested on July 1, 2012.

At June 30, 2012, the District had $350 cash on hand.

B. Investments As of June 30, 2012, the District had the following investments and maturities.

Investment Type NC Capital Management Trust – CASH NC Capital Management Trust – TERM* Total

Fair Value 5,853,904 9,098,159

Less Than 6 Months $ 5,853,904 9,098,159

6 to 12 Months N/A N/A

1 to 2 Years N/A N/A

3 to 5 Years N/A N/A

$ 14,952,063

$ 14,952,063

N/A

N/A

N/A

$

* Because the NC Capital Management Trust Term Portfolio had a duration of .17 years, it was presented as an investment with a maturity of 6‐12 months.

Interest Rate Risk—As a means of limiting its exposure to changes in fair value arising from rising interest rates, the District’s formally adopted investment policy calls for structuring the investment portfolio so that securities mature to meet cash requirements for ongoing operations and/or scheduled debt service, thereby avoiding the need to sell securities on the open market prior to maturity. In addition, the District invests operating funds primarily in shorter‐term securities.

Credit Risk—Credit risk is the risk of loss due to the failure of the security issuer or backer.

The District’s formally adopted investment policy mitigates credit risk by limiting investments to the safest types of securities and restricts the purchase of securities to the highest possible ratings whenever particular types of securities are rated. The District’s investments in the NC Capital Management Trust Cash Portfolio carried a credit rating of AAAm by Standard & Poor’s as of June 30, 2012. The District’s investment in the NC Capital Management Trust Term Portfolio is unrated. The Term Portfolio is authorized to invest in obligations of the US government and agencies, and in high‐grade money market instruments as permitted under North Carolina General Statutes 159‐30 as amended.

Custodial Credit Risk—For an investment, custodial credit risk is the risk that in the event of the failure of the counterparty, the District will not be able to recover the value of its investments or collateral securities that are in the possession of an outside party. The District’s formally adopted investment policy requires all transactions to be conducted on a delivery‐versus‐payment (DVP) basis and to be held by a contracted third‐party custodian and evidenced by safekeeping receipts. At June 30, 2012, the District did not have any investments exposed to custodial credit risk.

Concentration of Credit Risk—The District’s investment policy mitigates concentration of credit risk, that is, the risk from the failure of any one entity or industry, by limiting the 34

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Financial Section

maximum amount of the District’s portfolio that may be invested in Bankers’ Acceptances and Commercial Paper to 20% each. In addition, the District’s formally adopted policy limits investment in any single issue of a non‐governmental entity to the greater of $500,000 or 1% of the entire portfolio.

C. Forward Delivery Agreement Objective—In connection with the debt service reserve funds for the 2001 Bonds, the District entered into Forward Delivery Agreement (FDA) under which it has received a guarantee of the rate of return it will receive during the term of the agreement on amounts held in the reserve funds. Because this agreement is not held as an investment, its fair value is not included in the financial statements. However, all investments acquired under the terms of the agreement are presented at fair value.

Terms—Under this agreement, the Provider agrees to sell the District qualifying investments bearing a certain rate of interest and maturing at times when cash is needed for debt service requirements. The agreement entered into for the Series 2001 bonds with Salomon Brothers Holding Company Inc. matures July 1, 2021. The guaranteed rate of return is 5.38% and covers approximately $1.1 million of debt service reserve funds.

Interest Rate Risk—The FDA minimized the risk of loss resulting from fluctuations in interest rates during the term of the contract, but the District has also foregone the possibility of receiving greater returns on debt service reserve funds from such fluctuations. At June 30, 2012, the District did not have any funds invested in the FDA due to a June 30 maturity of the held investment.

Credit Risk—Credit risk is the risk of loss due to the failure of the security issuer or backer.

The FDA agreement provides for additional collateral or other remedies in the event the providing institution suffers a serious downgrade by one or more of the major investment rating firms. Currently Citigroup, of which Salomon Brothers is a subsidiary, is rated Baa2 by Moody’s Investors Service, A‐ by Standard & Poor’s Ratings Services, and A by Fitch Ratings.

Custodial Credit Risk—These investments are not subject to custodial risk because they are not evidenced by securities that exist in physical or book entry form.

Termination Risk—In the event the District desires to terminate the agreement, the provider will compute the value of the contract based on prevailing interest rates. If the amount is positive, the District will pay the amount to the provider, or if negative, the provider will pay such amount to the District. The District terminated the FDA on August 21, 2012 as described in Note 15. The provider has no option to terminate the contract.

Fiscal Year Ended June 30, 2012

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D. Hedging Derivative Instrument At June 30, 2012, the District had the following hedging derivative instrument: Fair Value June 30, 2011

Changes in Fair Value Type

Objective

Notional Amount

Cash Flow Hedge: PayHedge of changes Fixed in cash flows on Interest the 2005/2008A Rate Series Revenue Swap Refunding Bonds $33,095,000

Classification

Deferred Outflow of Resources

Amount

($3,183,888)

Effective Date

Maturity Date

Classification

Amount

1/6/2005

7/1/2031

Debt

$(6,734,174)

The mark‐to‐market valuation was established by market quotations from the counterparty representing estimates of the amounts that would be paid for replacement transactions.

Because the coupons on the District’s variable‐rate bonds adjust to changing interest rates, the bonds do not have a corresponding fair value increase.

Objective—As a means to lower its borrowing costs, when compared against fixed‐rate bonds at the time of issuance in January 2005, the District issued variable interest rate debt and entered into an interest rate exchange agreement (swap) in connection with its variable rate $33,915,000 Series 2005 Revenue Refunding Bonds. The intention of the swap was to effectively change the District’s variable interest rate on the bonds to a synthetic fixed rate of 3.4175%. In April 2008, the District issued $33,635,000 Revenue Refunding Bonds Series 2008A to currently refund the Series 2005 Revenue Refunding Bonds. The swap described above now applies to the Series 2008A Revenue Refunding Bonds.

Terms—Under the terms of the swap, the District pays the counterparty a fixed payment of 3.4175% and receives a variable payment computed as 59% of the one‐month London Interbank Offered Rate (LIBOR) plus 35 basis points. The swap had an initial notional amount equal to the associated Series 2005 variable rate bond principal amount of $33,915,000. The swap was entered into at the same time the Series 2005 bonds were issued in January of 2005. Starting in fiscal year 2006, the notional value of the swap and the principal amount of the associated debt declined in equal amounts. As the swap now applies to the Series 2008A bonds, the remaining notional value of the swap is correlated to the variable rate bond principal amount of $33,635,000. Starting in fiscal year 2010, the notional value of the swap and the principal amount associated debt decline in similar amounts until the debt is completely retired. The notional amount outstanding is $33,095,000 as of June 30, 2012. The bonds’ variable rate coupons are determined by the remarketing agent based on prevailing market conditions. This usually approximates The Securities Industry and Financial Markets Association (SIFMA). The bonds and the related swap agreement both mature on July 1, 2031.

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Metropolitan Sewerage District of Buncombe County, North Carolina

Financial Section

Credit risk—As of June 30, 2012, the District was not exposed to credit risk because the swap had a negative fair value. However, should interest rates change and the fair value of the swap becomes positive, the District would be exposed to credit risk in the amount of the swap’s fair value. The swap counterparty was rated A3 by Moody’s and A by Standard & Poor’s, and Fitch Ratings as of June 30, 2012. To mitigate the potential credit risk, if the counterparty’s credit quality falls below Baa3 (Moody’s) and BBB‐(S&P), the value of the swap may be fully collateralized by the counterparty or by several other means specified in the International Swap Dealers association (ISDA) Master Agreement and Counterparty Schedule.

Interest Rate/Basis Risk—As noted above, the swap exposes the District to basis risk should the relationship between LIBOR and SIFMA diverge, changing the synthetic rate on the bonds. The effect of this difference in basis is indicated by the difference between the intended synthetic rate of 3.4175% and the actual synthetic rate for the period ending June 30, 2012 of 3.07%. As of June 30, 2012, the rate on the District’s bonds was .18% whereas 59% of one‐month LIBOR plus 35 basis points was .4950%. If a change occurs that results in the rates’ moving in a direction unfavorable to the District, the expected cost savings may not be realized.

Termination Risk—The interest rate exchange contract uses the International Swap Dealers Association (ISDA) Master Agreement, which includes standard termination events, such as failure to pay and bankruptcy. The ISDA Schedule to the Master Agreement includes an “additional termination event.” That is, the swap may be terminated by the District if the counterparty’s credit quality rating falls below Baa3 (Moody’s) and BBB‐(S&P). The District or the counterparty may terminate the swap if the other party fails to perform under the terms of the contract. If the swap were terminated, the variable‐rate bonds would no longer carry a synthetic interest rate. In addition, if at the time of termination the swap has a negative fair value, the District would be liable to the counterparty for a payment equal to the swap’s fair value.

Market Access Risk/Rollover Risk—The District’s interest rate exchange contract is for the term (maturity) of the bonds and therefore there is no market‐access risk or rollover risk.

Note 3 - Long-Term Debt Obligations A. Long-Term Debt The District issues debt to help finance the cost of rehabilitation of wastewater interceptor and collection infrastructure, and treatment plant facilities. Unlike cities and counties, the District has no legal debt limit. However, the District must comply with the legal requirements contained in its Bond Order as described in Note 11.

Fiscal Year Ended June 30, 2012

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Metropolitan Sewerage District of Buncombe County, North Carolina

The District’s borrowings are subject to federal arbitrage regulations; however, management does not anticipate any material liability for arbitrage from any of these debt issues.

The District currently has the following issues outstanding: Original Issue Amount Revenue Bonds: Series 2001, Revenue Bonds Series 2003, Revenue Refunding Bonds Series 2008A, Revenue Refunding Bonds Series 2008B, Revenue Refunding Bonds Series 2009A, Revenue Bonds Series 2009B, Revenue Refunding Bonds

21,020,000 26,970,000 33,635,000 22,165,000 17,205,000 13,360,000

State Revolving Fund: 2009 North Carolina Water Pollution Control Revolving Fund

672,980

The following is a summary of changes in the Districts’ long‐term debt for the fiscal year ended June 30, 2012: Balance July 1, 2011

Additions

Retirements

Balance June 30, 2012

Revenue Bonds: Revenue bonds (Series 2001) issued for construction costs of a portion of the construction costs of a five-year capital improvement plan adopted by the District: 2.80% to 4.50% serial bonds issued December 13, 2001, with maturities on each July 1, 2004 through 2013 varying from $250,000 to $555,000; $ 1,045000 $ interest payable semi-annually $ 1,045,000 $

-

Enka-Candler Water and Sewer District Bonds liability assumed by the District on July 2, 1990 as stated in the sewer consolidation agreement: 5.00% serial bonds assumed July 2, 1990 with maturities on each June 1, through 2024 varying from $19,000 to $64,000, interest payable semiannually 759,000 53,000 706,000 Revenue refunding bonds (Series 2003) issued for the defeasance of a portion of the Series 1992A and 1992B revenue refunding bonds, and Series 1993A revenue bonds: 2% to 5.25% serial bonds issued April 3, 2003, with maturities on each July 1, 2004 through 2022 varying from $205,000 to $2,730,000; interest payable semi-annually 14,205,000 14,205,000 4% term bonds issued April 3, 2003, at 100% due July 1, 2014; interest payable semi-annually

38

1,910,000

-

10,000

1,900,000

Fiscal Year Ended June 30, 2012

Metropolitan Sewerage District of Buncombe County, North Carolina

Financial Section

Balance July 1, 2010

Additions

Retirements

Balance June 30, 2012

Revenue Bonds: (continued) Revenue refunding bonds (Series 2003) issued for the defeasance of a portion of the Series 1992A and 1992B revenue refunding bonds, and Series 1993A revenue bonds (continued): 4% term bonds issued April 3, 2003, at 99.09% 20,000 1,805,000 July 1, 2014; interest payable semi-annually 1,825,000 Total – Series 2003 Bonds 17,940,000 30,000 17,910,000 Revenue Refunding Bonds (Series 2008A) issued to currently refund the Series 2005 Revenue Refunding Bonds: Interest at variable rates in the weekly mode, 185,000 33,095,000 payable monthly, due serially until 2031 33,280,000 Revenue Refunding Bonds (Series 2008B) issued to currently refund the Series 2005 Revenue Refunding Bonds: Interest at variable rates in the weekly mode, payable monthly, due serially until 2031 20,705,000 770,000 19,935,000 Revenue Bonds(Series 2009A) issued for construction of certain projects in the capital improvement plan: 2.0% to 5.00% serial bonds issued October 7, 2009, with maturities on each July 1, 2010 through 2024 varying from $400,000 to $700,000; 415,000 7,105,000 interest payable semi-annually 7,520,000 5.00% term bonds issued October 7, 2009, at 109.001%, due July 1, 2029; interest payable semi-annually

4,065,000

-

-

4,065,000

2.0% to 5.00% serial bonds issued 5.00% term bonds issued October 7, 2009, at 107.240%, due July 1, 2034; interest payable semi-annually

5,220,000

-

-

5,220,000

16,805,000

-

415,000

16,390,000

Total - Series 2009A Bonds

Revenue Refunding Bonds (Series 2009B) used to refund portions of Series 1999: 2.0% to 5.00% serial bonds issued October 7, 2009, with maturities on each July 1, 2010 through 2019 varying from $595,000 to $3,100,000; interest payable semi-annually Total Revenue Bonds

Fiscal Year Ended June 30, 2012

10,680,000

-

2,810,000

7,870,000

101,214,000

-

5,308,000

95,906,000

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Metropolitan Sewerage District of Buncombe County, North Carolina

Balance July 1, 2010

Additions

Retirements

Balance June 30, 2012

State Revolving Fund: 2009 North Carolina Water Pollution Control Revolving Fund used to construct certain sewerage projects: $672,980 revolving loan issued August 18, 2009 unpaid principal sum is reduced by one-half as "Principal Forgiveness", interest accrues at 0%, 20 annual installments May 1, 2011 to 2030

319,665

-

16,825

302,840

Total State Revolving Fund

319,665

-

16,825

302,840

101,533,665

-

5,324,825

96,208,840

(1,566,229) 99,967,436

-

108,291

(1,674,520) 94,534,320

Total Long-Term Obligations Less net of unamortized discounts and premiums

Series 2001 Series 2003 Series 2008A Series 2008B Series 2009A Series 2009B 2009 State Revolving Fund Enka-Candler

1,045,000 30,000 185,000 770,000 415,000 2,810,000 16,825 53,000 (5,324,825) $94,642,611

35,000 170,000 790,000 430,000 2,925,000 16,825 55,000 (4,421,825) $90,112,495

Maturities of long‐term debt are as follows:

Year Ending June 30: 2013 2014

Serial and Term Maturity

Principal Mandatory Sinking Fund Requirements (Term Bonds)

$

$

4,386,825 5,184,825

35,000 35,000

Total $

Interest

4,421,825 5,219,825

$

3,702,901 3,494,039

2015

2,157,824

3,635,000

5,792,824

3,287,196

2016

6,020,824

-

6,020,824

3,049,444

2017

5,050,824

-

5,050,824

2,811,561

22,801,122

3,705,000

26,506,122

16,345,141

2021

21,349,122

1,995,000

23,344,122

11,328,487

2026

23,333,123

-

23,333,123

6,662,973

2031

19,740,473

-

19,740,473

2,415,157

2035

3,285,000

-

3,285,000

251,875

5,700,000

$ 96,208,840

$ 37,003,633

Five Years

$ 90,508,840

$

40

Fiscal Year Ended June 30, 2012

Metropolitan Sewerage District of Buncombe County, North Carolina

Financial Section

The mandatory sinking fund requirements for the term bonds set forth above assume sufficient cash flow to provide for the sinking fund requirements. To the extent the sinking fund does not fully redeem the term bonds, the Series 2003 bonds are payable in full at maturity on July 1, 2014.

The revenue bonds are secured by and payable solely from all sewer revenues of the District after provisions for operating expenses and from certain reserves and other monies of the District, as described in the bond order. Additional remittance requirements to the trustee for a sinking fund to redeem the term bonds, subordinated indebtedness outstanding, if any, and other purposes are set forth in the bond order.

Commencing on or after July 1, 2013, the District may redeem in whole or in part, any of the Series 2003 bonds maturing on or after July 1, 2014, at 0% premium.

Interest costs of $365,704 have been capitalized in the cost of construction for the year ended June 30, 2012. Net interest expense not capitalized in 2012 was $2,534,946.

B. Variable Debt Interest rates—Interest rates for variable debt change weekly as determined by the responsible remarketing agent based on competitive municipal bond rates in the secondary market.

Liquidity Agreement—The District has entered into a remarketing agreement with the Bank of America to perform various functions in connection with the Series 2008A and Series 2008B variable debt. The Remarketing Agent’s major responsibilities include (i) soliciting of purchases of Bonds from qualified investors, (ii) processing and recordkeeping for such purchases, (iii) billing and receiving payment for Bonds purchased, and (iv) determining the interest rate on the Bonds as provided in the Series Resolution.

Fiscal Year Ended June 30, 2012

41

Financial Section

Metropolitan Sewerage District of Buncombe County, North Carolina

C. Hedging Derivative and Associated Hedged Debt As of June 30, 2012, debt service requirements of the variable‐rate debt and net swap payments, assuming current interest rates remain the same for their term were as follows.

As rates vary, variable‐rate bond interest payments and net swap payments will vary.

Fiscal Year Ending June 30 2013

Variable Rate Bonds Principal Interest $

170,000

$

Interest Rate Swap, Net

59,571

$

967,204

Total $

1,196,775

2014

740,000

59,265

962,236

1,761,501

2015

765,000

57,933

940,609

1,763,542

2016

790,000

56,556

918,252

1,764,808

2017

825,000

55,134

895,164

1,775,298

2018

855,000

53,649

871,053

1,779,702

2019

885,000

52,110

846,066

1,783,176

2020

920,000

50,517

820,202

1,790,719

2021

2,075,000

48,861

793,315

2,917,176

2022

2,160,000

45,126

732,673

2,937,799

2023

2,235,000

41,238

669,546

2,945,784

2024

2,320,000

37,215

604,228

2,961,443

2025

2,400,000

33,039

536,426

2,969,465

2026

2,485,000

28,719

466,286

2,980,005

2027

2,585,000

24,246

393,662

3,002,908

2028

2,685,000

19,593

318,115

3,022,708

2029

2,785,000

14,760

239,646

3,039,406

2030

2,890,000

9,747

158,254

3,058,001

2031

1,240,000

4,545

73,793

1,318,338

2032

1,285,000

2,313

37,554

1,324,867

$ 33,095,000

$

754,137

$

12,244,284

$

46,093,421

The computations above are based on the following interest assumptions.

Rates at 6/30/2012

Terms Interest Rate Swap: Fixed Payment to Counterparty Variable Payment from Counterparty Net Interest Rate Swap Payments Variable-rate Bond Coupon Payments Synthetic Interest Rate on Bonds

42

Fixed 59% of LIBOR plus 35 Basis Points Remarketed Rate

3.4175% (.4950%) 2.9225% .1800% 3.1025%

Fiscal Year Ended June 30, 2012

Metropolitan Sewerage District of Buncombe County, North Carolina

Financial Section

D. Compensated Absences Changes to the liability for compensated absences were as follows: Balance June 30, 2011

$

714,097

Additions

606,975

Withdrawals

(593,071)

Balance June 30, 2012

$

728,001

The District accounts for compensated absences on a LIFO basis, assuming that employees are taking leave time as it is earned. For the year ended June 30, 2012, the District estimates that $32,000 is the current portion of this liability.

Note 4 - Defeasance of Bonds 1999 Refunding On April 12, 1999, the District deposited with an escrow agent sufficient funds to purchase Treasury obligations maturing as to principal and interest at such times and in such amounts as shall be sufficient to pay the principal and interest on a portion of the Series 1992A, Series 1992B, and Series 1993A bonds as follows: 1992A Revenue Refunding Term Bonds 1992B Revenue Refunding Term Bonds

$

3,545,000 2,395,000

1993A Revenue Serial Bonds

975,000

1993A Revenue Term Bonds

6,685,000 $ 13,600,000

Total

2003 Refunding On April 3, 2003, the District issued $26,970,000 of revenue advance refunding bonds to provide resources to purchase U.S. Government securities that were placed in an irrevocable trust for the purpose of general resources for all future debt service payments of $26,890,000 of 1992A, 1992B, and 1993A revenue bonds redeemed July 1, 2003. As a result, the refunded bonds are considered to be defeased and the liability has been removed from the statement of net assets.

The reacquisition price exceeded the net carrying amount of the old debt by $1,900,825. This amount is being netted against the new debt and amortized over the life of the refunded debt, which is shorter than the life of the new debt issued. This advance refunding was undertaken to reduce total debt service payments over the next 20 years by $3,591,700 and resulted in an economic gain of $2,026,796.

Fiscal Year Ended June 30, 2012

43

Financial Section

Metropolitan Sewerage District of Buncombe County, North Carolina

2005 Refunding On January 6, 2005, the District issued $33,915,000 of revenue advance refunding bonds to provide resources to purchase U.S. Government securities that were placed in an irrevocable trust for the purpose of general resources for all future debt service payments for $14,125,000 of 1999 bonds to be redeemed on July 1, 2009, and for $17,030,000 of 2001 bonds to be redeemed on July 1, 2011. As a result, the refunded bonds are considered to be defeased and the liability has been removed from the statement of net assets. The reacquisition price exceeded the net carrying amount of the old debt by $2,760,000. This amount is being netted against the new debt and amortized over the life of the refunded debt, which is shorter than the life of the new debt issued.

This advance refunding was undertaken to reduce total debt service payments over the next 25 years by $4,009,602 and resulted in an economic gain of $2,501,941.

Summary Depositing these funds amounted to a defeasance of a portion of the 1992A, 1992B, 1993A, and 2001 series bonds. These liabilities, as well as the funds held by the escrow agent, were removed from the District’s financial statements.

The defeased bonds at June 30, 2012 had the following outstanding balances: June 30, 2011 1992A

$

2,440,000

New $

Retired -

$

June 30, 2012

1,180,000

$

1,260,000

1992B

1,650,000

-

800,000

850,000

1993A

5,660,000

-

1,080,000

4,580,000

2001

17,030,000

-

17,030,000

-

$

26,780,000

$

-

$

20,090,000

$

6,690,000

Outstanding amounts will be redeemed as follows: July 1, 2012 1992A 1992B 1993A

$

$

44

1,260,000 850,000 1,140,000 3,250,000

July 1, 2013 $

$

3,440,000 3,440,000

Fiscal Year Ended June 30, 2012

Metropolitan Sewerage District of Buncombe County, North Carolina

Financial Section

Note 5 - Capital Assets A summary of changes in capital assets follows below.

Balance 6/30/11 Capital Assets Not Being Depreciated Land Easements Buildings not currently in service Construction In Progress Total Capital Assets Not Being Depreciated Capital Assets Being Depreciated Buildings & Waste Treatment Plants Improvements & Other than Bldgs.

Machinery & Equipment Interceptor Sewer Lines Collector Lines Automobiles and Trucks Computer Equipment Office Furniture & Equipment Total Capital Assets Being Depreciated Less Accumulated Depreciation Buildings & Waste Treatment Plants Improvements & Other than Bldgs.

Machinery & Equipment Interceptor Sewer Lines Collector Lines Automobiles and Trucks Computer Equipment Office Furniture & Equipment Total Accumulated Depreciation Total Capital Assets Being Depreciated, Net

$

2,515,666 6,061,191 1,159,908 4,818,414

Additions

$

18,141,096

Disposals

$

Balance 6/30/12

Transfers

-

$

- $ 438,432 (9,098,612)

2,515,666 6,499,623 1,159,908 13,860,898

14,555,179

18,141,096

-

(8,660,180)

24,036,095

47,881,160 4,149,044 50,270,856 108,621,465 252,904,769 4,079,783 572,891 584,142

287,560 2,047,550 347,491 -

(65,848) (270,564) (31,119) (110,200) (139,110) -

135,553 279,285 284,285 2,242,036 5,719,021 -

47,950,865 4,428,329 50,572,137 110,832,382 260,561,140 4,288,164 572,891 584,142

469,064,110

2,682,601

(616,841)

8,660,180

479,790,050

(17,784,650) (2,613,368) (40,698,173) (17,017,932) (49,710,307) (3,051,641) (440,328) (580,876) (131,897,275)

(959,706) (187,273) (1,092,576) (1,212,672) (4,049,285) (124,883) (54,119) (826) (7,681,340)

32,819 270,564 31,119 110,200 139,109 583,811

-

(18,711,537) (2,800,641) (41,520,185) (18,199,485) (53,649,392) (3,037,415) (494,447) (581,702) (138,994,804)

(4,998,739) $ 13,142,357 $

(33,030) (33,030)

8,660,180 -

340,795,246 $364,831,341

337,166,835 $351,722,014

$

Fully depreciated assets—The District currently has fully depreciated capital assets still in service with a historical cost of approximately $41.5 million, consisting primarily of sewer collector and interceptor lines, wastewater treatment plant facilities, and various machinery and equipment.

Buildings not being depreciated—In January of 1999, the District modified its sewage treatment process, which resulted in retiring the digester equipment. However, the building Fiscal Year Ended June 30, 2012

45

Financial Section

Metropolitan Sewerage District of Buncombe County, North Carolina

in which it had been housed is still suitable for use, and accordingly, depreciation will not be charged until it is placed back in service.

Contributed infrastructure—The District’s responsibility is to maintain existing collector and interceptor sewer lines as well as to provide wastewater treatment. The majority of sewer lines added to the District are constructed by member agencies or developers and donated to the District. Occasionally, owners of private lines will petition the District to take over their sewer lines as well. This infrastructure must meet minimum District engineering standards, and when accepted by Board action, the District assumes all responsibility for future maintenance and rehabilitation. During the year ended June 30, 2012, the District accepted capital assets with an estimated fair market value of $2,047,550.

Easements—The District acquires right‐of‐way easements in the course of sewer line rehabilitation projects. These easements have an indefinite useful life and are recorded at cost.

Note 6 - Pension Plan Obligation A. North Carolina Local Governmental Employees' Retirement System Plan Description—The District contributes to the statewide Local Governmental Employees’ Retirement System (LGERS), a cost‐sharing multiple‐employer defined benefit pension plan administered by the State of North Carolina. LGERS provides retirement and disability benefits to plan members and beneficiaries. Article 3 of G.S. Chapter 128 assigns the authority to establish and amend benefit provisions to the North Carolina General Assembly.

The Local Governmental Employees’ Retirement System is included in the Comprehensive Annual Financial Report (CAFR) for the State of North Carolina. The State’s CAFR includes financial statements and required supplementary information for LGERS. That report may be obtained by writing to the Office of the State Controller, 1410 Mail Service Center, Raleigh, North Carolina 27699‐1410, or by calling (919) 981‐5454.

Funding Policy—Plan members are required to contribute six percent of their annual covered salary. The District is required to contribute at an actuarially determined rate. For the District, the current rate for employees is 6.88% of annual covered payroll. The contribution requirements of members of the District are established and may be amended by the North Carolina General Assembly. The District’s contributions to LGERS for the years ended June 30, 2012, 2011 and 2010 were $534,804, $468,731, and $349,086, respectively.

The contributions made by the District equaled the required contributions for each year.

46

Fiscal Year Ended June 30, 2012

Metropolitan Sewerage District of Buncombe County, North Carolina

Financial Section

B. Supplemental Retirement Income Plan for Non-Law Enforcement Officers 401(k) Plan Plan Description—The District contributes to the Supplemental Retirement Income Plan of North Carolina, often referred to as the State’s 401(k) Plan, a defined contribution pension plan administered by the Department of State Treasurer and a Board of Trustees. The Plan provides retirement benefits to employees of the District who are members of the Local Government Employees’ Retirement System. Article 5 of G.S. Chapter 135 assigns the authority to establish and amend benefit provisions to the North Carolina General Assembly.

Funding Policy—Employee contributions are voluntary and must conform to applicable IRS limits. The District has a graduated matching contribution plan as follows: if an employee contributes 1%, 2% or 3%, the District will contribute 2%, 4%, or 5%, respectively, of their salary to either the 401(k) plan or the 457 plan described below. The District Board has the authority to establish and amend contribution requirements. During the year ended June 30, 2012, a total of $282,117 and $292,321 were contributed by the District and employees, respectively.

C. Deferred Compensation Plan Plan Description—The District also offers its employees a deferred compensation plan, another type of defined contribution plan, established under the Internal Revenue Code Section 457. The plan allows employees to defer receipt and taxation of a portion of their salary until future years. The deferred compensation is not available to employees until termination, retirement, death, or unforeseeable emergency. The plan is administered by a third‐party administrator who establishes and amends benefit provisions within the provisions of the Internal Revenue Code Section 457.

All amounts of compensation deferred under the plan, all property and rights purchased with those amounts, and all income attributable to those amounts, property, and rights (until paid or made available to the employee or other beneficiary) are held in trust for the exclusive benefit of participants and their beneficiaries. As such, these assets and the related obligations are not reported in these financial statements.

Funding Policy—Employee contributions are voluntary and must conform to applicable IRS limits. The District has a graduated matching contribution plan as follows: if an employee contributes 1%, 2% or 3%, the District will contribute 2%, 4%, or 5%, respectively, of their salary to either the 401(k) plan described above or the 457 plan. The District Board has the authority to establish and amend contribution requirements. During the year ended June 30, 2012, $23,848 and $28,351 were contributed by the District and employees, respectively, to the deferred compensation plan.

Fiscal Year Ended June 30, 2012

47

Financial Section

Metropolitan Sewerage District of Buncombe County, North Carolina

Note 7 - Other Employment Benefit Death Benefits—The District has elected to provide death benefits to employees through the Death Benefit Plan for Members of the Local Governmental Employees' Retirement System (Death Benefit Plan), a multiple‐employer State‐administered cost‐sharing plan funded on a one‐year term cost basis. The beneficiaries of those employees who die in active service after one year of contributing membership in the System, or who die within 180 days after retirement or termination of service and have at least one year of contributing membership service in the System at the time of death are eligible for death benefits. Lump sum death benefit payments to beneficiaries are equal to the employee's 12 highest months’ salary in a row during the 24 months prior to his/her death, but the benefit may not be below $25,000 or exceed $50,000. All death benefit payments are made from the Death Benefit Plan. The District has no liability beyond the payment of monthly contributions. Contributions are determined as a percentage of monthly payroll, based upon rates established annually by the State. Because the benefit payments are made by the Death Benefit Plan and not by the District, the District does not determine the number of eligible participants. For the fiscal year ended June 30, 2012, the District made contributions of $7,773 to the State to provide death benefits. The District's required contributions for employees represented 0.08% of covered payroll. The contributions to the Death Benefit Plan cannot be separated between the post‐employment benefit amount and the other benefit amount.

Note 8 - Other Post-Employment Benefits Healthcare Benefits Plan Description—Under terms of a District resolution, the District administers a single‐ employer defined benefit group health and dental insurance plan (the GHD Plan). As of May 14, 2008, the plan allow retirees to continue coverage under the Districts' self‐insured group health and dental insurance plan until the earlier of reaching age 65; or becoming covered under another group medical plan; or failing to timely pay any required premium for such coverage.

The District will pay the premium cost for the eligible retired employee as follows: Years of Service

Subsidy Vesting %

30 years at any age

100%

25 years at 55 years of age

90%

20 years at 55 years of age

80%

15 years at 55 years of age

65%

10 years at 55 years of age

55% - Existing Employees 50% - Employees hired after 7/1/08

5 years at 55 years of age

50% - Existing Employees

48

Fiscal Year Ended June 30, 2012

Metropolitan Sewerage District of Buncombe County, North Carolina

Financial Section

In addition, the District’s retirees can purchase coverage for their spouse at full actuarial cost.

The District’s Board may amend the benefit provisions. A separate report was not issued for the plan.

Membership in the District’s GHD Plan consisted of the following at July 1, 2010, the date of the latest actuarial valuation: Employees Retirees Receiving Benefits Active Plan Members Total

1 148 149

Funding Policy—The District pays the full cost of coverage for the healthcare benefits provided to qualified retirees under the plan. The District has chosen to fund the healthcare benefits on a pay as you go basis. Funding for these costs is included in budgeted appropriations in the annual budget. For the current year, the District contributed 16,100 or .2% of annual covered payroll.

The current ARC rate is 2.8% of annual covered payroll. The District had three participating retirees who contributed $3,895.

Summary of Significant Accounting Policies— Post‐employment expenditures are made from the Post‐employment account, which is maintained on the accrual basis of accounting.

Expenditures are paid as they come due.

The District’s board has agreed to set aside funds on an annual basis equivalent to the annual ARC requirement as determined by the District’s actuarial consultants. As of June 30, 2012, the District set aside $846,121. These funds are to be used to meet the District’s future post‐ employment obligation.

Annual OPEB Cost and Net OPEB Obligation—The District‘s annual OPEB cost (expense) is calculated based on the annual required contribution of the employer (ARC), an amount actuarially determined in accordance with the parameters of GASB Statement 45. The ARC represents a level of funding that, if paid on an ongoing basis is projected to cover normal cost each year and amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed thirty years.

Fiscal Year Ended June 30, 2012

49

Financial Section

Metropolitan Sewerage District of Buncombe County, North Carolina

The following table shows the components of the District’s annual OPEB cost for the year, the amount actually contributed to the plan, and changes in the District’s net OPEB obligation for the healthcare benefits: Annual Required Contribution Interest on Net OPEB Obligation Adjustment to Annual Required Contribution Annual OPEB Cost (Expense) Contributions Made Increase (Decrease) in Net OPEB Obligation Net OPEB Obligation, beginning of year NET OPEB Obligation, end of year

$

211,500 24,300 23,700 212,100 16,100 196,000 607,700 803,700

$

The District’s annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and the net OPEB obligation for 2012, 2011, 2010, and 2009 were as follows: For the Year Ended June 30

2009 2010 2011 2012

Annual OPEB Cost

$

212,000 221,400 200,600 212,100

Percentage of Annual OPEB Cost Contributed

0.0% 3.5% 9.3% 7.6%

Net OPEB Obligation

$

212,000 425,700 607,700 803,700

Funded Status and Funding Progress—As of July 1, 2010 the most recent actuarial valuation date, the plan was not funded. The actuarial accrued liability for benefits and, thus, the unfunded actuarial accrued liability (UAAL) was $1,678,300. The covered payroll (annual payroll of active employees covered by the plan) was $7,147,000 and the ratio of the UAAL to the covered payroll was 23.5%. Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and healthcare trends. Amounts determined regarding the funded status of the plan and the annual required contributions of the employer are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented as required supplementary information following the notes to the financial statements, presents multiyear trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits.

Actuarial Methods and Assumptions—Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and the plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing of benefit costs between the employer and plan members at that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short‐term volatility in actuarial accrued liabilities and the actuarial value assets, consistent with the long‐term perspective of the calculations.

50

Fiscal Year Ended June 30, 2012

Metropolitan Sewerage District of Buncombe County, North Carolina

Financial Section

In the July 1, 2010 actuarial valuation, the entry age normal actuarial cost method was used. The actuarial assumptions included a 4.0% investment rate of return (net of administrative expenses), which is the expected long‐term investment returns on the employer’s own investments calculated based on the funded level of the plan at the valuation date, and an annual medical cost trend increase of 9.0% to 5.0% annually. The investment rate included a 3.0% inflation assumption. The UAAL is being amortized as a level percentage of projected payroll on an open basis. The remaining amortization period at July 1, 2010 was 30 years.

Note 9 - Risk Management The District has established a self‐insured group health and dental insurance program, which provides medical coverage up to a maximum of $60,000 per employee, and approximately $1,000,000 in the aggregate. The District purchases commercial insurance for claims in excess of coverage.

All employees participate in the program and are responsible for premium and co‐payment amounts as determined by the District. Charges to the Enterprise Fund are adjusted annually so that the Program revenues and expenses are approximately equal and there is an adequate amount in reserves in the event the District decides to discontinue the plan. The accrued self‐ insurance claims liability of $82,479 reported at June 30, 2012 represents estimated claims liabilities, including incurred but not reported losses, at the estimated ultimate cost of settling the claims using historical experience as determined by the Third‐Party Administrator (TPA).

Changes since inception in the claims liability amount are as follows: Fiscal Year Ending June 30 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Beginning of Fiscal Year Liability $

Fiscal Year Ended June 30, 2012

72,152 62,120 135,323 83,498 35,414 68,370 44,456 77,683 126,098 91,500 121,470 115,542 165,829 111,019 113,804 53,056 111,129 136,435

Current Year Claim Claims & Payments Changes in Estimates $ 530,786 $ 540,818 775,891 702,688 381,338 433,163 304,519 352,603 484,512 451,556 635,222 659,136 610,882 577,655 543,810 495,395 783,630 818,228 772,527 742,557 1,030,787 1,036,715 1,134,973 1,084,686 1,092,881 1,147,691 1,129,645 1,126,860 1,217,628 1,278,376 1,378,101 1,320,028 1,622,029 1,596,723 1,739,643 1,793,599

Balances at Fiscal Year End

$

62,120 135,323 83,498 35,414 68,370 44,456 77,683 126,098 91,500 121,470 115,542 165,829 111,019 113,804 53,056 111,129 136,435 82,479

51

Financial Section

Metropolitan Sewerage District of Buncombe County, North Carolina

The District is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; injuries to employees; and natural disasters. The District participates in two self‐funded risk‐financing pools administered by the North Carolina League of Municipalities. Through these pools, the District obtains general liability and auto liability coverage, property coverage up to the total insurance values of the property policy, and workers’ compensation coverage up to statutory limits. The pools are reinsured through commercial companies for single occurrence claims against general liability, auto liability, and property in excess of $500,000 and $300,000 up to statutory limits for workers’ compensation.

The property liability pool has an aggregate limit for the total property losses in a single year, with the reinsurance limit based upon a percentage of the total insurance values.

The District carries commercial coverage for all other risks of loss. There have been no significant reductions in insurance coverage in the prior year, and settled claims have not exceeded coverage in any of the past three fiscal years.

The District carries flood insurance through the National Flood Insurance Plan (NFIP). Because the District’s structures, situated adjacent to the French Broad River, are in an “A” area designated by the Federal Emergency Management Agency (FEMA), the District has purchased coverage in the maximum amount of $500,000 through the NFIP for each eligible structure.

Management believes this will be adequate to remediate flood damage to exposed buildings and their contents.

In accordance with G.S. 159‐29, the District has adopted a system of blanket faithful performance bonds for all employees and has purchased coverage of $100,000 from a commercial insurance carrier. The Finance Officer is individually bonded for $250,000.

Note 10 - Construction in Progress and Future Expansion Plans During the year ended June 30, 2002, consulting engineers finalized a comprehensive twenty‐ year Wastewater System Master Plan to guide the District in reducing sanitary sewer overflows (SSOs) as well as keeping up with the maintenance and management of its infrastructure. The plan estimated that the District would need to spend approximately $257 million over a twenty‐ year period. Portions of this Master Plan are periodically updated as required to meet the needs identified by engineering staff for the Water Reclamation Facility and the collector and interceptor sewer lines. The District uses these plans, along with other resources including representatives from the member agencies, to develop a ten‐year Capital Improvement Plan projected to spend an average of $14.9 million annually. The District expects to fund these costs out of user charges along with the issuance of additional bonds.

As of June 30, 2012, the District had begun sewer projects expected to incur future costs of approximately $45.7 million, and the District is committed under various contracts encumbered for sewer construction and rehabilitation estimated to cost $2.5 million to complete. The majority of encumbered contracts are expected to be completed within the next fiscal year, and 52

Fiscal Year Ended June 30, 2012

Metropolitan Sewerage District of Buncombe County, North Carolina

Financial Section

the projects currently under construction are scheduled to be completed within the next two to five years.

Note 11 - Bond Covenants The District is subject to the 1999 Amended Bond Order, which contains several operational directives including internal accounting fund structure, disclosure of financial records, and setting rates. The District was in compliance with all requirements of the Bond Order during the year ended June 30, 2012. A copy of the Bond Order may be obtained by contacting the Director of Finance.

The District is required by the 1999 Amended Bond Order to set rates as summarized by the following: The District covenants to set rates and charges so that the Income Available for Debt Service (defined as the excess of “Revenues” over “Current Expenses”) will not be less than the greater of (i) one hundred twenty percent (120%) of the Long‐Term Debt Service Requirement for Parity Indebtedness only for such Fiscal Year and (ii) one hundred percent (100%) of the Long‐Term Debt Service Requirement for Parity Indebtedness and Subordinated Indebtedness for such Fiscal Year.

The definition of revenues for this purpose does not include grants, contributions, investment income credited to non‐operating funds, or tap and connection fees. However, tap and connection fees may be considered revenues upon a resolution duly passed by the Board.

Current expenditures include operating expenses other than additions to reserve funds, depreciation or amortization, or debt service payments. Long‐Term Debt Service Requirement means the aggregate of the required deposits to be made in respect of principal and interest.

The various Bond Series Resolutions require either monthly or semi‐annual deposits of the upcoming principal and interest payments to be received by the Trustee at least one day prior to the payment date. In other words, during the fiscal year ended June 30, 2012, the Long‐Term Debt Service Requirement equaled principal and interest due on January 1, 2012 and July 1, 2012.

Fiscal Year Ended June 30, 2012

53

Financial Section

Metropolitan Sewerage District of Buncombe County, North Carolina

The District does not currently have any subordinated indebtedness, so the computation of the current fiscal year’s compliance with this covenant is based solely on 120% of the debt service requirement as follows: Operating Revenues

$

Interest and Non-Operating Revenues

31,078,637 397,972

Adjustments to Revenues: Interest Income allocable to Non-Operating Funds

(135,913)

Grant Revenue

(110,439)

Facility, Tap, and Other Fees

(2,633,519)

(Gain) on Disposal of Property

(86,165)

Adjusted Revenues Less:

28,510,573

Operating Expenses

(21,663,609)

Add back Depreciation

7,681,340

Adjusted Current Expenditures Income Available for Debt Service

(13,982,269) $

Long-Term Debt Service Requirement

7,274,680

Minimum Required Percentage Minimum Required Income

14,528,304 120%

$

8,729,616

Therefore, the District is in compliance with the rate covenant as income available for debt service is in excess of 120% of the annual required debt service. The actual coverage ratio is 200%.

Note 12 - Hydroelectric Power The District operates a hydroelectric generation facility on the French Broad River in proximity to the wastewater treatment plant. In some years with above average rainfall, sufficient quantities of electricity are produced to supply all of the plant’s needs with excess electricity generated being sold to Progress Energy. During the year ended June 30, 2012, the District generated power used by the plant, which was estimated to have a net cost after deducting expenditures to generate such power of approximately $358,823 if purchased. An immaterial amount was sold to Progress Energy. This is considerably lower than in prior years due to rainfall that was significantly below average levels.

Note 13 - Operating Leases Rental Income The District has entered into a cancelable agreement expiring in 2016 with an optional two‐year renewal, with Pace Analytical Services Inc. (Pace) which leases a portion of a building in the 54

Fiscal Year Ended June 30, 2012

Metropolitan Sewerage District of Buncombe County, North Carolina

Financial Section

Wastewater Treatment Plant facilities along with laboratory equipment. In lieu of direct cash payments to the District for rent, Pace performs certain water sampling and analytical services required under the terms and conditions of the District’s NPDES Permit and its Industrial Waste Pretreatment Program. In the event that the fair market value of services rendered is less than the rent payment, Pace will remit funds for the deficit to the District. Conversely, if the fair market value of the laboratory services rendered exceeds the rental amount, the District will pay Pace for the difference. This agreement had an annual value of $60,000, and this amount is accordingly reflected as rental income and operating expense in these financial statements.

The District has also entered in to a cancelable lease expiring in 2015 with an optional two‐year renewal, with Buncombe County Partnership for Children to lease the old Administration Building at an annual rent of $51,312.

The final cancelable, renewable agreement entered into by the District is with a private company to lease land upon which the private company has placed a cell tower. The lease may be renewed indefinitely for five‐year terms with 15% increases upon each renewal, and will provide $19,044 annually until the next scheduled increase in 2015.

Following are the carrying values of leased assets, along with current year depreciation and total accumulated depreciation at June 30, 2012. The value of the land leased for a cell tower is not included as it is immaterial and not otherwise useful to the District in current operations.

Leased Asset

Cost

Portion of Plant Building (estimate) Laboratory Equipment Old Administration Building Office Equipment & Fixtures

$

Accumulated Depreciation

Book Value

426,000 14,251 467,008 16,742

$

322,484 192,972 -

$

103,516 14,251 274,036 16,742

Lease Expense The District leases certain office equipment under operating leases. Lease expenditures for these and other rental agreements during the year ended June 30, 2012 totaled $20,650.

Future minimum lease payments are as follows: Year Ended June 30 2013

$

20,640

2014

20,640

2015

19,713

2016

8,466

Total

Fiscal Year Ended June 30, 2012

Amount

S

69,459

55

Financial Section

Metropolitan Sewerage District of Buncombe County, North Carolina

Note 14 - Claims and Judgments The District may be a party to lawsuits arising from the ordinary conduct of business. In the opinion of management, settlement of actual or possible litigation, if any, will not have a material effect on the financial position of the District.

Note 15 - Subsequent Events On April 19, 2012, the North Carolina General Assembly, Legislative Research Committee (LRC) presented two recommendations as it pertains to water and sewerage issues in Western North Carolina.

The first recommendation was to amend the Metropolitan Sewerage District Act to reflect population shifts in single‐county districts, modify representation in multi‐county districts, and allow metropolitan sewerage district to exercise the same authority as metropolitan water districts. This was approved by the General Assembly of North Carolina Session Law 2012‐203 House Bill 1009 on August 3, 2012.

The second recommendation was to merge the City of Asheville Water Resource Department with the Metropolitan Sewerage District of Buncombe County. Additionally the LRC recommends that the 2013 Session of the North Carolina General Assembly consolidate the City of Asheville Water Resource Department with the Metropolitan Sewerage District of Buncombe County. Should the interested governments craft their own solution for consolidation, which achieves all the objectives of the Committee, before the 2013 North Carolina General Assembly convenes, due consideration would be given to the local plan. Action will not be taken if the parties are engaged in good‐faith negotiations on this matter. On July 18, 2012, the District engaged Malcolm Pirnie, Arcadis to assess the impact of the LRC recommendation on the ratepayers of the District.

On August 21, 2012, the District terminated its Forward Delivery Agreement (FDA) with Salomon Brothers, a subsidiary of Citigroup as described in Note 3. The District received $312,000 in compensation.

56

Fiscal Year Ended June 30, 2012

REQUIRED SUPPLEMENTAL INFORMATION

Metropolitan Sewerage Disstrict of Buncombe County, North N Carolinaa

Finnancial Sectionn

Other Po ost‐Employment Ben nefits Required Supplem ment Inform mation Schedule of Funding Progresss Actuarial Valuation Date 7/1/2008 7/1/2010

Actuariial Value of o Assetss (a) $

Actu uarial Acccrued Entrry Age (b) ( $1,8 801,000 1,6 678,300

Unfunded (UAAL) (b-a) $1,801,000 1,678,300

Funded Ratio (a/b) 0.0% 0.0%

Covere ed Payro oll (c) $6,532,000 7,147,000

% of Pa ayroll ((b--a) / c) 27 7.6% 23 3.5%

Fiscal Year Ended June 30,, 2012

57

Finanncial Section

Metropolitan Seweerage District oof Buncombe CCounty, North Carolina

Other Po ost‐Employment Ben nefits Required Supplem ment Inform mation er Contribu ution and Notes to tthe Requirred Schedu ules Employe Yea ar Ended Ju une 30,

Ann nual Required d Co ontribution 000 212,0

0.0%

2010

221,5 500

3.5%

2011

200,2 200

9.3%

2012

211,5 500

7.6%

2009

$

Percentage Contributed

Notes to th he Required d Schedules This inform mation presented in the required supplementaryy schedules was determ mined as parrt of the actuarial vaaluations at the dates indicated. Add ditional info rmation as o of the latestt actuarial vaaluation follows: Validation Date •7/1/2010

Actuarial Co ost Method •Entry Age N Normal

Amortizatio on Method •Level perce entage of pay, o open

Remaining Amortization n Period •30 Years

Actuarial A Assumptions •Investmentt Rate of Return ‐ 4.00% •Inflation Asssumption ‐ 3.00% 3 •Healthcare Cost Trend Rate ‐ 9.00% in nitial, 5.00% ultimate

58

Fiscal Year EEnded June 300, 2012

Metropolitan Sewerage District of Buncombe County, North Carolina

Financial Section

This page intentionally left blank.

Fiscal Year Ended June 30, 2012Â Â

59

SUPPLEMENTAL FINANCIAL DATA

Finanncial Section

Metropolitan Seweerage District oof Buncombe CCounty, North Carolina

Comparative State ement of N Net Positio on June 30, 2012 and 2 2011 2012 Assets: A C Current assets: sh equivalents Cash and cas Restricted ca ash and cash eq uivalents Receivables (net): s Accounts Sales ee Employe Grant Interest Inventories enses Prepaid expe Total current assets

$

$

35,574,345 3 6,938,290 4,548,059 385,565 21,521 236,912 293,362 2,500 48,000,554

Noncurrent asse N ets: Restricted ca ash and cash eq uivalents Restricted inv vestments Total res stricted assets

3,262,64 43 3,262,64 43

3,309,083 180,615 3,489,698

Deferred bo nd issuance cos ts-net

81 1,299,08

1,443,733

Capital Assets: C Land Easements Plant and eq uipment Construction in progress Less: accumulated deprecia tion operty and equiipment Total pro

2,515,66 66 23 6,499,62 58 480,949,95 98 13,860,89 (138,994,80 04) 41 364,831,34

2,515,666 6,061,191 47 70,224,018 4,818,414 (13 31,897,275) 35 51,722,014

Total no oncurrent assets

65 369,393,06

35 56,655,445

To otal assets

64 408,423,66

40 04,655,999

74 6,734,17

3,550,286

2,899,49 96 00 32,00

3,007,888 28,750

90 1,049,29 25 4,421,82 11 8,402,61

1,133,033 5,324,825 9,494,496

01 696,00 00 803,70 74 6,734,17 59 7,55 95 90,112,49 98,353,92 29

685,347 607,700 3,550,286 5,500 9 94,642,611 9 99,491,444

40 106,756,54

10 08,985,940

21 270,297,02

25 51,754,578

56 6,622,65 42 578,14 96 916,69 83 29,986,78 98 308,401,29

7,849,253 620,880 824,822 3 38,170,812 29 99,220,345

Liabilities and Net Position: L C Current liabilities s: Payments from m current assets: Accounts pay yable and accrued expenses Current portion of compens ated absences payable p m restricted cash h and cash equiv valents: Payments from Bond interes t payable m debt Current portion of long-term Total current liabilities Noncurrent liab ilities: N Compensated absences, nett of current porttion employment ben nefit Other post-e Derivative lia bility venue Deferred rev Bonds payab ble, net of curren nt maturities Total no oncurrent liabilities To otal liabilities Net position: N ent in capital ass sets Net investme Restricted fo or: Debt servic ce Avery's Cre eek Sanitary Disttrict Bond covenant Unrestricted otal net position To

12 26,518,11 40 5,904,14 5,192,54 40 10 722,71 27 14,72 31 2,73 45 251,24 16 292,21 78 132,17 39,030,59 99

Deferred outflo D ows of resource es: A Accumulated de ecrease in fair va alue o hedging deriv of vative

60

20 011

$

$

Fiscal Year EEnded June 300, 2012

Metropolitan Sewerage Disstrict of Buncombe County, North N Carolinaa

Finnancial Sectionn

Comparative State ement of R Revenues, Expenses,, and Chan nges in Nett Position For the FFiscal Years Ended Jun ne 30, 2012 and 2011

2012 Ope erating revenu ues: S Sewer charges F Facility and tap p fees M Miscellaneous Total operrating revenues

$

27,849,176 2,321,474 907,987 31,078,637

2011 $

26,894,894 2,238,171 612,721 29,745,786

Ope erating expensses: S Salaries and em mployee beneffits C Contractual serrvices U Utilities R Repairs and maintenance O Other supplies and expensess In nsurance claim ms and expens es D Depreciation es Total operrating expense Operating income

6,663,907 1,452,459 1,106,158 958,738 1,545,557 2,255,450 7,681,340 21,663,609 9,415,028

6,536,352 1,337,258 1,234,810 927,655 1,344,307 2,142,086 7,520,744 21,043,212 8,702,574

Non noperating rev venues (expen nses): In nterest income e In nterest expensse A Amortization of bond issuancce costs G Gain (Loss) on disposal of su urplus propertyy operating expe enses Total nono Income be efore contributtions

311,807 (2,534,946) (144,651) 86,165 (2,281,625) 7,133,403

493,002 (2,619,031) (156,120) 42,232 (2,239,917) 6,462,657

2,047,550

2,841,859

9,180,953

9,304,516

299,220,345

289,915,829

C Capital contribution Change in n net position

al Net Position,, beginning of year Tota Tota al Net Position,, end of year

Fiscal Year Ended June 30,, 2012

$

308,401,298

$

299,220,345

61

Finanncial Section

Metropolitan Seweerage District oof Buncombe CCounty, North Carolina

Schedule e of Revenues and Exxpenditure es – Budgeet and Actu ual (Non‐G GAAP) For the Ye ear Ended JJune 30, 20 012 Amend ded Budge et

Revenues: evenues: Operating re Sewer cha rges (net): Domestiic users Industria al users Billings and a collections

$

Facility and d tap fees City of Ash heville(Enka Bond ds) Rental inco ome Miscellane eous Total operating o revenu ues Nonoperatin ng revenues: Interest inccome Total nonoperating n revenues To otal revenues Expenditures: Operating exxpenditures: Salaries an nd employee benefits Contractua al services Utilities nd maintenance Repairs an Other supp plies and expend ditures Insurance claims and expe enditures o expen nditures Total operating Capital proje ects: Equipmentt Infrastructu ure Total capital c projects Debt service e Principal Interest d service Total debt To otal expendituress Revenues overr (under) expend ditures Other financing g sources: Use of ava ailable funds

Revenues and other financing sources over penditures and other o financing (under) exp uses

62

Actual

25,0 030,400 602,660 1,6 6 657,810 290,870 27,2

$

8 25,586,768 9 1,599,819 9 662,589 6 27,849,176

$

556,368 (2,841) 4,779 558,306

355,000 1,3 37,000 67,872 6 679,754 430,496 29,4

4 2,321,474 0 37,290 6 70,356 1 800,341 7 31,078,637

501,064 5 5 501,064

7 311,807 7 311,807

931,560 29,9

4 31,390,444

1 1,458,884

450,644 14,4

6,663,907 7 9 1,452,459 8 1,106,158 8 958,738 7 1,545,557 0 2,255,450 9 13,982,269

468,375

20,5 592,283

4 615,644 1 17,775,391 5 18,391,035

2 2,201,248

8,3 371,858

5 4,421,825 2 2,876,102 7 7,297,927

1 1,073,931

414,785 43,4

1 39,671,231

3 3,743,554

483,225) (13,4

7) (8,280,787

5 5,202,438

483,225 13,4 483,225 13,4

$

Varia ance Favorrable (Unfavo orable)

-

966,474 290 2,484 120,587 1 1,648,141

(189,257) (189,257)

-

$

(8,280,787 7)

(13 3,483,225) (13 3,483,225)

$

(8 8,280,787)

Fiscal Year EEnded June 300, 2012

Metropolitan Sewerage Disstrict of Buncombe County, North N Carolinaa

Finnancial Sectionn

Schedule e of Revenu ues and Exxpenditure es – Budgeet and Actu ual (Non‐G GAAP) For the Ye ear Ended JJune 30, 20 012 Actual Reconciliation from budgetaryy basis (modified accrual) a to full acccrual: Revenues and other financing sources over (under) exp penditures and other o financing uses

$

Reconciling iteems: Interest expeense capitalized Change in acccrued interest expense e Unamortized d discount recog gnized in interestt expenditures Debt principal payments Capital projeect transfers Contributed assets Depreciation n Gain (Loss) on o disposal of su urplus property Amortization n of bond issuan nce cost

4 365,704 3 83,743 (108,291 1) 4,421,825 5 5 18,391,035 2,047,550 0 (7,681,340 0) 5 86,165 (144,651 1)

Total reconciling r itemss Chang ge in net position n

7) (8,280,787

0 17,461,740 $

3 9,180,953

Fiscal Year Ended June 30,, 2012

63

Finanncial Section

Metropolitan Seweerage District oof Buncombe CCounty, North Carolina

Combiniing Statem ment of Ne et Position,, All Fundss (Non‐GAA AP) June 30,, 2012

Capittal Reserrve Accou unt

Enterprise Acccount

Debt Service Reserve Account

Bond Service Account

Construction A Account

Capital Account

Total

Assets: Current assets: uivalents Cash and cash equ Investments Restricted cash and cash equivalents Restricted investments Receivables (net): Accounts Sales tax Employee Grant Interest Inventories Prepaid expenses a Total current assets

23,226,522 $ -

- $ -

- $ 5,325,998 -

- $ -

1,804,000 $ -

5,192,540 207,381 14,727 2,731 6,012 292,216 24,450 28,966,579

-

5,325,998

-

506,366 107,728 2,418,094

Noncurrent assets: Restricted cash and cash equivalents Restricted investments ed assets Total restricte

-

16,696 91 16,696 91

-

2,345,947 2,345,947

Deferred bond issua ance costs-net

-

-

-

Capital assets: Land Easements ent Plant and equipme Construction in pro ogress Less accumulated depreciation Total propertyy and equipment

-

-

28,966,579

91 16,696 16,696 91

Total noncurrrent assets Total as sets

Generall Accountt

619,015 $ -

26,518,112 5,904,140 -

245,233 1,691,950

8,963 627,978

5,192,540 722,710 14,727 2,731 251,245 292,216 132,178 39,030,599

-

-

-

3,262,643 3,262,643

-

-

-

1,299,081

1,299,081

-

-

-

-

5,325,998

2,345,947 2,345,947

2,418,094

1,691,950

Deferred outflow of resources: Accumulated decre ease in fair value of hedging derivattive

868,575 578,142 -

2,515,666 6,499,623 480,949,958 13,860,898 (138,994,804) 364,831,341

2,515,666 6,499,623 480,949,958 13,860,898 (138,994,804) 364,831,341

366,130,422 366,758,400

369,393,065 408,423,664

6,734,174

6,734,174

Liabilities and Net Asssets: Current liabilities: Payments from curr ent assets: Accounts payable and accrued expenses Current portion off compensated absencess payable Payments from restrricted cash and cash equ uivalents: Bond interest paya able Current portion off long-term obligation Total current liabilities Noncurrent liabilities: Compensated absen nces, net of current portion Other post-employm ment benefits Derivative Liability Deferred Revenue ons, net of current matur ities Long-term obligatio Total noncurr ent liabilities Total liab ilities Net position: Net position

64

$

1,082,088 32,000

-

-

-

1,803,438 1 -

13,970 -

-

2,899,496 32,000

1,114,088

-

1,049,290 1,049,290

-

1 1,803,438

13,970

4,421,825 4,421,825

1,049,290 4,421,825 8,402,611

696,001 803,700 7,559 1,507,260

-

-

-

-

-

6,734,174 90,112,495 96,846,669

696,001 803,700 6,734,174 7,559 90,112,495 98,353,929

2,621,348

-

1,049,290

-

1 1,803,438

13,970

101,268,494

106,756,540

1,677,980 $

272,224,080

2 26,345,231

$

916,696

$

4,276,708

$

2,345,947

$

614,656 $

$

308,401,298

Fiscal Year EEnded June 300, 2012

Metropolitan Sewerage Disstrict of Buncombe County, North N Carolinaa

Finnancial Sectionn

Combining Schedu ule of Reve enues, Exp penses and d osition, All Funds (No on‐GAAP) Changess in Net Po For the Y Year Ended June 30,, 2012 Enterprise Acccount Operating revenues: unds) Sewer charges (refu Facility and tap fees Miscellaneous

$

Total operating reevenues Operating expenses: Operations Depreciation Total operating exxpenses Operating inccome (loss) Nonoperating revenu ues (expenses): Interest income Interest expense Less capitalized inteerest Amortization of bon nd issuance costs Gain (Loss) on dispo osal of surplus property Total nonoperatin ng revenues (expenses) Income (loss) before other transaction ns Capital contribution Operating transfers Purchase of and transfer capital assets Payment of debt: Principal Change in net posittion

Total Net Position, beginning of year Total Net Position, end d of year

$

Debt Service Reserve Account

Bond Service Account

Capital Reservee Accountt

Consttruction Acccount

General Account

Capital Account

Total

227,849,176 $ 884,147

- $ -

- $ -

- $ -

- $ -

- $ 2,321,4474 23,8840

- $ -

27,849,176 2,321,474 907,987

2 28,733,323

-

-

-

-

2,345,3314

-

31,078,637

113,773,694 -

-

-

-

37,719 -

-

170,856 7,681,340

13,982,269 7,681,340

1 13,773,694

-

-

-

37,719

-

7,852,196

21,663,609

1 14,959,629

-

-

-

(37,719)

2,345,3314

(7,852,196)

9,415,028

175,894 119,195

11,874 -

77 (2,900,650) 365,704 -

61,071 -

7,722 -

49,9905 -

5,264 (144,651) (33,030)

311,807 (2,900,650) 365,704 (144,651) 86,165

295,089

11,874

(2,534,869)

61,071

7,722

49,9905

(172,417)

(2,281,625)

1 15,254,718

11,874

(2,534,869)

61,071

(29,997)

2,395,2219

(8,024,613)

7,133,403

(112,942,515) (615,644)

80,000 -

7,317,729 (365,704)

(380,000) -

155,298,834 (177,775,391)

2,047,5550 (9,532,3339) (2,047,5550)

158,291 20,804,289

2,047,550 -

-

-

(5,324,825)

-

-

-

5,324,825

-

1,696,559

91,874

(907,669)

(318,929)

(22,506,554)

(7,137,1120)

18,262,792

9,180,953

2 24,648,672

824,822

5,184,377

2,664,876

3 3,121,210

8,815,1100

253,961,288

299,220,345

2 26,345,231 $

916,696 $

4,276,708 $

2,345,947 $

614,656 $

1,677,9980 $ 272,224,080 $ 308,401,298

Fiscal Year Ended June 30,, 2012

65

Financial Section

Metropolitan Sewerage District of Buncombe County, North Carolina

This page intentionally left blank.

66

Fiscal Year Ended June 30, 2012

Statistical Section

Metropolitan Sewerage District of Buncombe County, North Carolina

Statistical Section

Introduction This part of MSD’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.

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.

   

Net Position by Component Changes in Net Position General Revenue by Source Expenses by Function

Revenue Capacity These schedules contain information to help the reader assess the District’s most significant revenue sources.

  

Sewer Charge Revenue by Customer Type Residential Sewer Rates Principal Commercial Users

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.

 

Ratio of Outstanding Debt Revenue Bond Coverage

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.

  

Demographic & Economic Statistics Personal Income by Industry Principal Employers

Operating Information These schedules contain service and infrastructure data to help the reader understand how the information in the District’s financial report relates to the services the District provides and the activities it performs.

 

Employees by Division Operating Indicators by Division

Source: Unless otherwise noted, the information in theses schedules is derived from the comprehensive annual financial reports for the relevant year.

Fiscal Year Ended June 30, 2012

67

Statisstical Section

Metropolitan Seweerage District oof Buncombe CCounty, North Carolina

Net Posiition by Compone C ent

Fiscal Yea ar Ended June 30 0 2003

FY 20 003 to FY Y 2012

Net Invested I in n Capiital Assets $

1 188,888,144 4

Resstricted

$

8,930,265

Total Net N Assets

Unresttricted

$

26,0 071,210

$

89,619 223,88

2004

2 200,997,207 7

9,156,422

071,391 22,0

25,020 232,22

2005

1 190,156,068 8

1 11,404,911

055,205 38,0

16,184 239,61

2006

1 197,656,088 8

9,446,269

041,095 38,0

43,452 245,14

2007

2 214,808,683 3

9,447,494

699,672 36,6

55,849 260,95

2008

2 231,678,011 1

8,886,108

968,233 33,9

32,352 274,53

2009

2 244,875,790 0

9,493,497

30,570,139

39,426 284,93

2010

2 235,471,938 8

9,248,713

45,195,178

15,829 289,91

2011

2 251,754,578 8

9,294,955

38,170,812

20,345 299,22

2012

2 270,297,021 1

8,117,494

986,783 29,9

01,298 308,40

68

Fiscal Year EEnded June 300, 2012

2005

2006

2007

2008

2009

2010

2011

2012

$ 21,283,426

$ 22,146,671

$ 22,169,581

$ 22,980,969

$ 24,771,102

$ 24,895,694

$ 24,290,719

$ 25,369,818

$ 26,894,894

$ 27,849,176

1,557,990

2,050,380

1,769,620

2,481,850

3,054,950

3,005,184

2,959,115

1,654,010

2,238,171

2,321,474

Operating revenues: Sewer charges Facility and tap fees Miscellaneous Total operating revenues

502,172

594,118

1,091,124

525,392

1,194,643

702,777

509,239

770,389

612,721

907,987

23,343,588

24,791,169

25,030,325

25,988,211

29,020,695

28,603,655

27,759,073

27,794,217

29,745,786

31,078,637

5,502,176

5,176,637

5,400,871

5,637,905

5,372,585

5,717,428

6,181,775

6,303,951

6,536,352

6,663,907

915,812

1,067,585

1,041,397

1,062,093

1,194,932

1,167,260

1,387,098

1,240,175

1,337,258

1,452,459

1,154,367

1,153,457

943,951

1,319,915

1,384,603

1,265,901

1,298,053

1,111,644

1,234,810

1,106,158

Operating expenses: Salaries & employee benefits Contractual services Utilities Repairs and maintenance

796,882

772,187

907,881

888,423

945,091

877,634

877,124

851,966

927,665

958,738

Other supplies and expenses

761,655

962,080

1,225,679

1,233,017

1,320,107

1,288,061

1,337,610

1,468,655

1,344,307

1,545,557

Insurance claims and expenses

1,667,717

1,443,927

1,649,369

1,712,310

1,759,923

1,753,911

1,726,689

1,778,336

2,142,086

2,255,450

Depreciation

8,297,106

6,871,100

7,319,331

7,700,136

7,806,535

7,065,752

8,520,993

8,556,365

7,520,744

7,681,340

19,095,715

17,446,973

18,488,479

19,553,799

19,783,776

19,135,947

21,329,342

21,311,092

21,043,222

21,663,609

4,247,873

7,344,196

6,541,846

6,434,412

9,236,919

9,467,708

6,429,731

6,483,125

8,702,574

9,415,028

Interest income

742,279

447,907

1,284,644

1,922,002

2,190,254

1,742,108

1,047,587

578,302

493,002

311,807

Interest expense

Total operating expenses Operating income Nonoperating revenues (expenses):

(3,482,174)

(4,152,308)

(3,924,737)

(3,736,405)

(3,203,405)

(2,934,980)

(2,619,031)

(2,534,946)

(93,432)

(67,760)

(81,306)

(80,684)

(91,286)

(73,887)

(145,827)

(156,120)

(144,651)

Gain (loss) on sale of surplus property

54,230

-

60,985

(101,491)

(13,698)

(49,926)

22,150

67,099

42,232

86,165

Total nonoperating revenues (expenses)

(2,060,141)

(2,349,361)

(2,204,305)

(2,413,103)

(1,828,865)

(2,135,509)

(2,207,555)

(2,435,406)

(2,239,917)

(2,281,625)

Income before contributions & special items

2,187,732

4,994,835

4,337,541

4,021,309

7,408,054

7,332,199

4,222,176

4,047,719

6,462,657

7,133,403

4,096,598

3,340,566

3,053,623

4,184,135

8,404,343

6,244,304

5,856,798

1,128,684

2,841,859

2,047,550

-

-

-

(2,678,176)

-

-

-

-

-

-

$ 6,284,330

$ 8,335,401

$ 7,391,164

$ 5,527,268

$ 15,812,397

$ 13,576,503

$ 10,078,974

$ 5,176,403

Capital contribution Special items

69

Change in Net Position

$

9,304,516

$

9,180,953

Statistical Section

(2,703,836)

(99,610)

FY 2003 to FY 2012

(2,757,040)

Amortization of bond issuance costs

Metropolitan Sewerage District of Buncombe County, North Carolina

2004

2003

Changes in Net Position (Accrual Basis of Accounting)

Fiscal Year Ended June 30, 2012

FISCAL YEAR

Statisstical Section

Metropolitan Seweerage District oof Buncombe CCounty, North Carolina

Generall Revenue es by Sou urce Fiscal Year Ended June 30 2003

Industtrial Sew wer Charg ges

Domestic Sewer Charges

3,16 69,870

$ 18,113,556 6

2004

2,85 58,675

19,287,996 6

2005

2,91 12,188

2006

$

FY 20 003 to FY Y 2012

Facility & Tap Fee es $

1,55 57,990

Miiscellaneouss

$

Tottal

1,298,681 1

$ 24,14 40,097

2,05 50,380

1,042,025 5

25,23 39,076

19,257,393 3

1,76 69,620

2,436,753 3

26,37 75,954

2,61 17,298

20,363,671 1

2,48 81,850

2,447,394 4

27,91 10,213

2007

93,328 2,69

4 22,077,774

3,05 54,950

7 3,384,897

31,21 10,949

2008

1,51 10,669

23,385,025 5

3,00 05,184

2,444,885 5

30,34 45,763

2009

1,38 86,132

22,904,587 7

2,95 59,115

1,578,976 6

28,82 28,810

2010

1,49 98,529

23,871,289 9

1,65 54,010

1,348,691 1

28,37 72,519

2011

1,56 65,402

25,329,492 2

2,23 38,171

1,147,955 5

30,28 81,020

2012

1,59 99,819

26,249,357 7

2,32 21,474

1,305,959 9

31,47 76,609

Note: Doe es not includ de Capital Co ontributions

70

Fiscal Year EEnded June 300, 2012

Metropolitan Sewerage Disstrict of Buncombe County, North N Carolinaa

Staatistical Sectionn

Expense es by Fun nction Fiscal Year Ended June 30

ating Opera Expensses

(1)

FY 20 003 to FY Y 2012 Capital Im mprovement

Cap pital Contrib butions

(2)

(3 3)

2003

$ 10,79 98,609

8,441,950 0

2004

75,873 10,57

8 11,816,018

2005

69,148 11,16

2006

$

4,924,338

(4)

$

Tottal

4,691,040 0

$ 28,85 55,937

3,340,566

6 4,754,836

30,48 87,293

1 14,055,591

3,053,623

4 6,179,174

34,45 57,536

11,85 53,663

11,213,052 2

4,184,135

7,071,308 8

34,32 22,158

2007

11,97 77,241

12,574,902 2

8,404,343

7,650,737 7

40,60 07,223

2008

70,195 12,07

4 12,471,794

6,244,304

8,419,405

05,698 39,20

2009

12,80 08,349

12,447,791 1

5,856,798

6,413,405

37,52 26,343

2010

12,75 54,727

9,173,231 1

1,128,684

7,212,980 0

30,26 69,622

2011

22,468 13,52

5 16,226,145

2,841,859

6 7,255,856

39,84 46,328

2012

13,98 82,269

17,775,391 1

2,047,550

7,859,771

41,66 64,981

Note: (1) (2) (3) (4)

$

D Debt Service e

Includes gen neral operattions Excludes depreciation expense This include es collection system infra astructure co ontributed b by developerrs Includes Bond Principal Expense and d Bond Interrest Less Cap pitalized Inte erest Portion n and excludes early retiremen nt of long-te erm debt

Fiscal Year Ended June 30,, 2012

71

Statisstical Section

Metropolitan Seweerage District oof Buncombe CCounty, North Carolina

Sewer Charge C Re evenue by b Custom mer Type e

FY 200 03 to FY 2 2012

FIS SCAL YEAR 2003

2004

2005

2006

2007 7

2008

2009

201 10

2011

2012 $ 20,243,750

Domestic Users Asheville

$ 14,108,130

$ 15,256,447

$ 15,284,448

$ 15,933,744

$ 17,0833,346

$ 17,979,548

$ 17,930,855

$ 18,6669,278

$ 19,638,890

Biltmore Forest

266,354

252,008

248,609

268,993

2666,318

288,205

282,656

2775,621

286,574

310,060

Black Mountain

719,448

726,796

704,476

764,964

8577,251

819,685

888,368

9005,930

921,612

1,013,611

Henderson County

595,780

679,790

445,217

570,818

7622,702

1,133,375

925,744

8113,927

1,044,736

1,090,551

Montreat

186,002

185,604

209,974

192,327

2633,354

278,131

207,087

2442,821

233,859

253,546

Weaverville

464,927

505,419

547,485

528,099

5988,764

661,716

602,232

6111,983

608,323

648,722

Woodfin Sanitary Watter & Sewer District

678,807

597,993

656,303

759,633

8488,640

842,717

758,294

8003,368

924,567

912,414

1,094,108

1,083,939

1,160,881

1,345,093

1,3977,399

1,381,648

1,309,351

1,5448,361

1,670,931

1,776,703

3,169,870

2,858,675

2,912,188

2,617,298

2,6933,328

1,510,669

1,386,132

1,4998,529

1,565,402

1,599,819

$ 21,283,426 2

$ 22,146,6 671

$ 22,169,581

$ 22,980,969

$ 24,771,,102

$ 24,895,694

$ 24,290,719

$ 25,369 9,818

$ 26,894,894

$ 27,849,176

Other

Industrial Users

Totaal

Note: Mun nicipalities in nclude sewe er charges on n water bills.. "Other" rep presents sew wer charges b billed directly by MSD to dom mestic users on wells and d to septagee haulers.

72

Fiscal Year EEnded June 300, 2012

Metropolitan Sewerage Disstrict of Buncombe County, North N Carolinaa

Staatistical Sectionn

Custome er Accou unts by Member M Agency A

FY 20 003 to FY Y 2012 FISCAL YEAR R

2003 3

2004

2005

2006

2007

2008

2009

2 2010

2011

2012

33,40 00

34,300

35,000

35,900

36,700

37,5 582

37,878

3 37,878

38,906

40,732

ary Water & Sewer District Woodfin Sanita

2,30 00

2,300

2,330

2,330

2,330

2,3 374

2,579

2,306

2,317

2,337

Black Mountain n

2,30 00

2,350

2,375

2,400

2,479

2,5 519

2,579

2,559

2,572

2,544

Weaverville

1,27 70

1,300

1,390

1,400

1,403

1,4 488

1,503

2,246

2,281

2,318

Henderson Cou unty

Asheville

1,61 11

1,817

2,106

2,237

2,574

2,9 957

3,073

3,165

3,182

3,240

Biltmore Forest

62 24

631

637

642

637

6 633

636

644

639

650

Montreat

62 20

647

642

642

653

6 651

652

656

667

669

42,12 25

43,345

44 4,480

45,551

46,776

48,204

48,900

4 49,454

50,564

52,490

Total

Source: Member M Agen ncies

Fiscal Year Ended June 30,, 2012

73

Statistical Section

Metropolitan Sewerage District of Buncombe County, North Carolina

Residential Sewer Rates

Fiscal Year Ended June 30 2003

FY 2003 to FY 2012

Rate Per 1,000 Gallons

Monthly Base Rate $

4.51

$

3.92

Average Monthly Billing $

20.04

2004

4.60

4.00

20.43

2005

4.69

4.06

20.83

2006

4.83

4.20

21.45

2007

5.05

4.39

22.41

2008

5.25

4.56

23.28

2009

5.41

4.69

23.99

2010

5.61

4.87

24.84

2011

5.81

5.04

25.72

2012

5.98

5.19

26.45

Note: Rates are based on 5/8" meter, which is the standard household meter size. The District charges a higher base rate for larger meters. Each municipality will set its own water rates.

74

Fiscal Year Ended June 30, 2012

Metropolitan Sewerage District of Buncombe County, North Carolina

Statistical Section

Principal Commercial Users

FY 2003 & FY 2012 2003

2012 Percentage

Commercial User

Type of Business

Total Charges

Rank

of Total

Percentage Total Charges

Rank

Charges Milkco, Inc.

Dairy Products & Juices

Mission Health System

$

of Total Charges

478,353

3

2.35%

Health & Emergency Services

166,232

7

Ridgecrest Baptist Conference Center

Christian Conference Center

225,170

Givens Estates

Retirement Community

Jacob Holms Industries

Textile Manufacturing

Colbond, Inc. VA Medical Center

$

529,303

1

1.95%

0.82

264,630

2

0.97

5

1

176,541

3

0.65

-

-

-

142,559

4

0.52

-

-

-

120,883

5

0.44

Chemical Manufacturer

101,895

9

0

98,603

6

0.36

Veterans Hospital

102,908

8

0.50

98,181

7

0.36

- Asheville Department of Veterans Affairs Cooperative Laundry Services

Laundry Service Provider

-

-

-

85,556

8

0.31

Flint Group

Textile Machine Parts

-

-

-

74,878

9

0.28

-

-

-

74,346

10

0.27

- (formerly Day International) Continental Automotive Systems Lustar Dyeing & Finishing

Textile Manufacturing

668,039

1

3.28

-

-

-

Anvil Kintwear

Textile Manufacturing

656,560

2

3.22

-

-

-

Textile Manufacturing

259,881

4

1.27

-

-

-

BASF

Chemical Manufacturer

189,737

6

0.93

-

-

-

ArvinMeritor (Commercial Vehicle Systems Division)

Manufacturer of Commercial Truck Axles

72,308

10

0.35

-

-

-

14.33%

$ 1,665,479

- (formerly Asheville Dyeing & Finishing) Spring Global - (formerly Owen Manufacturing Company, Inc.)

TOTAL

$ 2,921,084

6.13%

Source: District Billing Records

Fiscal Year Ended June 30, 2012

75

Statistical Section

Metropolitan Sewerage District of Buncombe County, North Carolina

Ratio of Outstanding Debt

Fiscal Year

Revenue Bonds 1

2003

$

85,751,666

FY 2003 to FY 2012

Debt Per Capita 2 $

883

Per Capita Income 3 $

Percentage of Personal Income

27,541

3.21%

2004

83,788,169

843

29,620

2.85%

2005

102,182,133

1,127

30,750

3.67%

2006

98,689,233

1,076

32,777

3.28%

2007

95,098,097

968

34,243

2.83%

2008

91,539,395

912

34,987

2.61%

2009

87,481,237

887

33,171

2.67%

2010

100,167,900

1,002

33,777

2.97%

2011

94,642,611

832

Unavailable

-

2012

90,112,495

740

Unavailable

-

1

Details of the District's outstanding debt can be found in Note 3 to the Financial Statements.

2

This ratio was calculated by using the number of domestic accounts and multiplying by Buncombe County census average of 2.3 persons per household to get the number of users in the District.

3

U.S. Department of Commerce, Bureau of Economic Analysis

Note: See Personal Income by Industry on page 80 to assess economic base of the County.

76

Fiscal Year Ended June 30, 2012

Metropolitan Sewerage District of Buncombe County, North Carolina

Statistical Section

Revenue Bond Coverage

FY 2003 to FY 2012

From 1985 to 2002, the District was subject to Section 501 of the 1985 Bond Order which covenants that the District will set rates to produce sufficient revenues, together with any other available funds, including the amounts transferred by the District from the General Fund to the Revenue Fund, to permit the deposit and transfer to the credit of the Revenue Fund in the then current fiscal year of a sum at least equal to the total of the following:

1. the current expenses of the Sewerage System for the current fiscal year, and 2. to provide for the higher of either:

a. the amounts needed for making the required cash deposits in each fiscal year to the credit of the several accounts in the Bond Service Fund and to the credit of the Subordinated Indebtedness Service Fund, the Debt Service Reserve Fund and the Maintenance Reserve Fund, or

b. one hundred twenty per centum (120%) of the amount of the principal and interest requirements for the current fiscal year on account of the indebtedness then outstanding excluding principal and interest requirements on account of indebtedness incurred to finance improvements or additional improvements which have not been completed as of the beginning of such fiscal year.

However, with the issuance of refunding bonds on April 3, 2003, a sufficient amount of debt subject to the 1985 bond order was defeased allowing application of the 1999 Amended Bond Order whose rate covenant is summarized in the following paragraph.

The District covenants to set rates and charges so that the Income Available for Debt Service (defined as the excess of “Revenues” over “Current Expenses”) will not be less than the greater of (i) one hundred twenty percent (120%) of the Long‐Term Debt Service Requirement for Parity Indebtedness only for such Fiscal Year and (ii) one hundred percent (100%) of the Long‐Term Debt Service Requirement for Parity Indebtedness and Subordinated Indebtedness for such Fiscal Year. The definition of revenues for this purpose does not include grants, contributions, investment income credited to non‐operating funds, or tap and connection fees. Current expenditures include operating expenses other than additions to reserve funds, depreciation or amortization, or debt service payments.

The District does not currently have any subordinated indebtedness, so the computation of the current fiscal year’s compliance with this covenant is based solely on 120% of the debt service requirement. Long‐Term Debt Service Requirement is defined as interest and principal required to be remitted to the Trustee, except that interest shall be excluded from the determination of Long Term Debt Service Requirement to the extent the same is provided from the proceeds of the Long Term Indebtedness. The coverage ratio is computed on the basis of 100% of required debt service.

Fiscal Year Ended June 30, 2012

77

Statistical Section

Metropolitan Sewerage District of Buncombe County, North Carolina

Revenue Bond Coverage (continued)

FY 2003 to FY 2012

Current Expenses (A)

Income Available for Debt Service

Principal and Interest Payable During Year

120% Principal and Interest Payable

Excess of Income Available for Debt over Debt Service

Coverage Ratio

$ 22,108,456

$ 10,798,609

$ 11,309,847

$ 5,509,358

$ 6,611,230

$ 5,800,489

2.05

2004

22,927,997

10,575,873

12,352,124

6,603,923

7,924,708

5,748,201

1.87

2005

23,562,271

11,169,148

12,393,123

6,946,701

8,336,041

5,446,422

1.78

2006

23,959,694

11,853,663

12,106,031

7,866,765

9,440,118

4,239,266

1.54

2007

26,092,369

11,977,241

14,115,128

8,066,669

9,780,000

6,048,459

1.75

2008

26,104,746

12,070,195

14,034,551

8,074,031

9,831,535

5,960,520

1.74

2009

25,374,157

12,808,349

12,565,808

7,600,385

9,120,462

4,965,423

1.65

2010

26,268,075

12,754,727

13,513,348

7,855,989

9,427,187

5,657,359

1.72

2011

27,654,768

13,522,468

14,132,300

8,565,201

10,278,241

5,567,099

1.65

2012

28,510,573

13,982,269

14,528,304

7,274,680

8,729,616

7,253,624

2.00

Fiscal Year Ended June 30

Adjusted Revenues (B)

2003

(A) (B)

Includes all operation and maintenance expenses, except depreciation Does not include tap and connection fees, grants, contributions, investment income allocated to non-operating funds

78

Fiscal Year Ended June 30, 2012

Metropolitan Sewerage District of Buncombe County, North Carolina

Statistical Section

Demographic & Economic Statistics

FY 2003 to FY 2012 Civilian Labor Force 3

Population Estimates

1

Per Capita Income

2

Median Age

Unemployment

1

Employed

Unemployed

Rate

2003

214,982

27,541

39.70

108,133

6,038

5.3%

2004

218,139

29,620

39.96

109,230

5,250

4.6%

2005

221,642

30,750

40.23

110,282

5,492

4.7%

2006

226,524

32,777

40.39

115,386

4,769

4.0%

2007

230,766

34,243

40.49

116,794

4,525

3.7%

2008

233,772

34,987

40.65

117,950

5,975

4.8%

2009

236,349

33,171

40.84

111,837

10,667

8.7%

2010

238,846

33,777

40.69

114,442

11,042

8.8%

2011

243,855

Unavailable

40.92

115,313

10,749

8.5%

2012

247,536

Unavailable

Unavailable

117,454

10,047

7.9%

Note:

Sources:

The information above is for Buncombe County, N.C. The District believes that the above information is representative of the entire service area, which extends over approximately 80% of the County.

1 2 3

North Carolina Office of State Budget and Management U.S. Department of Commerce, Bureau of Economic Analysis North Carolina Department of Commerce, Division of Employment Security

Fiscal Year Ended June 30, 2012

79

2005

2006

2007

2008

2009

2010

2011

2012

$ 4,651,095

$ 4,942,217

$ 5,227,846

$ 5,584,362

$ 5,865,565

$ 6,026,057

$ 5,799,632

$ 5,929,883

Unavailable

Unavailable

10,073

20,165

29,122

32,930

14,517

15,353

16,955

14,409

-

-

Nonfarm earnings

4,641,022

4,922,052

5,198,724

5,551,432

5,851,048

6,010,704

5,782,677

5,915,474

-

-

Private earnings

3,900,922

4,134,177

4,378,764

4,674,393

4,923,474

5,010,374

4,754,607

4,872,385

-

-

Agricultural services, forestry, fishing

2,034

2,260

2,539

(D)

3,071

3,093

2,942

4,260

-

-

Mining

4,262

5,280

5,777

(D)

6,038

5,045

5,472

7,079

-

-

345,662

388,736

428,903

481,664

443,378

364,495

345,905

-

-

Total Personal Income

Farm earnings

Construction

683,390

682,236

676,173

684,925

701,404

714,562

689,981

686,323

-

-

Durable goods

458,716

468,405

469,289

480,697

503,211

(D)

(D)

503,788

-

-

Nondurable goods

224,674

213,831

206,884

204,228

198,193

(D)

(D)

182,535

-

-

Wholesale trade

181,376

185,996

198,137

218,119

222,557

222,247

197,701

209,259

-

-

Retail Trade

394,919

401,801

437,437

467,334

488,065

491,076

475,501

484,286

-

-

Transportation and public utilities

148,825

172,527

193,901

208,566

215,009

213,324

132,739

102,068

-

-

2,140,454

2,295,341

2,435,897

2,635,671

2,805,666

2,917,649

2,808,020

2,918,846

-

-

Services

Government and government enterprises

State and local

787,875

819,960

877,039

927,574

1,000,330

1,028,070

1,043,089

-

-

251,394

249,704

269,825

282,558

307,492

328,198

343,872

-

-

24,851

25,748

28,937

29,097

29,480

32,289

34,537

32,905

-

-

490,470

510,733

541,319

578,117

615,536

660,549

665,335

666,312

-

-

Note: The above data is for Buncombe County, North Carolina. MSD believes the data is representative of the entire service area. Growth in personal income over time may be compared to average monthly billing to evaluate the affordability of sewer rates for customers.

Source: Regional Economic Information System, Bureau of Economic Analysis, U.S. Department of Commerce

CY 2003 to CY 2012

Military

740,100 224,779

Fiscal Year Ended June 30, 2012

Federal, civilian

Metropolitan Sewerage District of Buncombe County, North Carolina

Manufacturing

450,945

Statistical Section

2004

80 2003

Personal Income by Industry

Calendar Year

Metropolitan Sewerage District of Buncombe County, North Carolina

Statistical Section

Principal Employers

FY 2003 to FY 2012 FY 2003

FY 2012 % of Total

Employer

Employees

Rank

County

% of Total Employees

Rank

Employment

County Employment

Mission Health System & Hospitals

5,125

1

4.74%

6,994

1

5.95%

Buncombe County Public Schools

3,650

2

3.38%

4,000

2

3.41%

875

9

0.81%

1,770

3

1.51%

VA Medical Center - Asheville

1,068

7

0.99%

1,593

4

1.36%

Buncombe County Government

1,741

4

1.61%

1,380

5

1.17%

Ingles Markets, Inc.

2,118

3

1.96%

1,137

6

0.97%

910

8

0.84%

1,100

7

0.94%

1,019

8

0.87%

The Biltmore Company

The Grove Park Inn Resort & Spa Asheville-Buncombe Technicial Community College City of Asheville

1,245

5

1.15%

1,000

9

0.85%

CarePartners

1,200

6

1.11%

950

10

0.81%

775

10

0.72%

Sonopress, Inc. (now known as Arvato Digital Services)

Total for Principal Employers

18,707

17.30%

20,943

17.83%

Note: The information above is for Buncombe County, N.C. The District believes that the above information is representative of the entire service area, which extends over approximately 80% of the County.

Source: Asheville Area Chamber of Commerce, Economic Development Department & NC Employment Security Commission

Fiscal Year Ended June 30, 2012

81

Statisstical Section

Metropolitan Seweerage District of Buncombe CCounty, North Carolina

Employe ees by Diivision

FY 20 003 to FY Y 2012

82

Fiscal Year EEnded June 300, 2012

Metropolitan Sewerage District of Buncombe County, North Carolina

Statistical Section

Employees by Division (continued)

FY 2003 to FY 2012 FISCAL YEAR

Division

2008

2009

2010

2011

2012

1

1

1

1

1

Human Resource

3

3

3

3

3

Environmental, Health & Safety

0

0

0

2

2

Office Support

0

0

0

0

0

IT & MIS

5

5

5

5

5

Environmental, Health & Safety

2

2

2

0

0

Fleet Maintenance

4

4

4

4

4

Finance & Budget

1

1

1

1

1

Accounting, Investments & Cash Flow Mgmt.

3

3

3

3

3

Purchasing & Warehouse

3

3

3

3

3

Office of the General Manager Office Support

Human Resources Department

Administrative Services Department

Financial Services Department

Water Reclamation Facility Office Support

0

0

0

0

0

Plant Operations

13

13

13

13

13

Laboratory

0

0

0

0

0

Industrial Waste

4

4

4

4

4

Mechanical Maintenance

8

8

8

8

8

Electrical Maintenance/Hydro

8

8

8

8

8

Structural Maintenance

5

5

5

5

5

System Services Department Office Support

4

4

4

4

4

System Services

52

52

52

52

52

7

7

7

7

7

Office Support

1

1

1

1

1

Right of Way

3

3

3

3

3

Construction Administration

5

5

5

5

5

Design and Drafting

3

3

3

3

3

Engineers

3

3

3

3

3

Geographic Information Systems

4

4

4

4

4

Division Heads

7

7

7

7

7

Deputy General Managers

0 1

0 1

0 1

1

1

150

150

150

150

150

Engineering Services Department Planning and Development

Capital Improvement Department

Management

General Manager Total

Fiscal Year Ended June 30, 2012

83

Statisstical Section

Metropolitan Seweerage District oof Buncombe CCounty, North Carolina

Â

Employe ees by Diivision (coontinued)

Note:

FY 20 003 to FY Y 2012

Alll employeess are conside ered full time e based on 2 2080 hours w worked per yyear. Above nu umbers reprresent budge eted position ns and may include vacaancies at yea ar-end.

Source: District Person nnel Recordss

84 Â

Fiscal Year EEnded June 300, 2012

Metropolitan Sewerage District of Buncombe County, North Carolina

Statistical Section

Operating Indicators by Division

FY 2003 to FY 2012 FISCAL YEAR

DEPARTMENT

2003

2004

2005

2006

2007

Capital Improvement Department Linear Feet of rehabilitated Sewer Systems

63,596

56,938

2,025

1,079

60,330

59,459

51,272

Engineering Services Department Sewer Tap Applications Plans Reviewed Linear Feet of Accepted Sewer Systems

1,597

1,236

1,339

133

119

114

115

123

30,304

61,688

65,484

76,056

129,025

Human Resources Department Number of workforce injuries Lost Work Rate per 100 employees

16

16

10

8

11

1.82

1.30

1.32

2.00

3.00

0.66

0.65

0.66

0.71

0.57 662,245

System Services Department Average Response Time to sewer problem (hours) Lines Washed (lineal feet) - in-house only

456,315

565,257

510,187

638,683

Construction Repairs to Sewer Lines

677

614

636

602

542

Taps Installed

251

211

305

294

308

Manhole Repairs

535

531

485

483

406

Sanitary Sewer Overflows

114

78

78

55

52

18

18

21

23

31

Water Reclamation Facility Pump Stations Sanitary Sewers (approximate miles) Treatment Provided (millions of gallons)

860

875

890

900

900

7,957.00

7,993.50

8,723.50

7,665.00

6,643.00

21.8

21.9

23.9

21.0

18.2

Daily (average) flow treated (millions of gallons daily) Maximum daily flow treated (millions of gallons daily) Percentage of plant capacity used Cost per millions of gallons treated

$

Energy cost per millions of gallons treated

$

Total suspended solids (TSS) removal efficiency (percentage) Inspection of Significant Industrial Users Restaurant inspections for Grease Reduction Compliance

63.1

57.7

63.6

51.0

47.9

54.5%

54.75%

59.75%

52.5%

45.5%

570

$

122

$

558

$

119

$

510

$

82

$

609

$

141

$

786 175

93%

91%

88%

90%

90%

28

28

23

24

20

203

552

650

680

710

Fiscal Year Ended June 30, 2012

85

Statistical Section

Metropolitan Sewerage District of Buncombe County, North Carolina

Operating Indicators by Division (continued)

FY 2003 to FY 2012 FISCAL YEAR

DEPARTMENT

2008

2009

2010

2011

2012

Capital Improvement Department Linear Feet of rehabilitated Sewer Systems

69,249

45,175

45,450

49,099

43,943

1,145

983

1,094

925

876

Engineering Services Department Sewer Tap Applications Plans Reviewed Linear Feet of Accepted Sewer Systems

123

101

47

78,451

77,572

10,400

37

33

52,856

25,550

Human Resources Department Number of workforce injuries Lost Work Rate per 100 employees

4

11

11

7

2

2.56

3.00

7.02

4.82

1.33

System Services Department Average Response Time to sewer problem (hours)

0.53

0.49

0.52

0.59

0.56

893,206

920,525

1,019,852

614,543

873,000

Construction Repairs to Sewer Lines

513

528

447

486

472

Taps Installed

260

211

225

196

208

Manhole Repairs

411

458

461

404

472

41

23

34

24

25

31

31

31

32

32

Lines Washed (lineal feet) - in-house only

Sanitary Sewer Overflows

Water Reclamation Facility Pump Stations Sanitary Sewers (approximate miles) Treatment Provided (millions of gallons)

930

920

960

977

986

5,767.00

6,022.50

7,774.50

6,752.50

6,606.50

15.8

16.5

21.3

18.5

18.1

Daily (average) flow treated (millions of gallons daily) Maximum daily flow treated (millions of gallons daily) Percentage of plant capacity used

33.2

40.7

57.8

56.8

50.2

39.5%

41.3%

53.3%

46.3%

45.3%

Cost per millions of gallons treated

$

873

$

877

$

675

$

803

$

828

Energy cost per millions of gallons treated

$

184

$

180

$

116

$

151

$

136

Total suspended solids (TSS) removal efficiency (percentage) Inspection of Significant Industrial Users Restaurant inspections for Grease Reduction Compliance

92%

91%

90%

90%

90%

23

24

18

19

18

995

890

846

606

906

Source: District Departmental Data

86

Fiscal Year Ended June 30, 2012

Metropolitan Sewerage Disstrict of Buncombe County, North N Carolinaa

Staatistical Sectionn

Operatin ng Indica ators by Division D (c continued)

FY 20 003 to FY Y 2012

Fiscal Year Ended June 30,, 2012

87

Statisstical Section

Metropolitan Seweerage District of Buncombe CCounty, North Carolina

Operatin ng Indica ators by Division D (c continued)

FY 20 003 to FY Y 2012

Source: Disstrict Operattional Record ds

88

Fiscal Year EEnded June 300, 2012

Compliance Section

Independent Auditor’s 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

The Board of Directors Metropolitan Sewerage District of Buncombe County, North Carolina Asheville, North Carolina

We have audited the accompanying Statement of Net Position of the Metropolitan Sewerage District of Buncombe County, North Carolina (the “District”) as of June 30, 2012 and the related Statements of Revenues, Expenses, and changes in Net Position, and Cash Flows for the year then ended and have issued our report thereon dated October 26, 2012. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States.

Internal Control Over Financial Reporting Management of the District is responsible for establishing and maintaining effective internal control over financial reporting. In planning and performing our audit, we considered the District’s internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinions 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.

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 District’s financial statements will not be prevented, or detected and corrected on a timely basis.

Fiscal Year Ended June 30, 2012

89

Compliance Section

Metropolitan Sewerage District of Buncombe County, North Carolina

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

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 no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards.

This report is intended solely for the information and use of management, Board of Directors, others within the entity, and federal and State awarding agencies and pass‐through entities and is not intended to be and should not be used by anyone other than these specified parties.

Charlotte, North Carolina October 26, 2012

90

Fiscal Year Ended June 30, 2012