kenneth p. folden & co. the operating company was to operate and manage llie system upon terms...

VILLAGE OF HODGE COMBINED UTILITY SYSTEM

HODGE UTILITY OPERATING COMPANYHODGE, LOUISIANA

FINANCIAL REPORT

DECEMBER 31,2007WITH SUPPLEMENTAL INFORMATION' SCHEDULES

Under provisions of state law, this report is a publicdocument. Acopy of the report has been submitted tothe entity and other appropriate public officials. Thereport is available for public inspection at the BatonRouge office of the Legislative Auditor and, whereappropriate, at the office of the parish clerk of court.

Release Date_

KENNETH P. FOLDEN & Co.CERTIFIED PUBLIC ACCOUNTANTS

302 EIGHTH STREET. JGNESBOKO, LA 11251(318)259-7316

FAX (318} 259-7315

VILLAGE OF HODGE COMBINED UTILITY SYSTEMAND

HODGE UTILITY OPERATING COMPANYFINANCIAL REPORT

TABLE OF CONTENTSDECEMBER 31,2007

StatementsINDEPENDENT AUDITOR'S REPORTON FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

Balance,8heel£ AStatements of Revenues, Expensesand Changes in Retained Earnings B

Statements of Cash Flows CNotes to Financial Statements

SUPPLEMENTAL INFORMATION SCHEDULES

Schedule of Cash Receipts and Disbursements-RestrictedAccounts Required by Indenture of Mortgage I 16-17

Schedule of Monthly Deposit Requirementsfor the Year Ended December 31.-20P7 2

Schedule of Insurance in Force (Unaudited) 3

REPORT.ON COMPLIANCE AND ON INTERNALCONTROL OVER FINANCIAL REPORTINGBASED ON AN AUDIT OF FINANCIALSTATEMENTS PERFORMEDTN ACCORDANCEWITH GOVERNMENT ALTQITING STANDARDS — 20-22

SCHEDULE OF FINDINGS AND QUESTIONED COSTS — 23

Kenneth D. Folden & Co.Certified Public Accountants tea w. Sanderim, CPA

MsiroiiersAmerican Institute of

INDEPENDENT AUDITOR'S REPORT

The Honorable Quencon Causey, MayorVillage of HodgeHodge. Louisiana 7 ] 24?

Mr, H,E, Ingram, Jr., SecretaryHodge Utility Operating Company

, L/oujsi&nu /1 — T- *

We have audited the accompanying financial ssaiements of the Combing Utility System, Village ofHodge, Louisiana, and of the Hodge:Utility Operating Comply, Hodge, Louisiana, as of and for the yearended December 31, 2007, as listed in the Table of Contents. These financial statements are theresponsibility of company's management. Our responsibility is to.express as opinion on these financialstatements based on our audit The preceding year's financial statements of the Combined Utility SystemVillage of Hodge, Louisiana and of the Hodge Utility Operating Company, Hodge, Louisiana have b^nincluded tor comparative purposes and were taken from the financial report of that year.

We conducted our audit in accordance with auditing standards generally accepted in the Uriitbd States ofAmerica 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 plari and performour audit to obtain reasonable assurance aboul whether the financial statements are free of materialmisstatement. An audit includes examining., on a test ba$% evidence supporting the amounts anddisclosures m the financial statement?..; An audit also includes assessing the accounting principles usedand the significant estimates made by management as well as evaluating the overall financial statementpresentation. We believe that our audit provides a reasonable basis for our opinion.

As described in Note 3. the Combined Utility System, Village of Hodge, Louisiana, and Hodge UtilityOperating Company, Hodge. Louisiana, prepare their financial statements on the prescribed basis ofaccounting that demonstrates compliance with the bond indenture dated December 18, 2003, which doesnot necessarily conform to generally accepted accounting principles.

fri our opinion, the 200? financial-statements referred to in the first paragraph present, fairly, in ailmaterial respects, the financial position of the Combined Utility System, Village of Hodge, Louisiana,aud Hodge Utility Operating Company as of December 31, 2007. and the results of its operations and itscash flows for the year then ended in conformity vviih the bond indenture dated December !8, 2003.

We found no evidence that Srnurfit Stone Container Corporation was in default under any of theprovisions of the utility contract between the Village of Hodge and Smurfit-Stone Container Enterprises.Inc.

Our audits were made for the purpose of forming an opinion on the financial statements taken as a whole,The accompanying financial information listed as supporting schedules in the Table of Contents ispresented for purpose of additional analysts and is not a required part of the financial statements of theCombined Utility System, Village of Hodge, Louisiana, and Hodge Utility Operating '.Company, Hodge,Louisiana. Such information, except for that portion marked "unaudited"! on which no opinion wasexpressed has been subjected to the aufJiting^procedures applied in the audit of the financial statementsand, in our opinion, is fairly presented in all material respects in relation to the financial statements takenas a whole.

In accordance with Government'AudilmgStandards, we have also issued oitr report dated• Apnl-28.2008,in our consideration of the Combined Utility System and the Hodge Utility Operatmg.Gompany^s internalcontrol over financial reporting and pur tests of its compliance with certain provisions of laws,regulations, contracts, and grants. That report Is aa integral part of an audit performed in accordance withGovernment Auditing Standards and should be read tn conjunction •with this report in cbnsii"results of our audit.

Kenneth D. Folden & Company, CP/Vs

April 28, 2(Jonesboro, Louisiana

Statement A

iilagc of Hodge Combined. Utility Systemand

Hodge Utility Operating CompanyBalance Sheets

December 31,200?

Gash

Due from Combined Utility System

Restricted Assets

Revenue 'Account

Hodge Customers Bank Account

Receivables - Hodge Customers

Operating Account

Bank Account

Reserve and Contingency Account

Bank Account

Plant, Property and Equipment

Total Assets

Hodge Utility Tottb (Memorandum Oalv)Operating- r p- ~^~~Compatiy | 100T [ 2006

S 7,083 S 7,OS3

5,184,468 5.I8M6S

6T7IO

32-2S3

6,808,052

4,972-

4,944,656 5,959,444

652,495

S 5J9L55I S29KI7T.56Q S 289.8

The accompanying notes are an integral part of this statement.

Statement A (Continued)

Hodge Utility Gyrating CompanyBalance Sfets (cont'd)

•31.2007

Liabilities £fe EquityCombined

Utility System

HodgeUtility

OperatingCompany

j Totals ^Memorandum Qpfy)

[ 200? 2(106Liabilities

Accounts Payable

Payable from .Restricted Assets-

Accrued Revenue Bond Interest

Due to Operating-CompanyRevenue Bonds Payable

Tola! LiabilitiesEquity

Contributed Capital

Total Contributed Capital

Retained Earnings

Reserved for Utility System Operations 3,825.000

Reserved for Kevenue Bond Retirement 0Reserved for Bond Contingency

1'oial Retailed EarningsTotal Liabilities & Equity

0 S 5JI9L551 S 5,191,551 S 6,815.1

i ,442,444 0 1,442,444 1,442'; 4

5,184.468 0 5f 184,468 G^G^C

58,085.000 0 58.085,000 _ 58,QS5,C

64JSK9O 5-191,551 69,903.463 73;i50;fi

0 140343,135 136,447,657

0 140,343,155 136^47:65

$ 285.986.00& S 5J91.551 S 29!.I77.5&D S 589.883:075

Village of Hodge Combined Utility Systemand

Hodge Utility Operating CompanyStatements of Revenues, Expenses and Changes m Retained Earnings

Year Ended December 3 [ ."200?

r ^ *Combined OperatingUtility System | Company

OPERATING REVENUES:SmuffUr Stone Container Enterprises, Inc. S 69,163318 SHodge Resident RevenuesHodge Water and Sewer RevenuesOperating Fees

Total Operating RevenuesOPERATING EXPENSES:

Operating FeesAdministrative and SupervisionSalaried LaborProduction and Service LaborMaintenance LaborOvertime PremiumEmployee Benefits

Maintenance MaterialsOperating SuppliesInsurance

Fuel GasPurchased Outside ServicePurchased "Electricity and DemandPurchased Coke

Total Operating ExpensesOPERATING INCOME tXOSS)

NON-OPERATING REVENUES (Expenses)interest cm InvestmentsBond Interest Expense

NET INCOME {LOSS}

Retained Earnings at Besinaiijg of YearRetained Earnings at End of Year

0 S 69,163,318 $ 77,004,3610 422,708 431,1820 2T550

69pSS,576

64,850,28000

0Q0

00000000

64,850,2884_.73S£96

235,191(4327333){4.092,142}

646,154

S 80.930.942 S

;64;85Q,2BO

0141,9965405QQ0

2,460,0001,800,000'452*232

l,62l'fp2Q3364,716

.1309,94&721,968

41;8?3S24D55^655

8,286,5 132,022,992

64,850,2800

0Q

0

0

0 S

I34.438.S56

64,850,280141,90654CLGOG

2f460tOOOLsoaooo

452,23.21.621,0203364,7161,509,048

721,9684l.S73;24Q-

55,6558,386,513..2 022,^92

129,700,5604,738,296

235,191(4.327,333)(4,092,142)

646 1 1 54

80,9">0.942 1

147,102,383

69,667,090138,528714516

3rV295«lW2T535;732

452,2322407,116.•2477^901

898,894-622,752

46,049,54357(30S

8,429,4472,053,617

13.9,334,180-7J68f203

282,273(4,327,333){4,045,060}

3S723,I43

76,561^645; 80.284.7SS

The accompanying notes are an inte^ai pan of ihis staicment.

Statement C

Village ofl-Iodg* Combined Uiiliiy System

l,g!3T5S4)

CASHFLOWSOPERATING ACTIVITIES:

Net Income (Loss)Adjustment to Reconcile "Met Income (Loss) to

Net Cash Provided by Operating Activities:(Increase) Decree in-

Due &om Corabmed Utility SystemReceivables-Hodge CustomersAccrued Interest Receivable

Increase (Decrease) in-Accounis Payable

Accrued Revenue Bond InterestDue to Operating Company

NET CASH PROVIDED (USED)BY OPERATING ACTIVITIES

CASH FLOWS FROMINVESTING -ACTIVITIES;

NET CASH PROVIDED (USED)BY INVESTING ACTIVITIES

CASH FLOWS FROMFINANCING ACTIVITIES:

NET CASH PROVIDED (USED)BY FINANCING ACTIVITIES

Net Increase (Decrease) in CashCash at Beginning of YearCash at End of Year

Supplemental Disclosures of Cash FJ&W InformationNoncash Financing Transactions;

EquipmentiSonlributed by Stone S 3,895T499 STotal Noncash Financing Transactions S 3TB95 £QQ •$

Cash £'3id During the Year:Interest (Net of Amounts Capitalized) S 4 3g7.3"v? S

Hodge Utility * • • „ , . --** .• ™ . <.rt " "M Totals (Memorandum Only)Operating \— * ^ —

Uh* System]Company | 2QQ7 [ 20Q6

O S 5,t54 S 3,723.143

1 ,623,5840

1,623,5.84(8,183)

(1.623,584) (1,623,

U S 3TS9$,499 S

2;264fOS510.707

0 {985,613) ....K469;8ll0 0 0

S

0(985,613)

6,616,91!

5.f31.29« S

00

7,0837.083 5

0 0(985,613) 1,469,811

6?623;994 5,154,182^5,638381 S 6,623,993

33 S 4.327.333


Hodge Utility Operating CompanyNotes to Financial Statement

December31, 2007

1. ORGANIZATIONAL AJND HISTORICAL BACKGROUND

The qualified electors of the Village of Hodge, Louisiana, and resident property- taxpayers of .saidVillage approved the issuance--of $o5,666,G00 is Combined Utility System Revenue Bonds underindenture of mortgage, dated March 1.1972,

The Village entered into an Acquisition and Construction Agreement on March U 1972 withContinental Group, Inc.. whereby the- Village acquired the existing combined water, sewerage andelectric generating facilities, and agreed to purchase improvements made to the existing s-ystem byContinental Group, inc. arid to acquire or construct electric distribution facilities within the Village.The system, acquired and completed, is known as the "Combined Utility System".

The Village entered into an agreement with the Hodge Utility Operating Company'on. March 1, 1972whereby the Operating Company was to operate and manage llie system upon terms arid conditions asset forth in the contract

On January 24 1990, the Village issued $93,000,000 of its Combined Utility System Revenue Bpa%Series 1990, under a bond indenture dated January- I? 1990. authorized by a resolution duly passes!and approved by the Mayor and Board of Aldermen of the Village, Hie bonds were issued for theprinciple purpose of financing.the replacement of a recovery boiler and associated equipment. Thebonds are secured by a security interest in revenues derived by the Village from operation, of theCombined Utility System (subject to the pledge of the first lien on revenues created by the indentureof Mortgage securing the series 1972 bonds) and oilier funds,

On December 18, 2003, the Village of Hodge issued 558,085,000 of the Village of Hpdge;ReloadingBonds Series 2003. The bonds were issued to refund the Series 1972 and 1990 bonds and to financeneeded capital improvements,

2. FLOW OF FUNDS: RESTRICTIONS ON USE

Under the terms of the indenture of mortgage of outstanding Combined Utility System RevenueRefunding Bonds, Series 2003, all receipts of every nature earned or derived from the operation of theCombined Utility System are pledged and dedicated, and are to be set aside into the following specialfunds:

Revenue Fund: There is hereby created a special fund of the Village to be known as the "CombinedUtility System Revenue Fund"', the existence of which shall be continued for as long as any bondsissued pursuant to this indenture are outstanding (said Fund being hereinafter referred to as thte"Revenue Fund*'). The Revenue Fund shall be held and administered by the Trustee, Upon and afterthe issuance of any Bonds issued pursuant to this Indenture, the Village hereby obligates and bindsitself irrevocably to set aside and pay to the Trustee in trust for the account of the Revenue Fund aspromptly as practicable after receipt thereof al! Revenues derived by ine Village through theownership and operation by it of the project, and all other monies required to be deposited in theRevenue Fund pursuant to this Indenture further covenants and agrees thai si! such Revenues and


Hodge Utilhy Operating CompanyNotes to Financial Statement (Continued)

31 2C

other monies now or hereafter imposed thereon by law or contract to the payment of which and forthe purposes said Revenues and other monies as provided herein are hereby pledged.

Monies in the Revenue Fund not required for individual disbursement for the purposes for which saidFund is .created'shall, to the fullest extent practicable and reasonable, Ve invested and reinvested bythe Trustee in Securities which shall mature prior to ihc respective dates when monies held for thecredit of such Fund will be required for the purpose intended. The Trustee shall not be liable for anydepreciation in value of any such investments, Alt income and profit resulting from the investment orreinvestment of said Fund shall accrue to and be deposited in-the Revenue Fund.

Deposit of Revenues: All Revenues shall be promptly deposited into the Revenue Fund. As soon aspracticable in each month after the deposit of Revenues in the Revenue Fund, the Trustee shallwithdraw from the Revenue Fund such monies in the amounts and manner set forth in Sections 63.6.4, 6.5 and 6.6 hereof,

Operating Fund: Ttere is hereby creaied a special fund of the Village to be known as'the "CombinedUtility System Operating Fond" (herein referred to as the "Operating Fund5*), Said Fund shall be heldby the Trustee and snail be administered by the Operating Company. On the date of delivery of theSeries 2003 Bonds there shall be deposited in the Operating Fund the sum of "S3;82S,QQOt

representing budgeted amounts necessary for operation and maintenance for the Project for ths: periodending January 31, 2005. Thereafter, the Trustee shall, on or before die last day of each calendarmonth, commencing.January 31, 2005, pay otit of the Revenue Fund into the Operating Fund anamount which will be sufficient to make the amount therein on such date equal to the amemmbudgeted for expenses of operation and maintenance for the next succeeding .calendar month, asshown in ihe Budget submitted most recently to the Trustee pursuant to Section 5 of the OperatingAgreement,

Monies in the Operating Fund shall be available and shall be used for the payment or-reimbursementof all costs and expenses incurred by ihe Operating Company in performance of its duties, as operatorof the Project for the Village under the provisions of the Operating Agreemen^ including, withoutlimitation, the costs of operation and maintenance, accrual items and Other related deferral items, thecosts of fuel furnished by the Operating Company and all other Operating Expenses as defined in theOperating Agreement,

Bond Fund: There is hereby created a special fund of the Village to be.kncnvn as the "CombinedUtility System Bond Fund" (hereinafter referred to as the "Bond Fund"). The Bond Fund and theaccounts herein shall be held and administered by the Trustee and shall be used solely for the purposeof paying the principal of and premium, if any, and interest on the Bonds, and of retiring the Bondsprior So the maturity and the manner herein provided. After making the payments heremaboveprovided for into ihe Operating Fund, the Trustee shaft pay out of ihe Revenues theretofore paid intothe Revenue Fund in trust For the account of the Bond Fund, certain amounts, sufficient to pay theprincipal of, the premium, if any, and interest on all the Bonds from lime to time outstanding as thesame respectively become due and payable, \vteher at maturity or upon redemption or accelerationor otherwise. Such amounts to be paid imo the Bond Fund shall be as follows and in ihe followingorder of priority, to-wit;

Village of Hodge Combined Utility System

Hodge Utility Operating- CompanyNotes 10 Financial Slalemerit (Continued)

December 3 L 2007

1. There rs hereby created, for the purpose of paying the interest on outstanding Bonds as thesame becomes due and payable, an Interest Account in the Bond Fund {hsreiriafler referred toas the "Interest Account").

On or before the date on which such interest payment is due, the.Trustee- shall pay from iheRevenue Fund into the Bond Fund to the credit of the Interest Account an amount equal tothe installment of interest then falling due on all Bonds then outstanding, in addition.' if anyBonds bear interest at a variable, floating or adjusted rate, the Trustee shall pay From theRevenue Fund into the Bond Fund to the credit of.'ife Interest Account on the day prior toany interest payment date, any additional amount due on the ne-xt succeeding interestpayment date,

2. There is also hereby created, for the purpose of paying-outstanding Bonds as --they mature, &Principal Account in the Bond Fund (hereinafter referred to as the "Principal Account**).- Noilater thai! each date upon which an installment of principal of the Bonds falls due, the Trusteeshall pay from the Revenue Fund into the Bond Fund to the credit of the Principal Accountanamount equal to tlie installment of principal next falling due,

3. There is also hereby created. For the purpose^ of meetingthe specified sinking fund installmentrequirements of any additional Series of Bonds, ^ Bond Retirement Account in the BondFund (hereinafter referred to as the "Bond Retirement Account"). Beginning on the dayspecified in the Supplemental Indenture authorizing the Issuance of said additional Series ofBonds, the Trustee shall pay-from the Revenue Fund into the Bond Fund to the credit of theBond Retirement Account an amount equal to the amount specified in the SupplementalIndenture.

4. Monies in the Interest Account, Principal Account and Bond Retirement Account in the BondFund shall be transmitted by the Trustee to the Paying Agent not later than the payment dateupon which any interest or principal is due on the Bonds, either at maturity thereof orredemption date prior to maturity* in amounts sufficient to meet such maturing installments ofprincipal of and premium, if any, and interest on the Bonds when due. In the even! that thereshall be a deficiency on such date in the Interest Account or Principal Account or BondRetirement Account in the Bond Fund in that order, the Trustee shatl promptly make up suchdeficiency from the Reserve and Contingency Fund.

5. Whenever and so long as the combined assets of the Bond Fund and the Redemption.Fundshall be sufficient to provide monies to retire all Bonds then outstanding,-including suchinterest thereon as thereafter may become due and payable and any premiums payable uponredemption thereof, no further payments need to be made into the Bond fund.

The Bond Fund shall be drawn upon for the purpose of paying the principal of and premium, if any,and interest on the Bonds. Monies and Securities set aside from time to time with the Paying Agentfor such payments shall be held in trust for the owners of the Bonds in respect of which the same shallhave been so set aside. Until so set astdc, all monies or Securities in the Bond Fund shall be held intrust for the benefh of the owners of all Bonds at the time outstanding, equally and ratably.


Hodge Utility Operating CompanyNotes to Financial Statement (Continued)

Redemption Fond: There is hereby created a special fund of the Village to be kliown as the"Combined Utility System Redemption Fund" (hereinafter referred to as the *Hedemplion:Fiii&*5) andSilid Fund shall be held and administered by the Trustee, There shall be deposited io the credit of theRedemption Fund (!) monies transferred to such Fund to effectuate a redemption of Bonds pursuantto Section 3.1{a) or (c). and (2) certain proceeds transferred pursuant to Section 4,7 and Section 4.12,Monies on deposit in the Redemption Fund, shall be used as promptly as practicable for the purpose ofredeeming or purchasing Bonds prior to mammy in the manner provided in Article 111 Hereof.

Monies on deposit in the Redemption Fund to be used for the redemption of .bonds shall betransmitted by the Trustee to the Paying Agent not later than the dale set for redemption,

Reserve and Contingency Fund: There is hereby created a special fund of the Village to be-known asthe "Combined. Utility System Reserve mid Contingency Fund" (herein referred to as the "Reserveand Contingency Fund"*} and said Fund shall fee held in trust by the Trustee, After making thepayments herein above provided for into the Operating Fund and into the Bond Fund, the Trusteeshall on or before March i of each year pay of out of the Revenue Fund into the Reserve andContingency Fund thai amount, if any, as may be recommended by the Consulting Engineer asnecessary in the next succeeding twelve months for the purposes for which the .Rcsferve aMContingency Fund was created. In connection with the making of any such wiihdrawat;6r deposit tfieTrustee will be entitled to rely on a certificate of the Operating Company with respect to the;arjiountof the then commitmejiisor obligations incurred by or'on behalf of the Village for any-ofthe purposeslisted in this Section 6,6.

Monies in the Reserve and • Contingency Rmd shall be used from time to time to make up ^nydeficiencies in the Interest Account,-Principal Account or Bond Retirement Account in the BondFund; and such monks in the Reserve and Contingency Fund are herein* pledged as additionalpayments into the Bond Fund to the extent required to make up any such deficiencies. To die extentnot required for arty such deficiency, monies in the Reserve and Contingency Fund-may be applied ioany one or more of the following purposes:

(1) to pay, or to reimburse the Village for the payment of. the cost of renewals, andreplacements to the Project; other than minor items of property:

(2) to pay, or to reimburse the Village for the payment of, extraordinary operation andmaintenance costs including the cast of preventing or correcting any unusual loss ordamage (including major repairs), to the Project in order to keep the Project in goodoperating condition; and

(3) to pay. or to reimburse the Village for the payment of, the additions, betterments andimprovements (other than Utility System improvements) to tire Project.

Except for the purpose of making up deficiencies in ihe payments required io be made into theInterest Account, Principal Account and Bond Retirement Account in the Bond Fund as aforesaid andexcept for the withdrawal of excess monies as aforesaid, monies in the Reserve and ContingencyFund shall be paid out by the Trustee only upon receipt by it of a requisition of the OperatingCompany, which requisition shall also be signed by the.Consulting Engineer if the amount shall be In

Village of Hodge Combined Utility Sysieinand


excess of $50,000 per any one item* directing the disbursement of such money for one or more of thepurposes authorized herein. Each such .requisition shall state with respect to each item (a) the itemnumber of the payment; (b) the name of the person, firm or corporation to whom payment is due forsuch item; (c) the amount to be paid; (d) thai an obligation in the stated amount has. beeajncunred forone prmore of the purposes authorized by this Section and specifying the same; <e) that the item is aproper and reasonable charge against the Reserve and Contingency Fund; and (f) that the amount-sospecified has not theretofore been authorized to be paid.

Whenever and so long as the combined assets of the Bond Fund. Reserve aad Gontingency'Fund andRedemption Fund shall be sufficient to;provide monies to retire all bonds then outstanding, includingsuch interest thereon as thereafter may become due and payable and any 'premium's upon redemptionthereof, no further payments need to be made into the Reserve and Contingency Fund^ 'and the monieson deposit in the Reserve and Contingency Fiuid sliall be transferred to ihe Bond Fund :and applied inaccordance with the provisions thereof.

Investment: Monies held for the credit of the Interest Account, Principal Account and BondRetirement Account In the Bond Fund and the Redemption Fund.shall be invested by the Trustee inSecurities which shall mature hot" later: than the respective dates when the monies held for the credit ofsuch Accounts will be required for the purposes intended,

Monies in the Operating Fund, shall, to the --fullest'extent practicable and reasonable, be invented'bythe Trustee in Securities which shall mature hot later than the respective dates when monies held forthe credit of such Fund shall be 'required for ibe purposes intended.

Monies in the Reserve and Contingency Fund not required for immediate disbursement for thepurposes for which said Fund is created shall, to the fullest.extent practicable and reasonab^.beinvested and reinvested by the Trustee;solely in Securities maturing, or subject to redemption at theoption of the owner thereof,, not later than the final maturity date of the Bonds.

Notwithstanding anything to the contrary contained herein, any investment made by the Trusteepursuant to this Section shall be made in accordance with the written directions of the Village, and theVillage agrees that it shall give such written directions and in such manner that the applicable fundsshall at all times be invested to the fii'llest extent practicable and reasonable and with due regard to theamounts needed from time to time to make payments therefrom. In the event monies that are investedare needed to meet obligations thereof for which funds are not otherwise available, then the Trusteeshall sell, or present for redemption, said investments to the extent required to provide funds for suchpurpose.

The Trustee shall not be liable for any depreciation in value of any such investment.

All income mid profits resulting from the investment or reinvestment of the Interest AccountPrincipal Account and Bond Retirement Account in the Bond Fund shall be deposited in the RevenueFund.

All income and profits resulting from the investment or reinvestment of the Operating Fund shallaccrue to and be deposited in the Operating Fund. AH income and profits resalttng from the

n

Village of Hodge Combined Utility Sysiem

liodge Utility- Operating-CompanyNotes to Financial Statement (Continued)

December 3 ls 2007

investment or reinvestment of the Reserve and Contingency Fund and the Redemption Fund shallaccrue to and be deposited in the-Reserve and Contingency Fund and the Redemption Ftmirespectively;

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accountitig and reporting practices of die Combined Utility System, Village oftjodgeyand ttieHodge Utility Operating Company conformed to the requirements of the indenture of mortgage> datedDecember 18, 2003, which do not necessarily conform to generally accepted accounting pnadplesapplied to.governmental accounting,

Financial Reporting Entitv: This report includes two proprietary funds, the Combined Utility System*Village of Hodge, and the Hodge Utility Operating Company, The Combined Utility System iscontrolled by the Village executive and legislative branches (the Mayor and Board of •Alifornen),whereas die Hodge Utility Operating Company is controlled by the Hodge Utility OperatingCompany Board of Directors, However, since the Hodge Utility dperating Company operates andmanages the Sysiem upon the terms and conditions of the operating agreement the Village of Hodgedoes not exercise significant oversight responsibility over the System. The specificelementsofoversight responsibility considered in the decision to. exclude the System were financialinterdependence &e ability to significantly influence operations, and accountability for fiscalmatters. Therefore^ this report is nbt included as a component unit of the Village of Hodge, and thereare no excluded component, units in this report

Totals Columns: Total Columns*on *Jie statements are captionerd ^Memorandum Only'1- tp. indicatethat they are presented only 10 facilitate financial analysis. Data iti these columns does not presentfinancial position in conformity with generally accepted accounting principles. Neither is such datacomparable to a consolidation. Inte/riund eliminations have,hot been made in the aggregation of tills

Fixed Assets and Long-term Liabilities: The Utility System is accounted for on the-cost of service or"'Capital Maintenance*' measurement f(3cus, TMs means that all assets and liabilities (whethercurrentor noncurrent) associated with their activity'.are included on their balance sheet. The reported fundequity (net total assets) is segregated Into contributed capital and related earnings components.

Depreciation on all exhaustible fixed assets ussd by the proprietary fund should be charged as anexpense against their operations in accordance with generally accepted accounting principles.Accumulated depreciation shouid also be reported on proprietary fund balance sheets.

Total cost of die Combined Utility Sysiem of the Village of Hodge is underwritten by ContinentalGroup. Inc. or its assigns; therefore, depreciation, an operating cost not requiring cash outlay, is notreported on the balance sheet of the Combined Utility Sysiem of the Village of Hodge.

Basis of Accounting: The Combined Utility System of die Village of Hodge and the Hodge: UtilityOperating Company is accounted for using tlie accrual basis of accounting. Revenues are recognised



December 3 L 2007

when they are earned and expenses are recognized when they are incurred. Receivables billed andnot paid and accounts payable (expenses incurred) are recorded monthly.

Budget and Budgetary Accounting: The Hodge Utility Operating Company, not less than 60 daysprior to the .beginning of each year,, shall prepare and file with the Village and the Trustee a budgetfor the following year. The budget shall show separately the.anticipated monthly outlay in respect tofixed obligations and variable-outlays. The budget shall show separately anticipated revenues thai areobligations of the Village, and Continental Group, Inc., or its assigns,

Investments: Investments are entirely obligations'of the United States invested by the Trustee and arerecorded at cost.

4, CHANGES IN PLANT, PROPERTY, AND EQUIPMENT

A summary of the Combined Utility System plant, property, and equipmenrat December 31, 200? isas follows;

Balance, January ls 2007 $ 276,426,929Additions 3,RetirementsBalance, December 31 s 2007 S 280.322.42S

Depreciation of the utility system assets is not recorded on the books of the Village.

CHANGES IN LONG-TERM DEBT

The following is a summary of the Series 1972._ Series 1990, and Series 2003 bond transactions forthe Village of Hodge Combined Utility System for the year:

Revenue Bonds Payable January 1. 2007 S 5&.G8S?OGGBonds Ketired 0Bonds Issued QRevenue Bonds Payable, December 31, 2007 £ 58.085.

Revenue Bonds;

558,085,000 OB March L 2024, interest rate of 7.45% payable semi-annually.

The annual requirements to amortize all debt outstanding as of December 31? 2007, including interestpayments of $69,958,534 are as follows:

Principal j Interest

Village of Hodge Combined Utili ty System


,-2023

S

$

0 S0000

58,085,00058.085.000 S

4,327,332 S4327,332

4,327,3324,327.332

51,927,984721,222

69.958.534 $

4,32733243273324,327 3324,327,332

51,927,984

58,806,222

12S.043,534

Current Debt Refunding;

On December IS, 2003, the Village of Hodge refonded^the Series 1990 and 1972 Bonds. The newissue is called the Village of Hodge Revenue Refunding Bonds Series 2003 in the amount ofSSS.085,000. The maturity is-March 1,2024, with an interest rate of 7,45% payable semi-annual ly onMarch } and September I. The bonds were used to refund the Series 1990 and 1972 bond's-andrelease funds from various trust accounts to finance the $9,4 million upgrade* to fc recovery boilersuperheater, turbine generator easings and PCB transformers durmg 2002 'and. 200.3- lie bondsissuance costs were 1503,500, which was funded by Stone Container Corporation,and were expensedduring,the year-

There were no penalties or premiums for refunding the Series 1990 and 1972 Bonds and ni> gain orloss was incurred. The Series 1990 Bonds were redeemed January 20, 2004 and the Series 1972Bonds were redeemed January 26, 2004. "Hie benefits derived from the refundinginclude:

» Interest savings of $l-:2 million will be realized in 2004 and s net present value of interestsavings of SO million will be realized over the life of the Series 2003 bonds;

* Cash flow is increased by reducing debt service requirements by SI2.9 million annuallyduring the years 2004 through 2006 and $9.3 million annually during ifee years 2007 throughMi*rch2GlQ.

6. INTERFUND RECEIVABLES ANI> PAYABLES

Interfund receivables and payable* at December 31, 2007 are as follows:

Receivable j PayableVillage of Hodge Combined Utility System S (5 J 84,468)Hodge Utility Operating Company S 5.184,46S


Hodge Utility Operating CompanyNotes to Financial Statement (Concluded)

?. EMPLOYEES RETIREMENT

Neither the Combined Utility System or Hedge Utility Operating Company has employees receivingpay directly. No retirement system exists. All employees and related retirement are. carried bySmurfit-Slone Comaker Corporation or its assigns.

8. ASSIGNMENT

Effective October 8, 1983, Continental Group, Inc. transferred to its successor. Stone Co^ticerCorporation, -Chicago, Illinois, all of its obligation under the acquisition and constnictionigreemfent,utility contract, indenture of mortgage and operating agreement, each dated March L 1972.

9. MERGER

On May 10, 199H, Jefferson Smurfit Corporation, a Delaware Corporation, now known ;a& Sniurfu-Stpne Container Corporation entered into an Agreement and Plan of Merger with JSC; AcquisitionCorporation. a wholly owned subsidiary of the Company, and Stone Container Corporation., Pursuantto the terms of the Merger Agreement JSC Acquisition was merged with and into Stone onNovember 18, 199S, Oa November 1, 2004, Jefferson Smurfit Corporation, a Delaware-Corporation,entered into a merger agreement with Stone Container Corporation, under the name of Smuiih-Sto&eContainer Enterprises, Inc., a corporation organized and existing wnder the laws of the State ofDelaware.

10. LITIGATION AND CLAIMS

We have been advised that the Hodge Utility Operating Company (company) is not involved in -anylitigation at December 3 i, 2007.

n «yr i *T*"P*Yi n 4 y» 'T"t r TT* A "?^TO i /*~"T^¥jrwTf*. RELATED FARTV TRANaAGTIONS

Serving on ihe Boani of Directors of the Hodge UtiHiy Operating Company Cooperating Company^),are tlic Mayor and Mayor pro-tern -of the Village of Hodge, Louisiana. The Village of Hodge isconsidered to be a related party. During the year ended December 3 1, 2G07, revenues received %; theOperating Company from the Village of Hodge was $2,550' for water and sewer 'usage. Expensespaid to the Village of Hodge was $ 48,220.

Village of Hod£c C&mbineJ Utility .Systemand

Hodge Utility Operating CompanySchedule of Cash Receipts and Disbursements-Restricted

Accounts Required by Indenture of MortgageYear Endc4 December 31, 2007

CasManuaiy K 2007

C^sh Receipts

Smurflt- Slonc.Oonlsiiter E&u

Hodge Wat^r A'Scwcr

Investment Interest

Transfers Jn

l Cash Available

Transfers Out

Boiui Pririuipat

Bond "I ntcrest

T

Cash, December 3 1.3J07

Tom! Gash and Investments aOccembcf-3It2007

Revenue Resident Revenue J2005 Bond InterestAccount Account [ Awuunt

S 0 S 4.972 S

414,52"

2350

0

4327,333

0 422,W9 '4.327J33'

4,327333

0 415,339 44.27,333 :

0 6,710 0-

« 0 S 6.710 S 0

Schedule !

Hodgt: Utility QpaatmE CanipuriySchedule of Cash Receipts &nd Dtsbuwemimts-Restneled

Accounts Required bvYear Ended December 31. 2U07

Cash, January 1,2007

Smtirfil- Stone ConiHiE2i KntLTph.'JCS, inc.

H*Hlgc Resident Revenue

Hodge Wmcr & Sewer

investment Interest

Transfers In

Tola! C'

Cash DisburscmemsTrans&nt OUTBond PrincipalBond InterestOperating

Total. Cash Disi

Cash, December 51, 2007

foisl Gash and Icvesimeius as,Dacerabcr 31,20»7

perating2803

OperatingAccount

agencyAccount

7.QS3 $ 5.959,44-1 5

65,2?i].t43

207,753.

.-1SOJ66 71,418,340

66,473.684

6.473.683 66,473,684

7,083 4,944,656

'Mi S 4.94-1656 S

651495

17

Schedule 2


Hodge Utility Operating CompanySchedule of Monthly Deposit Requirements

Year Ended December 3 1 , 2007

Revenue Ftmd

Based on the 200S annual budget of $ 59,432,439 , she average monthly deposit to the Revenue Fund forfiscal year 2008 is $ 4,952,701.

Bond Interest Account

Based on payment requirements, a deposit of $2,163,666 is due on or before March U 20QS, and a depositof $21163,666 is due on or before September 1,200S.

Operating Account

Based on the 2008 annual budget of $ 55,105,08? , die average' monthly deposited the Operating Fund forfiscal year 2008 is S 4,592,091.

IS


Hodge Utility Operating CompanySchedule oflnsurance in Force (Unaudited)

December}!, 2007

Insuring Companyand

Tvpe of Insurance Coverage Policy Number

Zurich AmericanGeneral Liabilitv

Effective DatesFrom To

1/07 4/I/C ',500.000

American GuaranteeExcess Liability Umbrella AUC 4/1J08 3,000,

Automobile LiabiluyZnHch.AinericanBAP 9303206-05 4/1/07 4/1/08 3j

Workers' CompensationSelf-Insured

WC 9303204^05 4/1/0? 4;

Workers1 Compensationand Employer's Liability

Zurich AmericanEWS 930320^We 9303201 4/1/07 4/

Independent Auditor's Report Requiredby Government Auditing Standards

The following independent auditor's report on compliance .and internal control is presented mcompliance with the requirements of Government Auditing Standards issued by the Comptroller Generalof the United Stales, and the Louisiana Governmental Audit Guide, issued by the Society of LouisianaCertified Public Accountants and the Louisiana Legislative Auditor.

Kenneth D. Folden & Co..C Accountants Ted W. SafKkrfe, CPA

MembersSociety of Loaisiaaa

Certified Public AccountantsEMAIL: Mbidcn££foldcacoa.ctmi FAX (318) 259-731S EMAIL; tsan4<

REPORT ON COMPLIANCE AND ON INTERNAL CONTROLOVER FINANCIAL REPORTING BASED ON AN AUDIT OF

FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITHGOVERNMENT AUDITING '-STANDARDS

To the Honorable Quenton Causey, MayorVillage of Ho#geHodge, Louisiana 71247

Mr. H.E. Ingram; SecretaryHodge Utility Operating CompanyHodge, Louisiana 7124?

We have audited the general purpose financial statements of the Combined Utility System^ Village ofHodge, Louisiana, and 'of ihe Hodge;-Utility Operating Company. Hodge, Louisiana, as o6aod for the yearended December31. 2007, and have issued our report thereon dated April 2B, 2008. We canceled ouraudit in accordance .with auditing standards generally accepted in the United States of America and thestandards applicable to financial audits contained in Government Auditing Standards, issuedby theComptroller General of ihe- United States,

Internal Control Over Financial Reporting

la planning and performing our audit, we considered the Combined Utility System and -|he Hodge UtilityOperating Company^ Internal control over financial reporting in ortjer to determine our auditingprocedures for the purpose of expressing our opinion on the financial statements but not for the,purposeof expressingan opinion on the effectiveness of the Combined 'Utility System:and the Hodge UtilityOperating Company's internal control over ilnaneial reporting. Accordingly, we do not express anopinion on the .effectiveness of the. Combined Utility System and the Hodge Utility Qper&iog Company'sinternal-control over financial reporting.

A control deficiency exists when the Design or operation of a control does not allow management oremployees, in the normal coarse of performing their assigned functions, to prevent or detectmisstatements 6n a timely basis. A significant deficiency is a control deficiency or combination of controldeficiencies, that adversely affects the Combined Utility System and the Hodge Utility OperatingCompany's ability to initiate, authorize, record, process, or report financial data reliably in accordancewfih generally accepted accounting principles such that there is more than a remote likelihood that amisstatement of the Combined Utility System and the Hodge Utility Operating Company's financialstatements that is more than inconsequential will not be prevented or detected by the Combined UtilitySystem and the Hodge Utility Operating Company's internal control.

A material weakness is a significant deficiency or combination of significant deficiencies, that results inmore than a remote likelihood that's material misscatement of the financial statements wilt not beprevented or detected by she Combined Utility System and the Hodge Utility Operating Company'sinternal control.

Our consideration of internal control over financial reporting was for the limited purpose described in thefirst paragraph of this section and would not necessarily identify all deficiencies in internal control thatmight be significant deficiencies or material weaknesses. We did riot identify any deficiencies in theinternal 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 Combined Utility System, and the HodgeUtility Operating Company^ financial statements are free of material mi statements, we performed testsof its compliance with certain provisions of laws, regulations, contracts, and bond agreements,noncoiriptiafice \vith which could have a direct and material effect'on the determination of financialstatement amounts. However, providing an opmkm on compliance with those provisions was not anobjective of our audit, and. accordingly, we do not express such an opmioii. The reuslts of our testsdisclosed no instances of noncompiiance or other matters that are required to be reported underGovernment Auditing Standards.

is intended forthe information of managemenL However, thlsreport is a matter of publicrecord and its distribution is not limited.

ineth D. Polden & Company, CPA'

April "28,2008


Hodge Utility Operating CompanySchedule of Findings and Questioned Costs

Year Ended December 31, 2007

A. SUMMARY OF AUDIT RESULTS

1, The auditor's report expresses an unqualified opinion on the (primary government) financialstatements of the Village of Hodge Combined .Utility System and Hodge Utility OperatingCompany.

2. No repairable conditions relating to the audit of the -finahcial.staterncnr are reported in the 'Reporton Compliance and on Internal Control over Financial Reporting Based on an Audit ,pf FinancialStatements Performed in Accordance wi^ovemment Auditing

3. No instances of noncompliance material to the financial statement? of the. Village of HodgeCombined Utility System and Hodge Utility Operating Company was disclosed during the audit

4. The Village of Hodge Combined Utility System and Hodge Utility Operating 'Company has nofederal award programs.

BT FINDINGS - FINANCIAL STATEMENTS AUDIT

There are no findings for the year ended Decembers!, 2007. Also, there were no prior year Findingsfor the year ended December 3 1 , 2007.

C FINDINGS AND QUESTIONED COSTS - MAJOR FEDERAL AWARD PROGRAM AUDIT

The Village of Hodge Combined Utility System and Hodge Utility Operating Company has no majorfederal programs.

kenneth p. folden & co. the operating company was to operate and manage llie system upon terms...

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