HAZLETON CITY AUTHORITY COMBINING FINANCIAL …

HAZLETON CITY AUTHORITY

COMBINING FINANCIAL STATEMENTS FOR THE YEAR ENDED

MARCH 31, 2011 (WITH COMPARATIVE TOTALS FOR 2010)

& INDEPENDENT AUDITORS' REPORT

& ADDITIONAL INFORMATION

& SINGLE AUDIT REPORTS

TABLE OF CONTENTS

PAGE

INDEPENDENT AUDITORS' REPORT ................................... 3

MANAGEMENT'S DISCUSSION AND ANALYSIS ........................................... 6

COMBINING FINANCIAL STATEMENTS:

STATEMENT OF NET ASSETS (DEFICIT) ................................................................. 13

STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS (DEFICIT) ...................... 15

STATEMENT OF CASH FLOWS .............................................................................. 16

NOTES To COMBINING FINANCIAL STATEMENTS ..................................................... 18

ADDITIONAL INFORMATION:

COMBINING SCHEDULE OF OPERATING REVENUES ................................................. 40

COMBINING SCHEDULE OF OPERATING EXPENSES ................................................. 41

SCHEDULE OF CHANGES IN TRUST FUND BALANCES (RESTRICTED ASSETS) - SERIES OF 1992-CASH BASIS ........................................................................ 42

SCHEDULE OF CHANGES IN TRUST FUND BALANCES (RESTRICTED ASSETS) - SERIES OF 2001 - CASH BASIS ........................................................................ 43

SCHEDULE OF CHANGES IN TRUST FUND BALANCES (RESTRICTED ASSETS) SERIES OF 2006 - CASH BASIS ........................................................................ 44

SCHEDULE OF ACTIVITIES - BUDGET AND ACTUAL - FOR THE YEAR ENDED MARCH 31, 2011 .......................................................... 45

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TABLE OF CONTENTS CONTINUED

SINGLE AUDIT REPORTS:

SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS......................................46

NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS.........................47

INDEPENDENT AUDITORS' 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.......................................................................48

INDEPENDENT AUDITORS' REPORT ON COMPLIANCE WITH REQUIREMENTS THAT COULD HAVE A DIRECT AND MATERIAL EFFECT ON EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH OMB CIRCULAR A-i 33......................................................................... 50

SCHEDULE OF FINDINGS AND QUESTIONED COSTS..........................................52

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Board of Directors Hazleton City Authority:

We have audited the accompanying combining statement of net assets (deficit) of the business-type activities of the Hazleton City Authority-Water Department and Industrial Division (the "Authority") as of March 31, 2011, with comparative totals for 2010, and the related combining statement of activities and changes in net assets (deficit) and the combining statement of cash flows for the year then ended which collectively comprise the Authority's basic financial statements as listed in the table of contents. These combining financial statements are the responsibility of the Authority's management. Our responsibility is to express an opinion on these combining 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. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the combining financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the combining financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall combining financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the combining financial statements referred to above present fairly, in all material respects, the financial position of the business-type activities of the Hazleton City Authority-Water Department and Industrial Division as of March 31, 2011, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

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In accordance with Government Auditing Standards, we have also issued our report dated June 7, 2012, on our consideration of the Authority's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, 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.

Accounting principles generally accepted in the United States of America require that the management's discussion and analysis, schedules of changes in Trust Fund Balances Restricted Assets and budgetary comparison information on pages 6 through 12 and 40 through 46 to be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.

Our audit was conducted for the purpose of forming an opinion on the combining financial statements of the Authority taken as a whole. The additional information presented on pages 40 through 46 is presented for purposes of additional analysis and is not a required part of the basic financial statements. The accompanying schedule of expenditures of federal awards is presented for purposes of additional analysis as required by U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Pro fit Organizations and is also not a required part of the financial statements. The information has been subjected to the auditing procedures applied in the audit of the combining financial statements and certain additional procedures, including comparing, and reconciling such information directly to the underlying accounting and other records used to prepare the combining financial statements or to the combining financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated, in all material respects, in relation to the combining financial statements taken as a whole.

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In connection with our audit, we became aware that the Authority was considered in technical default of the terms, covenants, provisions, or conditions of the trust indenture dated December 15, 1992 and the amended, restated, and supplemental trust indentures dated November 12, 1996, January 28, 1999, December 19, 2001, August 21, 2002 and January 5, 2006 securing the bond issues, we are not aware of any adverse consequences that the technical default will have on the Authority, nor has the bond Trustee made us aware of any other issues surrounding the noncompliance. However, our audit was not directed primarily toward obtaining knowledge of such noncompliance.

~19W 40OU iWall; J

June 7, 2012

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MANAGEMENT'S DiscussioN AND ANALYSIS (UNAUDITED)

BASIC FINANCIAL STATEMENTS

This annual report consists of a series of combining financial statements. The Combining Statement of Net Assets (Deficit) and Combining Statement of Activities and Changes in Net Assets (Deficit) (on pages 13 through 15) provide information about the activities of the Authority as a whole and present a longer-term view of the Authority's finances. The Combining Statement of Cash Flows (on pages 16 and 17) presents the cash inflows and outflows of the Authority for the fiscal year ended March 31, 2011. The remaining information on pages 40-45 is additional information that the Board of Directors has determined is necessary to understand the operations of the Authority. This additional information is not a required part of the basic combining financial statements.

The Combining Statement of Net Assets (Deficit) and Combining Statement of Activities and Changes in Net Assets (Deficit) report the Authority's combining net assets and changes in them. You can think of the Authority's combining net assets, (the difference between assets and liabilities), as one way to measure the Authority's financial health, or financial position. Over time, increases or decreases in the Authority's net assets are one indicator of whether its financial health is improving or deteriorating. You will need to consider other non-financial factors; however, such as changes in the Authority's customer base and the condition of the Authority's potable water delivery system, to assess the overall health of the Authority.

Our analysis of the Authority as a whole begins on page 8. One of the most important questions asked about the Authority's finances is, "Is the Authority as a whole better off or worse off as a result of the year's activities?" The Combining Statement of Net Assets (Deficit) and the Combining Statement of Activities and Changes in Net Assets (Deficit) report information about the Authority as a whole and about its activities in a way that helps answer this question. These statements include all assets and liabilities using the accrual basis of accounting. All of the current year's revenues and expenses are taken into account regardless of when cash is received or paid.

WE

In the Statement of Net Assets (Deficit) and the Statement of Activities and Changes in Net Assets (Deficit), we divide the Authority into two kinds of business-type activities:

• Water Department - The Authority charges a water usage fee to customers to help it cover all or most of the cost of services it provides.

• Industrial Division - The Authority began charging customers located in the City of Hazleton in January 2011 for residential waste and recyclable collections in connection with a Master Services Agreement with the City of Hazleton. The charges are to help the Authority cover all or most of the cost of services it provides.

The Authority charges customers for the services it provides using the same accounting principles as any other private sector business activity. The accounting records are maintained on the accrual basis. Revenue is recognized when earned and expenses are recorded at the time they are incurred.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

(UNAUDITED)

CONDENSED FINANCIAL INFORMATION

Condensed financial information from the combining statement of net assets and combing statement of activities and change in combining net assets as of March 31, 2011, 2010 and 2009 are as follows:

CONDENSED COMBINED STATEMENT OF NET ASSETS

2011 2010 2009

ASSETS

Current assets $ 6,660,078 $ 2,960,323 $ 2,283,833 Restricted assets 4,266,855 5,146,439 5,174769 Property and equipment, net 69,453,051 59,482,426 58,386,183 Other assets 62.081 95,301 137.660

TOTAL ASSETS $80,442,065 $67.684489 $65,982,445

LIABILITIES

Current liabilities $ 4,087,246 $ 4,394,961 $ 3,711,827 Long-term debt 22,580072 19,791,944 21,653,065 Deferred liabilities - 9,000 9,000

TOTAL LIABILITIES 26,667,318 24,195,905 25,373,892

NET ASSETS

Invested in capital assets, net of related debt 45,001,799 36,826,565 33,916,620

Restricted 3,001,420 3,347,457 3,291,841 Unrestricted 5,771,528 3,314,562 3,400,092

TOTAL NET ASSETS 53774,747 43,488,584 40,608,553

TOTAL $80,442,065 $67,684,489 $65,982,445



(UNAUDITED)

CONDENSED COMBINED STATEMENT OF ACTIVITIES AND CHANGE IN NET ASSETS

2011 2010 2009

REVENUE: Operating revenue Nonoperating revenue

Total revenue

EXPENSES: Operating expenses Norioperating expenses

$ 8,806,009 $8,219,117 $8,242,741 10,891,208 1,762,995 171,840

19,697,217 9,982,112 8,414,581

8,888,442 6,007,861 6,031,105 522,612 1,094,220 579,550

Total expenses

9,411,054

7,102,081

6,610,655

CHANGE IN NET ASSETS

$10,286,163 $2,880,031 $1,803,926

In the current year the Authority's combined net assets increased $10,286,163 from a year ago, increasing from $43,488,584 to $53,774,747. Last year the combined net assets increased $2,880,031. The current year increase in combined unrestricted net assets attributed to the continuing day-to-day operations of the Authority was $2,456,967 as compared to last year's decrease of $85,530. Unrestricted combined net assets; the part of combined net assets that can be used to finance day-to-day operations without constraints established by debt covenants, legislation, or other legal requirements, changed from $3,314,562 at March 31, 2010 to $5,771,528 at the end of the March 31, 2011 fiscal year.

HAZLETON CITY AumoRrrY MANAGEMENT'S DISCUSSION AND ANALYSIS

(UNAUDITED)

The following table summarizes the Authority's combined operating and combined nonoperating revenue sources for the years ended March 31, 2011, 2010, and 2009:

%OFTOTAL OPERATING AND NON-

OPERATING REVENUES..

2011 2010 2009

OPERATING REVENUES: SALE OF WATER:

Residential Commercial Industrial Public For resale Miscellaneous

FIRE PROTECTION PENALTIES BILLING SERVICES GARBAGE SERVICES

Total operating revenues

NONOPERATING REVENUES: CONTRIBUTIONS IN AID OF CONSTRUCTION INTEREST INCOME

27.5% 55.0% 68.2% 5.7 11.2 14.5 3.9 7.3 5.4 0.62 1.2 1.4 0.32 0.6 0.8 0.10 0.2 0.2 1.57 3.1 3.6 1.40 2.7 3.0 0.49 1.0 0.9 3.12 - -

44.72% 82.3% 98.0%

55.06 16.9

0.3

0.22 0.8

1.7

Total operating and nonoperating revenues 100,0% 100.0% 100.0%

The number of water customers has changed from 15,074 in 2009, 15,075 in 2010 and 14,987 in 2011. The average revenue earned per customer was $525 per customer in 2009, $521 in 2010 and $522 in 2011. These are averages for all customers and have not been segregated by residential, commercial and industrial customers.

The number of garbage customers is 10,316 at March 31, 2011. The average revenue earned per customer was $60 in 2011. The authority began the garbage services in 2011 for residents of the City of Hazleton.

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(UNAUDITED)

The following table shows the combined operating expenses for the years ended March 31, 2011, 2010, and 2009:

PERCENT OF TOTAL .OPERATING EXPENSES.. 2011 2010 2009

Commercial and general 30.6% 40.5% 35.0% Pumping system 17.3 17.2 17.1 Purification system 5.2 5.7 6.9 Distribution system 9.9 12.9 14.8 Depreciation 17.9 19.3 21.1 Administrative expenses 11.1 2.9 3.8 Garbage 6.2 - - Other 1.8 1.5 1.3

Total 100.0% 100.0% 100.0%

The following table shows the combined operating income for the years ended March 31, 2011, 2010, and 2009:

PERCENT OF TOTAL ..OPERATING REVENUES..

2011 2010 2009

Operating revenues 100.0% 100.0% 100.0%

Operating expenses: Commercial and general 28.1 32.3 25.6 Pumping system 15.8 13.8 12.5 Purification system 4.8 4.5 5.0 Distribution system 9.1 10.3 10.8 Depreciation 10.2 15.4 15.5 Administrative expenses 1.7 2.3 2.8 Garbage 5.7 - - Other 1.7 1.2 1.0

Total 77.1 79.8 73.2

Operating income 22% 20.2% 26.8%

HAZLETON CITY AumoRrr' MANAGEMENT'S DISCUSSION AND ANALYSIS

(UNAUDITED)

CAPITAL ASSETS

At the end of 2011, the Authority had approximately $69.5 million invested in capital assets, which is net of $30.1 million in accumulated depreciation. There was approximately $260,000 of capital assets placed in service and approximately $11.3 million of additions to construction in progress in 2011. The major additions for the current year are approximately, $1,955,877, McKinley Street property, $817,086, Locust Street main improvement, $1,650,307, Derringer/Fern Glen main replacement and $5,706,825, Broad Street Corridor Project.

DEBT

As of March 31, 2011 the Authority had $6,020,000 of Water Revenue bonds outstanding. The last bond issue was 2006 and was used to refinance the existing bonds. In addition, long-term debt also includes notes payable to PennVest in the amount of $12,752,313, and a note payable to PNC Bank N.A. in the amount of $3866855 and two notes payable to Landmark Community Bank in the amount of $2,850,800.

BUDGET INFORMATION

The Authority's Board of Directors considers many factors when setting the fiscal-year budget and fees that will be charged for water services. One of those factors is the general economic condition of the service area. Another factor is the requirements of the Trust and Indenture securing the Water Revenue Bonds and the PennVest loans. The Authority is required to comply with certain financial covenants and during the budget process; these covenants are factored into the determination of whether or not there will be a water rate increase.

ADDITIONAL FINANCIAL INFORMATION

This financial report is designed to provide the Authority's customers and other interested parties with an overview of the Authority's financial operations and financial condition. Should the reader have questions regarding the information included in this report or wish to request additional financial information, please contact the Hazleton City Authority Business Manager at 400 E. Arthur Gardner Parkway, Hazleton, PA. 18201.

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COMBINING STATEMENT OF NET ASSETS (DEFICIT) MARCH 31. 2011 (WITH COMPARATIVE TOTALS FOR 2010

WATER INDUSTRIAL DEPARTMENT DIVISION 2011 2010

ASSEI

CURRENT ASSETS: Cash Accounts receivable, net of allowance for

doubtful accounts of $850,000 for water customers and $734,640 for garbage customers

Unbilled revenues Materials and supplies inventory Prepaid Master Services Agreement- City of Hazleton Other current assets

Total current assets

RESTRICTED ASSETS: Deposits and investments Accrued interest on deposits and investments

Total restricted assets

PROPERTY AND EQUIPMENT: Property and equipment Construction in progress

Total

Less accumulated depreciation

Property and equipment, net

OTHER ASSET, Land management fee, net of accumulated amortization of $200,000

DEFERRED CHARGES, Bond issuance costs, net

TOTAL

$ 3,800,943

975,649 483,586 615,990 298,125

6,174,293

4,261,309 5,546

4,266855

86,468,360 13,054,256

99,522,616

30,069,565

69,453,051

62,081

$ 79,956,280

$ 203,300 $ 4,004,243 $ 997,467

70,348 1,045,997 851,793 206,320 689,906 515,122

- 615,990 578,993 - 298,125 -

5,817 5,817 16,948

485,785 6,660,078 2,960,323

- 4,261,309 5,135,641 - 5,546 10,798

- 4,266,855 5,146,439

- 86,468,360 86,077,338 - 13,054,256 2,027,118

- 99,522,616 88,104,456

- 30,069,565 28,622,030

- 69,453,051 59,482,426

13,333

- 62,081 81,968

$ 485,785 $ 80,442,065 $ 67,684489

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HAZLETON CITY AUTHORITY COMBINING STATEMENT OF NET ASSETS (DEFICIT) MARCH 31. 2011 (WITH COMPARATIVE TOTALS FOR 2010

WATER DEPARTMENT

INDUSTRIAL DIVISION 2011 2010

!AILITIES AND NET ASSETS (DEFIQIID

CURRENT LIABILITIES: Current portion of long-term debt $ 2,922,490 $ - $ 2,922,490 $ 2,863,917 Accounts payable 51,603 171,515 223,118 - Note payable - Hazleton City Community Development loan - 60,742 60,742 60,742 Accrued expenses 621,319 15,052 636,371 1,232,073 Customer service deposits 42,790 - 42,790 55,320

Total current liabilities 3,638,202 247,309 3,885,511 4,212,052

LIABILITIES PAYABLE FROM RESTRICTED ASSETS, Interest payable 198,678 3,057 201,735 182,909

LONG-TERM DEBT: Water revenue bonds, Series of 2006 5,287,583 - 5,287,583 6,035,652 Notes payable, PennVest 10,574,823 - 10,574,823 12,752,312 Interim Water Revenue Note, Bank 3,866,856 - 3,866,856 1,003,980 Non-revolving draw loans, Bank 1,799,500 1,051,310 2,850,810 -

Total long-term debt 21,528,762 1,051,310 22,580,072 19,791,944

DEFERRED LIABILITIES - - - 9,000

Total liabilities 25,365,642 1,301,676 26,667,318 24,195,905

COMMITMENTS AND CONTINGENCIES

NET ASSETS (DEFICIT): Invested in capital assets,

net of related debt 45,001,799 - 45,001,799 36,826,565 Restricted per bond indenture 3,001,420 - 3,001,420 3,347,457 Unrestricted 6,587,419 (815,891) 5,771,528 3,314,562

Total net assets (deficit) 54,590,638 (815,891) 53,774,747 43,488,584

TOTAL $ 79,956,280 $ 485,785 $ 80,442,065 $ 67,684,489

See Notes to Combining Financial Statements - 14 -


COMBINING STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS (DEFICIT)

FOR THE YEAR ENDED MARCH 31, 2011 (WITH COMPARATIVE TOTALS FOR 2010) WATER INDUSTRIAL

DEPARTMENT DIVISION 2011 2010

OPERATING REVENUES $ 8,191,248 $ 614,761 $ 8,806,009 $ 8219,117

OPERATING EXPENSES 7,532,366 1,356,076 81888,442 6,007,861

Operating income (loss) 658,882 (741,315) (82,433) 2,2111256

NONOPERATING REVENUES (EXPENSES): Contributions in aid of construction 10,846,216 - 10,846,216 1,684,267 Interest revenue 43,792 - 43,792 78,728 Road repairs - - - (550,000) Other miscellaneous revenue 1,200 - 1,200 - Interest expense (514,224) (8,388) (522,612) (544,2Q)

Nonoperating revenue (expense), net 10,376,984 (8,388) 10,368,596 668,775

INCREASE (DECREASE) IN NET ASSETS 11,035,866 (749,703) 10,286,163 2,880,031

NET ASSETS (DEFICIT), BEGINNING OF YEAR 43,554,772 (66,188) 43,488,584 40,608,553

NET ASSETS (DEFICIT), END OF YEAR $ 54,590,638 $ (815,891) $ 53,774,747 $ 43,488,584

See Notes to Combining Financial Statements

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COMBINING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED MARCH 31, 2011 (WITH COMPARATIVE TOTALS FOR 2010)


INCREASE (DECREASE) IN CASH Cash flows from operating activities:

Cash received from customers Cash payments to suppliers and employees for goods and services

Net cash provided by (used in) operating activities

Cash flows from capital and related financing activities: Capital contributed Change in demand note payable, bank Principal paid on notes Interest paid on revenue bonds and notes Acquisitions and construction of capital assets Principal paid on 2006 bond issue Repayment to other governments

Net cash provided by (used in) capital and related financing activities

Cash flows from investing activities: Interest received on investments Decrease in restricted assets

Net cash provided by investing activities

NET INCREASE IN CASH

CASH, UNRESTRICTED, BEGINNING OF YEAR

CASH, UNRESTRICTED, END OF YEAR

$ 8,100,128 $ 338,093 $ 8,438,221 $ 8,306,632 (6,962,618) (1,184,561) (8,147,179) (4,724,305)

1,137,510 (846,468) 291,042 3,582,327

10,846,216 - 10,846,216 1,684,267 4,662,376 1,051,310 5,713,686 1,003,980

(2,156,985) - (2,156,985) (2,147,682) (478,568) (5,331) (483,899) (538,741)

(11,418,160) - (11,418,160) (2,358,739) (710,000) - (710,000) (670,000)

7,317 (5,817) 1,500 -

752,196 1,040,162 1,792,358 (3,026,915)

49,044 - 49,044 88,271 874,332 - 874,332 18,787

923,376 - 923,376 107,058

2,813,082 193,694 3,006,776 662,470

987,861 9,606 997,467 334,997

$ 3,800,943 $ 203,300 $ 4,004,243 $997,467

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HAZLETON CITY AUTHORITY COMBINING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED MARCH 31, 2011 (WITH COMPARATIVE TOTALS FOR 2010


RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:

Operating income $ 660,082 $ (741,31) $ (81,233) $ 1,661,256 Adjustments to reconcile operating income to

net cash provided by (used in) operating activities: Depreciation 1,447,535 - 1,447,535 1,262,495 Amortization 13,333 - 13,333 20,001 Changes in assets and liabilities:

Accounts receivable (123,856) (70,348) (194,204) (17,643) Unbilled revenues 31,536 (206,320) (174,784) 105,158 Materials and supplies (36,997) - (36,997) (91,904) Prepaid expenses (288,494) - (288,494) (9,631) Accounts payable 51,603 171,515 223,118 Accrued expenses (595,702) - (595,702) 660,557 Customer service deposits (12,530) - (12,530) (7,962) Deferred liabilities (91000) - (9,000) -

Total adjustments

477,428 (105,153) 372,275 1,921,071

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

$ 1,137,510 $ (846,468) $291,042 $ 3,582,327


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NOTES To COMBINING FINANCIAL STATEMENTS

1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS AND REPORTING ENTITY

The Hazleton City Authority (the 'Authority") is a body corporate and politic incorporated by ordinance of the City of Hazleton, Pennsylvania and resolution of the Authority on October 18, 1938. The Authority exists and operates under the Municipality Authorities Act of 1945 of the Commonwealth of Pennsylvania. The Authority is comprised of two divisions, the Water Department and the Industrial Division.

The Water Department's water supply system presently serves the southern part of Luzerne County, and parts of Carbon and Schuylkill counties. The Authority's service area covers approximately sixty square miles of land, and serves approximately 15,000 customers.

The Industrial Division began garbage collection services for residents of the City of Hazleton in January 2011 and serves approximately 10,300 customers.

The Board of Directors of the Authority is composed of five members appointed by Council of the City of Hazleton, although such appointment is not authoritative. The Board is responsible for managing the business of the Authority.

The Government Accounting Standards Board ("GASB") has developed criteria to determine what constitutes state and local governmental entities for financial reporting purposes. The GASB concluded in Statement 39, that the basic criterion for including a governmental department, agency, institution, commission, public authority or other governmental organization as a component unit in the governmental unit's reporting entity for combined financial statements is the financial accountability over such agencies by the governmental unit's elected officials. Financially accountable embraces such factors as selection of governing authority, ability to significantly influence operations, and financial dependency.

Based upon the above, the Authority is the reporting entity.

HAZLETON CITY AUTHORITY NOTES To COMBINING FINANCIAL STATEMENTS

BASIS OF PRESENTATION, BASIS OF ACCOUNTING AND MEASUREMENT Focus

The Authority's combined financial statements are presented using the economic measurement focus and the accrual basis of accounting and conform to accounting principles generally accepted in the United States of America, as prescribed by GASB. Revenues are recorded when earned and expenses are recorded when liability is incurred regardless of the timing of the related cash flows. The Authority has elected under GASB Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Activities That Use Proprietary Fund Accounting, to apply all applicable GASB pronouncements as well as any applicable pronouncements of the Financial Accounting Standards Board, the Accounting Principles Board, or any Accounting Research Bulletins issued on or before November 30, 1989, unless these pronouncements conflict with or contradict GASB pronouncements.

OPERATING REVENUES AND EXPENSES

Operating revenues and expenses consist of those that result from the ongoing principal operations of the Authority. Operating revenues consist primarily of charges for services. Nonoperating revenues and expenses consist of those revenues and expenses that are related to financing and investing type of activities and result from non-exchange transactions or ancillary activities. When an expense is incurred for purposes for which there are both restricted and unrestricted net assets available, it is the Authority's policy to apply those expenses to restricted net assets to the extent such are available and then to unrestricted net assets.

BUDGET AND BUDGETARY ACCOUNTING

The Authority follows these procedures in establishing the budgetary data reflected in the additional information:

An operating budget for the Water Department and one for the Industrial Division are utilized as a management control device during the year. The budgets are adopted on a basis consistent with accounting principles generally accepted in the United States of America.

The Board of Directors of the Authority adopts a budget, which is reviewed by the consulting engineer and submitted to the trustee as required by the trust indenture.

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RESTRICTED ASSETS - CASH AND CASH EQUIVALENTS AND U. S. GOVERNMENT OBLIGATIONS

The restricted assets of the Authority are limited by the applicable bond covenants of the trust indenture dated as of December 15, 1992 as supplemented by the Supplemental Trust Indenture dated as of November 12, 1996, the Third Supplemental Trust Indenture dated December 19, 2001, the Fourth Supplemental Trust Indenture dated August 21, 2002 and the Fifth Supplemental Trust Indenture dated January 5, 2006.

All revenues of the Water Department are deposited into the revenue fund of the trustee. The trustee applies the funds deposited into the revenue fund and to the other funds as required by the above-mentioned trust indenture.

ACCOUNTS RECEIVABLE

Accounts receivable are reported at net realizable value. Accounts are written off when they are determined to be uncollectible based upon management's assessment of individual accounts. The allowance for doubtful accounts is estimated based upon the Authority's historical losses and periodic review of individual accounts and is $850,000 for water customers and $734,640 for garbage customers at March 31, 2011. At March 31, 2010 the allowance was $722,000 for water customers. Garbage collection services began in 2011.

UNBILLED REVENUES

Unbilled revenues are recorded for water usage by customers that have not been billed at fiscal year-end and for the January 2011 billings for garbage customers due to the timing of the conversion from the City to the Authority. The unbilled garbage was subsequently billed out over a four month period in the next fiscal year.

MATERIALS AND SUPPLIES

Materials and supplies consist of chemicals, related supplies and miscellaneous parts which are valued at the lower of cost or market. Cost is determined on the first-in first-out basis.


PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Expenditures for maintenance and repairs, which extend the useful life of assets, are capitalized and routine maintenance and repair costs are expensed as incurred.

Depreciation is computed on the straight-line basis at rates based on the estimated service lives of the various classes of property as follows:

CLASS OF PROPERTY YEARS

Collecting and impounding reservoirs 100 Mains 100 Building and structures - Water Department 75 Hydrants 66 Distribution reservoirs and standpipes 60 Wells and springs 50 Services 50 Meters 40 Water treatment equipment 33 Pumping equipment 30 Office furniture and equipment 25 Laboratory equipment 20 Tools, shop and garage equipment 10 Other equipment 10 Transportation 8

Depreciation in the amount of $1,447,535 has been recorded for the year ended March 31, 2011.

Capitalized interest for the year ended March 31, 2011 total $97,521.

DEPRECIATION - CONTRIBUTIONS AND GRANTS IN AID OF CONSTRUCTION

Depreciation is computed on the straight-line basis at rates based on the estimated service lives of the assets contributed to the Authority in the same manner as described in the preceding paragraph, with depreciation expense included in operating expenses.

-21-


IMPAIRMENT OF LONG-LIVED ASSETS

Accounting Standards Codification Section 360-10-55, Accounting for the Impairment or Disposal of Long Lived Assets, ("ASC 360-10-55"), requires that long-lived assets, including property and equipment, be reviewed for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Authority continually evaluates whether events and circumstances have occurred that indicate the remaining estimated useful lives of long-lived assets may warrant revision or that the remaining carrying amount may not be recoverable. When factors indicate that such assets should be evaluated, the estimated future undiscounted cash flows associated with the assets are compared to the assets' carrying amount to determine if a write-down to fair value is necessary. At March 31, 2011, based on management's evaluation, a charge for impairment of the Accounts Receivable related to the trash operations was necessary to write-down the balance to fair value. The impairment loss of $99,785 is included in the provision for uncollectible accounts and deposits. A charge for impairment was not considered necessary at March 31, 2010.

NET ASSETS

The Authority maintains the following net asset classifications:

Invested in capital assets, net of related debt: Capital assets, net of accumulated depreciation and outstanding principal balances of debt attributable to the acquisition, repair or improvement of those assets.

Restricted: Net assets whose use is subject to externally imposed conditions that can be fulfilled by the actions of the Authority or by the passage of time.

Unrestricted: All other categories of net assets. Unrestricted net assets may be designated for specific purposes by the Authority's Board of Directors.

DEFERRED CHARGES - BOND ISSUANCE COSTS

Unamortized bond issue costs of $194,363 have been deferred and are being amortized over the term of the debt using the effective interest method. Amortization expense was $19,888 and accumulated amortization was $132,283 for the year ended March 31, 2011.

-22-


LAND MANAGEMENT FEE

The Authority has an agreement by which the City of Hazleton will provide land management services on the undeveloped watershed lands owned by the Authority for a term of ten years. In consideration of the services to be provided which includes a land management plan for all of the land owned by the Authority, the Authority paid $200,000 to the City and has recognized $20,000 of amortization expense in the accompanying Combining Statement of Activities and Changes in Net Assets (Deficit). In addition, any net revenues received by the City from timbering operations will be split evenly between the Authority and the City. The balance was fully amortized March 31, 2011.

STATEMENT OF CASH FLOWS

The Authority considers all highly liquid investments that are readily convertible to cash with an original maturity of three months or less to be cash equivalents.

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 and liabilities and disclosure 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.

2. CASH, CASH EQUIVALENTS, AND INVESTMENTS

The Authority follows the Municipal Authorities in Pennsylvania Guide (the "Guide') for investment of Authority funds.

Authorized types of investments for Authority funds shall be:

a. United States Treasury bills.

b. Short-term obligations of the United States government or its agencies or instrumentalities.

-23-

HAZLETON Crry AUTHORITY NOTES To COMBINING FINANCIAL STATEMENTS

c. Deposits in savings and checking accounts or certificates of deposit, or share accounts of institutions insured by the Federal Deposit Insurance Corporation or the Federal Savings and Loan Insurance Corporation or the National Credit Union Share Insurance Fund.

d. Obligations of the United States of America or any of its agencies or instrumentalities backed by the full faith and credit of the United States of America, the Commonwealth of Pennsylvania, or any of its agencies or instrumentalities backed by the full faith and credit of the Commonwealth, or of any political subdivision of the Commonwealth of Pennsylvania or any of its agencies or instrumentalities backed by the full faith and credit of the political subdivision.

e. Shares of an investment company registered under the Investment Company Act of 1940, whose shares are registered under the Securities Act of 1933, provided that the only investments of that company are in the authorized investments for Authority funds listed.

f. Any investment authorized by 53 Pa. C.S. Ch. 8224 (relating to local governments) shall be an authorized investment for any sinking fund.

In making investment of Authority funds, the Board shall have authority: To combine funds from more than one Authority fund in order to purchase a single investment, to join with one or more political subdivisions and municipal authorities for the purchase of a single investment provided that appropriate separate accounting requirements are followed, to be pooled in accordance with the act of August 6, 1971 (P.L. 281, No. 72), relating to pledges of assets to secure deposits of public funds.

The Guide places no limit on the amount the Authority may invest in any one issuer.

Investments primarily represent debt sinking funds, escrow deposits and other accounts required to be maintained under bond or trust indentures. These investments are held by fiscal agents and managed in accordance with the terms of the respective indentures.

As of March 31, 2011, the aggregate bank balance of bank deposits was $4,091,069 of which $717,776 was covered by federal depository insurance and the uninsured remaining bank deposits of $3,373,293 were covered by pledged pools of assets maintained in accordance with Act No. 72 of the Pennsylvania General Assembly that requires the institution pool collateral for all government deposits. The carrying amount of these bank deposits was $4,004,243 at March 31, 2011.

-24-


INVESTMENTS

As of March 31, 2011, the Authority had the following investments with the following ratings:

FAIR STANDARD& MATURITIES VALUE POOR'S

Cash Less than 1 year $2,706,648 N/A U.S. Government Obligations 1-10 years 1,554,661 AAA

$4,261,309

The Authority has no investment policy that would limit its investment choices to certain credit ratings.

INTEREST RATE RISK

The Authority does have a formal investment policy that limits investment maturities as a means of managing its exposure to fair value losses arising from increasing interest rates.

CUSTODIAL CREDIT RISK

For an investment, custodial credit risk is the risk that, in the event of the failure of the counterparty, the Authority will not be able to recover the value of its investments or collateral security that are in the possession of an outside party. The Authority has no investment subject to custodial credit risk.

3. RESTRICTED INVESTMENTS

The Authority has restricted assets for the purpose of retiring long-term debt and related interest payments and funding certain capital and other projects.

-25-


4. PROPERTY, EQUIPMENT AND ACCUMULATED DEPRECIATION

At March 31, 2011 the major categories and related accumulated depreciation of property, equipment and depreciation consist of:

ACCUMULATED CATEGORY COST DEPRECIATION

Land $ 946,453 $ - Right of way 62,369 - Mains 34,336,164 6,473,882 Intangible costs 24,518,059 13,093,178 Intakes, wells and reservoirs 9,693,154 2,215,310 Standpipes 4,890,078 1,931,591 Pumping equipment 2,827,067 1,826,606 Building 2,464,071 967,274 Other equipment 2,329,128 1,605,351 Meters and installations 1,851,608 779,987 Services 1,211,569 670,940 Hydrants 471,510 192,645 Transportation equipment 867,130 312,801

Total $86,468 $30.069.565

The following is a summary of the changes in property and equipment, accumulated depreciation and construction in progress for the year ended March 31, 2011:

BALANCE, BALANCE, MARCH 31, MARCH 31,

2010 ADDITIONS TRANSFERS 2011

Property and equipment $86,077,338 $ 130,672 $260,350 $86,468,360 Construction in progress 2,027,118 11,287,488 (260,350) 13,054,256 Accumulated depreciation (28,622030) (1,447535) - (30,069,565)

Net $59.482.426 59.970,625 - $69.453.051

-26-



5. INTERIM WATER REVENUE NOTE, BANK

The Authority has available a $4,500,000 term loan facility with PNC Bank, N.A. (the "Bank") to fund water/storm water project construction costs that matures June 30, 2012 at which time the outstanding principal balance plus any accrued interest will be due and payable. The facility bears interest at the tax exempt, bank qualified, variable rate equal to 95% of the bank's prime rate (3.09% as of March 31, 2011). The Authority can prepay all or a portion of the outstanding principal balance and accrued interest at any time, if the Bank is given five business days prior notice. Outstanding borrowings on the line at March 31, 2011 were $3,866,856.

6. NON-REVOLVING DrtAw LOANS, BANK

The Authority has available a $2,000,000 non-revolving draw loan with Landmark Community Bank that closed on February 13, 2012, at which time the loan will be termed out for a period of ten years commencing March 13, 2012. Monthly payments of interest only at 4.375% are payable through February 13, 2012, at which time payments of principal and interest will commence. The interest rate remains fixed at 4.375% through and including August 13, 2015 at which time the interest rate changes to 75% of the then highest Wall Street Journal Prime Rate of interest through maturity. The loan is secured by a security interest in all of the Authority's assets including, but not limited to accounts receivable, inventory, equipment, and fixtures now owned or here after acquired. The position is subordinated to the existing Water Revenue Bonds and Pennvest loans (Note 7). Outstanding draws and this loan were $1,799,500 at March 31, 2011.

The Authority also has available a $2,250,000 non-revolving draw loan with Landmark Community Bank to provide working capital to the Authority for the collection of garbage services for residents of the City of Hazleton. The loan draw period is for eighteen months during which the Authority will pay interest only on the outstanding draws at a fixed rate of 4.375%. At the end of the eighteen months the balance of the loan will be termed out over a ten year period. The interest rate will remain fixes at 4.375% through the first sixty months and will then change to a rate equal to 75% of the then highest Wall Street Journal Prime Rate through maturity. The loan is secured by a first lien security interest in the revenue stream from the garbage collections. This loan does contain a certain financial covenant which the Authority met at March 31, 2011. Outstanding draws at March 31, 2011 were $1,051,310.

-27-


7. LONG-TERM DEBT

The following is a summary of changes in long-term debt for the year ended March 31, 2011:

OUTSTANDING OUTSTANDING BALANCE ISSUED RETIRED BALANCE

INTEREST ORIGINAL MARCH 31, CURRENT CURRENT MARCH 31, DESCRIPTION RATE AMOUNT 2010 YEAR YEAR 2011

Water Revenue Bonds, Series of 2006 to refund Series 1996 bonds and pay costs of issuance; maturity date April 1, 2017 5.00% $9,000,000 $6,730,000 - $(710,030) $6,020,000

PennVest note - Filtration Plant to partially fund the construction of a water filtration plant and related facilities; maturity date December 1, 2021 1.00% 20,000,000 9,170,561 - (739,225) 8,431,336

PennVest note - Transmission system for construction of a water system in the Authority's service area; maturity date December 1, 2012 1.00% 20,000,000 3,488,105 - (1,257,322) 2,230,783

PennVest note - Project 2001 for water main and water tank improvements; maturity date 1.34% - March 1, 2024 2.42% 2,890,000 1,886,960 - (133,890) 1,753,070

PennVest note - Pardeesville transferred in asset purchase; maturity date November 1, 2018 1.00% 239,674 132,657 - (14,727) 117,930

PennVest water revenue bond - Pardeesville water improvements; maturity date July 20, 2033 1.00% 328,869 227,946 - (8,752) 219,194

Note payable - Hazleton City Community Development Loan 60,742 - - 60,742

Deferred refunding cost (250,257) - 60,719 (189,538)

Bond premium 265,909 - (63,788) 202,121

Total WA915AM $21,712,623 $(2,866,985) $18,845,638

-28-

HAZLETON Cm' AUTHORITY NOTES To COMBINING FINANCIAL STATEMENTS

BONDS PAYABLE - SERIES OF 2006

On January 5, 2006, the Authority issued $9,000,000 of Water Revenue Bonds, Series of 2006 (the "Series of 2006 Bonds") pursuant to a trust indenture, dated as of January 5, 2006 (the 'indenture"), between the Authority and J.P. Morgan Trust Company, National Association (the "Bank") as Master Trustee. The primary purpose of the issuance was to refund the Series of 1996 Bonds in the amount of $9,255,000 and pay certain costs of issuing the Series of 2006 Bonds.

GASB No. 23, Accounting and Financial Reporting for Refundings of Debt Reported by Proprietary Activities, requires that the Authority defer the difference between the cost to retire the old debt and the net carrying amount of such debts as a reduction of the carrying amount of the new liability; this contra asset, which amounted to $593,415, will be amortized using the effective interest method as a component of interest expense over the remaining life of the old debt approximately 12 years. Amortization expense was $60,719 in 2011. Accumulated amortization was $403,877 as of March 31, 2011.

The Authority is obligated for annual payments under the terms of the agreement to meet the annual principal stated to mature on April 1 of each year.

The following table sets forth, for each respective year ending March 31, the amount required to be made available in such year for the payment of principal, interest (and mandatory redemption) on the bonds:

YEAR PRINCIPAL ENDING PAYMENTS DEBT INTEREST

MARCH 31 REDEMPTION INTEREST SERVICE RATE

2012 $ 745,000 $ 282,375 $ 1,027,375 5.00% 2013 785,000 244,125 1,029,125 5.00% 2014 820,000 204,000 1,024,000 5.00% 2015 865,000 161,875 1,026,875 5.00% 2016 910,000 117,500 1,027,500 5.00% 2017 955,000 70,875 1,025,875 5.00% 2018 940,000 23,500 963,500 5.00%

Total $6,020,000 $1.104,250 $7,12,2Q

The Series of 2006 Bonds are secured by the Authority's pledge to the Trustee of all its rights, title and interest in and to the revenues from the Water System under this restated indenture and other available funds.

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HAZLETON Ciiv AUTHORITY NOTES To COMBINING FINANCIAL STATEMENTS

The bonds were issued as fully registered bonds, in denominations of $5,000 and integral multiples thereof. The bonds are dated January 5, 2006 and bear interest from the date thereof until maturity.

PENNVEST NOTE - FILTRATION PLANT PROJECT

This loan agreement dated as of December 4, 1991 between the Authority and PennVest permitted the Authority to borrow up to $20,000,000 to partially fund the construction of a water filtration plant and related facilities as a project.

The loan is payable in monthly installments of $68,962 including interest at 1.00% through December 1, 2021.

ANNUAL REQUIREMENTS

The annual requirements to amortize debt outstanding regarding the PennVest Note - Filtration Plant Project is as follows:

YEAR ENDING MARCH 31

2012 2013 2014 2015 2016 2017-2022

PRINCIPAL INTEREST TOTAL

$ 746,651 $ 80,898 $ 827,549 754,152 73,397 827,549 761,728 65,821 827,549 769,380 58,169 827,549 777,110 50,439 827,549

4622,315 136,090 4,758,405

Total

$..431.336 $464,814 18,896.150

PENNVEST NOTE -TRANSMISSION PROJECT

This loan agreement dated as of December 18, 1992 and a modification of the loan agreement dated May 18, 1994 between the Authority and PennVest permitted for the Authority to borrow up to $20,000,000 for the construction of a water system in the Authority's service area. The project included the construction of a water transmission line, intake and pump station facilities, and necessary appurtenances.

The loan is payable in monthly installments of $107,204 including interest at 1.00% through December 1, 2012.

-30-


ANNUAL REQUIREMENTS

The annual requirements to amortize debt outstanding regarding the PennVest Note - Transmission Project is as follows:


2012 2013

Total

PENNVEST NOTE - PROJECT 2001


$1,269,952 $ 16,497 $1,286,449

960,831 4,008 964,839

$2,230,783 120450 $2251.288

On December 19, 20011 the Authority signed a loan agreement with PennVest for a $2,890,000 twenty-year term loan including interest at 2.423% through March 1, 2024. The loan is payable in monthly installments of $14,844 to be used for water main improvements in the City of Hazleton and water tanks and improvements in Junedale, Tomhickenm and Derringer. The Authority has pledged the receipts and revenues in accordance with the terms of the Third Supplemental Indenture dated December 19, 2001.

ANNUAL REQUIREMENTS

The annual requirements to amortize debt outstanding regarding the PennVest Note-Project 2001 is as follows:



2012 2013 2014 2015 2016 2017-2021 2022-2023

$ 137,171 140,531 143,975 147,502 151,116 812,965 219,810

$ 40,960 $ 178,131 37,600 178,131 34,156 178,131 30,629 178,131 27,015 178,131 77,689 890,654

3.546 223.356

Total

$1,753,070 $251,595 12,004,665

-31-

HAZLETON Cm' AUTHORITY NOTES To COMBINING FINANCIAL STATEMENTS

PENNVEST NOTE - PARDEESVILLE

In August 2002, the Authority purchased the assets of Pardeesville Water Association ("PWA") for $1 and assumed all liabilities of PWA. Included in the liabilities was a note payable to PennVest for water line improvements. The loan is payable in monthly installments of $1,332 including interest at 1.00% through November 1, 2018. The Authority has pledged the revenue and receipts in accordance with the terms of the Fourth Supplemental Indenture dated August 21, 2002.

ANNUAL REQUIREMENTS

The annual requirements to amortize the debt outstanding for the PennVest Note-Pardeesville is as follows:

YEAR ENDING MARCH 31 PRINCIPAL INTEREST TOTAL

2012 $ 14,875 $1,111 $ 15,986 2013 15,024 962 15,986 2014 15,175 811 15,986 2015 15,327 659 15,986 2016 15,481 505 15,986 2017-2019 42,048 581 42,629

Total $117,930 $4.629 $122559

PENNVEST WATER REVENUE BOND - PARDEESVILLE WATER IMPROVEMENTS

In conjunction with the purchase of assets, PWA assigned a loan that had been approved by PennVest in the amount of $328,869 for additional water improvements to the Pardeesville water system. The loan is payable in monthly installments of $916 including interest at 1.00% through July 2033. The Authority has pledged the revenues and receipts in accordance with the terms of the Fourth Supplemental Indenture dated August 21, 2002.

-32-


ANNUAL REQUIREMENTS

The annual requirements to amortize the debt outstanding for the PennVest Note-Pardeesville Water Improvements is as follows:

YEAR ENDING MARCH 31 PRINCIPAL INTEREST TOTAL

2012 $ 8,841 $ 2,151 $ 10,992 2013 8,929 2,063 10,992 2014 9,019 1,973 10,992 2015 9,110 1,882 10,992 2016 9,201 1,791 10,992 2017-2021 47,411 7,549 54,960 2022-2026 49,840 5,120 54,960 2027-2034 76,843 2,851 79,694

Total

$219.194 $25,380

$244,574

MATURITIES OF LONG-TERM DEBT

WATER REVENUE BONDS, SERIES OF

2006

$ 745,000 785,000 820,000 865,000 910,000

1,895,000

$6.020.000

PENNVEST NOTE-FILTRATION PLANT

PROJECT

$ 746,651 754,152 761,728 769,380 777,110

4,004,231 618,084

$8.43 1 .336

PENNVEST NOTE- TRANSMISSION

PROJECT

$1,269,952 960,831

$2,230.783


2012 2013 2014 2015 2016 2017-2021 2022

TOTAL

-33-


PENNVEST PENNVEST YEAR ENDING NOTE- NOTE-

MARCH 31 PROJECT 2001 PARDEESVILLE

2012 $ 137,171 $ 14,875 2013 140,531 15,024 2014 143,975 15,175 2015 147,502 15,327 2016 151,116 15,481 2017-2021 812,965 42,048 2022-2026 219.810 - 2027-2034

TOTAL

Hazleton City Community Development Loan

TOTAL

Less: Current maturities

Add: Unamortized balances under GASB No. 23, net

Long-term debt

PENNVEST WATER REVENUE BOND PARDEESVILLE

WATER IMPROVEMENTS TOTAL

$ 8,841 $ 2,922,490 8,929 2,664,467 9,019 1,749,897 9,110 1,806,319 9,201 1,862,908

47,411 6,801,655 49,840 887,734 76.843

$219194

76,843

$18272,313

60,742

18,833,055

2,983,232

12,583

$1 5,862,406

-34-



8. NET ASSETS - RESTRICTED PER BOND INDENTURE

As required by the trust indenture securing the water revenue bonds, certain funds have been classified as restricted assets in the accompanying Combining Statement of Net Assets (Deficit) as of March 31, 2011 and are restricted as to their use. Consequently, a portion of the net assets representing these restricted funds has been reserved and classified as "Restricted per bond indenture". The amount reserved was calculated as follows:

Series of 2006: Debt service reserve fund $1,046,762

Series of 1992: Debt service reserve fund - transmission 1,124,894 Debt service reserve fund - filtration 829,764

Total $3,001,420

9. PENSION PLAN

The Hazleton City Authority Water Department Pension Plan (the "Plan') is a single-employer defined benefit pension plan administered by the Authority. The Plan provides retirement, disability, and death benefits to plan members and beneficiaries.

CONTRIBUTIONS

Pennsylvania Act 205 of 1984, the Municipal Pension Plan Funding Standard and Recovery Act of the Commonwealth of Pennsylvania (as amended) (Act 205) requires that annual contributions be based upon the Minimum Municipal Obligation ("MMO"), which is based on the plan's annual actuarial valuation. The MMO includes the normal cost, estimated administrative expenses and an amortization of the unfunded actuarial accrued liability less estimated member contributions. The Commonwealth provides an allocation of funds which must be used for pension funding. Any financial requirements established by the MMO which exceeds Commonwealth and member contributions must be funded by the Authority.

Contributions are governed by the Plan's governing ordinances and collective bargaining agreements. Administrative costs, which may include but are not limited to, investment management fees and actuarial services, are charged to the Plan and funded through the MMO and/or investment earnings.

-35-


ANNUAL PENSION COST

For the year ended March 31, 2011 the Authority's annual pension cost was $181,450. The cost included the required minimum contributions as well as administrative expenses and amortization of unfunded Actuarial Accrued Liability.

The annual pension cost for the year ended March 31, 2011 was determined as part of the January 1, 2009 actuarial valuation using the entry age actuarial cost method. The actuarial assumptions included (a) 7.5% investment rate of return (net of administrative expenses) and (b) no projected salary increases. The actuarial value of assets was determined using the market value as determined by the Trustee. The unfunded actuarial accrued liability is being amortized over a fifteen year period with the remaining amortization period at March 31, 2011 was 13 years.

10. COMMITMENTS AND CONTINGENCIES

RISK MANAGEMENT

The Authority is exposed to various risks of loss related to torts, damage to and destruction of assets, errors and omission, employee injuries and natural disasters. The Authority has purchased commercial insurance for all these risks. There have not been significant reductions in insurance coverage for any major categories of risk compared to coverage in the prior year.

GRANT PROGRAM

The Authority received a grant for upgrades to the Pardeesville Water System from the Commonwealth of Pennsylvania. The grant is governed by various rules and regulations of the grantor agency. Costs charged to the respective grant program are subject to audit and adjustment by the grantor agency; therefore, to the extent that the Authority has not complied with the rules and regulations governing the grant, refunds of any money received may be required and the collectability of any related receivable at March 31, 2011 may be impaired. In the opinion of the Authority, there are no significant contingent liabilities relating to compliance with the rules and regulations governing the respective grant; therefore, no provision has been recorded in the accompanying financial statements for such contingencies.

-36-


LITIGATION

The Authority is the defendant in lawsuits arising principally in the normal course of operations. In the opinion of the Authority, the outcome of these lawsuits will not have a materially adverse effect on the accompanying financial statements; and accordingly, no provision for losses has been recorded.

SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK

The Authority's operations are located in Luzerne County, Pennsylvania. The Authority assesses residents within its service area, based upon usage, connection and assessment charges. The ability of each of the Authority's customers to honor their obligations to the Authority is dependent upon economic and other factors affecting the customers.

UNION CONTRACT

The Authority employs various employees under an agreement with the United Steelworkers of America, AFL-CIO-CLC, union. The agreement became effective April 1, 2009 and continues until March 31, 2014.

WATER SERVICES AGREEMENT

On February 26, 2009 the Authority entered into a Water Services Agreement with the Greater Hazleton Community Area New Development Organization, Inc. ("CAN DO") to supply water and service to CAN DO's Humboldt Industrial Park. The agreement obligates CAN DO to "take or pay' for 200,000 gallons of water per day based on a monthly average of water at the Authorities current rate schedule. The agreement runs for a term of twenty-five years and can be revisited on each five year anniversary date for mutually acceptable discussion restatement or amendment. During the first ten years from the date of signing, if CAN DO terminates the agreement the Authority will receive a penalty in the amount of $1,500,000. The agreement will renew for successive twenty-five year terms unless the Authority and CAN DO agree otherwise.

-37-


MASTER SERVICES AND ECONOMIC DEVELOPMENT AGREEMENT

On October 7, 2010 the Authority entered into a Master Services and Economic Development Agreement with the City of Hazleton (the "City"). Under the agreement, the following services are being provided by or to the Authority:

a. The City transferred to the Authority the solid waste management functions of the City, along with all related contracts, accounts receivable and payable, and all other items necessary or proper to carry out such solid waste management functions, pursuant to the powers granted to the Authority under Section 5607 of the Municipality Authorities Act. This transfer occurred on January 1, 2011, at which time the Authority paid the City $834,425.

b. The City provides enhanced police and fire security services to the Authority for the facilities maintained by the Authority, to be respectively provided by the City of Hazleton Police Department and the City of Hazleton Fire Department.

c. The City provides to the Authority consultation on matters of public health in connection with the Authority's provision of water services, to the extent such matters are within the scope and expertise of the City of Hazleton Health Department.

d. The City provides to the Authority inspection and enforcement services pertaining to compliance with local codes, ordinances, and other requirements pertaining to users of the Authority's water services, with such inspection and enforcement services to be provided by the City of Hazleton Code Enforcement and Zoning Department.

e. The City manages the leasing of tower and/or tank space on Authority facilities maintained by the Authority for public water supply.

The agreement also provides for the City to receive 80% of the net revenues from sales, royalties, contracts, agreements or other forms of revenue generated from the property, rights, products, or resources for which the City will provide management services, including but not limited to (a) timber rights on lands owned or controlled by the Authority and (b) sales of water to water bottlers or bulk haulers from water resources owned by the Authority that are not connected to the Authority's public water system.

-38-


Additionally, the Authority shall convey to the City land that the Authority has deemed to be no longer used or useful. A list of this land is due to the City within 90 days of the date of signing of the Agreement.

The Authority made payment to the City for services performed in the amount of $579,375 for the year ended March 31, 2011.

On or before January 1 of each calendar year beginning in 2011, the City shall submit to the Authority a written statement showing the amounts due annually under this Agreement ending in 2025. The minimum amount due each year will be $350,000, plus the net revenues from the tower leasing management services calculated as of December 31 of each calendar year.

The agreement expires 15 years following the date of execution, October 7, 2010.

The Agreement may not be terminated or modified without the written approval of the Authority after the occurrence of a vote of the Authority Board of Directors in favor of such a termination or modification. If the Agreement is terminated, the City within 90 days after the effective date of termination shall deliver a detailed written statement for all outstanding amounts owed to the City by the Authority. The amount owed to the City, if any, will be due and payable within 45 days of receipt of the statement.

-39-

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COMBINING SCHEDULE OF OPERATING EXPENSES FOR THE YEAR ENDED MARCH 31. 2011 (WITH COMPARATIVE TOTALS FOR 2010


COMMERICAL AND GENERAL: Salaries and wages $ 1,047337 $ - $ 1,047,337 $1,016,141 Insurance - general & group 885,013 - 885,013 717,825 Automobile and truck expense 109,114 - 109,114 84,704 Supplies and expense 249,916 - 249,916 175,718 Pension administration expense 181,450 - 181,450 114,328

Total 2,472,830 - 2,472,830 2,108,716

PUMPING SYSTEM: Salaries and wages 172,823 - 172,823 167,719 Supplies and expense 119,255 - 119,255 122,360 Power purchased 1101,414 - 1,101,414 840,547

Total 1,393,492 - 1,393,492 1,130,626

ADMINISTRATIVE EXPENSES: Legal fees 178,088 30,974 209,062 96,512 Engineering fees 21,061 - 21,061 10,392 Miscellaneous 614,861 15,172 630,033 52,120 Officers' and board members'

compensation 7,590 1,830 9,420 6,270 Auditing fees 30,360 - 30,360 24,420

Total 851,960 47,976 899,936 189,714

PROVISION FOR UNCOLLECTIBLE ACCOUNTS AND DEPOSITS 128,000 807,445 935,445 80,197

PURIFICATION SYSTEM: Salaries and wages 202,814 - 202,814 202,250 Supplies and expense 216,025 - 216,025 168,451

Total 418,839 - 418,839 370,701

DISTRIBUTION SYSTEM: Salaries and wages 481.291 - 481,291 567,204 Supplies and expense 320,412 - 320,412 279,611

Total 801,703 - 801,703 846,815

TRASH SYSTEM, Hauling fees - 500,655 500,655 -

TRUSTEE FEE 18,006 - 18,006 18,597

DEPRECIATION EXPENSE 1,447,536 - 1,447,536 1,262,495

Total operating expenses $ 7,532,366 $1,356,076 $ 8,888,442 $6,007,861


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SCHEDULE OF CHANGES IN TRUST FUND BALANCES (RESTRICTED ASSETS) SERIES OF 1992

CASH BASIS

DEBT SERVICE DEBT SERVICE RESERVE RESERVE

FUND FUND FILTRATION TRANSMISSION SUB-TOTAL

BALANCE, APRIL 1, 2010, Cash, cash equivalents and investments $ 1,143,321 $ 1,160,877 $2,304,198

REVENUES, Investment earnings (losses) (2,18) (3,9) (6,119)

EXPENDITURES: Service fees (19) (47) (66)

Transfers (311,34) (32QQ) (343,357)

Total expenditures (311,373) (32,050) (343,42)

BALANCE, MARCH 31, 2011, Cash, cash equivalents and investments $ 829,762 $ I ,124,894 $1,954,656


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CASH BASIS FOR THE YEAR ENDED MARCH 31, 2011

PROJECT FUND•

BALANCE, APRIL 1, 2010, Cash, cash equivalents and investments

$ 183,077

REVENUES, 10 Investment earnings

EXPENDITURES: Service fees

(10)

Construction costs (130)

Total expenditures (130)

BALANCE, MARCH 31, 2011, Cash, cash equivalents and investments

$52,405


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CASH BASIS FOR THE YEAR ENDED MARCH 31,2011

DEBT DEBT SERVICE

SERVICE RESERVE REVENUE FUND 2006 FUND 2006

FUND BONDS BONDS SUB-TOTAL 2011 2010

BALANCE, APRIL 1, 2010, Cash, cash equivalents and investments $ 726,594 $ 878,513 $1,043,259 $ 2,648,366 $ 5,135,641 $ 6,257,106

REVENUES AND TRANSFERS: Investment earnings 3,309 50

886,151 4,070

- 7,429

9,673,015 1,320

9,673,015 176,694

8,195,855 Transfers 8,786,864

Total revenues and transfers - 8,790,173 - 886,201 4,070 9,680,444 9,674,335 8,372,549

EXPENDITURES: Payment of debt service:

- (318,750) - (318,750) (318,750) (386,000) Interest Principal - (710,000) - (710,000) (710,000) (640,000)

Construction costs - (40)

- (47)

- (78)

- (165)

(130,672) (241)

- (1,830)

Service fees Transfers ±9,045,160) - (47) (9,045,647) (9,389,004) (8,447,397 )

Total expenditures (9,045,200) (1,028,797) () (10,074,562) (10,548,667) (9,475,227)

BALANCE, MARCH 31, 2011, Cash, cash equivalents and investments $ 471,567 $ 735,917 $1,046,764 $ 2,25448 $4,261,309 $5,154,428


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SCHEDULE OF ACTIVITIES - BUDGET AND ACTUAL FOR THE YEAR ENDED MARCH 31. 2011

WATER DEPARTMENT INDUSTRIAL DIVISION VARIANCE VARIANCE

FAVORABLE FAVORABLE BUDGET ACTUAL (UNFAVORABLE) BUDGET ACTUAL (UNFAVORABLE)

OPERATING REVENUES: Sale of water $ 8,326,734 $ 7,818,973 $ (507,761) $ - $ - $ - Trash services - 614,761 614,761 Penalties 274,388 275,573 1,185 - - - Other operating revenues 92,731 96,702 3,971 - - -

Total operating revenues 8,693,853 8,191,248 (502,605) - 614,761 614,761

OPERATING EXPENSES: Depreciation and amortization 1,300,000 1,447,536 (147,536) - - - Pumping system 1,194,700 1,393,492 (198,792) - - - Administrative 251,600 851,960 (600,360) - 47,976 (47,976) Commercial and general 2,220,004 2,472,830 (252,826) - - - Purification system 399,100 418,839 (19,739) - - - Trustee fee 16,000 18,006 (2,006) - - - Provision for uncollectibie accounts and deposits 128,000 (128,000) - 807,445 (807,445) Hauling fees - - - - 500,655 (500,655) Distribution system 1,079,300 801,703 277,597 - - -

Total operating expenses 6,460,704 7,532,366 (1,071 ,662) - 1,356,076 (1,356,076)

NONOPERATING REVENUES (EXPENSES): - Contributions in aid of construction - 10,846,216 10,846,216 Interest income 150,000 43,792 (106,208) - - - Interest expense (531,360) (522,612) 8,748 - (8,388) (8,388)

Net nonoperating (expenses) revenues (381,360) 10,367,396 10,748,756 - (8,388) (8,388)

NET INCOME $1,851,789 $ 11,026,278 $ 9,174,489 $ - $(749,703) $7q)


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SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED MARCH 31, 2011

TOTAL TOTAL

GRANTOR/PASS-THROUGH GRANTOR/

FEDERAL CFDA PASS-THROUGH AWARD

NUMBER GRANT PERIOD AMOUNT RECEIVED

FOR THE YEAR FEDERAL

EXPENDITURES PROGRAM OR CLUSTER TITLE NUMBER

UNITED STATES ENVIRONMENTAL PROTECTION AGENCY Drinking Water State Revolving Fund

ARRA- PENNSYLVANIA INFRASTRUCTURE INVESTMENT 66.468 N/A 5/01/09- 04/30/11 $ 12,508,600 $ 10,828,242 $ 10,828,242

AUTHORITY (Project 40084060009-CW)

See Notes to Schedule of Expenditures of Federal Awards

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NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS

1. NATURE OF PROGRAM

On April 20, 2009, the Authority was awarded a grant in the amount of $12,508,600 from the Pennsylvania Infrastructure Investment Authority ("PennVest") that is subsidized by the Drinking Water State Revolving Fund of the Environmental Protection Agency. The grant funded projects include replacement of water mains, pump station upgrades, tank replacement, and rebuilding of 3 filters. The projects construction start date was May 1, 2009 with a proposed completion date of April 30, 2011

2. BASIS OF PRESENTATION

The accompanying schedule of expenditures of federal awards includes the grant activity of Hazleton City Authority and is presented on the accrual basis of accounting. The information in the schedule is presented in accordance with the requirements of OMB circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Therefore, some amounts presented in the schedule may differ from amounts presented in, or used in the preparation of, the basic financial statements.

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INDEPENDENT AUDITORS' REPORT ON INTERNAL CONTROL OVER

FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN

ACCORDANCE WITH GOVERNMENTAUDITING STANDARDS

Board of Directors of Hazleton City Authority:

We have audited the combining financial statements of the Hazleton City Authority (the "Authority") as of and for the year ended March 31, 2011, and have issued our report thereon dated June 7, 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

In planning and performing the audit, we considered the Authority's internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Authority's internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the Authority's internal control over financial reporting.

A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis.

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

COMPLIANCE AND OTHER MATTERS

As part of obtaining reasonable assurance about whether the Authority'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 statements 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 the tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards.

We noted certain matters that we reported to management of the Authority in a separate letter dated June 7, 2012.

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

1400U & 4110At11 L&?

June 7, 2012

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INDEPENDENT AUDITORS' REPORT ON COMPLIANCE WITH REQUIREMENTS THAT COULD HAVE A

DIRECT AND MATERIAL EFFECT ON EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH OMB CIRCULAR A-I 33

Board of Directors of Hazleton City Authority:

COMPLIANCE

We have audited the compliance of Hazleton City Authority (the "Authority") with the types of compliance requirements described in the OMB Circular A-133 Compliance Supplement that could have a direct and material effect on the Authority's major federal program for the year ended March 31, 2011. The Authority's major federal program is identified in the summary of auditor's results section of the accompanying schedule of findings and questioned cost. Compliance with the requirements of laws, regulations, contracts and grants applicable to its major federal program is the responsibility of the Authority's management. Our responsibility is to express an opinion on the Authority's compliance based on our audit.

We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the Authority's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination of the Authority's compliance with those requirements.

In our opinion, the Authority complied, in all material respects, with the compliance requirements referred to above that could have a direct and material effect on its major federal program for the year ended March 31, 2011.

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INTERNAL CONTROL OVER COMPLIANCE

Management of the Authority is responsible for establishing and maintaining effective internal control over compliance with the requirements of laws, regulations, contracts and grants applicable to federal programs. In planning and performing our audit, we considered the Authority's internal control over compliance with requirements that could have a direct and material effect on a major federal program to determine the auditing procedures for the purpose of expressing our opinion on compliance and to test and report on internal control over compliance in accordance with OMB Circular A-133 but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the Authority's internal control over compliance.

A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness is a deficiency or combination of deficiencies in internal control over compliance, such that there is a reasonable possibility that material non compliance with a type of compliance requirement of a federal program will not be prevented or detected and corrected, on a timely basis.

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

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

~1)214 5 410afaL; f6l June 7, 2012

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HAZLETON Cmi' AUTHORITY

SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED MARCH 31, 2011

SECTION I - SUMMARY OF AUDITOR'S RESULTS

Financial Statements

Type of auditor's report issued:

Internal control over financial reporting:

Material weakness(es) identified?

Significant deficiency(ies) identified that are not considered to be material weaknesses?

Noncompliance material to financial statements noted?

UNQUALIFIED

yes X no

yes X none reported

yes X no

Federal Awards

Internal control over major programs:

Material weakness(es) identified?

Significant deficiency(ies) identified that are not considered to be material weaknesses?

Type of auditors' report issued on compliance for major programs:

Any audit findings disclosed that are required to be reported in accordance with section 510(a) of OMB Circular A-133?

yes X no

yes X none reported

UNQUALIFIED

yes X no

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HAZLETON CITY AUTHORITY SCHEDULE OF FINDINGS AND QUESTIONED COSTS

Identification of major programs:

CFDA Number(s)

66.468

Dollar Threshold used to distinguish Type A and Type B programs:

Auditee qualified as low-risk auditee?

Name of Federal Program or Cluster

Drinking Water State Revolving Fund

$300,000

yes no

SECTION II - FINANCIAL STATEMENT FINDINGS

None.

SECTION III - FEDERAL AWARD FINDINGS AND QUESTIONED COSTS

None.

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