Bristol Tennessee Essential Services 2011

Comprehensive Annual

Financial Report

Bristol Tennessee Essential Services

(A Self-Supported Enterprise Fund of the

City of Bristol, Tennessee)

Year ended June 30, 2011

Prepared by:

Accounting and Finance Department and CEO

Lola McVey R. Michael Browder

Director of Accounting and Finance Chief Executive Officer

Cover Photo: Boone Lake, Bluff City, Tennessee

Photo Taken By: Leslie Boughers

Bristol Tennessee Essential Services

Comprehensive Annual Financial Report

Year ended June 30, 2011

Introductory Section

Letter of Transmittal ....................................................................................................................... i

Background Information ................................................................................................................ v

Recap of Fiscal Year 2011 ........................................................................................................... vii

Organizational Chart ................................................................................................................... xiv

General Philosophy ...................................................................................................................... xv

Service Area ................................................................................................................................ xvi

Electric Utility Terms ................................................................................................................ xvii

Deregulation Dictionary .............................................................................................................. xx

Glossary of Broadband Terms ................................................................................................... xxii

Financial Section

Report of Independent Auditors .................................................................................................... 1

Management’s Discussion and Analysis ....................................................................................... 3

Basic Financial Statements

Balance Sheets ........................................................................................................................ 13

Statements of Revenues, Expenses and Changes in Net Position .......................................... 15

Statements of Cash Flows ....................................................................................................... 17

Statement of Plan Net Position ............................................................................................... 19

Statement of Changes in Plan Net Position ............................................................................ 20

Notes to Financial Statements ................................................................................................ 21

Required Supplementary Information

Schedule of Funding Process – Political Subdivision Pension Plan ...................................... 44

Schedule of Funding Process – BTES Retiree Benefit Plan .................................................. 45

State Schedules Section

Business Unit Balance Sheets ...................................................................................................... 47

Business Unit Schedules of Revenues, Expenses and Changes in Net Position ........................ 49

Business Unit Schedules of Cash Flows ...................................................................................... 51

Statistical Section

Schedule of Net Position (Last Ten Years) ................................................................................. 54

Statement of Revenues and Expenses (Last Ten Years) ............................................................. 55

Operating Revenues and Electric Consumption .......................................................................... 56

Purchased Power, Consumption and Active Service Statistics (Last Ten Years) ....................... 57

Schedule of Electric Rates (Last Ten Years) .............................................................................. 58

Schedule of Telephone, Cable and Internet Rates ....................................................................... 64

Schedule of Principal Customers Ranked by Kwh Usage .......................................................... 65

Schedule of Bonds Payable by Type and Power System Revenue Bond Coverage .................... 66

Ten Largest Employers ................................................................................................................ 67

Climatological Data ..................................................................................................................... 68

Demographic and Economic Statistics ........................................................................................ 69

Schedule of Property, Casualty and Other Insurance .................................................................. 70

Schedule of Employees (Last Ten Years) .................................................................................. 72

Statistics – June 2011 .................................................................................................................. 73

Internal Control and Compliance Section

Report of Independent Auditors 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 ............................................ 74

i

P.O. Box 549 



 2470 Volunteer Parkway 



 Bristol, TN 37621-0549

423/968-1526 



 Fax 423/793-5545

November 7, 2011

To the Chairman and Members of the

Board of Directors of Bristol Tennessee Essential Services

Letter of Transmittal

The Comprehensive Annual Financial Report (“CAFR”) of Bristol Tennessee Essential Services

(“BTES”), a self-supporting governmental enterprise fund of the City of Bristol, Tennessee

operated under the general supervision and control of a five-member Board of Directors as per

Chapter 32 Public Acts of Tennessee 1935, for the fiscal year ended June 30, 2011, is submitted

herewith.

The CAFR was compiled by the staff of the Accounting and Finance Department with the close

cooperation of our independent auditor. It represents the official report of BTES' financial

operations and conditions to the citizens, the Board of Directors, BTES management, rating

agencies and other interested parties.

Responsibility for the accuracy of the presented data and the completeness and fairness of the

presentation, including all disclosures, rests with BTES. We believe the data, as presented, are

accurate in all material respects and are presented in a manner designed to fairly set forth the

financial position and results of operations and cash flows of BTES.

All disclosures necessary for the reader to gain a thorough understanding of BTES' financial

condition have been included.

In order to meet the needs of a broad spectrum of financial statement readers, the CAFR is

presented in five sections:

• Introductory Section

• Financial Section

• State Schedules

• Statistical Section

• Internal Control and Compliance Section

The Introductory Section includes the table of contents, this transmittal letter, an organizational

chart of BTES, BTES' general philosophy, background of BTES and a brief recap of fiscal year

2011.

The Financial Section is composed of the report of independent auditors; Management

Discussion and Analysis (“MD&A”), including a narrative introduction, financial overview and

financial analysis; and the financial statements. This letter of transmittal is designed to

complement the MD&A and should be read in conjunction with it. The notes to the financial

statements are considered an integral and essential part of adequate disclosure and fair

presentation of the financial statements.

ii

Letter of Transmittal (continued)

The Statistical Section and State Schedules Section includes selected financial and

demographic trend information. The tables within this section differ from certain information in

the financial section in that they represent some non-accounting data covering ten fiscal years.

These data were accumulated through BTES statistical collection.

The Internal Control and Compliance Section includes the Report of Independent Auditors on

Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an

Audit of Financial Statements Performed in Accordance with Government Auditing Standards.

The accompanying financial statements present the financial position, results of operations and

cash flows of BTES, in accordance with the requirements of the Governmental Accounting

Standards Board (“GASB”).

This report does not include the financial activities of the City of Bristol, Tennessee. Financial

reports are available directly from the City of Bristol, Tennessee.

LOCAL ECONOMY

Bristol, Tennessee is located in the northeastern portion of the state. It is one of three cities in

Sullivan County, with the other two being Kingsport and Bluff City. The population of Sullivan

County is 156,823. Its industrial base is primarily manufacturing, followed by the service sector

and agriculture.

Because of its central location in the eastern United States, Bristol is within 600 miles of

approximately 53% of the population of the United States. Interstate 81 passes through the city.

Bristol is part of the consolidated metropolitan statistical area (CSA) of Bristol, Johnson City and

Kingsport, commonly called the Tri-Cities CSA. With a population of 508,260 people, the Tri-

Cities CSA is the 67th largest in the United States.

Bristol benefits from the state's high ranking in Alexander Grant and Company's GENERAL

MANUFACTURING CLIMATES, which ranks Tennessee near the top in the nation as a place

for manufacturing.

Bristol is a good place to work and live, with the following amenities:

• Excellent health care facilities

• Seven Tennessee Valley Authority lakes with

2,200 miles of shoreline

• Five national parks

• Bristol Motor Speedway (Two NASCAR dates per

year with over 160,000 seats)

• Low crime rate

• Four distinct seasons

• Excellent schools

• Nine colleges and universities (Degrees ranging

from Art to Medicine)

• Seven beautiful golf courses

Bristol and the surrounding areas continue to grow and prosper. Eastman Chemical Company is

headquartered in Sullivan County. Exide’s Super Battery Plant is in Bristol TN. Seaman

Corporation continues to invest in their Bristol, TN facility with a recent expansion and capital

investment of $6 million. Triad Packaging also combined their Tennessee and North Carolina

manufacturing operations to their Bristol, TN facility.

iii

Letter of Transmittal (continued)

LONG-TERM FINANCIAL PLANNING

BTES has established a projected Five Year Plant Addition plan that includes major engineering

and construction projects as well as the addition of two substations. BTES will also continue to

provide a financially viable fiber optic path to each home or business served, resulting in instant

power outage reporting, improved time to restore power, reduction in customer minutes of power

outages and peak load reduction. BTES will also continue to evaluate other uses for the fiber optic

system, including flex pay, in an effort to enhance cost, reliability and economic development.

RELEVANT FINANCIAL POLICIES

BTES used operating revenues to fund capital additions of $4,864,029 in fiscal year 2011. BTES

evaluates rates to assure they provide revenue to cover operating expenses and debt requirements.

BTES also continually monitors cash position and planned capital expenditures to evaluate the need

for additional long term debt.

MAJOR INITIATIVES

BTES is working with the Tennessee Valley Authority, the Electric Power Research Institute and

Carina Technologies to implement a new water heater program. BTES is also participating in a

Voltage Reduction pilot program through TVA to operate a load control program. Voltage

regulators are at each substation to reduce the feeder voltage during high-demand periods, thus

reducing the peak load. These two projects will help reduce the peak load for BTES and aligns with

the TVA initiative. As TVA transitioned to a new rate structure in April 2011, this will help reduce

BTES’ cost of purchased power.

BTES began work on Internet Protocol Television (IPTV) deployment. This system will allow

BTES to offer Video on Demand, more HD channels, ad insertion, whole home DVR and 3D

channels in the future.

INDEPENDENT AUDIT

BTES has an annual audit performed by independent certified public accountants. The firm of

Coulter & Justus, P. C., was selected by the Board of Directors. The auditor's report on the financial

statements is included in the Financial Section of this report.

AWARDS

For the first time, the Government Finance Officers Association (“GFOA”)

awarded a Certificate of Achievement for Excellence in Financial Reporting

to BTES for its CAFR for the fiscal year ended June 30, 1997. BTES was

also awarded the certificate for its CAFR for the fiscal years ended June 30,

1998, 1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007, 2008, 2009 and

2010. To qualify for this prestigious award, BTES issued an easily readable

and efficiently organized CAFR. In addition, this report satisfied both

accounting principles generally accepted in the United States of America and

applicable legal requirements.

A Certificate of Achievement is valid for a period of one year only. We

believe that our present report continues to meet the program's requirements,

iv

and we are submitting it to the GFOA to determine eligibility for another certificate.

ACKNOWLEDGMENTS

The preparation of this report could not have been accomplished without the staff of BTES. We

express our sincere appreciation to those who assisted and contributed to its preparation.

Sincere appreciation is also expressed to Sam Coulter, CPA, Adam Allen, CPA and the staff at

Coulter & Justus, P.C., for assistance throughout the year pertaining to various financial matters and

for their assistance in the preparation of this report.

In closing, we would like to thank the members of the Board of Directors of Bristol Tennessee

Essential Services for their interest and support in planning and conducting the operations of BTES

in a responsible and progressive manner.

Respectfully submitted,

Lola McVey R. Michael Browder

Director of Accounting and Finance Chief Executive Officer

v

BACKGROUND INFORMATION

On June 30, 1945, the Tennessee Valley Authority (TVA) purchased the properties of East

Tennessee Light and Power Company. Bristol Tennessee Electric System, now called Bristol

Tennessee Essential Services (BTES), was started July 1, 1945 as a result of a referendum in which

the citizens of Bristol, Tennessee voted to purchase from TVA a portion of these properties. A $1.3

million issue of Electric Light and Power bonds was required to finance the transaction. BTES

immediately agreed to terms of a 20-year power contract for TVA to supply power which BTES

distributed to the public at substantially lower rates.

As per Chapter 32 Public Acts of Tennessee 1935 and the contract with TVA, a five-member board

of directors was established by the city to have general supervision and control of the municipally-

owned electric system with one member serving from City Council. Current board members include

Chairman Patrick W. Hickie, Jr., CPA, Vice-Chairman Bryan K. Boyd, Kelly Graham, J. Scott

MacMorran and City Council Representative David K. Shumaker.

The International Brotherhood of Electrical Workers (IBEW) has represented the trades and crafts

employees since prior to TVA purchasing the system from East Tennessee Light and Power.

Sixty-five BTES employees serve over 33,000 customers in Bristol and Sullivan County in

Tennessee and a portion of Washington County, Virginia - approximately 280 square miles of

service area.

BTES purchases electric power from TVA, the nation’s largest public power generator of

electricity. For calendar year 2010, our residential customers paid approximately 8.32 cents per

kilowatt hour, while the national average is 11.58 cents per kilowatt hour. BTES has had seven rate

reductions since June 1982 with the most recent in October 1997. This does not include changes in

wholesale power costs from TVA. In October 2003, TVA added an environmental charge to their

rate to cover the cost of certain air pollution equipment. Since April 2006, cost of purchased power,

fuel and capital for plant improvement and debt reduction has caused TVA to raise rates.

Additionally, TVA implemented a Fuel Cost Adjustment in October 2006 which was reviewed

quarterly and is now reviewed monthly. The Fuel Cost Adjustment was 0.2537 cents per kilowatt

hour in June 2011.

The electricity we purchase from TVA is delivered at 161,000 volts to our two delivery points-

Bluff City Primary and Blountville Primary Substations. We step it down to 69,000 volts for

subtransmission to other substations and to 13,200/7620 volts for distribution. In some cases, small

distribution substations provide additional voltage reduction to large general power loads. The

voltage entering a customer’s home is 120/240 volts which is utilized for lighting, heating and

operating household appliances. Businesses and industries may be served at 208/120, 480/277,

4160/2400 and 13200/7620 volts or other standard voltages.

BTES provides high-speed Internet, telephone and cable television services over a fiber optic

network. This same network provides numerous enhancements to BTES’ electric system, including

automatic meter reading, power outage detection and power outage reporting. In the future, this

system will be used for pre-payment of electricity to offset the need for at risk customers to pay a

deposit and for load management.

vi

BACKGROUND INFORMATION (continued)

In 1994, BTES received the American Public Power Association's prestigious E. F. Scattergood

System Achievement Award for outstanding achievement by a utility.

Also in 1994, BTES was one of three organizations to receive the Tennessee Quality Governor's

Award, now called the Tennessee Center for Performance Excellence Award of Excellence,

presented by Governor Ned McWherter. The other two recipients were Nissan and FedEx. Other

organizations that have received this prestigious award include: Eastman Chemical Company,

Philips Consumer Electronics Company, Bridgestone/Firestone Company, Eaton Corporation,

Methodist Medical Center of Oak Ridge, Baptist Health Systems of Knoxville, Fleetguard,

Caterpillar Financial Services, Memphis Light, Gas and Water, Eaton Aeroquip, Pal's Sudden

Service, Tennessee Valley Authority Nuclear, John Deere Power Products and Mountain States

Health Alliance.

In June 1996, BTES received the American Public Power Association's Golden Tree Award in

recognition of BTES planting over one tree per customer.

In June 1997, BTES received the American Public Power Association's Community Service Award

for outstanding civic and community involvement by our employees.

In October 1997, CEO R. Michael Browder received the 1997 Jim Spradley Award for individual

accomplishments in the field of industrial and economic development in Tennessee that go above

and beyond the requirements of the vocation for which they are compensated. The award was

presented by Governor Don Sundquist at the Governor's Economic Summit in Nashville.

In May 2000, CEO R. Michael Browder received the Tennessee Valley Public Power Association's

Distinguished Service Award for his exceptional performance and contributions toward the

accomplishment of the organization's goals.

From July 2001 until June 2002, CEO R. Michael Browder served as Chairman of the Board of the

American Public Power Association.

In October 2004, BTES received approval to offer cable television and Internet service.

On December 15, 2004, the BTES Board of Directors changed the name of the organization from

Bristol Tennessee Electric System to Bristol Tennessee Essential Services to reflect the new services

being offered.

In fall 2005, BTES began providing cable television and Internet service.

In March 2006, BTES received approval from the Tennessee Regulatory Authority to provide

telephone service. In November 2006, BTES began providing telephone service.

In June 2008, BTES received the Energy Innovator Award from the American Public Power

Association for encouraging innovative thinking, providing better service to electric customers and

participating in projects that increase the efficiency of utility operations.

vii

BACKGROUND INFORMATION (continued)

In February 2009, BTES received the National Arbor Day Foundation Tree Line USA Award for

the ninth year in recognition of quality tree care, annual worker training, tree planting and public

education.

In March 2009, BTES received the American Public Power Association’s Reliable Public Power

Provider (RP3) Award in recognition for providing consumers with the highest degree of reliable

and safe electric service.

In June 2009, BTES again received the American Public Power Association’s prestigious E. F.

Scattergood System Achievement Award for outstanding achievement by a utility.

In February 2010, BTES received the National Arbor Day Foundation Tree Line USA Award for

the tenth year in recognition of quality tree care, annual worker training, tree planting and public

education.

In February 2010, CEO R. Michael Browder received the Ned R. McWherter Leadership Award

from the Tennessee Center for Performance Excellence for exemplifying outstanding leadership.

In May 2010, BTES gain received the American Public Power Association’s Community Service

Award for outstanding civic and community involvement by our employees.

In July 2010, BTES received the Tennessee Municipal Electric Power Association’s Community

Service Award for participating in activities in the community that addresses community need,

provide opportunities for employee involvement and providing improved service to customers.

In February 2011, BTES received the National Arbor Day Foundation Tree Line USA Award for

the eleventh year in recognition of quality tree care, annual worker training, tree planting and public

education.

In March 2011, BTES again received the American Public Power Association’s Platinum Level

Reliable Public Power Provider (RP3) Award in recognition for providing consumers with the

highest degree of reliable and safe electric service.

For fiscal year 2010, BTES received the Government Finance Officers Association Certificate of

Achievement for Excellence in Financial Reporting for the 14

th

year in a row.

RECAP OF FISCAL YEAR 2011

During the past year major engineering and construction projects include: rebuilt 1.68 miles of 3-

phase electric distribution lines along Old Hickory Tree Road and Beidleman Creek Road; built .86

miles of 3-phase electric distribution lines along Hamilton Road behind Tri-Cities Regional Airport;

rebuilt 13 spans on single phase electric distribution line along Sky-Wa-Mo Road; built 3 spans of

viii

RECAP OF FISCAL YEAR 2011 (continued)

3-phase electric distribution lines into Fox Meadow Subdivision to serve section two; built 4 spans

of 3-phase electric distribution lines for an emergency tie line for Wellmont’s Bristol Regional

Medical Center (BRMC) and used that line to replace the automatic switchgear servicing BRMC

without an interruption in their service; built three spans of 3-phase electric distribution lines on

Anderson Street; installed street lights for the City of Bristol at the following locations – Deer

Harbor (6), Egypt Road (12), Edison Circle (19) and Raytheon Road (22), installed decorative street

lights along 7

th

8

th

streets and installed a traffic signal at Highway 394 and Highway 11-E. We also

replaced 33 poles for CenturyLink and upgraded our Supervisory Control and Data Acquisition

(SCADA) system and capacitor communication and control system.

We installed over 17,940 feet of underground primary conductors and over 9,440 feet of fiber optic

cable to serve the following subdivisions and developments: Chadsworth Subdivision, Lakes Edge

Subdivision, Tail Water Estates and Section II Fox Meadow Subdivision.

We installed over 2,650 kVA of three-phase padmount transformers to serve the following general

power customers: Exide and The Academy at King.

Our outage time per customer was 58 minutes for calendar year 2010 which gives us a reliability

index of 99.989%.

During the last five years, we have been able to maintain our goal of a five-year tree clearance

cycle. We continue to monitor frequency of tree-caused outages by areas and make more frequent

visits to these areas. In 2010-2011, we cleared trees along feeder lines at Vance Substation circuits

224,234,254 and 264, Bluff City District Substation circuits 234 and 264 and at Piney Flats

Substation circuits 224 and 254.

Our goal is to maintain the distribution transformer capacity ratio to 200 percent of peak demand or

less. We continue to work to improve this number. We will continue our transformer loading

program to help us predict customer demand needs. The transformer loading program assists us in

identifying transformers that we will investigate for being heavily loaded and change if necessary.

During our routine substation preventative maintenance program, we discovered potential problems

and made repairs to regulators at Bluff City District and Industrial Substations, replaced the backup

overcurrent relay at Adams Chapel Substation, reclosing relay for a 15kV breaker at Blountville

Substation and a control switch relay for a 15kV breaker at Pemberton Substation. We also

replaced the station battery charger at Pemberton Substation, replaced two 15kV breaker bypass

switches at Piney Flats Substation and three lightning arrestors for a 15kV breaker at Vance

Substation.

We did routine investigations on 105 three-phase general power meter installations, finding all to be

okay.

We installed a 1Gbps circuit to the Sullivan County School System central office in partnership with

Educational Networks of America (ENA). We also added five more schools to the VLAN for a

total of 11.This multi-site private VLAN network is built using Alcatel ONTs. We are now serving

17 schools using this system.

ix

RECAP OF FISCAL YEAR 2011 (continued)

We installed Alcatel 7450 Ethernet Service Switches at each of six POP sites along with two Alcatel

7750 core routers at the Service Center. These will be used to deliver IPTV services along with

increased bandwidth to our customers. The 7750s will provide growth for our connections to the

Internet, as well.

We installed our first primary rate interface (PRI) service over GPON. This provides 23 phone lines

over a digital circuit. Because it was built using the GPON network, we now have a template to be

able to offer these enhanced voice services to other customers in our service area.

We increased our Internet capacity from 400 Mbps to 700 Mbps in July 2010. In April of 2011, we

increased again to a total of 1.2 Gbps between two carriers.

In April 2011, TVA changed the way it accounted for fuel costs in its wholesale electricity price.

Previously, fuel appeared in two categories; most was included in the base rate, but some was

recovered in the monthly “fuel cost adjustment”. Beginning in April 2011, all fuel was included in a

single fuel category, which still changes monthly, depending on the cost of fuel, purchased power

and related items. This change lowered the “base rate” amount. The new “total monthly fuel cost”

was larger than the past “fuel cost adjustment” because fuel costs that were included in the “base

rate” were moved to the “total monthly fuel cost” category. This shift did not alter the total amount

charged per kWh.

On April 1, 2011, TVA and the distributors of TVA power implemented new seasonal rate

structures. TVA’s costs to provide power vary significantly based on when customers are using

electricity – both the time of year and time of day. The new rates better reflect those cost

differences. In the summer months, the demand for power is higher in the afternoon when

temperatures rise because consumers are running air conditioning at full power to keep cool. In the

winter, demand for power is higher in the morning because that is when the temperature normally

drops to the lowest point. When demand for power increases during these peak periods of the day,

TVA has to operate its higher cost power plants or purchase power from others to meet demand.

This increases TVA’s costs. Since demand for power at peak times continues to increase, TVA has

had to build or buy new power plants to ensure it has electricity available when consumers need it.

Investing in new plants that are needed only a few hours a day is not the most efficient way to

operate the power system. On April 1, 2011, BTES also changed its rate structure to reflect the

seasonal differences. Summer rates will go from June through September, winter rates from

December through March and transition rates from April through May and again from October

through November. Residential customers also experienced an additional change in their rate

structure. Previously, residential customers paid one rate for the first 1,000 kWh and another rate for

any additional kWh usage. With the new rate structure, residential customers only pay one rate for

all kWh. This will allow an easier transition to time-of-use rates in the future.

BTES is participating in a Voltage Reduction pilot program through TVA to operate a load control

program. Voltage regulators are at each substation, line capacitors are remotely controlled and

voltage is monitored along distribution lines at customer locations, to reduce the feeder voltage

during high-demand periods, thus reducing the peak load and saving TVA on maximum required

generating capacity. When TVA changed the wholesale rate structure to demand and energy in

April 2011, BTES will save each month on demand charges.

x

RECAP OF FISCAL YEAR 2011 (continued)

As the city's largest taxpayer, we paid the maximum in-lieu-of-tax payments as provided by

Tennessee State Law and the TVA Contract to the City of Bristol in the amount of $1,646,426 for

fiscal year 2011. Combined with taxes paid to Sullivan County and Bluff City, Tennessee and

Washington County, Virginia, a grand total of $2,137,636 was paid by BTES.

We planted 165 dogwoods during fiscal year 2011 through our Trade-A-Tree program. We also

planted one Eastern Red Oak. We planted fifteen trees for the Vance Middle School Campus

Sustainable Garden/Orchard project.

Currently, BTES has mapped all pole locations in the BTES service territory. We continue to

update the mapping system as changes are made in the field.

Our electric bad debts, as a percentage of electric retail revenue, are 0.1 percent for the fiscal year

2011, which is below our stated goal of 0.25 percent. The industry target is 0.5 percent. This has

been accomplished in a variety of ways. We diligently work to prevent customers from falling too

far behind in paying their electric bill and thoroughly screen new applications to determine

inclination to pay. In an effort to help those in need find necessary funding, we work with area

churches, the Salvation Army, Bristol Faith in Action, United Way and the Upper East Tennessee

Human Development Agency. BTES, our customers, United Way and Salvation Army come

together to assist customers through our Help Your Neighbor program. Our deposit procedure seems

to be working well. Residential customers who demonstrate a history of paying their bills in a

timely manner may have their deposit waived. A general power customer with a calculated standard

deposit of $10,000 or less, which has a principal owner who has lived in our service area five or

more years with good pay and credit history and is willing to guarantee the account, may have the

deposit reduced or waived. To date, no adverse effects have been detected.

We continually update metering and billing functions and processes to provide documentation needed

for TVA’s compliance with the Sarbanes-Oxley Act.

We have been prepaying our power bill. Under this arrangement, we use an automated clearing

house to send our money to TVA before actual payment is due. In return, we receive interest

payments from TVA for the amount of their cost of short-term borrowing. This is used when TVA's

rate is higher than we are able to receive through other investment vehicles.

We continued working with a local bank to process mail and drop box payments. This increases

productivity for our Customer Service Department, while improving our cash management.

In December 2002, we purchased $8 million of Discounted Energy Units from TVA. Our

participation in the program will assure a long-term supply of power at a low price and increase our

return on investments. Our power bill is being discounted by the principle and interest earned.

Efforts to increase sales of electricity continued. Efforts are ongoing to increase the use of electric

heat pumps and electric water heaters, especially load-managed water heaters that can be switched

off during peak-demand periods. During calendar year 2010, we inspected 164 heat pump

installations and installed 694 water heaters. As of June 2011, BTES has over 15,600 load-managed

water heaters. During calendar year 2010, TVA paid us $976,754 for the ability to cycle these water

xi

RECAP OF FISCAL YEAR 2011 (continued)

heaters off during peak times. Thirty-three loans were made through the Energy Savings Loan

Program at a total of $123,610. One hundred eleven heat pump loans were made totaling $560,255.

As of June 2011, we are serving a total of 13,089 homes and businesses with Internet, telephone

and/or cable television service. We are reading 12,076 electric meters using the fiber optic system.

BTES continually reviews our channel line-up and looks at each customer request. We have added

MLB Network and CBS College Sports Network to our channel line-up.

We began work on the IPTV deployment. Activities included installing the infrastructure in the

headend to encode the satellite feeds into IPTV packets and setting the servers that will control the

IPTV network. We have also been trained on the use and maintenance of the IPTV system.

We continue to make subdivision development agreements available to developers. Instead of

initially collecting the total cost for electric facilities installed to serve subdivisions, we offer to

waive all or part of these costs for developers who agree to have all-electric homes with inspected

heat pumps and load-managed water heaters and fiber optic services built in their developments.

Total costs are charged for any lots on which homes are built that are not all-electric. We presently

have 429 lots in 17 subdivisions covered under this type agreement.

Our marketing programs are proving to be effective as the data shows on electric usage in new

homes where natural gas is available:

Water Heater Heating System

Gas Electric Gas Electric

2005 0 (0%) 62 (100%) 0 (0%) 62 (100%)

2006 1 (1.6%) 59 (98.3%) 1 (1.6%) 59 (98.3%)

2007 4 (2.6%) 151 (97.4%) 4 (2.6%) 151 (97.4%)

2008 3 (3.3%) 81 (96.7%) 3 (3.3%) 81 (96.7%)

2009 2 (4.4%) 43 (95.6%) 2 (4.4%) 43 (95.6%)

2010 0 (0%) 9 (100%) 0 (0%) 9 (100%)

Each customer who purchases a BTES water heater, has an inspected electric heat pump installed or

purchased fiber optic services is surveyed by mail. The surveys are used to monitor quality and

customer satisfaction of the programs and satisfaction with BTES employees, contractor employees

and Quality Contractor Network employees.

We are currently working with TVA, the Electric Power Research Institute and Carina Technologies

to implement a new water heater program. A control system was developed that will allow BTES to

connect the water heater to the electric meter and its existing fiber optic network. Using this

connection and thermocouples, BTES can read the temperature of the top and bottom thermostats.

The water heaters can then be cycled off during on-peak hours but a minimum temperature point

would be set for the top thermostat. If the water temperature decreased to the minimum temperature

while the water heater was cycled off, that individual water heater could be allowed to be cycled

back on to reach a load shed temperature point then turn off again. All the other water heaters above

the minimum temperature could remain off. An emergency override to turn off all heaters, however,

xii

RECAP OF FISCAL YEAR 2011 (continued)

is incorporated into the software. We have installed and tested 1,100 switches in Phase II to ensure

that all products are functioning correctly.

Deloitte Consulting and TVA identified Bristol, Tennessee as a Pre-Qualified Data Center Site.

Bristol West Industrial Park was one of only 12 locations in the seven-state Tennessee Valley

Region to qualify as a potential data center site. This location was identified because it meets the

criteria for electric service, fiber service, site considerations, labor accessibility and low risk for

natural disasters required to locate a data center.

BTES’ expansive broadband network along with our redundant state-of-the-art electrical

infrastructure was recently recognized in Southern Business and Development Magazine. Bristol,

Tennessee was ranked third in their top ten locations to locate a data center.

BTES also began a new marketing initiative advertising the ability to provide 1 Gigabit Internet

service to every business and every home in our service area. This initiative emphasizes the ultra

high-speed fiber optic connections available that is among the fastest available in the United States.

BTES staff met with 29 site selection consultants in Dallas, Texas to market this state-of-the-art

infrastructure.

For the 19th consecutive year, in cooperation with the Bristol Chamber of Commerce, the City of

Bristol Tennessee and NETWORKS - Sullivan Partnership, we maintained the Governor's Three-

Star Community Economic Preparedness Program Award which signifies that Bristol has the

organization, attitude, facilities and skills to attract and retain industry. A major component of this

certification is having available property for industrial development. The Bristol Industrial Park and

the Bristol Business Park purchased by BTES has assisted in providing this component.

In calendar year 2010, BTES personnel worked with 160 existing industries to discuss electrical or

fiber optic needs, expansion possibilities and their satisfaction with the service they are receiving.

BTES worked with the City of Bristol, Tennessee; State of Tennessee; TVA and NETWORKS -

Sullivan Partnership to identify and assist eight businesses with expansions or relocations to the

Bristol area, resulting in the potential for 580 new jobs.

Our Help Your Neighbor program was conducted successfully for the 16th year to assist residential

electric customers in paying their winter electric bills during difficult times. This year $8,719.83

was contributed by customers and BTES' match, providing assistance for over 60 families. As in the

past, the need of the customer is identified by the Salvation Army and funds are administered by the

United Way.

Sixty-one percent of our employees had perfect attendance for calendar year 2010.

We had 234,313 safe working hours through June 2011.

During calendar year 2010, eight full-time employees left BTES. This prompted organizational

changes and the hiring of seven new full-time employees.

We presented 18 awards at our annual heat pump dinner for Quality Contractor Network members.

xiii

RECAP OF FISCAL YEAR 2011 (continued)

At the annual Service Awards Banquet, we presented awards representing 60 years of service

including: one employee for 30 years of service, one employee for 15 years of service, one

employee for 10 years of service, and one employee for five years of service to BTES and five

recognition awards for new employees.

BTES employees continued a process improvement initiative. Data are gathered on every customer

communication that is positive or an opportunity for improvement. The opportunities for

improvement are categorized. From these categories, different departments choose their most

important process improvement initiative. As a result of this project, several internal systems were

automated, an online bill pay option was added and the wording of out disconnect notices was

changed. We also implemented a training and testing program called Sysdine that allows every

department to add in tutorials, flash cards and exams to help train our employees. Currently, 169

tutorials and 154 flash cards and exams have been added.

xiv

Organizational Chart

xv

General Philosophy

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Reliability For Our Customers Is Essential

The customer is our reason for being and ultimately judges the quality of our service. We must provide

safe, reliable, cost-effective service and properly allocate costs for BTES to survive, grow and meet the

needs of our present and future customers.

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BTES Employees Are Our Most Important Asset

They provide the intelligence and determine the reputation of our organization. They are respected as

valuable teamworkers striving to meet our goals of quality service. We are committed to providing a safe

and healthy workplace for all BTES employees who are the driving force behind all we do.

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Resources Must Be Wisely Allocated And Used

Our resources (time, money, facilities and equipment) must be wisely allocated, utilized and invested to

enable us to provide quality service at reasonable long-term rates.

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Our Vendors And Suppliers Are Our Partners

They provide goods and services that enable us to meet the needs of our customers. We will treat our

vendors and suppliers with respect and create an environment which will ensure mutual success.

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Increasing Sales Helps Keep Rates Down

We are committed to increasing sales by developing additional load such as residential heat pumps, water

heaters and industrial and commercial loads and by providing more customers with Internet, telephone and

cable television services. This will help provide us a broader base to divide expenses which helps keep

rates down.

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Safety, Conservation And Efficient Use Of Electricity Are Essential

We must provide a customer communication program through all area news media, school and civic

programs, direct mail, in-house seminars and trade shows in order to educate and assist customers in the

safety, conservation and efficient use of electricity.

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Effective Use Of Fiber Optic System Enhances Quality of Life

We must continually increase the ability of our fiber optic system to provide better cost effective

opportunities for our residential, business, commercial, industrial and education customers. Quality of life,

education and business will continue to be enhanced with even better fiber optic services. This will

increase our customer’s comfort, convenience, entertainment and productivity.

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Planning Is Vital To Achievement

To achieve our objectives at BTES, it is necessary that we clearly understand our plans, objectives and

strategies as we strive to maintain our excellence in service.

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Continuous Improvement Is The Key To Long-Term Success

We must continually strive for excellence and quality in everything we do - in our workmanship and

services, the appearance and safety of our workplace, human relations and our commitment to our

community and ourselves.

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We Want To Earn And Deserve The Trust And Respect Of Our Customers

The customer entrusts his family’s welfare to us to provide his electrical power, cable television, Internet

and telephone needs. He must have complete confidence in the quality service we provide and the people

who work for us.

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A Positive Image Is A Valuable Asset

We strongly believe in a professional image, and we will strive to maintain such an image in the eyes of our

customers, vendors and business associates to improve the quality of life in our community.

xvi

xvii

Electric Utility Terms

Air-Source Heat Pump - A system that can supply both space heating and cooling. In the

heating cycle, the heat pump removes heat from the outside air and pumps it indoors. When

cooling, the heat pump absorbs heat from the indoors and rejects it to the outside.

Ampere - Unit of measurement of electric current. It’s proportional to the quantity of

electrons flowing through a conductor past a given point in one second.

Base Load - The minimum load over a given period of time.

Blackout - A temporary loss of electricity in an area because of failure of generation or

transmission equipment.

Brownout - A voltage reduction during an electrical shortage that causes conditions such as

dim lights.

Bus - An electrical conductor which serves as a common connection for two or more

electrical circuits.

Capacity - The load for which a generating unit, generating station or other electrical

apparatus is rated by the user or the manufacturer.

Circuit Breaker - A switch that opens an electric circuit when a short occurs.

Conductor - Any substance, usually metallic, that will carry electricity.

Degree Day - A unit measuring the extent to which the average daily temperature varies

from a standard reference temperature. Based on a reference temperature of 65 degrees

Fahrenheit, if the average temperature (high plus low divided by 2) for a day is 70, then there

are five cooling degree days for that day. Likewise, if the average temperature was 60, then

there were five heating degree days. This historical information can be used for forecasting

system load and planning unit maintenance outages, to name a few.

xviii

Electric Utility Terms (continued)

Delivery Point - The point, usually a substation, to which electricity is transmitted from its

generating sources.

Demand - The rate at which electric energy is delivered to a system. The primary source of

demand is the power consuming equipment of the customers.

Depreciation - Charges made against income to equitably distribute the cost of the decrease

in plant value during the period when services are obtained from use of the facilities. The

decrease in plant value is caused by wear, deterioration or obsolescence.

Deregulation - Movement of an industry from one of monopolistic entities or environments

to one free market enterprise; in the electric industry this involves elimination of service area

and rate restrictions and obligation to serve; results in distributor choice of supplier and

eventually customer choice of supplier.

Dispatching - The control of an electric system involving switching substations,

transmission/distribution lines and other equipment. Monitoring and operating the SCADA

system. Dispatching crews for emergencies and maintaining a log of work locations and

purpose for outside crews.

Distribution System - A system that enables delivering electric energy at 2.4 kV to 25 kV

from convenient points (substations) on the transmission system to the customers.

Earth Coupled Heat Pump - An efficient electrical device that heats or cools by moving

heat into or out of a building. It uses an antifreeze solution or refrigerant in a pipe buried in

the ground to collect or disperse heat. Also called geothermal system, ground source heat

pump or water source heat pump.

Easement - A right obtained from property owners that allows utility companies to construct,

operate, maintain, and control facilities such as transmission lines on the property.

Eminent Domain - The right of government to take, or to authorize the taking of, private

property for public use, just compensation usually being given to the owner.

Electric Current - The flow of electric charge in a conductor between two points having a

difference in potential, generally expressed in amperes.

Electric and Magnetic Fields (EMF) - Radiation surrounding conductors that carry

electricity - present wherever electric power is being used.

Fault - A point of defect in an electric circuit that prevents the current from following the

intended course.

Insulator - A non conductor, usually of glass or porcelain, for insulating and supporting

electric wires.

Kilowatt - The basic unit of electric demand, equal to 1,000 watts - average household

demand is 10 to 20 kilowatts.

Kilowatt Hour - A unit of energy or work equal to 1,000 watt-hours. The basic measure of

electric energy generation or use. A 100-watt light bulb burning for 10 hours uses one

kilowatt hour.

xix

Electric Utility Terms (continued)

Load - The amount of electric power delivered or required at any specified point on a

system. Load originates at the power consuming equipment of the customers.

Load Factor - The ratio of the average load in kilowatts supplied during a designated period

to the peak load in kilowatts occurring in that period.

Load Management - A program used by an electric utility to control its customers’ use of

electricity during times when their demand for electricity is high. Can involve reducing

voltage or cutting off air conditioners or water heaters for short periods by remote control.

Losses - Power (kilowatts) and energy (kilowatt hours) lost during the operation of an

electric system. Losses occur principally when energy is transformed into waste heat in

conductors and other electrical apparatus.

Megawatt - 1,000 kilowatts or 1,000,000 watts.

Megawatt Hour - 1,000 kilowatt hours.

Peak Demand - The maximum rate at which electric energy is delivered to or by a system

during a specific period of time.

Power Factor - The ratio of real power (kilowatts) to apparent power (kilovolt-amperes) for

any given load and time.

Power Theft - Tampering with a meter to lower electric bills which is a dangerous and

illegal act.

Ratchet - An electric rate charge based on the exceptional load of a seasonal peak in respect

to the other seasons.

SCADA - Supervisory Control Data Acquisition System - Through a master station

comprised of the equipment and computer software, SCADA provides instantaneous

substation monitoring and control in addition to complete system status such as electric load,

voltage levels and interruptions of service. Data also includes system kilowatt hours,

amperage on each feeder phase, voltage on each phase, substation kilowatt hours and

instantaneous kilowatt demand by substation or transformer bank. It includes data used for

system planning, emergency switching and system maintenance.

Substation - An assemblage of equipment that enables switching and/or changing or

regulating the voltage of electricity.

Transformer - A device to change the voltage of alternating current electricity.

Transmission System - The system that transports electric energy in bulk form - usually in

high voltage - from a source of supply to the distribution systems or other major parts of the

electric system.

Volt - The force when steadily applied to a circuit having a resistance of one ohm, will

produce a current of one ampere.

Watt - The electrical unit of power or the rate of doing work. The rate of energy transfer

equivalent to one ampere flowing under a pressure of one volt at unity power factor. One

horsepower is equivalent to approximately 746 watts.

xx

Deregulation Dictionary

The following are terms that you may encounter when reading about deregulation in the

electric utilities industry.

Access Charge - a charge levied on a power supplier, or its customer, for access to a utility's

transmission or distribution system. It is a charge for the right to send electricity over

another's wires.

Aggregator - an entity that combines the needs of several smaller customers into a larger

block of power in order to get a better price.

Capacity - the amount of electricity for which a generating plant or transmission system is

rated.

Commercial Customer - non-manufacturing business customer.

Customer Choice - allows retail customers to select the power supplier or generator they

buy electricity from.

Demand - the amount of power a customer takes at a given moment.

Direct Access - the ability of an electric end-user to connect directly with a power supplier,

thus bypassing its local utility.

Distribution System - local delivery system of electricity to the retail customer's home or

business through distribution lines. BTES is a distribution system.

Electric Cooperative - a member-owned electric utility company that distributes electricity

on a nonprofit basis. Example: Mountain Electric Cooperative.

Federal Energy Regulatory Commission (FERC) - the agency that has jurisdiction over

natural gas pricing, hydroelectric licensing, oil pipeline rates and gas pipeline certification.

Generation Company (genco) - an entity that operates electricity-generating plants. The

genco may own the generation plants or interact with short-term marketers on behalf of plant

owners.

Independent Power Producer (IPP) - a private entity that generates electricity and sells it

to other businesses, including utilities.

Independent System Operator (ISO) - the independent operator of a transmission system,

responsible for guaranteeing open access, scheduling, system reliability and accounting.

Industrial Customer - business customer engaged in manufacturing.

Investor-owned Utility (IOU) - a stockholder-owned power company that generates and

distributes electric energy for profit. Example: American Electric Power.

Municipal - electric distribution system owned by a city to provide service for its residents.

Example: BTES.

Non-power Services - includes such services as gas, home security and telecommunications.

Power Marketer - an entity that provides bulk wholesale power for use at a specific place

and time. The marketer may or may not generate the power. Example: Cinergy.

Regional Transmission Organization (RTO) - FERC Order 2000 requires all investor-

owned utilities to consider joining a RTO.

xxi

Deregulation Dictionary (continued)

Retail Wheeling - a system in which individual retail electric customers are allowed to

choose their electric supplier. Also known as retail competition.

Service Area - the geographic region that a utility is required to serve, or has the exclusive

right to serve, in supplying electricity to the ultimate consumer.

Stranded Costs - costs of a utility that have already been legitimately and prudently incurred

that are not economically viable in a competitive market.

Tennessee Valley Authority - generation and transmission company supplying power to 158

electric utilities in a seven-state region including Tennessee.

Transmission System - all the lines, poles and other equipment used to move bulk electricity

from a generating plant to a distribution system.

Unbundling - separating the costs of operations of generation, transmission and distribution

of electricity. An unbundled electric bill would list all costs associated with providing

electricity to the consumer.

Wheeling - transmitting bulk electricity from a generating plant to a distribution system

across a third system's lines.

Wheeling Charge - an amount charged to an electric system by another for the transmission

of energy to and from another system.

Wholesale Customer - a power purchaser that buys for resale to retail customers. Example:

BTES.

Source: Tennessee Magazine

xxii

Glossary of Broadband Terms

3G – Third Generation: Intended to be the next great wireless technology, wideband mobile

services and applications offering users faster access to the web.

ADSL - Asymmetric Digital Subscriber Line: DSL service with a larger portion of the

capacity devoted to downstream communications, less to upstream. Typically thought of as a

residential service.

ATM – Asynchronous Transfer Mode: A data service offering by ASI, that can be used for

interconnection of customer’s LAN. ATM provides service from 1 Mbps to 145 Mbps

utilizing Cell Relay Packets.

Bandwidth – The amount of data transmitted in a given amount of time; usually measured in

bits per second, kilobits per second, and megabits per second.

Bit – A single unit of data, either a one or a zero. In the world of broadband, bits are used to

refer to the amount of transmitted data. A kilobit (Kb) is approximately 1,000 bits. A megabit

(Mb) is approximately 1,000,000 bits.

BPL – Broadband Over Powerline: A theoretical technology that would provide broadband

service over existing electrical power lines.

BPON – Broadband Passive Optical Network: BPON is a point-to-multipoint fiber-lean

architecture network system which uses passive splitters to deliver signals to multiple users.

Instead of running a separate strand of fiber from the CO to every customer, BPON uses a

single strand of fiber to serve up to 32 subscribers.

Broadband – A descriptive term for evolving digital technologies that provide consumers

with integrated access to voice, high-speed data service, video-demand services, and

interactive delivery services (e.g. DSL, Cable Internet).

CAP – Competitive Access Provider: (or “Bypass Carrier”) A Company that provides

network links between the customer and the Inter-Exchange Carrier or even directly to the

Internet Service Provider. CAPs operate private networks independent of Local Exchange

Carriers.

Cellular – A mobile communications system that uses a combination of radio transmission

and conventional telephone switching to permit telephone communications to and from

mobile users within a specified area.

CLEC – Competitive Local Exchange Carrier: Wireline service provider that is authorized

under state and Federal rules to compete with ILECs to provide local telephone service.

CLECs provide telephone services in one of three ways or a combination thereof: a) by

building or rebuilding telecommunications facilities of their own, b) by leasing capacity from

another local telephone company (typically an ILEC) and reselling it, and c) by leasing

discreet parts of the ILEC network referred to as UNEs.

CO – Central Office: A circuit switch where the phone lines in a geographical area come

together, usually housed in a small building.

Coaxial Cable – A type of cable that can carry large amounts of bandwidth over long

distances. Cable TV and cable modem service both utilize this technology.

xxiii

Glossary of Broadband Terms (continued)

CWDM – Coarse Wavelength Division Multiplexing (WDM): is generally held to be WDM

with less than 8 active wavelengths per fiber.

Dial-Up – A technology that provides customers with access to the Internet over an existing

telephone line.

DLEC – Data Local Exchange Carrier: DLECs deliver high-speed access to the Internet, not

voice. DLECs include Covad, Northpoint and Rhythms.

Downstream – Data flowing from the Internet to a computer (Surfing the net, getting E-mail,

downloading a file).

DSL – Digital Subscriber Line: The use of a copper telephone line to deliver “always on”

broadband Internet service.

DSLAM – Digital Subscriber Line Access Multiplier: A piece of technology installed at a

telephone company’s CO and connects the carrier to the subscriber loop (and ultimately the

customer’s PC).

DWDM – Dense Wavelength Division Multiplexing (WDM): A SONNET term which is the

means of increasing the capacity of Sonet fiber-optic transmission systems.

E-Rate – A Federal program that provides subsidy for voice and data lines to qualified

schools, hospitals, CBOs, and other qualified institutions. The subsidy is based on a

percentage designated by the FCC. CTF benefits are calculated net of the E-rate subsidy.

EON – Ethernet Optical Network: The use of Ethernet LAN packets running over a fiber

network.

EvDO – Evolution Data Only: EvDO is a new wireless technology that provides data

connections that are 10 times as fast as a regular modem.

FCC – Federal Communications Commission: A Federal regulatory agency that is

responsible, among other things, of regulating VoIP.

FTTN – Fiber To The Neighborhood: A hybrid network architecture involving optical fiber

from the carrier network, terminating in a neighborhood cabinet with converts the signal

from optical to electrical.

FTTP – Fiber To The Premise (Or FTTB – Fiber To The Building): A fiber optic system that

connects directly from the carrier network to the user premises.

GPON - Gigabyte-Capable Passive Optical Network: GPON uses a different, faster approach

(up to 2.5 Gbit/s in current products) than BPON.

GPS – Global Positioning System: A system using satellite technology that allows an

equipped user to know exactly where he is anywhere on earth.

GSM – Global System for Mobile Communications: This is the current radio/telephone

standard in Europe and many other countries except Japan and the United States.

HFC – Hybrid Fiber Coaxial Network: An outside plant distribution cabling concept

employing both fiber optic and coaxial cable.

IEEE - Institute of Electrical and Electronics Engineers

xxiv

Glossary of Broadband Terms (continued)

ILEC – Incumbent Local Exchange Carrier: The traditional wireline telephone service

providers within defined geographic areas. Prior to 1996, ILECs operated as monopolies

having the exclusive right and responsibility for providing local and local toll telephone

service within LATAs.

IP-VPN – Internet Protocol -Virtual Private Network: A software-defined network offering

the appearance, functionality and usefulness of a dedicated private network

ISDN – Integrated Services Digital Network: An alternative method to simultaneously carry

voice, data and other traffic, using the switched telephone network.

ISP – Internet Service Provider: A company providing Internet access to consumers and

businesses, acting as a bridge between customer (end-user) and infrastructure owners for

dial-up, cable modem and DSL services.

Kbps – Kilobits per second: 1,000 bits per second. A measure of how fast data can be

transmitted.

LAN – Local Area Network: A geographically localized network consisting of both

hardware and software. The network can link workstations within a building or multiple

computers with a single wireless Internet connection.

LATA – Local Access and Transport Areas: A geographic area within with a divested

Regional Bell Operating Company is permitted to offer exchange telecommunications and

exchange access service. Calls between LATAs are often thought of as longs distance

service. Calls within a LATA (IntraLATA) typically include local and local toll services.

Local Loop – A generic term for the connection between the customer’s premises (home,

office, etc.) and the provider’s serving central office. Historically, this has been a wire

connection; however, wireless options are increasingly available for local loop capacity.

MAN – Metropolitan Area Network: A high-speed date intra-city network that links multiple

locations with a campus, city or LATA. A MAN typically extends as far as 50 kilometers.

Mbps – Megabits per second: 1,000,000 bits per second. A measure of how fast data can be

transmitted.

Overbuilders – Building excess capacity. In this context, it involves investment in additional

infrastructure project to provide competition.

OVS – Open Video Systems: OVS is a new option for those looking to offer cable television

service outside the current framework of traditional regulation. It would allow more

flexibility in providing service by reducing the build out requirements of new carriers.

PON – Passive Optical Network: A Passive Optical Network consists of an optical line

terminator located at the Central Office and a set of associated optical network terminals located

at the customer’s premise. Between them lies the optical distribution network comprised of fibers

and passive splitters or couplers. In a PON network, a single piece of fiber can be run from the

serving exchange out to a subdivision or office park, and then individual fiber strands to each

building or serving equipment can be split from the main fiber using passive splitters / couplers.

This allows for an expensive piece of fiber cable from the exchange to the customer to be shared

amongst many customers thereby dramatically lowering the overall costs of deployment for fiber

to the business (FTTB) or fiber to the home (FTTH) applications.

xxv

Glossary of Broadband Terms (continued)

Right-of-Way – A legal right of passage over land owned by another. Carriers and service

providers must obtain right-of-way to dig trenches or plant poles for cable systems, and to

place wireless antennae.

RPR – Resilient Packet Ring: RPR uses Ethernet switching and a dual counter-rotating ring

topology to provide SONET-like network resiliency and optimized bandwidth usage, while

delivering multi-point Ethernet/IP services.

RUS – Rural Utility Service: A division of the United States Department of Agriculture, it

promotes universal service in unserved and underserved areas of the country with grants,

loans, and financing.

SONNET – Synchronous Optical Network: A family of fiber-optic transmission rates.

Streaming – A Netscape innovation that downloads low bit text data first, then the higher bit

graphics. This allows users to read the text of an Internet document first, rather than wait for

the entire file to load.

Subscribership – Subscribership is how many customers have subscribed for a particular

telecommunications service.

Switched Network – A domestic telecommunications network usually accessed by

telephones, key telephone systems, private branch exchange trunks, and data arrangements.

T-1 – Trunk Level 1: A digital transmission link with a total signaling speed of 1.544 Mbps.

It is a standard for digital transmission in North America.

T-3 – Trunk Level 3: 28 T1 lines or 44.736 Mbps.

UNE – Unbundled Network Elements: Leased portions of a carrier’s (typically an ILEC’s)

network used by another carrier to provide service to customers.

Universal Service – The idea of providing every home in the United States with basic

telephone service.

Upstream – Data flowing from your computer to the Internet (sending E-mail, uploading a

file).

VDSL – Very High Data Rate Digital Subscriber Line: A developing technology that

employs an asymmetric form of ADSL, with projected speeds of up to 155 Mbps.

Video On Demand – A service that allows users to remotely choose a movie from a digital

library and be able to pause, fast-forward, or even rewind their selection.

VLAN – Virtual Local Area Network

VoIP – Voice Over Internet Protocol: A new technology that employs a data network (such

as a broadband connection) to transmit voice conversations.

VPN – Virtual Private Network: VPN is a network that is constructed by using public wires

to connect nodes. For example, there are a number of systems that enable you to create

networks using the Internet as the medium for transporting data. These systems use

encryption and other security mechanisms to ensure that only authorized users can access the

network and that the data cannot be intercepted.

xxvi

Glossary of Broadband Terms (continued)

WiMax - WiMax is a wireless technology that provides high-throughput broadband

connections over long distances. WiMax can be used for a number of applications, including

"last mile" broadband connections, hotspot and cellular backhaul, and highspeed enterprise

connectivity for businesses.

Wireless – Telephone service transmitted via cellular, PCS, satellite, or other technologies

that do not require the telephone to be connected to a land-based line.

Wireless Internet – 1) Internet applications and access using mobile devices such as cell

phones and palm devices. 2) Broadband Internet service provided via wireless connection,

such as satellite or tower transmitters.

Wireline – Service based on infrastructure on or near the ground, such as copper telephone

wires or coaxial cable underground or on telephone poles.

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ConnectKentucky

1

Report of Independent Auditors

Board of Directors

Bristol Tennessee Essential Services

We have audited the accompanying financial statements of Bristol Tennessee Essential Services

(“BTES”), an enterprise fund of the City of Bristol, Tennessee, as of and for the years ended

June 30, 2011 and 2010, as listed in the table of contents. We also have audited the Bristol

Tennessee Essential Services Post Employment Benefits Trust (the “Trust”), a fiduciary fund of

the City of Bristol, Tennessee, as of and for the years ended June 30, 2011 and 2010, as

displayed in the basic financial statements. These financial statements are the responsibility of

BTES’ management. Our responsibility is to express an opinion on these financial statements

based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United

States of America and the standards applicable to financial audits contained in Government

Auditing Standards, issued by the Comptroller General of the United States of America. Those

standards require that we plan and perform the audit to obtain reasonable assurance about

whether the financial statements are free of material misstatement. An audit includes examining,

on a test basis, evidence supporting the amounts and disclosures in the financial statements. An

audit also includes assessing the accounting principles used and significant estimates made by

management, as well as evaluating the overall financial statement presentation. We believe that

our audits provide a reasonable basis for our opinion.

As discussed in Note 1, the financial statements present only BTES and the Trust and do not

purport to, and do not, present fairly the financial position of the City of Bristol, Tennessee, as of

June 30, 2011 and 2010, and the changes in its financial position, or, where applicable, its cash

flows for the year then ended in conformity with accounting principles generally accepted in the

United States of America.

In our opinion, the financial statements referred to above present fairly, in all material respects,

the financial position of Bristol Tennessee Essential Services as of June 30, 2011 and 2010, and

the changes in financial position and cash flows thereof for the years then ended in conformity

with accounting principles generally accepted in the United States of America. In addition, in our

opinion, the financial statements referred to above present fairly, in all material respects, the

financial position of the Bristol Tennessee Essential Services Post Employment Benefits Trust as

of June 30, 2011 and 2010, and the changes in financial position for the years then ended in

conformity with accounting principles generally accepted in the United States of America.

In accordance with Government Auditing Standards, we have also issued our report dated

November 7, 2011, on our consideration of BTES’ and the Trust’s internal control over financial

reporting and on our tests of its compliance with certain provisions of laws, regulations,

contracts, and grant agreements and other matters. The purpose of that report is to describe the

scope of our testing of internal control over financial reporting and compliance and the results of

that testing, and not to provide an opinion on the internal control over financial reporting or on

compliance. That report is an integral part of an audit performed in accordance with Government

Auditing Standards and important for assessing the results of our audit.

Board of Directors

Bristol Tennessee Essential Services

2

Accounting principles generally accepted in the United States of America require that the

management’s discussion and analysis and schedule of funding progress on pages 3 through 12

and 44 through 45 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 measurement about the methods of preparing the

information and comparing the information for consistency with management’s response 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 assurance on the information

because the limited procedures do not provide us with sufficient evidence to express an opinion

or provide any assurance.

Our audits were conducted for the purpose of forming an opinion on the financial statements that

collectively comprise BTES’ and the Trust’s basic financial statements. The introductory section,

state schedules section, and statistical section are presented for purposes of additional analysis

and not required parts of the basic financial statements. The state schedules section is the

responsibility of management and was derived from and relate directly to the underlying

accounting and other records used to prepare the financial statements. The information has been

subjected to the auditing procedures applied in the audit of the financial statements and certain

additional procedures, including comparing and reconciling such information directly to the

underlying accounting and other records used to prepare the financial statements or to the

financial statements themselves, and other addition 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 financial statements as a whole. The

introductory and statistical sections have not been subjected to the auditing procedures applied in

the audit of the basic financial statements and, accordingly, we express no opinion or provide

any assurance on them.

Coulter & Justus, P.C.

Knoxville, Tennessee

November 7, 2011

3

Bristol Tennessee Essential Services

Management’s Discussion and Analysis

June 30, 2011

This discussion and analysis is intended to be an introduction to the financial statements

and notes that follow this section and should be read in conjunction with them. This section

will provide narrative discussion and analysis of the financial activities of BTES. The

financial performance of BTES is discussed and analyzed within the context of the

accompanying financial statements and disclosures following this section. The Introductory

Section covers management’s letter of transmittal and other BTES information.

Financial Statement Overview

The financial statements herein are comprised of the Balance Sheets, the Statements of

Revenues, Expenses and Changes in Net Position, the Statements of Cash Flows and the

accompanying Notes to Financial Statements.

The Statements of Net Position include the assets and liabilities of BTES that represent the

available resources and required obligations, with the difference reported as net position.

The change in net position is a potential indicator of the improving or deteriorating

financial position of BTES. The change in net position is a function of the revenues and

expenses, which are recorded in the Statements of Revenues, Expenses, and Changes in

Net Position. Revenues are recorded as they are earned and expenses are recorded when

incurred (regardless of cash requirements). Cash activity for the period is presented in the

Statements of Cash Flows and the activity is segmented between operating, investing, and

financing activities. In addition, the Notes to the Financial Statements provides additional

information to provide a full understanding of the financial activity and position of BTES.

BTES is a self-supporting enterprise of the City of Bristol, Tennessee operated under the

general supervision and control of a five-member Board of Directors as per Chapter 32

Public Acts of Tennessee 1935. BTES issues a comprehensive annual financial report

which is incorporated in the City’s comprehensive annual financial report.

Operating Highlights

Net Position and Capital Assets

As indicated in Table 1, net position continues to increase as a result of positive operations

sufficient to support transfers and interest expense.

4

Management’s Discussion and Analysis (continued)

Table 1

2011 2010 2009

Current and other assets 36,202,188$ 32,881,092$ 32,923,094$

Capital assets net of accumulated depreciation 77,858,917 78,084,671 74,900,953

Total assets 114,061,105 110,965,763 107,824,047

Current liabilities 7,389,569 11,691,696 13,067,795

Other Accrued Liabilites 319,075 595,607 489,039

Bonds Payable 21,920,614 22,438,976 22,938,551

Total liabilities 29,629,258 34,726,279 36,495,385

Net position:

Invested in capital assets 55,433,303 53,974,367 51,492,401

Unrestricted 28,998,544 22,265,117 19,836,261

Total net position 84,431,847$ 76,239,484$ 71,328,662$

Bristol Tennessee Essential Services

Condensed Balance Sheet

June 30,

During the year, gross capital assets increased by $3,388,763 or 3%. The change in capital

additions over the past two years is a result of build out of the fiber backbone and fiber to

the home system. Refer to the Note 1 on Page 23 and Note 8 on Page 27 for more

information regarding capital assets.

5

Management’s Discussion and Analysis (continued)

Table 2

Net of Net of

Acummulated Acummulated

2011 Depreciation 2010 Depreciation

Transmission Plant

Land and land rights 94,696$ 94,696$ 94,696$ 94,696$

Station equipment 2,823,268 886,301 2,823,268 999,560

Total Transmission Plant

2,917,964 980,997 2,917,964 1,094,256

Distribution Plant

Land & land rights 881,765 881,765 855,111 855,111

Structures & improvments 862,742 53,439 862,742 81,764

Station equipment 12,141,863 2,620,288 11,930,652 2,648,873

Poles, towers, and fixtures 14,244,533 5,073,456 14,031,079 5,340,983

Overhead conductors and devices 7,237,042 2,082,843 7,128,205 2,125,051

Underground conduit 1,174,453 321,960 1,158,243 328,720

Underground conductors and devices 4,156,067 784,610 3,983,321 752,012

Line transformers 12,560,054 5,545,250 12,377,629 5,658,425

Services 3,482,052 1,108,929 3,337,260 1,068,678

Meters 4,167,915 2,462,452 4,065,754 2,436,129

Installation on customers' premises 1,089,559 (133,360) 1,076,633 (168,811)

Street lighting and signal systems 3,308,871 476,666 3,151,728 371,462

Total Distribution Plant

65,306,915 21,278,299 63,958,357 21,498,397

General Plant

Land and land rights 101,831 101,831 101,831 101,831

Structures and Improvements 1,158,943 578,423 1,158,943 576,817

Office Furniture and Equipment 787,557 470,479 787,557 491,086

Transportation Equipment

2,456,423 1,085,759 2,020,382 518,944

Stores Equipment 24,143 1,718 24,143 1,718

Tools, shop, and garage equipments 131,389 10,133 131,383 10,127

Laboratory equipment 104,035 5,965 104,035 5,964

Power operated equipment 104,946 10,203 104,946 10,203

Communication equipment 58,115,505 51,987,386 54,854,191 50,770,448

Miscellanceous equipment 43,407 3,653 43,407 3,652

Total General Plant

63,028,179 54,255,549 59,330,818 52,490,790

Total Utility Plant in Service 131,253,059 76,514,846 126,207,139 75,083,443

Construction work in progress 1,092,637 1,092,637 2,750,894 2,750,894

Non-utility property 251,434 251,434 250,334 250,334

Total Capital Assets All Sources

132,597,130 77,858,917 129,208,367 78,084,671

Years ended June 30,

Bristol Tennessee Essential Services

Capital Assets

6

Management’s Discussion and Analysis (continued)

Table 3

Bristol Tennessee Essential Services

Additions and Retirements to Utility Plant in Service

Years ended June 30,

2011 2010

Plant in service beginning 125,155,502$ 119,988,458$

Increases 5,649,833 5,800,885

Decreases 630,566 633,841

Plant in service ending 130,174,769$ 125,155,502$

Note: Plant in service does not include land, non-utility property or construction work in progress

Results of Operations

As indicated in Table 4, the net position of BTES increased by $8,192,363 from fiscal year

2010 to 2011 and increased by $4,910,822 from fiscal year 2009 to 2010. Operating revenues

were principally derived from retail sales of electricity. Temperature throughout the year has

historically been a main driver of electric sales. In addition, the Fuel Cost Adjustment has

fluctuated monthly since October 2009 and was negative for 8 months in fiscal year 2010. In

fiscal year 2011, the Fuel Cost Adjustment was positive and resulted in an increase in

purchased power expense and increased revenue as compared to the previous fiscal year.

After accounting for the differences related to the Fuel Cost Adjustment, revenue rose in

relation to electric sales. In 2006 cable and Internet revenue was added as a form of operating

revenue, and in 2007 telephone was added as a form of operating revenue. Revenues from

these sources continue to grow as our subscriber base grows. See Figures 1, 2 and 3. As

shown in Table 4, the internal tax equivalent payments made to the City of Bristol,

Tennessee are reported as transfers.

7

Management’s Discussion and Analysis (continued)

Table 4

Bristol Tennessee Essential Services

Condensed Statement of Revenues, Expenses and Changes in Net Position

Years ended June 30,

2011 2010 2009

Revenues:

Power revenues:

Residential 44,671,055$ 37,557,979$ 42,051,413$

Commercial (general power - under 50 kw) 5,864,765 5,086,485 5,567,336

Industrial ( general power - 50 kw and over) 34,338,102 29,831,995 33,840,683

Street and outdoor lighting 1,284,120 1,182,331 1,269,807

Total power revenues 86,158,042 73,658,790 82,729,239

Cable revenues 6,660,565 5,763,092 4,405,446

Internet revenues 4,380,089 3,571,391 2,321,562

Telephone revenues 3,335,118 2,894,491 2,458,309

Other revenues 4,242,531 3,402,534 3,387,662

Non-operating revenues:

Interest income 502,266 589,533 816,209

Plant cost recovered through contributions in aid

of construction (955,201) (368,800) (557,276)

Total Revenues 104,323,410 89,511,031 95,561,151

Expenses:

Purchased power 75,426,055 64,460,545 74,785,352

Cable programing 4,406,643 3,601,999 2,619,886

Internet cost of sales 233,413 160,521 158,416

Telephone cost of sales 587,333 518,424 442,856

Operation expenses 4,659,765 4,581,593 4,042,459

Maintenance 4,104,859 4,636,085 4,129,790

Depreciation 4,092,948 3,583,004 3,387,977

506,799 489,528 407,073

Social security taxes 293,771 291,766 275,326

12,970 11,047 11,047

Interest expense on bonds payable 982,807 998,144 1,013,180

Amortization of bond issue costs 10,618 11,583 11,583

Total expenses 95,317,981 83,344,239 91,284,945

Income before transfers and taxes 9,005,429 6,166,792 4,276,206

State income tax 121,841 66,352 44,105

Transfers out - tax equivalents to City of Bristol 1,646,426 1,558,418 1,444,412

Contributions in aid of construction 955,201 368,800 557,276

Changes in net position 8,192,363 4,910,822 3,344,965

Beginning net position 76,239,484 71,328,662 67,983,697

Ending net position 84,431,847$ 76,239,484$ 71,328,662$

Tax equivalents

Interest expense on customer deposits

8

Management’s Discussion and Analysis (continued)

Figure 1

Figure 2

Cable & Internet

10.5%

Telephone

3.2%

Residential

Pow er

42.1%

Commercial Pow er

5.7%

Industrial Pow er

33.4%

Street & Outdoor

Lighting

1.3%

Other Revenues

3.8%

Operating Revenues 2010

9

Management’s Discussion and Analysis (continued)

Figure 3

Cable & Internet

7.1%

Telephone

2.6%

Residential

Pow er

44.1%

Commercial Pow er

5.8%

Industrial Pow er

35.5%

Street & Outdoor

Lighting

1.3%

Other Revenues

3.6%

Operating Revenues 2009

Operating expenses, not including purchased power and cost of sales for cable, Internet and

telephone continues to increase, as indicated in Figure 4 as a result of additional services

being provided to an increased number of customers.

Figure4

10

Management’s Discussion and Analysis (continued)

As indicated in Figure 5, purchased power costs were $75,426,055 in 2011 as compared to

$64,460,545 in 2010, resulting in a 17% increase. Temperature is a main driver; however

the Fuel Cost Adjustment was negative for 8 months in fiscal year 2010. This followed a

16.28% increase in October 2008 and is now being adjusted monthly to try to avoid large

fluctuations. Refer to Results of Operation on Page 6 regarding fluctuation in the Fuel Cost

Adjustment.

Figure 5

Power Rates

BTES purchases its entire year power supply requirements from Tennessee Valley

Authority (“TVA”). Rate options available to BTES’ retail customers include firm, Time

Differentiated Hours of Use (TDHUD) and Seasonal Demand and Energy (SDE) rates. The

contract between TVA and BTES provides for TVA regulation over retail rates to

customers.

The TDHUD and SDE rates provide an opportunity for large customers to pay lower rates

for electric usage in non-peak hours than in peak hours. BTES has three customers on the

TDHUD rate and two customers on the SDE rate. Rate surveys show that BTES’ rates are

some of the most competitive in the U.S.

11

Management’s Discussion and Analysis (continued)

Deregulation

Over the last few years, Congress has been debating legislation to restructure the electric

utility industry. Because of TVA’s unique situation, deregulation and competition at both

national and state levels are moving more slowly to the Tennessee Valley. Under the

existing law, TVA is the exclusive supplier of power within its statutorily defined service

territory, an 80,000 square-mile area that includes virtually the entire state of Tennessee

and parts of Kentucky, Mississippi, Alabama, Georgia, North Carolina and Virginia. BTES

is shielded from competition until federal restructuring addresses the current law. BTES

continues to be involved in the restructuring effort individually and also as a member of the

Tennessee Valley Public Power Association, the American Public Power Association,

Tennessee Municipal Electric Power Association and the State of Tennessee Legislature.

Debt

On July 27, 2005, BTES issued $23,910,000 in Electric Revenue Bonds, Series 2005 for

the purpose of financing improvements to BTES’ system and pre-purchasing electrical

power from TVA. The bonds are limited obligations of BTES payable solely from the net

revenues of BTES.

The activity in the bond liability for 2010 and 2011 represents the scheduled principal

payments. Refer to the Note 10 on Page 29 for more information regarding long term debt.

Payment In Lieu of Taxes

BTES makes an in-lieu-of-tax payment to the municipalities and counties in which it sells

power and has utility plant. For the City of Bristol, Tennessee, City of Bluff City,

Tennessee and Sullivan County, Tennessee, the in-lieu-of-tax payment is based on the

formula provided by the State of Tennessee Municipal Electric System Tax Equivalent

Law of 1987. The formula includes a property tax equivalency calculation plus 4% of

operating revenue less power costs (three-year average). For Washington County, Virginia

the in-lieu-of-tax payment is based on the real property tax rate of the utility plant.

For fiscal year 2011, BTES made in-lieu-of-tax payments to the City of Bristol, Tennessee

(treated as transfers) in the amount of $1,646,426. For Sullivan County, Tennessee, Bluff

City, Tennessee and Washington County, Virginia BTES made in-lieu-of-tax payments for

fiscal year 2011 in the amount of $491,210.

Non-Operating Revenue

Interest from investments decreased from $589,533 in 2010 to $502,266 in 2011, resulting

in an approximate 17.4% decrease due to lower interest rates and reduction of cash through

capital asset acquisitions. As shown in Table 4, interest from investments is categorized as

non-operating revenue. BTES continues to look for ways to maximize their earnings, such

as the TVA’s Discounted Energy Units Program discussed below.

12

Management’s Discussion and Analysis (continued)

Discounted Energy Units (DEU) Program

BTES invested $8,000,000 in TVA’s Discounted Energy Units (“DEU”) Program in

December 2003. The goal of the DEU Program is to create a financial partnership between

TVA and its distributors, such as BTES, to help finance the re-start of the Browns Ferry

Unit One power generator. This facility uses nuclear fuel to generate electricity. The

potential benefits for BTES are to ensure a reliable, low-cost power supply and provide a

vehicle to better use operating cash and improve working capital liquidity. This program

provides BTES discounted monthly electric purchases that are equal to the monthly

principle and interest payments. The discount rate is 5.5% and has a term of 10 years.

BTES may borrow against part of the DEU investment in emergency situations, if needed.

For fiscal years 2011 and 2010, BTES recognized $110,530 and $160,378, respectively, in

interest income from the amortization of the DEUs which is included in non-operating

revenues discussed above.

2011 2010

Assets

Current assets:

Cash and cash equivalents

$ 8,574,079

$ 8,260,242

Accounts receivable:

Trade

7,373,202

6,378,649

Other

837,641

742,309

Allowance for bad debt

(707,095)

(619,563)

Net accounts receivable

7,503,748

6,501,395

Accrual for unbilled revenues

3,318,744

2,992,197

Due from City of Bristol, TN

181,324

54,307

Materials and supplies inventories

1,204,776

1,067,125

Current portion of customer notes receivable

440,000

410,000

Current portion of discounted energy units

986,131

933,485

Current portion of prepaid expense

1,100,000

-

Other current assets

163,801

127,437

Total current assets

23,472,603

20,346,188

Noncurrent assets:

Capital assets:

Capital assets in service

131,253,059

126,207,139

Less accumulated depreciation

(54,738,213)

(51,123,696)

76,514,846

75,083,443

Construction in progress

1,092,637

2,750,894

Non-utility property

251,434

250,334

Net capital assets

77,858,917

78,084,671

Other assets:

Long-term investments

8,000,000

Prepaid pension cost

397,822

453,279

Prepaid expense, less current portion

1,100,000

-

Customer notes receivable, less current portion

2,427,430

2,280,558

Discounted energy units, less current portion

513,778

1,499,894

Unamortized bond issue costs

290,555

301,173

Total other assets

12,729,585

12,534,904

Total noncurrent assets

90,588,502

90,619,575

Total assets

$ 114,061,105

$ 110,965,763

Bristol Tennessee Essential Services

Balance Sheets

June 30, 2011 and 2010

June 30

13

2011 2010

Liabilities and net assets

Current liabilities:

Trade accounts payable

2,535,342$

7,083,466$

Customer deposits and prepayments

2,143,249

2,078,716

Due to City of Bristol, TN

45,016

41,459

Interest payable

332,946

335,775

Deferred revenue

594,362

523,152

Other accrued liabilities

1,233,654

1,144,128

Current portion of bonds payable

505,000

485,000

Total current liabilities

7,389,569

11,691,696

Other noncurrent accrued liabilities

319,075

595,607

Bonds payable, less current portion

21,920,614

22,438,976

Total liabilities

29,629,258

34,726,279

Net position:

Net investment in capital assets

55,433,303

53,974,367

Unrestricted

28,998,544

22,265,117

Total net position

84,431,847

76,239,484

Total liabilities and net position

114,061,105

$

110,965,763

$

See accompanying Notes to Financial Statements.

Bristol Tennessee Essential Services

Balance Sheets (continued)

June 30, 2011 and 2010

June 30

14

2011 2010

Operating revenues:

Power revenues:

Residential

$ 44,671,055

$ 37,557,979

Commercial (general power - under 50 kw)

5,864,765

5,086,485

Industrial (general power - 50 kw and over)

34,338,102

29,831,995

Street and outdoor lighting

1,284,120

1,182,331

Total power revenues

86,158,042

73,658,790

Cable revenues

6,660,565

5,763,092

Internet revenues

4,380,089

3,571,391

Telephone revenues

3,335,118

2,894,491

Other revenues

4,242,531

3,402,534

Total operating revenues

104,776,345

89,290,298

Cost of sales:

Power purchased from Tennessee Valley Authority

75,426,055

64,460,545

Cable programming expense

4,406,643

3,601,999

Internet cost of sales

233,413

160,521

Telephone cost of sales

587,333

518,424

Total cost of sales

80,653,444

68,741,489

Gross profit

24,122,901

20,548,809

Operating expenses:

Operations

4,659,765

4,581,593

Maintenance

4,286,183

4,636,085

Depreciation

4,092,948

3,583,004

Tax equivalents

491,210

489,528

Social security taxes

309,360

291,766

Interest expense on customer deposits

12,970

11,047

Total operating expenses

13,852,436

13,593,023

Operating income

10,270,465

6,955,786

Bristol Tennessee Essential Services

Statements of Revenues, Expenses and Changes in Net Position

Years ended June 30, 2011 and 2010

Year ended June 30

15

2011 2010

Nonoperating revenue (expense):

Grant income

181,324$

-$

Interest income (including $110,530 in 2011 and

$160,378 in 2010 related to amortization of

discounted energy units)

502,266

589,533

Interest expense

(982,807)

(998,144)

Amortization of bond issue costs

(10,618)

(11,583)

Plant cost recovered through contributions in aid

of construction

(955,201)

(368,800)

Income before transfers and income taxes

9,005,429

6,166,792

State income tax expense

(121,841)

(66,352)

Transfers out--tax equivalents to the City of Bristol, TN

(1,646,426)

(1,558,418)

Contributions in aid of construction

955,201

368,800

Change in net position

8,192,363

4,910,822

Net position at beginning of year

76,239,484

71,328,662

Net position at end of year

$ 84,431,847

$ 76,239,484

See accompanying Notes to Financial Statements.

Years ended June 30, 2011 and 2010

Year ended June 30

Bristol Tennessee Essential Services

Statements of Revenues, Expenses and Changes in Net Position (continued)

16

2011 2010

Cash flows from operating activities

Cash received from customers

$ 98,102,705

$ 86,668,496

Cash received from City of Bristol, TN

2,888,465

2,234,163

Cash paid to suppliers and vendors

(87,720,635)

(75,195,305)

Cash paid to employees for services

(4,009,530)

(3,906,026)

Net cash provided by operating activities

9,261,005

9,801,328

Cash flows from noncapital financing activities

Transfers to City of Bristol, TN

(1,646,426)

(1,558,418)

State income tax

(121,841)

(66,352)

Net cash used in noncapital financing activities

(1,768,267)

(1,624,770)

Cash flows from investing activities

Interest received on investments

400,563

438,422

Purchases of certificates of deposit

(27,105,906)

(31,203,351)

Sales of certificates of deposit

27,105,906

31,203,351

Net cash provided by investing activities

400,563

438,422

Cash flows from capital and related financing activities

Principal payments on bonds payable

(485,000)

(470,000)

Interest payments on bonds payable

(985,636)

(1,015,550)

Net additions to capital assets

(4,864,029)

(7,130,611)

Contributions in aid of construction

955,201

348,328

Cash paid for prepayment of capital assets

(2,200,000)

-

Net cash used in capital and related financing activities

(7,579,464)

(8,267,833)

Increase in cash and cash equivalents

313,837

347,147

Cash and cash equivalents at beginning of year

8,260,242

7,913,095

Cash and cash equivalents at end of year

$ 8,574,079

$ 8,260,242

Bristol Tennessee Essential Services

Statements of Cash Flows

Years ended June 30, 2011 and 2010

Year ended June 30

17

2011 2010

Reconciliation of operating income to net cash

provided by operating activities

Operating income

$ 10,270,465

$ 6,955,786

Adjustments to reconcile operating income to net

cash provided by operating activities:

Depreciation

4,092,948

3,583,004

Provision for losses on accounts receivable

121,247

100,330

Redemption of discounted energy units

1,044,000

Changes in operating assets and liabilities:

Accounts receivable

(1,060,466)

(1,122,275)

Accrual for unbilled revenues

(326,547)

506,671

Materials and supplies inventories

(137,651)

17,589

Customer notes receivable

(176,872)

(113,936)

Prepaid pension cost

55,457

55,458

Other assets

(25,745)

52,421

Trade accounts payable

(4,548,124)

1,023,182

Due to City of Bristol, TN

-

(213,744)

Unbilled power expense

-

(3,054,352)

Customer deposits and prepayments

64,532

402,894

Other accrued liabilities

(112,239)

564,300

Net cash provided by operating activities

$ 9,261,005

$ 9,801,328

Supplemental disclosure of noncash activities

See accompanying Notes to Financial Statements.

Accounts payable at June 30, 2010 included $1,186,328 for capital assets.

Bristol Tennessee Essential Services

Statements of Cash Flows (continued)

Years ended June 30, 2011 and 2010

Year ended June 30

18

2011 2010

Assets

Cash and cash equivalents

43,365$

$ 12,752

Investments

786,066

180,143

Net assets held in trust for OPEB

829,431

$

$ 192,895

See accompanying Notes to Financial Statements.

Bristol Tennessee Essential Services Post Employment Benefits Trust

Statement of Plan Net Position

June 30, 2011 and 2010

June 30

19

2011 2010

Additions

BTES Contributions associated with ARC

595,607$

$ 200,000

BTES Contributions for claims made

386,971

442,242

Dividend Income

6,326

1,217

988,904

643,459

Deductions

Pension Benefits

(386,971)

(442,242)

Administrative fees

(3,000)

(2,000)

(389,971)

(444,242)

Appreciation (depreciation) in the fair value of investments

37,603

(6,322)

Net increase

636,536

192,895

Net assets held in trust for OPEB, beginning of year

192,895

-

Net assets held in trust for OPEB, end of year

$ 829,431

$ 192,895

See accompanying Notes to Financial Statements.

Bristol Tennessee Essential Services Post Employment Benefits Trust

Statement of Changes in Plan Net Position

Years ended June 30, 2011 and 2010

June 30

20

21

Bristol Tennessee Essential Services

Notes to Financial Statements

June 30, 2011 and 2010

1. Significant Accounting Policies

General

Bristol Tennessee Essential Services (“BTES”) is a self-supporting enterprise fund of the City of

Bristol, Tennessee (the “City”). The City is the primary reporting entity. An enterprise fund is

used to account for the financing of services to the general public on a continuing basis with

costs recovered primarily through user charges. The Board of Directors of BTES is the level of

responsibility that has oversight and control of BTES. The Board of Directors sets all policies,

local rates and appoints the Chief Executive Officer. The Board of Directors is composed of five

members, one of whom is also a member of the City Council, who are appointed by the mayor

and confirmed by the City Council. They serve four-year staggered terms. BTES manages,

operates and maintains the electric, cable, Internet, and telephone utilities servicing the citizens

of the City and surrounding areas. BTES issues a comprehensive annual financial report which is

combined in the City’s comprehensive annual financial report.

BTES has three business units within the enterprise fund, BTES accounts for the electric utility

operations in the Electric Business Unit (“EBU”), the cable and Internet operations in the Cable

and Internet Business Unit (“CBU”), and telephone operations in the Telephone Business Unit

(“TBU”).

BTES provides telecommunication services pursuant to Section 7-52-401 of the Tennessee Code

Annotated (“TCA”). As required by Section 7-52-603 of the TCA, the EBU may not subsidize

the operations of the CBU or the TBU with revenue from its power operations. In addition, the

CBU and the TBU must maintain its own accounting records and any funds that are lent from the

EBU must have a rate of interest, not less than the highest rate earned by the EBU on investment

funds. See Note 17 for further discussion of these units.

The industries that CBU and TBU operate in are regulated by the Federal Communications

Commission.

BTES classifies net position into three components – net investment in capital assets; restricted;

and unrestricted. These classifications are defined as follows:

• Net investment in capital assets – This component of net position consists of capital

assets, including restricted capital assets, net of accumulated depreciation and reduced

by the outstanding balances of any bonds, mortgages, notes, or other borrowings that

are attributable to the acquisition, construction or improvement of those assets. If

there are significant unspent related debt proceeds at year-end, the portion of the debt

attributable to the unspent proceeds is not included in the calculation of invested in

capital assets, net of related debt. Rather, that portion of the debt is included in the

same net position component as the unspent proceeds.

22

Bristol Tennessee Essential Services

Notes to Financial Statements (continued)

June 30, 2011 and 2010

1. Significant Accounting Policies (continued)

General (continued)

• Restricted – This component of net position consists of constraints placed on net asset

use through external constraints imposed by creditors (such as through debt

covenants), grantors, contributors or laws or regulations of other governments or

constraints imposed by law through constitutional provisions or enabling legislation.

• Unrestricted – This component of net position consists of net position that do not

meet the definition of “restricted or “net investment in capital assets.”

The unrestricted category includes a renewal and replacement fund of $8,000,000 which was

established by the Board of Directors to set aside funds for future construction, improvements

and extensions of BTES.

Fiscal Year-End

BTES operates on a fiscal year ending June 30. All references in these notes refer to the fiscal

year-end unless otherwise specified.

Measurement Focus

BTES operations are accounted for on a flow of economic resources measurement focus. With

this measurement focus, all assets and all liabilities associated with the operation of the

enterprise fund are included on the balance sheet. Operating statements present increases (e.g.

revenues) and decreases (e.g. expenses) in net total assets.

BTES utilizes the accrual basis of accounting whereby revenues are recorded in the period the

related services are provided, and expenses are recorded in the period incurred. Accordingly,

BTES has recorded an estimate of unbilled revenue and unbilled power expense. BTES considers

all revenues and expenses to be operating, except for interest income, interest expense and

amortization of bond issue costs, which are classified as nonoperating.

Cash and Cash Equivalents and Investments

Cash and cash equivalents include cash on hand and in demand deposits, and those investments

which are generally a part of BTES short-term cash management activities. State statutes

authorize BTES to invest in certificates of deposit, U.S. Treasury obligations, U.S. Agency issues

and the State Local Government Investment Pool.

Temporary investments, consisting entirely of certificates of deposit, are stated at cost which

approximates fair value.

23

Bristol Tennessee Essential Services

Notes to Financial Statements (continued)

June 30, 2011 and 2010

1. Significant Accounting Policies (continued)

Materials and Supplies Inventories

Materials and supplies are valued at the lower of cost or market, utilizing the moving average

method of determining cost.

Capital Assets

Capital assets are carried at historical cost, including applicable general and administrative costs

and payroll related costs such as pensions, taxes and other employee benefits. Substantially all

renewals and betterments are capitalized in accordance with BTES’ capitalization policy.

When property is retired or otherwise disposed of, its average cost, together with its cost of

removal less salvage, is charged to accumulated depreciation; no gain or loss is recognized. This

treatment may result in accumulated depreciation exceeding the original cost of the asset when a

fully depreciated asset is removed. The net effect of this treatment was $18,467 in 2011 and

$52,869 in 2010, as reflected in Note 8.

Capital assets other than land, construction in progress and non-utility property, are depreciated

using the straight-line method at rates which will amortize costs over the estimated useful lives

of the assets. The estimated useful lives of depreciable capital assets are as follows:

Transmission equipment, fixtures and devices

30 to 40 yea

rs

Fiber Optic system cable, equipment, fixtures and devices

Distribution transformers, meters, fixtures and devices

40 years

15 to 50 years

Buildings and improvements

50 years

Electronic communication equipment

15 to 20 years

Furniture

, fixtures and equipment

5 to 25 years

The provision for depreciation does not include depreciation on transportation equipment. Those

amounts are reported as operating expenses in the Statements of Revenues, Expenses and

Changes in Net Position and totaled $170,603 in 2011 and $147,801 in 2010. The cost of

maintenance and repairs is charged to expense as incurred.

Compensated Absences

BTES recognizes the cost of vacation pay as earned. In the event of termination or retirement, an

employee is reimbursed for accumulated vacation days. In general, accumulated vacation days

are limited to thirty days.

24

Bristol Tennessee Essential Services

Notes to Financial Statements (continued)

June 30, 2011 and 2010

1. Significant Accounting Policies (continued)

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 certain reported amounts and disclosures. Accordingly, actual results

could differ from those estimates.

Reclassifications

Certain amounts in the prior year have been reclassified to conform with 2011 classifications.

2. Cash and Investments

Cash and investments consist of the following as of June 30, 2011:

Interest

Purchase

Maturity

Amount

Rate

Date

Renewal and replacement fund:

Certificate of deposit

$

267,838

.69

%

3

/

25/11

6/30/11

Certificate of deposit

2,226,257

.69

%

3/25/11

6/30/11

Certificate of deposit

2,

400

,000

.69

%

3

/

25/11

6/30/11

Certificate of deposit

3,

105,905

.64

%

4/22/11

7

/

28

/

11

Total renewal and replacement fund

8,000,000

Other funds:

Certificate of deposit

2,900,000

.69

%

3/25/11

6/30/11

Certificate of deposit

1,500,000

.59

%

6

/

10

/

11

9

/

15

/

11

Certificate of deposit

1,000,000

.59

%

5/27/11

9/01/11

Business money market account

21,

891

.10%

–

Business money market account

55

8,729

.

13

%

–

Cash on deposit

2,593,459

Various

–

Total other funds

8,574,079

Total cash and investme

nts

$

16,574,079

25

Bristol Tennessee Essential Services

Notes to Financial Statements (continued)

June 30, 2011 and 2010

2. Cash and Investments (continued)

Cash and investments consist of the following as of June 30, 2010:

Interest

P

urchase

Maturity

Amount

Rate

Date

Renewal and replacement fund:

Certificate of deposit

$

267,838

1.75

%

6/08/10

9/08/10

Certificate of deposit

2,

226,257

1.75

%

6/08/10

9/09/10

Certificate of deposit

2,

400,000

1.75

%

6/08/10

9/08/10

Certificat

e of deposit

3,

105,905

1.29

%

3/26/10

7/01/10

Total renewal and replacement fund

8,000,000

Other funds:

Certificate of deposit

2

,

900,000

1.75

%

6/08/10

9/08/10

Certificate of deposit

1,500,000

1.29

%

5/13/10

8/19/10

Certificate of deposit

1,000,0

00

1.29%

4/28/10

8/05/10

Business money market account

21,867

.10

%

–

Business money market account

557,965

.13

%

–

Cash on deposit

2,280,410

Various

–

Total other funds

8,260,242

Total cash and investments

$

16,260,242

Custodial Credit Risk

Custodial credit risk is the risk that in the event of a financial institution failure, BTES deposits

may not be returned to it. BTES has no formal policy regarding custodial credit risk but requires

that all funds not insured by the FDIC be part of the state collateral pool. As of June 30, 2011,

BTES deposits in financial institutions (including certificates of deposit) of $17,004,521 were

entirely insured or collateralized with securities held by BTES agent in BTES’ name. Carrying

amounts differ from financial institution balances primarily due to outstanding checks and

deposits in transit.

Interest Rate Risk

BTES has no formal policy regarding interest rate risk. Our investments are structured in a

manner that ensures sufficient cash is available to meet anticipated liquidity needs. Selection of

investment maturities must be consistent with the cash requirements of BTES in order to avoid

the forced redemption of investments prior to maturity. All investments as of June 30, 2011 met

these requirements.

26

Bristol Tennessee Essential Services

Notes to Financial Statements (continued)

June 30, 2011 and 2010

3. Power Contract

BTES has a power contract with the Tennessee Valley Authority (“TVA”) whereby BTES

purchases all its electric power from TVA and is subject to certain restrictions and conditions as

provided in the contract. Either party may terminate this contract at any time upon not less than

five years prior written notice.

4. Residential Energy Efficiency Program Loans

BTES provides loans to customers for heat pump and insulation costs under BTES Residential

Energy Efficiency Program. The majority of these loans bears interest at rates ranging from 8%

to 10.25% and has maturities of up to 10 years. Satisfactory credit reports are required prior to

loan approval. Additionally, these loans are secured by a deed of trust on the property. BTES

recorded interest income of approximately $239,000 in 2011 and $224,500 in 2010 related to

these loans. These amounts offset operating expenses in the Statements of Revenues, Expenses

and Changes in Net Position, since management believes this is an operating activity and the

income should offset the additional expenses associated with maintaining this loan program.

5. Concentration of Credit Risk

BTES provides electric, cable, Internet and voice services primarily to customers in northeastern

Tennessee. Electric customers include residential, commercial and industrial service. Residential

and commercial customers are required to have satisfactory credit reports or place deposits with

BTES that approximate two months’ highest expected bill. Industrial customers are generally

required to either place deposits with BTES that approximate two months’ highest expected bill

or obtain a letter of credit or surety bond as security. Interest accrues on any deposits at the

passbook interest rate of the bank where the funds are deposited and totaled $12,970 in 2011 and

$11,047 in 2010. Cable, Internet and telephone customers are billed in advance of their service.

Deferred revenue in the amount of $594,362 is recorded, of which $483,324 relates to cable and

Internet services and $111,038 relates to telephone services. BTES also makes and services

loans to customers for heat pump and insulation costs. A subordinate deed of trust is obtained on

the related property for these loans. Loss experience on accounts and notes receivable has

historically not been significant to BTES operations.

6. Discounted Energy Units

During 2003, BTES purchased $8,000,000 in discounted energy units from TVA which are

redeemable on a straight-line basis over ten years. The units carry a discount of 5.5% and

amounted to $1,499,909 and $2,433,379 as of June 30, 2011 and 2010, respectively.

7. Prepayment

During 2011, BTES prepaid $2,200,000 for devices used to implement a new water heater

program we are working on with TVA and the Electric Power Research Institute. The

prepayment resulted in a 12% discount on future purchases of Water Heater Intelligent System

for Energy (WISE) devices. Management anticipates recognizing $1,100,000 during fiscal year

2012 and the remainder in fiscal year 2013.

27

Bristol Tennessee Essential Services

Notes to Financial Statements (continued)

June 30, 2011 and 2010

8. Capital Assets

The following is a summary of capital assets for the year ended June 30, 2011:

Balance

July 1,

June 30,

2010 Increases Decreases 2011

Capital assets not being depreciated:

Land $ 1,051,638 $ 26,654 $ - $1,078,292

Non-utility property 250,334 1,100 - 251,434

Construction in progress 2,750,894 137,669 1,795,926 1,092,637

Total capital assets not being depreciated 4,052,866 165,423 1,795,926 2,422,363

Capital assets being depreciated:

Transmission equipment, fixtures and

devices

2,823,268

-

2,823,268

Distribution transformers,

meters, fixtures and devices 62,240,504 1,550,188 228,283 63,562,409

Buildings and improvements 2,021,685 - - 2,021,685

Furniture, fixtures and equipment

Fiber optic communications

3,215,855

54,854,190

747,683

3,351,962

311,636

90,648

3,651,902

58,115,504

Total capital assets being depreciated 125,155,502 5,649,833 630,567 130,174,768

Less accumulated depreciation:

Transmission equipment, fixtures and

devices

Distribution transformers, (1,823,434) (113,534) (1,936,968)

meters, fixtures and devices (41,678,982) (1,858,197) 317,866 (43,219,313)

Buildings and improvements (1,363,379) (30,918) 4,475 (1,389,822)

Furniture, fixtures and equipment

Fiber Optic Communication

(2,174,159)

(4,083,743)

(201,469)

(2,059,433)

311,636

15,057

(2,063,992)

(6,128,119)

Total accumulated depreciation (51,123,697) (4,263,551) 649,034 (54,738,214)

Net capital assets being depreciated 74,031,805 1,386,282 (18,467) 75,436,554

Total net capital assets $78,084,671 $1,551,705 ($1,777,459) $77,858,917

28

Bristol Tennessee Essential Services

Notes to Financial Statements (continued)

June 30, 2011 and 2010

8. Capital Assets (continued)

The following is a summary of capital assets for the year ended June 30, 2010:

Balance

July 1,

June 30,

2009 Increases Decreases 2010

Capital assets not being depreciated:

Land $ 1,051,638 $ - $ - $1,051,638

Non-utility property 250,480 146 250,334

Construction in progress 1,733,283 3,203,140 2,185,529 2,750,894

Total capital assets not being depreciated 3,035,401 5,395,712 2,185,675 4,052,866

Capital assets being depreciated:

Transmission equipment, fixtures and

devices

2,823,268

-

2,823,268

Distribution transformers,

meters, fixtures and devices 62,044,632 609,242 413,370 62,240,504

Buildings and improvements 2,021,685 - - 2,021,685

Furniture, fixtures and equipment

Fiber optic communications

3,053,124

50,045,749

381,410

4,810,233

218,679

1,792

3,215,855

54,854,190

Total capital assets being depreciated 119,988,458 5,800,885 633,841 125,155,502

Less accumulated depreciation:

Transmission equipment, fixtures and

devices

Distribution transformers, (1,710,616) (112,818) (1,823,434)

meters, fixtures and devices (40,348,470) (1,796,181) 465,669 (41,678,982)

Buildings and improvements (1,332,461) (30,918) (1,363,379)

Furniture, fixtures and equipment

Fiber Optic Communication

(2,224,324)

(2,507,034)

(168,514)

(1,579,071)

218,679

2,362

(2,174,159)

(4,083,743)

Total accumulated depreciation (48,122,905) (3,687,502) 686,710 (51,123,697)

Net capital assets being depreciated 71,865,553 2,113,383 (52,869) 74,031,805

Total net capital assets $74,900,954 $5,316,523 ($2,132,806) $78,084,671

9. Self-Insurance Plan

BTES is self-insured for employee group health benefits. A liability is recorded, if necessary, for

those claims incurred but not paid prior to year-end, both reported and unreported, based on prior

experience and claims reported subsequent to year-end. Changes in estimates for claims incurred

but not reported are recorded in the year the estimates are revised. BTES’ risk is $75,000 per

covered employee up to an annual maximum of $852,583. An insurance company has insured all

claims exceeding the annual maximum.

29

Bristol Tennessee Essential Services

Notes to Financial Statements (continued)

June 30, 2011 and 2010

9. Self-Insurance Plan (continued)

Activity in the estimated liability for claims incurred but not paid is as follows for the years

ended June 30:

20

11

20

10

Balance at beginning of year

$177,416

$

1

77,416

Expense recorded related to:

Current year

473,040

557,897

Prior year

90,385

164,366

Net expense recorded

563,425

722,263

Payments related to:

Current year

550,890

557,897

Prior year

90,385

164,366

Total payments

641,275

722,263

Balance

at end of year

$99,566

$

1

77,416

10. Bonds Payable

Changes in bonds payable are summarized as follows:

Balance

July 1,

20

10

Decreases

Balance

June 30,

20

11

Electric System Revenue Bonds, Series

2005

$2

2,545,000

$ (485,000)

$22,060,000

Plus unamortized premium

378,976

(13,362)

365,614

Total bonds payable

$2

2,923,976

$ (498,362)

$22,425,614

Balance

July 1,

200

9

Decreases

Balance

June 30,

200

8

Electric System Revenue Bonds, Series

2005

$23,

015,0

00

$

(4

70

,000)

$

2

2,545

,000

P

lus unamortized premium

393,551

(14,57

5

)

3

78,976

Total bonds payable

$2

3,408,551

$

(4

84,575

)

$

2

2,923,976

30

Bristol Tennessee Essential Services

Notes to Financial Statements (continued)

June 30, 2011 and 2010

10. Bonds Payable (continued)

During 2006, the City issued $23,910,000 in 2005 Electric System Revenue Bonds (the “Bonds”)

on behalf of BTES. The Bonds were issued for the purposes of providing funds to construct

improvements and extensions of BTES’ transmission and distribution system and to pre-purchase

electric power from TVA. The Bonds are payable in annual installments ranging from $505,000

in 2012 to $1,450,000 in 2036. Bonds maturing on or after September 1, 2016 ($19,365,000) are

callable by the City at par at any time in any amount on or after September 1, 2015.

The interest rates on the Bonds are fixed and for each series, however, the interest rates for each

series vary between 3.25% to 5%, depending on the maturity. For 2011 and 2010, the effective

annual interest rate on the Bonds was 4.489% and 4.648% respectively.

The Bonds are secured by the net power revenues of BTES. In addition, BTES has obtained a

surety bond in lieu of funding a debt service reserve fund as required by the bond agreement.

Maturities of the Bonds as of June 30, 2011, are as follows:

Fiscal Year

Principal

Interest

Total

201

2

$

505

,000

$ 9

81,513

$ 1,48

6,513

201

3

5

20

,000

9

64,225

1,48

4,225

2014

540,000

947,000

1,487,000

2015

555,000

928,859

1,483,859

201

6

575,000

909,431

1,484,431

201

7

-

20

21

3,295,000

4,137,84

5

7,432,84

5

20

22

-

202

6

4,195,000

3,237,488

7,432,488

202

7

-

20

31

5,265,000

2,169,665

7,434,665

20

32

-

203

6

6,610,000

820,62

6

7,430,62

6

$ 22,060,000

$ 15,096,65

2

$ 37,156,65

2

11. Pension Plan

Plan Description

Employees of BTES are members of the Political Subdivision Pension Plan (“PSPP”), an agent

multiple-employer defined benefit pension plan administered by the Tennessee Consolidated

Retirement System (“TCRS”). TCRS provides retirement benefits as well as death and disability

benefits. Benefits are determined by a formula using the member’s high five-year average salary

and years of service. Members become eligible to retire at the age of 60 with five years of

service or at any age with 30 years of service. A reduced retirement benefit is available to vested

members at the age of 55. Disability benefits are available to active members with five years of

service who became disabled and cannot engage in gainful employment. There is no service

requirement for disability that is the result of an accident or injury occurring while the member

was in the performance of duty.

31

Bristol Tennessee Essential Services

Notes to Financial Statements (continued)

June 30, 2011 and 2010

11. Pension Plan (continued).

Members joining BTES after July 1, 1979, become vested after five years of service and

members joining prior to July 1, 1979, were vested after four years of service. Benefit provisions

are established in state statute found in Title 8, Chapter 34-37 of the Tennessee Code Annotated

(“TCA”). State statutes are amended by the Tennessee General Assembly. Political subdivisions

such as BTES participate in the TCRS as individual entities and are liable for all costs associated

with the operation and administration of their plan. Benefit improvements are not applicable to a

political subdivision unless approved by the chief governing body.

The TCRS issues a publicly available financial report that includes financial statements and

required supplementary information for the PSPP. That report may be obtained by writing to

Tennessee Treasury Department, Consolidated Retirement System, 10th Floor Andrew Jackson

Building, Nashville, TN 37243-0230 or can be accessed at www.treasury.state.tn.us/tcrs/PS/.

Funding Policy

BTES requires employees to contribute 5% of earnable compensation.

BTES is required to contribute at an actuarially determined rate using the frozen entry age

actuarial cost method; the rate for 2010 13.27% and the 2011 rate was 12.76% of annual covered

payroll. The contribution requirement of plan members is set by statute. The contribution

requirement for BTES is established and may be amended by the TCRS Board of Trustees.

Annual Pension Cost

For the year ending June 30, 2011, BTES’ annual pension cost of $484,250 to TCRS was equal

to BTES’ required and actual contributions. The required contribution was determined as part of

the July 1, 2009 actuarial valuation using the frozen entry age actuarial cost method. Significant

actuarial assumptions used in the valuation include (a) rate of return on investment of present and

future assets of 7.5% a year compounded annually, (b) projected 3.0% annual rate of inflation, (c)

projected salary increases of 4.75% (graded) annual rate (no explicit assumption is made

regarding the portion attributable to the effects of inflation on salaries), (d) projected 3.5%

annual increase in the Social Security wage base, and (e) projected post retirement increases of

2.5% annually. The actuarial value of assets was determined using techniques that smooth the

effect of short-term volatility in the market value of total investments over a ten-year period.

BTES’ unfunded actuarial accrued liability is being amortized as a level dollar amount on a

closed basis. The remaining amortization period at July 1, 2009 was 20 years. An actuarial

valuation was performed July 1, 2009, which established contribution rates effective July 1,

2010.

32

Bristol Tennessee Essential Services

Notes to Financial Statements (continued)

June 30, 2011 and 2010

11. Pension Plan (continued)

Trend Information

Annual Pension

Percentage of

Net Pension

Year end

ing

Cost (APC)

APC Contributed

Obligation

June 30, 2011

June 30, 20

10

$484,25

0

$4

90,763

100.00%

100.00

%

$0.00

$

0.00

June 30,

200

9

$4

71,232

100.00

%

$0.00

Funded Status and Funding Progress

As of July 1, 2009, the most recent actuarial valuation date, the plan was 79.26% funded. The

actuarial accrued liability for benefits was $17.60 million, and the actuarial value of assets was

$14.0 million, resulting in an unfunded actuarial accrued liability of $3.7 million. The covered

payroll (annual payroll of active employees covered by the plan) was $3.5 million, and the ratio

of the UAAL to the covered payroll was 103.36%.

The schedules of funding progress, presented as required supplementary information (RSI)

following the notes to the financial statements, present multiyear trend information about

whether the actuarial values of plan assets are increasing or decreasing over time relative to the

AALs for benefits.

The annual required contribution (ARC) was calculated using the aggregate actuarial cost

method. Since the aggregate actuarial cost method does not identify or separately amortize

unfunded actuarial liabilities, information about funded status and funding progress has been

prepared using the entry age actuarial cost method for that purpose, and this information is

intended to serve as a surrogate for the funded status and funding progress of the plan.

Prepaid Pension Cost

BTES has previously contributed amounts in excess of the annual pension cost to the PSPP and

recorded these amounts as a prepaid pension cost.

33

Bristol Tennessee Essential Services

Notes to Financial Statements (continued)

June 30, 2011 and 2010

11. Pension Plan (continued)

Activity in the prepaid pension cost is as follows for the years ended June 30:

201

1

2010

Balance at beginning of year

$453,279

$508,737

Annual pensio

n cost:

Annual required contribution

484,250

490,763

Interest on prepaid pension cost

(

28,208

)

(34,075)

Adjustment to the annual required contribution

83,665

89,533

Total annual pension cost

5

39,707

546,221

Contributions made

484,250

490,763

Decrea

se in prepaid pension cost

(55,45

7

)

(55,458)

Balance at end of year

$

397,822

$453,279

12. 401(k) Retirement Plan

BTES administers a defined contribution plan in the form of a 401(k) plan (Bristol Tennessee

Essential Services 401(k) Retirement Plan) available to all employees who have completed six

months of employment. During 2011, the amount of payroll covered by the plan was $3,398,970

of total payroll of $3,959,676. During 2010, the amount of payroll covered by the plan was

$3,178,978 of total payroll of $3,861,658. Under the plan terms, BTES will match participant

contributions up to 3% of the participant’s salary. Participants are not required but may

contribute up to a total of 15% of their pre-tax earnings, subject to IRS limitations.

Additionally, participants may contribute up to 10% of their after-tax earnings. Participants are

100% vested in the employer contributions when they are made. During 2011 and 2010, BTES

contributed $174,770 and $166,022, respectively, to the plan which represents 5.1% and 5.2%,

respectively, of the covered payroll and 100% of the required contribution for each year. During

2011 and 2010, the participants contributed $249,963 and $225,505, respectively, which

represents 7.3% and 7.1%, respectively, of the covered payroll.

13. Postemployment Benefits Other Than Pensions

BTES has established the Bristol Tennessee Essential Services Post Employment Benefits Trust

(the “Trust”) for the exclusive benefit of BTES retired employees and their dependents (who

meet the eligibility requirements) to fund the postemployment benefits provided through the

Bristol Essential Services Retirement Plan (the “Plan”). Amounts contributed to the Trust by

BTES are held in trust and are irrevocable and are for the sole and exclusive purpose of funding

benefits established by the Plan and the cost of operating and administering the Trust.

34

Bristol Tennessee Essential Services

Notes to Financial Statements (continued)

June 30, 2011 and 2010

13. Postemployment Benefits Other Than Pensions (continued)

Plan Description

BTES administers the Plan as a single-employer defined benefit Other Post Employment Benefit

plan (“OPEB”). As discussed in Note 9, BTES is self-insured for employee group health

benefits, with the medical plan administered by MCA Administrators and the prescription drug

program administered by MEDCO. BTES also provides these benefits to certain retired

employees, although not required to do so by any statutory, contractual or other authority. As of

June 30, 2011, there were 27 retirees eligible to receive these benefits. Employees with 30 years

of service or age 60 with 20 years of service are eligible for these benefits. BTES pays full

coverage for all retirees who meet these eligibility requirements.

Additionally, BTES is self-insured for certain life insurance benefits for retirees. Employees who

retire with 30 years of service or age 60 with a minimum of 20 years of service receive $5,000 in

life insurance for annual salaries less than $10,000 plus $1,000 in life insurance for each

additional $5,000 of annual salary or fraction thereof. As of June 30, 2011, there were 21 retirees

eligible to receive these benefits and, accordingly, a liability for $237,250 has been recorded for

these benefits. BTES made no payments in 2011 and 2010 related to these benefits.

As of June 30, 2011, the Plan did not issue a stand alone financial report because the Trust Fund

is included in BTES financial statements.

Significant Accounting Policies for the Trust

The Trust’s financial statements are prepared using the accrual basis of accounting. BTES

contributions are recognized when due and the employer has made a formal commitment to

provide the contributions. Benefits are recognized when due and payable.

Investments are reported at fair value, which is determined by the mean of the most recent bid

and asked prices as obtained from dealers that make markets in such securities.

Funding Policy

BTES annual contribution is based on the annual required contribution of the employer (“ARC”),

an actuarially determined amount. The ARC represents a level of funding that, if paid on an

ongoing basis, is projected to cover normal cost each year and amortize any unfunded actuarial

liabilities over a period not to exceed thirty years.

35

Bristol Tennessee Essential Services

Notes to Financial Statements (continued)

June 30, 2011 and 2010

13. Postemployment Benefits Other Than Pensions (continued)

Annual OPEB Cost and Net OPEB Obligation

20

11

20

10

Annual Required Contributi

on

$319,075

$

306,568

Interest on Net OPEB Obligation

–

Adjustment to ARC

–

Annual OPEB Cost

319,075

306,568

Contribution Made

595,607

200,000

Increase in Net OPEB

(276,532)

106,508

Net OPEB Obligation

–

beginning of year

595,607

489,039

Net OPEB

Obligation

–

end of year

$319,075

$

595,607

The annual OPEB Cost, the percentage of annual OPEB cost contributed to the plan and the net

OPEB obligation for fiscal year 2011 is as follows:

Percentage of Annual OPEB

Fiscal Year Ending Annual OPEB Cost Cost Contributed Net OPEB Obligation

06/30/2011

06/30/2010

06/30/2009

6/30/2008

$319,075

$306,568

$247,432

$241,607

187%

65%

0%

$319,075

$595,607

$489,039

$241,607

Funding Status and Funding Progress

Actuarial

UAAL as

Actuarial Actuarial Accrued Unfunded

a Percentage

Valuation

Date

Value of

Assets

Liability

(AAL)

AAL

(UAAL)

Funded

Ratio

Covered

Payroll

of Covered

Payroll

7/01/09

7/01/07

$200,000

$ 0

$3,841,608

$2,850,537

$3,641,608

$2,850,537

5.2%

–

$3,231,177

N/A

112.7%

N/A

Actuarial Methods and Assumptions

• Funding Interest Rate 7.00%

• 2009 Medical/Drug Trend Rate 9.00%/10.00%

• Ultimate Medical/Drug Trend Rate 5.00%

• Year Ultimate Trend Rate Reached 2013/2014

• Actuarial Cost Method Projected Unit Credit

• Annual Payroll Growth Rate 2.50%

• Remaining Amortization period at June 30, 2010 26.39 years

36

Bristol Tennessee Essential Services

Notes to Financial Statements (continued)

June 30, 2011 and 2010

13. Postemployment Benefits Other Than Pensions (continued)

Mortality

The mortality rates are from the RP-2000 Combined Mortality Table projected to 2010 with

projection scale AA.

Retirement Rates

It was assumed that the following percentage of eligible employees would retire each year.

Age Rate

55 1.5%

60 9.0%

61 11.5%

62 21.5%

63 14.5%

64 16.0%

65 29.0%

70 17.5%

75 100.0%

Termination Rates

It was assumed that employees would terminate employment in accordance with the rates in the

following table:

Male

Year of Employment

Age 1

st

2

nd

Ultimate

30 24.3% 20.0% 9.1%

40 20.4% 15.1% 2.5%

50 16.5% 12.7% 1.9%

Female

Year of Employment

Age 1

st

2

nd

Ultimate

30 24.3% 20.0% 11.1%

40 20.4% 15.1% 3.5%

50 16.5% 12.7% 2.4%

37

Bristol Tennessee Essential Services

Notes to Financial Statements (continued)

June 30, 2011 and 2010

13. Postemployment Benefits Other Than Pensions (continued)

Trend Rates

It was assumed that health care costs would increase in accordance with the trend rates in the

following table:

Year Medical Drug

2009 9.0% 10.0%

2010 8.0% 9.0%

2011 7.0% 8.0%

2012 6.0% 7.0%

2013 5.0% 6.0%

2014+ 5.0% 5.0%

Participation Rate

It was assumed that 100% of the current active employees covered under the active plan on the

day before retirement would enroll in the retiree medical plan upon retirement.

Percent Married

It was assumed that 75% of the male and 40% of the female employees who elect retiree health

care coverage for themselves would also elect coverage for their spouse upon retirement. It was

assumed that male spouses are three years older than their wives and female spouses are three

years younger than the retiree. For current retirees, actual census information was used.

Per Capita Claims Costs

Paid claims for the medical plan for the period beginning on January 1, 2006 and ending

December 31, 2009, formed the basis for the per capita claim rates. These claims were adjusted

to an annual basis and trended forward to the valuation date. Aging factors were then applied to

allow for the calculation of age-related per-capita claim rates.

Change in Assumptions

None

Change in Plan Provisions

None

Use of Assumptions

The preparation of the actuarial liabilities calculated above requires management to make

assumptions that are disclosed above. Due to the use of these assumptions, actual results could

differ from those estimates.

38

Bristol Tennessee Essential Services

Notes to Financial Statements (continued)

June 30, 2011 and 2010

14. Net Position

Net position consists of the following as of June 30:

2011

2010

Net i

nvestment

in capital assets

consists

of the following:

Capital assets

$77,858,917

$

78,084,671

Less bond payable

Less other borrowing associated

with capital assets

22,425,614

-

2

2,923,976

1,186,328

Net investment

in capital assets

$55,433,303

$

53,974,367

Unrestricted net position consists of all other items in the balance sheet not reflected above.

15. Pole Attachment Settlement

During 2011, BTES entered into a settlement agreement with a local provider of cable, Internet

and telephone services related to a disagreement about pole attachment fees. The settlement

resulted in BTES receiving $435,331 for pole attachments related to prior years.

16. Pledged Revenue

As discussed in Note 10, Bonds are secured by the net power revenues of BTES. Annual

principal and interest payments in 2011 of $1,483,837 were 13% of the net revenue available for

debt service of $11,458,113. Maturities of the Bonds as of June 30, 2011, are detailed in Note 10.

Schedule of Power System Revenue Bond Coverage (dollar amounts in thousands)

Net

Power Power Revenue

Operating Operating for Debt Debt Service Requirements

Revenues Expenses Service Principal Interest Total Coverage

2011 94,278 82,819 11,458 485 999 1,484 7.71

2010 80,465 72,465 8,000 470 1,016 1,486 5.38

2009 88,047 81,373 6,674 455 1,032 1,487 4.49

2008 74,007 70,699 3,308 440 1,047 1,487 2.22

2007 69,850 64,934 4,916 - 1,055 1,055 4.66

2006 66,376 62,283 4,093 - 627 627 6.53

39

Bristol Tennessee Essential Services

Notes to Financial Statements (continued)

June 30, 2011 and 2010

17. Risk Management

BTES is exposed to various risks of loss related to torts; theft of, damage to and destruction of

assets; errors and omissions; natural disasters; and injuries of employees for which BTES carries

commercial insurance purchased from independent third parties. BTES experienced extensive

roof damage as a result of high winds on April 27, 2011. Insurance coverage was adequate to

replace the roof. BTES bears the risk of loss up to the deductible amounts which are disclosed in

the accompanying Statistical Section.

18. Related Party Transactions

As described in Note 1, BTES is a self-supporting fund of the City. BTES provides electrical

service to the City at standard electric rates which generated revenues of $2,888,465 in 2011 and

$2,447,907 in 2010. As of June 30, 2011 and 2010, $54,307 and $54,307, respectively, was

recorded as a receivable from the City for these revenues. Payment is due within approximately

30 days of the billing.

BTES made tax equivalent payments to the City of $1,646,426 in 2011 and $1,558,418 in 2010.

These payments are based on BTES capital assets, along with average operating revenues less

power costs.

During 2011, the City applied for funds from the state and federal government for recovery

assistance from a natural disaster. A portion of these funds relates to recovery associated with

services provided by BTES. As of June 30, 2011, BTES was due $181,324 of the funds.

19. Business Unit Information

As discussed in Note 1, BTES operates three different business units. BTES allocates direct

costs to the specific business unit, common costs (costs that cannot be directly assigned to a

business unit) are allocated based on a direct analysis of the origin of the costs, an indirect, cost-

causative linkage to another category for which direct assignment or allocation is available, or

based on a general allocator. For inter-unit loans, the business unit charges the highest rate of

interest earned on invested funds. Depreciation, pole attachment fees, interest expense, and taxes

are allocated based on a per service usage model.

EBU CBU TBU

Assets:

Current assets

$ 21,729,509 $ 789,238 $ 2,055,899

Due from other business units

2,194,132 - -

Net capital assets

70,436,540 6,694,737 727,640

Other noncurrent assets

11,627,542 - -

Total assets

$ 105,987,723 $ 7,483,975 $ 2,783,539

Liabilities and net position:

Current liabilities

$ 6,112,967 $ 1,079,974 $ 196,628

Noncurrent liabilities

319,075 - -

Due to other business units

- 2,194,132 -

Bonds payable, long-term portion

21,920,614 - -

Total liabilities

28,352,656 3,274,106 196,628

Net investment in capital assets

50,205,058 4,500,605 727,640

Unrestricted

27,430,009 (290,736) 1,859,271

Total net position

77,635,067 4,209,869 2,586,911

Total liabilities and net position

$ 105,987,723 $ 7,483,975 $ 2,783,539

Balance Sheet by Business Unit

Bristol Tennessee Essential Services

Notes to Financial Statements (continued)

June 30, 2011 and 2010

19. Business Unit Information (continued)

Summary financial statement information for each of the business units are as follows (does not

include inter-unit eliminations):

June 30, 2011

40

EBU CBU TBU

Operating revenues

$ 94,277,806 $ 11,271,288 $ 3,527,511

Cost of sales

75,426,055 7,715,895 1,811,754

Gross profit

18,851,751 3,555,393 1,715,757

Operating expenses

10,979,606 1,988,917 883,913

Operating income

7,872,145 1,566,476 831,844

Nonoperating expense

(1,231,599) (33,437) -

Income before transfers and income taxes

6,640,546 1,533,039 831,844

Transfers out

(1,549,794) (35,779) (60,853)

State income tax expense

- (121,841) -

Contributions in aid of construction

955,201 - -

Change in net position

6,045,953 1,375,419 770,991

Net position at beginning of year

71,589,114 2,834,450 1,815,920

Net position at end of year

$ 77,635,067 $ 4,209,869 $ 2,586,911

EBU CBU TBU

Net cash provided by (used in):

Operating activities

7,491,973$ 841,108$

927,924$

Noncapital financing activities

(1,521,900) (185,514) (60,853)

Investing activities

400,563 -

-

Capital and related financing activities

(6,877,103) (655,594)

(46,767)

Decrease in cash and cash equivalents

(506,467) - 820,304

Cash and cash equivalents at beginning of

year

7,237,246 - 1,022,996

Cash and cash equivalents at end of year

6,730,779

$

-

$

1,843,300

$

Year ended June 30, 2011

Condensed Statement of Cash Flows by Business Unit

Year ended June 30, 2011

Bristol Tennessee Essential Services

Notes to Financial Statements (continued)

June 30, 2011 and 2010

19. Business Unit Information (continued)

Condensed Statement of Revenues, Expenses and Changes in Net Position

41

EBU CBU TBU

Assets:

Current assets

$ 18,581,390 $ 545,435 $ 1,219,363

Due from other business units

2,188,589 - -

Net capital assets

70,676,352 6,608,254 800,065

Other noncurrent assets

12,534,904 - -

Total assets

$ 103,981,235 $ 7,153,689 $ 2,019,428

Liabilities and net position:

Current liabilities

$ 9,357,538 $ 2,130,650 $ 203,508

Noncurrent liabilities

595,607 - -

Due to other business units

- 2,188,589 -

Bonds payable, long-term portion

22,438,976 - -

Total liabilities

32,392,121 4,319,239 203,508

Invested in capital assets, net of related debt

48,754,637 4,419,665 800,065

Unrestricted

22,834,477 (1,585,215) 1,015,855

Total net position

71,589,114 2,834,450 1,815,920

Total liabilities and net position

$ 103,981,235 $ 7,153,689 $ 2,019,428

Balance Sheet by Business Unit

Bristol Tennessee Essential Services

Notes to Financial Statements (continued)

June 30, 2011 and 2010

19. Business Unit Information (continued)

Summary financial statement information for each of the business units are as follows (does not

include inter-unit eliminations):

June 30, 2010

42

EBU CBU TBU

Operating revenues

$ 80,464,925 $ 9,501,469 $ 3,154,712

Cost of sales

64,460,545 6,549,520 1,562,232

Gross profit

16,004,380 2,951,949 1,592,480

Operating expenses

11,171,917 1,490,468 930,638

Operating income

4,832,463 1,461,481 661,842

Nonoperating expense

(738,961) (50,033) -

Income before transfers and income taxes

4,093,502 1,411,448 661,842

Transfers out

(1,477,908) (24,727) (55,783)

State income tax expense

- (66,352) -

Contributions in aid of construction

368,800 - -

Change in net assets

2,984,394 1,320,369 606,059

Net position at beginning of year

68,604,720 1,514,081 1,209,861

Net position at end of year

$ 71,589,114 $ 2,834,450 $ 1,815,920

EBU CBU TBU

Net cash provided by (used in):

Operating activities

5,988,123$ 2,878,170$

935,035$

Noncapital financing activities

(1,477,908) (817,676) (55,783)

Investing activities

1,165,019 -

-

Capital and related financing activities

(6,033,273) (2,060,494)

(174,066)

Decrease in cash and cash equivalents

(358,039) - 705,186

Cash and cash equivalents at beginning of

year

7,595,285 - 317,810

Cash and cash equivalents at end of year

7,237,246

$

-

$

1,022,996

$

Year ended June 30, 2010

Condensed Statement of Cash Flows by Business Unit

Year ended June 30, 2010

Bristol Tennessee Essential Services

Notes to Financial Statements (continued)

June 30, 2011 and 2010

19. Business Unit Information (continued)

Condensed Statement of Revenues, Expenses and Changes in Net Position

43

44



Bristol Tennessee Essential Services

Required Supplemental Information

June 30, 2011

Schedule of Funding Progress for Political Subdivision Pension Plan (in thousands)

Actuarial

Valuation

Date

Actuarial

Value of

Assets

Actuarial

Accrued

Liability

(AAL)

Unfunded

AAL

(UAAL)

Funded

Ratio

Covered

Payroll

UAAL as a

Percentage

of Covered

Payroll

07/01/09

07/01/07

$13,951

13,703

$17,603

16,363

$3,652

2,6

60

79.26%

83.7

4

$3,533

3,222

103.36%

82.5

6

07/01/05

12,335

13,290

955

92.81

2,890

33.06

07/01/03

11,831

12,907

1,076

91.66

2,584

41.64

Schedule of Employer Contributions for Political Subdivision Pension Plan

Annual

Required

Fiscal

Year Contribution

Contribution

Made

Percentage

Contributed

2011 $484,250 $484,250 100%

2010 $490,763 $490,763 100%

2009 471,232 471,232 100%

2008 491,517 491,517 100%

2007 478,187 478,187 100%

2006 338,163 338,163 100%

2005 332,686 332,686 100%

Note: The historical trend information about the Political Subdivision Pension Plan is presented

as required supplementary information. The information is intended to help users assess the

funding status on a going-concern basis and to assess progress made in accumulating assets to

pay benefits when due.

45



Bristol Tennessee Essential Services

Required Supplemental Information (continued)

June 30, 2011

Schedule of Funding Progress for

Bristol Tennessee Essential Services Retiree Benefit Plan

Schedule of Funding Progress

Actuarial

Valuation Date

July 1, 2009

Active Employees $ 1,142,496

Inactive Employees 2,699,112

Actuarial Accrued Liability 3,841,608

Actuarial Value of Assets -

Unfunded Actuarial Accrued Liability 3,841,608

Funded Ratio 0.0%

Annual Covered Payroll 3,231,177

Ratio of Unfunded Actuarial Accrued

Liability to Covered Payroll

118.89%

Annual Required

Fiscal Year

Contribution

Contribution Made

Percentage Contributed



2011

2010

$319,075

306,568

$595,607

200,000

187%

65%

2009

2008

247,432

241,607

0

0%

Note: The historical trend information about the Bristol Tennessee Essential Services Retiree

Benefit Plan is presented as required supplementary information. The information is intended to

help users assess the funding status on a going-concern basis and to assess progress made in

accumulating assets to pay benefits when due.

46



State Schedules Section

State Schedules are presented as part of Bristol Tennessee Essential Services’ Comprehensive

Annual Financial Report to provide additional sufficient details to comply with Tennessee Code

Annotated 7-52-401 and 7-52-601.

Contents Page

Business Unit Balance Sheets .......................................................................................... 47

Business Unit Schedules of Revenues, Expenses and Changes in Net Position ............. 49

Business Unit Schedules of Cash Flows .......................................................................... 51

Electric Cable/Internet Telephone

Assets

Current assets:

Cash and cash equivalents

$ 6,730,779

$ -

$ 1,843,300

Accounts receivable:

Trade

6,183,493

916,977

272,732

Other

837,642

-

Allowance for bad debt

(457,794)

(184,410)

(64,892)

Net accounts receivable

6,563,341

732,567

207,840

Accrual for unbilled revenues

3,318,744

-

Due from City of Bristol, TN

181,324

Interest receivable

10,155

-

Materials and supplies inventories

1,165,050

39,726

-

Current portion of customer notes receivable

440,000

-

Current portion of discounted energy units

986,131

-

Current portion of prepaid expense

1,100,000

Prepaid expenses and other current assets

131,942

16,945

4,759

Total current assets

20,627,466

789,238

2,055,899

Due from Other Business Units

2,194,132 - -

Unrestricted noncurrent assets:

Capital assets:

Capital assets in service

121,824,021

8,205,059

1,223,979

Less accumulated depreciation

(52,731,552)

(1,510,322)

(496,339)

69,092,469

6,694,737

727,640

Construction in progress

1,092,637

-

Non-utility property

251,434

-

Net capital assets

70,436,540

6,694,737

727,640

Other assets:

Customer notes receivable, less current portion

2,427,430

-

Long-term investments

8,000,000

-

Prepaid pension cost

397,822

-

Prepaid expense

1,100,000

Discounted energy units, less current portion

513,778

-

Unamortized bond issue costs

290,555

-

Total other assets

12,729,585

-

Total noncurrent assets

83,166,125

6,694,737

727,640

Total assets

$ 105,987,723

$ 7,483,975

$ 2,783,539

Bristol Tennessee Essential Services

Business Unit Balance Sheets

June 30, 2011

47

Electric Cable/Internet Telephone

Liabilities and net position

Current liabilities:

Trade accounts payable

2,017,450$ 489,011$ 28,881$

Customer deposits and prepayments

2,143,249 - -

Franchise fee due to City of Bristol, Tennessee

- 45,016 -

Interest payable

332,946 - -

Deferred revenue

- 483,324 111,038

Other accrued liabilities

1,114,322 62,623 56,709

Current portion of bonds payable

505,000 - -

Total current liabilities

6,112,967

1,079,974

196,628

Due to Other Business Units

-

2,194,132

-

Other noncurrent accrued liabilities

319,075

-

Bonds payable, less current portion

21,920,614

-

Total liabilities

28,352,656

3,274,106

196,628

Net position:

Net investment in capital assets

50,307,846 4,500,605 727,640

Unrestricted

27,327,221 (290,736) 1,859,271

Total net position

77,635,067 4,209,869 2,586,911

Total liabilities and net position

105,987,723

$

7,483,975

$

2,783,539

$

Bristol Tennessee Essential Services

Business Unit Balance Sheets (continued)

June 30, 2011

48

Electric Cable/Internet Telephone

Operating revenues:

Power revenues:

Residential

$ 44,671,055

-

$

-

$

Commercial (general power - under 50 kw)

5,864,765 - -

Industrial (general power - 50 kw and over)

34,338,102 - -

Street and outdoor lighting

1,284,120 - -

Total power revenues

86,158,042

-

Cable revenues

- 6,660,565 -

Internet revenues

- 4,380,089 -

Telephone revenues

- - 3,335,118

Interunit revenue

4,300,260 - -

Other revenues

3,819,504 230,634 192,393

Total operating revenues

94,277,806

11,271,288

3,527,511

Cost of sales:

Power purchased from Tennessee Valley Authority

75,426,055 - -

Cable programming expense

- 4,406,644 -

Internet cost of sales

- 233,413 -

Interunit cost of sales

- 3,075,838 1,224,421

Telephone cost of sales

- - 587,333

Total cost of sales

75,426,055

7,715,895

1,811,754

Gross profit

18,851,751

3,555,393

1,715,757

Operating expenses:

Operations

2,915,260 1,153,383 591,122

Maintenance

3,889,804 240,447 155,932

Depreciation

3,404,645 569,111 119,192

Tax equivalents

447,567 25,976 17,667

Social security taxes

309,360 - -

Interest expense on customer deposits

12,970 - -

Total operating expenses

10,979,606

1,988,917

883,913

Operating income

7,872,145

1,566,476

831,844

Bristol Tennessee Essential Services

Business Unit Schedules of Revenues, Expenses and Changes in Net Position

Year ended June 30, 2011

49

Electric Cable/Internet Telephone

Nonoperating revenue (expense):

Grant Income

181,324$

-$

Interest income (including $110,530 in 2011 and

$160,378 in 2010 related to amortization of

discounted energy units)

535,703

-

Interest expense

(982,807)

(33,437)

-

Amortization of bond issue costs

(10,618)

-

Plant cost recovered through contributions in aid

of construction

(955,201)

Income before transfers and income taxes

6,640,546

1,533,039

831,844

State income tax expense

-

(121,841)

-

Transfers out--tax equivalents to the City of Bristol, TN

Tennessee

(1,549,794) (35,779) (60,853)

Contributions in aid of construction

955,201

Change in net position

6,045,953 1,375,419 770,991

Net position at beginning of year

71,589,114 2,834,450 1,815,920

Net position at end of year

$ 77,635,067

$ 4,209,869

$ 2,586,911

Business Unit Schedules of Revenues, Expenses and Changes in Net Position

(continued)

Year ended June 30, 2011

Bristol Tennessee Essential Services

50

Electric Cable/Internet Telephone

Cash flows from operating activities

Cash received from customers

$ 83,457,866

$ 11,116,706

$ 3,528,133

Cash received from City of Bristol, Tennessee

2,863,130

25,335

-

Cash paid to suppliers and vendors

(74,819,493)

(10,300,933)

(2,600,209)

Cash paid to employees for services

(4,009,530)

-

Net cash provided by operating activities

7,491,973

841,108

927,924

Cash flows from noncapital financing activities

Transfers to City of Bristol, Tennessee

(1,549,794)

(35,779)

(60,853)

State income tax

-

(121,841)

-

Net repayments on interunit loans

-

5,543

-

Interest payments on interunit loans

-

(33,437)

-

Net cash used in noncapital financing activities

(1,549,794)

(185,514)

(60,853)

Cash flows from investing activities

Interest received on investments

400,563

-

Purchases of certificates of deposit

(27,105,906)

-

Sales of certificates of deposit

27,105,906

-

Net receipts from interunit loans

(5,543)

-

Interest receipts on interunit loans

33,437

-

Net cash provided by investing activities

428,457

-

Cash flows from capital and related financing

Principal payments on bonds payable

(485,000)

-

Interest payments on bonds payable

(985,636)

-

Net additions to capital assets

(4,161,668)

(655,594)

(46,767)

Contributions in aid of construction

955,201

-

Cash paid for prepayment of capital assets

(2,200,000)

-

Net cash used in capital and related financing

(6,877,103)

(655,594)

(46,767)

Decrease in cash and cash equivalents

(506,467)

-

820,304

Cash and cash equivalents at beginning of year

7,237,246

-

1,022,996

Cash and cash equivalents at end of year

$ 6,730,779

$ -

$ 1,843,300

Bristol Tennessee Essential Services

Business Unit Schedules of Cash Flows

Year ended June 30, 2011

51

Electric Cable/Internet Telephone

Reconciliation of operating income to net cash

provided by operating activities

Operating income

$ 7,872,145

$ 1,566,476

$ 831,844

Adjustments to reconcile operating income to net

cash provided by operating activities:

Depreciation

3,404,645

569,111

119,192

Provision for losses on accounts receivable

62,691

48,765

9,791

Redemption of discounted energy units

1,044,000

-

Changes in operating assets and liabilities:

Accounts receivable

(802,075)

(236,514)

(21,877)

Accrual for unbilled revenues

(326,547)

-

Materials and supplies inventories

(97,925)

(39,726)

-

Customer notes receivable

(176,872)

-

Prepaid pension cost

55,457

-

Other assets

(5,271)

(16,328)

(4,146)

Trade accounts payable

(3,420,527)

(1,105,812)

(21,785)

Due to City of Bristol, Tennessee

-

Unbilled power expense

-

Customer deposits and prepayments

64,532

-

Other accrued liabilities

(182,280)

55,136

14,905

Net cash provided by operating activities

$ 7,491,973

$ 841,108

$ 927,924

Supplemental disclosure of noncash activities

Bristol Tennessee Essential Services

Business Unit Schedules of Cash Flows (continued)

Year ended June 30, 2011

Accounts payable at June 30, 2011 and 2010 included $29,935 and $1,307,113, respectively for capital

assets.

52

53



Statistical Section

This part of Bristol Tennessee Essential Services’ Comprehensive Annual Financial Report

presents detailed information as a context for understanding what the information in the financial

statements, note disclosures, and required supplementary information says about the company’s

overall financial health.

Contents Page

Financial Trends 54

These schedules contain trend information to help the reader understand how the

company’s financial performance and well-being have changed over time.

Revenue Capacity 58

These schedules contain information to help the reader assess the company’s revenue

source and, sales of electricity and fiber optic products.

Debt Capacity 66

These schedules present information to help the reader assess the affordability of the

company’s current levels of outstanding debt and the company’s ability to issue

additional debt in the future.

Demographic and Economic Information 67

These schedules offer demographic and economic indicators to help the reader

understand the environment within which the company’s financial activities take place.

Operating Information 70

These schedules contain service and infrastructure data to help the reader understand

how the information in the company’s financial report relates to the services the

company provides and the activities it performs.

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

Invested in capital assets, net of related debt 55,433$ 53,974$ 51,492$ 46,269$ 35,243$ 33,531$ 34,026$ 31,895$ 31,568$ 29,297$

Unrestricted 28,999 22,265 19,836 21,715 30,875 29,185 26,825 26,127 24,984 26,301

Total net assets

84,432

$

76,239$ 71,328$ 67,984$ 66,118$ 62,716$ 60,851$ 58,022$ 56,552$ 55,598$

Note 1: Information is summarized from audited financial statements for the year indicated.

Bristol Tennessee Essential Services

Schedule of Net Assets (Last Ten Years)

Fiscal Years 2011 - 2002 (in thousands)

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

54

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54

2011 2010 2009 2008 2007 2006 2005 2004 2003 2002

Operating revenues:

Residential

44,671$

$ 37,558 $ 42,051 $ 34,810 $ 32,770 $ 30,666 $ 27,475 $ 28,368 $ 26,699 $ 24,746

Commercial

5,865

5,087 5,567 4,822 4,585 4,363 3,936 3,888 3,621 3,373

Industrial

34,338

29,832 33,841 30,608 28,786 27,845 22,524 22,143 20,072 19,006

Street and outdoor lighting

1,284

1,182 1,270 1,089 1,033 984 965 911 855 852

Cable

6,661

5,763 4,405 2,765 1,605 248 - - - -

Internet

4,380

3,571 2,322 1,373 687 105 - - - -

Telephone

3,335

2,895 2,458 1,412 385 - - - - -

Other revenues

4,242

3,402 3,388 2,776 2,709 2,518 2,424 2,448 2,100 2,018

Total operating revenues

104,776

89,290 95,302 79,655 72,560 66,729 57,324 57,758 53,347 49,995

Cost of sales:

Power purchased from TVA

75,426

64,460 74,785 64,518 59,438 56,598 47,253 48,516 44,857 41,676

Cable programming expense

4,407

3,602 2,620 1,548 801 71

- - - -

Internet cost of sales

233

161 158 79 67 5 - - - -

Telephone cost of sales

587

518 443 207 70 - - - - -

Total cost of sales

80,653

68,741 78,006 66,352 60,376 56,674 47,253 48,516 44,857 41,676

Gross profit

24,123

20,549 17,296 13,303 12,184 10,055 10,071 9,242 8,490 8,319

Operating expenses:

Operations

4,660

4,581 4,043 3,646 3,363 2,826 2,829 2,743 2,599 2,412

Maintenance

4,286

4,636 4,130 3,563 3,029 2,750 2,560 2,635 2,533 2,319

Depreciation

4,093

3,583 3,388 2,756 2,377 2,024 1,938 1,898 1,960 1,918

Tax equivalents

491

490 407 377 318 238 214 212 206 195

Social security taxes

309

292 275 258 243 228 224 206 213 193

Interest on customer deposits

13

11 11 15 14 17 8 6 6 11

Total operating expenses

13,852

13,593 12,254 10,615 9,344 8,083 7,773 7,700 7,517 7,048

Operating income

10,271

6,956 5,042 2,688 2,840 1,972 2,298 1,542 973 1,271

Net non-operating revenue

(311)

(421) (209) 429 1,655 986 892 628 587 591

Income before transfers

9,960

6,535 4,833 3,117 4,495 2,958 3,190 2,170 1,560 1,862

State Income Tax Expense

(122)

(66) (44) (52) - - - - - -

Transfers out--tax equivalents to the

City of Bristol, Tennessee

(1,646)

(1,558) (1,444) (1,200) (1,069) (1,093) (361) (700) (606) (666)

Change in net assets

8,192$

$ 4,911 $ 3,345 $ 1,865 $ 3,426 $ 1,865 $ 2,829 $ 1,470 $ 954 $ 1,196

Note 1: Cable and internet services commenced in 2006.

Note 2: Telephone services commenced in 2007.

Bristol Tennessee Essential Services

Statement of Revenues and Expenses (Last Ten Years)

Fiscal Years 2011-2002 (in thousands)

55

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56

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56

2011 2010 2009 2008 2007 2006 2005 2004 2003 2002

Purchased power from Tennessee

Valley Authority (megawatt hours)

1,041,797 1,015,122

1,031,991 1,054,810 1,047,479 1,039,435 1,003,918 1,014,411 997,525 935,485

Consumption (megawatt hours):

Residential

500,908 490,513

481,865 480,237 479,605 472,002 454,880 468,611 469,302 432,282

Commercial

55,661 54,484

54,714 55,235 55,411 55,620 53,642 53,344 54,335 49,880

Industrial

429,500 424,944

441,209 464,356 457,434 456,250 451,031 437,853 412,832 398,728

Street and athletic

5,849 5,857

5,681 5,535 5,719 5,638 6,455 5,164 5,255 5,209

Outdoor lighting

4,020 4,026

4,031 4,030 3,625 4,150 4,105 4,139 4,211 4,221

Internal use - - - - - - - -

Total consumption

995,938 979,824

987,500 1,009,393 1,001,794 993,660 970,113 969,111 945,935 890,320

Line losses and megawatt hours

accounted for

45,859 35,298

44,491 45,417 45,685 45,775 33,805 45,300 51,590 45,165

Percentage of line losses and megawatt

hours unaccounted for to purchased

power

4.40% 3.48%

4.31% 4.31% 4.36% 4.40% 3.37% 4.47% 5.17% 4.83%

Active service (number of power customers):

Residential

28,412 28,572

28,572 28,600 28,166 28,070 27,760 27,650 27,458 27,360

Commercial

3640 3558

3561 3537 3500 3,500 3,425 3,332 3,291 3,304

Industrial

633 627

647 649 636 622 609 614 591 588

Street and athletic

39 39

39 40 40 40 41 41 41 38

Outdoor lighting

148 150

153 157 161 159 160 161 160 158

32,872 32,946

32,972 32,983 32,503 32,391 31,995 31,798 31,541 31,448

Note: Information is compiled from internally generated statistical reports.

Bristol Tennessee Essential Services

Purchased Power, Consumption and Active Service Statistics (Last Ten Years)

Fiscal Years 2011-2002

57

2011 2010 2009 2008 2007 2006 2005 2004 2003 2002

Residential

Monthly customer charge 8.42 6.42$ 6.42$ 6.42$ 6.29$ 6.29$ 6.29$ 6.29$ 5.52$ 5.52$

Energy charge:

Summer* 0.08712 - - - - - - - - -

Winter* 0.08438 - - - - - - - - -

Transition* 0.08267 - - - - - - - - -

First 1,000 kWh per month - 0.07661 0.07407 0.07212 0.06157 0.06352 0.05374 0.05374 0.05018 0.05018

Additional kWh per month - 0.08216 0.07962 0.07767 0.06701 0.06896 0.05918 0.05918 0.05615 0.05615

Commercial, Industrial, Governmental and Institutional

Plan A-1 (demand up to 50 kW and usage up to 15,000 kWh):

Customer charge per month - 14.29 14.29 14.29 14.00 14.00 14.00 14.00 10.00 10.00

single phase self contained 13.86 - - - - - - - - -

single phase CT 13.86 - - - - - - - - -

three phase self contained 40.90 - - - - - - - - -

three phase CT 40.90 - - - - - - - - -

Energy charge - 0.08799 0.08461 0.08236 0.07112 0.07346 0.06240 0.06240 0.05820 0.05820

Summer* 0.09821 - - - - - - - - -

Winter* 0.09547 - - - - - - - - -

Transition* 0.09376 - - - - - - - - -

Bristol Tennessee Essential Services

Schedule of Electric Rates (Last Ten Years) (Unaudited)

Fiscal Years 2011 - 2002

* In April 2011 BTES went to seasonal billing.

The seasonal rates above include the June 2011 Fuel Cost Adjustment

58

2011 2010 2009 2008 2007 2006 2005 2004 2003 2002

Commercial, Industrial, Governmental and Institutional (continued)

Plan A-2 (demand of 50 kW to 1,000 kW or demand less than 50 kW but usage in excess of 15,000 kWh):

Customer charge per month 25.51 25.51 25.51 25.00 25.00 25.00 25.00 10.00 10.00

single phase self contained 48.43 - - - - - - - - -

single phase CT 48.43 - - - - - - - - -

three phase self contained 71.99 - - - - - - - - -

three phase CT 71.99 - - - - - - - - -

Demand charge:

Excess of 50 kW - 11.76 10.83 10.49 9.63 10.06 8.56 8.56 7.86 7.86

Summer* 10.15 - - - - - - - - -

Winter* 9.33 - - - - - - - - -

Transition* 9.33 - - - - - - - - -

Energy charge:

First 15,000 kWh per month - 0.08752 0.08414 0.08189 0.07066 0.07300 0.06194 0.06194 0.05774 0.05774

Summer* 0.09491 - - - - - - - - -

Winter* 0.09217 - - - - - - - - -

Transition* 0.09046 - - - - - - - - -

Additional kWh per month - 0.04945 0.04900 0.04785 0.03947 0.04042 0.03420 0.03420 0.03184 0.03184

Summer* 0.06377 - - - - - - - - -

Winter* 0.06106 - - - - - - - - -

Transition* 0.05990 - - - - - - - - -

Plan A-3 (demand of 1,001 kW to 5,000 kW):

Customer charge per month 100.00 25.51 25.51 25.51 25.00 25.00 25.00 25.00 10.00 10.00

Demand charge:

First 1,000 kW - 11.92 10.94 10.58 9.67 10.14 8.56 8.56 7.89 7.89

Excess of 1,000 kW - 14.04 12.88 12.45 11.39 11.94 10.06 10.06 9.09 9.09

Summer* 10.50 - - - - - - - - -

Bristol Tennessee Essential Services

Schedule of Electric Rates (Last Ten Years) (Unaudited) (continued)

Fiscal Years 2011 - 2002

* In April 2011 BTES went to seasonal billing.

The seasonal rates above include the June 2011 Fuel Cost Adjustment

59

2011 2010 2009 2008 2007 2006 2005 2004 2003 2002

Commercial, Industrial, Governmental and Institutional (continued)

Plan A-3 (demand of 1,001 kW to 5,000 kW) (continued):

Winter* 9.68 - - - - - - - - -

Transition* 9.68 - - - - - - - - -

Energy charge: 0.04945 0.04900 0.04785 0.03947 0.04042 0.03420 0.03420 0.03184 0.03184

Summer* 0.06377 - - - - - - - - -

Winter* 0.06106 - - - - - - - - -

Transition* 0.05990 - - - - - - - - -

Plan B (demand of 5,001 kW to 15,000 kW)

Customer charge per month - 1,500.00 1,500.00 1,500.00 1,500.00 1,500.00 1,500.00 1,500.00 1,500.00 1,500.00

Demand charge - 14.78 13.59 13.16 12.33 12.89 10.96 10.96 10.23 10.23

Energy charge: -

First 620 kWh per month - 0.04336 0.04333 0.04234 0.03514 0.03588 0.03050 0.03050 0.02825 0.02825

Additional kWh per month - 0.03576 0.03636 0.03559 0.02883 0.02928 0.02477 0.02477 0.02306 0.02306

Plan C (demand of 15,001 kW to 25,000 kW)

Customer charge per month - 1,500.00 1,500.00 1,500.00 1,500.00 1,500.00 1,500.00 1,500.00 1,500.00 1,500.00

Demand charge - 14.89 13.70 13.27 12.44 13.00 11.07 11.07 10.34 10.34

Energy charge: -

First 620 kWh per month - 0.04336 0.04333 0.04234 0.03514 0.03588 0.03035 0.03035 0.02825 0.02825

Additional kWh per month - 0.03576 0.03636 0.03559 0.02883 0.02928 0.02477 0.02477 0.02306 0.02306

Plan D (demand in excess of 25,000 kW)

Customer charge per month - - - - - - - - 1,500.00 1,500.00

Demand charge - - - - - - - - 12.60 12.60

Energy charge - - - - - - - - 0.02265 0.02265

Bristol Tennessee Essential Services

Schedule of Electric Rates (Last Ten Years) (Unaudited) (continued)

Fiscal Years 2011 - 2002

* In April 2011 BTES went to seasonal billing.

The seasonal rates above include the June 2011 Fuel Cost Adjustment

60

2011 2010 2009 2008 2007 2006 2005 2004 2003 2002

Commercial, Industrial, Governmental and Institutional (continued)

TOU GSB

Customer charge per month 1,500.00 1,500.00 - - - - - - - -

Admin charge: 350.00 - - - - - - - - -

Demand charge

Summer*

onpeak KW 15.38 15.45 - - - - - - - -

offpeak KW excess onpeak 3.30 3.36 - - - - - - - -

KW excess contract KW 15.38 15.45 - - - - - - - -

Winter*

onpeak KW 8.49 8.54 - - - - - - - -

offpeak KW excess onpeak 3.30 3.36 - - - - - - - -

KW excess contract KW 8.49 8.54 - - - - - - - -

Transition*

offpeak KW excess onpeak 3.30 3.36 - - - - - - - -

KW excess contract KW 3.30 3.36 - - - - - - - -

Energy charge

Summer OnPeak 0.09483 0.09158 - - - - - - - -

Summer OffPeak-First 425 HUD

0.06119 0.05793 - - - - - - - -

Summer OffPeak-Next 195 HUD

0.04308 0.03982 - - - - - - - -

Summer OffPeak-Over 620 HUD

0.02771 0.02445 - - - - - - - -

Winter OnPeak 0.06509 0.06183 - - - - - - - -

Winter OffPeak-First 425 HUD 0.06119 0.05793 - - - - - - - -

Winter OffPeak-Next 195 HUD 0.04308 0.03982 - - - - - - - -

Winter OffPeak-Over 620 HUD 0.02771 0.02445 - - - - - - - -

Transition OffPeak-First 425 HUD

0.06119 0.05793 - - - - - - - -

Transition OffPeak-Next 195 HUD

0.04308 0.03982 - - - - - - - -

Transition OffPeak-Over 620 HUD

0.02771 0.02445 - - - - - - - -

Bristol Tennessee Essential Services

Schedule of Electric Rates (Last Ten Years) (Unaudited) (continued)

Fiscal Years 2011 - 2002

* In April 2011 BTES went to seasonal billing.

The seasonal rates above include the June 2011 Fuel Cost Adjustment

61

2011 2010 2009 2008 2007 2006 2005 2004 2003 2002

Commercial, Industrial, Governmental and Institutional (continued)

TOU MSB

Customer charge per month 1,500.00 1,500.00 - - - - - - - -

Admin charge: 350.00 - - - - - - - - -

Demand charge

Summer*

onpeak KW 15.38 15.46 - - - - - - - -

offpeak KW excess onpeak 3.30 3.37 - - - - - - - -

KW excess contract KW 15.38 15.46 - - - - - - - -

Winter*

onpeak KW 8.49 8.55 - - - - - - - -

offpeak KW excess onpeak 3.30 3.37 - - - - - - - -

KW excess contract KW 8.49 8.55 - - - - - - - -

Transition*

offpeak KW excess onpeak 3.30 3.37 - - - - - - - -

KW excess contract KW 3.30 3.37 - - - - - - - -

Energy charge

Summer OnPeak 0.08011 0.07685 - - - - - - - -

Summer OffPeak-First 425 HUD

0.04685 0.04357 - - - - - - - -

Summer OffPeak-Next 195 HUD

0.02874 0.02546 - - - - - - - -

Summer OffPeak-Over 620 HUD

0.01337 0.01009 - - - - - - - -

Winter OnPeak 0.05097 0.04771 - - - - - - - -

Winter OffPeak-First 425 HUD 0.04685 0.04357 - - - - - - - -

Winter OffPeak-Next 195 HUD 0.02874 0.02546 - - - - - - - -

Winter OffPeak-Over 620 HUD

0.01337

0.01009

-

Transition OffPeak-First 425 HUD

0.04685 0.04357 - - - - - - - -

Transition OffPeak-Next 195 HUD

0.02874 0.02546 - - - - - - - -

Transition OffPeak-Over 620 HUD

0.01337 0.01009 - - - - - - - -

Bristol Tennessee Essential Services

Schedule of Electric Rates (Last Ten Years) (Unaudited) (continued)

Fiscal Years 2011 - 2002

* In April 2011 BTES went to seasonal billing.

The seasonal rates above include the June 2011 Fuel Cost Adjustment

62

2011 2010 2009 2008 2007 2006 2005 2004 2003 2002

Commercial, Industrial, Governmental and Institutional (continued)

SDE SMSB:

Customer charge per month 1,500.00 - - - - - - - - -

Admin charge: 350.00 - - - - - - - - -

Demand charge

Summer* 17.60 - - - - - - - - -

Winter* 11.46 - - - - - - - - -

Transition* 6.85 - - - - - - - - -

Energy charge

Summer* 0.04170 - - - - - - - - -

Winter* 0.03719 - - - - - - - - -

Transition* 0.03614 - - - - - - - - -

SDE SMSC:

Customer charge per month 1,500.00 - - - - - - - - -

Admin charge: 350.00 - - - - - - - - -

Demand charge

Summer* 17.71 - - - - - - - - -

Winter* 11.57 - - - - - - - - -

Transition* 6.96 - - - - - - - - -

Energy charge

Summer* 0.04140 - - - - - - - - -

Winter* 0.03718 - - - - - - - - -

Transition* 0.03617 - - - - - - - - -

Note1: Summarized from internal records.

Bristol Tennessee Essential Services

Schedule of Electric Rates (Last Ten Years) (Unaudited) (continued)

Fiscal Years 2011 - 2002

* In April 2011 BTES went to seasonal billing.

The seasonal rates above include the June 2011 Fuel Cost Adjustment

63

Telephone 2011 2010 2009 2008 2007

Basic Telephone Service 22.90 22.90 22.90 22.90 22.90

Includes: Caller ID w/ Name and Number, Call Waiting/Cancel Call

Waiting, Unconditional Call Forwarding, Remote Access to Call

Forwarding, Three-Way Calling, Speed Calling (One Digit), Caller

ID for Call Waiting

Enhanced Telephone Service 28.90 28.90 28.90 28.90 28.90

100 Minutes Long Distance 6.95 6.95 6.95 6.95 6.95

200 Minutes Long Distance

12.95

500 Minutes Long Distance 24.95 24.95 24.95 24.95 24.95

Unlimited Minutes Long Distance

29.95

Cable Television

Expanded Basic 39.95 39.95 39.95 39.95 39.95

Digital:

Basic 51.95 51.95 50.95 50.95 49.95

Bronze 62.95 62.95 59.95 59.95 59.95

Silver 70.95 70.95 67.95 67.95 67.95

Gold 78.95 78.95 72.95 72.95 72.95

Spanish Tier 4.95 4.95 4.95 4.95 4.95

High Definition Tier 9.95 9.95 9.95 9.95 9.95

Sports Tier 4.00 4.00 4.00 4.00 4.00

Pay-Per-View Movies:

New release 3.99 3.99 3.95 3.95 3.95

Premium Packages:

Cinemax 12.95 12.95 9.95 9.95 9.95

HBO 14.95 14.95 11.95 11.95 11.95

Showtime 12.95 12.95 11.95 11.95 11.95

STARZ 10.95 10.95 9.95 9.95 9.95

Internet

64K Tier 16.95 16.95 16.95 16.95 16.95

2 Mbps Tier (1.5 Mbps in 2007) 29.95 29.95 29.95 29.95 29.95

4 Mbps Tier (3 Mbps in 2007) 39.95 39.95 39.95 39.95 39.95

6 Mbps Tier (5Mbps in 2007) 49.95 49.95 49.95 49.95 49.95

12 Mbps Tier 59.95 59.95 59.95 - -

Note 1: Summarized from internal records.

Note 2: Cable and Internet services commenced in 2006.

Note 3: Telephone service commenced in 2007.

Bristol Tennessee Essential Services

Schedule of Telephone, Cable and Internet Rates (Unaudited)

Fiscal Years 2011 - 2007 (Last Five Years)

Includes: Above list of features plus Voicemail, *67 Caller ID

Blocking, *66 Repeat Dialing, *69 Call Return, Anonymous Call

Rejection

64

2011 2002

Name Rank Rank

Exide Corporation 1 1

City of Bristol, Tennessee 2 4

Wellmont BRMC 3 2

Modern Forge of Tennessee 4 3

King Pharmaceuticals 5 5

Royal Mouldings 6 –

Daramic/Amerace, LLC 7 7

Bristol Metals, Inc. 8 8

GlaxoSmithCline Labratories 9 6

Seaman Corporation 10 9

King College 11 12

Bristol Motor Speedway 12 8

Embarq/Sprint – 10

Fingerhut - 11

Note 1: Summarized from internal records.

Bristol Tennessee Essential Services

Current Year and Nine Years Ago

Schedule of Principal Customers Ranked by Kwh Usage (Unaudited)

65

2011 2010 2009 2008 2007 2006

Revenue bonds (in thousands) 22,060$ 22,545$ 22,899$ 23,499$ 24,333$ 24,347$

Number of customers 32,872 32,946 32,972 32,983 32,503 32,391

Outstanding debt per customer 671$ 684$ 694$ 712$ 749$ 752$

Note: No outstanding debt existed prior to fiscal year 2006.

Net

Power Power Revenue

Operating Operating for Debt

Revenues Expenses Service Principal Interest Total Coverage

2011 94,278 82,819 11,458 485 999 1,484 7.71

2010 80,465 72,465 8,000 470 1,016 1,486 5.38

2009 88,047 81,373 6,674 455 1,032 1,487 4.49

2008 74,007 70,699 3,308 440 1,047 1,487 2.22

2007 69,850 64,934 4,916 - 1,055 1,055 4.66

2006 66,376 62,283 4,093 - 627 627 6.53

Note 1: Power operating expenses do not include depreciation.

Note 2: No outstanding debt existed prior to fiscal year 2006.

Fiscal Years 2011-2006 (Last Five Years)

Debt Service Requirements

Bristol Tennessee Essential Services

Schedule of Bonds Payable by Type

Fiscal Years 2011-2006 (Last Six Years)

Schedule of Power System Revenue Bond Coverage (in thousands)

66

2010 2009

Name Number of Number of

Employees Employees

Wellmont 1,885 1,639

City of Bristol TN 885 870

Exide 410 300

NESCC 340 320

HSN 291 285

Bristol Metals 310 285

The Robinette Company 250 250

Modern Forge 220 200

Kysor Panel 175 -

Seaman Corp 127 -

Touchstone Wireless - 558

King Pharmaceuticals - 477

Note 1: Summarized from internal records.

Note 2: Service area total employment information not available. Total employments figures

are available only for the Tri-Cities CSA which is a much larger area that BTES service

area. As a result, percentages of total employment would not be accurate.

Bristol Tennessee Essential Services

Ten Largest Employers

Current Year and Last Year

67

68

BRISTOL TENNESSEE ESSENTIAL SERVICES

CLIMATOLOGICAL DATA

FISCAL YEARS 2011-2002

Fiscal

Year

2011

Heating

Degree Days *

4282

Cooling

Degree Days *

1418

2010 4476 1083

2009 4315 1013

2008 4002 1031

2007 4140 1120

2006 4038 1163

2005 4222 1068

2004 4141 1027

2003 4064 1132

2002 3921 1189

SOURCE: U.S. Department of Commerce, National Oceanic and

Atmospheric Administration

*

Degree Day is a unit measuring the extent to which the average of the daily high and daily low temperature varies

from a standard reference temperature. Based on a reference temperature of 65 degrees Fahrenheit, if the average

of the daily high and daily low temperature (high plus low divided by 2) for a day is 70, then there are five cooling

degree days for that day. Likewise, if the average of the daily high and daily low temperature was 60, then there

were five heating degree days. This historical information can be used for forecasting system load and planning

unit maintenance outages, to name a few.

69

BRISTOL TENNESSEE ESSENTIAL SERVICES

DEMOGRAPHIC AND ECONOMIC STATISTICS

TRI-CITIES, TENNESSEE-VIRGINIA CSA

CALENDAR YEARS 2010-2000

Calendar

Year

Population

Per Capita

Income

Personal

Income

Median

Age

Unemployment

Rate

2010 508,260 -* -* 42.3 9.4%

2009 503,060 $31,212 $15,700,341 41.7 9.4%

2008 500,538 $31,300 $15,664,419 40.8 5.6%

2007 496,934 $30,269 $15,041,660 40.8 4.5%

2006 493,796 $26,671 $8,987,850 40.7 4.3%

2005 490,238 $27,163 $9,360,578 42.0 4.6%

2004 479,830 $25,299 $9,751,870 39.6 4.8%

2003 485,884 $23,878 $10,128,666 39.2 5.9%

2002 485,300 $22,302 $10,726,989 40.2 5.3%

2001 484,900 $22,302 $11,166,649 39.7 5.0%

2000 480,091 $22,119 $11,495,389 39.7 4.5%

Information obtained from First Tennessee Development District.

*The per capita income and personal income data for 2010 was not yet available due to adjusting

of data to the new census data which takes longer.

Period of

Type of Coverage Limits Deductible Coverage Company

Crime $ 500,000 $ 5,000 12/04/10 to Travelers Casualty

12/04/11 and Surety Company of

America

Workers’ compensation 1,000,000 - 12/04/10 to

Distributors Self Ins.

Fund

12/04/11

General liability: 0 to 1,000 12/04/10 to

Distributors Self Ins.

Fund

General aggregate 750,000 12/04/11

Products-completed operations

aggregate 250,000

Personal and advertising injury 250,000

Each occurrence 250,000

Fire damage (any one fire) 250,000

Medical expense (any one person) 50,000

Employee benefits:

Each claim 250,000

Aggregate 250,000

Excess general liablity: 12/4/2010 to Chubb Comeercial

Other aggregate limit 2,250,000 12/04/11 Excess Follow - Form

Products completed operations Ins.

aggregate 750,000

each occurrence 750,000

Automobile policy: 100 to 1,000 12/04/10 to Chubb Goup of Ins. Co.

12/04/11

Liability 1,000,000

Comprehensive

Uninsured motorist 1,000,000

Collision

Medical payments

Bristol Tennessee Essential Services

Schedule of Property, Casualty and Other Insurance (Unaudited)

June 30, 2011

Actual Cash Value

5,000 per person

70

Period of

Type of Coverage Limits Deductible Coverage Company

Commercial umbrella liability $ 20,000,000 $ - 12/04/10 to

The North River Ins.

Co.

12/04/11

Property

5,000 to

100,000

12/04/10 to Affiliated FM Ins. Co.

12/04/11

On premise property 30,107,571

Flood 2,500,000 50,000

Earthquake 10,000,000 50,000

Directors, officers and employees 10,000,000 5,000 to 25, 000 04/28/11 to

Zurich American Ins.

Co.

liability and reimbursment policy

04/28/12

Boiler & machinery policy 1,000,000 5,000 to 12/04/10 to Cincinnati Ins. Co.

50,000 12/04/11

Employment related practices liability: 10,000 4/28/11 to Cincinnati Ins. Co.

04/28/12

Each insured event limit 1,000,000

Total limit 1,000,000

Note 1: Information is compiled from internal records.

June 30, 2011

Bristol Tennessee Essential Services

Schedule of Property, Casualty and Other Insurance (Unaudited) (continued)

71

Fiscal Full Part

Year Time Time Total

2011 59 7 66

2010 58 6 64

2009 60 5 65

2008 60 5 65

2007 60 2 62

2006 60 1 61

2005 60 1 61

2004 60 1 61

2003 60 5 65

2002 60 3 63

Note 1: Summarized from internal records.

Bristol Tennessee Essential Services

Schedule of Employees (Last Ten Years) (Unaudited)

Fiscal Years 2011 - 2002

72

73

B

RISTOL

T

ENNESSEE

E

SSENTIAL

S

ERVICES

S

TATISTICS

-

J

UNE

2011

2470 Volunteer Parkway, Bristol, TN 37620

P. O. Box 549, Bristol, TN 37621

Telephone: 423-968-1526

FAX Number: 423-793-5545

Power Outage Number: 423-968-BTES (968-2837)

Internet, Telephone and Cable TV Help Desk: 423-793-5555

Miles of Line ....................................................................................... 1,280

NUMBER OF CUSTOMERS

Large General Power (>50 kW) ............................................................. 633

Small General Power (<50 kW) .......................................................... 3,640

Residential ......................................................................................... 28,412

Street and Outdoor Lighting .................................................................. 187

Total ................................................................................................. 32,872

Employees/1000 Customers ................................................................ 2.01

NUMBER OF FIBER OPTIC CUSTOMERS

Residential Cable Television Customers ...............................................11,114

Commercial Cable Television Customers ..................................................292

Residential Internet Customers ................................................................9,193

Commercial Internet Customers ................................................................. 461

Residential Telephone Customers............................................................ 7,345

Commercial Telephone Customers ............................................................. 400

Total Services ...................................................................................... 28,805

Total Homes and Businesses Served .................................................. 13,089



74



Report of Independent Auditors on Internal Control Over Financial Reporting and

on Compliance and Other Matters Based on an Audit of Financial Statements

Performed in Accordance with Government Auditing Standards

Board of Directors

Bristol Tennessee Essential Services

We have audited the financial statements of Bristol Tennessee Essential Services, an enterprise

fund of the City of Bristol, Tennessee, and Bristol Tennessee Essential Services Post

Employment Benefits Trust, a fiduciary fund of the City of Bristol, Tennessee (collectively

referred to as “BTES”), as of and for the year ended June 30, 2011, and have issued our report

thereon dated November 7, 2011. We conducted our audit in accordance with auditing standards

generally accepted in the United States of America and the standards applicable to financial

audits contained in Government Auditing Standards, issued by the Comptroller General of the

United States of America.

Internal Control Over Financial Reporting

In planning and performing our audit, we considered BTES’ 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 BTES’ internal control over financial reporting. Accordingly, we do not express

an opinion on the effectiveness of BTES’ internal control over financial reporting.

A deficiency in internal control exists when the design or operation of a control does not allow

management or employees, in the normal course of performing their assigned functions, to

prevent, or detect and correct misstatements on a timely basis. A material weakness is a

deficiency, or a combination of deficiencies in internal control such that there is a reasonable

possibility that a material misstatement of BTES’ financial statements will not be prevented, or

detected and corrected on a timely basis.

Our consideration of internal control over financial reporting was for the limited purpose

described in the first paragraph of this section and was not designed to identify all deficiencies in

internal control over financial reporting that might be deficiencies, significant deficiencies, or

material weaknesses. We did not identify any deficiencies in internal control over financial

reporting that we consider to be material weaknesses, as defined above.

Board of Directors

Bristol Tennessee Essential Services

75



Compliance and Other Matters

As part of obtaining reasonable assurance about whether BTES’ financial statements are free of

material misstatement, we performed tests of its compliance with certain provisions of laws,

regulations, contracts, and grant agreements, noncompliance with which could have a direct and

material effect on the determination of financial statement amounts. However, providing an

opinion on compliance with those provisions was not an objective of our audit, and accordingly,

we do not express such an opinion. The results of our tests disclosed no instances of

noncompliance or other matters that are required to be reported under Government Auditing

Standards.

This report is intended solely for the information and use of management, the Board, others

within BTES’ and the Tennessee Comptroller of the Treasury and is not intended to be and

should not be used by anyone other than these specified parties.

Coulter & Justus, P.C.

Knoxville, Tennessee

November 7, 2011