2017 LWC Annual Report for the Web.Pdf

Louisville Water

2017 ANNUAL REPORT QUALITY WATER…QUALITY OF LIFE Every day, nearly a million people depend on Louisville Water Company to provide safe, high-quality drinking water. We’re proud to deliver. Louisville Water has a 157-year history of quality, innovation, value and service. The company began operations in 1860 as Kentucky’s first public water provider and today supplies water and fire protection to communities in Louisville Metro and parts of Bullitt, Hardin, Nelson, Oldham, Shelby and Spencer counties.

LOUISVILLE WATER MISSION Provide safe, high-quality water and related services that deliver an exceptional value to our customers, shareholder and community.

LOUISVILLE WATER VISION CONTENTS Be the water supplier of choice throughout the Louisville 1...President’s Message region by: 2...2017 Company Highlights • Providing best-of-class quality, customer service, innovation and value 23...Financial Performance • Expanding the geographic area we serve 28...Independent Auditor’s Report • Creating new lines of water-related businesses that build on existing competencies 30...Management’s Discussion and Analysis 38...Financial Statements 66...Supplementary Information 73...Corporate Information PRESIDENT’S MESSAGE Spencer Bruce, President/CEO

I’m pleased to provide you with Louisville Water Company’s 2017 “liquid assets” across the United States. This effort along with an Annual Report. In 2017, our customers enjoyed outstanding water emphasis on new lines of business accounted for $16.8 million quality; the community saw the results of engineering projects of our 2017 revenue. Regionalization and economic development to improve our infrastructure; and, our owner, Louisville Metro opportunities allow us to offset the trend of overall declining received a solid return on its investment. water consumption to maintain affordable water rates. Louisville Water customers enjoy some of the lowest rates in the region, with Producing and delivering a reliable, high-quality supply of drink- the average residential monthly bill of $24.60 for 5,000 gallons of ing water is at the core of our business and in 2017, we made great water. Our owner, Louisville Metro, continues to reap the benefits strides to continue our rich tradition. We maintained funding to from our sound management with a total contribution of $36.4 repair and replace our distribution water mains and assessed the million in 2017 for water, fire service and a dividend. structural integrity of 16 miles of large diameter mains. Along Eastern Parkway, we successfully completed the first phase of a Our employees deserve much of the credit for our success in 2017, three-year project to replace one of our largest and oldest water and I’m extremely proud that we recorded another great safe- mains. And with the national focus on reducing the risk of lead ty performance. Safety is paramount at Louisville Water and the in drinking water, our engineering team accelerated its work to company-wide focus is evident at the treatment plants, on the job replace our remaining known lead service lines by 2020. At the sites and in the office. same time, we launched an assistance program for customers to Louisville Water has always considered itself as more than a replace private lead service lines. This work, along with contin- water utility. We are a community asset. In 2017, our education ued research to enhance our corrosion control program, will min- and outreach efforts touched more than one million people and imize the risk of lead entering our water. thousands of guests toured the WaterWorks Museum and the Louisville Water continues to have two of only 16 treatment Crescent Hill Reservoir. Highlighting the value of water is key plants in the United States designated with the Phase IV Excel- and so is contributing to the communities where we work. Our lence Award for water quality. We not only produce a superior employees volunteered at over 100 organizations and donated product; with the Ohio River as the source, we have an abundant $159,000 to four company-supported charities. supply. In 2017, we welcomed two new wholesale partners, Har- Louisville Water began operations in 1860 and the quality of our din County Water District 1 and Hardin County Water District water is forever connected to the quality of life in this region. No. 2. We also broke ground on a project to deliver water to the I am proud to share the story of how in 2017 we continued this Shelbyville Municipal Water and Sewer Commission. We have in- 157-year tradition. tensified our focus on regionalization and economic development with a team of employees focused on sharing the story of our President/CEO 1 2017 AT A GLANCE AVERAGE DAILY DELIVERY million 4,200TOTAL 117 gallons MILES OF PIPE

At the River Quick response and technical expertise helped Louisville Water manage a dangerous spill on the Ohio River. When a barge acci- dent on December 19, 2017 dumped 467,000 gallons (5.1 million pounds) of a liquid fertilizer called urea ammonium nitrate in the Ohio River near Cincinnati, Louisville Water employees sprang into action without hesitation. Scientists, plant operators, and engineers determined a plan of action to keep the water safe, which included a never-before extended shutdown of approximately 11 hours of the intake pumps at Zorn Pumping Station and a slight adjustment to the water treatment strategy. This spill was unique in that we couldn’t see it on the river; scientists had to sample the water downstream from the spill to determine the length of the plume. Using the river’s flow rate and continuous sampling, we mapped a projected travel time to our water intakes. Several employees worked around the clock, even on Christ- mas Eve and Christmas Day, to ensure the safety of our drinking water. As the plume began passing by our Zorn Pumping Station on Christmas Day, we were able to close the intakes since the holiday is one of the lowest pumping days of the year. At the treatment plant, we monitored levels and maintained the high water quality our customers expect. That commitment to quality is a 24/7 focus. Louisville Water continues to produce some of the highest quality water in the United States. We maintained the Phase IV Partnership for Safe Water,

Scientists Chris Bobay and Mark Campbell work in a mobile lab and on the Ohio River to track the spill. 2 2017 AT A GLANCE 24,125 FIRE 53,374 VALVES HYDRANTS

a distinction that only 16 of the nation’s approximately 55,000 water utilities have earned. Both of our treatment plants have the Phase IV status which puts Louisville Water in an elite class of utilities. In the Field Louisville Water employees working in the field met high standards for quality, safety and efficiency throughout 2017. We completed Phase 1 and started Phase 2A of a three-year, $25 million project to replace a 1930 cast iron main along Eastern Parkway. This project—the largest replacement project in our history—uses a slip-lining technique, which involves installing a 42-inch outer diameter steel pipe inside the original 48-inch pipe. Slip-lining significantly minimizes environmental impacts and neighborhood disruptions while increasing the lifespan of this critical main. Customers along the route do not lose water service during the construction. In addition to the engineering aspect, the project has included a significant communication effort. From social media, neighborhood meetings, and construction signage to website updates and emails, Louisville Water continuously sent information on the project to more than two dozen stakeholder groups and thousands of commuters and residents. Crews dig pits and push a new pipe inside the original 1930 pipe on By the end of 2017, we had completed sidewalk and landscape Eastern Parkway. restoration from the first phase. Louisville Water also donated funds to neighborhood associations and Louisville Metro Parks to purchase and plant trees in the neighborhood.

3 2017 AT A GLANCE WATER MAIN NUMBER OF BREAKS 12.7 MAIN BREAKS 536 PER 100 MILES OF PIPE

When complete, Louisville Water will have slip-lined 6.4 miles of the water main. Replacing Lead Lines Louisville Water has made significant progress in replacing its remaining lead service lines. In 2017, crews and contractors replaced an average of four lead service lines daily, which puts the company on track to eliminate our remaining lead lines by 2020. Louisville Water has budgeted roughly $23.6 million to complete the work. Lead is not a public health concern for Louisville’s drinking water. There is no lead in the water when it leaves the treat- Louisville Water replaced 1,900 of its lead service lines in 2017. ment plants, but there’s a potential risk for lead to leach into the water through pipes and plumbing materials. Managing the risk LEAD SERVICE LINES in the distribution system begins at the plant with scientists bal- ancing the water chemistry, but it’s also important to eliminate 75,000 74,000 the primary risk posed by the lead service lines. (It was common to use lead for the line that connects to the customer’s property until 1950.) We began an aggressive strategy in 1991 to replace the remain- 50,000 ing lead service lines and at that time, we estimated there were 36,000 lines in service. By the end of 2017, approximately 4,500 remained, representing just 1.6% of our total service lines.

25,000 Of the 1,900 lead service lines we replaced in 2017, Louisville NUMBER OF LINES Water found that 47 of the private service lines were also made of lead. Because Louisville Water is only responsible for the lines 6,500 4,500 ELIMINATE that connect to the property, the company started a pilot program KNOWN LINES to help customers pay for the replacement of their private lead 1,000 137 2016 2017 2020 lines. The program includes Louisville Water matching 50% of the 4 2017 AT A GLANCE MILES MILES OF MAIN 2.07 OF MAIN 25.10INSPECTED FOR LEAK DETECTION

cost to replace the private lead line, up to $1,000. In addition, the Louisville Water Foundation set aside money to help customers who met certain income guidelines. Ten customers chose to participate in the pilot program, accepting a 50% match from Louis- ville Water and one customer received assistance from the Louis- ville Water Foundation. For customers who chose not to replace their private lead service line, we offered water filtration pitchers with a six-month supply of filters. While it’s not common to find lead service lines on the customer’s side of the property, Louisville Water will continue this program and offer customers financial assistance to remove them. Serving the Region Louisville Water expanded its reach in 2017 with a new partner Louisville Water to the south. In May, we began delivering water to Hardin Coun- ty Water District No. 2 through a wholesale agreement. Both Louisville Water and the district completed large projects to make a connection. The district installed 11 miles of 24-inch water main from its existing system in Elizabethtown to the Hardin-Bul- litt County line and built the Miller Pump Station. Louisville Water installed four miles of water main through Bullitt County to connect to the district. This $5.8 million investment also helped Louisville Water improve its service to its existing customers in Bullitt County. Hardin County District No. 2 will purchase at least 160 million gallons of water annually from Louisville Water. The partnership also provides a key economic benefit. The additional water supply Hardin County Water District No. 2 and Louisville Water celebrate the beginning is available for the Glendale Mega Site, one of only two Kentucky of a partnership.

5 2017 AT A GLANCE WHOLESALE CONTRACTS WATER WITH 9 PROVIDERS

certified CSX mega sites, which promises a large growth potential for the Hardin County region. In November, Louisville Water also began installing a large water main along Interstate 64 East that will deliver our drinking water to the city of Shelbyville. When this project is complete, Louisville Water will be able to supply up to seven million gallons of water daily to the Shelbyville Municipal Water and Sewer Commission. This is a regional solution for delivering drinking water because the project will benefit the four water providers in Shelby County. Louisville Water will install about 10 miles of 24-inch main along Interstate 64 East from the Jefferson/Shelby County line and connect with Shelbyville Water near Highway 55 in Shelby County. The work will begin near Louisville Water’s tank at the Shelby County line. In addition to water main installation, Louisville Water will con- struct a pumping station to maintain water pressure along the route. The work should be complete by the summer of 2019. Louisville Water’s regionalization work also includes contract operations for the water treatment plant and pumping facilities at the River Ridge Development Authority in southern Indiana and at the Fort Knox water treatment and pumping facilities. New Development Growth Work is underway to install a water main along I-64 E to deliver water to Shelbyville. Louisville Water has experienced noticeable growth within its traditional service area via pipelines constructed to serve new customers. In 2017, Louisville area developers added 17.21 miles of new water main, as compared to 12.51 miles in 2016 and 5.63 miles for 2012.

6 2017 AT A GLANCE MILES OF NEW WATER MAIN 17 INSTALLED FOR DEVELOPMENT

The increase in water pipeline projects generated more than $4 million in investments in 2017, which compares to about $3 million the year before and about $1.5 million in 2012. And the numbers indicate that pipeline expansion last year was more than four times the volume of all of 2011. To improve how we maintain our assets, Louisville Water moved forward with its WAM (Work and Asset Management) initiative, an in-house, software-based tool that will help the company plan for maintenance costs, provide more detailed work orders and extend the life cycle of Louisville Water’s assets. In 2017, a team of employees worked with vendors on the first phase of the project. It’s a significant undertaking, but the initiative is on track for An increase in development generated more than $4 million in investments. employees at the treatment plants to use the technology in the summer of 2018. Maintaining Our Network of Pipes In addition to installing new pipelines, Louisville Water has continued to focus on maintaining its existing water distribution network, which includes more than 4,200 miles of pipes ranging in size from 6 inches to 60 inches in diameter. The company keeps the system in good condition not only by repairing and replacing water mains, a significant portion of the capital budget at $9.6 million, but also by performing robotic inspections on the large transmission mains. Louisville Water allocated $9.5 million in 2017 for assessing the mains that are 20-inches in diameter and larger with a variety of robotic tools, many of which can move through a pipe while Louisville Water uses robotic technology to inspect its largest pipes. it’s filled with water. The devices generate a magnetic fieldso engineers can identify anomalies indicating potential damage

7 2017 AT A GLANCE OVER 16 MILES OF MAIN INSPECTED ROBOTICALLY

or a problem area inside a pipe. We inspected over 16 miles of transmission main with this technology in 2017 and based on the reports, we have projects to repair 45 sections of pipe. We’re extremely pleased with the results from the large pipe inspections and will continue this work in 2018. Oak and Clay Street Break In 2017, Louisville Water averaged 12.7 main breaks per 100 miles of pipe, a best-in-class performance. Water main breaks will hap- pen but the goal is to minimize their impact. In December, one of Louisville Water’s older mains, a 48-inch, 100-year-old main ruptured near the intersection of Oak and Clay Streets. This cast-iron main broke during morning rush hour, sending up to 20 million gallons of water through the Shelby Park neighborhood. Fortunately, no one was injured. Crews worked for several hours to isolate the site and completely turn off the water. In fact, crews worked on more than 60 valves in the ground to turn off the water. Some valves required up to 900 full turns, and it was a slow process because turning too quickly could have damaged the valves. After the water main was turned off, service was soon restored to 30 affected homes near the site, and crews worked quickly to repair the pipe. They put the main back in service within two weeks. A break on a 48-inch water main flooded several streets and took two weeks The repair on Oak Street also involved installing two new valves, to repair. including a 48-inch valve near Oak and Preston Streets that was last replaced in December 1927.

8 2017 AT A GLANCE OSHA RECORDABLE INJURIES IN 2017 1.93 HALF OF THE INDUSTRY AVERAGE

Our Best Year for Safety No matter what type of work Louisville Water crews perform, safety is always a primary concern, and in 2017, Louisville Water had another successful performance year. We experienced 10 Oc- cupational Safety and Health Administration (OSHA) recordable injuries, and the recordable injury incident rate was 1.93, which is less than half of the industry average. This is an amazing accomplishment considering the type of work our employees perform. The company has worked for years to build a safety culture that reduces injuries and preventable vehicular accidents. Our efforts have included a wide range of programs and initiatives, such as safety tailgate meetings, employee-led teams, detailed metrics, safety audits built into management goals, and safety “blitzes,” which are special events that promote safe practices. Louisville Water’s union, AFSCME Local 1683, which has about 200 members, is a key partner in the company’s commitment to safety. In February, the union elected a new president, Plumber Leader’s Assistant Adam Carter, who serves on Louisville Water’s Executive Leadership Team and also has led the union in its focus on such issues as training, grievance policies, and labor-management partnerships. Carter’s work has been supported by the union vice president, Plumber Leader Beau Newton, who also began serving a two-year term in 2017.

“Safety blitzes” focus on safe driving habits and best practices in the field.

9 2017 AT A GLANCE DAILY TESTS ON 200 THE DRINKING WATER SUPPLY

At the Plant Maintaining Excellent Quality Louisville Water continues to excel in water quality. Our drinking water meets and in most cases exceeds the Environmental Protection Agency’s (EPA) strict health standards. The water quality staff has increased its focus on monitoring the quality throughout the distribution area and in 2017, only 162 customers (out of nearly one million) contacted us with a water quality question, significantly lower than the five-year average. Once again, Louisville Water successfully met water quality requirements for the Lead and Copper Rule (LCR). LCR is an EPA regulation that controls lead and copper in drinking water at customers’ homes where there is a lead service line or lead sol- der line. Lead in the water is not a health concern for Louisville Water. There is no lead in the water when it leaves the treatment plants, but there’s a potential risk for lead to enter the water through pipes and plumbing materials. For 90 percent of its samples, Louisville Water recorded a level of less than 4.7 ppb (parts per billion) for lead, which was well below the EPA Action Level of 15 ppb. This level also met Louisville Water’s own stricter 2017 goal of less than 5 ppb for lead for 90 The labs at the Crescent Hill Water Treatment Plant underwent a facelift, which percent of its samples. This is an impressive achievement since a included new equipment and improved storage areas. community with a lead level recording of less than 5 ppb is considered “lead-risk free.” Research and corrosion control at the treatment plants plus the field work to replace our remaining lead service lines continues to reduce the risk of lead leaching into our drinking water.

10 2017 AT A GLANCE TREATMENT PLANTS RANKED AS 2 OF THE TOP 16 IN NORTH AMERICA

Facility Updates Keeping our facilities in top shape included major renovations to the Screen Tower and Pumping Station No. 3 at Zorn Avenue. This $6.8 million project includes rehabilitation of the masonry exteriors of both buildings, as well as painting of the pump housings, piping and the steam pump from the main floor up. The renovation also includes replacement of the slate roofs and several windows, plaster repairs and painting. The Screen Tower will remain in service during renovations and Pumping Station No. 2 will keep the water flowing while Pumping Station No. 3 is out of service. The project is expected to be completed in 2019. Pump- ing Station No.3 is unique in that it includes the last of Louis- ville Water’s steam engines. Although no longer operational, the

Allis-Chalmers 1919 engine is one of only a handful remaining in Louisville Water Tower Park and WaterWorks Museum remain open during the the United States. renovation of the Screen Tower and Pumping Station No. 3. The Crescent Hill Water Treatment Plant is nearly 100 years old and in 2017 we demolished the existing chemical silos and associated equipment in the seven-story chemical building on Frankfort Avenue. A portion of the reclaimed silo space will be transformed into office space after the demolition project. The chemical building’s outside masonry was also resealed and repainted. The labs at the Crescent Hill plant received an updated electrical system, improved storage areas, and some significant new pieces of equipment, such as new fume hoods (ventilation devices designed to limit exposure to fumes and vapors), a new reverse The demolition of the chemical silos in the seven-story chemical building on Frank- fort Avenue began in 2017. Records for the chemical building go back to at least osmosis system (a water purification technology) and a new TOC 1902 but the silos have not been used since the early 1990s. analyzer (which measures total organic carbon in water samples).

11 2017 AT A GLANCE LOUISVILLE WATER MILLION CUSTOMER GENERATES 1.6 BILLS ANNUALLY

Due Date Amount Due 02/15/16 At the Tap To avoid late charges, mail payment at LouisvilleWater.com 502.583.6610 least seven days prior to due date. See $172.82 To pay by phone, back for additional payment options. select option 3 If paid after 02/15/16, a $6.09 late fee will be applied to your next bill. Account Summary See back for charge details In 2017, Louisville Water modernized the customer’s bill with the Previous Balance $230.43 Payments Received $0.00 Bill Correction -$230.43 Account Balance $0.00 first redesign since the mid-1990s. The layout now reflects a more Account Information Current Charges Account Number 1234567890 Louisville Water Charges $35.47 Account Name Sample A Sample modern, user-friendly format with colors, charts and icons that Service Address 1234 Main St MSD Charges $86.41 Service Period 11/11/15 - 01/14/16 Bill Date 01/25/16 Other Charges $50.94 Usage History simplify understanding. Total Amount Due $172.82 Previous Bill Current Bill 1 CON = 1000 GALLONS Usage Comparison 6 5 This Bill Last Bill 4 Louisville Water has been looking to change how it collects data 3 2 6,000 5,380 1 Gallons Gallons CON May Jul Sep Nov Jan 2015 2015 2015 2015 2016 on customers’ water usage and, at the same time, allow custom-

Message Center ers to monitor their own usage. For several years, staff members Small Leaks Can Add Up to Big Bills!

Small undetected water leaks in your home can quickly add up! A small leak in your toilet can use up to 1,000 gallons

1/1 of water a day, and most leaks typically grow in size. We suggest you begin the leak search with your toilet. Other in metering, customer service and engineering have studied Ad- places to look are: Behind your washing machine, indoor & outdoor faucets and sprinkler systems. vanced Metering Infrastructure, a technology that will allow us Louisville Water Company Account Name Sample A Sample 550 South Third Street Account Number Bill Date Amount Due Due Date Louisville, KY 40202-1839 1234567890 01/25/16 $172.82 02/15/16 10000000 to remotely read meters. In 2017, an employee team evaluated If paid after 02/15/16, a $6.09 late fee will be applied to your next bill. Amount Enclosed $ vendor bids and interviewed the finalists to supply equipment for

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!Pe l S+ qqQQ11qqQ 0000000000000000000000000000 To help customers who have difficulty paying their water 44361420000160000100001100000000000 The new look for Louisville Water’s bill. and sewer bill, the Louisville Water Foundation granted nearly $237,000 for customer assistance in 2017. The Foundation provides funding to organizations in Jefferson, Oldham and Bullitt counties where Louisville Water has direct water service, and these agencies worked with 1,000 families who requested assistance with their Louisville Water and MSD bill.

In June, we launched an electronic customer newsletter, News Splash. Each month subscribers receive an email with information on Louisville Water news, tips, employee profiles, events, and history. Customers can visit LouisvilleWater.com to sign up for News Splash and browse past issues. Social media has dramatically changed how we interact with Louisville Water plans to phase out manually reading water meters. customers. Through our Facebook and Twitter accounts, we can

12 2017 AT A GLANCE CHILDREN AND ADULTS 70,000 REACHED THROUGH EDUCATION

quickly share information, and customers have another conve- nient avenue to ask questions. During 2017, Facebook followers grew by 33% and Twitter grew by 35%. Some of the most popular tweets are from college students who talk about how much they miss the taste and quality of Louisville pure tap® when they’re away at school.

Throughout the Community Education & Outreach Two Louisville Water logos rose over the community in 2017, one Some of the most popular Twitter comments are from college students who miss on a repainted elevated tank on Westport Road and one a new the taste of Louisville’s drinking water. three-million-gallon tank on English Station Road in Middletown. These logos represent not only the company’s efforts to expand its brand but also a commitment to enhancing the community through outreach efforts that include charitable work and exten- sive education programs. For instance, 2017 was the 10-year anniversary of the Adventures in Water Festival, which brings together two dozen community organizations to provide educational demonstrations and activities for local students. Since 2007, the festival has hosted 195 school groups (about 18,000 students). This festival is just one facet of a program that sends Louisville Water educators to more than 100 schools throughout the school year. These educators offer a range of free programs with experiments that provide real-world examples to the curriculum and highlight the value For the first time in our history, Louisville Water added branding to its water tanks. of water.

13 2017 AT A GLANCE LOUISVILLE WATER TOWER AND PUMPING STATION NO. 1 ARE ONE OF 8 NATIONAL HISTORIC LANDMARKS IN LOUISVILLE

Louisville Water hosts the Adventures in Water Festival at Lou- isville Water Tower Park, a popular destination for community events and weddings as well as the home of the WaterWorks Mu- seum, which celebrated its third anniversary in 2017. The museum offers historic photographs, films and memorabilia, some of which date from 1860. Visitors discover our contributions to safe drinking water through our innovations in science and engineering. Special exhibits rotate throughout the year. In May, Louisville Water Tower Park joined in a united effort to promote history and tourism in Jefferson County when eight local National Historic Landmarks—including Louisville Water’s Pump- ing Station No. 1 and Water Tower—became part of a new organization: National Historic Landmarks of Louisville. This group launched a program to encourage people to visit the sites that are open to the public. In addition, Louisville Water Tower Park participated in the city’s Cultural Pass Program, which provided free access during the summer to 38 of greater Louisville’s arts and cultural institutions for children and a guardian. Because of this program, nearly 600 children and more than 300 adults visited the park. Overall, more than 31,000 people visited the site for events and Louisville Water’s education program includes a water festival, classroom program- education in 2017. ming and the WaterWorks Museum. In July, Louisville Water Tower Park also hosted the 9th annual Buy Local Fair through a partnership with the Louisville Inde- pendent Business Alliance. The fair featured more than 200 local businesses, musicians and artists as well as craftspeople, farmers, and food trucks. Louisville Water provided free water bottle fills

14 2017 AT A GLANCE LOUISVILLE PURE TAP® PROGRAM REACHES NEARLY ONE MILLION PEOPLE

and refills at two pure tap stations. The crowd was estimated at 10,000—a new record. To highlight career opportunities in the water industry, we expanded our work with Fairdale High School in the school’s Heavy Equipment Science program. Students can train with professional equipment, including donated pieces of pipe from Louisville Water, for real-world excavations. The Fairdale program prepares students for construction-type jobs. Louisville Water has recently hired three students who graduated from this skills program. Louisville pure tap® Louisville Water participated in nearly 200 community events—from official Kentucky Derby Festival activities to Waterfront Wednesday concerts to special events at Slugger Field to water stops for marathons and other races—by providing free Louisville pure tap®, reusable water bottles and compostable cups. The pure tap campaign is our signature customer education effort. Speaking of races, about 1,200 runners participated in the 2017 Louisville pure tap® 5K in September, which began and ended at the Louisville Water Tower and reinforced our core values of promoting health and education. The race is the first leg of the Louisville Sports Commission’s Fall Runathon. Louisville Water connected with the community in many ways including donating equipment to a training program at Fairdale High School and serving water at Louisville Water employees again participated in Mayor Greg Louisville pure tap®events. Fischer’s Building Our Blocks program. They joined volun- teers from several city agencies—including Public Works, Codes & Regulations, Louisville Fire and MSD—to visit homes

15 2017 AT A GLANCE EVENTS INCLUDE 200 LOUISVILLE PURE TAP®

throughout several neighborhoods and provide information on services. Launched in October 2016, Building Our Blocks is designed to make residents aware of the range of services available, promote a sense of community, deter crime and beautify neighborhoods. An official tribute to Louisville Water’s long commitment to providing safe and great-tasting drinking water was unveiled when the Kentucky Historical Society dedicated a state historical marker at Louisville Water Tower Park to recognize the work of George Warren Fuller. From 1895 to 1897, Fuller performed a series of filter experiments in Louisville that laid the foundation for the water treatment that Louisville Water and other utilities around the world use today. Louisville Water employees participating in Building our Blocks. Louisville’s Liquid Assets When it comes to starting or growing a business in the region, Louisville Water is the “liquid asset.” This campaign, centered on economic development, includes partnerships with local, regional and state entities. Thanks to a rising interest in bourbon, distillers are now part of the liquid assets campaign. In 2017, Louisville Water launched a Bourbon & Branch partnership that highlights the company’s connection to Kentucky’s signature industry. From the start of the distilling process to the last sip you take from a glass, water plays a critical role in the Kentucky bourbon experience. Local distillers rely on Louisville Water, including Kentucky Historical Society honors Louisville Water with a historical marker. Bulleit Frontier Whiskey Experience at Stitzel-Weller. Louisville

16 2017 AT A GLANCE BOURBON DISTILLERS 12 USE LOUISVILLE WATER

Mayor Greg Fischer helped unveil a Stitzel-Weller visitor experience that includes an exhibit on how the bourbon industry benefits from water—from the crops, the fermenting process and bot- tling to how bourbon is served. “This new partnership is another part of the growth and evolution of bourbonism in our city,” the Mayor said. Boosting bourbonism is a natural fit for Louisville Water because of the company’s long history with the production side of the distilling industry. Louisville Water began in 1860 and by the 1880s, more than 10 distillers were using the company’s water. Today, Louisville Water has more than a dozen distillers as customers. The story of bourbon and water is highlighted at Stitzel-Weller. Louisville Water plans to expand its participation in many of the community’s bourbon-related events and attractions where water is served. A special Bourbon & Branch Water tour at the WaterWorks Museum, which highlights the bourbon and water connection, is in the planning stages and will launch in late 2018. A historic sign along the urban bourbon trail on Main Street also pays homage to Louisville Water’s long-standing relationship with the bourbon industry. The sign is part of the Bour - bon District Initiative, an effort led by the Louisville Downtown Partnership, Louisville Metro and the Louisville Convention and Visitors Bureau in cooperation with the downtown’s bourbon industry community. The initiative features historic signs as well as destination signs, banners and pop-up events. Louisville Water has also branded drinking water stations throughout the city to encourage residents and visitors to en- The Bourbon District Initiative includes the Louisville Water story.

17 2017 AT A GLANCE BRANDED DRINKING WATER FOUNTAINS 42 WITH A LOUISVILLE WATER MESSAGE

joy our city’s award-winning water straight from the tap. From the University of Louisville, YMCAs and Kentucky Kingdom, 42 fountain locations include signage that encourage people to stay hydrated with Louisville pure tap ®. Agreements were signed in 2017 to add 20 more locations throughout the city. We also took the liquid assets message on the road. Louisville Water executives joined forces with state and local leaders to introduce the city’s two most respected beverages, bourbon and water, to economic development prospects in Atlanta and Dallas. Why bring bourbon and water together to talk about Drinking water fountains at the KFC Yum! Center include a Louisville Water message. industry, jobs and opportunity? The parallels between the in- dustries speak to the innovation, the quality and the flavor of Louisville. Giving Back to Our Community Louisville Water’s employees gave back to the community in record numbers in 2017 in the annual Combined Giving Campaign. Employees raised more than $159,000 through payroll deductions, one-time contributions and events, an increase of approximately $12,000 from the 2016 campaign. Funds benefit four company supported charities: Fund for the Arts, Metro United Way, Water for People and the Louisville Water Foundation. Louisville Water brought its product to an economic development trip in Dallas. Employees are also part of over 100 organizations throughout the city, donating 3,620 hours of service in 2017.

18 2017 AT A GLANCE FUNCTIONAL AREAS PURSUED AS 7 PART OF A ONE WATER EFFORT

One Water Louisville Water and Louisville MSD continued their One Wa- ter efforts in 2017. In this initiative, the utilities pursue opportunities for efficiencies, target opportunities to increase revenue and identify ways to improve service. The work is done under an InterLocal Agreement, and with a One Water Advisory Committee (made up of executive leadership from both utilities) that works to identify and implement shared services opportunities. A One Water board oversees the efforts that includes two members from the MSD Board and the Board of Water Works. Ellen Hesen, Deputy Mayor for Louisville Metro, is the chair. In 2017, Louisville Water and MSD began sharing services in the following departments: Information Technology - A Security Administrator and Storage Administrator provide services to both organizations. Louisville Water customer service representative. The utilities also began using a common offsite data recovery center, jointly purchased storage and support and shared training opportunities for cyber security awareness. Fleet - A shared Fleet Services Administrator now supports the shared Fleet Director.

Louisville MSD trucks at their Central Maintenance Facility.

19 2017 AT A GLANCE LOUISVILLE WATER’S FLEET LOGGED 2.4 MILLION MILES

Customer Service - A shared Customer Service manager provides leadership to both Louisville Water and MSD’s call center operations. Procurement - The MSD Procurement & Supplier Diversity Director transitioned to a shared role to provide leadership and guidance to both staffs on purchasing and outreach. Communications - Louisville Water’s Vice President of Com- munications and Marketing is providing leadership to the MSD Communications department. Education - A joint education program to teach Louisville Water and MSD operations in Jefferson County Public Schools and at the Procurement for both companies is researching shared services opportunities. WaterWorks Museum is in development. The Louisville Water Ed- ucation Manager expanded the school-aged curriculum to include MSD’s operations. Engineering - Louisville Water offered an employee resource to provide expertise on MSD’s Waterway Protection Tunnel project. In addition, Louisville Water partnered with Louis- ville Metro to obtain improved pricing on the paving required for construction projects. In 2018, Louisville Water and MSD will finalize a strategic plan for the One Water effort and are evaluating shared revenue opportunities.

The ‘River to River’ curriculum will tell the story of both Louisville Water and Louisville MSD.

20 2017 AT A GLANCE ON AVERAGE, IT TAKES 2 DAYS TO PRODUCE DRINKING WATER

Awards and Achievements The American Society of Civil Engineers–Louisville Chapter presented Shanaka Winters, Project Engineer, with the Distinguished Service Award for understanding the importance of service, while attaining a high professional standard of civil engineering con- duct, accomplishment and service. The Drinking Water Branch of the Kentucky Division of Water recognized two employees for their exceptional performance. Nicole Tremblay received a Letter of Commendation from the lab certification officer for the Division of Water. The Division of Water Shanaka Winters performed an on-site evaluation in the microbiology labs where Roger Tucker evaluates daily samples and conducts research. The state officer spent over five hours auditing Roger’s work and found no problems or errors, which is a great achievement. Crescent Hill Water Treatment Plant earned an award from the Kentucky Energy and Environment Cabinet. The Division of Water in the cabinet’s Department of Environmental Protection recognized the Crescent Hill plant for reaching goals in the Area-Wide Optimization program, which encourages water treatment plants and drinking water distributors to surpass state and federal standards. The facility also was honored as an optimized plant for removing turbidity, or cloudiness, which is a measure of Crescent Hill Water Treatment Plant particles in water, including soil, algae, bacteria, viruses and other substances.

21 2017 AT A GLANCE PEOPLE WORK AT 477 LOUISVILLE WATER

Eric O’Neal, Louisville Water’s GIS (Geographic Information Sys- tem) Applications Developer, won a map contest sponsored by GIS Certification Institute. O’Neal’s project was named the “Peo- ple’s Choice” and an award of $250 was donated to the Kentucky Association of Mapping Professional’s scholarship fund. Louisville Water’s women’s tapping team, the Main Maniacs, had a great showing at the American Water Works Association con- ference in Philadelphia. They represented Louisville Water and the Kentucky-Tennessee section in the national “tapping team” competition. To get to the national competition, the Main Mani- acs first won the Kentucky-Tennessee regional competition. They completed tapping a pressurized water main in 3 minutes, 23 sec- onds; a great time, but not enough to move to the final round. The The Main Maniacs impress judges and audiences year after year. Main Maniacs include Minnette Jones, Toni Estes, Angie Shaftlein and Jayne Clark. All are members of Local 1683 and have more than 55 years of combined experience in the field.

22 Financial Performance Maintenance Expenses higher than expected. Labor and labor related costs, materials and supplies, contractual services and Louisville Water achieved sound financial performance in 2017, insurance claims all came in above prior year levels. These higher despite experiencing its lowest water consumption since 1969 costs were partially offset by reductions in chemicals costs and and suffering an unusual and costly 48-inch water main break late bad debt expense. in the year. Total shareholder value provided to Louisville Metro through the dividend and free water service totaled $36.4 million, Louisville Water spent $83.2 million on its capital program in 2017, a decrease from $36.8 million in 2016. an increase of close to 20% over the previous year. Much of funding was devoted to infrastructure, reflecting Louisville Water’s Water consumption in 2017 was 33.4 billion gallons, a drop of 0.13% commitment to investing in our system to ensure long-term sus- from the previous year. The largest declines came in the industrial tainability. The two largest projects in 2017, accounting for a com- and commercial categories which combined fell by 1.3%. The de- bined 18% of capital funds spent, involved the implementation of clines in these categories were offset to a great extent by whole- the WAM system and work on one of the oldest water mains in the sale water consumption, which grew by an impressive 8.1% in 2017. system along Eastern Parkway. This demonstrates the vital importance of Louisville Water’s strategy of expanding its regional footprint outside of the Louisville In 2018, alternative sources of revenue and wholesale water sales Metro area. Alternative lines of revenue are also key in offset- will continue to be the cornerstone of Louisville Water’s strate- ting losses in water revenue. In 2017, revenue growth from sewer gy to combat the negative financial impact of falling water con- billing services, home warranty services, contract operations and sumption. Effective January 2018, we signed a new agreement with customer fees resulted in an overall increase in Other Operating HomeServe USA for an additional five-year period, garnering an Revenue of $1.2 million. expected average annual increase in home warranty services revenue of about $900,000. And in 2018, we will begin delivering wa- Excluding the increase in pension expense recorded be- ter to Hardin County Water District 1 and will increase water sold cause of GASB 68, Operating Expenses were up by 4.0%, pri- to Hardin County Water District No. 2, driving overall anticipated marily driven by increases in Depreciation Expense and growth in wholesale revenue close to 10%. These key initiatives, Operating and Maintenance Expenses. Depreciation Ex- along with many others, will play a vital role in ensuring Louisville pense increased due to additional investment in capital as- Water’s long-term financial strength. sets and large main break in December drove Operating and

Historical Review

(000s) 2013 2014 2015 2016 2017 Water Revenue $ 145,696 $ 151,779 $ 159,965 $ 162,299 $ 167,862 Other Operating Revenue $ 13,128 $ 14,117 $ 14,421 $ 15,541 $ 16,703 Operating Expenses* $ 109,926 $ 116,297 $ 122,672 $ 125,493 $ 130,474 GASB 68 Pension Expense Adjustment $ 2,923 $ 3,595 $ 7,889 Net Non-Operating Expenses $ (8,052 ) $ (7,206 ) $ (6,303 ) $ (7,497 ) $ (7,296 ) Net Income before Distributions and Contributions $ 40,846 $ 42,392 $ 42,488 $ 41,255 $ 38,906

*Does not include GASB 68 pension expense adjustment

23 Financial Performance - Operations

TOTAL CONSUMPTION (in billion gallons) OPERATIONS 33.4 2017 (amount in millions of gallons) 2013 2014 2015 2016 2017 Water Delivered to Mains

2016 33.5 (Net System Delivery) 42,281 43,302 44,122 42,229 42,723

Average Daily Pumpage 116 119 121 115 117 34.6 2015 Maximum Daily Pumpage 153 155 162 145 161

Percent of Water Metered 81% 79% 79% 79% 79% 2014 34.1

33.9 2013

31 32 33 34 35

SALE OF WATER number of customers consumption - ytd revenue - ytd at December 31 (1,000) gallons (in 000s) 2017 2016 2017 2016 2017 2016 2017 WATER REVENUE Residential 248,565 247,629 12,638,288 12,582,347 $ 69,940 $ 67,810 Commercial 23,032 22,998 11,658,185 11,756,318 49,270 47,664 42% Residential Industrial 415 405 3,949,685 4,054,108 12,066 11,888 3% Wholesale Irrigation 13,392 13,118 1,940,813 1,913,107 11,048 10,501 2% Metro Govt. Fire Services 4,562 4,494 49,561 41,396 3,268 3,074 8% Fire Hydrants 2% Private Fire Services Wholesale 8 6 2,143,461 1,982,213 4,885 4,400 TOTAL 289,974 288,650 32,379,993 32,329,489 150,477 145,337 7% Irrigation 7% Industrial Public Fire Hydrants 24,332 24,130 - - 13,567 13,031 29% Commercial Metro Govt 634 625 1,034,984 1,128,790 3,818 3,930 TOTAL 24,966 24,755 1,034,984 1,128,790 17,385 16,961 GRAND TOTALS 314,940 313,405 33,414,977 33,458,279 $ 167,862 $ 162,299

24 Financial Performance - Operations

AVERAGE RESIDENTIAL MONTHLY BILL OTHER OPERATING REVENUE (in millions) (based upon median usage of 5,000 gallons per month)

$25 $24.60 $23.77 $17 $16.7 $22.97 $22.19 $21.40 $15.5 $20 $15 $14.4 $14.1 $15 $13.1 $13

$10

$11 $5

$9 $0 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017

TOTAL CONTRIBUTIONS TO LOUISVILLE METRO (in millions)

$40 $35.0 $36.4 $37.1 $36.8 $36.4 $15.8 $16.7 $17.0 $17.4 $15.4 $30 Water and Fire Service Provided in Lieu of Taxes

$20 $20.6 $20.4 $19.8 $19.6 $19.0

Dividends Declared $10

$0 2013 2014 2015 2016 2017

25 Financial Performance - Capital

2017 CAPITAL IMPROVEMENT PLAN 2018 CAPITAL IMPROVEMENT PLAN

17% Growth-Related 17% Growth-Related Improvements Improvements

14% New Technology 21% New Technology

5% Self-Financing 4% Self-Financing Improvements Improvements

64% Infrastructure 58% Infrastructure Renewal Renewal

2017 CONTRIBUTIONS IN AID OF CONSTRUCTION (in millions)

$12

$11 $10.3 $10.4 $10 $9.4 $9.2 $9

$7 $6.2 $6

$5 2013 2014 2015 2016 2017

26 Financial Performance - Capital

CAPITAL BIDS-ESTIMATES VERSUS ACTUAL CONTRACTS (in millions)

2017 Actual Contracts - $53.7

2017 Bid Estimate - $61.8

2016 Actual Contracts - $28.3

2016 Bid Estimate - $29.0

2015 Actual Contracts - $28.7

2015 Bid Estimate - $27.1

2014 Actual Contracts - $38.8

2014 Bid Estimate - $39.6

2013 Actual Contracts - $21.6

2013 Bid Estimate - $21.0

$0 $10 $20 $30 $40 $50 $60 $70

TOTAL CAPITAL PROGRAM AND EXPENDITURES (in millions)

140

120 $107.7 Capital Program $96.6 100 $94.8

$83.7 $83.2 $76.6 Expenditures 0 $69.3 $69.7

$57.6 60 $64.8

40 2013 2014 2015 2016 2017

27 Independent Auditor’s Report

Board of Water Works Louisville Water Company Louisville, Kentucky

Report on the Financial Statements We have audited the accompanying financial statements of the Louisville Water Company (the “Company”), a component unit of the Louisville/Jefferson County Metro Government, as of and for the years ended December 31, 2017 and 2016, and the related notes to the financial statements, which collectively comprise the Company’s basic financial statements as listed in the table of contents. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility 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. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Louisville Water Company as of December 31, 2017 and 2016, and the changes in its financial position and its cash flows thereof for the years then ended in accordance with accounting principles generally accepted in the United States of America.

28 Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the Management’s Discussion and Analysis on pages 30 through 37, the schedule of the Company’s proportionate share of the net pension liability on Page 66 and the schedule of the Company’s pension contributions on page 66 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Supplementary Information Our audits were conducted for the purpose of forming an opinion on the financial statements that collectively comprise the Louis- ville Water Company’s basic financial statements. The supplemental schedule of investments, summarized schedule of bond issues, schedule of outstanding bond indebtedness and annual debt service requirements, and schedule of operating and maintenance expenses are presented for purposes of additional analysis and are not a required part of the basic financial statements. The supplemental schedule of investments, summarized schedule of bond issues, schedule of outstanding bond indebtedness and annual debt service requirements, and schedule of operating and maintenance expenses are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audits of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the supplemental schedules are fairly stated in all material respects in relation to the basic financial statements as a whole.

Crowe Horwath LLP Louisville, Kentucky June 13, 2018

29 Management’s Discussion and Analysis

The following management’s discussion and analysis of Louisville Water Company’s (the “Company” or “Louisville Water”) financial performance provides an overview of the Company’s financial activities for the fiscal year ended December 31, 2017 as compared with the prior two years. Overview of the Financial Statements This annual financial report consists of four parts: Management’s Discussion and Analysis, Financial Statements, Required Supple- mentary Information and Supplementary Information. The Financial Statements also include notes that provide additional details and are an integral part of the statements. The Supplementary Information further explains and supports the information within the Financial Statements. The Financial Statements of the Company report information using accounting methods similar to those used by private-sector water utility companies, except for the reporting of contributions in aid of construction, equity capital and retained earnings. These statements offer short-term and long-term financial information about the Company’s activities. The Statement of Net Position includes all of the Company’s assets and liabilities. It provides information about the nature and amounts of investments in resources (assets) and the obligations owed to outside entities and individuals (liabilities). It also provides the basis for evaluating the capital structure of Louisville Water and assessing the liquidity and financial flexibility of the Company. All of the current year revenues and expenses are accounted for in the Statement of Revenues, Expenses and Changes in Net Position. This statement measures the Company’s operations over the past year and can be used to help determine whether the Company has successfully met its financial objectives, recovered all of its costs through its water rates and other charges, increased its net position and maintained credit-worthiness. The Statement of Cash Flows provides information about the Company’s cash receipts and cash payments, along with net changes in cash resulting from operating, financing and investing activities. The statement provides information on the sources and uses of cash and the changes in the balance of cash during the year. Summary of 2017 Performance Louisville Water achieved sound financial results in 2017, despite experiencing another year of declining water sales. The downward trend in water consumption remains one of the Company’s most significant challenges. In 2017, total water consumption fell by 43 million gallons, making it the lowest water consumption year since 1969. Management continues to focus on regionalization and alternative revenue streams to combat this negative trend. Both strategies showed very positive results in 2017, with wholesale water sales and other operating revenue growing by 8.1% and 7.5%, respectively. Year-end net income before distributions and contributions totaled $38.9 million in 2017. The resulting dividend of $19 million, combined with free water and fire protection valued at $17.4 million, provided a total shareholder value of $36.4 million.

30 Financial Highlights • Total Net Position increased by $30.3 million, or 3.3%, primarily due to funds generated from operations, net of dividend paid to our shareholder. • Operating Revenues increased by $6.7 million, or 3.8%, due to a water rate increase of 3.5% effective January 1, 2017, and growth in other operating revenue from sewer billing services for other utilities, home warranty services, late charges and other customer fees. Water sales in 2017 of 33.4 billion gallons were 43 million gallons or 0.1% less than 2016 sales of 33.5 billion gallons. • Operating Expenses increased by $9.3 million, or 7.2%. Excluding the impact of additional pension expense recorded in 2017 as a result of GASB Statement No. 68, Operating Expenses increased by $5.0 million or 4.0%, as a result of increases in Depreciation and Amortization Expense of $2.2 million and Operating and Maintenance Expense of $2.8 million over 2016 amounts. • Net Non-Operating Expense decreased by $201 thousand or 2.7%, due to lower interest expense on bonds. • Net Income before Distributions and Contributions decreased by $2.3 million, or 5.7%. Excluding the additional pension expense recognized in 2016 and 2017 as a result of the provisions of GASB 68, Net Income before Distributions and Contributions increased by $1.9 million or 4.3%. • Dividends Paid and Payable decreased by $797 thousand, or 4% as a result of a decline in the three-year average of adjusted net income utilized for the dividend calculation. Increases in pension expense recorded as a result of GASB 68 are the primary driver of the decline in the three-year average of adjusted net income. Statement of Net Position Total Net Position increased by $30.3 million, or 3.3%, in 2017 (see Figure 1). The largest portion of Net Position is Net Utility Plant, which increased by $43.5 million in 2017 as a result of additional investment in capital assets. The capital assets were funded by the 2015 bond issue, cash generated from operations and Contributions in Aid of Construction from developers, customers, and governmental agencies. Current Assets increased by $5.2 million in 2017, primarily due to an increase in Short-term Liquid Investments and Accounts Receivable. Noncurrent Assets declined by $24.9 million as a result of a decline in Capital Related Reserves, partially offset by an increase in Investments. Current Liabilities were $6.9 million higher than the prior year, with the largest increase com- ing from Accounts Payable. Long-term Liabilities decreased by $8.4 million as a result of principal paid on Bonds, partially offset by an increase in the Net Pension Liability. FIGURE 1 - Condensed Statement of Net Position

2017 2016 DIFFERENCE PERCENT 2015 Current Assets $ 117,399,509 $ 112,223,105 $ 5,176,404 4.6% $ 158,500,433 Noncurrent Assets 55,530,341 80,410,304 (24,879,963 ) (30.9% ) 53,189,364 Deferred Outflow of Resources 23,184,928 17,338,368 5,846,560 33.7% 15,843,086 Net Utility Plant 1,152,494,380 1,108,978,509 43,515,871 3.9% 1,077,248,307 Total Assets and Deferrals 1,348,609,158 1,318,950,286 29,658,872 2.2% 1,304,781,190 Current Liabilities 49,880,168 42,965,542 6,914,626 16.1% 44,416,395 Long-term Liabilities 358,650,143 367,058,453 (8,408,310 ) (2.3% ) 385,484,703 Deferred Inflow of Resources 3,218,422 2,354,682 863,740 36.7% - Total Liabilities and Deferrals 411,748,733 412,378,677 (629,944 ) (0.2% ) 429,901,098 Total Net Position $ 936,860,425 $ 906,571,609 $ 30,288,816 3.3% $ 874,880,092

31 2016 Compared to 2015 Total Net Position increased by $31.7 million, or 3.6%, in 2016. The largest portion of Net Position is Net Utility Plant, which increased by $31.7 million in 2016 through capital improvements. The capital improvements were funded by the 2015 bond issue, cash generated from operations and Contributions in Aid of Construction from developers, customers, and governmental agencies. Current Assets decreased by $46.3 million in 2016, as cash was utilized for investment in capital assets and to fund capital related reserves, resulting in a corresponding increase in Noncurrent Assets and Net Utility Plant. Long-term Liabilities decreased by $18.4 million primarily as a result of principal paid on Bonds. Statement of Revenues, Expenses and Changes in Net Position Operating Revenues grew by $6.7 million, or 3.8%, in 2017 (see Figure 2) primarily due to increased water revenue attributable to higher rates. Water consumption was close to flat to the prior year allowing most of the additional revenue generated from the 3.50% rate increase implemented on January 1, 2017 to be realized. Total water consumption decreased by 43 million gallons, or 0.1%, in 2017, just edging out 2016 as the Company’s lowest water consumption year since 1969. Over the last decade, water–saving fixtures, appliances and equipment, in residential, commercial and industrial settings, have driven falling water consumption in Louisville and across the nation. Louisville Water’s regionalization strategy has been instrumental in offsetting a portion of that lost consumption. In 2017, growth in wholesale water sales offset 79% of the net decline in consumption in other customer categories. The increase in water revenue, together with growth in other operating revenue related to sewer billing services for other utilities, home warranty services, contract operations, late charges and other customer fees, resulted in the increase in Operating Revenues. The key components of Operating Expenses are: Operating and Maintenance Expenses; GASB 68 Pension Expense Adjustment; Depreciation and Amortization; Water and Fire Service Provided in Lieu of Taxes; and Loss from Sale and Salvage of Retired Assets. Operating Expenses increased by $9.3 million, or 7.2% in 2017. Excluding the additional pension expense recorded in 2016 and 2017 as a result of GASB 68, Operating Expenses increased by $5.0 million or 4.0% as a result of higher Depreciation and Amortization and Operating and Maintenance Expenses. Depreciation and Amortization increased by $2.2 million due to additional investment in capital assets. Operating and Maintenance Expenses increased $2.8 million due to higher labor and labor related costs, materials and supplies, contractual services and insurance claims, offset by reductions in bad debt expense and chemicals. The 48-inch main break which occurred late in 2017 played a prominent role in the magnitude of the increase in Operating and Maintenance Expenses this year. Net Non-Operating Expense (non-operating expense less non-operating income) decreased by $201 thousand, or 2.7% in 2017, due to principal repayments on bonds, which resulted in lower interest expense. Net Income before Distributions and Contributions decreased by $2.3 million, or 5.7%, in 2017. Excluding the additional pension expense recognized in 2016 compared to 2017 as a result of GASB Statement No. 68, Net Income before Distributions and Contribu- tions increased by $1.9 million or 4.3%, primarily due increased revenue from the water rate increase and growth in other operating revenue, partially offset by higher Operating Expenses. The formula for computing the dividend, as established by covenant in the Series 2009 Bond Resolution (the Master Bond Resolution), is 50% of the average of current year and prior two fiscal years’ net income after certain stated deductions. Three-year averaging is used to adjust for the volatility in net income that results principally from the unpredictability of water consumption tied to the effects of weather. Dividends Paid and Payable for 2017 decreased by $797 thousand, or 4.0%, from $19.8 million to $19.0 million. Contributions in Aid of Construction are comprised of: pipeline contributions from developers for water main extensions and from governmental agencies for water main relocations; service installation fees from customers; apportionment warrant fees and tapping fees from customers to extend water service to unserved areas; and system development charges from customers for

32 growth-related expansion. The level of capital contributions varies from year to year and is affected by economic cycles. These types of projects are fully funded or nearly fully funded by outside entities in advance of construction. Contributions in Aid of Construction increased by $150 thousand, or 1.5%, from the previous year. FIGURE 2 - Condensed Statement of Revenues, Expenses and Changes in Net Position

2017 2016 DIFFERENCE PERCENT 2015 Operating Revenue $ 184,565,198 $ 177,839,572 $ 6,725,626 3.8% $ 174,385,609 Operating Expenses 138,363,335 129,087,637 9,275,698 7.2% 125,594,797 Net Operating Revenue 46,201,863 48,751,935 (2,550,072 ) (5.2% ) 48,790,812 NetNon-Operating Expense 7,296,011 7,497,069 (201,058 ) (2.7% ) 6,302,582 Net Income Before Distributions and Contributions 38,905,852 41,254,866 (2,349,014 ) (5.7% ) 42,488,230 Dividends Paid and Payable 19,024,825 19,821,376 (796,551 ) (4.0% ) 20,420,040 Contributions in aid of Construction 10,407,789 10,258,027 149,762 1.5% 9,394,095 Change in Net Position 30,288,816 31,691,517 (1,402,701 ) (4.4% ) 31,462,285 Net Position – Beginning of Year 906,571,609 874,880,092 31,691,517 3.6% 843,417,807 Net Position – End of Year $ 936,860,425 $ 906,571,609 $ 30,288,816 3.3% $ 874,880,092

2016 Compared to 2015 Operating Revenues grew by $3.5 million, or 2.0%, in 2016, primarily due to increased water revenue driven by higher rates. The increase in revenue garnered from the 3.50% rate increase implemented on January 1, 2016 was partially offset by the negative impact of lower consumption. Total water consumption decreased by 1.1 billion gallons, or 3.3%, in 2016. The increase in water sales, together with growth in other operating revenue resulted in the overall increase in Operating Revenues. Operating Expenses increased by $3.5 million or 2.8%, while Net Non-Operating Expense increased by $1.2 million or 19% in 2016. Net Income before Distributions and Contributions decreased by $1.2 million or 2.9% in 2016, and the dividend to our shareholder Louisville Metro decreased by $599 thousand or 2.9%. Statement of Cash Flows Cash at the end of 2017 was $4.3 million lower than at the end of 2016 (see Figure 3). • Cash from Operating Activities was $98.9 million, increasing by $10.7 million due to more cash received from customers and less cash paid to suppliers as compared to 2016. • Cash used by Capital and Related Financing Activities was $102.1 million in 2017, up from $88.3 million in 2016, as a result of an increase in funds expended for capital investments. • Cash provided by Investing Activities was $17.9 million in 2017, compared to cash used of $88.7 million in 2016. In 2016, the Com- pany invested a significant amount of funds that were in cash as of the end of 2015. In addition to the amounts held in unrestricted Cash and Investments, Louisville Water also held funds in restricted capital and bond related reserves totaling $32.2 million, reported as part of Restricted, Expendable Bond Service Accounts in Current Assets and Restricted Reserves in Noncurrent Assets on the Statement of Net Position and described in Note 3.

33 FIGURE 3 - Condensed Statement of Cash Flows

2017 2016 DIFFERENCE PERCENT 2015 Cash Flows From Operating activities $ 98,886,569 $ 88,195,306 $ 10,691,263 12.1% $ 87,669,405 Non-Capital Financing Activities (19,024,825 ) (19,821,376 ) (796,551 ) (4.0% ) (20,801,857 ) Capital and Related Activities (102,114,455 ) (88,260,721 ) 13,853,734 15.7% 23,542,158 Investing Activities 17,946,035 (88,704,952 ) 106,650,987 120.2% (25,280,833 ) Net Change in Cash (4,306,676 ) (108,591,743 ) (104,285,067 ) (96.0% ) 65,128,873 Cash, beginning of year 13,687,031 122,278,774 (108,591,743 ) (88.8% ) 57,149,901 Cash, end of year $ 9,380,355 $ 13,687,031 $ (4,306,676 ) (31.5% ) $ 122,278,774 2016 Compared to 2015 Cash at the end of 2016 was $108.6 million lower than at the end of 2015 (see Figure 3). • Cash from Operating Activities was $88.2 million, increasing by $526 thousand due to higher cash received from customers, partially offset by higher cash paid to suppliers and others as compared to 2015. • Cash used by Capital and Related Financing Activities was $88.3 million in 2016, compared to cash provided in 2015 of $23.5 million. In 2015, proceeds of $127.5 million from the Series 2015 Bond issue more than offset outflows which included funds expended for capital investments and bond principal and interest payments. • Cash used in Investing Activities was $88.7 million in 2016, compared to $25.3 million in 2015. In 2016, the Company invested $73.1 million of funds that were in cash as of the end of 2015. Capital Assets Louisville Water uses a five-year Capital Improvement Program (“CIP”) that is updated annually. Every five years, a twenty-year facility plan is prepared by our Consulting Engineer. The most recent Facilities Plan was prepared by CH2M in the latter part of 2015 and was adopted by the Board of Water Works in January 2016. Development of the CIP is based on the Company’s current Facilities Plan and recommendations from the biennial inspection of facilities. The CIP also identifies anticipated capital expenditures for a total of ten years. The Company’s current Facilities Plan covers the years from 2016 through 2035. The CIP approved by the Board of Water Works in late 2017 shows the Company plans to invest $565 million in improvements during 2018-2022. The Company spent $83.2 million on its capital program in 2017, with the largest portion being spent on infrastructure renewal. As shown in Figure 4, total investment in Utility Plant was $1.2 billion as of the end of 2017, an increase of $43.5 million from the prior year. Infrastructure renewal projects account for 58% of the planned 2018 capital expenditures. In 2018, the Company will continue to make significant investments in main replacement and rehabilitation, transmission condition assessment and rehabilitation, lead service renewals and technology. Key projects include the implementation of the Oracle Work and Asset Management system and replacing one of the oldest water mains in the system along Eastern Parkway.

34 FIGURE 4 - Condensed Summary of Capital Assets

2017 2016 DIFFERENCE PERCENT 2015 Capital assets $ 1,578,013,147 $ 1,518,049,214 $ 59,963,933 4.0% $ 1,465,076,619 Less accumulated depreciation (529,193,647 ) (498,154,255 ) (31,039,392 ) 6.2% (465,489,312 ) Capital assets, net 1,048,819,500 1,019,894,959 28,924,541 2.8% 999,587,307 Capital assets not being depreciated 103,674,880 89,083,550 14,591,330 16.4% 77,661,000 Utility plant, net $1,152,494,380 $1,108,978,509 $ 43,515,871 3.9% $ 1,077,248,307 Debt Administration As of December 31, 2017, the Company has principal outstanding of $37.6 million for the Series 2009A Bonds, $76.3 million for the Series 2009B Bonds, $59.2 million for the Series 2014A Bonds, $114.5 million for the Series 2015 Bonds and $1.4 million for the ARRA loan for a total of $289 million (Note 8). As shown in Figure 5, the Company’s debt service coverage was 1.89 times in 2017, un- changed from the prior year. The Series 2009A and 2009B Bonds are not insured, callable beginning in 2019 and carry ratings of Aaa from Moody’s and ratings of AAA from Standard & Poor’s. The Company was upgraded in December 2009 to AAA from Standard & Poor’s and affirmed in March 2013 and recalibrated to Aaa from Moody’s in May of 2010 and affirmed in June 2011. Both ratings were affirmed in September of 2014 and November of 2015. The Series 2015 Bonds are not insured, callable beginning in 2025 and carry ratings of Aaa from Moody’s and ratings of AAA from Standard & Poor’s. FIGURE 5 - Debt Service Coverage

2017 2016 DIFFERENCE PERCENT 2015 Income Available for Debt Service $56,956,790 $ 55,743,240 $ 1,213,550 2.2% $ 56,654,982 Current Aggregate Net Debt Service 30,124,292 29,529,459 594,833 2.0% 26,436,423 Coverage Times 1.89 1.89 - - 2.14 The Company’s debt rating is among the highest in the United States for water utility revenue bonds. Economic Factors and Next Year’s Budgets and Rates Management believes that the nationwide trend of declining water consumption will continue to be one of the Company’s most challenging issues. Management is implementing strategies to enhance revenue growth via both traditional and non-traditional avenues to offset the negative impact of lower water sales. The Company has had notable success in its regionalization efforts, through additional sales to existing customers and the execution of new wholesale contracts. Management will continue to actively pursue these opportunities. The Company has also had positive results with non-traditional revenue initiatives such as its service line protection program and sewer billing services. Management will continue to seek growth opportunities that capitalize on our existing competencies, expertise and strengths. Management believes that the 2018 Budget adequately addresses all revenue requirements. Water rates increased for retail water service by 3.5% on January 1, 2018. Water rates for wholesale customers are recommended to increase on July 1, 2018. Rate changes for five wholesale customers are subject to approval by the Kentucky Public Service Commission. Computation of Stockholder’s Equity Stockholder’s equity for Louisville Water is no longer published in the audited financial statements following adoption of GASB 34 in 2002. Using the common stock, retained earnings, and total equity capital reported in the 2001 audited financial statements and using Income before Distributions and Contributions less Dividends Paid and Payable from audited financial statements for subsequent years, Figure 6 below shows management’s computation of stockholder’s equity for the years ended December 31, 2017, 2016 and 2015.

35 FIGURE 6 - Computation of Stockholder’s Equity

2017 2016 DIFFERENCE PERCENT 2015 Total Equity Capital - Beginning of Year $ 576,300,164 $ 554,866,674 $ 21,433,490 3.9% $ 532,798,484 Plus Income Before Distributions and Contributions 38,905,852 41,254,866 (2,349,014 ) (5.7% ) 42,488,230 Less Dividends Paid and Payable 19,024,825 19,821,376 (796,551 ) (4.0% ) 20,420,040 Total Equity Capital - End of Year 596,181,191 576,300,164 19,881,027 3.5% 554,866,674 Less Cumulative Deposits to Infrastructure Replacement Reserve 52,553,244 49,553,244 3,000,000 6.1% 46,053,245 Stockholders’ Equity Eligible for Return Computation $ 543,627,947 $ 526,746,920 $ 16,881,027 3.2% $ 508,813,429 Net income before Distributions and Contributions for 2017 was $38,905,852. Transfers to the Infrastructure Replacement Reserve during 2017 of $3,000,000 are deducted to arrive at adjusted net income for the dividend and return on equity computations of $35,905,852. The return on equity earned by Louisville Water in 2017 was 6.6%. Comparative Analysis of Financial Results To optimize long-term financial viability, Louisville Water management plans for and monitors five groups of financial metrics: liquidity, capitalization, coverage, profitability and dividend payout. Figure 7 below shows management’s computation of certain financial ratios within each of these groups of metrics. FIGURE 7 - Comparative Analysis of Financial Results

LIQUIDITY ACCESS READILY AVAILABLE ASSETS TO 2016 2017 2018 TARGET MEET NEAR-TERM OBLIGATIONS BUDGET Days of Funded (Cash + Short-Term Liquid Inv.)/ Operations (O&M Expense/365) 444 446 482 >250

CAPITALIZATION RELIANCE ON DEBT FINANCING FOR 2016 2017 2018 TARGET CAPITAL INVESTMENTS BUDGET BUDGET Long-Term Debt to Long-Term Debt/Net Utility Plant Net Utility Plant 26.06% 23.38% 19.94% <35% Debt to Long-Term Debt/(Long-Term Debt + Capitalization Unrestricted Stock Equity) 35.43% 33.14% 28.60%

COVERAGE CAPACITY TO MAKE DEBT 2016 2017 2018 TARGET SERVICE PAYMENTS BUDGET Debt Service Income Available for Debt Service/ Current Coverage Debt Service 1.89 1.89 1.93 Target >2.0 Section 603 Rate Net Revenue/Max Agg. Debt Service Covenant 283% 281% 311% >130% Debt Service Safety (O&M Expense + Debt Service)/) Margin (Operating Revenue + Non-Operating Revenue 43.70% 43.87% 43.35% >30% EBITDA / Interest EBITDA/Interest Expense Expense 10.10x 10.44x 12.68x >5.0x

36 PROFITABILITY PROFITABILITY OF THE COMPANY 2016 2017 2018 TARGET BUDGET Return on Equity (Net Income—Infrastructure Reserve Replacement (“IRR”) - Construction Interest)/Stockholder Equity Eligible for Return 7.17% 6.60% 7.63% 9.8% Return on Assets (Net Income - IRR - Construction Interest)/Total Assets 2.90% 2.71% 3.27% Return on Net Utility (Net Income - IRR - Construction Plant Interest)/Net Utility Plant 3.40% 3.12% 3.80% Net Profit Margin (Net Income - IRR - Construction Interest)/Operating Revenue 21.23% 19.45% 22.74% Operating Margin EBITDA/Operating Revenue 56.65% 54.61% 58.38%

DIVIDEND PAYOUT MEASUREMENT OF DISTRIBUTION OF PROFIT 2016 2017 2018 AS A DIVIDEND BUDGET Dividend Payout Dividends Declared/ (Net Income - IRR - Construction Interest) 52.50% 52.99% 48.88% Total Transfers (Water in Lieu of Taxes + Dividends)/ Operating Revenue 20.71% 19.75% 20.52% Dividend Yield Dividends Declared/ Stockholder Equity Eligible for Return 3.76% 3.50% 3.73% Contacting the Company’s Financial Management This financial report is designed to provide our citizens, customers, creditors and stockholder with a general overview of the Company’s finances and to show the Company’s accountability for the money it receives. If you have questions about this report or need additional financial information, contact the Office of the Vice-President, Finance—Treasurer at Louisville Water Company, 550 South Third Street, Louisville, KY 40202.

37 Statements of Net Position December 31, 2017 and 2016

2017 2016 Assets Current Assets Cash $ 9,380,355 $ 13,687,031 Short-term liquid investments 80,890,608 73,078,067 Cash and short-term liquid investments 90,270,963 86,765,098 Accounts receivable, net 12,776,954 11,589,229 Contracts receivable, current portion 518,777 517,261 Materials and supplies 7,019,000 7,063,216 Restricted, expendable bond service accounts 2,723,738 2,981,917 Other current assets 3,356,715 2,889,107 Accrued interest receivable 733,362 417,277 Total Current Assets 117,399,509 112,223,105

Utility Plant, net of accumulated depreciation 1,152,494,380 1,108,978,509

Noncurrent Assets Investments 18,755,409 - Restricted reserves 29,488,180 71,908,741 Non-utility property 2,520,447 2,533,236 Unamortized bond issuance costs 1,764,434 2,027,591 Contracts receivable 689,331 792,875 Preliminary engineering charges 358,441 355,193 Prepaid regulatory assets 1,954,099 2,792,668 Total Noncurrent Assets 55,530,341 80,410,304

Total Assets 1,325,424,230 1,301,611,918

Deferred Outflow of Resources Deferred outflow - pension 18,197,360 11,503,654 Loss on refunding of debt 4,987,568 5,834,714 Total Deferred Outflow of Resources 23,184,928 17,338,368

Total Assets and Deferred Outflow of Resources $ 1,348,609,158 $ 1,318,950,286

See accompanying notes to financial statements

38 Statements of Net Position December 31, 2017 and 2016

2017 2016 Liabilities and Net Position Current Liabilities Accounts payable $ 13,895,020 $ 10,821,481 Sewer collections (contra) 1,589,587 1,441,173 Customer deposits and advances 6,873,406 5,528,176 Tax collections payable 471,201 670,556 Accrued interest payable 1,470,818 1,423,556 Contracts payable, retainage percentage 2,067,169 1,019,983 Accrued payroll 416,979 371,413 Accrued vacation and sick leave 1,810,856 1,711,140 Insurance reserve 1,756,285 865,968 Bonds and notes payable, current portion 19,528,847 19,112,096 Total Current Liabilities 49,880,168 42,965,542

Long-Term Liabilities Customer advances for construction 461,514 472,625 Net pension liability 72,516,743 58,797,619 Unamortized debt premium and discount 16,205,555 18,793,031 Bonds and notes payable, less current portion 269,466,331 288,995,178 Total Long-Term Liabilities 358,650,143 367,058,453

Total Liabilities 408,530,311 410,023,995

Deferred Inflow of Resources Deferred inflow - pension 3,218,422 2,354,682

Total Liabilities and Deferred Inflow of Resources 411,748,733 412,378,677

Net Position Net investment in capital assets 850,507,663 787,496,970 Unrestricted 54,140,844 44,183,981 Restricted, expendable - debt service 32,211,918 74,890,658 Total Net Position 936,860,425 906,571,609

Total Liabilities and Net Position $ 1,348,609,158 $ 1,318,950,286

See accompanying notes to financial statements

39 Statements of Revenues, Expenses and Change in Net Position Years ended December 31, 2017 and 2016

2017 2016 Revenues Operating revenues $ 184,565,198 $ 177,839,572

Operating Expenses Operating and maintenance expenses 74,029,418 71,229,009 GASB 68 pension expense adjustment 7,889,158 3,594,730 Depreciation and amortization 37,151,375 34,970,593 Water and fire service provided in lieu of taxes 17,429,731 17,017,225 Loss from sale and salvage of retired assets 1,863,653 2,276,080 Total Operating Expenses 138,363,335 129,087,637

Net Operating Revenue 46,201,863 48,751,935

Non-Operating Income (Expense) Interest income 1,002,116 1,120,495 Building America Bond refund 1,354,882 1,353,429 Interest expense (9,653,009 ) (9,970,993 ) Net Non-Operating Expense (7,296,011 ) (7,497,069 )

Net Income Before Distributions and Contributions 38,905,852 41,254,866 Dividends paid and payable (19,024,825 ) (19,821,376 ) Contributions in aid of construction 10,407,789 10,258,027 Total Distributions and Contributions (8,617,036 ) (9,563,349 )

Change in Net Position 30,288,816 31,691,517

Net Position, beginning of year 906,571,609 874,880,092 Net Position, end of year $ 936,860,425 $ 906,571,609

See accompanying notes to financial statements

40 Statements of Cash Flows Years ended December 31, 2017 and 2016

2017 2016 Cash Flows from Operating Activities Cash received from customers $ 168,903,784 $ 160,929,542 Cash paid to suppliers and others (40,954,208 ) (44,765,556 ) Cash paid to employees for services (29,063,007 ) (27,968,680 ) Net Cash Provided By Operating Activities 98,886,569 88,195,306

Cash Flows from Noncapital Financing Activities Dividends paid to stockholder (19,024,825 ) (19,821,376 )

Cash Flows from Capital and Related Financing Activities Acquisition and construction of utility plant (83,101,692 ) (69,706,622 ) Acquisition of non-utility property (566,059 ) (250,168 ) Contributions in aid of construction 10,407,789 10,258,027 Customer advances for construction (11,111 ) (22,104 ) Preliminary engineering charges (3,248 ) 44,870 Principal paid (19,112,096 ) (18,085,380 ) Interest paid (9,728,038 ) (10,499,344 ) Net Cash Used In Capital and Related Financing Activities (102,114,455 ) (88,260,721 )

Cash Flows from Investing Activities Investment - purchases (64,994,143 ) (73,078,067 ) Investment – maturities 38,426,193 - Restricted cash reserves 42,420,561 (34,568,790 ) Restricted funds 258,179 10,026,509 Contracts 102,028 134,701 Contracts, retainage percentage 1,047,186 35,036 Notes receivable - 7,705,000 Interest received 686,031 1,040,659 Net Cash Provided By (Used In) Investing Activities 17,946,035 (88,704,952 )

Net Change in Cash (4,306,676 ) (108,591,743 )

Cash, beginning of year 13,687,031 122,278,774 Cash, end of year $ 9,380,355 $ 13,687,031

See accompanying notes to financial statements

41 Statements of Cash Flows Years ended December 31, 2017 and 2016

2017 2016 Reconciliation of Net Operating Revenue to Net Cash Provided By Operating Activities Net operating revenue $ 46,201,863 $ 48,751,935 Adjustments to reconcile net operating revenue to net cash provided by operating activities Depreciation 37,622,250 35,600,422 Amortization 678,766 434,250 Loss from sale and salvage of retired assets 1,863,653 2,276,080 Changes in current assets and liabilities Accounts receivable (1,187,725 ) (393,065 ) Materials and supplies 44,216 616,891 Other current assets (467,608 ) (942,448 ) Other deferred charges 838,569 761,393 Accounts payable 3,073,539 (1,929,299 ) Accounts payable, sewer collections 148,414 (15,449 ) Customer deposits 1,345,230 (212,543 ) Tax collections payable (199,355 ) 76,840 Accrued vacation and sick leave 99,716 (88,249 ) Accrued payroll 45,566 96,179 Net pension liability 13,719,124 3,674,928 Deferred outflow - pension (6,693,706 ) (2,434,880 ) Deferred inflow - pension 863,740 2,354,682 Insurance reserve 890,317 (432,361 )

Net Cash Provided By Operating Activities $ 98,886,569 $ 88,195,306

Supplemental Information Non-cash capital and related financing activities Accrued utility plant acquisitions $ 6,558,790 $ 4,484,138

See accompanying notes to financial statements

42 Notes to Financial Statements

NOTE 1 – Significant Acounting Polices Description of the Business: Louisville Water Company (the “Company” or “Louisville Water”) is a provider of retail water and related services to residential, commercial, industrial and fire customers in Jefferson County and parts of Oldham and Bullitt Counties in Kentucky. The Company also provides wholesale water service to seven utility customers located in Bullitt, Nelson, Shelby and Spencer Counties in Kentucky and has contracts to operate water treatment facilities in southern Indiana and Fort Knox, Kentucky. Throughout its 160-year history, the Company has engaged the communities it serves through philanthropic and charitable outreach activities, directly contributing to improving the health and well-being of those communities. The Company is a component unit of Louisville/Jefferson County Metro Government (“Louisville Metro”). The Company is a legally separate entity that provides water utility services to the residents of the Louisville metropolitan area and charges fees for those services. It is shown as a discretely presented Component Unit because the Metro Government is the sole shareholder of LWC stock, receives a quarterly dividend, and the Mayor appoints the Company’s Board of Directors. Water and fire services valued at $17.4 and $17.0 million were provided to Metro Government in lieu of taxes during the year ended December 31, 2017 and 2016, respectively. The Company remitted $19,832,441 in dividends to Metro Government during Metro Government’s fiscal year ended June 30, 2017. In 2014, the Company further demonstrated its commitment to the community by founding a nonprofit organization, the Louisville Water Foundation (the “Foundation”). The Foundation’s mission is to improve the health and wellbeing of the communities it serves and around the world by providing water assistance and water education. The creation of a separate, nonprofit entity allows additional financial and/or in-kind support to flow into the Foundation from a broad base of public and private sources. The related financial activity of the Foundation is not deemed to be a component unit of the Company. Basis of Presentation: The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for governmental organizations reporting as a business-type activity and enterprise fund accounting, a type of proprietary fund. Business-type activities are those activities that are financed in whole or in part by fees charged to external parties for goods and services. An enterprise fund is accounted for under the economic resource measurement focus and uses the accrual basis of accounting which reports all assets, deferred outflows of resources, liabilities, deferred inflows of resources, revenues, expenses, gains and losses. The financial statements have been prepared on the accrual basis of accounting which allows for revenues to be recognized when earned and expenses to be recorded when an obligation has been incurred. Method of Accounting: The Company adopts common industry accounting policies for water utilities. Although the Company is not subject to regulation, the accounts are maintained in accordance with the uniform system of accounts prescribed by the National Association of Regulatory Utility Commissioners, except with respect to the treatment of gains and losses from the retirement or disposition of utility plant. The Company recognizes gain or loss, including cost of removal, upon the retirement or disposition of utility plant rather than the transfer of cost to accumulated depreciation, as provided by the National Association of Regulatory Utility Commissioners. Due to the election as a regulated operation under GASB 62, to meet industry accounting standards and follow transactional intent, the Company uses, as applicable, Accounting Standards Codification (“ASC”) 980, Regulated Accounting.

43 Estimates in the Financial Statements: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires, at times, management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications: Certain amounts in the 2016 financial statements have been reclassified to conform to the 2017 presentation. The reclassifications had no effect on total net position or the change in net position. Statements of Cash Flows: For purposes of the statements of cash flows, the Company considers all unrestricted highly liquid investments with a remaining maturity of twelve months or less to be short-term investments. Significant noncash transactions excluded from the statement of cash flows included accrued utility plant acquisitions of $6,558,790 and $4,484,138 for the years ended December 31, 2017 and 2016, respectively. Adoption of New Accounting Pronouncements: During fiscal year 2017, the Company adopted the following GASB statements: GASB Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other than Pension Plans, issued June 2015. The provisions of this Statement are effective for periods beginning after June 15, 2016. The objective of this Statement is to improve the usefulness of information about postemployment benefits other than pensions (other postemployment benefits or OPEB) included in the general purpose external financial reports of state and local governmental OPEB plans for making decisions and assessing accountability. GASB Statement No. 80, Blending Requirements for Certain Component Units—an amendment of GASB Statement No. 14, issued January 2016. The requirements of this Statement are effective for reporting periods beginning after June 15, 2016. The objective of this Statement is to improve financial reporting by clarifying the financial statement presentation requirements for certain component units. GASB Statement No. 81, Irrevocable Split-Interest Agreements, issued March 2016. The provisions of this Statement are effective for periods beginning after December 15, 2016. The objective of this Statement is to improve accounting and financial reporting for irrevocable split-interest agreements by providing recognition and measurement guidance for situations in which a government is a beneficiary of the agreement. GASB Statement No. 82, Pension Issues—An Amendment of GASB Statements No. 67, No. 68, and No. 73, issued March 2016. The provisions of this Statement are effective for periods beginning after June 15, 2016. This Statement addresses certain issues that have been raised with respect to Statement No. 67, Financial Reporting for Pension Plans, No. 68, Accounting and Financial Reporting for Pensions, and No. 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68. Adoption of these statements did not have a significant impact on the Company’s financial position or results of operations. Recent Accounting Pronouncements: The GASB has issued the following statements not yet required to be adopted by the Com- pany that the company believes may be relevant to their operations and note disclosures. • GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions, effective for periods beginning after June 15, 2017. • GASB Statement No. 83, Certain Asset Retirement Obligations, effective for periods beginning after June 15, 2018. • GASB Statement No. 84, Fiduciary Activities, effective for periods beginning after December 15, 2018. • GASB Statement No. 85 Omnibus 2017, effective for periods beginning after June 15, 2017. (This Statement addresses a variety of topics including issues related to blending component units, goodwill, fair value measurement and application, and postemployment benefits).

44 • GASB Statement No. 86, Certain Debt Extinguishment Issues, effective for periods beginning after June 15, 2017. • GASB Statement No. 87, Leases, effective for periods beginning after December 15, 2019. • GASB Statement No. 88, Certain Disclosures Related to Debt, including Direct Borrowings and Direct Placements, effective for periods beginning after June 15, 2018. The Company’s management has not yet determined the effect, if any, these statements will have on the Company’s financial statements. GASB Statements 75, 84 and 87 will have a financial impact on a retroactive basis and current year operations when implemented. Accounts Receivable and Allowance for Doubtful Accounts: Accounts receivable are stated at the estimated amount management expects to collect from outstanding customer accounts. The allowance for doubtful accounts is established based on historical collection experience and a review of the current status of existing water, contract and miscellaneous receivables. See Note 2 for more information. Inventory: Materials and supplies inventories are stated at the average cost. Investments: Investments are reported at fair value with gains and losses included in the Statements of Revenues, Expenses and Changes in Net Position. Gains or losses on dispositions are determined using the specific identification method. Treasury securities with maturity of one year or less at the time of purchases are recorded at amortized cost in accordance with GASB 72. Capitalized Interest: The Company follows the practice of capitalizing interest during construction on capital projects that are debt financed. Interest in the amount of $1,513,356 and $1,283,815 was capitalized during 2017 and 2016, respectively. Utility Plant: Utility plant is stated at cost of acquisition or construction, including certain indirect costs. Direct purchases with a unit cost of $2,500 or more and a useful life of greater than one year are capitalized. The Company applies the straight-line method of depreciation to the estimated useful lives of the various classes of depreciable property. The estimated useful lives of some significant asset categories are as follows: Buildings 50 to 100 years Pipelines 65 to 100 years Fire hydrants 50 years Services 40 years Meters 15 years Equipment 5 to 10 years Trucks and autos 5 years Depreciation expense for 2017 was $37,622,250 of which $1,149,641 was allocated to other operating expenses. Depreciation expense for 2016 was $35,600,422 of which $1,064,079 was allocated to other operating expenses. Non-utility Property: Non-utility property is stated at cost of acquisition or construction, including certain indirect costs. Direct purchases with a unit cost of $2,500 or more and a useful life of greater than one year are capitalized. The Company applies the straight-line method of depreciation to the estimated useful lives of the various classes of depreciable property. Depreciation expense of non-utility plant was $578,848 and $334,332 for 2017 and 2016, respectively. Prepaid Regulatory Assets: The Company capitalizes and depreciates abandoned plant assets generally over five to eight years. Amounts of $84,024 and $275,844 were added to the account during 2017 and 2016, respectively. The prepaid regulatory assets, stated net of depreciation were $1,954,099 and $2,792,668 as of December 31, 2017 and 2016, respectively.

45 Customer Deposits: The Company has implemented a security deposit policy for all customers applying for residential, commercial or industrial water service who: (i) have not had an account with the Company for three consecutive years; or (ii) have had a previous account in bad debt or bankruptcy status; or (iii) have had a service disconnected due to nonpayment within the last three years of service. The Company refunds the security deposit when: (i) a customer closes the account; or (ii) the customer has paid their bill in a timely manner for three consecutive years. Additionally, the Company charges a security deposit for temporary meters for construction. Total security deposits at December 31, 2017 and 2016 were $2,451,089 and $2,359,617, respectively. The Company also requires customers to make a deposit for the cost of construction of pipelines and special services. Deposits are refundable to the extent the deposit is in excess of the construction cost. Total construction deposits were $4,422,317 and $3,168,559 at December 31, 2017 and 2016, respectively. All customer and security deposits are included as customer deposits and advances in current liabilities on the statement of net position. Accrued Vacation and Sick Leave: Employees’ vested and accumulated vacation and sick leave is recorded as a liability on the statement of net position. Accrued vacation and sick leave balances were $1,810,856 and $1,711,140 as of December 31, 2017 and 2016, respectively. Customer Advances for Construction: The customer advances for construction accounts reflect the anticipated long-term liability for refunding construction costs based on future new service installations within certain time limits up to 20 years. Once the refund period has expired, any balance is recorded as a contribution in aid of construction in the Company’s Statements of Revenues, Expenses and Changes in Net Position. Total customer advances for construction at December 31, 2017 and 2016 were $461,514 and $472,625, respectively. Pensions: For purposes of measuring the net pension liability, deferred outflows and inflows of resources related to pensions, and pension expense, information about the fiduciary net position of the County Employees Retirement system (CERS) and additions to and deductions from CERS’ fiduciary net position have been determined on the same basis as they are reported by CERS. For this purpose, benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with the benefit terms. Investments are reported at fair value. Deferred Outflows and Inflows of Resources: Deferred outflows represent the consumption of resources that are applicable to a future reporting period, but do not require any further exchange of goods or services. Deferred outflows of resources in the Com- pany’s financial statements consist of the unamortized deferred loss on refunding of debt and CERS pension related unamortized balances. Deferred inflows of resources consist of the CERS pension related unamortized balances. Debt and Bond Related Costs: Debt related policies include the following: • Bonds payable are recorded at the principal amount outstanding, net of any applicable premium or discount. • Original issue discounts and premiums on bonds are amortized as a component of interest expense using the effective interest method over the lives of the bonds to which they relate. • Refunding bonds outstanding, which have been refunded and economically defeased, are not included in long-term debt. The related assets are not included in investments. The loss on refunding, which is the difference between the reacquisition price and the net carrying amount of the old debt, is deferred outflow of resources and amortized as a component of interest expense over the average remaining life of the old debt. • Bond issue costs are capitalized and amortized over the life of the respective bond issue using the effective interest method, pursuant to the election of regulatory operation under GASB 62, as they are deemed recoverable through future rates. Contributed Capital and Construction Grants: Construction and acquisition of water lines and other facilities and plants are financed, in part, from governmental grants and contributions in aid of construction from property owners and developers. Gov- ernmental grants in aid of construction represent the portion of construction cost incurred where paperwork has been submitted

46 to the entity. These amounts are recorded as a receivable and revenues from contributions at the time the documentation is submitted. The revenues from contributions are part of the change in net position.

Restricted and Unrestricted Funds: Restricted funds are externally reserved for the purpose of bond debt service, funding of capital expenditures and debt service reserves. Unrestricted funds are used to pay operating expenses. When an expense or outlay is incurred for which both restricted and unrestricted funds are available, it is the Company’s practice to use revenue from operations to finance construction, then reimburse from restricted funds as needed. Restricted funds can be used to pay operating expenses in the case of an emergency caused by some extraordinary occurrence, so characterized in a Certificate of an Authorized Officer filed with the Trustee, and an insufficiency of moneys to the credit of the Operation Fund to meet such emergency. Net Position: The Company classifies resources for accounting and reporting purposes into the following net position categories: • Net Investment in Capital Assets: Capital assets, net of accumulated depreciation and outstanding principal balances of debt attributable to the acquisition, construction or improvement of those assets. • Restricted: Restricted net position includes two categories: Nonexpendable - Net position subject to externally imposed stipulations that they be maintained permanently by the Company. Expendable - Net position whose use by the Company is subject to externally imposed stipulations that can be fulfilled by actions of the Company pursuant to those stipulations or that expire by the passage of time. • Unrestricted: Net position whose use by the Company is not subject to externally imposed stipulations. Unrestricted net position may be designated for specific purposes by action of management or the Board of Water Works or may otherwise be limited by contractual agreements with outside parties. Operating/Non-Operating Revenues and Expenses: Operating Revenues are those revenues that are generated directly from the primary activities of the Company. These revenues include water service and commodity charges, late and other water-related fees, contract operations and service line warranty fees, and compensation for service provided to others. Operating expenses are expenses incurred through the activities of operating and maintaining the Company, including depreciation, water provided in lieu of taxes, and loss on disposition of assets. Non-operating revenues and expenses are comprised of investment and financing earnings and cost. Revenue: Operating revenue is recognized in the period in which billings are rendered to customers. The Company does not accrue revenue for water delivered but not billed. Taxes: The Company, by virtue of its ownership by Louisville Metro, is exempt from taxation by federal, state and local taxing au- thorities, however, the Company is liable for certain other taxes and provides water and fire services in lieu of taxes to Louisville Metro. Tax expense, which includes water and fire service provided in lieu of taxes, for 2017 and 2016 was $17,429,731 and $17,017,225, respectively. Union Employees: The Company has employees who are covered by a collective bargaining agreement. At December 31, 2017 and 2016, approximately 43.1% and 42.2% of the Company’s full-time employees were covered by the collective bargaining agreement. This 7-year agreement expires on March 1, 2023.

47 NOTE 2 – Accounts Receivable Accounts receivable as of December 31, 2017 and 2016 include: YEARS ENDED DECEMBER 31 2017 2016 Water $ 10,586,312 $ 10,860,986 Other 3,193,652 1,940,255 13,779,964 12,801,241 Allowance for doubtful accounts (1,003,010 ) (1,212,012 ) $ 12,776,954 $ 11,589,229 NOTE 3 – 2009 Master Bond Resolution Funds The Company maintains a 2009 Master Bond Resolution (“Resolution”) that documents the legal requirements for the outstanding bonds payable for the 2009, 2014 and 2015 bond series. The following accounts and funds are established by the Resolution: Bond Service Account: Except to the extent that the interest and principal are to be paid from other available sources, the Com- pany is required to deposit monthly, into the Trustee’s Bond Service Accounts, one-sixth of the amount of the next succeeding interest payment on the Series 2015, 2014A, 2009A and 2009B Bonds outstanding and one-twelfth of the next maturing principal of those related bonds. The Bond Service Accounts are invested in a debt service fund agreement and government obligation mutual funds, each stated at fair value. Bond Reserve Account: The Resolution requires that the Bond Reserve Account be established at one-half of the highest future annual maximum aggregate debt service. The fund is to be used to pay maturing bonds and interest in the event funds in the Bond Service Account are not sufficient. Otherwise, funds may not be withdrawn until the bond issue is paid in full. However, the income earned on investments may be transferred to the Bond Service Account. The reserve is invested in a debt service fund agreement, repurchase agreements and government obligation mutual funds, each stated at fair value. Depreciation Fund: The Resolution requires the Company to make monthly deposits of an amount equal to one-twelfth of an amount not less than the annual depreciation charges into the Depreciation Fund. The balance also includes interest income earned. These funds are available to fund capital expenditures. The Depreciation Fund is collateralized by pledged assets with the Federal Reserve for those funds that exceed the $250,000 FDIC insurance limit. Infrastructure Replacement Reserve Fund: The Resolution provides for the funding of the Infrastructure Replacement Reserve Fund to support infrastructure replacement and rehabilitation projects. Budgeted funding was $3,000,000 for 2017 and $3,500,000 for 2016. This fund is collateralized by pledged assets with the Federal Reserve for those funds that exceed the $250,000 FDIC insurance limit. Revenue: The Resolution requires all revenues received by the Company, and not required to be deposited elsewhere or otherwise reserved for Special Investments, will be collected by the Company and deposited with a Depository or Depositories to the credit of the Revenue Fund. Operation Fund: Per the Resolution, each month the Company shall, after making required payments to the Bond Service Account, the Bond Reserve Account, and the Depreciation Fund, withdraw from the Revenue Fund and deposit with a Depository in the name of the Company to the credit of the Operation Fund the balance remaining in the Revenue Fund.

48 Rebate Fund: The Board and the Company have covenanted to rebate excess earnings to the United States in accordance with law. The Rebate Fund is established for this purpose and amounts credited to the Rebate Fund shall be free from the lien of the Resolution. Payment of any amount due shall be made by the Board of Water Works and the Company within 15 days following each five-year computation period for the calculation of excess rebateable arbitrage under the Internal Revenue Code. There were no deposits required to be made to this fund during 2017 or 2016. The Company has Reserve and Bond Service accounts within cash and investments as follows: YEARS ENDED DECEMBER 31 2017 2016 Restricted, Expendable Bond Service Accounts: Series 2009A $ 490,446 $ 565,226 Series 2009B 1,153,573 1,295,267 Series 2014 480,531 518,995 Series 2015 599,188 602,429 Total restricted, expendable bond service accounts $ 2,723,738 $ 2,981,917

Restricted Reserves:

Bond Related Reserves Bond reserve account $ 15,090,248 $ 14,896,772 Total bond related reserves $ 15,090,248 $ 14,896,772

Capital Related Reserves Depreciation Fund $ 81,325 $ 45,717,790

Infrastructure Replacement Reserve Fund 14,316,607 11,294,179 Total capital related reserves $ 14,397,932 $ 57,011,969

Total Restricted Reserves $ 29,488,180 $ 71,908,741 NOTE 4 – Cash and Investments The Company has adopted the provisions of GASB Statement No. 40, Deposits and Investment Risk Disclosures. This statement adds certain additional disclosures about cash and investments, including common areas of investment risk. The Company’s investment policy specifies that the primary objectives, in priority order, of investment activities are safety, liquidity and yield. In addition, funds are to be invested in conformity with federal, state and other legal requirements, including bond resolutions. At December 31, 2017, in addition to the reserve funds and the bond service account balances with trustees, as reflected in Note 3, the Company had $7,550,641 of cash deposits with financial institutions held in temporary investments collateralized by the financial institutions with pledged assets.

49 Information related to all cash and investments for December 31, 2017 and 2016 is included below. WEIGHTED AVERAGE DECEMBER 31, 2017 MATURITY CREDIT IN YEARS RATING Reserve and Bond Service Accounts: Mutual funds $ 4,714,556 0.08 Aaa U.S. Treasury securities 4,289,850 0.37 Aaa/AA+ Repurchase agreement (GIC) 8,809,580 9.84 Aaa/AA+ Total bond reserve and bond service 17,813,986 4.97 Cash in bank – capital related reserves 14,397,932 Total restricted reserves and restricted, expendable bond service accounts 32,211,918

Short-term liquid investments: U.S. Treasury securities 46,493,699 0.54 Aaa/AA+ Repurchase agreement 34,560,000 0.09 Aaa/AA+ Total 81,053,699 0.35 Unamortized discount (163,091 ) Total short-term liquid investments 80,890,608

Investments (long-term): U.S. Treasury securities 18,879,990 1.16 Aaa/AA+ Unamortized discount (124,581 ) Total investments (long-term) 18,755,409

Cash: Cash in bank 7,550,641 Petty cash 4,156 Checks outstanding and deposits in transit 1,825,558 Cash and temporary investments 9,380,355

Total cash and investments $ 141,238,290

50 WEIGHTED AVERAGE DECEMBER 31, 2016 MATURITY CREDIT IN YEARS RATING Reserve and Bond Service Accounts: Mutual funds $ 5,705,519 0.14 Aaa U.S. Treasury securities 4,412,979 0.37 Aaa/AA+ Repurchase agreement (GIC) 7,760,191 11.10 Aaa/AA+ Total bond reserve and bond service 17,878,689 4.95 Cash in bank – capital related reserves 57,011,969 Total restricted reserves and restricted, expendable bond service accounts 74,890,658

Short-term liquid investments: U.S. Treasury securities 38,426,191 0.72 Aaa/AA+ Repurchase agreement 34,560,002 1.00 Aaa/AA+ Total 72,986,193 0.85 Unamortized premium 91,874 Total short-term liquid investments 73,078,067

Cash: Cash in bank 13,536,085 Petty cash 4,157 Checks outstanding and deposits in transit 146,789 Cash and temporary investments 13,687,031

Total cash and investments $ 161,655,756 Custodial Credit Risk—Deposits: Custodial credit risk is the risk that in the event of a bank failure, the Company’s deposits may not be returned to it. The Company does not have a formal deposit policy for custodial credit risk, however, the Company has mitigated this risk as all deposits with depository institutions are collateralized by pledged assets with the Federal Reserve for those funds that exceed the $250,000 FDIC insurance limit. Custodial Credit Risk—Investments: For an investment, custodial credit risk is the risk that, in the event of the failure of the coun- terparty, the Company will not be able to recover the value of its investments or collateral securities that are in the possession of an outside party. The Company’s bond reserve and bond service investments are held in the name of the Company by a trustee. All other investments currently held are invested in or collateralized by U.S Treasury securities. Credit Risk: The Company’s Investment Guidelines (“the Guidelines”) allow it to invest only in certain authorized investments which include only “Investment Securities” as defined in the Amended and Restated Revenue Bond Resolution adopted on Novem- ber 10, 2009, as supplemented on March 15, 2016. These authorized investments consist of U.S. Government and Federal Agency securities, highly rated commercial paper and corporate fixed income securities, FDIC insured bank deposits and other high quality, low risk investments. The Guidelines also require diversification of the overall portfolio to eliminate the risk of loss from an over-

51 concentration of assets in a specific class of security, a specific maturity, or a specific issuer. Interest Rate Risk: The Company does not have a formal policy limiting maturities of its investments. Investments are made based on the prevailing market conditions and anticipated cash needs at the time of the transaction. The Company’s interest rate risk is mitigated by the relatively short maturity of the securities in which it invests. NOTE 5 – Fair Value Measurements The Company categorizes its fair value measurements using the fair value hierarchy established in GASB 72. The hierarchy is based on the valuation inputs used to measure fair value. Assets classified in Level 1 of the fair value hierarchy are valued using prices quoted for identical assets in active markets. Debt securities classified in Level 2 of the fair value hierarchy are valued using a matrix pricing approach. Matrix pricing is used to value securities based on the securities’ relationship to the benchmark quoted prices. Assets classified in Level 3 are valued based on unobservable inputs. The Company’s fair value measurements as of December 31, 2017 of investments held in operating, reserves and bond funds are:

QUOTED PRICES SIGNIFICANT IN ACTIVE OTHER SIGNIFICANT MARKETS FOR OBSERVABLE UNOBSERVABLE IDENTICAL ASSETS INPUTS INPUTS (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL Investments by fair value level: Mutual Funds $ 4,714,556 $ - $ - $ 4,714,556 U. S. Treasury Securities 23,169,840 - - 23,169,840 Repurchase agreement (GIC) - 43,369,580 - 43,369,580

Total $ 27,884,396 $ 43,369,580 $ - $ 71,253,976 At December 31, 2017, a portion of U.S. Treasury securities had maturities at the time of purchase of less than twelve months. These securities are recorded at amortized cost of $46,493,699. The Company’s fair value measurements as of December 31, 2016 of investments held in operating, reserves and bond funds are:

QUOTED PRICES SIGNIFICANT IN ACTIVE OTHER SIGNIFICANT MARKETS FOR OBSERVABLE UNOBSERVABLE IDENTICAL ASSETS INPUTS INPUTS (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL Investments by fair value level: Mutual Funds $ 5,705,519 $ - $ - $ 5,705,519 U. S. Treasury Securities 4,412,979 - - 4,412,979 Repurchase agreement (GIC) - 42,320,193 - 42,320,193

Total $ 10,118,498 $ 42,320,193 $ - $ 52,438,691 At December 31, 2016, a portion of U.S. Treasury securities had maturities at the time of purchase of less than twelve months. These securities are recorded at amortized cost of $38,426,191.

52 NOTE 6 – Utility Plant, Net The following is a schedule of utility plant for the year ended December 31, 2017: BEGINNING ENDING BALANCE ADDITIONS REDUCTIONS BALANCE Capital assets Buildings $ 203,180,360 $ 2,240,116 $ (423,704 ) $ 204,996,772 Machinery and equipment 95,136,406 9,210,225 (4,825,244 ) 99,521,387 Infrastructure 1,219,732,448 56,993,519 (3,230,979 ) 1,273,494,988 Total 1,518,049,214 68,443,860 (8,479,927 ) 1,578,013,147 Less accumulated depreciation for Buildings (64,603,550 ) (6,813,735 ) 345,446 (71,071,839 ) Machinery and equipment (53,030,574 ) (6,005,862 ) 4,788,563 (54,247,873 ) Infrastructure (380,520,131 ) (25,397,256 ) 2,043,452 (403,873,935 ) Total (498,154,255 ) (38,216,853 ) 7,177,461 (529,193,647 ) Capital assets, net 1,019,894,959 30,227,007 (1,302,466 ) 1,048,819,500 Capital assets not being depreciated Land 12,335,978 351,565 - 12,687,543 Construction in progress 76,747,572 84,566,084 (70,326,319 ) 90,987,337 Total 89,083,550 84,917,649 (70,326,319 ) 103,674,880

Utility plant, net $ 1,108,978,509 $ 115,144,656 $ (71,628,785) $ 1,152,494,380 The following is a schedule of utility plant for the year ended December 31, 2016: BEGINNING ENDING BALANCE ADDITIONS REDUCTIONS BALANCE Capital assets Buildings $ 196,213,914 $ 7,226,678 $ (260,232 ) $ 203,180,360 Machinery and equipment 91,170,076 5,494,402 (1,528,072 ) 95,136,406 Infrastructure 1,177,692,629 43,306,665 (1,266,846 ) 1,219,732,448 Total 1,465,076,619 56,027,745 (3,055,150 ) 1,518,049,214 Less accumulated depreciation for Buildings (58,185,836 ) (6,620,192 ) 202,478 (64,603,550 ) Machinery and equipment (49,202,938 ) (5,255,844 ) 1,428,208 (53,030,574 ) Infrastructure (358,100,538 ) (24,074,420 ) 1,654,827 (380,520,131 ) Total (465,489,312 ) (35,950,456 ) 3,285,513 (498,154,255 ) Capital assets, net 999,587,307 20,077,289 230,363 1,019,894,959 Capital assets not being depreciated Land 12,145,158 190,820 - 12,335,978 Construction in progress 65,515,842 68,220,211 (56,988,481 ) 76,747,572 Total 77,661,000 68,411,031 (56,988,481 ) 89,083,550

Utility plant, net $ 1,077,248,307 $ 88,488,320 $ (56,758,118 ) $ 1,108,978,509

53 NOTE 7 – Long-Term Liabilities Long-term liabilities at December 31, 2017, are summarized as follows: BEGINNING ENDING CURRENT NONCURRENT BALANCE ADDITIONS REDUCTIONS BALANCE PORTION PORTION Bonds payable $ 306,600,000 $ - $ (19,025,000 ) $ 287,575,000 $ 19,440,000 $ 268,135,000 KIA note payable 1,507,274 - (87,096 ) 1,420,178 88,847 1,331,331 Unamortized debt premiums and discounts 18,793,031 - (2,587,476 ) 16,205,555 - 16,205,555 Customer advances for construction 472,625 2,866 (13,977 ) 461,514 - 461,514 Net pension liability 58,797,619 13,719,124 - 72,516,743 - 72,516,743

Total long-term liabilities $ 386,170,549 $ 13,721,990 $ (21,713,549) $ 378,178,990 $ 19,528,847 $ 358,650,143 Long-term liabilities at December 31, 2016, are summarized as follows: BEGINNING ENDING CURRENT NONCURRENT BALANCE ADDITIONS REDUCTIONS BALANCE PORTION PORTION Bonds payable $ 324,600,000 $ - $ (18,000,000 ) $ 306,600,000 $ 19,025,000 $ 287,575,000 KIA note payable 1,592,654 - (85,380 ) 1,507,274 87,096 1,420,178 Unamortized debt premiums and discounts 21,760,009 - (2,966,978 ) 18,793,031 - 18,793,031 Customer advances for construction 494,729 8,179 (30,283 ) 472,625 - 472,625 Net pension liability 55,122,691 3,674,928 - 58,797,619 - 58,797,619

Total long-term liabilities $ 403,570,083 $ 3,683,107 $ (21,082,641 ) $ 386,170,549 $ 19,112,096 $ 367,058,453

54 NOTE 8 – Bonds and Notes Payable Bonds and notes payable consist of the following: 2017 2016 Water System Revenue Bonds, 2009A tax exempt, interest rates ranging from 2.25% to 5.0% with maturities from 2010 through 2025 $ 37,625,000 $ 41,385,000 Water System Revenue Bonds, 2009B taxable, interest rates ranging from 3.75% to 5.5% with maturities from 2017 through 2029 76,305,000 86,710,000 Water System Revenue Bonds, 2014A tax exempt, interest rates ranging from 2.5% to 5.0% with maturities from 2014 through 2031 59,200,000 62,405,000 Water System Revenue Bonds, 2015 tax exempt, interest rates ranging from 2.0% to 5.0% with maturities from 2016 through 2035 114,445,000 116,100,000 Kentucky Infrastructure Authority, Drinking Water State Revolving Fund Loan Program, interest rate of 2.0% and maturities from 2012 through 2031 1,420,178 1,507,274 $ 288,995,178 $ 308,107,274 Less current portion 19,528,847 19,112,096

Bonds and notes payable, less current portion $ 269,466,331 $ 288,995,178 All bonds are subject to optional redemption provisions. The Water System Revenue Bond resolution contains a rate covenant requiring that the schedule of rates and charges, and the rules and regulations for water services will not be revised so as to result in a decrease of revenues. Also, future adjustments to water rates and charges are required, as necessary, so that annual net revenues will not be less than 130% of the maximum Aggre- gate Bond Service for each Bond Fiscal Year in respect of all outstanding bonds. All revenues of the Company are pledged for the revenue bonds.

55 Maturities of bonds and notes payable, as of December 31, 2017, are as follows: YEARS ENDED DECEMBER 31 PRINCIPAL INTEREST TOTAL 2018 $ 19,528,847 $ 11,775,574 $ 31,304,421 2019 18,780,632 10,896,938 29,677,570 2020 19,537,454 9,994,936 29,532,390 2021 20,314,312 9,120,540 29,434,852 2022 20,161,208 8,199,856 28,361,064 2023-2027 96,290,837 27,697,975 123,988,812 2028-2032 68,931,888 10,080,425 79,012,313 2033-2035 25,450,000 1,596,591 27,046,591

$ 288,995,178 $ 89,362,835 $ 378,358,013 NOTE 9 – Dividends The Company is required by bond resolution to pay a dividend to Metro Government, the sole stockholder. The annual dividend, calculated in accordance with the provisions of the 2009 Master Bond Resolution, is equal to fifty percent (50%) of the average of the current and prior two fiscal years’ net income before distributions and contributions with certain adjustments and exclusions (adjusted net income). The dividend is paid quarterly each year based on estimated annual adjusted net income. The dividend is adjusted upon completion of the annual audit to reflect any difference between estimated and actual net income, with such adjustment to be made in the quarterly dividend payments of the following year. The 2017 dividend computed under this provision was $19,024,825, resulting in an overpayment of $1,802,375 which will be subtracted from 2018 dividend payments. The 2016 dividend computed under the provision was $19,821,376, resulting in an overpayment of $983,694 which was deducted from the 2017 dividend payments. NOTE 10 – Deferred Compensation Plans The Company offers its employees a deferred compensation plan created in accordance with Internal Revenue Code Section 457. The plan permits participating employees to defer a portion of their salary until future years. An employee may defer up to 100% of adjusted gross compensation or $18,000, whichever is less, to the plan. The deferred compensation is not available to employees until termination, retirement, death or unforeseen emergency. Plan assets and liabilities are not recorded by the Company. The Company contributes $0.25 for every $1.00 of an employee’s contribution up to $1,500 ($375 maximum Company contribution) to the plan. The amount contributed to the plan by the Company and charged to expense was approximately $99,347 and $96,653 for the years ended December 31, 2017 and 2016, respectively. The Company also offers its employees a deferred compensation plan created in accordance with Internal Revenue Code Section 401(k). An eligible employee may defer up to 100% of adjusted gross compensation or $18,000, whichever is less, to the plan. As of January 1, 2015, the Company no longer contributes to this plan. NOTE 11 – Pension Plan General Information About the Pension Plan: All full-time and eligible part-time employees of the Company participate in County Employee Retirement System (CERS), a cost-sharing, multiple-employer defined benefit pension plan administered by the Kentucky Retirement System (KRS), an agency of the Commonwealth. Under the provisions of Kentucky Revised Statute Section 78.520, the Board of Trustees (the Board) of KRS administers CERS, Kentucky Employee Retirement System, and State Police Retire- ment System. Although the assets of the systems are invested as a whole, each system’s assets are used only for the payment of benefits to members of that plan, and a pro rata share of administrative costs. The plan provides for retirement, disability and death benefits to plan members. Retirement benefits may also be extended to beneficiaries of plan members under certain circumstances. Under the provisions of Kentucky Revised Statute Section 61.701, the

56 Board of KRS also administers the Kentucky Retirement Systems Insurance Fund. The statutes provide for a single insurance fund to provide group hospital and medical benefits to retirees drawing a benefit from the three pension funds administered by KRS. The assets of the insurance fund are invested as a whole. KRS and the Commonwealth have statutory authority to determine Plan benefits and employer contributions. KRS issues a publicly available financial report that includes financial statements and required supplementary information for CERS. The report may be obtained by writing to Kentucky Retirement System, Perimeter Park West, 1260 Louisville Road, Frankfort, Kentucky 40601, or it may be found at the KRS website at www.kyret.ky.gov. Basis of Accounting: For purposes of measuring the net pension liability, deferred outflow of resources and deferred inflow of resources related to pensions, pension expense, information about the fiduciary net position of CERS and additions to/deductions from CERS’s fiduciary net position have been determined on the same basis as they are reported by CERS. For this purpose, benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with the benefit terms. Investments are reported at fair value. Benefits Provided: The information below summarizes the major retirement benefit provisions of CERS-Non-Hazardous. It is not intended to be, nor should it be interpreted as, a complete statement of all benefit provisions: Nonhazardous Normal Retirement: Members whose participation began before 8/1/2004: Age and Service Requirement: Age 65 with at least one month of Nonhazardous duty service credit, or at any age with 27 or more years of service credit. Benefit: If a member has at least 48 months of service, the monthly benefit is 2.20% times final average compensation times years of service depending on participation and retirement dates. Final compensation is calculated by taking the average of the highest five (5) fiscal years of salary. If the number of months of service credit during the five (5) year period is less than forty-eight (48), one (1) or more additional fiscal years shall be used. If a member has less than 48 months of service, the monthly benefit is the actuarial equivalent of two times the member’s contributions with interest. Members whose participation began on or after 8/1/2004, but before 9/1/2008: Age and Service Requirement: Age 65 with at least one month of Nonhazardous duty service credit, or at any age with 27 or more years of service credit. Benefit: If a member has at least 48 months of service, the monthly benefit is 2.00% multiplied by final average compensation, multiplied by years of service. Final compensation is calculated by taking the average of the highest five (5) fiscal years of salary. If the number of months of service credit during the five (5) year period is less than forty-eight (48), one (1) or more additional fiscal years shall be used. If a member has less than 48 months of service, the monthly benefit is the actuarial equivalent of two times the member’s contributions with interest.

57 Members whose participation began on or after 9/1/2008 but before 1/1/2014: Age and Service Requirement: Age 65 with 60 months of Nonhazardous duty service credit, or age 57 if age plus service equals at least 87. Benefit: The monthly benefit is the following benefit factor based on service credit at retirement plus 2.00% for each year of service greater than 30 years, multiplied by final average compensation, multiplied by years of service. Service Credit Benefit Factor 10 years or less 1.10% 10+ - 20 years 1.30% 20+ - 26 years 1.50% 26+ - 30 years 1.75% Final compensation is calculated by taking the average of the last (not highest) five (5) complete fiscal years of salary. Each fiscal year used to determine final compensation must contain twelve (12) months of service credit. Members whose participation began on or after 1/1/2014: Age and Service Requirement: Age 65 with 60 months of Nonhazardous duty service credit, or age 57 if age plus service equals at least 87. Benefit: Each year that a member is an active contributing member to the System, the member contributes 5% of creditable compensation, and the member’s employer contributes 4.00% of creditable compensation, which is a portion of the total employer contribution, into a hypothetical account. The hypothetical account will earn interest annually on both the member’s and employer’s contribution at a minimum rate of 4%. If the System’s geometric average net in vestment return for the previous five years exceeds 4%, then the hypothetical account will be credited with an additional amount of interest equal to 75% of the amount of the return which exceeds 4%. All interest credits will be applied to the hypothetical account balance on June 30 based on the account balance as of June 30 of the previous year. Upon retirement the hypothetical account which includes member contributions, employer contributions and interest credits can be withdrawn from the System as a lump sum or annuitized into a single life annuity option. Contributions: The Company was required to contribute at an actuarially determined rate determined by Statute. Per Kentucky Revised Statute Section 78.545(33) normal contribution and past service contribution rates shall be determined by the KRS Board on the basis of an annual valuation last preceding July 1 of a new biennium. The KRS Board may amend contribution rates as of the first day of July of the second year of a biennium, if it is determined on the basis of a subsequent actuarial valuation that amended contribution rates are necessary to satisfy requirements determined in accordance with actuarial bases adopted by the KRS Board. For the fiscal years ended June 30, 2017 and 2016, participating employers contributed 18.68% and 17.06% as set by KRS, respectively, of each Nonhazardous employee’s creditable compensation. For the fiscal year beginning July 1, 2017, participating employers will contribute 19.18%. These percentages are inclusive of both pension and insurance payments for employers. Administrative costs of KRS are financed through employer contributions and investments earnings. The Company has met 100% of the contribution funding requirement for the years ended December 31, 2017, 2016, and 2015. Total contributions recognized by the Plan were $4,402,741 and $3,848,753 for the fiscal years ending December 31, 2017 and December 31, 2016, respectively.

58 Members whose participation began before 9/1/2008: Nonhazardous contributions equal 5% of all creditable compensation. Interest paid on the members’ accounts is currently 2.5%; and per statute shall not be less than 2.0%. Members are entitled to a full refund of contributions with interest. Members whose participation began on or after 9/1/2008: Nonhazardous contributions equal to 6% of all creditable compensation, with 5% being credited to the member’s account and 1% deposited to the KRS 401(h) Account. Interest paid on the members’ accounts will be set at 2.5%. Member is entitled to a full refund of contributions and interest in their individual account, however, the 1% contributed to the insurance fund is non-refundable. Members whose participation on or after 1/1/2014 Nonhazardous contribution equal to 6% of all creditable compensation, with 5% being credited to the member’s account and 1% deposited to the KRS 401(h) Account. Members are entitled to a full refund of contributions and interest on the member’s portion of the hypothetical account, however, the 1% contributed to the insurance fund is non-refundable. 2017 Plan Information Total Pension Liability: The total pension liability (“TPL”) was determined by an actuarial valuation as of June 30, 2017, using the following actuarial assumptions, applied to all periods included in the measurement: Inflation 2.30 percent Salary increases 3.05 percent, average, including inflation Investment rate of return 6.25 percent, net of pension plan investment expense, including inflation The mortality table used for active members is RP-2000 Combined Mortality Table projected with Scale BB to 2013 (multiplied by 50% for males and 30% for females). For healthy retired members and beneficiaries, the mortality table used is the RP-2000 Combined Mortality Table projected with Scale BB to 2013 (set back 1 year for females). For disabled members, the RP-2000 Combined Disabled Mortality Table projected with Scale BB to 2013 (set back 4 years for males) is used for the period after disability retirement. There is some margin in the current mortality tables for possible future improvement in mortality rates and that margin will be reviewed again when the next experience investigation is conducted. The actuarial assumptions used in the June 30, 2017 valuation were based on the results of an actuarial experience study for the period July 1, 2008—June 30, 2013. Discount rate assumptions: (a) Discount rate: The discount rate used to measure the total pension liability was 6.25%. (b) Projected cash flows: The projection of cash flows used to determine the discount rate assumed that local employers would contribute the actuarially determined contribution rate of projected compensation over the remaining 26-year amortization period of the unfunded actuarial accrued liability. The actuarial determined contribution rate is adjusted to reflect the phase in of anticipated gains on actuarial value of assets over the first four years of the projection period.

59 (c) Long-term rate of return: The long-term expected return on plan assets is reviewed as part of the regular experience studies prepared every five years for the System. The most recent analysis, performed for the period covering fiscal years 2008 through 2013 is outlined in a report dated April 30, 2014. Several factors are considered in evaluating the long-term rate of return assumption including long term historical data, estimates inherent in current market data, and a log- normal distribution analysis in which best-estimate ranges of expected future real rates of return (expected return, net of investment expense and inflation) were developed by the investment consultant for each major asset class. However, the Board of KRS has the authority to review the assumptions on a more frequent basis and adopt new assumptions prior to the next scheduled experience study. These ranges were combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and then adding expected inflation. The capital market assumptions developed by the investment consultant are intended for use over a 10-year horizon and may not be useful in setting the long-term rate of return for funding pension plans which covers a longer timeframe. The assumption is intended to be a long term assumption and is not expected to change absent a significant change in the asset allocation, a change in the inflation assumption, or a fundamental change in the market that alters expected returns in future years. (d) Municipal bond rate: The discount rate determination does not use a municipal bond rate. (e) Periods of projected benefit payments: Projected future benefit payments for all current plan members were projected through 2117. The long-term assumed investment rate of return was applied to all periods of projected benefit payments to determine the total pension liability. (f) Assumed Asset Allocation: The target asset allocation and best estimates of arithmetic real rates of return for each major asset class are summarized in the following table: LONG-TERM TARGET EXPECTED REAL ASSET CLASS ALLOCATION RATE OF RETURN US Equity 17.50% 5.97% International Equity 17.50% 7.85% Global Bonds 4.00% 2.63% Global Credit 2.00% 3.63% High Yield 7.00% 5.75% Emerging Market Debt 5.00% 5.50% Private Credit 10.00% 8.75% Real Estate 5.00% 7.63% Absolute Return 10.00% 5.63% Real Return 10.00% 6.13% Private Equity 10.00% 8.25% Cash 2.00% 1.88%

Total 100.00% 6.56% The long-term expected rate of return on pension plan assets was established by the KRS Board of Trustees at 6.25% based on a blending of the factors described above.

60 %

(g) Sensitivity Analysis: This paragraph requires disclosure of the sensitivity of the net pension liability to changes in the dis count rate. The following presents the Company’s allocated portion of the net pension liability of the System, calculated using the discount rate of percent, as well as what the Company’s allocated portion of the System’s net pension liability would be if it were calculated using a discount rate that is 1-percentage-point lower (5.25 percent) or 1-percentage-point higher (7.25 percent) than the current rate for non-hazardous: CURRENT 1% DECREASE DISCOUNT RATE 1% INCREASE (5.25%) (6.25%) (7.25%) Net pension liability $91,459,281 $72,516,743 $56,671,444 Employer’s Portion of the Collective Net Pension Liability: The Company’s proportionate share of the net pension liability, as indicated in the prior table, is $72,516,743, or approximately 1.24%, as of June 30, 2017. The liability was distributed based on 2017 actual employer contributions to the plan. The Company’s proportionate share of the net pension liability as of June 30, 2016 was $58,797,619, or approximately 1.19%. Measurement Date: June 30, 2017 is the actuarial valuation date and measurement date upon which the total pension liability is based. Changes in Assumptions and Benefit Terms: Since the prior measurement date, the demographic and economic assumptions that affect the measurement of the total pension liability have been updated as follows: • The assumed investment rate of return was decreased from 7.50% to 6.25%. • The assumed rate of inflation was reduced from 3.25% to 2.30%. • Payroll growth assumption was reduced from 4.00% to 3.05%. Changes Since Measurement Date: There were no changes between the measurement date of the collective net pension liability and the employer’s reporting date. Pension Expense: The Company was allocated pension expense of $12,305,579 related to the CERS for year ending June 30, 2017. Deferred Outflows and Deferred Inflows: Since certain expense items are amortized over closed periods each year, the deferred portions of these items must be tracked annually. If the amounts serve to reduce pension expense they are labeled as deferred inflows. If they will increase pension expense they are labeled deferred outflows. As noted in the previous section, the amortization of these amounts is accomplished on a level dollar basis, with no interest included in the deferred amounts. Experience gains/ losses and the impact of changes in actuarial assumptions, if any, are amortized over the average remaining service life of the active and inactive System members at the beginning of the fiscal year. Investment gains and losses are amortized over a fixed five-year period. The following table provides a summary of the deferred inflows and outflows as of the Measurement Date and agrees to the Appendix A: Collective Pension Amounts for CERS Non-Hazardous System, of the CERS plan audit report. Pursuant to GASB 68, the deferred outflows and inflows related to the differences between expected and actual investment earnings on plan investments have been netted. The Appendix A referred to above shows the amounts gross as a deferred outflow of $5,743,239 and a deferred inflow of $4,826,291.

61 For year ending December 31, 2017: DEFERRED DEFERRED OUTFLOWS INFLOWS OF RESOURCES OF RESOURCES Difference between expected and actual experience $ 89,944 $ 1,840,786 Change of assumptions 13,381,304 - Changes in proportion and differences between employer contributions and proportionate shares of contributions 1,578,065 1,377,636 Differences between expected and actual investment earnings on plan investments 896,948 - Subtotal 15,946,261 3,218,422 Contributions subsequent to the measurement date 2,251,099 -

Total $ 18,197,360 $ 3,218,422 Deferred outflows of resources resulting from employer contributions subsequent to the measurement date will be recognized as a reduction of net pension liability in the year ending December 31, 2018. The remainder of the deferred outflows and deferred inflows of resources are amortized over three to five years with remaining amortization as follows: 2018 $ 5,631,463 2019 5,570,843 2020 2,471,584 2021 (946,051 )

$ 12,727,839 Pension Plan Fiduciary Net Position: Detailed information about the pension plans’ fiduciary net position is available in the sep- arately issued pension plan financial reports. 2016 Plan Information Total Pension Liability: The total pension liability (“TPL”) was determined by an actuarial valuation as of June 30, 2016, using the following actuarial assumptions, applied to all periods included in the measurement: Inflation 3.25 percent Salary increases 4.00 percent, average, including inflation Investment rate of return 7.50 percent, net of pension plan investment expense, including inflation The mortality table used for active members is RP-2000 Combined Mortality Table projected with Scale BB to 2013 (multiplied by 50% for males and 30% for females). For healthy retired members and beneficiaries, the mortality table used is the RP-2000 Combined Mortality Table projected with Scale BB to 2013 (set back 1 year for females). For disabled members, the RP-2000 Combined Disabled Mortality Table projected with Scale BB to 2013 (set back 4 years for males) is used for the period after disability retirement. There is some margin in the current mortality tables for possible future improvement in mortality rates and that margin will be reviewed again when the next experience investigation is conducted. The actuarial assumptions used in the June 30, 2016 valuation were based on the results of an actuarial experience study for the period July 1, 2008—June 30, 2013.

62 Discount rate assumptions: (a) Discount rate: The discount rate used to measure the total pension liability was 7.50%. (b) Projected cash flows: The projection of cash flows used to determine the discount rate assumed that local employers would contribute the actuarially determined contribution rate of projected compensation over the remaining 27-year amortization period of the unfunded actuarial accrued liability. The actuarial determined contribution rate is adjusted to reflect the phase in of anticipated gains on actuarial value of assets over the first four years of the projection period. (c) Long-term rate of return: The long-term expected return on plan assets is reviewed as part of the regular experience studies prepared every five years for the System. The most recent analysis, performed for the period covering fiscal years 2008 through 2013 is outlined in a report dated April 30, 2014. Several factors are considered in evaluating the long-term rate of return assumption including long term historical data, estimates inherent in current market data, and a log- normal distribution analysis in which best-estimate ranges of expected future real rates of return (expected return, net of investment expense and inflation) were developed by the investment consultant for each major asset class. These ranges were combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and then adding expected inflation. The capital market assumptions developed by the investment consultant are intended for use over a 10-year horizon and may not be useful in setting the long-term rate of return for funding pension plans which covers a longer timeframe. The assumption is intended to be a long term assumption and is not expected to change absent a significant change in the asset allocation, a change in the inflation assumption, or a fundamental change in the market that alters expected returns in future years. (d) Municipal bond rate: The discount rate determination does not use a municipal bond rate. (e) Periods of projected benefit payments: Projected future benefit payments for all current plan members were projected through 2117. The long-term assumed investment rate of return was applied to all periods of projected benefit payments to determine the total pension liability. (f) Assumed Asset Allocation: The target asset allocation and best estimates of arithmetic real rates of return for each major asset class are summarized in the following table: LONG-TERM TARGET EXPECTED REAL ASSET CLASS ALLOCATION RATE OF RETURN Combined equity 44.00% 5.40% Combined Fixed Income 19.00% 1.50% Real Return (Diversified Inflation Strategies) 10.00% 3.50% Private equity 10.00% 8.50% Real estate 5.00% 4.50% Absolute Return (Diversified Hedge Funds) 10.00% 4.25% Cash Equivalent 2.00% (0.25% )

Total 100.00% The long-term expected rate of return on pension plan assets was established by the KRS Board of Trustees at 7.50% based on a blending of the factors described above.

63 (g) Sensitivity Analysis: This paragraph requires disclosure of the sensitivity of the net pension liability to changes in the discount rate. The following presents the Company’s allocated portion of the net pension liability of the System, calculated using the discount rate of percent, as well as what the Company’s allocated portion of the System’s net pension liability would be if it were calculated using a discount rate that is 1-percentage-point lower (6.50 percent) or 1-percent age-point higher (8.50 percent) than the current rate: CURRENT 1% DECREASE DISCOUNT RATE 1% INCREASE (6.50%) (7.50%) (8.50%) Net pension liability $ 73,271,353 $ 58,797,619 $ 46,390,745 Employer’s Portion of the Collective Net Pension Liability: The Company’s proportionate share of the net pension liability, as indicated in the prior table, is $58,797,619, or approximately 1.19%, as of June 30, 2016. The liability was distributed based on 2016 actual employer contributions to the plan. As of June 30, 2015, the Company’s proportionate share of the net pension liability was $55,122,691, or approximately 1.28%. Measurement Date: June 30, 2016 is the actuarial valuation date and measurement date upon which the total pension liability is based. Changes in Assumptions and Benefit Terms: Since the prior measurement date, the demographic and economic assumptions that affect the measurement of the total pension liability have not been updated. Changes Since Measurement Date: There were no changes between the measurement date of the collective net pension liability and the employer’s reporting date. Pension Expense: The Company was allocated pension expense of $7,406,260 related to the CERS for year ending June 30, 2016. Deferred Outflows and Deferred Inflows: Since certain expense items are amortized over closed periods each year, the deferred portions of these items must be tracked annually. If the amounts serve to reduce pension expense they are labeled as deferred inflows. If they will increase pension expense they are labeled deferred outflows. As noted in the previous section, the amortization of these amounts is accomplished on a level dollar basis, with no interest included in the deferred amounts. Experience gains/ losses and the impact of changes in actuarial assumptions, if any, are amortized over the average remaining service life of the active and inactive System members at the beginning of the fiscal year. Investment gains and losses are amortized over a fixed five-year period. The table below provides a summary of the deferred inflows and outflows as of the Measurement Date. For year ending December 31, 2016: DEFERRED DEFERRED OUTFLOWS INFLOWS OF RESOURCES OF RESOURCES Difference between expected and actual experience $ 256,696 $ - Change of assumptions 3,114,784 - Changes in proportion and differences between employer contributions and proportionate shares of contributions 562,008 2,354,682 Differences between expected and actual investment earnings on plan investments 5,527,576 - Subtotal 9,461,064 2,354,682 Contributions subsequent to the measurement date 2,042,590 -

Total $ 11,503,654 $ 2,354,682

64 Deferred outflows of resources resulting from employer contributions subsequent to the measurement date will be recognized as a reduction of net pension liability in the year ending December 31, 2017. The remainder of the deferred outflows and deferred inflows of resources are amortized over five years with remaining amortization as follows: 2017 $2,639,665 2018 1,766,002 2019 1,720,075 2020 980,640

$7,106,382 Pension Plan Fiduciary Net Position: Detailed information about the pension plans’ fiduciary net position is available in the sep- arately issued pension plan financial reports. NOTE 12 – Contingencies and Commitments Self-Insurance: The Company retains certain insurable risks up to a fixed maximum per claim exposure. The risk is mitigated by maintaining a self-insured retention (“S.I.R.”) of $1,000,000 per occurrence for auto and general liability claims and lawsuits with excess liability insurance above the S.I.R. in multiple layers totaling $35,000,000. Claims and suits are managed by the Company with the assistance of outside counsel. The Company is self-funded for workers’ compensation claims with excess insurance in place with a specific (per occurrence) retention of $600,000, an estimated policy aggregate retention of $3,706,777 (approximately 355% of deposit premium based upon payroll estimates) and an aggregate limit of $3,000,000. Workers’ compensation claims are managed by a third-party administrator with oversight by the Company. Changes in the liability for self-insurance for liability and workers’ compensation claims are as follows: 2017 2016 2015 Liability – beginning of year $ 865,968 $ 1,298,329 $ 1,340,377 Accruals for current year claims and changes in estimate 1,563,169 351,212 756,087 Claims paid (672,852 ) (783,573) (798,135 )

Liability – end of year $ 1,756,285 $ 865,968 $ 1,298,329 Claims have not exceeded coverage for the last 3 years. Claims and Litigation: The Company is involved in litigation, which has arisen out of operations in the ordinary course of business. The Company accrues losses from litigation as a liability based on estimates. While it is not possible to forecast the outcomes of litigation, it is the opinion of the Company’s management, based on evaluations by outside counsel, that they will not have a material adverse effect on the financial statements of the Company. Construction Commitments: The estimated cost to complete construction projects under contract was approximately $42.8 million and $31.1 million at December 31, 2017 and 2016, respectively.

65 Required Supplementary Information

Schedule of the Company’s Proportionate Share of the Net Pension Liability December 31, 2017 2017 2016 2015 2014 Company’s proportion of the net pension liability 1.24% 1.19% 1.28% 1.25% Company’s proportionate share of the net pension liability $ 72,516,743 $ 58,797,619 $ 55,122,691 $ 40,419,796 Company’s covered payroll $ 29,830,808 $ 28,494,478 $ 29,911,208 $ 29,126,777 Company’s proportionate share of the net pension liability as a percentage of its covered payroll 243.09% 206.35% 184.29% 138.77% Plan fiduciary net position as a percentage of the total pension liability 53.30% 55.50% 59.97% 66.80% The amounts presented for each fiscal year were determined as of the June 30 year-end that occurred within the fiscal year. GASB 68 requires this schedule to show information for 10 years. However, until a full 10-year trend is compiled, the Company is presenting information for those years for which information is available. Schedule of the Company’s Pension Contributions December 31, 2017 2017 2016 2015 2014 Statutorily required contribution $ 4,402,741 $ 3,848,753 $ 3,680,646 $ 3,907,026 Contributions in relation to the statutorily required contribution (4,402,741 ) (3,848,753 ) (3,680,646 ) (3,907,026 ) Annual contribution deficiency (excess) $ - $ - $ - $ - Company’s contributions as a percentage of statutorily required contribution for pension 100.00% 100.00% 100.00% 100.00% Company’s covered payroll $ 30,405,336 $ 29,125,528 $ 29,787,416 $ 29,411,439 Contributions as a percentage of its covered payroll 14.48% 13.21% 12.36% 13.28% GASB 68 requires this schedule to show information for 10 years. However, until a full 10-year trend is compiled, the Company is presenting information for those years for which information is available.

66 Supplementary Information

Schedule of Investments December 31, 2017 FAIR MARKET MATURITY PAR VALUE Bond Reserve Account - 2009A Fidelity Governmental Fund 0.75% 01/29/18 $ 1,154,980 $ 1,154,980 Bayerische Landesbank Repo 3.46% 11/15/25 4,502,065 4,502,065 Bond Reserve Account - 2009B Fidelity Governmental Fund 0.75% 01/29/18 497,097 497,097 Bayerische Landesbank Repo 3.46% 11/15/29 4,307,514 4,307,514 Bond Reserve Account - 2014 Fidelity Governmental Fund 0.75% 01/29/18 2,366,894 2,366,894 US Treasury Bond 0.75% 05/15/18 2,274,000 2,261,698 Bond Service Account - Series 2009A Fidelity Governmental Fund 0.75% 01/29/18 124,404 124,404 US Treasury Bond 0.75% 05/15/18 368,000 366,042 Bond Service Account - Series 2009B Fidelity Governmental Fund 0.75% 01/29/18 283,228 283,228 US Treasury Note 0.75% 05/15/18 875,000 870,345 Bond Service Account - Series 2014 Fidelity Governmental Fund 0.75% 01/29/18 122,446 122,446 US Treasury Note 0.75% 05/15/18 360,000 358,085 Bond Service Account - Series 2015 Fidelity Governmental Fund 0.75% 01/29/18 165,507 165,507 US Treasury Note 0.75% 05/15/18 436,000 433,680 Repurchase Agreement US Treasury Note 0.67% 02/01/18 34,500,000 34,560,000 Treasury Portfolio US Treasury Note 1.59% 02/15/18 1,922,600 1,922,600 US Treasury Note 1.59% 03/15/18 5,346,400 5,346,400 US Treasury Note 1.59% 04/15/18 7,712,000 7,712,000 US Treasury Note 1.59% 06/15/18 5,336,400 5,336,400 US Treasury Note 1.59% 07/15/18 7,722,600 7,722,600 US Treasury Note 1.59% 09/15/18 5,346,400 5,346,400 US Treasury Note 1.59% 10/15/18 7,740,900 7,740,900 US Treasury Note 1.59% 12/15/18 5,366,400 5,366,400 US Treasury Note 1.59% 01/15/19 7,756,400 7,736,518 US Treasury Note 1.59% 03/15/19 5,373,100 5,370,786 US Treasury Note 1.59% 04/15/19 5,774,700 5,772,686

$ 117,735,035 $ 117,747,675

67 Summarized Schedule of Bond Issues 2015 Series Bond Issue The tax-exempt Water System Revenue Bonds were issued by the Board of Water Works and are payable only from revenue of the Company. Master Resolution Date November 10, 2009 Fourth supplemental resolution date October 20, 2015 Original amount $119,445,000 Interest rate 2.00% to 5.00% Bonds payable November 15 Interest payable May 15 and November 15 Call provisions in whole or in part 100% after November 15, 2025 2014A Series Bond Issue The tax-exempt Water System Revenue Bonds were issued by the Board of Water Works and are payable only from revenue of the Company. Master Resolution Date November 10, 2009 Third supplemental resolution date July 15, 2014 Original amount $63,195,000 Interest rate 2.50% to 5.00% Bonds payable November 15 Interest payable May 15 and November 15 Call provisions in whole or in part 100% after November 15, 2023 2009A Series Bond Issue The tax-exempt Water System Revenue Bonds were issued by the Board of Water Works and are payable only from revenue of the Company. Master Resolution Date November 10, 2009 First supplemental resolution date November 10, 2009 Original amount $116,220,000 Interest rate 2.25% to 5.00% Bonds payable November 15 Interest payable May 15 and November 15 Call provisions in whole or in part 100% after November 15, 2019 2009B Series Bond Issue The taxable Water System Revenue Bonds were issued by the Board of Water Works (“Board”) and are payable only from revenue of the Company. This series was issued as Federally Taxable Build America Bonds—Direct Payment. The American Recovery and Rein- vestment Act of 2009 authorized the Board to issue these taxable bonds, known as Build America Bonds (“BABs”), to finance capital expenditures and elect to receive a subsidy payment from the U.S. Treasury equal to 35% of the amount of each interest payment on such taxable bonds. The interest amounts reflected on the Schedule of Outstanding Bond Indebtedness and Annual Debt Service Requirements for the 2009B Series do not reflect this BABs subsidy payment.

68 As of October 1, 2013, The Internal Revenue Service Office of Tax Exempt Bonds announced a new sequester reduction in amounts paid to issuers of direct pay bonds for which issuers elected to receive a direct payment from the U.S. Treasury. The sequester reduction to the BABs subsidy payments were 6.6 percent and 6.8 percent for the federal fiscal years ending 2017 and 2016, respectively. Master Resolution date November 10, 2009 Second supplemental resolution date November 10, 2009 Original amount $86,710,000 Interest rate 3.75% to 5.00% Bonds payable November 15 Interest payable May 15 and November 15 Call provisions in whole or in part 100% after November 15, 2019

69 Schedule of Outstanding Bond Indebtedness and Annual Debt Service Requirements

2015 BONDS AGGREGATE PRINCIPAL BOND YEAR ENDING DECEMBER 31 INSTALLMENTS INTEREST SERVICE 2021 $ 5,110,000 $ 3,717,919 $ 8,827,919 2022 5,560,000 3,462,419 9,022,419 2023 5,845,000 3,184,419 9,029,419 2024 6,145,000 2,892,169 9,037,169 2025 6,430,000 2,584,919 9,014,919 2026 6,660,000 2,327,719 8,987,719 2027 6,860,000 2,127,919 8,987,919 2028 7,070,000 1,922,119 8,992,119 2029 7,285,000 1,710,019 8,995,019 2030 7,510,000 1,491,469 9,001,469 2031 7,745,000 1,256,781 9,001,781 2032 7,980,000 1,024,431 9,004,431 2033 8,225,000 785,031 9,010,031 2034 8,480,000 538,281 9,018,281 2035 8,745,000 273,279 9,018,279

$ 114,445,000 $ 41,386,900 $ 155,831,900

2014 BONDS AGGREGATE PRINCIPAL BOND YEAR ENDING DECEMBER 31 INSTALLMENTS INTEREST SERVICE 2018 $ 3,340,000 $ 2,163,850 $ 5,503,850 2019 3,500,000 1,996,850 5,496,850 2020 3,665,000 1,821,850 5,486,850 2021 3,800,000 1,675,250 5,475,250 2022 3,930,000 1,523,250 5,453,250 2023 4,065,000 1,366,050 5,431,050 2024 4,200,000 1,203,450 5,403,450 2025 4,350,000 1,035,450 5,385,450 2026 4,430,000 926,700 5,356,700 2027 4,525,000 815,950 5,340,950 2028 4,635,000 680,200 5,315,200 2029 4,760,000 541,150 5,301,150 2030 4,910,000 374,550 5,284,550 2031 5,090,000 178,150 5,268,150

$ 59,200,000 $ 16,302,700 $ 75,502,700

70 2009A BONDS AGGREGATE PRINCIPAL BOND YEAR ENDING DECEMBER 31 INSTALLMENTS INTEREST SERVICE 2018 $ 3,955,000 $ 1,664,975 $ 5,619,975 2019 4,170,000 1,467,225 5,637,225 2020 4,390,000 1,258,725 5,648,725 2021 4,580,000 1,083,125 5,663,125 2022 4,785,000 899,925 5,684,925 2023 5,000,000 708,525 5,708,525 2024 5,245,000 483,525 5,728,525 2025 5,500,000 247,500 5,747,500

$ 37,625,000 $ 7,813,525 $ 45,438,525

2009B BONDS AGGREGATE PRINCIPAL BOND YEAR ENDING DECEMBER 31 INSTALLMENTS INTEREST SERVICE 2018 $ 9,515,000 $ 3,761,118 $ 13,276,118 2019 8,580,000 3,380,518 11,960,518 2020 7,665,000 2,985,838 10,650,838 2021 6,730,000 2,621,750 9,351,750 2022 5,790,000 2,293,662 8,083,662 2023 4,820,000 2,004,162 6,824,162 2024 3,835,000 1,763,162 5,598,162 2025 2,805,000 1,561,825 4,366,825 2026 7,960,000 1,414,563 9,374,563 2027 7,105,000 976,763 8,081,763 2028 6,215,000 603,750 6,818,750 2029 5,285,000 277,463 5,562,463

$ 76,305,000 $ 23,644,574 $ 99,949,574

71 KIA NOTE AGGREGATE PRINCIPAL BOND YEAR ENDING DECEMBER 31 INSTALLMENTS INTEREST SERVICE 2018 $ 88,847 $ 27,962 $ 116,809 2019 90,632 26,176 116,808 2020 92,454 24,354 116,808 2021 94,312 22,496 116,808 2022 96,208 20,600 116,808 2023 98,142 18,666 116,808 2024 100,114 16,694 116,808 2025 102,127 14,681 116,808 2026 104,180 12,629 116,809 2027 106,274 10,535 116,809 2028 108,410 8,398 116,808 2029 110,589 6,219 116,808 2030 112,811 3,997 116,808 2031 115,078 1,729 116,807

$ 1,420,178 $ 215,136 $ 1,635,314

Schedule of Operating and Maintenance Expenses Years ended December 31, 2017 and 2016

2017 2016 Operating and maintenance expenses Pumping $ 8,041,941 $ 8,126,044 Water Treatment 10,668,622 10,565,575 Transmission and distribution 17,462,330 16,338,179 Customer accounts expenses 10,939,739 11,038,577 Administrative and general expenses 26,223,897 24,631,077 Operating expenses over (under) applied 692,889 529,557

Total operating and maintenance expenses $ 74,029,418 $ 71,229,009

72 BOARD OF WATER WORKS EXECUTIVE LEADERSHIP TEAM As of December 31, 2017 As of December 31, 2017 The Board of Water Works is the governing body of Louisville Water Company. It includes six members appointed by the May- or of Louisville Metro, who also serves as an ex officio member. No more than three of the appointed members may be from the same political party. Board members serve staggered four-year terms and may succeed themselves.

Back R0w: GREG FISCHER CREIGHTON MERSHON CRAIG D. WILLMAN Mayor, Louisville Chair - Retired, Vice-Chair - MICHAEL TIGUE, Vice President, Compliance, General Counsel and Corporate Secretary Metro (ex officio) General Counsel, BellSouth- Retired Louisville ADAM CARTER, President AFSCME Local 1683 ATT/KY Operations Firefighter TERRENCE SPENCE, Vice President, Human Resources and Labor Relations SPENCER BRUCE, President and Chief Executive Officer TOM LUCKETT, Vice President, Information Technology and Chief Information Officer TIM KRAUS, Vice President, Production Operations and Chief Engineer

Front R0w: KELLEY DEARING SMITH, Vice President, Communications and Marketing DR. SUNDEEP DRONAWAT PAUL ESSELMAN DR. SHARON KERRICK LYNN PEARSON, Vice President, Finance and Treasurer President, Payment Chief Operating Officer Dean, W. Fielding Rubel Holdings, CEO & Speed Museum School of Business, DAVE VOGEL, Executive Vice President, Customer Service and Distribution Operations Co-Founder, POS on Cloud Bellarmine University

Louisville Water acknowledges the contributions of Marita Willis and Glenn Sullivan, two long-time board members who concluded their service in 2017. Willis was first appointed to the Board of Water Works in 2003 and in her tenure served as chair and vice-chair. Sullivan was appointed in 2010 and TIERRA KAVANAUGH WAYNE served as vice-chair. Both members helped guide decisions CEO and Founder TKT & Associates in advanced treatment, regionalization, and infrastructure spending. Louisville Water appreciates their dedication to our company and community.

73 Louisville Water

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