VILLAGE OF HODGE COMBINED UTILITY SYSTEMAND

HODGE UTILITY OPERATING COMPANYHODGF. LOUISIANA

FINANCIAL REPORT

DECEMBER 31, 2004WITH SUPPLEMENTAL INFORMATION SCHEDULES

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

Release Date

VILLAGE OF HODGE COMBINED UTILITY SYSTEMAND

HODGE UTILITY OPERATING COMPANYFINANCIAL REPORT

TABLE OF CONTENTSDECEMBER 31,2004

Statements pageINDEPENDENT AUDITOR'S REPORTOK FINANCIAL STATEMENTS — 1 -2

FINANCIAL STATEMENTS

A 3-4Statements of Revenues, Expenses

and Changes in Retained Earnings B 5C 6~~~ I"i 3

SUPPLEMENTAL INFORMATION SCHEDULES

Schedule of Cash Receipts and Disbursements-RestrictedAccounts Required by Indenture of Mortage i 16-17

Schedule of Monthly Deposit Requirementsfor the Year Ended December 31»2004 2 18

Schedule of insurance in Force (Unaudited) 3 19

REPORT CW COMPLIANCE AND ON INTERNALCONTROL OVER FINANCIAL REPORTINGBASED ON AN AUDIT OF FINANCIALSTATEMENTS PERFORMED IN ACCORDANCEWITH GOVERNMEMT AUDITING STANDARDS — 20-21

SCHEDULE OF FINDINGS AND QUESTIONED COSTS — 22

S REPORT

Tlie Honorable Queraon Causey, MayorVillage of HodgeHodge, LA 7124?

Mr. Mike Entz, PresidentHodge Utility Operating Company

-LA 7124?

We have audited the accompanying financial statements of the Combined Utility System, Village ofHodge, Louisiana, and of the Hodge Utility Operating Company, Hodge, Louisiana, as of and for (he yearended December 31, 2004, as listed in the Table of Contents. These financial statements are theresponsibility of company's management. Our responsibility is to express an opinion on these financialstatements based on our audit The preceding year's financial statements of the Combined Utility SystemVillage of Hodge. Louisiana and of the Hodge Utility Operating Company, Hodge, Louisiana have beenincluded for comparative purposes and were lakes from the financial report of that year.

We conducted oar audit in accordance with auditing standards generally accepted in the United States ofAmerica and the standards applicable to financial audits contained in Gnvgrnmeni Auditing Standards.issued by the Comptroller General of the United Slates. Those standards require thai we plan and performour audit to obtain reasonable assurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles usedand Hie significant estimates made by management, as well as evaluating the overall financial statementpresentation. We believe that our audit provides a reasonable basis for our opinion.

As described in Note 3, the Combined Utility System,. Village of Hodge, Louisiana, and Hodge UtilityOperating Company. Hodge, Louisiana, prepam their financial statements on the prescribed basis ofaccounting that demonstrates compliance with the indenture of mortgage daxed March I, 1972, and thebond indenture dated January L 1990, and the bond indenture dated December 18, 2003f which does notnecessarily conform to generally accepted accounting principles.In our opinion, the 2004 financial statements referred to in the first paragraph present fairly, in allmaterial respects, the financial position of the Combined Utility System, Village of Hodge, Louisiana,and Hodge Utility Operating Company as of December 3 \, 2004, and the results of its operations and itscash flows for the year then ended in conformity wiiti the indenture of mortgage dated March I, 1972,and the bond indenture dated January 1, \ 990 and the bond indenture dated December 18,2003.

We found no evidence lira* Smurfif Stone Container Corporation was in default under any of iheprovisions of ihe utility contract between Ihe Village of Hodge and Stoner Container Co/poration.

Our audits were made for the purpose of formiag an opinion on the financial statements taken as a whole.The accompanying financial information listed as supporting schedules ia ihe Table of Contents ispresented for purpose of additional analysis and is not a required part of the financial statements of theCombined Utility System, Village of Hodge, Louisiana, and Hodge Utility Operating Company, Hodge,Louisiana, Such information, except for that portion marked "unaudited", on which no opinion wasexpressed has been subjected lo the auditing procedures applied in ihe aadit of the financial siaiementsand. in our opinion, is fairly presented in alt material respects in relation to the financial statements takenas a whole.

control over financial reporting and our tests of its compliance with certain provisions of laws,regulations, contracts, and grants. That report is an integral part of an aadit performed in accordance withGovernment Auditing S&mt&nfe and should be read in conjunction whh this report in considering theresults of our audit.

Kenneth D. Folden &. Company

Aori!23,2005Jonesboro, Louisiana

Villageand

Hodge Utility Gpararing Company

tem

Hodge maltyOperating

20036223 S 7389SU21 4.679,692Due &om Combined Utility System

Restricted Assets

Receivables - Hedge CustomersOperating Account

Bank Account

Reserve and Contingency AccountBank Account

Plant, Property end EquipmentTotal Assets

2.500

606,5790

6,223 S

6,188,121

00

0

00

2.5QG37,970

3,856.639

0

0

4,03838,045

541,000

32,915

83,425,109

0 606S5?9 600,0000 0 25,46?0 266.4S5?SS8 265,006,230

570.9S9.S16 S 6.194.344 S 277.183.920 S 354339.885

Statement A (Conlinued)

Combined Utility Systemand

,mg Company

Liabilities &lq«ity Ufflity System

Totals (Memorandum Only)

2004 2003

Revenue Bonds PayableToml Uabiliiies

0 S 6,1943^4 S 6.1M444 S 4,687,

0 i,44X444 1,703,1640 6, i 88.121 4,679,6920 58,085,000 138,935.000

M 7L90W9 I50f004t937

0 126,506,615 !25,126,506,615

Reserved for Usiliiy System (DerationsReserved for Revemie Bocd Retirement 74342,396

Total Retained EarningsTotal Liabilities & Equity

0 126306,615 125,817,899

3,825,000 583,083F4,342,3% 77,353,5

0

0 78,767496 78,537,049

S 270JMt3.*-M S 6.I94J44 S 277.183.920 S 354.359.885

The accompanying ncses are an imegrai pan of this statement

Village of Hodge Combined Utility System

Hodge Utility Opareting Company:!»C8ffl

OPERATING REVENUES:

Stone Contains Corpomtioa

Hodge Resident RevemwsHodge Water and Sewer Revenues

Operating Fees

OPERATING EXPENSES:

Operating Fees

Overtime Premiimj

fit

Operating SuppJEesInsurance

Fuel Gas

Purchased Electricity and DemandTotal Operating Expsi&ss

OPERATING INCOME (LOSS)

NON-OPERATING REVENUES (Expenses)Interest oa lavestmciUs

Combined

44|?33?2,550

0

55,448,130

00

Company

Totals iMt-inonindum Only)

2004

0

035.448,730

l— S

441.33? 420,667

2,550 2,55055.448.130 52,080. 1 8 J

i,9!2,929 115,31 U

55,448,730 52,080,

12&550 108,

671,770

2,402,106429,650

1,994,8012,724,39?

743,577817,658

603,240

2,497,851

2,077,7392,402,106

429,650 394,013S?994:S01 1,667,873

3,179,302

817,3051,274,238

37,022,14$ 37,022,148 33,318.201

69,259 69,259 57.9S85.4S0416 6,183.925

,̂724,397743.577

55,448,730 ,,55,448,730 110.897.460469 0

0 (4tS75,lS4)

0 0

Total Nou-OperaOas Revemies (Expenses) (4J85.I22)

NET INCX)ME (LOSS) 230.347

Retained Earnings at Beginning of Year

Retained learnings at End of Year

0 (4,785,122) (7,431421)1

230347

0 71537,

3,719,987

74,817,062.0 S 78.767.396 S 78.537.049

The accompanying notes are m integral pm of this 'statement.

Village of Hodge Combined Utility Systemand

Hodge Utility Operating CompanyFJows

Combined

CASH FIQWS FROMOPERATING ACTIVITIES:

Net Income (Loss)

Hodge .Utility ' Tf,[ah (Memnr[in(ilim On)v)

Company 2003

S 230,347 S 3.719.9S?to

Net Cash Provided fey Qjjsrauug Activities:(Increase) Decease in-

Due from Combined Utility System

Accrued Interest ReceivableIncrease (Decrease) in-

ACCOUKB PayableAccraed Revenue 802^ InterestDue to Operating Company

NET CASH PROVIDED (USED)BY OPERATING ACTIVITIES

CASH F1X)WS FROM

25,467 0

0 1,507,263 1,507,263 884,7530 (260,720) (911,836)0 1.508.429 888,199

Proceeds from Sale orinv«sanemsNET CASH PROVIDED (USED)

BY INVfcSTiKG ACnVTOESCASH FLOWS FROM

FINANCING ACTIVITIES:Principal Paid cm Revenue BandsIssuance of Series 20$3 Bosds

NET CASH PROVIDED (USED)BY FINANCING ACTIVITIES

Cash at Beginning of Year

Noncasb Hoandng Trmtsactions:

Cash Paid Duriag the YeanInterest (Net of Ammmts €apitdize<3)

1.303.597

082.634.168

82,634168

(80,830,000)0

(*OLS$<U)aO)3t2S7(?651,177.953

£ 4.4^5.?f8 S

'(i/ftm

S 1.479,658 $s: 1170 MS s

X 5 H6A47 S

(1,166) UG2.431

0 00 82.634,168

0 82,634,168

0 (80,850,000)0 0

0 (80.$50.0aO)(1,166) 3,286.5997,389 LIS5.3426.223 S 4.471.941

0 S J, 479,6580 S 1 479AU

0 S 5.P6.0S7

3,739.674

(330,520.177)282,535,494

(47,984,683)

(12,700,000)58,085,000

45,385,000J, 139,991

45,351S 1.185342

S 0S 0

S 7 33* 664

"OK accompanying notes are an integral pan of this siaiemenL

Hodge Utility Operating CompanyNotes to Financial Statement

1. ORGANIZATIONAL AKD HISTORICAL BACKGROUND

The qualified electors of the Village of Hodge, Louisiana, and resident property taxpayers of saidVillage approved the issuance of $65,000,000 m Combined Utility System Revenue Bonds underindenture of mortgage* dated March I, 1972.

The Village entered into an Acquisition and Construction Agreement on March t, 1972 withContinental Group, Inc.. whereby the Village aspired the existing combined water, sewerage andeteetric generating facilities, and agreed to purchase improvements made to the existing system byContinental Group, Inc. and to acquire or construct electric distribution facilities within the Village.The system, acquired and completed, is knmvn as the "Combined Utility System",

The Village entered into an agreement with the Hodge Utility Operating Company on March !, 1972whereby ihe Operating Company was to operate and manage the system upon terms and conditions assei forth in ihe contrast

On January 24,1990, the Village issued $93,000,000 of iis Combined Utility System Revenue Bonds,Series 1990, under a bond indenture dated January K 1990, authorized by a resolution duly passedand approved by the Mayor and Board of AMennsn of the Village. The bonds were issued for theprinciple purpose of fencing the replacement of a recovery boiler and associated equipment. Thebond:; are secured by a securiiy interest in revenues derived by the Village from operation of iheCombined Utility System (subject to the pledge of the first Hen on revenues created by the Indentureof Mortgage securing the series 1972 bonds) and other funds.

On December 18,2003, the Village of Hodge issued $58,08SS000 of die Village of Hodge RemindingBonds Series 2003. The bonds were issued to refund me Series 1972 and 1990 bonds and to financeneeded capita! improvements,

2. FLOW OF FUNDS: RESTRICTIONS ON USE

Under me terms of the indenture of mortgage of outstanding Combined Utility System RevenueReminding Bonds, Series 2003, all receipts of every nature earned or derived (rom the operation of iheCombined Utility System are pledged and dedicated, and are to be set aside into the following special

Revenue Fund: There Is hereby created a special fund of the Village to be known as the "CombinedUtility System Revenue Fund", the existence of which shall be continued for as long as any bondsissued pursuant to the this indenture are outstanding (said Fund being heremafter referred to as the"^Revenue Fund**). The Revenue Fund shaJ! be held and administered by ihe Trustee. Upon and afterthe issuance of any Bonds issued pursuant to mis indenture, the Village hereby obligates and bindsitself irrevocably to set aside and pay to the Trustee in trust for the account of the Revenue Fund aspromptly as practicable after receipt thereof all Revenues derived by the Village through theownership and operation by it of the project* and ail other monies required 10 be deposited in thtRevenue Fund pursuant to this Indenture further covenants and agrees that all such Revenues and

Village of Hodge Combined Utility System

Hodge Utility Operating CompanyNotes to Financial Statement (Continued)

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

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

Deposit of Revenues: All Revenues shall be promptly deposited into ihe Revenue Fund. As soon aspracticable in each month after the deposit of Revenues in the Revenue Fund, the Trustee shallwithdraw from the Revenue Fund such monies in the amounts and manner set forth in Sections 6.3,6,4,6.5 and 6.6 hereof

Operating Fund: There is hereby created a special fund of the Village to be known as the "CombinedUtility System Operating Fund" (herein referred to as the "Operating Fund"). Said Fund shall be heldby me Trustee and shall be administered by the Operating Company, On ihe date of delivery of dieSeries 2003 Bonds there shall bs deposited in the Operating Fund the sum of $3,825,000.representing budgeted amounts necessary for operation and maintenance for the Project for the periodending January 31, 2004. Thereafter, the Trustee shall, on or before the last day of each calendarmonth, commencing January 31, 2004,. pay out of the Revenue Fund into the Operating Fund anamount which will be sufficient to make the amount therein on such date equal 10 the amountbudgeted for expenses of operation and maintenance for the next succeeding calendar month, asshown in the Budget submitted most recently to the Trustee pursuant to Section 5 of the Operating

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

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

Village of Hodge Combined Utilhy System

Hodge Utility Operating CompanyNotes to Financial Statement (Continued)

1. There is hereby created, for the purpose of paying the interest on outstanding Bonds as UKsame becomes due and payable, an Interest Account in the Bond Fund (hereinafter referred u>as the "Interest Account"):

On or before &e date on which such ktersst payment is due, the Trustee shall pay from !heRevenue Fund into the Bond Fund to the credit of the Interest Account an amount equal tothe installment of interest then falling due on all Bonds then outstanding, tn addition, if anyBonds bear interest m a variable, floating or adjusted rate, the Trustee shall pay from theRevenue Fund into the Bond Fund to the credit of the Interest Account on the day prior toany interest payment date, any additional amount due on the next succeeding interestpayment date,

2. There is also hereby created, for the purpose of paying outstanding Bonds as they mature, aPrincipal Account in the Bond Fund (hereinafter referred to as the "Principal Account"). Notlater than each date upon which an installment of principal of the Bonds falls due, ihe Trusteeshall pay from the Kevenue Fund into the Bond Fund to the credit of fee Principal Account anamount equal to the installment of principal next falling due.

3. There is also hereby created, for the purpose of meeting the specified sinking fUnd installmentrequiremecis of any additional Scries of Bonds, a Bond Retirement Account in the BondFund (hereinafter referred to as the "Bond Retirement Account")* Beginning on the dayspecified in the Supplemental Indenture authorizing the issuance of said additional Series ofBonds, ths Trustee shall pay from the Revenue Fund into the Bond Fund to the credit of theBond Retirement Account an amount eijua! to the amount specified in the SupplementalIndenture.

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

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

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

Village of Hodge Combined Utility System

Hodge Utility Operating CompanyNotes (0 Financial Statement (Continued)

Redemption Fund; There Is hereby created a special fund of ttie Village to be known as the"Combined Utility System Redemption Fund'1 (hereinafter referred to as the "Redemption Fun<f) andsaid FamJ shall be held and administered fay the Trustee, There shall be deposited to the credit of theRedemption Fund (1) monies transferred to such Fund to effectuate a redemption or Bonds pursuantto Section 3.i<a) or (c), and (2) certain proceeds transferred pursuant to Section 4,7 and Section 4.12,Monies .on deposit In die Redemption Fund shad be used as promptly as practicable for the purpose ofredeeming or purchasing Bonds prior to maturity in the manner provided in Article III hereof.

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

Cpatmgertcv Fund: There is hereby created a special f«nd of the Village to be known asthe "Combined Utility System Reserve and Contingency Fund" (herein referred to as the "Reserveand Contingency Fund") and said Fund sbsi! be held in trust by the Tnmee. After making thepayments herein above provided for into the Operating Fund and into the Bond Fund, the Trusteeshall on or before March 1 of each year pay of out of the Revenue Fund into the Reserve andContingency Fund that amount if any. as may be recommended by tlic Consulting Engineer asnecessary in the next succeeding twelve months for the purposes for which the Reserve andContingency Fund was created. In connection with rfie making of any such withdrawal or deposit thsTrustee will be entitled to rely on a certificate of the Operating Company with respect to the amountof the then commitments or obligations incurred by or on behalf of the Village for any of the purposesfeted in this Section 6.6.

Monies in the Reserve and Contingency fund shall be used from time to time to make up anydeficiencies in tbe Interest Account, Principal Account or Bond Retirement Account in the BondFund; and such monies in the Reserve and Contingency Fund are hereby pledged as additionalpayments into the Bond Fund to the extent required to make up any such dellciencias. To the extentnot required for any such deficiency, monies in tbe Reserve and Contingency Fund may be applied toany one or more of the following purposes;

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

(2) to pay, or to reimburse the Village ft»r the payment of, extraordinary Operation andmaintenance costs including me cost of preventing or correcting any unusual loss ordamage (including major repairs), to the Project in order to keep the Project in goodoperating condition; and

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

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

Village of Hodge Combined Utility System

Hodge Utility Operating CompanyNotes to Financial Statement (Continued)

excess of $50,000 per any one item, directing the disbursement of such money for one or more of thepurposes authorized herein. Each such requisition shall slate wiih respect to each item (a) the itemnumber of the payment; (b) the name of the person, firm or corporation to whom payment is due forsuch tern; (c) the amount, to be paid; (d) lhat an obligation in the stated amount has been incurred forone or more of the purposes authorized by this Section and specifying ihs same: (e) thai the item is aproper and reasonable charge against the Reserve and Contingency Fund; and (f) that the amount sosi

Whenever and so Jong as the combined assets of the Bond Fund, Reserve and Contingency Fund andRedemption Fund shtd! be sufficient to provide monies to retire a]] bonds then outstanding, includingsuch interest thereon as thereafter may become due and payable and any premiums upon redemptionthereof, no farther payments need to be made into the Reserve and Contingency Fund, and the monieson deposit in the Reserve and Contingency Fund shall he transferred to the Bond Fund and applied in

wi

Investment: Monies held for the credit of the Interest Account Principal Account and BondRetirement Account in the Bond Fund and the Redemption Fund shall be invested by the Trustee IBSecurities which shall mature not later than the respective date; when the monies held for the credit ofsuch Accounts will be required for the purposes intended.

Monies in me Operating Fund, shall, to the fullest extent practicable and reasonable, be invested bythe Trustee ia Securities which shall mature not Imsrihan the respective dases when monies held forthe credit of such Fund shall be required for Ihe purposes intended.

Monies in the Reserve and Contingency Fund no! required for immediate disbursement for thepurposes for which said Fund is created shall, to the fullest extent practicable and reasonable, beinvested and reinvested by the Trustee, solely in Securities maturing, or subject to redemption at theoption of the owner thereof, not later than the final maturity date of the Bonds.

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

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

AH income and ppoHts resulting from the investment or reinvestment of the Interest Account,Principal Account and Bond Retirement Account in the Bond Fund shall be deposited m the Revenue

AH income and profits resulting from the investment or reinvestment of the Operating Fund shallaccrue to and be deposited in the Opening Fund, AH income mid profits resulting from the

Village of Hodge Combined Utility System

Hodge Utility Operating CompanyHoles to Financial Statement (Continued)

investment or reinvestment Of the Reserve and Contingency Fund and the Redemption Fund shallaccrue lo and be deposited in the Reserve and Contingency Fund and the Redemption Fund,respectively.

3, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting and reporting practices of the Combined Utility System, Village of Hodge, and theHodge Utility Operating Company conformed to the requirements of the indenture of mortgage datedDecember 18. 2003, which do not necessarily conform to generally accepted accounting principlesapplied to governmental accounting.

Financial Reporting Bntitv: This report iscludes two proprietary rands, the Combined Utility System,Village of Hodge, and the Hodge Utility Operating Company. The Combined Utility System tscontrolled by the Village executive and legislative branches (the Mayor and Board of Aldermen),whereas the Badge Utility Operating Company is controlled by (he Hod§e Utility OperatingCompany Board of Directors. However, since the Hodge Utility Operating Company operates andmanages die System upon the terms and conditions of the operating agreement the Village of Hodgedoes not exercise significant oversight responsibility over the System. The specific elements ofoversight responsibility considered in the decision to exclude the System were financialinterdependency. the ability to significantly influence operations, and accountability for fiscalmatters. Therefore, this report is not included as a component unit of the Village of Hodge, and thereate no excluded component units in this report.

Totals Columns: Total Columns on the statements are capiioned "Memorandum Only" to indicatethat they are presented only to facilitate financial analysis. Dala in these columns does not presentfinancial position in conformity with generally accepted accounting principles. Neither is such datacomparable to a consolidation, Interftmd eliminations have not been mads in tiie aggregation of this

Fixed Assets and Long'Term Liabilities: The Utility System is accounted for on the cost of service or"Capital Maintenance" measurement focus, Iliis means thai all assets and liabilities (whether currentor noncurreni) associated whh their activity are included on their balance sheet. The reported fundequity (net total assets) is segregated into contributed capital and retained earnings components.

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

Total cost of the Combined Utility System of the Village of Hodge is tmderwritten by ContinentalGroup, Inc. or ils assigns; therefore, depreciation, an operating cost not requiring cash outlay, is notreported on the balance sheet of the Combined Utility System of Ihe Village of Hodge.

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

12

Village of Hodge Combined Utility System

Hodge Utility Operating CompanyNotes to Financial Statement (Continued)

December 31.2004

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

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

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

4. CHANGES IN PLAIST, PROPERTY, AND EQUIPMENT

A summary of the Combined Utility System plant, property* and equipment at December 31, 2004 isas follows:

1,Additions 1,479,658Retirements 0^Balance, December 3 L 2004

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

5. CHANGES IN LONG-TERM DEBT

The following is a summary of the Series 19?2f Series 1990, and Series 2003 bond transactions forthe Village of Hodge Combined Utility System for the year:

Revenue Bonds Payable January t, 2004 $ 138,935,(80,850,000)

0

Revenue Bonds:

$15,750,000 on March i( 200?? interest rale of 6*4. refunded January, 2004.

$65,100,000 Combined Utility System revenue bonds, fully registered without coupons, datedJanuary 1,1990. due on March 1,2010; interest rate of 9%, refunded January, 2004.

The annual requirements to amortize all debt outstanding as of December 31,2004. including interestpayments of S8Z940.53Q are as follows:

13

Village of Hocke Combined Utility System

Hodge Utility Operating CompanyNotes to Financial Statement (Continued)

4,327,332 $ 4327,3324,327332 4327332

200" 0 4327332 4.327,3324,327,332 4,327,3324327,332 4327332

60,582,648 60,582,648721,222 58,806,222

£ 58.085.000 S 82,940.530 $ 14L025.S30

On December IS, 2003, the Village of Hodge refunded the Series J990 and 1972 Bonds. The newissae is called the Village of Hodge Revenue Refunding Bonds Scries 2003 in the amount of$58,085,000. The maturity is March 1, 2024* with an interest rate of 7.45% payable semi-ftnnuaUy oaMarch I and September 1. The bonds were used to refund the Series 1990 and 1972 bands andrelease funds from various trust accounts to finance the $9,4 million upgrade to the recovery boilersuperheater, mrbine generator casing, and PCS transformers during 2002 and 2003, The bondsissuance costs were $503.500, which was Rinded by Smurfit Stone Container, and were expensedduring the year.

There were no penalties or premiums tor retunding the Series 1990 and 1972 Bonds and no gain orloss was incurred. The Series 1990 Bonds were redeemed January 20, 2004 and the Scries 1972Bonds were redeemed January 26,2004. The benefits derived from the refunding include;

• Interest savings of Si 2 million will he realized in 2004 and a net present value of interestsavings of $6.7 million will be realized over the life of the Series 2003 bonds;

» Cash flow is increased by reducing debt sen-ice requirements by $12.9 million annuallyduring the years 2004 through 2006 and $9.3 million annually during the years 2007 through

INTERFDN0 RECEIVABLES AND PAYABLES

Tntcrftind receivables and payables at December 3I. 2QQ4 are as follows:

Village of Hodge Combined Utility System $ OS 6,188,121Hodge Utility Operating Company $ 6,188,121 S 0

14

Village of Hodge Combined Utility Systemand

Hodge Utility Operating CompanyNotes to Financial Statement (Concluded)

Decembers 1,2004

7. EMPLOYEES RETIREMENT

Neither the Village of Hodge nor Hodge Utility Operating Company has employees receiving paydirectly. No retirement system exists, All employees and related retirement are carried by Smurfit-Stone Container Corporation or its assigns,

8. ASSIGN1VIENT

Effective October 8. 1983* Continental Group* tnc, transferred to its successor, Stone ContainerCorporation, Chicago, Illinois, all of its obligations under the acquisition and consiruciion agreement,uf ility contract, indenture of mortgage and operating agreement, each dated March 1,1972.

9. MERGER

On May 10, 1^98, Jefferson Smurfit Corporation^ a Delaware Corporation, now known as Smurfit-Stone Container Corporation entered into an Agreement and Plan of Merger with JSC AcquisitionCorporation, a wholly owned subsidiary of the Company, and Stone Container Corporation. Pursuantto the terms of the Merger A^ement, JSC Acquisition was merged with and into Stone onNovember 18, 1998. On November 1,2004, JeSosoa Smurfit Corporation, a Delaware Corporation,entered into a merger agreement with Stone Container Corporation^ under the name of Smurfit-SloneContainer Enterprises, Inc., a corporation organized and existing under she laws of the Staie of

10. LITIGATION AND CtAIMS

We have been advised that the Hodge Utility Operating Company (company) is not involved in any

II. RELATED PARTY TRANSACTIONS

Serving on the Board of Directors of the Hodge Utility Operating Company ("Operating Company'7),am Uie Mayor and Mayor pro-tern of the Village of Hodge, Louisiana. The Village of Hodge isconsidered to be a related party. During the year ended December 31,2004, revenues received by theOperating Company &om the Village of Hodge was $2,550 for water and sewer usage. Expenses

Sctiedul

ash, Jammy K

Investment Interest

Transfers !i»Total Cash.-

Transfers OatBond PrinctpaBocii Interest

Resident 1972Revenue Revenue RelitA«cmot Atcount Acc<

S OS 4.038 S 16,1

0 30 441,33?0 Z5500 00 0

Bom! 1990 Bondtmtnt Retirementaunt Account

4S^9f S 67,309,425

0(10

10J3I 31,9-10

00030

0 44?#25 I&I5&S3Q 67,341,368

441425

2.500

451,MS

2.SOO

Schedule') (Continued,*

Hodge UllHty Q|mifeg Company

2083 BondInterestAccount

Hodge Utility:;Opera ling ";Account

:;"" 2W3OperatingAccoun?

2^3 Reserve |& CoiUingcuc.v

Accoaat 1

11

0D0

53.94U5I3,04U53 53,948,740

53.942,517

0

03.04U53 53,942,517

40,91

3,856.838

481.712

December 31.20EH 5 606.579

Schedule

Vilkge of Hodge Combined Utility System

Hodge Utility Operating CompanySchedule of Monthly Deposit Requirements

Year Ended December 31»2005

Ravenue Fund

Based on the 2005 annual budget of $57.988,186. tbe average monthly deposit to the Revenue Fund forfecal year 2005 is $4,852,349.

Bond Interest Account

Based on payment requirements, a deposit of $2,167,666 is due on or before March !. 2005, and a depositis due on or before September t,

Operating Account

Based on the 2005 annual budget of $S3,652J54, the average monthly deposit lo the Operating Fund forfiscal year 2005 is $4,4? I.07L

Village oFHodge Combined Utility System

mg Companyin Force (Unaudited)

2004

Hodge UtilitySchedule of Insurance

Schedule

Type of insurance Coverage

HXCCSS Liability Umbrella

Automobile Liability

Workers* Compensation

Workers' Compensationand Employer's Liability

Insuring Companyand

Policy Number

Sell-Insured

American InternationalGroup

BE2S80359

Zurich Americaninsurance CompanyBAP930320S-QQ

Self-InsuredRMWCX 5276472 (AOS)RMWCX 5276473 (MO)

Zurich AmericanInsurance* Company

RMWC 5276470(NYS Wi)

RMWC 5276471 (MD)RMWC 5276469

EfTcclive

4/1/04 4/1/05

4/l/M 4/1/05

4/1/04 4/1/05

4/1/04 m

imi'.s

2,000,000

4/1/04 4/1/05 2,000,CH30

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

FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH

To ihe Honorable Quenion Causey. Mayor

We have audited the general purpose financial statements of the Combined Utility System, Village ofHodge, Louisiana, and of the Hodge Utility Operating Company, Hodge, Louisiana, as of and for the yearended December 3L 2004, and have issued our report thereon dated April 23, 2005, We conducted ouraudit in accordance with auditing standards generally accepted in the United States of America and thestandards applicable to financial audils contained in Government Auditing Standards, issued by theComptroller General of the United Slates.

Compliance

As part of obtaining reasonable assurance about whether the Combined Utility System and the HodgeUtility Operating Company's financial statements are free of material misstatement, we performed tests ofits compliance with certain provisions of laws, regulations, contracts and grants, noncompliance withwhich could have a direct and material effect on the determination of financial statement amounts.However, providing an opinion on compliance with those provisions was not an objective of our audit,and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of

Internal Control Over Financial Reporting

In planning and performing our audit, we considered the Combined Utility System and the Hodge UtilityOperating Company!§ internal control over financial reporting in order to determine our auditingprocedures for the purpose of expressing our opinion ori ihe financial statements and not to provideassurance on the internal control over financial reporting. Our consideration of the internal control overfinancial reporting would not necessarily disclose all matters in the internal control over financialreporting that might be material weaknesses. A material weakness is a condition in which the design oroperation of one or more of the internal control components does not reduce to a relatively low level therisk that misstatements in amounts that would be material in relation to the financial statements beingaxidiied may occur and not be detected within a timely period by employees in the normal course ofperforming their assigned ftrneiions. We noted no matters involving the internal control over financialreporting and its operation that I consider to be material weaknesses.

Tnis report Is intended for rise information of management. However, this report is a matter of publicrecord and its distribution is not limircd.

April 23,2005Jonesboro, Louisiana

Exhibit A

Village of Hodge Combined Utility System

Hodge Utility Operating CompanySchedule of Findings and Questioned Costs

Year Ended December 31,2004

A. SUMMARY OF AUDIT RESULTS

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

2, No importable conditions relating to die audit of the financial statement are reported In the Reporton Compliance and oh Internal Control over Financial Reporting Based on an Audit of FinancialStatements Performed in Accordance with Government Auditing Standards,

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

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

B. FINDINGS - FINANCIAL STATEMENTS AUDIT

There are no findings for the year ended December 3!, 2004. Also, there were no prior year findingsfor the year ended December 313 2003,

C. FINDINGS Am> QUESTIONED COSTS - MAJOR FEDERAL AWARD PROGRAM AUDIT

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

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