NATURAL GAS ACQUISITION CORPORATION AUDITED FINANCIAL STATEMENTS JUNE 30, 2016

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1 AUDITED FINANCIAL STATEMENTS

2 Table of Contents Financial Section Page Independent Auditor s Report... 1 Management s Discussion and Analysis (Unaudited)... 3 Financial Statements: Statement of Net Position... 6 Statement of Revenues, Expenses and Changes in Net Position... 7 Statement of Cash Flows... 8 Notes to Financial Statements... 9 Other Report Independent Auditor s Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards Schedule of Prior Year Findings i -

3 INDEPENDENT AUDITOR S REPORT Board of Directors Natural Gas Acquisition Corporation Clarksville, Tennessee Report on the Financial Statements We have audited the accompanying financial statements of the Natural Gas Acquisition Corporation (the Corporation), a non-profit organization, and a component unit of the City of Clarksville, Tennessee, as of and for the year ended June 30, 2016, and the related notes to the financial statements, which collectively comprise the Corporation 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 audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. 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. The Astoria 3803 Bedford Avenue, Suite 103 Nashville, Tennessee phone: fax: An Independent Member of The BDO Alliance US

4 Board of Directors Natural Gas Acquisition Corporation Opinion In our opinion, the financial statements referred to above present fairly, in all material respects the financial position of the Natural Gas Acquisition Corporation as of June 30, 2016, and the respective changes in financial position and cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matter Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management s discussion and analysis on pages 3 through 5 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. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated October 12, 2016, on our consideration of the Corporation s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Corporation s internal control over financial reporting and compliance. Nashville, Tennessee October 12,

5 MANAGEMENT S DISCUSSION AND ANALYSIS (UNAUDITED) Our discussion and analysis of the Natural Gas Acquisition Corporation of the City of Clarksville, Tennessee s ( NGAC or the Corporation ) financial performance provides an overview of the Corporation s financial activities for the year ended June 30, 2016 and provides comparisons to This information should be read in conjunction with the financial statements and related notes following this section. FINANCIAL HIGHLIGHTS Net position of the Corporation was $3.9M at the close of the fiscal year. Of this amount, approximately $2.7M may be used to meet ongoing obligations of the Corporation. The Corporation s total net position decreased by approximately $69K during 2016, compared to increasing approximately $50K during The Corporation s total debt obligations decreased by approximately $16.0M during the current fiscal year. USING THIS ANNUAL REPORT This annual report consists of a series of financial statements that give information about the Corporation s activities. The Statement of Net Position includes all of the Corporation s assets and liabilities and provides information about the nature and amounts of investments in resources (assets) and the related obligations (liabilities). The Corporation had no deferred outflows or inflows of resources at June 30, All of the current year s revenues and expenses are accounted for in the Statement of Revenues, Expenses, and Changes in Net Position. This statement measures the success of the Corporation s operations over the past year and can be used to determine if the Corporation is recovering all its operating cost. The final required financial statement is the Statement of Cash Flows. The primary purpose of this statement is to provide information about the Corporation s cash receipts and cash payments during the reporting period. This statement reports cash receipts, cash payments, and net changes in cash resulting from operations, investing, and capital financing activities and provides answers to such questions as where did cash come from, what was cash used for, and what was the change in cash balance during the reporting period. The financial statements are prepared in accordance with U.S. generally accepted accounting principles. The Corporation uses the accrual basis of accounting, which is similar to accounting methods used by most private-sector companies. Accrual of the current year s revenues and expenses are taken into account regardless of when cash is received or paid. FINANCIAL ANALYSIS OF THE CORPORATION The financial statements of the Corporation include only activities from financing prepaid gas volumes for the Gas Department and Water and Sewer Department of the City of Clarksville, Tennessee ( CGW ) and the Humphreys County Utility District of Humphreys County, Tennessee ( HCUD ) for fiscal year end

6 MANAGEMENT S DISCUSSION AND ANALYSIS (UNAUDITED) - Continued NET POSITION A summary of the assets and liabilities of the Corporation are presented in Table A-1 below. The assets of the Corporation consist primarily of prepaid gas supplies. Current assets include the current portion of prepaid gas supplies that are available to CGW and HCUD for FYE The liabilities of the Corporation consist primarily of the bond indebtedness due to bondholders. See the notes to the financials for the payback schedule. Table A-1 Natural Gas Acquisition Corporation Condensed Statements of Net Position (In Millions) June 30, 2016 and 2015 ASSETS Dollar Change Total Percentage Change Current Assets $ $ $ % Noncurrent Assets % Prepaid gas supplies (noncurrent) (18.58) (16.54)% TOTAL ASSETS $ $ $(14.44) (9.74)% LIABILITIES AND NET POSITION Current liabilities $ $ $ % Noncurrent liabilities (17.70) (13.80)% TOTAL LIABILITIES (14.37) (9.96)% Restricted (0.43) (25.29)% Unrestricted % TOTAL NET POSITION (1.75)% TOTAL LIABILITIES AND NET POSITION $ $ $(14.44) (9.74)% REVENUES, EXPENSES AND CHANGES IN NET POSITION During the fiscal year 2016, NGAC delivered 4,092,351 dekatherms under the prepaid gas contract. The scheduled portion of the prepaid gas supplies equated to 2,854,476 dekatherms and was sold at 30 cents under index as published in platts Inside FERC s Gas Market Report. The remaining portion of 1,237,875 dekatherms was sold at first of the month index. Table A-2 summarizes the revenues and expenses of the Corporation s transactions relative to gas sales, purchases, and depletion of the prepaid gas supplies. Sales volume will fluctuate from year to year due to the heating degree day sensitivity of the area serviced and to the volatility of the price of natural gas. Degree days measure how much the average daily temperature varies from 65 degrees. This temperature is the value at which heating should not be needed. The volatility of gas cost is dictated by market demand and supply

7 MANAGEMENT S DISCUSSION AND ANALYSIS (UNAUDITED) - Continued Table A-2 Natural Gas Acquisition Corporation Condensed Statements of Revenues, Expenses & Changes in Net Position (In Millions) June 30, 2016 and Dollar Change Total Percentage Change Operating revenues $41.37 $22.63 $ % Non-operating revenues (0.97) (10.90)% TOTAL REVENUES % Cost of gas sold outside prepaid % Depletion of prepaid gas supplies % General and administrative % Non-operating expenses (0.80) (10.89)% TOTAL EXPENSES % CHANGE IN NET POSITION (0.07) 0.05 (0.12) (220.00)% NET POSITION - BEGINNING % NET POSITION - ENDING $ 3.93 $ 4.00 $(0.07) 1.50 % CAPITAL ASSETS At the end of 2016, the value of the Corporation s capital assets was zero as they are fully depreciated. No additions or disposals were made to or from capital assets for fiscal year ending LONG-TERM DEBT The Corporation expensed $6,512,031 in debt interest during fiscal year At year-end, the Corporation had long-term debt of $124,446,491. All operating revenues of the Corporation are security for the long-term debt, collectively. The notes in the audited financial statements give the details of the various components of the long-term debt and a detailed schedule of long-term debt obligations of the Corporation by year. Please read the notes in conjunction with this summary. CONTACTING THE CORPORATION S FINANCIAL MANAGEMENT This financial report is designed to provide a general overview of the Corporation s finances. If you have any questions about this report or need any additional information, contact the Natural Gas Acquisition Corporation of the City of Clarksville, 2215 Madison Street, Clarksville, Tennessee

8 STATEMENT OF NET POSITION ASSETS Current Assets: Cash and cash equivalents $ 171,568 Restricted investments 15,776,814 Accounts receivable 2,988,710 Interest receivable 13,139 Prepaid gas supplies (current) 18,583,768 Prepaid expenses and deposits 547 Total current assets 37,534,546 Noncurrent Assets: Restricted investments 2,619,673 Total noncurrent assets 2,619,673 Other Noncurrent Assets: Prepaid gas supplies (noncurrent) 93,740,644 Total other assets 93,740,644 Total assets $ 133,894,863 LIABILITIES AND NET POSITION Current Liabilities: Accounts payable $ 2,260,262 Accrued interest payable 256,511 Current portion of bonds payable 16,865,000 Total current liabilities 19,381,773 Noncurrent Liabilities: Bonds payable 107,581,491 Unearned revenue 2,996,844 Total noncurrent liabilities 110,578,335 Total liabilities 129,960,108 Net Position: Net investment in capital assets - Restricted 1,274,976 Unrestricted net position 2,659,779 Total net position 3,934,755 Total liabilities and net position $ 133,894,863 SEE ACCOMPANYING NOTES TO FINANICAL STATEMENTS

9 STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET POSITION FOR THE YEAR ENDED Operating Revenues: Gas sales $ 41,368,898 Total operating revenues 41,368,898 Operating Expenses: Cost of current market gas sold 18,111,453 Depletion of prepaid gas supplies 24,119,894 General and administrative: Remarketing fees 376,407 Accounting and legal fees 21,220 Directors compensation 8,000 Other expenses 98,014 Total general and administrative 503,641 Total operating expenses 42,734,988 Operating Loss (1,366,090) Nonoperating Revenues (Expenses): Investment earnings 519,086 Interest revenue 105,098 Amortization of asset interest earnings 6,869,577 Amortization of premium on bond issue 437,685 Unrealized/realized gain (loss) on investments (3,988) Interest on bonds payable (6,512,031) Amortization of asset interest expenses (118,011) Total nonoperating revenues (expenses) 1,297,416 Change in Net Position (68,674) Net Position, Beginning of Year 4,003,429 Net Position, End of Year $ 3,934,755 SEE ACCOMPANYING NOTES TO FINANICAL STATEMENTS

10 STATEMENT OF CASH FLOWS FOR THE YEAR ENDED Cash Flows from Operating Activities: Receipts from customers $ 39,435,207 Payments to suppliers of goods or services (16,590,644) Net cash provided by operating activities 22,844,563 Cash Flows from Noncapital Financing Activities: Debt service principal (15,525,000) Debt service interest (6,544,374) Net cash used in noncapital financing activities (22,069,374) Cash Flows from Investing Activities: Investment earnings 105,098 Sale of securities 46,498,351 Purchase of securities (47,385,143) Net cash used in investing activities (781,694) Net Decrease in Cash and Cash Equivalents (6,505) Cash and Cash Equivalents - Beginning 178,073 Cash and Cash Equivalents - Ending $ 171,568 Reconciliation of Operating Loss to Net Cash Provided by Operating Activities: Operating Loss $ (1,366,090) Adjustments to reconcile operating loss to net cash provided by operating activities Depletion of prepaid gas supplies 24,119,894 Change in Assets and Liabilities: Increase in accounts receivable (1,933,691) Decrease in prepaid expense 58 Increase in accounts payable 2,024,392 Net cash provided by operating activities $ 22,844,563 Noncash Noncapital Financing Activities: Unearned interest revenue $ 519,086 Amortization of asset interest earnings 6,869,577 Amortization of asset interest expenses (118,011) Net noncash noncapital financing activities $ 7,270,652 SEE ACCOMPANYING NOTES TO FINANICAL STATEMENTS

11 NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. General The Natural Gas Acquisition Corporation ( NGAC or the Corporation ) was established as a nonprofit corporation May 7, 1991 for the purpose of purchasing and selling natural gas on behalf of the City of Clarksville, Tennessee (the City ). No other funds of the City are presented in these financial statements. The Board of Directors is appointed by City Council and NGAC is a component unit of the City. The Corporation is presented as a blended component unit in the City financial statements as the services are provided almost entirely to the City of Clarksville. The City lies in the northern part of Middle Tennessee, approximately 40 miles northwest of Nashville, and encompasses a land area of approximately 75 square miles. The City is the county seat of Montgomery County and the principal metropolis in the area. Complete general purpose financial statements for the City are available for inspection at the office of the City s Chief Financial Officer, 102 Public Square, Clarksville, Tennessee. Basic Financial Statements The Corporation s financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ( GAAP ) as applied to governmental units. The Governmental Accounting Standards Board ( GASB ) is the accepted standard-setting body for establishing governmental accounting and financial reporting principles. The statement of net position presents NGAC s assets and liabilities with the difference reported as net position. Net position is reported in three categories: Net investment in capital assets consists of capital assets, net of accumulated depreciation and reduced by outstanding debt that is attributable to the acquisition, construction and improvement of those assets. Restricted net position consists of restricted assets reduced by liabilities related to those assets. Unrestricted net position consists of net position which does not meet the definition of the two preceding categories

12 NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued B. Reporting Entity As intended, NGAC was created to ensure municipal distributors of natural gas have the flexibility and power to compete for and obtain natural gas for redistribution on terms that will result in continuing availability of energy sources at reasonable rates to the citizens and residents of Clarksville. When the Corporation was originally established, it entered into an initial prepaid gas supply and bond which matured in November All accounting and management of NGAC was and still is conducted by the Gas Department of the City. On June 27, 2006, the Corporation issued bonds of $240,525,000. The bonds were issued to purchase for the Gas Department and Water and Sewer Department of the City of Clarksville, Tennessee ( CGW ) $218,834,969 of prepaid natural gas and for the Humphreys County Utility District of Humphreys County, Tennessee ( HCUD ) $21,216,031 of prepaid natural gas. The bonds were issued to purchase a 15-year supply of natural gas from Merrill Lynch Commodities, Inc. ( MLCI ). The contracts (Gas Agreements) between the Corporation and CGW and HCUD guarantee a minimum discount to index of thirty cents per MMBtu. An additional fifteen cents per MMBtu may be available, first, to pay operating expenses of the Corporation, and second, to provide CGW and HCUD additional savings at the discretion of the Corporation s Board of Directors. In order to structure the initial prepayment, both CGW and HCUD determined the quantity of natural gas needed on a monthly basis for fifteen years. A fixed natural gas curve was then determined by Merrill Lynch Commodities, Inc., based on a proprietary forward natural gas curve at the time of the pricing of the bonds, which when multiplied by the prepaid quantity, resulted in the amount needed to fund the prepayment. On a monthly basis, over the life of the delivery schedule, if the current market price is less than the prepaid price, CGW and HCUD will receive additional gas up to the initial monthly dollar amount funded. Alternatively, if the market price is higher than the prepaid price, CGW and HCUD will receive a lower quantity of gas. Over the 15-year period of the prepayment, CGW is expected to receive 37,362,903 MMBtus of natural gas and HCUD is expected to receive 3,786,410 MMBtus of natural gas. These amounts will fluctuate based on future natural gas prices as described above. C. Basis of Accounting Basis of accounting refers to when revenues and expenditures are recognized in the accounts and reported in the financial statements. Basis of accounting relates to the timing of the measurements made, regardless of the measurement focus used. The Corporation utilizes the economic resources measurement focus and the accrual basis of accounting. Revenues are recognized when earned and expenditures are recognized when incurred

13 NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued D. Cash and Cash Equivalents For purposes of the statement of cash flows, the Corporation considers all highly liquid instruments (including restricted assets) with a maturity of three months or less when purchased to be cash equivalents. Cash that is held in trust accounts by the trustee is not considered cash or cash equivalents. E. Prepaid Gas Supplies Prepaid gas supplies represent the Corporation s secured prepayment of natural gas to be received by the Corporation at specified quantities per month through September This amount is reduced monthly by the cost of gas sold and is increased by imputed interest based on the effective interest rate implied in the prepayment based on the prepayment amount and term. F. Operating and Non-operating Revenues and Expenses Operating revenues and expenses of the Corporation are those that result from providing services and delivering goods or services in connection with the Corporation s ongoing operations. The principal operating revenues of the Corporation are charges for gas supply. Operating expenses include the cost of sales and services, and administrative expenses. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses. G. Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. H. Capital Assets Capital assets are reported at cost. The cost of additions and improvements which substantially extend the useful life of a particular asset are capitalized. Repairs and maintenance costs are charged to current expense. The Corporation has a policy of $500 for capitalizing capital assets. Depreciation is computed using the straight-line method over the following estimated useful lives: Equipment Leasehold Improvements Furniture 5 years 5 years 7 years

14 NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued I. Restricted and Unrestricted Resources When the Corporation incurs an expense for which both restricted and unrestricted resources may be used, it is the Corporation s policy to use restricted resources first, then unrestricted resources. J. Receivables An allowance for doubtful accounts has not been established, as it is the Corporation s policy to use the direct write-off method for accounts deemed to be uncollectible. The effects of using this method approximate those of the allowance method. There were no bad debts as of June 30, K. Unearned Revenue Unearned revenue arises when assets are recognized before revenue recognition criteria have been satisfied. The unearned revenue includes unearned interest on debt service fund investments relating to the issuance of bonds. 2. GENERAL MATTERS The names of the officers and members of the Board of Directors of the Corporation are set forth in the following table: Officers and Directors of the Corporation Name Position Term Expires Pat Hickey Chairman 2020 Robert Yates President 2021 John Smith Secretary 2020 Mark Briggs Director 2020 Cindee Ellis Director 2017 The directors and board members who are not City employees receive compensation of $200 per month. No part of the Corporation s net position, revenue or assets may inure to the benefit of any private entity or person. The City, through both its senior gas department officials and its Mayor and the Utilities Committee of the City Council, has been an active participant since the early 1980 s in regulatory matters before the Federal Energy Regulatory Commission ( FERC ) involving the gas industry in general and the City s interstate pipeline supplier, Tennessee Gas Pipeline Company, in particular

15 NOTES TO FINANCIAL STATEMENTS 2. GENERAL MATTERS - Continued The City participated in the effort to ensure that open access transportation of gas supplies purchased on the spot market was made available to municipal distribution systems on the Tennessee Gas Pipeline Company system from the time the pipeline became an open access transporter late in 1986 until September 1, 1993, when FERC Order No. 636 took effect. The City s gas system consists of facilities for the distribution of natural gas throughout a large portion of the corporate limits of the City and certain portions of the surrounding developed areas of Montgomery County, including Fort Campbell. The distribution system consists of 928 miles of gas mains ranging in size from one to twelve inches. The City s FT-A contract, under which it is entitled to transport up to 5,900 MMBtu per day on Tennessee Gas Pipeline Company s supply leg (known as the 500 line ), is the contract under which the City intends to transport the gas supply (see Gas Sale Contact, Note 4) to its distribution system. The FT-A contract has been renewed under the provisions of the Natural Gas Act, 15 U.S.C. and regulations of FERC, 18 C.F.R. until October 31, The FT-G contract (known as the 800 leg) will also be used to transport up to 26,000 MMBtu per day in December through February; 24,500 per day in March; 18,000 per day in April; 3,000 per day in May; 2,000 per day in June through September; 6,000 per day in October; and 18,500 per day in November. The contract is in effect until October 31, 2020, at which time the Clarksville Gas Department can renew with the Tennessee Gas Pipeline Company. 3. ISSUANCE OF LONG-TERM BONDS The net proceeds from the sale of $240,525,000 bonds were used by the Corporation to purchase a 41,149,313 MMBtu Gas Supply over a fifteen-year period under the Gas Purchase Agreement. The full purchase price of $240,051,000 for the gas supply was paid in connection with the closing of the sale of the bonds. The purchase of a portion of the City s and HCUD s natural gas requirements for the next fifteen years on a prepaid basis through sale of the bonds enables the City and HCUD to fix the cost of that portion of its requirements at an attractive price. The City is not obligated to pay the bonds out of any general revenue. The bonds are payable solely from revenues of the Corporation as defined in the Indenture. 4. THE GAS SALE CONTRACT The Corporation entered into the Gas Sale Contract with the City solely to facilitate the financing of the purchase of the gas supply. Under the Indenture, the Corporation will assign its rights and interest under the Gas Sale Contract and the Gas Purchase Agreement to the Trustee for the benefit of bondholders. Bondholders will have no right to look to the Corporation or any of its unrestricted assets for any payment due on the bonds. Furthermore, neither the Gas Sale Contract, the Gas Purchase Agreement nor the Indenture creates a pecuniary liability on the part of any director or officer of the Corporation

16 NOTES TO FINANCIAL STATEMENTS 4. THE GAS SALE CONTRACT - Continued The gas supplier is Merrill Lynch Commodities, Inc., a Delaware corporation, which is a global commodities trading, marketing and risk management solutions company that transacts in a broad range of physical and financial products, including: natural gas, power, coal, weather derivatives, emissions, crude, refined products and natural gas liquids. The gas supplier is required by law to file certain reports and other information with the U.S. Securities and Exchange Commission in Washington, D.C. Documents filed by the gas supplier with the SEC are available for inspection. Under the Gas Sale Contract, the Corporation agrees to acquire all rights to the contract quantity of the gas supplier by paying the purchase price, and agrees to sell to the City such contract quantity. The City will act as agent for the Corporation, and will provide for the acquisition of the contract quantity pursuant to the terms of the Gas Purchase Agreement. After payment by the Corporation to the gas supplier of the purchase price from the proceeds of the bonds, the Corporation will be under no liability of any kind for the payment of any cost or expense of or relating to the gas supply, including without limitation any charges, expenses, fees, taxes, damages, injuries, or costs incurred or attributable to the handling, transportation and delivery of the gas supply. Subject to limitations on the liability of the City set forth on the Gas Sale Contract, the obligation of the City to make the gas payments is absolute and unconditional. Until such time as the purchase price has been paid in full or provision for the payment thereof shall have been made in accordance with the Gas Sale Contract, the City is prohibited from discontinuing or suspending any gas payments required to be made under the Gas Sale Contract when due, and the gas payments are not subject to reduction by offset or otherwise. The City is not required to advance any money derived from any funds, including the gas system revenues, beyond the fiscal year for which the appropriation is made for the payment of the gas payments or for the performance of any other agreements or covenants required to be performed by it pursuant to the Gas Sale Contract. The City may, however, advance money for any such purpose so long as such money is derived from a source legally available for such purpose and may be legally used by the City for such purpose. The obligation of the City to make the gas payments is a special obligation of the City payable (i) with respect to gas payments attributable to the Gas Purchase Agreement, only so long as the Gas Purchase Agreement is in effect and no event of default of the gas supplier in the delivery of gas or in the payment of the amounts due there under has occurred and is continuing there under, or to the extent of any amounts received there under, and (ii) solely from gas system revenues, during the fiscal year for which an appropriation is made, and does not constitute a debt of the City, of the Corporation or of the State of Tennessee or any political subdivision thereof within the meaning of any constitutional or statutory debt limitation or restriction. It is expressly made a condition of the Gas Sale Contract that any agreements, covenants or representations on the Gas Sale Contract, the Indenture, the bonds or documents and instruments executed in connection therewith shall not constitute or give rise to any personal or pecuniary liability or charge against the general credit of the Corporation or the City beyond the fiscal year for which the annual appropriation is made

17 NOTES TO FINANCIAL STATEMENTS 4. THE GAS SALE CONTRACT - Continued No recourse under or upon any obligation, covenant or agreement set forth in the Gas Sale Contract, or for any claim based thereon or in connection with the Indenture, may be had against any member of the governing board of the Corporation or of the City. Each officer of the City having custody of the gas system shall be under fidelity bond at all times in an amount not less than the total funds in the custody of such officer at any one time. The City will not grant a franchise to any competing gas system until all of the gas payments have been paid in full. The City will maintain insurance on the properties of the gas system for the benefit of the Corporation and the Trustee of a kind and in an amount which would normally be carried by private companies engaged in a similar type of business. Circumstances under which the Gas Sale Contract may be terminated include failure of the City to make gas payments under the Gas Sale Contract when due, to appropriate adequate funds to make gas payments, or otherwise to make gas payments or to pay any required shortfall; an event of default under the Indenture or Gas Sale Contract; and termination of the Gas Sale Contract by the Trustee upon such an event of default. In the event of early termination of the Gas Sale Contract, the Trustee may proceed to take possession of gas delivered under the Gas Purchase Agreement and to sell the remaining gas supply and contract rights to receive the remaining gas supply under the Gas Purchase Agreement, or to cause the gas supplier to repurchase the gas on a monthly basis at prices indexed to the then current spot market. In the event of a failure of the gas supplier to deliver the gas under the Gas Purchase Agreement, the ability of the Corporation to make full payment of principal and interest due on the bonds will depend upon the gas supplier s making the payments it is required to make in lieu of delivering gas under the Gas Purchase Agreement. 5. CONCENTRATIONS AND CONTINGENCIES Financial instruments that potentially subject the Corporation to significant concentrations of credit risk consist principally of cash, sales of gas, and accounts receivables. The Corporation maintains cash with federally insured financial institutions and limits the amount of credit exposure to any one institution by requiring collateral. For the year ended June 30, 2016, sales of gas to the City of Clarksville equaled $21,168,760 or 51% of gas sales for the year. Sales of gas to the Municipal Gas Authority of Georgia ( MGAG ) equaled $18,111,453 or 44% of gas sales for the year. Sales to MGAG consist of non-qualified gas sales, as described below. As further discussed in Note 1B, the Corporation s prepaid gas supply is based on a prepayment agreement with MLCI. MLCI is currently the sole provider of the natural gas to the Corporation. Approximately 58% of the accounts receivable are from MGAG, 24% from CGW, and 16% from MLCI, respectively. The Corporation considers the receivables from MGAG, CGW, and MLCI to be fully collectible. The Corporation does not require collateral or other security when extending credit to its customers

18 NOTES TO FINANCIAL STATEMENTS 5. CONCENTRATIONS AND CONTINGENCIES On a monthly basis, over the life of the gas delivery schedule, if the current market price is less than the prepaid price then CGW and HCUD will receive additional gas up to the initial monthly dollar amount funded. Alternatively, if the market price is higher than the prepaid price then CGW and HCUD will receive a lower quantity of gas. Natural gas not consumed by CGW and HCUD is sold back to the Corporation and the Corporation in return sells it back to MLCI. This resold gas is considered non-qualified gas. In order to clear non-qualified gas from the Corporation s gas ledger, MLCI is to sell/remarket the non-qualified gas to a qualified buyer, which is any municipality, utility district, gas authority or a non-profit entity. If the nonqualified gas is not remarketed to a qualified buyer within twenty-four months of it being classified as non-qualified gas, then it could result in permanent non-qualified gas and the Corporation s bond could lose its tax-exempt status. During 2016, the Corporation sold gas to MGAG in order to reduce the balance of non-qualified gas from the Corporation s gas ledger. The balance of non-qualified gas on the ledger was $871,490 as of June 30, 2016, and has been on the ledger for five months. 6. PREPAID GAS SUPPLIES The net proceeds of $240,051,000 of the bond issue were used to purchase 41,149,313 MMBtu of natural gas in This amount is to be used over a fifteen-year period as a supplement to the gas supply for the City of Clarksville and Humphreys County Utility District. The total remaining prepaid gas supply at June 30, 2016, was $112,324, RESTRICTED ASSETS Restricted assets represent cash and investments and are restricted by the bond covenants for the purpose of ensuring that assets are available for the retirement of bonds and interest obligations. Assets restricted for retirement of bond obligations were $18,396,487 at June 30, DEPOSITS AND INVESTMENTS The Corporation does not have an official investment policy. Although there is no official deposit and investment policy for the Corporation, in order to provide a safe temporary medium for investment of the Corporation s idle funds, the Corporation invests those idle funds under the provisions of Tennessee Code Annotated State statutes authorize the Corporation to invest in: (1) U.S. government securities and obligations guaranteed by the U.S. government; (2) deposit accounts at state and federally chartered banks and savings and loan associations; (3) the Local Government Investment Pool of the State of Tennessee, and (4) certain repurchase agreements

19 NOTES TO FINANCIAL STATEMENTS 8. DEPOSITS AND INVESTMENTS - Continued The Corporation recognizes its deposits and investments may have one or more of the following risks: 1. Credit risk: Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligations. State law limits investments in debt securities to the highest rated category by at least two nationally recognized rating agencies. The Corporation has no investment policy that would further limit its investment choices. 2. Concentration of credit risk: A concentration of investments in any one single issuer of debt securities presents a greater risk for loss in the event that the issuer fails on its obligations. The Corporation places no limit on the amount the Corporation may invest in any one issuer. 3. Interest rate risk: Interest rate risk is the risk that future changes in prevailing market rates of interest will have an adverse effect on the fair value of debt investments. The Corporation does not have a formal investment policy that limits investment maturities as a means of managing its exposure to fair value losses arising from increasing interest rates. 4. Custodial credit risk: Custodial credit risk is defined as the risk that a government will not be able to recover its deposits, investments or collateral from the bank in the event of bank failure. As of June 30, 2016, the carrying amount of the Corporation s deposits was $171,568 and the bank balances were $171,987. All deposits were covered by FDIC insurance. The Corporation s investments are held by a trustee in the Corporation s name. The trust was created pursuant to the bond covenants at the time of issuance of bonds and gas sale contract. The trustee collects all funds received from the sale of natural gas. The sale proceeds are used by the trustee to make bond principal and interest payments. Residual amounts are returned to the Corporation. Cash and cash equivalents $ 1,295,739 U.S. agency securities 15,019,588 Repurchase agreements 2,081,160 Total $18,396,487 The Corporation categorizes its fair value measurements within the fair value hierarchy established by generally accepted accounting principles. The hierarchy is based on the valuation inputs used to measure the fair value of the asset. Level 1 inputs are quoted prices in active markets for identical assets; Level 2 inputs are significant other observable inputs; and Level 3 inputs are significant unobservable inputs

20 NOTES TO FINANCIAL STATEMENTS 8. DEPOSITS AND INVESTMENTS - Continued The Corporation has the following recurring fair value measurements as of June 30, 2016: Cash and cash equivalents of $1,295,739 are valued using quoted market prices (Level 1 inputs); U.S. agency securities of $15,019,588 are valued using quoted market prices (Level 1 inputs); and Repurchase agreements of $2,081,160 are valued using other observable inputs (Level 2 inputs). 9. UNAMORTIZED BOND PREMIUM The unamortized bond premium remaining at June 30, 2016, was $1,321,491. The unamortized bond premium is being amortized over fifteen years using the imputed interest method. 10. RISK MANAGEMENT The Natural Gas Acquisition Corporation is exposed to various risks of loss related to torts, theft of, damage to, and destruction of assets, errors and omissions, and natural disasters. Under the terms of the Gas Sale Contract, each officer of the City having custody of the gas system funds is required to be under fidelity bond at all times in an amount not less than the total funds in the custody of such officer at any one time. The City is required to maintain insurance on the properties of the gas system for the benefit of the Corporation and the Trustee of a kind and in an amount which would normally be carried by private companies in a similar type of business. The City has elected to obtain insurance policies to transfer risk to commercial companies. Insurance settlements have not been in excess of insurance coverage in any of the prior three fiscal years. 11. SCHEDULE OF CAPITAL ASSETS Depreciated Capital Assets Balance 6/30/2015 Additions Retirements Balance 6/30/2016 Equipment $ 12,150 $ - $ - $ 12,150 Furniture and Fixtures 7, ,737 Leasehold Improvements 2, ,143 Total 22, ,030 Accumulated Depreciation ( 22,030) - - ( 22,030) Net of Accumulated Depreciation $ - $ - $ - $

21 NOTES TO FINANCIAL STATEMENTS 12. BONDS PAYABLE Changes in long-term debt (including current portions) for the year ended June 30, 2016, were as follows: Balance 6/30/2015 Additions Reductions Balance 6/30/2016 Amount due in Year Ending 6/30/2017 Bonds payable $138,650,000 $ - $15,525,000 $123,125,000 $16,865,000 Premiums on bonds 1,759, ,685 1,321,491 - Total Long-Term Debt $140,409,176 $ - $15,962,685 $124,446,491 $16,865,000 Gas Revenue Bond Series 2006 are collateralized by a pledge of revenues derived and to be derived from the sale of natural gas. The Corporation is also required to establish and maintain separate revenue, operating reserve and debt service funds to pay for the outstanding bonds and interest charges. The total interest expense for the year ended June 30, 2016, was $6,512,031. At June 30, 2016, principal and interest to maturity is $143,043,125. Future payments on Long-Term Debt are as follows: Year ending June 30, Principal Amount (1) Interest 5% Total 2017 $ 16,865,000 $ 5,734,625 $ 22,599, ,035,000 4,862,125 22,897, ,400,000 3,926,250 23,326, ,835,000 2,920,375 23,755, ,490,000 1,837,250 24,327, ,500, ,500 26,137,500 (1) Principal matures December 15 of each year. Total $123,125,000 $19,918,125 $143,043,

22 INDEPENDENT AUDITOR S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS Board of Directors Natural Gas Acquisition Corporation Clarksville, Tennessee We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of the Natural Gas Acquisition Corporation (the Corporation ), a component unit of the City of Clarksville, Tennessee, as of and for the year ended June 30, 2016, and the related notes to the financial statements, which collectively comprise the Corporation s basic financial statements, and have issued our report thereon dated October 12, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the Corporation s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Corporation s internal control. Accordingly, we do not express an opinion on the effectiveness of the Corporation s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected, on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. The Astoria 3803 Bedford Avenue, Suite 103 Nashville, Tennessee phone: fax: An Independent Member of The BDO Alliance US

23 Board of Directors Natural Gas Acquisition Corporation Compliance and Other Matters As part of obtaining reasonable assurance about whether the Corporation s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Corporation s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Nashville, Tennessee October 12,

24 SCHEDULE OF PRIOR YEAR FINDINGS FOR THE YEAR ENDED There were no prior year findings reported