COBB ELECTRIC MEMBERSHIP CORPORATION AND SUBSIDIARIES MARIETTA, GEORGIA

Transcription

1 COBB ELECTRIC MEMBERSHIP CORPORATION AND SUBSIDIARIES MARIETTA, GEORGIA CONSOLIDATED FINANCIAL STATEMENTS AS OF APRIL 30, 2017 AND 2016 AND INDEPENDENT AUDITOR S REPORT

2 COBB ELECTRIC MEMBERSHIP CORPORATION AND SUBSIDIARIES CONTENTS Independent Auditor s Report... 1 Consolidated Balance Sheets... 3 Consolidated Statements of Operations... 5 Consolidated Statements of Comprehensive Income... 6 Consolidated Statements of Changes in Equities... 7 Consolidated Statements of Cash Flows... 8 Notes to Consolidated Financial Statements Supplementary Information Consolidating Financial Statements as of and for the Year Ended April 30, Consolidating Financial Statements as of and for the Year Ended April 30, Communication with Those Charged with Governance... 48

3 MCNAIR, MCLEMORE, MIDDLEBROOKS & CO., LLC CERTIFIED PUBLIC ACCOUNTANTS 389 Mulberry Street Post Office Box One Macon, GA Telephone (478) Facsimile (478) mmmcpa.com The Board of Directors Cobb Electric Membership Corporation Report on the Financial Statements June 27, 2017 INDEPENDENT AUDITOR S REPORT We have audited the accompanying consolidated financial statements of Cobb Electric Membership Corporation and Subsidiaries (the Corporation), which comprise the consolidated balance sheets as of April 30, 2017 and 2016 and the related consolidated statements of operations, comprehensive income, changes in equities and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated 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 consolidated 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 consolidated 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 audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Corporation s preparation and fair presentation of the consolidated 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 Corporation 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 consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion

4 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cobb Electric Membership Corporation and Subsidiaries as of April 30, 2017 and 2016 and the results of its operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Report on Supplementary Information Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The consolidating financial statements are presented for purposes of additional analysis and are not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and related directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the consolidated financial statements as a whole. McNAIR, McLEMORE, MIDDLEBROOKS & CO., LLC - 2 -

5 COBB ELECTRIC MEMBERSHIP CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS APRIL 30 ASSETS Utility Plant Utility Plant in Service, at Cost $ 907,188,387 $ 874,002,505 Construction Work in Progress 4,664,599 3,590,513 Gross Utility Plant 911,852, ,593,018 Accumulated Provision for Depreciation (299,458,090) (283,018,544) 612,394, ,574,474 Other Property and Investments Investments in Associated Organizations 195,597, ,479,690 Nonutility Property 8,853,958 8,629,786 Restricted Funds 6,551,541 7,372,081 Other Investments 2,766,209 2,655, ,769, ,137,123 Current Assets Cash and Cash Equivalents 17,908,670 18,617,298 Short-Term Investments - 1,076,690 Accounts Receivable (Net of Accumulated Provision for Uncollectibles of $5,504,515 in 2017 and $5,329,326 in 2016) 52,823,505 43,897,715 Gas Inventory 11,400,152 12,607,257 Materials and Supplies 3,245,450 3,266,201 Deferred Tax Assets 894,000 2,584,000 Other Current Assets 9,389,994 8,300,257 95,661,771 90,349,418 Deferred Tax Assets 2,203,000 3,518,000 Other Assets 7,374,294 11,258,469 Total Assets $ 931,403,008 $ 907,837,484 See accompanying notes which are an integral part of these financial statements

6 COBB ELECTRIC MEMBERSHIP CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS APRIL 30 EQUITIES AND LIABILITIES Equities Membership Fees $ 492,980 $ 515,175 Patronage Capital - Unrestricted 13,603,835 - Patronage Capital - Restricted 308,784, ,342,206 Donated Capital 315, ,397 Other Equities 27,845,412 9,128,486 Accumulated Other Comprehensive Loss (19,905,209) (26,186,444) 331,136, ,164,820 Long-Term Liabilities Long-Term Debt 368,994, ,221,194 Defined Benefit Pension Plan 86,938,041 90,728,328 Deferred Compensation Plans 8,856,273 8,416, ,788, ,366,222 Current Liabilities Lines-of-Credit 34,400,000 46,500,000 Current Portion of Long-Term Debt 18,717,800 18,351,000 Current Portion of Deferred Compensation Plans 219,701 1,312,539 Accounts Payable 37,831,590 31,685,989 Consumer Deposits 13,018,132 12,913,862 Accrued and Withheld Taxes 4,146,003 4,641,680 Other Current and Accrued Liabilities 18,442,004 12,463, ,775, ,868,744 Deferred Credits 8,702,613 10,437,698 Total Equities and Liabilities $ 931,403,008 $ 907,837,484 See accompanying notes which are an integral part of these financial statements

7 COBB ELECTRIC MEMBERSHIP CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED APRIL 30 Operating Revenues $ 766,624,419 $ 726,928,799 Operating Expenses Cost of Revenues 551,785, ,781,324 Distribution Operations 8,650,034 8,181,545 Distribution Maintenance 21,859,821 22,306,252 Consumer Accounts 13,173,840 15,303,083 Consumer Service and Information 1,528,950 1,664,419 Administrative, Selling and General 75,404,929 78,715,500 Depreciation and Amortization 32,161,283 35,567,123 Operating Taxes 3,150,895 4,116,195 Total Operating Expenses 707,715, ,635,441 Operating Margins Before Interest Expense 58,909,301 61,293,358 Interest Expense 22,422,047 24,377,260 Operating Margins After Interest Expense 36,487,254 36,916,098 Nonoperating Margins 1,716,198 1,757,937 Reduction in Workforce (6,071,787) - Generation and Transmission Patronage Allocations 6,444,091 6,262,313 Other Capital Credits and Patronage Allocations 2,364,005 2,857,549 Net Income Before Income Taxes 40,939,761 47,793,897 Income Tax Expense 8,619,000 9,909,000 Net Income $ 32,320,761 $ 37,884,897 See accompanying notes which are an integral part of these financial statements

8 COBB ELECTRIC MEMBERSHIP CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED APRIL 30 Net Income $ 32,320,761 $ 37,884,897 Other Comprehensive Income (Loss) Change in Fair Value of Risk Management Liability, Net of Deferred Tax of $1,082,000 and $1,644,000 in 2017 and 2016, Respectively 2,581,930 1,701,150 Change in Fair Value of Costs Related to Cobb Electric Defined Benefit Pension Plan 3,176,374 (3,605,434) Change in Fair Value of Costs Related to Cobb Electric Supplemental Executive Retirement Plan (SERP) 308, ,591 Change in Fair Value of Costs Related to Cobb Electric Death Benefit Obligations 214,456 (135,746) Other Comprehensive Income (Loss) 6,281,235 (1,664,439) Comprehensive Income $ 38,601,996 $ 36,220,458 See accompanying notes which are an integral part of these financial statements

9 COBB ELECTRIC MEMBERSHIP CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITIES FOR THE YEARS ENDED APRIL 30, 2017 AND 2016 Membership Fees Patronage Capital - Unrestricted Patronage Capital - Restricted Donated Capital Other Equities Accumulated Other Comprehensive Loss Total Balance - April 30, 2015 $ 537,880 $ - $ 308,342,206 $ 338,294 $ (28,756,411) $ (24,522,005) $ 255,939,964 Net Income ,884,897-37,884,897 Other Comprehensive Loss (1,664,439) (1,664,439) Other (22,705) , ,398 Balance - April 30, , ,342, ,397 9,128,486 (26,186,444) 292,164,820 Net Income - 13,603, ,716,926-32,320,761 Other Comprehensive Income ,281,235 6,281,235 Other (22,195) - 441,808 (49,606) ,007 Balance - April 30, 2017 $ 492,980 $ 13,603,835 $ 308,784,014 $ 315,791 $ 27,845,412 $ (19,905,209) $ 331,136,823 See accompanying notes which are an integral part of these financial statements

10 COBB ELECTRIC MEMBERSHIP CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED APRIL 30 Cash Flows from Operating Activities Net Income $ 32,320,761 $ 37,884,897 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Depreciation and Amortization 32,161,283 35,105,859 Bad Debt Provision 6,289,500 7,335,000 Patronage Capital from Associated Organizations (8,808,096) (9,119,862) Net Periodic Benefit Cost - Defined Benefit Plans 8,755,854 11,502,430 Deferred Income Tax Expense 1,361,000 1,008,285 Lower of Cost or Market Adjustment - Gas Inventory (395,000) (1,052,544) Gain on Disposition of Assets (237,200) (205,846) Amortization of Gain on Early Extinguishment of Debt (384,263) (454,821) Defined Benefit Plan Contributions (8,653,811) (48,354,438) Deferred Power Cost 2,694,290 - Change In Accounts Receivable (15,215,290) (1,429,925) Gas Inventory 1,602,105 (1,420,722) Other Current Assets 575,014 (974,153) Other Assets 3,110,065 3,625,921 Accounts Payable 6,145,601 1,755,922 Consumer Deposits 104,270 45,592 Other Current and Accrued Liabilities 5,482,653 (3,309,172) Deferred Credits (1,350,822) (396,499) 65,557,914 31,545,924 Cash Flows from Investing Activities Extension and Replacement of Plant, Net (49,332,677) (37,408,943) Return of Equity from Associated Organizations 2,690,447 2,947,725 Change in Short-Term and Other Investments 966,047 (966,155) (45,676,183) (35,427,373) Balance - Carried Forward $ 19,881,731 $ (3,881,449) See accompanying notes which are an integral part of these financial statements

11 COBB ELECTRIC MEMBERSHIP CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED APRIL 30 Balance - Brought Forward $ 19,881,731 $ (3,881,449) Cash Flows from Financing Activities Advances of Long-Term Debt 10,000,000 - Principal Repayment of Long-Term Debt (18,860,366) (17,995,933) Lines-of-Credit, Net (12,100,000) 17,000,000 Other 370,007 4,398 (20,590,359) (991,535) Net Decrease in Cash and Cash Equivalents (708,628) (4,872,984) Cash and Cash Equivalents - Beginning 18,617,298 23,490,282 Cash and Cash Equivalents - Ending $ 17,908,670 $ 18,617,298 Supplemental Disclosures of Cash Flow Information Cash Paid for Income Taxes $ 7,450,000 $ 8,220,000 Cash Paid for Interest $ 22,673,000 $ 24,418,000 See accompanying notes which are an integral part of these financial statements

12 COBB ELECTRIC MEMBERSHIP CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies Accounting policies of Cobb Electric Membership Corporation and Subsidiaries (the Corporation) reflect practices appropriate to the electric utility industry and accounting principles generally accepted in the United States (U.S. GAAP). The records of the Corporation are maintained in accordance with the Uniform System of Accounts prescribed by the Federal Energy Regulatory Commission. Nature of Operations The operations of the Corporation are as follows: Cobb Electric Membership Corporation Cobb Electric Membership Corporation (Cobb Electric) is a not-for-profit electric membership corporation whose purpose is to provide electric service to its members located in the Georgia counties of Cobb, Cherokee, Bartow, Fulton and Paulding. The Corporation operates as a cooperative whereby all monies in excess of cost of providing electric service are capital, at the moment of receipt, and are credited to each member s capital account each calendar year on a tax basis. The rates charged by Cobb Electric are determined by the board of directors. Cobb Electric reviews its rates and fees at least annually for recovery of costs. Changes or additional charges are reviewed and approved by the board of directors as needed to account for changes in purchased power throughout the year. Gas South, LLC Gas South, LLC (Gas South), a wholly-owned subsidiary of Cobb Electric, is a retail energy marketer that serves residential, governmental and institutional customers throughout the southeast in areas where customers have the ability to choose their energy provider. Gas South is a certified natural gas marketer in the state of Georgia and competes to serve customers who are connected to the Local Distribution Company (LDC), Atlanta Gas Light (AGL). Gas South purchases natural gas from wholesale suppliers for delivery to the citygate where AGL assumes responsibility and liability associated with the delivery of natural gas to Gas South s customers. Gas South also serves commercial and industrial customers in the state of Florida through several other LDCs. Gas South is registered to serve large commercial and industrial customers in portions of North Carolina, South Carolina and Virginia through other LDCs. Gas South may also serve large customers that are connected directly to interstate pipelines. Cobb Energy Management Corporation Cobb Energy Management Corporation (Cobb Energy), a wholly-owned subsidiary of Cobb Electric, was incorporated in the state of Georgia on September 3, 1997, to provide various services to Cobb Electric, its subsidiaries and third parties. Cobb Energy is effectively a holding company as of April 30, ProCore Solutions, LLC (ProCore) is a wholly-owned subsidiary of Cobb Energy. The assets of ProCore were sold on February 4, Management is evaluating a timetable to dissolve Cobb Energy and its wholly-owned subsidiary

13 (1) Summary of Significant Accounting Policies (Continued) Regulated Operations Due to regulation of its rates by the board of directors, Cobb Electric accounts for certain revenue and expense deferrals in accordance with Accounting Standards Codification (ASC) 980. Accordingly, certain costs and income may be capitalized as a regulatory asset or liability that would otherwise be charged to expense or revenues. Regulatory assets and liabilities are recorded when it is probable that future rates will permit recovery. Consolidation The consolidated financial statements include the accounts and results of operations of the Corporation and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Long-Lived Assets The Corporation evaluates long-lived assets for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. The determination of whether an impairment has occurred is based on either a specific regulatory disallowance or an estimate of undiscounted future cash flows attributable to the assets, as compared with the carrying value of the assets. If an impairment has occurred, the amount of the impairment recognized is determined by estimating the fair value of the assets and recording a provision for loss if the carrying value is greater than the fair value. For the assets identified as held for sale, the carrying value is compared to the estimated fair value less the cost to sell in order to determine if an impairment provision is required. Until the assets are disposed of, their estimated fair value is reevaluated when circumstances or events change. U.S. GAAP requires the present value of the ultimate cost for an asset s future retirement be recorded in the period in which the liability is incurred. The cost should be capitalized as part of the related longlived asset and depreciated over the asset s useful life. The Corporation has no legal retirement obligations related to its distribution facilities. Therefore, a liability for the removal of these assets will not be recorded. Management believes the actual cost of removal, even though not a legal obligation, will be recovered through rates over the lives of the distribution assets. Utility Plant Electric distribution plant is capitalized at cost less related contributions in aid of construction. In general, electric distribution plant is capitalized at the time it becomes part of an operating unit and has been energized. However, certain items of plant referred to as special equipment items (meters, transformers, oil circuit reclosers, etc.) are capitalized at the time of purchase along with the related estimated cost of installation

14 (1) Summary of Significant Accounting Policies (Continued) Nonutility Plant Nonutility plant is recorded at cost and is comprised of certain non-depreciable assets of Cobb Electric, as well as depreciable assets and amortizable internally developed software costs of Cobb Electric s subsidiaries which are used for nonutility purposes. Nonutility plant is reflected net of accumulated depreciation of $5,115,606 and $2,999,937 as of April 30, 2017 and 2016, respectively. Depreciation and Maintenance Depreciation of distribution plant is provided using composite straight-line rates. When property subject to depreciation is retired or otherwise disposed of in the normal course of business, its capitalized cost and its cost of removal less salvage are charged to the accumulated provision for depreciation. Distribution plant is retired using a statistical mortality curve based on prior actual historic retirements based on the vintage of the plant retired. When a retirement of distribution plant occurs, the retirement is assigned the most likely vintage based on computed mortality quantities and the year-to-date retirements recorded for that vintage. Provision has been made for depreciation of distribution plant at a weighted average straight-line composite rate of 2.88 percent per annum. Depreciation of general plant is provided on a straight-line basis over the estimated useful lives of the various assets. Provision has been made for depreciation of general plant at a weighted average straight-line rate of percent per annum. Depreciation of nonutility plant is provided on a straight-line basis over the estimated useful lives of the assets, which range from 3 to 11 years. The cost of nonutility plant sold or otherwise disposed of, and the accumulated depreciation thereon, is eliminated from the nonutility plant and accumulated depreciation accounts, and gains and losses are reflected as a component of nonoperating margins in the period of disposal. The costs of maintenance, repairs and replacements of minor items of property are charged to maintenance expense accounts. Asset Impairment The Corporation monitors the recoverability of intangible assets with a finite life and long-lived tangible assets and performs a review of assets or asset groups when circumstances indicate that the carrying amount may not be recoverable. The carrying amount of an asset held and used is not recoverable if it exceeds the undiscounted sum of cash flows expected to result from the use and eventual disposition of the asset. If the carrying value is not recoverable, the impairment loss is measured as the excess of the asset s carrying value over its fair value. There were no such impairment losses for the years ended April 30, 2017 and Cash Equivalents, Short-Term Investments and Other Investments Cash equivalents include time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less. Short-term investments typically consist of certificates of deposit and other highly liquid debt instruments, which mature in less than one year. Amounts maturing in more than one year are included in other investments

15 (1) Summary of Significant Accounting Policies (Continued) Operating Revenues Operating revenues represent primarily electric and natural gas revenues. Electric revenues include patronage capital and are billed monthly to consumers on a cycle basis. Electric rates for the Corporation include provisions to permit the board of directors to adjust billings for fluctuations in fuel costs, purchased power costs and certain other costs. Electricity which had been used by the members of the Corporation but had not been billed to the members was not recorded. The components of this unbilled revenue can fluctuate based on factors including rate structure, weather, period of use, cost of purchased power and other factors. As a result, the overall estimate of unbilled revenues could be significantly affected, which could have a material impact on the Corporation s results of operations if recorded in the consolidated financial statements. Management estimates unbilled revenue to be approximately $17,346,000 and $13,799,500 as of April 30, 2017 and 2016, respectively. Gas revenues are recognized when the natural gas is delivered to the customer based upon meter reading data provided by the LDC. In addition, revenues are recorded for estimated deliveries of natural gas not yet billed to the customers. Unbilled receivables of approximately $8,744,000 and $7,002,000 are included in accounts receivable in the consolidated balance sheets for the years ended April 30, 2017 and 2016, respectively. Gas revenues include the LDC charges, which represent transportation and imbalance charges billed by the LDCs. These revenues are offset by corresponding amounts in cost of revenues for amounts billed to Gas South by the LDCs. Billed Accounts Receivable and Credit Policies Billed accounts receivable are stated at the amount management expects to collect. Once a natural gas customer s service is shut off and the account is 120 days past due, the Corporation writes off the associated account receivable. Once an electric customer s service is disconnected and final billed, the associated accounts receivable is written off within 365 days. An allowance is made for doubtful accounts based on experience and other circumstances which may affect the ability of customers to meet their obligations. Accounts considered uncollectible are charged against the allowance. Recoveries of accounts receivable previously written off are recorded against the allowance when received. Receivables are reported in the consolidated balance sheets net of such accumulated allowance. Cost of Revenues Cost of revenues for electricity and natural gas are expensed as consumed. The Corporation expenses all natural gas transportation and storage costs and includes these amounts in cost of revenues. Transportation and storage costs were approximately $43,994,000 and $44,253,000 for the years ended April 30, 2017 and 2016, respectively. Investments in Associated Organizations Investments in associated organizations primarily include investments in other cooperative organizations. Investments in other cooperative organizations represent capital investments made primarily to obtain an economical source of supply, financing, product or service. Investments in other cooperative organizations are carried at cost plus allocated equities in accordance with guidance issued in ASC

16 (1) Summary of Significant Accounting Policies (Continued) Gas Inventory Except to the extent that certain volumes of inventory are designated for fair value accounting treatment, inventory is valued at the lower of cost or net realizable value, with cost determined by applying the weighted average cost to purchases and the first-in, first-out method for each month. If it is determined that a decline in market price below the weighted average cost of the inventory is other than temporary, an adjustment is recorded to reduce the weighted average cost of the inventory to net realizable value. As of April 30, 2017 and 2016, gas inventory totaling $3,734,600 and $2,028,001, respectively, was marked to fair value. Materials and Supplies Materials and supplies are generally used for construction and for operations and maintenance work, and are not for resale. They are charged to construction or operations at average moving cost, when used. Equities and Margins Cobb Electric is organized and operates under the cooperative form of organization. As such, patronage-sourced margins are allocated to patrons on the basis of patronage. Cobb Electric s bylaws provide that any time prior to dissolution or liquidation, if the board of directors determines that the financial condition of Cobb Electric would not be impaired, patronage capital credited to patrons accounts may be retired in full or in part. Cobb Electric s bylaws currently require patronage-sourced income to be calculated on a tax basis. Cobb Electric has allocated patronage-sourced income to its members through December 31, Cobb Electric had tax basis losses for the years ended December 31, 2015, 2014 and 2013 and accordingly had no capital credits to assign for those years. Cobb Electric will assign $13,603,835 to its members for the tax year ended December 31, This amount is presented as unrestricted patronage capital on the consolidated balance sheets as of April 30, Patronage capital assigned through December 31, 2012 was included in the Class Action Settlement (See Note 17), and is therefore presented as restricted on the consolidated balance sheets, since the settlement contains specific provisions regarding patronage capital assigned for the years ended December 31, 2012 and prior. Under provisions of the long-term debt agreements, the return to patrons of capital contributed by them is limited unless Cobb Electric s total equity (as defined by the loan agreements) is equal to or greater than 20 percent of its total assets (as defined by the loan agreements) after giving effect to the distribution. The equity to assets ratio was approximately percent as of April 30, Other equities are not allocated and are retained by Cobb Electric. Since Cobb Electric assigns patronage capital on a tax basis, a component of other equities is related to timing differences between book basis income and tax basis income which may reverse in a future period and could be allocated as patronage capital. Other Comprehensive Income (Loss) The objective of other comprehensive income (loss) is to report a measure of all changes in equity of the Corporation that result from transactions and other economic events of the period other than transactions with owners. Other comprehensive income (loss) consists of net income, changes in the fair value of qualifying cash flow hedges and costs not yet recognized as a component of income related to Cobb Electric s defined benefit plans. Changes in the fair value of qualifying cash flow hedges are recorded net of tax

17 (1) Summary of Significant Accounting Policies (Continued) Other Comprehensive Income (Loss) (Continued) Amounts reclassified out of accumulated other comprehensive loss related to Cobb Electric benefit plans are spread based on direct labor cost. Any amounts reclassified out of accumulated other comprehensive loss related to Gas South s cash flow hedges are included as a component of cost of revenues, net of applicable taxes, in the consolidated statements of operations. Risk Management Activities As part of its regular operations, the Corporation enters into contracts, including options, swaps, futures, forwards, and other contractual commitments, to manage market risks such as changes in the price of natural gas and the fair value of natural gas inventory. The Corporation recognizes certain derivative instruments on the consolidated balance sheets as assets or liabilities at their fair value. Subsequent changes in fair value of the derivatives are recorded in current earnings unless certain hedge accounting criteria are met. The effectiveness of hedge transactions is measured by calculating a 36-month correlation ratio between the appropriate market index used in the derivative and the market price exposure being hedged. Material amounts determined to be ineffective are recognized in current period earnings. Advertising The Corporation expenses most of its advertising costs as incurred and includes these amounts in administrative, selling and general expenses. In the event an advertising expense covers several months, the amount is established as a prepayment and amortized over the appropriate time period. Advertising costs expensed were approximately $6,156,000 and $5,865,000 for the years ended April 30, 2017 and 2016, respectively. The Corporation has marquee sponsorships that are being expensed over the terms of the sponsorships. Marquee sponsorship costs allocable to years ending after April 30, 2017 are included as a component of other assets on the consolidated balance sheets. Income Taxes Cobb Electric is exempt from federal and state income taxes under Section 501(c)(12) of the Internal Revenue Code (IRC) which provides, in part, that the Corporation derive at least 85 percent of its annual gross income from members to retain the exemption. The Corporation has met the requirement for the year ended December 31, 2016, which is on extension through November 15, As a tax-exempt rural electric cooperative, Cobb Electric is precluded from filing a consolidated tax return with any subsidiary organizations. Gas South and Cobb Energy ( taxable subsidiaries ) file separate corporate tax returns for their respective tax years. The Corporation s taxable subsidiaries account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income. The effect of a change in tax rates on deferred income tax assets and liabilities is recognized in income in the period that includes the enactment date

18 (1) Summary of Significant Accounting Policies (Continued) Income Taxes (Continued) The Corporation records interest and penalties related to federal and state income tax returns as a component of interest expense and nonoperating margins, respectively. No interest or penalties are included in the consolidated statements of operations for the years ended April 30, 2017 and The deferred tax assets and liabilities presented in the consolidated financial statements as of April 30, 2017 and 2016 are all related to Gas South. Cobb Energy s deferred tax assets and liabilities are immaterial to the consolidated financial statements. Restricted Funds Restricted funds represent funds designated for specific purposes under the control of third parties or funds for which a specific purpose has been designated, and are therefore segregated from cash and cash equivalents, short-term or other investments. Recent Accounting Pronouncements The Corporation has early implemented certain provisions of Accounting Standards Update (ASU) , Financial Instruments - Overall (Subtopic ): Recognition and Measurement of Financial Assets and Financial Liabilities. To simplify reporting, fair value disclosures for financial instruments reported at amortized cost are no longer provided in the notes to these consolidated financial statements. In May 2014, the Financial Accounting Standards Board (FASB) released ASU , Revenue from Contracts with Customers. ASU is designed to create greater comparability for financial statement users across industries and jurisdictions through a more principles-based approach than companies in the United States are used to following. The standard would require companies to recognize revenue through a five-step process: (1) identify the contract with the customer, (2) identify the separate performance obligations in the contract, (3) determine the transaction type, (4) allocate the transaction price to the separate performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU deferred the effective dates for nonpublic companies to reporting periods beginning after December 15, 2018, and for interim periods within annual reporting periods beginning after December 15, The standard will require the Corporation to accrue unbilled electric revenue with retrospective application and will require a change in accounting principle in the period adopted. In November 2015, the FASB issued ASU , Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. This ASU simplifies the presentation of deferred income taxes by eliminating the requirement for entities to separate deferred tax liabilities and assets into current and noncurrent amounts in classified balance sheets. Instead, it requires deferred tax assets and liabilities be classified as noncurrent in the balance sheet. ASU is effective for financial statements issued for annual periods beginning after December 15, Early adoption is permitted, and this ASU may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Corporation has not yet selected a transition method and is currently evaluating the impact of the adoption of this standard on its consolidated financial statements. The adoption of this standard is not expected to have a material impact on the Corporation s consolidated financial statements. Upon adoption of this standard on a retrospective basis, all deferred income tax assets and liabilities will be presented as noncurrent

19 (1) Summary of Significant Accounting Policies (Continued) Presentation of Sales Tax Certain portions of the Corporation s sales are subject to sales tax imposed by tax jurisdictions. When required, the Corporation collects sales tax from customers and remits it to the applicable jurisdiction. The Corporation s accounting policy is to exclude the tax collected and remitted from revenues and cost of sales. Reclassifications Certain reclassifications have been made to the 2016 consolidated financial statements to conform to the 2017 consolidated financial statement presentation. These reclassifications had no effect on net income for the year ended April 30, Subsequent Events In preparing these consolidated financial statements, the Corporation evaluated events and transactions for potential recognition or disclosure through June 27, 2017, the date the consolidated financial statements were available to be issued. (2) Utility Plant Listed below are the major classes of the utility plant as of April 30: Distribution Plant $ 739,911,274 $ 713,996,985 General Plant 167,277, ,005,520 Electric Plant in Service 907,188, ,002,505 Construction Work in Progress 4,664,599 3,590,513 $ 911,852,986 $ 877,593,018 (3) Restricted Funds Restricted funds consisted of the following as of April 30: Cash Surrender Value of Life Insurance (See Note 9) $ 4,721,227 $ 4,649,887 Deferred Compensation Assets (See Note 9) 2,229,827 1,802,853 Self Insurance Cash Account Maintained by Claims Administrator 140, ,420 Cash Collateral Position (539,945) 805,921 $ 6,551,541 $ 7,372,

20 (3) Restricted Funds (Continued) Cash surrender value (CSV) of life insurance represents the surrender value of whole life insurance policies which are to be used to fund the Executive Death Benefit Agreements with certain current and former key executives of Cobb Electric and Cobb Energy. Deferred compensation assets represent amounts which have been funded for the Corporation s nonqualified deferred compensation plans (NQDC Plans) and SERP Plan. Gas South has a cash account with a Futures Clearing Merchant (FCM) for derivative trading that is restricted for use in exchange trading activities. The reported amounts of cash collateral position on the consolidated balance sheets represent the net position of trading activity with the exchange. A negative cash collateral position can exist when open trade equity is greater than the combination of the collateral requirements and cash collateral position. All collateral obligations with the exchange were fully met as of April 30, 2017 and (4) Investments in Associated Organizations Investments in associated organizations consisted of the following as of April 30: Oglethorpe Power Corporation Capital Credits $ 108,034,627 $ 102,850,549 National Rural Utilities Cooperative Finance Corporation (NRUCFC) Capital Term Certificates 30,659,746 31,586,973 Capital Credits 15,323,298 14,286,460 Georgia Transmission Corporation Contributed Capital 5,800,309 5,800,309 Capital Credits 25,181,684 23,921,749 Smarr EMC Contributed Capital 721, ,154 Capital Credits 6,578,314 6,578,314 CoBank Capital Credits 1,212,999 1,591,571 Other 2,085,208 2,142,611 $ 195,597,339 $ 189,479,

21 (5) Other Investments Other investments consisted of the following as of April 30: NRUCFC Member Capital Securities $ 2,000,000 $ 2,000,000 Convertible Corporate Debt Instruments 766, ,566 $ 2,766,209 $ 2,655,566 (6) Other Assets The following deferred debits and intangibles are included as other assets in the consolidated balance sheets as of April 30: Sponsorship Naming Rights (Net of Accumulated Amortization of $6,121,500 in 2017 and $5,485,500 in 2016) $ 6,598,500 $ 7,234,500 Deferred Power Costs - 2,694,290 Credit Facility Fees (Net of Accumulated Amortization of $138,888 in 2017 and $27,778 in 2016) 416, ,774 Long-Term Portion of Prepaid Marquee Sponsorships 75,791 96,124 Risk Management Asset, Net of Current Portion 270, ,865 Other 12, ,916 Sponsorship Naming Rights $ 7,374,294 $ 11,258,469 On January 25, 2005, Cobb Energy entered into a naming rights sponsorship agreement with the Cobb Marietta Coliseum and Exhibit Hall Authority. Under this agreement, Cobb Energy obtained naming rights for a new performing arts centre, officially known as the Cobb Energy Centre for the Performing Arts (the Centre). Under the agreement, Cobb Energy paid $12,720,000 for the naming rights of the Centre through September 2027, and continues to amortize the cost into income on a straight-line basis over the 20-year term of the agreement. Amortization expense of $636,000 is included in the consolidated statements of operations for the years ended April 30, 2017 and

22 (6) Other Assets (Continued) Future Amortization Future amortization related to other assets which are subject to amortization is expected to be as follows: Year Amount 2018 $ 1,106, , , , ,000 Thereafter 3,418,500 $ 7,374,294 (7) Debt Long-Term Debt Long-term debt consists of mortgage notes payable to NRUCFC. The notes are secured by a mortgage agreement between the Corporation and NRUCFC. Substantially all the assets of the Corporation, excluding those of Gas South, are pledged as security for long-term debt. The notes generally have initial maturity periods of 30 years and are payable on an installment basis. The notes have provisions for interest rate repricing based on the expiration of the fixed rate term for each advance. The notes contain certain affirmative and negative covenants, including maintenance of certain financial ratios as defined in the agreement. The notes have maturity periods varying from April 22, 2018 to July 7, 2051 and are payable on an installment basis. Long-term debt is comprised of the following as of April 30: Weighted Average Interest Rate NRUCFC Mortgage Notes 5.50% $ 387,711,828 $ 396,572,194 Maturities Due Within One Year (18,717,800) (18,351,000) $ 368,994,028 $ 378,221,194 Cobb Electric has unadvanced loan funds totaling $54,541,000 on commitment from NRUCFC. The availability of the funds is contingent on Cobb Electric s compliance with one or more preconditions set forth in the loan agreement

23 (7) Debt (Continued) Long-Term Debt (Continued) Principal maturities of long-term debt for each of the next five years are as follows: Year Amount 2018 $ 18,717, ,365, ,090, ,774, ,359,700 Thereafter 287,403,928 $ 387,711,828 Revolving Credit Facilities Cobb Electric s available lines-of-credit consisted of the following as of April 30: Lender Total Revolving Credit Facility at Outstanding Balance Borrower April 30, 2017 Compass Bank Cobb Electric $ - $ - $ 31,000,000 Bank of America Cobb Electric 30,000,000 17,500,000 - CoBank Cobb Electric 30,000,000 16,900,000 15,500,000 $ 60,000,000 $ 34,400,000 $ 46,500,000 Cobb Electric s $30,000,000 unsecured revolving credit facility with Bank of America bears interest at the LIBOR Daily Floating Rate plus 1.20 percent (2.19 percent as of April 30, 2017). The current agreement expires on September 15, Cobb Electric s $30,000,000 unsecured revolving credit facility with CoBank, ACB (CoBank) bears interest at CoBank s weekly quoted variable rate, which is a rate per annum equal at all times to the rate of interest established by CoBank on the first business day of each week (2.40 percent as of April 30, 2017). The current agreement expires on September 14, The Compass Bank credit facility was paid off on September 16, Both the Bank of America and the CoBank revolving credit facilities contain the following financial covenants: minimum debt service coverage, minimum equity to assets ratio and asset coverage testing. These covenants are tested on a rolling twelve months at each fiscal year quarter-end

24 (7) Debt (Continued) Revolving Credit Facilities (Continued) On January 27, 2016, Gas South entered into an $80,000,000 revolving credit agreement with a syndicate of banks, administered by SunTrust Bank that extends through January Amounts outstanding under the credit agreement are collateralized by virtually all assets of Gas South. Gas South has the option to utilize its revolving credit facility by issuing Variable Rate notes or LIBOR notes. The credit agreement contains provisions for certain minimum covenants including provisions for minimum interest coverage, maximum funded debt to EBITDA and minimum current ratio. There were no amounts outstanding as of April 30, Letters-of-Credit Gas South s credit agreements have provided the ability to issue letters-of-credit up to an amount not to exceed the amount available under the credit agreement. Gas South had letters-of-credit outstanding with certain counterparties totaling approximately $467,000 and $1,384,000 as of April 30, 2017 and 2016, respectively. Upon occurrence of specified events, each counterparty may draw upon its letter-of-credit up to the amount due from Gas South, which was approximately $172,000 and $194,000 as of April 30, 2017 and 2016, respectively. (8) Gas South Risk Management Activities Gas South had a net risk management asset of $1,905,751 and $323,723 as of April 30, 2017 and 2016, respectively. Gas South enters into master netting agreements with its counterparties and accounts for these agreements in accordance with U.S. GAAP. Gas South analyzes its contracts by counterparty and nets the derivative assets and derivative liabilities by counterparty and reports these assets or liabilities separately on the consolidated balance sheets. Assets and liabilities from risk management activities are classified as current or long-term based upon the maturities of the underlying financial instruments. Risk management assets (liabilities) are classified as follows in the consolidated balance sheets: Other Current Assets $ 1,669,101 $ 535,533 Other Assets 270, ,865 Other Current and Accrued Liabilities (34,220) (691,060) Deferred Credits - (94,615) $ 1,905,751 $ 323,723 Gas South enters into derivative contracts that are designated as either cash flow or fair value hedges. Commodity contracts that are used to mitigate the risk of cash flow variability associated with the forecasted purchases and sales of natural gas are designated as either cash flow or fair value hedges and extend through December To the extent cash flow hedges are effective, the change in the fair value of these contracts is included in other comprehensive income

25 (8) Gas South Risk Management Activities (Continued) Commodity contracts that are used to hedge the fair value exposure of natural gas stored in various locations are designated as fair value hedges. The changes in fair value of these contracts are accounted for immediately in earnings. In addition, the changes in the fair value of designated natural gas inventory are accounted for immediately in earnings according to published prices that correspond to the delivery point of the respective storage facilities. For the year ended April 30, 2017, the gain in fair value of marked inventory included in current earnings totaled $2,101,418. For the year ended April 30, 2016, the loss in fair value of the marked inventory included in current earnings totaled $1,096,705. Gas South experienced a loss in fair value derivatives for the year ended April 30, 2017 of $593,195. Gas South experienced a gain in fair value derivatives for the year ended April 30, 2016 of $275,420. These gains and losses are included as a component of cost of revenues in the consolidated statements of operations. Amounts recorded in accumulated other comprehensive loss related to cash flow hedges will be recognized in earnings as the related hedged transactions are recognized in earnings. If it is probable that the hedged transaction will not occur, the income or loss will be immediately recognized. In the next twelve months, subject to changes in market prices of natural gas, Gas South expects that a gain of approximately $1,480,000 will be recognized as the related fixed rate contract revenue is recognized. For the years ended April 30, 2017 and 2016, Gas South did not recognize in the consolidated statements of operations any material amounts related to the ineffectiveness of its hedge transactions. For the years ended April 30, 2017 and 2016, Gas South recognized losses of approximately $506,000 and $10,338,000, respectively, in the consolidated statements of operations for hedges that were previously recorded in accumulated other comprehensive loss as the hedged transactions were recognized in the current period s earnings. As of April 30, 2017 and 2016, all of Gas South s derivatives are designated as hedges under U.S. GAAP. (9) Retirement Benefits Defined Benefit Pension Plans Cobb Electric Cobb Electric has a defined benefit pension plan which provides a minimum pension benefit that is determined by an eligible participant s years of service, final average compensation and the value of the Corporation s contributions. On December 18, 2012, the board of directors froze participation in the pension plan for employees hired after December 31, Those employees are eligible for an employer retirement contribution as part of the employee savings plan

26 (9) Retirement Benefits (Continued) Defined Benefit Pension Plans (Continued) Cobb Electric (Continued) The status of the Cobb Electric pension plan as of April 30 is detailed as follows: Projected Benefit Obligation, Beginning of Year $ 162,977,194 $ 158,501,022 Service Cost 8,076,222 8,256,944 Interest Cost 5,345,339 6,635,885 Plan Curtailments (5,590,426) - Benefits Paid (6,114,907) (8,932,688) Change in Actuarial Assumptions 5,256,213 (1,483,969) Projected Benefit Obligation, End of Year 169,949, ,977,194 Fair Value of Plan Assets, Beginning of Year 72,248,866 33,729,246 Contributions 8,653,811 48,354,438 Benefits Paid (6,114,907) (8,932,688) Expenses (263,124) (205,256) Actual Return on Plan Assets 8,486,948 (696,874) Fair Value of Plan Assets, End of Year 83,011,594 72,248,866 Funded Status - Over (Under) $ (86,938,041) $ (90,728,328) Cobb Electric s net periodic benefit cost and projected benefit obligation are calculated using various actuarial assumptions and methodologies. These assumptions include discount rates, expected return on plan assets, rate of compensation increases, mortality rates and other factors. Actuarial assumptions are reviewed on an annual basis