City of Huntsville Electric, Natural Gas, and Water Systems. Component Unit Financial Statements. September 30, 2013 and 2012

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1 City of Huntsville Electric, Natural Gas, and Water Systems Component Unit Financial Statements September 30, 2013 and 2012 COMPONENT UNIT FINANCIAL STATEMENT HUNTSVILLE UTILITIES 2013 ANNUAL REPORT 21

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3 Table of Contents Page(s) Independent Auditors Report on Financial Statements 25 Management s Discussion and Analysis City of Huntsville Electric System (a component unit) Statements of Net Position Statements of Revenues, Expenses, and Changes in Net Position 36 Statements of Cash Flows 37 City of Huntsville Natural Gas System (a component unit) Statements of Net Position Statements of Revenues, Expenses, and Changes in Net Position 40 Statements of Cash Flows 41 City of Huntsville Water System (a component unit) Statements of Net Position Statements of Revenues, Expenses, and Changes in Net Position 44 Statements of Cash Flows 45 Notes To The Financial Statements Required Supplementary Information COMPONENT UNIT FINANCIAL STATEMENT HUNTSVILLE UTILITIES 2013 ANNUAL REPORT 23

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5 INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS To the Board of Directors of City of Huntsville Electric, Natural Gas, and Water Systems Huntsville, AL Report on the Financial Statements We have audited the accompanying financial statements of the City of Huntsville Electric, Natural Gas, and Water Systems (the Utilities ), component units of the City of Huntsville, Alabama, as of and for the year ended September 30, 2013, and the related notes to the financial statements, which collectively comprise the Utilities 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 opinions 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 opinions. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Utilities, as of September 30, 2013, and the changes in financial position and cash flows thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America. COMPONENT UNIT FINANCIAL STATEMENT HUNTSVILLE UTILITIES 2013 ANNUAL REPORT 25

6 Other Matters Adjustments to Prior Period Financial Statements The financial statements of the Utilities as of September 30, 2012, were audited by other auditors whose report dated January 30, 2013, expressed an unmodified opinion on those statements. The Utilities have restated its financial statements for the matters discussed in Note 16. The other auditors reported on the financial statements before the restatement. As part of our audit of the 2013 financial statements, we also audited the adjustments to the 2012 financial statements to correct certain errors in the accounting of unbilled revenues and utility plant as described in Note 16. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the Utilities 2012 financial statements other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2012 financial statement as a whole. Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis and schedules of funding progress on pages 27 through 33 and page 68 through 69 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 ( GASB ), 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 January 28, 2014 on our consideration of the Utilities internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Utilities internal control over financial reporting and compliance. Emphasis of Matter Regarding Changes in Accounting Principles As discussed in Note 1 to the financial statements, the Utilities adopted the provisions of GASB Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position, during the year ended September 30, Our opinion is not modified with respect to these matters. CARR, RIGGS & INGRAM, L.L.C. Certified Public Accountants January 28, HUNTSVILLE UTILITIES 2013 ANNUAL REPORT COMPONENT UNIT FINANCIAL STATEMENT

7 City of Huntsville Electric, Gas and Water Systems Management Discussion and Analysis Years Ending September 30, 2013 and 2012 The following management discussion and analysis (MD&A) for Huntsville Utilities (Utilities) is intended as an introduction and should be read in conjunction with the financial statements and the notes that follow this section. Overview of the Financial Statements The Utilities financial statements are comprised of the Statements of Net Position; the Statements of Revenues, Expenses and Changes in Net Position; the Statements of Cash Flows; and the accompanying Notes. This report also contains required supplementary information in addition to the basic financial statements. The Statement of Net Position reports the assets and deferred outflows of resources less liabilities and deferred inflows of resources, with the difference being the net position. Net position will be displayed in three components: net investment in capital assets, restricted, and unrestricted. Over time, increases or decreases in net position may serve as an indicator of whether the financial position is improving or declining. The Statements of Revenues, Expenses and Changes in Net Position show how net position changed during each year based on revenues and expenses. All changes in net position are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. The Statements of Cash Flows report changes in cash and cash equivalents summarized by net changes from operating, capital, related financing, and investing activities. The Notes provide additional detailed information to support the financial statements. The statements present the current year and preceding year for comparison. The report also includes Statistical Highlights. These highlights convey significant data that affords the readers a better historical perspective and assists in assessing the current financial status and trends of the Utilities. The highlights present a threeyear comparison beginning with the current year and preceding two years for the electric, gas and water systems. The Utilities is a Component Unit of the City of Huntsville, Alabama. The Utilities statements are provided to the City of Huntsville and reformatted to conform to the City s format for Component Units. The City of Huntsville incorporates the Utilities statements ending September 30 into its statements ending September 30. By City Ordinance, the Utilities are required to account separately for its electric, natural gas and water systems. Costs are allocated to the three systems in a manner that ensures results of operations and changes in financial position are presented fairly and consistently from year to year. COMPONENT UNIT FINANCIAL STATEMENT HUNTSVILLE UTILITIES 2013 ANNUAL REPORT 27

8 Management s Discussion and Analysis Years Ending September 30, 2013 and 2012 City of Huntsville Electric System Table A1 Condensed Statements of Net Position (In Thousands) FY13 FY12 FY12 FY % Change 2011 % Change Assets Current and other assets $129,879 $121, % $83, % Capital assets (net) 253, , % 249, % Total assets $383,286 $369, % $332, % Liabilities Current and other liabilities $53,144 $52, % $46, % Longterm liabilities 71,102 73, % 50, % Total liabilities 124, , % 97, % Net Position Invested in capital assets 213, , % 232, % Restricted assets 26,850 32, % 4, % Unrestricted assets 18,855 6, % (2,619) 350.2% Total net position 259, , % 234, % Total liabilities and net position $383,286 $369, % $332, % 2013 Compared to 2012: As of September 30, 2013 the Electric System s total assets were $383 million, an increase of 3.7%, compared to September 30, This increase is primarily due to an increase in Cash and Cash Equivalents of $16.3 million due to an increase in the net cash provided by operations of 29.0%. As of September 30, 2013 the Electric System s liabilities were $124 million, a decrease of 0.9%, compared to September 30, As of September 30, 2013 the Electric System s net position was $259 million, an increase of $15 million or 6.1%, compared to September 30, This increase is due primarily to cash provided by operating activities of $48 million and investment in capital assets Compared to 2011: As of September 30, 2012, the Electric System s total assets were $369 million, an increase of 11.2%, compared to September 30, The Electric System s cash position has increased due to 3.5% rate increase which was implemented October This rate increase was implemented to assist in funding a new bond issue in the amount of $28,285,000, which was issued for the purpose of (i) providing funds to pay the costs of various public capital improvement to the system more particularly described herein, (ii) refunding, on an advance basis, the Series 2002 Warrants ($4,575,000), (iii) providing for a portion of the debt service reserve fund (the "Reserve Fund") established in the Indenture, and (iv) paying the costs of issuing the Series 2011 Warrants. The Electric System s liabilities also increased $23 million due to the 2011 Bond Issue referenced above. 28 HUNTSVILLE UTILITIES 2013 ANNUAL REPORT COMPONENT UNIT FINANCIAL STATEMENT

9 Management s Discussion and Analysis Years Ending September 30, 2013 and 2012 City of Huntsville Electric System Table A2 Condensed Statement of Revenues, Expenses and Changes in Net Position (In Thousands) FY13 FY12 FY12 FY % Change 2011 % Change Operating revenues $475,333 $470, % $487, % Nonoperating revenues % % Total revenues 475, , % 488, % Operating expense 432, , % 445, % Depreciation expense 15,876 15, % 15, % Nonoperating expense 1,249 1, % 1, % Total expenses 449, , % 461, % Income before transfers 26,607 21, % 26, % Transfers out tax equivalents (11,644) (11,818) 1.5% (12,107) 2.4% Change in net position 14,963 9, % 14, % Beginning net position 244, , % 220, % Ending net position $259,040 $244, % $234, % 2013 Compared to 2012: As of September 30, 2013 the Electric System s total revenues were $475 million, an increase of 1.0%, compared to September 30, This increase is primarily due to an increase in kwh sold of 0.2% and our load factor being 61%, an increase of 6.5%, compared to September 30, As of September 30, 2013 the Electric System s operating expenses were $449 million and remained flat compared to September 30, The power cost decreased 0.7% due to the lower demand cost experienced in September 30, Compared to 2011: As of September 30, 2012 the Electric System s operating revenues were $471 million, a decrease of 3.5%, compared to September 30, The change in operating revenues was a decrease of $16.8 million due to a 5.3% decrease in kilowatt hour sales. The System experienced a warmer than normal winter period which lowered revenues by $18.2 million, lower purchased energy costs by $14.5 million and lower operating expenses by $12.4 million. Our customer growth for the area increased.63% this year. We have been shielded from the worst effects of the economy s downturn due to our diversity in industry and the continued strength of our core businesses. Non Operating Revenues declined $237 thousand due to the falling interest rates (which have become next to nonexistent) lowering the income on reserves and cash on hand. COMPONENT UNIT FINANCIAL STATEMENT HUNTSVILLE UTILITIES 2013 ANNUAL REPORT 29

10 Management s Discussion and Analysis Years Ending September 30, 2013 and 2012 City of Huntsville Natural Gas System Table B1 Condensed Statements of Net Position (In Thousands) FY13 FY12 FY12 FY % Change 2011 % Change Assets Current and other assets $56,459 $54, % $50, % Capital assets (net) 98,688 96, % 96, % Total assets $155,147 $151, % $147, % Liabilities Current Liabilities $6,568 $5, % $5, % Longterm debt outstanding 15,022 16, % 16, % Total liabilities 21,590 21, % 21, % Net Position Invested in capital assets 91,213 88, % 88, % Restricted % % Unrestricted 41,389 39, % 36, % Total net position 133, , % 125, % Total liabilities and net position $155,147 $151, % $147, % 2013 Compared to 2012: As of September 30, 2013 the Gas System s total assets were $155 million, an increase of 2.7%, compared to September 30, This increase is primarily due to an increase in Cash and Cash Equivalents of $3.6 million which is due to the net cash provided by operations increasing 9.1%. The Gas System also invested an additional $5.3 million in Utility Plant. As of September 30, 2013 the Gas System s total liabilities were $22 million, an increase of 1.2%, compared to September 30, This increase is primarily due to an increase in trade payables of $800 thousand. As of September 30, 2013 the Gas System s net position is $134 million, an increase of 3.0%, compared to September 30, Compared to 2011: As of September 30, 2012 the Gas System s total assets were $151 million, an increase of 2.9%, compared to September 30, Current and Other Assets show an increase of $4.1 million which is due to the contribution from operations while at the same time Current Liabilities show a decrease of $453 thousand. In the Gas System, finances are extremely dependent on weather conditions out of the System s control. Income is only made in the winter months that must carry the System through the entire year. If there is a very mild winter, there is no summer season that may aid in the year s recovery. At September 30, 2012 available funds, including reserves, stood at $41.2 million, $2.5 of which is segregated in a Rate Stabilization Fund. The Gas Board desires to maintain approximately $6.8 million in operating reserves due to the possibility of extreme fluctuations in wholesale gas prices and retail gas usage. 30 HUNTSVILLE UTILITIES 2013 ANNUAL REPORT COMPONENT UNIT FINANCIAL STATEMENT

11 Management s Discussion and Analysis Years Ending September 30, 2013 and 2012 City of Huntsville Natural Gas System Table B2 Condensed Statement of Revenues, Expenses and Changes in Net Position (In Thousands) FY13 FY12 FY12 FY % Change 2011 % Change Operating revenues $41,725 $38, % $47, % Nonoperating revenues 3,350 3, % 3, % Total revenues 45,075 41, % 51, % Depreciation expense 3,408 3, % 3, % Operating expense 35,890 31, % 37, % Nonoperating expense % % Total expenses 39,625 35, % 41, % Income (loss) before contributions and transfers 5,450 6, % 9, % Capital contributions % % Transfers out tax equivalents (2,520) (2,280) 10.5% (2,884) 20.9% Change in net position 3,879 4, % 7, % Beginning net position 129, , % 117, % Ending net position $133,557 $129, % $125, % 2013 Compared to 2012: As of September 30, 2013 the Gas System s total revenues were $45 million, an increase of 8.7%, compared to September 30, This increase is primarily due to an increase in MCF sold of 24.6%. The Gas System also had a rate decrease which was effective with meter readings on and after December 1, This change reflects a decrease in rates ranging from ± 10.1% to ± 12.0%, contingent on individual rate classes. As of September 30, 2013 the Gas System s expenses were $40 million. An increase of 11.8% compared to September 30, 2012 due to increase in operating and maintenance costs Compared to 2011: The Gas System experienced a warmer than normal winter period which resulted in a 21.4% decrease in natural gas being sold thus decreasing operating revenues 19.9% or $9.5 million from the previous year. The Gas System s operating expense decreased $6.1 million due to the 20.7% decrease in natural gas being purchased as well as the price of natural gas delivered was $6.54 an MCF compared to $6.68 for Even with the decrease in operating revenues the system had a positive change in net assets of $4.1million. COMPONENT UNIT FINANCIAL STATEMENT HUNTSVILLE UTILITIES 2013 ANNUAL REPORT 31

12 Management s Discussion and Analysis Years Ending September 30, 2013 and 2012 City of Huntsville Water System Table C1 Condensed Statements of Net Position (In Thousands) FY13 FY12 FY12 FY % Change 2011 % Change Assets Current and other assets $39,936 $37, % $40, % Capital assets (net) 168, , % 165, % Total assets $208,441 $204, % $206, % Liabilities Current Liabilities $10,656 $9, % $11, % Longterm debt outstanding 36,740 38, % 40, % Total liabilities 47,396 48, % 52, % Net Position Invested in capital assets 133, , % 126, % Restricted 7,374 8, % 12, % Unrestricted 20,513 18, % 16, % Total net position 161, , % 154, % Total liabilities and net position $208,441 $204, % $206, % 2013 Compared to 2012: As of September 30, 2013 the Water System s total assets were $208 million, an increase of 1.8%, compared to September 30, This increase is primarily due to a rate increase that was effective January 1, This rate increase is a 5 step increase to assist in paying for the construction of a new water treatment plant. After this increase, the rates will increase every October for the next 4 years. This reflects a 28% increase in rates. The Water System also invested an additional $7.2 million in Utility Plant. As of September 30, 2013 the Water System s total liabilities were $47 million, a decrease of 2.2%, compared to September 30, As of September 30, 2013 the Water System s net position is $208 million, an increase of 1.8%, compared to September 30, This increase is primarily due to an increase in Cash and Cash Equivalents of $3.2 million which is due to net cash provided by operations increasing 52.8% Compared to 2011: Current and Other Assets decreased by $2.5 million due to withdrawals from the 2008 Bond Construction Funds which were used to fund system improvements. Net Investment in Capital Assets increased $3.7 million due to increases in Net Capital Assets of $1.6 million and decrease in LongTerm Debt of $2.4 million. The Board desires to maintain approximately $2.5 million in operating reserves. 32 HUNTSVILLE UTILITIES 2013 ANNUAL REPORT COMPONENT UNIT FINANCIAL STATEMENT

13 Management s Discussion and Analysis Years Ending September 30, 2013 and 2012 City of Huntsville Water System Table C2 Condensed Statement of Revenues, Expenses and Changes in Net Position (In Thousands) FY13 FY12 FY12 FY % Change 2011 % Change Operating revenues $29,097 $25, % $26, % Nonoperating revenues % % Total revenues 29,172 25, % 26, % Depreciation expense 6,033 5, % 5, % Operating expense 18,483 17, % 17, % Nonoperating expense 1,809 1, % 1, % Total expenses 26,325 25, % 24, % Income (loss) before contributions and transfers 2, % 1, % Capital contributions 3,456 2, % 2, % Transfers out tax equivalents (1,611) (1,428) 12.8% (1,398) 2.1% Change in net position 4,692 2, % 2, % Beginning net position 156, , % 151, % Ending net position $161,045 $156, % $154, % 2013 Compared to 2012: As of September 30, 2013 the Water System s total revenues were $29 million, an increase of 12.5%, compared to September 30, This increase is primarily due to a rate increase that was effective January 1, This rate increase is a 5 step increase to assist in paying for the construction of a new water treatment plant. After this increase, the rates will increase every October for the next 4 years. This reflects a 28% increase in rates. As of September 30, 2013 the Water System s expenses were $26 million. An increase of 4.9% compared to September 30, 2012 due to increase in operating and maintenance costs Compared to 2011: Gallons sold decreased by 186 million gallons which was a 1.6% decrease in total volume of sales from the previous year. This was due to a rainier than normal summer. This resulted in an operating revenues decrease of 1.6%. Operating Expense increased by 2.4% which is due to continued maintenance of the distribution system. Capital Contributions increased this year by $378 thousand with the addition of several area construction projects. William Pippin, Chief Executive Officer Ted Phillips, Chief Financial Officer COMPONENT UNIT FINANCIAL STATEMENT HUNTSVILLE UTILITIES 2013 ANNUAL REPORT 33

14 City of Huntsville Electric System Statements of Net Position Financial Statements Years Ending September 30, 2013 and 2012 September 30, Assets Current Assets Cash and Cash Equivalents $ 35,059,466 $ 18,730,305 Board Designated Funds Cash and Cash Equivalents Insurance Funds 20,814 10,283 Worker's Compensation Funds 30,164 Construction Funds 5,894,772 6,664,772 Emergency Funds 742, ,736 Investments Insurance Funds 1,359,283 1,327,581 Worker's Compensation Funds 1,969,836 2,002,916 Construction Funds 1,250,000 Accounts Receivable Trade, Net of Allowance for Doubtful Accounts of $559,061 in 2013 and $937,134 in ,463,538 48,241,286 Inventories Materials and Supplies 6,186,940 8,310,405 Prepaid Expenses 40,823 42,191 Accrued Interest, Rent and Other Receivables 3,561,679 3,499,772 Total Current Assets 102,579,593 89,047,247 NonCurrent Assets Restricted Assets Cash, Cash Equivalents, and Investments Construction Bond Funds 19,910,731 25,388,365 Improvement Bond Funds 500, ,000 Debt Service Bond Funds 2,488,462 2,452,766 Reserve Debt Service Bond Funds 3,950,642 3,950,639 Total Restricted Assets 26,849,835 32,291,770 Other Assets Unamortized Bond Expense 450, ,278 Utility Plant Plant in Service 457,260, ,018,756 Construction in Progress 23,155,645 17,697,339 Total Utility Plant 480,415, ,716,095 Less: Accumulated Depreciation (227,009,350) (213,104,850) Total Utility Plant Net 253,406, ,611,245 Total NonCurrent Assets 280,707, ,424,293 Total Assets $ 383,286,961 $ 369,471,540 Continued The accompanying notes and independent auditors' report are an integral part of these financial statements. 34 HUNTSVILLE UTILITIES 2013 ANNUAL REPORT COMPONENT UNIT FINANCIAL STATEMENT

15 Financial Statements Years Ending September 30, 2013 and 2012 City of Huntsville Electric System Statements of Net Position September 30, Liabilities Current Liabilities Accounts Payable Trade $ 36,164,986 $ 36,336,755 Accounts Payable Other Utility Departments 1,974,280 1,843,115 Customer Meter Deposits, Including Accrued Interes 5,880,000 5,421,695 Compensated Absences 2,785,208 2,555,283 Accrued Payroll 920,302 1,123,992 Other Current Liabilities 2,521,670 1,979,117 Total Current Liabilities payable from current assets 50,246,446 49,259,957 Liabilities Payable From Restricted Assets Current Maturities of LongTerm Debt 2,355,000 2,285,000 Interest Payable 543, ,092 Total Liabilities Payable from Restricted Assets 2,898,458 2,851,092 NonCurrent Liabilities Customer Meter Deposits, Less Current Portion 33,477,836 33,235,758 Revenue Bonds, Less Current Portion 35,065,000 37,420,000 Unamortized Bond Premium 2,845,851 3,019,242 Unamortized Gain/Loss on Debt Refunding (286,289) (391,939) Total NonCurrent Liabilities 71,102,398 73,283,061 Total Liabilities 124,247, ,394,110 Net Position Net investment in capital assets 213,334, ,234,128 Restricted 26,849,835 32,291,770 Unrestricted 18,855,311 6,551,532 Total Net Position 259,039, ,077,430 Total Liabilities and Net Position $ 383,286,961 $ 369,471,540 The accompanying notes and independent auditors' report are an integral part of these financial statements. COMPONENT UNIT FINANCIAL STATEMENT HUNTSVILLE UTILITIES 2013 ANNUAL REPORT 35

16 Financial Statements Years Ending September 30, 2013 and 2012 City of Huntsville Electric System Statements of Revenues, Expenses, and Changes in Net Position For the year ended September 30, Operating Revenues Residential $ 225,614,698 $ 220,533,357 Large Commercial and Industrial 196,627, ,406,423 Small Commercial 35,654,045 34,850,354 Public Street and Highway Lighting 4,559,768 4,356,021 Other Operating Revenue 12,876,857 11,682,761 Total Operating Revenues 475,332, ,828,916 Operating Expenses Purchased Power 392,160, ,022,812 Transmission 357, ,737 Distribution 19,561,944 20,471,681 Customer Accounting 6,534,717 5,967,073 Administrative and General 11,957,140 9,720,987 Depreciation 15,875,828 15,455,181 Payroll Taxes 1,432,261 1,397,167 Total Operating Expenses 447,880, ,178,638 Operating Income 27,452,469 22,650,278 NonOperating Revenues (Expenses) Gain or Loss on Sale of Assets 238,447 0 Interest Income 164, ,372 Interest Expense (1,351,820) (1,743,372) Amortization of Bond Discount (70,381) (71,394) Amortization of Bond Premium 173, ,390 Total NonOperating Revenues (Expenses) (845,643) (1,533,004) Income Before Transfers 26,606,826 21,117,274 Transfers Out Tax Equivalent (11,644,597) (11,818,433) Increase (Decrease) in Net Position 14,962,229 9,298,841 Net Position Beginning 244,077, ,778,589 Net Position Ending $ 259,039,659 $ 244,077,430 The accompanying notes and independent auditors' report are an integral part of these financial statements. 36 HUNTSVILLE UTILITIES 2013 ANNUAL REPORT COMPONENT UNIT FINANCIAL STATEMENT

17 Financial Statements Years Ending September 30, 2013 and 2012 City of Huntsville Electric System Statements of Cash Flows For the year ended September 30, Net Cash Provided By (Used For) Operating Activities 48,397,538 37,500,665 Trustee, Investment, and Escrow Accounts 5,441,935 (27,670,430) Net Cash Provided By (Used For) Capital and Related Financing Activities Cash and Cash Equivalent End of Year The accompanying notes and independent auditors' report are an integral part of these financial statements. COMPONENT UNIT FINANCIAL STATEMENT HUNTSVILLE UTILITIES 2013 ANNUAL REPORT 37

18 City of Huntsville Natural Gas System Statements of Net Position Financial Statements Years Ending September 30, 2013 and 2012 Restated September 30, Accounts Receivable Trade, Net of Prepaid Expenses Total Current Assets 55,361,649 53,035,002 Debt Service Bond Funds 818, ,286 Other Assets Plant in Service 149,261, ,941,049 Total Utility Plant 152,496, ,221,486 Total Utility Plant Net Total NonCurrent Assets Total Assets $ 155,146,687 $ 151,014,515 The accompanying notes and independent auditors' report are an integral part of these financial statements. 38 HUNTSVILLE UTILITIES 2013 ANNUAL REPORT COMPONENT UNIT FINANCIAL STATEMENT

19 Financial Statements Years Ending September 30, 2013 and 2012 City of Huntsville Natural Gas System Statements of Net Position (Continued) Restated September 30, Liabilities and Net Assets Current Liabilities Accounts Payable Trade $ 2,177,203 $ 1,358,542 Customer Meter Deposits, Including Accrued Interest 1,833,432 1,392,455 Compensated Absences 1,036, ,327 Accrued Payroll 294, ,223 Other Current Liabilities 670, ,429 Total Current Liabilities 6,011,409 4,507,976 Liabilities Payable from Restricted Assets Current Maturities of LongTerm Debt 505, ,000 Interest Payable 52,097 55,007 Total Liabilities Payable from Restricted Assets 557, ,007 NonCurrent Liabilities Customer Meter Deposits, Less Current Portion 7,961,492 8,723,423 Revenue Bonds, Less Current Portion 7,060,000 7,565,000 Total NonCurrent Liabilities 15,021,492 16,288,423 Total Liabilities 21,589,998 21,336,406 Net Position Invested in Capital Assets, Net of Related Debt 91,213,438 88,920,375 Restricted 954, ,130 Unrestricted 41,388,749 39,803,604 Total Net Position 133,556, ,678,109 Total Liabilities and Net Position $ 155,146,687 $ 151,014,515 The accompanying notes and independent auditors' report are an integral part of these financial statements. COMPONENT UNIT FINANCIAL STATEMENT HUNTSVILLE UTILITIES 2013 ANNUAL REPORT 39

20 Financial Statements Years Ending September 30, 2013 and 2012 City of Huntsville Natural Gas System Statements of Revenues, Expenses, and Changes in Net Position For the year ended September 30, ,437,794 N (Decrease) in Net Position 3,878,580 4,122,940 Net Position Beginning 129,678, ,555,169 The accompanying notes and independent auditors' report are an integral part of these financial statements. 40 HUNTSVILLE UTILITIES 2013 ANNUAL REPORT COMPONENT UNIT FINANCIAL STATEMENT

21 Financial Statements Years Ending September 30, 2013 and 2012 City of Huntsville Natural Gas System Statements of Cash Flows For the year ended September 30, Operating Activities Received from Customers $ 45,343,749 45,343,748 $ 41,856,660 Paid to Suppliers for Goods and Services (27,012,131) (27,012,132) (24,750,925) Paid to Employees for Salaries and Wages (7,854,018) (7,498,492) Net Cash Provided By (Used For) Operating Activities 10,477,599 9,607,243 NonCapital Financing Activities Transfers Out Tax Equivalent (2,519,903) (2,280,110) Capital and Related Financing Activities Payment of Principal on LongTerm Debt (485,000) (470,000) Gain or Loss on Sale of Assets 56,535 Additions to Plant in Service (5,225,541) (3,452,074) Capital Contributions 949, ,808 Trustee, Investment, and Escrow Accounts (372) 214 Interest Expense (318,239) (598,843) Net Cash Provided By (Used For) Capital and Related Financing Activities (5,023,201) (4,154,895) Investing Activities Purchase of Investment Securities (2,464,654) 4,594,056 Changes in Board Designated Funds, Purchases and Proceeds 3,035,494 (16,817,942) Interest Income Earned on Investments 45, ,084 Net Cash Provided By (Used For) Investing Activities 616,428 (12,122,802) Increase (Decrease) in Cash and Cash Equivalents 3,550,923 (8,950,564) Cash and Cash Equivalents Beginning of Year 18,849,106 27,799,670 Cash and Cash Equivalents End of Year $ 22,400,029 $ 18,849,106 Reconciliation of Operating Income to Net Cash Provided By (Used For) Operating Activities Operating Income $ 5,674,360 $ 6,544,346 Adjustments to Reconcile Operating Income to Net Cash Provided By (Used For) Operating Activities: Depreciation and Amortization 3,408,301 3,307,490 Change in Accounts Receivable Customer 370, ,508 Change in Accounts Receivable Other 186, ,800 Change in Inventories 96,496 (1,032,139) Change in Prepaid Expenses (99) (315) Change in Accounts Payable 818,661 (1,221,994) Change in Customer Deposits (320,954) 969,463 Change in Accrued Expenses and Other Current Liabilities 243, ,084 Total Adjustments 4,803,239 3,062,897 Net Cash Provided By (Used For) Operating Activities $ 10,477,599 $ 9,607,243 The accompanying notes and independent auditors' report are an integral part of these financial statements. COMPONENT UNIT FINANCIAL STATEMENT HUNTSVILLE UTILITIES 2013 ANNUAL REPORT 41

22 City of Huntsville Water System Statements of Net Position Financial Statements Years Ending September 30, 2013 and 2012 Restated September 30, Prepaid Expenses The accompanying notes and independent auditors' report are an integral part of these financial statements. 42 HUNTSVILLE UTILITIES 2013 ANNUAL REPORT COMPONENT UNIT FINANCIAL STATEMENT

23 Financial Statements Years Ending September 30, 2013 and 2012 City of Huntsville Water System Statements of Net Position (Continued) Restated September 30, The accompanying notes and independent auditors' report are an integral part of these financial statements. COMPONENT UNIT FINANCIAL STATEMENT HUNTSVILLE UTILITIES 2013 ANNUAL REPORT 43

24 Financial Statements Years Ending September 30, 2013 and 2012 City of Huntsville Water System Statements of Revenues, Expenses, and Changes in Net Position For the years ended September 30, Restated Operating Revenues Residential Industrial Commercial Government Fire Hydrants Other Opera ating Revenue Total Operating Revenues Operating Expense ses Purificati tion Pumping Distribution Customer Accounting Administrative and General Depreciation Total Operating Expenses Operating Income NonOperating Revenues (Expens ses) Gain or loss on Sale of Assets Interest Income Interest Expense Amortiz zation of Premium on Debt Amortiz zation of Bond Discount Total NonOperating Income Before Capital Contributions and Transfers Capital Contributions Transfe ers Out Tax Equivalent Increase in Net Position Net Positi on Beginning Revenue (Expenses) $ 14, 993, 500 $ 13,237,961 1, 669,974 1,729,399 8, 058,214 6,696,668 1,230,072 1,076,960 2, 068, , ,716 2,279,648 29, 097,215 25,865,486 1, 314,901 1,426,918 4, 364,192 4,342,547 5, 658,417 5,399,513 1, 615,073 1,936,715 5, 530,468 4,501,346 6, 033,340 5,894,158 24, 516,391 23,501,197 4, 580,824 2,364,289 53,572 21,070 62,027 (1,816,861) (1,591,577) 52,456 52,456 (44,248) (44,248) (1,734,011) (1,521,342) 2,846, ,947 3, 456,008 2,606,082 (1,610,777) (1,428,038) 4, 692,044 2,020, , 353, ,332,132 Net Positi on Ending $ 161, 045,167 $ 156,353,123 The accompanying notes and independent auditors' report are an integral part of these financial statements. 44 HUNTSVILLE UTILITIES 2013 ANNUAL REPORT COMPONENT UNIT FINANCIAL STATEMENT

25 Financial Statements Years Ending September 30, 2013 and 2012 City of Huntsville Water System Statements of Cash Flows For the years s ended September 30, Operating Activities Received fr rom Customers Paid to Suppliers for Goods and Services Paid to Employees for Salaries and Wages Restated $ 29,370,407 $ 26,776, 798 (8,126,344) (9,800,143) (9,552,339) (9,294,424) Net Cash Provided By Operating Activities 11,691,724 7,682,231 NonCapital Financing Activities Transfers Out Tax Equivalents Capital and Related Financing Activities Payment of Principal on LongTerm Debt Issuance of Long Term Debt Bond Warrants Acquisition and Construction of Capital Assets Gain on sale of assets Capital Contributions Trustee, Investment, and Escrow Ac ccounts Interest Expense Net Cash Used For Capital and Related Financing Activities (1,610,777) (1,428,038) (2,260,000) (2,190,000) 180,000 (7,414,626) (7,458,268) 53, 572 3,456,008 2,606, ,575 3,851,979 (1,714,155) (1,563,260) (6,746,626) (4,753,467) Investing Activities Purchase of Investment Securities (36,494) Changes in Board Designated Funds, Purchases and Proceeds (98,637) Interest t Income Earned on Investme ents 21,070 (44,710) 368,025 62,027 Net Cash Provided By (Used For) Investing Activities Increase in Cash and Cash Equivalents Cash and Cash Equivalents Beginnin ng of Year (114,061) 3,220,260 10,755, , 342 1,886,068 8,869,930 Cash and Cash Equivalents End of Year $ 13,976,258 $ 10,755,998 Reconcilia tion of Operating Income to Net Cash Provided By (Used For) Operating Activities Operating Income Adjustments to Reconcile Operating Income to Net Cash Provide ed By (Used For) Operating Activities: Depreciation and Amortization Change in Accounts Receivable Customer Change in Inventories Change in Prepaid Expenses Change in Accounts Payable Change in Customer Deposits Change in Accrued Expenses and Other Current Liabilities Total Adjustments Net Cash Pr ovided By Operating Activities $ 4,580,824 $ 6,033, ,691 (168,342) (760) 383, , ,070 7,110,900 $ 11,691,724 $ 2,364,289 5,894, ,312 (88,352) (1,278) (716,177) (71,936) (609,785) 5,317,942 7,682,231 The accompanying notes and independent auditors' report are an integral part of these financial statements. COMPONENT UNIT FINANCIAL STATEMENT HUNTSVILLE UTILITIES 2013 ANNUAL REPORT 45

26 NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2013 AND 2012 Note 1 Summary of Significant Accounting Policies The financial statements of the City of Huntsville Electric, Natural Gas, and Water Systems (the Utilities or Huntsville Utilities ) have been prepared in accordance with generally accepted accounting principles of the United States of America ( GAAP ) as applied to government units. The Governmental Accounting Standards Board ( GASB ) is the accepted standard setting body for establishing governmental accounting and financial reporting principles. The more significant of the Utilities accounting principles are described below. Reporting Entity GASB Statements No. 14 and 39 establish standards for defining and reporting on the financial reporting entity. The definition of the reporting entity is based primarily on the notion of financial accountability. A primary government is financially accountable for agencies that make up its legal entity. It is also financially accountable for a legally separate agency if its officials appoint a voting majority of that agency s governing body and either it is able to impose its will on that agency or there is a potential for the agency to provide specific financial benefits to, or to impose specific financial burdens on, the primary government. There are no component units which should be included as part of the financial reporting entity of the Utilities. However, the Utilities are a component unit of the City of Huntsville, Alabama. Financial Presentation The Utilities are operated by separate Boards for the electric, natural gas and water systems (collectively, the Boards ). The Boards are responsible for the daytoday operations of the Utilities and for making recommendations to the City for major capital outlays and rate revisions. The Electric Board consists of three members appointed by the Huntsville City Council for staggered three year terms. The Natural Gas and Water Boards are made up of the same three members who serve on each board, simultaneously. The Boards have hired a President and CEO to administer all three utilities. Financial statements are presented for each Board. The footnotes are presented separately for each Board, where applicable, and jointly for areas where common descriptions exist. Basis of Accounting The Utilities use the accrual basis of accounting under which revenues are recognized when earned and expenses are recognized when incurred, even though actual payment or receipt may not occur until after the period ends. Generally Accepted Accounting Principles (GAAP) are set by the Governmental Accounting Standards Board (GASB), not the FASB as the private sector. The industry as a whole is a regulated industry that follows the Federal Energy Regulatory Commission (FERC) mandates. The Huntsville Electric System s regulatory body is the Tennessee Valley Authority which has adopted most of these directives as published in the Federal Code of Regulations Title 18. These statements offer short and long term financial information about their activities. The Statements of Net Position include all of the individual System s assets and liabilities and provide information about the nature and amounts of investments in resources (assets) and the obligations to creditors (liabilities). It also provides the basis for evaluating the capital structure of the System and assessing the liquidity and financial flexibility of the System. The Utilities prepares its financial statements in accordance with the provisions of GASB Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in PreNovember 30, 1989 FASB and AICPA Pronouncements, paragraphs , for regulated operations. These paragraphs recognize that accounting for rate regulated enterprises should reflect the relationship of costs and revenues introduced by rate regulation. 46 HUNTSVILLE UTILITIES 2013 ANNUAL REPORT COMPONENT UNIT FINANCIAL STATEMENT

27 NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2013 AND 2012 Note 1 Summary of Significant Accounting Policies (Continued) Cash and Cash Equivalents For purposes of the statements of cash flows, the Utilities consider all highly liquid temporary cash investments with low interest rate risk to be cash equivalents. Cash purchases and sales of these investments generally are part of the entity's cash management activities rather than part of its operating, investing and financing activities, and details of these transactions are not reported in the statements of cash flows. Restricted funds are provided for under trust indentures and are not considered cash equivalents. All restricted funds are considered investments for purposes of classification in the statement of cash flows. Board Designated Cash and Board Designated Unrestricted Net Assets The Boards have designated that cash assets be set aside in each system to fund construction and renewal and replacement activity. The designations are segregated in the balance sheets current assets as Board Designated Funds. Designations are relieved once the Board has approved expenditures from those funds. The designated balances are fully funded and are not separately stated in the net assets portion of the balance sheets at September 30, 2013 and Investments Investments in U.S. Treasury, government agency, and state and local government securities are recorded at fair value, as determined by quoted market prices. Investments in overnight repurchase agreements and commercial paper are recorded at cost, which approximates fair value. Accounts Receivable Trade The Electric System acts as a billing and collection agent for other City of Huntsville and Madison County utility departments. Current earnings are charged with an allowance for doubtful accounts based on a percent of gross revenue, determined from prior years' bad debt experience. Receivables are due 15 days after the issuance of the invoice and are considered delinquent when more than 25 days past due. Accounts considered uncollectible throughout the year are charged against the allowance. Materials and Supplies Inventories Materials and supplies inventories are stated at the lower of cost (average cost) or market using the firstin, firstout consumption method of inventory accounting. Stored Gas Inventory The stored inventory is reflected at the aggregate amount of the lower of cost (average cost) or market. Fuel Management Program In connection with the purchase of natural gas, the Utilities has developed and implemented a procurement program intended to manage the risk of changes in the market place of natural gas. Pursuant to this program, the Utilities may execute fixed price and options contracts from time to time to help manage fluctuations in the market prices of natural gas. COMPONENT UNIT FINANCIAL STATEMENT HUNTSVILLE UTILITIES 2013 ANNUAL REPORT 47

28 NOTES TO THE FINANCIAL STATEMENTS SEPTEMBER 30, 2013 AND 2012 Note 1 Summary of Significant Accounting Policies (Continued) Utility Plant The Utilities maintain a $1,000 capitalization threshold for equipment, land, buildings and improvements. Utility plant and construction in progress are stated at cost less accumulated depreciation. Depreciation is computed using the straight line method over the estimated useful life of the assets ranging from five to fifty years. Retirements of units of property from service are credited against plant in service at the original cost of the units and accumulated depreciation is debited at the date of retirement. Improvements that extend the useful life of the assets are capitalized and depreciated over the remaining useful life of the asset. The cost of maintenance, repairs and replacement of minor items of property are charged to operations and maintenance accounts. Interest on bonds is capitalized during the construction period for assets financed by bond proceeds. Accounts Receivable/Payable from/to Other Utilities Included in other receivables are amounts due from the other utility systems for services rendered to them by the Utilities. Included in the payable is cash held by the Utilities in the master account for the amounts owed to the City of Huntsville and other utilities for services rendered by them to the Utilities. Revenues Revenues are recognized from meters read on a monthly basis. Service that has been rendered from the latest date of each meterreading cycle to month end is estimated and accrued as unbilled revenue receivable. Grants in Aid to Construction It is the Electric System's policy not to record amounts as grants in aid to construction, in accordance with guidelines established by FERC. The substance of this accounting treatment is to reduce the cost of operating the Electric System by reducing depreciation expense. It is the Water and Natural Gas System's policy to record grants in aid to construction and other amounts received as capital contributions in the statement of revenues, expenses and changes in net assets. Amortization of Debt Issue Costs Amortization of debt issue costs and bond discounts and premiums is computed on a straightline basis, which approximates the effective interest method over the remaining term of the outstanding bonds. Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates. Environmental Costs Huntsville Utilities expenses, on a current basis, certain known costs incurred in complying with environmental regulations and conducting remediation activities. 48 HUNTSVILLE UTILITIES 2013 ANNUAL REPORT COMPONENT UNIT FINANCIAL STATEMENT